TMI Blog2007 (3) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ltd., and Nirma Ltd., and their respective shareholders. The petitioner-company has prayed for the following reliefs: "( a )The modified composite scheme of arrangement referred to in paragraph 15 of this petition and being annexure with this petition hereto, be sanctioned by this Hon ble Court so as to be binding on all equity shareholders, class A lenders and class B lenders of the petitioner-company and on the petitioner-company; ( b )That the petitioner company do within 30 days from the date of sealing of the order cause a certified copy of the order sanctioning the scheme of arrangement to be filed with the Registrar of Companies, Gujarat, Ahmedabad, for registration and upon such certified copy of the order being so delivered, the Registrar of Companies, Gujarat, Ahmedabad, be directed to consolidate all relevant files, documents, records relating to the demerged company maintained by him with the files, documents, records of the resulting company; ( c )For such incidental, consequential and supplemental orders and directions may be given as may be made in the premises as to this Hon ble Court may deem fit and proper; ( d )Costs of this petition and the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Nirma Ltd. The company became full fledged public company vide a special resolution passed on 8-11-1993. One Nilnita Chemicals Ltd., was amalgamated with Nirma under order dated 3-5-1995, passed by the High Court. Vide another order dated 19-12-1996, passed by this Court, the three companies, namely, Nirma Detergents Ltd., Nirma Soaps and Detergents Ltd., and Shiva Soaps and Detergents Ltd., were amalgamated with Nirma Ltd. Under order dated 13-8-2003, passed by this Court, the operating division of Nirma Industries Ltd., was demerged and transferred to Nirma Ltd. 9. As per the latest audited balance-sheet as on 31-3-2005, the authorised, issued, subscribed and paid-up share capital of Nirma consist of the following : Share Capital as on 31-3-2005 Authorised: (Rs.) 9,50,00,000 equity shares of Rs. 10 each 95,00,00,000 5,00,000 6 per cent Redeemable non-cumulative non-convertible preference shares of Rs. 100 each 5,00,00,000 Total 1,00,00,00,000 Issued and subscribed: 7,94,01,376 equity shares of Rs. 10 each fully paid-up 79,40,13,760 2,79,285 6 per cent Redeema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quick growth and grand success in a short period of time. The company registered a phenomenal growth during nineties. In 1993-94, it was a company with turnover of more than 100 crores and a net profit of 21 crores. Encouraged by the same, it initiated upon an aggressive growth plan in 1993-95, involving investment of about Rs. 600 crores for expansion of its existing facility and also diversification into manufacture of medical devices. The plan was validated by the board of directors, consultants, lenders and also appraised by all lenders while sanctioning the loans. Based on the same, the company set up one of the world s most modern and largest, pharmaceutical manufacturing facility across 600 acres of land with most modern manufacturing technology from world-renowned suppliers. The company continued to achieve appreciable growth in sales and financial performance despite significant increase in costs, overheads and fixed charges up to 1996. The company s new manufacturing facility for I.V. Fluids won the prestigious IDMA award for 1994-95 in its very first year of operations the highest recognition for quality assurance in Indian Pharmaceutical Industry. The facility at Sachan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e request of ARCIL, BIFR vide order dated 12-1-2005, has abated the pending reference of the company, being Reference No. 149 of 2001. 18. Nirma, the resulting company, according to Core, is a leading multi-location, multi-product company and an established player in the fast moving consumer goods segment. It is engaged in the business of manufacture of synthetic detergents, toilet soaps, linear alkyl benzene and soda ash, etc., having a turnover of approx. Rs. 2,150 crores during the financial year ended on 31-3-2005. The operating profit for the year was Rs. 510 crores. The company has reserves and surplus of more than Rs. 1,792 crores. The shares of the company are listed on Mumbai Stock Exchange and National Stock Exchange. "NIRMA" today is one of the largest selling detergent brand with a sustained growth in the Indian market. The company has also penetrated and developed toilet soap segment as well as premium segment and successfully acquired substantial market share. It has established integrated soaps and detergent plants, employing the state-of-the-art technology located at Mandali, Chhatral, Moraiya, Trikampura, Kalatalav and Alindra in the State of Gujarat. The log ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uence to the compromise with the lenders and the same is proposed as an integral part of the composite scheme. On one hand, the petitioner-company has substantial balance in its share premium account and on the other hand, there is substantial reduction in the value of investments, debtors, loans and advances over a period of time. The company has balance of miscellaneous expenditure as well as debit balance of profit and loss account. Similarly, as a consequence to the proposed compromise, the value of the liabilities of the company also undergoes a substantial change. The net effects of the above are to be reflected in the reconstruction account. In order to realise the realistic financial position of the company, it is proposed that an amount not exceeding Rs. 5.66 crores standing in the share premium account of the company be utilised to adjust/write off the balance of the said reconstruction account. Under clause 46 of the articles at Table "A", which is Schedule I to the Act, and which have been adopted by the applicant generally as its articles of association, subject to the provisions of sections 78 and 100 of the Act, the petitioner-company is authorised to use its share p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 of 2005, seeking a direction for holding of the meetings of the equity shareholders, class "A" lenders and class "B" lenders for considering the scheme of arrangement in the nature of compromise with the lenders and reconstruction and reorganisation of the capital of demerger between M/s. Core and Nirma and their respective shareholders. Despite objects raised by M/s. HDFC, one of the lenders, the court allowed the application and directed as under : "( a )That separate meetings of the equity shareholders, class A lenders and class B lenders (of the demerged undertaking, as defined in the scheme) of the applicant-company be convened and held at the registered office of the company at village Sachana, Taluka Viramgam, Distt. Ahmedabad on Friday, 9-12-2005 at 9.30 a.m., 10.30 a.m. and 11.30 a.m., respectively, for the purpose of considering, and if thought fit, approving with or without modifications, the composite scheme of arrangement in the nature of compromise with the lenders and reconstruction of Core Healthcare Ltd., the applicant demerged company, reorganisation of capital of Nirma Ltd., the resulting company and demerger and transfer of undertaking (as defined in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( g )Voting by proxy is permitted provided that the proxy in the prescribed form and duly signed by the person entitled to attend and vote at the aforesaid meetings, or by his authorised representative, is filed with the applicant-company at its registered office at village Sachana, not later than 48 hours before the said meetings. ( h )The value of the vote of each equity and preference shareholder of the company shall be as per the entries in the registers and/or books of account of the company and where the entries in the records or registers are disputed, the chairman of the meetings shall determine the value or number for the purposes of the meetings and his decision in that behalf would be final. ( i )The chairman do report to this Court, the result of the said meetings within 14 days of the conclusion of the meetings and the said report shall be verified by his affidavit." 24. The court also observed that in view of the special circumstances and the facts of the case, the requirements, to meet the provisions of section 101(2) of the Act with the procedure, as is required under rules 48 to 65 of the Companies (Court) Rules, 1959, could be conveniently dispensed wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise with the lenders and reconstruction of Core Healthcare Ltd., the applicant demerged company, reorganisation of capital of Nirma Ltd., the resulting company and demerger and transfer of undertaking (as defined in the scheme) of Core Healthcare Ltd., the applicant-company to Nirma Ltd., the resulting company and its shareholders. ( b )That at least 21 days before the meetings be held as aforesaid, "notice" convening the said meetings, indicating the day, the date, the place and the time as aforesaid, together with the copy of the scheme of agreement, copy of the explanatory statement required to be sent under section 393 of the Companies Act, 1956, and the prescribed form of proxy shall be sent by a pre-paid letter posted under certificate of posting, addressed to each of the equity and preference shareholders of the applicant-company at their last known address. ( c )That at least 21 clear days before the meetings to be held as aforesaid, notice, convening the said meetings, indicating the day, the date, the place and the time as aforesaid be published, stating that copies of the scheme of agreement, the explanatory statement required to be furnished pursuant to section 393 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e modifications proposed and approved by the shareholders and different classes of lenders are annexed with the company petition and shall now become integral part of this judgment in the scheme. 