2004 (7) TMI 364 - HC - Companies Law

Court approves modified compromise scheme under Companies Act 1956, directing timely payments for financial recovery.

Gujarat Lease Financing Ltd., In re

Gujarat Lease Financing Ltd., In re - [2005] 62 SCL 511 (GUJ.) Issues Involved:1. Sanction of a scheme of compromise under section 391 of the Companies Act, 1956.2. Financial distress and restructuring of the petitioner-Company.3. Approval and implementation of the scheme by the Consortium of Banks and G-series Debenture holders.4. Legal formalities and procedural compliance for convening meetings and obtaining approvals.5. Final court sanction and directives for implementation of the scheme.Issue-wise Detailed Analysis:1. Sanction of a scheme of compromise under section 391 of the Companies Act, 1956:The petitioner-Company filed a petition under section 391 of the Companies Act, 1956, seeking court sanction for a scheme of compromise with its secured creditors, specifically a consortium of 16 banks. This legal provision allows companies to propose a compromise or arrangement with creditors or members, subject to court approval.2. Financial distress and restructuring of the petitioner-Company:The petitioner-Company, a Non-Banking Financial Company (NBFC), faced significant financial distress starting in 1997-98 due to various economic factors, including recession, low GDP growth, and stringent RBI policies. The company's financial position deteriorated, leading to downgrades by rating agencies and defaults by lease and hire purchase debtors. Consequently, the company incurred substantial losses and conducted negligible business from September 1997 onwards.3. Approval and implementation of the scheme by the Consortium of Banks and G-series Debenture holders:The company proposed a scheme of compromise with its 'E' and 'F' series Debenture holders, which was sanctioned by the court in 2002, resulting in payments of over Rs. 57 crores. A similar scheme was proposed for the Consortium of Banks and 'G' series Debenture holders, with a revised proposal to pay 65% of the outstanding amount as of specific dates. The scheme was approved by the required majority of G-series debenture holders and subsequently sanctioned by the court in December 2003. The Consortium of Banks initially did not approve the scheme by the requisite statutory majority, leading to further negotiations and modifications.4. Legal formalities and procedural compliance for convening meetings and obtaining approvals:The company filed an application for convening a meeting of the Consortium of Banks, which was directed by the court. The notice of the meeting was sent to all consortium members and advertised in newspapers. Multiple adjournments occurred due to requests from banks for further consideration and negotiations. Eventually, an amended proposal was put forward, which included the transfer of existing assets and receivables to benefit the consortium and G-series debenture holders. The amended scheme was approved by 86.67% in number and 86.44% in value of the members present at the meeting.5. Final court sanction and directives for implementation of the scheme:The court admitted the petition and ordered its advertisement. The Central Government did not object to the proposed scheme. No opposition was received from the public or dissenting members. The court, after reviewing the scheme and the majority approval, sanctioned the scheme of compromise. The court noted the substantial implementation of the scheme and directed the company to make the remaining payments within 60 days from the effective date. The court also addressed the procedural history and payments made through an escrow account, ensuring compliance with previous court orders.Conclusion:The court sanctioned the modified scheme of compromise, binding on all members of the Consortium of Banks and the petitioner-Company, and directed the company to complete the remaining payments within the stipulated time frame. The petition was disposed of with specific directives for cost payment to the Additional Central Government Counsel.