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Judgment
V. Periya Karuppiah, J.—These appeals are directed against the common order dated December 4, 2008, passed by the learned single
judge made in C.P. Nos. 96 to 98 of 2008 ( In Re: G.V. Films Ltd., ).
The appellant is the petitioner before the said court, who sought for approval of the scheme of arrangement between G.V. Films Ltd., and G.V.
Studio City Ltd., and G.V. New Media Technology Ltd. The said arrangement is for the demerger of the G.V. Films Ltd. (hereinafter referred to
as a parent company) and thereby to create two more companies, viz., G.V. Studio City Ltd., and G.V. New Media Technologies Ltd.
(hereinafter referred to as offspring companies).
The short facts which are necessary for the disposal of these appeals would be as follows:
The petitioner-company is the parent company, viz., G.V. Films Ltd., incorporated under the Companies Act, 1956. It proposes the demerger and
to form the offspring companies known as G.V. Studio City Ltd., and G.V. New Media Technologies Ltd. The main objects of the said parent
company are to carry on the business as film producers (sound and/or silent), hippodrome and circus proprietors of cinema houses, theatres,
concert halls and picture places and studios and also to provide for musical, dramatic and athletic performances for amusements and/or
entertainment for both private and public.
It also has the right of purchasing or owning, acquiring properties, lands and properties and to hotel management, acquire or lease TV channels,
radio and TV stations inside or outside India and to produce Tele serials and to exhibit movies or serials or any film on satellite, internet, cablenet
or any other means of communication.
The said parent company''s authorised sum capital as on June 30, 2007, is Rs. 20,00,00,00,000 divided into 200,00,00,000 equity shares of Rs.
10 each. The issued, subscribed and paid-up capital of the parent company as on June 30, 2007, is Rs. 348,22,00,000 divided into 34,82,20,000
equity shares of Rs. 10 each.
The circumstances which necessitated the demerger of the said company as G.V. Studios and G.V. New Media Technologies (offspring
companies) are to enable the said division to grow as focused business entities and attract capital/strategic investors and facilitate the offspring
companies in becoming major market players in the relevant business.
It is also stated by the petitioner that the demerger will ensure better operational management and result in greater synergies of operations and
focus on accelerated growth of individual units and will also ensure higher returns to the shareholders, creditors and employees and is also in
general public interest. Therefore, it has enunciated a scheme of programme for demerger of the parent company into offspring companies. When
they have sought for approval of the said scheme, the petitioner company was directed by this Court in C. A. No. 3066 of 2007, in its order dated
November 29, 2007, to convene a meeting of the equity shareholders of the petitioner-company for the purpose of considering, and if thought fit,
approving, with or without modification, a scheme of arrangement between the parent company and offspring companies. For that purpose,
hon''ble Mr. Justice K. Govindarajan (Retd.) was appointed to act as a chairman of the said meeting and to report the results thereof.
Accordingly, a meeting of the equity shareholders was convened as per the requirements made in Section 396 of the Companies Act, 1956, and
each of the equity shareholders of the company were informed through certificate of posting, and a notice was also advertised in the English daily
The Hindu Business Line on December 29, 2007 and in Tamil daily Malai Murasu on December 29, 2007, as per the directions of the court.
Accordingly, on January 24, 2008, the meeting of the shareholders of the petitioner-company was duly convened in accordance with the said
order of this Court at New Woodlands Hotel P. Ltd., Nos. 72-75, Dr. Radhakrishnan Salai, Mylapore, Chennai-600 004, and hon''ble Mr.
Justice K. Govindarajan (Retd) presided over the said meeting.
In the said meeting of the equity shareholders, some modification was proposed in Clause 2 of Section 1 of Part IV of the scheme and the said
amendment was duly approved, and a report has been filed by the said chairman of the meeting before this Court on January 30, 2008.
In the meeting of the equity shareholders of the petitioner-company, 787 equity shareholders exercised their votes either in person or by proxy,
and the total number of votes cast were 7,86,61,306. Out of said votes cast, 689 shareholders holding 7,84,85,906 equity shares of Rs. 10 each,
voted in favour of the modified scheme as proposed in the meeting. Three (3) shareholders holding 1,75,400 equity shares of Rs. 10 each, voted
against the said resolution, and the remaining 95 shareholders cast invalid votes. Therefore, the petitioner had sought for approval of the scheme of
arrangement as modified and approved by the equity shareholders held on January 24, 2008.
