2017 (3) TMI 50 - HC - Companies Law

Court Tentatively Sanctions Company Arrangement; Requires Further Evaluation by CDR EG

The Court tentatively sanctioned the scheme of arrangement between two companies, subject to approval by the Corporate Debt Restructuring Empowered Group ... Scheme of arrangement under section 391 - company whose liabilities exceed assets - majority in number representing three fourths in value present and voting - court's supervisory jurisdiction vis a vis commercial wisdom - fair, just and reasonable test - Corporate Debt Restructuring (CDR) mechanism and CDR Empowered Group approvalCompany whose liabilities exceed assets - scheme of arrangement under section 391 - A company whose liabilities exceed its assets is not barred from proposing a scheme of arrangement under Section 391. - HELD THAT: - The Court applied established precedent recognising that the object of Section 391 is to enable compromise or arrangement, including revival or restructuring, and that financial weakness or factual insolvency does not per se disqualify a company from seeking sanction. Reliance was placed on judicial authorities holding that where a scheme offers prospect of revival and is otherwise lawful and fair, the court should, insofar as possible, lean in favour of revival rather than winding up. The petitioners' circumstances arising from regulatory changes and resultant liquidity stress did not create a statutory bar to placing a scheme before the Court.Held for the petitioners; financial weakness is not a bar to seeking sanction under Section 391.Majority in number representing three fourths in value present and voting - fair, just and reasonable test - court's supervisory jurisdiction vis a vis commercial wisdom - Whether the statutory majorities were obtained and the extent of the Court's scrutiny of that approval. - HELD THAT: - The Court analysed voting principles under Section 391(2), noting that the statutory test is majority in number of those present and voting together with three fourths in value of those present and voting, and that absenteeism does not automatically equate to opposition. While the meetings convened by the Court complied technically with the voting thresholds, the Court emphasised its supervisory role to ensure the scheme is not unconscionable, illegal, coercive of minorities or contrary to public policy. The Court held it cannot act as an appellate body over commercial wisdom but must be satisfied that meetings were fairly representative, that material was available to voters, and that the scheme is fair, just and reasonable to the classes affected.The meetings satisfied the technical statutory majority requirements; however the Court retained supervisory scrutiny to ensure fairness to creditors and preference shareholders.Corporate Debt Restructuring (CDR) mechanism and CDR Empowered Group approval - court's supervisory jurisdiction vis a vis commercial wisdom - Whether the scheme could be finally sanctioned by the Court without evaluation by the CDR Empowered Group (CDR EG), and the consequent course of action. - HELD THAT: - Although Sections 391-394 provide the statutory mode for scheme sanction, the petitioners' companies were parties to CDR inter creditor arrangements and the CDR mechanism exists to evaluate restructuring proposals of debtors and creditors. The CDR EG had earlier deferred or not given mandates for the proposal; several major creditors expressed substantive concerns about allocations, conversion of OCCRPS and repayment timelines. Given the technical compliance with Section 391 but the significant commercial and creditor protection issues (including substantial conversion and long moratoriums), the Court concluded it lacked the expertise to resolve certain financial prudence questions and therefore sanctioned the scheme only tentatively. It directed that final sanction be made subject to CDR EG's approval after evaluation; if CDR EG approves the scheme the order and CDR EG decision are to be filed with Registrar, and if CDR EG proposes modifications or disapproves, the modified or reconsidered scheme shall be placed before the Court for final sanction.Scheme tentatively sanctioned subject to approval by CDR EG; matter remitted to CDR EG for evaluation and thereafter to be finalised before the Court in accordance with CDR EG's decision.Final Conclusion: The Court held that financial weakness does not bar a company from seeking a scheme under Section 391, found that the requisite statutory majorities were technically obtained but retained supervisory scrutiny to ensure fairness, and therefore tentatively sanctioned the composite demerger/merger scheme subject to final approval and any modifications recommended by the CDR Empowered Group, with the resultant order and CDR EG decision to be filed with the Registrar and any modified scheme to be placed before the Court for final sanction. Issues Involved:1. Entitlement of a financially weak company to enter into a scheme of arrangement under Section 391 of the Companies Act.2. Approval of the scheme of arrangement by the requisite majority of shareholders, preferential creditors, and creditors.3. Jurisdiction of the Court to modify the scheme of arrangement and the necessity of any modifications in light of objections raised.Issue-wise Detailed Analysis:1. Entitlement of a Financially Weak Company to Enter into a Scheme of Arrangement:The Court examined whether a company with liabilities exceeding its assets can propose a scheme of arrangement under Section 391 of the Companies Act. The Court referred to Section 391, which allows a company to propose a compromise or arrangement with its creditors or members. The Court cited the Delhi High Court’s decision in *Wearwell Cycle Company India Limited v. A.K. Misra and Brahm Arenja*, emphasizing that the law favors the revival of companies over winding them up. The Court concluded that there is no legal bar preventing a financially weak company from submitting a scheme of arrangement. Thus, this point was held in favor of the petitioner companies.2. Approval of the Scheme of Arrangement by the Requisite Majority:The Court analyzed whether the scheme was approved by the requisite majority of shareholders, preferential creditors, and creditors. The meetings were convened as per the Court’s directions, and the scheme was approved by the required majority in each meeting. However, objections were raised by HDFC Bank and Aditya Birla Finance Limited, who argued that the scheme was detrimental to creditors' interests and that the voting process was flawed. The Court noted that the objections primarily concerned the allocation of debts and the reduction of share capital. Despite these objections, the Court found that the statutory requirements for approval were met, but the objections warranted further scrutiny.3. Jurisdiction of the Court to Modify the Scheme and Necessity of Modifications:The Court discussed its jurisdiction to sanction or modify the scheme of arrangement. It referred to the Supreme Court’s decision in *Miheer H. Mafatlal v. Mafatlal Industries Limited*, which outlined the Court’s role in ensuring that the scheme is fair, reasonable, and not violative of any law or public policy. The Court emphasized that it must ensure the scheme does not unfairly prejudice any class of creditors or shareholders. Given the objections raised, particularly regarding the transfer of business between the companies and the impact on creditors, the Court found it necessary to involve the Corporate Debt Restructuring (CDR) Empowered Group (EG) for a thorough evaluation. The Court tentatively sanctioned the scheme subject to approval by the CDR EG, indicating that if the CDR EG approves the scheme, it would become final. If modifications are suggested, the modified scheme would need to be placed before the Court for final sanction.Conclusion:The Court tentatively sanctioned the scheme of arrangement between the two companies, subject to approval by the CDR EG. The scheme’s approval by the requisite majority was acknowledged, but the objections raised by significant creditors necessitated further evaluation by the CDR EG. The Court directed that the scheme, along with the CDR EG’s decision, be submitted to the Registrar of Companies for necessary action. If the CDR EG suggests modifications, the modified scheme must be resubmitted to the Court for final approval. The Company Petitions and related applications were disposed of accordingly.