HIGH COURT OF ANDHRA PRADESH
Model Financial Corpn. Ltd.
versus
A.P. Mahesh Co-operative Urban Bank Ltd.
Ramesh Ranganathan, J.
C.P. Nos. 83 & 84 of 2002
C.A. Nos. 182 & 183 of 2002, 1218 of 2007 & 221 of 2009
NOVEMBER 2, 2012
JUDGMENT
1. C. P. No. 83 of 2012 is filed by Model Financial Corporation Ltd. (hereinafter called the “transferor company”), and C. P. No. 84 of 2012 is filed by M/s. Model Chit Corporation Ltd. (hereinafter called “the transferee company”), seeking sanction of this court, under sections 391 to 394 of the Companies Act, 1956 (“the Act”), to the proposed scheme of arrangement between both the companies and their respective shareholders and bondholders.
2. The transferor company was incorporated as a private limited company on April 20, 1987, under the name and style of “Model Housing and Finance P. Ltd”. The name of the company was, thereafter, changed to “Model Housing and Finance Ltd.”, and a fresh certificate of incorporation was issued on February 11, 1992. Subsequently the petitioner again changed its name to “Model Financial Corporation Ltd.”, and a fresh certificate of incorporation was issued by the Registrar of Companies, Andhra Pradesh on August 20, 1993. The registered office of the transferor company is situated at Hyderabad. Its authorised share capital is Rs. 15,00,00,000 divided into 1,00,00,000 equity shares of Rs. 10 each, and 50,00,000 preference shares of Rs. 10 each. The issued, subscribed and paid-up share capital of the transferor company, as at September 30, 2001, was Rs. 3,99,92,000 divided into 39,99,200 equity shares of Rs. 10 each fully paid-up. The main objects, for which the transferor company was incorporated, were to purchase, lease or otherwise acquire land, plots, construct and erect houses, buildings, flats on such land or plots, pull down old structures or acquire, rebuild, enlarge, improve, expand, alter existing houses, buildings and flats ; to act as contractors for the construction of buildings of all descriptions, roads, bridges, dams, etc. ; and to carry on and undertake the business of leasing and hire purchase, to finance lease operations of all kinds, purchasing, selling, hiring or letting on hire all kinds of plant and machinery, equipment and vehicles. For the financial year ending September 30, 2001, the transferor company suffered a loss before tax of Rs. 5,80,53,308 which, along with the accumulated losses of the previous years, was carried forward to the balance-sheet, as at September 30, 2001, as a loss of Rs. 6,10,47,079. The board of directors of the transferor company, in their meeting held on March 5, 2002, approved the scheme of arrangement.
3. The transferee company was incorporated on August 17, 1995. Its registered office is also situated at Hyderabad. The authorised share capital of the transferee company, as at March 31, 2001, was Rs. 5,00,00,000 divided into 50,00,000 equity shares of Rs. 10 each. Its issued, subscribed and paid-up share capital, as at March 31, 2001, was Rs. 86,20,900 divided into 8,62,090 equity shares of Rs. 10 each. The main objects, for which the transferee company was incorporated, were to organise, establish, support or aid in the organisation, establishment and support of chit series and, thereby, develop the habit of savings ; and to act as foreman for any of the chit fund series for the promotion of chits. For the financial year ending March 31, 2001, the transferee company made a profit, after tax of Rs. 1,69,04,473 which, along with the accumulated profits for the previous years and after appropriations, was carried forward to the balance-sheet, as at March 31, 2001, as a profit of Rs. 2,54,80,476. However, its subsidiaries, i.e., Model Chit Corporation (Karnataka) Ltd., suffered a loss of Rs. 7,59,643 for the financial year ending March 31, 2001, which, along with the accumulated losses of the previous years, was carried forward to the balance-sheet as at March 31, 2001, as a loss of Rs. 31,24,650. Likewise, another subsidiary, viz., Model Chit Corporation (Chennai) Ltd., made a profit after tax for the year ending March 31, 2001, of Rs. 2,83,312 which, after adjustment of its previous years accumulated losses of Rs. 18,57,502 was transferred to the balance-sheet, as at March 31, 2001, as a loss of Rs. 15,74,190. The board of directors of the transferee company, in their meeting held on March 5, 2002, approved the scheme of arrangement.
