IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH JAIPUR. ORDER In S.B. Company Petition No. 19 of 2006 IN THE MATTER OF THE COMPANIES ACT 1956 AND IN THE MATTER OF SECTION 391 OF THE COMPANIES ACT 1956 AND IN THE MATTER OF SCHEME OF COMPROMISE WITH THE SECURED CREDITORS OF MODERN DENIM LTD. Date of Order : July 22 2008 P R E S E N T HON'BLE MR. JUSTICE SHIV KUMAR SHARMA Mr. Paras Kuhad ) for the petitioner. Mr. Sunil Nath ) Mr. Manish Priyadarshi) Mr. P.K. Mulick ) for the respondent Mr. Himanshu Agnihotri) BY THE COURT: Modern Denim Ltd., (in short the petitioner company) has filed this petition under section 391 of the Companies Act, 1956 (hereinafter shall be referred to as the Act of 1956) for sanctioning the scheme of compromise between the petitioner company and its secured creditors. 2. The petitioner company was incorporated as Modern Suitings (P) Ltd. in November 1977 as a part of Modern Group of Companies. As a part of an exercise to restructure its activity the Modern Suitings Ltd. spun off its suiting division to Modern Syntex (India) Ltd. in April 1993 under the scheme of arrangement approved by this Court. The name of Modern Suitings Ltd. thereafter was changed to the present name i.e. Modern Denim Ltd. (in short “MDL”). 3. The petitioner company till 1997 was earning profits and its operations were profitable. From the year 1998 the operations of the petitioner company suffered losses on account of worldwide recession and excess supply scenario in denim industry. This situation remained worst till 2001- 2002. On account of accumulated losses the net worth of the petitioner company was completely eroded as on March 31, 2000 and consequently upon reference to the Board for Industrial and Financial Reconstruction (in short BIFR) to get itself registered as a Sick Industrial company in terms of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The petitioner company was declared as a sick company. It has been given out in the petition that the revival scheme was under progress. In the petition it was stated that the debt burden of the petitioner company reached at unserviceable level and in these circumstances it was not possible for it to carry on its business effectively without reducing the debts due to the creditors to a serviceable level and further a necessity was felt for rescheduling and restructuring of the existing debts. For this purpose an elaborate scheme of compromise was prepared in order to enter into compromise with the secured creditors of the petitioner company. It is averred in the petition that it is imperative in the best interest of the company and also the creditors to settle the debts in terms of the Scheme of Compromise which would prevent the company from getting insolvent. Creditors would also be benefited through the channel of recovery if the company remains a running concern and the same is not put under liquidation. It is submitted that the proposed scheme of compromise with secured creditors would enhance the opportunities of revival of the company by benefiting the company. The petitioner company in its Board meeting approved the proposed Scheme of Compromise by unanimously passing a resolution in its meeting held on August 10, 2006. Thereafter the petitioner company filed company application No.44 of 2006 before this Court. This Court on August 18, 2006 directed to convene meeting of the secured creditors of the petitioner company for the purpose of considering the said scheme of compromise. The meeting of the secured creditor was convened on September 20, 2006. The meeting was attended by 11 secured creditors and total value of their debt was 224.86 crores. The proposed scheme was approved by seven secured creditors holding Rs.181.53 crores of the secured debt representing 80.73% in value of the total value of debts as against four secured creditors holding 43.33 crores of the secured debts representing 19.27% of the total value of debt present and voted. 4. The Regional Director Ministry of Company Affairs New Delhi in the affidavit stated that out of 11 secured creditors who participated in voting four secured creditors having their debts aggregating Rs.43.33 crores voted against the scheme. It is submitted that the Registrar of Companies Jaipur intimated to his office regarding receipt of some complaints in respect of non payment of fixed deposits under section 58 A of the Companies Act, which is subject to Company Law Board orders dated December 29, 1997. The petitioner company failed to submit 'No Objection' to the scheme of arrangement from Jaipur Stock Exchange. The petitioner company vide its letter dated November 18, 2006 informed that the scheme of compromise is for the secured creditors and not for the shareholders and hence NOC from Jaipur Stock Exchange was not obtained. The Regional Director in its affidavit also incorporated Auditor's report. In para (v) of Auditor's report, it was stated - (v) The directors, other than nominee directors of the company are restricted from being appointed as director in other Companies under clause (B) of Section 274 (l) (g) of the Companies Act, 1956 as the company has defaulted in payment of Deposits, Term Loans, Redemption of Debenture's and interest thereon. In para (vi) of Auditor's report it was stated thus - (a) Compound interest, Penal and liquidation damages in respect of all borrowings have not been provided, amount of which is unascertainable, pending confirmation/ reconciliation. (b) Dividend for the year amounting to Rs. 110.75 lacs on cumulative redeemable preference shares has not been