9911796707
TMI Blog2003 (2) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... Kaytee Switchgear Pvt. 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, al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the production facility, to reduce overheads and to unlock the real asset value at Bangalore the following operational restructuring is proposed : -Shift unit (1) (AC Machines - Small and Medium Plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 retained in residual KECL), Peenya, Pune and surplus machinery and group company advances and receivables. The total realizable amount from sale of such assets is estimated at Rs. 14,855 lakhs (net of cost of sales). The liabilities of secured lenders to extent of Rs. 12,159 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Rs. in lakhs Equity to KECL 5,292 Equity to lenders of KEC (in lieu of) Conversion of KECL (liabilities) 1,308 Net worth 6,600 Assignment (Transfer) of Liabilities of KECL to Rmg i.Balance of Term Debt of term lenders and FITL secured 6,741 ii.WCTL to Banks 1,297 Sub Total 8,038 Working Capital of Banks 3,362 Overdue sundry Creditors 1,000 Grant Total 19,000 The break up of liabilities being transferred to KEC-1 (RMG) is given in Annexure-1. The secured lenders will be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. 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 Malleswaram land) retained in Residual KEC and amount of liabilities assigned are given below : Liabilities Assets Existing Liabilities Rs. in Lakhs Sale price for Rs. in Lakhs CST, Sales Tax, Entry Tax etc. 302 part of Bangalore Complex land 2000 Salary Arrears 446 PF, Income Tax etc., 133 Less : Cost of Gratuity 439 Sales 50 Total 1320 Other Liabilities VRS (Part) 180 Cost of Shifting 450 Total 630 Total Liabilities 1950 Total Assets 1950 10. The Company filed C.A. No. 134/2002 under section 391 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, they have not suggested any modification or additional condition to be stipulated in the scheme. Thus, all the legal formalities have been complied with by the petitioner-company. 14. It is also pertinent to point out the petitioner-company being a sick company, a reference has been made under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 to the BIFR by its application dated 26-3-2002 and the matter is now pending before BIFR. 15. Thereafter, the petitioner-company sought for sanctioning of the scheme by this Court. However, this Court by an order dated 22-10-2002 rejected the petition on the ground that the transferee companies have not sought permission of this Court for convening the meeting of their shareholders and creditors to consider and approve the scheme formulated by the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 change of name dated 18-6-1999, it was incorporated as Best Trading and Agencies Ltd. at Bangalore having its registered office at Industrial Suburb Rajajinagar, Bangalore. The main object of the said Company is to carry on the business of agency of all kinds and to act as traders, dealers, importers, exporters, merchants, wholesalers, retailers, stockists, distributors and other business as mentioned in the Memorandum and Articles of Association annexed along with Company Petition No. 271/2002. The authorised share capital of this Company is Rs. 1 Crore and the subscribed capital is Rs. 1000 divided into 100 equity shares of Rs. 10 each. 19. Similarly, Best Trading and Agencies Limited, the petitioner in COP 271/2002, also filed an application in CA No. 1048/2002 under section 391 of the Companies Act seeking permission of the Court to call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prietary 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 the KECL contending that the said dispute is of a civil nature, it cannot be decided in these proceedings. They contend the word "Kirloskar" and the trade mark "Kirloskar" belongs to them exclusively. The objectors right to take action against the company on the ground of alleged violation also remains unaffected and therefore they have prayed for rejection of the said objections. 24. Another secured creditors ICICI Bank Limited has filed an application requesting the Court to modify the scheme by enabling them to hold upto 19 per cent of the shareholding in the transferee company by themselves and in their names and further to nominate such person or persons as the applicant may deem fit to hold the shareholding in the transferee company such that their shareholding put together does not exceed 56 per cent of the shareholdings to which the applicant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectric 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 the rehabilitation package to be formulated and submitted by them under section 17(2) of the Act. Further a direction was issued to the Company to discuss the rehabilitation package with all secured creditors and other concerned parties and reach an agreement on the reliefs and concessions envisaged from them. A direction was issued to the company not to dispose of any fixed asset or current assets of the company without the consent of the secured creditors and the BIFR and they have issued other directions in this regard. That is how the petitioner-company has formulated the scheme and has obtained the approval of the shareholders and the secured creditors. 29. Learned senior counsel for the petitioner P. Chidambaram, submitted that the scheme is approved by the shareholders and the creditors by three-fourths majority present and voting and therefore the legal requirement of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 Counsel, submitted if the total number of votes cast in the secured creditors meeting is taken into consideration, the scheme is not approved by three-fourths majority of creditors present and voting, and therefore, there is non-compliance of section 391(2) of the Act. Secondly, she contended, admittedly, no meeting is convened of the preference shareholders, as such, the legal requirement contemplated under section 391(1) of the Act is not complied with. Compliance of sections 391(1) and 391(2) of the Act is a condition precedent for the Court considering sanction of the scheme, as such the scheme cannot be sanctioned. 