The further case of the petitioner would be that the proposed arrangement between the petitioner-company (parent company) and the said
offspring companies will not affect the creditors both secured and unsecured. As per the orders passed by this Court on November 29, 2007, in
C. A. No. 3066 of 2007, the petitioner-company was directed to convene a meeting of the secured creditors of the company for the purpose of
considering and approving with or without modification of the scheme of arrangement between the parent company and offspring companies, and
the said order was to the effect that hon''ble Mr. Justice K. Govindarajan (Retd) would act as the chairman of the said meeting and report the
results thereof to this Court in accordance with Section 393 of the Companies Act, 1956.
Notice was sent to the secured creditors by prepaid post and certificate of posting on December 28, 2007 and the notice of convening the
meeting of the secured creditors was advertised in all the editions of the Tamil daily Malax Murasu on December 29, 2007 and in all editions of the
English daily The Hindu Business Line on December 29, 2007. One Smt. A. Sushila Devi moved this Court by way of an application in C. A. No.
199 of 2008 in C. A. No. 3065 of 2007 praying for postponing the meeting to be convened on January 24, 2008, till the liability due to her was
crystallised. The meeting was postponed by this Court by an order dated January 23, 2008 and subsequently the said A. Sushila Devi in C. A.
No. 199 of 2008 reported settlement arrived at between the petitioner-company and herself on March 7, 2008 and accordingly, C. A. No. 199 of
2008 filed by her was dismissed as withdrawn.
Since the meeting ordered by this Court was redundant, the court granted four weeks'' time to the petitioner-company to get consent from
other secured creditors. Accordingly, consent of three secured creditors, viz., Citi Bank, State Bank of India and the Lakshmi Vilas Bank Ltd.,
were obtained for the proposed scheme of arrangement, and they also submitted their consent for the said scheme. The proposed scheme of
arrangement would take effect from July 1, 2007, the appointed date, under the provisions of Sections 391 to 394 of the Companies Act, 1956.
The scheme of arrangement will be beneficial to all the companies involved in the scheme, including the shareholders of the said companies.
Therefore, the petitioner-company prays for the scheme of arrangement between G.V. Films Ltd. (parent company) and G.V. Studio City Ltd.,
and G.V. New Media Technologies Ltd. (offspring companies) enclosed with the said petition, be sanctioned by this Court with effect from July 1,
2007, so as to combine all the shareholders and creditors of the petitioner-company.
The contention of respondents Nos. 1 and 2 would be that they are bond holders under the deed of trust dated April 20, 2006, executed by
the petitioner and respondents Nos. 1 and 2 in which the Bank of New York, London Branch, was appointed as the trustee, and the said trust
deed contains terms and conditions of the bonds and the interests of respondents Nos. 1 and 2, in the issue of foreign currency convertible bonds
(hereinafter referred to as FCCB) on dollars.
One of the important terms under which the bonds have been issued to respondents Nos. 1 and 2, is a right available to them to get the bonds
converted into shares including the right available to convert them into global depository receipts (GDR). Those bonds were paid for in dollars, and
the entire covenant and interest are categorised in the said deed of trust produced in annexure B of the affidavit filed by respondents Nos. 1 and 2.
The proposed scheme of arrangement by the petitioner would benefit only the promoters and the major shareholders of the petitioner-
company, and nobody else would stand to benefit by the scheme. Without considering the terms and conditions of the bonds as per the trust deed
held by respondents Nos. 1 and 2, the proposed scheme cannot be proceeded with. The entire scheme would vitally affect the interests of
respondents Nos. 1 and 2 since the subscribed and paid-up capital of the petitioner-company stands reduced by 153,96,35,247. The resulting
companies (offspring companies) G.V. Studios City Division and G.V. New Media Technologies Division would take 39,13,73,237 and
125,93,07,858, respectively, and out of this amount, the resultant transfer would be Rs. 28,60,91,755 for the Studio Division and Rs.
125,93,07,858 for the New Media Division in respect of fixed assets. If it is so, the petitioner-company would be left with hardly any business or
assets supporting the obligations under the bonds, and respondents Nos. 1 and 2 would be left with no other option than to share little quantum of
money if converted into shares of the company.
The provisions of Sections 101 to 103 of the Companies Act should have been complied with since there is a reduction of capital taken place.
Therefore, the scheme of arrangement suggested would be in violation of provisions of Sections 101 to 103 of the Companies Act.