provided. The total amount of Dividend not provided till 31st March 2006 amounts to Rs. 1107.50 lacs. ( c ) Provision for the interest certain Secured and Unsecured loans amounting to Rs. 486.69 lacs has not been made in accounts. The total amount of interest not provided till 31st March 2006 amounts to Rs. 2737.36 lacs. (d) Balances of Debtors, Creditors, Advances and Loans etc. are subject to confirmation and reconciliation if any. (e) Pursuant to restructuring of some of the borrowings, the Company has taken credit of Rs. 14212.52 lacs to Profit and Loss account as exceptional items; pending fulfillment of future obligations. Total credit taken by the Company upto 31st March 2006 which are subject to fulfillment of future amount to Rs. 19994.95 lacs. (f) The accounts of the company have been prepared on a going concern basis though the BIFR has declared the Company as a sick company. 5. Learned counsel for the petitioner company filed reply to the affidavit stating that the Regional Director has failed to consider the disclosure made by the company under notes on accounts in schedule 14 of the balance sheet as on 31.3.2006. It is stated that vide order dated 21.12.2001 passed by the Company Law Board, the company was required to make payment of deposits and the interest thereon in accordance with the revival of the scheme to be approved by the Board of Infrastructure and Finance Reconstruction under the provisions of Sick Industrial Companies ( Special Provisions ) Act, 1985. The petitioner company is making payment on compassionate ground duly approved by the Committee constituted by the Company Law Board. The petitioner company is also making payment to all depositors who have sent letters directly to them or through the office of Registrar of Companies. The Regional Director merely reproduced the observations from the Auditor's Report. The balance sheet as on 31.3.2006 was circulated to all the shareholders and secured creditors in compliance to the provisions of the Companies Act and hence the petitioner company has not suppressed any material facts which are required to be disclosed under the Companies Act. The accounts have been prepared on the basis of the prevalent accounting practices. The share holders of the petitioner company have already approved the accounts in annual general meeting held on 30.9.2006. The show cause notice issued by the BIFR has been quashed by the AAIFR vide its order dated 8.6.2007. It is not in the interest of any secured or other creditors that company should be wound up. 6. One of the secured creditor viz. M/s. Indusind Bank Ltd. also filed objections to the proposed scheme of compromise thus - (i) Since the different creditors have been offered different options, there are different sub- classes amongst the secured creditors, accordingly as per the mandate of law, different meetings ought to have been convened for different sub classes of secured creditors. (ii) The Scheme has been opposed by Directors of the company as also important public financial institutions. The objectors IFCI Ltd., Indusind Bank Ltd., LIC and UTI Asset Management Co. voted against the scheme clearly demonstrates that the scheme is not reasonable and reliable. The objectors who offered option VIII not only lose all interest that has accrued on their lending, but also lose 80% of the principal amount lent by them. The said sacrifice is wholly oppressive and unjustified. The company cannot be permitted to attempt to revive itself in this manner. The majority of secured creditors who voted in support of the scheme obtained options I to VII through back door negotiations. The Scheme is thus not equitable or reasonable and vitiated by fraudulent preference. (iii) There have been material suppressions and the proposed scheme is also vitiated by inadequate disclosure. It is not possible for secured creditors to take an informed decision on basis of the information disclosed. The notice to the secured creditors does not disclose the following information : (a) Copy of the last audited balance sheet. (b) The latest audited report on the accounts of the company. (c) Proposed cash flow and profit projections for future years. (d) Details regarding pendency of any investigation proceeding in relation to the Company u/s. 235 to 251. (e) Details of various proceedings pending against the Company and the various proceedings pending before BIFR/ AAIFR/ High Court etc. which are all material facts relating to the company. (f) The viability study/ report/ basis on which MDL is sought to be restructured and the manner in which the options I to VIII have been formulated. (g) Details of repayments already made to various institutions so far under various OTS entered into by them. (h) Relevant financial details pertaining to debtors,creditors and utilization and repayment of loan (which is material for enabling the secured creditors to form an informed decision) : (i) Companies to whom loans and advances were given and the purposes thereof and resolutions in support thereof ; (ii) List of sundry creditors paid off; (iii) List of secured creditors year wise with dates of payment and amount paid as also payments made in the form of any other fee to them; (iv) Dates of settlement with the various secured creditors complete correspondence relating to the same ,dates and amounts of payments made and fees if any, paid to them in any other name. (v) List of creditors paid off between 1.4.2003 to 31.3.2006 with exact amounts paid, inclusive of interest, if any; (vi) Details of applications for loan made between 1.4.2003 onwards