IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 28.08.2009 CORAM THE HON'BLE MR. JUSTICE P.JYOTHIMANI COMPANY APPLICATION NOS.1066 and 1067 of 2009 ORDER These applications are filed under sections 391 and 394 of the Companies Act,1956 read with Rules 9, 11(b), 19 and 67 of the Companies (Court) Rules,1959 by the applicant, M/s.Cash & Carry Wholesale Traders Private Ltd., a company registered under the Companies Act on 21.5.2002, having its registered Office at Govind-I, Kannappa Nagar Extn., Thiruvanmiyur, Chennai-41. 2. The object of the company as it is seen in the affidavit filed in support of the applications is to carry on the business of wholesale in all kinds of goods and products including goods manufactured by and/or to trade by way of wholesale in any articles, goods, rights, possessions of any nature and of any use being industrial, commercial, household, technical and in such process to buy, sell, acquire, lease any merchandise, goods or property of any form whatsoever as authorised dealers, stockists, agents, brokers, factors and render all such services. To manufacture, brand market in any articles, goods, rights, possessions of any nature and of any use being industrial, commercial, household, technical and in such process to buy, sell, acquire, lease, any merchandise, goods or property of any form whatsoever as authorised dealers, agents, stockists, brokers, factors and render all such services to carry out the other as stated in its Memorandum of Association. 3. Admittedly, the applicant company is stated to be a shareholder of M/s.Subhiksha Trading Services Limited (hereinafter called as 'the Company'), holding 11 equity shares of Rs.10/- each. At this stage, it is relevant to point out that as against the said Company, which is also a private limited company and whose object is similar to that of the applicant Company, C.P.Nos.26 and 68 of 2009 have been filed for winding up under section 433(e) of the Companies Act,1956. 4. The applicant is stated to be a Promoter of M/s.Blue Green Constructions and Investments Limited, which has already filed C.P.Nos.239 and 240 of 2008, for sanction of a Scheme of Amalgamation between the Company and M/s.Blue Green Constructions and Investments Limited, which is the transferee company. 5. The present applicant is the Sponsor of a Scheme of Arrangement and these applications are filed for direction to hold the meeting of non-lending creditors of the Company, for considering and approving with or without modification of the Scheme of Arrangement between the Company and lending creditors and non-lending creditors and the consequential orders regarding publication of notices, etc. including the appointment of Chairman. Another application is filed for direction to hold the meeting of lending creditors of the Company for considering the said Arrangement and for other consequential orders. 6. The said Company, as on 31.3.2008, as per the audited balance sheet was having authorised share capital of Rs.50 crores divided into 5 crore equity shares of Rs.10/- each. The issued capital as on the said date was Rs.3,25,70,370 shares of Rs.10/- each and subscribed and paid up capital as on the said date was Rs.31,80,79,470/- and it is stated that a sum of Rs.76,24,230/- is receivable from the employees. 7. There has been a steep change in the financial position of the said company, when there was an increase in authorised capital from Rs.50 crores to Rs.74 crores as per the resolution of the Extra Ordinary General Body Meeting held on 25.7.2008, by creating Rs.240 lakhs equity shares of Rs.10/- each. The General Body Meeting on the said day also approved the issuance of 4,07,08,236 preferential warrants, each carrying right to subscribe one equity share of Re.1/- each, that was issued to the non-promoters, who are: (1)India Advantage Fund 1,55,79,066; (2)Emerging Sector Fund 76,73,271; (3)ICICI Fusion Fund 16,60,947; (4)ICICI Fusion Fund II 33,72,227; (5)Zash Investment & Trading Co.Pvt.Ltd., 1,00,66,346; and (6)ESOS Trust 23,56,379. 8. In the said Company, Mr.R.Subramanian, is the main promoter and the present Managing Director and the said company was the country's largest retailer having over 1600 shops and stores in India as on September, 2008 and the second largest in terms of sale. ICICI Venture Limited has invested on five different occasions in the said company. According to the applicant, the valuation of shares of the company taking note of the large block of equity shares sold by ICICI Ventures Limited would be Rs.230 crores. It is stated that the company which was having 150 stores and only Rs.330 Crores of sales in 2005-06 has increased its business around 1600 stores and over Rs.2300 crores of sale by two years namely, during 2006 to 2008. 