1 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 217 of 2005 WITH COMPANY APPLICATION No. 224 of 2005 For Approval and Signature: THE HON'BLE 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 ? ======================================================= ESSAR OIL LIMITED - Petitioner(s) Versus .. - Respondent(s) ======================================================= Appearance : MR M.J. THAKORE AND MR S.N. SOPARKAR, SENIOR ADVOCATES WITH MR SUNIT S SHAH for Applicant Company. MR N K PAHWA for Objector – Peerless. MRS K.K. RAVAL WITH MS DHARMISHTHA N RAVAL for Objector - UTI. ======================================================= 2 CORAM :THE HON'BLE MR.JUSTICE K.A.PUJ Date : 30/06/2005 COMMON ORAL JUDGMENT 1. Company Application No. 217 of 2005 is filed by Essar Oil Limited seeking direction of this Court for convening of the meeting of the Scheme Lenders of the applicant Company for the purpose of considering and if thought fit, approving with or without modification, the arrangement embodied in the Scheme of Compromise and arrangement between the applicant Company and its Scheme Lenders. The applicant has also prayed for the method of convening, holding and conducting the said meetings and as to the notice and advertisement be issued in this behalf. Lastly, the applicant has prayed for the appointment of the Chairman of the meeting. 2. Company Application No. 224 of 2005 is filed by Peerless General Finance and Investment Company 3 Limited seeking declaration from this Court to declare the Scheme of Arrangement and Compromise (Annexure 'II') submitted by the Company is null and void. Alternatively, the direction was sought for by the applicant to direct the Company to convene separate meeting of the Debenture holders holding more than 2000 debentures in the interest of justice. 3. Company Application No. 217 of 2005 was filed on 23.06.2005 and it was placed for hearing on 24.06.2005. However, a request was made on behalf of the applicant in Company Application No. 224 of 2005 to adjourn the said matter. Accordingly, it was adjourned to 27.06.2005. On that day, Peerless General Finance and Investment Company Limited has moved Company Application No. 224 of 2005 and has sought the permission of this Court to circulate the said matter and hear the same along with Company Application No. 217 of 2005. Accordingly, both these applications are heard 4 together with the consent of the parties and on mutual understanding between the parties, the hearing of both these applications is treated as the final hearing of the applications. 4. As far as Company Application No. 217 of 2005 is concerned, an affidavit in support of the Judge's Summons is filed by Shri Sheikh S. Shaffi, Senior Vice President and Company Secretary of the applicant Company. Mr. Mihir Thakore and Mr. S.N. Soparkar, learned senior counsels along with Mr. Sunit S. Shah, learned advocate appeared on behalf of the applicant Company. It is submitted that before filing the present application, the Company has initially filed four separate company applications being Company Application Nos. 164, 166, 167 & 168 of 2003. It is further stated that the Scheme proposed by the applicant Company were in line with the proposed terms of CDR package under discussion at that time and based on discussions with the principal lenders. This 5 Court has accorded its sanction to three out of four Schemes vide its judgment and orders dated 07.10.2004. In respect of the 4th Scheme of the Debenture holders holding more than 2000 debentures mainly comprising of Financial Institutions, Banks and Mutual Funds, the meetings were held and adjourned from time to time in view of the ongoing deliberations and discussions with the CDR Cell on the proposal of restructuring package for overall dues of Lenders including dues pertaining to the debenture holders. The CDR Cell vide their letter dated 17.11.2004, conveyed their final approval to restructuring package. Some of the debenture holders were not in agreement with the Scheme proposed by the applicant Company by way of Company Application No. 166 of 2003. One of the debenture holders, namely, Peerless General Finance and Investment Company Limited has approached this Court by way of Company Application No. 405 of 2004 inter alia on the ground that more than 1/4th of the debenture 6 holders are not agreeable to the Scheme proposed by the applicant Company and, therefore, the said Scheme proposed for debenture holders holding more than 2000 debentures have failed. This Court vide its order dated 21.02.2005 disposed of Company Application No. 405 of 2004 inter alia directing the Chairman of the meeting to hold the meeting on 23.02.2005 or any other adjourned meeting thereafter but not later than 30.06.2005. 