Court Approves Equity Share Cancellation & Debenture Issuance Scheme

The Court sanctioned the scheme of arrangement between the Petitioner and its equity shareholders, allowing the cancellation of equity shares in small lots and issuance of secured redeemable debentures. Amendments to the scheme were approved, including the modification of debenture redemption terms. Compliance with the Companies Act, 1956 was ensured, with individual notices served to creditors. Despite objections raised by creditors, including Thermax Limited, the Court found the Petitioner's strong financial position justified approving the scheme. The Court granted the petition, with a stay on the order for further applications or appeals until a specified date.

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Issues Involved:
1. Sanction of the scheme of arrangement between the Petitioner and its equity shareholders.
2. Amendment of certain provisions of the scheme.
3. Compliance with the provisions of Section 101(2) of the Companies Act, 1956.
4. Rights and objections of creditors regarding the scheme.
5. Financial condition and its relevance to the sanction of the scheme.
6. Objections raised by creditors, particularly Thermax Limited.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Arrangement:
The Petitioner sought the Court's sanction for a scheme of arrangement under sections 391 to 394 read with section 100 of the Companies Act, 1956. The scheme aimed to cancel equity shares held in small lots and issue 11% secured redeemable non-convertible debentures (NCDs) of Rs. 20 each in lieu. The objective was to reduce the cost of distribution of dividends, printing, and posting of annual reports, and to provide an exit option for shareholders holding small or odd lots.

2. Amendment of Certain Provisions of the Scheme:
The Petitioner also sought to amend certain provisions of the scheme. Specifically, the amendment of clause 10.4 was proposed to make the debentures redeemable at the end of one year from the date of issuance rather than from the appointed date. No objections were raised against this modification.

3. Compliance with Section 101(2) of the Companies Act, 1956:
The Court initially dispensed with the provisions of Section 101(2) based on the Petitioner's incorrect statement that the reduction of share capital did not involve payment to any shareholders of paid-up share capital. Upon realizing the error, the Petitioner corrected the statement, leading to a fresh order that dispensed only with the procedure under Section 101(2), not the provisions themselves. The Court directed individual notices to be served upon secured creditors and unsecured creditors with claims exceeding Rs. 1 lakh.

4. Rights and Objections of Creditors:
The Court emphasized the importance of creditors' rights under Section 101(2), which allows creditors to object to the reduction of share capital and seek security for their claims. The Court clarified that the earlier orders did not dispense with these rights but merely modified the procedure. Creditors who appeared at the hearing were entitled to object to the scheme and apply for security of their debts.

5. Financial Condition and Its Relevance:
The financial condition of the Petitioner was considered relevant in deciding whether to dispense with the provisions of Section 101(2). The Petitioner demonstrated a strong financial position with substantial net wealth and net current assets. The Court found that the company's financial health posed no threat to creditors' rights, justifying the exercise of discretion under Section 101(3).

6. Objections Raised by Creditors, Particularly Thermax Limited:
Thermax Limited opposed the scheme, claiming unpaid dues and damages. The Court found Thermax's claims to be disputed and not admitted or liquidated. Given the serious dispute and the Petitioner's sound financial position, the Court was not inclined to secure Thermax's claims. Other creditors, such as Watco Technical Private Limited and Paharpur Cooling Towers Limited, reached settlements with the Petitioner, while Alstom Limited withdrew its objection.

Conclusion:
The Court sanctioned the scheme of arrangement, including the proposed amendments, and found no grounds to deny the scheme based on the objections raised. The petition was made absolute in terms of the prayer clauses, with no order as to costs. The order was stayed until 26th November 2002, allowing time for any further applications or appeals.

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