TaxTMI 
TaxTMI 
2010 (4) TMI 1236
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....sel appearing for respondent-ARCIL, respectively, in the appeals. 3. Aggrieved by the common order dated 5.10.2007 passed by the learned Company Judge in Company Petition No. 43 of 2007 and Company Application Nos. 852, 974, 1071, 1240, and 1199, 1200, 1201, 1202 of 2007 and Company Application (SR).Nos. 2310, 3349, 4432 and 3351 of 2007, respondent No. 9 in C.P. No. 43 of 2007 filed O.S.A. No. 1 of 2009, respondent Nos. 1 and 2 filed O.S.A. No. 62 of 2009, respondent Nos. 3 to 7 filed O.S.A. No. 65 of 2007, and respondent No. 8 filed O.S.A. No. 66 of 2007. 4. For the sake of convenience, in this common judgment, the appellants herein are referred to as "the respondents-objectors" and the 1st respondent herein is referred to as "the petitioner company" and the Trustee of ARCIL-Spectrum Power Generation Limited Trusts is referred to as "ARCIL". 5. The facts that led to filing of the present appeals, in brief, are as under: The 1st respondent in these appeals, namely, Spectrum Power Generation Limited (SPGL), who is the petitioner company in C.P. No. 43 of 2007 filed a Company Petition under Section 391 of the Companies Act, 1956 (for short, 'the Companies Act') read with Rule 79....
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.... For various other reasons, the amounts due to be paid to the secured creditors has been mounted to Rs.1,23,506- 41 lakhs and as a result the petitioner company has been in default as it could not make payments of both principal and interest. Further, the petitioner company started incurring losses since 2003. The accumulated losses were to the extent of Rs.14,03,08,843/-, which had subsequently grown up to Rs.244,49,98,645/- as on 31.3.2006. The said figure had further aggravated to more than Rs.1100,40,31,924/-. 9. The only source of income of the petitioner company was the sales realisation from the purchaser which comes to an average of Rs.22-00 crores per month, which is far lesser than the amount due to be paid to the secured creditors. The said realisation sources are also very likely to be further reduced in the coming years. Due to various reasons, particularly due to the delay in infusion, the petitioner company turned into a Non-Performing Asset (hereinafter referred to as "NPA"). Hence, it had necessitated to rehabilitate the petitioner company by restructuring its debt and capital structure in order to protect and safe-guard the interests of the company, its sharehold....
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.... out of them, 65 shareholders representing 99.99% of the total value of shares held by the shareholders voted in favour of the resolution, while 4 shareholders representing 0.01% of the total value of shares voted against the resolution. 12. One of the shareholders, by name R.R. Godavari Power Limited, Mauritius, had sent a communication dated 16.3.2007, proposing certain modifications in the scheme of arrangement, which relates to the alteration in the capital clause. The said proposal by way of modification was also approved. A bare perusal of the scheme would only show that the existing share capital would be converted into 0.05% redeemable preference shares, to be redeemed at the end of 15 years. From out of the outstanding amount to be paid to ARCIL, a sum of Rs.50-00 crores should be paid by the bidder (POAL), which intends to step into the company in the capacity of Manager as well as investor and equity holder. The schedule of the scheme further provides that in addition to the above Rs.50-00 crores already paid, a further amount of Rs.100-00 crores should be paid by POAL. In addition to it, it was proposed that the secured creditors would be paid by the company an amount ....
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.... Rao individually, as well as on behalf of his HUF, representing the promoter shareholder of the company in question. Further, similar applications are also filed in C.A.Nos. 1071 and 1240 of 2007 on behalf of two of his group companies viz., M/s. Bambino Agro Industries Limited and Bambino Finance Private Limited, which are stated to be the shareholders, to come on record as respondents, opposing the proposed scheme. On behalf of 5 individual shareholders, C.A.No. 974 of 2007 is filed to get themselves impleaded as party-respondents opposing the scheme. 18. It was the specific averment of Sri M. Kishan Rao, who got impleaded as respondent in the company petition before the learned Company Judge that he was a shareholder holding 27,370 shares, while his HUF was holding 18,85,090 shares, apart from the share hold by the group companies and though their names are being shown in the register of shareholders of the company, they were not allowed to participate in the meeting of the ARCIL by addressing letter dated 20.3.2007 informing them that ARCIL had been exercising its right to vote and, therefore, they were not asked to participate in the meeting of the company, which was convene....
