| SooperKanoon Citation | sooperkanoon.com/832826 |
| Subject | Company |
| Court | Chennai High Court |
| Decided On | Dec-04-2008 |
| Case Number | C.P. Nos. 96 to 98 of 2008 and C.A. Nos. 1177 and 1178 of 2008 |
| Judge | Chitra Venkataraman, J. |
| Reported in | [2009]150CompCas415(Mad) |
| Acts | Companies Act, 1956 - Sections 1, 2, 2(12), 3, 9, 2(12), 75, 78, 78(1), 78(2), 94 to 97, 100 to 105, 217(1), 235 to 251, 390 to 394 and 643; Indian Contract Act, 1872 - Sections 21; Companies (Court) Rules, 1959 - Rules 47 and 85; Code of Civil Procedure (CPC) - Order 38, Rule 5 |
| Appellant | In Re: G.V. Films Ltd. |
| Appellant Advocate | P.S. Raman, Adv. for ;Rugan and ;Arya, Advs. in C.P. Nos. 96 to 98 of 2008 and ;Arvind P. Datar and ;R. Venkatavaradan, Advs. in C.A. Nos. 1177 and 1178 of 2008;T.K. Seshadri and ;T.K. Bhaskar, Advs.; |
| Respondent Advocate | P.S. Raman, Adv. for ;Rugan and ;Arya, Advs. in C.A. Nos. 1177 and 1178 of 2008 |
| Disposition | Petition dismissed |
| Cases Referred | (Miheer H. Mafatlal v. Mafatlal Industries Ltd. |
1. GV Films Ltd., hereinafter referred to as 'demerged company', is the petitioner in C.P. No. 96 of 2008 ; GV Studio City Ltd., (hereinafter referred to as 'first resulting company'), is the petitioner in C.P. No. 97 of 2008 and GV New Media Technologies Ltd., (hereinafter referred to as 'second resulting company'), is the petitioner in C.P. No. 98 of 2008.
2. C.P. No. 96 of 2008 is filed by GV Films Ltd., under Sections 391 to 394 of the Companies Act, 1956, to sanction the scheme of arrangement, whereby, GV Studios Division of GV Films Ltd., the petitioner in C.P. No. 96 of 2008, is proposed to be hived off and transferred to the company known as GV Studio City Ltd., the petitioner in C.P. No. 97 of 2008, and GV New Media Technologies Division of the demerged company is proposed to be demerged and transferred to the company known as GV New Media Technologies Ltd., the petitioner in C.P. No. 98 of 2008.
3. The present petitions are filed for sanction of a scheme that comprehends a scheme of demerger, re-organisation of the share capital of the demerged company as on June 30, 2007, reducing of the securities premium account of the demerged company, GV Films Ltd., by writing off the goodwill, unamortised miscellaneous expenditure against the securities premium account and by giving effect to the impairment in value of certain identified assets as per AS-28. The scheme contemplates the sanction of the scheme from July 1, 2007.
4. By order dated November 29, 2007 in C.A. No. 3066 of 2007, Justice S. Rajeswaran directed the demerged company to convene a meeting of the equity shareholders of the demerged company for the purpose of considering and, if thought fit, approving, with or without modification, a scheme of arrangement between GV Films Ltd., the demerged company and GV Studio City Ltd., first resulting company and GV New Media Technologies Ltd., the second resulting company appointing Justice K. Govindarajan as the chairman of the said meeting. Notice of the meeting was advertised in The Hindu Business Line on December 29, 2007 (Chennai edition) and in Malai Murasu on December 29, 2007. The resolution passed was informed to this Court through the report of the learned chairman.
5. One of the creditors by name K. Sushila Devi moved this Court by way of Company Application No. 199 of 2008 and sought for postponing of the meeting to be convened on January 24, 2008, till the liability due to her was satisfied. By order dated January 23, 2008, this Court postponed the meeting of the secured creditors. By reason of the settlement arrived at between the demerged company and the secured creditor, by order dated March 7, 2008, C. A. No. 199 of 2008 was dismissed as withdrawn. This Court held that conducting of the meeting had become redundant; hence, directed the consent to be obtained from the secured creditors. Three secured creditors, namely, Citi Bank, State Bank of India and The Lakshmi Vilas Bank expressed no objection and gave their consent to the scheme of proposed arrangement. In terms of the compliance of the procedure, the demerged company sought for approval of the scheme and hence the present petitions.
6. On notice, the Regional Director has filed the report, wherein, the Regional Director pointed out that Section 2 of Part IV of the scheme contemplated combining of the authorised share capital of the demerged company to an extent of Rs. 800 crores transferred in addition to the existing share capital of the resulting companies in the ratio of 50 : 50 without payment of any filing fees and stamp duty. The Regional Director took the view that the resulting companies and the demerged company are separate entities and they have to comply with the provisions of Sections 94 to 97 of the Companies Act, 1956, when the resulting companies increased their authorised capital on account of the scheme of arrangement. He also took an objection that the authorised capital is a notional limit up to which a company can raise its paid-up capital; hence, two notional limits could not be clubbed together. It is also pointed out that clause 13 of the scheme is against the Accounting Standard 14, as the excess of assets should be transferred to 'capital reserve' and not against 'general reserve'. Hence, the clause has to be amended suitably.
7. Apart from these objections, four other objectors moved this Court objecting to the sanctioning of the scheme, three of whom happened to be debenture holders and the other shareholder and the creditor. M/s. Metage Special Emerging Market Funds Ltd., applicant in C. A. No. 1177 of 2008; M/s. Metage Funds Ltd., applicant in C. A. No. 1178 of 2008 and Peter Beck and Partner Vermogenverwaltun GmbH, the foreign debenture holders, objecting creditor in C.P. No. 96 of 2008 and M/s. Gayathri Holdings P. Ltd., stated to be a shareholder and creditor of the demerged company, raised serious objections and prayed for rejection of the scheme of arrangement.
8. Before going into the various contentions raised herein, a brief look into the scheme of arrangement is necessary.
9. A perusal of the documents annexed to the petition shows that the demerged company is carrying on the business of production, distribution, exhibition of feature films, production of teleserials, delivery of cinema through new media technologies and related activities. It is stated that G.V. Studio City undertaking, is engaged in the exhibition of movies through cineplexes, including the hospitality and entertainment related projects ; G.V. New Media Technology Services Undertaking, is engaged in the operations pertaining to web casting of movies and other entertainment content across various medium, encoding, encryption, decryption technologies, animation works, 3D television software development and CGI work.
10. Considering the potential growth of each of these businesses, the demerged company has proposed the scheme of arrangement, whereby, the two divisions referred to above would be hived off and transferred to GV Studio City Ltd., and GV New Media Technologies Ltd. In that process, the demerged company proposes to re-organise its capital structure, which, according to the demerged company, would benefit the shareholders and other creditors. It is stated that the present scheme of arrangement is between GV Films Ltd., GV Studio City Ltd., GV New Media Technologies Ltd., and the respective shareholders. Thus, the arrangement of the demerged company, petitioner in C.P. No. 96 of 2008 with the first resulting company, petitioner in C.P. No. 97 of 2008 and the second resulting company, petitioner in C.P. No. 98 of 2008, would enable all the three companies to focus their operations on their respective field, thereby, would become independent profit making entities. Apart from hiving off, the scheme contemplates reduction of share capital and reduction of share premium account by writing off goodwill and unamortised miscellaneous expenditure as per AS-28.
11. Part I of the scheme contains the definition. Part II of the scheme deals with the demerger and vesting of GV Studios division of GV Films with GV Studio City Ltd. Part III deals with demerger and vesting of GV New Media Technologies Division of GV Films with GV New Media Technologies Ltd. Part IV deals with the consideration for demerger and issuing shares on demerger by the resulting company. Part V deals with the re-organisation of capital of the GV Films, the demerged company. Part VI deals with the remaining business to be carried on by the demerged company.
12. The scheme contemplates the appointed day as July 1, 2007, or such date that this Court may give. 'Remaining business' is defined under Clause (Q) as all business and divisions of GV Films other than those that are demerged and vested in resulting companies pursuant to Part II and Part III of this scheme and includes GV Films trademarks, trade names, brands, patents, copyrights, logo, designs and all other intellectual property whether registered or unregistered.
13. Part II of the scheme deals with demerger and vesting of GV Studios division of GV Films into GV Studio City Ltd. It gives the share capital structure of GV Studios as on June 30, 2007 having 10,00,000 equity shares of Re. 1 each and the issued and subscribed 5,00,000 equity shares of Re. 1 each. Upon coming into effect of the scheme, the assets, rights, claims, title, interest and authorities shall be demerged from the demerged company and to be transferred and vested with the first resulting company as a going concern. Section 3 relates to loans and liabilities. It is stated that the loans and borrowings that are to be transferred to the first resulting company would be the loans and borrowings and debentures of the first resulting company. Clause 5 of this part states that all assets and liabilities of the GV Studios Division shall be transferred to the first resulting company at the value appearing in the books of the demerged company immediately before the demerger and which are set forth in the opening financial statement. The assets transfer would read as follows:
-------------------------------------------------------------------------------Liabilities Rs. Assets Rs.-------------------------------------------------------------------------------Share capital 11,60,73,333 Fixed assets 28,60,91,755-------------------------------------------------------------------------------General Reserve 16,42,54,056 Current assets 52,81,482-------------------------------------------------------------------------------Secured loan 63,40,000------------------------------------------------------------------------------- Unsecured loanCurrent liabilities 47,05,848------------------------------------------------------------------------------- Total 29,13,73,237 29,13,73,237-------------------------------------------------------------------------------Book value of assets over liabilities is Rs. 28,03,27,389.
14. Part III of the scheme deals with transfer and vesting of the GV New Media Technologies Division. It contemplates that the assets acquired by the demerged company for the operation of the GV New Media Technologies Division would stand transferred to and vested in GV New Media Technologies Ltd., upon coming into effect of the scheme. As in the case of GV Studios, the transfer of assets and liabilities of the GV New Media Technologies Division would be at the value appearing in the books of the demerged company immediately before the demerger. Clause 5 of this part states that all the assets and liabilities of the GV New Media Technologies Division shall be transferred to GV New Media Technologies at the values appearing in the books of the demerged company immediately before the demerger. Post such transfer, the impairment of assets, as decided by the board of directors of GV New Media Technologies, shall be effected immediately on the statement of assets and liabilities set forth in the opening financial statement. The assets transfer would read as follows:
-------------------------------------------------------------------------------Liabilities Rs. Assets Rs.-------------------------------------------------------------------------------Share capital 11,60,73,333 Fixed assets 125,93,07,858-------------------------------------------------------------------------------General Reserve 114,32,34,525 Current assets-------------------------------------------------------------------------------Total 125,93,07,858 125,93,07,858-------------------------------------------------------------------------------
Thus, the total value of the assets of these two divisions hived off to the resulting companies would be Rs. 153,96,35,247.
15. Part IV deals with re-organisation of the share capital of the demerged company. Clause 2(1) deals with the transfer of the authorised share capital by the demerged company. It is stated that the authorised share capital of the demerged company to the extent of Rs. 800,00,00,000 shall stand transferred to, in addition to the existing share capital to the resulting companies in the ratio of 50 : 50. Consequently, the authorised share capital of GV Films Ltd., the demerged company, petitioner in C.P. No. 96 of 2008, shall stand decreased to Rs. 1200,00,00,000. The authorised capital of the demerged company, hence, is divided into 120,00,00,000 equity shares of Rs. 10 each.
16. The scheme contemplates that each resulting company shall allot one equity share of Re. 1 each fully paid-up for every equity shareholder of the demerged company who holds 3 equity shares of Rs. 10 each fully paid-up as part of the share entitlement ratio.
17. Part V deals with re-organisation of capital. The present share capital structure of the demerged company as on June 30, 2007 and the one as on March 31, 2007, are given as follows:
-------------------------------------------------------------------------------Particulars As at 30-6-2007 As at 31-3-2007------------------------------------------------------------------------------- Sources of funds -------------------------------------------------------------------------------Shareholders' funds -------------------------------------------------------------------------------Share capital 3482200000 1882200000 -------------------------------------------------------------------------------Reserves and surplus 1324614507 4806814507 1157490571 3039690571-------------------------------------------------------------------------------Deferred tax 505814 505814-------------------------------------------------------------------------------Loan funds -------------------------------------------------------------------------------Secured loans 14027295 14774376-------------------------------------------------------------------------------Unsecured loans 376502100 376502100-------------------------------------------------------------------------------5197849716 3431472861-------------------------------------------------------------------------------Application of funds: -------------------------------------------------------------------------------Fixed assets -------------------------------------------------------------------------------Gross block 2146454786 1647074035 -------------------------------------------------------------------------------Less : Depreciation 20314355 19719481 -------------------------------------------------------------------------------Net block 2126140431 1627354554-------------------------------------------------------------------------------Investments 196496 196496-------------------------------------------------------------------------------Current assets, loans and advances: -------------------------------------------------------------------------------Current assets : -------------------------------------------------------------------------------(a) Inventories 2028674197 310169940 -------------------------------------------------------------------------------(b) Sundry debtors 241261763 223544213 -------------------------------------------------------------------------------(c) Cash and bank 430467804 680169326 balances-------------------------------------------------------------------------------(d) Loans and advances 351575321 567451340-------------------------------------------------------------------------------3052009086 1781334819 -------------------------------------------------------------------------------Less : Current liabilitiesand provision 83488860 80405572------------------------------------------------------------------------------- Net current assets 2968520225 1700929247-------------------------------------------------------------------------------Miscellaneous expenditureto the extent not writtenoff/adjusted -------------------------------------------------------------------------------Capital issue expenditure 102992566 102992566-------------------------------------------------------------------------------Total 5197849716 3431472861-------------------------------------------------------------------------------Authorised share capital 20000000000 20000000000-------------------------------------------------------------------------------Issued, subscribed andpaid-up share capital 3482200000 1882200000-------------------------------------------------------------------------------Reserves and surplus:-------------------------------------------------------------------------------General reserves 71533466 71533466-------------------------------------------------------------------------------Profit & Loss a/c 303068541 263944605-------------------------------------------------------------------------------374602007 335478071-------------------------------------------------------------------------------Share premium 950012500 1324614507 822012500 1157490571-------------------------------------------------------------------------------Secured loans -------------------------------------------------------------------------------Vehicle loans 7687295 8434376 -------------------------------------------------------------------------------Sushila Devi. A. 6340000 14027295 6340000 14774376-------------------------------------------------------------------------------Unsecured loans------------------------------------------------------------------------------- -From individuals 5739500 57395000--------------------------------------------------------------------------------FCCB Issue 370762600 376502100 370762600 376502100-------------------------------------------------------------------------------Investments: -------------------------------------------------------------------------------Shares in GSFC 188000 188000-------------------------------------------------------------------------------Units-US 64 8496 196496 8496 196496-------------------------------------------------------------------------------Inventories -------------------------------------------------------------------------------Closing stock 1917032136 202672775 -------------------------------------------------------------------------------Pictures & Serialsunder production 111642061 2028674197 107497165 310169940-------------------------------------------------------------------------------Sundry debtors: -------------------------------------------------------------------------------(Unsecured, consideredgood)(a) Debts outstanding fora period exceeding 6months 241291763 166594675-------------------------------------------------------------------------------(b) other debts 241291763 56949538 223544213-------------------------------------------------------------------------------Cash & Bank balances: -------------------------------------------------------------------------------Cash in hand 1025425 7589906-------------------------------------------------------------------------------Balance with banks--------------------------------------------------------------------------------on current a/cs 377511210 628048249--------------------------------------------------------------------------------on deposit a/cs 51827061 44427062--------------------------------------------------------------------------------Others 104108 430467804 104108 680169326-------------------------------------------------------------------------------Loans & advances -------------------------------------------------------------------------------Advances-receivable incash or in kind orfor value to bereceived (considered good)-------------------------------------------------------------------------------Deposits 5032857 5106354-------------------------------------------------------------------------------Loans & advances 339649845 282776105-------------------------------------------------------------------------------Advance for filmproduction 6892919 351575321 279568881 567451340-------------------------------------------------------------------------------Current liabilities& provisions-------------------------------------------------------------------------------Current liabilities-------------------------------------------------------------------------------Sundry creditors 8294219 10030008-------------------------------------------------------------------------------Other liabilities & advances 39955686 39094883-------------------------------------------------------------------------------Dues to directors 3485860 51735765 3458660 52583550-------------------------------------------------------------------------------Provisions -------------------------------------------------------------------------------FBT 550000 603287-------------------------------------------------------------------------------Provision for taxation 28116694 23047271-------------------------------------------------------------------------------FCCB-Interest provision 3086401 31753095 4171464 2782202283488860 80405572-------------------------------------------------------------------------------Miscellaneous expenditure -------------------------------------------------------------------------------GDR issue expenditure 36906652 36906652-------------------------------------------------------------------------------Rights issue expenditure 58578534 58578534-------------------------------------------------------------------------------Sanra issue expenses 50000 50000-------------------------------------------------------------------------------Other preliminary expenses 7457380 102992566 7457380 102992566-------------------------------------------------------------------------------
18. The scheme seeks to reduce the subscribed and paid-up capital of the demerged company by Rs. 153,96,35,247 being the value of the demerged divisions. Consequently, on the scheme contemplated the share capital, securities premium and other reserves and surplus account of the demerged company would stand as follows:
Rs.1. Capital account - 194,25,64,7532. Securities premium account - 95,0012,5003. General reserve - 7,15,33,4664. Profit and loss account - 30,30,68,541
19. It is further stated under Sub-clause 2(ii), the securities premium account of the demerged company would be further reduced by Rs. 74,23,14,033 towards writing off of goodwill, unamortised miscellaneous expenditure against the securities premium account as per Accounting Standard 28 and in line with the accounting practices.
20. The paid-up share capital of the demerged company consisting of Rs. 348,22,00,000 divided into 34,82,20,000 equity shares of Rs. 10 each fully paid-up shall stand reduced to Rs. 34,82,20,000 divided into 3,48,22,000 equity shares of Rs. 10 each fully paid-up by cancellation of 31,33,98,000 equity shares of Rs. 10 each. Thus, the result of the demerger and the re-organisation of the capital would result in the share capital, securities premium and other reserves and surplus account of demerged company as follows:
Rs.1. Capital account - 34,82,20,0002. Securities premium account - 20,76,98,4673. General reserve - 166,58,78,2194. Profit and loss account - 30,30,68,541
21. It is stated that notwithstanding the provisions of Sections 100 to 104 of the Companies Act, 1956, as an integral part of the scheme, under Section 391 of the Companies Act, 1956, the arrangement seeks a reduction of share capital and securities premium account of the demerged company. Upon sanction, the order shall be deemed as one under Section 102 of the Companies Act for the purpose of confirming the reduction.
22. Part VI deals with the remaining business of the demerged company. It stipulates that the remaining business and all assets, liabilities and obligations pertaining thereto shall continue to belong to and be vested in and be managed by the demerged company.
23. It is stated that the shares are listed in the Bombay Stock Exchange, Madras Stock Exchange and Hyderabad Stock Exchange. The Bombay Stock Exchange and Madras Stock Exchange have given their consent to the scheme vide their letters dated October 17, 2007 and October 23, 2007, respectively. Since the Hyderabad Stock Exchange was de-recognised by the SEBI, the said exchange could not issue the no objection.
24. Keeping this in the background, the objectors' rights need to be noted. It is stated that by resolution of the board of directors dated September 4, 2006 and the shareholders of the demerged company in its annual general meeting held on July 11, 2006, it was resolved to the issue of euro 9000,000 in aggregate principal amount of Zero Coupon Unsecured Foreign Currency Convertible Bonds due 2012 of GV Films Ltd. The bonds are constituted by a trust deed dated October 23, 2006, executed between the issuer, the GV Films Ltd., and the Bank of Newyork, London branch as the trustee for the holder of the bond. Pursuant to the agreement dated October 23, 2006, entered into between the issuer (GV Films Ltd.) and Global Absolute Research P. Ltd., the issuer has appointed Global Absolute Research P. Ltd., as the monitoring agent in relation to the bonds.
