Madras High Court
G.V.Films Limited vs Metage Special Emerging Market Fund ... on 21 December, 2009
Bench: M.Chockalingam, V.Periya Karuppiah
IN THE HIGH COURT OF JUDICATURE OF MADRAS DATED: 21.12.2009 CORAM THE HON'BLE MR. JUSTICE M.CHOCKALINGAM AND THE HONBLE MR. JUSTICE V.PERIYA KARUPPIAH O.S.A NOS. 51, 434 AND 435 OF 2009 G.V.Films Limited A company incorporated under the Companies Act, 1956 and having its Registered office at New No.7, Old No.4 Seshadri Road, Alwarpet Chennai-600 018 Represented by Mr.P.Raghuraman, Director .... Appellant Vs. 1.Metage Special Emerging Market Fund Limited Represented by its Director Mr.Jerome Muller and Having its Principal Office at PO Box No.513 GT, Strathvale House North Church Street George Town, Grand Cayman, Cayman Islands. 2.Metage Funds Limited Represented by its Director Mr.Jerome Muller and Having its Principal office At PO Box No.513 GT, Strathvale House North Church Street, George Town, Grand Cayman, Cayman Islands. 3.Peter Beck and Partner Vermogenverwaltun GMBH Represented by its Authorised Signatory And Having its Principal Office at Alleenstrasse 126 (Postfach:1105) D-73230 Kirchheim/Teck(d-73219) Germany. 4.Gayathri Holdings P.Limited New No.22/1, Old No.33, Pasumarthy Street Kodambakkam,Chennai-600 024 5, Mr.K.L.Swamy 09, Seshadri Road Bangalore 560 009. Respondents O.S.As preferred under Clause 15 of the Letters Patent and Order 36 Rule 1 of O.S.Rules against the common Judgment and Decree dated 04.12.2008 made in C.P.Nos.96 to 98 of 2008. For Appellant : Mr.K.Ravi for M/s.Rugan and Arya For Respondents:-For R1 and R2:- Mr.Arvind P.Dadar Senior Counsel for Mr.R.Venkatavaradan. For R3 :-Mr.T.K.Baskar For R4 :-Mr.T.K.Seshadri, Senior counsel for Mr.Srinath Sridevan. J U D G M E N T
(Judgment of the court was made by V.PERIYA KARUPPIAH.J.,) These appeals are directed against the common order dated 04.12.2008 passed by the learned Single Judge made in C.P.Nos.96 to 98 of 2008.
2. The appellant is the petitioner before the said court, who sought for approval of the scheme of arrangement between G.V.Films Limited and G.V.Studio City Limited and G.V.New Media Technology Limited. The said arrangement is for the demerger of the G.V.Films Limited (hereinafter referred to as a Parent Company) and thereby to create two more companies viz., G.B.Studio City Limited and G.V.New Media Technologies Limited (hereinafter referred to as Offspring Companies).
3. The short facts which are necessary for the disposal of these appeals would be as follows:-
3.1 :- The petitioner company is the parent company viz., G.V.Films Limited, incorporated under the Companies Act, 1956. It proposes the demerger and to form the Offspring Companies known as G.V.Studio City Limited and G.V.New Media Technologies Limited. The main objects of the said parent company are to carry on the business as film producers (sound and / or silent), hippodrome & circus proprietors of cinema houses, theatres, concert halls and picture places and studios and also to provide for musical, dramatic and athletic performances for amusements and / or entertainment for both private and public.
3.2:- It also has the right of purchasing or owning, acquiring properties, lands and properties and to hotel management, acquire or lease TV Channels, radio and TV Stations inside or outside the India and to produce Tele serials and to exhibit movies or serials or any film on Satellite, Internet, cablenet or any other means of communication.
3.3 :- The said parent company's authorized sum capital as on 30th June 2007 is Rs.20,00,00,00,000 divided into 200,00,00,000 Equity Shares of Rs.10/- each. The issued, subscribed and paid up capital of the parent company as on 30th June 2007 is Rs.348,22,00,000/- divided into 34,82,20,000 Equity Shares of Rs.10/- each share.
4. The circumstances which necessitated the demerger of the said company as G.V.Studios and G.V.New Media Technologies (Offspring Companies) are to enable the said division to grow as focused business entities and attract capital/ strategic investors and facilitate the offspring companies in becoming major market players in the relevant business.
5. It is also stated by the petitioner that the demerger will ensure better operational management and result in greater synergies of operations and focus on accelerated growth of individual units and will also ensure higher returns to the shareholders, creditors and employees and is also in general public interest. Therefore, it has enunciated a scheme of programme for demerger of the parent company into offspring companies. When they have sought for approval of the said scheme, the petitioner company was directed by this court in C.A.No.3066 of 2007, in its order dated 29.11.2007, to convene a meeting of the Equity Share Holders of the petitioner company for the purpose of considering, and if thought fit, approving, with or without modification, a scheme of Arrangement between the parent company and offspring companies. For that purpose, Honble Mr.Justice K.Govindarajan (Retd) was appointed to act as a Chairman of the said meeting and to report the results thereof.
6. Accordingly, a meeting of the Equity Share Holders was convened as per the requirements made in Section 396 of the Companies Act and each of the Equiry Share Holders of the Company were informed through certificate of posting, and a notice was also advertised in the English daily The Hindu Business Line on 29.12.2007 and in Tamil daily Malai Murasu on 29.12.2007 as per the directions of the Court. Accordingly, on 24.01.2008, the meeting of the Shareholders of the petitioner company was duly convened in accordance with the said order of this court at New Woodlands Hotel Private Limited, No.72 75, Dr.Radhakrishnan Salai, Mylapore, Chennai-600 004, and Honble Mr.Justice K.Govindarajan (Retd) presided over the said meeting.
