TMI Blog2009 (8) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... any cleared its loan from Industrial Development Bank of India (IDBI) to the extent of ₹ 12.75 crores. The said loan was released on the belief of the representation of the company and also in good faith that a mortgage was to be executed in order to secure the dues, but it was not done. It was also agreed that the loan should be repaid within a period of six years in 20 quarterly instalments. Despite many a demand and personal contacts, neither the amount was paid nor regularised the account, nor the company obtained the documents from IDBI. (b) While the matter stood thus, the company has made an arrangement for scheme of amalgamation/demerger. C.P.No.239 of 2001 was filed seeking approval of the scheme of arrangement of merger of the textile division with RSL Textile India Limited, the transferee company. C.P.No.241/2002 was filed for amalgamation of RSL Industries with Ramco Super Leather Limited. An order of approval was made by the Court on 6.12.2001. (c) Before making such arrangement for a scheme of amalgamation/demerger, notice should have been issued to the creditors before approval of the scheme. But, keeping the Corporation Bank in darkness and without its k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company for textile division; that the State Bank of India and Lakshmi Vilas Bank jointly got bank guarantee setting out terms and conditions; that firstly, it was agreed that the charge by way of hypothecation of the current assets of the textile division of the company created in favour of these three banks should rank pari passu inter-se the banks without any reference or priority to them; that secondly, among the three banks, State Bank of India shall be the lead bank in respect of their dealings; that the hypothecation charge of the current assets of the company's textile division in favour of the three banks was duly registered with Registrar of Companies; that it was clear in one of the clauses contained in the working capital consortium agreement dated 12.1.2001, executed by the company in favour of the three banks that during the currency of the working capital credit facilities extended, the company should not without the prior permission of the State Bank of India, the lead bank, formulate any scheme of amalgamation or reconstruction or effect any change in its capital structure, etc.; that the company without placing before the Court the fact that it has no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State Bank of India or from other financial institutions for demerger; that it would be quite clear from clause 42(a) and (b) that the borrower shall not during the subsistence of the liability of the borrower to the bank under or in respect of any of the aforesaid credit facilities without the written consent of the bank, effect any scheme of amalgamation or reconstitution etc.; that RSL Industries has not paid the half yearly interest on the foreign currency loan of ₹ 1.15 crores which became due on 17.9.2001 and quarterly interest working capital loan on and from 30.9.2001; that the State Bank of India wrote a letter on 18.9.2001 which was replied on 4.10.2001; that it was stated in the reply that the amalgamation/demerger schemes were not finalised and not taken to the High Court and agreed that it will arrange for a consortium meeting at the earliest; that RSL Industries Limited intentionally withheld and suppressed the material fact that as on 4.10.2001, the petition filed by RSL Industries was pending before the Court praying for demerger/amalgamation; that the State Bank of India sent a letter on 29.11.2001 requiring convening of consortium meeting, but there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e banks of the consortium headed by State Bank of India on 18.9.2001 simultaneously; that the notice for approval of the scheme of demerger by the shareholders was advertised in the newspapers also; that even after the demerger ordered, they have negotiated bills of RSL Textiles India during January 2002 and adjusted the outstanding of the limits sanctioned by it to the textile division of RSL Industries; that on 10.7.2002, there was a consortium meeting at Coimbatore which was attended by all the applicants; that if the agreement is violated, it is open to the applicants to recall the loan; that the allegation that the company has suppressed its liability to the bank is not correct; that the company has created a first charge on their fixed assets for ₹ 67 crores and the balance available was only ₹ 7 crores to cover the second charge; that under the circumstances, there was no dilution of the security as contended by the applicants; that the personal guarantee executed by the Directors before and after demerger is still in force; that no direction was given by the Court to send notice to the secured creditors; that it is the responsibility of the bank to convene the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the appellant and its creditors; that nothing prevented the secured creditors themselves convening a meeting to discuss about the scheme of arrangement/amalgamation; that the secured creditors did not point out any defect in the scheme; that even assuming that there is a technical violation of the agreement signed by the appellant with secured creditors by its failure to obtain prior permission for the amalgamation/arrangement the same will not affect the interest of the secured creditors since their security are in tact; that under such circumstances, the omission on the part of the appellant in not obtaining prior sanction from the secured creditors for the said arrangement/amalgamation did not affect the interest of the secured creditors; that it is not correct to contend that the appellant has obtained an order from this Court by suppressing material facts since all the relevant information as required under the Act has been placed before this Court; that after the order passed by this Court, the secured creditors have negotiated various bills of RSL Textile India Ltd., and released a portion of their amounts, and thus they are estopped from contending that the demerger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the currency of the working capital facilities extended by the banks, the company should not without the prior permission of the State Bank of India, the lead bank, inter alia, formulate any scheme of amalgamation or reconstruction or effect any change in its capital structure. The State Bank of India granted a foreign currency loan of ₹ 24.50 crores out of which ₹ 13.46 crores was availed by the leather division and 11.54 crores was availed by the textile division. Insofar as the collateral security for the foreign currency loan, the company has created a second charge on the current assets of the textile and leather division of RSL Industries. The company was also granted a working capital limit of ₹ 10.80 crores for its textile division. Lakshmi Vilas Bank Limited also extended credit facilities and they were secured by a charge over the movable and immovable assets of the textile division. (b) A letter of undertaking was also executed along with other documents stipulating that the company would not effect any change in the consortium without the prior permission during the currency of the credit. While the matter stood thus, the company has approved the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 391 