25. The object of the issue of the FCCB Bonds is given as to raise 9 million euro ; that the proceeds were to be used for the project, namely, for GV Studio City, which would be an integral complex of the theme of the multiplex theatres and star hotels in India in different locations.
26. It is seen from the circular that it contains various clauses on the conversion rights, the obligations of the issuer, that it shall comply with the obligations under the trust deed and not make any modification or amendment to such documents other than in accordance with the respective terms and use its best endeavour to comply with the obligations. The issuer also covenanted that the issuer shall not stop conducting its core businesses as conducted as of October 23, 2006, or materially change such core businesses (for which purpose the development of the multiplexes will be included as a core business) of the issuer without the approval by an extraordinary resolution of the bondholders (condition 5.5 (1)). Condition (jj) reads, the issuer company shall not make any reduction of its ordinary share capital or any uncalled liability in respect thereof or of any share premium account or capital redemption reserve fund (except, in each case, as permitted by law). Among other things, condition 7.4.1. reads that the issuer has undertaken that so long as any bond remained outstanding, save with an approval of an extraordinary resolution (as defined in the trust deed) of the bondholders or with the approval of the trustee where it is satisfied that it is not materially prejudicial to the interest of the bondholders, to give such approval.
27. Under condition 1 of the terms and conditions of the bonds relating to the status and payment of subscription price, it is stated that 34 per cent. of the subscription price payable of the bonds shall be payable on October 23, 2006 (the closing date). The remaining 66 per cent. of the subscription price shall be payable on the subscription date as defined in condition 2.1.1. Pursuant to this condition of the FCCB terms and conditions, the demerged company has the right to call on the bondholders for the balance of 66 per cent. of the subscription amount by issuing an issue subscription notice. Subscription date is defined under the deed. It is stated that the balance subscription amount is not due as on the date of filing the demerged company's affidavit.
28. Condition 1.1 reads that the bonds to the extent that their subscription price has been paid, shall constitute direct, unsubordinated, unconditional and (subject to the provisions of condition 5) unsecured obligations of the issuer and shall at all times rank pari passu and without any preference or priority among themselves. The payment of obligations of the issuer under the bonds shall, say for such exceptions as may be provided by mandatory provisions of applicable law and subject to condition 5, at all times, rank at least equally with all of its other present and future direct, unsubordinated, unconditional and unsecured obligations.
29. As to the issue of Foreign Currency Convertible Bonds due in 2012 (FCCBs), the issue circular, among other things, defines conversion date, conversion period, conversion price and conversion notice, the conversion amount of the bonds and the covenant to pay. Clause 5.16 states that there shall not be any reduction of the authorised share capital or any uncalled liability in respect thereof or of any share premium account or capital redemption reserve fund (except, in each case, as permitted by law).
30. Clause 18 deals with notice that all notices to bondholders shall be validly given if published at the issuers expense in a leading newspaper having general circulation in (i) Asia (which is expected to be the Asian Wall Street Journal) and (ii) Europe (which is expected to be the Financial Times) and each such notice shall be deemed to have been given on the date of such publication or, if published more than once on different dates, on the first date on which publication is made and for the purpose of any notice to be given in respect of these conditions if such date is after the date prescribed in these conditions, such date shall be deemed to be the date set out in these conditions.
31. Clause 15 deals with meetings of the bondholders. Clause 15.1 is regarding modification of bonds or trust deed. That without the consent of the bondholders, the trustee may not go for any modification of the bonds in the trust deed only to correct manifest errors or to comply with the mandatory provisions of the law.
32. The terms and conditions of the trust deed relating to euro 9,000,000 Zero Coupon Unsecured Convertible Foreign Currency Bonds due in 2012 incorporate the circular terms. Some of the relevant clauses for the purpose of considering the objections are as follows:
(A) The following clauses are extracted from the deed of trust:
5. Covenants relating to conversion rights:
5.16 : No reduction of authorised share capital.-Not to make any reduction of its issued share capital or any uncalled liability in respect thereof or any share premium account or capital redemption reserve fund (except, in each case, as permitted by law).6. Notices relating to the conversion right:
6.1 Requirement to give notice, if:
6.1.3 there is a re-classification of the shares (including a division or consolidation of issuers outstanding shares) or a consolidation, merger or amalgamation to which the issuer is a party (whether or not the issuer will be a continuing corporation) or any sale or transfer of all or substantially all of the assets or business of the issuer ;
6.1.5. there is a voluntary or involuntary dissolution, liquidation or winding up of the issuer, the issuer shall forthwith give 14 days written notice thereof to the trustee and the principal agent and in addition, it will give at least 5 days before the applicable record date (provided, however, that if there is no record date, the date by which the issuer shall give such written notice shall be earlier to the effective date or the date of submission) give notice to the bondholders (in accordance with conditions 18) stating, as the case may require.
9.23. Use of proceeds : use the net proceeds received by it from the issue of bonds in the manner specified in the offering circular issued in connection with such issue.
(B) The following clauses are extracted from the terms and conditions of issue of convertible bond:
7. Conversion:
7.1.3. Conversion price:
The price at which shares will be issued upon conversion (the 'conversion price') will initially be price per share determined on the conversion price setting date in accordance with the following formula provided in clause 7.1.3.7.2.3 Delivery of shares:
(d) : The shares issued upon conversion of the bonds will in all respects rank pari passu with the shares in issue on the relevant conversion date (except for any right excluded by mandatory provisions of applicable law) and such shares shall be entitled to all rights the record date or other due date for the establishment of entitlement for which falls on or after such conversion date to the same extent as all other fully-paid shares of the issuer in issue as if such shares had been in issue throughout the period to which such rights relate. A holder of shares issued on conversion of bonds shall not be entitled to any rights of the record date which precedes the relevant conversion date.
Clause 7.4.1 reads that the issuer has undertaken in the trust deed, inter alia, that so long as any bond remains outstanding, save with an approval of an extraordinary resolution (as defined in the trust deed) of the bondholders or with the approval of the trustee where it is satisfied that it is not materially prejudicial to the interest of the bondholders to give such approval.
12. Consolidation, amalgamation or merger
The issuer may consolidate with, merge or amalgamate into or transfer its assets substantially as an entirety to any corporation or convey or transfer its properties and assets substantially as an entirety to any person (the consummation of any such event, a 'merger') provided that:
(i) the issuer shall be solvent immediately prior thereto,
(ii) prior thereto the issuer shall have notified the trustee and the bondholders of such event in accordance with the condition 18,
(iii) the corporation formed by such merger or the person that acquired such properties and assets shall, upon consummation of the merger, be solvent and shall expressly assume, by a supplemental trust deed, all obligations of the issuer under the trust deed, the agency agreement and the bonds and the performance of every covenant and agreement applicable to it contained therein and to ensure that the holder of each bond then outstanding will have the right (during the period when such bond shall be convertible) to convert such bond into the class and amount of shares, cash and other securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of shares which would have become liable to be issued upon conversion of such bond immediately prior to such consolidation, amalgamation, merger, sale or transfer ;
(iv) immediately after giving effect to any such merger, no event of default shall have occurred or be continuing or would result therefrom ; and
(v) the corporation formed by such merger, or the person that acquired such properties and assets, shall expressly agree, among other things, to indemnify each holder of a bond against any tax, assessment or governmental charge payable by withholding or deduction thereafter imposed on such holder solely as a consequence of such merger with respect to the payment of principal and premium and interest on the bonds.
Such supplemental trust deed shall provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions of condition 7. The trustee shall be entitled to require from the issuer such opinions, consents, and documents and other matters at the expense of the issuer in connection with the foregoing as it may consider appropriate and may rely on such opinions, consents and documents without liability to any person. The above provisions of this condition 12 will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales and transfers.
33. It is stated that Metage Special Emerging Market Fund Ltd. (hereinafter referred to 'as Metage'), invested in convertible bonds issued by the demerged company for a total value of $ 2 million carrying interest rate of 2 1/4 per cent. It is stated that Metage agreed to subscribe to the bond on the solemn assurances and representations made by the demerged company as to the profitability and the future predictions of the demerged company, apart from the specific purpose for which the borrowed funds are to be used. A deed of trust was executed between the demerged company and the Bank of New York, London branch and as per the trust deed the Bank of New York, London branch was appointed as a trustee under the trust deed. It is stated that one of the key terms under which the bonds was issued is the right available to Metage to get the bond converted into shares including the right to convert it into global depository receipts (GDR).
34. Metage Funds Ltd., is yet another subscriber to the bonds issued for the value of $ 2 million carrying interest at 2 1/4 per cent. As in the case of Metage, a deed of trust was executed on April 20, 2006, by and between the petitioner and the Bank of New York, whose London branch was appointed as the trustee under the trust deed.
35. It is stated that Peter Beck and Partner Vemogenverwaltun GmbH is yet another subscriber to the bonds who purchased all euro 9,000,000 zero coupon Unsecured Foreign Currency Convertible Bonds due in 2012 as equity shares of the petitioner-company from the lead manager of the issue being Daewoo Securities (Europe) Ltd. A trust deed was executed by and between the petitioner and the Bank of New York whose London branch was appointed as the trustee under the trust deed.
36. In the wake of assurances contained in the circular and in the trust deed executed by the demerged company, the scheme of arrangement with reduction of share capital and share premium account floated by the demerged company has come for severe criticisms and objections from three of the unsecured creditors-Foreign Currency Convertible Bond holders ; that the petitioner-company had gone for a scheme of demerger contrary to the terms of the trust deed and without obtaining the clearance from the bondholders and the scheme being in violation of the terms of the trust deed, the same has to fail. The bondholders submit that the scheme terms virtually brings new terms into the trust agreement when the conditions on the issue of FCCB as well as the trust deed alone govern the relationship between the bondholders and the demerged company. Without observing the procedure under the deed, the petitioner cannot modify the terms agreed in the guise of floating the scheme.
37. Apart from these three bondholders, there is yet another objector, who happens to be a shareholder having 36,100 numbers of equity shares, claiming right as an unsecured creditor too. This objector states that it had not been posted with notice to participate in the meetings. There was no meeting of the class of creditors ; that without the consent of the creditors, the assets of the demerged company are transferred, leaving the liabilities alone to remain with the demerged company unsupported by any assets. Thus, the interest of the unsecured creditors are seriously affected. It is contended that the scheme is colourable ; that the scheme contemplates transfer of all the assets to the resulting companies herein with the ulterior purpose of excluding the assets to the prejudice of the creditors ; the directors in all these companies are closely associated who alone would be benefited ; hence, prayed for the rejection of the scheme.
38. The objectors as well as the petitioner placed their submissions under three heads (i) as regards contractual obligations under the trust deed and the breach alleged ; (ii) the scheme is in violation of statutory provision and finally ; and (iii) the scheme being against public interest.
39. Mr. T.K. Bhaskar, learned Counsel appearing for one of the objectors, bondholders Peter Beck and Partner Vemogenverwaltun GmbH, referring to the offer circular of the demerged company, submitted that the circular declared the intention as to the issuing of bonds ; that the proceeds were to be used for the project, namely, for GV Studio City, which would be an integral complex of theme multiplex theatres and star hotels in India in different locations. Referring to clause 5 relating to the conversion rights and the conversion price given therein under the deed, he pointed out that when the demerged company had bound itself by the covenants in the trust deed not to go for reduction of its issued share capital and that as per clause 6.1 of the trust deed, the demerged company was bound to give notice to the trustee and the principal agent, there being a breach of the obligation, the scheme is liable to be rejected.
40. Referring to condition 12 of the terms and conditions of the bonds relating to consolidation, amalgamation or merger, learned Counsel submitted that the petitioner is bound to respect the interest of the creditors, since any dealing with the assets under any of those circumstances referred to above would seriously prejudice the interest of the creditors, more so, in the case of an unsecured creditor. Referring to the various clauses in the demerger scheme, he submitted that the course of conduct adopted clearly show that the exercise is totally contrary to the terms of the trust deed and lacked bona fides.
41. Learned Counsel referred to the inconsistencies in the scheme and the schedule and submitted that while the scheme contemplates transfer of assets and liabilities, the schedule to the scheme shows what is contemplated therein is the transfer of assets only to the resulting companies retaining the liabilities with the demerged company. Contrary to the issue of circular, the scheme seems to change the very purpose of raising the debenture, namely, to use the proceeds for GV Studio City ; thus the hiving off without any notice or a resolution as contemplated under the trust deed cuts the very promise extended in the circular. The unsecured creditors, like this bondholder, are left without any security, thus throwing their status as highly unprotected and without any support of security. The scheme further seeks reduction of the subscribed and paid-up capital of the demerged company by 90 per cent. by cancelling 31,33,98,000 equity shares of Rs. 10 each amounting to Rs. 313,39,80,000 and reduce the share premium account by Rs. 74,23,14,033 towards writing off the goodwill and unamortised miscellaneous expenditure against the securities premium account. Thus, the paid-up share capital stands cancelled and reduced to Rs. 34,82,20,000. This, he pointed out, is against the condition 7.4.1(c) of the terms and conditions of the trust deed. He pointed out that for this exercise, the petitioner should have taken the approval of the extraordinary resolution of the bondholders or of the trustee as provided for under the terms of the trust deed. Ignoring the obligations thus undertaken, the petitioner had acted arbitrarily.
42. So too, the reduction sought on securities premium account is contrary to clause 5.16. He pointed out that without a special resolution, any attempt made to reduce the share capital or the share premium account would constitute breach in terms of the trust deed and a fraud played on the bondholders. He pointed out that the scheme contains no clause as to the proposed business of GV Films after the demerger. He pointed out that the demerged company could no longer carry on the business hived off and that it has to rest satisfied only with those business other than those that are given to the resulting companies. The contention of the demerged company in paragraph 12 of the petition and in the counter by the demerged company belies its contention of the petitioner as to the continuation of the business for which the bond was floated. Referring to the master circular of the RBI, he pointed out that when the purpose of the borrowing itself could only be for capital investment, retaining the liabilities without the capital is contrary to law. Questioning the bona fides of such reduction contemplated, learned Counsel pointed out that when the trust deed contemplates any modification only by an extraordinary resolution by the majority consisting of not less than three quarters of the votes cast in the meeting of the bondholders duly convened and held in accordance with the provisions as defined in clause 18, the scheme, having failed to adhere to the terms of the agreement, has to fail.
43. In this connection, he referred to the financial statements of the demerged company particularly to clause 5 in paragraph 2 of Section 2, whereby, the assets and liabilities of GV Studios Division are to be transferred to GV Studios at the value appearing in the books of the demerged company immediately before the demerger. Under Schedule I relating to GV Studio City Division, under the caption 'unsecured loan', nothing is transferred except the assets. As far as GV New Media Technologies Division is concerned, no liabilities are transferred. Referring to the statement in the scheme, he pointed out that there is absolutely no reference as to the debenture holders' contribution. In this background, he submitted that Schedule I appended to the arrangement gives a misleading picture as to the status of the unsecured liability on the amount borrowed by issue of debentures for the stated purpose of GV Studio City. On the other hand, bulk of the assets stand transferred to the GV New Media Technologies Division without any liability at all.
44. Learned Counsel again referred to the last audited balance-sheet as on March 31, 2007, giving the value of the fixed assets at Rs. 1,62,73,54,554 and to the statement filed by the demerged company as regards the assets of GV Films on the quarter ending June 30, 2007, that while asset to the tune of Rs. 153,000,000 moved out of the company, the liabilities, however, remained with the demerged company. Contrary to the assertions of the demerged company, there are no supportive assets to safeguard the interest of the debenture holders. He pointed out that by hiving off, the value of assets that would go to the resulting companies, viz., GV Studio City Division would be Rs. 29,14,73,237 and GV New Media Technologies would be Rs. 125,93,07,858, respectively. The aggregate value of the assets of these division over their liabilities would be Rs. 153,96,35,247.
45. As substantial part of the assets are now getting transferred to the resulting companies, the same would amount to change of control as per condition 9.4 of the FCCB terms and conditions and the objector has the right to require the demerged company to redeem the FCCB in whole. He pointed out that the capital work in progress has no market value and the demerged company would have mere rupees one crore worth of vehicles and Rs. 59 lakhs worth of plant and office equipments in terms of fixed assets. He pointed out that the scheme is silent as to whether the FCCB liabilities would stand transferred to GV Studios or will remain with the demerged company. He pointed out that the assets shown to the tune of Rs. 174.47 crores relate to film rights distribution which are subject to impairment.
46. Referring to Section 393(2) read with Section 2(12) of the Act, he pointed out that there was no disclosure of material information as to the bonds as required under Section 391 of the Companies Act as to the liabilities that are to be transferred to the first and second resulting companies. He pointed out that the bondholders cannot be driven to look for the discharge of the liabilities from a person other than the company. With the substantial assets thus sought to be transferred to the resulting companies under the scheme, the creditors are without any support of the assets. He pointed out that the contention that the demerged company still has assets to the tune of Rs. 25.97 crores does not stand to reason as to what is available is only book assets. There are no details regarding the portion of the share capital given as consideration in terms of Section 75(b). He pointed out that the scheme violates Sections 101 to 103 of the Companies Act, 1956, as no meeting of the creditors as a class is called when effecting a reduction of the paid-up capital. Placing reliance on the decision of the Gujarat High Court reported in [2003] 116 Comp Cas 248 (Essar Steel Ltd. v. Gramercy Emerging Market Fund), that a debenture holder is a creditor of the company, learned Counsel submitted that the demerged company should have convened the meeting of the unsecured creditors when the scheme adversely affects the interest of the creditors like the objector who form a class by themselves. He referred to Section 390(c) of the Companies Act, 1956, as to the relevant persons, who form a class that when the interest of these unsecured creditors as a class are at stake and cases are pending against the company, such hiving off and transfer of the assets substantially would cause prejudice. In the circumstances, the petition lacks bona fide for this Court to accept and act upon.
47. Learned Counsel referred to the counter affidavit filed by one of the directors of the demerged company and pointed out that contrary to the assertion as to the business that the demerged company proposed to carry on, the business that are to be carried on thus specified in the scheme and the negative covenant that the demerged company shall not carry on the business of the resulting companies, there is absolutely no reference as to the business to be carried on by the demerged company post the merger.
48. Referring to the quarterly balance-sheet as on June 30, 2007 and to the addition to the asset side to the extent of Rs. 174.47 crores which are stated to be as a result of acquiring the new feature film rights, learned Counsel for the objector pointed out that the same are not assets in real sense of the term but rights subject to uncertainty as well as impairment in value. By not calling the meeting or complying with the terms of the contract, the demerged company invited risk, attracting the breach of contract. The statement of the demerged company that for such breach, the objector always has other remedy is not an answer when there is a specific covenant in the contract giving the procedure to be adopted in the event of the demerged company going for a scheme of demerger or reduction in share capital or in the share premium account as any change in its constitution or in its financial affairs had serious implication on the conversion rights of the bondholders. Placing reliance on an unreported decision in C. A. No. 499 of 2003 dated January 29, 2003, and C.P. No. 118 of 2000 dated January 24, 2001, he submitted that when there is a material suppression of facts as to the covenants in the trust deed and when the interests of the creditors are offended by an improper convening of a meeting by not effecting proper notice, the scheme has to fail.
49. Countering the contention of learned senior counsel for the demerged company that the trust deed provides for conversion rights and a conversion price to protect the bondholders, Mr. T. K. Bhaskar, learned Counsel appearing for the bondholders pointed out to clauses 7.1.3 and 7.3.1 on the conversion price not to go below the particular limit. He further submitted that the transfer of assets, reduction of share capital and the share premium account under the scheme practically results in keeping only the liability at the hands of the demerged company thereby affecting the conversion price thereby the conversion rights as given under clause 7.1.3.
