Source: http://advocatemmmohanlaw.blogspot.in/2017/04/the-corporate-debt-restructuring.html
Timestamp: 2018-03-18 23:16:15
Document Index: 706114612

Matched Legal Cases: ['Application No.1277', 'Application No.480', 'Application No.481', 'Application No.1277', 'Application No.1278', 'Application No.1277', 'Application No.1277', 'Application No.1277']

The Corporate Debt Restructuring Mechanism was evolved by the Reserve Bank of India to ensure timely and transparent mechanism for restructuring of corporate debts of viable entities facing problems, for the benefit of all concerned. It is also intended to minimize the losses to the creditors and other stock holders through an orderly and coordinated restructuring programme. It is a voluntary non-statutory system based on Debtor-Creditor Agreement and Inter-Creditor Agreement and the principle of approvals by super majority of 75% creditors which makes it binding on the remaining 25% to fall in line with the majority decision. It consists of three tiers, namely, CDR Standing Forum, CDR Empowered Group and CDR Cell. In view of the petitioner company having an Inter- Creditor Agreement, which is binding on the Companies, any order passed by this Court approving the scheme of arrangement would have an impact on such agreement. Though, the banks or creditors to the Companies are part of CDR mechanism, the scheme was not evaluated by the CDR mechanism as such. Some banks attended the creditors meeting and some banks did not. The HDFC Bank raised objections. In the circumstances, the scheme of arrangement is tentatively sanctioned subject to approval by the CDR EG and if the CDR EG approves the scheme by evaluating the financial implications, the present order along with the decision of the CDR EG shall be delivered to the Registrar of Companies, A.P., Hyderabad within thirty (30) days from the date of receipt of decision of CDR EG and he shall take all necessary consequential action in accordance with law. In case the CDR EG does not approve the scheme and suggest any modifications, the same shall be taken into account and the modified scheme of arrangement shall be placed before this Court for its sanction. Both the Company Petition Nos.200 and 201 of 2016 are, accordingly, disposed of. Consequently, Company Application No.1277 of 2016 in C.P.No.200 of 2016 and Company Application Nos.1278, 1342 and 1442 of 2016 in C.P.No.201 of 2016 are also disposed of.
THE HONBLE SRI JUSTICE A.RAMALINGESWARA RAO
Company Petition Nos.200 of 2016 AND BATCH
!Counsel for the Petitioner: Sri Rubaina S. Khatoon
1.(1998) 94 CampCas 723 Delhi = ILR 1994 Delhi 109
2.AIR 1997 Supreme Court 506(1)
3.2012 Law Suit (AP) 687 = (2012) Supreme (AP) 1025
4.(2004) 121 CompCas 523 (Bom)
5.AIR 1960 Cal 637
6.(2005) 124 Comp Cas 637 (Kar.)
7.AIR 1962 Guj 305
8.(1972) 42 Com Cases 265 at 320 (Guj)
THE HONBLE SRI JUSTICE A. RAMALINGESWARA RAO
Company Petition Nos.200 and 201 of 2016
These two Company Petitions are being disposed of by this
common order as they relate to the scheme of arrangement agreed
between the two companies, who are the petitioners in both the Company
The petitioner in Company Petition No.200 of 2016 is Asmitha
Microfin Limited (Asmitha) a public limited company incorporated on
26.02.2001. Its registered office is situated in Hyderabad, Telangana.
The authorized share capital of the said company as on 01.04.2015 is
Rs.400.00 crores divided into 3,50,00,000 equity shares of Rs.10/- each
and 36,50,00,000 preference shares of Rs.10/- each. The issued,
subscribed and paid-up share capital of the company is
Rs.333,64,38,510/- divided into 2,43,82,786 fully paid-up equity shares of
Rs.10/- each and 30,92,61,065 optionally convertible cumulative
redeemable preference shares (OCCRPS) of Rs.10/- each.
Similarly, the petitioner in Company Petition No.201 of 2016,
SHARE Microfin Limited (SHARE) was registered on 20.04.1999 as a public
limited company and it is having its registered office in Hyderabad,
Telangana. Its authorized share capital as on 01.04.2015 is Rs.830.00
crores divided into 10,00,00,000 equity shares of Rs.10/- each and
73,00,00,000 preference shares of Rs.10/- each. The issued, subscribed
and paid-up share capital as on 01.04.2015 is Rs.697,35,20,420/- divided
into 5,32,17,042 fully paid up equity shares of Rs.10/- each and
64,41,35,000 OCCRPS of Rs.10/- each.
Both the companies are engaged in the business of providing
financial and support services to marginalized sections of society
particularly underserved rural and urban women across India. The
erstwhile State of Andhra Pradesh passed Andhra Pradesh Micro Finance
Institutions (Regulation of Money Lending) Act, 2010 regulating the loan
disbursement and recovery process for micro finance institutions in
Andhra Pradesh and Telangana. The provisions of the said Act reduced
the revenue generation of the companies. The reduced revenues of both
the companies have caused both of them to service their repayment
obligations to their creditors out of the recoveries made by them from
their business in States other than Andhra Pradesh and Telangana. The
debt payment obligations coupled with limited fresh loans to the
companies lenders created liquidity issues. The petitioners thought of
segregating their respective businesses and consolidate in order to face
the challenges. The Board of Directors of both the companies met on
31.03.2016 and approved the scheme of arrangement between the two
companies to be operative from the appointed date subject to approval
and direction of this Court.
The petitioner in Company Petition No.200 of 2016 filed Company
Application No.480 of 2016 for convening the meetings of equity
shareholders, preference shareholders and creditors. This Court, by order
dated 27.04.2016, appointed the Chairpersons to convene the meetings of
the equity shareholders, preference shareholders and creditors of the
petitioner company. Similarly, the petitioner in Company Petition No.201
of 2016 filed Company Application No.481 of 2016 for convening the
meetings of equity shareholders, preference shareholders and creditors
and this Court, by order dated 27.04.2016, appointed the Chairpersons to
convene the meetings of the equity shareholders, preference shareholders
and creditors of the petitioner company.
The meetings of the shareholders, preference shareholders and
creditors of both the Companies were held as follows:
Shareholders of Asmitha Microfin Ltd
30th May2016
Preference shareholders of Asmitha Microfin Ltd
Creditors of Asmitha Microfin Ltd
Shareholders of SHARE Microfin Ltd
Preference shareholders of SHARE Microfin Ltd
Creditors of SHARE Microfin Ltd
After filing the reports by the respective Chairpersons, both the
Company Application Nos.480 and 481 of 2016 were closed by orders
dated 14.06.2016. After closure of the said Company Applications, the
present Company Petitions were filed for sanctioning and confirming the
scheme of arrangement agreed between the petitioners so as to be
binding on all the members, employees, creditors of both the companies.
The Company Petitions were admitted and the petitioners were
directed to get the notices published in the Business Standard, English
daily, Hyderabad edition and Andhra Bhoomi Telugu Daily, Hyderabad
edition. Appropriate notices were issued to the Regional Director, South
East Region, Ministry of Corporate Affairs, Ranga Reddy District. Pursuant
to the said notices, the Regional Director filed his report on 04.08.2016.
After publication of notices in the Newspapers, the HDFC Bank
Limited filed Company Application No.1277 of 2016 in Company Petition
No.200 of 2016 submitting their objections to the said scheme. In
support of their application it is stated that the Bank is one of the
creditors of the petitioner company, who advanced a term loan of
Rs.85.00 Crores vide facility agreement dated 29.07.2010. The total
principal loan amount outstanding as on 31.03.2015 is Rs.26,85,70,850/-
and out of the total 33 creditors of the petitioner company, the applicant
is one of the major lenders to the company. In view of the environment
created by the operation of the provisions of the Andhra Pradesh Micro
Finance Institutions (Regulation of Money Lending) Act, 2010, the
petitioner company proposed a Corporate Debt Restructuring Package
(CDR) to its lenders. The same was approved by the lenders including the
applicant on 29.06.2011 and CDR documents were executed on
16.09.2011. It was agreed that the total restructured debt was
Rs.1156.79 crores out of which an amount of Rs.350.00 crores was to be
converted into Optionally Convertible Cumulative Redeemable Preference
Shares (OCCRPS) and those instruments were redeemable along with
redemption premium at an yield of 12% p.a., on a quarterly basis over 16
quarterly instalments commencing from June 2013 till March 2018. It is
further stated that during the implementation of CDR package, the
petitioner company failed to adhere to the terms of repayment due to
which priority loans were extended by most of the CDR lenders and
despite the same, the petitioner company failed to repay the outstanding
loan amounts to the creditors. At this juncture, SHARE in Company
Petition No.201 of 2016 approached the CDR Cell with the present scheme
of arrangement with Asmitha for approval. Pursuant to the said proposal,
various meetings of CDR Empowered Group (CDREG) were convened.
But, the CDR lenders forum have not provided their mandates for the
above referred proposal of scheme of arrangement between the petitioner
companies. The same was communicated on 30.07.2016. The applicant
bank also lent monies to the petitioner company in Company Petition
No.201 of 2016 and the said company also defaulted in its repayment
under CDR package. The following grounds were raised by the applicant
against the proposed scheme of arrangement:
1) The applicant received the notice dated 02.05.2016 of meeting
of creditors in its branch office at Secunderabad. Even though
the loan was sanctioned by the City Branch Office, all the
correspondence emanated from the registered and corporate
office of the applicant company at Mumbai and the notice dated
02.05.2016 was not communicated to the said office at Mumbai
in order to avoid participation of the top management. Hence,
the service of notice on the applicant was not properly done and
consequently the meeting of creditors convened pursuant to the
orders of this Court in C.A.No.480 of 2016 is bad in law and not
binding on the applicant. Immediately after coming to know of
the meeting of the creditors, a letter was issued through its
advocate on 12.07.2016 to the petitioner to make available all
the relevant information pertaining to the case to enable the
applicant to take a decision and in spite of the same the
petitioner company vide its reply dated 18.07.2016 refused to
cooperate. After receipt of the said reply the applicant
informed by letter dated 10.08.2016 that it reserves its rights to
raise appropriate objections before this Court.
2) Though the notice of meeting was received in the branch office
of the applicant bank it took sometime to reach the higher
authorities and by that time the meeting was already convened
on 31.05.2016 and the bank could not attend such meeting due
to inadvertent delay in internal correspondence among the
departments of the applicant bank. The non-participation in the
meeting is merely a procedural irregularity and hence the
decision taken in the said meeting is not binding more
particularly when it has a substantial loan exposure.
