1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. COMPANY PEITION NO.29 OF 2007 WITH COMPANY APPLICATION NO.1140 OF 2006 In the matter of Scheme of Arrangement between Mather and Platt Fire Systems Ltd. And Unsecured Creditors. Mather and Platt Fire Systems Limited A Company incorporated under the Companies' Act, 1956, having its Registered Office at Mumbai-Pune Road, Chinchwad (East), Pune-411 019. ...Petitioner. ....... Mr. Shyam Mehta with Mr. Vikram Trivedi, Mr. S.R. Tilokchandani and Mr.Tanmaya i/b. M.K. Ambalal & Co. for the Petitioners. Mr. M.P. S. Rao with Mrs. Deepa Chavan, Mr. V.R. Warerkar for MEC Tubes & other objectors. Mrs. Deepa Chavan with Mr. V.R. Warerkar fo Kalpa Valves. Mr. C.J. Joy with Ms. Madhuri Gaikwad for the Regional Director. Mrs. K.V. Gautam, Dy. Official Liquidator present. ...... CORAM : DR. D.Y. CHANDRACHUD, J. April 30, 2007. 2 ORAL JUDGMENT : The sanction of this Court is sought to a Scheme of Arrangement which the Petitioner proposes with its unsecured creditors under Sections 391 to 394 of the Companies' Act, 1956. The Petitioner was incorporated on 2nd July 1993 under the Companies' Act, 1956 as Veedip Financial Services Pvt. Ltd. On 13th September 2001, the name of the Petitioner was changed to Mather & Platt Fire Systems Pvt. Ltd. and on 5th October 2001 to Mather & Platt Fire Systems Ltd. In or about July 2005, a Share Purchase Agreement was entered into between the erstwhile promoters of the Petitioner and Wilo AG, a German Company (“Wilo”) under which Wilo agreed to acquire the shareholding of the erstwhile promoters in the Petitioner subject to certain compliances including the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1977. Pursuant to the agreement, Wilo acquired 18,87,697 shares of the Petitioner. The Petitioner has consequently become a subsidiary of Wilo. 3 -2. The audited balance sheet of the Petitioner as of 30th June 2006 presents a grim picture. The gross value of the fixed assets was Rs. 54.56 lakhs and after allowing for a depreciation of Rs. 54.50 lakhs, the net block has been valued at Rs.6,200/-. The total investments were only Rs.21,100/-. Sundry debtors stood at Rs. 77.73 lakhs while cash and Bank balance were to the extent of Rs. 34.10 lakhs. The net current liabilities stood at Rs. 6.94 crores. A total loss of Rs. 10.34 crores was sustained. -3. The Company Petition, contains an averment that the down turn in the business activities of the Petitioner resulted in a severe crisis of liquidity causing a mismatch in the position of the assets and liabilities. The circumstances responsible for this position have been spelt out in para 8 of the Company Petition thus: “The factors responsible for the present state of affairs inter alia include depressed market condition for more than (the) last five years, internal disputes among the past promoters, delays in completion of turnkey projects due to fault of parties, no technology upgradation in the business of the Petitioner Company, switching suppliers and service 4 providers in the middle of on going projects (which) caused delays in implementation of projects, no corresponding incremental rise in contract price for redoing certain works which were outside purview of projects.” The business of the Company stagnated and activities were stated to be restricted merely to completing existing projects, recovering past dues and repayment to creditors. The net worth was completely eroded resulting in substantial accumulated losses. -4. Negotiations were carried out by the Petitioner with its unsecured creditors with a view to arriving at a settlement. The negotiations, it has been stated, were not fruitful. The Petitioner has no secured creditors. -5. On 20th September 2006, a meeting of the Board of Directors of the Petitioner took place at which a Scheme of Arrangement for restructuring of debts was approved. On 8th November 2006, the Bombay Stock Exchange furnished its no 5 objection and the Pune Stock Exchange did so on 14th November 2006. -6. The proposed scheme was presented before the Court for its sanction and on 1st December 2006 directions were issued in Company Application 1140 of 2006 calling for a meeting of unsecured creditors of the Company as specified in clause 1.8 of the Scheme of Arrangement. The holding of a meeting of the shareholders of the Company was dispensed with upon a statement made by the Company that the shareholders would not be affected by the Scheme. A meeting of other unsecured creditors with whom no compromise or arrangement was proposed was also dispensed with in view of the statement made by the Company that their rights were not affected. The Chairman was directed to send notices to the unsecured creditors Under Certificate of Posting and to issue public notices in English and Marathi newspapers. Voting by proxy was permitted provided a proxy in a prescribed form duly signed by persons entitled to attend and vote at the meeting was filed with the Company not less than 48 hours before the commencement of the 6 meeting. The value of each of the unsecured creditors was to be assessed in accordance with the Books of Account of the Company and, where entries in the Books of Account were disputed, the Chairman of the meeting was empowered to determine the value for the purposes of the meeting. Accordingly, notices were despatched to the unsecured creditors and public notices came to be issued as directed by the Court. 7. On 30th December 2006, a meeting of the unsecured creditors took place. 