The petitioner-company had approached this Court without even considering the interests of the unsecured creditors in general and
respondents Nos. 1 and 2 in particular, and they would stand completely jeoparadised by this scheme and arrangement. The petitioner-company
had deliberately moved the said application only for convening the meeting of the secured creditors knowing fully well that it would not be in a
position to obtain consent of respondents Nos. 1 and 2 and other unsecured creditors. Since no meeting of the secured creditors was held as per
the directions of this Court also, the scheme of arrangement cannot be approved. Therefore, the proposed scheme of arrangement being a dubious
one may not be approved by the court.
The third respondent had also raised similar contentions in his affidavit. According to him, a similar deed of trust was entered into by the
petitioner-company with the third respondent on October 23, 2006, in which the Bank of New York, London Branch, was appointed as the
trustee under the trust deed. The said FCCB was in the form of euro bonds. The third respondent has also raised objections similar to that of the
objections of respondents Nos. 1 and 2.
The fourth respondent had stated in his objections that he being a shareholder, did not receive any notice of the meeting in relation to the
scheme of arrangement proposed by the petitioner-company.
The fourth respondent was having 36,100 number of equity shares. It is also stated that the group of companies held by one G.
Venkateswaran, viz., the petitioner, Sujatha Estates P. Ltd., Sujatha Films Ltd., Sujatha Productions P. Ltd., and Aruna International P. Ltd.,
during the year 1987 and 1990, and those group of companies claimed to have 7,80,000 equity shares of M/s. Shaw Wallace Co. Ltd., and those
7,80,000 equity shares of Shaw Wallace were taken away in an Income Tax raid held in the premises of the group of companies belonging to Mr.
G. Venkateswaran for the Income Tax due to the tune of Rs. 380 lakhs.
In order to pay the Income Tax arrears, the said G. Venkateswaran requested the fourth respondent to enter into an agreement of sale of
shares, and it was entered into between them on November 9, 1987, under which 7,80,000 equity shares in M/s. Shaw Wallace Company which
were seized by the Income Tax Department, were agreed to be purchased for a total consideration of Rs. 663 lakhs. Accordingly, the funds were
arranged, and Rs. 380 lakhs tax arrears were paid on November 30, 1987, by way of pay order drawn on Bank of Baroda favouring Income Tax
Department for the specific purpose of releasing 7,80,000 shares held in Shaw Waillace Company Ltd., from the custody of the Income Tax
Department in order to facilitate the transfer of those shares in favour of the fourth respondent. Subsequently, it was found that the said Mr. G.
Venkateswaran and the remaining four companies were lawful owners of only 174,399 shares and not the entire 780,000 shares. Ultimately, the
said 174,399 shares alone were transferred to the fourth respondent and the said G. Venkateswaran and four companies had agreed on January
24, 1990, to make good the loss for the fourth respondent. Accordingly, 13,43,700 shares of the companies, viz., Sujatha Estates P. Ltd., Sujatha
Films Ltd., Sujatha Productions P. Ltd., and Aruna International P. Ltd., were deposited with the fourth respondent as per the letters written on
February 14, 1990 and February 26, 1990. After that, the said G. Venkateswaran passed away in the year 2003, and therefore, the fourth
respondent had filed a suit in this Court in C. S. No. 915 of 2006 for a decree for accounts and for other reliefs like selling the shares referred to
above and paying over the sale proceeds to the fourth respondent-company against the petitioner-company and four other companies. Therefore,
the fourth respondent would thus become a creditor having shares of the shareholders as pledgee of the petitioner-company. The scheme of
arrangement as proposed by the petitioner would certainly affect all the creditors including the fourth respondent. The proposed scheme of
arrangement is violative of provisions of law and also contrary to public policy. The fourth respondent would come as one of the secured creditors,
and the direction of the court to convene a meeting of the secured creditors on January 24, 2008, at 10.30 a.m., was not informed to the fourth
respondent. The non-participation or the non-conduct of the said meeting of the secured creditors of the company would vitally affect the decision
relating to the scheme of arrangement. Even assuming that the fourth respondent is not a secured creditor, but only an unsecured creditor, meeting
of the unsecured creditors of the company was not convened which is fatal to the approval of the scheme. 21 The petitioner cannot seek demerger
of the companies under the scheme of arrangement without the consent of the creditors when the liabilities of the company are sought to be
transferred to its division, and therefore, if the scheme is approved without the consent of the class of creditors whose rights are also transferred
and they will be vitally affected. The unsecured creditors as a whole were not consulted and thus the scheme without the approval of the creditors
will be ineffective and the scheme is thus contrary to the established procedures u/s 391 of the Companies Act.
