TMI Blog2007 (4) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... a German Company ( Wilo ) under which Wilo agreed to acquire the shareholding of the erstwhile promoters in the petitioner subject to certain compliances including the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1977. Pursuant to the agreement, Wilo acquired 18,87,697 shares of the petitioner. The petitioner has consequently become a subsidiary of Wilo. 2. The audited balance sheet of the petitioner as of 30-6-2006 presents a grim picture. The gross value of the fixed assets was Rs. 54.56 lakhs and after allowing for a depreciation of Rs. 54.50 lakhs, the net block has been valued at Rs. 6,200. The total investments were only Rs. 21,100. Sundry debtors stood at Rs. 77.73 lakhs while cash and Bank balance were to the extent of Rs. 34.10 lakhs. The net current liabilities stood at Rs. 6.94 crores. A total loss of Rs. 10.34 crores was sustained. 3. The Company Petition, contains an averment that the down turn in the business activities of the petitioner resulted in a severe crisis of liquidity causing a mismatch in the position of the assets and liabilities. The circumstances responsible for this position have been spell out in para 8 of the Company Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured creditors was to be assessed in accordance with the Books of Account of the Company and, where entries in the Books of Account were disupted, the Chairman of the meeting was empowered to determine the value for the purposes of the meeting. Accordingly, notices were despatched to the unsecured creditors and public notices came to be issued as directed by the Court. 7. On 30-12-2006, a meeting of the unsecured creditors took place. 99 unsecured creditors attended and voted at the meeting representing a total debt of the value of Rs. 5,22,28,215. The total value of the debt of unsecured creditors covered by the scheme is Rs. 5,75,68,101. Of 99 ballot papers, 7 representing a debt of the value of Rs. 1,28,61,222 were rejected by the Scrutineer as invalid. Out of the 92 valid ballot papers representing a debt of the value of Rs. 3,93,66,993, 85 ballot papers representing a debt of the value of Rs. 3,68,87,921, constituting 93.70 per cent of the total valid votes cast were in favour of the Scheme. 7 ballot papers representing a debt of the value of Rs. 24,79,072 constituting 6.30 per cent of the total valid votes cast were against the Scheme. The names and details of the objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Cut off Date within six months from the Effective Date or date of exercising the option whichever is later without interest and balance amount (including interest) should be waived off. Option II - The Unsecured Creditors will be paid total 45 per cent of the outstanding principal amount due and payable as on the Cut off Date (without interest) in the following manner : 5 per cent of the outstanding principal amount due as on Cut off Date, within six months from the Effective Date or date of exercising the option, whichever is later. 40 per cent of the outstanding principal amount due as on Cut off Date in four annual instalments starting from 1-4-2011. Balance amount (including interest) should be waived off. Option III - The Unsecured Creditors will be paid 100 per cent of the outstanding principal amount due as on Cut off Date, at the end of twelve years from the Effective Date. The interest amount should be waived off." Except for the payments stipulated as aforesaid, each of the unsecured creditors has to waive or write off the balance of the principal, interest, penal interest and other charges whatsoever including interest and penal interest relatable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in liabilities to MPPL. The increase in liabilities must, it was urged, be regarded as an attempt to increase the voting power of MPPL at the meeting of the unsecured creditors. Finally, it was submitted that votes of five of the objectors before the Court were wrongly declared as invalid and that the conduct of the Scrutineer in doing so cannot be regarded as bona fide. It was submitted that if the votes which were recorded as invalid were to be counted in computing the votes in favour of and against the scheme, the scheme would have to fail since 3/4th in value of the unsecured creditors would then not be supportive of the scheme. Each of the objections can now be taken up for consideration : ( i ) Notice 13. On 1-12-2006, the Company Judge issued directions for convening and holding a meeting of the unsecured creditors. Clauses 3 and 4 of the order provided for the issuance of an advertisement in English and Marathi newspapers circulating in Pune and for a notice to be sent at least 21 days before the meeting to the unsecured creditors by a pre-paid letter posted Under Certificate of Posting. The obligation to do so was cast by clause 7 of the directions upon the Chair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defect is not intentional or deliberate and no prejudice whatsoever is caused to a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the Court would grant the relief." (p. 35) The Division Bench held that to hold otherwise would "lead to very unusual results making it difficult for large public Companies to effectively function." 17. In the present case, even on merits, the grievance has been found to lack substance. ( ii ) Class of Creditors 18. The objection voiced before this Court is that MPPL should have been treated as a separate class among unsecured creditors and the votes cast by the Company should have been counted separately. The submission is founded on the premise that MPPL is a wholly owned subsidiary of Wilo AG, like the petitioner. Hence, it was submitted that the interest of MPPL and the petitioner overlap and it was necessary to count the vote cast by MPPL separately. In support, reliance was placed on an affidavit dated 3-4-2007 of the Company Secretary in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a class of creditors or, as the case may be, a class of members where the compromise or arrangement is sought to be effected not with the creditors or members in general, but with a particular class among them. In such a case, the compromise or arrangement upon being sanctioned would affect the rights of a class of members or a class of creditors. Hence it is, that class whose rights are to be affected that is furnished with an opportunity of giving vent to its views at a meeting of the class. The holding of a meeting of the class must, therefore, be considered in the context of the compromise. The definition of "class" is relatable to the terms of the compromise which affects or modifies the rights of that class. 