7. In the said meeting of the Equity Shareholders, some modification was proposed in Clause 2 of Section 1 of Part IV of the Scheme and the said amendment was duly approved, and a report has been filed by the said Chairman of the meeting before this Court on 30.01.2008.
8. In the meeting of the Equity Shareholders of the petitioner company, 787 Equity Shareholders exercised their votes either in person or by proxy, and the total number of votes cast were 7,86,61,306. Out of said votes cast, 689 shareholders holding 7,84,85,906 Equity Shares of Rs.10 each, voted in favour of the modified Scheme as proposed in the meeting. Three (3) shareholders holding 1,75,400 Equity Shares of Rs.10/- each, voted against the said resolution, and the remaining 95 shareholders cast invalid votes. Therefore, the petitioner had sought for approval of the scheme of arrangement as modified and approved by the Equity Shareholders held on 24.01.2008.
9. The further case of the petitioner would be that the proposed arrangement in between the petitioner company (parent company) and the said offspring companies will not affect the creditors both secured and unsecured. As per the orders passed by this court on 29.11.2007 in C.A.NO.3066 of 2007, the petitioner company was directed to convene a meeting of the secured creditors of the company for the purpose of considering and approving with or without modification of the scheme of arrangement between the parent company and offspring companies, and the said order was to the effect that Honble Mr.Justice K.Govindarajan (Retd) would act as the Chairman of the said meeting and report the results thereof to this court in accordance with Section 393 of the Companies Act 1956.
10. Notice was sent to the secured creditors by prepaid post and certificate of posting on 28.12.2007, and the notice of convening the meeting of the secured creditors was advertised in all the editions of the Tamil Daily Malai Murasu on 29.12.2007 and in all editions of the English Daily The Hindu Business Line on 29.12.2007. One Smt.A.Sushila Devi moved this Court by way of an Application in C.A.No.199 of 2008 in C.A.No.3065 of 2007 praying for postponing the meeting to be convened on 24.01.2008, till the liability due to her was crystallized. The meeting was postponed by this court by an order dated 23.01.2008 and subsequently the said A.Sushila Devi in C.A.No.199 of 2008 reported settlement arrived at between the petitioner company and herself on 07.03.2008, and accordingly, C.A.No.199 of 2008 filed by her was dismissed as withdrawn.
11. Since the meeting ordered by this court was redundant, the court granted four weeks' time to the petitioner company to get consent from other secured creditors. Accordingly, consent of three secured creditors viz., Citi Bank, State Bank of India and The Lakshmi Vilas Bank Limited, were obtained for the proposed scheme of arrangement, and they also submitted their consent for the said scheme. The proposed scheme of arrangement would take effect from 1st July 2007, the appointed Date, under the provisions of Sections 391 to 394 of the Companies Act, 1956. The scheme of arrangement will be beneficial to all the companies involved in the scheme, including the shareholders of the said companies. Therefore, the petitioner company prays for the scheme of arrangement between G.V.Films Limited (parent company) and G.V.Studio City Limited and G.V.New Media Technologies Limited (Offspring companies) enclosed with the said petition , be sanctioned by this court with effect from 01.07.2007, so as to combine all shareholders and creditors of the petitioner company.
12. The contention of the respondents 1 and 2 would be that they are Bond holders under the Deed of Trust dated 20.04.2006, executed by the petitioner and the respondents 1 and 2 in which the Bank of New York, London Branch, was appointed as the Trustee, and the said Trust Deed contains terms and conditions of the Bond and the interests of the respondents 1 and 2, in the issue of Foreign Currency Convertible Bond (hereinafter referred to as FCCB) on dollars.
13. One of the important terms under which the Bonds have been issued to the respondents 1 and 2, is a right available to them to get the bond converted into shares including the right available to convert it into Global Depository Receipts (GDR). Those bonds were paid in Dollars, and the entire covenant and interest are categorized in the said Deed of Trust produced in Annexure B of the affidavit filed by the respondents 1 and 2.
14. The proposed scheme of arrangement by the petitioner would benefit only the promoters and the major shareholders of the petitioner company, and nobody else would stand to benefit by the scheme. Without considering the terms and conditions of the bond as per the Trust Deed held by the respondents 1 and 2, the proposed scheme cannot be proceeded . The entire scheme would vitally affect the interests of the respondents 1 and 2 since the Subscribed and Paid-up capital of the petitioner company stands reduced by 153,96,35,247/-. The resulting companies (offspring companies) G.V.Studios City Division and G.V.New Media Technologies Division would take 39,13,73,237 and 125,93,07,858 respectively and out of this amount, the resultant transfer would be Rs.28,60,91,755/- for the Studio Division and Rs.125,93,07,858/- for the New Media Division in respect of fixed assets. If it is so, the petitioner company would be left with hardly any business or assets supporting the obligations under the Bond, and the respondents 1 and 2 would be left with no other option than to share little quantum of money if converted into shares of the company.
15. The provisions of Section 101 to 103 of the Companies Act should have been complied with since there is a reduction of capital taken place. Therefore, the scheme of arrangement suggested would be in violation of provisions of Section 101 to 103 of the Companies Act.
16. The petitioner company had approached this court without even considering the interests of the unsecured creditors in general and the respondents 1 and 2 in particular, and they would stand completely jeoparadized by this scheme and arrangement. The petitioner company had deliberately moved the said application only for convening the meeting of the secured creditors knowing fully well that it would not be in a position to obtain consent of the respondents 1 and 2 and other unsecured creditors. Since, no meeting of the secured creditors was held as per the directions of this court also, the scheme of arrangement cannot be approved. Therefore, the proposed scheme of arrangement being a dubious one may not be approved by the court.
