2005 (7) TMI 720 - HC - Companies Law

Court approves company's compromise scheme under Companies Act, 1956

Modiluft Limited and Ors. Versus S.K. Modi and Ors.

Modiluft Limited and Ors. Versus S.K. Modi and Ors. - TMI Issues Involved:1. Incorporation and Name Changes of the Company2. Termination of Agreements and Financial Crisis3. Provisional Liquidator Appointment and Deposits4. Scheme of Arrangement with Creditors5. Disputes Between RHSL and S.K. Modi Group6. Objections to the Scheme of Arrangement7. Legal and Procedural Compliance for Scheme ApprovalIssue-wise Detailed Analysis:1. Incorporation and Name Changes of the Company:The company was initially incorporated as Genius Leasing Finance & Investment Company under the Indian Companies Act, 1956. It underwent several name changes: to M.G. Express (17th February 1993), Modiluft Limited (12th April 1994), and finally to Royal Airways Ltd. (31st December 2001). The authorized share capital was Rs. 100 crores, divided into 10 crore equity shares of Rs. 10 each, with issued capital of Rs. 63.4 crores as of 28th February 1999.2. Termination of Agreements and Financial Crisis:The company started domestic airline operations in 1993 in collaboration with Lufthansa, which later terminated all agreements and repossessed its aircrafts, leading to a halt in operations. Creditors filed petitions for winding up under Sections 433 and 434 of the Act due to the company's inability to repay debts. The court admitted one such petition on 12th January 1998 and appointed an official liquidator on 29th April 1998.3. Provisional Liquidator Appointment and Deposits:The company deposited Rs. 9 crores with the Registrar of the Court by 31st December 1999 to restart operations. It received approvals from the Foreign Investment Promotion Board (FIPB) and the Ministry of Commerce & Industry to issue CRCPS worth $17.5 million in collaboration with Verus Group, Canada, for relaunching the airline.4. Scheme of Arrangement with Creditors:The company filed CA No. 797/2000 in May 2000 under Sections 391(1) and 393 of the Act, proposing a scheme of arrangement with creditors. RHSL secured investments and entered into agreements with investors, depositing $15,462,246.10 in an escrow account. The company settled disputes with major creditors, including Indian Oil Corporation and Hindustan Petroleum Corporation Limited, and received court orders for convening creditor meetings.5. Disputes Between RHSL and S.K. Modi Group:Differences arose between RHSL and the S.K. Modi Group, leading to multiple lawsuits and disputes over management control. The court noted that the scheme proposed by RHSL was bona fide, reasonable, and feasible, directing meetings of Inter Corporate Depositors and Staff Creditors, both of which approved the scheme by significant majorities.6. Objections to the Scheme of Arrangement:Three main objectors, including the S.K. Modi Group, raised objections. The S.K. Modi Group argued that RHSL, a foreign company, lacked locus standi to file the scheme and that CRCPS were never properly converted into equity shares. The court found these objections unconvincing, noting that necessary government approvals had been obtained and that RHSL's actions were consistent with prior shareholder resolutions.7. Legal and Procedural Compliance for Scheme Approval:The court emphasized that the scheme should be fair, reasonable, and in the interest of creditors. It rejected objections regarding the scheme's workability and funding, noting that RHSL had already spent significant amounts and secured necessary approvals. The court also addressed specific objections from Malanpur Steels Ltd. and Paradise Credit Pvt. Ltd., finding them without merit.Conclusion:The court sanctioned the scheme of compromise under Section 391(2) read with Section 394 of the Companies Act, 1956, subject to certain conditions, including the outcome of pending suits and necessary government approvals. The scheme was found to be in the interest of creditors and feasible for the company's revival.