50. Mr. Arvind P. Datar, learned senior counsel appearing on behalf of Mr. Venkatavaradhan, learned Counsel appearing for two of the bondholders M/s. Metage Special Emerging Market Fund Ltd., submitted that the entire scheme has to fail it being against law and contrary to the terms of the trust deed. Touching on the contractual obligations, he pointed out that when the demerged company had borrowed and issued debenture bonds after approval of the board and the shareholders, the scheme now seeks modification of the contract, which would mean that there is a virtual rewriting of the offer circular and the contract entered into with the bondholders, The trust deed as well as the contract provide for the redemption of bonds as well as conversion as shares and if the demerged company is to be granted approval of the scheme, virtually there would be a change in the contractual terms and the trust deed, leaving the obligation of the demerged company under the trust deed a mere paper obligation. He pointed out to the counter filed by the petitioner in C.P. No. 96 of 2008, taking a stand that there was no privity of contract between the bondholder and the company and submitted that, if the scheme is to be sanctioned without an opportunity to the bondholders who are the creditors, the bondholders would be left with no remedy at all. Reiterating the points raised by Mr. T. K. Bhaskar, learned Counsel appearing for one of the bondholders, he pointed out that by seeking the arrangement, the petitioner cannot set at naught a commercial obligation under the contract.
51. Commenting on the scheme under the head re-organisation of the capital and securities premium account of GV Films beginning with a non-obstante clause that the reduction in capital and share premium account would be 'notwithstanding anything contained in Sections 78, 100 and 104 of the Companies Act, 1956', Mr. Arvind P. Datar, learned senior counsel referred to Section 9(b) of the Companies Act, and pointed out that any agreement or resolution which is admittedly against the statute and repugnant to the provisions of the Act is void and cannot be given effect to. Pointing out to clause 2(a)(ii) in the scheme relating to re-organisation of the capital and securities premium account of the demerged company, he pointed out that when the reduction of the share premium account does not fall under any of the clauses under Section 78(2) of the Act and the purpose of the reduction stated is as one other than what is contemplated under Section 78(2) of the Act, the reduction undertaken in the share premium account has to follow the provisions as in the case of reduction of share capital, viz., Sections 100 to 104. Going by the admitted details for reduction on the share premium account and the fact that all the shareholders of the demerged company get shares in exchange in the resulting companies, the demerged company has to comply with the statutory requirement under Section 101(2)(b) of the Act. In this, he placed reliance on the decision of the Chancery Division reported in [1957] 1 WLR 1143 : [1958] 28 Comp Cas 252 (Paringa Mining and Exploration Co. Ltd., In re), and contended that as the petitioner-demerged company has failed to follow the procedure under the Act, the scheme is violative of the provisions of the statute and, hence, liable to be set aside. Learned senior counsel submitted that in the face of Sections 101 to 104 of the Companies Act, there being no compliance of the same, the scheme has to fail and the same is against public interest.
52. Touching on the aspect of writing off goodwill as against the share premium account as well as on the reduction of capital as seen from the details of the current assets as on March 31, 2007 and June 30, 2007, learned senior counsel pointed out that consequent to the proposed re-arrangement, the demerged company would be left with the share capital of Rs. 58.40 crores ; left with only liabilities, the demerged company has no assets to match or meet the same. Referring to the balance-sheet as on June 30, 2007, he submitted that under the balance-sheet as on March 31, 2007, on the sum of Rs. 31,01,69,940 given under the head 'inventories' the same is now increased multifold to Rs. 174.47 crores and that there are no details as to how this got built up to this extent all too suddenly in a period of three months' time. He further pointed out that the share capital as on March 31, 2007, at Rs. 188 crores has gone up to Rs. 348 crores as on June 30, 2007, of the demerged company, who, under the scheme, seeks reduction of share capital. There are also no materials to explain these entries and no explanatory note is appended to this balance-sheet.
53. Mr. Arvind P. Datar, learned senior counsel appearing for the bondholders, referred to AS-28 to impress on the circumstances and the manner under which goodwill can be written off. When there are specific methods of arriving at the reversal of the impairment loss of goodwill, there are no details as to how the same had been worked out. He pointed out that Section 391 of the Companies Act cannot be a route to get over Section 100 of the Companies Act. In the background of these submissions, learned senior counsel appearing for the objectors pleaded that the scheme be rejected.
54. Mr. R. Venkatavaradhan, learned Counsel appearing for the bondholders, pointed out to the balance-sheet dated June 30, 2007 and to the rationale of the scheme that under the scheme of demerger, while the webcasting portal and the multiplexes stand hived off to the resulting companies, clause 7(c) in Part III of the scheme states that the demerged company shall carry on the remaining business. Given the list of business that is now stated to be available at the hands of the resulting companies, the scheme clearly belies the claim of the demerged company in the counter that they would continue to carry on the business. He pointed out that given the fact that the demerged company does not propose to carry on the business of the demerged company, there are no details available in the scheme as to the nature of business that the demerged company has or it proposes to carry on.
55. He pointed out to the specific question raised by the objector as to the breach of the convenants in the trust deed and the reply by the demerged company in its letter dated February 25, 2008 and March 25, 2008, contending that it had discharged its obligations under the trust deed and in further compliance of the obligation ; it had also given an annexure as certificate of compliance as required under clause 9.7 of the trust deed ; that as regards clause 5.8 regarding conversion price adjustments and conversion rights notice, the demerged company has stated that since the scheme of demerger is an event yet to happen awaiting court order, issuance of a certificate as contemplated would be undertaken if and when the relevant event happens. The demerged company admitted that the company should have provided the trustees with the copy of the notice issued to the shareholders which was missed inadvertently. Learned Counsel also referred to the petitioner's letter dated July 15, 2008, written after the filing of objection before the court, admitting fall in the market price of the petitioner's share by more than 75 per cent. leading to destabilisation of the company's financial position and structure leading to erosion of the market capitalisation of the company and called upon the respondent objector to withdraw the objections which it termed as untenable. In the face of this attitude of the demerged company, learned Counsel pointed out that the entire scheme lacked bona fides as there are no intention to respect the obligations under the bond. Consequently, for committing the breach of contractual obligations, the scheme has to fail. Learned Counsel also referred to the decision reported in [2005] 128 Comp Cas 152 (Kar) (Comat Infoscribe P. Ltd., In re), relied on by the demerged company and submitted that the said decision has no relevance to the case on hand as demerger with reduction of share capital is different from a case of amalgamation with reduction of share capital. He referred to the decision reported in [1972] 42 Comp Cas 563 (Mad) (I. Durairajan v. Waterfall Estates Ltd.) and : [1992] 73 Comp Cas 517 (Mad) (Asian Investments Ltd., In re), that the case on hand is a clear case of violation of settled principles of law.
56. Referring to the reduction of the share premium account and the goodwill written off, Mr. Venkatavaradhan, learned Counsel appearing for one of the bondholders, pointed out that adjustment is different from reduction and the decisions relied on by learned senior counsel for the petitioners, particularly with reference to the contention based on the decision reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re), is totally irrelevant. If the scheme is only a scheme of amalgamation, then Section 100 of the Companies Act will have no relevance for specific observance. Given the admitted fact that the demerger goes with the reduction, there is a clear statutory violation in not observing Section 100 of the Companies Act herein.
57. Countering the claim of the objectors that there cannot be a scheme without involving the bondholders and convening a meeting to obtain their consent, Mr. P.S. Raman, learned senior counsel appearing for the petitioners, submitted that what is prohibited under clause 7.1 of the trust deed was that, there cannot be a merger or amalgamation of the issuer with any other corporation or sale or transfer of 'all or substantially all', of the assets of the issuer without the prior consent of the bondholders. He pointed out that the objectors can have objection only if there is a transfer of all or substantially all assets of the issuer and that they are not put on notice by the company. He pointed out that the assets that would go for transfer on the demerger would be one-third of the total assets only. The share ratio was approved by the firm Deloitte Haskins & Selis, chartered accountants. In the absence of anything to show that the scheme contemplates transfer of all or substantially of all assets, the question of violation of clause 7.1 does not arise. In any event, he pointed out that the resulting companies are walling to give such additional support in terms of the trust deed to secure the interest of the objectors.
58. Countering the argument of the objectors that no publication was given and no meeting of the unsecured creditors was conducted, he pointed out that the intention of the, bondholders are very clear to make an unlawful gain in insisting on a meeting to be called for, of the unsecured creditors. Learned senior counsel for the petitioners pointed out that when the information had been given to the bondholders, such notice would be a sufficient compliance of the terms of the trust deed. He pointed out that there is total compliance of contractual terms of the trust deed and that it is not mandatory to convene a meeting to get the consent of the debenture holders on the proposed merger. He pointed out that the interests of the objectors had been fully secured and in terms of the trust deed clauses, the resulting companies have expressly agreed to execute such supplementary deeds in which the demerged company would also join. Learned senior counsel pointed out that the demerged company as well as the resulting companies are ready and willing to execute such supplementary agreements, which fact may be recorded by this Court. Referring to the purpose of issuing notice and publication, he pointed out that the creditors of the company are put on notice about the scheme only to inform them that in bringing the scheme, no prejudice is caused to the bondholders, as the assets are still there in the demerged company. Being unsecured creditors, the bondholders cannot now insist on any security towards their protection. As such, the question of issuing notice or to call for meeting of unsecured creditors for their consent does not arise. Even going by the terms of the contract, there is no violation for the bondholders to object the scheme.
59. Raising an issue on the bona fides of the bondholders claim, particularly with reference to the conversion price, he pointed out that the contention would merit consideration only if there is a breach of the conditions. Further, considering the strength of the balance-sheet as on June 30, 2008 and assets available, there is no breach of the obligations under the deed. At the most, if the bondholders are not willing to keep their debentures, all that the bondholders can do is to recall their money and they are not entitled to object to the scheme. He pointed out that principally, there is nothing in the scheme to touch or materially alter the conversion price so as to affect the interests of the unsecured creditors ; as such, there are no justifiable grounds in the contentions of the objectors to come before this Court objecting the scheme.
60. Referring to the contention of the objectors that there has been a transfer of all the assets to the resulting companies, learned senior counsel appearing for the petitioner, pointed out that when the company has current assets worth Rs. 174.47 crores as on June 30, 2007, it is not correct to say that the demerged company is left with no assets at all for its operation or to meet its obligations. It is stated by the demerged company that the assets position has gone up by purchase of rights in feature films and the fund for that had been raised by the company ; that with its ongoing projects, the interests of the objectors could not be said to have been compromised under any circumstances. He pointed out that the company had not gone for transfer of all its assets or substantially all its assets to contend that the company is left with no assets at all ; that there had been no violation of the clauses in the agreement. He further pointed out that the cause for objection from the objectors could arise only in the event of any default committed by the company which included the failure to pay the principal or interest or performance of any obligation in the bond as given under the trust deed.
61. As to the contention that on the increase of equity share capital from Rs. 188 crores to Rs. 348 crores between March 31, 2007 and June 30, 2007, he pointed out to the note appended to the chartered accountant's report ; that during this period the company had issued GDRs representing equity shares of face value of Rs. 160 crores, thus resulting in the increase of capital. The total amount of Rs. 172 crores was realised from such GDR issued, of which Rs. 160 crores was accounted in the share capital account and Rs. 17.80 crores was accounted in the share premium account. As to the reduction in the share premium account, AS-28 permitted the writing off of goodwill of the assets whose value got impaired. Thus, as on June 30, 2007, the share capital stood at Rs. 348 crores and the share premium account at Rs. 95 crores; quite apart from that, there are suits pending at the instance of the demerged company for recovery of money. With the source thus shown, the bondholders cannot have any apprehension as to the financial strength of the demerged company at all. Learned senior counsel also pointed out that contrary to the assertions of the objectors that the demerged company had only liabilities and no assets, the balance-sheet would clearly disprove the claim. He pointed out that under Section 101(2) of the Companies Act, it is not mandatory to call for meeting of the creditors, since the reduction proposed in the share premium account or share capital does not involve either diminution of liabilities or payment to any shareholder.
62. The contention of the bondholders fall under the heading of breach of contractual obligations and the statutory provisions. In connection with the consideration of the contentions of the bondholders and the demerged company, I have perused the offer circular and the trust deed executed.
63. First, on the breach of contractual obligation, as already pointed out, the offer circular and the trust deed executed show that the bonds were the result of the resolution of the board of directors and the shareholders to raise money for the specific purpose of using the investment thus raised for the company's division GV Studio City, which will be an integral complex of theme multiplex theatres and star hotels in India. Given the purpose for raising the money, the company has bound itself to certain terms and conditions indicating the same in their offer circular followed by executing the trust deed that in the event of the company proposing to effect any change in its constitution, it shall give notice to the bondholders, get their approval through an extraordinary resolution of the bondholders with reference to the purpose (condition 7.4.1.c) that it will not make any reduction of its ordinary share capital or any uncalled liability in respect thereof or of any share premium account or capital redemption reserve fund (except, in each case, as permitted by law) (clause 5.16 of the circular trust deed). Further, be it a case of merger or amalgamation or a case where there is transfer of all or substantially all of the assets of the company or a reduction of ordinary share capital or of any share premium account, or capital redemption reserve fund, the agreement is that the company can undertake any such proposal only with the approval of the bondholders through extraordinary resolution after giving notice to the trustees. If by an arrangement, the company proposes any change in the offer made and acted upon through the execution of the trust, it is but essential that the procedure contemplated and agreed on is to be observed in toto by the company, considering the binding obligation of the company under the trust deed, since any dealing with the assets of the company certainly has its impact on the interest of the bondholders. Quite apart from observing the obligation given by the company under the trust deed, the issuer has to see that in floating a company, it commits no breach of the resolution of the board of directors and the shareholders and that the scheme of arrangement has no impairment as to the backup of assets that the bondholders look upon as a security. It must be noted that even though the bondholders are unsecured creditors, still maintaining the assets as indicated in the issue circular followed by the trust deed is of considerable importance, having regard to the purpose of issue of bonds as disclosed in the issue circular, as per the resolution of the board of directors. The directors are the trustees and agents of the company. On the role of directors, in the decision reported in : [2004] 122 Comp Cas 161 : [2005] 1 SCC 212 (Dale and Carrington Invt. P. Ltd. v. P.K. Prathapan), the apex court pointed to the decision of Lord Russell reported in [1942] 1 All ER 378 (HL) (Regal (Hastings) Ltd. v. Gulliver) as follows (page 176):
Directors of a limited company are the creatures of a statute and occupy a position peculiar to themselves. In some respects they resemble trustees, in others they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners in others they do not.
64. Dealing with the case of power of directors in issuing additional share capital by the managing director in his own favour, the apex court considered the power of directors of the company and held that while testing the exercise of powers by the directors of companies, the courts in India have applied the same tests as in other Commonwealth countries ; that the action of the directors need to be tested not only on bona fide test but also as to the proper purpose test.
65. Elaborating on the position of the directors as akin to a trustee, in the decision reported in [1968] 2 All ER 1073 at 1092 (Ch. D) (Selangor United Rubber Estates Ltd. v. Cradock), the Chancery Division held thus:
Directors are clearly not trustees identically with trustees of a will or marriage settlement. . . However much the company's purposes and the directors' duties, powers and functions may differ from the purposes of a strict settlement and the duties, powers and functions of its trustees, the directors and such trustees have this indisputably in common-that the property in their lands or under their control must be applied for the specified purposes of the company or the settlement; and to apply it otherwise is to mis-apply it in breach of the obligation to apply it to those purposed for the company or the settlement beneficiaries. So, even though the scope and operation of such obligation differs in the case of directors and strict settlement trustees, the nature of the obligation with regard to property in their hands or under their control is identical, namely to apply it to specified purposes for others beneficially.
As already noted, the offer circular is the result of the resolution of the board of directors and the shareholders' meet. Thus, given the role of the board of directors as the trustee, agent of the company, the object of raising the debentures thus disclosed and the obligations thus incorporated in the trust deed, the resolution now made clearly manifests that the board, as trustees of the company, has failed to observe the terms of the trust deed by which the company has bound itself and as rightly submitted by the objectors, brings about a modification to the terms of the trust deed.
66. A reading of the offer circular shows the business of the company, statement as to the financial status as on the date of the issue of the circular as well as its financial capabilities and the purpose of raising the debenture bonds and its application of funds raised through debenture bonds. In the face of the scheme now presented, in terms of the trust deed clauses 12 and 18, the petitioner is bound to give notice to the bondholders and a special resolution passed in terms of clause 18, which contemplates that in the event of any merger or demerger or transfer of all or a substantial transfer of the assets, then, as rightly pointed out by the objectors, the explanatory note to the scheme mentions nothing about the bondholders' interest or to the observance of the obligation. The materials placed before this Court do not show any notice issued to call for meeting of the trustees or the bondholders, as required under clause 18. On the other hand, the demerged company made no secret of its obligation under the trust deed when in the letter written by the demerged company dated March 25, 2008, the demerged company admitted that it had not provided the debenture holders with the notice given to the shareholders. The contention now taken by the demerged company that it is not bound to give notice, hence, cannot be accepted as based on any contractual obligations. On the other hand, the letter stands as an admission as to the lapses on the part of the demerged company.
67. The objectors' contention that the scheme proposed has left nothing for the company to call it as its substantial assets needs to be seen.
68. The demerged company contended that floating of the scheme of demerger has not resulted in the transfer of all assets or much less substantial assets. Learned senior counsel for the demerged company pointed out that when under the scheme, one-third of the assets alone are now sought to be transferred, the objectors are not right in their contention that the arrangement of demerger leaves the objectors unprotected, there being no assets left with the demerged company.
69. In this regard, the financial position given in the offer circular and the one given under the demerger scheme need to be seen. The financial position given in the circular as on March 31, 2006, gives the net worth of the company as Rs. 1,932.57 million. The total assets of the company is given as Rs. 1,945.54 million. The balance-sheet as on March 31, 2006, gives the total assets as on March 31, 2007, as Rs. 3,43,14,72,861. The unsecured loans stated therein was Rs. 37,65,02,100. The fixed assets value as on March 31, 2007, is given as Rs. 164,70,74,035. In this, goodwill as on April 1, 2006, is Rs. 30,50,00,000. Apart from that, land as Rs. 1,47,01,115 and buildings as Rs. 1,03,02,156 are also found in the fixed assets schedule. In the notes forming part of the Eighteenth Annual Report 2006-2007, funds raised through Foreign Currency Convertible Bonds (FCCBs) and Global Depository Receipts (GDRs) are referred to. The balance-sheet for the quarter ending June 30, 2007, gives the statement of assets and liabilities of the company. This reflects the position that would prevail on the demerger and the reduction of the share capital and share premium account as provided in the scheme now presented before this Court. As per this, the share capital of the demerged company stands at Rs. 34.82 crores as against Rs. 188 crores. The capital in progress stands at Rs. 25.97 crores. As against the column 'assets', the entire land and building stands transferred to GV Studio City Ltd., leaving the demerged company with no fixed assets at all. The current liabilities of the company which stood at Rs. 8,04,05,572 remains with the company to the extent of Rs. 7,88,00,000 leaving 0.47 lakhs with GV Studio City Ltd.