17. The third respondent had also raised similar contention in his affidavit. According to him, a similar Deed of Trust was entered into by the petitioner company with the third respondent on 23.10.2006, in which the Bank of New York, London Branch, was appointed as the Trustee under the Trust Deed. The said FCCB was in the form of Euro Bonds. The third respondent has also raised objections similar to that of the objections of the respondents 1 and 2.
18. The fourth respondent had stated in his objections that he being a Shareholder, did not receive any notice of the meeting in relation to the Scheme of Arrangement proposed by the petitioner company.
19. The fourth respondent was having 36,100 number of equity shares. It is also stated that the Group of Companies held by one G.Venkateswaran viz., the petitioner, Sujatha Estates (P) Limited, Sujatha Films Limited, Sujatha Productions(P) Limited and Aruna International Private Limited during the year 1987 and 1990, and those group of companies claimed to have 7,80,000 equity shares of M/s.Shaw Wallace Company Limited and those 7,80,000 equity shares of Shaw Wallace were taken away in an Income Tax raid held in the premises of the Group of Companies belonging to Mr.G.Venkateswaran for the income tax due to the tune of Rs.380 lakhs.
20. In order to pay the income tax arrears, the said G.Venkateswaran requested the fourth respondent to enter into an agreement of sale of shares, and it was entered into between them on 09.11.1987, under which 7,80,000 equity shares in M/s.Shaw Wallace Company which were seized by the Income-tax Department, were agreed to be purchased for a total consideration of Rs.663 lakhs. Accordingly, funds were arranged, and Rs.380 lakhs tax arrears were paid on 30.11.1987, by way of Pay Order drawn on Bank of Baroda favouring Income Tax Department for the specific purpose of releasing 7,80,000 shares held in Shaw Wallace Company Limited from the custody of Income Tax Department in order to facilitate the transfer of those shares in favour of the fourth respondent. Subsequently, it was found that the said Mr.G.Venkateswaran and the remaining four companies were lawful owners of only 174,399 shares and not the entire 780,000 shares. Ultimately, the said 174,399 shares alone were transferred to the fourth respondent and the said G.Venkateswaran and four companies had agreed on 24.01.1990, to make good loss for the fourth respondent. Accordingly, 13,43,700 shares of the companies viz., Sujatha Estates (P) Limited, Sujatha Films Limited, Sujatha Productions(P) Limited and Aruna International Private Limited were deposited with the fourth respondent as per the letters written on 14.02.1990 and 26.02.1990. After that, the said G.Venkateswaran passed away in the year 2003, and therefore, the fourth respondent had filed a suit in this court in C.S.No.915 of 2006 for a decree for accounts and for other reliefs like selling the shares referred to above and paying over the sale proceeds to the fourth respondent company against the petitioner company and four other companies. Therefore, the fourth respondent would thus become a creditor having shares of the share holders as pledgee of the petitioner company. The scheme of arrangement as proposed by the petitioner would certainly affect all the creditors including the fourth respondent. The proposed scheme of arrangement is violative of provisions of law and also contrary to public policy. The fourth respondent would come as one of the secured creditors, and the direction of the court to convene a meeting of the secured creditors on 24.01.2008 at 10.30 a.m., was not informed to the fourth respondent. The non participation or the non conduct of the said meeting of the secured creditors of the company would vitally affect the decision relating to the scheme of arrangement. Even assuming that the fourth respondent is not a secured creditor, but only an unsecured creditor, meeting of the unsecured creditors of the company was not convened which is fatal to the approval of the scheme.
21. The petitioner cannot seek for the demerger of the companies under the scheme of arrangement without the consent of the creditors when the liabilities of the company are sought to be transferred to its division, and therefore, if the scheme is approved without the consent of the class of creditors whose rights are also transferred and they will be vitally affected. The unsecured creditors as a whole were not consulted and thus the scheme without the approval of the creditors will be ineffective and the scheme is thus contrary to the established procedures under Section 391 of the Companies Act.
22. The Scheme of Arrangement does not disclose material particulars like what are all the liabilities that are to be transferred to the offspring companies viz., G.V.Studios City Limited and G.V.New Media Technologies Limited, whose liabilities are sought to be transferred. It has also not disclosed the transfer of fixed assets, and thereby the creditors whose liabilities are to be discharged by the petitioner company are deprived of the assets and what would be the recourse once the scheme is sanctioned are also not given. Therefore, the creditors are thus vitally affected by the scheme of arrangement of demerger and without approval of the class of unsecured creditors by convening a meeting.
23. It cannot be said that the scheme of arrangement is in accordance with law and not prejudicial to the share holders nor to the creditors both secured and unsecured. Therefore, the demerger proposed by the scheme of arrangement is not tenable in law and therefore, the confirmation of the scheme need not be granted.
24. Learned Single Judge on hearing both sides had elaborately discussed the various pointed raised before her and had come to the conclusion of disallowing the claim of the petitioner companys scheme of arrangement for demerger. Aggrieved against the said order, the present appeals have been preferred by the petitioner company.
25. Heard Mr.K.Ravi, learned counsel for M/s.Rugan and Arya, appearing for the appellant, Mr.Aravind P.Dadar, learned Senior Counsel for Mr.Venkatavaradhan, appearing for respondents 1 and 2, Mr.T.K.Baskar, learned counsel appearing for the third respondent and Mr.T.K.Seshadhri, learned Senior Counsel for Mr.Srinath Sridevan, appearing for the fourth respondent.