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....ly against the interest and penal interests without absorbing even part of the amount towards the principal debts. Therefore, it was claimed by the leading respondent-objector that he and his associates would continue to be the shareholders of the petitioner company, despite which the institutions and the company deprived the respondents and his associates from participating and exercising their right as shareholders and that the whole exercise undertaken by the ARCIL after taking over the secured assets and the management of the petitioner company, invited bids for expression of interest without following any uniform rule only with an intention to favour the present bidder i.e., POAL and that the whole bidding process conducted by ARCIL is far from law and suffers from lack of lack of transparency. It is also stated that the losses, which were minimal by the time the management of the petitioner company was taken over by the financial institutions, for which the financial institutions owed obligation to explain the reasons and circumstances, under which the said losses have been mounted up, which the financial institutions have not explained. 22. It is the further contention of t....
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.... as per the scheme, the status of the respondents-objectors as Preferential Shareholders would be reduced to Equity Shareholders, which is unfair. 29. Sri V.S. Raju, learned counsel appearing for one of the respondents-objectors contended that the financial statement of the company was not placed before the Company Court. 30. In retaliation to the above contentions, Sri Ranjith Kumar, learned Senior Counsel appearing for the petitioner company (SPGL) contended that Section 391 (3) of the Companies Act contemplates that if a majority in number, representing ¾ in value of the creditors or class of creditors agree to any compromise and if sanctioned by the Court, the same is binding on all the creditors, however, subject to satisfaction of the Court on aspects like disclosure of latest financial position of the company, the auditors reports and the pendency of any investigation proceedings under Sections 235 to 251 etc., and such compromise or scheme, as the case may be, arrived at by the company is binding on all others, including the dissenting parties. 31. It is also contended by the learned Senior Counsel for the petitioner company that it is not restructuring of capital....
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....espondents-objectors to putforth their objections in formulating the scheme of arrangement was taken away by the petitioner company by preventing them to participate in the meeting of Board of Directors? If so, what is the effect? (2) Whether ARCIL was justified in addressing letters requesting the respondents-objectors not to participate in the meeting of the Board of Directors convened for approval of the scheme of arrangement on the ground that by virtue of the pledge agreement, the respondents-objectors had given up their right to participate in the meeting and exercise their right of voting? (3) Whether the scheme of arrangement arrived at in the meeting and as approved by the Company Court is in the best interest of the petitioner company and its shareholders? 39. In Re Issue Nos.1 and 2 : Insofar as these two issues, in a way, the question that falls for consideration is as to whether the scheme was formulated by the petitioner company in a fair and reasonable manner? 40. Several objections have been raised before the learned Company Judge to the effect that the procedure adopted before formulating the scheme was not in consonance with either law or expected fairness....
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.... the like.]" From the above proviso, it is obvious that the compromise or arrangement cannot be sanctioned by the Court unless the Court is satisfied regarding the material facts relating to the petitioner company, such as financial position, accounts etc. 42. Much stress has been laid on this aspect contenting that the financial statement of the petitioner company is not filed before the Company Court and in such circumstances the scheme ought not have been approved by the Company Judge and such scheme deserves to be rejected. 43. In this context, reliance is placed on Bharat Synthetics Ltd. v. Bank of India [(1995) Vol.82 of Comp.Cases 437] wherein a learned single Judge of Bombay High Court, while dealing with this aspect, held that noncompliance with the proviso to sub-section (2) of Section 391 of the Companies Act can be a ground to reject the petition filed under Section 391 of the said Act seeking sanction of the scheme. 44. But, in Jaypee Cement Ltd. In Re. [2004 (2) Comp.L.J. 105 (All)] a learned single Judge of Allahabad High Court, while considering the objections with reference to non-filing of the latest financial statement, held that the concerned company shou....
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....y. 47. It is equally important for the Court to correct that mistake or failure by way of calling for the records. All this is, in the best interest of the company and its shareholders, the scheme which was proposed, if meant for the purpose of wriggling out the company from the fatal eventuality of its winding up. 48. It is further on record that the petitioner company had, in fact, filed the Annual Report for the year ending 31.3.2006 and also limited review report of the Auditors upto December, 2006, which were available as on the date of filing of the Company Petition seeking sanction of the scheme and since an objection was raised for the subsequent year also i.e., till July, 2007, an un-audited report upto 31.3.2007 also was filed. 49. Therefore, what is required is the financial position just immediately prior to filing of the application has to be made available to the Court and that requirement is met with by way of filing the Annual Report upto 31.3.2006, in which year the company petition was filed. In addition to that, the unaudited report up to 31.3.2007 was also furnished to the Court. As a matter of fact, there was no much difference in the financial position of t....