70. The following table gives one the figures as to the details of assets and liabilities as per the scheme of arrangement as on June 30, 2007:
--------------------------------------------------------------------------------Total of Particulars GV films Ltd. GV Studio GV New Media all 3 cos.(Rs. in crores) City Ltd. Tech. Ltd. (Rs. In(Rs. in crores) (Rs. in crores) crores)--------------------------------------------------------------------------------Share capital 3482 11.61 11.61 58.04--------------------------------------------------------------------------------Reserve and surplus 166.59 16.43 114.32 297.34--------------------------------------------------------------------------------Securities premium 20.77 20.77--------------------------------------------------------------------------------Unsecured loan 37.65 37.65--------------------------------------------------------------------------------Secured loan 0.77 0.63 1.40--------------------------------------------------------------------------------Current liabilities: 7.88 0.47 8.35--------------------------------------------------------------------------------Fixed assets--------------------------------------------------------------------------------Land 3.89 3.89--------------------------------------------------------------------------------Buildings 1.48 1.48--------------------------------------------------------------------------------Plant and office equipments 0.59 4.65 5.23--------------------------------------------------------------------------------Capital work in progress 25.97 18.59 44.56--------------------------------------------------------------------------------Web casting portal 125.93 125.93--------------------------------------------------------------------------------Vehicles 1.02 1.02--------------------------------------------------------------------------------Current assets:--------------------------------------------------------------------------------Inventories-Featurefilms 174.47 174.47--------------------------------------------------------------------------------Loans and advances 34.92 0.25 35.16--------------------------------------------------------------------------------
71. Apart from the transfer of the assets, upon coming into effect of the scheme, the paid up share capital of the demerged company now consisting of Rs. 348,22,00,000 divided into 34,82,20,000 equity shares of Rs. 10 each fully paid-up shall stand reduced to Rs. 34,82,20,000 divided into 3,48,22,000 equity shares of Rs. 10 each fully paid-up by cancellation of 31,33,98,000 equity shares of Rs. 10 each and the share capital, securities premium and surplus account of the demerged company would stand revised. It must also be noted that the share premium account of the company, which stood at Rs. 95,00,12,500 would be reduced by Rs. 74,23,14,033 by writing off of the goodwill, unsecured creditors' miscellaneous expenditure against securities premium account and by giving effect to the impairment in value of security. The net result is the paid-up capital of the demerged company stands reduced to Rs. 153,96,35,247. The effect of these exercise shows that while apart from the business substantially stand transferred to the resulting companies, practically, all the fixed assets also stand transferred to the two resulting companies, leaving a portion of the plant and office equipment, capital work in progress and vehicle alone at the hands of the demerged company.
72. As rightly pointed out by the objectors/bondholders, as evidenced by the balance-sheet as on June 31, 2007, if assets as a concept has to have a meaning, then practically, the demerged company is left with no assets at all to be called as so to support this obligation of the company under the trust deed. The admitted financial status shows that there has been a substantial transfer of the assets and that the contention of the demerged company that only one-third of the assets stands transferred carries no basis to sustain the said stand. As to the meaning of 'substantial', the House of Lords had an occasion to consider the said phrase in the decision reported in [1948] 1 All ER 1; AC 291, 316 (Palser v. Grinling), on a rent control matter as to whether the payments made in respect of attendance and use of furniture should be added together to determine whether these payments form a 'substantial portion' of the whole rent. The House of Lords pointed out:
What does 'substantial portion' mean It is plain that the phrase requires a comparison with the whole rent, and the whole rent means the entire contractual rent payable by the tenant in return for the occupation of the premises together with all the other covenants of the landlord. 'Substantial' in this connection is not the same as 'not unsubstantial', i.e., just enough to avoid the de minimis principle. One of the primary meanings of the word is equivalent to considerable, solid, or big. It is in this sense that we speak of a substantial fortune, a substantial meal, a substantial man, a substantial argument or ground of defence. Applying the word in this sense, it must be left to the discretion of the judge of fact to decide as best he can according to the circumstances in each case, the onus being on the landlord. If the judgment of the Court of Appeal in Palser's case [1946] K.B. 631 were to be understood as fixing percentages as a legal measure, that would be going beyond the powers of the judiciary. To say that everything over 20 per cent. of the whole rent should be regarded as a substantial portion of that rent would be to play the part of a legislator. If Parliament thinks fit to amend the statute by fixing percentages, Parliament will do so. Aristotle long ago pointed out that the degree of precision that is attainable depends on the subject-matter. There is no reason for the House to differ from the conclusion reached in these two cases that the portion was not substantial, but this conclusion is justified by the view taken on the facts, not by laying down percentages of general application.
73. The said issue was reiterated in the decision reported in [1962] 3 All ER 751 (RPC) (Net Book Agreement, 1957, In re). I have no hesitation in agreeing with this interpretation. Going by the said exposition on the phrase 'substantial' which cannot be restricted by a percentage of general application, the details as to the assets retained by the demerged company clearly belies the claim of the demerged company that only one third of the assets stand transferred to the resulting companies, retaining a substantial part of the assets. The objection of the bondholders on the transfer of the immovable properties is substantiated and going by the description of the assets retained by the demerged company, the contention of the objectors cannot be rejected as an imaginary one or baseless. As such, even though the bondholders are unsecured creditors, when the basis of subscription to the bonds are on the strength of what had been disclosed as its fixed assets, as to the business of the demerged company as well as to the very purpose of issuing bonds for GV Studios development, hiving off of valuable assets, including the money invested in the assets of GV Studios, practically leaves the company without any immovable assets to support the obligations under the bond. Hence, I agree with the submissions of the objector that the scheme of arrangement results in the transfer of substantially all the assets. When compared to the assets at the hands of the company prior to the demerger, what is transferred to the resultant companies under the scheme is practically all or substantially all the assets of the company and the assets left with the demerged company is so negligible that one can even go to the extent of saying that demerged company has no assets worth the name of it. The contention of the demerged company that it has retained a major part of the assets is not supported by any material. On the contrary, as already pointed out, the financial statement as on June 31, 2008, stands as an ample proof as to the kind of assets retained by the demerged company. In Part II of the scheme under Section 5 it is stated:
All the assets and liabilities of the GV Studios Division shall be transferred to GV Studios at the value appearing in the books of the demerged company immediately before the demerger and which are set forth in the opening financial statement.
74. Schedule I gives the assets that are transferred which we have already extracted in paragraphs 13 and 14 of this judgment. The total assets given to the hived off companies would be Bis. 153,96,35,247 (GV Studios- Rs. 28,03,27,389+GV New Media Technologies-Rs. 125,93,07,858). Hence I have no hesitation in agreeing with the submissions of the objectors.
75. As to the business to be carried on by the demerged company on hiving off, as rightly pointed out by Mr. T. K. Bhaskar, learned Counsel, there is no reference either in the scheme or in the counter filed at least as to the business it proposes to carry on. It is seen that 'remaining business' is defined under clause Q of the scheme, Part I, as 'all the business and Divisions of GV Films other than those that are demerged and vested in resulting companies pursuant to Part II and Part III of this scheme and shall include GV Films trademarks, trade names, brands, patents, copyrights, logo, designs and all other intellectual property whether registered or unregistered.'
76. Part VI of the scheme states that 'the remaining business and all assets, liabilities and obligation pertaining thereto' shall continue to belong to and be vested in and be managed by the demerged company. In Part II and Part III, Section 2, Sub-section (7)(c) (demerger and vesting of the business and assets of the first and second resulting companies), it is stated that the demerged company shall carry on the remaining business in terms of the scheme distinctly and as a separate business from the demerged division. The business of the company as given in the issue circular under the heading 'GV Films Ltd., the conceptualist', states that GV Films Ltd., is in the business of film production, exhibition, distribution, web casting and TV serial production. The circular also gives the business of GV Studio City in clause IV of the offer circular. In the background of the terms of the arrangement, it is clear that the scheme does not spell out the business that the demerged company has to carry on, which apparently cannot be the same as what is to be carried on by the two resulting companies. Whatever be the merits of the contentions of the demerged company as regards the business that it proposes to continue, the fact remains that contrary to the terms of the trust deed, apart from the assets substantially transferred, the entire business of GV Studios along with the assets stand hived off, a situation which the objectors rightly object as contrary to the terms of the trust and without referring to the rights of the bondholders under the trust deed. The claim of the demerged company that it has acquired feature film rights, does not answer the objection of the bondholders that when there is no indication as to the nature of business to be carried by the demerged company with practically nil assets left, the interest of the bondholders are totally ignored and slighted by the demerged company, which clearly indicate the lack of bona fides in the conduct of the demerged company.
77. As for Metage Special Emerging Funds Ltd., and Metage Funds Ltd., are concerned, Mr. Arvind P. Datar, learned senior counsel pointed out that they had paid the entire amount acting on the disclosure of the demerged company as to its financial status. Being an unsecured creditor, the only security that they may have for the realisation would be the immovable asset and business, but as of today, under the scheme, except for retaining the liabilities, the demerged company has transferred all its assets, which means the demerged company is left with no assets at all except its liabilities to be content with.
78. As to the contention of senior counsel for the demerged company that the writing off of the goodwill was in tune with AS-14, as rightly pointed out by Mr. Arvind P. Datar, learned senior counsel, writing off a goodwill with reference to the impairment in value would only be as per AS-28. AS-28 gives the method of arriving at the impairment value. The impairment clause recognises the method for valuing goodwill. Paragraphs 93 to 111 deal with the requirements for reversing an impairment clause recognised for an asset or a cash generating unit in prior accounting period. Paragraphs 78 to 82 give the recognition of the impairment value of goodwill as an asset. Given the circumstances under which an impairment clause could be recognised, the claim now put forth by the demerged company for an adjustment in the share premium account carries no details either by way of an explanation in the balance-sheet prepared or anywhere in the scheme or in the resolutions passed.
79. If the goodwill, as projected in the issue circular is to go for a set off as against a share premium account having its reflection on the conversion price, then the demerged company should have put on the bondholders to notice indicating the arriving of the impairment value.
80. Even that apart, any modification of the terms of the trust deed on this aspect, can only be in the manner stated therein. Hence, given the binding character of the resolution passed in issuing the offer circular on the company itself and a trust deed executed, any modification/amendment as to the constitution of the demerged company can only be through a procedure agreed upon between the parties. It is not the case of the objectors that the terms of the trust deed intended to remain rigid and not to take note of any changes in the circumstances of the company. The issue circular followed by the trust deed do provide for a situation which may call for modification, substitution or change to the terms and conditions. This, however, demands a procedure of an extraordinary resolution by the parties to the trust agreement. Hence, what is not possible under the trust deed in the ordinary course except through the procedure agreed thereunder, cannot be circumvented by adopting a means, even though otherwise such course would normally be in conformity with law. The fact that the decision to pass the scheme of arrangement has gone through the majority of the shareholders, per se, may be well in accord with the provisions under Sections 390 to 394 of the Companies Act. Yet in the context of the trust deed, if such resolution touches on the interest of the parties where the rights are created and agreed upon by the demerged company by reason of a resolution of the board of directors and the shareholders, in the absence of compliance of the obligation under the trust deed, the course adopted by the company certainly calls for criticism, which cannot be brushed aside as unsustainable. I am in entire agreement with the submissions of the objectors that given the role of directors as trustees and agents of the company, the course of conduct adopted by the company clearly amounts to breach of trust in not observing the purpose for which the funds were raised, viz., for investment in GV Studio which was held as part of the company GV Films.
81. In considering this violation, one has to look at the conversion rights too. The trust deed executed contains provision and options for conversion, the manner of conversion and the price that has to be worked out. Clause 7 of the trust deed deals with conversion rights, which includes conversion period, conversion price, conversion procedure, delivery of shares, capitalisation issue, division, consolidation and re-classification of shares, dividends, etc. The said clause is comprehensive enough to cover all related matters under this head. Under clause 5, the demerged company has covenanted to keep available, free from pre-emptive or other similar rights, out of its authorised but unissued share capital, such number of shares as would be required to be issued from time to time on conversion of all bonds remaining outstanding and to satisfy in full all other rights of conversion into or exchange or subscription for shares and shall ensure that the issuer will register the relevant bondholder as the holder of only that number of shares issuable upon conversion. Clause 6 of the trust deed makes provision for notice relating to conversion rights. Under Clause 6.1 relating to requirement to give notice, it is stated that if there is reclassification of the shares (including a division or consolidation of the issuer's outstanding shares) or a consolidation, merger or amalgamation to which the issuer is party (whether or not the issuer will be a continuing corporation) or any sale or transfer of all or substantially all of the assets or business of the issuer or where the issuer authorises the issue of any securities convertible into or exchangeable for shares or rights or warrants, which give rise to an adjustment of the conversion price pursuant to condition 7.3 and wherever an adjustment to conversion price is required, the company has to give notice on the adjustment. It is stated that the bondholders and the trustee must be given not less than 28 days nor more than 42 days' notice in writing by the issuer reminding them of the end of the conversion period. Under Clause 9, there is a general covenant, which states, so long as any bond is outstanding, the issuer has to comply with the obligations, which are listed therein. This includes sending of financial statements after the close of each fiscal period, apart from ensuring minimum conversion price that it would not be reduced below the par value of the shares, i.e., Rs. 10 at the date of the issuance of the bond ; that the issuer had further undertaken that it would not take any action which would result in the conversion price being reduced below the permissible limit. Clause 9.23 states that the proceeds received from the issuer of bonds shall be used in the manner specified in the offering circular. The terms and conditions on the conversion price thus specified are intrinsically connected with the business and the assets of the company. Hence, any change in the assets position or in the business has to be in accordance with the terms of the trust deed. As rightly pointed out by learned senior counsel appearing for the objectors, the scheme of arrangement referred to the business of the company post demerger as other than the one given to the resultant company. There is no denial of this in the counter by the company too.
82. Learned senior counsel appearing for the demerged company, however, submitted that when there is no substantial transfer of assets or a sale, the objectors cannot have a valid objection to the scheme. He pointed out that out of Rs. 453.90 crores, only one-third stands transferred and the share ratio stands at 3:1:1. The share value had been done by an experienced firm of chartered accountants. Demerger, as such, does not come under clause 7.1 of the trust deed. However, taking note of the claim of the objectors, the resultant companies are willing to execute supplementary documents to assure repayment. He further pointed out that by the transfer of these assets, the share value, or for that matter, the conversion right, does not get offended in any event. If there be a breach of the terms of the bond, the remedy is elsewhere and not available before this Court by raising objection to a validly passed scheme. Hence, objecting the bona fides of the claim of the bondholders, learned senior counsel pointed out that all that is required under clause 18 is just a notice to be issued to the bondholders. If a notice is given in terms of clause 18, that would be in total compliance of the contractual obligations on the demerged company. The idea behind giving of notice to the bondholders is that they shall be put on notice about the proposed arrangement. The claim of the bondholder would be sustained only if there be a prejudice caused by the demerger. Hence, leaving aside the balance-sheet for a moment, when the resulting companies are giving a supportive supplementary deed and that the assets are there, the bondholders, as unsecured creditors, cannot insist on anything more than what is now offered. Hence, there is no violation of the contractual claim.
83. Learned senior counsel Mr. Arvind P. Datar, pointed out that at the time of issue of bond, the share value stated was Rs. 10. The share value now quoted at Rs. 2 per share stands nowhere to offer any protective cover to the claims of the bondholders. The debenture holders can only look upon the assets as a security for the bonds. With the substantial assets now sought to be hived off and the value of the shares thus almost very negligible, practically, there could exist no such thing as conversion right or even working for a conversion price. In the light of this submission, learned senior counsel for the objectors pointed out that the scheme is violative of the circulars issued and the trust deed.
84. As already pointed out, the conversion rights and the related topics herein carry significance only so long as the demerged company is in the business as assured and the conversion price capable of working in accordance with the formula given therein under clause 7 read with the clauses relating to adjustment to conversion price and floor price as given under clause 7.3.1. The explanation offered before this Court by the demerged company does not touch on any of these aspects as to how the scheme does not do any violence to the conversion price to remain as it is as stated in the trust deed. On the admitted fact that the price of the shares had dipped low, the objectors submitted that the option to go for conversion thus remaining doubtful, the only recourse as a support system to the claim is the assets.
85. The trust deed gives the method of calculating the conversion price as follows:
The price at which shares will be issued upon conversion (the 'conversion price') will initially be price per share determined on the conversion price setting date in accordance with the following formula:
CP = the lessor of (i) Rs. 10.8 and (ii) the floor price
Where
CP = the initial conversion price
floor price = 10.8
This initial conversion price and the floor price will be subject to adjustment in a manner provided for in condition 7.3.
86. It is trite law that interest of the company encompasses the interest of the company's creditors too. A company which holds out its financial strength to invite investors to lend their money to the company owe a duty to the creditors that its property is not dissipated or exploited to the prejudice of the creditors.
87. I agree with the submission of the bondholders that the contractual obligations created under the trust deed consequent on the resolution to issue bonds as approved by the board and the shareholders cannot be touched or modified by the present scheme. If the parties contemplate any change to the terms of the trust deed, it must be through a procedure contemplated under the contract. Hence, what could not be done indirectly even under the contract could not be justified by merely quoting the right available under Sections 390 to 394 of the Act to go for arrangement. Learned Counsel for the demerged company pointed out that the bondholders have no locus standi to complain any breach of the terms of the trust deed and make an issue out of it before this Court in the guise of raising objection to the scheme. It must be seen that the allegation as to the breach arises only by reason of a scheme floated which ignores their own resolution to issue bonds and that the scheme fails to take note of the interest of the class of creditors like the bondholders. As per Section 390(c), the bondholders are unsecured creditors and hence, are entitled to raise their objections if the scheme attempts to defeat the claims of the unsecured creditors. The fact that the bondholders can invoke their rights under the trust deed on a breach committed by one of the parties does not stand in the way of the bondholders questioning the scheme, since any such move would directly be in conflict with their interest as unsecured creditors and as assured under the trust deed. Hence, I do not find any justification in the contention of the demerged company that the bondholders have no right to complain of the breach of the terms of the trust deed in the proceedings before this Court. The availability of any other forum to sue the demerged company on a violation of the terms does not negate the right of the bondholders as unsecured creditors to come before this Court to object to the scheme. Consequently I do not agree with the submission of the demerged company.
88. As to the reduction of share capital, as may be seen from the terms of the trust deed, the reduction could only be subject to clause 5.1.6 of the trust deed, which stipulates that the company would not make any reduction of its authorised share capital or any uncalled liability or on any share premium account or capital reserve, redemption reserve fund, except in each case as permitted by law and with the approval of an extraordinary resolution of the bondholders or with the approval of the trustees so long as they are subscribed that such reduction would not be materially prejudicial to the interest of the bondholders. Mr. T. K. Bhaskar, learned Counsel pointed out that the reduction in share premium account and share capital account now undertaken as part of the arrangement merely reflects an unfairness practised on the class of these unsecured creditors whose rights on conversion are assured as a contractual obligation in the trust deed. I do not find any flaw in the reasoning of the objectors.
89. Learned senior counsel for the demerged company pointed out that floating a scheme of arrangement and reduction in the capital and share premium account are taken in good faith and in the interest of the company ; hence, a commercial decision passed and accepted by the majority of the shareholders. Learned senior counsel for the demerged company pointed out that when law permits the demerged company to go for an arrangement and reduction, the objectors have no locus standi to question the very right.
90. As rightly pointed out by Mr. T. K. Bhaskar, the company seeks transfer of its 'substantial assets', retained as an asset is only book asset to the extent of Rs. 25.97 crores. No details are given as regards the portion of the share capital retained as required under Section 75(b) of the Act. The claim that the company has acquired fresh assets or the capital to the tune of Rs. 174.47 represents acquisition of feature films' rights which are subject to impairment. With the end use given in the circular as regards the amounts raised by issuing bonds thus violated and no evidence as to the intention to carry on the business for which the bonds were issued, rightly as contended by the objectors, the change in the financial set up of the company and in modifying the articles as regards the business it seeks to run is contrary to the undertaking that the company gave while issuing the issue circular on FCCB and the trust deed. It is not anybody's case as to the right of a company to go for an arrangement, merger, demerger or for reduction of a capital or a share premium account. But when a demerged company has bound itself to observe its rights subject to certain terms and obligations and in a particular manner under a contract while effecting the arrangement, reduction in share capital or share premium account, so that the rights of the other party are not prejudiced, it stands to reason that the company follows the procedure. Insisting on the demerged company to observe the procedure agreed upon does amount to a denial of a statutory right available to the demerged company to go for an arrangement for a reduction. Hence, given the right under the statute to go for arrangement, merger, demerger, a reduction in share capital, or share premium account, when the agreement prescribes the procedure, the obligation thus undertaken by the company not complied with the objectors have every reason to object which cannot be rejected as one without substance. Hence, any failure to follow the procedure necessarily results in the breach as complained of.
