TMI Blog2003 (2) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. and Best Trading and Agencies Limited, are the transferee companies. For the purpose of brevity, Kirloskar Electric Company Limited is referred to as the Company or (KECL) in this order. 3. The petitioner-Company was incorporated as a Public Limited Company on 26-7-1946 under the Mysore Companies Act at Bangalore having its registered office at industrial Suburb, Rajajinagar, Bangalore-10. The authorised share capital of the Company is Rs. 700,000,000 (Rupees Seven Hundred Million) divided into 40,000,000 (Forty Million) Equity shares of Rs. 10.00 each and 3,000,000 (three Million) preference shares of Rs. 100.00 each. The issued, subscribed and paid-up share capital is Rs. 25,268,817 (twenty five million two hundred and sixty eight thousand eight hundred and seventeen) Equity Shares of Rs. 10.00 each and 1,800,000 (One million eight hundred thousand) Preference Shares of Rs. 100.00 each. 4. The object of the Company is to manufacture electric apparatus and appliances required for or capable of being used in connection with the generation, distribution, supply, accumulation and employment of electricity, produce a wide range of electricity motors, alternators, tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with industry norms, restore bankability of business units, achieve long term viability under given economic and industry scenario, achieve positive net worth situation as early as possible and keep options open for future possibilities of Joint Venture with Strategic Partners. Therefore, a detailed technical feasibility report for relocation and consolidation of manufacturing facilities has been made by the technical team of the petitioner-Company. The manufacturing Unit for large motors/generators (part of Unit-1) and DC machines and Traction equipment (Unit-3) will be consolidated at a new location to derive advantages of sharing of common facilities, minimizing material flow, higher productivity and reduction of employee costs. In this connection, ICICI (lead Institution) at the request of consortium of Banks and term lenders has obtained report from an independent technical consultant, who has confirmed the feasibility and rationale of relocation as proposed in the scheme. Therefore, they have formulated a scheme of arrangement between the petitioner-company and its members and creditors which is produced at Annexure-B. 7. In terms of the scheme, with a view to consolidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a subsidiary company of KECL, incorporated under the Companies Act, 1956 is the entity identified for this purpose. The other entities which are relevant is as under : ( i )"KEC-1" means the "Rotating Machine Group" or Kaytee Switchgear Private Limited (KSPL) ( ii )"Residual KEC" means the Company remaining after transfer of assets and liabilities to KEC-1 and SPV and ( iii )"New Location" means the new location for shifting of the existing plant at Unit-1 and Unit-3 as may be deemed fit by the management. 9. With effect from the appointed date, KECL will be de-merged/hived off into three entities so as to achieve the objectives of restructuring : ( a )Special Purpose Vehicle (SPV) to leverage Non-manufacturing Surplus Assets and real estate. ( b )KEC-1: (Hubli, New Location near Bangalore, Tumkur, Spares Division and REG in existing locations) called the Rotating Machine Group. ( c )Residual KEC : Unit 4 (Electronics,) Unit 5 (Transformer), unit 10 (Switchgear), and PSG. ( i )Special Purpose Vehicle (SPV) SPV will be carved out of KECL to comprise of surplus non-manufacturing and liquid assets such as real estate at Bangalore (other than a part of the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative each from the participating institutions/banks and one from KEC. The sale of any asset of SPV shall be with the approval of the members representing minimum of 75% in value of the total loan outstandings at any point of time in SPV. The sale proceeds shall be appropriated first to meet cost of VRS, cost of shifting operations from the existing locations, etc. The amount remaining thereafter shall be utilized for payment to lenders in SPV proportionately. No rent or other charges shall be payable to SPV by KECL or RMG from the appointed date to the date of vacation of the Malleswaram property. KECL and RMG shall vacate the premises within 9 (nine) months from the date of receipt of Rs. 2,696 lakhs from SPV towards the cost of shifting and voluntary retirement expenses. ( ii )KEC-1 (RMG) KEC-1 will be Rotating Machine Group (RMG) with a business valuation of Rs. 19,000 lakhs on the basis of Discounted Cash Flow (DCF) method. The fixed assets of RMG together with current assets and current liabilities will be transferred to Kaytee Switchgear Private Limited. This Company will be assigned liabilities of Rs. 19,000 lakhs as under : Particulars R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted cash generations of the company would ensure acceptable level of Average-Debt Service Coverage Ratio (DSCR). According to the scheme, the manufacturing operations of the main plant in Bangalore have to be shifted and the premises vacated. Certain expenditure like payments towards Statutory dues, workers dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location, etc., is involved. This requirement of funds has to be met out of the sale proceeds of the land, as no financial institution/Bank is willing to advance fresh funds for payment towards such expenditure. The Company intends to sell a part of the land measuring about 31000 square metres at the Bangalore main plant to a party with whom an agreement has been entered into for a sale price of approximately Rs. 2000 lakhs. The sale proceeds are to be utilised to meet certain expenditure such as payments towards statutory dues, workers dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location etc. The details of the asset (part of the Mall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of arrangement unconditionally. 