3) If the applicant bank had attended the creditors meeting it
could not have got requisite majority for approval.
4) The mere change in legislative environment cannot be a ground
for merger or demerger of the company.
5) The proposed scheme of arrangement is detrimental to the
interests of the creditors and if the same is allowed it would
result in severe financial hardship to the creditors.
6) The main purpose of the scheme is transferring the healthy part
to one entity, petitioner in Company Petition No.201 of 2016
and unhealthy part to the other entity, petitioner in Company
Petition No.200 of 2016 and it results in healthy company
flourishing and unhealthy company having its natural death.
7) The reasons for formulating the CDR package and the proposed
scheme are one and the same i.e., the challenges posed by the
Andhra Pradesh Micro Finance Institutions (Regulation of Money
Lending) Act, 2010. Though the CDR was approved, the
companies have defaulted on the terms of repayment under the
CDR, and hence there is no guarantee that the proposed
scheme of arrangement could be successful.
8) The proposed scheme lacks bona fides and is a fraud played on
9) The petitioner company in Company Petition No.200 of 2016
requires huge and continuous cash flow/fresh investments in its
business in order to keep the rotation of finances into the
market. But keeping in mind the petitioners financial track
record and also its failure to adhere to the repayment schedule
as envisaged in the CDR and the legislative environment in the
States of AP and Telangana it would be extremely risky for all
the creditors including the applicant Bank to pump in fresh
credit to the business of the petitioner company and it is
difficult for the creditors to recover the existing/outstanding
loan amounts from the petitioner due to its poor financial status
as reflected in its latest audited balance sheets. In fact, the
petitioner is liable to be wound up as could be seen from the
excess of liability over assets.
10) The scheme of arrangement would benefit the promoters of
the petitioner who are also majority shareholders in the
company. The proposed scheme provides for allotting 1.0956
shares of the petitioner in Company Petition No.201 of 2016 for
every one share hold by the existing shareholder in Company
Petition No.200 of 2016 in addition to their share holding in the
petitioner company, but the debt of the creditors would be
transferred to the petitioner company which would carry a
meager interest of 1% with a very long repayment period
coupled with the aspect of absence of any tangible identified
11) The repayment schedule provided under part G of the scheme
for the creditors of the company is highly unreasonable as the
principal outstanding will be paid in a span of 9 years from the
effective date with a moratorium period of 3 years. In fact, the
creditors are not going to realize any significant portion of their
debt in the next 6 years and since the survival of the company
itself is doubtful, it is not in the interest of creditors to sanction
the scheme by this Court.
12) There is no road map outlined under the scheme in clear terms
about the survival of the petitioner in Company Petition No.200
of 2016 post demerger under the proposed scheme. In fact,
the CDR Cell has rejected the proposal of demerger vide its
letter dated 30.07.2016. It is surprising that when no bank has
given any mandate to the CDR Cell, 11 creditors consented to
the scheme of demerger mechanically and without introspecting
the adverse implications of such proposed scheme.
13) The petitioner would not be in a position to continue its
business in the States of AP and Telangana due to legislative
environment and hence the proposed scheme would cause
undue financial damage to its creditors.
14) The petitioner did not enclose the list of pending litigations to
the scheme nor disclosed the details in the scheme with respect
to suits for recovery of monies filed against its borrowers in
order to show its bona fides in recovering the dues. The
applicant Bank further states that most of the claims are now
time barred and hence the petitioner cannot recover any money
from the defaulters.
15) The petitioner had written off an amount of Rs.318.18 Crores
as per the explanatory scheme of calculations enclosed to the
scheme, but the mode of adjustment of the said amount is not
16) The proposed scheme is intended to seek undue legal
protection from its creditors and deny them their lawful right of
recovery of their outstanding dues. The applicant apprehend
that the promoters/majority shareholders of the petitioner
company may take steps to wind up the company and allow its
natural death after implementation of the scheme as the
company would become financially unviable after the
implementation of the scheme.
17) The issue of OCCRPS in the petitioner company to its CDR
lenders is sham and creditors would not be benefited out of the
same. Further, there are many restrictions imposed on
redemption of such OCCRPS. The redemption period is 12
years i.e., redeemable in 12 quarterly instalments starting from
30.06.2024 and it does not secure the interest of the creditors.
18) Though the CDR was approved in the year 2011 and in view of
the legal protection enjoyed by the companies no action could
be taken by the lenders. Now after 5 years, this devise of
scheme of arrangement is made only to avoid legal actions.
19) The company which is liable to be wound up under Section
433 of the Companies Act is not eligible to take protection
under Section 391 of the Act.
Ultimately, it is stated that the applicant would reserve its right to inform
the said objections to other Central Government authorities such as
Registrar of Companies, Competition Commission of India and Reserve
Bank of India with a request to them not to give approval to the scheme.
It is also stated that if the Court is pleased to sanction the scheme, the
scheme shall be sanctioned subject to modifications under Section 392 of
The petitioner Company filed a counter to the objections stating
that the applicant Bank approached this Court with unclean hands by
suppressing material facts and presented a tailor made and misleading
factual matrix moulded to suit its vested interests. The application was
filed to delay approval of the scheme by this Court after approval by the
equity shareholders, preference shareholders and the creditors of the
companies. The total exposure of the applicant Bank is Rs.26,85,70,850/-
and it represents the total outstanding debt of 6% of the petitioner as on
30.04.2016 and the applicant is a participant in the Joint Lenders Forum
(JLF) formed in respect of the petitioner company in accordance with the
Reserve Bank of India guidelines and CDR mechanism. When the
applicant Bank filed a request to the CDREG to revoke the approved CDR
package to the company on 03rd October 2015 the same was rejected by
the CDREG. The applicant Bank also asked the larger creditors for one
time settlement with the petitioner company in the meeting of JLF held on
14.10.2015 and the same was also negatived by the other lenders. In
fact, the creditors consented to the present scheme of arrangement and
referred it to the CDREG for approval. It was stated that consequent to
the legislation, the RBI issued a notification recognizing that the
challenges afflicting the MFI sector were not necessarily on account of any
credit weakness per se, but were mainly due to environmental factors and
hence a special regulatory asset classification benefit has to be extended
by the RBI to the lenders who have restructured MFI accounts. In
pursuance of the same, the petitioner companies were referred to the
CDR mechanism by the lenders and the decisions regarding the CDR
proposals, schemes, assumptions and workings were driven by the
lenders. The CDR package assumed recoveries of approximately 20% of
the outstanding loans in the states of Andhra Pradesh and Telangana as
on 31.03.2011 on an annual basis. But, in view of the legislation the
actual recovery was less than 1%. In spite of the effect on recovery
process, the petitioner companies have repaid INR 2,430 Crores in the
form of principal and interest payments (apart from penal interest and
other fees under CDR mechanism) to its lenders as on July 2016. In fact,
during the Senior Level Bankers Meeting (SLBM) dated 22.08.2013, SIDBI
and ICICI (two biggest lenders of the petitioner) and all other senior
bankers placed on record the appreciation for the petitioners performance
in fulfilling commitments to its lenders. In the said SLBM dated
22.08.2013 the merger - demerger plans of the petitioner companies were
also discussed. In fact the applicant Bank communicated its consent for
the said plan on 26.10.2013 and executed a Rupee Term Loan Agreement
with the petitioner company on 08.05.2014. The said crucial facts are
suppressed in the present application. It is also stated that in the Joint
Lenders Meeting on 06.03.2014 and CDREG meeting dated 07.03.2014,
the lenders advised the petitioner companies to implement a merger
demerger, and to separate its business in the AP states and non-AP
states. The scheme was approved by the super majority of the creditors
of the petitioner company present and voting at the meeting as required
under law. The letter quoted by the applicant in the CDREG was issued in
the absence of proper appraisal of the developments by the relevant
representatives of the lenders. In fact the applicant received notice dated
02.05.2016 at its branch office in Secunderabad on 07.05.2016 with
regard to proposed meeting to be held on 31.05.2016. The status of
scheme of arrangement was circulated to all the lenders including the
applicant Banks senior officials via e-mail on 05.04.2016 duly informing
the applicant about the filing of proceedings for seeking sanction of this
Court to the scheme of arrangement. The HDFC Bank, Secunderabad
branch has been the point of regular communication between the
petitioner companies for more than a decade. E-mails were sent to the
senior officials on 05.05.2016 and 06.05.2016 also and the deponent of
this application is one of such officers. It is also stated that if a lender
abstains from attending the court ordered meeting of creditors, such a
lender cannot raise contentions after the scheme of arrangement has
been approved. The applicant, having not chosen to attend the meeting,
is not entitled to raise the objections nor thwart the approval of the
scheme of arrangement. The allegation that the petitioner did not
cooperate for the information sought by the applicant on 12.07.2016 in
spite of its reply dated 18.07.2016 is without any basis. The applicant
intentionally not participated in the creditors meeting held on 31.05.2016
and the allegation that if it had attended the meeting, the scheme would
not have got requisite majority of approval is totally unsustainable. The
present application is filed only to harass and pressurize the petitioners to
engage in discussion for one time settlement of their dues after the
scheme of arrangement was approved by all the shareholders and
pending consideration before this court. Since October 2013, the
petitioner company in Company Petition No.201 of 2016 disbursed INR
63.61 Crores and the petitioner company in Company Petition No.200 of
2016 disbursed INR 36.81 Crores in the AP State. These fresh
disbursements facilitated recoveries from the defaulted borrowers to the
tune of 55.51% and 59.41% of the disbursements since October 2013 in
respect of the petitioners in Company Petition Nos.201 and 200 of 2016
respectively. The petitioners proposed business plans were submitted to
both the RBI and its lenders. The allegation that the petitioners would not
be in a position to repay the debt of creditors is based on assumptions
and without any basis. The allegation that the petitioner company is liable
to be wound up is also equally untenable as the object and purpose of
Section 391 of the Companies Act is to revive/restructure the companies
instead of administering them civil death. The rationale for repayment
schedule is based on various discussions held between the petitioners and
their lenders including two largest lenders (SIDBI and ICICI Bank). In
view of sensitive nature of markets involved and external regulatory
environment, none of the MFIs including the petitioners have pursued any
legal proceedings or actions against the borrowers in AP. The scheme
does not envisage the writing off INR 318.00 Crores of debt obligations
towards its lenders as alleged. The write off by the petitioner company in
Company Petition No.201 of 2016 relates to a portion of its non-
performing portfolio in the AP States which the management observed as
unrecoverable. In respect of the OCCCRPS redemption also the allegation
was denied. It is also stated that in consideration of the special
circumstances applicable to the companies, the creditors of the petitioner
have previously waived demands for any personal guarantees which are
otherwise mandatory for any fresh funding under the JLF mechanism.