5. It is further stated that in the meantime, some of the debenture holders had given their proposal in respect of the settlement of their debts. The applicant Company under the terms of the CDR sanction was obliged to refer the matter to Lender Monitoring Committee for its decision and approval. Subsequent to the order passed by this Court in Company Application No. 405 of 2004, several meetings were held by the Company with the Lender Monitoring Committee in respect of the proposal put forward by certain debenture holders. 7 The Company had also held meetings with the said debenture holders from time to time in respect of the proposals submitted by them. The Lender Monitoring Committee after evaluation of the proposals placed by the said Debenture holders with the sustainability of the Company's cashflows, sustainability of Company's debt and post-settlement and impact on project completion with the envisaged time and cost suggested for the repayment of the dues as on maturity date of all the debenture holders with 5% each down payment immediately and thereafter another 5% at the end of 12 months from the down payment date and the balance within a period of 6 years from the down payment date. The said proposal suggested by the Lender Monitoring Committee did not lend support of the said debenture holders inspite of efforts made by the Company based on the guidelines provided by the Lender Monitoring Committee. The meeting of the debenture holders was thereafter adjourned to 25.06.2005. However, the lenders 8 informed the Company to restructure all the debts in line with CDR sanction and hence, the Company has moved the present Scheme and sought the direction of this Court. 6. It is further stated that the Scheme now framed by the Company is on the line of the restructuring package sanctioned by CDR Cell and it contemplates waiver of default interest and charges, reduction in rate of interest, deferment of repayment of borrowings and further financing for restarting the project, varying the terms and conditions of various borrowings coupled with injection of fresh funds from Promoters and Lenders for the purpose of restart and completion of the Refinery. The Refinery is expected to be commissioned within 18 to 24 months after restart of the Project Implementation activities. 7. Mr. M.J. Thakore has submitted that for the purpose of seeking direction for convening the 9 meeting under Section 391 (1), no other party is required to be heard. In this connection, he has drawn the attention of the Court to the provisions of Rule 67, 68 & 71 of the Company (Court) Rules, 1959. Rule 67 deals with Summons for directions to convene a meeting. It reads as under :- 67.Summons for directions to convene a meeting :- An application under Section 391 (1) for an order convening a meeting of Creditors and/or members or any class of them shall be by a Judge's Summons supported by an affidavit. A copy of the proposed compromise or arrangement shall be annexed to the affidavit as an exhibit thereto. Save as provided in Rule 68 hereunder, the summons shall be moved ex parte. The summons shall be in Form No. 33 and the affidavit in support thereof in Form No. 34. Rule 68 carves out an exception. It deals with Service on Company. It reads as under :- 10 68. Service on Company :- Where the Company is not the applicant, a copy of the summons and of the affidavit shall be served on the Company, or, where the company is being wound up on its liquidator, not less than 14 days before the date is fixed for the hearing of the summons. 8. Mr. Thakore has further submitted that combined reading of Rule 67 & 68 makes it clear that an application under Section 391 (1) for an order convening the meeting of Creditors or members shall be moved ex parte except where the Company is not the applicant or the Company is being wound up. In this context, he has invited the attention of the Court to Rule 71. It deals with application for stay. It reads as under :- 71.Application for Stay :- An application under sub-section (6) of Section 11 391 for stay of the commencement or continuation of any suit or proceeding against the Company may be moved by a Judge's Summons ex parte, provided that where a petition for winding up of the Company or a petition under Section 397 or 398 is pending, notice of the application shall be given to the petitioner in such petition. 