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Ramco Super Leathers Ltd. Versus The Dhanalakshmi Bank Ltd.

O.S.A.Nos.55 to 68 of 2003 - Dated:- 17-8-2009 - M. CHOCKALINGAM AND R. SUBBIAH JJ. For Appellants : Mr. A.K. Mylsamy For Respondents : Mr. Karthick Seshadri, Mr. Arvind Subramaniam, Mr. M. Udhaya Bhanu Senior Panel Counsel. JUGEMENT 2.The above company applications were filed by four banking companies namely Corporation Bank, Dhanalakshmi Bank Limited, State Bank of India and Lakshmi Vilas Bank Limited whereby an order in C.P.Nos.239 to 242 of 2001 dated 6.12.2001 was sought to be set aside. 3. .....

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d creditors. Availing the financial facilities, the company 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 contac .....

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s 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 knowledge, the company has sought for approval of the scheme by making publication in Business Line and Dinamalar. The petitioner has sent a lawyer's notice on 10.1.2002 for regulrisation of the account. (d) The charge that was created by the comp .....

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powered to refuse the approval of the scheme if it was not in the public interest. The scheme was opposed to public interest since no care to protect the money advanced by public sector bank was shown. (e) The company had two major divisions, leather and textile, whose operations were carried out independently and performance was also monitored. But the over all management was by the common Board of Directors. There was no separate banking operation and consortium arrangement. The present spinni .....

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ce or hardship would be caused if the scheme is not accepted. The company has not produced previous balance sheets or profit and loss account of the Ramco Super Leather Limited. While the liability of the bank under the foreign currency loan of ₹ 1700 lakh was being transferred to the books of the company which has very insufficient capital, the bank is an interested party and aggrieved by the scheme of amalgamation. 4.In the affidavit in support of the application made by Dhanalakshmi Ban .....

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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 t .....

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ed the order dated 6.12.2001, which has caused great injury and hardship to the banks and also caused prejudice to the rights and interest, and hence it was to be set aside. 5. Equally, the State Bank of India in the course of the affidavit in support of the application has stated that they have not been provided with the petition and other materials relied upon by RSL Industries Limited for obtaining sanction of the scheme; that the RSL Industries which comprised of two divisions namely textile .....

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that the foreign currency loan was secured by the primary security by way of first charge over the factory land and building and the machinery and pari passu first charge over the entire fixed assets of leather division and pari passu first charge over the entire fixed assets of Vijayalakshmi Mills; that the bank was the leader of the consortium of banks which granted credit limits to the textile division of RSL Industries; that the Canara Bank was the other leader of consortium of banks which g .....

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sion; that the respondent company has applied and obtained the approval from this Court without projecting the proper facts regarding their liabilities to their creditors and also neglected to obtain consent or no objection letter from the 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 afor .....

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inalised 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 response at all and thus the company failed and neglected to .....

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s which have financed to leather division as the security position is increased by three folds; that the leather division has availed greater proportion of loan and under the present scheme, the benefit under the loan was transferred to the transferee company which was already chocking for profit with the onerous liability; and that as per agreement, clause 25(2) read with clauses 26 to 29 provide that the primary security cannot be dealt with without specific instructions from the State Bank of .....

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ant's prior permission during the currency of the credit limit; that the permission of the lead bank was necessary in the event of any formulation of any scheme of arrangement or reconstitution; that had notice been issued, the lead bank would have had discussions with the other consortium members and thereupon would have offered its opinion and permission; that the order dated 6.12.2001, was made on the suppression of the fact by the company as to its liability to the applicant and the requ .....

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rtised 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 .....

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ity of the bank to convene the consortium meeting; that the company has not suppressed the existing charge; that the bank has been all along passive spectator of the steps taken by the companies for amalgamation and demerger; that due to failure of IDBI to return the document to the company for creating a charge in favour of the applicant for the loan sanctioned by it, the company could not honour its commitment, and hence all the applications have got to be dismissed. 8.Advancing arguments on b .....