26. Learned counsel for the appellant/petitioner company (herein after referred to as petitioner company or parent company) would submit in his argument that rejection of the scheme of arrangement proposed by the petitioner, by the learned Single Judge is contrary to all canons of law when the scheme of demerger was approved by an overwhelming share holders present and all secured creditors of the company have given assent. He would further submit in his argument that the demerger proposed by the petitioner is not a transfer since the group of companies would face the liabilities as that of the parent company. He would further submit that the learned Single Judge failed to appreciate the basic fact that three objectors viz., 3 FCCB holders, the respondents 1 to 3, are not at all prejudiced and will not be worse off by sanctioning the Scheme of Demerger in view of the readiness and willingness expressed by all the three companies (parent company and offspring companies) to jointly and severally continue to shoulder all the obligations under the FCCBs by executing a Supplementary Trust Deed as contemplated in the FCCB conditions. He would further submit in his argument that even otherwise the maturity of those bonds either Dollar bonds entered with respondents 1 and 2 or the Euro Bonds entered with the third respondent, would be only in the year 2012. In the mean while they can exercise their right to demand equity shares of any company instead of their bonds, after getting permission from the Reserve Bank of India and therefore they cannot have any objection. He would further submit that there will not be any prejudice caused to the respondents 1 to 3. He would further submit that the scheme would not result in reduction of the price in conversion of FCCB bonds by its holders, since any reduction in conversion price would be informed to all the FCCB holders to get more shares. He would also submit in his argument that the fact that the erstwhile Chairman of the petitioner company is stated to have taken an advance of Rs.380 lakhs from the fourth respondent in the year 1987 for and on behalf of his Group companies towards sale of Shaw Wallace Shares held by him and his companies would show that the claim of the fourth respondent against the petitioner company is only a speculative one. As regards the other submissions of the fourth respondent that only a portion of the said shares of M/s.Shaw Wallace were given to them and the said petitioner company is liable to pay the remaining sum towards the payment made by him to the Income Tax department, no document has been produced to show the liability of the said Chairman on behalf of the petitioner company to the fourth respondent. He would also submit in his argument that the advertisement regarding the court convened meeting of the share holders as ordered by the previous learned Single Judge of this court was perfectly alright, and the finding of the learned Single Judge that the meeting convened on the basis of the order was erroneous and inadequate is not sustainable. He would again submit in his argument that according to the orders passed by this court, an advertisement was given in Hindu Business Line in all the editions of the country and in the vernacular daily viz., Malai Murasu, in all editions and accordingly 787 share holders attended, and thereby a major portion of the share holders voted in favour of the modified scheme as proposed in the meeting and less number of share holders against the said resolution. In the said meeting, with some modification, the scheme of arrangement of demerger of the petitioner company was approved under the Chairmanship of Honble Mr.Justice K.Govindarajan (Retd). He would also submit that the report of the Honble Judge was filed immediately, and it would depict the intention of the share holders who are the owners of the company. Demerger as a scheme is possible, and there is no impediment for granting approval, since the three secured creditors have also given their consent for the said scheme. He would also submit that the objections of FCCB holders are also not sustainable because they can at any time change the hands of those bonds, and the condition that they should have consulted for the demerger of the petitioner company is not necessary, and the basic conditions in the Trust Deed would be that of contractual relationship, and if at all they would be entitled to the said amount of conversion on maturity in the year 2012, and they cannot preclose the said bonds nor oppose the demerger of the company which is inter se. It can be objected only by the share holders of the company to which a prompt meeting was held as per the orders of this court on 24.01.2008, and the majority of the share holders approved the scheme with modification. He would also submit that the requisites of Section 391 of the Act have also been complied with, and there was no violation of the said provisions nor any act done against public policy, and no prejudice would be caused to anybody due to demerger of the petitioner company. Learned Single Judge has accepted the notional reduction of share capital to which the share holders would not be entitled to any payment. However, the learned Single Judge failed to note the meeting of the unsecured creditors was not mandatory when such reduction was found only as notional one. However, the respondents 1 and 2 have filed a suit before the London Court exercising their right over the said bonds invoking the jurisdiction of the London Courts. He would also submit that according to the agreement in between the parties, Eurobonds can be converted into equity shares and the said stipulation for conversion was not challenged till today, and the respondents are bound by that. He would further submit in his argument that notices have been promptly given to the creditors as per the direction of this Court, and the meeting was postponed only due to the intervention of one of the secured creditors on 23.01.2008 by this court, and the petitioner was directed to get consent from the secured creditors. He would also submit that if really the court directed the convening of the meeting of the secured creditors and the unsecured creditors, the petitioner would have complied with the same. For the mistake of the court, the petitioner company should not be penalized. He would further submit that the total value of the assets of the petitioner company was 348.2 crores, out of which 156.93 crores were moved to the offspring companies. The balance will be available to the parent company, and 159.4 crores would be the general reserve, and the capital would be 38.8 crores. He would further submit that the share premium account shows 95 crores and 30.5 crores was stated to be the good will of the company. Since the aborted projects during 5 years was to the tune of 33 cores, it is good for the secured and unsecured creditors as well as bond holders that the demerger would bring flourishing results of the parent and offspring companies. He would further submit that even according to Sections 100 to 104 of the Act, no previous consent is necessary for the approval of the scheme from the creditors, and there is no material prejudice caused to the share holders or creditors or the respondents.