20. The interpretation which has to be placed on the provisions of sub-section (1) of section 391 is no longer res integra and has been dealt with in several reported cases. The leading judgment of the Supreme Court on the subject is in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 1 . The judgment of the Supreme Court is an authority for the proposition that a separate meeting of a class of members or a class of creditors is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the Gujarat High Court in the case of Maneckchowk Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 . Mr. Justice D.A. Desai noted that a class consists of a homogeneous group with a commonality of interest. The true test is that a class consists of persons whose rights are similar in terms of the compromise which is offered to others by the Company. The Learned Judge held as follows : " 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 [ vide Sovereign Life Assurance Co. v. Dodd (1892) 2 Q.B. 573 (C.A.)]. Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the majority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or a group of members or creditors vis-a-vis the directors of the company or the persons in the management of the company are alien for the purpose of classification. As held by the Apex Court in Mihir Mafatlal s case, the member or members or creditor or creditors claiming right against one or more directors of the company cannot claim that he or they constitutes a separate class only by reason of having a separate private right or interest." (p. 467) The Division Bench further held thus : ". . . Amongst unsecured creditors also there can be sub-classes. It was held in the case of Sovereign Life Insurance Co. ( supra ) that the creditors whose policies had matured and who had crystallised claim would form a different sub-class from the creditors whose policies had not matured and whose claims were not crystallised. Amongst unsecured creditors, some may be preferred like the Government, or the workers who may have a statutory preference over others. It is difficult to enumerate the circumstances under which different creditors, secured or unsecured, would form a separate sub-class. But, the general principle would be the same namely whether the interest of the creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The former shareholders of the Company were to be paid 48p. per share by Hambros for the loss of their former shares. The submission before the Court on behalf of the Company was that since the parent and the subsidiary were separate corporations with separate Directors and since MIT was an ordinary shareholder, it followed that MIT had the same interest as the other shareholders. The submission that MIT was capable of forming an independent and unbiased judgment irrespective of the interest of the appellant company was held to be unreal. The Learned Judge held thus: "When the vendors meet to discuss and vote whether or not to accept the offer, it is incongruous that the loudest voice in theory and the most significant vote in practice should come from the wholly owned subsidiary of the purchaser. No one can be both a vendor and a purchaser and, in my judgment for the purpose of the class meetings in the present case, MIT were in the camp of the purchaser. Of course this does not mean that MIT should not have considered at a separate class meeting whether to accept the arrangement. But their considerations will be different from the considerations given to the matter by the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no explanation for the increase in the liabilities of the petitioner to MPPL between 31-12-2005 and 30-6-2006 is without merit. The balance sheet shows that as on 31-12-2005, the outstanding to MPPL was Rs. 1.75 crores. On 30-6-2006, the outstanding increased to Rs. 2.66 crores. This has been reflected in the balance sheet as an advance furnished by MPPL. The objectors have not produced material before the Court to establish that the increase in liabilities towards MPPL, as reflected in the audited Balance Sheet, was bogus or sham. ( iv ) Rejection of Ballots 26. The report of the Scrutineer contains reasons for the rejection of certain votes. Now it is common ground before the Court that if the rejection of the ballot filed by AP Genco Ltd. (Sr. No. 5 in Exh. C) is upheld, the resolution would still be carried by the requisite majority even if the other invalid votes were to be treated as votes validly cast against the scheme. The record before the Court shows that the ballot of AP Genco was cast by one Shri Murlidhar. The authorisation in favour of the aforesaid person was signed by the Chief General Manager. Rule 70(2) of the Companies (Court) Rules, 1959 provides as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned (New Fire Engineers Pvt. Ltd.), a proxy was lodged in favour of Shri Rameshchandra Mishra. The person who actually voted was some one else on the basis of a letter of authorization. However, there was no resolution of the Company as mandated by rule 70(2). The entities at Sr. Nos. 6 and 7 are not before the Court and have not lodged any objection to the scheme. 28. In these circumstances, having considered the record and the report of the scrutineer, it is not possible for the Court to accede to the submission of the objectors that the rejection of the ballots was lacking in bona fides and that it was illegal. 29. After the Counsel for the objectors was heard on the objection to the scheme, and arguments of the Company were also heard, this Court had indicated to Counsel appearing on behalf of the Company that it would be in the interests of justice if instructions could be taken on whether the Company was willing to improve upon the terms of the offer of settlement with the unsecured creditors. Counsel appearing on behalf of the Company fairly on instructions, agreed to do so, and submitted before the Court that the Company would be willing to associate the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e between the objectors and the Company, the aforesaid revised terms have been agreed upon and that the terms are fair and proper. Having considered the revised terms, this Court is also satisfied that the terms of the proposed settlement would enure to the benefit of all the unsecured creditors covered by the scheme and are fair and proper. Under the revised terms, there is a considerable enhancement in the terms of payment offered to the unsecured creditors. The scheme as now modified should, in the view of the Court, be sanctioned. 31. All statutory compliances requisite for the sanctioning of the scheme have been duly fulfilled. Counsel appearing on behalf of the Regional Director has stated before the Court that the provisions of the scheme are not contrary to the interest of public or to the interests of creditors or shareholders. There being no other objection to the scheme and since all the objectors before the Court who are represented by Learned Counsel Shri M.P.S. Rao have stated before the Court that they are satisfied with the terms of the scheme as modified, there is no reason why the Company Petition should not be allowed. Before concluding, it would be necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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