The scheme of arrangement does not disclose material particulars like what are all the liabilities that are to be transferred to the offspring
companies, viz., G.V. Studios City Ltd., and G.V. New Media Technologies Ltd., whose liabilities are sought to be transferred. It has also not
disclosed the transfer of fixed assets, and thereby the creditors whose liabilities are to be discharged by the petitioner-company are deprived of the
assets and what would be the recourse once the scheme is sanctioned are also not given. Therefore, the creditors are thus vitally affected by the
scheme of arrangement of demerger and without approval of the class of unsecured creditors by convening a meeting.
It cannot be said that the scheme of arrangement is in accordance with law and not prejudicial to the shareholders nor to the creditors both
secured and unsecured. Therefore, the demerger proposed by the scheme of arrangement is not tenable in law and therefore, the confirmation of
the scheme need not be granted.
The learned single judge on hearing both sides had elaborately discussed the various points raised before her and had come to the conclusion
of disallowing the claim of the petitioner-company''s scheme of arrangement for demerger. Aggrieved against the said order, the present appeals
have been preferred by the petitioner-company.
Heard Mr. K. Ravi, learned Counsel for M/s. Rugan and Arya, appearing for the appellant, Mr. Aravind P. Datar, learned senior counsel for
Mr. Venkatavaradhan, appearing for respondents Nos. 1 and 2, Mr. T. K. Baskar, learned Counsel appearing for the third respondent and Mr. T.
K. Seshadhri, learned senior counsel for Mr. Srinath Sridevan, appearing for the fourth respondent.
Learned counsel for the appellant/petitioner-company (hereinafter referred to as petitioner-company or parent company) would submit in his
argument that the rejection of the scheme of arrangement proposed by the petitioner, by the learned single judge is contrary to all canons of law
when the scheme of demerger was approved by an overwhelming shareholders present and all secured creditors of the company have given
assent. He would further submit in his argument that the demerger proposed by the petitioner is not a transfer since the group of companies would
face the liabilities as that of the parent company. He would further submit that the learned single judge failed to appreciate the basic fact that three
objectors, viz., 3 FCCB holders, respondents Nos. 1 to 3, are not at all prejudiced and will not be worse off by sanctioning the scheme of
demerger in view of the readiness and willingness expressed by all the three companies (parent company and offspring companies) to jointly and
severally continue to shoulder all the obligations under the FCCBs by executing a supplementary trust deed as contemplated in the FCCB
conditions. He would further submit in his argument that even otherwise the maturity of those bonds either dollar bonds entered with respondents
Nos. 1 and 2 or the euro bonds entered with the third respondent, would be only in the year 2012. In the meanwhile they can exercise their right to
demand equity shares of any company instead of their bonds, after getting permission from the Reserve Bank of India and therefore they cannot
have any objection. He would further submit that there will not be any prejudice caused to respondents Nos. 1 to 3. He would further submit that
the scheme would not result in reduction of the price in conversion of FCCB bonds by its holders, since any reduction in conversion price would
be informed to all the FCCB holders to get more shares. He would also submit in his argument that the fact that the erstwhile chairman of the
petitioner-company is stated to have taken an advance of Rs. 380 lakhs from the fourth respondent in the year 1987 for and on behalf of his group
companies towards sale of Shaw Wallace Shares held by him and his companies would show that the claim of the fourth respondent against the
petitioner-company is only a speculative one. As regards the other submissions of the fourth respondent that only a portion of the said shares of
M/s. Shaw Wallace were given to them and the said petitioner-company is liable to pay the remaining sum towards the payment made by him to
the Income Tax Department, no document has been produced to show the liability of the said chairman on behalf of the petitioner-company to the
fourth respondent. He would also submit in his argument that the advertisement regarding the court convened meeting of the shareholders as
ordered by the previous learned single judge of this Court was perfectly alright, and the finding of the learned single judge that the meeting
convened on the basis of the order was erroneous and inadequate is not sustainable. He would again submit in his argument that according to the
orders passed by this Court, an advertisement was given in The Hindu Business Line in all the editions of the country and in the vernacular daily,
viz., Malai Murasu, in all editions and accordingly 787 shareholders attended, and thereby a major portion of the shareholders voted in favour of
the modified scheme as proposed in the meeting and less number of shareholders against the said resolution. In the said meeting, with some
modification, the scheme of arrangement of demerger of the petitioner-company was approved under the chairmanship of hon''ble Mr. Justice K.
