IN THE HIGH COURT OF JUDICATURE OF MADRAS DATED: 21.12.2009 CORAM THE HON'BLE MR. JUSTICE M.CHOCKALINGAM AND THE HON’BLE MR. JUSTICE V.PERIYA KARUPPIAH O.S.A NOS. 51, 434 AND 435 OF 2009 G.V.Films Limited A company incorporated under the Companies Act, 1956 and having its Registered office at New No.7, Old No.4 Seshadri Road, Alwarpet Chennai-600 018 Represented by Mr.P.Raghuraman, Director ....Appellant / Petitioner in C.P. in OSA.No.51/2009 Vs. 1.Metage Special Emerging Market Fund Limited Represented by its Director Mr.Jerome Muller and Having its Principal Office at PO Box No.513 GT, Strathvale House North Church Street George Town, Grand Cayman, Cayman Islands. 2.Metage Funds Limited Represented by its Director Mr.Jerome Muller and Having its Principal office At PO Box No.513 GT, Strathvale House North Church Street, George Town, Grand Cayman, Cayman Islands. 3.Peter Beck and Partner Vermogenverwaltun GMBH Represented by its Authorised Signatory And Having its Principal Office at Alleenstrasse 126 (Postfach:1105) D-73230 Kirchheim/Teck(d-73219) Germany. https://hcservices.ecourts.gov.in/hcservices/ 4.Gayathri Holdings P.Limited New No.22/1, Old No.33, Pasumarthy Street Kodambakkam,Chennai-600 024 5, Mr.K.L.Swamy 09, Seshadri Road Bangalore 560 009. ...Respondents G.V.New Media Technologies Ltd. A company incorporated under the companies Act 1956, new no.7, old no.4, Seshadri Road, Alwarpet, Chennai - 600 018 represented by Mr.R.Viswanathan, Director ...Appellant in OSA.Nos.434/09 (Petitioner in C.P. No.98/08) G.V.Studiocity Ltd., A.Company incorporated under the companies Act 1956 and having its Registered Office at New NO.7, Old No.4, Seshadri Road, Alwarpet, Chennai - 600 018 ...Appellant in reptd. by MR.K.C.Suresh, Director O.S.A.No.435/09 (Petitioner in C.P.No.97/08) O.S.As preferred under Clause 15 of the Letters Patent and Order 36 Rule 1 of O.S.Rules against the common Judgment and Decree dated 04.12.2008 made in C.P.Nos.96 to 98 of 2008. For Appellant : Mr.K.Ravi for M/s.Rugan and Arya For Respondents :-For R1 and R2:- Mr.Arvind P.Dadar Senior Counsel for Mr.R.Venkatavaradan. For R3 :-Mr.T.K.Baskar For R4 :-Mr.T.K.Seshadri, Senior counsel For Mr.Srinath Sridevan. J U D G M E N T (Judgment of the court was made by V.PERIYA KARUPPIAH.J.,) These appeals are directed against the common order dated 04.12.2008 passed by the learned Single Judge made in C.P.Nos.96 to 98 of 2008. 2. The appellant is the petitioner before the said court, who sought for approval of the scheme of arrangement between G.V.Films Limited and G.V.Studio City Limited and G.V.New Media Technology https://hcservices.ecourts.gov.in/hcservices/ Limited. The said arrangement is for the demerger of the G.V.Films Limited (hereinafter referred to as a Parent Company) and thereby to create two more companies viz., G.B.Studio City Limited and G.V.New Media Technologies Limited (hereinafter referred to as Offspring Companies). 3. The short facts which are necessary for the disposal of these appeals would be as follows:- 3.1 :- The petitioner company is the parent company viz., G.V.Films Limited, incorporated under the Companies Act, 1956. It proposes the demerger and to form the Offspring Companies known as G.V.Studio City Limited and G.V.New Media Technologies Limited. The main objects of the said parent company are to carry on the business as film producers (sound and / or silent), hippodrome & circus proprietors of cinema houses, theatres, concert halls and picture places and studios and also to provide for musical, dramatic and athletic performances for amusements and / or entertainment for both private and public. 3.2:- It also has the right of purchasing or owning, acquiring properties, lands and properties and to hotel management, acquire or lease TV Channels, radio and TV Stations inside or outside the India and to produce Tele serials and to exhibit movies or serials or any film on Satellite, Internet, cablenet or any other means of communication. 3.3 :- “The said parent company's authorized sum capital as on 30 th June 2007 is Rs.20,00,00,00,000 divided into 200,00,00,000 Equity Shares of Rs.10/- each. The issued, subscribed and paid up capital of the parent company as on 30th June 2007 is Rs.348,22,00,000/- divided into 34,82,20,000 Equity Shares of Rs.10/- each share. 4. The circumstances which necessitated the demerger of the said company as G.V.Studios and G.V.New Media Technologies (Offspring Companies) are to enable the said division to grow as focused business entities and attract capital/ strategic investors and facilitate the offspring companies in becoming major market players in the relevant business. 