2014 (1) TMI 1640 - HC - Companies Law

Scheme of Arrangement sanctioned where bona fide and procedurally compliant; winding up stayed with safeguards for creditors and workers.

Scheme of arrangement and reconstruction may be sanctioned under the Companies Act where it is bona fide, complies with statutory procedure and requisite ... Stay of winding up under Section 466 - sanction of scheme of arrangement and reconstruction under Sections 391-394 - bona fide scheme and not a ruse to dispose of assets - custodia legis - supervisory jurisdiction of the Company Court (not appellate) - protection of workers' claims and constitution of Claim Committee - duties and reports of the Official Liquidator on handing overSanction of scheme of arrangement and reconstruction under Sections 391-394 - bona fide scheme and not a ruse to dispose of assets - supervisory jurisdiction of the Company Court (not appellate) - Approval of the Scheme of Arrangement and Reconstruction filed by the petitioner - HELD THAT: - The Court examined whether the scheme for revival was fair, reasonable and not opposed to public interest. The statutory procedure for convening and holding meetings of shareholders and unsecured creditors was complied with; the Chairman's report records unanimous approval by shareholders and unsecured creditors. Objections raised by the Regional Director were considered and met by undertakings and documentary material produced by the petitioner, and the Official Liquidator's report did not disclose any objection to the scheme beyond specified concerns which were addressed. The scheme envisages settlement of secured creditors' dues and provisions for statutory and workers' liabilities; petitioner gave undertakings regarding accounting treatment, statutory compliances and payments. Applying the settled principles that the Court's role is supervisory and that a scheme must be bona fide and not a cloak to dispose of assets, the Court was satisfied prima facie that the scheme was just, fair and not contrary to public interest and accordingly approved the scheme and directed filing of a certified copy of the order with the Registrar of Companies. [Paras 15, 16, 18, 20, 28]The Scheme of Arrangement and Reconstruction as filed is approved and shall form part of the order; petitioner to file certified copy with Registrar of Companies.Stay of winding up under Section 466 - custodia legis - duties and reports of the Official Liquidator on handing over - Whether winding up proceedings should be permanently stayed and the assets handed over to the promoting contributory - HELD THAT: - Having found the scheme to be bona fide and acceptable on the material before it, the Court exercised its power under Section 466 to stay further liquidation proceedings permanently. Consequential directions were issued for the Official Liquidator to hand over the assets to the applicant-promoter/contributory, to prepare inventory with full land details, photographs and videography of handing over, and to make available company records to authorised representatives. Conditions were imposed: prohibition on transfer or alienation of assets without leave of the Court (subject to the promoter approaching financial institutions for financing and creating charges), payment by the promoter of the Official Liquidator's expenses until handing over, periodic reporting by the promoter to the Official Liquidator, and maintenance of the winding up petition pending for limited purposes (grievances against Claim Committee adjudications). The Court also provided for review by the Official Liquidator if the promoter withdraws from the scheme. [Paras 6, 21, 30]Liquidation proceedings are permanently stayed; Official Liquidator to hand over assets subject to enumerated conditions and safeguards.Protection of workers' claims and constitution of Claim Committee - bona fide scheme and not a ruse to dispose of assets - Adjudication and protection of claims of ex-workers and measures to safeguard their interests in the context of revival - HELD THAT: - The Court recognised that workers' claims cannot be ignored and that revival may be in their interest because of offers of re-employment and local employment benefits. To protect those interests, the Court appointed a one-man Claim Committee (Hon. Justice S.P. Khare, Retd.) to adjudicate workers' claims; directed the Official Liquidator to invite and place claims before the Committee within two months; fixed a three-month period for the Committee to decide claims; required the promoter to pay amounts adjudicated by the Committee within two months of adjudication; and mandated that the promoter deposit a token sum with the Official Liquidator to demonstrate bonafides. The Court preserved the workers' right to challenge adjudications before the Court and kept the winding up petition pending for that limited purpose. Expenses of the Official Liquidator in inviting claims and of the Claim Committee are to be borne by the promoter. [Paras 23, 24, 25]A Claim Committee is constituted to adjudicate workers' claims with specified timelines and payment obligations on the promoter; workers may challenge adjudications before the Court.Duties and reports of the Official Liquidator on handing over - Disposition of interlocutory applications concerning settlement and verification of claims (workers' provident fund applications and electricity dues) - HELD THAT: - Applications by workers under Rule 9 for settlement and release of dues were disposed of by directing their claims to be placed before the constituted Claim Committee. Applications for provident fund verification were permitted to be verified and signed by the competent person on behalf of the Company