Approval of Company Demerger Scheme under Companies Act: Shareholders and Creditors Meet for Sanction

The High Court approved the Scheme of Arrangement (Demerger) between two companies after meetings with shareholders and creditors. The Tribunal was directed to sanction the modified scheme, emphasizing compliance with Section 66 of the Companies Act, 2013. Objections were withdrawn, and secured lenders supported the scheme. The Long Stop Date was extended, accounting standards were adjusted, and rights of employees were protected. The Tribunal's initial order was set aside, and the scheme was approved with modifications, including an extended Long Stop Date and protection of employee rights.

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Issues Involved:
1. Approval of Scheme of Arrangement (Demerger)
2. Compliance with Section 66 of the Companies Act, 2013
3. Objection by Power Finance Corporation Limited
4. Long Stop Date of the Scheme
5. Accounting Standards
6. Rights of Employees and Workmen

Issue-wise Detailed Analysis:

1. Approval of Scheme of Arrangement (Demerger):
The case involved a joint petition under Sections 230 to 232 of the Companies Act, 2013, for sanction of a 'Scheme of Arrangement' (Demerger) between two companies. The Hon'ble High Court of Delhi directed the convening of meetings for equity shareholders and creditors of both companies, which were held as per the directions. The scheme was subsequently approved by all equity shareholders, secured creditors, and unsecured creditors of both companies.

2. Compliance with Section 66 of the Companies Act, 2013:
The Tribunal refused to sanction the modified scheme without compliance with Section 66 of the Companies Act, 2013, or without obtaining fresh consents from shareholders and creditors. The appellant argued that Section 230 is a complete code in itself and expressly states that the provisions of Section 66 shall not apply to the reduction of share capital effected under Section 230. The Tribunal failed to consider this explanation, which categorically excludes the application of Section 66 in such cases.

3. Objection by Power Finance Corporation Limited:
One of the grounds for rejection was the dissent by Power Finance Corporation Limited. However, it was found that the objection was subsequently withdrawn, and the secured lenders, including Power Finance Corporation Limited, supported the scheme. The IDBI Bank Limited, as the lead creditor, confirmed this in their application before the Tribunal.

4. Long Stop Date of the Scheme:
The Tribunal noted that the scheme contained a Long Stop Date of 31st March 2017, and there was no record of extension. The appellants argued that the Long Stop Date was extended to 31st March 2018, as evidenced by the minutes of board meetings of both companies. The Tribunal's finding was contrary to the records, which showed that the extension was duly approved by the respective boards.

5. Accounting Standards:
The statutory auditor suggested a different method of accounting, which did not affect the financial position or net worth of the appellant companies. The board of directors approved the suggestions, and the scheme was modified accordingly. The Tribunal's technical objection regarding the accounting method was found to be baseless, as it did not prejudice the shareholders or creditors.

6. Rights of Employees and Workmen:
The objectors, representing the employees of one of the companies, claimed that the lands of 158 employees were taken over for factory construction, and the employees had a right to continue until retirement. The Tribunal noted that the Industrial Court held the employees as permanent and successor-in-interest of the predecessor company. The Tribunal suggested modifying the scheme to protect the rights of employees and workmen. The appellant companies proposed a draft amendment to accommodate the employees in either of the companies, prioritizing them over contract employees without any court orders in their favor.

Final Judgment:
The Tribunal's order dated 16th August 2017 was set aside. The scheme was approved with modifications to protect the interests of the 158 employees, extending the Long Stop Date to 31st March 2018. The scheme shall come into effect from the date mentioned in the scheme and be notified as required by law. Both appeals were allowed without any order as to costs.

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