HON’BLE SRI JUSTICE D.S.R.VARMA AND HON’BLE SRI JUSTICE SAMUDRALA GOVINDARAJULU O.S.A.No.1 of 2009 and O.S.A.Nos.62, 65 and 66 of 2007 Common Judgment: (per Hon’ble Sri Justice D.S.R.Varma) Since all the appeals are filed assailing the judgment rendered by the Company Court, we propose to dispose of these appeals by this common judgment. 2. Heard Sri V.Aka Venkataramana, Sri V.Shekhar, learned Senior Counsel, representing Sri M.Mohan Rao; Sri V.S.Raju, and Sri Vedula Srinivas, learned counsel appearing for the appellants as well as Sri S.Ravi, learned Senior Counsel appearing for the respondent-SPGL; Sri Ranjit Kumar, learned Senior Counsel, representing Sri S.Niranjan Reddy appearing for respondent-ARCIL; and Sri S.R. Ashok, learned Senior Counsel, representing Sri P.Venkat Reddy, learned counsel appearing for respondent-ARCIL, respectively, in the appeals. 3. Aggrieved by the common order dated 5.10.2007 passed by the learned Company Judge in Company Petition No.43 of 2007 and Company Application Nos.852, 974, 1071, 1240, and 1199, 1200, 1201, 1202 of 2007 and Company Application (SR).Nos.2310, 3349, 4432 and 3351 of 2007, respondent No.9 in C.P.No.43 of 2007 filed O.S.A.No.1 of 2009, respondent Nos.1 and 2 filed O.S.A.No.62 of 2009, respondent Nos.3 to 7 filed O.S.A.No.65 of 2007, and respondent No.8 filed O.S.A.No.66 of 2007. 4. For the sake of convenience, in this common judgment, the appellants herein are referred to as “the respondents- objectors” and the 1st respondent herein is referred to as “the petitioner company” and the Trustee of ARCIL-Spectrum Power Generation Limited Trusts is referred to as “ARCIL”. 5. The facts that led to filing of the present appeals, in brief, are as under: The 1st respondent in these appeals, namely, Spectrum Power Generation Limited (SPGL), who is the petitioner company in C.P.No.43 of 2007 filed a Company Petition under Section 391 of the Companies Act, 1956 (for short, ‘the Companies Act’) read with Rule 79 of the Company Court Rules, 1959 seeking approval of the scheme arrangement made between SPGL and its secured creditors and members, under which the debts as well as capital was proposed to be restructured. SPGL is a company incorporated under the provisions of the Companies Act, having its registered office at Hyderabad and its objects, briefly, are to generate, distribute and supply the electricity power by setting up Thermal Power Plants through various methods. The other objects are elaborated by the learned Company Judge in the impugned judgment. 6. It appears that there was a proposal by the Government to set up a gas based power plant in Andhra Pradesh and the same was granted to National Thermal Power Corporation (NTPC) by the central government. But since NTPC was busily involved in various other projects, the said project was decided to be allocated to a private company and as a consequence to the said decision, tenders were invited. The project was awarded to the Original Promoters of the Company on 19.6.1992, but, after the allotment, because of the intervention of various circumstances, which are not necessary to mention, could not proceed with implementation of the project, as expected. 7. The petitioner company had entered into a long term Power Purchase Agreement (hereinafter referred to as “PPA”) with the erstwhile Andhra Pradesh State Electricity Board. Due to various circumstances, the rights under PPA were transferred from A.P. TRANSCO to the distribution companies with effect from 9.6.2005. Since then, the Andhra Pradesh Coordination Committee (APCC) has been constituted to represent the distribution companies and coordinate the company in respect of the PPA. It appears that the completed cost of the project stands at Rs.972-60 crores and the reason for the cost overrun is primarily due to various factors. The said cost was funded through different equities and loans from different sources. The revised completed cost details were submitted to APSEB/A.P. TRANSCO for approval and the same yet to be approved. 8. The petitioner company has been operating under severe financial constraints due to numerous factors as set out in the scheme, which resulted in its net worth becoming negative and the petitioner company failed to fulfil its financial commitments towards the repayment of loans/credit facilities due to various secured creditors. For various other reasons, the amounts due to be paid to the secured creditors has been mounted to Rs.1,23,506- 41 lakhs and as a result the petitioner company has been in default as it could not make payments of both principal and interest. Further, the petitioner company started incurring losses since 2003. The accumulated losses were to the extent of Rs.14,03,08,843/-, which had subsequently grown up to Rs.244,49,98,645/- as on 31.3.2006. The said figure had further aggravated to more than Rs.1100,40,31,924/-. 