IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No 405 of 2004 For Approval and Signature: HON'BLE MR.JUSTICE K.A.PUJ ============================================================ 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 concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- THE PEERLESS GENREAL FINACE & INVESTMET CO. LTD. Versus ESSAR OIL LIMITED -------------------------------------------------------------- Appearance: 1. COMPANY APPLICATION No. 405 of 2004 MR NAVIN K PAHWA for Applicant. MR MIHIR J THAKORE WITH MR. S.N. SOPARKAR SENIOR ADVOCATES for Respondent No. 1 MR PRANAV G DESAI for Respondent No. 2,3,4. MR MIHIR JOSHI, SENIOR ADVOCATE WITH MS MEGHA JANI for ICICI Bank Ltd. -------------------------------------------------------------- CORAM : HON'BLE MR.JUSTICE K.A.PUJ Date of decision: 21/02/2005 ORAL JUDGEMENT The applicant, namely, The Peerless General Finance & Investment Company Limited has taken out this Judge's Summons making following prayers :- [A] That this Hon'ble Court be pleased to hold and declare that holding of meeting of the debenture holders holding more than 2000 debentures would not serve any fruitful purpose as more than one-fourth in value of debenture holders holding more than 2000 debentures are opposed to the Scheme of Arrangement / Compromise by the respondent, in the interest of justice and equity; [B] That this Hon'ble Court be pleased to hold and declare that the meeting held on 26.10.2004 for consideration of the Scheme of Arrangement / Compromise proposed by the respondent concludes that the Scheme is defeated / has failed as the same is opposed by more than one-fourth in value of debenture holders holding more than 2000 debentures, in the interest of justice; [C] That this Hon'ble Court be pleased to vacate the order dated 04.04.2003 made by this Hon'ble Court in Company Application No. 166 of 2003, in the interest of justice and equity; 2. This Court has permitted the applicant to join the Company, namely, Essar Oil Limited as respondent and notice was issued on 06.12.2004 making it returnable on 17.12.2004. This Court has passed further order on 29.12.2004 recording the submission of Mr. S.N. Soparkar, learned Senior advocate appearing for the respondent Company that without prejudice to the rights and contentions of the respective parties, a joint meeting would be held between the applicant and the respondent Company in presence of the debenture trustees somewhere in the second week of January, 2005, to explore the possibilities and to put an end to all disputes between the parties. The said statement was made on the basis of information that the meeting was being convened by the debenture trustees, where both the parties were invited. 3. This Court has passed further order on 02.02.2005 observing that the applicant along with others, namely, UTI Asset Management Company Private Limited, LIC Mutual Fund and G I C Asset Management Company Limited are holding 36.37% of the total holding of the debenture holders. The Court has further recorded the statement of Mr. N.K. Pahwa, learned advocate appearing for the applicant that pursuant to the direction issued by this Court on 29.12.2004, a meeting was held for negotiation on 13.01.2005 to explore the possibility of settlement and to put to an end of all the disputes between the parties. However, no fruitful result was achieved in the said meeting. The Court has further recorded the statement of Mr. Pahwa that when the Court convened meeting was held on 23.12.2004, in that meeting, the applicant as well as above institutes have opposed the Scheme. Based on this statement and only with a view to ascertain the stand of the above institutes, the said institutes were permitted to be joined as parties in this application and notices were issued on them making it returnable on 11.02.2005. The Court has further recorded the statement of Mr. Soparkar to the effect that ICICI Bank Limited being one of the Term Lenders is also required to be heard in the matter as ultimately, the respondent Company would have to offer the better terms to the applicant on the basis of the stand which may be taken by ICICI Bank Limited and other Term Lenders. ICICI Bank Limited was also ordered to be joined as party and notice was issued on it making it returnable on 11.02.2005. 4. An affidavit is filed by Shri Patit Paban Ray, an authorised officer of the applicant Company in support of the Judge's Summons. An affidavit-in-reply is filed by Shri Sheikh S. Saffi, Company Secretary of the respondent Company. A further affidavit was filed by the said Shri Sheikh S. Saffi on 02.02.2005. 