28. According to Core, the meeting of the shareholders and separate meetings of class "A" and class "B" lenders of the company were duly convened on 9-12-2005. In accordance with the orders passed by the court, Shri Chinubhai R. Shah chaired the meeting. Shri Chinubhai R. Shah reported the results of the meeting to this Court which are as under: ( a )( i )The said meeting of the equity shareholders of the company was attended by 29 (twenty nine) equity shareholders of the said company entitled to together Rs. 16,36,12,800 being 163,61,280 equity shares of Rs. 10 each. The said scheme of arrangement was taken as read with the permission of all the equity shareholders present at the meeting. The detailed discussions and deliberations were made on the proposed scheme. The modifications in the scheme as proposed and approved by the equity shareholders of Nirma at the meeting convened on 29-11-2005, for the approval of the scheme, were also put before the equity shareholders of Core and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put for consideration. Separate vote was taken on for both, the approval of the modifications proposed and approval of the modified scheme of arrangement submitted to the meeting. ( iv )Vote for the approval of the modifications showed the following result : Class "A" lenders Nos. % of total present and voting Value of debt (Rs. in lakhs) % of total holding present and voting In favour 7 70 111,545.40 90.42 Against 3 30 11,816.45 9.58 Invalid votes 2 N.A. 3,095.08 N. A. Total present 12 126,457.65 Total valid voting 10 123,361.85 Out of total 12 ballot papers, two ballot papers representing the value of debt at Rs. 3,095.08 lakhs were treated as invalid as the same did not indicate whether the votes were cast in favour or against the proposed modifications. Thus, the proposed modifications were approved by majority of 70 per cent in number and 90.42 per cent in value of the class "A" lenders present and voting at the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B" lenders (including the debenture holders) of the said company entitled to together for Rs. 34,810.05 lakhs being the value of their debt. The compromise or arrangement which was circulated among them with the individual notice served upon them was taken as read with the permission of the lenders present at the meeting. The scheme was explained in detail to the meeting and elaborate deliberations were made to consider the scheme. The modifications in the scheme as proposed and approved by the equity shareholders of Nirma at the meeting convened on 29-11-2005, for the approval of the scheme, were also put before the class "A" lenders of Core and the same were explained. Inserting the said modifications, the duly modified scheme was then put for consideration. Separate vote was taken on for both, the approval of the modifications proposed and approval of the modified scheme of arrangement submitted to the meeting. ( iii )Vote for the approval of the modifications showed the following result : Class "B" lenders Nos. % of total present and voting Value of debt (Rs. in lakhs) % of total holding present and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were made on the proposed scheme. Some of the equity shareholders proposed certain modifications in the proposed scheme. The modifications as proposed by them were explained and discussed at the meeting. They were put to vote for approval and the same were approved by requisite majority. ( b )Out of 110 votes cast at the meeting, 107 votes representing the value of shares of Rs. 64,39,03,440 were found to be in favour of the proposed modifications. One vote representing the value of share at Rs. 2,000 was cast against the modifications and 2 votes representing the value of shares at Rs. 3,920 were found to be invalid as the folio number and the name of the shareholder did not match with that of the register of the company. Thus, the modifications were approved by the majority of 97.27 per cent in number and 99.99 per cent in value by the equity shareholders present and voting at the meeting. ( c )Since the proposed modifications were approved by the said meeting with requisite statutory majority, the duly modified scheme was then put for consideration and to vote. The poll was taken to ascertain the wishes of the equity shareholders which showed the following result: ( i ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the creditors, the meetings were not properly classified, the description of the lenders as class "A" and class "B" was ambiguous, incorrect and mischievous. It is submitted by them that from the facts, it would appear that various banks have assigned their loan in favour of ARCIL by executing a deed of assignment and that ARCIL had taken the possession of the assets of the company under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( the SARFAESI Act ) and ARCIL is working as a trustee of ARCIL-Core Healthcare Trust. According to them, once ARCIL had exercised the powers under the SARFAESI Act, it can never be defined as class "B" lender. According to them, as various creditors and banks have assigned their loans in favour of ARCIL, neither the banks nor ARCIL can be classified in class "A" lenders. Conduction of the meeting was condemned alleging that it was done in violation of the principles of natural justice, no appropriate notices were issued, the scheme is against public interest, 90 per cent of the amount would go to class "A" lenders while only 10 per cent would be paid to class "B" lenders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A ), various secured creditors of Core, who have now voted for the scheme, had requested the BIFR to make investigation into auditing of Core. The BIFR vide its order dated 24-1-2003, in case No. 149 of 2001, after observing that various doubtful and unjustified, unexplainable entries in the books of account of Core and siphoning away of the funds, ordered to carry out special investigative audit. Accordingly, IDBI was appointed as an operating agency and IDBI, in its turn, appointed M/s. Ernst and Young, a firm of chartered accountants, as a special investigative audit to conduct audit of Core. M/s. Ernst and Young, vide its special investigative audit report, made several observations with respect to the working of the company. According to the objector, the said report revealed various acts of malfeasance and misfeasance by the directors of Core. It was observed by M/s. Ernst and Young that the company failed to show its books of account and other materials on certain occasions and M/s. Ernst and Young were left with no other alternative but to arrive at inferential conclusions. Various parts of the said reports have also been referred to in the objections. According to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of Rs. 1,887.04 lakhs forfeited against the bank guarantees. Such benefit or refund due has not at all been reflected in the books of account of the petitioner-company. The bank is entitled to the entire amount of refund along with interest payable by the custom authorities. ( v )By proposing and passing a scheme of arrangement, the company has acted against the interest of the bank in compromising the bank s position with the custom authorities without giving true and proper disclosures to the Court and in effect attempting to defraud public monies of the bank. 36. It is also submitted by them that Core has obtained revalidation for compliance of export obligation till 8-10-2007, and the Government of India, Ministry of Commerce has, by a letter dated 27-12-2005, addressed to the company with a copy to HDFC, stated, inter alia , that he has no objection to refund the sum of Rs. 987.24 lakhs already forfeited provided a new bank guarantee for the same amount is executed by the bank with the Commissioner of Customs, Mumbai. Their submission is that if the export obligations are performed, the amount of Rs. 987.24 lakhs would be received by Core and the same would amount to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the possession of any of its assets to anyone. Their further submission is that the settlement amount is shown of Rs. 138 crores, which Nirma will pay to Core for acquiring demerged undertaking of Core at Sachana, but, it has not been disclosed how the figure of Rs. 138 crores is worked out. According to them, no valuation report for the assets of Sachana unit was placed before the Court or before the creditors. According to them, the book value of fixed assets is more than Rs. 699 crores as on 31-3-2004, and the market value thereof is likely to be much more than the depreciated or book Value. They also submitted that Nirma is acquiring Sachana unit of Core as a going concern and as per clause (8) of the scheme, Nirma is claiming set off of the accumulated losses and unabsorbed depreciation. According to the objector, Nirma is likely to claim set off of more than Rs. 1,200 crores and are likely to save more than Rs. 400 crores by way of tax benefits. According to them, grant of the scheme would cause loss to the revenue because the scheme is a fraud upon the revenue. They also submitted that HDFC had filed Original Application No. 77 of 2005 before the Debts Recovery Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors who have first claim over the amount, sacrifice that is being given by the creditors, whether the company is going to continue the business, what additional benefits are likely to get if the proposal is accepted, what is the need for compromise and whether by the proposed demerger that need can be achieved by the proposer and what incentive is given to the creditors for effecting any sacrifice of their dues. According to the objector, such details if are not supplied, then, the scheme/proposal would come under the shadow of doubt and would not make the proposal a valid proposal. They submitted that the scheme of compromise does not disclose the particulars of the secured as well as unsecured creditors and the amount due to each of the said class of creditors. According to them, the petitioner did not give the detailed particulars of lists of class "A" and class "B" creditors, amount due to each of the creditors falling in each of the classes, any agreement or otherwise arrived at with any class of creditors, percentage of sacrifice each of the creditors has to undergo and the criteria adopted for determining the classification. 43. Their further objection is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odi can be dealt with right now. 45. Section 529A of the Act provides that notwithstanding anything contained in any other provision of the Act or any other law for the time being in force, in the winding up of a company ( a ) workmen s dues; and ( b ) debts due to secured creditors to the extent such debts rank under clause ( c ) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts. 46. Sub-section (2) of section 529A provides that the debts payable under clause ( a ) and clause ( b ) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. 47. Section 530 of the Act provides that in a winding up, subject to the provisions of section 529A, there shall be paid in priority to all other debts, ( a ) all revenues, etc.; ( b ) all wages or salary of employees; ( c ) all accrued holiday remuneration, etc. After all such debts are paid, the shareholders would be entitled to receive their share value and thereafter, the balance would be given to the promoters. 48. In the present case, undisputedly, the assets of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances, they object to the grant of the scheme. 52. The objections, in the opinion of this Court, are misconceived. Undisputedly, Rajpur unit is neither being transferred nor demerged. As per the scheme, Sachana unit, with its excise liability, is to be demerged with Nirma and Nirma is undertaking to clear the statutory liability raised against Sachana Unit. If the excise department has to recover an amount of Rs. 1,93,19,641 as against Sachana unit, and such statutory liability is accepted by Nirma, then, the excise department would be entitled to recover the said amount from Nirma. I have already observed while dismissing the objections made by Mr. Modi that in case a company is to be put under liquidation and the entire property of Core, including both the units, namely, Rajpur and Sachana, are auctioned, then too, money to discharge the liability or pay to the secured creditors would not be made available. If such is the situation, then, the excise department even in case of liquidation and sale of the property would not be in a position to recover anything. Would it be prudent for the excise department to oppose to the scheme, which provides payment of a sum of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice of all concerned. As a fact, it is submitted that litigation of HDFC Bank and injunction obtained by it were discussed in the meetings. They also submit that letter dated 7-1-2006, addressed by the HDFC Bank to the chairman, specifically refers to the injunction order operating in favour of the HDFC Bank and the said letter was fully read out at the said meeting and was subject-matter of discussion. They submit that when the facts were known to all concerned, then it would not be proper to say that the facts were suppressed. 