9. The only source of income of the petitioner company was the sales realisation from the purchaser which comes to an average of Rs.22-00 crores per month, which is far lesser than the amount due to be paid to the secured creditors. The said realisation sources are also very likely to be further reduced in the coming years. Due to various reasons, particularly due to the delay in infusion, the petitioner company turned into a Non- Performing Asset (hereinafter referred to as “NPA”). Hence, it had necessitated to rehabilitate the petitioner company by restructuring its debt and capital structure in order to protect and safe-guard the interests of the company, its shareholders, creditors and other stakeholders and also mainly to avoid the risk of the company going into liquidation. 10. It was at that stage, the Asset Reconstruction Company (India) Limited (hereinafter referred to as “ARCIL”) had issued an invitation for expression of interest inviting bids from prospective bidders for the resolution of the debt due from the petitioner company. In consequence thereof, ARCIL had received various bids and among them Pinnacle Overseas Assets Limited (hereinafter referred to as “POAL”) was the successful bidder. A sanction letter was also issued by ARCIL to POAL incorporating various terms necessary for restructuring the debt and capital of the petitioner company. The Board of Directors of the Company also had executed a definitive agreement with ARCIL and POAL. Pursuant to the execution of the said definitive agreement, the scheme has been prepared by the petitioner company, as it is interested in the revival/rehabilitation of its business. It is to be remembered here that the said scheme was not only in the interest of the petitioner company, but also the creditors and shareholders. 11. Consequent upon the said decision, the Board of Directors of the Company, at its meeting held on 27.1.2007, approved the scheme of arrangement subject to the approval of the shareholders, secured creditors and the Court. Accordingly, the petitioner company filed an application before the learned Company Court an application C.A.No.261 of 2007 to convene the meeting of the shareholders and the secured creditors and the meeting of the shareholders was conducted in the presence of the Chairpersons appointed by the Company Court. As per the orders of the Company Court, a separate meeting of Equity Shareholders was also conducted on the same day. Pursuant to the said meetings, the Chairpersons filed reports stating that out of 16 secured creditors of the company, all the secured creditors were present either through their representatives or the proxies and that out of 16 secured creditors, 15 secured creditors representing 98.49% of the total outstanding debit due to the secured creditor viz., UTI Asset Management Company Private Limited, holding 1.51% out of the total outstanding debt, voted against the resolution. Similarly, with reference Equity Shareholders, the reports shows that 69 shareholders were present ether directly or through proxies and out of them, 65 shareholders representing 99.99% of the total value of shares held by the shareholders voted in favour of the resolution, while 4 shareholders representing 0.01% of the total value of shares voted against the resolution. 12. One of the shareholders, by name R.R. Godavari Power Limited, Mauritius, had sent a communication dated 16.3.2007, proposing certain modifications in the scheme of arrangement, which relates to the alteration in the capital clause. The said proposal by way of modification was also approved. A bare perusal of the scheme would only show that the existing share capital would be converted into 0.05% redeemable preference shares, to be redeemed at the end of 15 years. From out of the outstanding amount to be paid to ARCIL, a sum of Rs.50-00 crores should be paid by the bidder (POAL), which intends to step into the company in the capacity of Manager as well as investor and equity holder. The schedule of the scheme further provides that in addition to the above Rs.50-00 crores already paid, a further amount of Rs.100-00 crores should be paid by POAL. In addition to it, it was proposed that the secured creditors would be paid by the company an amount of Rs.150-00 crores out of the outstanding amount in 60 monthly instalments, commencing from 30.4.2007 with interest at 10% per annum with quarterly rests. A further sum of Rs.175-00 crores was proposed to be paid as bullet payment on 31.3.2012 to the secured creditors (pro rata inter se) with 10% interest per annum. It further contemplates that a sum of Rs.325- 00 crores out of the outstanding amount to be paid by issuance of compulsorily convertible debentures to the secured creditors. 