Case: State Bank of India &amp; Others Vs. Alstom Power Boilers Limited &amp; Others

2.The Company Petition No.337 of 2002 arose out of the Company Application No. 116 of 2002 filed by Alstom Boilers Private Limited (for short "ABPL" or the transferor company) and the Company Petition No. 338 of 2002 arose out of the Company Application No. 117 of 2002 filed by Alstom India Limited (for short "APIL" or the transferee company). Three companies namely (i) Alstom Transport Limited (ii) Alstom Systems Limited and (iii) APBL belonging to the Alstom group sought to merge with another group company viz. APIL under the scheme of arrangement which is challenged in this appeal. The scheme of arrangement of the two transferor companies namely Alstom Transport Limited and Alstom System Limited having their registered offices in Delhi has already been approved by the Delhi High Court. APBL and APIL have their registered offices within the State of Maharashtra and therefore, the approval of this Court was sought by the aforesaid two companythe Meetings of APBL (Transport Company)3.Initially, Company Application No. 116 of 2002 was filed by APBL for directions of this Court to convene the separate meetings of the equity share holders, the preference share holders, the secured creditors and the unsecured creditors of the transferor company. By an order dated 22nd February, 2002, this Court passed an order convening four separate meetings as above in the same manner as proposed by the company. As there were more than one type of preference shares issued by it at different times at different rates of dividend with different dates of maturity while grantingrequest of the company to convene a single meeting in respect of all the preference share holders, this Courtissue as to whether different preference share holders form a same class or not is expressly kept open in view of the judgment of the Honble Supreme Court of India in the cases of Miheer Mafatlal v. Mafatlal Industries, reported in A.I.R. 1997 Supreme Court Page 504 (Pointpursuance of the directions given by this Court by the aforesaid order dated 22nd February, 2002 in Company Application No. 116 of 2002, APBL convened four separate meetings of equity share holders, preference share holders, secured creditors and unsecured creditors on 28th March, 2002 to consider the scheme of arrangement. The meeting of equity share holders was attended by 22 shares holders holding 2,53,94,336 shares of the value of Rs.All but one, whose vote was declared invalid, cast their votes in favour of the scheme. At the meeting of the preference share holders, all the preference share holders holding 3,73,00,000 shares of the value of Rs. 3,73,00,000/voted in favour of the scheme. At the meeting of the secured creditors, six secured creditors having credit of Rs.9,04,46,353 were present and all including SBI voted in favour of the scheme. At the meeting of the unsecured creditors, 86 unsecured creditors of the value of Rs. 30.79 crores were present. 85 unsecured creditors of the value of Rs. 30,74,96,612 voted for the scheme and one unsecured creditors of the value of Rs.4,48,090 voted against. Thus, the scheme of arrangement proposing merger of transfer of APBL with APIL was approved in all the meetings by an overwhelming majority of more than 98% in value and number of the shareholders and/or creditors attending in eachthe meetings of APIL (Transferee Company)5.APIL moved the Court by the Company Application No. 117 of 2002 for directions to convene separate meetings of the equity share holders and the unsecured creditors of the company for consideration of the scheme of arrangement. By an order dated 22nd February, 2002 this Court directed convening of the separate meetings of the equity share holders and the unsecured creditors on 28th March, 2002. In the meeting of the equity share holders, 196 share holders holding shares of the value of Rs. 2,36,00,785/equity shares attended; 189 share holders holding 2,35,99,924 shares of value of Rs. 23,59,99,240/voted for the scheme and two equity share holders holding 501 equity shares of the value of Rs. 5010 voted against. The votes of 5 equity share holders holding 360 shares were declared invalid. The scheme was thus approved by 98.95% in number and 99.99% in value of the equity share holders present. The State Bank of India (for short SBI) who is the appellant No. 1 in Appeal No. 1116 of 2002 and an equity share holder did not attend the meeting of equity share holders. Industrial Development Bank of India (for short IDBI) who is the appellant No. 2 in Appeal No. 1116 of 2002 and an equity share holder attended the meeting through an authorised representative but, did not vote at the meeting of the equity share holders. The meeting of the secured creditors was attended by 115 creditors of the value of114 unsecured creditors of the value of Rs. 38,32,16,556/voted in favour of the scheme and the vote of one unsecured creditors of the value of Rs.3,12,040/was declared invalid. No vote was cast against the resolution. Thus, the scheme was approved by a majority of more than 98% in value and number of the members as well as the creditors in their separate meetings.6.On securing approval of the respective share holders and creditors as above, APBL filed the Company Petition No. 337 of 2002 and APIL filed the Company