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 - Held that:- In this present scenario, the Court has to cautiously examine the scheme of arrangement and this Court considers the tenability of the objection with regard to transfer of business relating to Telugu States to one company and non- Telugu States in another company exposing the business in Telugu States to greater risk. This Court has no expertise to evaluate the risk. It is also noticed that Asmitha Microfin Limited is not a member of Micro Finance Institutions Network, whereas SHARE is a member. There is reduction in the equity, conversion of OCCRPS into ordinary equity shares involved in the present scheme of arrangement. In the absence of any expertise, this Court cannot give any conclusive finding except placing before the CDR EG for a decision on the scheme of arrangement, though legal requirements are met substantially, as the CDR EG itself deferred its decision in view of the pendency of the present Company Petitions before this Court. The Corporate Debt Restructuring Mechanism was evolved by the Reserve Bank of India to ensure timely and transparent mechanism for restructuring of corporate debts of viable entities facing problems, for the benefit of all concerned. It is also intended to minimize the losses to the creditors and other stock holders through an orderly and coordinated restructuring programme. It is a voluntary non-statutory system based on Debtor-Creditor Agreement and Inter-Creditor Agreement and the principle of approvals by super majority of 75% creditors which makes it binding on the remaining 25% to fall in line with the majority decision. It consists of three tiers, namely, CDR Standing Forum, CDR Empowered Group and CDR Cell. In view of the petitioner company having an Inter- Creditor Agreement, which is binding on the Companies, any order passed by this Court approving the scheme of arrangement would have an impact on such agreement. Though, the banks or creditors to the Companies are part of CDR mechanism, the scheme was not evaluated by the CDR mechanism as such. Some banks attended the creditors meeting and some banks did not. The HDFC Bank raised objections. In the circumstances, the scheme of arrangement is tentatively sanctioned subject to approval by the CDR EG and if the CDR EG approves the scheme by evaluating the financial implications, the present order along with the decision of the CDR EG shall be delivered to the Registrar of Companies, A.P., Hyderabad within thirty (30) days from the date of receipt of decision of CDR EG and he shall take all necessary consequential action in accordance with law. In case the CDR EG does not approve the scheme and suggest any modifications, the same shall be taken into account and the modified scheme of arrangement shall be placed before this Court for its 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.