OJA/241/2007 1 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No. 241 of 2007 In COMPANY PETITION No. 93 of 2007 In COMPANY APPLICATION No. 126 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE MOHIT S.SHAH and HONOURABLE MR.JUSTICE K.A.PUJ ================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? Yes 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 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 ? No 5 Whether it is to be circulated to the civil judge ? No ================================================= SATYESH JAMES PARASAD & 16 - Appellant(s) Versus INDIAN PETROCHEMICAL CORPORATION LIMITED - Opponent(s) ================================================= Appearance : MR SHALIN N MEHTA for Appellant(s) : 1 - 17. MR KS NANAVATI, Sr, Advocate with MR SN SOPARKAR, Sr. Advocate with MR NANDISH CHUDGAR for NANAVATI ASSOCIATES for Opponent(s) : 1, ================================================= CORAM : HONOURABLE MR.JUSTICE MOHIT S.SHAH and HONOURABLE MR.JUSTICE K.A.PUJ Date : 28/12/2007 CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE MOHIT S.SHAH) OJA/241/2007 2 ORDER This Original Jurisdiction appeal is directed against the judgment and order dated 16.8.2007 in Company Petition No.93 of 2007 by which the learned Company Judge sanctioned the scheme of amalgamation of the petitioner-Company- Indian Petrochemicals Corporation Ltd. (hereinafter referred to as “IPCL” or “the transferor Company) having its registered office at Baroda with Reliance Industries Ltd. (hereinafter referred to as “RIL” or “Reliance” or “the transferee Company”) having its registered office at Mumbai. 2. Reliance Industries Ltd. had filed Company Application No.283 of 2007 before the Bombay High Court. Pursuant to the order dated 16.3.2007 in the said application, RIL held separate meetings of equity shareholders, secured creditors (including debenture holders) and unsecured creditors of RIL on 21.4.2007. The Chairman of the said meeting submitted his report before the Bombay High Court and the RIL filed Company petition No. 345 of 2007 before the Bombay High Court for sanctioning the same scheme of amalgamation of the IPCL with RIL. The said company petition was allowed and the scheme was sanctioned by the Bombay High Court by its order dated 12.6.2007 as modified by order dated 11.7.2007. 3. We may indicate the broad facts leading to filing of this appeal. 3.1 By Resolution of the Board of Directors of IPCL and by Resolution of the Board of Directors of Reliance Industries Ltd., the two companies decided for amalgamation of IPCL (transferor Company) with RIL (transferee Company) and for that purpose to follow the procedure prescribed by and under the provisions of Sections 391 to 394 of the Companies Act, 1956 (hereinafter OJA/241/2007 3 ORDER referred to as “the Act”). By order dated 16.3.2007 in Company Application No.126 of 2007, this Court directed IPCL to convene separate meetings of equity shareholders, secured creditors (including debenture holders) and unsecured creditors of the IPCL under the Chairmanship of Hon'ble Mr Justice SD Dave, a retired Judge of this Court. 3.2 Accordingly, three separate meetings were held at Baroda on 14.4.2007 under the Chairmanship of Hon'ble Mr Justice SD Dave. The Chairman submitted his report dated 18.4.2007 placing on record the result of the meetings as under:- (A) The scheme came to be approved by overwhelming majority of the equity shareholders present and voting as per the following details :- “(i) 7,632 Equity Shareholders holding in the aggregate, 20,37,73,286 equity shares constituting 97.04% in number and representing 99.89% in value of the Equity Shareholders, present in person or by proxy and voting at the Meeting, voted in favour of the Scheme. (ii) 233 Equity Shareholders holding in the aggregate, 2,28,705 equity shares constituting 2.96% in number and representing 0.11% in value of the Equity Shareholders present in person or by proxy and voting at the Meeting, voted against the Scheme. (iii) Votes of 54 Equity Shareholders holding 11,74,879 Equity Shares, were declared invalid.” OJA/241/2007 4 ORDER (B) The secured creditors (including debenture holders) unanimously approved the scheme as per the following particulars:- (i) 51 Secured Creditors (including Debenture holders) having claims against the Applicant Company of an aggregate value of Rs.355.34 crore and constituting 100% in number representing 100% in value of the Secured Creditors (including Debenture Holders), present in person or by proxy and voting at the Meeting, voted in favour of the Scheme. (ii) No Secured Creditor (including Debenture holder) of the Applicant Company voted against the Scheme. (iii) The votes of 3 Secured Creditors having claims against the Applicant Company of an aggregate value of Rs.0.25 crore were declared invalid.” (C) Similarly the unsecured creditors present and voting also unanimously approved the