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....irs of the petitioner company. Therefore, ARCIL, having taken the reins of the petitioner company, has every right to choose the best bidder who can invest capital and bring in technical and managerial expertise to resurrect the company. 55. It is to be further remembered that the petitioner company was almost at the stage of winding up. Therefore, having given up the custody, care and management of the petitioner company to the leading secured creditor i.e., ARCIL, the shareholders of the petitioner company, who were waiting for some security to their respective shares, cannot dictate terms to ARCIL. Therefore, it is the subjective satisfaction of such leading secured creditor to sell to the best person among the available lot i.e., POAL. In this regard, it was noticed by the Company Judge that it was not the case of the respondents-objectors that there are better bidders even as on that date. 56. What is more intriguing factor is, the present respondents-objectors had also participated in the bidding process through their company M/s. Ganta Infrastructures, but failed to stand in the contest. It appears that the said M/s. Ganta Infrastructures is owned by Sri M. Kishan Rao, who....
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....diction under Section 9 C.P.C., but, conferring right to proceed against the secured properties either by itself or through Securitisation i.e., acquisition of financial assets by any Securitisation company or reconstruction company as noted in Section 2(z) of the Securitisation Act. The said enactment also sets out enforcement of security interest in Chapter-III under Sections 13 to 19 of the said Act. What Section 31(b) of the Securitisation Act meant was that pledge of movables within the meaning of Section 172 of the Indian Contract Act, 1872 cannot be enforced by adopting procedure under the Securitisation Act. In fact, ARCIL was not making any attempt by way of the proposed scheme to enforce security interest in the pledge document by following the procedure prescribed by the said enactment. Therefore, Section 31(b) of the Securitisation Act has no relevance in these proceedings under Section 391 of the Companies Act. 65. The heading of the agreement of pledge, which was on record, reads as under: "General Power of Attorney Agreement for Pledge of shares" 66. As per clause (1) of the said agreement, the pledgers, who are the respondents/objectors gave an undertaking, whi....
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....enders should be permitted to attend and exercise the voting rights in respect of the said shares on any matter at any meeting of the Borrower………" 69. From the above two clauses of the agreement, it is abundantly clear that the respondents-objectors agreed with the Lenders, in consideration of the loans, not only to pledge all their share certificates, but also irrevocably authorize the said lenders to exercise the voting rights on any matter at any meeting of the borrower/petitioner company. 70. From the above agreement, it is obvious that; firstly, the respondents-objectors had pledged their stakes in favour of the lenders and; nextly, they have also authorized their respective lenders to participate in any meeting of the company, with no exception, and vote on their behalf. 71. It is to be noted that these agreements were entered into in the year 2002 - far before the scheme was on the anvil. It is not even their case that they were participating in the meetings of the company prior to the present meeting of the shareholders convened as per the directions of the Company Court on 23.3.2007 in which the scheme was slate to be formulated and, for the first ....
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...., Hyderabad-500004. Several events of default specified in the Loan Agreement have occurred including payment event of default. Pursuant to aforesaid Clause 5 of the Pledge Agreement, it has been decided by Arcil and the other Pledgees that the Pledgees shall attend the captioned meeting of the members of SPGL and exercise the voting rights in respect of 2,64,89,700 equity shares pledged by you. The Pledgees have authorized Arcil to attend and exercise voting rights in respect of the pledged shares at the said meeting of the members of the Company to be held on March 23, 2007 or any adjournment thereof. In the circumstances, we also request you to refrain from attending the said meeting of the members of the company and exercising voting rights in respect of the shares pledged by you." (emphasis supplied by us) 73. From the above, what is obvious is; initially, the respondents-objectors have pledged the shares and authorized their lenders by way of pledge agreements to vote on their behalf in any meeting of the company, and subsequently, the said pledgees/financial institutions have authorized ARCIL to attend the meetings and exercise voting rights in respect of the pledged shar....
