TMI Blog2008 (7) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... xibility in their business operations, formulation of growth strategies and implementation of growth plans, that it was likely that the synergies of consolidating the plastics/packaging business and information technology KPO into distinct entities would lead to re-rating of the stock of the resulting company and the demerged company and value enhancement for the shareholders of both the companies and that the Scheme would also provide scope for independent growth and expansion. It is also stated that the Scheme would create enhanced value for the shareholders and allow focused strategy in operations which would be in the best interests of the company, the shareholders and all persons connected thereto. The Scheme provides for protection of the services of all the employees’ who are to be continued on terms and conditions not less favourable than which were applicable to them earlier. It cannot, therefore, said that the Scheme of amalgamation, if approved, would be against public interest. Thus sanction the Scheme of arrangement. - COMPANY PETITION NOS. 6 TO 8 OF 2008 COMPANY APPLICATION NOS. 2238 TO 2240 OF 2007 - - - Dated:- 25-7-2008 - RAMESH RANGANATHAN, J. L.V.V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services in India and abroad to individuals/organizations using various programmes, languages and tools, export of software packages, programmes etc. 4. MPL was originally incorporated, under the Companies Act, 1956, on 28-2-1997 under the name and style of Treasure Paks Private Limited. This company was converted into a public limited company called Treasure Paks Limited on 10-8-2007. Its name was changed to Moldtek Plastics Limited with effect from 20-8-2007. Its registered office is also situated at Hyderabad. The authorized capital of MPL is Rs. 10,00,000 divided into 1,00,000 equity shares of Rs. 10 each. Its issued, subscribed and paid-up capital is Rs. 5,00,000 consisting of 50,000 equity shares of Rs. 10 each. Pursuant to a resolution passed in the extraordinary general meeting of the members of the company on 25-1-2008, the authorized capital of MPL was increased to Rs. 9,00,00,000 divided into 90,00,000 equity shares of Rs. 10 each. The objects for which MPL was incorporated are to manufacture, process, export, import or otherwise deal in all kinds of card board packing, plastic packing, polythene packing, gunny bags, containers, etc., and to carry on the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual affidavits affirming their consent and it was, therefore, a fit case to dispense with the meeting of the members of the company. Accordingly, convening of the meeting of the members of TTPL was dispensed with by this Court. On the very same day, similar orders were passed in respect of MPL also. With regards MTL, this Court, in its order in C.A. No. 2239 of 2007, dated 26-12-2007, directed that a meeting of the members be held and appointed an advocate as the Chairman to conduct the meeting and submit his report. Accordingly, a meeting of the members of MTL was held and the Chairman, in his report, informed this Court that 66 shareholders attended the meeting in person and 27 by proxy holding in all 62,06,655 shares of Rs. 10 each for Rs. 6,20,66,550, that while shareholders, holding 62,06,528 shares of Rs. 10 each for Rs. 6,20,65,280, had voted in favour of the resolution, shareholders, holding 95 equity shares had voted against the resolution and shareholders holding 32 equity shares had neither voted in favour or against the resolution. The percentage of votes cast in favour of the resolution is 99.99 per cent of the members present and voting either in person or by proxy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be convened only of the class which is affected (Shackleton on "Law and Practice of Meetings" ) and that it is not necessary to issue a notice to every creditor of the company nor is it the primary intendent of section 394 that he should be personally heard before an order is made. [ Vijaya Durga Cotton Trading Ltd. In re [1980] 50 Comp. Cas. 785 (AP). 11. A different view was taken in ICICI Ltd. In re [2002] 36 SCL 682 (Bom.) and while doubting the view that the creditors had no right to participate in the process of consideration of the Scheme of arrangement between the Company and its members, the Bombay High Court observed that section 391(1) gave a discretion to the Court to convene a meeting of the creditors or any class of them. However, even the Bombay High Court did not read any mandatory requirement, of holding such a meeting of the creditors, into section 391 and merely rested its conclusions on the discretionary powers of the Court. 