IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No 167 of 2001 with COMPANY APPLICATION No 337 of 2001 For Approval and Signature: Hon'ble MR.JUSTICE M.S.SHAH ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- GUJARAT LEASE FINANCING LTD. Versus . -------------------------------------------------------------- Appearance: 1. COMPANY PETITION No. 167 of 2001 MR SAURABH SOPARKAR, Sr. Advocate with MRS SWATI SOPARKAR for Petitioner No. 1 MR PC KAVINA for Respondent No. 1 MR NV ANJARIA for Respondent No. 1 MR IJ DESAI for Respondent No. 1 MS PJ DAVAWALA for Central Government 2. COMPANY APPLICATION No. 337 of 2001 MR NV ANJARIA for Petitioner No. 1 MR PC KAVINA for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE M.S.SHAH Date of decision: 28/01/2002 ORAL JUDGEMENT This is a petition filed by the Gujarat Lease Financing Ltd. (hereinafter referred to as `the petitioner - GLFL or `the Company') praying for sanction of the Scheme of compromise and arrangement at Ex.`C' so as to be binding on all the three categories of both `E' series debenture holders and `F' series debenture holders of the petitioner - Company and on the petitioner Company. 2.0 Background facts and the Scheme Highlights 2.1 The Company carries on the business of leasing and hire purchase in respect of movable and immovable properties. The Company commenced its operations in 1985 by providing lease finance to its customers in Gujarat and also in other States. The Company has authorized share capital of Rs.50 crores and the paid-up equity share capital is Rs.27.16 crores. 2.2 The Company issued redeemable non-convertible debentures in `E' and `F' series in the following three categories:- (a) Cumulative Debentures of Rs.5200/- each (b) Monthly Income Debentures of Rs.3500/- each (c) Regular Return Debentures of Rs.2500/- each. The total face value of all the debentures in Series `E' and `F' taken together was Rs.69 crores. All the debentures were issued on 8th August, 1996 and were to mature after a period of five years i.e. on 8th August, 2001. 2.3 The maturity value of the cumulative debentures was to be Rs.12000/- each on 8th August, 2001. A majority of debentures, which are the subject matter of this petition are Cumulative debentures of Rs.5200/- each and accordingly the discussion will centre around on the maturity value of such Cumulative debentures. As far as the other categories of debentures are concerned i.e. Monthly Income debentures and Regular Return debentures, they have already been paid the interest accrued on the debentures as per the Debenture Deed and in their case the maturity amount on the face of it is the maturity amount of the principal debenture amount but the learned counsel for the petitioner points out that the maturity value is now worked out in such a manner that it will also take into account the interest paid so far. 2.4 As per the Scheme of Compromise proposed by the Company, in each category, the amount to be paid back by the Company to the Debenture holders is as under:- ------------------------------------------------------------------ Type of Face value Amount requ- Amount proposed %age Debentures of initial ired to be to be paid as investment paid on matu- per the scheme of (Rs.) rity as per of compromise trust deed (Rs.) (Rs.) (1) (2) (3) (4) (5) ------------------------------------------------------------------ Cumulative 5200 12000 8400 70 Monthly 3500 3500 2500 71.4 Income Regular 2500 2500 1860 74.4 Return ------------------------------------------------------------------ 2.5 The petitioner Company has indicated the following factors resulting into adverse financial condition of the petitioner from 1996-97 onwards, warranting reduction of the maturity amount payable to the Debenture holders:- (i) Recession in the economy and increasing defaults in corporate sector coupled with increased tendency to avail the shelter under BIFR (ii) Loss of confidence of the depositors in NBFC sector, consequent to CRB episode and defaults by number of companies in repayment of public deposits. (iii) Increasing competition in retail sector from Foreign Banks, Financial Institutions and Indian Banks, who have funds available at comparatively lower cost resulted into pressure on spreads. (iv) Over a period of time, the Company's networth is eroded and the loss incurred by the Company till 31st March, 2001 is to the extent of Rs.249 crores, against the sum of total of capital and reserves of Rs.124 crores. 3.0 The Procedure 3.1 The Company had earlier filed Company Application No.188 of 2001 seeking orders of this Court for convening meetings of the debenture holders of `E' and `F' series and by order dated 12-7-2001, this Court issued appropriate directions in that behalf. The meetings were ordered to be held on 18th August, 2001 and were to be presided over by Mr. Justice BJ Diwan (Retd.), a former Chief Justice of this Court. The quorum for the meeting of debenture holders was fixed at 5; voting by proxy was permitted. Accordingly, the meetings of the debenture holders in `E' and `F' series were convened on 18th August, 2001 under the Chairmanship of Mr Justice BJ Diwan (Retd.). 3.2 The notices of the meetings were advertised, as directed by the order of this Court, in `The Times of India' and `Sandesh', Ahmedabad editions on 24-7-2001. The learned counsel for the petitioner further adds that it was also published in `Gujarat Samachar'. The meetings were accordingly held on 18th August, 2001 under the Chairmanship of Mr Justice BJ Diwan (Retd.). The learned Chairman submitted his report. The report was produced before this Court in Company Application No.188 of 2001 along with an affidavit dated 28-8-2001. 