Petition No. 338 of 2002 for approval of the scheme of arrangement by the Court. At the hearing of the petitions, SBI, IDBI and one Mrs. Darshana Kenia her father Damji Ghalla, and her husband Mr. Prafulkumar Kenia appeared and opposed the scheme. The learned Single Judge considered all the objections raised by the objectors and by a detailed but common order dated 31st October, 2002 rejected all the objections and approved the scheme of arrangement under sectionsof the Companies Act (For short the Act). Being aggrieved by the said order, the appellants are beforeAppeal Lodging No. 953 of 2002 was lodged on 1st November, 2002 and Appeal No. 1116 of 2002 was lodged on 13th November, 2002, no efforts were made by the appellants in either of the appeals till 20th November, 2002 to obtain a stay of the order of the learned Single Judge dated 31st October, 2002 approving the scheme. When the appeals came up for admission on 20th November, 2002, the learned Counsel for APBI and APIL pointed out that all actions to give effect to the scheme of arrangement by way of merger were taken and the order of amalgamation was fully implemented. This fact was noted by us in the order dated 20th November, 2002 and parties were directed to maintain status quo as on 20th November, 2002, and the appeals were placed on board for final hearing on 4th December,was initially incorporated as ACC VickersBabcock Limited and in the year 1982. Its name was first changed to ACC Babcock Limited, before being changed to APBL. It remained closed for a period of 20 months inand proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985, (for short "SICA") were initiated before the Board for Industrial and Financial Reconstruction (for short "BIFR"). The company was engaged in direct power projects and was considered strategic by the Government of India as engaged in infrastructural development. The Government of India granted in interest free loan of Rs. 26 crores and Financial Institutions (For short FIs) advanced term loans of Rs. 13 crores which were guaranteed by the Government of India which also had committed to procure orders for power boilers. But, according to the company, this commitment was not fulfilled and the company made substantial cash losses and repayment of the loans and not possible. As on 31st March, 1994 the company had accumulated losses of Rs. 10.9 crores and its cash losses were Rs. 107 crores. There were little hopes for FIs for recovery of the principal amount of loans leave alone the interest. Before the BIFR, efforts were made to find out a promoter who would infuse funds pay loans due to FIs subject of course to several concessions and revive the company. The ABB group being a multinational group agreed to take the management control and repay the principal sum due to the FIs and bring in additional funds for continuing the operations of the transferor company. In 1995, the ABB group acquired the management control of the APBL under a scheme sanctioned by the BIFR by an order dated 30th May, 1995. As per the said scheme, the ABB group inducted Rs. 60 crores Rs. 24 crores as equity capital, Rs. 28 crores as preference share capital and Rs. 8 crores as loans. By this, the ABB groups holding in the equity share capital of the transferor company was raised to 76%. The APBL group agreed to pay the principal sums of Rs. 45 crores due to the FIs who waived their over due interest of approximately Rs. 20 crores which was guaranteed by the Government of India. The Government of Indias existing loan of Rs.28 crores was converted into capital Rs. 4.6 crores in equity and Rs. 25.4 crores in 10% cumulative preference shares redeemable in the year 2005. Due to infusion of funds and improved performance, the net worth of APBL turned positive, i.e. is the assets exceeded the liabilities. As a result as on 31st March, 1996, APBL ceased to be a sick company under the SICA. By an order dated 7th February, 1997 the BIFR recorded that APBL was no longer a sick company and was not required to be dealt with by the board and the case was closed and the special directors appointed wasthe year 1997 to 2002, APBL continued to suffer losses due to the recession in the power sector, cancellation of existing orders and above all, the fact that other public sector companies like BHEL and others who were competitors were getting price preference of 15% or more being public sector undertakings which was denied to the company, it being a private sector company with 76% equity held by multinational ABB group. In the meanwhile, the Indian assets of the ABB group were taken over by Alstom group which, to sustain the operations of APBL, brought in additional amount of Rs. 345 crores in the form of preference share capital. Accordingly, the total preference share capital of APBL was increased to Rs. 394.4 crores of which the Government of India held preference shares of Rs. 21.4 crores and Alstom group held preference shares of Rs. 373 crores. The Alstom group found that despite their infusing hundreds of crores of rupees, the APBL was not viable. Therefore, by their letter dated 7th January, 2000 the Alstom group requested the Government of India to take back the management control of the company but there was no response. By the end of March, 2001 the net worth of APBL was only Rs. 24 crores as against its capital base (preference and equity) of Rs. 426 crores, showing erosion of more than 94% of the capital. According to the promoters, the preference shares were thus not worth more than 5% of their face value and that too assuming that in case of liquidation, the full value of the assets would be realised to without any diminition. As the Government of India did not come forward to take back the management control of the company, the Alstom group proposed the scheme of arrangement of merger of the APBL and other two group companies with APIL being another group company, instead of closing the shop. The merger would save costs, bring in synergies and make the merged entity viable andrelating to APIL10.APIL was incorporated in the year 1992 and its name was changed to Alstom Power India Limited with effect from 5th September, 2000. It is engaged in design engineering, manufacturing procurements, supply and commissioning services and renovating and modernising of power plants for utility and industrial users. It is a public limited company whose shares are listed on the Bombay Stock Exchange. The learned Counsel states that presently the shares of the transferee company are quoted at around Rs. 44 per share. Mrs. Kenia, her husband and her father who are the appellants in Appeal (Lodging) No. 953 of 2002 are share holders of APIL. The IDBI is also a share holder of APIL. Under the proposed scheme of amalgamation, the Alstom Transport Limited, Alstom Systems Limited, and APBL are proposed to be amalgamated and merged with APIL. In these appeals, we are not concerned with the amalgamation of Alstom Power Limited and Alstom Systems Limited whose schemes for amalgamation have already been sanctioned by the Delhi Highder Scheme of Arrangement the entire business and undertaking of APBL (which is the transferor company) as a going concern together with all its assets, debts, liabilities and obligations, is to stand transferred and vested in APIL (which is the transferee company) with effect from the appointed date i.e. 31st March, 2001. The holders of equity shares of the transferor company (APBL) are to be issued 2.2 new fully paid equity shares of Rs. 10/each in the transferee company (APIL) in lieu of every 85 equity shares of Rs. 10/each held by them in the transferor company (APBL). The preference share holders in the transferor company (APBI) are to be issued 22 fully paid up new equity shares of Rs. 10/each in the transferee company (APIL) in lieu of every 85 preference shares of 100 each held by them in the transferor company (APBL). New equity shares issued in the transferee company are to rank pari passu in all respects with the old equity shares in the transferee company from the appointed date. The scheme of arrangement also makes provisions regarding accounting adjustments; the employees of the transferor company are to become the employees of the transferee company with the provisions regarding their provident fund, gratuity, superannuation etc. All the business carried on by the transferor company from the appointed date till the implementation and sanctioning of the scheme is deemed to be carried out on account of and in trust for transferee company. The scheme is subject to being sanctioned by a requisite majority of the members and creditors of the transferor and transferee companies and being approved by the High Court. By the impugned judgment and order dated 31st October, 2002, the learned Single Judge of this Court has granted the approval to the scheme of arrangement.

Reasoning: 21. In the present case, we do not see any reason to make any furtherof the preference share holders. The Government of India did not form a separateamongst the class of preference share holders. The rights of the Government of India as a preference share holder were not so different from the other preference share holders namely the Alstom group. The terms offered to both of them were identical, each was to be issued 22 fully paid up equity shares in APIL in lieu of 85 preference shares of Rs. 100/each held by them in ABPL. The preference capital of each of them was going to be eroded to the same extend and their rights were affected similarly. There is nothing on record to show that they could not have consulted together in furtherance of their common interest. We therefore, reject the first contention that the Government of India formed a separatedistinct from other preference share holders.Dividend in respect of preference shares was unpaid for a period of more than two years. Under Clause (b) of(2) of section 87 of the Companies Act, the preference share holders were therefore, entitled to vote on every resolution at any meeting of the company. The Government of India was entitled to vote on the resolution seeking approval of the scheme in any and every meeting of the company including (i) the meeting of the equity shareholders and (ii) the meeting of the creditors. We have no doubt that the meeting of the equity share holders of the company was a meeting of the company and the Government of India was entitled to vote on every resolution placed before that meeting as a preference shareholder to whom dividend was not paid for more than 2 years. The Government of India which was a preference share holder, and an equity shareholder entitled to vote in that capacity also, however did not send its representative