11. The meeting of the unsecured creditors was attended either personally or by proxy by 401 unsecured creditors of the company and the total value of their debt is Rs. 25,29,76,149.07. The scheme was approved by a majority of 24,91,52,868.10 votes against 38,23,280.97 votes. 12. The meeting of the equity shareholders was attended either personally or by proxy by 910 equity sharesholders of the company entitled together to 1,42,25,793 equity shares of Rs. 10.00 aggregating to Rs. 14,22,57,930.00. The scheme was approved by a majority of 1,42,22,428 votes against 424 votes. 13. The preference shares issued by the company are held by one share- holder only viz., IDBI Limited. No meeting as such was convened to ascertain their view. Instead by a letter dated 18-4-2002 they were requested to convey their approval or otherwise of the proposed scheme. In reply thereto by their letter dated 26-7-2002 they stated that in principle agreement to the company s demerger proposal is accepted by them subject to the modification of the scheme or additional conditions, if any, as may be stipulated by them in the ensuing High Court hearing. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into 200 equity shares of Rs. 10 each. 17. The Kaytee Switchgear Private Limited, the petitioner in COP 270/2002, made an application in CA 1044/2002 before this Court under section 391 of the Companies Act seeking permission of this Court to call for the meetings of the shareholders are creditors of the Company to consider and approve the scheme. By an order dated 31-10-2002 this Court granted the permission sought for and directed the meetings of the shareholders and creditors to be held on 1st of December, 2002. Accordingly, notices were issued to the shareholders and meeting was held on 1st of December, 2002. The said meeting was attended by two equity shareholders of the said Company entitled together to 200 shares of the value of Rs. 2000.00 and the scheme of arrangement was unanimously approved. The Chairman of the meeting has filed his report. Thereafter, they have filed COP 270/2002 seeking sanctioning of the scheme. 18. The transferee Company No. 2 - Best Trading and Agencies Limited was incorporated on 2-5-1988 in Delhi, as Best Credits Private Limited, under the provisions of the Companies Act, 1956. Subsequently, vide a fresh certificate consequent on chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y obtained written consent of the IDBI in this regard. Therefore, they contend as the legal formalities have not been complied with as required under section 392 of the Companies Act the sanction sought for cannot be granted. 22. Yet another objection is from the Kirloskar Proprietary Limited. They contend that the word trade mark "Kirloskar" belongs to them: The KECL was the permitted user of the trade mark "Kirloskar" under an agreement which has been terminated on 24-1-2001 which termination has been accepted by the said Company. Therefore, they have no right to transfer the said name or trade mark or the benefits of the permitted user agreement to Kaytee Switchgear Private Limited. Not only the same is opposed to the provisions of the Trade and Merchandise Act but also the said property do not belong to them as it belongs to the Kirloskar Proprietary Limited. If the scheme as propounded by the Company is approved it would mean that this Court has granted permission for such transfer which is prohibited by law and it would also affect their interest and therefore they want Clause (2) in para 3 of the scheme to be deleted. 23. A reply was filed to the said objections by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of real estate at Bangalore will not dilute the security as contended by the objector but the sale proceeds will be used for paying off the loans as per the scheme. The remaining security remains intact and is quite adequate to cover the liabilities assigned to the Rotating Machine Group as well as the KECL. Therefore, it is submitted that the said objection has no substance. 27. The employees of the Kirloskar Electric Company Employees Association have filed an affidavit stating that the employees have no objection of or sanction of the scheme. All that has been said in the affidavit is that the management has mutually agreed with the Union that Voluntary Retirement Scheme will not be forced on the workmen. 28. The order passed by the BIFR in case No. 320/2002 of M/s. Kirloskar Electric Company Limited is also placed on record. It discloses that M/s. Kirloskar Electric Company Limited has been declared as a sick industrial company in terms of section 3(1)( o ) of the Sick Industrial Companies (Special Provisions) Act, 1985. They have further observed that the Company could make the net worth exceed the accumulated losses within a reasonable period on their own as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protect their interest, if any, and while according sanction, this Court may explicitly make this position clear so as to protect the interest of the Kirloskar Proprietary Concern. Insofar as the modification suggested by the secured creditors ICICI is concerned, he submitted, the same can be modified, as it would not in any way affect the working of the scheme. Insofar as the objection of State Bank of Travancore is concerned, he submitted, the Bank had only second charge on the property. Now, under the scheme, they would get a first charge on the property and to this effect an agreement has been entered into between all the secured creditors creating a pari passu charge on the property and therefore the apprehension expressed by the Bank is wholly misconceived. Therefore, he submitted, as all the legal requirements have been complied with and the scheme do not contravene any law and it is made with bona fide intention and good faith and the shareholders, creditors and the workman have given their consent for sanction of the scheme, there is no impediment for sanction of the scheme. 