3.3 The number of Debenture holders who were present in person or through proxy in the various categories and those who voted in favour of the Resolution approving the scheme of compromise and those who voted against, with the percentage are set out in a chart hereinbelow (after excluding conditional votes and invalid votes; the particulars of which are already contained in the Chairman's report - the total number of abstentions, invalid votes and conditional votes being comparatively insignificant 87, 5 and 2 for Groups `a', `b' and `c' respectively). (a) Result of the voting at the meeting of Cumulative Debenture Holders _________________________________________________________ Total Valid Number % Value % Votes (Rs.) _________________________________________________________ In favour 5184 99.08 6,96,96,000 98.78 Against 48 0.92 8,64,000 1.22 _________________________________________________________ Total 5232 100.00 7,05,60,000 100.00 _________________________________________________________ (b) Result of the voting at the meeting of Monthly Income Debenture Holders _________________________________________________________ Total Valid Number % Value % Votes (Rs.) _________________________________________________________ In favour 312 100 35,07,585 100 Against - - - - _________________________________________________________ Total 312 100 35,07,585 100 _________________________________________________________ (c) Result of the voting at the meeting of Regular Return Debenture holders _________________________________________________________ Total Valid Number % Value % Votes (Rs.) _________________________________________________________ In favour 489 98.99 1,23,69,645 99.53 Against 5 1.01 58,410 0.47 _________________________________________________________ Total 494 100.00 1,24,28,055 100.00 _________________________________________________________ 3.4 The petitioner Company filed the present petition for sanction of the Scheme of Compromise. By order dated 2-9-2001, advertisements were ordered to be published. They were published in `Times of India' dated 10th September, 2001 and `Gujarat Samachar' and `Sandesh'' dated 11th September, 2001. 4. PARTIES IN THE ARENA In response to the notice issued by this Court and after publication of the advertisement in the newspapers, objections have been filed by 95 Debenture holders, with the following break-up. Maturity value as per trust deed (Rs.) (a) Cumulative Debenture 58 8,04,000 holders (b) Monthly Income 06 52,500 Debenture holders (c) Regular Return 31 3,20,000 Debenture holders They have filed Company Application No.337 of 2001 lodging their objections. Another set of objections has come from the consortium of Banks which had given finance to the Company and which are claiming their rights as secured creditors having first charge over the properties of the Company. 5. Before setting out the objections lodged against the proposed Scheme, it is necessary to record one clarification coming from the petitioner through the affidavit dated 14-12-2001 of Mr R Srinivasan, General Manager (Finance) of Torrent Pvt. Ltd. which company is one of the promoters of the GLFL and owns 25% of the share holding in GLFL. It has been stated therein that Torrent Pvt. Ltd. has agreed to pay an amount upto Rs.11 crores to GLFL for the purpose of raising the amount of compromise to be paid to Debenture holders in `E' and `F' series from 55% to 70% of the outstanding dues as proposed in the Scheme of Arrangement. It is specifically stated in the said affidavit that the said amount of Rs.11 crores shall be utilised only for repaying the `E' and `F' series Debenture holders for which an appropriate escrow mechanism would be worked out and further that the amount agreed to be given is subject to sanction of the Scheme by this Court and shall be paid within 30 days of the effective date under the Scheme. It is further stated that the amount would be given by way of 0% unsecured debentures or an instrument of a like nature to GLFL and would be repayable only after settling the liabilities of its other secured and unsecured creditors. In other words, GLFL proposes to pay 55% of the maturity amount to the Debenture holders in `E' and `F' series from out of its own fund and the remaining 15% amount is to be paid from the funds to be made available by Torrent Pvt. Ltd. specifically for the purpose of paying the same to the Debenture holders in `E' and `F' series and subject to the sanction of the Scheme by this Court. 6. CONTENTIONS OF THE DEBENTURE HOLDERS: The objections raised by Mr IJ Desai with Mr NV Anjaria on behalf of the above 95 Debenture holders in `E' and `F' series are as under:- 6.1.0 There was noncompliance with various statutory provisions. 6.1.1 There was breach of Section 393 (1)(a). The explanatory statement sent to the Debenture Holders along with the notice of meeting did not mention the powers of the Debenture Trustees. On account of non-disclosure of such a vital issue, the consent given by the Debenture Holders cannot be said to be a valid consent. 6.1.2 There was noncompliance with the provisions of section 117-B (subsections 3 and 4 of Section 117-B) of the Act which provisions have been recently inserted w.e.f.13-12-2000 and also the provisions of Section 119 of the Companies Act. 6.1.3 The SEBI "Debenture Trustees" Regulations, 1993 cast certain duties on the Debenture Trustees. Those duties have not been discharged by the Trustees. The duties cast by Regulations No.15 and 16 on the Debenture Trustees have not been discharged by the Trustees of the Debenture Series `E' and `F' and, therefore, also the proceedings of the meetings held on 18th August, 2001 are vitiated. 