12. The expression "as the case may be" is found both in sub-sections (1) and (2) of section 391 of the Companies Act. If the words "as the case may be" in section 391(1) is construed as requiring the Court to order a meeting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Scheme, which prescribes the manner in which the interests of the creditors, employees and others are required to be dealt with, is approved by the Court, it would then bind the creditors, employees and others even if they have not directly participated in such a Scheme of arrangement. 14. The meaning of the expression "as the case may be" is what the expression says, i.e., as the situation may be. ( Subramaniam Shanmugham v. M.L. Rajendran AIR 1987 SC 2166) and can only mean "whichever the case may be" i.e., either one or the other. ( Shri Balaganesan Metals v. M.N. Shanmugham Chetty AIR 1987 SC 1668). The said expression envisages two situations and does not permit the application of the same alternative to both the contingencies or vice versa. It is implicit in the use of this phrase that one out of the various alternatives would apply to one out of the various situations and not the other. ( Khan Chand Tiloka Ram v. State of Punjab AIR 1966 Punjab 423). 15. The words "as the case may be", as found in section 391(1), can only mean that where the Scheme of arrangement is between a company and its members then the Court may order a meeting of the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement between the company and its members, a meeting of the members is held and 3/4th of those present and voting in the said meeting approve the Scheme it would then bind the dissenting minority of members. Similarly, in a Scheme of arrangement between the company and its creditors, where the Court directs that a meeting of the creditors be held and in case 3/4th of the creditors present and voting approve the Scheme of arrangement then the Scheme would bind the dissenting minority of the creditors. 19. It is evident, therefore, that section 391 does not mandate holding of a meeting of the creditors in a Scheme of arrangement between the company and its members and similarly a meeting of the members in a Scheme of arrangement between the company and its creditors. It follows therefrom that, even if the Scheme of arrangement between a company and its members is approved by 3/4th of the members present and voting in the meeting, it would not automatically bind the creditors and, similarly, in a Scheme of arrangement between the company and its creditors mere approval of the Scheme by 3/4th of the creditors would not, by itself, bind the members of the company. As a necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement, is being taken up for hearing and that they are entitled to put forth their objections thereto. Under rule 81, where the Court sanc- tions the compromise or arrangement, the order shall include such directions in regard to any matter, and such modifications in the compromise or arrangement, as the Judge may think fit to make for the proper working of the compromise or arrangement. Under rule 82, where the arrangement is in connection with a Scheme of reconstruction or amalgamation, and the matter involved cannot be dealt with on the petition for sanction of the arrangement, an application may be made to the Court under section 394 for its directions as to the proceedings to be taken. Rule 83 confers powers on the Court to make such orders, or give such directions, as it may think fit, as to the proceedings to be taken for the purpose of reconstruction or amalgamation, as the case may be, including, where necessary, an inquiry as to the creditors of the transferor company and the securing of the debts and claims of any of the dissenting creditors in such manner as the Court considers just. 22. On a conjoint reading of sections 391 and 394 of the Companies Act, 1956, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuine and bona fide Scheme chalked out by the companies involved. 25. A creditor, who has a debt due from the transferor company, would, on the Scheme of arrangement being sanctioned, be required to look not to the transferor company for repayment of his dues but to the transferee company with whom he neither had any dealings in the past nor privity of contract prior to its substitution in the place of the transferor company. In a given case, the transferee company may have negative assets or may not have sufficient liquidity to repay the creditor, as per the original terms agreed between him and the transferor company. Whether the creditor would be adversely affected by being required to deal with the transferee company, in substitution of the transferor company, is a matter of perception of the creditor. ( Zee Interactive Multi Media Ltd. In re [2002] 3 Comp. Cas. 733 1 (Bom.); Mayfair Ltd. In re [2003] 4 Com. L.J. 102 2 (Bom.); Asia Udyog (P.) Ltd. s case ( supra ). 