scheme as per the following details:- “(i) 635 Unsecured Creditors having claims against the Applicant Company of an aggregate value of Rs.687.48 crore and constituting 100% in number representing 100% in value of the Unsecured Creditors present in person or by proxy and voting at the Meeting, voted in favour of the Scheme. (ii) No Unsecured Creditor of the Applicant Company voted against the Scheme. (iii) The votes of 4 Unsecured Creditors having NIL claims against the Applicant company were declared invalid.” (emphasis supplied) OJA/241/2007 5 ORDER 3.3 In light of the above report, IPCL filed Company Petition No.93 of 2007, giving rise to the present appeal, seeking sanction of the Company Court to the scheme of amalgamation of IPCL (transferor Company) with RIL (transferee Company). The petition was also supported by affidavit dated 18.4.2007 of the Company Secretary, IPCL stating that the petitioner-Company (IPCL) had complied with the directions given by the Company Court in Company Application No.126 of 2007 and that the scheme was approved by requisite majority of shareholders and creditors of the Company. 3.4 When the petition came up for preliminary hearing on 23.4.2007, the learned Company Judge admitted the petition, fixed it for final hearing on 19.6.2007 and directed publication of the advertisement in two daily newspapers viz. Times of India, Ahmedabad edition and Gujarat Samachar, Ahmedabad and Baroda editions. Notices were also issued to the Regional Director and the Official Liquidator. The Official Liquidator was directed to obtain services of a Chartered Accountant and to submit the report on the affairs of the Company. The Official Liquidator attached to this Court also submitted his report dated 18th June 2007 along with the Chartered Accountant's Investigation Report dated 4.6.2007 indicating that by sanctioning the scheme the interest of the members and the public at large would not be prejudiced. The Regional Director submitted his report indicating that the Government of India had no objection to approval of the scheme and also stating that scheme was not against the public policy. The Bombay Stock Exchange Ltd. and the National Stock Exchange of India Ltd. where the shares of the transferor and transferee Company were listed, granted their no objection to the scheme under the provisions of Section 24(f) of the listing agreements. OJA/241/2007 6 ORDER 3.5 It appears that the Company petition was extensively heard by the learned Company Judge. The objections lodged by 21 equity shareholders as well as the objections lodged by three union of employees were considered by the learned Company Judge who ultimately allowed the Company petition by judgment dated 16.8.2007, which is impugned in this appeal filed on 24.10.2007. 4. In the meantime, after the above judgment, IPCL filed caveat on 22.8.2007 in the OJ Appeals likely to be filed against the judgment. It is the case of the respondent-IPCL (now Reliance Industries Ltd.) that the IPCL received the certified copy of the judgment on 5.9.2007 and that the said certified copy was filed with the Registrar of Companies, Gujarat State, Ahmedabad in prescribed Form 21 on 5.9.2007 itself; similarly, the order of the Bombay High Court was also filed by the RIL with the Registrar of Companies, Maharashtra State, Mumbai on 5.9.2007 and that thus the scheme became effective on 5.9.2007, the appointed date being 1.4.2006. It is also the case of the respondent-IPCL (now RIL) that the scheme has been implemented by the Company by taking various steps in compliance of the same; including fixing record date for issue of shares (12.10.2007), listing approval from the stock exchange (16.10.2007) and despatch of physical share certificates to members who had still not dematerialized their shares (17.10.2007) and declaration of quarterly financial results of RIL post-merger with IPCL, to all stock exchanges and dissemination of information to all shareholders (18.10.2007). 5. This appeal has been filed by 17 minority shareholders who held 19,970 shares which constituted 0.007 % of share holding in the transferor Company- IPCL. OJA/241/2007 7 ORDER 6. Mr Shalin Mehta, learned counsel for the appellants has raised the following broad contentions :- I The debenture holders of IPCL (transferor Company) form a class distinct and separate from the secured creditors of IPCL but instead of convening separate meetings of the debenture holders, they were clubbed with the secured creditors and, therefore, the scheme of amalgamation is required to be rejected with a direction to hold a separate meeting of the debenture holders of IPCL. II The share exchange ratio of 1 : 5 (one share of Reliance Industries Ltd. in exchange of five shares of IPCL) is unfair, unjust and prejudicial to the whole class of equity shareholders of IPCL. III Serious irregularities were committed by IPCL in obtaining proxies from certain minority