54. It is also submitted that the objection that some of the creditors wanted audit of Core when the matter was pending before the BIFR would lead to nothing, because present is not a case to find out whether the company is sick or not, present is a case for restructuring a company and scheme is for compromise and/or arrangement between the petitioner-company and its shareholder and lenders. They also submitted that the writing off of some amount by majority is not a question to be considered in these proceedings, because these proceedings are in relation to the scheme and are not relating to malfeasance or misfeasance. It is submitted that the misc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appointed date, principal amount payable to persons having first charge over the fixed asset would be more than Rs. 1,300 crores while the total amount payable to the persons having charge over the current assets was approximately Rs. 350 crores. They submitted that considering the large amount of statutory dues payable by Core, it was decided to propose a scheme whereby Nirma would discharge all liabilities of lenders at the total price of Rs. 138 crores. According to them, total worth of the security of the scheme of class "B" lenders on the basis of its market value today is lower than 10 per cent which is coming to their share. They submitted that this matter is purely in the realm of the discussion, negotiations and satisfaction between the respective creditors, inter se and between one and another group and between all of them at one end and Nirma on the other. According to them, the issue has no bearing to the validity of the scheme. They submit that ARCIL, certainly would be creditor of Core to the extent of Rs. 82,273.64 lakhs, because the lenders who had right to recover the amount and had transferred the debt in favour of ARCIL, had to recover the said amount. They ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meetings held in the office of ARCIL for considering the terms of the present scheme, every objection raised by the objector was recorded and from that it would be clear that the objector had information with him and objector being class "A" lender would not be careless in discussing the scheme. It is submitted that the scheme was approved by statutory majority and out of class "A" lenders, Oman International Bank is the only one lender which objects to the scheme. It is submitted that in the scheme of demerger, valuation of assets is immaterial. If any lender had any objections, then the same were to be projected in the meetings. Once statutory majority which includes international banks, financial institutions, foreign banks and private banks, had considered everything, then it would be too much to say that the other institutions which had higher stakes approved the scheme without understanding it. According to them, in the meeting dated 23-11-2005, ARCIL had agreed that sale proceeds from sale of shares will be distributed by it in the same manner and on the same basis as is contained in the case of Sachana unit. According to them, benefit of pledge of shares would be avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchaser of the debts would not be to such an extent. It is reiterated that the explanatory statement circulated by the petitioner was incomplete, vague and was not providing required material. The petitioner filed its affidavit dated 5-12-2006, in reply to objections raised by the HDFC. They submit that M/s. ICICI, IFCI, IDBI, SBI, SBM and SBT had assigned debt to the extent of Rs. 37,191 lakhs in favour of ARCIL, Dena Bank assigned debt of Rs. 5,932.57 lakhs in favour of M/s. Niya Finstock (P.) Ltd., and M/s. Indusind Bank assigned debt of Rs. 1,289.56 lakhs in favour of Astramd Technologies Ltd. Their submission is that purchaser of the debt, specially, ARCIL has acquired financial assets from the banks and financial institutions under section 5 of the SARFAESI Act and it has become lender. It is further submitted that minority was not forced to accept the settlement in order to promote interest of ARCIL. Core had filed yet another affidavit dated 13/14-12-2006, wherein, they had submitted that Core did not know that for what amount financial institutions had assigned their debt in favour of ARCIL, but the said institutions had informed the petitioner that the debts were assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or in the case of a company which is being wound up, on the liquidator and the contributories of the company : Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Tribunal, 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 li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is called under section 391, ( a )with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular, stating any material interests of the directors, managing director or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if and insofar as, it is different from the effect on the like interests of other persons; and ( b )in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such statement as aforesaid. (2) Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promise or arrangement or by a subsequent order, make provision for all or any of the following matters : ( i )the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company; ( ii )the allotment of appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person; ( iii )the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; ( iv )the dissolution, without winding up, of any transferor company; ( v )the provision to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement; and ( vi )such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out : Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been summarised above, but parties have submitted their written argu- ments and the court now is required to deliver judgment after deciding the written objections in the form of written arguments. 62. Nobody appeared for Gannon Dunkerly to support their objections, therefore, the same are rejected. 63. HDFC Bank says that creditors of Core have not been properly classified, Core had clubbed secured creditors other than class "A" lenders, unsecured creditors and debenture holders in the category of class "B" lenders. The said creditors have different interests and are not homogeneous. Class "B" lenders include assignees of the debt being ARCIL, Niya Finstock (P.) Ltd., and Astramed Technologies Ltd., representing Rs. 3,676.63 lakhs, Rs. 10,385 lakhs and Rs. 5,371.60 lakhs of value of debts of class "B" lenders. Since the debts had been purchased at a fraction of the value by the assignees, the compromise offered under the scheme to the class "B" lenders (3.8 per cent of the outstanding amount as on the cut off date) is effectively and in substance different, for the original lenders would have to sacrifice 96.2 per cent of their claim. According to them, assignees being th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ESI Act, transferee is vested with all rights as if the transfer had been made by the owner of such secured assets. Therefore, the scheme seeking demerger of the said unit is wholly misconceived. Company Petition No. 48 of 1999, filed by jost s Engineering Company Ltd., has been filed for winding up of the company and the same has already been admitted for hearing. They submit that under the circumstances, the scheme be rejected. 64. Oman International Bank has also summarised their arguments and has submitted written arguments after completion of the oral hearing. They submit that the scheme is neither legal nor fair and reasonable. Before the scheme came to be proposed, notices were served and possession of the secured assets was taken by ARCIL under the SARFAESI Act and the said Act has to prevail over the provisions of the Companies Act. Once the possession has been taken under the SARFAESI Act and such action has not been challenged by Core, assets are required to be disposed of in accordance with the provisions of the SARFAESI Act and sale proceeds are required to be distributed as per the provisions of the SARFAESI Act. According to the objections, the SARFAESI Act does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst and Young, was not produced in the meeting dated 10-1-2005, and the company s explanation that, it was sent to the consortium leader would amount to service would be a bad argument. They submit that even if the objector knew about the report, then too, the question that whether proper informations were supplied or not would be a material question. They submit that there was no offer on the part of the company to get the report produced and concept of adverse inference in case of statutory requirement has no room. They submit that ARCIL cannot be considered in the category of secured creditors, because it never lent money to the company but in fact, it had purchased debts and the assignment is secured at a price much less than the amount of debts. Under the circumstances, consideration for sanctioning the scheme of compromise for ARCIL would be different. It is also submitted by them that the Company Court has no jurisdiction to pass an order taking away effect of O.A. (DRT proceedings) and the reliefs claimed thereunder. They are placing their reliance upon the judgment of the Supreme Court in the matter of Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64. They also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100 2,79,28,500 100 Against Nil N.A. Nil N.A. Invalid votes Nil N.A. Nil N.A. Total present 7 100 2,79,28,500 100 ( iii )Outcome of the meeting of shareholders of Core Healthcare Ltd. : Equity shareholders Nos. % of total present and voting Value of shares held in Rs. % of total holding present and voting In favour 29 100 16,36,12,800 100 Against Nil N.A. Nil N.A. Invalid votes Nil N.A. Nil N.A. Total present 29 100 16,36,12,800 100 ( iv )Outcome of the meeting of "class-A" lenders of Core Healthcare Ltd., was as under: "Class A" lenders Nos. % of total present and voting Value of debt (Rs. in lakhs) % of total holding present and voting In favour 7 70 111,545.40 90.42 Asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benture Holders 58 0.2835 Against 4 5.33 3,267.42 Etah Gramin Bank 1 69.5800 Aligarh Gramin Bank 1 313.1200 Pragati Gramin Bank 1 14.0000 HDFC Bank 1 2,870.7200 Invalid votes Total present 75 34,810.05 66. They submit that section 391 requires that the scheme must be approved by the majority members having not less than three-fourths in value, of the members present and voting at the meeting. According to them, the scheme has been approved in all the four meetings by majority. They also submit that more than 50 per cent of the shareholders have approved the scheme and under the circumstances, the scheme cannot be said to be illegal. 