6.2 The Resolution was not valid because the notice for convening the meeting did not make a reference to pending proceedings against the Company being the suit before the Debts Recovery Tribunal and the winding up petition filed by two banks out of the consortium of bankers. 6.3 Four lac unsecured depositors were paid Rs.157 crores. The said depositors were paid principal amount as well as interest as per the terms of deposit without reducing the rate of interest. 6.4 Out of 60,000 Debenture holders only 6331 Debenture holders were present and therefore approval given by only about 8 to 10% of the Debenture holders cannot be said to be valid in the eye of law. 6.5 The Court has power to modify the Scheme under section 392 (1)(b) and accordingly the court may exercise its powers for raising the maturity amount so as to require the Company to pay 80% of the maturity amount immediately and the balance 20% maturity amount may be paid in installments. 7. The thrust of the submissions of Mr PC Kavina for the Banks was that when the Company has agreed to pay only 55% of the Bank's dues, there was no justification for the Company agreeing to pay 70% to the Debenture holders in Series `E' and `F' when the Banks have a better claim over the properties of the Company as holding first charge as against the Debenture holders who are having only the second charge. A detailed reference to the objections made by the Banks will be made hereinafter. Of course, Mr Soparkar for the Company has also raised a preliminary objection against the locus standi of the Banks. That will also be discussed hereinafter. 8. For the present reference is made to the objections raised by the Banks only with a view to pointing out that the factum of objections raised by the Banks (and not their validity) is one of the factors which is required to be taken into consideration while taking the final decision for granting or not granting sanction to the Scheme of Compromise and Arrangement as proposed by the Company and which has been approved by the overwhelming majority of the Debenture holders who remained present and voted at the meeting held on 18th August, 2001. 9.0 COMPANY'S REPLY TO DEBENTURE HOLDERS On the other hand Mr Soparkar learned counsel for the Company has made the following submissions in reply to the contentions raised on behalf of Debenture holders in series `E' and `F':- 9.1 There was no breach of any provisions prescribing the procedure for convening and holding meetings of Debenture holders. 9.2 The explanatory statement sent to the Debenture Holders along with the notice of the meeting convened on 18th August, 2001 had set out all the relevant facts and there was no non-disclosure. The suit filed by one of the Banks before Debts Recovery Tribunal was instituted on 13th August, 2001 whereas the notice for convening the meeting on 18th August, 2001 was sent on 18th July, 2001. As far as the winding up petition filed by one of the Banks is concerned, although the petition was pending, there was no intention to introduce any element of coercion on Debenture Holders when they were going to consider the Scheme of Compromise and Arrangement but the pendency of the case was discussed at the meeting held on 18th August, 2001. 9.3 As far as payment of the dues of the fixed deposit holders is concerned, the same was done as per the directive dated 28th August, 2000 of the Reserve Bank of India vide letter Ref.DNBS(AH).No.423/R.234/2000-2001, for repayment of the dues of the unsecured fixed deposit holders, reference to which is already made in the order dated 12-7-2001 passed by this Court in Company Application No.187 of 2001. 9.4 As per Section 174(1) of the Act and the Articles of Association, the quorum for the meeting was stipulated by the Court's order dated 12-7-2001. 9.5 More than 98 to 99% of the Debenture holders present and voting have approved the Scheme of Arrangement. In such circumstances, the Court is not required to sit in appeal over the decision taken at the meeting and the Court is required to consider the matter in light of the principles laid down by the Apex Court in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd., AIR 1997 SC 506. DISCUSSION 10. Before dealing with the rival submissions in respect of the objections raised by the Debenture holders, it would be necessary to set out the principles laid down by the Apex Court in Miheer H. Mafatlal vs. Mafatlal Industries Ltd., AIR 1997 SC 506, which principles are as under:- "In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad contours of such jurisdiction have emerged : 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 meeting as contemplated by Section 391(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 fair to the class as whole so as to legitimately blind even the dissenting members of that class. 