along with purpose for which the loan was sought, how the loan was utilized and how the loan was required to be utilized under the agreement. (vii) List of sundry debtors and creditors with details of material supplied and received and their relationship with the company or its directors and documents in support thereof. (i) Valuation of the company on basis of going concern and on replacement basis ; (j) Details of the present status of the company and factory's working ; (k) The promoters have not indicated how they propose to bring in Rs. 16 crores in two years. (l) The fact that in view of serious objections raised by all creditors regarding accounting practices adopted by the company for its audited balance sheet for the year 1999-2000, the various secured creditors sought an independent special investigative Audit of the Accounts of the Company and the further fact that such investigative audit was never carried out, has been conveniently suppressed. (iv) Even on facts, there is no reasonable possibility of rehabilitating MDL. The BIFR itself formed an opinion that the company should be wound up and issued show cause notice to that effect. The matter of rehabilitation of MDL has been pending before BIFR/ AAIFR since 2000 and no concrete rehabilitation proposal could be finalized in all these years. The proposed scheme has been made only with a view to gain further time and delay liquidation of the company with the ulterior motive of denying the creditors their dues. In the proceeding before BIFR on 6.5.2003, the BIFR held that the company ought to be wound up. On 1.8.2003 the BIFR recorded consent of ICICI, IDBI, IFCI, UTI, Bank of Baroda, SBI, Indian Overseas Bank, Bank of Maharashtra and Sanwa Bank Ltd. for winding up of the Company. (v) The management is guilty of fraudulent accounting and mismanagement leading to most companies in the group becoming sick or closed and therefore cannot be trusted with rehabilitation of the company. The management of the petitioner company has been guilty of fraudulent accounting and cannot be trusted to make a bonafide attempt to revive the company. This is shown by the following : (a) MDL has been operating accounts with non\consortium banks while accounts with all the consortium banks continue to be in NPA category. (b) MDL has not been submitting QIS data, break-up of balance sheet and break-up of its debtors as is required in the stock statements in contravention of the terms of sanction, thereby making it possible for the Bank to ascertain proper end use of the funds. (c) At the BIFR hearing on 23.2.2001, ICICI brought to the notice of BIFR that the Company had made payments to ICD holders of Rs. 115 lacs in six months out of which payment to a single ICD holder was Rs. 50 lacs. This clearly shows fraudulent accounting as also fraudulent preferences on part of MDL. (d) At the same hearing Bank of Baroda, brought to the notice of BIFR that the company had written off Rs. 5 crores as bad and doubtful debt, invested Rs. 45.35 lacs in sister concern and that there had been a steep rise in other expenses despite fall in the sales of the company. For these reasons the Bank of Baroda sought a special investigation audit. (vi) Scheme prepared and proposed by the same manipulative management cannot be trusted and accepted without independent investigation. (vii) Almost all the group of companies in the Modern group have become sick due to mismanagement. Unless there is a complete change of management there is not even a remote chance of turning around the company. (viii) Almost all the loans advanced to the Company are secured by personal guarantees of its directors/ managerial personnel. The loan advanced by Indusind Bank Ltd. is secured by personal guarantees of Mr. H.R. Ranka and Mr. Sachin Ranka. The scheme specifically envisages that all personal guarantees shall stand discharged on payment being made in accordance with the scheme. Since the directors have given personal guarantees and the scheme envisages discharge of the personal guarantees, it is a gross misstatement that no director or any managerial personnel has any interest in the proposed scheme of compromise. (ix) Company having been declared a 'Sick Industrial Company' by BIFR on 23.2.2001 and thereafter on 6.5.2003 the BIFR having taken a prima facie view that it was just, equitable and in public interest that the company be wound up, this Court should not proceed with the present proceedings. (x) Once a company is declared a sick industrial company, the BIFR which comprises of experts in the field of rehabilitation, should be allowed to determine the proper course of rehabilitation/ winding up and this court should stay its hand and refrain from passing any orders having bearing on the matter except in exercise of supervisory jurisdiction under Article 227 of the Constitution. In case of any consistency between the companies Act and SICA, SICA will prevail. 