to attend either of the meetings of preference share holders or equity share holders. It was never denied the right to vote in the meeting of the equity shareholders. It voluntarily chose not to exercise its franchise by not sending its representative to attend either of the meetings.We are however unable to hold that the Government of India in the capacity of a preference share holder with unpaid dividends for more than two years, had a right to attend and vote at the meeting of the creditors.The right given under Clause (b) of(2) is "to vote on every resolutions placed before the company at any meeting". In our opinion, the words "before the company at any meeting" refer to a meeting of the company i.e. a meeting of the members of the company. A meeting of outsiders like the creditors of the company is not a meeting of the company. It is a special type of meeting of outsiders for a special purpose under section 391 of the Act. Sections 165 to 197 of the Act grouped under the heading. "Meetings and Proceedings" in Chapter I of Part VI of the Act contain certain provisions relating to the meetings. They also regard only the meetings of the members of the company (as opposed to the meetings of outsiders like creditors) as the meetings of the company. Another clue to this interpretation can be found by reference to Clause (c) of(2) of section 87 which lays down that the voting right of a holder of preference share who has a right to vote under(2) shall be in the same proportion as the capital paid up in respect of the preference share bears to the total paid up equity share capital of the company. For the purpose of determining the value of the vote cast by a preference share holder, one has to find its proportion to the total paid up equity capital of the company and not to the total debts of the company. In the meeting of the creditors of the company to be held under section 391 of the Act, the value of creditors vote for ascertaining requisite majority of 3/4th in value has a reference to the total debt of the company and not to the total paid up capital. A preference share is not a debt instrument. Preference share amount is a capital and not a debt. Thus, in the meeting of the creditors, it would not be possible to assign a value to the vote of a holder of preference share. If we were to hold that the preference share holders who are not paid dividend for more than two years are also entitled to attend the meeting of the creditors under section 391 of the Act and vote threat, then it would be impossible to determine what would be the value to their votes vis a vis the value of votes of creditors. It would be wrong to contend that preference share holders have a right to vote but, valuation of their vote is unascertainable. We are therefore of the view that preference share holders are not entitled to attend and vote at the meeting of the creditors convened under section 391 of the Act even though dividend on the preference shares have remained unpaid for more than 2 years.Admittedly, the entire net worth of APBL was eroded and the company was referred to BIFR under SICA. The scheme of Rehabilitation was approved by the BIFR under its order dated 30th May, 1995. Of the Rs. 26 crores owed to the Government of India, an amount of Rs. 4.6 crores was converted into equity share capital and balance of Rs. 21.4 crores was converted into 10% cumulative preference shares. In pursuance of the assurance given by it the ABB/Alstom group brought in money in the form of equity and preference shares capital as also debt. On account of the conversion of the loan by the Government into equity and preference share capital and bringing in of money by the ABB/Alstom group, the net worth of the company became positive, by the end of the year ending 31st March, 1996. The company thus ceased to be a sick company within the meaning of section 3(1)(o) of SICA. The BIFR also passed a formal order to that effect on 7th February, 1997.We express no opinion on the question as to whether it would be legal and valid to implement a scheme under sections 391 to 394 of the Act while the company is sick and governed by SICA or where the scheme of Rehabilitation under SICA is under implementation under the supervision of BIFR. However, as the company had ceased to be a sick company and was no longer monitored by the BIFR, sanction of the BIFR was not necessary for making an application under section 391 of the Act. We are unable to agree with the contention of the learned Advocate General that since the preference shares were issued in pursuance of the BIFR scheme and they were not yet redeemed, the scheme continued to remain in force. The basic purpose of a scheme under the BIFR is to give protection to a sick company against the action by the creditors to enable it to reorganise its affairs and continue to remain in business. The protection would not continue indefinitely till every obligation undertaken by the company under the scheme is fulfilled. If we were to hold that a company continues to be governed by the SICA and the scheme of Rehabilitation continues to be in force till the last preference share is redeemed or till the last debenture/bond issued in pursuance of the scheme is paid off, then a dishonest company may issue preference shares redeemable after a long time and/or may issue Yankee Bonds