9. He has further submitted that in the present case, the applicant has simply moved an application under Section 391 (1) seeking direction for convening the meeting of the Scheme Lenders. No application under Section 391 (6) for stay has been moved by the Company. The objectors have no right to have any audience while deciding the application by the Court seeking direction to convening the meeting under Section 391 (1) of the Act. He has further submitted that the provisions contained in Rule 69 deals with directions at hearing of Summons and it starts with “Upon the hearing of the summons or any adjourned hearing 12 thereof, the Court can given such directions as it may think necessary in respect of the matters enumerated therein.” The word “hearing” contemplates that the hearing of all the parties interested in the proceedings. This issue arose before the Allahabad High Court in the case of HIND AUTO INDUSTRIES LIMITED V/S. PREMIER MOTORS (P.) LTD. AND OTHERS, (1969) 39 COMPANY CASES 137 (ALL.). The Court takes the view that hearing as contemplated by Rule 69 obviously implies hearing of all sides which are to be heard and each of the questions, in Rule 69 involves the interest or at any rate the convenience of persons whose meetings are to be held. The shareholders are necessary parties before a decision can be taken on the matters specified in Rule 69 and are entitled to be heard at this stage. The Court further takes the view that even if the rule does not specifically provide for such notice to them, Rule 9 of Rules enables the Company Court in the exercise of its inherent powers to issue 13 directions for service of notice upon the persons concerned or interested. The Court, therefore, held that the nature of function exercised in the matter before the Court under Section 391 (1) is undoubtedly a judicial function and both the Central Government and the shareholders are entitled to notice. 10. Mr. Thakore has also referred to the decision of the Bombay High Court in the case of VASANT INVESTMENT CORPN. LTD. V/S. COLABA LAND AND MILLS CO. LTD. (1977) 47 COMPANY CASES 662 (BOM.) wherein it is held that merely because a rule makes the provision for ex parte application, it cannot debar the party interested in the action from placing its view point that the proposed order should or should not be made. The interest of justice require that if a party desires to make any submission, even at the ex parte stage, the Court should hear him. Precisely for this reason and keeping these judicial pronouncements in mind, 14 the Court has orally directed the applicant to supply a copy of the application to the learned counsel appearing for Peerless General Finance and Investment Company Limited. The Court is, therefore, of the view that though the proceedings as referred to in Rule 67 are ex parte proceedings, the Court while exercising its inherent powers permits the interested parties to make their submissions before the Court in respect of the directions which are sought from the Court. The Court has, accordingly, heard Mr. N.K. Pahwa, learned advocate appearing for Peerless General Finance and Investment Company Limited and Ms. Dharmishtha N. Raval, learned advocate appearing for UTI. 11. Mr. Thakore has addressed the Court on the other issue as to whether the Court can examine the Scheme at the stage of seeking direction for convening the meeting or whether the Court can straightway reject the Scheme without issuing 15 direction to convene the meeting. In this connection, he relied on the decision of GUJARATI KAMDAR SAHAKARI MANDAL AND OTHERS V/S. RAMKRISHNA MILLS LIMITED (1998) 92 COMPANY CASES 692 (GUJ.) wherein this Court has observed that when in cases where at the threshold serious objections are raised by class of Creditors, the Court may issue directions to convene the meetings of shareholders and Creditors because the discussion and exchange of views, with or without modification may ultimately result in the evolving of some such scheme which may become acceptable to a class of persons who opposed the scheme initially. The Court has further observed that the very purpose of this consultation would be frustrated if the Sponsor of the Scheme is denied opportunity of consulting the affected interests by convening the meeting. The Court has, therefore, taken the view that the application cannot be rejected by the Court at the very threshold. 