equity shareholders of IPCL. They were threatned or cerced into signing blank proxy forms by the Heads of Departmens of IPCL before the day of the equity shareholders' meeting. This was violative of the provisions of Section 166 of the Companies Act, violative of the Articles of Association of IPCL and also violative of the Company Court's order dated 23.4.2007 in Company Application No.126 of 2007. IV Sanction to the scheme results in creation of monopoly status with RIL and concentration of economic power in the hands of a few individuals, which is opposed to the Directive Principles of State Policy as contained in Article 39(b) and (c) of the Constitution. The provisions of Sections 391 to 397 of the Companies Act are required to be read and interpreted in conjunction with Article 39 of the Constitution. V The scheme is also contrary to the public interest and public policy. The real and apparent purpose of the scheme is that RIL wants to strip IPCL (which was considered to be Navratna) of its assets for diverting funds to the Special Economic Zones and to OJA/241/2007 8 ORDER wipe out the reserves of IPCL worth more than Rs.4500 crores in one stroke. RIL wants to undertake a systematic liquidation of IPCL assets to fund its ventures. VI This is a fit case for applying the doctrine of lifting the veil or piercing in the corporate veil. 7. On the other hand, Mr KS Nanavati and Mr SN Soparkar, learned counsel for the respondent-Company have raised the following preliminary objection :- The order of the Company Court sanctioning the scheme of amalgamation passed on 16.8.2007 had already been implemented before the present appeals were filed because the certified copy of the order was filed in the prescribed form with the Registrar of Companies, Gujarat State Ahmedabad on 5.9.2007. Similarly, the order of the Bombay High Court sanctioning the scheme of amalgamation in the petition filed by the transferee company- RIL was also filed with the Registrar of Companies, Maharashtra at Mumbai on 5.9.2007. Thus the scheme became effective on 5.9.2007; the appointed date being 1.4.2006. The orders were filed with the Registrar of Companies in the prescribed forms through electronic filing on 5.9.2007. Intimations were given to the stock exchanges and the RIL shares were issued to the IPCL shareholders in electronic form and to those who had not dematerialized their shares, physical share certificates were despatched on 17.10.2007. Trading approval was also given by the stock exchange on 22.10.2007 and quarterly financial results of RIL post-merger with IPCL were was also declared to all stock exchanges and disseminated to all shareholders on 18.10.2007. In this view of the matter, the appeal filed on 24.10.2007 against IPCL was not competent and otherwise also infructuous. OJA/241/2007 9 ORDER 8. Apropos the above preliminary objection raised on behalf of the respondent, Mr Shalin Mehta, learned counsel for the appellants has submitted that the appellants requested the learned Company Judge for stay of order sanctioning the scheme of amalgamation in order to enable the appellants to prefer this appeal and to obtain the appropriate interim orders. However, the learned Company Judge did not grant any such stay. In view of the voluminous record and judgment of the learned Company Judge running into 495 pages, the appellants took some time to prefer the appeal which was filed within the period of limitation after deducting the time requisite for obtaining the certified copy. It is, therefore, submitted that these facts cannot be held out against the appellants and for this reason alone, the appeal cannot be treated as not maintainable or infructuous. 9. Having heard the learned counsel for the parties, we do find that in view of the voluminous record of the company petition and also the bulk of the judgment running into 495 typed pages, the appellants needed some time to prepare the appeal memo and the paper-books. In the meantime, the learned Company Judge had declined to stay operation of the order sanctioning the scheme of amalgamation and, therefore, the transferor company as well as the transferee company took the necessary steps towards implementation of the scheme of amalgamation resulting into the transferor company having already been amalgamated into the transferee company before the appeal came to be filed on 24.10.2007. In these peculiar facts and circumstances of the case, therefore, we are not inclined to dismiss the appeals at the threshold. The question as to what would happen in case the judgment of the learned Company Judge were to be disturbed OJA/241/2007 10 ORDER would arise if we find any substance in the merits of the contentions raised by the appellants. We now proceed to deal with those contentions. Was Separate Meeting of Debenture Holders required ? 