5. Mr. N.K. Pahwa, learned advocate appearing for the applicant has submitted that the respondent Company approached the applicant to invest in Optionally Fully Convertible Debentures (OFCDs) of face value of Rs. 190 consisting of three parts as follows :- Part A Rs. 40 Part B Rs. 45 Part C Rs.105 6. He has further submitted that the applicant agreed to invest in 26,50,000 OFCDs and paid full amount of Rs. 27,82,50,000/- on account of Part-C. The applicant was duly allotted 26,50,000 OFCDs and was also issued Debenture Certificates all dated 27.04.1996. The debenture Certificates issued to the applicant contained financial covenants and conditions. It was stipulated therein that the Company would pay interest @ 12.5% p.a. semi-annually on June 30th and December 31st beginning from 21.04.1995 on the debentures upto December 20, 1997 on the paid up value of Part-C of the debentures outstanding from time to time. It was further stipulated that the first payment of interest would be for the period ending 31.12.1995. It was also stipulated that the debenture holders who did not opt to exercise the conversion option of Part-C of the debentures, interest would be paid @ 14% p.a. beginning for the period from December 21, 1997 till the date prior to redemption date. The said interest was to be paid also on June 30th and December 31st. The last payment of interest would be made along with the redemption amount of the debentures. The applicant has chosen not to opt to exercise the conversion option in respect of Part C of the debentures and therefore, the applicant was entitled to interest 12.5% p.a. from 21.04.1995 semi-annually and @ 14% p.a. from 21.12.1997 till the date prior to redemption date i.e. 20.04.2003. The Company neglected to pay any interest either on 31.12.1995 or at any point of time thereafter at the rate stipulated in the covenants. Several reminders and requests demanding payment of the due amount remained un-addressed. However, by a subsequent communication, the Company admitted that it has not been able to pay the interest amount and it promised to pay the interest amount. 7. Mr. Pahwa has further submitted that despite the assurance given by the Company when no payment was received, a notice was sent claiming an amount of Rs.11,23,59,684/- upto 31.12.2000 from the Company. Despite the receipt of the notice, the Company did not make payment to the applicant. The applicant was, therefore, constrained to file Civil Suit No. 434 of 2001 in the High Court at Calcutta under its original Civil Jurisdiction in August, 2001 praying for a decree for an amount of Rs.11,23,59,684/- from the respondent Company. In the said suit, on issuance of notice by the Court in notice of motion taken out by the applicant, the respondent Company has filed an affidavit before the Calcutta High Court wherein it was inter alia urged that the Company has formulated four Schemes of Arrangement / Compromise under Section 391 of the Companies Act, 1956 for settlement of dues of four categories of debenture holders of the Company. So far as the applicant is concerned, it was pointed out by the Company that the applicant is covered by 4th category of debenture holders which read as "holders of fully paid debentures holding more than 2000 debentures". It was further submitted by the Company that the Company has filed an application before this Court under Section 391 of the Companies Act, 1956 for convening meetings of the aforesaid four categories of debenture holders for considering and if thought fit, to approve the Scheme of Arrangement / Compromise. The Company also submitted that this Court by order dated 04.04.2003 made in Company Applications has directed holding of meeting of different category of debenture holders which were scheduled on 06.05.2003. The Company has also filed an application in this Court for stay of proceedings against the Company and this Court vide its order dated 07.04.2003 has granted such stay. So far as category No. 4 debentures holders is concerned, the Company has filed Company Application No. 171 of 2003. Since the Company was not permitting the applicant to proceed with the pending suit filed by the applicant for recovery of its dues from the Company, the applicant has filed Company Application No. 263 of 2004 in this Court praying for vacating / modifying the order dated 07.04.2003 passed by this Court in Company Application No. 171 of 2003. This Court vide its order dated 18.10.2004 permitted the applicant to proceed with the pending suit. However, it was directed that the decree that may be made in the suit shall not be executed until finalisation of the Scheme of Arrangement or until suitable orders are made by this Court in that behalf. 