30. Per contra, Smt. Madumita Bagachi, learned Additional Central Government Standing Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme put up for sanction is approved by majority of secured creditors as required under section 391(2) of the Act ? ( ii )Whether non-convening of the meeting of the preference shareholders violate the statutory requirement contemplated by section 391(1) of the Act ? ( iii )whether the sanctioning of the scheme amounts to contravening the provisions of the Trade Marks Act ? ( iv )whether the modification of the scheme suggested by the secured creditor ICICI is reasonable ? ( v )whether sanctioning of the scheme resulting is sale of portion of the property at Bangalore would substantially dilute the security offered to State Bank of Travancore ? ( vi )whether the scheme requires to be sanctioned with or without modification ?" 35. Before I deal with the aforesaid points for determination, it is necessary to keep in view the limited scope of the jurisdiction of the Company Court which is called upon to sanction the scheme of amalgamation as per the provisions of section 391 read with section 393 of the Act. The aforesaid provisions of the Act provides that compromise or arrangement can be proposed between a Company and its creditors or any class of them, or betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht be supported by the requisite majority if the Court finds that it is a unconscionable or an illegal scheme or is otherwise unfair and unjust to the class of shareholders or creditors for whom it is meant. The Court is not to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme being approved by the majority. 38. However, the question remains whether the Court has jurisdiction like an Appellate Authority to minutely scrutinise the scheme and arrive at an independent conclusion whether the scheme should be sanctioned or not when the creditors and members have approved the scheme as required by section 391(2). The Court has to keep in view the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority. The Court certainly would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast." After reviewing the entire case law, the Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 has laid down the following broad contours defining the jurisdiction of the Company Court in these matters, which is as hereunder : "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 requisite meetings as contemplated by section 391(1)( a ) have been held. 2.That the scheme put up for sanction of the court is backed up by the requisite majority vote as required by section 391, sub-section (2). 3.That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the background of this legal position, I have to examine the scheme placed before this court for sanction, in the light of the objections raised for its sanction. 41. Regarding Point No. (i) : It is not in dispute that the unsecured creditors and shareholders have approved the scheme by three-fourths majority. The dispute pertains to the majority of secured creditors. The total number of secured creditors present were 18 in number and their value is 2533643491. Out of 18 present, one abstained from voting. Therefore, it is 17 persons whom were present and have voted. The value of the one secured creditor who was present and who did not vote is 309821941. The total value of secured creditors present and voting is 2223821550. There were 2 invalid votes, value of which is 389862275. Therefore, the total number of valid votes cast is 15 and their value is 1833959275. Out of the valid vote cast, 12 voted for the resolution and their value is 1477391975, 3 persons voted against the resolution and their value is 356567300. If the total secured creditors present and voted is taken into consideration and the votes held in favour of the said resolution out of them is taken into con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the voter either for or against the resolution is no voting at all. Similarly, voting for or against the motion subject to the conditions stipulated in the vote is no voting in the eye of law. Therefore, voting understood in a proper perspective, it could be either in the affirmative or in the negative. Therefore, in construing whether a resolution is passed by three-fourths majority present and voting, what is to be taken into consideration in calculating the majority is not the number of persons present and voting, but the number of valid votes polled in such meeting. The number of valid votes includes only votes which are indicating the mind of the voter for or against the resolution. 