91. As already pointed out, the substantial objection of the objectors to the scheme is that it has changed the very face of the obligations and the rights of the objectors that with no worthwhile assets left at the hands of the demerged company and this has been without notice to the objectors and in contravention of the procedure agreed upon, the objectors are right in their submissions, that apart from the statutory right that the demerged company has, there is equally a right and interest of the contracting parties in the business of the company that the interest of the creditors are not in any manner prejudiced. Apart from the shareholders having material interest, the creditors are one class of persons other than the shareholders having interest in the assets of the company as the only source for the satisfaction of their debt. If the contemplated action of demerger or the reduction of the share capital leaves behind assets good enough to cover the debts fully or substantially, then the interest of the creditors in the scheme is practically negligible. However, where the scheme leaves nothing or practically very little for the creditors to fall back on and given the object of the execution of the trust deed and the various clauses, the interests of creditors really matters while considering the rights of the demerged company to go for an arrangement. As pointed out by the objectors, there is hardly any mention as to the interest of the objectors or the bondholders' interest as unsecured creditors considered as a matter of consideration under the scheme. With the substantial assets transferred and the purpose held for raising the debentures defeated by hiving off the studio unit and the serious impact on the conversion price, I agree with the submissions of the objectors that the scheme now floated, apart from committing breach of the obligation, result in modification and alteration of the conditions of the trust deed and hence, without undergoing the process contemplated under the trust deed, the scheme cannot be sanctioned.
92. This leads us to the second submission of the objectors that the scheme is violative of provisions of the statute. The issue relates to Sections 78 and 101 of the Companies Act, 1956.
93. Mr. Arvind P. Datar, learned senior counsel, pointed out that the scheme floated by the demerged company, particularly with reference to re-organisation of capital and securities premium account, starts with a non obstante clause that 'notwithstanding anything contained in Sections 78 and 104 of the Companies Act', the scheme has been framed, pursuant to which, there would be a demerger of the GV Studios Division to vest with GV Studios and GV New Media Technologies Division to vest with GV New Media Technologies and the reduction of share capital and the securities premium account of GV Films reduced by writing off of goodwill, etc. Learned senior counsel pointed out that when the scheme contemplates a reduction in share capital and share premium account and that given the object of reduction as stated in clause 2(a)(2) of the scheme, Section 78(2) of the Act has no relevance if reduction contemplated must follow Sections 100 to 104 of the Companies Act. Referring to the decision of the Chancery Division reported in [1957] 1 WLR 1143 : [1958] 28 Comp Cas 252 (Paringa Mining and Exploration Co. Ltd., In re), learned senior counsel Mr. Arvind P. Datar pointed out that given the course of conduct that all the shareholders get the shares in the new companies, the relevant provision that stands attracted is Section 101(2) of the Act.
94. In this connection, Mr. P.S. Raman, learned senior counsel appearing for the petitioner, pointed out that Section 101(2) of the Companies Act, 1956, has relevance for the court to call for meeting if the facts so warranted ; that the provision contemplated is only a discretionary jurisdiction of this Court to call for a meeting as regards cases falling under Section 101(2) of the Act. There is no mandatory requirement for the court to issue or for the petitioner to seek issue of such notices to the bondholders. He pointed out that the share premium account was created out of the shares allotted on the purchase of distribution rights. The 18th annual report of the company relating to the year 2006-07 refers to the amalgamation of One World Media Network Infotainment Ltd. (OMNI Ltd.) with the demerged company that pursuant to the scheme approved by the High court, the company had allotted 3,85,00,000 equity shares of Rs. 10 each fully paid to the shareholders of the erstwhile OMNI Ltd., on May 14, 2004. The difference between the value of the net assets acquired on amalgamation and the amount of shares issued to the shareholders of the amalgamating company had resulted in a goodwill of Rs. 30.50 crores. The annual report further states that considering the share premium amount of Rs. 79.50 crores available with the company, the management had decided to adjust the goodwill of Rs. 30.50 crores as against the share premium account after getting approval from the shareholders, the regulatory authorities and the High Court. The adjustment of the goodwill as against the share premium account is as per AS-14. Hence, comparing the situation between Sections 78 and 101(2) of the Act, he pointed out that even leaving aside Section 78 for a moment and that Section 101 would be applicable, even then, when the jurisdiction of this Court to issue notice under Section 101(2) of the Act is merely a discretionary one and when the court had not decided to issue notice to call for a meeting of the unsecured creditors, no exception could be taken to the conduct of the demerged company in not taking notice on the objectors.
95. Placing reliance on the decision reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re), learned senior counsel appearing for the demerged company pointed out that only where there is a repayment of the paid-up capital or a cash outflow that the law requires calling for a meeting of the creditors. Referring to the decision reported in [2005] 128 Comp Cas 152 (Kar) (Comat Infoscribe P. Ltd., In re), he further pointed out that law does not contemplate any specific notice to be issued under Section 78 or 101(2) of the Act. He also referred to the decision reported in : [1997] 88 Comp Cas 596 (AP) (Novopan India Ltd., In re) and : [2004] 122 Comp Cas 900 (Mad) (Parrys Confectionery Ltd., In re), apart from placing reliance on Ramaiah's Companies Act, 16th edition at page 5236 and the order of this Court dated July 8,1997 in C.P. Nos. 114 of 1987 and 118 of 1997 relating to Rule 85 that when the procedures under Section 101 of the Companies Act are complied with, by reason of Section 391 of the Act being a complete code by itself with the single window clearance, the law does not contemplate individual notices to the unsecured creditors on the reduction of the share premium account and share capital, there being no outflow of capital resulting in diminution of value payable to the creditors. The extent of the interest of the unsecured creditors in the demerged company prior to the arrangement is only 38 per cent. In the face of the resulting companies agreeing to execute the supplementary trust deed, the interests of the unsecured creditors are fully taken care of. Given the power of reduction in the articles of association and as recognised by the provisions of the Act, no exception could be taken to the arrangement presented by the demerged company before this Court. In the background of specific provisions thus complied with, the notice as contemplated either under Section 101 or 78 of the Companies Act does not arise ; the demerged company had not shirked from their responsibility of giving notice. Hence, there is no violation.
96. Learned senior counsel appearing for the petitioners placed heavy reliance on : [2005] 123 Comp Cas 458 (AP) (Hyderabad Industries Ltd., In re (No. 2)), that there is no prohibition in going for reduction of share premium account by writing off goodwill, or for reduction of share capital and given the scheme of Section 391 of the Act, once the scheme has been approved by the majority of the shareholders and the procedure laid down under the Act thus observed, there is no need to have the self-same procedure observed once again.
97. To this, Mr. Venkatavaradhan, learned Counsel, submitted that all that Section 78 of the Act contemplates is reduction, whereas, what has been taken as a part of the scheme is an adjustment, which is different from reduction. Referring to the decisions relied on by Mr. P.S. Raman, learned senior counsel, he pointed out that the decision reported in [2005] 128 Comp Cas 152 (Kar) (Comat Infoscribe P. Ltd., In re), is distinguishable, as the transferor companies in that case were subsidiaries of the transferee company and no shares were proposed to be issued to the shareholders of the transferor companies in terms of the scheme of amalgamation. The reduction sought for was as regards the share premium account of the transferee company. Referring to the decision reported in [1972] 42 Comp Cas 563 (Mad) (T. Durairajan v. Waterfall Estates Ltd.), he pointed out that the demerger with reduction is different from amalgamation with a reduction, wherein, it was held that in the background of Sections 390 to 394 of the Act, the provisions of Section 100 of the Act have no relevance to the scheme of amalgamation. Learned Counsel pointed out that in this case, the scheme floated by the company is for demerger with reduction in the share capital as well as share premium account. Hence, going by the decision reported in : [1992] 73 Comp Cas 517 (Mad) at page 523 (Asian Investments Ltd., In re), the scheme violates Section 100 of the Act and hence, liable to be rejected.
98. A reading of Section 78 of the Companies Act, 1956, shows that the amount in the share premium account could be applied only for stated purpose as given in Sub-section (2), which reads as follows:
Section 78(2)...(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares ;
(b) in writing off the preliminary expenses of the company ;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
99. If the amount in the securities premium account is to be used for any other purpose, then it would amount to reduction in share capital attracting the provisions of Sections 100 to 105 of the Act.
100. Section 100 of the Act deals with reduction of share capital by way of special resolution, provided, the articles of association so authorised the company to reduce the share capital. Section 101 of the Act deals with the application to the court for confirming the reduction.
101. Section 101(2)(a) of the Act states that every creditor of the company, entitled to a debt or claim that would be admissible in proof if that date were the date of commencement of winding up of the company, would be entitled to object to the reduction.
102. Section 101 of the Companies Act, 1956, reads as follows:
101. Application to court for confirming order, objections by creditors and settlement of list of objecting creditors.-(1) Where a company has passed a resolution for reducing share capital, it may apply, by petition, to the court for an order confirming the reduction.
(2) Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, and in any other case if the court so directs, the following provisions shall have effect, subject to the provisions of Sub-section (3):
(a) every creditor of the company who at the date fixed by the court is entitled to any debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction ;
(b) the court shall settle a list of creditors so entitled to object, and for that purpose shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which the creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction ;
(c) where a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of this debt or claim by appropriating, as the court may direct, the following amount:
(i) if the company admits the full amount of the debt or claim, or, though not admitting it, is willing to provide for it, then, the full amount of the debt or claim ;
(ii) if the company does not admit and is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the court after the like inquiry and adjudication as if the company were being wound up by the court.
(3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, the court may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct that the provisions of Sub-section (2) shall not apply as regards any class or any classes of creditors.
103. Section 102 states that the court may confirm reduction on such terms as the court thinks fit if it is satisfied of the contention of the creditors' objection to the reduction that either his consent to the same has been obtained or the debt or the claim stands discharged or served. Sub-section (b) states that the court shall settle the list of creditors so entitled to object, to direct notice to be published.
104. Touching on the scope of Sections 100, 101 and 102 of the Companies Act, while considering a case of amalgamation, in the decision reported in : [1992] 73 Comp Cas 517 (Mad) (Asian Investments Ltd., In re), this Court referred to the procedure on reduction of capital as given under Rule 85 of the Companies (Court) Rules, 1959. This Court held (page 523):
Further, Rule 85 of the Companies (Court) Rules, 1959, which is part of the scheme of Section 101 and Section 102 of the Act, provides that where a proposed compromise or arrangement involves reduction of capital of the company, the procedure prescribed by the Act and the rules relating to reduction of capital shall be complied with before the compromise or arrangement so far as it relates to reduction of capital is concerned. It is, therefore, evident that Section 101 and Section 102 and Rule 85 would stand attracted only to cases of compromise or arrangement involving reduction of capital and not to cases of amalgamation simpliciter when the entirety of the assets and liabilities are transferred and when there is no release of any assets.
The object of asking for confirmation by the court of reduction of capital is to safeguard the interest of the creditors of the company.
105. While interpreting the scope of Section 100 of the Act, in the decision reported in [2005] 123 Comp Cas 458 (Hyderabad Industries Ltd., In re (No. 2)), the Andhra Pradesh High Court, considered the decision of the Orissa High Court reported in [1999] 95 Comp Cas 429 (OCL India Ltd., In re), and held as follows (page 464 of 123 Comp Cas):
In OCL India Ltd., In re [1999] 95 Comp Cas 429, the Orissa High Court speaking through Sri A. Pasayat J. as his lordship then was, while interpreting Section 100 of the Act observed:
Section 100 of the Act deals with special resolution for reduction of share capital. In exercising its power the court will have due regard to the interests of the creditors, who may consent or object to the reduction. For a company to reduce its share capital in any manner set out in Section 100, it must have power given to it under its articles to do so. Subject to confirmation by the court as required under Section 101 of the Act, a company may, if authorised by its articles, effect a reduction of its share capital in any way which it may think fit by special resolution, including in particular any of the following ways:
(1) it may reduce or altogether extinguish the liability on any unpaid or partly paid-up shares ;
(2) it may, by reducing the face value of any shares or otherwise, cancel any paid-up share capital which is lost or cancel it to the extent to which there is found deficiency in available assets ;
(3) it may pay off any paid-up share capital which is found to be in excess of the capital requirements of the company.
Reduction of capital in the following ways is within the Act:
(1) diminishing the nominal amount of the shares so as to leave a less sum unpaid ;
(2) diminishing the nominal amount of any shares by writing off or repaying paid-up capital;
(3) diminishing the nominal amount by combining both (1) and (2);
(4) diminishing the number of shares by extinguishing the existing liability on certain shares, writing off or repaying the whole amount paid-up thereon, and cancelling them. The statute has not prescribed the manner in which the reduction is to be carried out nor has it prohibited any method of effecting that object-per Lord Herschell L.C. in British and American Trustee and Finance Corporation v. Couper [1894] AC 397 (HL), at page 405, quoted with approval by Lord Reid in Westburn Sugar Refineries Ltd., Ex parte [1951] 1 All ER 881 who added that 'paying off capital can be done otherwise than by payment of money'. Important though its task is to see that the procedure/by which a resolution is carried through, is formally correct and that creditors are not prejudiced, it has the further duty of satisfying itself that the scheme is fair and equitable between the different classes of shareholders. What then is the duty of the court in considering a matter of this kind In the first place, the interests of the creditors must be safeguarded, but here that has been done. Secondly, the interests of the shareholders may have to be considered but in the case there has been no opposition' by any shareholder at any time and it is difficult to see how there could be any prejudice to any single shareholder. Thirdly, there is the public interest to consider.
The court has first to be satisfied that in the case of the creditors who had objected to the reduction either to their consent to the reduction has been obtained or their debts or claims have been discharged or settled or secured. The court has the power to dispense with this procedure if there is strong cause. Thus, in Meux's Brewery Co. Ltd., In re 1918 1 All ER 1192 : [1919] 1 Ch 28, debenture-holders unsuccessfully objected that the proposed reduction would be prejudicial to their security by enabling the company to pay dividends out of the profits instead of such profits being applied in making good the lost capital. No evidence was adduced, however, to show what part of the lost capital was attributable to circulating capital. The court can also correct immaterial errors in the resolution : Willaire Systems plc., In re [1987] BCLC 67.
Special circumstances which would justify a direction for dispensing with creditors' objections must be such as would satisfy the court that so far as could be reasonably foreseen the relevant creditors would not be adversely affected by the proposed reduction. But if the creditors did actually appear and object, the court would dispense with a creditor's assent only if the company secured payment of his claim by appropriating a sufficient sum. Lucania Temperance Billiard Halls (London) Ltd., In re [1965] 3 All ER 879 : [1966] 36 Comp Cas 356 : [1966] 1 Comp LJ 350 (Ch. D). 'The power under Section 102 is conferred on the court in order to enable it to protect the interests of dissenting shareholders and even those who do not appear. Before confirming a reduction the court must see that the interests of the minority shareholders and of the creditors are adequately protected and that there is no unfairness even though this is an internal matter of the company'. Indian National Press (Indore) Ltd., In re : [1989] 66 Comp cas 387 (MP)'.
106. Keeping these propositions in the background with which I agree, the facts herein show that reduction in the share premium account is part of the scheme of demerger. The reduction sought to be undertaken is by writing off the goodwill to the value of Rs. 30.50 crores and unauthorised miscellaneous expenses. In the process so undertaken, there is no doubt that the reduction has not resulted in payment of any money to the shareholders. It is not denied by the demerged company too that the exercise could not be validly termed as one under any of the clauses under Section 78(2) of the Act. If reduction is not a case falling under Section 78(2) of the Act, then the only relevant provision that one can look at is as given under Section 78(1) of the Act, which means, the demerged company has to go through the motion of Sections 100 to 104 of the Act as a deemed reduction in capital. Learned senior counsel appearing for the demerged company is, no doubt, right that Accounting Standard 14 provides that goodwill on amalgamation could be amortised in five years. He is also right that Section 101(3) of the Act enables the court to dispense with a notice contemplated under Section 101(2) of the Act, relating to the settlement of the creditors' objection when the court is satisfied that the reduction does not prejudice the interest of the creditors. Yet, all these might have demanded acceptance from this Court, had there not been a clause in the trust deed which required that 'in the case of reduction in share capital, the issuer has undertaken in the trust deed, inter alia, that so long as any bond remains outstanding, save with an approval of an extraordinary resolution (as defined in the trust deed) of the bondholders or with the approval of the trustee where it is satisfied that it is not materially prejudicial to the interest of the bondholders to give such approval'. Leaving aside this contractual obligation, given the fact that the reduction of share premium account does not fall under Section 78(2), the question now is whether there has to be a compliance of Section 101(2) of the Act herein, there being prejudice to the interest of the creditors. On the other hand, bound by contractual obligations, the question is, was there a compliance of the terms of the trust deed.
107. As rightly pointed out by the objectors, the case on hand is not one of amalgamation, where on transfer, the assets remain as it is or enhanced ; that the creditors have nothing to lose by way of diminution in the value and security to support this claim. The scheme presented before this Court, as already seen, involves hiving off of the units, transfer of assets of substantial value to the resultant companies, leaving only liabilities at the hands of the demerged company. Even though the balance-sheet as on June 31, 2007, shows the increase in its share capital with the further increase in the inventories, the value ever remaining ambulatory of the rights acquired not having a status as fixed assets to be called so in terms of AS-10, the objectors are right in their submission that their interests are seriously prejudiced. Contrary to the assertion of the demerged company that there is no outflow of capital, as part of the scheme of arrangement, the beneficiaries would be the shareholders in the resulting companies getting shares in the ratio mentioned therein.
108. It is true that in the decision reported in [2005] 128 Comp Cas 152 (Comat Infoscribe P: Ltd., In re), the Karnataka High Court held that there is no impediment for reduction of share capital being part of the scheme of amalgamation ; that when the scheme had been approved by the requisite majority of the shareholders and the creditors, there was a total compliance of the requirement of Sections 78 and 100 of the Act read with Rules 85 and 47 of the Companies (Court) Rules, 1959.
109. A look at the facts of the reported case shows that the scheme was with reference to amalgamation of two transferor companies with a transferee company. Notice was ordered by the court to be issued to the shareholders and the creditors of the transferor companies. As far as the first transferor company was concerned, the transferee company was the only creditor. As far as the second transferor company was concerned, on notice, four creditors, who represented 95.29 per cent. of the total debts of the second transferor company, attended the meeting. The resolution was passed unanimously. So too, the shareholders of both the transferor companies. The court pointed out that the reduction of share premium account could be effected as an integral part of the scheme itself as the same does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid-up share capital and the order of the court sanctioning the scheme shall also be deemed to be an order under Section 102 of the Act confirming the reduction, as the creditors were informed of the reduction in capital. The court pointed out 'two persons whose interest are going to be affected in so far as a reduction of a share capital is concerned are shareholders and creditors of the company. When once the reduction in share capital does not involve the diminution of liability in respect of unpaid share capital or payment of any shareholder to any paid-up share capital, the question of their interest being affected is not there'. When the draft scheme of amalgamation was sent to the creditors and the shareholders enabling the parties to have a clear picture of the scheme and participate in the meeting to consider the same, the transparency required therein is complied with and thereby, the procedure prescribed under Section 100 of the Act is also substantially complied with and that is what Rule 85 of the Companies (Court) Rules 1959, calls for. The court pointed out 'the provision is made for very good reasons. Thus, reduction of share capital can be brought about as part of the scheme of compromise, arrangement or amalgamation. Once the shareholder and creditor of the company by a statutory majority approve the scheme of amalgamation and the said scheme of amalgamation is not opposed to public policy and when the auditor has given the report stating that the affairs of the company have not been conducted in a manner prejudicial to the interest of the members or public interest, the scheme which includes reduction of shares requires to be approved. However, further procedure prescribed under Section 100 in so far as the share capital is to be followed in addition to the procedure to be followed after sanctioning of the scheme'. Being subsidiaries of the transferee company, the question of issuing share certificates in favour of the shareholders of the transferor companies did not arise.