8. Mr. Pahwa has further submitted that pursuant to the directions issued by this Court by an order dated 04.04.2003 in Company Application No. 166 of 2003 meeting for debenture holders for considering the Scheme was to be convened on 06.05.2003. However, no decision was taken in the meeting so directed by the Court for more than a year. The Chairman of the Meeting thereafter issued an advertisement dated 01.08.2004 stating that the meeting of the debenture holders holding more than 2000 debentures was scheduled to be held on 26.10.2004. On 26.10.2004, when the meeting was held, all the four institutions / Companies have unanimously opposed the Scheme. The applicant as well as three other institutions have submitted written objections to the Scheme. He has further submitted that upon receiving the objections from these four institutions / Companies, it was obligatory on the part of the Chairman of the meeting to declare that the Scheme has failed in view of the fact that debenture holders holding more than one-fourth in value of debenture have opposed the Scheme. In view of the provisions contained in Section 391 (2) of the Act, the Scheme of Arrangement / Compromise is required to be approved by a majority in number representing three-fourth in value of creditors present and voting at the meeting. The applicant and the other three institutions which in aggregate held 45% (in terms of value who were present in the meeting) in value of the debentures opposed the Scheme. However, the Chairman of the meeting realising that the Scheme will not get through adjourned the meeting to 23.12.2004. For the last more than one and half year, the meetings are being adjourned from time to time and the same is causing great prejudice to the applicant and other three institutions. Even the meeting held on 23.12.2004 was also adjourned to 23.02.2005 despite the fact that the present application is pending before this Court. 9. Mr. Pahwa has further submitted that considering the majority of the applicant and the other three institutions, who even opposed the move for adjournment, it was not open for the Chairman to adjourn the meeting. The action of the Chairman of the meeting clearly suggests a strong bias in favour of the Company and against the interest of the applicant and other similarly placed institutions. The holding of other debenture holders comprising part of the class of debenture holders holding more than 2000 debenture holders is not sufficient to get the Scheme sanctioned in the meeting and hence, there is no need to permit any further meeting to be held by the Company for the purpose of considering the Scheme. 10. Mr. Pahwa has further submitted that the Scheme as proposed by the Company is not acceptable to the applicant and other three institutions on various grounds which are already enumerated in the written objections submitted before the Chairman of the meeting. The Scheme is also opposed by the applicant, in particular, in view of the fact that the Scheme is contrary to the statutory guidelines issued by the Reserve Bank of India to non-banking financial Companies. The applicant being a non-banking financial Company is amenable to the guidelines issued by the Reserve Bank of India and it is, therefore, not open for the applicant to deviate from the said guidelines as they are mandatory in nature. Considering the totality of circumstances and in particular the fact that the institutions holding more than about 45% in value of votes are opposed to the Scheme proposed by the Company, no fruitful purpose would be achieved in permitting the Company to hold and convene any further meeting of the debenture holders of the class holding more than 2000 debentures. He has, therefore, submitted that relief prayed for in the present Judge's Summons is required to be granted. 7. In support of his submission that when it is apparent that the requisite majority is not in favour of sanctioning the Scheme, the Court should not grant permission to the Company to convene the meeting, Mr. Pahwa has relied on the decision of this Court in the case of KRISHNAKUMAR MILLS CO. LTD. (IN LIQUIDATION), IN RE., 45 COMPANY CASES 248 wherein the Court has taken the view that the main consideration was that the two secured creditors representing more than half the interest in total value of the secured creditors had opposed the Scheme. Therefore, the Scheme would not be able to be passed by the majority of the creditors of the secured class representing more than 3/4th value. Therefore, no meeting could be called as prayed for. 