The present application is filed to defeat the decision of the majority
lenders who intend to save the public money, protect two and half decade
old institutions, protect the employment of over 4500 employees and
ensure continuity of financial inclusion of 3.50 million households.
Accordingly, it sought dismissal of the application.
A rejoinder and a surrejoinder were filed by the applicant Bank
disputing the averments made in the counter affidavit.
Similarly, Company Application No.1278 of 2016 was filed by the
applicant HDFC Bank in Company Petition No.201 of 2016.
M/s. Aditya Birla Finance Limited also filed Company Application
No.1342 of 2016 in Company Petition No.201 of 2016 seeking to implead
as respondent and adjudicate the objections raised by it. In support of
the said application it is stated that the applicant sanctioned and
disbursed an amount of Rs.50.00 Crores to the petitioner company in
Company Petition No.201 of 2016 in August 2010 and September 2010.
The said company was unable to maintain the repayment schedule of the
said term loan in view of the enactment. The applicant is a part of the
lenders who approved the CDR package with effect from 01.04.2011. As
per the said package the outstanding amount was fixed at Rs.36.00
Crores as on 01.04.2011 and the said amount was restructured as
Rs.23.02 Crores towards term loan and Rs.12.98 Crores towards OCCRPS.
In spite of not maintaining the repayment schedule under the said CDR
package the applicant sanctioned and disbursed additional loan of Rs.6.70
Crores to the petitioner company. As on 31.03.2015 the petitioner
company is due and payable a sum of Rs.27.80 Crores to the applicant.
The applicant also stated that in the scheme of arrangement the said
amount is proposed to be transferred to the extent of Rs.18.18 Crores to
the petitioner company in CP No.200 of 2016 where recoveries were
negligible and Rs.9.19 Crores to be transferred to the petitioner company
in CP No.201 of 2016. The specific objections are as follows.
1) There is no majority in value of the creditors and shareholders
who voted in support of the proposed scheme of arrangement
in the meeting held by the chairperson.
2) The vote of the Small Industries Development Bank of India
(SIDBI) was subject to certain conditions and objections but
was taken as a favourable vote.
3) The value of SIDBI voting was Rs.243,38,32,757/- and the
same has to be deducted from the majority voting. Even if it is
not deducted at least its vote should be treated as neutral.
4) The allocation of an amount of Rs.18.18 Crores to the
company in CP No.200 of 2016 is intended to defeat the
recovery of the amounts as no recovery is possible in respect of
the said company. Thus, the entire debt of Rs.27.80 Crores is
drastically affected on account of the proposed scheme of
5) It is further stated that when the petitioner in CP No.201 of
2016 obtained CDR package from its creditors and the borrower
account became substandard it is not entitled to invoke the
rights under the Companies Act.
6) If the scheme of arrangement is approved the equity of the
company in CP No.201 of 2016 would come down from
6,44,13,50,000/- to Rs.32,20,67,500/- and the status of
OCCRPS would be converted into ordinary equity shares giving
up the preferential and security coverage.
7) Even if the proposed scheme of arrangement was approved by
majority of the creditors, the interest of the minority
shareholders and creditors have to be protected by this court.
In the light of the above facts, the following points would arise for
consideration in the present Company Petitions.
1) Whether a company, whose financial position has become weak
by the liabilities being more than the assets is entitled to enter
into a scheme of arrangement under Section 391 of the
Companies Act?
2) Whether the scheme of arrangement was approved by the
requisite majority of shareholders, preferential creditors and
3) Whether this Court has got jurisdiction to modify the scheme of
arrangement proposed by the Board of Directors of the
Companies involved in it and approved by the shareholders,
creditors and others in the meeting held for the purpose of
considering the scheme of arrangement and if so whether the
proposed scheme of arrangement requires any modification in
the light of the objections raised by the objectors?
financial and support services to marginalized sections of the society
particularly underserved rural and urban women across India. Both the
companies were incorporated in the year 2001 and 1999 respectively.
The passing of Andhra Pradesh Micro Finance Institutions (Regulation of
Money Lending) Act, 2010 brought a drastic change on the operations of
both the companies. It reduced the revenue generation of the
companies. In view of the adverse impact caused by the legislation, both
the companies had to service their repayment obligations to their creditors
out of the recoveries made by them from their business in the States
other than in the State of Andhra Pradesh and Telangana. The debt
repayment obligations coupled with limited fresh loans to the companies
created liquidity issues. In those circumstances, they thought of
segregating their AP businesses and non-AP businesses from each other
and consolidate them. They wanted to consolidate their AP businesses in
Asmitha and non-AP businesses in SHARE. The salient features of the
scheme of arrangement between the two companies are that; demerger
of non-AP businesses of Asmitha into SHARE and demerger of AP business
of SHARE into Asmitha. This involved issuance of equity shares of SHARE
to the lenders of the SHARE, cancellation of certain share capital of
SHARE held by OCCRPS holders and revision of the terms of the loans and
preference capital pertaining to the AP businesses of SHARE and Asmitha.
It was envisaged that by virtue of the said scheme of arrangement,
SHARE would become a mature micro finance institution and both the
SHARE and Asmitha companies would have an increased scope for the
operations of their respective non-AP business and AP business in order to
achieve economies of scale through consolidation. It was also stated that
the terms and conditions of service applicable to the staff and employees
after implementation of the scheme shall not in any way be less
favourable than those applicable to them immediately preceding the
implementation of the scheme. 01.04.2015 was appointed as the date for
implementation of the scheme. The scheme proposes issuance of equity
shares of SHARE in the ratio of 1:1.0956 to the shareholders of Asmitha
and the equity shares of Asmitha in the ratio of 1:1.1541 to the
shareholders of SHARE. The Board of Directors of both the companies
passed a resolution approving the scheme of arrangement in their
meeting held on 31.03.2016.
The Chairpersons were appointed for convening the meetings of
the equity shareholders, OCCRPS holders and creditors by order dated
27.04.2016. The meetings were held on 30.05.2016, 31.05.2016,
31.05.2016, 01.06.2016, 02.06.2016 and 02.06.2016 respectively and the
Chairpersons had filed their respective reports.
The meetings of Asmitha were attended by the respective members
and approved the scheme of arrangement as follows:
The meeting was attended by 53 Equity Shareholders in person
holding 1,49,66,202 equity shares of Asmitha and 42 equity
shareholders through proxy holding 86,73,084 equity shares of
Asmitha, aggregating to 95 equity shareholders holding 2,36,39,286
equity shares of Asmitha. The said scheme of arrangement was
opened for voting at the meeting by the Chairperson, Ms. K. Sumathi.
No votes were cast against the proposed scheme of arrangement.
The proposed scheme of arrangement was approved unanimously by
the equity shareholders.
The meeting was attended by 20 preference shareholders in person
holding 16,40,72,140 preference shares of Asmitha and 1 preference
shareholder through proxy holding 30,10,000 preference shares of
Asmitha, aggregating to 21 preference shareholders holding
16,70,82,140 preference shares of Asmitha. The said scheme of
arrangement was opened for voting at the meeting by the
Chairperson, Mr. J. Amrutha Rao. 11 preference shareholders
(holding 8,72,12,940 preference shares of Asmitha) have voted in
favour of the proposed resolution. 4 preference shareholders (holding
2,64,05,250 preference shares of Asmitha) have voted
against/opposing the resolution. 6 preference shareholders holding
5,34,63,950 preference shares of Asmitha did not participate in the
voting or cast valid votes.
The meeting was attended by 22 creditors in person to whom Asmitha
owed a sum aggregating to INR 397,45,46,441 and one creditor
through proxy to whom Asmitha owed a sum aggregating to INR
7,33,69,937, aggregating to 23 creditors to whom Asmitha owed a
sum aggregating to INR 404,79,16,378. The said scheme of
arrangement was read and explained to the meeting by the
Chairperson, Mr. JUMV Prasad. 11 creditors (to whom Asmitha owed
an amount aggregating to Rs.173,06,78,609/-) have voted in favour
of the proposed resolution. 5 creditors (to whom Asmitha owed an
amount aggregating to Rs.56,23,47,876/-) have voted
against/opposing the resolution. 7 creditors to whom Asmitha owed a
sum aggregating to INR 175,48,89,892 did not participate in the
The meetings of SHARE were attended by the respective members
and approved the scheme of arrangement as follows.
The meeting was attended by 28 Equity Shareholders in person
holding 4,82,99,709 equity shares of SHARE and 7 equity
shareholders through proxy holding 49,16,833 equity shares of
SHARE, aggregating to 35 equity shareholders holding 5,32,16,542
equity shares of SHARE. The said scheme of arrangement was read
and explained to the meeting by the by the Chairperson, Ms. K.N.
Vijaya Lakshmi. No votes were cast against the proposed scheme of
arrangement. The proposed scheme of arrangement was approved
unanimously by the equity shareholders.
The meeting was attended by 19 preference shareholders in person
holding 40,69,54,750 preference shares of SHARE. The said scheme
of arrangement was read and explained to the meeting by the
Chairperson, Ms. Vangala Poornasri. 13 preference shareholders
holding 34,66,20,250 preference shares of SHARE voted for the
scheme and 6 preference shareholders holding 6,03,34,500
preference shares of SHARE voted against the scheme.
The meeting was attended by 21 creditors in person to whom SHARE
owed a sum aggregating to INR 679,02,04,375. The said scheme of
Chairperson, Mr. P.V. Narsaiah. 14 creditors to whom SHARE owed a
sum aggregating to INR 595,93,12,677 voted for the scheme and 7
creditors to whom SHARE owed a sum aggregating to INR
83,08,91,698 voted against the scheme.