67. I will take up the objections and their replies later on, but, at this stage, I am tempted to refer to the judgment of the Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 1 . The said judgment has been relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) If the court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act. (3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Act under section 153 of the Indian Companies Act, 1913 (7 of 1913), sanctioning a compromise or an arrangement. Of course, this section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy maker. Consequently, the propriety and the merits of the compromise or arrangement have to be judged by the parties who are sui juris with their eyes open and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs were made by Lindley L.J., as under : What the court has to do is to see, first of all , that the provisions of that statute have been complied with; and, secondly , that the majority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve it. [Emphasis supplied] To similar effect were the observations of Fry L. J., whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, certainly, there will be some economics in the matter of maintaining accounts, filing of returns and various other matters. However, the court is really not concerned with the exact details of the matter and if the shareholders approved the scheme by the requisite majority, then the court only looks into the scheme as to find out that it is not manifestly unfair and/or is not intended to defraud or do injustice to the other shareholders. We may also in this connection profitably refer to the judgment of this court in the case of Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30 (SC)/[1995] Supp. (1) SCC 499, wherein a Bench of three learned Judges speaking through Sen, J. on behalf of himself and Venkatachaliah, C.J., and with which decision Sahai, J., concurred. Sahai, J., in his concurring judgment in the aforesaid case has made the following pertinent observations in this connection in paragraphs 3 and 6 : But what was lost sight of was that the jurisdiction of the court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical tests. A Company Court does not exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is some illegality or fraud involved in the scheme, the court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr. Dhavan has argued that TOMCO is not yet a sick company. That may be right, but TOMCO at this rate will become a sick company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The shareholders, the employees, the creditors will all suffer. The argument that the company has large assets is really meaningless. Very many cotton mills and jute mills in India have become sick and are on the verge of liquidation, even though they have large assets. The scheme has been sanctioned almost unanimously by the shareholders, debenture holders, secured creditors, unsecured creditors and preference shareholders of both the companies. There must exist very strong reasons for withholding sanction to such a scheme. Withholding of sanction may turn out to be disastrous for 60,000 shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad parameters about the requirements 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 could 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. 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 arrangement are not exhaustive but only broadly illustrative of the contours of the court s jurisdiction." (p. 94) 68. From this judgment, it would be clear that in the scheme proceedings, the court does not sit in judgment over the commercial wisdom of the parties to the scheme, the court has supervisory role in the matter of sanction of the scheme, the court is not required to find out as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possibly, but I do not think that because a scheme is not 100 per cent fair or right there is the kind of unfairness with which Maugham, J., was dealing in the case to which I have referred. The mere finding of items, or details, in the scheme which are open to valid criticism, is not unfairness consistent with the spirit of that judgment. A scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies to the extent of 100 per cent with the highest possible standards of fairness, equity and reason. After all, a man may have an offer made to him and, although he would prefer something better, would be quite prepared to accept it because it was good enough in all the circumstances. It may be that the grounds for criticising the present scheme are not grounds of such a nature as to render the whole thing unfair in the sense in which Maugham, J. used the words in the case which I have cited. ****** Without putting my own view as to how this scheme could have been improved and made a little more favourable and a little more fair, perhaps, to the ordinary sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 391. Section 391 provides for sanction of a scheme of compromise and arrangement. Such a scheme may provide an exceptional procedure to modify or abrogate the rights of shareholders, debenture holders and creditors. They are variously described as reconstruction, reorganisation, schemes of arrangement, amalgamation, mergers or takeovers; but none of these terms is clearly defined and connotes a distinguishable legal meaning. As Gower in the Principles of Modern Company Law , third edition, observed in general, the expression reconstruction, reorganisation or scheme of arrangement is employed when only one company is involved and the rights of its investors and occasionally of its general creditors are varied, the last expression being more commonly employed when creditor s rights are affected. Under an amalgamation, merger or takeover, two or more companies are merged either de jure by a consolidation of their undertaking, or de facto by the acquisition of a controlling interest in the share capital of one by the other or of the capital of both by a new company. It has now been established that the compromise and arrangement covered by section 391 are of the widest c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be done under section 391. Now before referring to a decision on this point, I should like to notice that sections 391, 393, 394 and 395 are in pari materia with sections 206, 207, 208 and 209 of the Companies Act, 1948 (United Kingdom). In fact we have almost bodily incorporated those provisions. The interpretation of identical provisions of the Companies Act, 1948 (United Kingdom) would undoubtedly assist in finding out the true scope and ambit of the identical provisions included in our Companies Act, 1956. The question in terms raised is whether the scheme of compromise and arrangement by which one company takes over the other company can be brought about by way of scheme of compromise and arrangement. If it is done under section 391, it could not be done without the company which is being taken over being a party to it. It could be done ignoring the company if the procedure prescribed in section 395 is followed. Any scheme of compromise and arrangement under section 391 must undisputably be between the company and its creditors and members or any class of them. But under section 395 an individual or a company may directly by making offer to the shareholders of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that that portion of the shares held by shareholders of Guardian shall be compulsorily acquired for allotment to the shareholders of Reliance. The scheme in a nutshell was that for one share of Reliance two shares of Guardian would be issued and Guardian shall acquire such number of shares for allotting it to the shareholders of Reliance by acquiring the same from its own shareholders. Therefore, the shareholders of Guardian had to compulsorily part with a portion of its shares for being allotted to shareholders of Reliance in return for taking over shares of Reliance. In my opinion, this is an extreme case of arrangement and when the scheme came up for sanction before Younger, J., he was of the opinion that as the shareholder of a company cannot by any device escape from his liability to pay in full the nominal amount unpaid upon his shares, so he cannot be called upon, to pay to the company s funds more than his agreed contribution in respect of his shares. It was, therefore, felt that it would be a remarkable thing to find that any section of the Act authorised a majority of his fellow shareholders to require, even with the approval of the court that same shareholder to return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words of section 120, and that there is no necessity to put such limitation upon those words as Younger J., felt bound to do. (page 448) Warrington L. J., and A. T. Lawrence J., concurred and the scheme was sanctioned. I would also refer to National Bank Ltd., In re [1966] 36 Comp. Cas. 626, 630 (Ch. D); [1966] 1 WLR 819, 822 (Ch. D). The scheme which was submitted to the court for its sanction under section 206 of the Companies Act, 1948 (U.K.) (which is in pari materia with section 391 of our Companies Act), was as under: The proposals involve the division of the National Bank s business into two parts, the assets and liabilities attributable to the Irish business being transferred to a new Irish company, the National Bank of Ireland Ltd., ("N.B.I."), while the assets and liabilities attributable to the English business will remain with the National Bank. N.B.I. will then be acquired by the Irish Bank. that is to say, the Bank of Ireland and the National Bank will become a wholly-owned subsidiary of the Scottish bank. I have taken pains to set out the broad outlines of the scheme to show that the scheme which I am now considering is almost identical though not as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of all the issued shares of the company, the court should not approve the arrangement unless both : (1) the petitioner proves on full disclosure that the price is fair, and (2) the arrangement is approved by the 90 per cent majority referred to in section 209. It was urged that arrangement brought before the court was one of section 209 character and was not approved by the appropriate majority. Repelling this contention, it was observed as under : As regards Mr. Suenson-Taylor s second objection, namely, that the scheme really ought to be treated as a section 209 case needing a 90 per cent majority. I cannot accede to that proposition. In the first place, it seems to me to involve imposing a limitation or qualification either on the generality of the word "arrangement" in section 206 or else on the discretion of the court under that section. The Legislature has not seen fit to impose any such limitation in terms and I see no reason for implying any. Moreover, the two sections, sections 206 and 209, involve quite different considerations and different approaches. Under section 206 an arrangement can only be sanctioned if the question of its fairness has first of all been submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 395 may not even come to the court. It can only come to the court if the dissenting minority challenges the proposed offer as unfair and the burden will be on them to show that the proposed offer is unfair. In a scheme under section 391 the fact that the scheme is fair and reasonable and is such that honest men guided by best of commercial instincts would approve, has to be established by the sponsors and the dissenting minority has only to show that the court should not exercise discretion in favour of such a scheme. But in a scheme under section 395, it can only come to the court at the instance of dissenting minority and burden will be on them to show that the price offered is unfair. This is clearly a distinguishable feature between the scheme under sections 391 and 395; and in my opinion both operate in different fields and one has no impact on the other even though the ultimate result that may be achieved by the one or the other scheme may be the same. The present scheme in my opinion being one under section 391(1) it is immaterial and irrelevant whether any procedure prescribed in section 395 has or has not been carried out. The third limb of the submission under this h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Corporation of India Ltd., In re [1987] 61 Comp. Cas. 92 (Bom.); the word arrangement has been interpreted in a wider manner. Another case is Guardian Assurance Co., In re [1917] 1 Ch. D 431 (CA) to demonstrate that the word arrangement has a wide