Govindarajan (Retd). He would also submit that the report of the hon''ble judge was filed immediately, and it would depict the intention of the
shareholders who are the owners of the company. Demerger as a scheme is possible, and there is no impediment for granting approval, since the
three secured creditors have also given their consent for the said scheme. He would also submit that the objections of FCCB holders are also not
sustainable because they can at any time change the hands of those bonds, and the condition that they should have consulted for the demerger of
the petitioner-company is not necessary, and the basic conditions in the trust deed would be that of contractual relationship, and if at all they would
be entitled to the said amount of conversion on maturity in the year 2012 and they cannot preclose the said bonds nor oppose the demerger of the
company which is inter se. It can be objected only by the shareholders of the company to which a prompt meeting was held as per the orders of
this Court on January 24, 2008 and the majority of the shareholders approved the scheme with modification. He would also submit that the
requisites of Section 391 of the Act have also been complied with, and there was no violation of the said provisions nor any act done against public
policy, and no prejudice would be caused to anybody due to demerger of the petitioner-company. The learned single judge has accepted the
notional reduction of share capital to which the shareholders would not be entitled to any payment. However, the learned single judge failed to note
the meeting of the unsecured creditors was not mandatory when such reduction was found only as notional one. However, respondents Nos. 1 and
2 have filed a suit before the London court exercising their right over the said bonds invoking the jurisdiction of the London courts. He would also
submit that according to the agreement between the parties, eurobonds can be converted into equity shares and the said stipulation for conversion
was not challenged till today, and the respondents are bound by that. He would further submit in his argument that notices have been promptly
given to the creditors as per the direction of this Court, and the meeting was postponed only due to the intervention of one of the secured creditors
on January 23, 2008, by this Court, and the petitioner was directed to get consent from the secured creditors. He would also submit that if really
the court directed the convening of the meeting of the secured creditors and the unsecured creditors, the petitioner would have complied with the
same. For the mistake of the court, the petitioner-company should not be penalised. He would further submit that the total value of the assets of the
petitioner-company was 348.2 crores, out of which 156.93 crores were moved to the offspring companies. The balance will be available to the
parent company, and 159.4 crores would be the general reserve, and the capital would be 38.8 crores. He would further submit that the share
premium account shows 95 crores and 30.5 crores was stated to be the good will of the company. Since the aborted projects during 5 years was
to the tune of 33 crores, it is good for the secured and unsecured creditors as well as bond holders that the demerger would bring flourishing
results of the parent and offspring companies. He would further submit that even according to Sections 100 to 104 of the Act, no previous consent
is necessary for the approval of the scheme from the creditors, and there is no material prejudice caused to the shareholders or creditors or the
respondents.
He would also submit that respondents Nos. 1 to 3 have admittedly not exercised their option to convert the bonds into shares, and therefore,
they would not be termed as shareholders, and their bonds would mature only in the year 2012, and therefore there cannot be any objection nor
any prejudice caused to respondents Nos. 1 to 3 by virtue of approval of the scheme of arrangement. He would cite a judgment of the hon''ble
apex court reported in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., , in support of his case. The scheme contemplates reduction of capital and
the issued unpaid capital has not been reduced. The shares reduced are allotted to offspring companies demerged from the parent company, and
therefore there cannot be any prejudice to the shareholders nor the creditors. He would also submit that unless the bond holders, viz., respondents
Nos. 1 to 3 opted for conversion, the petitioner cannot itself convert them into shares, and therefore, there is no question of any prejudice caused
to respondents Nos. 1 to 3. However, he would submit in his argument that all the three companies are ready to give an undertaking to the
shareholders that no prejudice will be caused to them and are also ready to give an undertaking to creditors both secured and unsecured that they
would jointly and severally pay the liabilities. All these reductions would be only in book adjustments and not actual loss caused to the
shareholders. Since the reduction of the share capital is only notional, there will not be any prejudice to any one much less to the shareholders, who
have participated and approved the scheme of arrangement and had considered their right and had accepted for the same. He would further submit
that even though demerger is not contemplated under the Companies Act, it has been mentioned in the Income Tax Act u/s 45, and therefore, the
concept of demerger which has to be considered like that of amalgamation of companies, should have been accepted for the benefit of not only the
company, but also its shareholders and the creditors. He would also cite a judgment of the Gujarat High Court reported in AIR 1970 Guj 819, in
support of his case. He would further submit that the fourth respondent is not at all its creditor, and he holds negligible share, and he was also given
notice, but he did not participate in the meeting of the shareholders and therefore, his objections cannot be accepted. Therefore, he would request
the court to approve the scheme of arrangement, to set aside the order of the learned single judge and thus allow the appeal.
