IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.460 OF 2005 IN COMPANY APPLICATION NO.338 OF 2004 ALONG WITH COMPANY APPLICATION (LODGING) NO.709 OF 2005 IN COMPANY PETITION NO.460 OF 2005 In the matter of Scheme of Compromise/Arrangement between Sharp Industries Limited and its secured, unsecured creditors and equity shareholders. Sharp Industries Limited, a Company Incorporated under the provisions of the Indian Companies Act, 1956 having its Registered office at Plot No.6, Survey No.70, Village Waliv, Vasai (E), Dist.Thane - 401 208. ...Petitioner ...... Messrs Jai Chinoy with A.Y.Bookwala & Joydeep Mitra i/b Dewen Dwarkadas & Partners for Petitioner. Mr.R.D.Soni i/b Ram & Co. for Videocon International Limited. Mr.J.P.Sen i/b Universal Legal for G.E.Capital Services India. Mr.K.K.Shroff i/b Bharat Shah & Co. for Caveator : 2 : Adhesives & Chemicals. Ms.Gayatri Singh for Workers. Messrs C.J.Joy with R.C.Master & M.M.Goswami i/b Dr.T.C.Kaushik for Regional Director. ...... CORAM: A.M.KHANWILKAR, J. CORAM: A.M.KHANWILKAR, J. CORAM: A.M.KHANWILKAR, J. NOVEMBER 17, 2005. NOVEMBER 17, 2005. NOVEMBER 17, 2005. ORAL JUDGMENT : ORAL JUDGMENT : ORAL JUDGMENT : 1. The Petitioner has approached this Court to sanction the modified and amended scheme of compromise/arrangement as amended between Sharp Industries Limited-the Petitioner Company and its secured, unsecured, statutory creditors and equity shareholders. It is also prayed that the reduction of the equity share capital in terms of the modified and amended scheme as approved by the special resolution passed by the equity shareholders of the Petitioner Company in their meeting held on 1st June 2005 be confirmed, and that, the order sanctioning the modified and amended scheme of compromise/arrangement be deemed to be an order confirming reduction in capital : 3 : within the meaning of Section 102 of the Companies Act, 1956. 2. The Petitioner Company was incorporated on 9th March 1988 under the provisions of Companies Act, 1956. The Certificate of commencement of business was granted by the Registrar of Companies, Maharashtra, Mumbai on 9th March 1988. The authorised share capital of the Petitioner is 1,20,00,000 (One Crore Twenty Lakhs) equity shares of Rs.10/- each. The issued, subscribed and paid up share capital is 1,08,16,382 (One Crore Eight Lakhs Sixteen Thousand Three Hundred Eighty-two) equity shares of Rs.10 each fully paid. The Petitioner is engaged in the business of manufacturing, converting, processing, designing, buying, selling, exporting, importing and/or otherwise dealing in the packaging materials, printing by various printing processes including Rotogravure Printing process way coating and lamination, slitting and sheeting of paper, board, plastic films, polythene, cellophane metal and aluminium foils, Manufacture of bags and pouch making and contract packing and related activities : 4 : and other packing material used for packaging industrial consumers, commercial or domestic articles and materials, whether solid or liquid or gaseous. It is stated that the Petitioner’s plants operated with high level of capacity utilisation of 82-85% each till December 2000. The Petitioner is an established manufacturer of flexible laminates. It is stated that Petitioner enjoys product approvals and continuous orders from prestigious clients like Hindustan Lever, Proctor & Gamble, Dabur, Castrol, Prefect, etc. It is stated that the capacity utilisation sharply declined from the year 2001 onwards due to recession in the end-user segments and unhealthy competition, which resulted in continuous losses, erosion of working capital of the company, which in turn, affected production. The sales of the Petitioner during the year 2003 and current year 2003-2004 were mainly in the nature of job work sales due to complete erosion of the working capital, and declined from Rs.144 crores for 18 months ended 31st December 2000 (annualized Rs.96 crores) to Rs.53 crores in year ended 31st December 2001. It is stated that with a view to overcome the adverse market situation, : 5 : Petitioner introduced new products based on holographic lamination and printing technology, for which, undertook substantial expenditure on product development. This experiment, however, did not materialise, for reasons beyond the control of the Petitioner, which resulted in further financial pressure on the Petitioner incurring heavy losses in the year 2001. It is stated that the losses gradually eroded the available resources, as a result of which, Company entered the vicious cycle of lower sales due to restricted activity of working capital, which had cumulative effect of increase in losses by wiping out the working capital. It is then stated that during the nine months ended September 2003, the sales of the Petitioner comprised mainly from job work that is toll manufacturing for other flexible packaging material manufacturing companies. To sustain itself, Petitioner