meaning and interpretation, even under the English laws. The extract of the relevant paragraphs are (page 95 of 61 Comp. Cas.) : "Mr. Bulchandani has next argued that section 391 of the Companies Act contemplates that where a compromise or arrangement is arrived at between the company and its creditors and/or the company and its shareholders; it may approach the court for the sanction of the same. The expression "arrangement" has been defined in section 390, sub-clause ( b ), which reads as follows : "390. In sections 391 and 393. . . ( b )the expression arrangement includes a reorganisation of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods; and. . . . ." The proposed scheme does not contemplate a reorganisation of the share capital of the company by the consolidation of shares of different cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered his very able judgment, I am unable to come to the same conclusion as he did. I think the order ought to be made as asked by the petition. Warrington, L.J. I am of the same opinion. The scheme which we are asked to sanction is no doubt one of a somewhat unusual nature, but for all that it may still be an arrangement within the meaning of the 120th section of the Act. (page 448) At this juncture, it is necessary to refer to the arrangement in the present scheme in question. It is not a case of amalgamation as contemplated under the provisions of sections 391 to 394. In the present scheme, there is no transferor company merging into a transferee company and/or is dissolved without winding up. The present scheme admittedly is a composite scheme; and it envisages a demerger, i.e., the transfer only of the cement undertaking of the petitioner (L T) to the transferee company, a wholly owned subsidiary of the petitioner-company and the issuance of shares by the transferee company to the shareholders of the transferor company. Both the companies continue to remain in existence. The effect of the scheme is that the shareholders of the transferor company become the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, demerger of one unit of a company would also come under an agreement/arrangement, because, if demerger is not taken to be an arrangement, then the company would not be able to deal with its property in accordance with law. 74. According to the objectors, directors and promoters of Core are holding more than 50 per cent equity shares of Core and would be benefited under the scheme. The objections raised by the objectors, in the opinion of this Court are misconceived, firstly, because it is undisputed that the promoters have already pledged their shares and the person holding shares would now be benefited and, secondly, because ARCIL has dearly stated that the benefit of share exchange ratio would be shared by all. I have no reason to disbelieve the submission of the petitioner that 30 per cent of the total capital (promoters holdings) has already been pledged by them with ARCIL and the proceeds from the sale of shares held by ARCIL would be distributed for the benefits of the lenders. The promoters would not be getting share of Nirma and this aspect is clearly noted in the second meeting of the lenders which is available on the record at pages 562 and 563. 75. So fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Young is available with Oman International Bank and HDFC and they are suppressing the same and are not producing it on the record. 77. It would be clear from the letter dated 10-2-2005 (page-166 of Company Petition No. 9 of 2006), of ARCIL whereby it has sent copies of the said valuation report to various lenders as per the list at pages 167 to 169. HDFC Bank and Standard Chartered Bank are named in the same. Standard Chartered Bank was provided two copies; one in its personal capacity and second in its capacity as representative bank having foreign exchange exposure in Core, in capacity as lead trustee and agent of the consortium, of which Oman International Bank is a member. The said Standard Chartered Bank, in its turn, had sent copy of the report to M/s. Oman International Bank. It would also be clear that case of the petitioner-Nirma in its affidavit dated 5-12-2006, (page 150 of Company Petition No. 9 of 2006), is that the report was circulated amongst all lenders of Core and the lenders had complete information about the worth of Core. These facts stated on oath have not been controverted by anybody. It would also be clear from the records (page 149 of Company Petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits and avoid delay, then further valuation report is not necessary. 79. So far as the respondents objection regarding transfer of funds to subsidiaries by giving interest-free loans is concerned, in the opinion of this Court, the objection cannot be considered in these proceedings. The act of the board of directors or the management of Core have nothing to do with the present scheme. It is also to be noted that Core is not amalgamated in Nirma nor is in winding up. If ultimately it is found that the board of directors, managing director or director or the management of Core is guilty of an act of commission or omission, misfeasance or malfeasance, then it could certainly be brought before the court, their liability under the law would continue. In the matter of Arvind Mills Ltd., In re [2002] 111 Comp. Cas. 118 1 (Guj.), the court held as under : "One of the arguments advanced on behalf of the objectors is that the past conduct/transactions of the company would disentitle approval of the scheme. As far as provisions contained in section 391 and section 394 are concerned the past conduct would be hardly relevant for the purpose of the approval of the arrangement. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , subject to and without prejudice to the liability, if any, in the civil and criminal proceedings in respect of past transactions." (p. 167) 81. From this judgment, it would be clear that the scheme can always be sanctioned subject to and without prejudice to the liability, if any, in the civil and criminal proceedings in respect of the past transactions. The argument of objectors that the scheme is vague and incomprehensible should not detain this Court unnecessarily because the scheme is clear, nobody either raised an objection in the meetings held for the purpose or at the time of the discussion that the scheme was vague and income- prehensible. The liability, if any, of the board, directors, management, etc., in civil and criminal proceedings would continue, and I accordingly so order. 82. One of the objections raised by the objectors is that the present scheme was conceived in deceit and delivered in fraud as a result of conspiracy amongst Core, Nirma and ARCIL. So far as the allegation of conspiracy is concerned, this Court is unable to accept the said argument. ARCIL and other banks, in the opinion of this Court, would not become party to a conspiracy. After all, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as was required under the rules framed under the said Act. It is also submitted by the objectors that under section 35 of the Act, scheme proceedings are not maintainable. Section 13 of the said Act reads as under: "13. Enforcement of security interest. (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or Tribunal, by such creditor in accordance with the provisions of this Act. (2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). (3) The notice referred to in sub-section (2) shall give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) Any payment made by any person referred to in clause ( d ) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. (6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset. (7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posited by the secured creditor with the liquidator : Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen s dues, if any. Explanation. For the purpose of this sub-section, ( a ) record date means the date agreed upon by the secured creditor representing not less than three-fourth in value of the amount outstanding on such date; ( b ) amount outstanding shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor. (10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. (11) Without prejudice to the rights conferred on the secured creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be noted that report of M/s. Ernst and Young is available on the record, was available with ARCIL and they had invited public offers for disposal of the property. If Nirma was the only company to make its offer then, ARCIL could sell the property in favour of Nirma or could allow Core to float the scheme for demerger so that in terms of the scheme, the property is demerged with Nirma for the same value which ARCIL was to receive otherwise. Present is not a case where anybody says that report of M/s. Ernst and Young is wrong report or Nirma was not the sole offerer or somebody had come forward to make better offer, or even the objectors have somebody with better offer. If offer made by Nirma continues to be the same and the property stands demerged in favour of Nirma, then purpose of the SARFAESI Act is achieved because after the property of the defaulter company is sold the receipts are to be distributed amongst the lenders and different classes. So far as section 35 of the SARFAESI Act is concerned, the said provision would come into force if it is held that the scheme under the provisions of the Companies Act contained anything inconsistent with the SARFAESI Act. Sections 391 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and by grant of the scheme as the objectors are to be non-suited by the Debts Recovery Tribunal, present proceedings are illegal. The petitioners have placed their reliance upon the judgment of the Supreme Court in the matter of Allahabad Bank s case ( supra ). So far as the right of the objector to proceed with the case before the Debts Recovery Tribunal is concerned, it would certainly stand if the scheme proceedings are not approved by the High Court. Core certainly would have a right to take out proceedings for compromise. If the proceedings ultimately fail and the scheme is not approved by the High Court, then right to proceed with the proceedings before the Debts Recovery Tribunal would stand, but it cannot be said by any stretch of imagination that scheme proceedings cannot be approved by the High Court in view of pendency of the proceedings before the Debts Recovery Tribunal. The right to recover through agency of Debts Recovery Tribunal is a statutory right and at the same time, right to get any scheme approved is also a statutory right under the Companies Act. If no proceedings are taken for the scheme or its finalisation, then, the Debts Recovery Tribunal can proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that in a pending litigation, a borrower can come forward for settlement and it would always be open to the lender to accept the terms of the settlement. If such authority is available to a borrower, then he can always come forward with a scheme for compromise which is being offered to the creditors individually so also jointly. However, I would agree with the petitioner that if an individual lender can settle, then, there is no reason to hold that the lenders collectively cannot enter into the scheme of compromise. 