26. Is it open to the Court, on a bare perusal of the audited financial statements placed before it, to determine whether or not the interests of the creditors are safeguarded and decide whether or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors need not be held, it should record its reasons in arriving at such a decision. In cases where a meeting of the creditors is held, the Court would ascertain their wishes looking not only at the resolutions passed in their meeting but also at the report of the Chairman of the meeting which would contain details of the proceedings in brief and the views expressed by the creditors in the meeting. ( ICICI Ltd. s case ( supra ). 30. Now the question whether, in the facts and circumstances a direction should be given that a meeting of the creditors of all, or any of, the three companies should be convened. The Scheme, as presented to this Court for its sanction, provides, in clause 3.1( c ) in Part II of section A under the head "Amalgamation", that the transfer/vesting shall be subject to existing charges/hypothecation/mortgage, (if any as may be subsisting), over or in respect of the assets or any part thereof. Clause 3.2 relates to transfer of liabilities and, under sub-clause ( i ) thereunder, with effect from the appointed date and upon the Scheme becoming effective, all debts, (whether secured or unsecured), liabilities, (including contingent liabilities, whether disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 33. The Balance Sheet of TTPL, as at 31-3-2007, would show that the company had obtained a term loan from APSFC for Rs. 36,19,500 and from Canara Bank of Rs. 23,90,822. While unsecured loans are for Rs. 11,37,721, the unsecured loans from promoters is for Rs. 9,58,049. Under the head "Current liabilities", in Schedule VIII to the Balance Sheet, creditors for goods are for Rs. 41,10,424. Sri M. Srinivas, a Director of TTPL, has, in his affidavit dated 24-6-2008, stated that TTPL owed Rs. 11,37,721.41 to the transferee company MTL. 34. APSFC, in its letter addressed to TTPL on 17-11-2007, has expressed its no objection to the merger of TTPL with MTL and, thereafter, demerger of the plastics division with MPL subject to the condition that the existing securities for the loans availed from it be continued, that the Directors of MTL shall, in their individual capacity, guarantee the loans availed by the transferor company and that a certificate of no objection to the scheme of amalgamation obtained by MTL from their bankers/financial institutions shall be submitted to the corporation, that the no objection letter from Canara Bank, in whose favour the Corporation had ceded seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding of a meeting of this class of creditors, (unsecured loans), is also unnecessary. 38. With regards creditors for goods of Rs. 41,10,424, a copy of the certificate from the statutory auditors M/s. Praturi Sriram, Chartered Accountants, is filed along with the affidavit dated 19-6-2008. It is stated therein that creditors for goods of Rs. 38,29,058, representing 93.15 per cent in value of the creditors for goods of Rs. 41,10,424, had given their letters of consent to the scheme of amalgamation. The letters of consent have also been filed along with the said certificate. Since a substantial number of more than 90 per cent of the creditors for goods have given their consent to the scheme of amalgamation, it is wholly unnecessary for this Court to direct that a meeting of this class of creditors, (creditors for goods), be held. 39. A perusal of the Balance Sheet of the transferee company MTL as at 31-3-2007 would show that ICICI Bank has advanced a cash credit loan for Rs. 9,76,49,000 and a term loan for Rs. 9,75,00,000. ICICI Bank, vide their letter dated 23-11-2007, conveyed their no objection to the Scheme of arrangement. Since the sole secured creditor ICICI Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he was conveying his consent to the Scheme of arrangement. From out of the unsecured loans of Rs. 5,04,373, Rs. 1,54,373 has been repaid subsequently and for the balance Rs. 3,50,000 letter of consent to the Scheme of amalgamation has been obtained. Holding of a meeting of this class of creditors is, therefore, wholly unnecessary. The certificate of M/s. Praturu Sriram, Chartered Accountants, dated 6-6-2008 is placed before this Court wherein it is stated that, from out of the sundry creditors for Rs. 13,34,769, all of them had given their letters of consent. It is necessary to note that the entire amount of Rs. 13,34,769 is due from MPL to MTL and MTL, in their letter dated 23-5-2008, had given their consent to the Scheme of arrangement, Since the dues of the secured and unsecured creditors of MPL have either been satisfied, or their consent to the Scheme of amalgamation has been obtained, holding of a meeting of the creditors of MPL, or a class of them, is unnecessary. 