2008 (11) TMI 403 - HC - Companies Law

Court approves modified compromise scheme under Companies Act, 1956, with adjustments for fairness .

The court sanctioned the modified scheme of compromise and/or arrangement under section 391 of the Companies Act, 1956, subject to adjustments addressing ... Compromise and arrangement - sanction of this Court to the modified scheme of compromise and/or arrangement between the petitioner and its secured lenders and equity shareholders - Held that:- The present scheme is sanctioned subject to the following modifications - The total outstanding amount of GIIC as on cut-off date i.e., 31-3-2004 should be taken at ₹ 21.93 crores as against ₹ 16.71 crores, in CDR Scheme during the period from 1-4-2004 to 31-3-2005, the interest is not provided which is unreasonable and improper. Such interest should be provided at least at 10 per cent p.a. In CDR Scheme as on cut-off date the proposed amount of loan is shown at ₹ 142.55 crores after restructuring and it is proposed to be settled as regards Loan - I i.e., ₹ 62.71 crores, the petitioner proposed to pay the said amount with interest @ 5 per cent p.a. compounded at quarterly rest commencing from 1-4-2005 and ending on 31-3-2010. This interest at the rate of 5 per cent p.a. is very low and unreasonable looking to the present financial market scenario and even OTS Schemes proposed by Reserve Bank of India and considering the debt funds of GIIC. The rate of interest should at least be 10 per cent p.a. instead of 5 per cent p.a. As regards Loan - II i.e., ₹ 13.76 crores, the petitioner proposed to issue Secured Non-Convertible Debentures (NCDs Series I) coupon rate of face value of ₹ 1 lakh each to the secured lender and repayable within 18 months from the date of issue. However, no interest is proposed on such NCDs which is absolutely unjust and unreasonable. At least interest at the rate of 10 per cent p.a. should be provided on such NCDs. As regards Loan - III of ₹ 66.08 crores, the petitioner proposed to issue Fully Convertible Debentures (FCDs) of face value of ₹ 10 each within three months from the effective date with 0 per cent rate of interest. The FCDs shall be converted into equity shares of ₹ 10 each at a premium of 25 per cent. The conversion of FCDs should be at par (i.e., at ₹ 10 per equity share) and not at a premium as proposed under the Scheme. Since GIIC has objected to the scheme and since the Court found substantial force in the said objections, the proposed scheme shall be binding to GIIC with above modifications.Subject to the above modifications in the scheme the scheme is sanctioned. This petition is accordingly disposed off.The fees to the Central Government Counsel is determined at ₹ 3,500. The same shall directly be paid by the petitioner company to Mr. Iqbal Shaikh, the learned Central Government Standing Counsel. Issues Involved:1. Sanction of the modified scheme of compromise and/or arrangement under section 391 of the Companies Act, 1956.2. Objections raised by Gujarat Industrial Investment Corporation Ltd. (GIIC) regarding the scheme.3. Status and rights of Asset Reconstruction Company (India) Ltd. (ARCIL) as a secured creditor.4. Validity and fairness of the scheme towards all creditors, especially GIIC.5. Adequacy of consideration for the assignment of debts to ARCIL.6. Court's duty to ensure the scheme is fair, just, and reasonable.Issue-wise Detailed Analysis:1. Sanction of the Modified Scheme:The petitioner company filed a petition under section 391 of the Companies Act, 1956, seeking the court's sanction for a modified scheme of compromise and/or arrangement between the company and its secured lenders and equity shareholders. The scheme aimed to restructure the company's debt and capital structure in line with business viability and cash flows. The court directed the petitioner to convene meetings of secured lenders and equity shareholders, which were held, and the scheme was approved by the requisite statutory majority.2. Objections Raised by GIIC:GIIC raised several objections to the scheme, arguing that it was not in the general interest of secured creditors and that their dues were not correctly considered. GIIC contended that the scheme did not provide for interest for the year 2004-05 and that the interest rates offered were meager. They also argued that the financial position of the petitioner company had improved, making the scheme unnecessary. GIIC further claimed that their objections were not properly discussed in the meeting of secured creditors.3. Status and Rights of ARCIL as a Secured Creditor:The court examined the status of ARCIL, which had acquired debts from ICICI Bank Ltd. and State Bank of India. ARCIL's status as a secured creditor was challenged by GIIC, who argued that the assignment of debts was not for proper consideration. The court, however, noted that the petitioner had accepted ARCIL's status as a secured creditor and that no other secured creditor had challenged this status. The court held that it did not have jurisdiction to question the validity of the assignment or the adequacy of consideration.4. Validity and Fairness of the Scheme Towards All Creditors:The court emphasized its duty to ensure that the scheme was fair, just, and reasonable for all creditors, including dissenting ones like GIIC. The court referred to the Supreme Court's decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd., which highlighted the need for the court to consider the pros and cons of the scheme and ensure it did not violate any laws or public policy. The court also noted that it must ensure the scheme was not coercive to the minority creditors.5. Adequacy of Consideration for the Assignment of Debts to ARCIL:GIIC argued that the consideration paid by ARCIL for the assignment of debts was not adequate. The court, however, held that the adequacy of consideration was a matter between the assignor and assignee and did not affect the validity of the assignment. The court referred to precedents, including Narain Food Products Ltd. v. Tikam Chand and Vijaya Minerals (P.) Ltd. v. Bikash Chandra Deb, which supported the view that inadequacy of consideration does not invalidate an assignment.6. Court's Duty to Ensure the Scheme is Fair, Just, and Reasonable:The court reiterated its duty to ensure the scheme was fair, just, and reasonable for all creditors. The court found that while the scheme was approved by the requisite majority, the objections raised by GIIC had merit. The court decided to modify the scheme to address GIIC's concerns. The modifications included adjusting the outstanding amount of GIIC, providing interest for the period not covered in the scheme, and revising the terms of loans and debentures to ensure fairness.Conclusion:The court sanctioned the scheme subject to modifications addressing GIIC's objections. The modifications included recalculating GIIC's outstanding amount, providing interest for the period from 1-4-2004 to 31-3-2005, and adjusting the terms of loans and debentures to ensure they were fair and reasonable. The court emphasized the need to protect the interests of all creditors and ensure the scheme was not coercive to the minority. The petition was disposed of with these modifications, and the fees for the Central Government Counsel were determined at Rs. 3,500, to be paid by the petitioner company.