4. This court admitted both the company petitions on June 24, 2002 and, by order in C. A. No. 531 of 2002 dated July 11, 2002, granted stay of all proceedings, including filing of civil suits, for a period of eight weeks. The said interim order was extended until further orders on September 4, 2002. Thereafter, by order dated December 10, 2002, this court directed that the interim order, passed in C. A. No. 531 of 2002, be continued till the final disposal of C. P. Nos. 83 and 84 of 2002. This court, however, observed that the transferor should file an undertaking before this court that they would not dilute, or in any manner alter, the securities furnished in favour of the creditors. The secured creditors, i.e., A. P. Mahesh Co-operative Urban Bank Ltd., State Bank of Hyderabad, Lakshmi Vilas Bank Ltd., Andhra Pradesh Industrial Development Corporation (APIDC), etc., were permitted to come on record.
5. By order in C. P. Nos. 83 and 84 of 2002, dated June 25, 2003, this court rejected sanction of the proposed scheme of arrangement, and dismissed both the company petitions holding that the meetings of the secured creditors of the transferor company, and one of the secured creditors of the transferee company, were not held ; the Reserve Bank of India had cancelled the certificate of registration of the transferor company, and had prohibited them from carrying on the business of a non-banking financial institution ; the transferor company had been prohibited from accepting deposits and alienating its assets, with the exception that it was under an obligation to repay public deposits ; in view of the said prohibition the scheme of arrangement, which provided for assignment of book debts in favour of the transferee company, could not be legally permitted as it amounted to a transfer ; the main thrust of the scheme was assignment of book debts of the transferor in favour of the transferee in consideration whereof the transferee had agreed to settle the dues of the bondholders ; section 12 of the Chit Funds Act, 1982, prohibited chit fund companies from carrying on any business other than chit business unless necessary permission was obtained ; the dues of one of the secured creditors of the transferee, viz., Lakshmi Vilas Bank Ltd., had been adjusted, the transferee company had not adjusted its dues with another secured creditor, namely, IREDA, New Delhi ; no leave had been sought by the transferee company for not convening and holding meetings of the secured creditors ; and the existing scheme of arrangement could not be sanctioned by this court until the transferor company had obtained necessary permission from the State Government in view of the express bar in section 12 of the Chit Funds Act, 1982.
6. Aggrieved by the order passed by this court, in C. P. Nos. 83 and 84 of 2002 dated June 25, 2003, both the petitioner-companies preferred O. S. A. Nos. 69 and 71 of 2003 respectively. This court, by order in C. A. Nos. 1126 and 1405 of 2003 in O. S. A. No. 69 of 2003 dated December 24, 2003, modified the earlier order of stay granted on October 22, 2003 and observed that the proceedings pending before the Debts Recovery Tribunal initiated by the State Bank of Hyderabad, and other consortium banks/institutions, could go on in accordance with law ; and the decision, if any, rendered would be subject to further orders to be passed in the appeal ; the proceedings, if any, initiated by other creditors pending before whatever forum, including the Consumer Forum, could also go on, and the result thereof would be subject to the further orders passed in the appeal ; and the transferor company, its managing director and directors were restrained from alienating any of the properties which were the subject-matter of mortgage or guarantee in whatever form.
7. Both O. S. A. Nos. 69 and 71 of 2003 were allowed, by order dated January 30, 2006, by the Division Bench holding that the Chit Funds Act, 1982, did not apply to the State of Andhra Pradesh, as no notification had been issued by the Central Government under section 1(3) of the Chit Funds Act, 1982, with respect to the State of Andhra Pradesh. The order passed in C. P. Nos. 83 and 84 of 2002 dated June 25, 2003, was set aside, and the company petitions were remanded back for fresh hearing. The Division Bench also allowed an application filed by Ms. Leela Devi to be arrayed as a respondent in the company petitions. As a result of both the OSAs being allowed the interim order, passed in C. A. Nos. 1126 and 1405 of 2003 in O. S. A. No. 69 of 2003 dated December 24, 2003, ceased to remain in force (Mrs. KavitaTrehan v. Balsara Hygiene Products Ltd., AIR 1995 SC 441 and Spg. Corp. of India Ltd. v. Machado Bro, AIR 2004 SC 2093) ; and the earlier interim order, granting stay of all proceedings including filing of civil suits, passed in the company petitions stood revived.