110. As already pointed out, the law, as stated above will have relevance only to a case of simple merger and where the scheme does not result in any prejudice to the rights of the creditors. Short of repetition, when the contract contemplates a particular procedure irrespective of whether Section 101(2) of the Act will have relevance or not, the demerged company is bound to observe the procedure. In the face of the distinguished facts presented herein, I do not find, the reliance placed by the demerged company on the decision of the Andhra Pradesh High Court is well placed. Even otherwise, the reduction of share premium account not falling under Section 78(2) of the Act, the relevant provision would be Section 101(2) of the Act. The arrangement certainly demands notice in terms of Section 101(2) of the Act, the relevancy of which cannot be ignored by any terms.
111. Quite apart from what has been stated above, AS-28 is the relevant accounting standard to be observed in the matter of writing off of goodwill as an impaired asset. This contains elaborate provisions including identifying of an asset as impaired asset and the method of setting off. The demerged company had not, in any manner, touched on this aspect, be it in its financial statement or by way of an explanatory note in the balance-sheet as on June 30, 2007, as to the recognition of the impairment loss and the liability thereon. The relevant paragraphs relating to the valuation of goodwill as an impaired asset is given under paragraphs 78 to 82. AS-28 defines corporate assets other than goodwill that contribute to the future cash flows of both the cash generation unit under review and other generating units. Paragraph 5 says, when an asset is impaired, then the carrying amount of the asset exceeds recoverable amount. Paragraphs 57 to 62 set out the requirement for recognising and measuring impairment losses for an individual asset. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. This reduction is an impairment loss (paragraph 57). In the allocation of corporate assets, every commercial organisation conducts impairment test of each of its cash generating units. Paragraph 87 states that the impairment loss should be allocated to reduce the carrying amount of the assets of the unit in the manner specified therein and this includes first the goodwill allocated to the cash generating unit and then to the other assets of the unit on a pro rata basis based on the carrying amount of each asset in the unit. Paragraphs 78 to 82 prescribe the methodology of allocation of goodwill to the cash generating units. The allocation of the goodwill should be on a reasonable and consistent basis applying either the bottom up test or the top down test. Unless the details are worked out as given therein, the claim of the demerged company as regards writing off of goodwill as an impaired asset cannot be sustained. The claim that there is no outflow of capital in reduction of share premium account that the same is done by writing off of the goodwill and other expenses, by itself, cannot be accepted that the same was in tune with the Accounting Standards. Given the fact of arrangement herein that the reduction itself is not for any of the purposes stated under Section 78(2) of the Act, or reduction of share capital per se will not entitle the demerged company to have the scheme sanctioned without observing the procedure under Section 102(3)(b) of the Act.
112. Learned senior counsel appearing for the demerged company submitted that issuing of notice to the creditors is a discretion of the court and that the unsecured creditors cannot demand such a notice as of right. He further pointed out that the fact that the case does not fall under Section 78(2) of the Act does not mean that automatically one has to go for a notice to be issued to the unsecured creditors. It is no doubt true that notice under Section 102(3) of the Act is a matter of discretion for the court to exercise, given the interest of the creditors herein. It is no doubt true that when Justice Rajeswaran ordered by order dated November 29, 2007, in C. A. No. 3066 of 2007, directing the convening of the meeting of the shareholders, the meeting of the creditors was not ordered, apparently for the reason that the details that are now available before this Court were not available then. However, the fact that this Court did not do so, does not mean that on an objection from the creditors, the issue as to whether Section 102 of the Act is relevant or not for the purpose of issuing notice, does not remain a concluded issue for the court to consider the issuance of notice to the unsecured creditors.
113. In this, I agree with the submissions of the objectors that given the facts herein that the scheme contemplates substantial transfer of assets and going by the built-up of the share premium account and the adjustment sought for by writing off the goodwill, notice under Section 102(3) of the Act is really required to be given to the unsecured creditors. It must be noted that it is the scheme that contemplates reduction of the share premium account by an adjustment of the goodwill by writing off. If the adjustment or the reduction takes place consequent on any statutory requirement, then it would be totally a different aspect for the demerged company to contend that no notice is required, since statutory requirement, as such, itself is a sufficient notice. But where a company goes for a reduction on a circumstance other than any of the stated clauses under Section 78 of the Act, then the only other provision on which reliance could be placed is Section 101(2) of the Act. Hence, going by the requirement under Section 101 of the Act as well under Section 78 of the Act, it is clear that on the given facts herein, the demerged company is bound to go by the provisions of Section 101 of the Act.
114. Counsel on either side referred to the decisions on the scope of Sections 101 and 102 of the Act, apart from Rule 85 of the Companies (Court) Rules 1959, in the case of an amalgamation as to whether the company has to undergo the same procedure once again, when reduction of the share capital is part of the scheme itself. In the decision reported in [1972] 42 Comp Cas 563 (T. Durairajan v. Waterfall Estates Ltd.) this Court pointed out that the object for confirmation of a reduction of capital by the court is to safeguard the interest of the creditors of the company and other obligations or rights coming into existence in the light or on the strength of the existing capital structure either fully paid-up or realisable at call. This Court pointed out that where the scheme involved transfer of the entire assets rights and liabilities of the amalgamating companies to the new company, which becomes liable to the creditors of the amalgamated company to the fullest extent, then to such a case, the procedure as provided under Sections 100, 101 and 102, is hardly applicable and Rule 85 did not contemplate a compromise in the nature of an amalgamation as stated above. In : [1992] 73 Comp Cas 517 (Mad) at page 523 (Asian Investments Ltd., In re), justice AR. Lakshmanan (as he then was) pointed out as follows:
Further, Rule 85 of the Companies (Court) Rules, 1959, which is part of the scheme of Section 101 and Section 102 of the Act, provides that where a proposed compromise or arrangement involves reduction of capital of the company, the procedure prescribed by the Act and the rules relating to reduction of capital shall be complied with before the compromise or arrangement so far as it relates to reduction of capital is concerned. It is, therefore, evident that Section 101 and Section 102 and Rule 85 would stand attracted only to cases of compromise or arrangement involving reduction of capital and not to cases of amalgamation simpliciter when the entirety of the assets and liabilities are transferred and when there is no release of any assets.
The object of asking for confirmation by the court of reduction of capital is to safeguard the interest of the creditors of the company.
115. In the background of the law thus declared, unlike in the case of an amalgamation where the transferor company's assets with the liabilities stand transferred to the transferee company; that the creditors have nothing to complain about as to the disappearance of the assets to support their claim, the facts herein show that this is a case of a demerger where substantially all the assets stand transferred to the resulting companies. The share premium account and the share capital are reduced. Practically the demerged company does not have any assets as such to offer as a security to these creditors. Although the resulting companies state that they will offer a supporting affidavit, yet, given the obligations under the trust deed and the rights available to the creditors, namely, the bondholders, the claim that there is no need at all to give a notice to the bondholders as creditors cannot be accepted. Even if the reduction is to be treated as part of the arrangement and hence there is no requirement for observing the procedure under Sections 101 to 104 of the Act, Section 393 will have relevance. As rightly relied on by the objectors to the unreported decision of this Court dated January 29, 2003 in C.P. Nos. 239 to 242 of 2001, this Court pointed out in paragraph 28 'there is nothing in the Act to show that notice to the creditors need not be given and the notice should be given only to the shareholders. The issue of notice to the shareholders or to the secured creditors is in the discretion of the court and it depends upon the facts and circumstances in each case. If all the material particulars are disclosed by the company and if the court is satisfied, then the court can pass appropriate orders.'
116. This Court pointed out that there is no hard and fast rule relating to the converting of the creditors' meeting. Class rights can arise by reason of difference in interest and regard must be paid to this in framing the proposed arrangement. If by the arrangement, the security is likely to be affected, then the company ought to have convened the meeting of the creditors before moving the court.
117. As rightly pointed out by Mr. Arvind P. Datar, learned senior counsel, there cannot be a scheme formulated to ignore the statutory provisions of Sections 78 and 101 to 104 of the Act.
118. Having regard to the above, I agree with the submissions of the objectors that the scheme is violative of the statutory provisions, apart from committing breach of the contractual obligations as contained in the trust deed. The decisions relied on by the demerged company in [2005] 128 Comp Cas 152 (Kar) (Comat Infoscribe P. Ltd., In re), is distinguishable on facts.
119. Mr. Arvind P. Datar, learned senior counsel pointed out that the scheme itself is opposed to public policy. As rightly pointed out, there is no explanation as to the commercial compulsion under which the present course of action is taken and the scheme cannot be used to set at naught the commercial obligations under the contract.
120. This takes us to the objection of the other objector, namely, Gayathri Holdings P. Ltd., the shareholder who also is an unsecured creditor as per Section 390(c) of the Act.
121. Mr. T.K. Seshadri, learned senior counsel appearing for the objector/shareholder, pointed out that the shareholder of the demerged company holds 36,100 numbers of equity shares. The second objector herein is the director of the first objector, Gayathri Holdings P. Ltd. It is stated that at the request of G. Venkateswaran, the then director of the demerged company, along with the other sister concerns, Sujatha Estates P. Ltd., Sujatha Film Ltd., Sujatha Products P. Ltd., and Anna International P. Ltd., claimed to have owned 7,80,000 equity shares of Shaw Wallace & Co. On the representation of the said G. Venkateswaran requesting the first objector company to buy the said shares, the first objector company agreed to give G. Venkateswaran a sum of Rs. 380 lakhs at Rs. 85 per share value totalling Rs. 663 lakhs, for the specific purpose of discharging the income-tax dues, so that the claim of the Income-tax Department over the said shares could be discharged to make them fully transferable. An agreement was stated to have been executed between the first objector company and G. Venkateswaran representing himself and the demerged company and other companies on November 9, 1987, whereby, 7,80,000 equity shares of Shaw Wallace & Co., was agreed to be purchased for a total consideration of Rs. 663 lakhs. The first objector learnt that contrary to the assertion of G. Venkateswaran and other companies, including the demerged company, the demerged company and its sister concerns owned 1,74,399 shares only and thus on payment of the amount, the Income-tax Department released 1,74,399 shares to the first objector company. On January 24,1990, G. Venkateswaran, the demerged company and four other companies agreed to make good the loss and deposited with the objector company, the shares held in the company, Sujatha Estates, Sujatha Film Products and Anna International Co., totalling in all 7,20,000 shares. It was further agreed that the said G. Venkateswaran would convey certain unencumbered property situated in Mahabalipuram. The first objector company filed a suit before this Court in C.S. No. 915 of 2006 against the demerged company and the sister concerns as a holder of share in GV Films, demerged company, and sought for a decree directing sale of the shares and paying over the proceeds thereof to the first objector company and for a personal decree for money against the demerged company and the sister concerns for the balance or in the alternate, for a money decree for the sum falling due after such account is taken against the demerged company and the sister concerns.
122. The demerged company took an application in A. No. 2471 of 2007 and sought for rejection of the plaint on the ground of limitation and to institute criminal proceedings against this objector. By order dated March 10, 2008, this Court dismissed the plea of the demerged company that considering certain allegations of fraud, the plea of limitation being a mixed question of fact and law, the said claim could not be decided at the stage of the application and hence rejected the application. In the meantime, the Central Bank of India filed an application in A. No. 2472 of 2007 in A. No. 5085 of 2006 and sought for impleading the bank in the suit. It was alleged that the demerged company availed of some credit facilities from the bank and had pledged the shares of Sujatha Estates P. Ltd., as security. The share certificates were issued by the demerged company. When the bank sought to execute their right to invoke the pledge and transfer the share certificate to their name, it was found that the certificates mismatched. In the circumstances, alleging that the share certificates were forged, the bank sought for impleading itself in the suit. The application was ordered by this Court, as against which an' appeal is stated to be pending.
123. In the face of the amount thus due from the demerged company, the present objection is taken in the capacity of the shareholder and creditor.
124. Learned senior counsel pointed out that since the demerged company seeks to transfer the substantial assets, as a shareholder and creditor, it is entitled to object to the scheme, since as a creditor it cannot have any recourse against the resulting companies. Hence, going by Section 390(c) of the Act and Order 38, Rule 5 of the Civil Procedure Code, as an unsecured creditor, this objector is entitled to come before this Court objecting to the scheme. He referred to the number of shareholdings of this objector as admitted in the counter as 36,100 equity shares. He pointed out that the company holds 85,545 shares and the shareholders spread all over India. The shares were listed in three stock exchanges. In the first notice ordered by this Court for convening the meeting, publication was directed to be effected in The Hindu Business Line, Chennai edition and Malai Murasu, Chennai edition. This was as per the order dated November 29, 2007, in C. A. No. 3065 of 2007. He pointed out that considering the strength of the shareholders, there was no wide publicity done as regards the convening of the meeting. As against 85,545 shareholders, 787 shareholders alone were present in the shareholders' meeting to approve the arrangement, vide the chairman's report. Learned senior counsel pointed out this fact to emphasise that there was no proper representation in the shareholders' meet on account of lack of wide publicity. In the absence of wide publicity to enable the participation of the shareholders, the fact that majority of the shareholders present, voted and passed this scheme would not amount to proper compliance of Section 390 of the Act. In the circumstances, the demerged company failed to disclose the list of shareholders spread throughout the country and this clearly demonstrates the underlying agenda to pass through the scheme without proper notice, but by merely showing some semblance of compliance of the provisions of the Act. Learned senior counsel pointed out that as a shareholder, this objector has not received notice as required under the Companies (Court) Rules 1959. The affidavit of the chairman referred to the notices sent. The letter by the courier service, viz., Cameo Corporate Service, merely referred to the sending of letters, but there are no evidence to support the same. There is no reference regarding the service of notice through Cameo Corporate Service in the chairman's report and in the absence of valid proof regarding service of notice by certificate of posting, the letter by Cameo Corporate Service could not be accepted as evidencing the service of notice. As to its claim as an unsecured creditor, who had parted with the money on the security of the shares pledged by the demerged company and others, learned senior counsel pointed out that by the reduction of share capital, the interest of the shareholders and the creditors are totally ignored. When the manner of conduct of meeting itself does not satisfy the requirement of law, the court would not grant its approval to the scheme.
125. Learned senior counsel referred to the decisions reported in : [1996] 87 Comp Cas 792 (SC) (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), as to the definition of 'class', that when the scheme seeks to touch on the interest of the class of creditors and notice thus not given to such class, the question of enforcing the scheme do not arise. He also placed reliance on the decisions reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re); [1995] 83 Comp Cas 30 (SC) (Hindustan Lever Employees' Union v. Hindustan Lever Ltd.) and : [1996] 87 Comp Cas 792 (SC) (Miheer H. Mafatlal v. Mafatlal Industries Ltd.) and submitted that once the scheme is against Section 21 of the Indian Contract Act, 1872, the same has to fail.
126. Learned senior counsel also objected to the scheme as violative of the procedure laid down under the Act. Referring to the chairman's report as to the modification suggested by the company secretary, he submitted that the scheme placed before this Court in the application stage seeking a meeting of the shareholders is not the same as the one placed before the shareholders. Quite apart, he pointed out placing a modification to the scheme without the same being passed by the board of directors itself is contrary to the provisions of the Act.
127. Learned senior counsel further pointed out that when the demerged company had admitted the status of the objector Gayathri Holdings P. Ltd., as a shareholder, the only question is whether there is compliance of the requirement of law. He pointed out that a scheme could be sanctioned only if and when all the formalities are complied with in accordance with the provisions of the Act. He pointed out that law contemplates notice to be served on the shareholder individually as well as by publication. He pointed out that an affidavit from the courier service Cameo Corporate Service in general does not establish the stand of the demerged company as regards the service of notice on this shareholder. Referring to the decision reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re), learned senior counsel submitted that when there is a substantial issue raised as to the lack of compliance in accordance with Section 391(1), the demerged company is bound to prove that there is an absolute compliance of the requirement of law that it is not enough that there is a substantial compliance. He further pointed out to the chairman's report that the total number of shareholders present was less than 10 per cent. Referring to paragraph 19 of the company petition, he pointed out that when the Act contemplates the majority present and voting, the claim as to the compliance by reference to those who were present having less than 10 per cent. of the value of shares of the company would not be a meaningful and purposeful compliance of the provisions.
128. As to the status as an unsecured creditor, learned senior counsel pointed out to the reply affidavit filed by this objector as well as to the affidavit filed by the Central Bank of India in the suit proceedings, which confirms its status as an unsecured creditor and entitled to participate in the meeting. Learned senior counsel further pointed out that there is no answer from the demerged company as to the non-compliance of the procedure with reference to the modification floated, nor placed before the shareholders for its approval first and later on the modified scheme. Placing reliance on the commentary from Shackleton on the Law and Practice of the Meetings, 9th edition, to Chapter VII on the conduct of the meetings, learned senior counsel pointed out that the law on the subject is clear and there is no answer to this from the demerged company. Consequently, when the objects have not been made in the manner known to law and on facts, the scheme could not be approved.
129. Mr. T.K. Seshadri, learned senior counsel for the objector, referring to clause 2 of the amended scheme and pointed out that as stated in paragraph 10 of the petition, the board of directors, on July 16, 2007, appointed a committee of directors, who, in turn, amended the scheme in its resolution dated October 1, 2007. The scheme that was given to the chairman for putting it to vote is not the one which was approved by the board of directors. Hence, there is a deviation from the procedure given under the Companies (Court) Rules. Consequently, the scheme has to be rejected, it having failed to observe the procedure prescribed.
130. Countering the objections of this shareholder-creditor, learned senior counsel for the demerged company pointed out that apart from the affidavit from the courier service Cameo Corporate Service, the annexure to the chairman's report showed the certificate of posting of the notices to all the shareholders. In any event, the holdings of Gayathri Holdings P. Ltd., was to the extent of 0.0001 per cent. only. Referring to the suit filed by the Gayathri Holdings P. Ltd., he pointed out that GV Films was incorporated on March 7, 1989. He pointed out that the case of Gayathri Holdings P. Ltd., was that they lent some money to G. Venkateswaran in the year 1987. Given the date of incorporation of the demerged company, the stand of the first objector as a shareholder and creditor did not arise. The alleged transaction also did not find place in the accounts of the demerged company. Hence, the said objector has no locus standi to question the transaction as a creditor too. He further pointed out that under Section 390(c) of the Companies Act, the unsecured creditors, who have filed a suit and those who have not filed a suit would belong to the same class. In the case of Gayathri Holdings P. Ltd., there being no proof as to its status as an unsecured creditor, the objection cannot be sustained. In fact, the demerged company has filed a suit in C.S. No. 126 of 2007 for damages from the said Gayathri Holdings P. Ltd., claiming that the said Gayathri Holdings P. Ltd., have filed a vexatious suit solely with the intention to malign the reputation of the demerged company.
131. As regards the objection that the procedure observed by the chairman was contrary to the Companies (Court) Rules, 1959, and that the committee had no competency to make recommendation and modification to the scheme, he placed reliance to the chairman's report and submitted that when the scheme with the amendment had passed through the majority and there being no requirement as to any modification to be put on board and thereafter the modified scheme to be put for vote, there is an absolute compliance of the procedure under the Act. He also pointed out that the publication in the newspapers had been effected as directed by this Court ; hence, the plea of lack of publication is also not sustainable. In the circumstances, learned senior counsel for the demerged company submitted that there are no merits in the submissions of the objectors. Having regard to this submission, learned senior counsel for the demerged company prays for approval of the scheme.
132. As to the status of the objector as a creditor, Section 390(c) reads as follows:
Section 390(c) : unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors.
