TaxTMI 
TaxTMI 
2002 (1) TMI 1223
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....tal is Rs. 27.16 crores. 2.2 The company issued redeemable non-convertible debentures in 'E' and 'F' series in the following three categories:- (a)Cumulative Debentures of Rs. 5200 each (b)Monthly Income Debentures of Rs. 3500 each (c)Regular Return Debentures of Rs. 2500 each. The total face value of all the debentures in Series 'E' and 'F' taken together was Rs. 69 crores. All the debentures were issued on 8-8-1996 and were to mature after a period of five years, i.e., on 8-8-2001. 2.3 The maturity value of the cumulative debentures was to be Rs. 12,000 each on 8-8-2001. A majority of debentures, which are the subject-matter of this petition are Cumulative debentures of Rs. 5,200 each and accordingly the discussion will centre around on the maturity value of such Cumulative debentures. As far as the other categories of debentures are concerned, i.e., Monthly Income debentures and Regular Return debentures, they have already been paid the interest accrued on the debentures as per the Debenture Deed and in their case the maturity amount on the face of it is the maturity amount of the principal debenture amount but the learned counsel for the petitioner points out ....
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....irmanship of Mr. Justice BJ Diwan (Retd.). 3.2 The notices of the meetings were advertised, as directed by the order of this Court, in 'The Times of India' and 'Sandesh', Ahmedabad editions on 24-7-2001. The learned counsel for the petitioner further adds that it was also published in 'Gujarat Samachar'. The meetings were accordingly held on 18-8-2001 under the Chairmanship of Mr. Justice BJ Diwan (Retd.). The learned Chairman submitted his report. The report was produced before this Court in Company Application No. 188 of 2001 along with an affidavit dated 28-8-2001. 3.3 The number of Debenture holders who were present in person or through proxy in the various categories and those who voted in favour of the Resolution approving the scheme of compromise and those who voted against, with the percentage are set out in a chart hereinbelow (after excluding conditional votes and invalid votes; the particulars of which are already contained in the Chairman's report - the total number of abstentions, invalid votes and conditional votes being comparatively insignificant 87, 5 and 2 for Groups 'a', 'b' and 'c' respectively). (a)Result of the voting at the meeting of Cumulative Debe....
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.... compromise to be paid to Debenture holders in 'E' and 'F' series from 55 per cent to 70 per cent of the outstanding dues as proposed in the scheme of arrangement. It is specifically stated in the said affidavit that the said amount of Rs. 11 crores shall be utilised only for repaying the 'E' and 'F' series debenture holders for which an appropriate escrow mechanism would be worked out and further that the amount agreed to be given is subject to sanction of the scheme by this Court and shall be paid within 30 days of the effective date under the scheme. It is further stated that the amount would be given by way of 0 per cent unsecured debentures or an instrument of a like nature to GLFL and would be repayable only after settling the liabilities of its other secured and unsecured creditors. In other words, GLFL proposes to pay 55 per cent of the maturity amount to the Debenture holders in 'E' and 'F' series from out of its own fund and the remaining 15 per cent amount is to be paid from the funds to be made available by Torrent (P.) Ltd. specifically for the purpose of paying the same to the debenture holders in 'E' and 'F' series and subject to the sanction of the scheme by this....
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....ues, there was no justification for the company agreeing to pay 70 per cent to the debenture holders in Series 'E' and 'F' when the Banks have a better claim over the properties of the company as holding first charge as against the debenture holders who are having only the second charge. A detailed reference to the objections made by the Banks will be made hereinafter. Of course, Mr. Soparkar for the company has also raised a preliminary objection against the locus standi of the Banks. That will also be discussed hereinafter. 8. For the present reference is made to the objections raised by the Banks only with a view to pointing out that the factum of objections raised by the Banks (and not their validity) is one of the factors which is required to be taken into consideration while taking the final decision for granting or not granting sanction to the scheme of compromise and Arrangement as proposed by the company and which has been approved by the overwhelming majority of the debenture holders who remained present and voted at the meeting held on 18-8-2001. COMPANY'S REPLY TO DEBENTURE HOLDERS 9.0 On the other hand Mr. Soparkar learned counsel for the company has made t....
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....erged : 1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meeting as contemplated by section 391(1)(a) have been held. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391 of sub-section (2). 3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just fair to the class as whole so as to legitimately bind even the dissenting members of that class. 4.That all the necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391, sub-section (1). 5. That all the requisite material contemplated by the provision of sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of com....
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....r the company that when the notice for the meeting along with the explanatory statement was sent on 18-7-2001, no proceedings were pending before the Debts Recovery Tribunal and the suit by one of the Banks was instituted only on 18-8-2001 and, therefore, no fault can be found with the company for not referring to the DRT proceedings in the explanatory statement. 12.2 As far as the pendency of the winding up petition before this Court is concerned, there is no dispute regarding the fact that one winding up petition was pending when the explanatory statement was sent on 18-7-2001. It is, however, the submission of the learned counsel for the company that the company did not intend to coerce the debenture holders into accepting the scheme proposed for compromise and arrangement by making a reference to the winding up petition but the company was keen to persuade the debenture holders that payment of 70 per cent of the maturity amount was best that the company was giving under the circumstances having regard to the depressed market conditions and the performance of other non-banking finance companies. 12.3 Without intending to lay down any general principle or making any general....
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....t would not like to interfere with their wisdom. Contention No. 4 : A small percentage of debenture holders present at the meeting 14. Mr. Desai thereupon submitted that when hardly 8 to 10 per cent of the debenture holders were present at the meeting, their views cannot be taken as the view of the entire body of debenture holders. Under the existing law as contained in section 174(1) of the Act and a similar provision in article 103(a) of the articles of association of the GLFL stipulating that five members personally present shall be the quorum, the grievance, though not frivolous, cannot be accepted. The quorum is fixed in terms of the number of persons, and not in terms of the percentage of the number of members or creditors. The concern about lack of participation of shareholders in management of the company or examination of the need for affirmative vote by a minimum percentage of affected members of a class are larger issues which do not merit any further discussion in the facts of the present case and must await debate in a more appropriate case. For the reasons being presently recorded in the facts of this case, the Court is of the view that looking to the circums....
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....s, i.e., Torrent (P.) Ltd. came out with an offer to contribute Rs. 11 crores so as to raise the maturity amount from 55 per cent to 70 per cent, even in teeth of the opposition which was likely to come from the Banks which were assured only 55 per cent payment by 31-3-2002. It is submitted that in view of the depressed market conditions and in view of the performance of the other non-banking finance companies, the details of which are given in a separate list of NBFCs having defaulted in payment, the offer made by the GLFL should be examined in this background and also in light of the challenge being made by the Banks to the offer of 70 per cent payment to the debenture holders. 17. Having heard the learned counsel for the parties, the Court is of the view that while the suggestion of Mr. Desai for the debenture holders cannot be said to be unreasonable, in view of the fact that performance of other NBFCs is hardly enviable, that even for raising the maturity amount from 55 per cent to 70 per cent, the company has to borrow funds from another company in its group and more particularly in view of the stand being adopted by the Banks (who did not oppose the payment of Rs. 157 cro....
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....he explanatory statement to the debenture holders which was sent along with the notice for convening the meeting on 18-8-2001. 18.4 When the Banks are being paid only 55 per cent of their dues, the company cannot offer a higher maturity amount to the debenture holders to the extent of 70 per cent. Earlier the Banks had agreed to accept 55 per cent from 31-3-2002 only because the debenture holders were also to be paid 55 per cent of the maturity amount. 18.5 The company's case that 15 per cent additional maturity amount is to be paid to the debenture holders from borrowings from a group company does not alter the fact that the entire maturity amount is going to be paid by the company itself. The source of funds has no bearing on the question involved. COMPANY'S REPLY TO BANKS 19. On the other hand, Mr. Soparkar the learned counsel for the company has raised the preliminary objection that the scheme of compromise having been offered only to the debenture holders in Series 'E' and 'F', it is for them alone to raise any objection to the scheme and the Banks have nothing to do with the scheme and, therefore they have no right to object to the scheme offered to the debenture ....
