TMI Blog2003 (8) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... to dispose of all these petitions by this common judgment and order. 2. The Boards of Directors of all the companies prepared a scheme of arrangement consisting of debt restructuring as well as business restructuring and the said Boards of Directors have passed resolutions approving the said scheme of arrangement. Petitions were filed in this Court under section 391(1) of the Companies Act and this Court by order dated February 11, 2003 was pleased to direct the companies to convene separate meetings of its equity shareholders, preference shareholders, secured creditors and unsecured creditors for the purpose of considering and, if thought fit, approving the said scheme of arrangement with or without modification. Meetings of the equity shareholders, preference shareholders, secured and unsecured creditors were held in terms of the orders of this Court. After the aforesaid meetings were held the Chairperson has submitted his report which is placed on record. It is reported that in compliance with the provisions of section 391 of the Companies Act the scheme of arrangement has been approved in those meetings. Thereafter, the companies have filed the present petitions for sancti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Union of India , Siel Limited had to close its manufacturing units located in Delhi. Due to the said reasons and for various other reasons the company also faced financial problems. The chemical plant of the company was relocated at Rajpura, Punjab, which commenced its commercial production from the month of February 1999. During the aforesaid period from 1996 to 1999, the company incurred heavy losses resulting in the large debt burden consequent to which in October 1999 the company and the financial institutions agreed for restructuring of the debt without the intervention of the Court. However, despite the aforesaid restructuring the company continued to face financial problems. 4. It is the further case of the petitioners that as on September 30, 2002, the principal amount of long term debt due to financial institutions/banks are Rs. 211.03 crores which remained at the same level as on December 31, 2002. Besides the working capital lenders had also advanced Rs. 98.13 crores which, however, due to some repayment came down to Rs. 45.75 crores by December 31, 2002. As the Reserve Bank of India issued guidelines for corporate debt restructuring, the Siel Limited decided to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been valued at Rs. 65 crores and an equivalent amount or debt, i.e., Rs. 65 crores has been allocated to the aforesaid Shivajimarg Properties Ltd. and upon sale of the aforesaid real estate, the said company would get liquidated. ( f )The other assets of the company, namely, investment in shares which is also held to be non-performing assets, have been assigned to Siel Holdings Ltd. which is also made to be a self-liquidating company. The said shares have been valued at Rs. 35 crores and an equivalent amount of debt, i.e., Rs. 35 crores have been assigned to Siel Holdings Ltd. ( g )The sugar business would be spun off and vested in Siel Sugar Limited. The shareholders of Siel Ltd. shall be allocated shares in the Siel Sugar Limited in proportion of three shares in the new company for every four shares held in Siel Ltd., and ( h )The petitioner company, i.e., Siel Ltd., would continue to operate with the residual business, i.e., chemicals and vegetable oil. 5. According to the petitioners, by the aforesaid restructuring the non-performing assets of an estimated value of Rs. 100 crores would be liquidated and an equivalent amount of debt would be discharged, and fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or casting its vote a sheet was found attached raising the following objections: "1. There is no parity among lenders. In case of other institutions, their principal as well as funded interest is part of principal outstanding, whereas in case of UTI only principal is shown which is also less. 2. We as NCD holders are at least more than 64% of total NCD of the company. Hence, we should be treated as separate class of creditors. We form majority of NCDs and we do not agree to this scheme of arrangement. 3. That SOA is not acceptable to us as all the three packages involve considerable sacrifices, which do not suit our business and regulatory environment. We would like our dues to be settled through a OTS which should not be linked to sale of assets." The said ballot paper, however, clearly indicates that the U.T.I. had voted against the resolution. In the ballot paper given to the State Bank of India it was found by the Chairperson that the State Bank of India had voted for the resolution but a letter dated March 13, 2003 addressed to the Chairperson was found attached along with the ballot paper. However, the minutes of the meeting record that at the meeting no mention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the pleadings, namely, the objections and the replies filed thereto and the submissions made by the counsel appearing for the parties, several issues like the following arise for consideration: 1. Whether the debenture holders like Unit Trust of India, which is a financial institution, constitute a separate and distinct class? Whether there is no uniformity or similarity of interest between them and the other secured creditors as their rights are distinct as envisaged in the Trust Deed? 2. Whether the objector UTI having held 64% of the total non-convertible debentures, a separate meeting for the UTI was to be held as it constitutes a separate and distinct class from other debenture holders as interest in their case was not funded and as UTI had sought for one time settlement? 