COMP/10/2006 1/265 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION NO. 10 OF 2006 With COMPANY PETITION NO. 9 OF 2006 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the Civil Judge? ========================================================= In re CORE HEALTHCARE LIMITED And In re NIRMA LIMITED ========================================================= Appearance : Shri Saurabh Soparkar, Sr. Counsel, with Smt. Swati Soparkar for Petitioner(s). Shri J.A. Adeshra for Respondent(s). Shri Y.N. Ravani for M/s. Gannon Dunkerley & Co. Ltd. Shri G.N. Shah for M/s.Alstom Projects India Limited. Shri Sunit S. Shah for Oman International Bank S.A.O.G. Shri Mihir Joshi, Sr. Counsel, with Shri Anip A. Gandhi for HDFC Bank Ltd. Shri Mihir J. Thakore, Sr. Counsel, with Shri Sandeep Singhi for M/s. Singhi & Company for M/s.ARCIL. Shri Harin P. Raval, Central Government Asst. Solicitor General for the Union of India. Shri Bharat Jani for Industrial Development Bank of India Ltd. ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG Date of Pronouncement : 01/03/2007 COMMON C.A.V. JUDGMENT COMP/10/2006 2/265 JUDGMENT This judgement shall dispose of Company Petition Nos.9 and 10 of 2006. 2. Company Petition No.10 of 2006 has been filed under Sections 78, 100, 391 and 393 of the Companies Act, 1956 (“the Act” for short) by the Company named Core Healthcare Limited, a company incorporated under the Act in the matter of a composite Scheme of Arrangement in the nature of compromise with the lenders and reconstruction, reorganisation of capital and demerger between Core Healthcare Limited and Nirma Limited and their respective shareholders. The petitioner-Company has prayed for the following reliefs: “(a) The Modified Composite Scheme of Arrangement referred to in para-15 of this petition and being Annex. with this petition hereto, be sanctioned by this Hon'ble Court so as to be binding on all Equity Shareholders, Class 'A' Lenders and Class 'B' Lenders of the Petitioner Company and on the Petitioner Company; (b) That the Petitioner Company do within 30 days from the date of sealing of the order cause a certified copy of the order sanctioning the Scheme of Arrangement to be COMP/10/2006 3/265 JUDGMENT filed with the Registrar of Companies, Gujarat, Ahmedabad for registration and upon such certified copy of the order being so delivered, the Registrar of Companies, Gujarat, Ahmedabad be directed to consolidate all relevant files, documents, records relating to the De-merged Company maintained by him with the files, documents, records of the Resulting Company. (c) For such incidental, consequential and supplemental orders and directions may be given as may be made in the premises as to this Hon'ble Court may deem fit and proper; (d) Costs of this petition and the order to be made thereon be provided for.” 2.1. According to the petitioner-Company, the object of the petition is to obtain sanction of the Court to the composite Scheme of Arrangement in the nature of compromise with the lenders and reconstruction of Core Healthcare Limited, the petitioner demerged Company, reorganisation of capital of Nirma Limited, and demerger and transfer of undertaking (as defined in the Scheme) of Core Healthcare Limited to Nirma Limited, as modified at the meetings. 2.2 The petitioner, M/s. Core Healthcare COMP/10/2006 4/265 JUDGMENT Limited, (hereafter referred to as “Core” for brevity) was incorporated as a public limited company on 28th August, 1986 in the name and style of Core Parenterals Limited. The name of the company was changed to Core Healthcare Limited with effect from 17th November, 1994. It is submitted by the petitioner that as per the latest audited balance sheet as on 31st March, 2004, the authorised, issued, subscribed and paid-up share capital of Core consist of the following: Share Capital as on 31.03.2004 Authorised: 5,00,00,000 Equity Shares of Rs.10/­ each Rs.50,00,00,000 5,00,00,000 Preference Shares of Rs.10/­ each Rs.50,00,00,000 Total... Rs.1,00,00,00,000 Issued and Subscribed Fully Paid­up: 2,67, 56,676 Equity Shares of Rs.10/­ each Fully Paid­up Rs.26,75,66,760 Add amount received on shares forfeited Rs. 16,000 Partly Paid­up: 90,37,000 Equity Shares of Rs.10/­ each Rs.8/­ paid­up Rs. 7,22,96,000 Total.. Rs.33,98,78,760 There has been no change in the issued, subscribed and paid-up capital of Core after 31st COMP/10/2006 5/265 JUDGMENT March, 2004 till the date of filing of the petition. 2.3 The objects of Core are set out in the Memorandum of Association annexed to the petition and under the circumstances, it is not necessary to burden this judgement by referring to the main objects of the Company. 2.4. Core is a listed public limited company engaged in the business of manufacturing and selling medical and pharmaceutical products. 