9. It is stated that till the financial year ending 2008, the company's operation has been continuously profitable and the company has been making substantial contributions towards its taxes. The company has achieved a turnover of Rs.2,305 crores for the fiscal year ending on 31.3.2008 and a post-tax profit of Rs.39 crores. It was at that time, the said company, with the consent of its promoters and directors and major shareholders has decided to take over a listed company viz., M/s.Blue Green Constructions and Investments Limited, for which C.P.Nos.239 and 240 of 2008 were filed for the purpose of merger. Due to the collapse of the stock market after September, 2008 and global recession, there was a complete dearth and liquidity in the financial system between September, 2008 and January, 2009. Meetings of creditors and bank groups were held and the said company sought a finance of Rs.125 crores from the banks to tide over the situation in November, 2008 and the company has virtually collapsed especially taking note of its size of operation in India with 1600 stores and 15000 employees in 13 States and the Union Territories and its operation has come to a standstill. 10. ICICI Bank, being one of the largest lenders of the said company has agreed for a Corporate Debt Restructuring (CDR) created by the Reserve Bank of India. It is relevant to point out at this stage, as submitted by the learned senior counsel for ICICI Bank Mr.AL.Somayaji, the period of CDR has already come to an end by 31.7.2009 and there is no possibility of continuing the CDR proposal. However, Mr.Murari, learned counsel appearing for the transferee company under the proposed amalgamation, would submit that the CDR is still pending. 11. Since the entire operation of the Company has come to a standstill, the concept of restructuring of business was looked into and according to the applicant, most of the lending banks have accepted for revival of operation in spite of its clear impairment in the assets. It is also relevant to point out that the said CDR mechanism is applicable only to bankers who are signatory to the said mechanism. It is stated that out of 13 banking lenders of the said company, only 6 banks viz., ICICI, HDFC, Federal Bank, Yes Bank, Bank of India and Bank of Baroda are parts of CDR proposal and the remaining seven banks viz., HSBC, ABN Amro, Indusind Bank, Barclays Bank, Development Credit Bank, Standard Chartered Bank and Kotak Mahindra Bank, have remained out of CDR proposal. According to the applicant, out of the said seven banks, six banks are likely to accept the proposal. As stated above, it is the submission of the learned senior counsel that CDR proposal has come to an end on 31.7.2009 and there is no possibility for extension of the said scheme. 12. On a petition filed by one of the parties for winding up of the said company, this Court has passed an ex parte order on 31.3.2009, appointing the Official Liquidator as Provisional Liquidator of the company and on appeal by the company, the Division Bench in O.S.A.Nos.84 and 93 of 2009 has stayed the order of the learned Single Judge dated 31.3.2009 with certain conditions and it is stated that the said conditions have been complied with. 13. In any event, since the order of Division Bench is only in respect of appointment of Official Liquidator, the concerned company petitions for winding up have also been heard and orders are being passed separately in C.P.Nos.29 and 68 of 2009. 14. In addition to the 13 banking financial lenders, there are three more non-banking lenders of the company and there are dues to various unsecured creditors who have supplied goods and rendered services and there are non-lending creditors who include suppliers of saleable goods, service providers and employees who continued in service as well as resigned. 15. Since the CDR scheme is binding only on the signatory banks and there are non-signatory banks who are secured creditors and other unsecured creditors who are suppliers as stated above, it was thought that a scheme should be framed to enable the company to revive its operation. 16. Such operation can be done only with the approval of the scheme by the lending and non-lending creditors. It is specifically stated that the present Scheme of Arrangement is based on the Scheme of Amalgamation raised by M/s.Blue Green Constructions Investments Limited pending in C.P.Nos.239 and 240 of 2008. As per the present arrangement which is sought to be discussed in the meeting of lending and non-lending creditors, it was found that the company immediately needs funds to the extent of Rs.300 crores to restart the business and there is no possibility of revival with less than Rs.250 crores. Taking note of the fact that non-promoter shareholders of the company were not able to contribute additionally and left it to others for revival of the company, the applicant in the present applications viz., M/s. Cash & Carry Wholesale Traders Private Limited (hereinafter referred to as 'the Sponsor') has sponsored the present Scheme. Admittedly, the present applicant is holding only 11 equity shares of the company. It is also admitted fact that the applicant in these applications who sponsors the arrangement is also a promoter of M/s.Blue Green Constructions & Investments Ltd., into which the company is proposed to be merged as per the Scheme of Amalgamation and holding almost 40% of the paid up capital of the said company. It is also stated that C.P.Nos.239 and 240 are pending. 