3. Whether 3/4th of the value of the creditors and members had not voted in favour of the scheme and, if so, its effect? 4. Whether holding of meeting and including working capital providers in the said meeting held for the secured creditors, is illegal? 5. Whether the share exchange ratio propounded by the company under the scheme is unjust and improper? 6. Whether the latest balance sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured creditors as the UTI who in view of the provisions made in the trust deed could not have been equated with that of the other secured creditors. In support of the aforesaid contention, the counsel appearing for the objector relied upon the ratio of the decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 1 (SC) and also on the decision Hawk Insurance Co. Ltd. In re [2001] 2 Butterworths CLC 480. Mr. Chidambaram and Mr. Chandhiok appearing for the company also relied upon the same decisions while refuting the submissions made by the counsel appearing for the objector on the aforesaid score. In addition, counsel for the petitioner also relied upon the decision of the Bombay High Court in Wipro Finance Ltd. v. Suman Motels Ltd. [2002] 108 Comp. Cas. 549 2 , and the decision of the Gujarat High Court in Arvind Mills Ltd. In re [2002] 4 Comp. LJ 273 3 . With the aforesaid issue which is raised, another issue which is closely connected is the submission of the objector UTI contending inter alia that a non-convertible debenture holder is distinct from other debenture holders and, therefore, a separate treatment was to be given to the UTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like." 14. A reading of the aforesaid provisions would make it amply clear that that where different terms are offered to different class of creditors under the proposed compromise or arrangement, then in that event a separate class could be said to be constituted in respect of each class of creditors or shareholders and in that event separate meetings are to be held for such different class of creditors. If the creditors do not have a commonality of interest and if their rights and interest under a compromise would have different effect, they are to be separately treated and cannot be included into one class. Those who are offered substantially different compromise have to be treated separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the UTI to be given and treated as a separate class of creditor as it holds more than 64% of the total Non-Convertible Debentures of the company. It, however, did not come up with an application before this Court initially contending inter alia that it could not have been included within the ambit of the class of the secured creditors as it constituted a distinct and separate class. The classification of members of creditors can be founded on the basis of difference in the terms offered under the scheme. The difference in terms of the scheme can only be the criterion for identifying class for the purpose of convening a separate meeting of such class. In this connection, a reference may be made to the decision of the Supreme Court in Miheer H. Mafatlal s case ( supra ) where the Supreme Court has said as follows: "In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad contours of such jurisdiction have emerged: (1) The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arragnement are not exhaustive but only broadly illustrative of the contours of the Court s jurisdcition. (p. 818)" In the said decision the Supreme Court proceeded to hold as follows: "... On the express language of section 391(1) it becomes clear that where a compromise or arrangement is proposed between a company and its members or any class of them a meeting of such members or class of them has to be convened. This clearly pre-supposes that if the scheme of arrangement or compromise is offered to the members as a class and no separate scheme is offered to any sub-class of members which has a separate interest and a separate scheme to consider, no question of holding a separate meeting of such a sub-class would at all survive. Even otherwise, it becomes obvious that as minority shareholder if the appellant had to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the scheme. Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of a small number of persons who will all be willing to be bound by the scheme. In that case, it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is, however, necessary for at least one class meeting to be held in order to give the Court jurisdiction under the section. It is, therefore, obvious that unless a separate and different type of scheme of compromise is offered to a sub-class of a class of creditors or shareholders otherwise equally circumscribed by the class no separate meeting of such sub-class of the main class of members or creditors is required to be convened. On the facts of the present case the appellant has not been able to make out a case for holding a separate meeting of the dissenting minority equity shareholders represented by him....." (p. 833) 15. Hawk Insurance Co. Ltd. s case ( supra ) it was held as follows: "12. It can be seen that each of those stages serves a distinct purpose. At t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those creditors are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. If the rights of those creditors whom the scheme is intended to bind are such as to make it impossible for them to consult together with a view to their common interest, then the scheme must be regarded as a number of linked arrangement. In the latter case it will be necessary to have a separate meeting of each class of creditors; a class being identified by the test that the rights of those creditors within it are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. " 16. The facts of the present case indicate that all secured creditors including the UTI have been treated alike and in the scheme no separate provision is made for any of the secured creditors, and no distinction at all is made amongst the secured creditors. Almost similar terms of arrangement have been made and offered to all the secured creditors. No preferential treatment is given to any of the secured creditors and they were treated alike for all purposes under the scheme making similar provision of arrangement for all of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set apart in the accounts of the company to redeem the debentures must be treated as moneys set apart to meet a known liability. It was, therefore, held that debentures have to be shown in the company s balance sheet of the year as a "liability . In paragraph 12, the Supreme Court held that the debentures were nothing but secured loans and merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist, and that the same was a known liability. The aforesaid conclusion was arrived at also in view of the fact that in the form of balance sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading "liabilities" which also included debentures amongst others such as loan and advances, loans and advances from banks, loans and advances from subsidiaries and other kind of loans and advances. Therefore, the aforesaid decision conclusively holds that debenture is only a security like any other security. A very extensive argument was made by the counsel for the UTI to prove and establish that the Debenture Holder forms a separate class distinct from other secured creditors. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by corresponding assets on the balance sheet and, therefore, it cannot be said to be a reserve as there is no physical money available in a separate account for redemption of debentures as has been clearly pointed out by the Supreme Court in paragraphs 3 and 4 in National Rayon Corpn. Ltd. s case ( supra ). 18. In the present case also the UTI has a commonality of interest of securing their dues and, therefore, their rights are not dissimilar to the rights of other secured creditors. There was commonality of interest and no conflict of interest amongst all the aforesaid secured creditors including the objector and, therefore, the aforesaid submission of the objector is without any merit. Issue No. 3: 3/4th of the value of the creditors.: 19. Next major thrust was made and substantial argument was advanced by the objector UTI to the effect that 3/4th of value of the creditors did not vote in favour of the scheme and, therefore, requirement of sub-section (2) of section 391 was not complied with and could not be satisfied and, therefore, the scheme should be deemed to have been rejected in terms of the provisions of sub-section (2) of section 391. In support of the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id contents it was submitted by Mr. Chidambaram that as the objector has confirmed receipt of a sum of Rs. 1074 lakhs from the petitioner and the said amount was adjusted towards the principal amount of Rs. 4603.01 lakhs, therefore, the remaining principal amount would be Rs. 3529 lakhs. I have perused the contents of the aforesaid letter dated September 11, 2001. The said letter relates to one time settlement whereby the UTI has intimated its decision stating that it has examined company s request and the Trust is agreeable for one time settlement of Rs. 5260.74 lakhs on the basis as mentioned therein. There are several conditions attached to the aforesaid letter. Subsequently, however, the said proposal was cancelled by the Trust in terms of its subsequent letter. Therefore, the aforesaid proposal has fallen through and the said amount of Rs. 1074.40 lakhs which was paid by the company and proposed to be adjusted against the original principal amount of Rs. 4603.01 lakhs could not have been so adjusted. In that view of the matter, the position would be that the principal amount which was due and payable to the UTI was Rs. 4623 lakhs towards principal and interest payment was Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 391(2) of the Companies Act in the present case. The aforesaid objection raised by the objector is also found to be without merit for the aforesaid reasons. Issue No. 4: Joint meeting of secured creditors and working capital providers. 