133. Mr. T.K. Seshadri, learned senior counsel, also projected his case in his capacity as a creditor. He pointed out that the interest of the shareholders, creditors, bondholders fall under one class. Unsecured creditors are also class of creditors, whose interest need to be protected.
134. The demerged company does not deny the fact that Gayathri Holdings P. Ltd., is a shareholder of the demerged company. Although the demerged company took the plea that Gayathri Holdings P. Ltd., is not an unsecured creditor, the status as an unsecured creditor is admitted as evident in paragraph 8 of the reply to the affidavit of the Central Bank. It is further seen that the demerged company had admitted the shareholdings numbering 36,100 of the objector in the demerged company and the demerged company was incorporated as early as March 7,1989. Whatever be the merits of the contentions in the suit, the company is yet to file its written statement in the suit. The admitted facts leave no manner of doubt as to the locus standi of this objector to raise its objection as an unsecured creditor entitled to object as per Section 390(c) of the Act.
135. A reading of the plaint shows that the relief sought for is a money claim and hence, this objector satisfies the description under Section 390(c) as an unsecured creditor.
136. The scheme contemplates a change in the state of affairs of the company and as a shareholder having vital interest in the conduct of the business of the company as well as in its assets and irrespective of the extent of holding, he is entitled to be informed of any change in the constitution of the company. When the Companies (Court) Rules, 1959, as well as provisions of the Act contemplate wide publicity to be given as to the convening of the meeting, given the number of equity shareholders spread throughout the country, it is not correct for the demerged company to say that this Court ordered publication in the Chennai edition and hence no error could be read into in the conduct of the proceedings. Although the demerged company gave the total number of shareholders, when the details as to the spread of the equity shareholders is a matter lying only within the knowledge of the demerged company, the claim that the demerged company acted in terms of this Court's order cannot be accepted as a good explanation for this Court to accept.
137. When the company has shareholders numbering 85,545 as noted in the chairman's report, that the publication effected was only in the Chennai edition of the English and the Tamil dailies, the compliance spoken to as absolute in terms of the provisions of the Act cannot be accepted that the scheme passed through the test of the procedures complied with.
138. The letter of Cameo Corporate Services dated July 18, 2008, states as follows:
1. Date & Mode of Despatch of Notice : 27-12-2007 (under certificate ofposting)2. Details of shareholdings : 36,1003. Folio No. : 833934. Certificate No. : 95345. Distinctive Nos. : 1676718 to 17128176. Address : New No. 22 (Old No. 33)Pasumarthy Street,Kodambakkam,Chennai-600 024.
139. The letter lacks details as to the date of posting the notice as well as certificate to the effect from the postal department. The ledger produced before this Court by the demerged company herein gives the annexure regarding the posting of notices under certificate of posting, however shows that the letter addressed to the objector has in fact been sent. Hence, as far as this particular individual aspect of the case is concerned, it cannot be stated that there was no private notice to the shareholder. However, when the Act contemplates dual notice, one in the personal notice form and the other in the form of publications in the two dailies, when there was no proper dual compliance of law, the violation of Section 391(1) of the Act is still persisting, the stand of the objector is well justifiable. In this, I am in agreement with the contention of Mr. T. K. Seshadri, learned senior counsel, that there should be a meaningful compliance of Section 391(1) of the Act. Although the report of the chairman states that the publication had been effected in the all India edition of The Hindu Business Line, the order of this Court clearly shows that this Court directed publication in Chennai edition of The Hindu Business Line and the demerged company has not denied the fact that it published only in the Chennai edition. The copy of the publication filed before this Court also confirms this. Hence, given the number of the shareholders spread throughout the country as admitted by the demerged company, the publication in the local dailies does not satisfy the requirement of law to put all the shareholders on notice as to the convening of notice for the purpose of considering the arrangement and for voting.
140. As to the contention of the objector that the scheme fails to observe the prescribed procedure in the conduct of meeting and passing the resolution, it must be noted that sanctioning of the scheme depends on the company's total observing of the procedure laid down under the Act. It must be noted that the objection raised as to the demerged company failing to observe the procedure as regards the placing of the scheme before the shareholders fall under the following heads:
(i) The modification referred to in the chairman's report while placing the scheme in the shareholders' meeting did not comply with the procedure required, viz., the modifications were not passed by the board of directors but suggested by the secretary of the company.
(ii) The modification of the terms suggested before the shareholders' meeting even prior to the placing of the scheme before the shareholders were recommended only by the committee appointed by the board of directors.
(iii) The scheme placed before the shareholders' meeting was not the same as was placed before the court while ordering the convening of the meeting of the shareholders.
(iv) The modification suggested by the secretary of the company was not put to vote first for considering the incorporation and that only after the modification was considered and voted by the shareholders, can the scheme in entirety in the modified form be put to vote once again for consideration by the shareholders.
141. As regards this objection, it may be noted that the board of directors in the meeting dated July 16, 2007, resolved to place the scheme of arrangement before this Court for convening the meeting of the members/creditors for their consent. The enclosures filed before this Court give the details of the extracts of the meeting of the committee of directors of the company held on October 1, 2007 at 2.00 p.m. It is seen from this minutes that the committee was appointed pursuant to the board meeting dated September 24, 2007 (wrongly typed as 2009 in the minutes in the extracts of the minutes filed before this Court in the paper book) to review the issue regarding the retention of the face value at Rs. 10 each even after demerger but can consider reduction in number of shares. The resolution passed dealt with the share entitlement ratio on the proposed demerger as well as the reduction of share capital. It may be seen that the share exchange ratio arrived at by the firm of chartered accountants is dated July 16, 2007. Accordingly, the board meeting of September 24, 2007, directed the committee to view the issue on the share entitlement ratio and suggest modification. Accordingly, on October 1, 2007, referring to the board meeting of September 24, 2007, the committee of directors minuted the reference as to the majority shareholders' desire to retain the face value of the shares at Rs. 10 each and suggested the modification relating to share exchange ratio as referred to above. Apart from this, it also considered the reduction of share capital of the demerged company to Rs. 34,82,20,000 divided into 3,48,22,000 equity shares of Rs. 10 each by cancellation of 31,33,98,000 equity shares of Rs. 10 each.
142. Evidently, the extracts of the meetings of the board of directors held on October 1, 2007, referred to the issue on share exchange ratio and held that the board unanimously adopted the modified scheme of demerger. It further held 'the chairman of the board of directors reviewed the modification made in the scheme of demerger by M/s. G.V. Films Ltd., based on the suggestion and request of its shareholders and directors regarding the cancellation of equity shares and non-reduction of face value of the equity shares of M/s. G.V. Films Ltd.'. It passed the following resolution:
Resolved that the draft revised scheme of demerger be and is hereby considered and adopted.
Resolved further that the board do hereby agree, subject to obtaining necessary approval from the shareholders and regulatory approvals from the hon'ble High Court of Madras Judicature, BSE and other Governmental agencies, if any, with or without modifications, the share entitlement ratio for the proposed demerger, as the shareholders of M/s. G.V. Films Ltd., will be issued, 1 (one) fully paid-up equity share of Re. 1 each of M/s. GV Studio City Ltd., for ever 3 (three) fully paid-up equity shares of Rs. 10 each held by them in the M/s. G.V. Films Ltd.
143. Read in the background of the resolution of the committee of directors, the board of directors resolution shows that it adopted the recommendation only in so far as share exchange ratio was concerned. There is nothing to show that the resolution of the board of directors dated October 1, 2007, adopted the recommendation of the committee as regards reduction in the share capital.
144. The company application filed before this Court seeking an order to convene the meeting referred to the consideration for demerger in Part IV, Section 1 Clause 2 as follows:
2. Upon the effective date and in consideration of the demerger, including the transfer and vesting of the demerged divisions in the resulting companies pursuant to Part II and Part III of this scheme, the resulting companies shall, without any further act or deed, issue and allot to each member of the demerged company whose name is recorded in the register of the members of the demerged company as on the record date, including those of the Foreign Curency Convertible Bond (FCCBs) holders who will exercise their right for converting the bonds into equity shares at the appropriate rate and become members before the said record date, in the ratio of 1 (one) equity share in each of the resulting company(ies) of Re. 1 each credited as fully paid for every 3 (three) equity shares of Rs. 10 each fully paid-up (the 'share entitlement ratio'). As such, each resulting company shall allot 1 (one) equity share of Re. 1 each fully paid-up for every equity shareholder of demerged company who holds 3 (three) equity shares of Rs. 10 each fully paid-up as part of the share entitlement ratio.
145. It referred to the reduction of share capital also in Part V. Under order dated November 29, 2007, Justice S. Rajeswaran ordered convening of the meeting of the equity shareholders of the petitioner-company in C. A. No. 3066 of 2007 and ordered advertisement in The Hindu Business Line on December 29, 2007 and Tamil daily Malai Murasu on December 29, 2007. Accordingly, the meeting was held on January 24, 2008, held under the chairmanship of Justice K. Govindarajan at New Woodlands Hotel P. Ltd., Chennai. It is stated that the number of equity shareholders who attended the meeting in person and by proxy were 787 equity shareholders. The total number of votes cast were 7,86,61,306 being 7,86,61,306 equity shares of Rs. 10 each held by them. 689 shareholders holding 7,84,85,906 equity shares of Rs. 10 each voted in favour of the modified scheme. 3 shareholders holding 1,75,400 equity shares voted against the scheme. Votes cast by 95 shareholders were held to be invalid. It must be remembered that the paid-up share capital of the company is Rs. 3,48,22,00,000 divided into 34,82,20,000 equity shares of Rs. 10 each. The total number of shareholders is stated to be 85,545.
146. A reading of the chairman's report dated January 29, 2008, filed before this Court shows that the equity shareholders were summoned by notice sent individually upon them on December 26, 27, 28 and 29, 2007 and by advertisement published in English daily The Hindu Business Line (all India edition) and the Tamil daily Malai Murasu on December 29, 2007.
147. In paragraphs 2 and 3, the report reads as follows:
2. With a view to providing better clarity, the applicant-company through its chief executive officer, Mr. Subrmonian, suggested the following modifications in the proposed scheme of arrangement:
In Clause 2 of Section 1 of Part IV of the scheme the following words be added after the words 'register of members of the demerged company as on the record date:
including those of Foreign Curency Convertible Bonds (FCCBs) holders who will exercise their right for converting the bonds into equity shares at the appropriate rate and become members before the said record date.3. Thereafter, I placed a copy of the scheme of arrangement duly including the proposed modification and gave an opportunity to the shareholders to seek clarifications on the scheme, if any. The queries raised by the shareholders were answered by the chief executive officer of the company.
148. The scheme now filed before this Court containing the modification in Part IV paragraph 2 reads as follows:
23. At the said meeting, the following modifications in the scheme proposed by the company, were approved:
In clause 2 of Section 1 of Part IV of the scheme the following words be added after the words 'register of members of the demerged company as on the record date':including those of Foreign Currency Convertible Bonds (FCCBs) holders who will exercise their right for converting the bonds into equity shares at the appropriate rate and become members before the said record date.
149. Mr. T.K. Seshadri, learned senior counsel appearing for the objectors, objects to this portion of the chairman's report and the committee of directors recommending the modification at the first instance as one in violation of the procedure. I agree with the said submission. As is apparent from the resolution placed before this Court and while asking the chartered accountant to suggest the share exchange ratio, no recommendation as regards the reduction of share capital was passed through in the meeting of the board of directors, although the same was there in the minutes of the meeting of the committee of directors. As already noted in paragraph 140 to the extract of the meeting of the committee of directors dated October 1, 2007, at 2.00 p. m., the committee reviewed the issue and resolved on the issue of share exchange ratio as well as the reduction in share capital. The resolution passed on October 1, 2007, or for that matter July 16, 2007, made no resolution on the reduction of share capital. If the reduction of share capital was contemplated already as part of the scheme, there was no necessity at all for the committee to consider the same as an agenda for the committee to pass the resolution. Considering the fact that the resolution of the board of directors dated October 1, 2007, made no reference to this aspect of reduction of share capital, it raises a doubt as to whether the reduction of share capital was a subject-matter of resolution at all before the board of directors.
150. Apart from this, the report of the learned chairman, as already pointed out, referred to the suggestion of the chief executive officer of the company to modify clause 2 of Section 1 of Part IV to add the 'Foreign Currency Convertible Bondholders' rights as a matter of clarification. The said recommendation as extracted in the report of the learned chairman and the modified clause in the scheme placed before the shareholders, reads as follows:
2. With a view to providing better clarity, the applicant-company through its chief executive officer, Mr. Subramonian, suggested the following modifications in the proposed scheme of arrangement:
In clause 2 of Section 1 of Part IV of the scheme the following words be added after the words 'register of members of the demerged company as on the record date.
including those of Foreign Currency Convertible Bonds (FCCBs) holders who will exercise their right for converting the bonds into equity shares at the appropriate rate and become members before the said record date.
151. This inclusion in Part IV is a modification which was not there in the scheme filed before this Court or ever placed before the shareholders' meeting for its consideration with details thereof for consideration of the same for inclusion in the scheme. Accepting the said suggestion from the chief executive officer of the demerged company, the learned chairman merely placed this for voting-an exercise which correctly is now objected to by the objector. He stated:
Thereafter, I placed a copy of the scheme of arrangement duly including the proposed modification and gave an opportunity to the shareholders to seek clarifications on the scheme, if any. The queries raised by the shareholders were answered by the chief executive officer of the company.
152. The statutory requirement as to the details of the scheme to be distributed amongst the members so as to give a full and fair picture of the proposed scheme cannot be disputed by any degree by the demerged company. It must be kept in mind that when the shareholders who attended the meeting represented a fractional part of the general body of the shareholders, the responsibility of it is still greater to see whether the directions of the court are properly complied with. In the decision reported in : [1996] 87 Comp Cas 792 at page 819 : AIR 1997 SC 506 (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), the apex court pointed out the broad contours of the jurisdiction of the court under Sections 391 to 394 of the Act as follows:
(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(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(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 not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same.
(7) That the company court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.
(8) That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
(9) Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The court cannot refuse o sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit of the jurisdiction of the company court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the court's jurisdiction.
153. Applying the said test to the facts herein it is seen that the procedure adopted by the learned chairman in putting the modified scheme for voting is defective as the scheme placed before the meeting is not the same as the one placed before this Court while seeking the convening of the meeting. The scheme that was given to the chairman was not the one approved by the board of directors. Learned senior counsel for the objector placed reliance on the Commentary by Shackleton as to the procedure to be adopted where a modification is sought in the clause of the scheme.
154. I agree with the submission of Mr. T. K. Seshadri, learned senior counsel for the objector/shareholder that the procedure for placing the scheme has not been observed in the manner known to law; that the recommendation of the committee of directors is not the resolution of the directors to carry out the modification in Part IV of the scheme which was placed before this Court while ordering the convening of the meeting. The modification suggested by the chief executive officer of the company cannot be adopted by the chairman as a matter of course without putting the same for voting and that what was placed before the shareholders as a scheme is different from what was given to the court while filing the application to convene the meeting for placing before the shareholders. It must be noted that the procedure contemplates that when a notice is issued to the shareholders, the scheme as is given to the court need to be given to them for considering the same while participating in the meeting. If there is to be an amendment or a modification to the scheme, it can only be after a discussion on the said modification by the shareholders in the meeting. Dealing with the necessity of giving prior notice on an amendment or a modification of the scheme, the learned author Shackleton pointed out that it is customary for a motion or an amendment to be accepted for discussion only after it has been moved and seconded, and if no seconder is found the motion or amendment will fail, although this rule is not adhered to strictly in small committee meetings. If the motion is not of contentious nature and there appears to be unanimity in the meeting, the chairman will put it to the vote and if approved, it becomes the resolution of the meeting. After the motion has been passed by the requisite majority, it becomes the resolution of the meeting. The learned author pointed out that when an amendment is moved, it takes priority over the original motion and must be voted upon before the original motion can be put. When the amendments are passed by a resolution, they are incorporated in the original motion. Then, this must be put to vote.
155. It is no doubt true that the Act or the Rules does not specify the manner in which the meeting has to go on while considering the scheme and a modification suggested. Nevertheless, in fairness to the presence of the shareholders who come to participate in the meeting to consider the scheme, with a copy of the scheme already circulated, the modification proposed by a company needs to be first put on vote and thereafter consider the incorporation into the scheme for purposes of consideration of the same once again by the shareholders in the meeting. The said procedure as suggested by the learned author is more in consonance of fair play that is expected of by a company floating a scheme that the shareholders participating in the meeting are a well-informed gathering to assess the merits and demerits of the scheme, the modification proposed for incorporation and the effects on such incorporation. Going by the facts already stated above as regards the board of directors not passing a resolution on the suggestion of the committee and the scheme placed before the shareholders' meet is not the same as what was originally given to this Court and the procedure contemplated under Section 391 of the Act thus not followed, I have no hesitation in agreeing with the submission of learned senior counsel for the objector. Consequently, I reject the submissions of the demerged company that there has been an absolute compliance of the procedure.
156. As to the number of shareholders attended, viz., 787 as against 85,545 shareholders, as rightly pointed out by Mr. T. K. Seshadri, learned senior counsel, the mere fact the majority of the shareholders present and voted in favour of the scheme cannot be construed as compliance in terms of the provisions of the Act. The publication effected as to the convening of the meeting was in The Hindu Business Line and Malai Murasu of Chennai edition. Considering the total strength of the shareholders numbering 85,545 spread throughout the country, the question remains as to whether there was an effective publication, that the voting by 787 shareholders approving the scheme could be taken as a meaningful and purposeful compliance of the provision.
157. The provision as regards the procedure required as to the number of votes for passing the scheme as given under Section 391(2) reads as follows:
Section 391(2). If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under Section 643, by proxy, at the meeting, agreed to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or in the case of a company which is being wound up, on the liquidator and contributories of the company:Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under Sub-section (1) has disclosed to the court, by affidavit or otherwise, all material facts relating the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like.
158. It is no doubt true that as held by the apex court in [1996] 87 Comp Cas 792 (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), the court does not act as on appeal to set in judgment over the informed shareholders' decision.
159. A reading of the provisions of the Act makes it clear that notice that is contemplated in the section must show compliance both by proper advertisement as well as by individual notices. Learned senior counsel appearing for the demerged company submitted that there is an absolute compliance of the procedure contemplated under the Act when the majority of the shareholders present and voted in favour of the scheme. The said submission would merit acceptance if only there had been a proper notice through publication to all the shareholders. The publication effected in Chennai edition does not satisfy the requirement under law. The fact that there are individual notices to the shareholders does not satisfy the dual compliance contemplated under the provisions in Section 391 of the Companies Act.
160. In this, I agree with the submission of learned senior counsel for the objectors that when there are more than 85,000 shareholders spread all over the country, a publication within a small region is not a compliance absolute in terms of Section 391(1) of the Act. As may be seen from the report of the learned chairman, 787 shareholders attended the meeting as against the total number of shareholders of 85,545. In the background of a publication effected only in Chennai edition, the question certainly arises as regards a purposeful and meaningful compliance of Section 391(1). Learned senior counsel appearing for the demerged company pointed out that the publication was effected as ordered by this Court and that there was no wanting of details in the application as to the number of shareholders that the company has. Hence, no exception could be taken to the publication, which is in compliance of this Court's order. While it cannot be denied that the publication has been effected in terms of this Court's order, the responsibilities that the demerged company has to bring out before this Court the necessary fact that 85,545 shareholders are not residing just in this State alone, but spread all over the country, a fact which the demerged company alone has privy to, cannot be forgotten or ignored by any standards. Hence, it is not correct for the demerged company to take shelter under the orders of this Court that there is an absolute compliance of the provisions of the Act. It may be pointed out that although the learned chairman refers to publication in all India edition, yet, a perusal of the newspapers which are enclosed along with the chairman's report, show that The Hindu Business Line wherein the English version was published in Chennai edition and not in all India edition. In this background, it is quite apparent that there had not been a wide publicity that is required, considering the number of shareholders, as admitted by the demerged company. The compliance of the requirement under law being twin-fold, the demerged company ought to have taken necessary steps to see that there is a wide publication of the scheme, so that there is a proper, effective and purposeful participation of all the shareholders and bring it to the notice of the court the necessity for such wide publication. Learned Counsel for the objector referred to the decision reported in [1970] 40 Comp Cas 819 (Guj) at page 820 (Maneckchowk and Ahmedabad ., In re), in this regard.