13. A further amount of Rs.8-50 crores to be paid to secured creditors within 7 days of the sanction of the scheme by the Court in lieu of past interest overdues and other charges. In view of the above, the petitioner company sought approval of the scheme by the Company Court. 14. Company Application Nos.1199, 1200, 1201 and 1202 of 2007 have been filed by the Trustee of ARCIL-Spectrum Power Generations Limited Trusts, who have acquired 80% of the financial assets of the petitioner company, seeking to implead as party-respondents to support the scheme of arrangement proposed by the petitioner Company. Being a securitisation and asset reconstruction company, the financial assets of the petitioner company were acquired by the said Trustees in accordance with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity “the Securitisation Act”). 15. Pursuant to the said acquisition and in accordance with the provisions of the Securitisation Act, ARCIL had invited Expression of Interest for resolution of the dues of the company and among the four offers received, ARCIL found the offer submitted by one Lehman Brothers Commercial Corporation (Asia) Limited on behalf of POAL as the most beneficial to the lenders. 16. ARCIL, having been satisfied with the said offer of the POAL, had issued a letter of acceptance and the bidder deposited a sum of Rs.50-00 crores as was proposed. Further, the nominees of the POAL were also co-opted on the Board of Directors of the Company. Later, the Company has filed the present application under Section 391 of the Companies Act seeking sanction of the scheme of arrangement to reconstruct the debt and capital of the company. 17. Implead applications are filed on behalf of some of the shareholders, who are the appellants herein. C.A.No.852 of 2007 is filed by Sri M.Kishan Rao individually, as well as on behalf of his HUF, representing the promoter shareholder of the company in question. Further, similar applications are also filed in C.A.Nos.1071 and 1240 of 2007 on behalf of two of his group companies viz., M/s. Bambino Agro Industries Limited and Bambino Finance Private Limited, which are stated to be the shareholders, to come on record as respondents, opposing the proposed scheme. On behalf of 5 individual shareholders, C.A.No.974 of 2007 is filed to get themselves impleaded as party- respondents opposing the scheme. 18. It was the specific averment of Sri M.Kishan Rao, who got impleaded as respondent in the company petition before the learned Company Judge that he was a shareholder holding 27,370 shares, while his HUF was holding 18,85,090 shares, apart from the share hold by the group companies and though their names are being shown in the register of shareholders of the company, they were not allowed to participate in the meeting of the ARCIL by addressing letter dated 20.3.2007 informing them that ARCIL had been exercising its right to vote and, therefore, they were not asked to participate in the meeting of the company, which was convened as per the directions of the Company Court. It is his specific contention that since they were prevented from participating in the meeting of the shareholders they could not raise any objection with regard to the scheme. It is further averred that apart from being shareholders of the petitioner company, the respondents have substantial interest and stake in the company as the promoters and guarantors for the loans availed by the company from the banks and financial institutions. 19. The learned Company Judge having gone through the rival contentions and the material available on record, through the impugned order dated 5.10.2007, allowed the implead applications filed by the applicants as party-respondents in the Company Petition, however, approved the scheme of arrangement, while rejecting the objection petitions filed by the implead respondents- objectors opposing the scheme of arrangement. Aggrieved by the same, the present appeals have been preferred by the implead respondents-objectors. 20. It was specifically averred by the respondents-objectors in the said guarantees that subsequent to the change in the management of the petitioner company in October, 2003, were never extended and that the said guarantees also ceased to exist when ARCIL took over the petitioner company under Securitization Act and through a sham and dubious bidding process allotted the same to POAL. The respondents-objectors further questioned the bidding process conducted by the ARCIL when the petitioner company was headed by an illegally elected Chairman and Directors and the said issue was subject matter of a civil suit and, therefore, such illegally elected Chairman and Directors cannot correspond with the ARCL and could all the things in finalizing the bidding process. 