obtained financial assistance from various banks and financial institutions, but the Petitioner was unable to service its long term debts and was unable to pay interest and instalments of the principal amount due to its creditors. Suffice it to observe that to overcome : 6 : the adverse situation, Petitioner thought it advisable and expedient to restructure the debts. The Petitioner Company therefore made reference to the Board of Industrial and Financial Reconstruction (BIFR) on the assertion that its accumulated losses has exceeded its net worth, as on 31st December 2002. The said reference however came to be rejected on 29th December 2003. Against that decision, Petitioner Company has preferred an appeal, which is still pending before the Appellate Authority. In the meantime, the Petitioner Company had discussion with Banks and Financial Institutions for financial restructuring. This effort paid dividends as the Asset Reconstruction Company (India) Limited (ARCIL) registered with Reserve Bank of India under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by their letter dated July 9, 2004 informed the Petitioner that the restructuring proposal submitted by them was under examination and may be considered acceptable, subject to approval from their management. Similarly, ICICI Bank Limited by its letter dated 5th April 2004 and State Bank of India vide letter : 7 : dated 12th May 2004 informed the Petitioner that they have absolutely assigned their respective debts to ARCIL. In this backdrop, the Petitioner company propounded the present scheme of compromise/arrangement for restructuring the Petitioner’s debts vis-a-vis secured, statutory and unsecured creditors as also shareholders. The Petitioner, anticipating that all the secured lenders may not enter into arrangement with ARCIL under the Act of 2002, proposed a scheme under Sections 391 and 392 of the Companies Act, 1956 to cover all the lenders. The objects to be achieved by the present scheme of compromise are stated as follows: "(a) The Scheme would enable the Petitioner Company to match its assets and liabilities in terms of cash flow requirements for servicing the debts. This would also be in the long term interests of all the stakeholders, as this would enable the Petitioner to channalise its energies more effectively in its business and make it financially healthy; (b) The Scheme in its present form will provide stability of the business operations and improve the profitability of the Company, while ensuring liquidity and solvency of the operations of the Petitioner. The Scheme will also ensure security of employment to over 250 : 8 : employees with the Petitioner. Without reducing the liabilities of the Petitioner, it is not possible for the Petitioner to carry on its business effectively and profitably; (c) The Petitioner manufacture multilayered laminated flexible packaging material used for packaging of various consumer products like detergents, shampoo, snack food, biscuits as well as commodities like oil, wheat flour (atta), lubricants oil, pharmaceuticals etc. The end user segments are essentially FMCG producers and market is characterized by decent growth of 5-6% p.a. The market for flexible packaging laminate can be categorized into three broad segments viz. Segment A : Segment A : Segment A : for high quality products for FMCG brands with national and multinational presence. Segment B : Segment B : Segment B : for consumer products of large Indian Companies. Segment C : Segment C : Segment C : for lesser known local brands. This segment is derived more by price sensitivity than quality aspect. (d) The Petitioner established itself as a leading producer in segments A & B. The Petitioner’s products are well established and have found acceptance by multinationals like Hindustan Lever, Proctor & Gamble, Castrol, Dabu, Perfect etc. The adverse market conditions, which prevailed in the late 1990, have now changed for the better. The Petitioner now expects to be able to make good profit from its operations, which is not possible unless its debt is restructured as proposed in the Scheme; (e) The FMCG segment for both A & B category has witnessed buoyancy and the selling prices have also firmed up. The : 9 : Petitioner has had long term relationship with many of its customers who are willing to renew the contracts, if the Petitioner is in a position to meet their demands on timely basis. The availability of fresh working capital would enable the Petitioner to capitalize on its core strengths, such as technology capabilities and products approvals with FMCG customers and achieve 75-80% of its capacity utilization in the first year, with its well established products." 