99 unsecured creditors attended and voted at the meeting representing a total debt of the value Rs.5,22,28,215/-. The total value of the debt of unsecured creditors covered by the scheme is Rs.5,75,68,101/-. Of 99 ballot papers, 7 representing a debt of the value of Rs.1,28,61,222/- were rejected by the Scrutineer as invalid. Out of the of 92 valid ballot papers representing a debt of the value of Rs.3,93,66,993/-, 85 ballot papers representing a debt of the value of Rs.3,68,87,921/-, constituting 93.70% of the total valid votes cast were in favour of the Scheme. 7 ballot papers 7 representing a debt of the value of Rs.24,79,072/- constituting 6.30% of the total valid votes cast were against the Scheme. The names and details of the objecting creditors before this Court are as follows: Name Value of Deft (Rs) Status of Vote Mec Tues Pvt. Ltd. 69,92,125 Invalid. Sanghvi Forging & Engineers Ltd. 2,99,446 Invalid. Andhra Pradesh Power Generation Corporation Ltd. 37,25,895 Invalid. New Fire Engineers Pvt.Ltd. 8,56,996 Invalid. Rajendra Pipes & Fittings 3,17,921 Invalid. Max Forge. 1,86,000 Valid. Fire Mech. 20,016 Valid. Kalpana Valves Mfg. Co. Pvt. Ltd. 5,03,012 Valid. Ghosh Engg.Industries. 10,43,737 Valid Kansal Pipes Fitting Co. 43,932 Valid. Panja Engg. Pvt. Ltd. 6,62,765 Valid. 8. The Company Registrar in his capacity as Chairman of the meeting has submitted his report dated 16th January 2007, pointing out that the Resolution was carried by the requisite majority. 8 The Scheme : 9. The cut of date under the scheme is 31st July 2006. The expression “unsecured creditors” is defined in clause 1.8 of the Scheme as follows : “1.8 “Unsecured Creditors” would mean and include: i. Creditors who have supplied goods or rendered services to the Company and whose dues are neither in dispute nor time barred under provisions of any law. ii. Creditors whose dues are disputed but no decree has been executed against the Company. iii. Customers from whom advances have been received. iv. Contingent Creditors who have made a claim or have filed suits for recovery of amount towards loss caused due to the alleged improper execution or delay in execution/completion of projects or otherwise but such claim is disputed by the Company. v. Unsecured Creditors who have deposited monies in the nature of unsecured loans or deposits (not being a deposit within Section 58A of the Act but including inter corporate deposits, loans and advances from the group company) with the Company without any security and who do not have any charge on the assets of the Company.” 9 Clause 4.1 of the proposed Scheme of Arrangement/Compromise provides for three options for the payment of the outstanding dues of unsecured creditors, these being as follows: “Option 1 The Unsecured Creditors will be paid 25% of the outstanding principal amount due as on Cut off Date within six months from the Effective Date or date of exercising the option whichever is later without interest and balance amount (including interest) should be waived off. Option II The Unsecured Creditors will be paid total 45% of the outstanding principal amount due and payable as on the Cut off Date (without interest) in the following manner: 5% of the outstanding principal amount due as on Cut off Date, within six months from the Effective Date or date of exercising the option, whichever is later. 40% of the outstanding principal amount due as on Cut off Date in four annual installments starting from 1st April 2011. Balance amount (including interest) should be waived off. Option III 10 The Unsecured Creditors will be paid 100% of the outstanding principal amount due as on Cut off Date, at the end of twelve years from the Effective Date. The interest amount should be waived off.” Except for the payments stipulated as aforesaid, each of the unsecured creditors has to waive or write off the balance of the principal, interest, penal interest and other charges whatsoever including interest and penal interest relatable to the period after the cut off date. Payments stipulated in clause 4.1 are to be in full and final settlement of the outstanding dues. 10. One of the unsecured creditors of the Company is Mather and Platt Pumps Ltd. (MPPL). Both the Petitioner as a propounder of the scheme and MPPL are subsidiaries of the holding Company, Wilo AG of Germany. Clause 4.4 of the Scheme provides as follows: “4.4 MPPL, which is also one of the unsecured creditors, will not be paid its dues until proper arrangements are made to make payments to all the unsecured creditors covered under the Scheme as per the option selected by the respective unsecured creditors.” In other words, as a result of clause 4.4, MPPL is to have no 11 preferential rights in the payment of its debt. The scheme provides that MPPL will not be paid its dues until proper arrangements are made for making payment of all the unsecured creditors. 11. Of the 11 objectors before the Court in these proceedings, 5 belong to the category of those whose votes were declared as invalid, while six are those who had validly cast their votes against the scheme. Submissions of the Objectors : 12. On behalf of the objectors the following submissions have been urged at the hearing of the petition. Firstly, it has been submitted that none of the objectors received individual notices of the meeting that was convened of the unsecured creditors for considering the scheme and that the publication in the newspapers was not adequate to place the objectors on notice of the meeting. The second submission is that out of the total votes representing a value of Rs. 3.68 crore of the debts of the Company which were cast in favour of the scheme, votes representing a debt value of Rs. 2.80 12 crores were cast by MPPL which together with the Petitioner