TaxTMI 
TaxTMI 
2003 (2) TMI 330
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...., would be the transferor Company and the Kaytee Switchgear Pvt. Ltd. and Best Trading and Agencies Limited, are the transferee companies. For the purpose of brevity, Kirloskar Electric Company Limited is referred to as the 'Company' or (KECL) in this order. 3. The petitioner-Company was incorporated as a Public Limited Company on 26-7-1946 under the Mysore Companies Act at Bangalore having its registered office at industrial Suburb, Rajajinagar, Bangalore-10. The authorised share capital of the Company is Rs. 700,000,000 (Rupees Seven Hundred Million) divided into 40,000,000 (Forty Million) Equity shares of Rs. 10.00 each and 3,000,000 (three Million) preference shares of Rs. 100.00 each. The issued, subscribed and paid-up share capital is Rs. 25,268,817 (twenty five million two hundred and sixty eight thousand eight hundred and seventeen) Equity Shares of Rs. 10.00 each and 1,800,000 (One million eight hundred thousand) Preference Shares of Rs. 100.00 each. 4. The object of the Company is 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, ....
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....rm viability under given economic and industry scenario, achieve positive net worth situation as early as possible and keep options open for future possibilities of Joint Venture with Strategic Partners. Therefore, a detailed technical feasibility report for relocation and consolidation of manufacturing facilities has been made by the technical team of the petitioner-Company. 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 term lenders has obtained report from an independent technical consultant, who has confirmed the feasibility and rationale of relocation as proposed in the scheme. Therefore, they have formulated a scheme of arrangement between the petitioner-company and its members and creditors which is produced at Annexure-B. 7. In terms of the scheme, with a view to consolidate the production facility, to reduce overheads and to unlock the real asset v....
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....ty identified for this purpose. The other entities which are relevant is as under : (i)"KEC-1" means the "Rotating Machine Group" or Kaytee Switchgear Private Limited (KSPL) (ii)"Residual KEC" means the Company remaining after transfer of assets and liabilities to KEC-1 and SPV and (iii)"New Location" means the new location for shifting of the existing plant at Unit-1 and Unit-3 as may be deemed fit by the management. 9. With effect from the appointed date, KECL will be de-merged/hived off into three entities so as to achieve the objectives of restructuring : (a)Special Purpose Vehicle (SPV) to leverage Non-manufacturing Surplus Assets and real estate. (b)KEC-1: (Hubli, New Location near Bangalore, Tumkur, Spares Division and REG in existing locations) called the Rotating Machine Group. (c)Residual KEC : Unit 4 (Electronics,) Unit 5 (Transformer), unit 10 (Switchgear), and PSG. (i)Special Purpose Vehicle (SPV) SPV will be carved out of KECL to comprise of surplus non-manufacturing and liquid assets such as real estate at Bangalore (other than a part of the land retained in residual KECL), Peenya, Pune and surplus machinery and group company advances an....
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....an outstandings at any point of time in SPV. The sale proceeds shall be appropriated first to meet cost of VRS, cost of shifting operations from the existing locations, etc. The amount remaining thereafter shall be utilized for payment to lenders in SPV proportionately. No rent or other charges shall be payable to SPV by KECL or RMG from the appointed date to the date of vacation of the Malleswaram property. KECL and RMG shall vacate the premises within 9 (nine) months from the date of receipt of Rs. 2,696 lakhs from SPV towards the cost of shifting and voluntary retirement expenses. (ii)KEC-1 (RMG) KEC-1 will be Rotating Machine Group (RMG) with a business valuation of Rs. 19,000 lakhs on the basis of Discounted Cash Flow (DCF) method. The fixed assets of RMG together with current assets and current liabilities will be transferred to Kaytee Switchgear Private Limited. This Company will be assigned liabilities of Rs. 19,000 lakhs as under :- Particulars Rs. in lakhs Equity to KECL 5,292 Equity to lenders of KEC (in lieu of) Conversion of KECL (liabilities) 1,308 Net worth 6,600 Assignment (Transfer) of Liabilities of KECL to Rmg ....