Mr. Arvind P. Datar, learned senior counsel appearing for respondents Nos. 1 and 2 would submit in his argument that the appellant-company
did not produce the latest accounts of its own even after the demerger for approval. On going through the balance-sheet of the appellant-company
and offspring companies, radical changes have taken place after 2007, and the profit is shown to be 1 crore as on March 31, 2008. But, it was
found to be 12.19 million, i.e., 1.219 crores. He would further submit that the petitioner did not file any accounts at the time of filing the petition.
Subsequently, it was shown to be a loss at 119.599 crores. When the status of the petitioner-company was found to be so, the meeting of the
shareholders cannot be convened for reconsideration of their approval. He would further submit in his argument that the provision u/s 391 of the
Companies Act has to scrupulously be followed for the purpose of seeking approval of the scheme of arrangement. Latest financial accounts or the
auditors report should have been produced atleast at the appellate stage. He would cite a judgment of the hon''ble apex court reported in Miheer
H. Mafatlal Vs. Mafatlal Industries Ltd., for the said principle. He would further submit in his argument that nothing is mentioned in the scheme of
arrangement about the liability to pay the creditors either secured or unsecured or the bond holders out of which they could exercise their right. The
scheme of arrangement without any meeting of the secured and unsecured creditors is a calculated fraud to deceive the shareholders and creditors.
He would also submit that the argument advanced before the learned single judge that the advertisement for the convening of the shareholders
meeting was done only in The Hindu Business Line of Chennai edition and not in country wide editions. He would also submit that out of 85,540
shareholders, 787 shareholders only attended the meeting since there was no proper publication. He would further submit that the shares of the
petitioner-company are throughout India, and they have not been informed properly to the unsecured creditors and bond holders. When the
monies were given by the unsecured creditors and bond holders to the petitioner-company, the petitioner-company has not informed them that due
to the demerger, the benefits would go to the offspring companies but the liabilities were shown with the parent company, and how the bond
holders and the secured creditors and the unsecured creditors would get their money from the petitioner parent company is not known. In the case
of demerger which is diametrically opposed to amalgamation, the liabilities are with the parent company and the assets and profits are given to the
offspring companies, which would affect the rights of the shareholders and creditors of the said company. Normally, the big companies are not
demerging and the option of the petitioner-company to demerge is without any reason and it should be with mutual consensus from the
shareholders of the company who are sharing the ownership and that the secured and unsecured creditors'' consent is necessary for changing their
claim from one company to another company. He would further submit that the share capital was shown to be 348,22,00,000 from
178,00,00,000. However, the closing stocks were shown to be 31 crores as on March 31, 2002. The share premium should be given sanctity like
shares. According to Section 78 of the Act, shareholders are entitled to the remaining sum after payments were made to the creditors in the case of
winding up of the company. Therefore, the shares are concerned with the assets of the company in the case of demerger. He would further submit
that as regards the demerger of the petitioner-company, parental company is shown to have only liabilities and not profits, and it will certainly affect
the shareholders and its creditors. The good will of the company amounting to Rs. 30 crores would wipe out in the case of demerger and by virtue
of demerger such asset belonging to the shareholders would certainly amount to detriment and prejudice to the shareholders and creditors. The
parent company would be certainly reduced to its capital. When there is no reduction of liability, it would affect not only the shareholders but also
bond holders and creditors. The good will to the tune of Rs. 30 crores was wiped out and it would certainly prejudice the rights of the
shareholders and respondents Nos. 1 to 3. He would also submit that the paid-up share capital was reduced by 90 per cent., and nothing was
explained in the scheme of arrangement. He would further submit that as per the letter of offer issued by the petitioner-company to respondents
Nos. 1 and 2, the promise given by the petitioner-company was that 140 per cent. of the value of the bonds will be given at the time of maturity. In
such circumstances, he would further submit that the bond holders would be very much concerned about the assets, out of which the money could
be paid to the bonds held by respondents Nos. 1 and 2. He would further submit that once demerger had taken place, the petitioner-company
would not get assets since demerger is a transfer u/s 2(19)(AA) of the Income Tax Act. The argument advanced by the appellant that demerger
was not a transfer is not correct and therefore undertaking given by all the companies and group of companies will not serve the purpose, and
prejudice would be caused to the respondents creditors. As per Section 62 of the Indian Contract Act, 1872, by mutual consent, contract could
be done and when the liability cannot be changed by the debtor and especially when the FCCB were held by respondents Nos. 1 and 2, the
petitioner-company ought to have convened a meeting of the unsecured creditors so as to avoid prejudice to any one of the parties and not to have
undone the contract. Therefore, the approval of the scheme of arrangement may not be ordered, and the learned single judge is right in rejecting
the claim of the appellant.
