TMI Blog2003 (3) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... f Arrangement which is challenged in this appeal. The Scheme of Arrangement of the two transferor companies namely Alstom Transport Limited and Alstom Systems Limited having their registered offices in Delhi has already been approved by the Delhi High Court. APBL and APIL have their registered offices within the State of Maharashtra and therefore, the approval of this court was sought by the aforesaid two Company Petitions. Re the Meetings of APBL (Transferor Company) 3. Initially, Company Application No. 116 of 2002 was filed by APBL for directions of this court to convene the separate meetings of the equity shareholders, the preference shareholders, the secured creditors and the unsecured creditors of the transferor-company. By an order dated 22nd February, 2002, this court passed an order convening four separate meetings as above in the same manner as proposed by the company. As there were more than one type of preference shares issued by it at different times at different rates of dividend with different dates of maturity while granting ex parte request of the company to convene a single meeting in respect of all the preference shareholders, this Court observed : "T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of Rs. 5,010 voted against. The votes of 5 equity shareholders holding 360 shares were declared invalid. The Scheme was thus approved by 98.95% in number and 99.99% in value of the equity shareholders present. The State Bank of India (For short SBI) who is the Appellant No. 1 in Appeal No. 1116 of 2002 and an equity shareholder did not attend the meeting of equity shareholders. Industrial Development Bank of India (For short IDBI) who is the appellant No. 2 in Appeal No. 1116 of 2002 and an equity shareholder attended the meeting through an authorised representative but, did not vote at the meeting of the equity shareholders. The meeting of the secured creditors was attended by 115 creditors of the value of Rs. 38,35,28,596. 114 unsecured creditors of the value of Rs. 38,32,16,556 voted in favour of the scheme and the vote of one unsecured creditors of the value of Rs. 3,12,040 was declared invalid. No vote was cast against the resolution. Thus, the scheme was approved by a majority of more than 98% in value and number of the members as well as the creditors in their separate meetings. 6. On securing approval of the respective shareholders and creditors as above, APBL f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India which also had committed to procure orders for power boilers. But, according to the company, this commitment was not fulfilled and the company made substantial cash losses and repayment of the loans was not possible. As on 31st March, 1994 the company had accumulated losses of Rs. 10.9 crores and its cash losses were Rs. 107 crores. There were little hopes for FIs for recovery of the principal amount of loans leave alone the interest. Before the BIFR, efforts were made to find out a promoter who would infuse funds pay loans due to FIs subject of course to several concessions and revive the company. The ABB group being a multinational group agreed to take the management control and repay the principal sum due to the FIs and bring in additional funds for continuing the operations of the transferor company. In 1995, the ABB group acquired the management control of the APBL under a scheme sanc- tioned by the BIFR by an order dated 30th May, 1995. As per the said scheme, the ABB group inducted Rs. 60 crores, Rs. 24 crores as equity capital, Rs. 28 crores as preference share capital and Rs. 8 crores as loans. By this, the ABB group s holding in the equity share capital of the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets would be realised to without any diminition. As the Government of India did not come forward to take back the management control of the company, the Alstom group proposed the Scheme of Arrangement of merger of the APBL and other two group companies with APIL being another group company, instead of closing the shop. The merger would save costs, bring in synergies and make the merged entity viable and profitable. Facts relating to APIL 10. APIL was incorporated in the year 1992 and its name was changed to Alstom Power India Limited with effect from 5th September, 2000. It is engaged in design engineering, manufacturing procurements, supply and commissioning services and renovating and modernising of power plants for utility and industrial users. It is a public limited company whose shares are listed on the Bombay Stock Exchange. The learned counsel states that presently the shares of the transferee company are quoted at around Rs. 44 per share. Mrs. Kenia, her husband and her father who are the appellants in Appeal (Lodging) No. 953 of 2002 are shareholders of APIL. The IDBI is also a shareholder of APIL. Under the proposed scheme of amalgamation, the Alstom Transport Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int No. 1 : The Government of India holding 10% cumulative preference shares redeemable in the year 2005 formed a separate sub-class distinct from other holders of preference shares. As a separate meeting of this sub-clause of 10 % cumulative preference shares redeemable in 2005 was not called, there has been no proper resolution approving the scheme by this sub-class. The single meeting of all the preference shareholders was not valid and therefore, there was no approval in law to the Scheme of Arrangement by this sub-class. Point No. 2 : Dividend in respect of the cumulative preference shares was not paid for a period of more than two years and therefore, the Government of India was entitled to vote in the meeting of equity shareholders as well as the meeting of the creditors. As this was not allowed, the meetings of the equity shareholders and the creditors were not properly conducted and the resolution approving the scheme passed in the meetings of equity shareholders and creditors was not valid. Point No. 3 : The provisions of SICA have an overriding effect. The Scheme of Arrangement proposed by the company under sections 391 to 394 of the Companies Act was in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval of the Scheme of Arrangement between the company and its members and/or creditors or any class or classes of them. When such an application is made, the court does not ordinarily decide whether a particular group of members or creditors forms a separate class and the order for convening the meeting or meetings is usually passed on the basis of the averments made in the application and the classifications as proposed by the applicant. It is the applicant who proposes the classification at the risk of the Scheme being rejected ultimately if the court at the hearing of the petition which is filed subsequently for sanction of the scheme finds that classification proposed was improper and the separate meetings of the proper classes have not been held. It is precisely for this reason that while initially passing an order on the Application No. 1116 of 2002, this court kept the issue whether different preference shareholders form same class or not expressly open. It is therefore now necessary to consider this point. We would presently refer to the various authorities cited by both the sides on the issue of classification. 