4. That all the 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 provision of 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 of to 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." Contention No.1 : Non-compliance with statutory procedure 11. Now as far as reference to the statutory powers and duties of the Debenture trustees are concerned, it is not possible to accept the contention of Mr Desai for the Debenture holders that such duties were required to be mentioned in the explanatory notice convening the meeting of the Debenture holders. All such duties are prescribed by the Statute and there is no provision that reference to such duties must be made in the explanatory statement with the notice convening the meeting of the debenture holders. Whether the Debenture trustees have failed in discharging their duties is another matter but no proceedings are taken out against the debenture trustees and, therefore, it is not for this Court to probe this issue any further in these proceedings. Contention No.2: Alleged Nondisclosure in the Notice for the meeting 12.0 The only objection raised on behalf of 95 Debenture holders in respect of the alleged non-disclosure is that the explanatory statement with the notice convening the meeting on 18th August, 2001 did not contain all the relevant particulars such as statutory duties of the Debenture trustees and pendency of the proceedings before the Debts Recovery Tribunal and pendency of a winding up petition. 12.1 As regards non-disclosure of the proceedings before the Debts Recovery Tribunal, there is considerable substance in the submission of the learned counsel for the Company that when the notice for the meeting along with the explanatory statement was sent on 18th July, 2001, no proceedings were pending before the Debts Recovery Tribunal and the suit by one of the Banks was instituted only on 18th August, 2001 and, therefore, no fault can be found with the Company for not referring to the DRT proceedings in the explanatory statement. 12.2 As far as the pendency of the winding up petition before this Court is concerned, there is no dispute regarding the fact that one winding up petition was pending when the explanatory statement was sent on 18th July, 2001. It is however the submission of the learned counsel for the Company that the Company did not intend to coerce the Debenture holders into accepting the Scheme proposed for compromise and arrangement by making a reference to the winding up petition but the Company was keen to persuade the Debenture holders that payment of 70% of the maturity amount was best that the Company was giving under the circumstances having regard to the depressed market conditions and the performance of other non-banking finance companies. 12.3 Without intending to lay down any general principle or making any general observation that non-disclosure of a pending winding up petition would not result into violation of the statutory requirement of disclosing material facts to the class of creditors, in the facts and circumstances of this case, it is clear that approval granted by a large number of Debenture holders present and voting, was not vitiated on account of non-disclosure of pending winding up petition in the explanatory statement sent along with the notice convening the meeting held on 18th August, 2001. It is not possible to hold or infer that if the notice convening the meeting had disclosed pendency of the winding up petition, over and above the 95 Debenture holders (who lodged their protest at the meeting) others would have turned up in large numbers at the meeting for opposing the proposed Scheme of compromise. The very fact that 98 to 99% of those who remained present at the meeting voted in favour of the Scheme is one of the factors indicating that the Debenture holders were not averse to accepting the Scheme of compromise as suggested by the Company which contemplates payment of 70% of the maturity amount. If anything, the knowledge of the winding up petition would have in all likelihood persuaded the Debenture holders to accept the Scheme rather than take the chance of any adverse orders being passed in the winding up proceedings and to stand in queue after the consortium of banks claiming first charge over the properties of the Company. Contention No.3: Payment of full amount to Fixed Deposit Holders 13. The grievance made by Mr Desai and Mr Anjaria on the score of the company paying full amount with agreed rate of interest to the unsecured fixed Deposit holders at Rs.157 crores, but not paying full maturity amount to the Debenture holders at Rs.69 crores would have merited serious consideration, if the Fixed Deposit Receipt holders were not already paid off. Of course, the Company conveniently takes shelter behind the Reserve Bank Directive dated 28th August, 2000 but even the mighty Banks did not dare to squeak, much less whisper, before the Reserve Bank regarding the possible consequences of compliance by the Company with the said RBI directive. Presented with this fait accompli, as prudent men, the overwhelming number of Debenture holders decided at the meeting held on 18th August, 2001, to accept 70% of the maturity amount. Hence the Court would not like to interfere with their wisdom. Contention No.4: A small percentage of Debenture holders present at the meeting 14. Mr Desai thereupon submitted that when hardly 8 to 10% of the Debenture holders were present at the meeting, their views cannot be taken as the view of the entire body of debenture holders. Under the existing law as contained in Section 174(1) of the Act and a similar provision in Article 103 (a) of the Articles of Association of the GLFL stipulating that five members personaly present shall be the quorum, the grievance, though not frivolous, can not be accepted. The quorum is fixed in terms of the number of persons, and not in terms of the percentage of the number of members or creditors. The concern about lack of participation of