COMP/320/2008 1/50 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY PETITION No. 3 of 2008 For Approval and Signature: HONOURABLE 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 ? ========================================================= PANCHMAHAL STEEL LIMITED - Petitioner(s) Versus . . - Respondent(s) ========================================================= Appearance : MR VIMAL M PATEL with MR Sandip Singhi and MR Mihir Thakore for Petitioner(s) : 1, MR RD DAVE with MR SN Shelat for Respondent(s) : 1, MR IQBAL SHAIKH for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 24/11/2008 CAV JUDGMENT 1. The petitioner Company has filed this petition under Section 391 of the Companies COMP/320/2008 2/50 JUDGMENT Act, 1956 to obtain sanction of this Court to the modified scheme of compromise and/or arrangement between the petitioner and its secured lenders and equity shareholders. 2. The brief facts giving rise to the present petition are that in 1995-96, the petitioner Company took up a Steel Melt Shop (SMS) Project for a capacity of 1,50,000 M.T. Per annum. However, on account of recessionary trends in the steel sector, the petitioner company could not achieve the financial closure of the project. Further, reduction in operating margins as a result of competitive pressures, unexpected delay in stabilization of the new rolling mill and the requirement of servicing the project debt led to liquidity problems. At the end of financial year in March, 2001 the petitioner Company's accumulated losses exceeded its net worth and hence came within the purview of Section 3(1)(0) of Sick Industrial Companies COMP/320/2008 3/50 JUDGMENT (Special Provisions) Act, 1985 and the Board for Industrial and Financial Reconstruction (BIFR) declared the petitioner Company as a sick industrial Company by its order dated 7.11.2002. The secured creditors of the petitioner company comprising of Financial Institutions and Banks formulated in 2000, a scheme of restructuring of liabilities, which was given effect from April 1, 1999. Subsequently, debts were again restructured in the year 2001 by some of the secured creditors. The efforts of the petitioner Company towards cost reduction, concentration on value added products and the enhancement of prospects for the stainless steel sector worldwide yielded some positive results. In the year 2004 and 2006, Asset Reconstruction Company (India) Ltd., (ARCIL) acquired debts from certain Banks, who had given loans and financial assistance to the petitioner company. ARCIL suggested the terms and conditions for the proposed restructuring COMP/320/2008 4/50 JUDGMENT scheme in consultation with the petitioner company and accordingly the scheme was prepared pursuant to the said terms and conditions. 3. The scheme prepared by the petitioner Company seeks to evolve a customized and contemporary business model and a revised capital and debt structure so that these are resized in line with the business viability and cash flows. The existing loans of the petitioner company shall be restructured on the terms and conditions as stipulated in the scheme. 4. The petitioner company, therefore, filed Company application No.525 of 2007, before this Court and this Court vide its order dated 22.11.2007 directed the petitioner company to convene separate meetings of the secured lenders and equity shareholders of the petitioner company, for the purpose of COMP/320/2008 5/50 JUDGMENT considering and if thought fit, approving with or without modification, the arrangement embodied in the scheme of compromise and/or arrangement. As directed by this Court vide its order dated 22.11.2007, notice of the meetings were sent individually to the secured lenders and equity shareholders of the petitioner company, together with the copy of the scheme, a copy of the explanatory statement required to be sent under Section 393 of the Act and a form of proxy. The notice of the meeting was also advertised as directed by this Court once in 'Indian Express' Baroda Edition and 'Sandesh', Ahmedabad Edition, both on 30.11.2007. 5. In compliance with the order dated 22.11.2007 the meeting of the secured creditors of the petitioner company was held on 28.12.2007. The said meeting of the secured creditor was attended to by three secured lenders through authorised COMP/320/2008 6/50 JUDGMENT representatives holding value of Rs.142.55 crores. At the meeting one of the secured lenders, namely, Asset Reconstruction (India) Limited (ARCIL) through its letter date 24.12.2007 proposed modification to the scheme. The Gujarat Industrial Investment Corporation Ltd., (GIIC) also submitted a letter dated 27.12.2007 and informed that they object to the modifications and to the scheme. Voting took place on the modification of the scheme and the said modification was approved by the requisite statutory majority. Thereafter, the modified scheme was taken into consideration and scrutineers after verifying the poll papers informed the result as under:- (a) 3 secured lenders used 3 poll papers for the purpose of voting. (b) 2 secured lenders holding value of Rs.125.84 crores, representing 66.67% of number of secured lenders and 88.28% in value present and voting, voted in favour of COMP/320/2008 7/50 JUDGMENT modified scheme. (c) 1 secured lender holding value of 16.71 crores, representing 33.33% of number of secured lenders and 11.72% in value present and voting, voted against the modified scheme. This modified scheme was thus approved and resolution to that effect was carried by requisite majority. 