16. In Sovereign Life Assurance Co. v. Dodd [1852 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e who voted represented a substantial portion of those entitled to vote. The court held that the meeting was validly held because there was only one class of creditors. Whilst those summoned to attend the meeting had different types of insurance, given the nature of the proposed scheme, it could not be said that their interests were different or conflicted with each other. 18. Hellenic General Trust Ltd., In re [1975] 3 All ER 382, Hellenic and General Trust Ltd. (for short the Company) carried on business as an investment trust. 53.01% of the ordinary shares of the company were held by another company namely Merchandise and Investment Trust Ltd. (for short MIT) and 13.95% shares were held by National Bank of Greece SA (for short NBG). All the shares of MIT were held by another bank viz. Hambros Ltd. and therefore MIT was a wholly subsidiary of Hambros Ltd. An arrangement was proposed under which the ordinary shares of the company were to be cancelled and new shares were to be issued to Hambros Ltd. and the company was thus to become a mighty fully owned subsidiary of Hambros Ltd. Former shareholders of the company were to be paid by Hambros Ltd. 48 pense per share for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any emphasis that the General Body of equity shareholders acting as a class while considering the question of approval of the Scheme was likely to take a decision which would adversely affect the commercial interest of the appellant as an equity shareholder. His personal conflict of interests with the director was totally foreign to the scope of class meeting which was convened to consider the Scheme in question as we have seen earlier while considering earlier points for determination. It is also to be kept in view that the appellant would have urged with some justification his contention for convening a separate meeting representing from him and his group of dissenting equity shareholders if it was his case that the Scheme of Compromise and Arrangement as offered to him and his group was in any way different from the Scheme of Compromise and Arrangement offered to other equity shareholders who also belonged to the same class in the wider sense of the term. 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 conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two or more groups of members or creditors are so dissimilar that they cannot reasonably be expected to have a common interest and are not likely to consult together to have a common view of their common interest. If their interests are so dissimilar that they are reasonably unlikely to take the same view about the Scheme and would reasonably feel that any one view would unreasonably benefit one or unreasonably prejudice the other than they would form different classes. ( iv )The private interest of one or a group of members or creditors vis-a-vis the directors of the company or the persons in the management of the company are alien for the purpose of classification. As held by the Apex Court in Mihir H. Mafatlal s case ( supra ), the member or members or creditor or creditors claiming right against one or more directors of the company cannot claim that he or they constitutes a separate class only by reason of having a separate private right or interest. ( v )While in case of shareholders, the court would not generally favour a further sub-classification other than equity shareholders and preference shareholders, there may be need for making a further sub-classification i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each held by them in ABPL. The preference capital of each of them was going to be eroded to the same extent and their rights were affected similarly. There is nothing on record to show that they could not have consulted together in furtherance of their common interest. We therefore, reject the first contention that the Government of India formed a separate sub-class distinct from other preference shareholders. Re Point No. 2 22. Dividend in respect of preference shares was unpaid for a period of more than two years. Under clause ( b ) of sub-section (2) of section 87 of the Companies Act, the preference shareholders were therefore, entitled to vote on every resolution at any meeting of the company. The Government of India was entitled to vote on the resolution seeking approval of the Scheme in any and every meeting of the company including ( i ) the meeting of the equity shareholders and ( ii ) the meeting of the creditors. We have no doubt that the meeting of the equity shareholders of the company was a meeting of the company and the Government of India was entitled to vote on every resolution placed before that meeting as a preference shareholder to whom dividend was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the same proportion as the capital paid-up in respect of the preference share bears to the total paid-up equity capital of the company." 