of the Companies Act deals with power to compromise or make arrangement with creditors and members. Sub-section (1) and its proviso reads as follows: Where a compromise or arrangement is proposed (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them; the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Bank. 27.In respect of credit facilities granted to the Borrower against pledge of goods movables and other assets all such goods movables and other assets shall be placed in the Bank's possession under its control and in such manner that such possession and control may be apparent and indisputable. In pursuance thereof, inter alia, the godown, factory and other places approved by the Bank in this respect where the goods movables and other assets that are pledged have been stored shall bear the Bank's name boards indicating that the goods movables and other assets lying therein are pledged to the Bank. Where the goods movables or other assets which are pledged with the bank are released to the Borrower on trust under a factory, mundy type pledge, or other basis or the limited purpose of facilitating the Borrower carrying on the manufacturing or other activity, the Borrower undertakes that the Bank's padlocks will be used on the godown factory or other place where they are stored and such godown, factory or other place will be locked by the Borrower when not in use and the keys thereof shall be returned to the Bank on demand and that the Bank's name boards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly carried to the transferee company, no prejudice would be caused to the secured creditors. The learned Counsel also took the Court to the clauses in the scheme of arrangement which stipulates that the charges created by the company prior to 6.12.2001 will continue to be in tact and subsist till the satisfaction of the charge, and when the security and charge continued even after the demerger, the creditor banks could not have any grievance or complaint about the same. According to the counsel, even assuming that there was a violation of the said agreement, so long as the banks' rights were not affected, it should not have any grievance, and it is always open to the banking companies to take steps for recovery of the money; that they have also taken steps accordingly before the Recovery Tribunal; that having exercised their right, now the banking companies should not be allowed to raise a contention that the stipulations in the agreement were violated by the company, and the same has got to be rejected. Attractive though the arguments of the learned Counsel for the appellant, this Court is unable to agree with the same for more reasons than one. 18.A reading of the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured creditors would not be affected has to be rejected. 19.As could be seen from the available materials, the company could issue directions for conduct of a meeting of the shareholders on 10.9.2001. Consequently, publication was made on 14.9.2001 in Dinamalar and Business Line, and the meeting of the shareholders of the company was held on 8.10.2001. The report of the Chairman was filed into the Court as to the unanimous approval of the scheme by the members the next day 9.10.2001. The company petitions were filed on 10.10.2001 and advertisement was made on 14.10.2001. The scheme of amalgamation/demerger was approved by the Court by an order dated 6.12.2001. At this juncture, it is pertinent to point out that the State Bank of India, the leader of the consortium, wrote to the company on 18.9.2001 wherein it is stated Please convene a consortium meeting immediately to discuss all the developments that are taking place and possible repercussions of merger/take over as the case may be . The same was replied on 4.10.2001, stating Please note that we had planned to inform the bankers after the scheme was finalised and taken by the High Court before which the News Item has app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced the real situation before the company Court. Placing all the materials regarding the liability of the creditors becomes all the more important to satisfy the Court to or not to grant the approval for the proposed compromise or arrangement when placed before the Court in view of Sec.391 of the Companies Act. While exercising its powers under Sec.391 of the Act, the Court can refuse sanction for any compromise or arrangement unless it is satisfied that the company or any such person by whom an application has been made under sub-section (1) has disclosed to the Court 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 like. In the instant case, the emphasis has to be laid on the words by affidavit or otherwise all material facts relating to the company such as the latest financial position of the company . This would include the charges created over the assets and existing liabilities at the time when the applications were made. In the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Court, the Court could have ordered notice to the secured creditors also and could have given them an opportunity to put forth their contentions. It was contended by the learned Counsel for the appellant that the secured creditors had a thorough knowledge of the proceedings in Court since proper publications were effected, and if really they had got any objection, they should have approached the Court, but not done so. It is true that the publications were effected as per the orders of the Court. But in the case on hand, when all the secured creditors have issued communications to the company calling for a meeting and having given a reply that the consortium meeting will be convened and that too pending the proceedings in Court, the appellant cannot be permitted to put forth a contention as stated above. 22.Under the above stated facts and circumstances, the decision of the Apex Court reported in 1995 COMPANY CASES VO.82 PAGE 37 (BHARAT SYNTHETICS LTD. V. BANK OF INDIA AND ANOTHER) has got to be applied, wherein it is held as follows: (i) that undisputedly no meeting of the creditors and shareholders had been held, nor consent of the requisite number of creditors, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in appraisement of the facts and circumstances is of the view that the interest of the creditors would be adversely affected if the scheme is approved, then it has to refuse to sanction the scheme since what is involved is a public interest. The banking institutions from whom the appellant company availed different kinds of loan facilities were nationalised banks and also public sector undertaking. Needless to say if any loss occasioned to these institutions, it would ultimately affect the public interest. In the case on hand, it is very clear that the scheme placed before the Court for approval would no doubt affect the interest of the secured creditors. Having flouted the binding clauses in the agreement creating the charge and having kept the creditors under darkness as to the entire proceedings of the scheme despite their request for the consortium meeting and also having not placed before the Court all material facts which would enable the Court to or not to approve the scheme and all the more when it is apparently clear that the scheme of amalgamation if approved would certainly affect the public interest, naturally the secured creditors should have been heard before a ..... 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