2.5 M/s. Nirma Limited (hereinafter referred to as “Nirma” for brevity), the Resulting Company, was incorporated under the Act as a private limited company on 25th day of February, 1980 under the name and style of Nirma Private Limited. Pursuant to the provisions of Section 43A of the Act, the company became deemed public company with effect from 1st day of July, 1989 and it came to be known as Nirma Limited. The company became full fledged public company vide a special Resolution passed on 8th day of November, 1993. One Nilnita Chemicals Limited was COMP/10/2006 6/265 JUDGMENT amalgamated with Nirma under Order dated 3rd May, 1995 passed by the High Court. Vide another order dated 19th December, 1996 passed by this Court, the three companies, namely, Nirma Detergents Limited, Nirma Soaps & Detergents Limited and Shiva Soaps & Detergents Limited, were amalgamated with Nirma Limited. Under order dated 13th August, 2003 passed by this Court, the operating division of Nirma Industries Limited was demerged and transferred to Nirma Limited. 2.6 As per the latest audited balance sheet as on 31st March, 2005, the authorised, issued, subscribed and paid-up share capital of Nirma consist of the following: Share Capital as on 31.03.2005 Authorised: 9,50,00,000 Equity Shares of Rs.10/­ each Rs.95,00,00,000 5,00,000 6% Redeemable non­cumulative Non­convertible Preference Shares of Rs.100/­ each Rs. 5,00,00,000 Total... Rs.1,00,00,00,000 Issued and Subscribed: 7,94,01, 376 Equity Shares of Rs.10/­ each Fully Paid­up Rs.79,40,13,760 COMP/10/2006 7/265 JUDGMENT 2,79,285 6% Redeemable non­cumulative Non­convertible Preference Shares of Rs.100/­ each Rs. 2,79,28,500 Total.... Rs.82,19,42,260 Paid­up: 7,93,82,484 Equity Shares of Rs.10/­ each Fully Paid­up Rs.79,38,24,840 2,79,285 6% Redeemable non­cumulative Non­convertible Preference Shares of Rs.100/­ each Rs.2,79,28,500 Add Amount received on forfeiture of equity shares Rs. 2,000 Total.... Rs.82,17,55,340 Further, the Board of Directors at its meeting held on 24th October, 2005 allotted 2200 Equity Shares of Rs.10/- each pursuant to the order of the Court of the learned Civil Judge, Varanasi, which were earlier kept in abeyance at the time of allotment made to the warrant holders against the warrants held by them. There has been no other change in the issued, subscribed and paid-up capital of the petitioner after 31st March, 2005 till the date of filing of the affidavit. Hence, the paid up capital of the COMP/10/2006 8/265 JUDGMENT petitioner-Company as on date stands as under: Paid up: 7,93,84,684 Equity Shares of Rs.10/­ each Rs.79,38,46,840 Fully Paid­up 2,79,285 6% Redeemable non­cumulative non­convertible Preference Shares of Rs.100/­ each. Rs. 2,79,28,500 Add Amount received on forfeiture of equity shares Rs. 2,000 Total.. Rs.82,17,77,340 2.7 The objects of Nirma are set out in the Memorandum of Association annexed to the Company Petition and therefore, it is not necessary to refer to the said objects in detail. 2.8 Core is a listed public limited company; it is a multi-product healthcare company manufacturing I.V. solutions, medical disposables, injectables, orals and formulations, etc. It has two units, one at Village-Sachana (Ahmedabad) and another at Village- Rajpur (Mehsana) in Gujarat. 2.9 According to the petitioner (Core), the company was incorporated in the year 1986 by the first generation entrepreneurs to manufacture COMP/10/2006 9/265 JUDGMENT infusion and transfusion solutions. Over a period of time, Core has catapulted to the league of large international companies through its wide range of products of international quality, available across global market. This became possible due to adherence to high quality standards through use of state-of- the-art technology, and large scale manufacturing facilities. The company achieved quick growth and grand success in a short period of time. The company registered a phenomenal growth during nineties. In 1993-94, it was a company with turn over of more than 100 crores and a net profit of 21 crores. Encouraged by the same, it initiated upon an aggressive growth plan in 1993-1995, involving investment of about Rs.600 crores for expansion of its existing facility and also diversification into manufacture of medical devices. The plan was validated by the Board of Directors, consultants, lenders and also appraised by all lenders while sanctioning the loans. Based on the same, the company set up one of the world's most modern and largest pharmaceutical manufacturing facility across 600 acres of land with most modern manufacturing technology from world-renowned COMP/10/2006 10/265 JUDGMENT suppliers. The company continued to achieve appreciable growth in sales and financial performance despite significant increase in costs, overheads and fixed charges upto 1996. The company's new manufacturing facility for I.V. Fluids won the prestigious IDMA award for 1994-95 in its very first year of operations – the highest recognition for quality assurance in Indian Pharmaceutical Industry. The facility at Sachana also received ISO 9002 approval and also was certified for GMP as per World Health Organisation (WHO) standard. The medical devices products of the company were awarded 'CE Mark'. Such quality recognitions of the new plant at Sachana reinforced the commitment of the management towards delivering international quality products. 