27. He would also submit that respondents 1 to 3 have admittedly not exercised their option to convert the bonds into shares, and therefore, they would not be termed as share holders, and their bonds would mature only in the year 2012, and therefore there cannot be any objection nor any prejudice caused to the respondents 1 to 3 by virtue of approval of the scheme of arrangement. He would cite a judgment of the Honble Apex Court reported in 1997 SC 506 between Miheer H.Mafatlal Vs. Mafatlal Industries Ltd in support of his case . The scheme contemplates reduction of capital and the issued unpaid capital has not been reduced. The shares reduced are allotted to offspring companies demerged from the parent company, and therefore there cannot be any prejudice to the share holders nor the creditors. He would also submit that unless the bond holders viz., respondents 1 to 3 opted for conversion, the petitioner cannot himself convert them into shares, and therefore, there is no question of any prejudice caused to the respondents 1 to 3. However, he would submit in his argument that all the three companies are ready to give undertaking to the share holders that no prejudice will be caused to them and are also ready to give undertaking to creditors both secured and unsecured that they would jointly and severally pay the liabilities. All these reductions would be only in book adjustments and not actual loss caused to the share holders. Since the reduction of the share capital is only notional, there will not be any prejudice to any one much less to the share holders, who have participated and approved the scheme of arrangement and had considered their right and had accepted for the same. He would further submit that even though demerger is not contemplated under the Companies Act, it has been mentioned in Income Tax Act under Section 45, and therefore, the concept of demerger which has to be considered like that of amalgamation of companies, should have been accepted for the benefit of not only the company, but also its share holders and the creditors. He would also cite a judgment of Gujarath High Court reported in AIR 1970 Gujarath page 819 in support of his case. He would further submit that the fourth respondent is not at all its creditor, and he holds negligible share, and he was also given notice, but he did not participate in the meeting of the share holders and therefore, his objections cannot be accepted. Therefore, he would request the court to approve the scheme of arrangement, to set aside the order of the learned Single Judge and thus allow the appeal.
28. Mr.Arvind P.Dadar, learned senior counsel appearing for respondents 1 and 2 would submit in his argument that the appellant company did not produce the latest accounts of its own even after the demerger for approval. On going through the balance sheet of the appellant company and offspring companies, radical changes have taken place after 2007, and the profit is shown to be 1 crore as on 31.03.2008. But, it was found to be 12.19 million i.e 1.219 crores. He would further submit that the petitioner did not file any accounts at the time of filing the petition. Subsequently, it was shown to be a loss at 119.599 crores. When the status of the petitioner company was found to be so, the meeting of the share holders cannot be convened for reconsideration of their approval. He would further submit in his argument that the provision under Section 391 of the Companies Act has to scrupulously be followed for the purpose of seeking approval of the scheme of arrangement. Latest financial accounts or the Auditors report should have been produced atleast at the appellate stage. He would cite a judgment of the Honble Apex Court reported in 1997 SC 506 for the said principle. He would further submit in his argument that nothing is mentioned in the scheme of arrangement about the liability to pay the creditors either secured or unsecured or the bond holders out of which they could exercise their right. The scheme of arrangement without any meeting of the secured and unsecured creditors is a calculated fraud to deceive the share holders and creditors. He would also submit that the argument advanced before the learned Single Judge that the advertisement for the convening of the share holders meeting was done only in Hindu Business Line of Chennai edition and not in country wide editions. He would also submit that out of 85,540 share holders, 787 shareholders only attended the meeting since there was no proper publication. He would further submit that the shares of the petitioner company are through out India, and they have not been informed properly to the unsecured creditors and bond holders. When the monies were given by the unsecured creditors and bond holders to the petitioner company, the petitioner company has not informed them that due to demerger, the benefits would go to the offspring companies but the liabilities were shown with the parent company, and how the bond holders and the secured creditors and the unsecured creditors would get their money from the petitioner parent company is not known. In the case of demerger which is diametrically opposed to amalgamation, the liabilities are with the parent company and the assets and profits are given to the offspring companies, which would affect the rights of the share holders and creditors of the said company. Normally, the big companies are not demerging and the option of the petitioner company to demerge is without any reasons and it should be with mutual consensus from the share holders of the company who are sharing the ownership and that secured and unsecured creditors' consent is necessary for changing their claim from one company to another company. He would further submit that the share capital was shown to be 348,22,00,000/- from 178,00,00,000. However, the closing stocks were shown to be 31 crores as on 31.03.2002. Share premium should be given sanctity like shares. According to Section 78 of the Act, share holders are entitled to the remaining sum after payments were made to the creditors in the case of winding up of the company. Therefore, the shares are concerned with the assets of the company in the case of demerger. He would further submit that as regards the demerger of the petitioner company, parental company is shown to have only liabilities and not as profits, and it will certainly affect the share holders and its creditors. The good will of the company amounting to Rs.30 crores would wipe out in the case of demerger and by virtue of demerger such asset belonging to the share holders would certainly amount to detriment and prejudice to the share holders and creditors. The parent company would be certainly reduced to its capital. When there is no reduction of liability, it would affect not only the share holders but also bond holders and creditors. The good will to the tune of Rs.30 crores money was wiped off and it would certainly prejudice the rights of share holders and the respondents 1 to 3. He would also submit that the paid up share capital was reduced by 90%, and nothing was explained in the scheme of arrangement. He would further submit that as per the letter of offer issued by the petitioner company to the respondents 1 and 2, the promise given by the petitioner company was that 140% of the value of the bonds will be given at the time of maturity. In such circumstances, he would further submit that the bond holders would be very much concerned about the assets, out of which the money could be paid to the bonds held by the respondents 1 and 2. He would further submit that once demerger had taken place, the petitioner company would not get assets since demerger is a transfer under Section 2(19) (AA) of Income Tax Act. The argument advanced by the appellant that demerger was not a transfer is not correct and therefore undertaking given by all the companies and group of companies will not serve the purpose, and prejudice would be caused to the respondents creditors. As per Section 62 of the Contract Act, by mutual consent, contract could be done and when the liability cannot be changed by the debtor and especially when the FCCB were held by the respondents 1 and 2 , the petitioner company ought to have convened a meeting of the unsecured creditors so as to avoid prejudice to any one of the parties and not to have undone the contract. Therefore, the approval of the scheme of arrangement may not be ordered, and the learned Single Judge is right in rejecting the claim of the appellant.