Thus, the resolutions of the Board of Directors of both the
companies were approved by the equity shareholders, preference
shareholders and creditors of both the companies. The final position in
the meetings convened by the Chairpersons emerged as under:
CONSOLIDATED RESULTS OF VOTINGS IN THE HC CONVENED MEETINGS OF SHARE & ASMITHA
Chairperson/Chair
man for the
s/Proxies/Cr
held/Amount
Mrs.K. Sumathi
23,639,286
Mr. J. Amruth Rao
113,618,190
87,212,940
26,405,250
Mr. JUMV Prasad
2,293,026,485
1,730,678,609
562,347,876
Mrs. K. Vijaya
53,216,542
Mrs. V. Poorna Sri
406,954,750
346,620,250
60,334,500
Mr. P.V. Narsaiah
6,790,204,375
5,959,312,677
830,891,698
Section 390 of the Companies Act defines the company meaning
any company liable to be wound up under the provisions of the Act.
Relevant portions of Section 391 of the Companies Act reads as
391. Power to compromise or make arrangements
with creditors and members.
(1) Where a compromise or arrangement is proposed-
(a) between a company and its creditors or any class of
them; or (b) between a company and its members or any
class of them; the Court may, on the application of the
company or of any creditor or member of the company, or,
in the case of a company, which is being wound up, of the
liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the
case may be, to be called, held and conducted in such
manner as the Court directs.
(2) If a majority in number representing three- fourths in
value of the creditors, or class of creditors, or members, or
class of members as the case may be, present and voting
either in person or, where proxies are allowed under the
rules made under section 643, by proxy, at the meeting,
agree to any compromise or arrangement, the compromise
or arrangement shall, if sanctioned by the Court, be binding
on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may
be, and also on the company, or, in the case of a company
which is being wound up, on the liquidator and
contributories of the company:
Provided that no order sanctioning any compromise or
arrangement shall be made by the Court unless the Court is
satisfied that the company or any other person by whom an
application has been made under sub-section (1) has
disclosed to the Court, by affidavit or otherwise, all material
facts relating to the company, such as the latest financial
position of the company, the latest auditor' s report on the
accounts of the company, the pendency of any investigation
proceedings in relation to the company under sections 235
to 251, and the like.
(3) An order made by the Court under sub- section (2) shall
have no effect until a certified copy of the order has been
filed with the Registrar.
The above provision makes it clear that even in the case of a
company which is being wound up one can ask for consideration of the
proposal for a compromise or arrangement if majority number
representing 3/4th in value of the creditors or members present and voting
at the meeting agreed to such proposal, the compromise or arrangement
can be considered by the Court.
In Wearwell Cycle Company India Limited v. A.K. Misra and
Brahm Arenja , the Delhi High Court was dealing with a company in
liquidation which submitted a scheme for revival of the company and the
same was sanctioned by the Court. The Company Court recalled the
winding up order and cancelled the same in view of the said scheme. The
Court appointed a committee of management for implementation of the
scheme. It was held that whenever a choice is available to Court between
the revival of the company and its winding up, the Court must as far as
possible, lean in favour of revival of the company for that will have the
prospectus of generating jobs and putting the assets of the company to
productive use as against auction of assets and distribution of the
proceedings by the official liquidator to various parties.
Hence, there is nothing in the Act preventing a company whose
financial position is weak from submitting a proposal for the scheme of
compromise or arrangement. Thus, point No.1 has to be held in favour of
the petitioner companies and it is accordingly held.
The jurisdiction of this Court for approving the scheme of
compromise and arrangement as provided under Section 393 of the
Companies Act, 1956 came up for consideration before the Honble
Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries
Limited . In the said case the Honble Supreme Court was considering
the case of a scheme of amalgamation of two public limited companies.
After considering the provisions of Sections 391 and 393 of the Companies
Act it held as follows:
28...On a conjoint reading of the relevant
provisions of Sections 391 and 393 it becomes at once 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 respective
classes who might have voted in favour of the scheme by
requisite majority but the Court 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 it does not violate any public
policy. This is implicit in the very concept of compromise or
arrangement which is required to receive the imprimatur of
a court of law. No court of law would ever countenance any
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 a Company Court before
whom an application is moved for sanctioning such a
scheme which might have got requisite majority support of
the creditors or members or any class of them for whom the
scheme is mooted by the concerned company, has to act
merely as rubber stamp and must almost automatically put
its seal of approval on such a scheme. t 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 its sanction. It is, of
course, true that so far as the Company Court is concerned
as per the statutory provisions of Sections 391 and 393 of
the Act the question of voidability of the scheme will have to
be judged subject to the rider that a scheme sanctioned by
majority will remain binding to a dissenting minority of
creditors or members as the case may be, even though they
have not consented to such scheme and to that extent
absence of their consent will have to effect the scheme. It
can be postulated that even in case of such a Scheme of
Compromise and Arrangement put up for sanction of a
Company Court it will have to be seen whether the proposed
scheme is lawful and just and fair to the whole class of
creditors or members including the dissenting minority to
whom it is offered for approval and which has been
approved by such class of persons with requisite majority
28-A. However further question remains whether the
Court has jurisdiction like an appellate authority to minutely
scrutinise the scheme and to arrive at an independent
conclusion whether the scheme should be permitted to go
through or not when the majority of the creditors or
members or their respective classes have approved the this
aspect the nature of compromise or arrangement between
the company and the creditors and members has to be kept
in view. It is the commercial wisdom of the parties to the
scheme who have taken an informed decision about the
usefulness and propriety of the scheme by supporting it by
the requisite majority vote that has to be kept in view by the
Court. The Court certainly would not act as a court of appeal
and sit in judgment over the informed view of the concerned
parties to the compromise as the same would be in the
realm of corporate and commercial wisdom of the concerned
parties. The Court has neither the expertise nor the
jurisdiction to delve deep into the commercial wisdom
exercised by the creditors and members of the company
who have ratified the Scheme by the requisite majority.
Consequently the Company Court's jurisdiction to that extent
is peripheral and supervisory and not appellate. The Court
acts like an umpire in a game of cricket who has to see that
both the teams play their according to the rules and do not
overstep the limits. But subject to that how best the game is
to be played is left to the players and not to the
umpire............
The Honble Supreme Court quoted with approval the passage in Bucklay
on the Companies Act. As per the said passage the following points are to
be considered in exercising the jurisdiction:
(i) the provisions of the statute have to be complied with;
(ii) it should be seen that the class was fairly represented by
those who attended the meeting and the statutory majority
was acting bona fide and was not coercing the minority in
order to promote interest adverse to those of the class
whom they purport to represent and
(iii) the arrangement is such as an intelligent and honest man, a
member of the class concerned and acting in respect of this
interest might reasonably approve.
After considering the case law the Honble Supreme Court culled out the
1 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 meeting 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 concerned meetings 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 fair to the class as whole so
as to legitimately blind even the dissenting members of that
4. That all the 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).
5. That all the requisite material contemplated by the
provision of sub-Section (2) of Section 391of 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.
6. 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 of to
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 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
of 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
requirements 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 commercial wisdom of
the majority of the class of persons who with their open
eyes have given their approval to the scheme even if in the
view of the Court there would be a better scheme for the
company and its members or creditors for whom the scheme
is framed. The Court cannot refuse to sanction such a
scheme on that ground as it would otherwise amount to the
Court exercising appellate jurisdiction over the scheme
rather than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit of the
jurisdiction of the Company Court which is called upon to
sanction a Scheme of Compromise and Arrangement are not
exhaustive but only broadly illustrative of the contours of the
Courts jurisdiction.
This Court in IL & FS Engineering and Construction Company
Limited v. Wardha Power Company Limited , while considering the
point relating to scheme of arrangement involving reduction of share
capital and the scope of enquiry observed as follows:
10. Either in the case of a reduction of capital or a
scheme of arrangement or both, the Court cannot interfere
with the discretion and commercial wisdom of the
stakeholders and the Board of Directors. (Re Ratners Group
Plc; In Re Hindalco Industries Ltd). If the reduction is one
which is properly passed by the shareholders who are
treated equitably, have had the facts explained, and
provided the creditors are safeguarded, the court will
habitually sanction reductions and exercise its discretion in
favour of them unless the act is a pointless and hollow act.
Provided those requirements are satisfied, the company
may reduce its capital in any way that it thinks fit. Rafter
Group plc, 1988 ChD 685; Re Ratners Group plc; In Re
Hindalco Industries Ltd. The court does not exercise any
appellate power over the decision of the Company or its
management. The Court is required to satisfy itself and see
that the procedure, by which the resolution is carried
through, is legally correct and the shareholders and
creditors are not prejudiced. It is also the duty of the Court
to see that the scheme is fair and equitable between the
different classes of shareholders, Hindalco Industries Ltd;
Hyderabad Industries Ltd., 2004 55 SCL 1, the arrangement
is such as a man of business would reasonably approve,
Hindustan Lever Employees Union v Hindustan Lever Ltd.,
1995 83 CompCas 30; Custina Re Haare, 1933 AER 105 and
Butfe Press LIC, 1961 CD 270, and the proposed reduction
is within the powers of the company, and for the purposes
allowed by the statute. The courts have a 'discretion' to
confirm or not to confirm, which it is their duty to apply in
'every proper case,' and this discretion is to be exercised by
reference to - whether the scheme would be 'fair and
equitable,' 'just and equitable,' 'fair and reasonable' or 'not
unjust or inequitable'. Gower's Principles of Modern
Company Law (Fourth Edition) Chapter 10; Scottish
Insurance Corpn. v. Wilson & Clyde Coal Co., 1948 SC 360).
Petitions, for approval of such schemes, are usually matters
where the court can sanction the scheme without more
than a careful check that all the correct steps have been
taken. Although the court must be satisfied that "the
proposal is such that an intelligent and honest man, a
member of the class ... might reasonably approve" - yet the
underlying commercial purposes need not be investigated.
The court will not be concerned with their commercial
reasons for approval. M B Group plc, 1989 BCLC 672; In re
Dorman, Long and Company Limited v. In re South Durham
Steel and Iron Company, 1934 1 Ch 635).
11. Where the reduction of capital forms part of the
scheme of arrangement, the overall duty of the Court is to
satisfy itself that the scheme of arrangement, together with
the reduction of capital, is such that an intelligent and
honest man, a member of the class concerned and acting in
respect of his interest might reasonably approve and might
reasonably consider to be fair and equitable. (Hindusthan
Commercial Bank Ltd v. Hindusthan General Electrical
Corporation, 1960 30 CompCas 367; Scottish Insurance
Corporation Ltd.; Re: Dorman Long and Co. Ltd.. The
principles upon which the Court will require to be satisfied
are, that all shareholders are treated equitably in any
reduction. That usually means that they are treated equally,
but may mean that they are treated equally save as to
some who have consented to their being treated unequally.