6. Simultaneously as per direction of this Court vide its order dated 22.11.2007, the meeting of the equity shareholders of the petitioner company was held on 28.12.2007. The said meeting of the equity shareholders was attended to by 14 equity shareholders comprising of 12 equity shareholders in person and 2 equity shareholders through authorised representatives for an aggregate of 1,13,83,558/- shares. In the meeting of the equity shareholders, initially modification was proposed and the same was approved and the resolution was carried COMP/320/2008 8/50 JUDGMENT unanimously. Thereafter, on modification, the voting took place and scrutineer after verifying the poll paper informed the results as under:- (a) 14 equity shareholders used 17 poll papers for the purpose of voting. (b) 14 equity shareholders holding 1,13,83,558 equity shares, representing 100% of number of equity shareholders and 100% of equity shareholding present and voting, voted in favour of modified scheme. Thus, the modification was approved and the Resolution was carried unanimously. The Chairman has reported the result of the aforesaid meetings to this Court by his report dated 3.1.2008. The present petition was thereafter filed by the petitioner on 7.1.2008. 7. This Court has admitted the petition on 8.1.2008. The Court has directed the COMP/320/2008 9/50 JUDGMENT publication of notice of hearing of the petition in English daily, 'Indian Express' Baroda Edition and Gujarati daily, 'Sandesh', Ahmedabad Edition. The Court has also directed to serve notice of hearing of the petition on the Central Government through the Regional Director, Department of Company Affairs, pursuant to Section 394(4) of the Companies Act, 1956. 8. Pursuant to this order, notice of hearing of the petition has been published in English daily, 'Indian Express' Baroda Edition and Gujarati daily, 'Sandesh', Ahmedabad edition, both dated 16.1.2008. Notice of hearing of the petition has already been served upon the Regional Director, Department of Company Affairs, on 16.1.2008 and affidavit to this effect was filed alongwith relevant cuttings of the newspapers, on 31.1.2008. Since GIIC has raised objection against the modification as well as the scheme itself, an advance copy COMP/320/2008 10/50 JUDGMENT of the petition was served on GIIC and on behalf of GIIC an affidavit-in-reply raising objection to the scheme is filed by Shri Dinubhai D. Patel, Manager (Legal) on 28.2.2008. An affidavit is also filed by Shri R.K.Dalmia, Dy. Registrar of Companies alongwith which letter dated 29.1.2008 of Joint Director (Legal) was attached, wherein it is stated that there was no objection to the scheme of compromise and/or arrangement moved by the petitioner Company before this Court. 9. On 16.5.2008, the Court has passed detailed order after hearing Mr.Mihir Thakore, learned Sr. Counsel appearing with Mr.Sandeep Singhi for the petitioner Company and Mr. S.N.Shelat, learned Sr. Counsel appearing with Mr. R.D.Dave for the objector, namely, GIIC. The Court observed that During the course of hearing, the question arose as to the status of ARCIL as secured creditor, ARCIL has acquired COMP/320/2008 11/50 JUDGMENT debts of State Bank of India and ICICI Bank Ltd under the deed of assignment. Before considering the status of ARCIL as secured creditor, the Court was inclined to go through the deed of assignment and the value of debts assigned by State Bank of India as well as ICICI Bank Ltd. to ARCIL and at what consideration the said debts have been assigned to ARCIL. The Court, therefore, felt that the presence of ARCIL was necessary before the Court. Accordingly, notice was issued to ARCIL making it returnable on 18.6.2008 with a direction that ARCIL should produce deed of assignment under which the debts were assigned by State Bank of India as well as ICICI Bank Ltd. to ARCIL and the amount of debts assigned and the amount of consideration at which the said debts have been assigned. 10. Pursuant to the said order, an affidavit is filed by Shri Nilesh Shah, Vice President of ARCIL attaching therewith assignment agreement between ICICI Bank Ltd. and ARCIL. It is stated in the said affidavit that this COMP/320/2008 12/50 JUDGMENT Court, in exercise of its jurisdiction under Section 391 of the Companies Act, especially, when the petitioner has accepted the status of ARCIL as a secured creditor and no other secured creditor, as on the date of passing of the order dated 16.5.2008, challenged the status of ARCIL, would not have jurisdiction to go into the question of status of ARCIL as a secured creditor. The Court has also no jurisdiction to go into the question whether the assignment is for proper consideration or not, especially because ARCIL is a securitisation Company as defined under the SARFAESI Act. However, without prejudice to its right to take up all the legal contentions which may be available to it, at a future date and without prejudice to its right to challenge the order dated 16.5.2008 in so far as it issues directions against ARCIL and assumes jurisdiction against ARCIL and its rights the deed of assignment of debt executed by ICICI Bank Ltd., in favour of COMP/320/2008 13/50 JUDGMENT ARCIL was attached alongwith the affidavit. It is further stated in the affidavit that since ARCIL has recently shifted its office and it was trying to trace the deed of assignment of debt executed by State Bank of India in favour of ARCIL. The purchase consideration for assignment agreement with SBI is Rs.19,90,00,000/-. The purchase consideration for assignment agreement with ICICI is Rs.528,54,00,000/- which is for portfolio of loans of all borrowers mentioned in said assignment agreement. The debt due from the petitioner company to these two banks was Rs.94.35 crores as on 31.1.2004 and Rs.49.52 crore as on 31.12.2005 respectively. 