21. Broadly, it is the specific contention of the respondents- objectors that the company application is a bundle of distorted facts and not in the best interest of the minority shareholders and the scheme was devised with a malafide intention of hijacking the petitioner company and its assets at a throw away price. It is the further contention of the respondents that under the earlier management, the petitioner company had repaid considerable amount to the banks and financial institutions. But, unfortunately, the financial institutions have appropriated the amounts remitted by the petitioner company unilaterally against the interest and penal interests without absorbing even part of the amount towards the principal debts. Therefore, it was claimed by the leading respondent-objector that he and his associates would continue to be the shareholders of the petitioner company, despite which the institutions and the company deprived the respondents and his associates from participating and exercising their right as shareholders and that the whole exercise undertaken by the ARCIL after taking over the secured assets and the management of the petitioner company, invited bids for expression of interest without following any uniform rule only with an intention to favour the present bidder i.e., POAL and that the whole bidding process conducted by ARCIL is far from law and suffers from lack of lack of transparency. It is also stated that the losses, which were minimal by the time the management of the petitioner company was taken over by the financial institutions, for which the financial institutions owed obligation to explain the reasons and circumstances, under which the said losses have been mounted up, which the financial institutions have not explained. 22. It is the further contention of the respondents-objectors that the scheme in question is violative of the provisions of Section 391 of the Companies Act, in addition to violation of the respondent and his associates’ rights as shareholders and creditors and that there was a hidden agenda behind the scheme to take over the project of the company. 23. It is their further contention that if really the Board of Directors have approved the scheme on 27.1.2007, the same ought to have been mentioned in the annual report for the year ending 31.3.2006, which is conspicuously absent, and which contravenes the terms of Section 217 of the Companies Act. 24. It is the further contention of the respondents-objectors that ARCIL had accepted the bid of one Lehman Brothers Commercial Corporation Asia Limited. However, the successful bidder was stated to be a company, by name POAL, in which the Lehman Brothers Commercial Corporation Asia Limited has a miniscule share of 10%. 25. It is the further contention of the respondents-objectors that even assuming that the petitioner company was a non- performing asset (though it was still generating about Rs.22-00 crores per month at the time of the filing for sanction of the scheme), a prudent business strategy would be to go for Asset Reconstruction only after all other alternatives for settlements, like compromise settlement schemes, restructuring/re-schedulement, Lok Adalat etc., have been exhausted and that the petitioner company instead of exhausting such alternatives, hastily and in complete disregard to the interest of not only the petitioner company and the shareholders, but also the interest of the creditors went ahead with the Asset Reconstruction. 26. It is the further contention of the respondents-objectors that when these disparities are brought to the notice of the learned Company Judge, he should have lifted the corporate veil and exposed the fraud being perpetrated by the petitioner company and further that the object of the scheme was to ensure that there was no independent investigation into the acts of the previous management headed by Mr. Mohan Rao and his group. 27. It is also the contention of the respondents-objectors that restructuring of the capital either in the scheme or bidding is expressly prohibited by proviso to Section 394 of the Companies Act. 28. It is their further contention that by virtue of issuing fresh equity share capital as per the scheme, the status of the respondents-objectors as Preferential Shareholders would be reduced to Equity Shareholders, which is unfair. 29. Sri V.S. Raju, learned counsel appearing for one of the respondents-objectors contended that the financial statement of the company was not placed before the Company Court. 30. In retaliation to the above contentions, Sri Ranjith Kumar, learned Senior Counsel appearing for the petitioner company (SPGL) contended that Section 391 (3) of the Companies Act contemplates that if a majority in number, representing ¾ in value of the creditors or class of creditors agree to any compromise and if sanctioned by the Court, the same is binding on all the creditors, however, subject to satisfaction of the Court on aspects like disclosure of latest financial position of the company, the auditors reports and the pendency of any investigation proceedings under Sections 235 to 251 etc., and such compromise or scheme, as the case may be, arrived at by the company is binding on all others, including the dissenting parties. 