41. The first proviso to section 391(2) requires the petitioner to disclose all material facts relating to the company such as its latest financial position, its latest auditors report on the accounts, penden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n his report dated 24-4-2008, the Official Liquidator states that he had called for the statutory books and other relevant information, that in response thereto the transferor company had furnished the statutory books and the information called for, that upon examining the same he had observed that consent letters of APSFC and Canara Bank were subject to compliance of certain conditions, that the consent of APSFC was subject to the personal guarantees to be provided by the Directors of the Transferor company and that the consent letter of Canara Bank dated 12-10-2007 spoke of the requirement of satisfaction of SBI, Jeedimetal Branch s charge, but no information had been furnished by the Transferor company. 45. With regards the objection of Canara Bank, in its letter dated 12-10-2007, it is evident from its subsequent letter dated 16-6-2008 that TTPL had satisfied the charge of S.B.I., Jeedimetal branch with the Registrar of Companies. Insofar as the conditions stipulated by APSFC and Canara Bank are concerned, including the condition specified by APSFC that personal guarantees should be given by the Directors of the Transferor company, it is made clear that sanction of the Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance Sheet of MPL as at 31-3-2007 reveals that the company has no Reserves and Surplus as compared to its Reserves and Surplus for the earlier year ending 31-3-2006 of Rs. 1,38,777. MPL has incurred a loss of Rs. 16,88,224 for the year ending 31-3-2007 as against the profit it made in the previous year ending 31-3-2006 of Rs. 78,682. Sri L.V.V. Iyer, learned counsel for the petitioner, would submit that, while MPL had done job works in the previous year ending 31-3-2006 for Rs. 10,86,920, it had not carried out any job works in the year 2006-07 and that its entire expenditure of Rs. 14,91,224, other than a small sum of Rs. 3,000 which the company had received by way of dividend, represents its losses. Learned counsel would contend that it is only to make its business more viable was the plastics division of the amalgamated company being transferred to MPL. 50. The only question which remains to be examined is whether the Scheme is in public interest. In examining this question, the Court cannot abdicate its duty simply because the statutory majority has approved the Scheme of arrangement and there is no opposition to it in Court. It must scrutinize the Scheme to find out wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a dynamic concept which keeps on changing. It has been explained in Black s Law Dictionary as : "Something in which the public, the community at large, has some pecuniary interest, or some by which their legal rights or liabilities are affected. It does not mean anything so narrow as mere curiosity, or as the interests of the particular locality which may be affected by the matters in question. Interest shared by citizens generally in affairs of local, State or national Government." 53. It is an expression of wide amplitude. A Scheme, valid and good, may yet be bad if it is against public interest. The basic principle of the satisfaction, that the Scheme is not contrary to public interest, is none other than the broad and general principles inherent in any compromise or settlement entered into between the parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, Courts have evolved the principle of "prudent business management test" or that the Scheme should not be a device to evade the law. [ Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30 1 (SC)]. No court of law would ever co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flexibility to the investor in their investment decisions in future, that the Scheme would provide the resulting company and the demerged company enhanced flexibility in their business operations, formulation of growth strategies and implementation of growth plans, that it was likely that the synergies of consolidating the plastics/packaging business and information technology KPO into distinct entities would lead to re-rating of the stock of the resulting company and the demerged company and value enhancement for the shareholders of both the companies and that the Scheme would also provide scope for independent growth and expansion. It is also stated that the Scheme would create enhanced value for the shareholders and allow focused strategy in operations which would be in the best interests of the company, the shareholders and all persons connected thereto. The Scheme provides for protection of the services of all the employees who are to be continued on terms and conditions not less favourable than which were applicable to them earlier. 56. It cannot, therefore, said that the Scheme of amalgamation, if approved, would be against public interest. I consider it appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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