5. It is also stated by the petitioner that the demerger will ensure better operational management and result in greater synergies of operations and focus on accelerated growth of individual units and will also ensure higher returns to the shareholders, creditors and employees and is also in general public interest. Therefore, it has enunciated a scheme of programme for demerger of the parent company into offspring companies. When they have sought for approval of the said scheme, the petitioner company was directed by this court in C.A.No.3066 of 2007, in its order dated 29.11.2007, to convene a https://hcservices.ecourts.gov.in/hcservices/ meeting of the Equity Share Holders of the petitioner company for the purpose of considering, and if thought fit, approving, with or without modification, a scheme of Arrangement between the parent company and offspring companies. For that purpose, Hon’ble Mr.Justice K.Govindarajan (Retd) was appointed to act as a Chairman of the said meeting and to report the results thereof. 6. Accordingly, a meeting of the Equity Share Holders was convened as per the requirements made in Section 396 of the Companies Act and each of the Equiry Share Holders of the Company were informed through certificate of posting, and a notice was also advertised in the English daily “The Hindu Business Line” on 29.12.2007 and in Tamil daily “Malai Murasu” on 29.12.2007 as per the directions of the Court. Accordingly, on 24.01.2008, the meeting of the Shareholders of the petitioner company was duly convened in accordance with the said order of this court at New Woodlands Hotel Private Limited, No.72 – 75, Dr.Radhakrishnan Salai, Mylapore, Chennai-600 004, and Hon’ble Mr.Justice K.Govindarajan (Retd) presided over the said meeting. 7. In the said meeting of the Equity Shareholders, some modification was proposed in Clause 2 of Section 1 of Part IV of the Scheme and the said amendment was duly approved, and a report has been filed by the said Chairman of the meeting before this Court on 30.01.2008. 8. In the meeting of the Equity Shareholders of the petitioner company, 787 Equity Shareholders exercised their votes either in person or by proxy, and the total number of votes cast were 7,86,61,306. Out of said votes cast, 689 shareholders holding 7,84,85,906 Equity Shares of Rs.10 each, voted in favour of the modified Scheme as proposed in the meeting. Three (3) shareholders holding 1,75,400 Equity Shares of Rs.10/- each, voted against the said resolution, and the remaining 95 shareholders cast invalid votes. Therefore, the petitioner had sought for approval of the scheme of arrangement as modified and approved by the Equity Shareholders held on 24.01.2008. 9. The further case of the petitioner would be that the proposed arrangement in between the petitioner company (parent company) and the said offspring companies will not affect the creditors both secured and unsecured. As per the orders passed by this court on 29.11.2007 in C.A.NO.3066 of 2007, the petitioner company was directed to convene a meeting of the secured creditors of the company for the purpose of considering and approving with or without modification of the scheme of arrangement between the parent company and offspring companies, and the said order was to the effect that Hon’ble Mr.Justice K.Govindarajan (Retd) would act as the Chairman of the said meeting and report the results thereof to this court in accordance with Section 393 of the Companies Act 1956. https://hcservices.ecourts.gov.in/hcservices/ 10. Notice was sent to the secured creditors by prepaid post and certificate of posting on 28.12.2007, and the notice of convening the meeting of the secured creditors was advertised in all the editions of the Tamil Daily “Malai Murasu” on 29.12.2007 and in all editions of the English Daily “The Hindu Business Line” on 29.12.2007. One Smt.A.Sushila Devi moved this Court by way of an Application in C.A.No.199 of 2008 in C.A.No.3065 of 2007 praying for postponing the meeting to be convened on 24.01.2008, till the liability due to her was crystallized. The meeting was postponed by this court by an order dated 23.01.2008 and subsequently the said A.Sushila Devi in C.A.No.199 of 2008 reported settlement arrived at between the petitioner company and herself on 07.03.2008, and accordingly, C.A.No.199 of 2008 filed by her was dismissed as withdrawn. 11. Since the meeting ordered by this court was redundant, the court granted four weeks' time to the petitioner company to get consent from other secured creditors. Accordingly, consent of three secured creditors viz., Citi Bank, State Bank of India and The Lakshmi Vilas Bank Limited, were obtained for the proposed scheme of arrangement, and they also submitted their consent for the said scheme. The proposed scheme of arrangement would take effect from 1st July 2007, the appointed Date, under the provisions of Sections 391 to 394 of the Companies Act, 1956. The scheme of arrangement will be beneficial to all the companies involved in the scheme, including the shareholders of the said companies. Therefore, the petitioner company prays for the scheme of arrangement between G.V.Films Limited (parent company) and G.V.Studio City Limited and G.V.New Media Technologies Limited (Offspring companies) enclosed with the said petition , be sanctioned by this court with effect from 01.07.2007, so as to combine all shareholders and creditors of the petitioner company. 