The next principle to be applied is that the shareholders, at
the general meeting, had the proposals properly explained
to them so that they could exercise an informed judgment
upon them; that the creditors of the company are
safeguarded so that money cannot be applied in any way
which would be detrimental to creditors, Ratners Group plc,
1988 BCLC 685; Hindalco Industries Ltd, 2009 151
CompCas 446), and the reduction is for a discernible
purpose. "Discernible" means something which is
demonstrated by evidence to the court and is something
sufficiently solid and near in expectation to be a real
prospect. Once those tests have been satisfied the court,
which has a discretion whether or not to confirm a
reduction, will normally exercise its discretion in favour of
confirming the reduction. Thorn EMI plc, 1988 4 BCC 698.
The discretion conferred by the section will, however, only
be exercised in favour of confirmation of the reduction
where the court is satisfied that the cause of the reduction
(capital in excess of wants; capital lost; capital not
represented by available assets, or as the case may be) was
properly put to the shareholders so that they could exercise
an informed choice; the cause is proved by the evidence
before the court; Jupiter House Investments (Cambridge)
Ltd, 1985 BCLC 222; In Re Grosvenor Press Plc., 1985 1
WLR 980; the proposal is one that ought to be sanctioned;
and the proposal is fair and equitable to the shareholders as
a whole. Ransomes Plc, 1999 2 BCLC 591.
12. Subject to confirmation by the court, which is
required and which is the safeguard of the minority, the
question of reducing capital is a domestic one for the
decision of the majority, and the Act leaves the company to
determine the extent, the mode, and the incidence of the
reduction and the application of any capital moneys which
the reduction may set free. (Buckley on the Companies Acts
(14th edn, 1981, Butterworths), Vol. 1, p. 180; Re
Ransomes plc15). The power of confirming or refusing to
confirm the special resolution of a company to reduce its
capital is conferred on the court to enable it to protect the
interest of persons who dissented or even `of persons who
did not appear. (In Re OCL India Ltd, 1998 AIR (Ori) 153;
Re Rafter Group plc3; In Re Hindalco Industries Ltd2;
Indian National Press (Indore) Ltd., 1989 66 CompCas 387).
In Larson and Toubro Limiteds case , the High Court of
Bombay while dealing with the objection relating to the reduction of
capital held that a combined petition for sanction of a scheme of
arrangement and reduction of share capital is maintainable and it relied
on Hindustan Commercial Bank Limited v. Hindustan General
Electrical Corporation and the relevant observations are as follows:
73. Sections 100 to 104 of the Companies Act:
In the present case, there is no dispute that the due
procedure as prescribed under the Companies Act has been
complied with in reference to reduction in capital as referred
to and relied on in the present petition and necessary orders
dispensing with the various procedures have been granted
by the court by order, which is reflected in the minutes of
the order dated February 13, 2004. Based on the averments
made in para. 26 of the petition, the convening of the
meeting of the creditors was dispensed with. Therefore, this
objection has no force and the cases cited in relation to the
same cannot be made applicable to the facts and
circumstances of the present case. The scheme itself,
therefore, seeks confirmation for the reduction of the share
capital in accordance with Sections 100 to 104 of Companies
Act as referred to in paragraph 25 to 27 of the petition. Such
a combined petition for sanction of a scheme of
arrangement and reduction of share capital is
maintainable. Hindustan Commercial Bank Ltd. v. Hindustan
General Electrical Corporation .
74. No separate procedure for bringing requisite
The provisions under Sections 391 to 394 of the Act
are meant to clear the contemplated scheme and related to
or concerning other alterations or changes which may be
made effectively to implement the sanctioned scheme. PMP
Auto Industries Ltd., In re [1994] 80 Comp Cas 289 (Bom)
has declared that these provisions are in the nature of a
single window clearance system to ensure that the parties
are not put to avoidable or unnecessary cumbersome
procedure for making a representation or application to the
court for various other alterations or changes which may be
essential or necessary or consequential to implement the
sanctioned scheme. In view of this, on this ground also,
scheme cannot be halted.
With regard to counting of votes in the creditors meeting, the High
Court of Delhi in Wearwell Cycle Company India Limiteds case
(supra) relied on Palmers Company Law, 24th Edition, para 79.16 and
quoted the following passage and opined that the following illustration is
not based on any judgment of any Court or any authentic judicial
pronouncement in interpreting the expression.
I will deal with Objections Nos. (i) and (ii) together.
The main objection which was most vehemently canvassed
before me by Mr. J C. Seth, counsel for Mr. H. L. Seth
related to the Scheme having not been approved by the
requisite majority in terms of Section 391(2) of the Act and
that the Court should: not exercise its discretion in favour of
the Scheme. Another application being Ca 328190 was filed
by one Mr. Subhas Chander raising substantially similar
objections to the sanction of Scheme contained in Ca 26185
as modified by Resolution No. 1 in the meeting of the
creditors and shareholders of the Company. His objection
was mainly based on the plea that notwithstanding the
314th majority of number of shares represented by the
persons present and voting under proper proxy and number
of votes representing the Scheme should not be sanctioned
as there is no majority of the number of persons who were
present and who voted at the meeting either in person or by
proxy notwithstanding also the fact of poll having been
demanded, granted and taken place. Similar is the
submission regarding creditors. Mr. Seth has cited a number
of authorities on this point including Palmer's Company
Law 24th Ed. para. 79.16 reading as under :
"The court must be satisfied that those who attended the
meeting are fairly representative of the class and that the
statutory majority did not coerce the minority in order to
promote interests adverse to those of the class whom they
purport to represent.
This requirement is, in part, an offshoot of the first. As
regards the majority, there are two requirements: the
majority who vote in favour of the scheme must be first a
majority in number of those members of the class
(whether of creditors or shareholders) who are present
and voting; and, secondly, it must be three fourths in
value of the holding of such person.
Thus, there are 100 members voting of whom (to take an
extreme example) one member holds 901 shares and the
remainder hold one each, the 99 shareholders holding one
share each cannot force a scheme against the vote of the
holder of the 901 shares, because they do not muster
three-fourths in value. Conversely, that 'shareholder and
49 of the others could not force a scheme against the
votes of the remaining 50 because there would not be a
majority in number. The same principle applies to
It will be seen that the majorities are of those who vote,
not of those entitled to vote nor of those who are present.
Thus, shareholders who are not present in person or by
proxy, or who, although present, do not vote, may be
It was further held that the correct method for counting the votes of the
creditors is counting the number of creditors represented by the persons
voting including the number of creditors into whose shoes he has stepped.
It was held "Number" to mean/convey number of shares/creditors
represented by each person present and voting.
A similar view was taken in Maharashtra Apex Corporation
Limiteds case , which is as follows:
29In the 13th Edition of Buckley on
the Companies Act, it has been observed that for the
purpose of corresponding provision under the English law,
sanction of majority in number representing 3/4th in value of
the members of the class present and voting in person or by
proxy is sufficient, although it may not represent 3/4th in
value, nor semble, constitute a majority in number of the
total class. The provisions of section 391(2) of the Act are in
pari materia with the section 206(2) of the Companies Act,
1948 which was being interpreted in the aforesaid book. The
English Company Law by Professor Robert R.
Pennington (5th Edition), Page 590 use of the words
"present and voting" has been explained as under:
"...It appears that proxies may both speak and vote
at meetings of creditors or members, and that the
inability of proxies for members to speak at general
meetings of a public company does not apply to
meetings called to approve scheme of arrangement.
The vote on the scheme at each meeting of members
or creditors is taken by a poll, and for a resolution
approving the scheme to be carried, the persons who
are present in person or by proxy at the meeting and
who vote in favour of the scheme must comprise a
majority in number of all persons who vote in person
or by proxy, and they must also hold three-quarters in
value of the interests of all such persons. The number
and the value of the interests of persons who do not
attend and are not represented at the meeting, or
who do attend the meeting but abstain from voting,
are immaterial, and do not enter into the calculation
at all. Likewise, the interests of persons who appoint
proxies are disregarded if the proxies do not attend
the meeting, or do attend but do not vote..."
This provision has further been explained in the twenty-
fourth edition of Palmer's Company Law (at page 1145) as
"2. The class must have been fairly represented.
The Court must be satisfied that those who attended
the meeting are fairly representative of the class and
that the statutory majority did not coerce the minority
in order to promote interests adverse to those of the
class whom they purport to represent.
This requirement is, in part, an off shoot of the first.
As regards the majority, there are two requirements:
the majority who vote in favour of the scheme must
be first a majority in number of those members of the
class (whether of creditors or shareholders) who are
present and voting; and, secondly, it must be three-
fourths in value of the holding of such persons.
Thus, if there are 100 members voting of whom (to
take an extreme example) one member holds 901
shares and the remainder hold one each, the 99
shareholders holding one share each cannot force a
scheme against the vote of the holder of the 901
shares, because they do not muster three-fourths in
value. Conversely, that shareholder and 49 of the
others could not force a scheme against the votes of
the remaining 50 because there would not be a
It will be seen that the majorities are of those who
vote, not of those entitled to vote nor of those who
are present. Thus, shareholders who are not present
in person or by proxy, or who, although present, do
not vote, may be ignored.
However, this is not the whole requirement, because
in addition the Court requires to be satisfied that the
class is fairly represented. If, for instance, there were
altogether 1000 shareholders holding 10,000 shares
in all, the Court would be unlikely to be satisfied by
the statutory majorities at a meeting at which 10
members holding 100 shares in all were present and
voted."
In Gower's Principles of Modern Company Law (sixth
edition) (at page 585) the scope and meaning of the concept
of "majority in number representing three-fourths in value of
the creditors or class of creditors or members or class of
members, as the case may be, present and voting" has been
explained by giving an illustration as under:
"An ordinary resolution is one passed by a simple
majority of those voting, and is used for all matters
not requiring another type of resolution under the Act
or the articles. An extraordinary resolution is one
passed by a three-fourths majority but no special
period of notice is needed. Under the Act an
extraordinary resolution is required only for certain
matters connected with winding up, or when class
meetings are asked to agree to a modification of class
rights. A special resolution is also one passed by a
three-fourths majority, but 21 days notice must be
given of the meeting at which it is to be proposed. A
special resolution is required before any important
constitutional changes can be undertaken; and as a
result of the legislation in the 1980s the number of
such cases has greatly increased. In the case of both
extraordinary and special resolutions the notice of the
meeting must specify the intention to propose the
resolution as an extraordinary or a special resolution,
In all these three cases the requisite majority is of the
members entitled P to vote and actually voting cither
in person or by proxy where proxy voting is allowed.
