Debenture holders treated equally in scheme approval, court upholds majority vote and fair share exchange ratio.

The court held that debenture holders, including Unit Trust of India (UTI), did not constitute a separate class, as all secured creditors were treated equally under the scheme. UTI's objection to being treated separately was dismissed since it participated in meetings without initial objection. The court found that the majority of creditors, representing 3/4th of the value, had approved the scheme. It also upheld the inclusion of working capital providers in the meeting and deemed the share exchange ratio fair. The court dismissed objections regarding disclosure of financial information and the appointment of directors, ultimately sanctioning the scheme with a modification to ensure parity among lenders.

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Issues Involved:
1. Whether the debenture holders like Unit Trust of India (UTI), which is a financial institution, constitute a separate and distinct classRs.
2. Whether UTI, holding 64% of the total non-convertible debentures, required a separate meeting as it constitutes a separate and distinct class from other debenture holdersRs.
3. Whether 3/4th of the value of the creditors and members had not voted in favor of the scheme and, if so, its effectRs.
4. Whether holding a meeting and including working capital providers in the said meeting held for the secured creditors is illegalRs.
5. Whether the share exchange ratio propounded by the company under the scheme is unjust and improperRs.
6. Whether the latest balance sheet and latest financial position were not disclosed by the companyRs.
7. Whether all relevant materials were not disclosed by the company along with the notice sent to the members and the creditorsRs.
8. Whether the company could appoint those directors under the scheme who had already incurred disability under the provisions of section 274(1)(g)(B) as the company failed to redeem the debentures within one yearRs.
9. Whether the provisions in the scheme for the transfer of the assets, particularly the land, are illegal as the same is sought to be transferred in violation of the orders of the Supreme CourtRs.

Issue-wise Detailed Analysis:

Issue 1 and 2: Separate Class for UTI
The court examined whether UTI, holding 64% of the total non-convertible debentures, should be treated as a separate class from other secured creditors. The court referred to Section 391 of the Companies Act, which allows for compromise or arrangement between a company and its creditors or any class of them. The court noted that all secured creditors, including UTI, were treated alike under the scheme, with no distinction made amongst them. The court held that since UTI participated in the meetings without raising any objection initially, it could not claim to be treated separately later. The court concluded that debenture holders are secured creditors and do not constitute a separate class.

Issue 3: 3/4th Value of Creditors Voting
The court addressed the contention that 3/4th of the value of the creditors did not vote in favor of the scheme. The court found that the UTI's value of share was 24.91%, and only UTI voted against the scheme. The State Bank of India (SBI) had voted in favor of the scheme despite raising certain queries. The court concluded that the majority in number representing 3/4th of the value of creditors had agreed to the arrangement, complying with Section 391(2) of the Companies Act.

Issue 4: Inclusion of Working Capital Providers
The court considered the objection regarding the inclusion of working capital providers in the meeting of secured creditors. The court found that working capital providers had to make sacrifices under the scheme, such as reduced interest rates and conversion of interest into funded interest term loans. The court held that working capital providers are secured creditors enjoying common security over the company's assets, and their inclusion in the meeting was justified.

Issue 5: Share Exchange Ratio
The court examined the objection to the share exchange ratio, which was based on the unaudited report. The court noted that the share exchange ratio was determined by a reputed firm of Chartered Accountants, M/s. S.S. Kothari & Co., using commonly accepted methodologies. The court referred to the Supreme Court's decisions, emphasizing that valuation of shares is a technical matter best left to experts. The court found no mistake in the valuation and held that the share exchange ratio was just and proper.

Issue 6: Disclosure of Latest Balance Sheet
The court addressed the objection regarding the non-disclosure of the latest balance sheet. The court found that the company had obtained an extension for holding the Annual General Meeting and had filed the latest available audited accounts up to September 30, 2001. The unaudited balance sheet for the period up to September 30, 2002, was prepared and circulated. The court concluded that the latest balance sheet and financial position were available on record.

Issue 7: Disclosure of Relevant Materials
The court considered the objection regarding the non-disclosure of all relevant materials. The court found that the company had made full disclosure about the directors and their relatives in all three companies. The court also noted that the scheme provided information about the land to be retained and the land to be surrendered to the DDA. The court held that the amount of sacrifice to be made by each lender depended on the option exercised by them, and the notice issued to the members and creditors was in compliance with the provisions of the Act.

Issue 8: Disability under Section 274(1)(g)
The court examined the objection regarding the appointment of directors who had incurred disability under Section 274(1)(g) of the Companies Act. The court found that only Shri Siddharth Sriram was being appointed as a director in the three new companies, and he had resigned on December 12, 2001, before incurring any disqualification. The court also noted that his appointment was necessary to provide personal guarantees for securing loans. The court held that there was no illegality or irregularity in his appointment.

Issue 9: Sale of Land
The court addressed the objection regarding the transfer of land under the scheme. The court found that the company had surrendered 68% of the land as per the Supreme Court's order and retained 32% for its own utilization. The court noted that the land to be transferred was legally vested in the petitioner, and the value of the land was hypothetically fixed at Rs. 65 crores. The court held that the objection regarding the transfer of land was without basis.

Conclusion:
The court dismissed the objections raised by UTI and other objectors, finding them without merit. The court sanctioned the scheme of arrangement subject to the condition that UTI be paid an additional amount of Rs. 3 crores to maintain parity with other lenders on funding of interest. The scheme was sanctioned with this modification, and the petitions were disposed of.

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