17. Under the scheme formulated by the sponsor, it is seen that the proposal is to be placed before the meeting of creditors, both lenders and non-lenders. The lending creditors are to waive (a) the interest chargeable on their respective loans falling between 1.10.2008 and upto 120 days after the effective date of the scheme, the effective date being the last of the dates on which the sanction, consent or approval of the scheme is obtained; and (b) the lending creditors shall also waive 50% of their respective principal amounts due and payable by the company as on the effective date of scheme determined. After the waiver, as per clause (a), the lending creditors shall accept the payment of remaining 50% of the principal amounts in full and final settlement on pro-rata basis as set out in the scheme as follows: Time of Repayment of the remaining 50% of Principal Quantum (i) At the end of 3 years from the Effective Date 5.0% (ii) At the end of 4 years from the Effective Date 5.0% (iii) At the end of 5 years from the Effective Date 7.5% (iv) At the end of 6 years from the Effective Date 12.5% (v) At the end of 7 years from the Effective Date 15.0% (vi) At the end of 8 years from the Effective Date 15.0% (vii) At the end of 9 years from the Effective Date 20.0% (viii) At the end of 10 years from the Effective Date 20.0% 18. Apart from that, the lending creditors are to waive interest on loans, interest on interest, penalties, fines, etc. on their respective loans for the period from 1.10.2008 till the effective date in addition to other provisions in respect of lending creditors. 19. As per the proposed arrangement, the non-lending unsecured creditors shall be repaid as per the books of account of the company as on 31.12.2008 in 12 equal monthly instalments i.e., from 31.1.2011 to 31.12.2011 along with all interests. Penal charge, claims for loss of profits, claims on any other grounds etc. shall be waived permanently in full. The said dates have been fixed on the basis that the effective date of the scheme shall be on or before 30.9.2009. If the effective date is beyond 30.9.2009, the schedule will be readjusted. All dues arising from supplies made or services rendered on or after 01.01.2009 and upto the effective date of the scheme shall stand extinguished in full. Any continuing liability like service being rendered, such as rentals etc., shall recommence only from 120 days from the effective date. As per the said scheme, it is admitted that the amount of Rs.250 crores will be pumped in only after the scheme of amalgamation with M/s.Blue Green Constructions and Investments Ltd. comes into effect. 20. It was in those circumstances, when the above applications were taken up, the learned counsel for the applicant/petitioner in C.P. Nos.239 and 240 of 2008, Mr.Murari was requested to argue the said applications so that a comprehensive order can be passed especially in the circumstance that the source of present scheme of arrangement for which permission is sought for in these applications, viz., Rs.250 crores is to come only after the scheme of amalgamation takes effect, which is the subject matter of C.P.Nos.239 and 240 of 2008, which have been pending even before the present applications. However, Mr.Murari, learned counsel for the applicant in the said applications would submit that the amalgamation applications can be taken up at a later point of time since the amalgamation can be worked out effectively only after the present arrangement is approved by the lending and non-lending creditors of the company. Therefore, the present applications alone have been taken up for hearing. 21. As submitted by Mr.R.Muthukumarasamy, learned senior counsel appearing for the applicant in these applications, normally when an application is taken up under sections 391 and 394 of the Companies Act,1956 filed for arrangement, compromise, etc., the creditors or other persons are not heard for the reason that they can always raise their objections in the meeting of secured and unsecured creditors. The said checks are provided under section 391 of the Companies Act,1956, which is as follows: ' Section.391.