TaxTMI 
TaxTMI 
2007 (4) TMI 376
X X X X Extracts X X X X
X X X X Extracts X X X X
....G, a German Company ('Wilo') under which Wilo agreed to acquire the shareholding of the erstwhile promoters in the petitioner subject to certain compliances including the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1977. Pursuant to the agreement, Wilo acquired 18,87,697 shares of the petitioner. The petitioner has consequently become a subsidiary of Wilo. 2. The audited balance sheet of the petitioner as of 30-6-2006 presents a grim picture. The gross value of the fixed assets was Rs. 54.56 lakhs and after allowing for a depreciation of Rs. 54.50 lakhs, the net block has been valued at Rs. 6,200. The total investments were only Rs. 21,100. Sundry debtors stood at Rs. 77.73 lakhs while cash and Bank balance were to the extent of Rs. 34.10 lakhs. The net current liabilities stood at Rs. 6.94 crores. A total loss of Rs. 10.34 crores was sustained. 3. The Company Petition, contains an averment that the down turn in the business activities of the petitioner resulted in a severe crisis of liquidity causing a mismatch in the position of the assets and liabilities. The circumstances responsible for this position have been spell out in para 8 of the Company Petiti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to be assessed in accordance with the Books of Account of the Company and, where entries in the Books of Account were disupted, the Chairman of the meeting was empowered to determine the value for the purposes of the meeting. Accordingly, notices were despatched to the unsecured creditors and public notices came to be issued as directed by the Court. 7. On 30-12-2006, a meeting of the unsecured creditors took place. 99 unsecured creditors attended and voted at the meeting representing a total debt of the value of Rs. 5,22,28,215. The total value of the debt of unsecured creditors covered by the scheme is Rs. 5,75,68,101. Of 99 ballot papers, 7 representing a debt of the value of Rs. 1,28,61,222 were rejected by the Scrutineer as invalid. Out of the 92 valid ballot papers representing a debt of the value of Rs. 3,93,66,993, 85 ballot papers representing a debt of the value of Rs. 3,68,87,921, constituting 93.70 per cent of the total valid votes cast were in favour of the Scheme. 7 ballot papers representing a debt of the value of Rs. 24,79,072 constituting 6.30 per cent of the total valid votes cast were against the Scheme. The names and details of the objecting creditors before ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al amount due and payable as on the Cut off Date (without interest) in the following manner : 5 per cent of the outstanding principal amount due as on Cut off Date, within six months from the Effective Date or date of exercising the option, whichever is later. 40 per cent of the outstanding principal amount due as on Cut off Date in four annual instalments starting from 1-4-2011. Balance amount (including interest) should be waived off. Option III - The Unsecured Creditors will be paid 100 per cent of the outstanding principal amount due as on Cut off Date, at the end of twelve years from the Effective Date. The interest amount should be waived off." Except for the payments stipulated as aforesaid, each of the unsecured creditors has to waive or write off the balance of the principal, interest, penal interest and other charges whatsoever including interest and penal interest relatable to the period after the cut off date. Payments stipulated in clause 4.1 are to be in full and final settlement of the outstanding dues. 10. One of the unsecured creditors of the Company is Mather and Platt Pumps Ltd. (MPPL). Both the petitioner as a propounder of the scheme and MPPL are subsidia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uct of the Scrutineer in doing so cannot be regarded as bona fide. It was submitted that if the votes which were recorded as invalid were to be counted in computing the votes in favour of and against the scheme, the scheme would have to fail since 3/4th in value of the unsecured creditors would then not be supportive of the scheme. Each of the objections can now be taken up for consideration : (i) Notice 13. On 1-12-2006, the Company Judge issued directions for convening and holding a meeting of the unsecured creditors. Clauses 3 and 4 of the order provided for the issuance of an advertisement in English and Marathi newspapers circulating in Pune and for a notice to be sent at least 21 days before the meeting to the unsecured creditors by a pre-paid letter posted Under Certificate of Posting. The obligation to do so was cast by clause 7 of the directions upon the Chairman of the meeting, namely, the Company Registrar of this Court. 14. Rule 73(2) of the Companies (Court) Rules, 1959 provides that a notice of a meeting to the creditors has to be remitted by post Under Certificate of Posting to the last known address not less than 21 clear days before the date fixed for the meetin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court would grant the relief." (p. 35) The Division Bench held that to hold otherwise would "lead to very unusual results making it difficult for large public Companies to effectively function." 17. In the present case, even on merits, the grievance has been found to lack substance. (ii) Class of Creditors 18. The objection voiced before this Court is that MPPL should have been treated as a separate class among unsecured creditors and the votes cast by the Company should have been counted separately. The submission is founded on the premise that MPPL is a wholly owned subsidiary of Wilo AG, like the petitioner. Hence, it was submitted that the interest of MPPL and the petitioner overlap and it was necessary to count the vote cast by MPPL separately. In support, reliance was placed on an affidavit dated 3-4-2007 of the Company Secretary in reply to the objections in which it has been stated that the scheme was propounded after a detailed exercise was carried out by the petitioner "and after considering support from MPPL to fund (a) temporary mismatch of funds to implement the scheme fully without any delay." Moreover, it was averred in the affidavit that as a result of the inab....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that class whose rights are to be affected that is furnished with an opportunity of giving vent to its views at a meeting of the class. The holding of a meeting of the class must, therefore, be considered in the context of the compromise. The definition of "class" is relatable to the terms of the compromise which affects or modifies the rights of that class. 20. The interpretation which has to be placed on the provisions of sub-section (1) of section 391 is no longer res integra and has been dealt with in several reported cases. The leading judgment of the Supreme Court on the subject is in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 7921. The judgment of the Supreme Court is an authority for the proposition that a separate meeting of a class of members or a class of creditors is required to be convened where a compromise or arrangement is proposed between the Company and that class of members or creditors. Where the same terms of compromise are offered to a class of members or creditors, no separate meeting of a sub-class among them is required. The Supreme Court held as follows : ". . .On the express language of section 391(1) it becomes clear that wher....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned Judge held as follows : "'Class' must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest [vide Sovereign Life Assurance Co. v. Dodd (1892) 2 Q.B. 573 (C.A.)]. Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the majority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even 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 pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of having a separate private right or interest." (p. 467) The Division Bench further held thus : ". . . Amongst unsecured creditors also there can be sub-classes. It was held in the case of Sovereign Life Insurance Co. (supra) that the creditors whose policies had matured and who had crystallised claim would form a different sub-class from the creditors whose policies had not matured and whose claims were not crystallised. Amongst unsecured creditors, some may be preferred like the Government, or the workers who may have a statutory preference over others. It is difficult to enumerate the circumstances under which different creditors, secured or unsecured, would form a separate sub-class. But, the general principle would be the same namely whether the interest of the creditors who claim to belong to a different class are so dissimilar to the interest of the other creditors that it would be impossible for them to sit and consult together and take a common view of their common interest." (p. 468) 22. A recent judgment of the Court of Appeal in Singapore contains a lucid exposition of when it can be held that creditors who are "related parties" can be regarded as constituting a sep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing an independent and unbiased judgment irrespective of the interest of the appellant company was held to be unreal. The Learned Judge held thus: "When the vendors meet to discuss and vote whether or not to accept the offer, it is incongruous that the loudest voice in theory and the most significant vote in practice should come from the wholly owned subsidiary of the purchaser. No one can be both a vendor and a purchaser and, in my judgment for the purpose of the class meetings in the present case, MIT were in the camp of the purchaser. Of course this does not mean that MIT should not have considered at a separate class meeting whether to accept the arrangement. But their considerations will be different from the considerations given to the matter by the other shareholders. Only MIT could say, within limits, that what was good for Hambros must be good for MIT." 24. In the present case it would merit emphasis that MPPL is an unsecured creditor of the petitioner. The scheme as propounded confers no higher rights upon MPPL than those conferred upon other unsecured creditors. In the balance sheet, Wilo AG is disclosed as a related party being the holding Company of the petitioner. O....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rease in liabilities towards MPPL, as reflected in the audited Balance Sheet, was bogus or sham. (iv) Rejection of Ballots 26. The report of the Scrutineer contains reasons for the rejection of certain votes. Now it is common ground before the Court that if the rejection of the ballot filed by AP Genco Ltd. (Sr. No. 5 in Exh. C) is upheld, the resolution would still be carried by the requisite majority even if the other invalid votes were to be treated as votes validly cast against the scheme. The record before the Court shows that the ballot of AP Genco was cast by one Shri Murlidhar. The authorisation in favour of the aforesaid person was signed by the Chief General Manager. Rule 70(2) of the Companies (Court) Rules, 1959 provides as follows : "(2) Where a body corporate which is a member or creditor (including holder of debentures) of a company authorises any person to act as its representative at the meeting of the members or creditors of the company, or of any class of them, as the case may be, a copy of the resolution of the Board of Directors or other governing body of such body corporate authorising such person to act as its representative at the meeting and certified to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....crutineer, it is not possible for the Court to accede to the submission of the objectors that the rejection of the ballots was lacking in bona fides and that it was illegal. 29. After the Counsel for the objectors was heard on the objection to the scheme, and arguments of the Company were also heard, this Court had indicated to Counsel appearing on behalf of the Company that it would be in the interests of justice if instructions could be taken on whether the Company was willing to improve upon the terms of the offer of settlement with the unsecured creditors. Counsel appearing on behalf of the Company fairly on instructions, agreed to do so, and submitted before the Court that the Company would be willing to associate the objectors and their Learned Counsel in the process of working out modified terms of a proposed settlement. Both the Learned Counsel appearing on behalf of the Company and the Learned Counsel appearing on behalf of the objectors have stated before the Court that as a result of extensive discussions which were held thereafter, parties have arrived at more beneficial terms of settlement for the unsecured creditors than those originally envisaged. Three options are ....