10. Mr Shalin Mehta for the appellants has submitted that a separate meeting of the debenture holders of IPCL was required to be convened for the following reasons :- (a) Commercial law and common law recognize three broad categories/classes of creditors viz., preferential creditors, secured creditors and unsecured creditors (Palmer's Company Law, 21st Edition at page 700, and in Re Manekchowk and Ahmedabad Manufacturing Company Ltd. (1970) 40 Company Cases 819 (877) (Guj). The debenture holders of IPCL belong to the category/class of preferential creditors and in the event of liquidation of the company, the debenture holders would get paid off first in preference to the secured and unsecured creditors of IPCL. (b) The Companies Act, 1956 has special provisions for protecting the interest of the debenture holders. Sections 117A to 117C indicating the intention of the Legislature to provide special protection to the class of debenture holders, which provisions are not applicable to secured and unsecured creditors of the Company. (c) The Articles of Association of IPCL also provide separately for debentures and debenture holders. (d) The balance-sheet of IPCL as on 31.3.2006 also provides separate treatment to debentures. The debentures are not clubbed with other secured term loans and working capital loans. OJA/241/2007 11 ORDER (e) The debenture holders of IPCL and the secured creditors of IPCL have charges over different assets of IPCL as compared to the assets over which the secured creditors have charges. The non-convertible debentures are secured by way of first equitable mortgage on the land admeasuring 2.04 acres at village Angadh, Dist. Vadodara with all the superstructures and plant and machinery thereon. However, the term loans are secured on another parcel of land admeasuring one acre at village Angadh together with all the superstructure and plant and machinery and also the whole of the other fixed assets of Vadodara and Gandhar complexes of the Company except the stocks of raw materials, finished goods etc.. (f) The Chairman's report on the meeting of the secured creditors held on 14.4.2007 does not at all reflect the voting pattern between the debenture holders and the secured creditors of IPCL; does not even state as to how many debenture holders were present at the meeting. (g) Absence of objection from the debenture holders or secured creditors of IPCL cannot justify the illegality and irregularity in not convening a separate meeting of the debenture holders. (h) Reliance is also placed on the decisions in - – (1970) 40 Company Cases 819, at page 877 (Gujarat), in re Maneckchowk and Ahmedabad Manufacturing Company Limited. – 1995 Suppl (1) SCC 499, at pages 514-528, Hindustan Lever Employees' Union vs. Hindustan Lever Limited and others. – (1994) 79 Company Cases 27, at pages 37 to 40, D.A. Swamy and others vs. India Meters Ltd. OJA/241/2007 12 ORDER 11. On the other hand, Mr Soparkar for the Company has submitted that minority shareholders who are raising the above objection were neither debenture holders nor secured creditors of the IPCL- transferor company and, therefore, the appellants have no locus standi to raise such objection. Further, neither debenture holders nor other secured creditors had objected to being invited at the same meeting either at the meeting or in any court proceedings. Moreover, debenture holders of IPCL were secured creditors and, therefore, they were rightly called at the same meeting. Debenture holders belong to the same class as the other secured creditors like banks and financial institutions. Sub-classes of secured creditors may be relevant only if different treatment is given in the scheme. If the same treatment is given in the scheme to all secured creditors including debenture holders, there is no requirement of classifying debenture holders as a different class. In any case, since all the secured creditors, including all debenture holders present and voting at the meeting had unanimously approved the scheme of amalgamation and since the same treatment is given to all secured creditors including debenture holders, there was no need for classifying the debenture holders as a separate class. Strong reliance is placed on the observations made by this Court in Miheer Mafatlal Industries' case reported in (1996) 87 Comp. Cases 705 (Guj) at page 733 and in Re Arvind Mills Ltd. (2002) 111 Comp Cases 118 (Guj) and on the observations made by the Delhi High Court in Re Siel Ltd. (2004) 122 Comp Cases 536. It is also submitted that merely because the entries in the balance-sheet had shown debenture holders as separate from other secured creditors, that cannot make debenture holders a separate class of stakeholders. Balance-sheet of Company is drawn up in the form given in Schedule VI to the Companies Act where OJA/241/2007 13 ORDER also the debenture holders are classified under secured creditors. Reliance is also placed on the observations made by the Apex Court in National Rayon Corporation Ltd. vs. Commissioner of Income- tax, AIR 1997 SC 3487 (para 12). 