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....es, workers' dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location, etc., is involved. This requirement of funds has to be met out of the sale proceeds of the land, as no financial institution/Bank is willing to advance fresh funds for payment towards such expenditure. The Company intends to sell a part of the land measuring about 31000 square metres at the Bangalore main plant to a party with whom an agreement has been entered into for a sale price of approximately Rs. 2000 lakhs. The sale proceeds are to be utilised to meet certain expenditure such as payments towards statutory dues, workers' dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location etc. The details of the asset (part of the Malleswaram land) retained in Residual KEC and amount of liabilities assigned are given below : Liabilities Assets Existing Liabilities Rs. in Lakhs Sale price for Rs. in Lakhs CST, Sales Tax, Entry Tax etc. 302 part of Bangalore Complex land 2000 ....
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....tended either personally or by proxy by 910 equity sharesholders of the company entitled together to 1,42,25,793 equity shares of Rs. 10.00 aggregating to Rs. 14,22,57,930.00. The scheme was approved by a majority of 1,42,22,428 votes against 424 votes. 13. The preference shares issued by the company are held by one share- holder only viz., IDBI Limited. No meeting as such was convened to ascertain their view. Instead by a letter dated 18-4-2002 they were requested to convey their approval or otherwise of the proposed scheme. In reply thereto by their letter dated 26-7-2002 they stated that in principle agreement to the company's demerger proposal is accepted by them subject to the modification of the scheme or additional conditions, if any, as may be stipulated by them in the ensuing High Court hearing. However, they have not suggested any modification or additional condition to be stipulated in the scheme. Thus, all the legal formalities have been complied with by the petitioner-company. 14. It is also pertinent to point out the petitioner-company being a sick company, a reference has been made under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1....
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....31-10-2002 this Court granted the permission sought for and directed the meetings of the shareholders and creditors to be held on 1st of December, 2002. Accordingly, notices were issued to the shareholders and meeting was held on 1st of December, 2002. The said meeting was attended by two equity shareholders of the said Company entitled together to 200 shares of the value of Rs. 2000.00 and the scheme of arrangement was unanimously approved. The Chairman of the meeting has filed his report. Thereafter, they have filed COP 270/2002 seeking sanctioning of the scheme. 18. The transferee Company No. 2 - Best Trading and Agencies Limited was incorporated on 2-5-1988 in Delhi, as Best Credits Private Limited, under the provisions of the Companies Act, 1956. Subsequently, vide a fresh certificate consequent on change of name dated 18-6-1999, it was incorporated as Best Trading and Agencies Ltd. at Bangalore having its registered office at Industrial Suburb Rajajinagar, Bangalore. The main object of the said Company is to carry on the business of agency of all kinds and to act as traders, dealers, importers, exporters, merchants, wholesalers, retailers, stockists, distributors and other....
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.... permitted user of the trade mark "Kirloskar" under an agreement which has been terminated on 24-1-2001 which termination has been accepted by the said Company. Therefore, they have no right to transfer the said name or trade mark or the benefits of the permitted user agreement to Kaytee Switchgear Private Limited. Not only the same is opposed to the provisions of the Trade and Merchandise Act but also the said property do not belong to them as it belongs to the Kirloskar Proprietary Limited. If the scheme as propounded by the Company is approved it would mean that this Court has granted permission for such transfer which is prohibited by law and it would also affect their interest and therefore they want Clause (2) in para 3 of the scheme to be deleted. 23. A reply was filed to the said objections by the KECL contending that the said dispute is of a civil nature, it cannot be decided in these proceedings. They contend the word "Kirloskar" and the trade mark "Kirloskar" belongs to them exclusively. The objectors right to take action against the company on the ground of alleged violation also remains unaffected and therefore they have prayed for rejection of the said objections. ....
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....employees of the Kirloskar Electric Company Employees Association have filed an affidavit stating that the employees have no objection of or sanction of the scheme. All that has been said in the affidavit is that the management has mutually agreed with the Union that Voluntary Retirement Scheme will not be forced on the workmen. 28. The order passed by the BIFR in case No. 320/2002 of M/s. Kirloskar Electric Company Limited is also placed on record. It discloses that M/s. Kirloskar Electric Company Limited has been declared as a sick industrial company in terms of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. They have further observed that the Company could make the net worth exceed the accumulated losses within a reasonable period on their own as per the rehabilitation package to be formulated and submitted by them under section 17(2) of the Act. Further a direction was issued to the Company to discuss the rehabilitation package with all secured creditors and other concerned parties and reach an agreement on the reliefs and concessions envisaged from them. A direction was issued to the company not to dispose of any fixed asset or current asse....