7. The petitioner company filed reply to the objections raised by Indusind Bank. It was stated that in the proposed scheme of compromise from “the appointed date 31.3.2003” the principle amount due to the secured creditors existing on the books of the petitioner company has been proposed to be settled or restructured. The principle outstanding as on appointed date due to the objector is Rs. 7.83 crores. It was stated that same set of scheme has been offered to all the secured creditors and similarly the same options were offered to all the secured creditors. The desirability of having different options and limiting such payment options specifically to the extent of available cash flows, is an integral part of the Scheme, and has been designed by the creditors themselves and has accordingly been accepted by all the secured creditors who voted in favour of the scheme. The question of convening different meetings arises only if different schemes are offered to different creditors. The scheme has been approved by the secured creditors representing 80.73% in value of the total value of debts present and voting in the meeting. The sacrifices proposed for the scheme are sacrifices that have been worked out by the experts. The scheme has been prepared after various rounds of negotiations with the secured creditors and examining the feasibility and sustainability of the debt burden and repayment burden. Once the scheme is implemented with comprehensive solutions, the financial health of the company will be restored as the scheme is aiming at infusion of fresh equity and loans by the promoters and their associates and reduction/ rescheduling of debts so as to align with the expected generation of cash surplus in future. It was stated that the creditors will be benefited through the channel of recovery, as the same shall stand to be on the higher end if the company remains a running concern and the same is not put under liquidation. On the other hand if the liquidation proceedings are initiated the returns would be at lower end for the creditors. The scheme will help in continued existence of the petitioner company which employs over 1050 workmen and the staff. It is stated that the scheme is neither oppressive nor unreasonable. The show cause notice issued by the BIFR was set aside by appellate authority (AAIFR) vide order dated 8.6.2007. Earlier no secured creditors agreed to the proposed scheme but after continuous dialogue by the petitioner company with the secured creditors, the present scheme was proposed and the same has been approved by 7 secured creditors representing 80.73% in value of the total value of debts. This fact is indicative of the fact that the scheme is reasonable and viable option to revive the company. It was stated that it is not in the interest of any secured or other creditors that company should be wound up. The annual accounts for the year ended 31st March, 2006 have been approved by the share holders in their meeting held on 30th September 2006. There is no bar under section 391 of the Companies Act which prohibits this Court to entertain and sanction the scheme of compromise. It is stated that section 22 of the Sick Industrial Companies Act (Special Provisions) Act, 1985 bars the continuation and maintainability of proceedings against the industrial company with respect to which a inquiry under section 16 or scheme is under preparation under section 17 or wherein appeal is pending under section 25 of the said Act namely : (i) Winding up proceedings; (ii) Proceedings for execution, distress or the like (iii) Proceedings for the appointment of a receiver. (iv) A suit for recovery ; or (v) Proceedings for the enforcement of any security or any guarantee. Clearly enough, proceedings under section 391 of the Companies Act relating to Scheme of compromise/ arrangements do not fall under any of the above mentioned proceedings and these are not barred by section 22 of the SICA. The judgment of NGEF Ltd. vs. Chandra Developers (P) Ltd. has no application in the facts of the present case. 8. I have heard learned counsel for the parties and considered the submissions in view of the material on record. 9. Learned counsel placed before me the copies of judgments rendered in Company Petition No. 21 of 2006, M/s. Lords Chloro Alkali Limited decided on March 15, 2007 and Company Petition No.22 of 2005, Modern Syntex (India) Limited, decided on December 1, 2006. 10. Before proceeding further it would be relevant to refer the case laws on the subject enunciated by the Apex Court. A. HINDUSTAN LEVER & ANR. V/S. STATE OF MAHARASHTRA, 2004 (9) SCC 438. Para.11: "While exercising its power in sanctioning a scheme of agreement, the court has to examine as to whether the provisions of the statute have been complied with. Once the court finds that the parameters set out in Section 394 of the Companies Act have been met then the court would have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their eyes open give their approval, even if, in the view of the court a better scheme could have been framed. This aspect was examined in detail by this Court in Miheer H. Mafatlal v/s. Mafatlal Industries Ltd. The court laid down the following board contours of the jurisdiction of the Company Court in granting sanction to the scheme as follows: (SCC pp.597-98 & 601-02, para 29). 1. The sanctioning court has to see to it that all requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391 (1) (a) have been held. 2. That the scheme put up for sanction of the court is backed up by the requisite majority vote as required by Section 391 sub-section (2). 3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the class of voters concerned is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the meetings concerned as contemplated by Section 391 sub-section (1). 5. That all the requisite material contemplated by the provisions of sub- section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not unconscionable, nor contrary to public policy. For ascertaining the real purpose underlying the scheme with a a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors class of creditors, as the case may be, were action bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the