Learned counsel Mr. T. K. Baskar appearing for the third respondent in his argument stated that the third respondent had obtained euro bonds
and he is standing on the same footing like that of respondents Nos. 1 and 2 and the reorganisation of the petitioner-company by virtue of
demerger would certainly affect the rights of the third respondent, and it would be amounting to breach of contract. He would further submit that
the agreement reached between the petitioner and the third respondent by virtue of the trust deed entered into between them would go to show
that on maturity, the petitioner-company had agreed to pay 175 crores and because of the demerger proposed by the petitioner-company, the
assets would go to the offspring companies, and how the third respondent would get his maturity amount from out of the Euro bonds will be in the
dark. He would further submit that every aspect regarding the liability to pay the amount to the third respondent should be given in the scheme of
arrangement; otherwise, the scheme of arrangement cannot be approved and therefore, the demerger sought for by the petitioner-company need
not be approved and the appeal be dismissed.
Mr. T. K. Seshadhri, learned senior counsel appearing for the fourth respondent would submit in his argument that the fourth respondent is an
unsecured creditor and he has filed a suit for recovery of money and the application filed by the petitioner-company to reject the plaint was
dismissed, and an appeal has been preferred before a Division Bench of this Court against the said order. It was also dismissed, and now the suit is
pending before this Court. Therefore, the liability to pay the said amount as claimed in the suit cannot simply be shifted to the offspring companies
by virtue of demerger scheme. He would refer to the points relied upon by the learned single judge and had sought for the confirmation of the order
passed by the learned single judge and for dismissal of the appeals.
We have given anxious thought to the arguments advanced on all the sides and the point for consideration in these appeals would be whether
the decision reached by the learned single judge that the scheme of arrangement proposed by the petitioner-company cannot be approved since it
is in violation of the statutory provisions and prejudicial to the shareholders as well as the secured creditors of the company would be sustainable
or not.
As far as the present cases are concerned, the admitted facts would be that the petitioner-company was in existence as per the incorporation
under the Companies Act, 1956 and respondents Nos. 1 and 2 have purchased dollar bonds as per the offer circular given by the petitioner-
company and the trust deed entered into between them and the said dollar bonds to the said value were still possessed by respondents Nos. 1 and
2, and their maturity value is in the year 2012. Similarly the third respondent had obtained euro bonds to the value mentioned in the offer circular as
well as trust deed entered into between them which would also be in existence for its maturity till 2012. It has been categorically agreed by the
petitioner-company and respondents Nos. 1 to 3 that the maturity value of 140 per cent. of the bonds would be paid by the petitioner-company. It
is seen that by virtue of the bonds issued by the petitioner-company, respondents Nos. 1 to 3 being foreign bodies, are having right over the
petitioner-company. According to the further agreement, i.e., the trust deed, the said bonds given, at any time can be converted into shares of the
petitioner-company. The hon''ble Thiru Justice K. Govindarajan (Retd) headed as a chairman, and a meeting was convened on January 24, 2008
and a report has also been filed. Similarly, yet another order was passed by this Court for convening a meeting of the secured creditors to which
one of the secured creditors had asked the court for postponement by filing an application in C. A. 199 of 2008, and the said meeting was
postponed, and thereafter, she had settled her claim with the petitioner-company, and she had withdrawn C. A. No. 199 of 2008. The said
company application was dismissed as withdrawn by order dated March 9, 2008. Thereafter, no meeting of the secured creditors was convened,
and as such, it was directed by this Court to get consent of the secured creditors within the stipulated time and it has been obtained by the
petitioner-company. The consent of the 3 secured creditors, viz., Citi Bank, Lakshmi Vilas Bank Ltd., and State Bank of India, were also obtained
for the demerger of the company.
