IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 17-8-2009 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE R.SUBBIAH O.S.A.Nos.55 to 68 of 2003 Ramco Super Leathers Ltd., rep. By its Director S.Palaniappan 'Sethu House' 28, Dr. Alagappa Road Chennai 84. .. Appellant in OSA 55, 59 & 63/2003 (1st Respondent) RSL Industries Ltd., Rep. By its Director S.Ramaswamy "Sethu House" 28, Dr.Alagappa Road Chennai 600 084. .. Appellant in OSA 56, 58, 60, 62, 64, 65, 66 & 68/2003 (1st Respondent) RSL Textiles (India) Ltd Rep. By its Director M.Kumarappan Kuniamuthur Post Coimbatore 641 008. .. Appellant in OSA 57 & 61/2003 (1st Respondent) RSL Textiles (India) Ltd., Rep. By its Director M.Kumarappan having its registered office at "Sethu House" No.28, Dr.Alagappa Road Chennai 600 084 and now presently having its registered office at Kuniamuthur Post Coimbatore 641 008. .. Appellant in OSA 67/2003 (1st Respondent) vs 1.The Dhanalakshmi Bank Ltd Coimbatore Branch Cross Cut Road, Gandhipuram Coimbatore 641 012. https://hcservices.ecourts.gov.in/hcservices/ 2.The Registrar of Companies Shastri Bhavan, II Floor 26, Haddows Road, Chennai 600 006. 3.The Regional Director Department of company Affairs 26, Haddows Road, Chennai 6. 4.The Official Liquidator High Court, Madras 104. .. Respondents in OSA 55, 66, 67 & 68/2003 (Applicant & Respondents 2 to4) Corporation Bank George Town Branch Rep. By its Senior Manager 49 Armenian Street Chennai 600 001. The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar The Registrar of Companies Shastri Bhavan, Haddows Road Chennai 600 006. The Official Liquidator The Official Liquidator's Office High Court, Madras 600 104. .. Respondents in OSA 56, 57, 58 & 59/2003 (Applicant & Respondents 2 to 4) Kotak Mahindra Bank Ltd Rep. By its Branch Manager M.Sethuraman No.68, Oppanakkara Street Coimbatore 641 001. (substituted in the place of Lakshmi Vilas Bank as per order of Court dated 17.8.2009 in memos in OSA 60 to 63/2003) .. 1st respondent in OSA 60, 61, 62 & 63/2003(Applicant) RSL Textiles (India) Ltd., Rep. By its Director M.Kumarappan "Sethu House" 28, Dr.Alagappa Road Chennai 600 084. .. 2nd Respondent in OSA 60 & 62/2003 & 3rd respondent https://hcservices.ecourts.gov.in/hcservices/ in OSA 63/2003 & 5th respondent in OSA 64/2003 (2nd Respondent) RSL Industries Ltd. Rep. By its Director S.Ramaswamy "Sethu House" 28, Dr.Alagappa Road Chennai 600 084 .. 2nd Respondent in OSA 61 & 63/2003 (1st Respondent) Ramco Super Leathers Ltd Rep. By its Director S.Palaniappan "Sethu House" 28, Dr.Alagappa Road Chennai 600 084. .. 3rd Respondent in OSA 60, 61 & 62/2003 & 5th Respondent in OSA 65/2003 (3rd Respondent) The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar The Registrar of Companies Shastri Bhavan, Haddows Road Chennai 600 006. The Official Liquidator High Court, Madras 600 104. State Bank of India Rep. By its Dy.General Manager Commercial Branch, Trichy Road Coimbatore 641 018. The Dhanalakshmi Bank Rep. By its Chief Manager Cross-Cut Road Coimbatore Branch, Coimbatore. .. Respondents 4 to 8 in OSA 60, 61, 62 & 63/2003 (Respondents 4 to 8) State Bank of India Commercial Branch Rep. By its Chief Manager 35/E Kattabomman Street Coimbatore 641 006. / Trichy Road, Coimbatore 641 018 (in O.S.A.No.65/03) https://hcservices.ecourts.gov.in/hcservices/ The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar of Companies Block II, Shastri Bhavan Chennai 600 006. The Official Liquidator High Court, Kuralagam, Madras 600 104. .. Respondents 1 to 4 in OSA 64 & 65/2003 (3rd Party & Respondents 2 to 4) Original side appeals preferred under Order XXXVI Rule 11 of O.S. Rules against the order dated 29.1.2003 of this Court in 1) C.A.No.146/03 in C.P.No.242 of 2001 2) C.A.No.499/02 in C.P.No.239 of 2001 3) C.A.No.502/02 in C.P.No.240 of 2001 4) C.A.No.505/02 in C.P.No.241 of 2001 5) C.A.No.508/02 in C.P.No.242 of 2001 6) C.A.No.521/02 in C.P.No.239 of 2001 7) C.A.No.522/02 in C.P.No.240 of 2001 8) C.A.No.523/02 in C.P.No.241 of 2001 9) C.A.No.524/02 in C.P.No.242 of 2001 10) C.A.No.1937/02 in C.P.No.239 of 2001 11) C.A.No.1940/02 in C.P.No.241 of 2001 12) C.A.No.137/03 in C.P.No.239 of 2001 13) C.A.No.140/03 in C.P.No.240 of 2001 14) C.A.No.143/03 in C.P.No.241 of 2001 respectively For Appellants in all the Appeals : Mr.A.K.Mylsamy For Respondents : Mr.Karthick Seshadri for R1 in OSA 60 to 63/2003 Mr.S.Sethuraman for Corporation Bank Mr.M.Udhaya Bhanu Senior Panel Counsel for R2 Mr.S.R.Sundar for Official Liquidator COMMON JUDGMENT (Judgment of the Court was delivered by M.CHOCKALINGAM, J.) All these appeals have arisen from a common order made by the learned Single Judge of this Court in Company Application Nos.499, 500, 502, 503, 505, 506, 508, 509, 521, 522, 523, 524, 1937 and 1940 https://hcservices.ecourts.gov.in/hcservices/ of 2002 and 137, 140, 143 and 146 of 2003 in Company Petitions 239 to 242 of 2001. 