This may and, in the case of a public company
normally will, be much less than a majority of the
total membership, and may even be less than a
majority of the members present at the meeting, for
those who refrain from voting are ignored. To take an
extreme case: A meeting of a company with 5,00,000
preference shares without voting rights, and 5,00,000
ordinary shares each with one vote, is attended only
by five ordinary shareholders, four with one share
each and one with hundred shares. If on a poll a
resolution is voted for by three of the holders of one
share and against by the fourth shareholder with one
share, the holder of the hundred shares abstaining,
the resolution will have been duly carried even if it is
an extraordinary or special resolution,
notwithstanding that only three out of a total of one
million shares, three out of 5,00,000 total votes and
three out of 104 votes exercisable at the meeting,
have actually been polled in its favour. As we shall
see later the procedure of voting on a show of hands,
unless a poll is effectively demanded, may produce
even greater anomalies."
In Bessemer Steel & Ordinance Co., In re [1875-76] 1
Ch. D 251, wherein identical provisions of the English Law
have been interpreted as under: (page 252):
"The only question is, whether the agreement has
been approved by the proper number of creditors
required by the Act. The second section of the Act
provided that the meeting of the company's creditors
may approve and sanction the agreement: 'If a
majority in number representing three- fourths in
value of such creditors, or class of creditors, present
either in person or by proxy at such meeting, shall
agree to the arrangement or compromise, and the
agreement or compromise shall, if sanctioned by an
order of the Court, be binding on all such creditors or
class of creditors (as the case might be) and also on
the liquidators and contributories of the company'.
The question, therefore, is whether 'the majority
representing three-fourths in value' is to be the
majority of all the creditors in which case the Pounds
1,20,002,12s, 3d. does not constitute three-fourths of
funds 1,70,000, or the majority representing that
value of the creditors present at the meeting? In the
latter case, all the creditors but one, for a very small
amount, approved the agreement.
We say that the clause in the Act is satisfied by the
sanction of three- fourths in value of the persons
present at the meeting, and this was decided by your
Lordship in re Tunis Railway Company (May 22,
1874) affirmed on appeal (before the Lords Justices,
July 11, 1874).
Carson, for Dixon said he was desirous that the
arrangement should be carried into effect.
MALLINS, V.C. :
I think the agreement should be carried into effect.
All the creditors of the company received notice of
this meeting, and it must be presumed that those
who did not attend left it to those who did to decide
whether the agreement was advantageous or not, or
they took so little interest in the matter that they did
not think it worth their while to attend. At all events, I
think that under the Act of Parliament only those
creditors who were present at the meeting are to be
attended to, and that three-fourths in value of those
present are sufficient to sanction the contract."
Before the Karnataka High Court in Kirloskar Electric Co.
Ltd., In re [2003] 116 Comp. Cas. 413, 43 SCL 186, the
question for consideration was as to whether the proposed
arrangement had been approved by the requisite majority at
the meeting of the secured creditors within the meaning
of section 391(2) of the Act. The meeting was attended by
18 secured creditors and the total value of their debt was
Rs. 2,53,36,43,491. Out of the 18 present, one abstained
from voting and the value of his debt was Rs. 30,98,21,941.
Thus, the total value of secured creditors present and voting
was Rs. 2,22,38,21,550. Two votes representing value of Rs.
3 8,98,62,275 were found to be invalid. The scheme was,
therefore, approved by vote of 15 creditors and the value of
their debt was Rs. 1,83,39,59,275. There was no difficulty as
far as the majority in number is concerned because 15
creditors had voted in favour of the scheme. The question,
however, was as to whether they represented three-fourths
value of the creditors present and voting. The High Court
held that the three-fourths majority required under Sub-
section (2) of section 391 of the Act was of the value
represented by the members who were not only present but
who had also voted. In fact, it went a step further to hold
that the creditors who were present and had even voted but
whose votes had been found to be invalid, could not be said
to have voted because casting an invalid vote is no voting in
the eyes of law.
30. In the aforesaid case of Kirloskar Electric Co. Ltd.
(supra) this Court had an occasion to consider the meaning
of the words "present and voting" and it was held as under:
"Sub-section (2) of section 391 requires that a
scheme of compromise or arrangement must be
approved by majority of creditors/members
representing three-fourths in value of the creditors or
class of creditors, or members or class of members,
present and voting either in person or where proxies
are allowed, by proxy. There is no difficulty in
understanding the word 'present' as the creditors or
members should be physically present in person or
through their proxy in the meeting. The problem
arises in the context of the word 'voting'. Voting is
formal expression of will or opinion by the person
entitled to exercise the right on the subject or issue in
question. Voting is explained as the expression of
ones will, preference, or choice in regard to the
decision to be made by the body as a whole upon any
proposed measure or proceeding. Right to vote
means right to exercise the right in favour of or
against the motion or regulation. A member present
and voting may remain neutral, indifferent, unbiased
or impartial not engaged on either side. Voting has to
be either in the affirmative or negative, i. e., 'yes' or
'no' on the ballot paper or voting paper. One is not
supposed to write anything except putting 'yes' or 'no'
either in favour of the proposition or against the
proposition. In addition to the same, if any
suggestion, condition, reservation or stipulation is
written stating that the expression of the will or
opinion either for or against the proposition is subject
to those things, then, the votes have to be necessarily
treated as invalid or void, as such votes are no votes
leading either way. A vote cast without indicating the
mind of the voter either for or against the resolution
is no voting at all. Similarly, voting for or against the
motion subject to the conditions stipulated in the vote
is no voting in the eye of law. Therefore, voting
understood in a proper perspective, it could be either
in the affirmative or in the negative. Therefore, in
construing whether a resolution is passed by three-
fourths majority present and voting, what is to be
taken into consideration in calculating the majority is
not the number of persons present and voting, but
the number of valid votes polled in such meeting. The
number of valid votes includes only votes which are
indicating the mind of the voter for or against the
Therefore, by 'voting', the mind, intention, preference
of the voter must be clearly expressed. There should
not be any ambiguity and scope for interpretation. It
should be clear, unqualified and pointing. In this
context, a voter who is not present at the meeting,
who is present and not voting, present and voting by
casting a blank ballot, and casting a ballot with
conditions and stipulations, all stand on the same
footing. It is no 'voting' in the eye of law. Therefore,
in my opinion, the proper construction to be placed in
calculating whether any resolution is approved or
passed by a three-fourths majority present and voting
necessarily mean the value of the valid votes and out
of the same whether the resolution has been passed
with three-fourths majority...." (p. 436)
31. The Full Bench of the Punjab & Haryana High Court in
the case of Swift Formulations (P.) Ltd., In re [2004]
121 Comp. Cas. 27, 53 SCL 433. dealing with the
identical situation, after reviewing the entire case law on the
point has held that to interpret the requirement of majority
under section 391(2) of the Act to mean three-fourths
majority of the total value of shares/credit would not only
render the expression "present and voting" as redundant but
also make the provision totally unworkable and impractical.
It was also held that for the purpose of section 391(2) of the
Act, the requirement of majority of three-fourths has to be
seen in relation to the value of shares/credit represented by
the persons who are present and voting in the meeting,
either in person or by proxy. This provision cannot be
interpreted to mean that the three-fourths majority has to
be of the total value of the creditors/shareholders of the
company. It was also held that section 391(2) of the Act has
also been enacted so as to ensure that, a compromise or
arrangement should receive substantial support from the
creditors/shareholders. It is for this purpose that a two fold
requirement has been prescribed. Firstly, it must be
approved by a majority in number of the members present
and voting and in addition, such majority should also
represent three-fourths value of the creditors/shareholders
who are present and voting. This ensures that the persons
representing nominal value of shares or credits though may
be in majority, may not take a decision which adversely
affects the rights of the persons who have substantial
shareholding or credit, but are in minority in numbers.
Conversely, it also protects the rights of the small
creditors/shareholders against persons holding large
shareholdings or representing substantial credit.
39. Therefore, if the creditors who have been duly served
with the notices of the meeting which was also accompanied
by the scheme, if they do not chose to be present in the
meeting and express their view one way or the other, the
only inference that could be drawn is prima facie, they have
no objection for the said scheme being approved. Any other
interpretation in this regard would make it impossible for any
company to get any of the schemes approved. If a mere
absence of the shareholder or a creditor of the company has
to be construed as opposition to the scheme which is
proposed, then it would render section 391(2) of the Act
redundant and certainly that was not the intention of the
Legislature. When the persons who had ample opportunity
to oppose such a scheme, who are invited to attend the
meeting and to cast their vote against the said scheme, do
not chose to attend the meeting, participate in the meeting
or express their views by casting vote against it, it only
means that they have no objection for sanction of the
scheme, and by absence and not opposing the scheme, they
have given their implied consent, though not an express
consent by being present in the meeting and voting for the
It is clear from the above decisions that this Court cannot act as a
rubber stamp for approving the scheme of arrangement, even though the
same was approved by the Board of Directors of the companies, its
shareholders and creditors. This Court has to see that the proposed
scheme is not violative of any provisions of the Act and also not contrary
to the public policy. It has also to see and satisfy itself that the majority
of the members or creditors 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.
Apart from the above, the scheme must be fair and reasonable and
viable taking every thing into consideration. The conduct of the
propounder of the scheme is also a relevant consideration. However, the
law is settled that when a scheme is found to be reasonable and fair, it is
not the function of the Court to substitute its judgment for the collective
wisdom of the shareholders of the companies involved.
