COMP/166/2006 1/30 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 166 of 2006 In COMPANY APPLICATION No. 39 of 2006 In COMPANY PETITION No. 256 of 2000 With COMPANY APPLICATION No. 637 of 2006 In COMPANY PETITION No. 166 of 2006 With COMPANY APPLICATION No. 638 of 2006 In COMPANY PETITION No. 166 of 2006 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ ========================================================= 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 ? ========================================================= SHREE NARMADA ALUMINIUM INDUSTRIES LTD. - Petitioner(s) Versus . . - Respondent(s) ========================================================= Appearance : MR ASHOL L SHAH with PAVAN S GODIAWALA for Petitioner(s) : 1, MR RM DESAI for Respondent(s) : 1, MR SN THAKKAR for Respondent(s) : 1, MR PURVISH J MALKAN for Respondent(s) : 1, ========================================================= COMP/166/2006 2/30 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 16/05/2008 ORAL JUDGMENT 1. The petitioner has filed this petition under Sections 391 to 394 of the Companies Act for sanctioning the scheme of arrangement in the nature of compromise between Shree Narmada Aluminium Industries Ltd., its secured and unsecured creditors and shareholders. 2. The Company was incorporated on 15.4.1981 in the name and style of Narmada Aluminium Extrusion Pvt. Ltd., under the provisions of the Companies Act, 1956. This name was subsequently changed to Shree Narmada Aluminium Industries Ltd., with effect from 9.11.1995. The Company, due to reasons beyond its control was registered with the Board of Industrial Financial Reconstruction under the Sick Industrial Companies (Special COMP/166/2006 3/30 JUDGMENT Provisions) Act, 1985. Thereafter, the Board opined for winding up of the Company and the Company Petition No.256/2000 came to be filed with this Court. The petitioner Company preferred the Appeal before the Appellate Authority and the said authority has dismissed the Appeal. Thereafter, the petitioner preferred the Special Civil Application challenging the validity of the orders passed by the BIFR and AAIFR but the said petition came to be dismissed. The petitioner preferred the Letters Patent Appeal against the order passed in Special Civil Application which also came to be dismissed. 3. The petitioner is the Company which was facing financial problems and has started doing the business and regularly paying the current dues statutory and contractual. The petitioner had deposited the substantial amount of Rs.50 lacs with the registry of COMP/166/2006 4/30 JUDGMENT this Court, pursuant to the order dated 4.10.2005 passed in Company Petition No.256/2000 and shown its bonafide. The petitioner did file detailed affidavit in the Company Petition No.256 of 2000 stating therein that, the secured creditors have agreed for one time settlement for the amount of Rs.200 lacs as full and final payment and the petitioner has also placed on record the necessary correspondence from the respective secured lenders to the aforesaid effect. The two unsecured creditors have preferred winding up petitions being Company Petition Nos.131 and 132 of 1990 before this Court which matters are pending because of the pendency of the proceedings before BIFR and, thereafter, pendency of the present petition. The said two unsecured creditors have also filed Civil Suit Nos.904 and 905 of 1993 before the Bombay High Court and the petitioner Company has also filed counter claim being Civil Suit No.1793 of 1993. All COMP/166/2006 5/30 JUDGMENT these proceedings are still pending. Irrespective of the disputes and alleged claims and without prejudice the said alleged unsecured creditors are also put at par with the other unsecured creditors of the Scheme and thus are offered the same compromise as is offered to the other unsecured creditors. Upon sanctioning of the scheme the above petition and civil suits shall be withdrawn as not pressed. The petitioner is under the process of restructuring its manufacturing unit and to attain the object of fullfledged revival of the unit. The petitioner has also made offers to other creditors to settle their dispute with the Company. The petitioner had shown its readiness and willingness to offer to the respective creditors and shareholders as per the scheme. The petitioner Company has sustained losses in the past years but is coming out from the woods and has made strenuous efforts to revive the company and for that the Company COMP/166/2006 6/30 JUDGMENT has also shown its bonafide and potentiality before this Court. It is further stated that the projected profit and loss statement of the petitioner company is produced before the Court. The State sales tax authority has proposed to initiate the coercive action against the