89. In the matter of Arvind Mills Ltd. s case ( supra ), the High Court has observed as under : "There is no denying the fact that if the scheme is approved the objectors would not be able to get a money decree against the company. At the same time the objectors would get their dues as per the terms of the scheme as offered to other secured creditors, but because the objectors have filed a suit in the English court, that cannot deprive the other secured creditors of the benefits under the scheme when they have floated and supported the scheme. Pages 392 to 403 of file-I is the copy of the plaint filed in the English court. As far as the reliefs claimed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt is purchased at a lower price, the right to recover would stand reduced to the price paid for acquiring the rights. In the present matter, undisputedly, ARCIL had paid lower price for acquiring greater right but if a person voluntarily without any pressure, duress or coercion taking into consideration the hard realities of life, sells his property at a lower price, then the law does not stop him from doing so. Any person who purchases valuable property for a lower price and element of fraud or dishonesty is not associated with it, then he becomes absolute owner of the right purchased by him. In case the property was to be sold by ARCIL under the provisions of the SARFAESI Act, could objectors say that their money should be paid to them in full and ARCIL be paid in proportion to the money which they have paid to purchase the entire right. If the SARFAESI Act does not provide for such bar nor creates any ban against any lender, to say, that ARCIL would not be entitled to recover full money, then in these proceedings, one cannot be allowed to say that ARCIL purchased the right of greater value but lower price was paid, therefore, value of the purchased or assigned right should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of securitisation company or reconstruction company, as the case may be. (4) If, on the date of acquisition of the financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be." 93. If debts were not assigned in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs are of the same class, then conflict must be real. The objectors cannot say that though they are lenders of money, they are secured creditors of class A or class B, but, they are absolutely different class, because they do not agree with what the majority says. In a given case, if the property was to be sold by the High Court in winding up or liquidation proceedings, then purchaser of the rights, i.e., ARCIL would be entitled to recover what it had purchased and not what it had paid to purchase the rights. If in such proceedings, the objectors would be taken to be the lenders of the same class or birds of the same block, then in these proceedings or in the meeting, they cannot be treated to be different class of lenders. In the present case, all the lenders had a solitary object, that is to realise dues, maximum recovery in minimum time. The argument that the lenders in view of their unchanged position would be taken to be a class in itself would also be bad, as no lender can be put in identical position because, amount of loan is different, rate of interest is different, repayment period is different or in a given case, some extra or additional benefits are offered by the len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y should make a sacrifice to the tune of 50 per cent. In the present case, classification of creditors has to be on the basis of the terms offered to them under the scheme and not on any other basis. It would be correct to say that ARCIL had purchased the debt at much lesser price and would therefore, suffer lesser in comparison to objectors but under the law it would have no bearing upon the scheme proceedings. 97. In the present case, if the lending banks could sell their right to recover money, then, they could also enter into agreement with Core to settle their dues for the amount which was offered to them by ARCIL. If such settlement could be entered into between Core and lending banks, then, Core would have been benefited to the extent of full debt and not to the extent of price paid for the settlement. If Core is to be benefited to the extent of full, then any purchaser of the right would also be entitled to the benefit to the full extent. Under the law, lender would not be entitled to presume that interest is definite. Perception of such lender or presumption in its favour or any ipse dixit of a lender would not change the legal position. In fact, perception of one le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Company Affairs gave approval to the scheme of agreement on 1-2-2002. The demerger was complete on 1-2-2002, and only thereafter, the shares of the Government of India in Hotel Yamuna (P.) Ltd., were sold to respondent No. 5 on 7-2-2002, by the share purchase agreement. 100. The Supreme Court also observed that a policy decision should be least interfered in judicial review because the policy decision or the final verdict in the meeting would reflect the general consensus. 101. This judgment of the Supreme Court gives an appropriate reply to the objectors objections that demerger is not permissible under sections 391 and 394 of the Act and the court can interfere in the matter if the majority is trying to give rough shod to the minority. 102. In the present matter, ARCIL, the biggest creditor, and other purchasers of the debts, have already approved the scheme. The shareholders, class "A" lenders and class "B" lenders have already approved the scheme. If any scheme is approved by the shareholders, then, virtually, the shareholders are taking a policy decision subject to approval of the scheme by the lenders of class "A" or class "B", whose interest may be advers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fects the class differently or not. Or in a given case no compromise or term is offered to a particular class of shares but may be confined to one or more than a class of shares. Therefore, before adverting to the question whether the appellant-objector constitutes a separate class of shareholders or not, it has to be seen whether any different terms have been offered to different classes of creditors or members and whether any classification of members is required to be made in accordance with those distinctions in terms of the compromise offered to them and whether any such separate meeting was required to be called. The classification of members or creditors will be founded on the basis of the difference in the terms offered under the scheme. The difference in terms of the scheme can be the only criterion for identifying the separate class for the purpose of convening a separate meeting for such class. It is not even the case of the shareholder-objector that any different terms have been offered to persons holding shares affected by the family arrangement or otherwise. In fact, the entire proposal is one affecting in a like manner all the existing shareholders of the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders about distribution of a legacy would result in conferring the distinction of a separate class on each of the contesting claimants. That in our opinion, has no place in the scheme of provisions. The class of creditors or members envisaged under section 391 is directly related to interrelationship between the company and the shareholder on the basis of rights and obligations attached to the class of shares issued and such rights being affected by the proposed scheme of arrangement or compromise differently and not personal rights of the holders of shares emanating from their right of inheritance or personal contracts between themselves. Who is on the board of a company or is in the driver s seat in controlling the affairs of a company is not a part of the proposed scheme or no special rights are attached to any shareholder, but is a result of democratic functioning of the body of shareholders electing its board. What constitutes a class of members or a class of creditors, in the context of the provisions of section 391 of the Act, is not defined under the statute. But, as discussed above, it is obvious from the scheme of provision itself that, in order to be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired until a group is treated differently under the scheme. The illustration clarifies the position transparently that where rights of ordinary shareholders are to be altered but those of preference shares are not touched, a meeting of ordinary shareholders alone is required but not of preference shareholders. If amongst the ordinary-shareholders, some group is to be treated differently than the other group, that too, within the class of ordinary shareholders, a separate meeting may have to be held for the purpose of binding different interest which are treated differently under the scheme. The term of any interest treated differently under the scheme is important. The fact that the shareholders-members of the same class, offered the same terms under the scheme perceive their interest differently or consider that their interest may be affected differently from others because of their interrelationship or their interests other than as shareholder simpliciter, cannot sustain their claim to constitute a class distinct from others. Such interest is to be taken care of by way of expressing their views and voting during the course of the meeting. If that were not so, all interests woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery of the two loans raised against the two policies taken out by him. In defence, Mr. Dodd claimed full amount payable under the policy as set off which but for winding up would have been payable to him upon the policies. The plaintiff-company put forward the said arrangement to negative the claim of set off. It is under these circumstances when the matter reached the Court of Appeal, Bowen, J., in his judgment concurring with Lord Esher M. R., stated thus: If we are to construe the section as it suggested on behalf of the plaintiffs it ought to be construed we should be holding that a class of policy holders whose interests are uncertain may by a mere majority in value override the interest of those who have nothing to do with futurity, and whose rights have been already ascertained. It is obvious that these two sets of interests are inconsistent, and that those whose policies are still current are deeply interested in sacrificing the interests of those whose policies have matured. They are bound by no community of interest, and their claims are not capable of being ascertained by any common system of valuation. Are we, then, justified in so construing the Act of Parliam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame class. All the shareholders whether they have purchased the share at base price or market price and continue to be the shareholders would, therefore, constitute one class. The secured creditors/class "A" lenders who have charge over the immovable properties, irrespective of the terms of the loan agreement would be taken to be secured creditors and would constitute a different class. People who have advanced loan on hypothecation of the goods, would be treated as a class with another lenders. 