29. The learned counsel Mr.T.K.Baskar appearing for the third respondent in his argument stated that the third respondent had obtained Euro bonds and he is standing on the same footing like that of the respondents 1 and 2 and the Reorganisation of the petitioner company by virtue of demerger would certainly affect the rights of the third respondent, and it would be amounting to breach of contract. He would further submit that the agreement reached in between the petitioner and the third respondent by virtue of the Trust Deed entered into between them would go to show that on maturity, the petitioner company had agreed to pay 175 crores and because of the demerger proposed by the petitioner company, the assets would go to the offspring companies, and how the third respondent would get his maturity amount from out of the Euro bonds will be in dark. He would further submit that every aspect regarding the liability to pay the amount to the third respondent should be given in the scheme of arrangement; otherwise, the scheme of arrangement cannot be approved and therefore, the demerger sought for by the petitioner company need not be approved and the appeal be dismissed.
30. Mr.T.K.Seshadhri, learned Senior counsel appearing for the fourth respondent would submit in his argument that the fourth respondent is an unsecured creditor and he has filed a suit for recovery of money and the application filed by the petitioner company to reject the plaint was dismissed, and an appeal has been preferred before a Division Bench of this Court against the said order. It was also dismissed, and now the suit is pending before this court. Therefore, the liability to pay the said amount as claimed in the suit cannot simply be shifted to the offspring companies by virtue of demerger scheme. He would refer to the points relied upon by the learned Single Judge and had sought for the confirmation of the order passed by the learned Single Judge and for dismissal of the appeals.
31. We have given anxious thought to the arguments advanced on all the sides and the point for consideration in these appeals would be whether the decision reached by the learned Single Judge that the scheme of arrangement proposed by the petitioner company cannot be approved since it is in violation of the statutory provisons and prejudicial to the share holders as well as the secured creditors of the company would be sustainable or not.
32. As far as the present cases are concerned, the admitted facts would be that the petitioner company was in existence as per the incorporation under the Companies Act, 1956 and the respondents 1 and 2 have purchased Dollar bonds as per the offer circular given by the petitioner company and the Trust Deed entered into between them and the said Dollar bonds to the said value were still possessed by the respondents 1 and 2, and their maturity value is in the year 2012. Similarly the third respondent had obtained Euro bonds to the value mentioned in the offer circular as well as Trust Deed entered into between them which would also be in existence for its maturity till 2012. It has been categorically agreed by the petitioner company and the respondents 1 to 3 that the maturity value of 140% of the bonds would be paid by the petitioner company. It is seen that by virtue of the bond issued by the petitioner company, the respondents 1 to 3 being the foreign bodies, are having right over the petitioner company. According to the further agreement i.e., the Trust Deed, the said bonds given, at any time can be converted into shares of the petitioner company. Honble Thiru Justice K.Govindarajan (REtd) headed as a Chairman, and a meeting was convened on 24.01.2008 and a report has also been filed. Similarly yet another order was passed by this court for convening a meeting of the secured creditors to which one of the secured creditors had asked the court for postponement by filing an application in C.A.199 of 2008, and the said meeting was postponed, and thereafter she had settled her claim with the petitioner company, and she had withdrawn the C.A.199 of 2008. The said C.A. was dismissed as withdrawn by order dated 09.03.2008. Thereafter, no meeting of the secured creditors was convened, and as such, it was directed by this court to get consent of the secured creditors within the stipulated time and it has been obtained by the petitioner company. The consent of the 3 secured creditors viz., Citi Bank, Lakshmi Vilas Bank Limited and State Bank of India, were also obtained for the demerger of the company.
33. As far as the convening of the meeting is concerned, it has been objected by the respondents that the meeting of the share holders was not properly convened since proper notice was not given to all the share holders. It is further contended that out of 84,540 share holders, only 787 share holders attended the meeting and it shows that the publication in the paper was not properly done nor the notice of the convening of the said meeting was properly given to the share holders.
34. According to the learned counsel for the appellant, this court had ordered for the publication of the convening of the meeting in Hindu Business Line at Chennai edition wherein it has been effected through out India. The learned counsel produced a bill for the said payment of the money for the publication to Hindu Business Line before this court establishing that it has been published through out the country in all the editions. No doubt, Malai Murasu publication was done in vernacular language within the State. The said production of the bill to the effect that it had been published through out India cannot be relied upon since the Bill mentions only some of the cities of our country, and it is not mentioned therein that it was made in all the editions through out India. The said bill would disclose that it has been published in the editions of New Delhi, Bombay, Calcutta, Bangalore and other cities, and it never said that through out India. Therefore, it cannot be taken as that it was published through out India and by virtue of the publication, every one of the share holders would be presumed to have been informed.