31. It is also contended by the learned Senior Counsel for the petitioner company that it is not restructuring of capital that is in question, but it is the question of restructuring of the debts, which is permissible under law. It is further contended that the approved scheme was arrived for restructuring/ settlement of the debts under restructuring of its capital structure under the provisions of Sections 81, 100 and 391 to 394 of the Companies Act. 32. Section 394 deals with facilitating reconstruction and amalgamation of the companies, whereas Section 100 deals with special resolution for reduction of share capital also and since the scheme specifically envisages restructuring of the capital debts, the same is permissible under Section 100 and 394 of the Companies Act and the scheme formulated and approved by the Company was under different provisions, including Section 100. 33. As per Section 13 (4) of Securitisation Act, the secured creditors may take recourse to recover his secured debt. Therefore, the ARCIL, being a secured creditor, has vast powers under the Securitisation Act and the powers of ARCIL have already been considered by the learned Company Judge. Further, it is not only the respondents-objectors, who are at loss, all the shareholders, regardless of their status as Preferential Shareholders or Equity Shareholders, are at loss. 34. It is further contended that the pledge made by the respondents-objectors in favour of the secured creditors is comprehensive in nature but not a pledge simplicitor. 35. It is further contended that pledge is outside the scope of Section 31(b) of the Securitisation Act. Therefore, ARCIL cannot get any rights of the respondents-objectors, nor can it be treated as an authorization and also that the conversion of equity capital into preferential share capital is not provided under law. 36. At the outset, we must state that though many of these grounds are argued before us, many of the controversial issues, as contended above broadly, were not subjected to discussion before us. However, some of the important questions that have been raised and urged before us also incidentally touch upon those other grounds. 37. Apart from the various contentions, the main contention raised by the respondents-objectors is that the scheme, as approved by the learned Company Court, is not in the best interest of the petitioner company and its shareholders. 38. The ultimate issues that fall for consideration are :- (1) Whether the right of the respondents-objectors to putforth their objections in formulating the scheme of arrangement was taken away by the petitioner company by preventing them to participate in the meeting of Board of Directors? If so, what is the effect? (2) Whether ARCIL was justified in addressing letters requesting the respondents-objectors not to participate in the meeting of the Board of Directors convened for approval of the scheme of arrangement on the ground that by virtue of the pledge agreement, the respondents-objectors had given up their right to participate in the meeting and exercise their right of voting? (3) Whether the scheme of arrangement arrived at in the meeting and as approved by the Company Court is in the best interest of the petitioner company and its shareholders? 39. In Re Issue Nos.1 and 2 : Insofar as these two issues, in a way, the question that falls for consideration is as to whether the scheme was formulated by the petitioner company in a fair and reasonable manner? 40. Several objections have been raised before the learned Company Judge to the effect that the procedure adopted before formulating the scheme was not in consonance with either law or expected fairness. The first objection raised by the respondents- objectors is that there was no transparency in the bidding process. For Eg. The shareholding of POAL was not specified and that the petitioner company was being managed by the illegally elected Chairman and Directors and that the relevant material as contemplated under proviso to sub-section (2) of Section 391 of the Companies Act was not complied with. 41. For the sake of convenience and ready reference, Section 391 of the Companies Act, to the extent relevant, is extracted hereunder. “391. Power to compromise or make arrangements with creditors and members. (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 [Tribunal] 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 [Tribunal] directs. (2) If a majority 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, where proxies are allowed [under the rules made under section 643], by proxy, at the meeting, agree to any compromise or arrangement,