is a subsidiary of the holding Company in Germany. Wilo AG has a controlling interest in both the Petitioner and MPPL and hence it has been urged that while convening meetings of the creditors, MPPL should have been treated as a separate class amongst the unsecured creditors. The third and related submission is that the balance sheet of the Petitioner would show that the liabilities owing to MPPL stood at Rs. 1.75 crores on 31st December 2005 which increased to Rs. 2.66 crores on 30th June 2006. It is submitted that no explanation is forthcoming for the basis or the reasons for the sudden increase in liabilities to MPPL. The increase in liabilities must, it was urged, be regarded as an attempt to increase the voting power of MPPL at the meeting of the unsecured creditors. Finally, it was submitted that votes of five of the objectors before the Court were wrongly declared as invalid and that the conduct of the Scrutineer in doing so cannot be regarded as bona fide. It was submitted that if the votes which were recorded as invalid were to be counted in computing the votes in favour of and against the scheme, the scheme would have to fail since 3/4th in value of the unsecured creditors would then not be 13 supportive of the scheme. Each of the objections can now be taken up for consideration: (i) Notice : 13. On 1st December 2006, the Company Judge issued directions for convening and holding a meeting of the unsecured creditors. Clauses 3 and 4 of the order provided for the issuance of an advertisement in English and Marathi newspapers circulating in Pune and for a notice to be sent at least 21 days before the meeting to the unsecured creditors by a pre-paid letter posted under Certificate of Posting. The obligation to do so was cast by clause 7 of the directions upon the Chairman of the meeting, namely, the Company Registrar of this Court. 14. Rule 73(2) of the Companies (Court) Rules, 1959 provides that a notice of a meeting to the creditors has to be remitted by post Under Certificate of Posting to the last known address not less than 21 clear days before the date fixed for the meeting. The direction of the Court was, therefore, in pursuance of the provisions of Rule 73. 14 15. The Petitioner complied with the obligation cast upon the Company by the directions issued by this Court on 1st December 2006 by publishing an advertisement in the newspapers on 5th December 2006 and remitting the postal packets Under Certificate of Posting on 8th December 2006. The objection that there was an absence of notice holds no substance because all the 11 objectors, as a matter of fact, attended and voted at the meeting which was held on 30th December 2006. The record shows that the objectors were aware of the date, time and place of the meeting. The principal objector, who is the Managing Director of an unsecured creditor by the name of MEC Tubes Pvt. Ltd. claimed awareness of the meeting from 28th December 2006. He addressed a communication to the Company on 28th December 2006. His affidavit of objection shows that on 26th December 2006, his Company had passed a resolution of the Board of Directors authorising him to vote at the meeting. At the meeting, he had also addressed a letter to the Chairman and to the other creditors. Seven unsecured creditors voted against the resolution and six of them had cast their votes through proxies. 15 16. In these circumstances, the allegation of an absence of notice is without any merit whatsoever. In such cases, unless there is material before the Court to demonstrate that by a course of devious conduct, the Company has deliberately avoided to transmit individual notices, isolated instances cannot lead to the invalidation of a meeting held to consider a scheme propounded under Section 391 of the Companies' Act, 1956. In Shailesh Harilal Shah vs. Matushree Textiles Ltd.,1 a Division Bench of this Court formulated the principle which must apply in such cases. While holding that the provisions of Section 171(1) of the Companies' Act, 1956 were directory and not mandatory, the Court held as as follows : “The Court will not proceed to invalidate the proceedings on the ground of insufficient duration of notice only when it is established that defect is not intentional or deliberate and no prejudice whatsoever is caused to a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the Court would grant the relief.” The Division Bench held that to hold otherwise would “lead to very 1 AIR 1994 Bombay 20 16 unusual results making it difficult for large public Companies to effectively function”. 17. In the present case, even on merits, the grievance has been found to lack substance. (ii) Class of Creditors : 18. The objection voiced before this Court is that MPPL should have been treated as a separate class among unsecured creditors and the votes cast by the Company should have been counted separately. The submission is founded on the premise that MPPL is a wholly owned subsidiary of Wilo AG, like the Petitioner. Hence, it was submitted that the interest of MPPL and the Petitioner overlap and it was necessary to count the vote cast by MPPL separately. In support, reliance was placed on an affidavit dated 3rd April 2007 of the Company Secretary in reply to the objections in which it has been stated that the scheme was propounded after a detailed exercise was carried out by the Petitioner “and after considering support from MPPL to fund (a) temporary mismatch of funds to implement the 17 scheme fully without any delay.” Moreover, it was averred in the affidavit that as a result of the inability of the Petitioner to fulfill its contractual obligation with respect to its on going jobs, MPPL extended financial, managerial and technical support to the Petitioner in order to enable the Petitioner to fulfill its contractual obligations. 