12. The contention of the respondents 1 and 2 would be that they are Bond holders under the Deed of Trust dated 20.04.2006, executed by the petitioner and the respondents 1 and 2 in which the Bank of New York, London Branch, was appointed as the Trustee, and the said Trust Deed contains terms and conditions of the Bond and the interests of the respondents 1 and 2, in the issue of Foreign Currency Convertible Bond (hereinafter referred to as FCCB) on dollars. 13. One of the important terms under which the Bonds have been issued to the respondents 1 and 2, is a right available to them to get the bond converted into shares including the right available to convert it into Global Depository Receipts (GDR). Those bonds were paid in Dollars, and the entire covenant and interest are categorized in the said Deed of Trust produced in Annexure B of the affidavit filed by the respondents 1 and 2. https://hcservices.ecourts.gov.in/hcservices/ 14. The proposed scheme of arrangement by the petitioner would benefit only the promoters and the major shareholders of the petitioner company, and nobody else would stand to benefit by the scheme. Without considering the terms and conditions of the bond as per the Trust Deed held by the respondents 1 and 2, the proposed scheme cannot be proceeded . The entire scheme would vitally affect the interests of the respondents 1 and 2 since the Subscribed and Paid-up capital of the petitioner company stands reduced by 153,96,35,247/-. The resulting companies (offspring companies) G.V.Studios City Division and G.V.New Media Technologies Division would take 39,13,73,237 and 125,93,07,858 respectively and out of this amount, the resultant transfer would be Rs.28,60,91,755/- for the Studio Division and Rs.125,93,07,858/- for the New Media Division in respect of fixed assets. If it is so, the petitioner company would be left with hardly any business or assets supporting the obligations under the Bond, and the respondents 1 and 2 would be left with no other option than to share little quantum of money if converted into shares of the company. 15. The provisions of Section 101 to 103 of the Companies Act should have been complied with since there is a reduction of capital taken place. Therefore, the scheme of arrangement suggested would be in violation of provisions of Section 101 to 103 of the Companies Act. 16. The petitioner company had approached this court without even considering the interests of the unsecured creditors in general and the respondents 1 and 2 in particular, and they would stand completely jeoparadized by this scheme and arrangement. The petitioner company had deliberately moved the said application only for convening the meeting of the secured creditors knowing fully well that it would not be in a position to obtain consent of the respondents 1 and 2 and other unsecured creditors. Since, no meeting of the secured creditors was held as per the directions of this court also, the scheme of arrangement cannot be approved. Therefore, the proposed scheme of arrangement being a dubious one may not be approved by the court. 17. The third respondent had also raised similar contention in his affidavit. According to him, a similar Deed of Trust was entered into by the petitioner company with the third respondent on 23.10.2006, in which the Bank of New York, London Branch, was appointed as the Trustee under the Trust Deed. The said FCCB was in the form of Euro Bonds. The third respondent has also raised objections similar to that of the objections of the respondents 1 and 2. https://hcservices.ecourts.gov.in/hcservices/ 18. The fourth respondent had stated in his objections that he being a Shareholder, did not receive any notice of the meeting in relation to the Scheme of Arrangement proposed by the petitioner company. 19. The fourth respondent was having 36,100 number of equity shares. It is also stated that the Group of Companies held by one G.Venkateswaran viz., the petitioner, Sujatha Estates (P) Limited, Sujatha Films Limited, Sujatha Productions(P) Limited and Aruna International Private Limited during the year 1987 and 1990, and those group of companies claimed to have 7,80,000 equity shares of M/s.Shaw Wallace Company Limited and those 7,80,000 equity shares of Shaw Wallace were taken away in an Income Tax raid held in the premises of the Group of Companies belonging to Mr.G.Venkateswaran for the income tax due to the tune of Rs.380 lakhs. 