(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 Court 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 Court 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, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or in the case of a company which is being wound up, on the liquidator and contributories of the company: [Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like. (3) An order made by the Court under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar. (4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constitution or defining the constitution of the company. (5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default,shall be punishable with fine which may extend to one hundred rupees for each copy in respect of which default is made. (6) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of. (7) .....' 22. It is true that on a reading of the said provision it is clear that when the creditors or members or class of members are present and vote the proposal agreeing for a compromise or arrangement in a meeting wherein 3/4th value of creditors are present and vote, then only the proposal comes into effect and the same will come into operation after it is sanctioned by the Court. It is only due to the said protections available to the creditors both secured and unsecured of the Company, the Court normally grants such permission. 23. The further protection is available under section 394 of the Companies Act which is as follows: " 394. Provisions for facilitating reconstruction and amalgamation of companies. (1) Where an application is made to the Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court- (a) that the compromise or arrangement has been proposed for the purpose of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another company (in this section referred to as "the transferee company"); the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters: (i)the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company; (ii) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (iv)the dissolution, without winding up, of any transferor company; (v)the provision to be made for any persons who, within such time and in such manner as the Court directs, dissent from the compromise or arrangement; and (vi)such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out: [Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the Court unless the Court has received a report from the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest: Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.] (2) where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect. (3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration. If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees. (4) In this section- (a) "property" includes property, rights and powers of every description; and "liabilities" includes duties of every description; and (b) "transferee company" does not include any company other than a company within the meaning of this Act; but "transferor company" includes any body corporate, whether a company within the meaning of this Act or not." Ultimately, when the approval for final sanction is granted by the Court, this Court takes into account the report of the Official Liquidator apart from the report of the Registrar of Companies on the affairs of the company as to whether the affairs are not conducted to the prejudice of the members or public interest and only thereafter, the final sanction is granted. 24. It is the contention of Mr.R.Muthukumarasamy, learned senior counsel that for granting permission to convening meeting under section 391(1)(a) of the Companies Act between the company and its creditors, it is only the prima facie satisfaction of the Court that is sufficient and it does not require any hearing. However, since the banker creditors including Kotak Mahindra Bank and non-lending creditors have raised doubt about the genuineness of the said arrangement itself, the counsel representing the secured creditor banks and the suppliers were heard. 25. Mr.Karthik Seshadri, learned counsel appearing for the banking creditors would submit that inasmuch as the company is not the applicant, Rule 67 of the Companies (Court) Rules, 1959 would not apply and inasmuch as the applicant is a third party, under Rule 68 notice has to be given to the company before any order is made. It is his submission that even at the time when permission is given for convening the meeting, the Court must be satisfied about the genuineness of the scheme. He would rely upon the judgement of the Bombay High Court in Sakamari Steel & Alloys Ltd., In re [51 Com. Cas. 266]. He would submit that by order dated 31.3.2009 in C.P.No.68 of 2009, this Court having been satisfied with the prima facie case, ordered notice and in the appeal which was filed against the appointment of provisional liquidator, stay was granted by the Division Bench of this Court due to the reason that the said order in the company petition was made ex parte. Therefore, it is his submission that it is the duty of the applicant to show that the proposal made by it by way of sponsorship is genuine and that will be possible only if the source of