In Sidhpur Mills Co. Ltd., In Re , the learned single Judge of the
Gujarat High Court, while pointing out the correct approach for the
sanctioning of a scheme for amalgamation, says that the scheme should
not be scrutinized in the way a carping critic, a hair-splitting expert, a
meticulous accountant or a fastidious counsel would do it. But, it must be
tested from the point of view of an ordinary reasonable shareholder,
acting in a businessman-like manner, taking within his comprehension and
bearing in mind all the circumstances prevailing at the time when the
meeting was called upon to consider the scheme in question. It is pointed
out that, before the scheme is sanctioned, it would be the duty of the
court to see that the proposed scheme is a fair and reasonable one, but
the initial burden in this respect would be on the petitioner to show that,
prima facie, the scheme is a fair and reasonable one, such as a prudent
and reasonable shareholder would approve of and not object to.
Followed in Navjivan Mills Ltd., Re .
As stated above, the scheme of compromise and arrangement was
approved by the requisite 3/4th majority of the members and creditors
who attended the meeting. Now an objection is raised by the two
creditors who did not attend the meeting and raised any objection, but
pursuant to the notice published in the Newspapers, appeared before this
Court and raised the above objections.
The creditor who raised an objection in respect of Asmitha is HDFC
Bank Limited which advanced a term loan of Rs.85.00 Crores under facility
agreement dated 29.07.2010. The total principal loan amount
outstanding as on 31.03.2015 was Rs.26,85,70,850/-. As stated above, in
view of the financial difficulties faced by the company it proposed a
Corporate Debt Restructuring Package (CDR) and the said package was
approved on 29.06.2011. The applicant in Company Application No.1277
of 2016 i.e., HDFC Bank is one of the creditors who approved the same.
The CDR documents were executed on 16.09.2011 and out of the total
liability of Rs.1156.79 Crores of all lenders an amount of Rs.350.00 Crores
was converted as OCCRPS. Those instruments were to be redeemed
along with redemption premium at an yield of 12% p.a., on a quarterly
basis over 16 quarterly instalments commencing from June 2013 to March
2018. It appears that the terms of CDR proposal was not complied with
and the Company failed to repay the outstanding loan amount to the
creditors. When the scheme of arrangement was placed before the CDR
Empowered Group (CDR EG) it was not approved due to lack of requisite
mandates from the lenders in the meeting dated 22.06.2016. The present
controversy related to the approval of the scheme of arrangement by the
creditors. A similar application was filed by the HDFC Bank in respect of
SHARE company in Company Petition No.201 of 2016 also stating that it
lent an amount of Rs.110.00 Crores vide facility agreement dated
05.08.2010 and the total principal amount outstanding as on 31.03.2015
was Rs.36,27,28,828/-. In respect of the said company also the CDR
proposal was accepted by the Bank along with other creditors on
21.06.2011 and CDR documents were executed on 29.06.2011. Out of
the total debt of Rs.1940.94 Crores of all lenders an amount of Rs.700.00
Crores was agreed to be converted as OCCRPS. The said instruments
were to be redeemed along with redemption premium at an yield of 12%
p.a., on a quarterly basis over 16 quarterly instalments commencing from
June 2013 to March 2018. In the case of the said company also the CDR
Cell did not approve the scheme of arrangement and informed vide its
letter dated 30.07.2016. In spite of the said letter, now the scheme of
arrangement was approved by the requisite majority of creditors who
The value of the HDFC Bank interest in SHARE Company is 4.27%
aggregating to INR 418,646,368, whereas in Asmitha it is 5.12%
aggregating to INR 296,301,250. The other objector, Aditya Birla Finance
Limited is not having any interest in Asmitha, but its interest in SHARE
company is 1.74% and of the value of INR 170,323,420. The objections
of the HDFC Bank relate to its non-participation in the meeting due to
improper communication of the notice of the meeting, the very nature of
the scheme and repayment schedule provided to the creditors. The
objections of the Aditya Birla Finance Limited who is also one of the
creditors is with regard to majority secured in the meeting of the creditors
by taking the vote of SIDBI and coming down of the equity of the SHARE
company from 644,13,50,000 to 32,20,67,500.
The composite scheme of arrangement affects the OCCRPS. As a
part of the scheme, 57,45,71,293 OCCRPS issued by SHARE to its CDR
lenders under the SHARE Master Restructuring Agreement representing
89.2004% of the total outstanding OCCRPS issued by SHARE shall be
cancelled and on such cancellation the cancelled capital will be moved to
the Securities Premium Account and/or Capital Reserve Account in the
balance sheet of SHARE. The OCCRPS amount shall be treated as
repayments made by the SHARE to the holders of such OCCRPS on debt
owed by SHARE to such holder of OCCRPS and shall be applied (i) first
any priority debt to be repaid to such lender and (ii) thereafter to any CDR
debt repayable to such lender. It was also stated that the consent
expressed by the equity shareholders, preference shareholders and
creditors of SHARE shall be deemed to be their consent for cancellation of
preference share capital under Sections 100 to 102 of the Companies Act,
1956 and no separate resolution, act, application, petition or deed would
be required. It was also stated that as a part of the scheme 3,73,56,959
OCCRPS that were issued by SHARE to its CDR lenders under the SHARE
Master Restructuring Agreement representing 5.7996% of the total
outstanding OCCRPS issued by SHARE would be converted as 59,07,887
equity shares of SHARE each having a face value of Rs.10/-. The scheme
of arrangement also proposes to write off the advances lent by SHARE
aggregating 3,18,83,82,981 pertaining to its AP business.
As a part of the scheme a total of Rs.2,47,06,65,820/- of the
outstanding debt of Asmitha is converted into 24,70,66,582 OCCRPS
issued by Asmitha having face value of Rs.10/-. It appears that the total
aggregate term loans under CDR debt of Asmitha was Rs.4,22,98,77,843/-
The new OCCRPS shall have a preferential dividend of 0.001% per annum
and the redemption period is 12 years redeemable in 12 quarterly
instalments starting from 30th June 2024 and they would convert into
equity shares of Asmitha in accordance with the terms of and in the same
manner and to the extent as the OCCRPS issued by Asmitha pursuant to
the Asmitha Master Restructuring Agreement. It was also stated that an
aggregate of 98,910 OCCRPS that were issued by Asmitha under Asmitha
Master Restructuring Agreement to Asmitha OCCRPS conversion lenders,
representing 0.0320% of the total outstanding OCCRPS issued by Asmitha
would be converted into 98,910 equity shares of Asmitha each having a
face value of INR 10 each.
As per the information furnished by the petitioners, the position is
I. ESSENTIAL FEATURES OF THE SCHEME OF ARRANGEMENT
* SHARE demerges its Andhra Pradesh/Telangana States
business into a demerged undertaking which merges into
Asmitha.
* Asmitha demerges its rest of India business (except AP/TS
business) into a demerged undertaking which merges with
* If this Honble Court were to accord sanction to the scheme
the resultant companies will have the following present
businesses of the two companies
- Asmitha Andhra Pradesh and Telangana State
- SHARE Rest of India business
II. SITUATION POST SANCTION (If accorded by this Honble Court)
Equity Shareholders:
* Shareholders of Asmitha would be allotted equity shares in
SHARE in the ratio of 1:1.956 as consideration for transfer of
Asmithas rest of India business to SHARE.
* Shareholdersl of SHARE would be allotted equity shares in
Asmitha in the ratio of 1:1.1541 as consideration for transfer
of SHAREs AP/TS business to Asmitha.
OCCRPS Shareholders:
Note:- The Optionally Convertible Cumulative Redeemable
Preference Shares are held by Banks/Financial Institutions for a
total value of INR 644 Crores in SHARE and INR 309 Crores in
* 89.2004% of the total outstanding OCCRPS issued by SHARE
to be cancelled (Note corresponding OCCRPS being issued
in Asmitha)
* 5.7996% of the total outstanding OCCRPS issued by SHARE
to be converted to equity shares.
* Asmitha
* Out of the total outstanding debt of Asmitha (INR
422,98,77,843), an amount of INR 247,06,65,820 to be
converted to 24,70,66,582 OCCRPS.
* 0.0320% of the total outstanding OCCRPS issued by Asmitha
to be converted to equity shares
* In lieu of cancellation of OCCRPS issued by SHARE as
mentioned above, 57,45,71,293 OCCRPS to be issued by
Asmitha to the CDR lenders of SHARE.
However, it is sought to be supported by the petitioners stating
that the arrangement of allotting more number of OCCRPS in Asmitha was
consensually worked out as the Banks/Financial Institutions are desirous
of retaining a larger portion of the debt in SHARE as such the
arrangement would ensure recovery of monies irrespective of future
performance of Asmitha. But there is no evidence of involvement of the
Banks/Financial Institutions in such an arrangement.
It is not denied by the applicant in Company Application No.1277 of
2016 that its branch office at Secunderabad received a notice on
02.05.2016 and the said branch office is a servicing branch. The meeting
was convened on 31.05.2016 and nothing prevented the applicant from
participating in the said meeting. No cogent reason was given for not
communicating to the Head Office in time. In view of the objection that
had it attended the creditors meeting and opposed the resolution whether
it got any impact on the total voting has to be seen. As could be seen
from the consolidated results of voting, in view of around 5% stake in
both the companies held by the applicant, if the applicant had voted
against the resolution it definitely would not have secured the requisite
majority. Though this Court is not in agreement with the plea of the
applicant with regard to non-service of notice, in view of the objection
raised by the applicant before this Court in the present Company Petitions
it has to be considered whether the objection of the applicant should be
taken into account in spite of non-participation in the meeting convened
for the purpose. The learned counsel for the petitioners in the Company
Petitions submitted that it is not open to the applicant to raise the
objection that the scheme was unfair to it in view of its remaining absent
in the meeting conducted. Learned counsel for the petitioners relied on
the observations of the Honble Supreme Court in Mafatlal Industries
Limiteds case (supra) and that of the High Courts of Karnataka and
Bombay reported in Maharashtra Apex Corporation Limiteds case
(supra), Alstom Power Boilers Limited v. State Bank of India
(Company Petition Nos.337 and 338 of 2002 in Company Application
Nos.116 and 117 of 2002 of Bombay High Court decided on 31.10.2002),
and Larsen and Toubro Limiteds case (supra). However, learned
counsel, by relying on the observations made in the last two cases agreed
that the applicant can raise objection before this Court and the only thing
that has to be satisfied is with regard to unfairness of the scheme.
In the light of the above, it has to be seen whether the case set up
by the objector before this Court can be entertained in spite of its non-
participation in the meeting convened for the purpose of approving the
scheme of arrangement. The objector states that the main purpose of the
scheme is transferring the healthy part to one entity and unhealthy part to
other entity resulting in the unhealthy company to have its natural death.