3. As the Petitioner Company is optimistic about overcoming the financial difficulty presently encountered on account of adverse market conditions, as it was already on the road of recovery on account of improved market conditions and being a viable corporate entity, capable of recovering itself from such set-backs, if the debts’ level were to be reduced, has propounded the present Scheme. Under the Scheme, the paid up value of equity shares shall stand reduced to Rs.54,08,190/- (Rupees Fifty-four Lakhs Eight Thousand One Hundred Ninety) i.e. by 95% i.e. by cancelling Rs.9.5 per equity share from the face value of Rs.10/- each, held by the equity shareholders as on the record date to be fixed by the Board of Directors. The shares shall : 10 : thereafter be consolidated and 20 existing equity shares of Rs.0.50 each, shall be merged into one share of Rs.10/- each, as on the effective date and the paid up capital shall stand reduced to Rs.54,08,190/- (Rupees Fifty-four Lakhs Eight Thousand One Hundred Ninety Only) comprising of 5,40,819 (Five Lakhs Forty Thousand Eight Hundred Nineteen) equity shares of Rs.10/- each. 4. The Petitioner took out summons for directions being Company Application No.338 of 2004 before this Court. On the said Application, this Court directed the Petitioner to convene meetings of its equity shareholders, secured creditors, statutory creditors and unsecured creditors on 18th October 2004 for the purpose of considering and if thought fit, for approving, with or without modifications, the Scheme of Compromise/Arrangement between the Petitioner Company and its secured creditors, unsecured creditors, statutory creditors and equity shareholders. On 27th August 2004, an interim order was granted in favour of the Petitioner staying all the criminal prosecution. Against the said decision, four unsecured creditors : 11 : applied for vacating the stay so granted. During the pendency of the latter application, meeting of the equity shareholders, unsecured creditors, secured creditors and statutory creditors was held on 18th October 2004, as directed by this Court. The Scheme was approved by requisite majority of the shareholders as well as unsecured creditors. Meeting of the secured creditors and statutory creditors was adjourned due to lack of quorum. The Application filed by the four unsecured creditors for vacating the stay of criminal prosecution was considered by this Court and that prayer was accepted by order dated 4th/5th November 2004. By that order, application preferred by the Petitioner for stay of criminal prosecution came to be dismissed. The Petitioner Company, after obtaining fresh orders, convened a meeting of the secured creditors on 3rd December 2004, where the scheme was approved by requisite majority of the secured creditors with certain amendments. In view of the approvals accorded by the shareholders, secured creditors and unsecured creditors, Petitioner filed Petition to sanction the Scheme of compromise/arrangement in Company Petition No.92 of : 12 : 2005 connected with Company Application No.338 of 2004. After obtaining fresh orders, meeting of statutory creditors of the Company was convened and held on 10th March 2005 where the amended Scheme was approved by the requisite majority of statutory creditors. Later on, the Company Petition No.92 of 2005 for sanction of the Scheme of Compromise/Arrangement which was admitted, came to be advertised in newspapers on 18th March 2005 and fresh advertisement was published in newspapers on 21st March 2005. During the pendency of the said Petition, Petitioner Company filed application for seeking directions for holding fresh meeting of unsecured creditors. On the said application in Company Petition No.92 of 2005, order was passed on 28th April 2005 directing fresh meeting of unsecured creditors and shareholders on 1st June 2005. The said order, however, was amended by consent of all concerned on 5th May 2005, disposing of Company Petition No.92 of 2005 and the Company Application filed therein. In terms of the consent order dated 5th May 2005, meeting of equity shareholders and unsecured creditors was held on 1st June 2005 under the Chairmanship of Chairman of : 13 : the said meeting appointed by this Court. In the meeting of the shareholders, the Scheme was approved by requisite majority of the shareholders. Similarly, the Scheme was approved in the meeting of unsecured creditors by requisite majority of the unsecured creditors. Accordingly, present Petition has been filed by the Petitioner Company for sanction of the Scheme of Compromise/Arrangment. 5. When this Petition was presented in the Registry, it appears, the Registry refused to entertain the same on the ground that earlier Company Petition No.92 of 2005 has already been disposed of. This aspect was considered by me on 1st July 2005, by which order, the Registry was directed to accept the Company Petition, leaving the question open about the maintainability thereof, to be decided if the occasion arises. Accordingly, present Petition has been lodged and registered. 