2.10 According to the petitioner-Core, during the year 1996-97, the company experienced unprecedented cash flow mismatches adversely reflecting its ability to fulfill the commitment. This was due to the impact of increase in financial charges, non-receipt of funds in time already sanctioned by the lenders and pressure on margin in the I.V. Fluid business on COMP/10/2006 11/265 JUDGMENT account of steep increase in industry capacity altogether. The adverse profitability situation also has its genesis in delayed execution of the project resulting out of the delayed project financing as well as increase in interest rates, which the company was compelled to absorb. As a standalone, the first generation entrepreneurial company, Core could not absorb the injury leading to major setback to the company's financial situation, operations, performance and image. 2.11 The petitioner – Core, to come out of the financial stringencies and bad liquidity conditions, took certain steps including pledge of shares, bring back funds given for specific purposes, divestiture of pharma business and power project and one time settlement with certain Banks, which enabled it to reduce its liability during the period of 1998 to 2002. 2.12 According to the petitioner-Core, the company's efforts for the settlement of the dues with its lenders failed and the company did become sick. COMP/10/2006 12/265 JUDGMENT During the year 2001, it had to make a reference before the Board for Industrial & Financial Reconstruction (hereinafter referred to as 'BIFR' for brevity) based on the balance sheet as at 30th June, 2000. IDBI was appointed by BIFR as an operating agency. Recently, Asset Reconstruction Company (India) Limited (hereinafter referred to as “ARCIL” for brevity), an Assets management company, initiated a dialogue with banks/financial institutions for assignment of debts. Various lenders, viz. ICICI Bank Limited, Industrial Development Bank of India,State Bank of India, IFCI Limited, State Bank of Mysore, State Bank of Travankore have assigned their loan in favour of ARCIL by executing a Deed of Assignment. It is now working as a trustee of the Arcil-Core Healthcare Trust. As a consequence at the request of ARCIL, BIFR vide Order dated 12th January, 2005 has abated the pending reference of the company, being Reference No.149 of 2001. 2.13 Nirma, the Resulting Company, according to Core, is a leading multi-location, multi-product company and an established player in the fast moving COMP/10/2006 13/265 JUDGMENT consumer goods segment. It is engaged in the business of manufacture of synthetic detergents, toilet soaps, linear alkyl benzene and soda ash, etc. having a turn over of approx. Rs.2,150 crores during the financial year ended on 31st March, 2005. The operating profit for the year was Rs.510 crores. The company has reserves and surplus of more than Rs.1,792 crores. The shares of the company are listed on Mumbai Stock Exchange and National Stock Exchange. 'NIRMA' today is one of the largest selling detergent brand with a sustained growth in the Indian market. The company has also penetrated and developed toilet soap segment as well as premium segment and successfully acquired substantial market share. It has established integrated soaps and detergent plants, employing the state-of-the-art technology located at Mandali, Chhatral, Moraiya, Trikampura, Kalatalav and Alindra in the State of Gujarat. The logistic advantage with the geographical dispersal of the manufacturing bases has enabled it to respond to the emerging and hitherto untapped market needs with more pro-active, dynamic and near-to-the-customer approach, resulting into savings in cost and time, both. The company COMP/10/2006 14/265 JUDGMENT holds the highest volume share of 38% in the detergent market, mainly dominated by two players including Nirma. Extending the value for money proposition to toilet soaps, it has within a short period of time wrested about 25% market share. 2.14 Based on broad review of financial and technical operation of the demerged undertaking of Core, viz. the unit situated at Village Sachana, Taluka Viramgam, District: Ahmedabad, and pertaining to the business of manufacturing and selling of medical and pharmaceutical products, the Board of Directors of Core thought it appropriate to propose a composite scheme. The said Scheme envisages compromise with the lenders, reconstruction of the demerged company and demerger of the above referred undertaking on a going concern basis and transfer of the same to Nirma, subject to the settlement of the dues with the lenders and approval of the High Court. The management envisages the following commercial advantages: (i) The management of the petitioner-Company is of the opinion that the demerger and transfer of the undertaking of Core to Nirma will unlock