12. Discussion : Was a Separate Meeting required for Debenture holders. 12.1 Before dealing with the rival submissions, it would be necessary to refer to the principles laid down by the Apex Court, this Court and Bombay High Court. In National Rayon Corporation Ltd. vs. Commissioner of Income-tax, AIR 1997 SC 3487 the Apex Court held that debentures are nothing but secured loans. Similarly in Miheer Mafatlal Industries case decided by a Division Bench of this Court and reported in (1996) 87 Comp. Cases 705 (Guj.) at page 733, which decision came to be confirmed by the Apex Court in (1997) 1 SCC 579, this Court made the following observations :- “In our opinion, a plain reading of the section does not leave any doubt that only where separate terms are offered to separate classes of shareholders or creditors under the proposed compromise or arrangement, separate meetings are required to be held in respect of each class of creditors or shareholders for whom separate compromise or arrangement has been offered .. ... The classification of members or creditors will be founded on the basis of difference in terms offered under the Scheme. The difference in terms of the Scheme can be the only criterion for identifying the separate class for the purpose of convening a separate meeting for such class.” Similarly, this Court held in Re Arvind Mills Ltd. (2002) 111 Comp. Cases 118 that - “... The classification of members or creditors can be founded on the basis of difference in the terms offered under the scheme. The difference in terms of the scheme can be the only criterion for identifying separate class for the purpose of convening a separate meeting for such class.” OJA/241/2007 14 ORDER The Delhi High Court has also followed the above principle in Re Spartek Ceramics India Ltd. reported in Manu/AP/0991/2005 (para 13) wherein it is observed as under :- “It is, therefore, obvious that unless a separate and different type of scheme of compromise is offered to a sub-class of a class of creditors or shareholders otherwise equally circumscribed by the class, no separate class of sub-class of the main class of members or creditors is required to be convened.” In State Bank of India vs. Alstom Power Boilers Ltd., (2003) 116 Comp. Cases 1, the Bombay High Court has held that it would depend upon the facts and circumstances of each case whether there would be any need for sub-classification amongst the secured creditors but the general principle would be the same, namely, whether the interests of the creditors who claim to belong to a different class are so dissimilar to the interests of the other creditors that it would be impossible for them to sit and consult together and take a common view of their common interest. These observations were made by the Bombay High Court in a matter where some creditors claimed to belong to a different class and, therefore, wanted separate meetings to be convened. 12.2 In view of the above principles, we put a specific query to the learned counsel for the appellants whether the scheme offered different treatment to debenture holders as compared to the treatment offered to the other secured creditors and the answer was in the negative. Once it is clear that the same treatment is offered to the debenture holders and the other secured creditors, no useful purpose could have been served by convening one meeting for debenture holders and another meeting for the other secured creditors. The very fact that all the secured creditors who OJA/241/2007 15 ORDER were present and voted at the meeting unanimously approved the scheme of amalgamation is a further fact which supports the case of the respondent that there was no objection to the scheme of amalgamation from any debenture holder or from any other secured creditor. None of the secured creditors whether debenture holders or otherwise, have ever demanded convening of a separate meeting for debenture holders nor has any debenture holder or any other secured creditor made any grievance whatsoever against the same meeting having been convened for all secured creditors including the debenture holders. In the above factual background, both in terms of the identical treatment given to the debenture holders and the other secured creditors and also in absence of any opposition from a single debenture holder or any other secured creditor, we are of the view that the other arguments submitted on behalf of the appellants do not merit any serious consideration. 12.3 We may, however, deal with the argument based on statutory provisions. A perusal of the provisions of Sections 117A to 117C merely indicates that the said provisions are part of the special provisions relating to debentures contained in Sections 117 to 123 in Part IV of the Companies Act, 1956. Part IV contains provisions relating to Share Capital and Debentures. Part IV commences with Section 82