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....ason that authorization does not fall within the ambit of Section 172 of the Indian Contract Act. 80. Therefore, it is immaterial for us to go into the aspect as to whether the pledge of the shares is outside the applicability of the Securitisation Act or not? On the contrary, what is more relevant for us to consider, in the light of the present factual situation, is whether the authorization given to the pledgees to vote on their behalf is true and effective in law or not? 81. In this regard, we are of the considered view that the latter part of the pledge agreement, which deals with the authorization given to the pledgees to vote on their behalf in any meeting of the company, is binding on the respondents-objectors and there is no prohibition, as such, for the pledgees, in turn, to authorize ARCIL to vote on their behalf. 82. It is to be further seen that the pledgees, ARCIL and the petitioner company have identical interests i.e., the welfare of the company is the welfare of the pledgees. Furthermore, as already pointed out, the very pledge document is for two different and distinct purposes - one is, "the General Power of Attorney" and the other is "Agreement for pledge of s....
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.... prohibited. 91. In this regard, it has been contended by Sri S. Ravi, learned Senior Counsel appearing for the petitioner Company that the Company Petition was filed not only under Section 391 of the Companies Act, but also under Section 100 of the said Act and that the petitioner company had suffered enormous losses and its capital was completely eroded, which prompted the financial institutions and other banks to proceed under the Securitisation Act. 92. Section 100 of the Companies Act deals with the special resolution for reduction of share capital. For the sake of convenience and ready reference, Section 100 of the Companies Act is extracted hereunder: "100 Special resolution for reduction of share capital. (1) Subject to confirmation by the ["Tribunal"], a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may- (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) either with or without e....
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....o the guidelines of the Reserve Bank, may take any one or more of the following measures, namely:- (a) the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower; (b) the sale or lease of a part or whole of the business of the borrower; (c) rescheduling of payment of debts payable by the borrower; (d) enforcement of security interest in accordance with the provisions of this Act; (e) settlement of dues payable by the borrower; (f) taking possession of secured assets in accordance with the provisions of this Act. 96. Therefore, in the face of the rights that are available to the secured creditor like ARCIL this court cannot interfere with exercising of such rights by ARCIL. The only thing that can be scrutinized is as to whether such recourse adopted by ARCIL in going for formulating a scheme is fair and legitimate and further as to whether the same is in the best interest of the company as a whole. 97. As already pointed out, it was contended by the respondents-objectors that the method adopted by ARCIL in restructuring the debts was not proper and that restructuring of the capital was not permi....
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.... Court has to see to it that all the requite 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 sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is....
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....f the shareholders have participated in the voting through their pledgees by virtue of the authorization given by them in favour of those pledgees who are the secured creditors. The majority was overwhelming. Even if the dissenting shareholders were allowed to participate in the meeting, the majority was more than 85% in favour of the scheme. This overwhelming majority is to the satisfaction of the required conditions under sub-section (2) of Section 391 of the Companies Act, 1956. thirdly; the entire material was placed before the creditors during the course of meeting, or it is not the case of anybody that no such material was placed before participation of the meeting dated 23-3-2007 except of the respondents. fourthly; the entire material as postulated by sub-section (2) of Section 391 of the Companies Act, 1956 was placed before the court. Of course, there was a complaint made by the respondents objectors to the effect that some material like financial statements preceding the formulation of the scheme was not supplied to the court. The learned Company Judge had recorded a categorical finding that entire material regarding the financial position up to 2006 was placed bef....
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....e and beyond anybody's comprehension. 107. The basic facts are - the company had authorized share capital of Rs.235 Crores as on 31-3-2006. The issued, subscribed and paid up share capital of the company as on the said date was about Rs.176 Crores. Due to various reasons, the Central Electricity Authority had approved the project with a capital cost of Rs.748.43 Crores on 03-01-1994. The complete cost of the project was Rs.972.60 Crores. The reason for the cost overrun being due to various unforeseen reasons. The outstanding debt due from the company as on the appointed date to the secured creditors had mounted to Rs.1235 Crores and the cash flow before the company was very meager and the accumulated losses were mounting from time to time and the returns by way of sales realization were only to the tune of Rs.22 Crores as against the total accumulated losses of Rs.1235 Crores. 108. This was broad picture, in brief, regarding the state in which the company was, before it went into the hands of ARCIL, which forced the company to streamline the management by way of infusing managerial and technical expertise of the highest level, and also to restructure the company's capital etc. Un....