31. Learned counsel appearing for Kirloskar Proprietary Limited, submitted, Clause 2 of Part III of the scheme read as a whole provides for transfer of the trade marks which are permitted to be used by the Company, in favour of the transferee companies and therefore it viola ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anction 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 between a Company and its members or any class of them. When a scheme is put forward by a Company for the sanction of the Court, in the first instance the Court has to direct holding of meetings of creditors or class of creditors, or members or class of members who are concerned with such a scheme. Once the majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement the Court gets jurisdiction to sanction the scheme. Once such a compromise is sanctioned by the Court, it would be binding on all the creditors or class of creditors, or members or class of members, as the case may be, which would also necessarily mean that even to dissenting creditors or class of creditors or dissenting members or class of members, such sanctione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 wisdom exercised by the creditors and members of the Company who have ratified the scheme by the requisite majority. To that extent the jurisdiction of the Company Court is peripheral and supervisory and not appellate. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of section 392 of the Act. The propriety and the merits of the compromise and arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasonable judgment and agree to be bound by such a compromise or arrangement. 39. In this regard, it is useful to refer to the observations found in the oft-quoted passage in Bucklay on the Companies Act, 14th Edition. They are as under : "In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, secondly, that the class was fairly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391, sub-section (1). 5.That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6.That the proposed scheme of compromise and arrangement is no found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7.That the Company Court has also to satisfy itself that members or class of members or creditors o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 consideration, the resolution is passed by 58.31 per cent which is below the three-fourths majority mark. If out of the valid votes cast, votes polled for resolution is taken into consideration, it would be 80.58 per cent well above the three- fourths mark. The number of votes voted against the resolution out of the valid votes is taken into consideration, the value of votes would be 19.44 per cent. 42. In the light of these aforesaid facts, the question for consideration is: whether "present" and "voting" means even those persons who cast the votes and whose votes were found to be invalid ought to be taken into consideration or it is among the valid votes cast three-fourths majority is to be taken into consideration. 43. Sub-section (2) of section 391 requires that a scheme of compromise or arrangement must be approved by majority of creditors/members representing three-fourths in value of the creditors or class of creditors, or members or class of members, present and voting eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent 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, the proper construction to be placed in calculating whether any resolution is approved or passed by a three-fourths majority present and voting necessarily mean the value of the valid votes and out of the same whether the resolution has been passed with three-fourths majority. This view of mine is supported by a judgment of the Gujarat High Court in the case of Arvind Mills Ltd. [2002] 111 Comp. Cas. 118 , where it has been held as under : "Thus it will be seen from the above that a member present and voting may remain neutral, indifferent, unbiased, impartial, not engaged on either side. Voting is formal expression of will or opinion by the person entitled to exercise the right on the subject or issue in question has to be either in the affirmative or negative, that is yes or no. On the ballot paper or voting paper one is not supposed to writ anything, except putting a "X", "V" either in favour of the proposition or against the proposition and any writing suggesting condition or reservation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 for or against the scheme. Therefore, though 17 persons voted in the said meeting, as the 2 votes cast were invalid, in order to determine the majority what is to be taken into consideration is only the value of 15 creditors who voted in the said meeting. The value of such 15 creditors is 1833959275 which is not in dispute 12 out of the 15 creditors voted for the scheme and the value of those creditors is 1477391975. The value of the 3 votes cast against the scheme is 356567300. Therefore, it is clear that the scheme is approved by a majority of 80.56 per cent which is above the three-fourths majority required under law, as the value of the valid votes voted against the scheme is 19.44 per cent. In that view of the matter, it cannot be said that the secured creditors have not approved the scheme by a three-fourths majority as required under law. 45. It is also relevant to point out at this juncture the requirement that the scheme should be approved by the requisite majority has been held to be directory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 Company inasmuch as three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders where it is unanimous or by a three-fourth majority, must be obtained in a meeting summoned on the orders of the Court under section 391. This is in accordance with the general principals that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirements of a meeting. Secondly, written resolutions instead of those passed in meeting are now capable of being registered e.g., section 192 of the Companies Act. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of action of the members enables the Court to hold the consent of the overwhelming majority of the shareholders outside the meeting is sufficient to show that the resolution was supported by virtually all the members of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly preference shareholder, no separate meeting of preference shareholders has been convened and therefore IDBI was requested to convey their approval or otherwise to the proposed scheme. Along with the said letter, a copy of the scheme was also sent for reference. Acknowledging the said letter, IDBI wrote on 26th July, 2002. The said letter reads as under : "Proposal for demerger - Please refer to your request for IDBI's approval for the company's proposed demerger scheme filed before the High Court of Karnataka. IDBI's in principle agreement to the company's demerger proposal may be conveyed at the ensuing High Court hearing. The final approval shall be subject to the modifications to the scheme or additional conditions, if any, as may be stipulated by IDBI." However, the IDBI, did not stipulate any modifications or additional conditions. The hearing of this Company Petition has been duly notified in the newspaper and the IDBI did not appear before the Court to suggest any modifications or to impose any additional conditions before the High Court. In other words, the IDBI have agreed to the scheme proposed by the Company. Under these circumstances, when the sole preferential sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company which remains intact