6. In response to this Petition, reply affidavits have been filed on behalf of intervenor G.E.Capital Services India by Shri Kapil Singhal, : 14 : Vice President, Risk Management of the said Intervenor. Another affidavit has been filed on behalf of intervenor Videocon International Limited by Mr.Raphael Thomas, Legal Manager of the said intervenor. Both these affidavits have been filed to oppose the present Petition for diverse reasons referred to in the said affidavits. Affidavit of Shri V.Sreenivasa Rao, Regional Director, Western Region, Ministry of Company Affairs, has been filed, which mentions that the proposed Scheme has been examined and it is found that it is not prejudicial to the interest of creditors and shareholders, for which reason, appropriate orders may be passed. 7. Ordinarily, as the Scheme has been approved by requisite majority of the creditors and shareholders and as all formalities have been complied with, the Petition ought to have succeeded. However, this Court is called upon to consider the challenge set-up at the instance of the intervenors referred to above. Besides the above-named intervenors, who have filed reply affidavits in this Court, appearance was made on : 15 : behalf of Caveators Adhesives and Chemicals as well as Workmen Union to oppose the present Petition. Arguments canvassed on behalf of Counsel appearing for the respective parties have been considered. It may be mentioned that during the course of arguments, no argument was canvassed on the point of maintainability of the present Petition. In that sense, I will have to consider the merits of the objections raised on behalf of the intervenors and the workmen union. At the outset, it needs to be mentioned that although appearance was made on behalf of workmen union, and objection was raised with regard to certain clauses, which makes reference to the workers, the Counsel appearing for the Petitioner Company made it amply clear that the Scheme was in no way concerned with the workers. In that, it was not related to any rights and obligations of the workers at all. The position of the Petitioner Company has been placed on record by affidavit dated 17th August 2005 making it plainly clear that no direction is sought, which would in any way, affect the interest of the workers. Inspite of such a stand taken by the Petitioner Company, and although the Counsel for the workmen : 16 : union, during the course of arguments, submitted that in that situation, the workmen union will have no objection to the proposed scheme, written submissions have been filed on behalf of workmen union registering objections to clauses 5(b), 5(c), 5(f) and 5(h) of the Scheme. I shall deal with this aspect a little later. 8. As mentioned earlier, the above-named intervenors have filed their reply affidavits objecting to the proposed scheme and the present Petition for diverse reasons stated in the said affidavits. However, during the course of arguments, the Counsel appearing for the respective intervenors have addressed the Court only on the points, to which, I shall presently advert to. 9. It may be noted that the proposed scheme is opposed only at the instance of unsecured creditors. No objection has been registered on behalf of shareholders, secured creditors and statutory creditors. Insofar as unsecured creditors as a class is concerned, in the meeting convened on 1st June 2005, from the Chairman’s : 17 : report, it is noted that point was raised by the representative of Videocon International Limited and no other unsecured creditor. The report plainly records that no other unsecured creditor present at the meeting raised any query to the proposed Scheme. Insofar as Videocon International Limited is concerned, its representative drew attention of the Chairman on the following issues: (1) That they were not sure of the amount in the Company’s record in respect of their outstanding, which as per the consent terms, was Rs.6,00,00,000/- (Rupees Six Crores). (2) The notice convening the meeting was received by them very late and was not as per the directions of the High Court. (3) The list of all the creditors has not been provided to them. . All the three objections have been duly : 18 : considered by the Chairman. All the three issues raised on behalf of Videocon International Limited have been duly considered and opinion recorded by the Chairman in Para 12 of the report. At this stage, it would be appropriate to note that the Chairman of the meeting dated 1st June 2005 appointed by this Court under order dated 5th May 2005 was Shri S.M.Pradhan of M/s.S.M.Pradhan & Company, Chartered Accountants. As he was known to me, at the beginning of the hearing, Counsel appearing for the parties were informed, to which, all the Counsel submitted that they had no objection if I proceeded with the hearing, as none of them were going to make submissions suggesting bias or malafide against the Chairman as such. It was submitted that the correctness of the recording of facts in the report of the Chairman were not in issue at all. But one of the