11. The main thirst of the objection raised by Mr. S.N.Shelat, learned Senior Counsel appearing for GIIC is that the scheme proposed by the petitioner is not maintainable in law and is not in the general interest of secured creditors. In the meeting COMP/320/2008 14/50 JUDGMENT of the secured creditors, GIIC has raised objections which are referred to in the report of the Chairman. However, said objections are not considered and not discussed in the meeting at all. It is further stated that the petitioner has not correctly considered the dues of GIIC as of cut off date of CDR Scheme, which is 31.3.2004 which according to GIIC is Rs.21.55 crores and not Rs.16.71 crores as mentioned by the petitioner. It is, therefore, submitted that the true and correct facts are not represented in the petition by the petitioner. It is further submitted that the CDR Scheme is silent on the interest payable for the year 2004-05, which requires to be incorporated/added in the scheme. The interest rates offered on three components of calculated outstandings at 5% and 0% are very meagre and even very much less than RBI Bank rate also. COMP/320/2008 15/50 JUDGMENT 12. It is further stated that GIIC filed its objections in the meeting of secured creditors/lenders dated 27.12.2007 which has been submitted to the Chairman of the meeting on 28.12.2007. However, same has not been discussed and considered in the meeting. It is, therefore, submitted that there is no effective and proper discussion in the meeting and as such whole proceedings vitiated and the petition deserves to be rejected on this ground alone. 13. Mr. Shelat has further submitted that GIIC cannot be compelled to accept lesser amount than the actual outstanding dues by the petitioner in the name of such scheme. The scheme cannot be granted at the cost of GIIC which is a trustee of public funds. The GIIC has borrowed moneys from financial corporation and in turn has to pay interest on borrowed funds which are advanced to the entrepreneurs and borrowers like the COMP/320/2008 16/50 JUDGMENT petitioner. Therefore, if the GIIC is compelled to reduce the rate of interest drastically it will incur heavy losses and the GIIC is not getting similar concessions which are to be accepted by GIIC under the scheme. It is, therefore, submitted that it may result into non-fulfillment of demands to its lenders. 14. It is further stated in the said affidavit that the financial position of the Company is now no longer poor as the petitioner has applied for de-registration from BIFR and the company is already making substantial profits for last few years. Accordingly, company's share price on the stock exchange, which was 52 week low at Rs.144/-, went up and once touched high value of Rs.400/-. It is, therefore, submitted that the Company is no longer a sick company and hence the Company is not entitled to any concession from GIIC. COMP/320/2008 17/50 JUDGMENT 15. The GIIC has filed its further objection on 12.8.2008 wherein it is stated that despite the order of this Court, ARCIL has not produced the deed of assignment of debts entered into between ARCIL as well as SBI. It is further stated that the document which is sought to be enforced and relied on in judicial proceedings in the present case is not adequately stamped and required stamp duty has not been paid as applicable in the State of Gujarat under Bombay Stamps Act. It is, therefore, submitted that the agreement is not ex-facie, enforceable and cannot be relied on in the present proceedings. Even if it is held to be enforceable, alternatively it is submitted that on page 52 of the petition, outstanding dues of the ARCIL (combined total of ICICI and SBI) as on 31.3.2004 together with interest is shown as Rs.116.23 crores. As against that, in the affidavit of ARCIL total debt from the petitioner company to ICICI and SBI is COMP/320/2008 18/50 JUDGMENT mentioned at Rs.94.35 crores only as on 31.1.2004 i.e. two months prior to cut-off date which is 31.3.2004. Subsequently, the said debt is substantially reduced to Rs.49.52 crores only as on 31.12.2005. Accordingly, ARCIL is required to give details of outstanding dues from petitioner company, with break up as principal and unpaid interest etc, as of 31.3.2004, the cut off date for the proposed CDR Scheme. It is, therefore, submitted that as against Rs.116.23 crores the debt should be considered revised lower figure as Rs.49.52 crores, which means, the petitioner company must have paid substantial amount to ARCIL which reduced the debt after cut-off date. It is, therefore, submitted that this aspect has been suppressed materially by the petitioner in the petition with an ulterior motive and the scheme is not submitted with full details and correct statement of facts. The scheme is, therefore, not bonafide which COMP/320/2008 19/50 JUDGMENT does not contain true and correct facts before this Court. The GIIC has, therefore, strong objection against sanction of scheme and the Court should reject the same. 16. It is further stated in the affidavit that ARCIL has not disclosed the purchase consideration in respect of ICICI Bank Ltd., only gross amount for total portfolio list of various borrowers have been mentioned. If true and correct facts are stated on record by ARCIL, the actual ratio of consent between the parties, whether for or against the scheme can be worked out. 17. Mr. Shelat further submitted that ARCIL is a securitisation company under the provisions of Securitisation Act established