COMP/10/2006 15/265 JUDGMENT the value and potential of the business. The Resulting Company being a financially sound company and having extensive experience to manage the products having potential of mass consumption with wide and deep market reach will be in a position to manage the unit profitably. (ii) The I.V. Fluids manufacturing facilities of Core at Sachana being one of the largest in the world and of very high technical compatibility, the inflow of the required funds for its working operations shall provide opportunity to make the optimum use of the facilities. The domestic market as well as the export potential of the product segment shall be well exploited. (iii) Considering the financial implications, the account of Core has so far remained a non- performing asset in the books of its lenders. Under the circumstances, the compromise proposed to the lenders under the Scheme shall provide immediate cash flow to these lenders. 2.15 The reconstruction of the demerged company is essentially a consequence to the compromise with the lenders and the same is proposed as an integral part of the composite scheme. On one hand, the petitioner-Company has substantial balance in its Share Premium Account and on the other hand, there is COMP/10/2006 16/265 JUDGMENT substantial reduction in the value of investments, debtors, loans and advances over a period of time. The company has balance of miscellaneous expenditure as well as debit balance of profit and loss account. Similarly, as a consequence to the proposed compromise, the value of the liabilities of the company also undergoes a substantial change. The net effects of the above are to be reflected in the reconstruction account. In order to realise the realistic financial position of the company, it is proposed that an amount not exceeding Rs.5.66 crores standing in the Share Premium Account of the company be utilised to adjust/write off the balance of the said reconstruction account. Under Clause 46 of the Articles at Table 'A', which is Schedule I to the Act, and which have been adopted by the applicant generally as its Articles of Association, subject to the provisions of Sections 78 and 100 of the Act, the petitioner-Company is authorised to use its Share Premium Account for the said purpose. 2.16 Accordingly, the Board of Directors of the petitioner-Core resolved in their meeting held on 25th COMP/10/2006 17/265 JUDGMENT October, 2005 that subject to the approvals of the shareholders and lenders and subject to directions and sanctions of the appropriate Courts, as may be required under the law, and/or any other regulatory authorities, as may be prescribed under the Act, and subject to the such permission of the Central Government and other authorities that may be necessary, a composite Scheme of Arrangement in the nature of compromise with the lenders of the demerged company, reconstruction of the said company, reorganisation of the capital of the petitioner- Company and demerger and transfer of the undertaking of Core (as defined specifically in the Scheme) to Nirma be made on the broad basis referred to in the Scheme of Arrangement. However, at the meeting of the Equity shareholders of Nirma, convened on 29th November, 2005, pursuant to the directions of this Court some modifications pertaining to the denomination of the equity share of Nirma and some clarificatory modifications were proposed to the said scheme. The same being considered and approved unanimously by the shareholders of Nirma, the proposed scheme was accordingly modified. The said COMP/10/2006 18/265 JUDGMENT modifications were also put for consideration at all the meetings of the shareholders and lenders of the petitioner-Company and were duly approved. As reflected in the result of the meetings, the duly modified scheme was put for consideration at the aforesaid meetings and the same is now put before this Court for consideration and sanction. 2.17 The Scheme, which is in great details, is appended to the petition and the modifications approved by the shareholders held on 25th October, 2005 are also appended to the petition. The original scheme and the modifications approved by the shareholders and the lenders of the company shall become integral part of this order, therefore, it is not necessary to refer to different parts of the Scheme, however, if required, particular provisions of the Scheme would be referred to in this judgement. It is also the case of the petitioner-Company that the Board of Directors of Core and the Board of Directors of Nirma have approved the Scheme of Arrangement. COMP/10/2006 19/265 JUDGMENT 2.18 According to the petitioner, after the proposal of the Scheme, the petitioner-Company, Core, made Company Application No.357 of 2005 seeking a direction for holding of the meetings of the equity shareholders, Class 'A' lenders and Class 'B' lenders for considering the Scheme of Arrangement in the nature of compromise with the lenders and reconstruction and reorganisation of the capital of