161. I am in entire agreement with the submission of this objector that the demerged company has run into the risk of conducting the shareholders' meeting by going for a publication available in a limited area. Hence, even though the publication effected is as per the orders of this Court, given the fact that the demerged company knows about the total number of shareholders and their locations, the demerged company cannot get over the requirement of law seeking protection under the orders of this Court.
162. Learned senior counsel for the objector also referred to the decision reported in : [1996] 87 Comp Cas 792 (SC) (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), that if the court is satisfied that there had not been a proper compliance of the provisions of law in the matter of giving publication, this Court is bound to interfere.
163. Mr. T.K. Seshadri, learned senior counsel pointed out that out of the total equity shareholders value of Rs. 34,82,20,000 the total number of shareholders present were less than 10 per cent. with the aggregate shareholding of 23 per cent. This shows that the conduct of the proceedings are aimed at defeating the rightful claims of the persons like the objector.
164. Mr. T.K. Seshadri, learned senior counsel pointed out that in sanctioning a scheme, the role of the court is just not a supervisory one alone. The court is bound to see the pros and cons of the scheme and when an objection is taken that the scheme affects the creditors as a whole and that there had been no compliance of the provisions of the Act in the matter of giving publication and notice, as held in the decision reported in : [1996] 87 Comp Cas 792 (SC) (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), this Court is bound to interfere. Given the fact that there has been lack of publicity in the convening of the meeting that the scheme that was given to the shareholders was not the same as what was filed before this Court, while seeking permission to convene the meeting, there being fundamental errors in the conduct of convening of meeting, this Court is bound to reject the prayer.
165. Learned senior counsel appearing for the demerged company pointed out to the decision reported in : [1996] 87 Comp Cas 792 (SC) (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), that when the meeting had been held in terms of this Court's order and the details as regards the certificate of posting of the notices are there to show that the individual shareholders were put on notice, this objector cannot complain that there had been no notice at all served on it. When the proof as to the service of notice on individual shareholders is there, the fact that the paper publication was effected only in the Chennai edition of the English daily and the Tamil daily cannot be construed as no compliance of the procedure laid down under the Act and hence this Court may not interfere on the ground that Section 391(1) of the Act had not been complied with. I do not deny for a moment, there is the report from the chairman appointed by the court disclosing the convening of a meeting in terms of the orders passed by this Court and as per the provisions of the Act ; but then, it must be remembered that sanction is not just a formality for the court to go by the mere arithmetical figures that the majority of the share holders representing three-fourths of the value present and voting is the magic figure and sacrosanct for the court to accept as the compliance of the requirements of law. As Mr. T. K. Seshadri, learned senior counsel puts it, there must be a purposeful and meaningful compliance of the requirements on the convening of the meeting of the shareholders. It is the duty of the court to find out whether the procedure under the Act are complied with in letter and spirit in so far as they relate to the holding and conduct of the meeting and the percentage of the shareholding and the shareholders present and therefore the scheme is not against the public interest. The interest of the company is the interest of the shareholders as well as that of the creditors and that there is nothing in the scheme which is against public interest. The fact that the scheme had been passed by the majority of the shareholders, representing three-fourths of the value of the shares, present and voting, by itself, does not demand a seal of approval as to the compliance of the provisions to warrant the sanction of the scheme.
166. In yet another decision reported in [1948] 18 Comp Cas 144 at page 153 (Calcutta Industrial Bank Ltd., In re), the Calcutta High Court held:
The sanction of a scheme by the court makes it binding on the company and all its members and creditors whether they attended the meetings or not and whether they voted for it or against. The responsibility of the court is still greater when the creditors or shareholders who attended the meeting in person or by proxy and approved the scheme by the requisite statutory majority are only a fractional part of the general body of creditors or shareholders as the case may be. Before, therefore, the court may take upon itself the responsibility of thrusting the scheme on all concerned it must look at the surrounding circumstances which led to the proposal of the scheme, see whether the directions of the court and the requirement of the statute were properly carried out and the meetings were properly convened and conducted and whether the matter was considered from the proper point of view on relevant facts fairly disclosed and put before the meeting and, what is more, be satisfied that the scheme is a fair scheme and that there is no reasonable objection to it. The court, I apprehend, will reject the scheme if it is brought to its notice and it is satisfied that there has been any material oversight or miscarriage. I think the court will be justified in rejecting the scheme if it is satisfied that material facts were intentionally withheld from or otherwise not placed before the meeting or that the object of the scheme is to prevent an enquiry into transactions which require investigation or that there has been flagrant failure or disregard in complying with the provisions of the company law in managing the affairs of the company.
167. In yet another decision reported in [1948] 18 Comp Cas 265 (Lakshmi Commercial Bank Ltd., In re), the East Punjab High Court considered the following passage of Lindley L. J. in Alabama, New Orleans, Texas and Pacific Junction Railway Co., In re [1891] 1 Ch. D 213 (page 267):
What the court has to do is to see, first of all that the provisions of the statute have been complied with; and, secondly, that the majority have been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interest of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly...take a view which can be reasonably taken by business men.
Later on the learned judge observed:The court must look at the scheme, and see whether the Act has been complied with,...and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it'.
168. The High Court further pointed out to yet another passage from Lindley L. J. in the case of English, Scottish, and Australian Chartered Bank, In re [1893] 3 Ch. D 385, that while considering the results of the meeting held, it was held that the court is not to register the decision automatically to see that the meeting had been properly convened ; that the shareholders properly consulted and considered the matters from a proper point of view, i.e., with a view to the interest of the class to which they belong. The court ought to be slow to differ from the shareholders' view. If anything is wrong, it should do so without hesitation. The learned judge Lindley L. J., held (page 267 of 18 Comp Cas):
While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted, and have considered the matter from a proper point of view, i.e., with a view to the interests of the class to which they belong and are empowered to bind, the court ought to be slow to differ from them. It should do so without hesitation, if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the court to show that there has been some material oversight or miscarriage.
169. Following respectfully the view thus expressed, when the facts herein project that there had not been a proper publication and had not been a purposeful compliance of the provisions and when the shareholders present at the meeting were less than 10 per cent. representing the share value of 23 per cent. alone, I do not find that there had been a proper purposeful and meaningful compliance of the provisions of the Act. Going by the circumstances herein, I have no hesitation in holding that there is no compliance of the procedure given under the Act.
170. It may be noted that the interest of a company as an artificial person cannot be distinguished from the interests of the person who are interested in it. In the decision reported in [1988] BCLC 20 (Brady v. Brady), the learned judges of the Court of Appeal held that : 'Who are those persons Where a company is both going and solvent, first and foremost come the shareholders, present and no doubt future as well. How material are the interests of creditors in such a case. Admittedly, existing creditors are interested in the assets of the company as the only source for the satisfaction of the debts. But in a case where the assets are enormous and the debts minimal it is reasonable to suppose that the interests of the creditors ought not to count for very much. Conversely, where the company is insolvent or even doubtfully solvent, the interests of the company or in reality the interests of the existing creditors alone'. Although on facts the decision of the Court of Appeal reported in [1988] BCLC 20 (Brady v. Brady), was reversed in Brady v. Brady [1988] 2 All ER 617 by House of Lords, yet the principle of law stated in the Court of Appeal fully supports the case of the objectors herein.
171. Yet another contention taken by Mr. T. K. Seshadri, learned senior counsel related to the status of Gayathri Holdings P. Ltd., as a creditor. The demerged company contended that GV Films was incorporated on March 7, 1989. The letter as to the borrowing is dated January 24, 1990, that is much after the date of incorporation. Hence, it cannot be gain said by the company that Gayathri Holdings P. Ltd., is not a creditor for the purpose of coming before this Court as an objector.
172. It may be noted that the demerged company has not filed any written statement in the suit. The prayer for dismissal of the suit on the ground of limitation was also dismissed holding that the plea of limitation is a question of fact and law. Whatever be the merits of the contention on this, the fact remains that although G.V. Films Ltd., was incorporated in the year 1989, there was an agreement between this objector and the said G. Venkateswaran representing defendants Nos. 1 to 5 and himself for the sale of shares on November 9,1987, of Shaw Wallace company which were under the attachment of the Income-tax Department. Going by the definition of Section 390(c) of the Act, the claim of this objector who has filed a suit before this Court as an unsecured creditor cannot be ignored.
173. In the course of argument, one of the arguments taken by the objector was after hiving off and in the face of covenant in the trust deed that the demerged company will continue to carry on the business stated therein in the trust deed, nothing has been given or indicated as to the business to be carried on by the demerged company to answer the description in the trust deed. The contention of the demerged company that web casting portal is retained by the demerged company is contrary to what is stated in the scheme. As already pointed out, whatever be the effect of the articles of association as to the business to be carried on under omnibus clause, no reference made to the kind of the business that the demerged company has to take on, the scheme suffers from want of details as to the nature of business that the demerged company proposed to continue. Hence, as rightly pointed out by Mr. T. K. Bhaskar, learned Counsel, the contention of the demerged company in paragraph 12 of the petition belies the contention as regards continuation of the business for which the bond was made and that there are no statement as to the nature of business that the demerged company would carry on.
174. Learned senior counsel appearing for the demerged company submitted that when calling for a meeting under Section 101(2) of the Act is absolutely a matter of discretion for the court to exercise particularly when there is no diminution of liability or any payment to be made to the shareholders as regards the paid-up share capital, the question of compliance of Section 101(2) of the Companies Act does not arise. Making a submission that even without following Section 101 of the Companies Act, reduction of share premium account could be ordered, he placed reliance on the decisions reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re) ; [2005] 128 Comp Cas 152 (Kar) (Comat Infoscribe P. Ltd., In re) ; : [1997] 88 Comp Cas 596 (AP) (Novopan India Ltd., In re) and : [2004] 122 Comp Cas 900 (Mad) (Parrys Confectionery Ltd., In re), to impress on the submission that in all these cases of reduction of share premium account, where there is no repayment of paid-up capital, law does not contemplate any specific notice. He pointed out that in any event, the demerged company had complied with the procedure under Section 101 of the Companies Act. There is no outflow of cash or diminution of the value payable to the unsecured creditors. Apart from that, the resulting companies are agreeing to execute supplementary trust deed. Hence, going by the above said facts and that the interest of the unsecured creditor is only 38 per cent., necessary protection is already there for these objectors and there is nothing on fact to complain about on the scheme floated. He further made a submission that even under the trust deed, under clause 5.16, the parties have agreed not to reduce the capital except in accordance with law. When the reduction as per law is permissible and there is full compliance of the provisions of the Act, the objections are to be rejected.
175. Mr. T.K. Seshadri, learned senior counsel, in answer to the contention as to relevancy of Section 78 of the Act and the discretion spoken to in Section 101(2) of the Act placed reliance on the decision reported in [1970] 40 Comp Cas 819 (Guj) (Maneckchowk and Ahmedabad ., In re). Given the fact that the scheme of demerger contemplates a reduction in share capital and in the share premium account with none of the clauses under Section 78 of the Act applying to the case herein, the only section that would govern the case is Section 101(2) of the Act. Hence, the demerged company should have taken steps to convene the meeting of the unsecured creditors.
176. While considering the claim of the bondholders on the scope of Section 101(2) of the Act, I have already pointed out the need for convening the meeting of the unsecured creditors. Given the fact that the reduction is against the terms of the trust deed when it specifically contemplates an extraordinary resolution, in the meeting consisting of a bondholder and the issuer, viz., the demerged company and that substantially all assets stand transferred to the resulting companies, the claim of the objectors cannot be rejected as without substance. In the decision reported in [1970] 40 Comp Cas 819 (Maneckchowk and Ahmedabad ., In re), the Gujarat High Court considered the claim of an objector as to the reorganisation of share capital without observing the provisions under Sections 100 to 104 of the Act. The said case related to a scheme of compromise and arrangement between the creditors and members of the company. Some of the creditors questioned the scheme that the petitioner therein had not satisfied the requirement under Section 391(2) proviso, apart from not convening the meeting of the creditors. While considering the said contention, particularly with reference to reduction in share capital, the Gujarat High Court pointed out that (page 854): 'If Section 391 were not to be treated as complete code and if it is intended that various things that can be done by way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in Rule 85. A scheme of compromise and arrangement may be between the company and the creditors or between the company and members. If the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reduction of share capital which can be carried out as part of the scheme under Section 391 without going through the procedure prescribed under Section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise and arrangement between the company and its members, yet as this prescribed procedure for affecting reduction of share capital has to be gone through even though it forms part of a scheme of compromise and arrangement, the creditors will have a chance to object to the same if it adversely affects them'. The Gujarat High Court pointed out that in an arrangement between the company and its members, since it has a direct impact on the creditors, specific provision is made in Rule 85 that even if reduction of the share capital is to be effected as part of the scheme of compromise and arrangement, the procedure prescribed for reduction of share capital in the Companies Act and the Rules must be gone through before the scheme is sanctioned. It pointed out that if Rule 85 were not enacted, obviously, reduction of the share capital could have been effected as part of the scheme of compromise and arrangement without going through the procedure prescribed in Section 100 onwards. The Gujarat High Court marked a distinction that if the creditors and members of the company arrived at a certain compromise, it can be sanctioned under Section 391 of the Act, despite the fact for some of those things included in the compromise, another procedure is prescribed in the Companies Act and which has not been carried out. The Gujarat High Court further pointed out that where the scheme of compromise and arrangement comprises within its ambit of reduction of the share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under Section 100 onwards has been carried out simultaneously, while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The important thing to be found out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory it has been substantially carried out. The procedure prescribed under Section 101(2) of the Act is not mandatory, but however, where the court requires service of notice of the petition filed on every creditor of the company affected by the reduction and who is entitled to object to the reduction, the procedure has to be complied with. The question then arises under what circumstances such discretion can be exercised As pointed out in the preceding paragraphs if it is a scheme of amalgamation simpliciter and as part of the arrangement between the company and the members of the shareholders if the reduction is taken as part of the scheme having no impact on the creditors, then a single window clearance would be sufficient enough to grant the scheme. The procedure contemplated under Section 101 would necessarily be undertaken simultaneously without going through the procedure prescribed under Section 100 onwards. However, where, in a scheme of demerger with the assets substantially transferred to the resultant companies leaving only the liabilities with the demerged company, the proposal for reduction of share capital and share premium account is undertaken by the demerged company, the unsecured creditors thus left with no security to assure their payment, certainly the discretion spoken to under Section 101(2) of the Act comes alive to call for a meeting of the secured creditors. Hence, even though Sections 390 to 394 of the Act is a complete code by itself providing for a single window clearance and the special provision thereon that the scheme for reduction of share capital could be sanctioned as part of compromise and arrangement, given the facts herein as stated above, the demerged company should have gone for convening the meeting of this class of creditors before the scheme is placed before this Court for sanction.
177. The objectors, namely, the debenture-holders and the shareholders are the creditors to form a class by itself and in all fairness, in respect of the unsecured creditors, the company should have put them on notice as to the scheme proposed, since substantially all the assets are transferred to the resultant companies. Even going by the submission of Mr. P.S. Raman, learned senior counsel when the purpose of calling for a meeting of the secured creditors is to assure them of the availability of the assets, more so in a case like this, when the rights of the bondholders as per the agreement deserves to be respected quite apart from the provisions contained under Section 101(2) of the Act, I do not find any logic in the contention that the scheme need to take note of the interests of the secured creditors only. I do not find any justification in the contention of the demerged company that in insisting on the notice, the objectors are trying to claim an advantage over the demerged company. The unsecured creditors form a separate class and are offended to the extent that given the asset position of the demerged company, these unsecured creditors are compelled to look upon to a third party for its relief. In these circumstances, the company had failed to observe the provisions of the Act.
178. Mr. T.K. Seshadri further pointed out that there had been a deliberate suppression by the board of directors as to the contemplation of the company as to a merger scheme, when they passed the financial report on July 16, 2007. The board of directors met on October 1, 2007. It was also pointed out that the chartered accountants, by that time were engaged by the company to study on the share entitlement ratio on the proposed merger and in their letter dated July 16, 2007, reported the same to the company. Thus, when the board had adopted the financial report in its resolution on July 16, 2007 and when the chartered accountants had already informed the share exchange ratio in their letter dated July 16, 2007, there was a duty cast on the shareholders to disclose these material changes that they proposed to implement therein in terms of Section 217(1)(d) of the Companies Act, 1956.
179. Mr. T.K. Seshadri, learned senior counsel, pointed out that this is a deliberate suppression ; hence, in the background of these facts, the entire exercise of the demerged company is writ with mala fides and hence, prayed for rejection of the scheme.
180. Touching on the scope of the jurisdiction of this Court under Sections 391 to 394 of the Act, in the decision reported in [1996] 87 Comp Cas 792 at page 812 (Miheer H. Mafatlal v. Mafatlal Industries Ltd.), the apex court held as follows:
On a conjoint reading of the relevant provisions of Sections 391 and 393 of the Companies Act, it becomes at once clear that the company court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy.
181. The apex court further pointed out as follows (page 817):
Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered into between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved the principle of 'prudent business management test' or that the scheme should not be a device to evade law.
182. The court has to see that all the requisite statutory procedures supporting the scheme had been complied with and the requisite meetings held in accordance with law. The court has to satisfy itself that the proponent of the scheme is acting bona fide and in good faith, not acting to promote any interest adverse to that of the creditors of the company.
183. Taking guidance from the decision of the apex court, I have no hesitation in holding that the scheme placed before this Court has to fail, it having failed to consider the claims of the class of creditors, namely, bond- holders and the creditors, Gayathri Holdings P. Ltd., whose claim fall under Section 390(c) of the Act to be considered as a creditor. Secondly, the scheme fails, since the demerged company has failed to give proper paper publication as to the holding of the meeting of the shareholders who are nearly 85,545 as admitted by the demerged company themselves ; that the compliance of notice spoken of under Section 391(1) of the Act is a dual compliance in absolute sense; thirdly that the scheme placed before the shareholders' meet has not been put through in motion in accordance with law, in the sense that the modifications suggested by the committee of the directors were not passed through the resolution of the Board particularly with reference to reduction in share capital ; that the modifications suggested at the time of the meeting of the shareholders by the chief executive officer of the demerged company have not been put through in motion for adoption before the ultimate scheme was placed before the shareholders ; that only after the adoption of the modification, the entire scheme has to be placed before the shareholders for their consideration; fourthly, that the scheme floated fails to observe the obligations under the trust deed which are the result of the resolution of the shareholders and the board of directors floating the issue circular to raise foreign currency convertible bonds for the purposes of using the proceeds in the GV Studio Development ; that there has been a substantial transfer of the assets of the demerged company ; that the reduction in share premium account and share capital require a meeting of the unsecured creditors in terms of the trust deed as well as Section 101(2).
184. Having regard to the above said facts, I hold that the scheme is not in compliance of the provisions of the Act and that the objections taken by the objectors merit to be accepted on facts and in law. Consequently, the scheme fails and the company petitions are dismissed. In view of the dismissal of the company petition although the report of the Regional Director is not of any consequence, yet as a matter of completion of the facts projected before this Court, it may be pointed out that the objection as to the clubbing of two notional limits, is already considered in the decision of this Court reported in [2006] 129 Comp Cas 915 (Cavin Plastics and Chemicals P. Ltd., In re), wherein this Court has rejected the objection.
185. In the light of the above, these company petitions stand dismissed. No order as to costs. Consequently, C.A. Nos. 1177 and 1178 of 2008 are allowed.