8. Mr. Pahwa has further relied on the decision of the Delhi High Court in the case of KOMAL PLASTIC INDUSTRIES V/S. ROXY ENTERPRISES PVT. LTD., 72 COMPANY CASES 61 wherein it is held that the provisions of Section 391 (2) of the Companies Act, 1956, are clear and unambiguous. The Company Court has no jurisdiction to sanction a Scheme if it is not approved by 3/4th majority of the creditors or each class of creditors. The question of the Court considering the sanctioning of the Scheme would arise only if the Scheme has been approved by the statutory majority provided for under Section 391 (2). Where separate meetings are called to consider one composite Scheme covering both secured and unsecured creditors, it is necessary that both the meetings should pass the Scheme by 3/4th majority. If the secured creditors, on the first meeting, reject the Scheme, the Scheme has to be deemed to have been rejected by the Creditors generally and cannot be considered for sanctioning by the Court. It is not even binding on the unsecured creditors even if they might have voted by a majority in favour of the Scheme. The Court has accordingly held that since the State Bank of India was the only Secured Creditor of the Company and was opposed to the Scheme of Arrangement propounded under Section 391, this amounted to opposition of the Scheme by 100% of the class of secured creditors. The scheme propounded was a composite scheme covering both secured and unsecured creditors and in view of the stand of the State Bank of India, no useful purpose would be served by directing the convening of meetings to consider the Scheme. The applications filed under Section 391 were liable to be dismissed. 9. Mr. Pahwa in support of his submission that the directions with regard to convening the meeting were issued by this Court ex-parte and since the meeting is not convened and it was being adjourned from time to time, the applicant can certainly approach this Court for vacation and/or modification of the order passed by this Court, has relied on the decision of the Bombay High Court in the case of SAKAMARI STEEL & ALLOYS LIMITED (In Re.), 51 COMPANY CASES 266 wherein it is held that Rule 67 of the Companies (Court) Rules, 1959, says that an application under Section 391 (1) of the Companies Act, 1956, for directions is to be moved ex-parte. Hearing a motion ex-parte does not mean that the Court has not to apply its mind or be prima facie satisfied about the merits of the application. The language of Section 391 (1) is manifestly clear about the discretion resting with the Court in granting an application. Rule 69 is equally clear and points out that the directions are to be given "unless he (the judge) thinks fit for any reason to dismiss the Summons (for directions)". Thus, on the basis of the Act and the Rules made thereunder, it is not compulsory for the Court to give directions to convene a meeting contemplated under Section 391 (1). The Court has to consider the circumstances before giving its approval, though the fact that 3/4th in value of the creditors have agreed to accept the Scheme would be a strong circumstances in favour of sanctioning the Scheme by the Court. 10. Mr. Pahwa has further relied on the decision of the Hon'ble Supreme Court in the case of MIHEER H. MAFATLAL V/S. MAFATLAL INDUSTRIES LTD., 87 COMPANY CASES 792 wherein, while laying down broad contours of the jurisdiction of the Company Court, it is inter alia observed 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 bonafide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. It is further observed by the Court that the proposed Scheme of Compromise and Arrangement is not found to be violative of any provisions 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. 11. Based on this decision, Mr. Pahwa has submitted that by not putting the Scheme to vote and by getting the meetings adjourned, the Company as well as other Term Lenders are coercing the applicant and other three institutes in order to promote their own interest of settling their disputes on the line of CDR Package, the copy of which was never supplied to the applicant. The Court should pierce the veil and come to the conclusion that the meetings are adjourned only with a view to get the requisite majority by hook or crook or by pressurising the applicant and other institutes to fall in line with their offers. He has, therefore, submitted that the Court should reject the application for convening the meeting as it becomes apparent now that the respondent Company has failed to have the approval of the requisite majority to the Scheme. Alternatively, Mr. Pahwa has submitted that the Chairman of the meeting should be directed to put the Scheme to vote in the forth coming meeting which is scheduled to be held on 23.02.2005. 