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.... Bank of Travancore is concerned, he submitted, the Bank had only second charge on the property. Now, under the scheme, they would get a first charge on the property and to this effect an agreement has been entered into between all the secured creditors creating a pari passu charge on the property and therefore the apprehension expressed by the Bank is wholly misconceived. Therefore, he submitted, as all the legal requirements have been complied with and the scheme do not contravene any law and it is made with bona fide intention and good faith and the shareholders, creditors and the workman have given their consent for sanction of the scheme, there is no impediment for sanction of the scheme. 30. Per contra, Smt. Madumita Bagachi, learned Additional Central Government Standing Counsel, submitted if the total number of votes cast in the secured creditors meeting is taken into consideration, the scheme is not approved by three-fourths majority of creditors present and voting, and therefore, there is non-compliance of section 391(2) of the Act. Secondly, she contended, admittedly, no meeting is convened of the preference shareholders, as such, the legal requirement contemplated un....
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....ation of the scheme suggested by the secured creditor ICICI is reasonable ? (v)whether sanctioning of the scheme resulting is sale of portion of the property at Bangalore would substantially dilute the security offered to State Bank of Travancore ? (vi)whether the scheme requires to be sanctioned with or without modification ?" 35. Before I deal with the aforesaid points for determination, it is necessary to keep in view the limited scope of the jurisdiction of the Company Court which is called upon to sanction the scheme of amalgamation as per the provisions of section 391 read with section 393 of the Act. The aforesaid provisions of the Act provides that compromise or arrangement can be proposed between a Company and its creditors or any class of them, or between a Company and its members or any class of them. When a scheme is put forward by a Company for the sanction of the Court, in the first instance the Court has to direct holding of meetings of creditors or class of creditors, or members or class of members who are concerned with such a scheme. Once the majority in number representing three-fourths in value of the creditors or class of creditors or members or class ....
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....diction like an Appellate Authority to minutely scrutinise the scheme and arrive at an independent conclusion whether the scheme should be sanctioned or not when the creditors and members have approved the scheme as required by section 391(2). The Court has to keep in view the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority. The Court certainly would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the Company who have ratified the scheme by the requisite majority. To that extent the jurisdiction of the Company Court is peripheral and supervisory and not appellate. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of section 392 of the Act. The propriety and the merits of the compromise and arrangement have to be judged by the pa....
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....following broad contours defining the jurisdiction of the Company Court in these matters, which is as hereunder : "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 meetings 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, 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 and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all 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 proviso to sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanctio....
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....8 in number and their value is 2533643491. Out of 18 present, one abstained from voting. Therefore, it is 17 persons whom were present and have voted. The value of the one secured creditor who was present and who did not vote is 309821941. The total value of secured creditors present and voting is 2223821550. There were 2 invalid votes, value of which is 389862275. Therefore, the total number of valid votes cast is 15 and their value is 1833959275. Out of the valid vote cast, 12 voted for the resolution and their value is 1477391975, 3 persons voted against the resolution and their value is 356567300. If the total secured creditors present and voted is taken into consideration and the votes held in favour of the said resolution out of them is taken into consideration, the resolution is passed by 58.31 per cent which is below the three-fourths majority mark. If out of the valid votes cast, votes polled for resolution is taken into consideration, it would be 80.58 per cent well above the three- fourths mark. The number of votes voted against the resolution out of the valid votes is taken into consideration, the value of votes would be 19.44 per cent. 42. In the light of these afor....
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....ideration in calculating the majority is not the number of persons present and voting, but the number of valid votes polled in such meeting. The number of valid votes includes only votes which are indicating the mind of the voter for or against the resolution. 44. Therefore, by "voting", the mind, intention, preference of the voter must be clearly expressed. There should not be any ambiguity and scope for interpretation. It should be clear, unqualified and pointing. In this context, a voter who is not present at the meeting, who is present and not voting, present and voting by casting a blank ballot, and casting a ballot with conditions and stipulations, all stand on the same footing. It is no "voting" in the eye of law. Therefore, in my opinion, the proper construction to be placed in calculating whether any resolution is approved or passed by a three-fourths majority present and voting necessarily mean the value of the valid votes and out of the same whether the resolution has been passed with three-fourths majority. This view of mine is supported by a judgment of the Gujarat High Court in the case of Arvind Mills Ltd. [2002] 111 Comp. Cas. 118 , where it has been held as unde....
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....ification etc. (2)we will not agree for equity participation letter to the company has already been submitted." Insofar as Bank of India is concerned, have also cast their vote for the resolution subject to the modifications suggested by them which was annexed to the ballot paper. There they have suggested 13 modifications to the scheme and it is made clear they are giving consent to the scheme subject to the aforesaid modifications. Therefore, the Chairman of the meeting has rightly treated those two ballots as invalid, because the said two creditors were not expressing their will or opinion in favour of the resolution unconditionally. The said votes are not votes leading either way and therefore they cannot be taken into consideration either for or against the scheme. Therefore, though 17 persons voted in the said meeting, as the 2 votes cast were invalid, in order to determine the majority what is to be taken into consideration is only the value of 15 creditors who voted in the said meeting. The value of such 15 creditors is 1833959275 which is not in dispute 12 out of the 15 creditors voted for the scheme and the value of those creditors is 1477391975. The value of the 3 ....
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.... of the Companies Act. As such, there is compliance with the said statutory requirement also. 47. Regarding Point No. (ii) : The second objection raised was that no meeting of the preference shareholders are convened to consider the scheme and there is no resolution passed approving the said scheme and therefore the requirement of section 391(1) of the Companies Act is not complied with. As such, the Court cannot accord sanction to the scheme. 48. Therefore, the question for consideration is : convening of a meeting of the members and creditors of the Company, or any class of them, to consider and approve the same is mandatory? 49. The meeting contemplated under section 391 is analogous to an extra-ordinary general meeting of the Company inasmuch as three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders where it is unanimous or by a three-fourth majority, must be obtained in a meeting summoned on the orders of the Court under section 391. This is in accordance with the general principals that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the c....
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....ly small and if they give their consent to such a scheme in writing, there is no necessity in law to convene the meeting of such class of shareholders or creditors. The said consent letter or approval given can be acted upon and is sufficient to show that they have approved the scheme. 50. In this context, in the facts of the case, it is not in dispute the entire preference shares in the Company is held by Industrial Development Bank of India. By a letter dated 18th April, 2002, the Company brought to the notice of the IDBI the aforesaid scheme and further informed that as they are the only preference shareholder, no separate meeting of preference shareholders has been convened and therefore IDBI was requested to convey their approval or otherwise to the proposed scheme. Along with the said letter, a copy of the scheme was also sent for reference. Acknowledging the said letter, IDBI wrote on 26th July, 2002. The said letter reads as under : "Proposal for demerger - Please refer to your request for IDBI's approval for the company's proposed demerger scheme filed before the High Court of Karnataka. IDBI's in principle agreement to the company's demerger proposal may be conve....
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....itchgear Pvt. Ltd. or to any other person. It is also stated by them that even if the scheme is approved by the Court, the said scheme or any clause thereof, cannot effect KPL's paramount statutory and common law rights. Therefore, they submitted that if the scheme is to be approved by the Court, the aforesaid objectionable part of the scheme is to be deleted. 52. The Company has filed its objections contending that the contentions raised by KPL do not in any way require to be heard in this petition, as the issue of Company's right of use of the trade mark "Kirloskar" does not alter the corporate entity of the Company which remains intact irrespective of the name and style under which it carries on its business, nor does it effect the proposed scheme of arrangement. As the Company's identity as a corporate entity remains unaffected even after the scheme, the KPL's right to take action against the Company on the ground of alleged violation also remains unaffected. They have also contended that the KPL does not manufacture any goods and in fact those trade marks originally belong to the Company who in turn assigned in favour of the KPL for the benefit of the group. The said assign....