demerger between M/s. Core and Nirma and their respective shareholders. Despite objects raised by M/s. HDFC, one of the lenders, the Court allowed the application and directed as under: “(a) That separate meetings of the equity shareholders, Class “A” lenders and Class “B” lenders (of the demerged undertaking, as defined in the scheme) of the applicant company be convened and held at the registered office of the company at village Sachana, Taluka Viramgam, Dist. Ahmedabad on Friday, 9th day of December, 25 at 9.30 a.m, 10.30 am and 11.30 am respectively, for the purpose of considering, and if thought fit, approving with or without modifications, the composite Scheme of Arrangement in the nature of compromise with the lenders and reconstruction of Core Healthcare Limited, the applicant demerged company, COMP/10/2006 20/265 JUDGMENT Reorganisation of capital of Nirma Limited, the Resulting Company and demerger and transfer of undertaking (as defined in the scheme) of Core Healthcare Limited, the applicant company to Nirma Limited, the resulting Company and its shareholders. (b) That at least 21 days before the meetings be held as aforesaid, notice convening the said meetings, indicating the day, the date, the place and the time as aforesaid, together with the copy of the scheme of Agreement, copy of the explanatory statement required to be sent under Section 393 of the Companies Act, 1956 and the prescribed Form of Proxy shall be sent by a pre- paid letter posted under Certificate of Posting, addressed to each of the equity and preference shareholders of the applicant Company at their last known address. (c) That at least 21 clear days before the meetings to be held as aforesaid, notice, convening the said meetings, indicating the day, the date, the place and the time as aforesaid be published, stating that copies of the scheme of Agreement, the explanatory statement required to be furnished pursuant to Section 393 of the Companies Act, 1956 and Form of Proxy can be obtained free of charge at the Registered Office of the applicant Company and/or at its Advocate's office i.e. 204, Akanksha, opposite Vadilal House, Mithakhali, Navrangpura, COMP/10/2006 21/265 JUDGMENT Ahmedabad 380 009, be published once each in the Times of India (Ahmedabad edition) and Gujarat Samachar (Ahmedabad edition). (d) Shri Chimanbhai R.Shah,(Past President of Chamber of Commerce as also the Institute of Company Secretaries of India) and failing him Shri Kamlesh Shah, the Director of the applicant company shall be the Chairman of the aforesaid meetings to be held on 9th December, 2005 and in respect of any adjournment or adjournments thereof. (e) The Chairman appointed for the aforesaid meetings do issue advertisements and send out notices of the said meetings referred to above. It is further directed, that the Chairman of the meetings shall have all powers under the Articles of Association of the applicant Company and under the Companies (Court) Rules, 1959 in relation to conduct of meetings including an amendment to the Scheme or resolution, if any, proposed at the meetings by any person(s) and to ascertain the decision of the meetings on a poll. (f) The quorum for the meeting of the equity shareholders shall be 5(five) shareholders and for the meeting of the preference shareholders the quorum shall be 3 (three) shareholders, present in person. (g) Voting by proxy is permitted provided that the proxy in the prescribed form and duly signed by the person entitled to attend and vote at the COMP/10/2006 22/265 JUDGMENT aforesaid meetings, or by his authorized representative, is filed with the applicant Company at its registered office at village Sachana, not later than 48 hours before the said meetings. (h) The value of the vote of each equity and preference shareholder of the company shall be as per the entries in the Registers and/or books of accounts of the company and where the entries in the records or registers are disputed, the Chairman of the meetings shall determine the value or number for the purposes of the meetings and his decision in that behalf would be final. (i) The Chairman do report to this Court, the result of the said meetings within 14 days of the conclusion of the meetings and the said report shall be verified by his affidavit”. The Court also observed that in view of the special circumstances and the facts of the case, the requirements, to meet the provisions of Section 101(2) of the Act with the procedure, as is required under Rules 48 to 65 of the Companies (Court) Rules, 1954, could be conveniently dispensed with. 3. Company Petition No.9 of 2006 has been filed by Nirma. The objects of the petition is to obtain sanction of the Court to the composite Scheme of COMP/10/2006 23/265 JUDGMENT Arrangement in the nature of compromise with the lenders and reconstruction of Core the demerged Company, reorganisation of capital of Nirma Limited, the petitioner-Company, demerger and transfer of undertaking (as defined in the Scheme) of Core to Nirma,