12. Mr. Pranav G. Desai, learned advocate appearing for UTI Asset Management Company Private Limited, LIC Mutual Fund and G I C Asset Management Company Limited, respondent Nos. 2,3, & 4 herein have supported the submissions and the arguments made by Mr. Pahwa. He has submitted that there are in all 11 meetings held for considering the Scheme and all these meetings were adjourned. Despite specific objections raised by these institutes, the Scheme was not put to vote and instead thereof, the meetings were adjourned by simple majority. Mr. Desai has furnished the details of adjournments of meetings which are as under :- 04.04.2003 :- This Court ordered to hold meeting on 06.05.2003. 06.05.2003 :- Adjourned to 14.06.2003. 14.06.2003 :- Adjourned to 14.08.2003. 14.08.2003 :- Adjourned to 11.09.2003. 11.09.2003 :- Adjourned to 15.11.2003. 15.11.2003 :- Adjourned to 16.01.2004. 16.01.2004 :- Adjourned to 15.04.2004. 15.04.2004 :- Adjourned to 24.06.2004. 24.06.2004 :- Adjourned to 26.08.2004. 26.08.2004 :- Adjourned to 26.10.2004. 26.10.2004 :- Adjourned to 23.12.2004. 23.12.2004 :- Adjourned to 23.02.2005. 13. Mr. Desai has further submitted that if the respondent Company is not in a position to get through the Scheme, it should frame the new Scheme and seek the permission of this Court for convening the meeting to consider that new Scheme. The present scheme for which the permission is granted by this Court is pending for the period of more than one year and 10 months and 11 times the meetings were adjourned. The Court should not, therefore, permit the respondent Company or the Chairman of the meeting appointed by this Court to hold the meeting for consideration of the Scheme which is opposed by the applicants and three other institutes holding more than 25% in value of the total votes of debenture holders having more than 2000 debentures. 14. Mr. M.J. Thakore, learned Senior advocate appearing for the respondent Company has submitted that the Company has framed four Schemes for different class of debenture holders. Out of these four Schemes, three Schemes have already been approved by the debenture holders and sanctioned by this Court. So far as the present Scheme is concerned, he has submitted that except for the meetings held on 06.05.2003, 14.06.2003 and 26.10.2004, all the remaining eight meetings were adjourned unanimously. Some of the debenture holders holding more than 2000 debentures are Banks and Financial institutions. The meetings were adjourned for the reasons that debenture holders who are Banks and Financial Institutions were also independently deciding the Scheme proceedings considering the Arrangement / Compromise proposed by the Company under the Scheme or otherwise and were urging the Chairman of the meeting to postpone the meeting to enable debenture holders to have a workable scheme in place. He has, therefore, submitted that there is no delay on the part of the Company. On the contrary, debenture holders themselves had opted to get meetings adjourned. So far as the meeting held on 26.10.2004 is concerned, Mr. Thakore has submitted that during the course of the meeting, the Chairman asked the Company Secretary of the Company about the status of the Company's Corporate Debt Restructuring proposal being considered by the Empowered Group of Corporate Debt Restructuring (CDR) cell of lenders. The Chairman was informed that the Empowered Group of Corporate Debt Restructuring (CDR) cell of lenders met on 28.09.2004 confirming the approval given and stating that the detailed terms and conditions will be issued in due course. The Chairman was further informed that the Company was hopeful of receiving the said detailed terms and conditions within a fortnight and thereafter the Scheme would be modified suitably. Keeping this in mind, the adjournment motion was moved by ICICI Bank Limited which was duly seconded by the State Bank of India. Though the applicant and other three institutes have opposed the adjournment motion, the same was carried by majority. Mr. Thakore has further submitted that so far as the meeting held on 23.12.2004 is concerned, in the said meeting the representatives of debenture trustees requested the representatives of the debenture holders, namely, Unit Trust of India, GIC Mutual Fund, LIC Mutual Fund and the applicant that a meeting to be held to discuss about submission of a reasonable proposal to the Company to modify the present Scheme which in turn can be referred to their lenders for