24. The right given under clause ( b ) of sub-section (2) is "to vote on every resolutions placed before the company at any meeting." In our opinion, the words "before the company at any meeting" refer to a meeting of the company i.e. a meeting of the members of the company. A meeting of outsiders like the creditors of the company is not a meeting of the company. It is a special type of meeting of outsiders for a special purpose under section 391 of the Act. Sections 165 to 197 of the Act grouped under the heading "Meetings and proceedings" in Chapter I of part VI of the Act contain certain provisions relating to the meetings. They also regard only the meetings of the members of the company (as opposed to the meetings of outsiders like creditors) as the meetings of the company. Another clue to this interpretation can be found by reference to clause ( c ) of sub-section (2) of section 87 which lays down that the voting right of a holder of preference share who has a right to vote under sub-section (2) shall be in the same proportion as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of section 3(1)( o ) of SICA. The BIFR also passed a formal order to that effect on 7th February, 1997. The last part of the order reads as follows: "We are, therefore, of the opinion that the company has ceased to be sick industrial company within the meaning of section 3(1)( o ) of the Act and no longer requires to be dealt with by the Board. The case is therefore, closed. The Special Director last appointed by us hereby stand discharged." 26. We express no opinion on the question as to whether it would be legal and valid to implement a scheme under sections 391 to 394 of the Act while the company is sick and governed by SICA or where the Scheme of Rehabilitation under SICA is under implementation under the supervision of BIFR. However, as the company had ceased to be a sick company and was no longer monitored by the BIFR, sanction of the BIFR was not necessary for making an application under section 391 of the Act. We are unable to agree with the contention of the learned Advocate General that since the preference shares were issued in pursuance of the BIFR Scheme and they were not yet redeemed, the scheme continued to remain in force. The basic purpose of a scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me for sanction - Blue Star Ltd., In re [2000] 2 Comp. LJ. 245 at page 255. 28. In the present case, petitioner companies had initially produced the audited accounts together with the Auditor s Report for the year ending 31st March, 2001 both in the case of APBL as well as APIL. Despite the fact that the petitions came up for hearing before the learned Single Judge sometime in the year October, 2002 when the latest audited accounts as well as the auditor s report for the year ending 31st March, 2002 were available, they were not produced by the company. We must however, mention that Mrs Darshana Kenia (Appellant in Appeal Stamp No. 981 of 2002) had produced the latest Balance Sheet and financial position of APIL after conclusion of the hearing before the learned Single Judge but, before pronouncing of the judgment. The learned Single Judge however, declined to look into the same for the reasons mentioned in paragraph 39 of its judgment. In the case of Zee Interactive Multi Media Ltd. [company petition No. 1096 of 2001, dated 1-2-2001] one of us (Kernik, J) has clarified that the latest Balance Sheet, Profit and Loss Account and the Auditor s Report must be produced up to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The net worth of APBL would be negative. The preference shareholders of APBL would not probably get any amount in the event of winding up. Issuing of 22 equity shares (of the paid up value of Rs. 220) in APIL in lieu of 85 preference shares of paid up value of Rs. 8,500 of APBL was too high as such preference shareholders would not have ever received any amount as contributory in the event of winding up of APBL. He further pointed out that the equity shares of APIL were traded at around Rs. 44 per share at the relevant time and therefore, the value of Rs. 22 equity shares would translate into market value of more than Rs. 1000 whereas 85 preference shares in APBL though had a paid up value of Rs. 8,500 had practically no market value. Thus the preference shareholders of APBL gained unfair advantage to the detriment of the equity shareholders of APIL. Though the learned Advocate General and Mr. Vasudeo are agreed that the scheme should not be sanctioned, their contentions are directly contradictory to each other. Both the contentions cannot stand together. 31. For considering the contentions of the learned Advocate General and Shri Vasudeo, we would refer to the decision of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence shareholder had sent a fax message just a day prior stating : "In view of the above, I am directed to inform that the Government of India is not in a position to support the scheme of the proposed merger of APBL and APIL unless steps are taken to safeguard the interest and investments by the government institutions . It is requested that till then, the proposed merger may be differed." [Emphasis supplied] The Government of India did not sent its representatives to attend the meeting and voice its concern or oppose the resolution. The underlined portion from the communication of the Government extracted above makes it clear that the Government only thought that the Scheme was adverse to the interest and investments by the Government and financial institutions but, did not feel that the Scheme was adverse to the interest of the members or creditors or any class of them. The Government of India must be aware of the distinction between the individual interest of the Government and financial institutions as opposed to the interest of the company and its members and creditors and, therefore, did not rightly oppose the Scheme either in the meetings of the members and creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of its equity shares is to be accepted then we fail to see why appellants augmented their holdings and purchased a few more equity shares in APIL knowing fully well that their intrinsic value is going to be reduced by virtue of the Scheme of Amalgamation. The fact that Mr. Kenia, his wife and father-in-law did not attend the meeting of the equity shareholders either personally or through proxy to vote against the sanction of the Scheme of Arrangement and his conduct of purchasing further equity shares after the resolutions were passed leaves no manner of doubt in our minds that commercially he was satisfied that the scheme was not against the interest of the members of APIL. We are of the view that the present opposition to the scheme is for collateral reasons. In his arguments, Mr. Vasudeo made allegations of threats and also of the inducement made to Kenia to win over their opposition which of course were denied by learned counsel for the respondent company. It is possible that either because of the offer of inducement of hopes of offer of inducement to withdraw his opposition in the collateral motive, we however, are not obliged to make an inquiry into the real motive but we a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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