16 12. Mr. Thakore further relied on the decision of the Hon'ble Supreme Court in the case of RAINBOW DENIM LIMITED V/S. RAMA PETROCHEMICALS LIMITED (2003) 116 COMPANY CASES 641 (S.C.) wherein the Hon'ble Supreme Court has observed that the appropriate time for the Company Judge to consider the scheme was subsequent to approval thereof by the shareholders and creditors of the appellant Company. Therefore, the orders of the Company Judge and the Division Bench were to be set aside and liberty given to the appellant Company to move the High Court for calling meetings of its shareholders and creditors for the purpose of considering and approving the Scheme. Once that was done a further application had to be made to the Company Judge and that would be the time for him to consider the Scheme. Though in no uncertain terms, the Hon'ble Supreme Court has observed that it is not time for the Company Judge to consider at the stage of issuance of direction to convene the meeting, whether the said 17 observations are confining to the facts of that case only or it lays down any precedent. 13. In this connection, Mr. Thakore has invited the Court's attention to the decision of this Court dated 24.02.2005 in Company Application No. 01 of 2005 in the case of SHREE RAMA MULTITECH LTD. Wherein this Court has taken the view that the plain reading of Rule 69 itself makes it clear that the powers are conferred on the Company Judge even to dismiss the Summons at the stage of hearing of Summons. The Court has further taken the view that the observation made by the Hon'ble Supreme Court does not lay down any precedent and the said observations are confining to the facts of the said case. The Court has ample power within the meaning of Rule 69 to dismiss the Summons at the initial stage if prima facie it appears to the Court that the application is not sustainable or is palpably in contravention of the provisions of the Act. In such case, the Court 18 does not show any indulgence for issuance of directions to convene the meeting. Mr. Thakore has, therefore, submitted that the exceptions carved out by this Court in this decision are not applicable to the facts of the present case as it cannot be said that the present application is not sustainable or that it is palpably in contravention of the provisions of the Act. He has, therefore, submitted that the prayers made in the present application by the Company and the directions sought for therein should be granted by this Court. 14. Mr. N.K. Pahwa, learned advocate appearing for Peerless General Finance and Investment Company Limited, the applicant in Company Application No. 224 of 2005 has submitted that the Company from its very inception had classified its liabilities in two parts, one pertaining to the dues of the Banks and Financial Institutions and the other pertaining to the dues of Debenture holders. 19 Whereas in so far as the dues of Banks and Financial Institutions are concerned, the Company has already reached to an agreement of compromise with them which is binding on the parties under a Restructuring package finally sanctioned by CDR Cell. The Company has thereafter proposed the Scheme under Section 391 of the Act for the Debenture holders. As far as the present Scheme is concerned, the Company has put both the Banks and Financial Institutions as well as the Debenture holders holding more than 2000 debentures under one Class. This is being done despite the fact that so far as Banks and Financial Institutions are concerned, there is no question of any Scheme for compromise as the respondent Company has already reached to a compromise with them under a Restructuring package approved by CDR Cell. As per CDR system, the Restructuring Package approved by CDR Cell is binding on the parties. Pursuant to the approval granted by CDR Cell, formal contracts in the 20 direction of implementation of the Restructuring Package were also executed. There is, therefore, no reason to include the Banks and Financial Institutions in the present Scheme for the debts which are already restructured. The Banks and Financial Institutions, even otherwise, constitute a separate and distinct Class as compared to the Debenture holders and it is not open for the Company to club these two Classes into one. 15. Mr. Pahwa has further submitted that the present Scheme is proposed by the Company only with a view to see that the debenture holders who are opposed to the Scheme as proposed earlier by the Company and who had about 33% stake are brought down below the statutory margin of majority required under Section 391 of the Act. The Company is not entitled to any orders from this Court on the application submitted by the Company. The Company once having failed in procuring their requisite majority for the purpose of approval of the Scheme 21 has presented the present Scheme with completely malafide intentions and with ulterior motives. The Company is seeking to enforce its own terms upon the Debenture holders. The present Scheme is completely a replica of the CDR package which is approved by the Banks and Financial Institutions for themselves and by presenting such Scheme, the Company is seeking to impose the CDR package upon the Debenture holders by adopting this illegal method. Mr. Pahwa has, therefore, submitted that the present Scheme is nothing but a gross case of fraud which is sought to be committed upon the Debenture holders. 