19. In assessing the submission, a reference would have to be made to Section 391 of the Companies' Act, 1956. Sub-section (1) of Section 391 provides as follows: “391(1) Where a compromise or arrangement is proposed - (a) between a company and its creditors or any class of them; or (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.” Thereafter, the provisions of sub-section (2) lay down that if a majority 18 in number representing three-fourths in value of the creditors or class of creditors or members, or class of members, as the case may be, present and voting either in person or, by proxy, agree to any compromise or arrangement, the compromise or arrangement shall be binding on all the creditors, all the creditors of the class, all the members, or all the member of the class, as the case may be, and also on the Company. Clause (a) of sub-section (1) contemplates a situation where a compromise or arrangement is sought between a Company on one hand and its creditors or a class of them on the other. Similarly, under clause (b) a compromise or arrangement may take place between the Company on the one hand and its members or a class of them on the other. Sub-section (1) contemplates the holding of a meeting of the creditors or a class of creditors or of the members or class of members. The statute contemplates the holding of a meeting of a class of creditors or, as the case may be, a class of members where the compromise or arrangement is sought to be effected not with the creditors or members in general, but with a particular class among them. In such a case, the compromise or arrangement upon being sanctioned would affect the rights of a class 19 of members or a class of creditors. Hence it is, that class whose rights are to be affected that is furnished with an opportunity of giving vent to its views at a meeting of the class. The holding of a meeting of the class must, therefore, be considered in the context of the compromise. The definition of “class” is relatable to the terms of the compromise which affects or modifies the rights of that class. 20. The interpretation which has to be placed on the provisions of Sub-section (1) of Section 391 is no longer res integra and has been dealt with in several reported cases. The leading judgment of the Supreme Court on the subject is in Miheer H. Mafatlal vs. Mafatlal Industries Ltd.2 The judgment of the Supreme Court is an authority for the proposition that a separate meeting of a class of members or a class of creditors is required to be convened where a compromise or arrangement is proposed between the Company and that class of members of creditors. Where the same terms of compromise are offered to a class of members or creditors, no separate meeting of a sub class among them is required. The Supreme Court held as follows: 2 1996 (87) Com.Cases 792 20 “On the express language of Section 391(1) it becomes clear that where a compromise or arrangement is proposed between a company and its members or any class of them a meeting of such members or class of them has to be convened. This clearly pre-supposes that if the scheme of arrangement or compromise is offered to the members as a class and no separate scheme is offered to any sub-class of members which has a separate interest and a separate scheme to consider, no question of holding a separate meting of such a sub-class would at all survive. Even otherwise it becomes obvious that as minority shareholder if the appellant had to dissent from the scheme his dissent representing 5% equity shareholding would have been visible both in a separate meeting, if any, of his sub-class or in the composite meeting where also his 5% dissent would get registered by the appellant either remaining present in person or through proxy. Consequently when one and the same scheme is offered to the entire class of equity shareholders for their consideration and when the commercial interest of the appellant so far as the scheme is concerned is in common with other equity shareholders he would have a common cause with them either to accept or to reject the scheme from a commercial point of view. ... It is also to be kept in view that it is not the case of the appellant that any different terms of compromise were offered to persons holding equity shares who were covered by the family arrangement of 1979 or otherwise. In fact the entire proposal of the scheme of arrangement was one affecting equally and in the like manner all the existing equity shareholders of the respondent-company. ... It is, therefore, obvious that unless a separate and different type of scheme of compromise is offered to a sub-class of a class of creditors or shareholders otherwise equally circumscribed by the class no separate meeting of such sub-class of the main class of members or creditors is required to be convened.” 21 21. The same principle was enunciated in an earlier judgment of the Gujarat High Court in the case of Maneckchowk and Ahmedabad Manufacturing Co. Ltd.3 Mr.Justice D.A. Desai noted that a class consists of a homogeneous group with a commonality of interest. The true test is that a class consists of persons whose rights are similar in terms of the compromise which is offered to others by the Company. The Learned Judge held as follows : “ “Class” must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Soverign Life Assurance Co. vs. Dodd, (1892) 2 Q.B. 573 (C.A.) ). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined