TaxTMI 
TaxTMI 
2002 (10) TMI 429
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....illion) divided into 40,000,000 (Forty Million) equity shares of Rs. 10 each and 3,000,000 (Three Million) preference shares of Rs. 100 each. The issued, subscribed and paid-up share capital is 25,268,817 (Twenty-five Million Two Hundred and Sixty-eight Thousand Eight Hundred and Seventeen) equity shares of Rs. 10 each and 1,800,000 (One Million Eight Hundred Thousand) preference shares of Rs. 100 each. The main object for which the company was incorporated was to manufacture electric apparatus and appliances required for or capable of being used in connection with the generation, distribution, supply, accumulation and employment of electricity, produce a wide range of electrical motors, alternators, traction equipment, rotating machines, transformers, switch gears, voltage regulators, industrial electronics, automotive controls, etc. 3. The petitioner-company has explained the reasons, which necessitated the formation of the scheme and also the benefits under the scheme to the company, to its shareholders and creditors. They are : (a)The petitioner-company has a dominant market position in large and medium sized rotating machines and traction equipments and over the years it....
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....irloskar, as Chairman to preside over the meetings. The Court had further directed the petitioner-company to advertise the company petition in one edition of 'Times of India' newspaper and one edition of 'Prajavani' newspaper, inviting objections, if any, from the persons, who would be affected by the proposed scheme of arrangement. Before the meetings were convened, the Chairman had issued notices of the meetings individually to the secured creditors, unsecured creditors including fixed deposit holders and equity shareholders of the company and had annexed to the notice the whole scheme as proposed by the petitioner-company and explana-tory statement as required under section 393 of the Companies Act. 6. The report submitted by the Chairman appointed by this Court to hold the meetings gives a picture of what transpired at each meeting. 6A. The meeting of equity shareholders was held at 3.00 p.m. on 26th April, 2002 at the registered office of the company situate at Industrial Suburb, Rajajinagar, Bangalore. This meeting was attended by 910 equity shareholders either personally or by proxy. Their aggregate holding is 1,42,25,993 equity shares of Rs. 10 each aggregating to Rs.....
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....a voted for the scheme subject to certain conditions. Their approval being condition, their votes have been held invalid. All other Secured Creditors approving the scheme have voted for the scheme of arrangement unconditionally. During the meeting, some of the secured creditors had given letters requiring the company to comply with creation conditions, to which the Chairman specifically informed them that the conditions were administrative in nature and did not relate to modification of the Scheme being considered and that they have to take decision in the matter of approval unconditionally." 6D. The meeting of the unsecured creditors and creditors was held at 11.30 a.m. on 26th April, 2002. The meeting was attended either personally or by a proxy by 401 unsecured creditors of the company and the total value of their debt is Rs. 25,29,76,149.07 ps. The scheme of arrangement proposed between the petitioner-company and its members and creditors have been approved in the meeting by a majority of votes of 24,91,52,868.10 votes against 38,23,380.97 votes. 6E. The next important equity shareholder and the secured creditor of the company is IDBI Limited. The preference shares issued....
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....tioner-company. 9. Along with the company petition, the petitioner-company has also filed an application under Rule 9 of the Companies (Court) Rules, 1959, inter alia seeking the permission of this Court to sell a part of its immovable asset as provided in the scheme of arrangement for the reasons stated in the affidavit filed along with the application. However, the prayer so made was not seriously pressed by the applicant-company before this Court. When the main petition was posted before this court on 5-6-2002, the Court was pleased to issue notice of the petition on the Regional Director, Department of Company Affairs, and also had directed the petitioner- company to take out notice of the company petition in one edition of 'Times of India' newspaper and in one edition of 'Prajavani' newspaper, fixing the date of hearing as 11-7-2002. 10. The directions issued by this Court have been faithfully carried out by the petitioner-company. In response to the notice issued, the Regional Director, Department of Company Affairs, Chennai, has filed his objections opposing the proposed scheme of arrangement between the petitioner-company and its members and creditors. I will refer to....