16. Mr. Pahwa has further submitted that a comparison of the earlier Scheme which is already rejected and the present Scheme will disclose that the present Scheme is much more worse in its offer for compromise with the Debenture holders. As per the earlier Scheme, the Company proposed moratorium period for payment of the principal amount upto 22 20.04.2009 and to be paid in 8 Annual installments from 20.04.2009 to 20.04.2017 whereas under the present Scheme, the Company is proposing moratorium period of the principal amount upto 25.10.2014 and repayment upto 25.07.2018 (assuming Project re-start date of 25.01.2005 and completion date of 25.04.2007). With respect to payment of interest for the period from 01.10.1998 to 29.12.2003, in the earlier Scheme, the Company proposed to pay the interest as a Bullet repayment on 20.04.2025, whereas in the present Scheme, it is proposed for a Bullet repayment by 31.03.2026. He has further invited the Court's attention to the distinguishing features between the Term Lenders and Working Capital Lenders on the one side and Debenture Holders on the other side. In this connection, he has submitted that as far as Term Lenders are concerned, the year of investment / finance is 1996 and there are distinguishing features with regard to governing document, rate of interest, repayment, security, listing and the 23 nature of finance / investment for investor. So far as Debenture Holders are concerned, the same were issued pursuant to the public issue prospectus. The rate of interest was 14%. It was to be repaid by April, 2003 and the Debenture Holders are having second charge over assets of the Company and there was no personal guarantee of promoters. Moreover, security in trust managed by a debenture trustee and the Security is common for all debenture holders on a particular debenture issue. He has, therefore, submitted that both these Classes are different and they can never be put in the same class. 17. Mr. Pahwa has further submitted that the Company itself has firstly proposed the Scheme for the Debenture holders holding more than 2000 debentures by treating them as a separate Class. However, having realised that this Scheme is not being accepted, the Company kept on adjourning the meetings on its own without any approval of this 24 Court for almost two years. Ultimately, this Court has directed the Company to conclude the meeting latest by 30.06.2005. Faced with no other legal way, the Company has presented the Scheme which, on the face of it, suffers from the vice of malafides. He has, therefore, submitted that the Scheme should be declared as null and void at the very outset. 18. Mr. Pahwa has further submitted that though the Company's counsel has relied on the decision of this Court as well as the decision of the Hon'ble Supreme Court, the present case clearly falls within the ambit of the exceptions carved out by this Court in the order dated 24.02.2005 in Company Application No. 01 of 2005 in the case of Rama Multitech as the present application on the face of it is not maintainable and even otherwise, not sustainable and it is palpably in contravention of the provisions of the Act. He has, therefore, submitted that the directions 25 sought for in the present application should not be granted by this Court. 19. Alternatively, Mr. Pahwa has submitted that if this Court is not inclined to declare the Scheme as null and void at the very threshold, necessary directions may be issued to the Company to hold separate meeting for the Debenture Holders holding more than 2000 debentures as this class of debenture holders is absolutely a different class having no connection whatsoever with the other Term Lenders as well as Working Capital Lenders. Their institutions are different, their nature of security is different and in all respect, they cannot sit together and take any decision in the meeting and hence, as per the decided case law, direction may be issued by this Court to hold separate meeting for the Debenture holders. 20. In support of his submission, he has relied on the decision of this Court in the case of SHREE 26 BANSIDHAR PVT. LTD. V/S. O.L. OF M/S. SHREE BANSIDHAR SPG. AND WVG. MILLS PVT. LTD. in Company Application No. 67 of 2004 wherein the Scheme proposed by the Company was rejected by the Court at the very threshold. An appeal preferred against the said decision