ground would be that the Chairman has not resorted to proper procedure in terms of the orders of this Court. It is in this backdrop, I proceeded with the hearing of the case, as Counsel appearing for the respective parties, on instructions, agreed in that behalf. : 19 : 10. The sum and substance of the objections raised by the intervenors appearing through Counsel during the course of arguments are as follows: . That this Court being Company Court has no jurisdiction to entertain the present Petition in view of the bar contained in Section 32 read with Section 26 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as ‘SICA’). It is stated that as reference in respect of the Petitioner Company is pending before the BIFR, this Court will have no jurisdiction to entertain the present proceedings. To support this submission, reliance is placed on the decision of the Andhra Pradesh High Court reported in 1996 CC (Vol. 87) 22 in the case of 1996 CC (Vol. 87) 22 in the case of 1996 CC (Vol. 87) 22 in the case of K.Sitarama Raju vs. Board for Industrial & K.Sitarama Raju vs. Board for Industrial & K.Sitarama Raju vs. Board for Industrial & Financial Reconstruction & Ors. Financial Reconstruction & Ors. Financial Reconstruction & Ors. It was then contended that assuming that even present remedy is available to the Petitioner Company, as the same is not inconsistent with the proceedings pending before the BIFR, in that case, as two remedies are available to the Petitioner, the Petitioner ought to elect one of them. It was then contended that : 20 : order passed by Justice S.U.Kamdar dated 5th May 2005 has not been complied with. This is so, because what was placed for consideration in the meeting was only the amendments to the Scheme and not the original Scheme. Besides, the Chairman has failed to consider the objections raised at the meeting in respect of the original scheme and in particular, with regard to the dispute regarding amount to be paid to the respective creditors as claimed by the said creditors. 11. It was then contended that the Scheme as propounded is unreasonable, unjust, unconscionable and unimplementable. This is so, because if the Petitioner Company was to come out of BIFR, serious prejudice would be caused to the concerned creditors, as the creditors such as the intervenors who are possessed of decree passed by the Court which provides for far higher liability of the Petitioner Company towards decretal amount will be denuded of that claim. Further, the process of repayment provided for in the Scheme unjustly slices down the claim of the creditor to principal amount as on the cutoff date. The provision for : 21 : waiver of interest accrued and accruable is not only prejudicial but unjust and conscionable. Besides, it is argued that the Scheme as propounded, far from being conscionable, is unimplementable, inasmuch as the repayment provided under the Scheme envisages situation of surplus claim than the cap of Rs.1075 lakhs provided under the Scheme. The surplus amount will have to be rolled over to the next year and there is no guarantee that at the end of the 8th year, the entire principal amount would be offered and paid to the creditors, even though the claim of the unsecured creditors have been pegged down to principal amount due on the cutoff date. Moreover, no default clause has been provided in the proposed scheme insofar as unsecured creditors are concerned. It is also argued that provision is only made regarding upward cap and no minimum payment is assured to the unsecured creditors. It is then contended that no details or flow chart regarding provision of available funds has been disclosed by the Petitioner Company. From the figures which are available from record, it is seen, contends learned Counsel, that the liability : 22 : of payment to secured creditors would be in excess of inflow of income. If it is so, no payment will be ever received by the unsecured creditors. It is contended that it is common ground that the networth of the Petitioner Company has eroded and if it is so, the Scheme will not be viable and cannot be implementable at all. It is contended that the Scheme is against public policy as the real purpose of the scheme is to absolve the guarantors and directors of the criminal liability. In other words, the main purpose of the Scheme is of stifling of criminal actions pending against the Petitioner Company and its Directors. It is contended that the options provided in the proposed Scheme is nothing but sham, bogus, unfair and unconscionable. In that, Option No.I makes no provision for commitment to pay the entire principal amount, though it provides for repayment spread over in eight years commencing from the second year with 1st year to be observed as moratorium period, insofar as the unsecured creditors are concerned. The Option No.I provides that initial instalment is paltry amount and the later is substantial; but no specific date is : 23 :