21. The next contention was that holding of the meeting of the creditors and the working capital providers together was also illegal. It was also submitted that the working capital providers could not have been included in the list of secured creditors as no sacrifice is made by the aforesaid working capital providers. The aforesaid contention appears to be unacceptable in view of the fact that under the Scheme working capital providers have also to make sacrifices in the following manner: ( a )Interest rate, so far working capital providers are concerned, would stand reduced from existing agreed rate to 12% per annum. ( b )Interest of working capital providers from January 1, 2003 to December 31, 2003 would be converted into funded interest term loan on which no interest would be paid till the date of payment which would be in the year 2008-2009 and 2009-2010. ( c )The security of working capital providers would get diluted on reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as on March 31, 2003 as provided by the petitioner on record and no independent investigation/enquiry was made regarding such valuation by the said Chartered Accountant which is established from the said valuation report. It was also submitted that the valuation report as submitted by M/s. S.S. Kothari is based on capital asset pricing model approach. Counsel for the objector submitted that there is hazard involved in practical application of the CAPM approach in a country like India. In support of the said contention a reference was made to the book written by M.Y. Khan and P.K. Jain on Financial Management , Text and Problems (Second Edition). Particular reference was made to pages 335 and 337 of the said book. However, when the report of the Chartered Accountant, M/s. S.S. Kothari is scrutinised it would be apparent therefrom that the said report took notice of several factors and various methods and thereafter it proposed an exchange ratio taking a summary of the varius methods. A close reading of the valuation advisory report submitted by M/s. S.S. Kothari Co. would indicate that while suggesting the share exchange ratio, it took notice of the several commonly used meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mself was a member. C.C. Chokshi and Co., a reputed firm of Chartered Accountants, having considered all the relevant aspects suggested the aforesaid exchange ratio keeping in view the valuation of shares of respective companies. It must at once be stated that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of Accountancy...." (p. 835) 25. In this connection, reference may also be made to the decision of the Supreme Court in Balco Employees Union (Regd.) v. Union of India AIR 2002 SC 350, wherein the Supreme Court in paragraph 94 has held as follows: "94. The offer of the highest bidder has been accepted. This was more than the reserve price which was arrived at by a method which is well recognised and, therefore, we have not examined the details in the matter of arriving at the valuation figure. Moreover, valuation is a question of act and the Court will not interfere in matters of valuation unless the methodology adopted is arbitrary [ see Duncans Industries Ltd. v. State of U.P. [2000] 1 SCC 633 (p. 381)" 26. In Chaturanan Industries Ltd. v. Sulabh Leafin (P.) Ltd. [1998] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies. The aforesaid ratio was also accepted by this Court in Jindal (India) Ltd. v. Cold Rollings India (P.) Ltd. [1998] 1 Comp. L.J. 36 1 . 29. In Hindustan Lever Employees Union s case ( supra ), it was again held by the Supreme Court that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain mathematical accuracy, if the determination satisfied the arithmetical test. It was further held that a Company Court does not exercise an appellate jurisdiction. In the said decision it was held as follows: "... The Court s obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as, even though the chartered accountant who performed this function was a director of TOMCO, but he did so as a member of renowned firm of Chartered Accountants. His determination was further got checked and approved by two other independent bodies at the instance of shareholders of TOMCO by the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or extension of time has been granted and the same stood extended by letter dated 29-10-2002 for holding the Annual General Meeting of the company upto 29-9-2003. Therefore, in view of the aforesaid extension granted, the accounts for the current year as extended have to be finally audited and placed before the Annual General Meeting to be held on or before September 29, 2003. The company has filed the latest available audited accounts upto September 30, 2001. Unaudited balance sheet, however, for the period upto September 30, 2002 was prepared and circulated and, therefore, it must be held that the latest balance sheet and the latest financial position was available on record and that there is no default of the petitioners on that score also. Issue No. 7: All relevant materials were not disclosed. 