8. Before sanctioning a scheme of arrangement, the court must be satisfied that the statutory provisions are complied with ; in case a meeting of the members, or a class of members or of the creditors or a class of creditors, is called for, the class is fairly well represented ; and the scheme of arrangement is such as a man of business would reasonably approve. It is the commercial wisdom of the parties to the scheme, who have taken an informed decision about the usefulness and propriety of the scheme supporting it by the requisite majority vote, that has to be kept in view by the court. The court would not act as a court of appeal and sit in judgment over the informed view of the parties to the compromise as it has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom of the creditors and members of the company who had ratified the scheme by the requisite majority. The company court’s jurisdiction to that extent is peripheral and supervisory and not appellate. The supervisor cannot ever be treated as the author or the policy-maker. The propriety and the merits of the compromise or arrangement has to be judged, by the parties who as sui juris, with their eyes open and fully informed about the pros and cons of the scheme, arrive at their own reasoned judgment and agree to be bound by such a compromise or arrangement. The court cannot scrutinise the scheme to find out whether a better scheme could have been adopted by the parties (Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 10 SCL 70 (SC).
9. When a scheme of arrangement of a company is placed before the court for its sanction, the court should, in the first instance, direct holding of the meetings in the manner stipulated in section 391 of the Act. This court, by order in C. A. No. 182 of 2002 dated March 20, 2002, directed that the meeting of both the shareholders and the bondholders of the transferor company be convened and held on April 29, 2002 and appointed an advocate of this court as the chairman to convene and hold the meeting. By its order in C. A. No. 344 of 2002, this court appointed another advocate to convene and hold the meeting. The chairman of the meeting, in his report submitted to this court, stated that 190 shareholders and 1,831 bondholders had attended the meeting either personally or by proxy ; the managing director had shown a short multimedia presentation ; the representatives of the press and television had tried to enter the meeting hall, but were prevented from doing so ; the police were asked to be present to avoid any untoward incident during the course of the meeting ; the views expressed by some of the members, who were the shareholders of the company, had been noted ; the shareholders holding 2,09,37,400 shares had voted in favour of the proposed scheme of arrangement, and the shareholders holding 7,000 shares had voted against the scheme ; the total value of the valid bondholders, who voted for the proposed scheme, was Rs. 6,44,02,000 ; and the value of the bondholders, who voted against the scheme, was Rs. 32,66,000.
10. On the question whether, in a scheme of arrangement between the company and its members and a class of its creditors (bondholders) a meeting of the other classes of creditors (both secured and unsecured), must be held, it is necessary to note that section 391(1) enables the court, on the application of a company or a creditor or a member of the company, to order a meeting of the creditors/or the members “as the case may be” to be held and conducted in such manner as the court directs. Under section 391(2), if a majority representing three-fourths in value of the creditors or members agree, in the meeting, to approve the compromise or arrangement, the scheme, on its sanction by the court, would be binding on all the creditors/members “as the case may be”, and also on the company. The expression “as the case may be” finds place both in sub-sections (1) and (2) of section 391. If the words “as the case may be” in section 391(1) is construed as requiring the court to order the meeting of only the members, in a scheme of arrangement between the company and its members, and only a meeting of a class of creditors in a scheme of arrangement between the company and such class of creditors, should the expression “as the case may be” in section 391(2) not be read as to bind only the members where a meeting of the members is held, and such creditors where a meeting of a class of creditors is held ? The safeguard in the provision, of three-fourths the members or creditors in value voting in the meeting to approve the scheme, is that the wishes of a majority of the class should prevail, and the dissenting minority of one-fourth or less of the class should not be permitted to derail the scheme of arrangement unless, of course, the court, on examining the scheme, finds that the objection of the minority is justified. If no meeting of the creditors is required to be held, in a scheme of arrangement between the company and its members, then, in the absence of ascertaining whether three-fourths in value of the creditors approve the scheme or not, would the court be justified in statutorily imposing such a scheme of arrangement on the creditors, even though their consent has not been obtained or their wishes ascertained ? If it were held that not holding the meeting, and ascertaining the wishes of the creditors, would result in the scheme of arrangement not to bind them, would the very purpose of the scheme being sanctioned by the court not be defeated, and approval of the scheme not be an exercise in futility ? If, on the other hand, the view, that a meeting of the creditors/members must necessarily be held in all cases, irrespective of whether the scheme of arrangement is between the company and its members or the creditors, is accepted would that not render the words “as the case may be” in section 391(1) mere surplusage ?
