TMI Blog2009 (6) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of Hindalco Industries Ltd. (hereinafter referred to as HIL or the Company) and its Equity Shareholders under section 391, read with section 100 of the Companies Act, 1956 (hereinafter referred to as the Act). 2. The Company is the flagship Company of the Aditya Birla Group and a leading manufacturer of aluminium and copper. It is stated that over the years, the Company has grown into the largest vertically integrated non-ferrous metal company in the country and among the largest primary producers of aluminium and copper in Asia. It is further stated that in 2007, the acquisition of Novelis Inc., a world leader in aluminium rolling and can recycling, marked a significant milestone in the history of aluminium industry in India. It is the case of the Company that an important element of HIL s growth strategy has been to seek out opportunities for acquisitions and strategic partnerships in India as well as overseas with a view to diversify its product portfolio, consolidation of customer base and to extend the presence of the Company in overseas markets. It is stated that such an endeavour by the Company would not only provide the Company with an opportunity to widen its inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its subsidiaries and interest and other financial charges paid/payable upon refinancing of such borrowings; 1.4.3. Impairment of assets/investments/intangibles in the Financial Statements of HIL and/or any of its subsidiaries; 1.4.4. Diminution in the value of investments in subsidiary companies in the Financial Statements of HIL and/or any of its subsidiaries; 1.4.5. Costs associated with existing projects/divisions in part and/or whole by HIL and/or any of its subsidiaries and financial costs associated with delay in projects; 1.4.6. Consultants/law firms fees and/or any fees payable towards professional services (say due diligence, etc.) in connection with financing/refinancing acquisitions." Further, Part III of the Scheme provides for Financial Restructuring of HIL and Accounting Treatment. Clause 3 pertains to creation and utilization of Business Reconstruction Reserve Account and the modalities therefor. Clause 4 provides for alteration in the Articles of Association, which is stated to be an integral part of this Scheme. Article 71 of the Articles of Association of the Company are intended to be amended to read "The words Share Premium Account shall be substit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders was duly convened and held in accordance with the said Order, which meeting was chaired by Mr. A.K. Agarwala. In the said meeting 549 Equity Shareholders of the Petitioner Company representing 76,94,00,729 equity shares of Re. 1 each attended personally or through Authorised Representatives or by proxy. After inviting debate on the proposed scheme, the resolution was put to vote by poll in the meeting, in which, 424 members holding 72,19,93,282 Equity Shares of Re. 1 each of the aggregate value of Rs. 72,19,93,282 voted in favour of the Scheme. 11 members holding 8,997 equity shares of Re. 1 each of the aggregate value of Rs. 8,997 voted against the said Scheme. Votes of 58 members for aggregate 4,73,90,050 shares cast were declared invalid. In other words, the resolution was passed by requisite majority of Equity Shareholders supporting the same. The Chairman of the said meeting has submitted report recording these facts. It is further stated that pursuant to the order of this Court an Extraordinary General Meeting was held on the same date i.e. 2-4-2009, at the same place at Ravindra Natya Mandir, P.I. Deshpande Maharashtra Kala Academy, Prabhadevi, Mumbai at 12.00 p.m. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is primarily entered into between the Petitioner Company and its Equity Shareholders and not between the Petitioner and other class of shareholders or creditors. It is stated that insofar as Preference Shareholders of the Petitioner Company are concerned, under the Scheme their interest is not affected at all as they are entitled to a fixed rate of dividend under the terms of the issue and also under the provisions of the Act. It is stated that the meeting of Preference Shareholders was dispensed with by this Court vide order passed in Company Application No. 234 of 2009 on the basis of undertaking given by the Petitioner Company that all Preference Shares will be redeemed and fully paid off by 1-4-2009. It is stated that as per the said undertaking, all its Preference Shareholders have been redeemed by 1-4-2009 and the Petitioner company has no Preference Shareholders on the date of presentation of the Petition. It is also stated that meeting of secured creditors and unsecured creditors has also been dispensed with by this Court. As on 31-1-2009, the Petitioner company has had 57 Secured Creditors of the value of Rs. 5,741.73 crores and 11,646 Unsecured Creditors of the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor of the Petitioner company. His objection is opposed by the Petitioner company, amongst others, on the ground of his locus. Insofar as objection filed by Bhupendra Gandhi, it is the case of the Petitioner company that he is not a bona fide complainant. In