petitioner Company for non payment of deferred sales tax dues to the extent of Rs.2.50 crores. The petitioner Company is in the process of settling the said alleged dues under Settlement Scheme of the GBIFR and the application in this regard has been made. In this view of the matter, the Board of Directors of the petitioner company is of the opinion that the restructuring and revival would result in benefit to all concerns including the shareholders, creditors, employees of petitioner. The employees of the petitioner company are supporting the petitioner and as the company is situated in the remote place, the said company if is given opportunity then COMP/166/2006 7/30 JUDGMENT the workers and employees would not be deprived of their livelihood. It is further submitted that sundry creditors/suppliers have full trust in the management of the petitioner company and are also ready to supply the raw materials to the petitioner company. 4. By an order made in the Company Application No.39 of 2006 on 20.2.2006 the petitioner was directed to convene a meeting of shareholders, secured creditors and unsecured creditors for the purpose of considering and, if thought fit, approving with or without modifications, the compromise/arrangement proposed to be made between the petitioner company and its shareholders, secured creditors and unsecured creditors to the proposed scheme and the said order directed the Registrar General of the High Court to appoint one person not below the rank of Asstt. Registrar to convene, hold and COMP/166/2006 8/30 JUDGMENT conduct separate meeting and to report to the Court within four weeks from the date of passing of the order. Thereafter, the petitioner preferred Company Application No.128 of 2006 for extension of time to convene, hold and conduct meeting of the petitioner company and its shareholders, secured creditors and unsecured creditors and the Court has extended the date of convening the meeting from 4.4.2006 to 10.5.2006 vide its order dated 20.3.2006. Notice of meeting was sent individually to the shareholders, secured creditors and unsecured creditors as required together with a copy of the compromise or arrangement and of the statement required under Section 393 and a form of Proxy. Notice of the meeting was also advertised as directed under the said order in two daily newspapers, namely, 'Navgujarat Times' (Gujarati language) Surat Edition and 'Indian Express' (English language), Baroda Edition. On 10.5.2006, COMP/166/2006 9/30 JUDGMENT meeting of shareholders and unsecured creditors of the company was duly convened in accordance with the order and was held at Bharuch and Shri P.C.Joshi, Asstt. Registrar of this Court acted as Chairman of the meeting. The meeting of the secured creditors was terminated by the Chairman for the mandatory lapse on the part of the secured creditors. 5. The said meeting of the shareholders was attended by 22 shareholders entitled together 18,05,700 equity shares. Of the 22 equity shareholders, 2 shareholders attended in person, 16 attended through Proxy and 4 attended through representative. The said scheme of arrangement in the nature of compromise was read and explained by Shri Dharamsinhbhai J. Patel, Executive Director upon request by the Chairman of the meeting and it was unanimously resolved that the scheme of compromise and/or arrangement COMP/166/2006 10/30 JUDGMENT between the company and its equity shareholders as well as unsecured creditors was approved. The Chairman of the meeting reported the result of the meeting to this Court. The meeting of the secured creditors was terminated on 10.5.2006 as none of the secured creditors had lodged with the Company at least 48 hours before the time fixed for the meeting, a copy of the Resolution of their respective Boards of Directors authorizing the persons present to act as their respective representative, and hence in view of the mandatory requirements of Rule 70 (2) of the Companies (Court) Rules, 1959 the representative of the secured creditors could not be permitted to act as representative. The meeting of the secured creditors was terminated by the Chairman with the suggestion that the Company should obtain suitable direction for holding a fresh meeting of the secured creditors, which suggestion was acceptable to all persons COMP/166/2006 11/30 JUDGMENT present. Thereafter, the petitioner Company has preferred separate Company Application No.290 of 2006 in Company Application No.39 of 2006 in Company Petition No.256 of 2000 for convening a fresh meeting of secured creditors. This Court vide its order dated 16.6.2006 considered submission and ordered for fresh meeting of the secured creditors to be convened on 22.7.2006. Notice of the said meeting was sent by U.P.C. and hand delivery as per order dated 16.6.2006 to the secured