11. One view expressed by courts is that the creditors are not entitled, as of right, to participate in the process of consideration of sanction of the scheme, as the Act does not contain a specific provision for notice being given to the creditors at any stage either prior to the making of the order or subsequent thereto, except in so far as the creditors may have notice of it by public advertisement (Union of India v. Asia Udyog P. Ltd. ) [1974] 44 Comp. Cas. 359 (Delhi), and that the Legislature has cast a duty on the court to ascertain whether the scheme affects the interests of the creditors to such an extent that holding of their meeting is essential and, if the court is of the view that the interests of the creditors would be adversely affected, it could refuse to sanction the scheme unless their consent has been obtained (Ansal Properties and Industries Ltd., In re [1978] 48 Comp. Cas. 184 (Delhi)).
12. Another facet of this view is that, under section 391 of the Act, a compromise or arrangement is either between a company and its creditors or between a company and its members. In case of an arrangement between the company and its members, the arrangement is the result of an agreement between the company and its members and there is, therefore, no provision for the participation of persons other than the members of the company to vote on an arrangement proposed between a company and its members (Nava Bharat Ferro Alloys Ltd., In re [1997] 14 SCL 267 (AP) ; Mafatlal Industries Ltd., In re [1995] 84 Comp Cas 230 (Guj) ; Coimbatore Cotton Mills Ltd. & Lakshmi Mills Co. Ltd.,In re [1980] 50 Comp Cas 623 (Mad) and Telesound India Ltd., In re [1983] 53 Comp Cas 926 (Delhi)).
13. Yet another view is that section 391(1) gives a discretion to the court to convene a meeting of the creditors or any class of them ; the court would exercise the discretion by convening a meeting of creditors, if the creditors are likely to be adversely affected by an arrangement between the company and its members ; attending the meeting and voting are steps of participation in the process of consideration of the scheme ; if the creditors have no right of hearing at the time of hearing of the petition under section 391, the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors expressed by them in a meeting which the court is entitled to convene under sub-section (1) of section 391 ; and, therefore, the court would exercise discretion as a matter of course to convene a meeting of the creditors of the company under sub-section (1) of section 391 unless the court is, prima facie, satisfied that the interests of the creditors are not likely to be adversely affected by the scheme (ICICI Bank Ltd., In re [2002] 104 Bom. LR 399).
14. In cases where the scheme of arrangement involves the company and one class of creditors, the wishes of the other classes of creditors, more particularly public sector/scheduled banks, must be ascertained as the scheme may adversely affect their interests. In the present case both the transferor and the transferee companies have neither convened a meeting of their secured creditors (other than bondholders) nor was their no objection/consent obtained for the proposed scheme of arrangement. Company Application No. 794 of 2002 was filed by the State Bank of Hyderabad wherein, while referring to the dues of the transferor company, to the consortium banks, it is stated that they were opposing the scheme of arrangement. Reference is made to the fact that the computation statement for Rs. 50 lakhs was erroneous ; the pre-closed contracts included in the stock statement was for Rs. 8.53 lakhs ; the expired hire purchase agreements shown in the stock statement was for Rs. 3.72 lakhs ; there were discrepancies in the documents, such as non-availability of insurance, non-registration of charges, and non-filing of Form Nos. 8 and 13 with the Registrar of Companies ; and the company was due Rs. 272.63 lakhs to the State Bank of Hyderabad as on September 26, 2002. While Sri V. S. Raju, learned counsel for the petitioners, would submit that the dues of the State Bank of Hyderabad were subsequently repaid, no document has been placed before this court in proof thereof. The affidavit filed by the State Bank of Hyderabad, in C. A. No. 794 of 2002, details the dues to various secured creditors of the transferor company as on September 26, 2002 :