105. In the said matter, the Division Bench of this Court observed as under: ". . . what is the primary importance for the purpose of constituting a class requiring a separate meeting thereof, is different treatment given to a group under the proposed scheme and no separate classification is required until a group is treated differently under the scheme.....The term of any interest treated differently under the scheme is important. The fact that the shareholders/members of the same class, offered the same terms under the scheme perceive their interest differently or consider that their interest may be affected differently from others because of their interrelationship of their inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the matter of Miheer H. Mafatlal s case ( supra ). The Supreme Court has observed as under : "So far as the articles of association of the respondent-company are concerned they also contemplate two classes of shareholders....... No separate class of equity shareholders is contemplated either by the Act or by the articles of association of the respondent-company. The appellant is admittedly an equity shareholder. Therefore, he would fall within the same class of equity shareholders whose meeting was convened by the orders of the Company Court.....Even though the Companies Act or the articles of association do not provide for such a class within the class of equity shareholders, in a given contingency it may be contended by a group of shareholders that because of their separate and conflicting interests vis-a-vis other equity shareholders with whom they formed a wider class, a separate meeting of such separately interested shareholders should have been convened. But such is not the case of the appellant. It is not his case that his interest as an equity shareholder in the respondent-company is in any way conflicting with the general interest of the equity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors or members should be made parties to the scheme . . . . ." (p. 113) 108. The Supreme Court then proceeds to observe that : "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 on such sub-class of the main class of members or creditors is required to be convened. . . ." (p. 114) 109. In the case of D.A. Swamy v. India Meters Ltd. [1994] 79 Comp. Cas. 27 (Mad.) the Division Bench of the Madras High Court has observed that : "Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should, ordinarily, be homogeneous and must have commonality of interest and the compromise offered to them must be identical." (p. 27) 110. In the above case before the Madras High Court, at the meeting of the unsecured creditors of the company to consider a proposed scheme for revival of the company, certain motions for amendments sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal lenders as all the secured creditors have similar rights in the company. As far as commonality or conflict of interest is concerned all the secured creditors have a common interest of securing their dues in proportion to the amount lent and the terms or conditions thereof. It is not the say of the objectors that their rights are dissimilar to the rights of supporting secured creditors. As far as the body of secured creditors is concerned, there can be an effective consultation as far as their dues/interest/rights against the company under the scheme are concerned. It is not the say of the objectors that in the meeting of 13-7-2001, they were not allowed to participate in the proceedings of the meeting nor any secured creditor including the onshore lenders prevented them to have their say in the meeting. The class of creditors constituted, namely, secured creditors cannot be regarded as a heterogeneous group having nothing in common or want of the commonality of interest or the objectors have conflict of interest vis-a-vis the scheme with other secured creditors or that the class was formed to ensure that the rights and interest of some of the secured creditors (objectors) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liabilities was very small compared to the quantum of its assets. It was anticipated that the run-off would take several years to complete. All policy-holders present in person or by proxy at the statutory meeting convened to consider the scheme voted in favour of the scheme. Although the number of those who voted was small compared to the number of those entitled to vote the value of the claims held by those who voted represented a substantial portion of those entitled to vote." 113. The Chancery Division held as under : "(1) 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. (2) The court must not act simply as a rubber stamp to approve the scheme. The court must ask whether the scheme was such that an intelligent and honest man in the position of one of the scheme creditors or potential scheme creditors could not reasonably have approved it or whether it contains some other blot. (3) Notwithstanding some disadvantages with the scheme, given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the test formulated by the Lord Justice Bowen in order to determine which creditors fall into a separate class, that is to say, that a class must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. 116. From this judgment, it would also appear that the meaning of the word "class" was appreciated in light of a judgment of Justice Bowen L.J., in Sovereign Life Assurance Co. s case ( supra ), as under : "The word class is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term class as will prevent the section being so worked as to result in confiscation and in justice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest." (p. 583) 117. In view of the authoritative pronouncements of this Court, the Supreme Court and other courts and in view of the facts which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cause of the petitioners. 120. According to the objectors, the scheme must fail because there were inadequacies in the explanatory statement and in particular, in relation to the following explanatory statements : ( i )ARCIL had proposed the scheme; ( ii )ARCIL had a special role including the recovery of its dues; ( iii )Possession of Sachana unit has been handed over to Nirma; and ( iv )There was an injunction order issued by the Debts Recovery Tribunal operating against Core prohibiting it from transferring its assets in the suit filed by HDFC Bank. 121. The afore-quoted section 393(1)( a ) of the Act provides that the explanatory statement must contain : (1) terms of the scheme of the arrangement; and, (2) its effect and in particular, any material interest of the director, managing director or manager of the company insofar as it is different from the interest of other persons. 122. According to the petitioners, the so-called inadequacies were factually known to every lender even before the meeting. Non-disclosure of a fact known to the notice, according to the petitioners, can never be regarded as a failure because the purpose of such information is to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamation of the transferor company MFL with the transferee company MIL. However, the special grievance of the appellant voiced by his learned counsel is to the effect that the real interest underlying the scheme of merger was that of the director Shri Arvind Mafatlal and his group who were at the helm of affairs of the transferee company. The learned senior counsel, Shri Shanti Bhushan, in this connection submitted that under section 393(1)( a ) of the Act, the company is enjoined to mention in the statement material interest of the director, Shri Arvind Mafatlal, in the scheme which is of a special nature as compared to the interest of other shareholders and it was also necessary to mention the effect of the compromise and arrangement on such special interest of Shri Arvind Mafatlal and as that was not mentioned in the explanatory statement along with which the copy of the scheme was circulated to the members the majority vote became vitiated. Now a mere look at section 393(1)( a ) shows that the special interest of the director which is required to be brought home to the voters must satisfy the following requirements of the section before it can be treated to be a relevant spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rough weather. Suit No. 1010 of 1987 was filed by Arvind N. Mafatlal against Miheer H. Mafatlal and others before the Bombay High Court alleging that another agreement subsequent to the said family arrangement has come into existence under which Miheer H. Mafatlal and other brothers of Arvind had agreed to transfer all their holdings in MIL to A. N. Mafatlal, drawing a curtain on the family arrangement of 1979. Miheer H. Mafatlal has filed a counter claim in that suit claiming enforcement of the family arrangement of 1979. The said dispute and the outcome thereof will have a direct effect on the respective interests of the shares held by A. N. Mafatlal, Miheer H. Mafatlal and other members of the Mafatlal family, and trusts under them. He also invited our attention to the observations of the Division Bench at page 328 of the paper book to the effect that having considered the rival contentions and closely examined the scheme of section 393, they were unable to sustain the conclusion that the facts about the interests under the alleged family arrangements and the effect of the proposed arrangement for amalgamation on such interests were not required to be disclosed under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant s counter claim fails then all that would happen is that the appellant will have to sell his shareholding which is only 5 per cent in the transferee company to the plaintiff, Arvind Mafatlal. That has nothing to do with the equity shareholders as a class, which was called upon to decide whether the scheme of merging the transferor company MFL with the transferee company was for the benefit of the shareholders as a class. The equity shareholders of the transferee company had to decide in their commercial wisdom whether it is worthwhile to have a larger body of shareholders on account of the merger so that apart from the shareholdings of the transferee company its objects would also get diversified and its field of operation would be enlarged with the prospect of hike in the dividend available to these shareholders after the economic and industrial activities of both the companies so amalgamated would get elongated and whether the value of their shares in such consolidated companies were likely to get a boost in the stock market. This was the commercial decision which the equity shareholders of the transferee company had to take. For taking this informed decision they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, that such non-disclosure of interest had no impact on the voting pattern adopted at the meeting by the equity shareholders who are called upon to approve the scheme. It may also be noted in this connection that the resolution of the equity shareholders approving the scheme of amalgamation was passed with overwhelming majority by members including through proxies, present and voting. It projected the following picture : In favour Against Total ( i )N umber of members 5,298 143 5,441 ( ii )Number of valid votes 19,36,964 86,061 20,23,025 From the pattern of voting it became apparent that out of 100 per cent of the share capital 75.75 per cent in value participated of which 95.75 per cent voted in favour of the proposed scheme. Out of 95.75 per cent of the votes in value, a paltry 8.43 per cent votes had been attributed to Arvind Mafatlal group consisting of individuals and trusts. 