irrespective of the name and style under which it carries on its business, nor does it effect the proposed scheme of arrangement. As the Company's identity as a corporate entity remains unaffected even after the scheme, the KPL's right to take action against the Company on the ground of alleged violation also remains unaffected. They have also contended that the KPL does not manufacture any goods and in fact those trade marks originally belong to the Company who in turn assigned in favour of the KPL for the benefit of the group. The said assignment was without any consideration. The Company has been doing business under the name and style of "Kirloskar" for over 50 years, and therefore, they requested the Court to reject the said objection of the KPL. Learned counsel for the Company contended that all those disputed questions cannot be gone into in a proceedings under section 391 of the Act. If the KPL has any grievance against the petitioner in this regard, it is always open to them to initiate appropriate legal proceedings in the Civil Court or in any other Court and can agitate their rights, and sanctioning of the scheme by this Court would in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip of these brands, names and trade marks. It is totally outside the purview of section 391. However, any sanction to be accorded by this Court to the scheme cannot be construed as taking away the right of KPL, if they have any. Therefore, to that extent, the interest of KPL has to be protected. Therefore, it is made clear that this order of sanctioning the scheme by this Court would in no way effect the rights/interests of KPL to the brand name, trade mark or user agreement of theirs. It is always open to them to initiate appropriate legal proceedings either in the Civil Court or before appropriate forum to protect their rights in respect of brand name, trade mark, etc. If any such proceedings are initiated, those authorities who are empowered to decide shall decide those rights independently on merits and in accordance with law without in any way being influenced by any of the observations made by this Court in this order and the sanctioning of the scheme by this court would in no way put fetters on the power of the Court or the forum to go into these disputed questions. It will not be open to the Company to contend in those proceedings that as the scheme containing the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding in the SPV by themselves and in their names and further to nominate such person or persons, as they may deem fit, to hold the shareholding in the SPV, such that their shareholding put together does not exceed 56 per cent of the shareholdings to which they are entitled under the scheme. To this extent, the terms of the scheme stands modified. 56. Regarding Point No. (v ) : The State Bank of Travancore opposing the scheme contends that the Company is due in a sum of Rs. 1,030.98 lakhs and the same has been treated as a Non Performing Assets; the Company is heavily indebted; the Company is not able to service its debts for a long time; even after the proposed restructuring, it is not possible for the Company to service the debts and the proposed scheme will only postpone the repayment; the valuable real estate of the Company in Bangalore is proposed to be sold as part of the arrangement which will substantially dilute the level of the security for the facilities proposed to be extended to RMG and residual KECL entities; the Company has been incurring losses for a long time and shifting of units away from Bangalore cannot make the operations profitable; even after clearing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time to be consumed for such payment is unpredictable. Insofar as their objection regarding shifting of the unit and objection to the sale of the Bangalore property is concerned, they cannot have any say in this matter. The proprietary and the merits of the compromise or arrangement have to be judged by the parties who as sub juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot therefore undertake the exercise of scrutinizing the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the Company who in their best commercial and economic interest by majority agree to give green signal to a compromise or arrangement. In the instant case, a consortium of 22 financial institutions has been formed under the scheme for the purpose of selling the assets of the Company and for discharge of the liability of the Company. When th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has come forward with the scheme to rehabilitate and restructure the Company to the satisfaction of all the members, creditors and workforce. The only alternative for the scheme is winding up of the Company, in which event, neither the creditors nor the members nor the workmen would be benefited. 60. Broadly speaking, the scheme contemplates that the value of the large real estate assets belongs to the Company, the land and building in Malleswaram at Bangalore will have to be unlocked upon implementation of operational restructuring. The real estate value can be suitably leveraged for reducing the debt burden on manufacturing operations. An asset sale committee has been constituted comprising of one representative each from the participating institutions/banks and one from the Company. The sale of any asset of SPV shall be with the approval of members representing minimum of 75 per cent in value of the total loan outstanding 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 utilised for payment to lenders in SPV proportionately. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open to this court to undertake the exercise of scrutinizing the scheme with a view to find out whether a better scheme could have been adopted by the parties. When the creditors and members of the Company, who in their best commercial and economic interest by a majority agree and approve the scheme, the discretion of this court is to be exercised in approving such a scheme. Under these circumstances, I am satisfied that the scheme is fair, just, bona fide, honest and it takes into consideration the interest of the members, the creditors, the workmen and this is the best that could be done under the circumstances and the only mode in which winding up of the Company could be prevented. Accordingly, I pass the following : ORDER All the three Company Petitions are allowed. This Court doth hereby sanction the arrangement set forth in the scheme produced as Annexure O to the petitions and doth hereby declare the same to be binding on all the creditors, members of the petitioner-Companies and also on the companies subject to the following modifications : (a)the ICICI Bank Limited is permitted to hold upto 19 per cent of the shareholding in the SPV by themselves and they are permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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