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....nt as to how it would be binding on all these entities. 12. In response to the representation so filed by the Regional Director, M/s. Best Trading Agencies and M/s. Kaytee Switch Gear Private Limited, who are infact the transferee-companies under the proposed scheme of arrangement have filed applications under Rule 9 of the Companies (Court) Rules, 1959, inter alia seeking permission of this Court to come on record in these proceedings and to dispense with the meetings of the shareholders and creditors of the applicant-companies and further to proceed to consider the plea for sanction of the scheme of the petitioner- company, on the basis that the applicants will be bound by the terms of the scheme insofar as it applies to the applicants. 13. The next unsecured creditor, who is claiming unpaid licence fee is Kirloskar Proprietary Limited. This proprietary concern contends that it had authorised under an agreement to the petitioner-company for the user of its trade marks 'Kirloskar' in the corporate name of the petitioner- company as also on its stationery and the said agreement has been terminated by their letter dated 24-1-2001, and therefore petitioner- company cannot inclu....
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....at the existing locations. Under the Scheme, the Bank is given first pari passu charge for Rs. 555 lakhs on the fixed assets and a second pari passu charge on current assets and for the balance amount, it will have a first pari passu charge on the current assets and a second pari passu charge on fixed assets. Since Debt Servicing Capital Ratio (DSCR) is at acceptable level and RMG and residual KECL both are profitable companies, account of the bank will not be a Non-Performing Asset (NPA). It is also submitted that the petitioner has not sought for any higher non-fund based facility than the sanctioned existing limits. Thus viewed in any way, the Bank's interests remain unaffected and are in fact better protected and there is no legally justifiable reason for the Bank to object to the Scheme." 15. ICICI Bank Limited, the single largest creditor of petitioner-company has filed an application accompanied by an affidavit under section 391(1)(b) of the Companies Act, with a request to modify the scheme by enabling the applicant to hold up to 19 per cent of the shareholding in the SPV by themselves and in their name and further to nominate such person or persons as the applicant may ....
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....of rehabilitation needs and to leverage the internal assets of the company to the extent possible. (iv)The detailed technical feasibility report for relocation and consolidation of manufacturing facilities has been made by technical team of KECL. The manufacturing unit for large motors/generators (part of Unit-1) and DC machines and Traction equipment (Unit-3) will be consolidated at a new location to derive advantages of sharing of common facilities, minimizing material flow, higher productivity and reduction of employee costs. In this connection, ICICI (lead Institution) at the request of consortium of Banks and terms lenders has obtained report from an independent technical consultant, who has confirmed the feasibility and rationale of relocation as proposed in the Scheme. The abovesaid consolidation of manufacturing facilities will also enable elimination of duplication of certain machine shops. The company would also derive the advantage of cost reduction by outsourcing some of the components and services at lower costs. The surplus machinery as a result of the consolidation will be sold through a Special Purpose Vehicle. Accordingly, with a view to consolidating the produc....
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....ocations. The 'Special Purpose Vehicle' (SPV) means an entity to which the non-manufacturing surplus assets and real estate of KECL will be transferred for liquidating/repayment of secured creditors liabilities and statutory and other dues of KECL. Best Trading and Agencies Limited (BTAL) a subsidiary company of KECL incorporated under the Companies Act, 1956, is the entity identified for the purpose. In part III of the Scheme, it is stated : "2. It has been mutually agreed between the Company and KSPL (RMG) that all the brand/s/trade mark/s, the registered trade mark/s and benefits of permitted user agreements of KECL shall be available to KSPL for manufacture of products being currently manufactured by the Company so long as KECL holds not less than 51 per cent of the paid-up equity capital of KSPL. The present covenant shall serve as requisite consent for use of the brand name/trade mark without requiring the execution of any further deed or document as to assignment and permitted user of the said brand name/trade mark, subject, however to approval of instant Scheme of Arrangement by the Hon'ble Court. 8. RMG undertakes to engage on and from the effective date all pe....