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n, amalgamation with any other body corporate or body corporate is void; that pursuant to the news item published in Business Line, State Bank of India the lead bank of the consortium wrote to the appellant about the hiving off of the textile division and amalgamation of leather division with the transferee; that the secured creditors are not affected by the scheme of arrangement/amalgamation since their securities are kept in tact and they have not been diluted, and the meeting convened is only .....

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s report approved by the shareholders as on 31.3.2001 has been filed along with the company petition as Annexure B wherein all the details of the secured and the unsecured creditors are set out; that the meeting of the creditors has not been convened since their rights are not affected and more particularly, the secured creditors and the scheme of arrangement/amalgamation is between the appellant and its shareholders and not between the appellant and its creditors; that nothing prevented the sec .....

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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 .....

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the submissions made and also looked into all the materials available and in particular, the common order under challenge. 11.The following would emerge as admitted facts: (a) M/s.R.S.L. Industries, a public limited company and incorporated under the Indian Companies Act availed loans from various banks including Corporation Bank, Dhanalakshmi Bank, State Bank of India and Lakshmi Vilas Bank and other financial institutions. They were secured creditors of the said company. The company had two m .....

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be paid within a period of six years in twenty quarterly instalments, there was default. Dhanalakshmi Bank along with State Bank of India and Lakshmi Vilas Bank and in consortium extended working capital credit facilities to the company for its textile division. The State Bank of India and Lakshmi Vilas Bank also got security documents as found in the terms and conditions. It was agreed inter se that the charge by way of hypothecation of the current assets of the textile division of the first re .....

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ipulate that during 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 divisio .....

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h 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 scheme for arrangement and amalgamation on 6.9.2001. The Court gave direction for convening and holding the meeting of the shareholders on 10.9.2001. The publication was made on 14.9.2001 in Dinamalar and Business Line with regard to the convening and holding of the meeting of the sha .....

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RSL Industries Limited with Ramco Super Leather Limited. Company Petitions were filed to confirm the scheme approved by the members on 10.10.2001. An advertisement was effected in Dinamalar and Business Line on 14.10.2001. The Court granted sanction for the scheme of arrangement/amalgamation on 6.12.2001. All the four banking institutions, the secured creditors have challenged the said approval and sought to set aside the same. 12.As could be seen above, the four banking institutions who were th .....

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the shareholders, meeting of the secured creditors should have also been convened and conducted. (iv) The creditor banks from the commencement of the proceedings of the arrangement till it was approved by the Court, were kept in darkness. (v) Even before the Court where the company sought the approval of the scheme, they suppressed all the necessary details, and if made, the Court would not have granted approval. (vi) By the said arrangement, textile division was saddled with more liabilities. ( .....

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he 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 disclose .....

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f Directors. When the company went for scheme of amalgamation/demerger, it sought approval of the scheme of arrangement of undertaking of the textile division with RSL Textiles India the transferee company, and for amalgamation of M/s.R.S.L. Industries with Ramco Super Leather Limited. The grievance of the secured creditors is that from the commencement of the proceedings of demerger and amalgamation, neither a notice was given to them, nor a meeting was convened or conducted, nor prior permissi .....

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f the Chairman that the scheme was unanimously approved by the members, the company petitions were filed to confirm the scheme; that the Court was satisfied that the legal requirements were satisfactorily fulfilled and then granted the relief of approval, and in such circumstances, it cannot be questioned now. 15.Admittedly, the agreement entered into by the company with the secured creditors contained the following clauses. Clauses 25(2), 26, 27, 37 and 42(b) read as follows: "25(2). The b .....

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ngs have been fixed under and some/all of the aforesaid credit facilities have been stored indicating that such goods movables and other assets are hypothecated and/or pledged 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 .....

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g 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 shall be displayed on such factory, mundy or other place where such manufacturing or other activity is carried on indicating th .....