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....are objecting to transfer of those rights to KSPL, then, the Court has to go into the question whether it is against any law. The Company has denied the right of KPL, as claimed by them. On the contrary, they contend that this brands and trade marks belong to them, they are using it for the last 50 years, it is they who have assigned it in favour of KPL, without consideration for the benefit of the group, and therefore, KPL has no right to the same. In view of these disputed facts, in a proceeding under section 391 of the Act, this Court cannot hold enquiry and go into the question who is entitled to the ownership of these brands, names and trade marks. It is totally outside the purview of section 391. However, any sanction to be accorded by this Court to the scheme cannot be construed as taking away the right of KPL, if they have any. Therefore, to that extent, the interest of KPL has to be protected. Therefore, it is made clear that this order of sanctioning the scheme by this Court would in no way effect the rights/interests of KPL to the brand name, trade mark or user agreement of theirs. It is always open to them to initiate appropriate legal proceedings either in the Civil Co....
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....ting the ICICI Bank Limited to hold up to 19 per cent of the share holding in the SPV by themselves and by permitting ICICI Bank Limited to nominate such person or persons as they may deem appropriate for the allotment and for holding the remaining shares in the SPV such that their shareholding and their nominee put together does not exceed 56 per cent of the shareholdings to which ICICI Bank Limited is entitled under the scheme. The Company has no objection for the proposed modification by the secured creditor. Accordingly, the scheme stands modified enabling the ICICI Bank Limited to hold 19 per cent of the shareholding in the SPV by themselves and in their names and further to nominate such person or persons, as they may deem fit, to hold the shareholding in the SPV, such that their shareholding put together does not exceed 56 per cent of the shareholdings to which they are entitled under the scheme. To this extent, the terms of the scheme stands modified. 56. Regarding Point No. (v ) : The State Bank of Travancore opposing the scheme contends that the Company is due in a sum of Rs. 1,030.98 lakhs and the same has been treated as a Non Performing Assets; the Company is hea....
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....me envisages repayment of 312 lakhs immediately after the sale of land at Bangalore. In so far the balance amount is concerned, 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. Thus, the interest of the Bank is completely taken care of. If the Company is wound up, the Bank being a second charge holder, is not sure of getting back its full money having regard to the extent of liability of the Company. Moreover, the time to be consumed for such payment is unpredictable. Insofar as their objection regarding shifting of the unit and objection to the sale of the Bangalore property is concerned, they cannot have any say in this matter. The proprietary and the merits of the compromise or arrangement have to be judged by the parties who as sub juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot therefore undertake the exercise of scrut....
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....ications suggested by ICICI Bank has not been opposed by the Companies, as such, the scheme stands modified to the extent of the modifications suggested by ICICI Bank. The interest of the secured creditor, namely, the State Bank of Travancore is fully taken care of by making a provision for the repayment of the loan to the extent of Rs. 312 lakhs and providing sufficient security for the remaining 555 lakhs and other amounts due to them from the Company. It is also to be taken note of here that the matter is before the BIFR. The Board is unable to rehabilitate this Company. It is in that context, at their suggestion, the Company has come forward with the scheme to rehabilitate and restructure the Company to the satisfaction of all the members, creditors and workforce. The only alternative for the scheme is winding up of the Company, in which event, neither the creditors nor the members nor the workmen would be benefited. 60. Broadly speaking, the scheme contemplates that the value of the large real estate assets belongs to the Company, the land and building in Malleswaram at Bangalore will have to be unlocked upon implementation of operational restructuring. The real estate valu....
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....hich event shareholders interest is completely ruined. On the contrary, if the scheme is worked out, they stand to gain, the Company will be fully functioning and their interest is protected, and, therefore, they cannot have any grievance whatsoever. In fact, the shareholders and creditors of the transferee companies have unanimously approved the scheme. 61. Therefore, taking into consideration all circumstances of the case, an opportunity is to be given to the Company to restructure the Company as suggested in the scheme which would be beneficial for one and all. As a whole, the scheme is just, fair and reasonable. It is not open to this court to undertake the exercise of scrutinizing the scheme with a view to find out whether a better scheme could have been adopted by the parties. When the creditors and members of the Company, who in their best commercial and economic interest by a majority agree and approve the scheme, the discretion of this court is to be exercised in approving such a scheme. Under these circumstances, I am satisfied that the scheme is fair, just, bona fide, honest and it takes into consideration the interest of the members, the creditors, the workmen and th....