with the Official Liquidator's concurrence. The Electricity Board's claim for arrears was disposed of with liberty to recover dues in accordance with law; the promoter undertook to pay such charges in accordance with law. [Paras 25, 26, 27]The listed interlocutory applications are disposed of with directions for verification, adjudication or recovery as specified; Official Liquidator to cooperate in provident fund applications.Final Conclusion: The Scheme of Arrangement and Reconstruction is approved; winding up proceedings are permanently stayed under Section 466 and assets are to be handed over to the promoter/contributory subject to conditions and safeguards, a Claim Committee is constituted to adjudicate workers' claims with payment and deposit obligations on the promoter, various interlocutory applications are disposed of in accordance with the directions, Company Petition No.21/2013 is disposed and Company Petition No.17/2002 remains pending only for challenges to Claim Committee adjudications. Issues: (i) Whether the Scheme of Arrangement and Reconstruction for revival of Dhar Cement Limited in liquidation is fair, reasonable and may be sanctioned under Sections 391, 392 and 394 of the Companies Act, 1956; (ii) Whether the winding up proceedings in Company Petition No.17/2002 should be stayed permanently under Section 466 of the Companies Act, 1956 and assets handed over in accordance with the sanctioned scheme; (iii) Whether the claims of ex-workers and statutory dues should be protected and adjudicated and what interim directions should be issued regarding adjudication and protection of workers' claims and assets of the company.Issue (i): Whether the proposed Scheme of Arrangement and Reconstruction is fit for sanction under Sections 391 and 394 of the Companies Act, 1956.Analysis: The Court examined the Scheme, the Chairman's report of meetings of shareholders and unsecured creditors, the Regional Director's objections and the Official Liquidator's report. The Court applied settled principles that sanction is permissible where statutory procedures are complied with, the requisite majorities and meetings are properly convened and conducted, the scheme is bona fide, not a ruse to dispose of assets, is fair and reasonable to the classes concerned and not opposed to public interest. The petitioner undertook to comply with accounting standards and statutory liabilities; secured creditors' no-dues were on record and meetings of shareholders and unsecured creditors approved the scheme unanimously; regulatory concerns were addressed by undertakings and the Official Liquidator raised only specific administrative objections which were dealt with.Conclusion: In favour of Petitioner. The Scheme of Arrangement and Reconstruction is sanctioned and is fair, reasonable and not opposed to public interest.Issue (ii): Whether the winding up proceedings should be permanently stayed and assets handed over to the promoter/contributory in terms of Section 466 of the Companies Act, 1956.Analysis: Applying Section 466 and authoritative precedent, the Court considered whether the scheme genuinely contemplates revival, is bona fide and would protect creditors and workers. The record showed secured creditors' dues had been settled by the petitioner and meetings of unsecured creditors had approved the scheme. The Official Liquidator's practical concerns were addressed by directions concerning inventory, photographs, videography, restrictions on alienation and filing of periodic reports and payment of outstanding operational expenses.Conclusion: In favour of Petitioner. The winding up proceedings are permanently stayed and the Official Liquidator is directed to hand over assets subject to the Court's directions and safeguards.Issue (iii): Whether and how the claims of ex-workers and statutory dues should be protected and adjudicated in the context of sanctioning the scheme and staying liquidation.Analysis: The Court recognised that workers' claims cannot be ignored and that revival may be in their interest due to prospective re-employment; the petitioner offered to satisfy workers' claims and to deposit funds to show bonafides. To protect workers' rights, the Court appointed a one-man Claim Committee, directed advertisement and submission of claims, set timeframes for adjudication, required an interim deposit by the promoter/contributory, provided for payment of claims as adjudicated, preserved a limited avenue for aggrieved workers to approach the Court, and ordered that the promoter bear Official Liquidator's related expenses.Conclusion: In favour of workers. Workers' claims are to be adjudicated by the constituted Claim Committee; interim protection and a deposit were ordered and the applications of the workers were disposed of accordingly.Final Conclusion: The Court sanctioned the Scheme of Arrangement and Reconstruction, permanently stayed the winding up proceedings subject to protective directions (including handover procedures, restrictions on alienation, periodic reporting and modalities for adjudication and payment of workers' claims), disposed of the workers' and other interlocutory applications as directed, and closed Company Petition No.21/2013 while keeping Company Petition No.17/2002 pending only for limited purposes connected to workers' grievances.Ratio Decidendi: A company court may, under Sections 391-394 and Section 466 of the Companies Act, 1956, stay winding up and sanction a scheme of arrangement if the scheme is bona fide, complies with statutory procedure and majorities, is fair and reasonable to the concerned classes and not a ruse to dispose of assets, subject to protective measures to safeguard creditors' and workers' rights.