creditors together with the copy of scheme of arrangement in the nature of compromise and of the statement required under Section 393 and the form of Proxy. Publication of the notice of the meeting was dispensed with. On 22.7.2006, a meeting of the secured creditors of the Company was duly convened in accordance with the said order. The Chairman of the meeting has reported the result of the said meeting vide his report dated 18.6.2006. As per the Chairman's report, the said COMP/166/2006 12/30 JUDGMENT meeting of the secured creditors was attended by 3 secured creditors having total voting value of Rs.37,32,13,894/- attending and voting at the meeting through their representatives. During the course of discussion in the meeting of the secured creditors representative of IFCI moved in writing a motion for modification of the scheme. The said amendment was put to vote by poll and on counting the votes, the modification proposed by IFCI was rejected by majority. Thereafter, Dena Bank proposed an amendment in the scheme offered to the secured creditors. The second amendment was proposed by Dena Bank. The second amendment was put to vote by poll and vote was taken on the said second amendment. On counting the vote the said meeting was was of the opinion that the second amendment proposed by the Dena Bank be passed and approved. Of the 3 secured creditors having a total voting value of Rs.37,32,13,894.16 attending and voting at COMP/166/2006 13/30 JUDGMENT the meeting through their representatives, two secured creditors having voting value of Rs.31,06,84,102.16 ps. i.e. to say two third in number and 83.24% in value of those present and voting, voted in favour of the proposed scheme amendment and one secured creditor, having voting value of Rs.6,25,29,792/- voted against the proposed second amendment. 6. The petition came to be admitted on 4.9.2006 and notice was issued to the Central Government through the Regional Director, Department of Company Affairs, Mumbai. Notice of hearing of the petition was also ordered to be published in two daily newspapers, namely, 'Navgujarat Times' (Gujarati language) Surat Edition and 'Indian Express' (English language), Baroda Edition. Publication of notice in Government Gazette was dispensed with. COMP/166/2006 14/30 JUDGMENT 7. On notice being served on the Central Government an affidavit was filed by Shri P.L.Malik, Asstt. Registrar of Companies along with the letter dated 14.12.2006 issued by the Regional Director, wherein following objections were raised. (i) The Company is a listed Company and registered in different stock exchanges. However, the petitioner has not obtained NOC from such stock exchanges. (ii) As per Clause (8) of the scheme the paid up capital of the Company will be reduced to Re.1 by cancelling Rs.9. However, no special Resolution under Section 100-105 read with Rule 85 of the Companies Rules have been passed by the Company. (iii) The company was registered in the BIFR under the Sick Industrial (Special Provisions) Act, 1985 and the said Board opined for winding up of the Company in Company Petition No.256/2000 in public interest. COMP/166/2006 15/30 JUDGMENT (iv) There is no concrete revival scheme before this Court from the Board of Directors of the Company. 8. A further affidavit is filed by Kanubhai Chaturbhai Patel, authorised representative of the petitioner Company stating therein that IFCI one of the secured creditor who has opposed the scheme in the meeting of the secured creditors, subsequently vide its letter dated 20.9.2007 has withdrawn the objections to the scheme and supported and approved the sanctioning of the scheme. 9. An affidavit is filed by the Manager of Kotak Mahindra Bank Ltd., raising objections against the scheme and stating therein that ICICI Bank Ltd., had filed Original Application No.229 of 2003 in DRT-III, Mumbai claiming huge amount from the petitioner Company. The amounts claimed are more than Rs.7.50 crores as on 31.5.2003 along with the COMP/166/2006 16/30 JUDGMENT interest thereon. Pursuant to the assignment of debts by ICICI Bank Ltd., in favour of the objector Bank, the objector Bank has been permitted to be on record in place of ICICI Bank Ltd. in DRT proceedings. The objector Bank has already filed an application for appointment of a receiver in respect of the secured assets and the matter is pending before DRT-III, Mumbai. As recovery proceedings initiated under the Recovery of Debts Dues to Banks and Financial Institutions Act, 1993 which is a special Act and has also non-obstante clause, are pending before the competent forum, this Court, therefore, may not have jurisdiction to consider the present scheme which has direct effect of causing prejudice to the claims of the objector Bank. 10. It is further submitted in the said affidavit that