35. It is an admitted fact that the fourth respondent is holding 38,100 shares with the petitioner company. He has categorically mentioned that he was not served with any notice and he had not attended the meeting conducted on 24.01.2008. Since the petitioner has not produced any proof that he has served notice properly on the fourth respondent, the submission that 787 share holders attended the meeting and it was an overwhelming one cannot be accepted. The further submission of the petitioner company that the fourth respondent is possessing only lesser extent of shares was not a point raised before the learned single judge. Merely because the court has passed the orders that it has been only in respect of Chennai edition, the argument that the petitioner company had not published in all the editions all over India is not acceptable, and the participation of the limited share holders would go to show that it has not been properly published by the petitioner company.
36. As regards the claim of the respondents 1 to 3 that they are also the creditors of the petitioner company, and their rights have been affected by virtue of the demerger proposals, and the liability of the petitioner company has been washed away because of the demerger, and they cannot claim the amount due under the bonds executed by the petitioner company in case of demerger are concerned, such arguments of the learned counsel for the respondents 1 to 3 cannot be simply brushed aside. The liability to pay either in the form of shares at the option of the bond holders viz., respondents 1 to 3, or to repay the matured amount on maturity of those bonds would be only by the petitioner company and if at all the liability is transferred, the same ought to have been done with the consensus of the creditors and the share holders. If the bond holders viz., respondents 1 to 3, opt for conversion of their bonds into shares of the company, a different consideration would come into play, and they have to be considered only as share holders. Till then, the respondents 1 to 3 should have been considered as creditors of the petitioner company, whose liabilities should have been considered only with consensus arrived at with those creditors also.
37. It is an admitted fact that there was no meeting convened by the petitioner company for getting consensus of the unsecured creditors or to frame any scheme within the scheme arrangement or modify the said scheme of arrangement or for the due payment of debts payable to the unsecured creditors. It cannot be taken shelter by the petitioner company that the said meeting of the unsecured creditors was not ordered by the court, and if ordered, the company would have conducted the meeting. The said argument cannot be sustained. It is for the petitioner company to show to court before getting approval that nobody would be prejudiced by virtue of demerger proposal. The petitioner company did not ask for the convening of the meeting of the unsecured creditors nor asked for reconvening of the secured creditors meeting. The respondents are having the bonds and they are coming under the category of creditors, and they would be certainly affected if liabilities are transferred to the offspring companies without the consent of the respondents or the liability alone are kept with the parent company, and the assets have been transferred to the offspring companies. Such a transfer of assets detrimental to the unsecured creditors would be certainly amounting to act of prejudice. The obligation cast upon the petitioner company under the Trust Deed entered into between the petitioner company and the respondents 1 to 3 should not have been breached or violated by the scheme of arrangement proposed by the petitioner company.
38.In this behalf, the learned counsel for the respondents 1 and 2 cited a judgement of the Honble Apex Court in Miheer H.Mafatlal Vs. Mafatlal Industries Limited reported in AIR 1997 SC 506 explaining the scope of Court while dealing with amalgamation scheme. The Apex Court considering various judgments have indicated the scope as follows:-
1. The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 39(1)(a) have been held.
2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391, sub-section (2).
3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.
4. That all necessary material indicated by Section 393(1) (a) is placed before the voters at the concerned meetings as contemplated by Section 391, sub-section (1)
5. That all the requisite material contemplated by the proviso to sub-section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the court gets satisfied about the same.
6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.
7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.
8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
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 no exhaustive but only broadly illustrative of the contours of the Courts jurisdiction."
In the aforesaid judgment, it has been categorically mentioned that the creditors or class of creditors has to be considered. The scheme proposed should be found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. Moreover, it should not be violative of any provisions of law and is not opposed to public policy.
39. In the aforesaid circumstances, the approval of the scheme could be done only in case of majority resolution passed by the share holders. However, the report of the Chairman would go to show that there were some objectors in the meeting and the said opposition was negligible. Therefore, there is no question of any unanimous approval.
40. As far as the requisites of the statutory provisions contemplated under Section 391 are concerned, for better understanding Section 391 has to be extracted as follows:-
Section 391 of the Companies Act deals with power to compromised 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; (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 auditors report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Section 235 to 251 and the like.
41.It is true that the respondents 1 to 3 are the FCCB holders with the petitioner company, and the value of the bonds should have been paid by the petitioner company on maturity. Indisputably, they are coming under the class of unsecured creditors. Any compromise in between parties should have been mutually agreed in between them. It cannot be unilaterally decided by the debtor himself. The petitioner company is the person of liability to their unsecured creditors viz., the respondents 1 to 3. The liability to pay the respondents 1 to 3 as unsecured creditors should have been agreed in the case of settlement. The scheme of arrangement proposed by the petitioner company with the offspring companies would amount to transfer of the liability of paying the bonds or to retain them by transferring its assets to the offspring companies. Therefore, the non convening of meeting and no attempt taken by the petitioner company to convene such meeting of unsecured creditors would violate the provisions of Section 391 (1)(a) of the Act. That would also violate the provisions of Section 62 of the Contract Act. When the liabilities are to be transferred from one person to another person, mutual consent is necessary for substitution or alteration or novation of such contract. In this case, the respondents 1 to 3 and other unsecured creditors were not at all met and their consensus was not obtained. Hence, production of consent letter of 1 or 2 unsecured creditors will not mean that all the remaining unsecured creditors rights would also be protected in case of approval of demerger. The violation of Section 62 of the Contract Act is also warranted. It is also brought to the notice of this court that the proposed demerger programme involves reduction of capital of the company, and in such circumstances, the procedure prescribed under the Act viz., Sections 100 to 104 of the Act, should have been followed. It is categorically mentioned that no specific resolution has been passed for reduction of capital by the petitioner company nor any such resolution has been produced.