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....knowing the obvious result of this petition, the learned Counsel has thought it fit to file two separate applications for and on behalf of the transferee-companies under Rule 9 of the Companies (Court) Rules, with a request to dispense with convening of the meetings of the shareholders and creditors of the transferee-companies. In the synopsis of the submissions of the petitioner-company, the learned Counsel for petitioner-company admits, may be with some reservation that there is a requirement under the Act for the transferee-companies to file separate petition as envisaged under sections 391 to 394 of the Act but that legal requirement is satisfied by filing affidavits of shareholders, which confirm the position that the transferee-companies have taken the con- sent, both of the Board of Directors as well as individual shareholders. The submission made in that regard is as under : "(3) Transfer of assets in favour of K.T. Switchgear Private Limited and Best Trading and Agencies Limited: The scheme of restructuring envisages transfer of certain assets and liabilities to these two companies. The objection raised is that these companies are not parties to the petition and that....
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.... shareholders and creditors of the company, it is stated that it does not have any creditors as on 1-10-2002 and in its Board meeting held on 4th March, 2002, it has examined the scheme of arrangement presented by the petitioner-company and the applicant-company, its Directors and share-holders have agreed to accept the terms of the scheme of restructuring and to discharge their obligations in regard to the liabilities imposed upon the applicant-company in terms of the said scheme and any further consent of the company, its Directors and shareholders would indeed be unneces-sary at this stage as the said legal requirement is fulfilled in spirit and therefore they request this Court to dispense with the convening of the meetings of the shareholders of the applicant company for the purpose of approving the scheme. 23. M/s. Best Trading and Agencies Limited is another transferee company, which was incorporated on 2nd May, 1988 with an authorised capital of Rs. 1 crore. The subscribed capital is Rs. 1,000 divided into 100 equity shares of Rs. 10 each and the same is held by the shareholders namely, Kirloskar Electric Company Limited, which is the petitioner company, Sri Vijaya R. Ki....
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.... same is as under: "Neither "reconstruction" nor "amalgamation" has a precise legal meaning. Where an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is a reconstruction. It is nonetheless a reconstruction because all the assets do not pass to the new company, or all the shareholders of the transferor company are not shareholders in the transferee company, or the liabilities of the transferor company are not taken over by the transferee company". The arrangement now proposed does all the giving. To arrive at this conclusion, I have carefully analysed the scheme and it is only for that purpose, I have reproduced in extenso some material clauses in the scheme of arrangement. An analysis of the scheme of arrangement would definitely demonstrate that under the scheme, the assets and liabilities of the transferor company will be transferred to M/s. Kaytee Switch Gear Private Limited and M/s. Best Trading and Agencies Limited, without those companies presenting any petition before this Court as requi....
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....gives a wide discretion to the Court, while sanctioning any compromise or scheme of arrangement. Before granting the prayer made in the petition filed under section 391(2) and section 394 of the Act, the Court must be satisfied that the company or any other person by whom the application is made under sub-section (1) has disclosed to the Court by affidavit or otherwise all the material facts relating to the company, the latest financial position of the company, the latest auditors report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like. Section 392 of the Act provides ample powers to the Court to enforce compromise and arrangement. Section 393 of the Act mandates that whenever a meeting of creditors or any class of creditors or of members or any class of members is called under section 391 of the Act by issuing a notice, it should contain statement setting with the terms of the compromise or arrangement and explaining its effect. Section 394 of the Act provides: 1. Where an application is made to the Court under section 391 of the Act for the sanctioning of a compromise or arr....
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....rnment and take into consideration the representation made by the Regional Director before passing any order on the proposed scheme of arrangement or compromise. The object and purpose of introducing the aforesaid mandatory provision has been explained by Madras High Court in the case of Ucal Fuel Systems Ltd., In re [1972] 73 Comp. Cas. 63. "Section 394A of the Act makes it obligatory on the Court to give notice to the Central Government of every application made to it under section 391 or section 394 and to take into consideration the representations made by that Government before passing any order on the proposed scheme of amalgamation. This would enable the Central Government to study the proposal and raise objections thereto as it thinks fit in the light of the facts and information available with it, and also place the Court in possession of certain facts which might not have been disclosed by those who appear before it so that the interests of the investing public at large may be fully taken into account by the Court before passing its order. The powers and functions of the Central Government under this section have been delegated to the Regional Directors who are to exer....