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....arge over the funds being made available by the company such as refund from the Income-tax Department. LOCUS STANDI OF BANKS 20. Having heard the learned counsel for the parties, it appears to the Court that there is considerable substance in the submission made by the learned counsel for the company that when the scheme of compromise offered to the debenture holders in 'E' and 'F' series does not even purport to affect the rights of the Banks, the Banks have no right to oppose the scheme of compromise between the company and the debenture holders in 'E' and 'F' series. 21. Section 391(1) provides that where a compromise or arrangement is proposed between a company and its creditors or any class of them, the Court may on the application of the company or of any creditor order a meeting of the creditors or class of creditors, to be called, held and conducted in such manner as the Court directs. It further provides that if a majority in number representing three-fourths in value of the creditors or class of creditors, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, such compromise or arrangement, if sanctioned by the Co....
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....re (supra ), this Court has laid down the following principles:- "When the judge's summons is taken out for seeking directions for convening meetings a duty is cast on the company to put proper materials before the Court so that the Court may give proper directions for separate meetings of different classes of creditors and members. If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members is not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in [1934] Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed. It is always a moot question what constitutes a class. Buckley on the Companies Acts, 13th edition, page 406, has observed that it is a formidable ....
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....ey are not considered to be secured creditors but because none of their legal rights are required to be waived by the Banks and, therefore, their interests are not affected by the scheme whereas the debenture holders in 'E' and 'F' series are required to give up their rights over 30 per cent of the maturity amount. Hence the very fact that the debenture holders of 'E' and 'F' series are offered only 70 per cent of the maturity amount makes them a different class by itself. This Court has also recognised that if there are different groups within a class the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. It is, thus, clear that the debenture holders in 'E' and 'F' series who are required to give up their claim over 30 per cent of the maturity amount constitute a separate class and when the company does not require any waiver of rights by the Banks, there is no question of offering any scheme of compromise to the Banks. The fact that the Banks and the company agreed that the company will pay 55 per cent of the Banks' dues by 31-3-2002 and that....
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....ed above. The only reason why the Court has not accepted the submission of Mr. Desai for the debenture holders for making an endeavour for increasing the maturity amount above 70 per cent is the intransigent stand being adopted by the Banks for objecting to any amount being available to the debenture holders beyond 55 per cent, as the GLFL is hopeful of persuading the Banks to take a more reasonable stand by making some more funds available to the Banks instead of raising the funds proposed to be paid to the debenture holders in 'E' and 'F' series. BANKS' OBJECTIONS NO. 5 28. The contention urged on behalf of the Banks that source of funds is not relevant, cannot be accepted. The Banks do not and cannot have any charge over the contributions from another company of the promoter group or over the refund amount received from the Income-tax Department, even if the refund pertains to the year/s prior to the year in which the debentures in question were issued. STAND OF THE CENTRAL GOVERNMENT 29. As far as the Central Government is concerned, Ms. Parinda J Davawala, the learned Additional Standing Counsel for the Central Government has produced on the record of these proceed....
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....ders in 'E' and 'F' series, as already stated in the affidavit dated 14-12-2001 and that appropriate clarification may be issued by this Court so that the borrowings to be made by the company with good intention of paying the amounts to the debenture holders in 'E' and 'F' series may not be construed as a violation of the directives of the Reserve Bank of India. 32. It is obvious that in view of the financial condition of the company, the Reserve Bank had restrained the company from accepting any further public deposits. However, the amount of Rs. 11 crores or any higher amount being borrowed by the company is not from the public at large, but its own promoter group which has agreed for the aforesaid lending for the purpose of increasing payment of maturity amount to the debenture holders in 'E' and 'F' series from 55 per cent to 70 per cent. Hence, the borrowing by the company from its promoter group for payment of maturity amount and interest to the debenture holders would not amount to acceptance of any public deposit prohibited by the Reserve Bank of India's directive dated 28-8-2000. 33. Mr. Soparkar further points out that under the interim orders dated 12-7-2001, the c....