42. As already pointed out, the service of notice to the share holders for the meeting held on 24.01.2008 is not adequate and the certificate of posting issued to the fourth respondent who is holding nearly 38,100 shares, will not serve the purpose, and no proof has been filed in that regard. The recent production of bill from Hindu Business Line would only depict certain towns of the country and it does not mention all editions issued from important cities from all over the country. No other documents have been produced to show that the cities mentioned in the said bill were only the place of editions of the said Hindu Business Line newspaper. Even though the said publication was ordered by the court, the petitioner company should have asked for paper publication for effective information to its share holders. The petitioner company was not prevented from seeking permission from the court to convene a meeting with the unsecured creditors whose rights are also prejudiced due to the demerger of the petitioner company. It is also brought to the notice of this court that the demerger would tantamount to transfer of assets of the petitioner company as per the definition of demerger under Section 391 of the Companies Act. The definition of merger would be thus according to Section 2(19AA) of Income Tax Act.
"2(19AA) "demerger" in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 ( 1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that-
(i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.
Explanation 1 For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2 For the purposes of this clause, the liabilities referred to in sub-clause (ii) shall include-
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger."
43. As per the aforesaid definition, the demerger of the company would amount to transfer. Therefore, the right and liabilities of the unsecured creditors should also have been cared by the petitioner company by taking appropriate steps in accordance with law. Otherwise, the rights of the said class of creditors would be jeoparadised or prejudiced by demerger of the petitioner company.
44. It has also been argued by the respondents that the petitioner company must show with authentic proof that there would not be any prejudice. Even at the appellate stage, they have not produced any proof of accounts. However, the balance sheet of the petitioner company as derived from the website of the company in the internet has been produced by the respondents 1 and 2. The net profit shown as per the account ending with 31.03.2007 was shown to be Rs.17,59,70,000/- whereas it was found to be Rs.1,21,19,000/- for the year ending with 31.03.2008. It deteriorates with a loss of Rs.119,15,19,000/- for the year ending with 31.03.2009. The said accounts/balance sheet would clearly depict that the result of demerger which is very much detrimental to the parent company viz., the petitioner company, and the liabilities of the company attached with the parent company to which the unsecured creditors viz., the respondents 1 to 3 are to be paid by the said company would certainly be jeoparadised or prejudiced in case the approval of the scheme of arrangement of demerger is ordered.
45. It is also brought to the notice of this court that the demerger would make good will of the company wiped off and the good will of the petitioner company to the tune of Rs.30 crores should have been wiped off for the simple reason of demerger. The said good will is also an asset of the company, and if it is lost by merely approving the scheme of merger it would also be a loss not only to the share holders but also prejudicial to the creditors. It was the argument advanced by the learned counsel for the petitioner company that the fourth respondent was not at all either a secured creditor or an unsecured creditor, and therefore, he cannot attack or question the scheme of arrangement. The fourth respondent is admittedly a share holder who is holding 30,100 shares with the petitioner company, and he had complained that the service of notice was not made to him for the meeting convened on 24.01.2008.
46. It is the case of the fourth respondent that he had filed a suit, and the application filed by the petitioner company to reject the plaint was dismissed, and the appeal preferred by the petitioner company before a Division Bench in O.S.A., was also dismissed, and the suit is pending for his claim. Whether the fourth respondent is an unsecured creditor, who is entitled to the claim made in the suit or not is to be decided in the suit. In the mean while, he could be considered as a share holder and his objection should have been heard. In the event of his claim in the suit being decreed in his favour, he would also be prejudiced by the act of demerger. The said stand taken by the fourth respondent cannot be brushed aside since he would also be affected in the event of the liability is mounting with the petitioner company and the assets have been transferred to the offspring companies.
47. In the aforesaid circumstances, the decision of the Honble Apex Court reported in 1995 82 Comp cas 37 (Bharat Synthetics Ltd., Vs. Bank of India and another) is as follows:-
(i) that undisputedly no meeting of the creditors and shareholders had been held, nor consent of the requisite number of creditors, obtained. The requirements, such as that the meetings of the concerned were duly held and conducted, that the scheme was accepted by a competent majority, that it was for a common advantage, reasonable, prudent and proper 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 jeopardize their claims was justified, and sanction had to be refused. Following the said judgment, this court in an earlier occasion, found in O.S.A.55 to 68 of 2003 between the Ramco Super Leathers Ltd., Rep. by its Director S.Palaniappan and others Vs. The Dhanalakshmi Bank Limited and others, came to a conclusion as follows:-
Though not specific provision has been made for ascertaining the wishes of the creditors in a scheme of arrangement between the company and its members, the court is entrusted with the duty to ascertain whether scheme would affect the interest of the creditors to such an extent that the holding of their meeting is essential, and if the 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 nationalized bank 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.
48. On a overall consideration of the facts and circumstances of the case, for ascertaining the real purpose of the scheme, by piercing the veil of apparent corporate purpose underlying the scheme and also by scrutinising the same judiciously in the light of the dictum laid down by the Honble Apex court, we are of the considered view that the approval sought for by the petitioner company for the demerger with its two offspring companies is prejudicial to the respondents 1 to 4 and the said scheme of arrangement is also violative of the provisions of Section 391 of the Companies Act, Sections 100 to 104 of the Act and Section 62 of the Indian Contract Act. Therefore, the rejection of approval of the scheme of arrangement by the learned Single Judge is in order, and we are unable to see anything to disturb the finding of the learned Single Judge.
49. In the result, the three O.S.As are dismissed confirming the order of the learned single judge and leaving the parties to bear their respective costs.
Nvsri