20. In order to pay the income tax arrears, the said G.Venkateswaran requested the fourth respondent to enter into an agreement of sale of shares, and it was entered into between them on 09.11.1987, under which 7,80,000 equity shares in M/s.Shaw Wallace Company which were seized by the Income-tax Department, were agreed to be purchased for a total consideration of Rs.663 lakhs. Accordingly, funds were arranged, and Rs.380 lakhs tax arrears were paid on 30.11.1987, by way of Pay Order drawn on Bank of Baroda favouring Income Tax Department for the specific purpose of releasing 7,80,000 shares held in Shaw Wallace Company Limited from the custody of Income Tax Department in order to facilitate the transfer of those shares in favour of the fourth respondent. Subsequently, it was found that the said Mr.G.Venkateswaran and the remaining four companies were lawful owners of only 174,399 shares and not the entire 780,000 shares. Ultimately, the said 174,399 shares alone were transferred to the fourth respondent and the said G.Venkateswaran and four companies had agreed on 24.01.1990, to make good loss for the fourth respondent. Accordingly, 13,43,700 shares of the companies viz., Sujatha Estates (P) Limited, Sujatha Films Limited, Sujatha Productions(P) Limited and Aruna International Private Limited were deposited with the fourth respondent as per the letters written on 14.02.1990 and 26.02.1990. After that, the said G.Venkateswaran passed away in the year 2003, and therefore, the fourth respondent had filed a suit in this court in C.S.No.915 of 2006 for a decree for accounts and for other reliefs like selling the shares referred to above and paying over the sale proceeds to the fourth respondent company against the petitioner company and four other companies. Therefore, the fourth respondent would thus become a creditor having shares of the share holders as pledgee of the petitioner company. The scheme of arrangement as proposed by the petitioner would certainly affect all the creditors including the fourth respondent. The proposed scheme of arrangement is violative of provisions of law and also contrary to public policy. The fourth respondent would come as one of the secured creditors, and the https://hcservices.ecourts.gov.in/hcservices/ direction of the court to convene a meeting of the secured creditors on 24.01.2008 at 10.30 a.m., was not informed to the fourth respondent. The non participation or the non conduct of the said meeting of the secured creditors of the company would vitally affect the decision relating to the scheme of arrangement. Even assuming that the fourth respondent is not a secured creditor, but only an unsecured creditor, meeting of the unsecured creditors of the company was not convened which is fatal to the approval of the scheme. 21. The petitioner cannot seek for the demerger of the companies under the scheme of arrangement without the consent of the creditors when the liabilities of the company are sought to be transferred to its division, and therefore, if the scheme is approved without the consent of the class of creditors whose rights are also transferred and they will be vitally affected. The unsecured creditors as a whole were not consulted and thus the scheme without the approval of the creditors will be ineffective and the scheme is thus contrary to the established procedures under Section 391 of the Companies Act. 22. The Scheme of Arrangement does not disclose material particulars like what are all the liabilities that are to be transferred to the offspring companies viz., G.V.Studios City Limited and G.V.New Media Technologies Limited, whose liabilities are sought to be transferred. It has also not disclosed the transfer of fixed assets, and thereby the creditors whose liabilities are to be discharged by the petitioner company are deprived of the assets and what would be the recourse once the scheme is sanctioned are also not given. Therefore, the creditors are thus vitally affected by the scheme of arrangement of demerger and without approval of the class of unsecured creditors by convening a meeting. 23. It cannot be said that the scheme of arrangement is in accordance with law and not prejudicial to the share holders nor to the creditors both secured and unsecured. Therefore, the demerger proposed by the scheme of arrangement is not tenable in law and therefore, the confirmation of the scheme need not be granted. 24. Learned Single Judge on hearing both sides had elaborately discussed the various pointed raised before her and had come to the conclusion of disallowing the claim of the petitioner company’s scheme of arrangement for demerger. Aggrieved against the said order, the present appeals have been preferred by the petitioner company. 25. Heard Mr.K.Ravi, learned counsel for M/s.Rugan and Arya, appearing for the appellant, Mr.Aravind P.Dadar, learned Senior Counsel for Mr.Venkatavaradhan, appearing for respondents 1 and 2, Mr.T.K.Baskar, learned counsel appearing for the third respondent and Mr.T.K.Seshadhri, learned Senior Counsel for Mr.Srinath Sridevan, https://hcservices.ecourts.gov.in/hcservices/ appearing for the fourth respondent. 