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.The case of the petitioners bank in the above company applications can be stated thus: (a) M/s.RSL Industries, a public limited company and incorporated under the Indian Companies Act, availed loans from various banks including Corporation Bank and other financial institutions. The said company availed a foreign currency loan of 200 million USD in order to meet its high cost borrowals from various financial institutions and other money lenders and thus the Corporation Bank was one of the secured creditors. Availing the financial facilities, the company cleared its loan from Industrial Development Bank of India (IDBI) to the extent of Rs.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 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 company in favour of the Corporation Bank was not limited to Textile Division alone. The loan availed was not only utilised to pay back the liability if the IDBI, but also several other borrowers. Hence the intention of the company to frame a scheme without notice to the creditor Bank was only an attempt with a malafide intention to dilute the security available. But the charge created in favour of the bank shall continue till the satisfaction of the charge by payment of loan amount. The Court is empowered 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. https://hcservices.ecourts.gov.in/hcservices/ (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 spinning off and merger according to the company, had resulted in bifurcation of assets. The cash flow and cash accrual and the repayment capacity of the bank were taken into account at the time of granting of the loan. Now, they have been altered and tampered with. The balance sheet of these two companies do not reveal any profit. Hence it would be quite clear that the scheme was only to defraud the bank. It has caused greater hardship on the bank, and they will be put to irreparable loss. No prejudice 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 Rs.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 Bank Limited, it was averred that along with SBI and Lakshmi Vilas Bank Limited and in consortium have extended working capital credit facility 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 right to evolve any scheme of arrangement for amalgamation or reconstruction without obtaining prior permission of these banks through the lead bank, has obtained 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 textiles and leather, was granted a foreign currency loan of Rs.24.50 crores; that it was specifically averred that Rs.13.46 crores should be availed by the leather division and Rs.11.54 crores should be availed by the https://hcservices.ecourts.gov.in/hcservices/ textile division; that the company has created a second charge on the current assets of the textile and leather divisions of RSL Industries as collateral security; that RSL Industries was also granted working capital limit of Rs.10.80 crores for its textile division; 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 granted credit limits to the leather division of RSL Industries; that the leather division used the major part of the loan for its modernisation; that after demerger, security cover was reduced to 101%; that the profit of textile division was Rs.0.37 crore per annum and the profit of leather division was Rs.8.98 crores per annum; that though the foreign currency loan was granted to both the divisions, under the demerger scheme, all the liabilities have been allocated to the textile division; 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 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 Rs.