that, on the date of meeting of the Equity Shareholders to consider the proposed scheme, the second objector had only one share of the Petitioner company. He participated in the meeting and registered his objection. But the Resolution was passed with overwhelming majority. Moreover, on the one hand he objected to the proposed scheme and on the other hand, after the meeting of the Equity Shareholders, he has purchased additional 50 Equity Shares of the Petitioner company, which reflects on his bona fide . According to the Company, his objection should be thrown out on this count alone. Besides raising issue of locus and bona fide of the objectors, the Petitioner company has also countered the grievance of the objectors on merits. On merits the issue raised by the objectors are broadly that the scheme if approved would result in allowing the Petitioner company to violate accounting standards by providing for adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sterlite Industries (India) Ltd. [2003] 113 Comp. Cas. 273 1 (Bom.) ( see paragraphs 8 and 9) in which this Court has had occasion to dismiss the appeal preferred by SEBI against the order passed under section 391 on the ground that it had no locus in a Petition under section 391, not being shareholders or creditors of the company. Counsel for Mr. Kedia, however, placed reliance on the decision of the Apex Court in the case of S.K. Gupta v. K.P. Jain [1979] 49 Comp. Cas. 342 . He placed emphasis on the observations in the said decision at page 353 of the reported Judgment to contend that if the Court can suo motu act, it is immaterial as to who drew the attention of the Court to a situation which necessitated Court s intervention. Reliance placed on this decision is inapposite. Inasmuch as, the observations in this decision are in the context of proceedings under section 392 of the Act. As a matter of fact, the Supreme Court in the same Judgment has noted the distinction between the proceedings under sections 391 and 392, as can be discerned from the observations at pages 350 to 352 of the reported decision. At page 352, the Apex Court has noted the distinction in the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implementation of the scheme and to limit write off of the expenses to Securities Premium Accounts in the Books of Account up to 31-3-2009 and not thereafter. I am in agreement with the stand taken by the Petitioner company that this changed opinion of the Regional Director inspite of having found that the objections taken by the objector Mr. Bhupendra Gandhi were untenable was on account of intervention of the Member of Parliament at the behest of the objector - Bhupendra Gandhi, who had forwarded the complaint for reconsideration. Significantly, the Regional Director has not adverted to any provision of law which obligates the Petitioner company to limit the period to write off all the expenses in the Books of Account. It would have been a different matter, if the law obliged the company to do so within a particular time. In absence of such requirement, the Regional Director ought to have assigned tangible reason as to why it was still necessary to impose the outer limit for writing off the expenses. Even during the argument advanced on behalf of the Regional Director or for that matter the objectors, I was unable to discern any tangible reason to justify such restriction. Unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion pressed into service by the Petitioner in the case of Re Ratners Group plc. ,[1988] Ch.D. 685. This decision would also answer the objection raised by the objectors about unspecified expenses in the scheme. Dealing with that contention, the Court has noted the scope of interference by the Court while considering the proposal for approval of the scheme. The Court cannot interfere with the discretion and commercial wisdom of the stakeholders and the Board of Directors. The Court has considered the same in the following words: "Secondly it was said that there was a worry because the amount of goodwill to be written off could not be specified. It is said in the affidavit to be a sum in excess of 140m. But at present, the balance sheet date not having arrived and the accounts not having been prepared, the amount is not clear and fixed. In my judgment counsel for the company is again correct when he submits that that factor has no effect on discretion. Counsel wholly accepted that the court will not do anything in vain and that, if a reduction was applied for, approved by shareholders but on the evidence was not for any discernable purpose at all but simply an act in a vacuum, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al summary of the proposition which I think is not really perhaps best expressed as the motive for the reduction, since the reduction is the result of an extraordinary resolution which will have been voted for by multifarious persons, many of whom will have different private motives, all leading them to act the same way. But, if it can be seen that the reduction is one which is properly passed by shareholders who are treated equitably, have had the facts explained and provided the creditors are safeguarded, the court will habitually sanction reductions and exercise its discretion in favour