redeemable after number of years to claim protection and ward of the creditors till the last preference share is redeemed or the last bond holder is paid off. This cannot be the intention of the legislature. After the net worth becomes positive, the company ceases to be a sick company within the meaning of section 3(1)(o) of the SICA. APBL was not a sick company when the scheme under sections 391 to 394 of the Act was proposed and there was no bar for approval of the scheme.In the present case, petitioner companies had initially produced the audited accounts together with the Auditors Report for the year ending 31st March, 2001 both in the case of APBL as well as APIL. Despite the fact that the petitions came up for hearing before the learned Single Judge sometime in the year October, 2002 when the latest audited accounts as well as the auditors report for the year ending 31st March, 2002 were available, they were not produced by the company. We must however, mention that Mrs. Darshana Kenia (appellant in Appeal Stamp No. 981 of 2002) had produced the latest Balance Sheet and financial position of APIL after conclusion of the hearing before the learned Single Judge but, before pronouncing of the judgment. The learned Single Judge however, declined to look into the same for the reasons mentioned in paragraph 39 of its judgment. In the case of In the matter of Scheme of Amalgamation of Zee Interactive Multimedia Limited, Company Petition No. 1096 of 2001 decided on 1st February, 2001 one of us (Karnik, J.) reported in 2002 (4) Bom.C.R. (O.O.C.J.) 137, has clarified that the latest Balance Sheet, Profit and Loss Account and the Auditors Report must be produced up to the date of hearing of the company but, if they are not produced the Court can call for them to obtain the latest possible information even at and during the course of the hearing. We are of the opinion that the learned Single Judge was entitled to call for and look into the said Balance Sheet which were produced before him. The fact that they were not produced by the company but, were produced by Mrs. Kenia was immaterial. They were produced before the Court so that it could look into them and to ascertain the latest financial position. We have perused the latest financial position contained in the Balance Sheet produced before the learned Single Judge. We have also perused further financial results published by the company in newspapers in pursuance of a statutory/ SEBI requirement of publishing the quarterly results (and filed before us by the appellants in the compilation). We do not find anything adverse in them. On the contrary, we notice improvement in the financial position in the post amalgamation results published by the transferee company pending approval of the scheme of amalgamation by this Court.We are of the opinion that the requirement of placing before the Court all material facts relating to the company including latest financial position is satisfied.In the light of the aforesaid legal position, we would now proceed to consider whether the scheme of arrangement as proposed in the present case should have been sanctioned by the learned Single Judge. In doing so, we must take note of the facts mentioned below :(i) In their respective meetings of the equity share holders, preference share holders and creditors of APBL, the scheme was sanctioned almost unanimously. Less than 2% in value as well as in number of the share holders and creditors voted against the scheme in their respective meetings. In the meetings of the equity share holders and secured creditors of APIL also, the scheme was approved almost unanimously. Less than 2% of the members/creditors only opposed theState Bank of India, appellant No. 1 in Appeal No. 1116 of 2002 who was a share holder of APIL as well as creditor of APBL did not oppose the scheme in the respective meetings of the share holders and creditors. It did not attend the meeting of members of APIL. It attended the meeting of the creditors of APBL and voted in favour of the scheme. The IDBI appellant No. 2 in Appeal No. 1116 of 2002 who was an equity share holder of the transferee company also did not oppose the scheme in the meeting of the members of APIL. Thus, at the time of the meetings of the members and creditors, both the appellants in Appeal No. 1116 of 2002 in their commercial wisdom thoughts that the scheme was just and fair and in any event not opposed to the interest of the transferor or transferee company or their members or creditors. It is only later that they think that their individual interest are being harmed. In our opinion, while sanctioning the scheme, the Court has to see the general interest of the transferor and the transferee company as the case may be, and of different classes of their members and creditors in general and not to the interest of a particular member or creditors. The individual interest of a particular member or creditor or a group of members or creditors is to be distinguished from the interest of the class of members or creditors to which such individual or groupThe Government of India which was a preference share holder had sent a fax message just a day priorview of the above, I am directed to inform that the Government of India is not in a position to support the scheme of the proposed merger of APBL and APIL unless steps are taken