with specific purpose and object stated in the Securitisation Act. On consideration paid/payable by ARCIL for the debts assigned to ARCIL by ICICI Bank Ltd., as well as State COMP/320/2008 20/50 JUDGMENT Bank of India is for substantially lower amounts than the actual amount of outstanding debt due from the petitioner company in respect of both ICICI Bank Ltd as well as SBI. Therefore, the capacity of ARCIL to sacrifice under the present scheme is substantially higher, meaning thereby the ARCIL can afford to give up and sacrifice large amount as it was enjoying the benefit of assignment deed at subsequently reduced purchase price. It is, therefore, submitted that the margin between actual purchase consideration and the liability due from petitioner company is substantial. By giving consent to the unreasonable contents of the scheme by ARCIL by sacrificing even full margin amount would not cause any loss to ARCIL. It is, therefore, submitted that the consideration for consent to the draft CDR scheme by ARCIL is substantially different because of much lower purchase consideration paid/payable under assignment agreement under COMP/320/2008 21/50 JUDGMENT Securitisation Act and the actual transaction. It is, therefore, submitted that the ARCIL and GIIC both are different class of creditors and they form different class of creditors. The GIIC being separate class of creditor, separate meeting ought to have been held by the petitioner company. Since the present scheme does not fulfill the paramount requirement under Section 391 of Companies Act and as such the petition deserves to be rejected. 18. Mr. Shelat in support of his submissions relied on the decision of the Hon'ble Supreme Court in Miheer H. Mafatlal's case (Supra) wherein it is held that on a conjoint reading of the relevant provisions under Section 391 and 393 of the Companies Act, it becomes clear that the Company Court which is called upon to sanction such a Scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their COMP/320/2008 22/50 JUDGMENT respective classes who might have voted in favour of the scheme by requisite majority but has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and does not violate any public policy. The Court further held that no Court of law would countenance a scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently, it cannot be said that the Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the COMP/320/2008 23/50 JUDGMENT concerned Company must automatically put its seal of approval on such a scheme. It is trite to say that once the Scheme gets sanctioned by the Court, it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court while putting its seal of approval on the concerned scheme placed for its sanction. The Court has also caste duty on the sanctioning Court and held that the sanctioning Court has to see to it that all the 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, 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), that the concerned meetings COMP/320/2008 24/50 JUDGMENT 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 concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class; that all necessary material indicated by Section 393 (1) (a) is placed before the voters at the concerned meetings as contemplated by Section 391, sub-section (1); that all the requisite material contemplated by the proviso to sub- section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a Scheme and the Court gets satisfied about the same; that the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to COMP/320/2008 25/50 JUDGMENT 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. The Company Court has also to satisfy itself that the members or class of members or creditors or class of creditors, as the case may be, were acting 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. The Scheme as a whole must also be 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. 19. In the case of M/s. Indequip Limited V/s. M/s. Maneckchowk and Ahmedabad Manufacturing Company Limited by provisional Liquidator, (1970) II Company Law Journal 300, this Court COMP/320/2008 26/50 JUDGMENT held that the Court has power at the time of making an order sanctioning the Scheme under Section 392 to make such modification in the compromise or arrangement as it seems necessary for the proper working of compromise or arrangement. The power can be exercised not for substituting the scheme as approved by the members and creditors but for making the compromise or arrangement effective and workable. 20. In S. M. Holding Finance Private Limited V/s. Mysore Machinery Manufacturers Limited (In Liquidation), 1993 (78) Company Cases 432 (Karnataka), the Court held that to protect the interest of the dissenting unsecured creditors, the Court can make an order in exercise of the power under Section 392 (1), and make modification in the compromise or arrangement while sanctioning the Scheme. In other words, the power of the Court under Section 392 is wide enough to give effect to COMP/320/2008 27/50 JUDGMENT the sanctioned scheme by amending the scheme and not by substituting a new Scheme. This power can be exercised suo motu without any application. In exercise of that power, it cannot be doubted, that the Company Court can issue necessary directions with a view to remove an impediment, difficulty or obstruction which may arise in the working of such a Scheme or arrangement. Thus, when approving the Scheme of compromise / arrangement, the Court may, by the order giving its approval, make provision for the benefit of the dissenting creditors and pass orders by way