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ing the currency of these presents the shareholding of such of the shareholders in the Borrower who are its Directors at present and the principal shareholders and promoters of the Borrower shall not be varied without the previous written consent of the Bank first obtained. 42(b):- 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 ama .....

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k under or in respect of any of the credit facilities without the written consent of the bank it shall not effect any scheme of amalgamation or reconstitution. 17.Pointing to the above clauses and in particular clause 42(b), the learned Counsel for the respondent bank secured creditors would submit that without the written consent of the secured creditors banks, the company should not effect any scheme of amalgamation or reconstitution what is now sought for. Answering to the above, the learned .....

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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 mo .....

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rly indicate that the appellant company should not without the consent of the bank, effect any scheme of amalgamation or reconstitution. Having executed the agreement with the above clauses, the borrower company if allowed to effect a scheme of amalgamation or demerger without the approval of the secured creditors, needless to say it might even affect the interest of the company. The two divisions of the appellant company were granted with foreign currency loan of ₹ 24.50 crores by one of .....

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ver the entire fixed assets of Vijayalakshmi Mills. The current assets of the textile and leather divisions were given as the second charge. The State Bank of India which led the consortium, gave loan to the textile division, and the Canara Bank the leader of the other consortium, granted loan to the leather division. Admittedly, while the foreign currency loan was granted to both divisions, by operation of the demerger scheme, all liabilities were transferred to the textile division. No doubt, .....

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be termed as a technical violation of the pari passu agreement. Having agreed not to go for amalgamation or reconstruction without the written consent of the secured creditor banks and when the banks are able to show that the security position could not continue as it originally stood, the contentions put forth by the appellant company that the interest of the secured creditors would not be affected has to be rejected. 19.As could be seen from the available materials, the company could issue dir .....

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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 wa .....

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discuss the developments. It is pertinent to point out that the proceedings were pending before the Court even on 4.10.2001. This would make it clear that the company has come with a false reply that the scheme was finalised. Though the appellant company gave an assurance for convening a meeting at the earliest, neither it convened a meeting, nor put the secured creditors on notice as to the developments. Even on 29.11.2001, the next communication was addressed by the State Bank of India to the .....

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reditors were neither added as parties nor put on notice as to the proceedings before the Court for demerger and amalgamation. It was contended by the learned Counsel for the appellants that the secured creditors need not be added as parties in the petition for demerger or amalgamation and even the Court do not order any notice to the secured creditors, but it ordered publication and also the convening a meeting of the shareholders which was actually done, and in such circumstances, it cannot be .....

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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 m .....

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he 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 instant case, had the company brought to the notice of the Court the latest financial position including the existing liability of the company and the charges created over the securities in respect of the liability, it is highly doubtful whether the Court would have granted the approval as asked for. Sec.391 of the .....

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mpany in respect of the latest financial position of the company was disclosed by affidavit or otherwise. It is in the nature of a warning to the Court that all the material facts relating to the company as to the latest financial position of the company if not placed, the Court should not sanction an order of compromise or arrangement. It is a case where not only the secured creditors were kept in darkness from the commencement of the proceedings as to the scheme of demerger or amalgamation til .....

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tion to its shareholders. The answer by the appellant is that it was neither mandatory nor necessary. It is not the case of the appellant that the shareholders when they were called for the meeting pursuant to the orders of the Court, were put on notice as to the entire financial position of the company. No material was placed before the Court that any such statement was furnished to the shareholders. If all the material particulars regarding the latest financial position of the company includin .....

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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 .....

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oper in every aspect, were mandatory; (ii) that, moreover the company had not placed before the court its authenticated latest financial position, as required under sub-section (2) of section 391 of the Companies Act; (iii) that, on the facts, the banks' apprehension that the merger would jeopardise their claims was justified, and sanction had to be refused." 23.The Supreme Court has held in a decision reported in (1997) 1 SUPREME COURT CASES 579 (MIHEER H. MAFATLAL V. MAFATLAL INDUSTRI .....

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agement test' or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalised economic policy is to achieve this goa .....

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