32. It was next submitted that the company has failed to disclose all material interests as is required to be done under the provisions of section 393 of the Companies Act. It was submitted that the shareholding of only director has been given and not of the group companies. It was also submitted that notice issued gives an impression that Mr. Siddharth Shriram s interest is only u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme proposed, which is part of the record, when read with the allocation of the debt of the lenders, would depend upon the option exercised by each one of them, i.e., from Options A, B and C. 34. The amount of sacrifice that is to be made under the scheme by each of the lenders would depend upon the option exercised by such lender. Even the UTI was aware of the aforesaid position and also of the sacrifice to be made as each option clearly spells out the degree of sacrifice to be made by each of the lenders including the working capital providers. It is also understood that the sacrifice to be made by each of the lenders cannot be the same as it was open for each of the lenders to select its own option and as the sacrifice to be made by a lender opting for one option would always be different from the sacrifice to be made by a lender opting for the second category of options. However, it is also established from the scheme that within each of the options the degree of sacrifice is the same. 35. Besides, notice issued to each of the members and the creditors in respect of the meetings to be held was settled by the Registrar under the relevant company rules. No grievan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause ( a ) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B)." 38. It was submitted that the petitioner-company-Siel Ltd. was in default since 1998 was the company failed to redeem the debentures of the objector and, therefore, the directors of the petitioner-company as on the effective date of the scheme are disqualified to become the directors of any public company for five years. It was also submitted that as the petitioner-company failed to redeem the debentures on the due date, the directors of the petitioner-company have to resign as per provisions of law, and in order to circumvent the same the present scheme has been so framed in a manner that the directors who had resigned could protect themselves from earning the disqualification under section 274(1)( g ) of the Companies Act and could again become directors of the company. The aforesaid submission was made relying on the provisions of section 274(1)( g ). It is, however, brought out by the petitioners-company during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the petitioner-company pursuant to the orders of the Supreme Court in M.C. Mehta s case ( supra ) has surrendered 68% of the land and has also made provision only to retain 32% of the land for its own utilisation. What is proposed under the scheme is transfer of the aforesaid portion of 32% of the land which the company is entitled to retain and utilise. In this connection reference may be made to the letter of the petitioner to the Delhi Development Authority dated April 14, 2003 wherein it was specifically mentioned by the company that all encumbrance on the 68% of the land has been removed by the company and it is in position to hand over possession of the land to be surrendered pursuant to the orders of the Supreme Court. The Delhi Development Authority was requested to withdraw the execution application pending before the District Judge whereupon the company undertook to hand over the possession of the land required to be surrendered pursuant to the Supreme Court order. In view of the aforesaid request and in view of the fact that the land which is surrendered is also demarcated, a drawing of which is placed on record indicating that the surrendered land has also proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances and in the light of the aforesaid discussion, it is held that the aforesaid objection also has no basis. 41. In terms of the aforesaid discussion, the various issues which have emerged during the course of arguments stand crystallised, discussed and decided. The objections raised by the two objectors, are, therefore, found to be without any merit and the same are dismissed. Having held thus, I find no impediment in granting sanction to the proposed scheme of arrangement. 42. However, the aforesaid sanction to the scheme, in my considered opinion, is to be granted only on fulfilment of one condition. It was found by me during the course of my discussion, as stated hereinbefore, that the UTI has demanded parity with all other lenders on funding of interest. It is true that the UTI failed to accept the option when it was given to the UTI at the time of earlier debt restructuring package of the company in the year 1999. However, on the facts and circumstances of the present case I am fully satisfied that although at that stage the UTI rejected the aforesaid proposal on funding of interest, since the UTI had demanded a parity with all other lenders on funding of in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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