the scheme of compromise is based on the figures of the outstanding COMP/166/2006 17/30 JUDGMENT amounts as determined between the secured creditors in the meeting of the secured creditors on 9.1.2006 in the office of IDBI. All the secured creditors present had agreed to outstanding amounts as also the ratio based on the first charge on the fixed assets. The outstanding amounts was fixed Rs.383.35 lacs for all the secured creditors including IDBI Ltd., IFCI Ltd., Kotak Mahindra Bank Ltd., and Dena Bank. The share of the objector, Kotak Mahindra Bank Ltd., was Rs.148 lacs which is 38.60% of the total outstanding amount. The objections of the objector Bank are in respect of debt which is above 25% of the outstanding debts sought to be compromised. The dues have to be calculated on current debt and not as per the original funding amount. The say of the objector that the Company has settled the dues of IDBI, IFCI and Dena Bank. As such the objector is the sole secured creditor of the Company comprising 100% of the debt of COMP/166/2006 18/30 JUDGMENT the Company. It is, therefore, submitted that in view of the objections of the objector Bank alone, the present scheme of compromise does not have the support of the statutory majority as provided under Section 391(1) of the Act. 11. It is further submitted that in the meeting held in pursuance to the order made by this Court, IFCI Ltd., had submitted its objections to the scheme of comprise. The subsequent letter addressed by IFCI Ltd., cannot be construed to be a decision of the secured creditors which was to be taken in the meeting ordered to be held by this Court in terms of Section 391(1) of the Act. It is, therefore, submitted that the scheme does not have support of the secured creditors holding debt more than the statutory majority as provided in Section 391(1) of the Act. 12. Pursuant to the additional affidavit dated COMP/166/2006 19/30 JUDGMENT 4.3.2008 filed by Kotak Mahindra Bank Ltd., the petitioner Company has filed counter affidavit dated 10.3.2008. It is stated in this affidavit that inspite of objections being raised, Kotak Mahindra Bank Ltd., has still not produced a true and full copy of deed of assignment on the basis of which it has assigned its debt to Kotak Mahindra Bank Ltd. The petitioner Company has challenged before the Appellate Tribunal the order of the DRT whereby Kotak Mahindra Bank has been permitted to be on record in place of ICICI Bank Ltd. The said appeal is still pending. Since Kotak Mahindra Bank Ltd., is not producing true and full copy of the alleged deed of assignment, the petitioner made private inquiries and it has been reliably learnt that the alleged deed of assignment on which Kotak Mahindra Bank relies on is a compromise document by which for a stamp fee of Rs.1 lac claims of ICICI Bank Ltd., against 114 parties are sought to be assigned COMP/166/2006 20/30 JUDGMENT to the Kotak Mahindra Bank Ltd. The petitioner has also learnt that by the said deed of assignment Kotak Mahindra Bank is sought to be assigned for an upfront payment of only Rs.6 crores, claims of ICICI Bank Ltd., worth more than Rs.2000 crores (consisting of claims for Rs.215.72 crores as the principal amount and the balance as interest). 13. It is further submitted in the said affidavit that the scheme of compromise and arrangement is based on figures of outstanding amount as mentioned in the meeting of Banks and Financial Institutions on 9.1.2006 as alleged or otherwise. So far as present scheme is concerned it is based on the agreed sum of Rs.200 lacs which all the Banks and Financial Institutions have agreed to accept amongst themselves but could not agree as to its distribution of the said sum amongst themselves. COMP/166/2006 21/30 JUDGMENT 14. The facts stated and averments made in the further affidavit filed on behalf of the petitioner Company were disputed by Kotak Mahindra Bank Ltd., and an affidavit in sur rejoinder was filed. It is, inter alia, submitted therein that the present scheme and the action taken by the petitioner are nothing less than a fraudulent act on the objecting secured creditors. The stand taken by the petitioner in the present affidavit is not bonafide. The scheme defines secured creditors in Clause (1.7) which has a reference to the total sum due and payable by the Company to the secured creditors as on 31.1.2006. Considering the outstanding amount even as per the Company which is based on the principal amount and the interest amount thereon, the extent of value of debt in favour of the objector bank is 26.36%. The amount which is unsecured and/or not secured by the first charge on the fixed COMP/166/2006 22/30 JUDGMENT assets of the petitioner Company cannot be included so as to determine the outstanding amount keeping in view class of secured creditors having first charge on the fixed assets. The objector Bank has produced a copy of the decision dated 9.1.2006 in Company Application No.638/2006 and perusal of the decision taken in the meeting held on 9.1.2006 makes it clear that the principal outstanding amount which came to be agreed by all the secured creditors as of the same period i.e. January, 2006 was as under:- (Rupees in Lakhs Security % of debt IDBI 149 First pari pasu charge on the fixed assets. 