to safeguard the interest and investments by the Government and financial institutions. It is requested that till then, the proposed merger may be differed." (UnderliningGovernment of India did not send its representatives to attend the meeting and voice its concern or oppose the resolution. The underlined portion from the communication of the Government extracted above makes it clear that the Government only thought that the scheme was adverse to the interest and investments by the Government and financial institutions but, did not feel that the scheme was adverse to the interest of the members or creditors or any class of them. The Government of India must be aware of the distinction between the individual interest of the Government and financial institutions as opposed to the interest of the company and its members and creditors and therefore, did not rightly oppose the scheme either in the meetings of the members and creditors nor in this Court. At the time of voting, it did not send its representative to vote at the meeting because, it probably know that in law its individual interest must yield to the greater interest of the company and its members andWe have also noticed that the business of APBL was in shambles. It is true that it had come out of sickness and was no longer dealt with by the BIFR but that was not on account of any improvement in the business but, on account of huge amount of several hundreds of crores of rupees brought in by ARR/Alstom group by way of additional share capital to make the net worth positive. Even after several hundreds of crores were brought in by way of equity and preference share capital, APBL continued to make loss. its capital was eroded to the extend of about 95%. There was no hope that the APBL would survive on stand alone basis. We have also noted from the letter dated 7th January, 2000 (at page 711 AA of the compilation) by the Country President of ABBL/Alstom Power to the Secretary, Government of India, APBL proposed to the Government to take back APBL under the hold of Ministry of Power, to take back the management of APBL. The very said letter also makes an offer to transfer all its interest to the Government of India. The Alstom group had thus offered to cede the management control and transfer all its interest to the Government of India. We have no doubt in our mind that no person in management having any hope of success in the reasonable future offer would offer to cede the management control to any other person. The very offer to seed the management control itself shows that the management had lost all hopes of APBL being run successfully in any reasonable foreseeable future. It was in this light that the management of APBL decided to merge it with other group company when the Government did not come forward to take the management control. The decision was thus based on commercialAfter the scheme of arrangement was approved in the respective meetings of APBL and APIL, Mr. Praful Kumar Kenia, husband of Ms. Darshana Kenia andof Mr. Damji Gala the appellants in the Appeal (Lodging No. 953 of 2002 purchased 100 shares of APIL. If the contention of these appellants that the scheme was harmful to the interest of the members of APIL and reduces the intrinsic value of its equity shares of its equity shares is to be accepted then we fail to see why appellants augmented their holdings and purchased a few more equity shares in APIL knowing fully well that their intrinsic value is going to be reduced by virtue of the scheme of amalgamation. The fact that Mr. kenia, his wife anddid not attend the meeting of the equity share holders either personally or through proxy to vote against the sanction of the scheme of arrangement and his conduct of purchasing further equity shares after the resolutions were passed leaves no manner of doubt in our minds that commercially, he was satisfied that the scheme was not against the interest of the members of APIL. We are of the view that the present opposition to the scheme is for collateral reasons. In his arguments, Mr. Vasudeo made allegations of threats and also of the inducement made to Kenia to win over their opposition which of course were denied by learned Counsel for the respondent company. It is possible that either because of the offer of inducement of hopes of offer of inducement to withdraw his opposition in the collateral motive. We however, are not obliged to make an inquiry into the real motive but we are certainly satisfied that their conduct shows they did not think that the scheme of arrangement was against the interest of the equity share holders of APIL as aWe have also noted that the scheme of arrangement is uniform to all the members of a class.32. Nothing has been shown to us that the scheme of arrangement is in any way unfair and unjust to any class of members of creditors. Even though the Court while sanctioning a scheme must not act merely as a rubber stamp to approve the scheme of enquiry is limited and contours of jurisdiction of the Court are narrow. Court does not scrutinises the scheme as an Appellate Authority and respects the commercial wisdom of the members and creditors, unless the scheme is shown to be unfair and unjust. Even if we were to sit in appeal over the scheme, we would not have come to the conclusion that the present scheme was in any way unjust and unfair.