44. Therefore, by "voting", the mind, intention, preference of the voter must be clearly expressed. There should not be any ambiguity and scope for interpretation. It should be clear, unqualified and pointing. In this context, a voter who is not present at the meeting, who is present and not voting, present and voting by casting a blank ballot, and casting a ballot with conditions and stipulations, all stand on the same footing. It is no "voting" in the eye of law. Therefore, in my opinion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts of this case, if we look into the voting pattern, though 17 persons voted in the meeting, it was found 2 secured creditors (1) Bank of Baroda, (2) Bank of India, have voted for the resolution. But the Bank of Baroda in the ballot paper mentioned that the vote is for the resolution with modifications below : "(1)we may agree for demerger on principle subject to final approval by higher authorities with regard to stock verification etc. (2)we will not agree for equity participation letter to the company has already been submitted." Insofar as Bank of India is concerned, have also cast their vote for the resolution subject to the modifications suggested by them which was annexed to the ballot paper. There they have suggested 13 modifications to the scheme and it is made clear they are giving consent to the scheme subject to the aforesaid modifications. Therefore, the Chairman of the meeting has rightly treated those two ballots as invalid, because the said two creditors were not expressing their will or opinion in favour of the resolution unconditionally. The said votes are not votes leading either way and therefore they cannot be taken into consideration either fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vote, the Court cannot blindly by technical interpretation refuse to sanction the scheme on the ground of non-compliance of section 391(2) of the Companies Act. It is also to be remembered here that 2 creditors whose votes have held to be invalid have also voted for the scheme. Under these circumstances, I am satisfied that the secured creditors also have approved the scheme with three-fourths majority as required under section 391(1) of the Companies Act. As such, there is compliance with the said statutory requirement also. 47. Regarding Point No. ( ii ) : The second objection raised was that no meeting of the preference shareholders are convened to consider the scheme and there is no resolution passed approving the said scheme and therefore the requirement of section 391(1) of the Companies Act is not complied with. As such, the Court cannot accord sanction to the scheme. 48. Therefore, the question for consideration is : convening of a meeting of the members and creditors of the Company, or any class of them, to consider and approve the same is mandatory? 49. The meeting contemplated under section 391 is analogous to an extra-ordinary general meeting of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know of the scheme voluntarily, unconditionally, give their consent or approval for such a scheme, calling a meeting of such class of members or creditors to a meeting to express their mind by way of casting vote in a meeting would be an empty formality. If a copy of the scheme propounded stating the terms of the compromise or arrangement and explaining its effects is sent and acknowledged by that class of members or creditors who are numerically small and if they give their consent to such a scheme in writing, there is no necessity in law to convene the meeting of such class of shareholders or creditors. The said consent letter or approval given can be acted upon and is sufficient to show that they have approved the scheme. 50. In this context, in the facts of the case, it is not in dispute the entire preference shares in the Company is held by Industrial Development Bank of India. By a letter dated 18th April, 2002, the Company brought to the notice of the IDBI the aforesaid scheme and further informed that as they are the only preference shareholder, no separate meeting of preference shareholders has been convened and therefore IDBI was requested to convey their approval or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of instant Scheme or Arrangement by the Hon ble Court." Their contention is that they are the owners of the trade mark "Kirloskar"; the Company is the permitted user of the said trade mark; and by a letter dated 24-1-2001 they have terminated the agreement permitting/licensing the use of KPL s trade mark "Kirloskar". Therefore, the Company has no right to use the said trade mark nor is entitled to allow the use of said trade mark by Kaytee Switchgear Pvt. Ltd. or to any other person. It is also stated by them that even if the scheme is approved by the Court, the said scheme or any clause thereof, cannot effect KPL s paramount statutory and common law rights. Therefore, they submitted that if the scheme is to be approved by the Court, the aforesaid objectionable part of the scheme is to be deleted. 52. The Company has filed its objections contending that the contentions raised by KPL do not in any way require to be heard in this petition, as the issue of Company s right of use of the trade mark "Kirloskar" does not alter the corporate entity of the Company which remains intact irrespective of the name and style under which it carries on its business, nor does it effect the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval of the scheme by this Court is sought for. Therefore, in the present proceedings, what the Court has to consider is whether that clause is legal and valid and it contravenes any law for the time being in force. On the face of it, it does not contravene any provisions of law, but, if as contended by KPL those brands, trade marks, fall in to their ownership and they have given the same to the Company under a permitted user agreement and if they are objecting to transfer of those rights to KSPL, then, the Court has to go into the question whether it is against