27.2% IFCI 63 --do-- 11.5% Kotak Mahindra Bank Ltd., 148 --do-- 27.0% Dena Bank 187 Only Rs.22.94 lakh is secured by a charge on the fixed assets. Balance amount is unsecured and/or secured only to current assets. 34.0% 547 100% Percentage of debt in favour of Dena Bank COMP/166/2006 23/30 JUDGMENT include the debt secured only on current assets and not on the fixed assets. 15. It is further submitted that in the same meeting it was proposed that by way of one time settlement the outstanding amount shall be distributed amongst secured creditors having first charge. The proposal was as under:- O/s Sharing based on principal Sharing based on first charge % sharing IDBI Ltd. 149.41 (38.97%) 55.37 77.97 38.98 IFCI 63.00 (16.39%) 22.60 32.86 16.43 Kotak Mahindra Bank Ltd. (ICICI A/c.) 148.00 (38.40%) 51.41 77.22 38.61 Dena Bank 22.94(5.93 %) 70.62 11.96 5.98 383.35 200 200 100 16. On the basis of these two charts, a submission was made that the percentage stake of the objector Bank was to the extent of 38.40% and the proposal to settle the dues of COMP/166/2006 24/30 JUDGMENT the secured creditors was almost to the similar extent while keeping in view the one time settlement amount of Rs.200 lacs. 17. It is further submitted that the Company in connivance with Dena Bank and with a view to pay higher amount to Dena Bank than what it was entitled to claim under the Scheme on merits, the petitioner presented the present scheme of compromise. Several objections were raised in the meeting against not allowing Kotak Mahindra Bank's representative to participate in the meeting. Thus, raising various issues it was emphatically stated in the said affidavit in rejoinder that Dena Bank is required to be considered as secured creditor for the purpose of presence scheme to the extent of Rs.22.94 lacs which would only constitute 5.93%. As against this, the value of debt of Dena Bank is considered at Rs.20.12 crores which would constitute 44.89%. It is, therefore, submitted that the COMP/166/2006 25/30 JUDGMENT scheme is contrary to the order passed by this Court. The scheme is in any case contrary to the binding order of this Court and, therefore, the scheme is liable to be rejected. 18. On behalf of the Dena Bank an affidavit is filed on 24.2.2007, wherein it is stated that Kotak Mahindra Bank Ltd., is not a contributory of the Company. It is not a secured creditor or unsecured creditor of the Company. It has no locus standi to intervene in the proceedings. It is further submitted that the jurisdiction of the Court in dealing with the scope of power under Section 391 of the Companies Act, 1956 with regard to the arrangement or the scheme it has no power to adjudicate rights of the parties in a scheme under Section 391 of the Companies Act, 1956 is to see that the scheme is fair and reasonable and made in good faith. Sections 391 and 394 make it clear that the Court has COMP/166/2006 26/30 JUDGMENT to consider the pros and cons of the scheme to find out whether the scheme is fair and reasonable and it does not violate any public policy and is not contrary to the provision of law. The Court has not to reject the scheme at ipse dixit of certain persons. It is further submitted that whether a particular person having a first charge or second charge is not relevant for the purpose of deciding whether the scheme is fair and reasonable. Whether the Company has made proposal for settlement and such proposal is accepted by the respective classes by majority in number and in value. The majority in number and in value of secured creditors has accepted the proposal and settlement. Neither IFCI Ltd., nor Kotak Mahindra Bank Ltd., has been able to show that the scheme is unreasonable or is unfair or is contrary to the provisions of law or it violates any public policy. It is further submitted that the status of Kotak Mahindra COMP/166/2006 27/30 JUDGMENT Bank Ltd., is not a creditor of the Company till it is established beyond doubt that it is a creditor then the issue will be whether it is a secured creditor or unsecured creditor. If unsecured creditor, it would be paid as per the settlement offered to unsecured creditor. In view of this fact, objections raised by Kotak Mahindra Bank Ltd., deserve to be rejected. 19. In light of the above facts and circumstances of the case and pleadings of the parties, learned