26. Learned counsel for the appellant/petitioner company (herein after referred to as petitioner company or parent company) would submit in his argument that rejection of the scheme of arrangement proposed by the petitioner, by the learned Single Judge is contrary to all canons of law when the scheme of demerger was approved by an overwhelming share holders present and all secured creditors of the company have given assent. He would further submit in his argument that the demerger proposed by the petitioner is not a transfer since the group of companies would face the liabilities as that of the parent company. He would further submit that the learned Single Judge failed to appreciate the basic fact that three objectors viz., 3 FCCB holders, the respondents 1 to 3, are not at all prejudiced and will not be worse off by sanctioning the Scheme of Demerger in view of the readiness and willingness expressed by all the three companies (parent company and offspring companies) to jointly and severally continue to shoulder all the obligations under the FCCBs by executing a Supplementary Trust Deed as contemplated in the FCCB conditions. He would further submit in his argument that even otherwise the maturity of those bonds either Dollar bonds entered with respondents 1 and 2 or the Euro Bonds entered with the third respondent, would be only in the year 2012. In the mean while they can exercise their right to demand equity shares of any company instead of their bonds, after getting permission from the Reserve Bank of India and therefore they cannot have any objection. He would further submit that there will not be any prejudice caused to the respondents 1 to 3. He would further submit that the scheme would not result in reduction of the price in conversion of FCCB bonds by its holders, since any reduction in conversion price would be informed to all the FCCB holders to get more shares. He would also submit in his argument that the fact that the erstwhile Chairman of the petitioner company is stated to have taken an advance of Rs.380 lakhs from the fourth respondent in the year 1987 for and on behalf of his Group companies towards sale of Shaw Wallace Shares held by him and his companies would show that the claim of the fourth respondent against the petitioner company is only a speculative one. As regards the other submissions of the fourth respondent that only a portion of the said shares of M/s.Shaw Wallace were given to them and the said petitioner company is liable to pay the remaining sum towards the payment made by him to the Income Tax department, no document has been produced to show the liability of the said Chairman on behalf of the petitioner company to the fourth respondent. He would also submit in his argument that the advertisement regarding the court convened meeting of the share holders as ordered by the previous learned Single Judge of this court was perfectly alright, and the finding of the learned Single Judge that the meeting convened on the basis of the order was erroneous and inadequate is not sustainable. He would again submit in his argument that according to the orders passed by this court, an advertisement was given in Hindu Business Line in all the editions of the country https://hcservices.ecourts.gov.in/hcservices/ and in the vernacular daily viz., Malai Murasu, in all editions and accordingly 787 share holders attended, and thereby a major portion of the share holders voted in favour of the modified scheme as proposed in the meeting and less number of share holders against the said resolution. In the said meeting, with some modification, the scheme of arrangement of demerger of the petitioner company was approved under the Chairmanship of Hon’ble Mr.Justice K.Govindarajan (Retd). He would also submit that the report of the Hon’ble Judge was filed immediately, and it would depict the intention of the share holders who are the owners of the company. Demerger as a scheme is possible, and there is no impediment for granting approval, since the three secured creditors have also given their consent for the said scheme. He would also submit that the objections of FCCB holders are also not sustainable because they can at any time change the hands of those bonds, and the condition that they should have consulted for the demerger of the petitioner company is not necessary, and the basic conditions in the Trust Deed would be that of contractual relationship, and if at all they would be entitled to the said amount of conversion on maturity in the year 2012, and they cannot preclose the said bonds nor oppose the demerger of the company which is inter se. It can be objected only by the share holders of the company to which a prompt meeting was held as per the orders of this court on 24.01.2008, and the majority of the share holders approved the scheme with modification. He would also submit that the requisites of Section 391 of the Act have also been complied with, and there was no violation of the said provisions nor any act done against public policy, and no prejudice would be caused to anybody due to demerger of the petitioner company. Learned Single Judge has accepted the notional reduction of share capital to which the share holders would not be entitled to any payment. However, the learned Single Judge failed to