of them unless the act is a pointless and hollow act. Provided those requirements are satisfied, the company may reduce its capital in any way that it thinks fit and the court will normally sanction those reductions." [Emphasis supplied] Applying the principle stated in the abovesaid decisions, if the grievance of the objector or for that matter opinion of the Regional Director were to be acted upon, it would trench upon the discretion of the stakeholders and the Board of Directors in propounding the Scheme for stated purpose. For, it is not a hollow act. It will be apposite to advert to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in its subsidiaries, approved the scheme on the finding that the decision was within the framework of law, which is not illegal or contrary to the public policy. The Court then proceeded to observe that there was no reason to interfere with the said decision taken by the experts which includes business, financial experts, auditors and majority shareholders of the company. Suffice it to observe that no tangible basis is forthcoming as to why the proposed scheme should be approved with amendment of placing time-limit for implementation of scheme and to limit write off Securities Premium Account upto 31-3-2009 and not thereafter. If the equity shareholders or the stakeholders of the Company have resolved consciously and approved the proposed scheme, inspite of open ended scheme, they have exercised business discretion. It is not open for this Court to sit over the said view as an Appellate Court, unless the same was against the framework of law or public policy. There is nothing wrong in the decision to spread out or adjust and write off all the expenses. The fact that this may enable the Company to declare sufficient dividend as have been declared in the past, does not militate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements. In the case of Companies, section 211(3B) of the Companies Act, 1956, provides that Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely: the deviation from the accounting standards; the reasons for such deviation; and the financial effect, if any, arising due to such deviation. In view of the above, if an item in the financial statements of a Company is treated differently pursuant to an Order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard, following disclosures should be made in the financial statements of the year in which different treatment has been given: A description of the accounting treatment made along with the reason that the same has been adopted because of the Court/Tribunal Order. Description of the difference between the accounting treatment prescribed in the Accounting Standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial position and that the losses should necessarily be adjusted to the profit and loss account and not against the Reserve Account. All these objections will have to be only stated to be rejected for reasons already recorded in the earlier part of this Judgment. Similarly, argument of the objector that the scheme provides for wide and undefined discretion in the Board also does not commend to me. These matters would fall within the realm of commercial wisdom and sound business practice which the Petitioner company intends to adopt. The Court cannot sit over the said decision as Court of Appeal. The argument of the objectors that the scheme does not disclose the amount or for that matter non-operating extraordinary expenses, is also of no avail. The Petitioner Company has rightly pointed out that the Books of Account are prepared in accordance with the requirement of law. Not only the Books of Account and the balance sheet of the Petitioner Company are duly prepared, but a separate consolidated statement of the Petitioner company and its subsidiary is also prepared and issued. Financial position of the Company is reflected from the consolidated accounts prepared in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid-up capital. There is no reduction in the amount payable to any of the creditors. There is no compromise or arrangement with the creditors. The asset cover ratio as per the agreement with the creditors will continue even after the restructuring. The restructuring does not involve any cash outflow or affect the normal operations of the Petitioner. It will not impact the ability of the Company to honour its commitments and to pay its debts. Whereas, it is intended to project a more realistic picture of the financial position of the Company. 21. Taking over all view of the matter therefore, there is no substance in the objections taken to the proposed scheme either by the two objectors or the recommendation of the Regional Director for placing time-limit upto 31-3-2009. In that view of the matter, the Petition should succeed. 22. Since all the requisite statutory compliances have been fulfilled. Company Petition No. 293 of 2009 filed by the Petitioner company is made absolute in terms of prayer clauses ( a ) to ( f ). 23. The Petitioner in the Company Petition to pay cost of Rs. 7,500 to the Regional Director, Western Region. Costs to be paid within four weeks from toda ..... X X X X Extracts X X X X X X X X Extracts X X X X
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