any law. The Company has denied the right of KPL, as claimed by them. On the contrary, they contend that this brands and trade marks belong to them, they are using it for the last 50 years, it is they who have assigned it in favour of KPL, without consideration for the benefit of the group, and therefore, KPL has no right to the same. In view of these disputed facts, in a proceeding under section 391 of the Act, this Court cannot hold enquiry and go into the question who is entitled to the ownership of these brands, names and trade marks. It is totally outside the purview of section 391. However, any sanction to be accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old shares in any company, whether as pledge, mortgagee or an absolute owners thereon, for an amount exceeding 30 per cent of the paid up share capital of the Company or 30 per cent of its own paid up share capital and reserves. In the light of the said subsequent event and the legal position and in view of the accounting standards and norms required to be maintained by it, it has become essential that the above scheme be modified by additionally permitting the ICICI Bank Limited to hold up to 19 per cent of the share holding in the SPV by themselves and by permitting ICICI Bank Limited to nominate such person or persons as they may deem appropriate for the allotment and for holding the remaining shares in the SPV such that their shareholding and their nominee put together does not exceed 56 per cent of the shareholdings to which ICICI Bank Limited is entitled under the scheme. The Company has no objection for the proposed modification by the secured creditor. Accordingly, the scheme stands modified enabling the ICICI Bank Limited to hold 19 per cent of the shareholding in the SPV by themselves and in their names and further to nominate such person or persons, as they may deem fit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming Asset. It was also submitted that the Company has not sought for any higher non-fund based facility than the sanctioned existing limits. Thus, the Bank s interest remain unaffected and are in fact better protected and as such there is no legally justifiable reason for the Bank to object the scheme. 58. The Bank is one of the secured creditors. All that the secured creditor would be interested is in repayment of the loan borrowed by the Company. The scheme envisages repayment of 312 lakhs immediately after the sale of land at Bangalore. In so far the balance amount is concerned, the Bank is given first pari passu charge for Rs. 555 lakhs on the fixed assets and a second pari passu charge on current assets and for the balance amount, it will have a first pari passu charge on the current assets and a second pari passu charge on fixed assets. Thus, the interest of the Bank is completely taken care of. If the Company is wound up, the Bank being a second charge holder, is not sure of getting back its full money having regard to the extent of liability of the Company. Moreover, the time to be consumed for such payment is unpredictable. Insofar as their objection regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oving the resolution. The proposed scheme is not found to be violative of any provisions of law nor is it contrary to public policy. The members and the creditors of the Companies have acted bona fide and in good faith and not coercing the minority in order to promote any interest adverse to that of the latter. The interest of Kirloskar Proprietary Limited is taken care of making it clear that the sanction of the scheme by this court could in no way affect their rights. The modifications suggested by ICICI Bank has not been opposed by the Companies, as such, the scheme stands modified to the extent of the modifications suggested by ICICI Bank. The interest of the secured creditor, namely, the State Bank of Travancore is fully taken care of by making a provision for the repayment of the loan to the extent of Rs. 312 lakhs and providing sufficient security for the remaining 555 lakhs and other amounts due to them from the Company. It is also to be taken note of here that the matter is before the BIFR. The Board is unable to rehabilitate this Company. It is in that context, at their suggestion, the Company has come forward with the scheme to rehabilitate and restructure the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets of the Company and utilizing the proceeds and appropriating the same towards discharge of the debts due to them by the Company. A portion of the amounts due to them is sought to be adjusted by allotment of equity to those secured creditors. Thus, the interest of the creditors have been taken care of completely under the scheme. Insofar as the interest of the shareholders are concerned, if restructuring of the Company is not done, the only option is winding up of the Company in which event shareholders interest is completely ruined. On the contrary, if the scheme is worked out, they stand to gain, the Company will be fully functioning and their interest is protected, and, therefore, they cannot have any grievance whatsoever. In fact, the shareholders and creditors of the transferee companies have unanimously approved the scheme. 61. Therefore, taking into consideration all circumstances of the case, an opportunity is to be given to the Company to restructure the Company as suggested in the scheme which would be beneficial for one and all. As a whole, the scheme is just, fair and reasonable. It is not open to this court to undertake the exercise of scrutinizing the scheme wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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