39.45 per cent were the votes attributable to financial institutions which can be said to have no interest other than their own interests as men of business in considering the proposed scheme. Over 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do so by remaining personally present in the meeting for that purpose. It, therefore, clearly appears to be an afterthought when he put forward such an objection for the sake of it at the time of opposing the scheme which was put for sanction of the court. It may also be kept in view that the explanatory statement in no way emphasised that it is the management of the transferee-company by Shri Arvind Mafatlal which is going to be better monitored and managed by him after the merger in question. In other words management of the company is not at all a germane consideration for the scheme. Consequently, whether the management remains with Arvind Mafatlal or in future may get changed and go in the hands of the appellant is not a consideration which has any linkage or nexus with the scheme. Consequently, the interest of Arvind Mafatlal in the shareholding or likely future impact thereon by the litigation was de hors the scheme in question and was not required to be placed before the voters. The first point for determination is, therefore, answered in the negative." (p. 100) 124. According to the petitioners, in relation to the objections of non-disclosure levelled against ARCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it hand over the possession of the property to a third party. In fact, the possession was taken from them by ARCIL under its statutory rights. Mention or non-mention of the injunction in any case would not have benefited the case and cause of the objectors. From the records, it would also be clear that the order passed by this Court on October 28, 2005, directing convening of the meeting, does refer to this order and the said order of the court was placed in the meeting of the lenders. According to the petitioners, the order of the court was made known to everybody and the same was disclosed in the meeting of the lenders. What the petitioners propose to contend is that if the injunction and its effect was not immediately informed, then too, at least, people knew about it and after going through the orders passed by this Court did not raise any objection that the fact was not brought to their notice in the explanatory statement. 128. For the reasons stated above, I am unable to hold that the scheme must fail because the explanatory statement did not give correct details and suffered with the vice of inadequacies. 129. The next question for consideration is that whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot ascertain worth of the assets and/or quantum of liabilities. According to them, the compromise is a package deal for demerger of the assets and liabilities as exist today and to what extent the assets would crystallise or liabilities would prop up at a future date would be in the realm of speculation and this cannot, therefore, invalidate the scheme proceedings. According to them, under the scheme of demerger, Sachana undertaking with all liabilities and its assets would stand vested in Nirma. According to them, if Nirma is agreeable to take over Sachana undertaking under the scheme of demerger, then, Nirma would be entitled to all the benefits and would also suffer the liabilities. 131. In the opinion of this Court, the argument of the petitioners must prevail. Once it is held that on payment of the amount under the bank guarantee, HDFC Bank had become the lender of money and under the scheme of demerger, all assets and liabilities of Sachana unit would vest in Nirma, then, there is no scope to say that HDFC, though a lender, would be entitled to say that particular amount be kept outside the scheme. It would absolutely be correct to say that the compromise and demerg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of the share capital, which can be part of the very scheme and it would not be necessary to convene a separate meeting for considering such reduction. 133. In the matter of Maneckchowk Ahmedabad Mfg. Co. Ltd. s case ( supra ) this Court has held as under : "That takes me to the last attack under the head Reorganisation of share capital , namely, that the scheme envisages reduction of share capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganisation of the share capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of reduction of share capital when it is to be carried out as part of the scheme of compromise and arrangement. Rule 85 which I have already referred to earlier, provides that when reduction of share capital is to be effected as part of a scheme of compromise and arrangement procedure prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable assets the same cannot be done except by following the procedure specifically prescribed in section 100 onwards of the Companies Act. It is, therefore, necessary to find out whether the procedure therein prescribed has been carried out by the company or not. There is nothing objectionable in the company proposing a scheme of compromise and arrangement simultaneously proposing reduction of share capital and both can be considered and approved simultaneously. This is borne out by the observations in Tata Iron and Steel Co. Ltd., In re [1975] 45 Comp. Cas. 355 (Bom.). In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having een taken under the Act in the manner laid down by the Act for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alteration in the memorandum and articles of association. Negativing this contention, it was held that where the Act lays down express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure before applying for sanction under section 120, but where that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial resolution for reduction of capital, and, under section 153, sanction the scheme. If, however, the requirements of section 55 and other sections have not been complied with, the court may direct the application for sanction to stand over in order to enable the company to advertise the petition and otherwise comply with the requirements of the Act for reduction of capital, as was done in Cooper , In re [1902] 51 W. R. 514. It does appear well-settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory has been substantially complied with. Before one can find out as to what exact procedure should be followed for effecting reduction in sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or payment to any shareholder of any paid up share capital. That is not the case here. It is common ground that reduction is by way of cancellation of the paid up share capital which is lost or is unrepresented by available assets. Unless, therefore, the court otherwise directs, the procedure prescribed under sub-section (2) of section 101 is not mandatory in this case. Therefore, in order to effect reduction of share capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned; I will hold that the company has given notice of 21 days duration and the notice convening the meeting served upon the members disclosed the resolution that, while approving the scheme, the members should approve the reduction of share capital. Resolution approving the scheme has been passed with statutory majority. The only question would be whether the intention to move the resolution as special resolution in a general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such set off, then, the objectors cannot be allowed to say that the scheme would be a fraud on the Revenue. It would be correct to say that what is permissible under the law can never be regarded as contrary to the public policy or fraud on the Revenue. 136. In relation to the objection regarding the share exchange ratio, the petitioners have submitted that none of the objectors-banks are shareholders of Core or Nirma and therefore, they are not entitled to raise such objection. From the submissions made by the petitioners, it would clearly appear that the exchange ratio is fixed on the basis of the report of M/s. RSM and Co., Chartered Accountants of Mumbai. According to them, this report was placed at the meeting of the shareholders and the lenders and no objection whatsoever was raised in any of the meetings as to fixation of the said ratio. In the opinion of this Court, if by allotment of shares of Nirma to the shareholders of Core, the said shareholders are to be benefited, then, the present objectors cannot have any objection. In the case of sale of the assets and winding up of the company, the shareholders of Core would not get anything. If under the scheme, such share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Shri Shanti Bhushan, learned senior counsel for the appellant, in this connection invited our attention to the observation of the Division Bench in its judgment at page 375 (at page 783) wherein it has been observed that if one were to examine the exactitude of exchange ratio that may be offered fairly on the arithmetic scale by taking into consideration various details, there is some force in what were suggested by Mr. B. R. Shah on behalf of the appellant. However, keeping in view the scope of enquiry which the court is required to undertake and with whose findings we are concerned, it will not be permissible for us in law to undertake this exercise in the facts and circumstances of the present case in the absence of bona fides . We fail to appreciate how this observation can be of any avail to learned senior counsel for the appellant as all that the court wanted to suggest was that even assuming that some another exchange ratio can be suggested to be a better one, it was for the equity shareholders who acted bona fide in the interest of their class as a whole to accept even a less favourable ratio considering other benefits that may offset such less favourable ratio once a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by a recognised firm of chartered accountants, who are experts in the field of valuation and no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio. It would also be clear from this judgment that if the overwhelming majority of the shareholders of the two companies accept the share exchange ratio, then, it is not for the court to substitute its own wisdom because the shareholders otherwise were entitled not to accept the share exchange ratio. 139. The petitioners have submitted that there is no variation in the value of votes cast by ARCIL, Niya Finstock (P.) Ltd., and Astramed Technologies Ltd. According to them, there is no variation between the vote of ARCIL as per the books of Core and as recognised in the meeting of the lenders. According to them, in response to the order made by this Court, ARCIL had filed two affidavits and has given value of different debts, being the value of the debts assigned on the date of assignment to it and the account books of Core, the value is taken as on cut off date, that is, 30-11-2004. According to the books of Core, the principal value of debt is Rs. 371.91 crores in relation to cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from M/s. Alstom Projects (India) Ltd., and sold to IDBI Bank. Their submission is that the said plant is not part of the scheme and though ARCIL has permitted them to take away their plant, Nirma is not permitting them to take away their plant. 144. The petitioners have submitted that this issue does not arise out of the scheme proceedings. They do nowhere say that the power plant belongs to Core or is a part of the scheme or has been transferred to Nirma. If the power plant does not belong to Core or is not being transferred in favour of Nirma, then, Nirma would not be entitled to retain its possession. True it is, that the Apex Court, in the matter of National Organic Chemical Industries Ltd. v. Miheer H. Mafatlal [2004] 121 Comp. Cas. 519 1 , has observed that such would be an issue beyond the scope of consideration in a matter relating to sanction of the scheme, but, in the opinion of this Court, it must be observed in favour of IDBI that if Core or Nirma does not permit them to have the possession of their power plant, then, they would be entitled to take appropriate legal proceedings against Core and/or Nirma. At this stage, I must advise Core and Nirma that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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