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 response at all and thus the company failed and neglected to conduct the consortium meeting with mala fide and withheld the information; that the State Bank of India also issued a notice to the respondent company on 2.4.2002; that the reply notice dated 4.4.2002, was sent raising unsustainable claims and making misleading averments; that it has not whispered about the approval or the knowledge of merger by other banks; that only shareholders meeting has been convened; that the demerger sanctioned by the Court was highly advantageous to the consortium banks 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 https://hcservices.ecourts.gov.in/hcservices/ Bank of India. 6.Lakshmi Vilas Bank also filed an affidavit stating that the company approached them to extend credit facilities to its textile division jointly with the State Bank of India and Dhanalakshmi Bank under the consortium agreement; that the facilities were secured by a charge over the movable and immovable assets of the textile division; that the first respondent issued a letter of undertaking among other loan documents that it would not effect any change in the constitution without applicant'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 requirement of the prior approval; that the scheme of arrangement and the scheme of amalgamation was prejudicial to the interest of the banks and as such, they are liable to be set aside. 7.The respondent filed separate counter affidavit in all the above applications stating that a note on the scheme was sent by the company to all the 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 Rs.67 crores and the balance available was only Rs.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 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 behalf of the appellants, the learned Counsel would submit that it is pertinent to point out that clause 4.4 of the scheme provides that the rights of the secured creditors are not affected by the scheme unless they agree otherwise; that the absolute prohibition imposed by the secured creditors that without their prior permission, no amalgamation or reconstruction should take https://hcservices.ecourts.gov.in/hcservices/ place is contrary to Section 376 of the Companies Act, which prohibits entering of any agreement prohibiting reconstruction, 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 of the shareholders and not of the creditors; that it remains to be stated that none of the creditors in response to the advertisement released by the company in Business Line and Dinamalar dated 14.10.2001 neither appeared before the Court nor opposed the scheme; that in the reply dated 4.10.2001, a note was enclosed explaining the necessity of hiving off the textile division and the merger of RSL Industries Ltd with Ramco Super Leathers Ltd.; that the balance sheet along with the auditor'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 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 is detrimental to their interest; that the order of the learned Single Judge is erroneous and hence it has got to be set aside. 9.The learned Counsel appearing for the respondent Bank has reiterated the very same contentions raised before the learned Single Judge and would submit that the appeals have got to be dismissed. 10.The Court paid its anxious consideration on 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 https://hcservices.ecourts.gov.in/hcservices/ 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 major divisions Leather and Textiles. The operations of both the divisions are carried out independently, and the performance was also monitored; but the over all management was by the common Board of Directors. The company availed foreign currency loan of 200 millions USD to meet its high cost borrowals. Out of the said sum availed, the company also cleared the dues from the Industrial Development Bank of India to the extent of 12.75 crores. Though it was agreed that the said entire loan should 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 respondent created in favour of these banks shall run pari passu inter-se the banks without any preference or priority to them. The State Bank of India shall be the lead bank in respect of the dealings. The hypothecation charge of the current assets of the textile division in favour of the banks was duly registered with the Registrar of Companies. One of the clauses in the working capital consortium agreement dated 12.1.2001, executed by the company in favour of these three banks, would clearly stipulate 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 Rs.24.50 crores out of which Rs.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