The conduct of the companies in not adhering to the terms of the CDR
package approved on 29.06.2011 and reduced into writing on 24.09.2011
under the CDR mechanism, and the challenges faced by both the
companies were not appreciated and a Joint Lenders Meeting was called
after two years. In the Senior Level Bankers Meeting held on 22.08.2013
the merger - de-merger plans of both the companies were discussed, but
it appears that nothing concrete has emerged as could be seen from the
latest communication made by the CDR Cell on 08.11.2016. The
relevant resolution of the CDR EG meeting held on 27.09.2016 and
confirmed in the meeting held on 26.10.2016 as communicated to the
SIDBI on 08.11.2016 reads as follows.
Asmita Microfin Ltd.
The review note in respect of Asmitha Mecrofin Limited
submitted by SIDBI, the MI was taken up for discussion. The
review contained matters for information based on meetings
held on January 19 2016 March 03, June 13, 2016 and August
09, 2016.
MI updated the forum about the Merger Demerger
proposal. They informed that the High Court approval for this
proposal is still pending and it would take further 3 to 4
months to compete the process. It was mentioned that the
above proposals alongwith tranche C funding was
recommended by the MI to CDR EG for approval in the CDR
EG meeting dated January 22, 2016 and has been discussed
in several meetings till June 22, 2016. Requisite mandates for
achieving super majorit was not received from the lenders and
hence the proposals couldnot be approved. However, it was
felt b the forum that the proposals could be re-opened and
can be taken up in the ensuing CDR EG meeting by the MI
after receipt of requisite approvals from High Court instead of
setting aside decision of CDR EG.
MI further informed that the bilateral funding was
discussed extensive in the JLMs held in August 2015, October
2015 and January 2016. However, there was no consensus
among lenders for bilateral funding They informed that a
separate note on bilateral funding shall be submitted to CDR
EG for approval after discussions at JLM.
Thereafter, Shri R. Jayasurya (CEO Asmitha Microfin
Ltd.) was invited to the CDR EG meeting. The forum enquired
about the status of the merger-demerger proposal. Shri
Jayasurya mentioned that the proposal on demerger has been
referred to High Court and the outcome of the same is
awaited. He mentioned that they have approached RBI for
seeking forbearance and special dispensation for asset
classification in the books of lenders.
Thereafter, CDR EG gave the following decision.
CDR EG noted the above matters for information and
directed the MI to bring a review note after seeking high court
Learned counsel for the petitioners submitted that the matter was
not pursued at the level of CDREG regarding merger - demerger as
requisite majority of lenders had already approved the scheme in the
board convened meeting and Sections 391 and 394 of the Act provide a
complete mode and manner in which scheme of arrangement between a
company, its shareholders and its creditors are to be proposed,
considered, scrutinized, approved and sanctioned. It is further submitted
that the proceeding before CDREG cannot have any effect on a scheme
proposed. It is admitted that the CDR mechanism operates as follows.
The RBI has issued detailed guidelines on the
Corporate Debt Restructuring System on 23.08.2001 for
implementation by the banks and financial institutions.
The Corporate Debt Restructuring (DCR) Mechanism
provides for a voluntary, non-statutory system based on the
principle of approvals of debt restructuring packages by
super majority of 75% creditors by value, which makes the
CDR EG decisions binding on the remaining 25% creditors.
The CDR Mechanism is based on a three tier structure
comprising of the CDR Standing Forum, CDR Empowered
Group (CDR EG) and CDR Cell.
The CDR EG is the second tier structure in the CDR
Mechanism which decides individual cases of corporate debt
restructuring. CDR EG, in respect of each individual case,
comprises of Executive Director level representatives of IDBI
Ltd., ICICI Bank Ltd., and SBI as standing members in
addition to Executive Director level representatives of
financial institutions and banks which have an exposure to
the concerned company.
Though it was stated that the details of the scheme was shared
with all the lenders including the HDFC Bank in October 2015 and
November 2015, the actual scheme was prepared much later and was
approved by the Board of Directors only in their meeting held on
31.03.2016. Hence, it cannot be said that the details of the scheme were
available to the lenders prior to the said meeting of the Board of
Directors. Coming to the impact of the scheme on the objector, as stated
above the petitioners did not comply with the CDR terms of agreement
and there is truth in the averments made by the objector that the non-
Telugu State business is transferred to the company in Company Petition
No.201 of 2016 and the business of Telugu States is given to the
petitioner in Company Petition No.200 of 2016. The business in Telugu
states had already suffered due to challenges posed by the AP Micro
Finance (Regulation of Money Lending) Act, 2010 which resulted in CDR
package. The payment of the outstanding amount envisaged under the
scheme would start after an initial moratorium period of 3 years and the
OCCRPS issued to the lenders cannot be redeemed in the next 12 years.
The majority of the shareholders are common to both the companies and
this Court is not concerned with their interest as there was no objection
from that group. This Court is concerned only with the interest of the
preference shareholders and the creditors. As stated above, though 11
creditors consented securing the technical requisite majority, in view of
the substantial objection raised by the objectors, it has to be seen
whether the scheme secured the requisite majority (the scheme of
arrangement proposed cannot be approved without the approval of the
CDR Cell, though the same is a voluntary body of lenders).
The other objection raised by the objector in Company Application
No.1342 of 2016 relates to the vote cast by SIDBI based on the letter
dated 02.06.2016 issued to the Chairperson. The letter issued by SIDBI
to the Managing Director of Share Microfin Limited dated 02.06.2016
reads as follows.
With regard to the Scheme of Arrangement between
Share Microfin Limited and Asmitha Microfin Limited, SIDBI
has received notice from the Honble High Court, Hyderabad,
for providing mandate at the meeting of the Creditors of
Share Microfin Limited.
In this connection, we would like to inform you that
we are agreeable for proposed Scheme subject to increasing
your offer of debt allocation in Company to SIDBI from
existing offer to higher amount to our satisfaction. Please
bring this to kind attention of Chairperson, Creditors Meeting
of Share Microfin Ltd, and record the same in his report to
Honble High Court.
The apprehension with regard to recovery of an amount of
Rs.18.18 Crores by transferring the said amount to the petitioner in
Company Petition No.200 of 2016 which was given the unhealthy part as
stated above cannot be said to be without basis. There is no answer to
the objection that the proposed scheme of arrangement reduces the
equity of the share from 6,44,13,50,000 to 32,20,67,500 and the shares
of OCCRPS would be converted into ordinary shares giving up their
preferential and security coverage. Though this Court is not in agreement
with the contention raised by the objector that the procedure prescribed
for reduction of share capital was not valid, the reduction of share capital
as aforesaid and conversion of OCCRPS into ordinary equity shares would
have major impact on the status of the lenders.
It can be seen from the consolidated results of the voting in the
meetings convened by this Court that in respect of Asmitha Microfin
Limited 75.48% creditors voted in favour of the resolution, whereas
24.52% creditors voted against the resolution. The percentage simply
satisfies the technical compliance of the Section. One of the objectors,
HDFC is having an exposure of 5.12% in Asmitha. I already held that the
objector had sufficient notice, but did not attend the meeting. However,
its absence in the meeting does not disentitle it to raise an objection
before this Court and accordingly filed the above applications and raised
the objections. It is one of the members of the CDR Group and there is
no clarity with regard to stand taken by the CDR Group as a whole,
though some of the members attended the meetings of creditors
convened by this Court and supported the resolution. As stated above,
we cannot go by the technicalities and by taking into consideration the
voting percentage approving the scheme of arrangement based on the
said voting percentage. The creditors are none other than the Bankers
who do business with the money of the public. In the recent times,
people are witnessing big borrowers committing defaults and in some
cases the Banks themselves writing off the loans. In this present
scenario, the Court has to cautiously examine the scheme of arrangement
and this Court considers the tenability of the objection with regard to
transfer of business relating to Telugu States to one company and non-
Telugu States in another company exposing the business in Telugu States
to greater risk. This Court has no expertise to evaluate the risk. It is also
noticed that Asmitha Microfin Limited is not a member of Micro Finance
Institutions Network, whereas SHARE is a member. There is reduction in
the equity, conversion of OCCRPS into ordinary equity shares involved in
the present scheme of arrangement. In the absence of any expertise, this
Court cannot give any conclusive finding except placing before the CDR
EG for a decision on the scheme of arrangement, though legal
requirements are met substantially, as the CDR EG itself deferred its
decision in view of the pendency of the present Company Petitions before
The Corporate Debt Restructuring Mechanism was evolved by the
Reserve Bank of India to ensure timely and transparent mechanism for
restructuring of corporate debts of viable entities facing problems, for the
benefit of all concerned. It is also intended to minimize the losses to the
creditors and other stock holders through an orderly and coordinated
restructuring programme. It is a voluntary non-statutory system based on
Debtor-Creditor Agreement and Inter-Creditor Agreement and the
principle of approvals by super majority of 75% creditors which makes it
binding on the remaining 25% to fall in line with the majority decision. It
consists of three tiers, namely, CDR Standing Forum, CDR Empowered
Group and CDR Cell. In view of the petitioner company having an Inter-
Creditor Agreement, which is binding on the Companies, any order passed
by this Court approving the scheme of arrangement would have an impact
on such agreement. Though, the banks or creditors to the Companies are
part of CDR mechanism, the scheme was not evaluated by the CDR
mechanism as such. Some banks attended the creditors meeting and
some banks did not. The HDFC Bank raised objections.
In the circumstances, the scheme of arrangement is tentatively
sanctioned subject to approval by the CDR EG and if the CDR EG approves
the scheme by evaluating the financial implications, the present order
along with the decision of the CDR EG shall be delivered to the Registrar
of Companies, A.P., Hyderabad within thirty (30) days from the date of
receipt of decision of CDR EG and he shall take all necessary
consequential action in accordance with law. In case the CDR EG does
not approve the scheme and suggest any modifications, the same shall be
taken into account and the modified scheme of arrangement shall be
placed before this Court for its sanction.
Both the Company Petition Nos.200 and 201 of 2016 are,
accordingly, disposed of. Consequently, Company Application No.1277 of
2016 in C.P.No.200 of 2016 and Company Application Nos.1278, 1342 and
1442 of 2016 in C.P.No.201 of 2016 are also disposed of.
A.RAMALINGESWARA RAO, J
Date:03rd February 2017
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