As far as the convening of the meeting is concerned, it has been objected to by the respondents that the meeting of the shareholders was not
properly convened since proper notice was not given to all the shareholders. It is further contended that out of 84,540 shareholders, only 787
shareholders attended the meeting and it shows that the publication in the paper was not properly done nor the notice of the convening of the said
meeting was properly given to the shareholders.
According to learned Counsel for the appellant, this Court had ordered the publication of the convening of the meeting in The Hindu Business
Line of the Chennai edition wherein it has been effected throughout India. Learned Counsel produced a bill for the said payment of the money for
the publication in The Hindu Business Line before this Court establishing that it has been published throughout the country in all the editions. No
doubt, Malai Murasu publication was done in vernacular language within the State. The said production of the bill to the effect that it had been
published throughout India cannot be relied upon since the bill mentions only some of the cities of our country, and it is not mentioned therein that it
was made in all the editions throughout India. The said bill would disclose that it has been published in the editions of New Delhi, Bombay,
Calcutta, Bangalore and other cities, and it never said that throughout India. Therefore, it cannot be taken as that it was published throughout India
and by virtue of the publication, every one of the shareholders would be presumed to have been informed.
It is an admitted fact that the fourth respondent is holding 38,100 shares in the petitioner-company. He has categorically mentioned that he was
not served with any notice and he had not attended the meeting conducted on January 24, 2008. Since the petitioner has not produced any proof
that it has served notice properly on the fourth respondent, the submission that 787 shareholders attended the meeting and it was an overwhelming
one cannot be accepted. The further submission of the petitioner-company that the fourth respondent is possessing only lesser extent of shares was
not a point raised before the learned single judge. Merely because the court has passed the orders that it has been only in respect of Chennai
edition, the argument that the petitioner-company had not published in all the editions all over India is not acceptable, and the participation of the
limited shareholders would go to show that it has not been properly published by the petitioner-company.
As regards the claim of respondents Nos. 1 to 3 that they are also the creditors of the petitioner-company, and their rights have been affected
by virtue of the demerger proposals, and the liability of the petitioner-company has been washed away because of the demerger, and they cannot
claim the amount due under the bonds executed by the petitioner-company in case of demerger are concerned, such arguments of learned Counsel
for respondents Nos. 1 to 3 cannot be simply brushed aside. The liability to pay either in the form of shares at the option of the bond holders viz.,
respondents Nos. 1 to 3, or to repay the matured amount on maturity of those bonds would be only by the petitioner-company and if at all the
liability is transferred, the same ought to have been done with the consensus of the creditors and the shareholders. If the bondholders, viz.,
respondents Nos. 1 to 3, opt for conversion of their bonds into shares of the company, a different consideration would come into play, and they
have to be considered only as shareholders. Till then, respondents Nos. 1 to 3 should have been considered as creditors of the petitioner-
company, whose liabilities should have been considered only with consensus arrived at with those creditors also.
It is an admitted fact that there was no meeting convened by the petitioner-company for getting consensus of the unsecured creditors or to
frame any scheme within the scheme of arrangement or modify the said scheme of arrangement or for the due payment of debts payable to the
unsecured creditors. It cannot be taken shelter by the petitioner-company that the said meeting of the unsecured creditors was not ordered by the
court, and if ordered, the company would have conducted the meeting. The said argument cannot be sustained. It is for the petitioner-company to
show to the court before getting approval that nobody would be prejudiced by virtue of the demerger proposal. The petitioner-company did not
ask for the convening of the meeting of the unsecured creditors nor asked for reconvening of the secured creditors'' meeting. The respondents are
having the bonds and they are coming under the category of creditors, and they would be certainly affected if liabilities are transferred to the
offspring companies without the consent of the respondents or the liability alone are kept with the parent company, and the assets have been
transferred to the offspring companies. Such a transfer of assets detrimental to the unsecured creditors would be certainly amounting to act of
prejudice. The obligation cast upon the petitioner-company under the trust deed entered into between the petitioner-company and respondents
Nos. 1 to 3 should not have been breached or violated by the scheme of arrangement proposed by the petitioner-company.
In this behalf, learned Counsel for respondents Nos. 1 and 2 cited a judgment of the hon''ble apex court in Miheer H. Mafatlal Vs. Mafatlal
Industries Ltd., , explaining the scope of court while dealing with the amalgamation scheme. The apex court considering various judgments have
indicated the scope as follows (page 819 of 87 Comp Cas):
(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....
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.
In the aforesaid judgment, it has been categorically mentioned that the creditors or class of creditors has to be considered. The scheme
proposed should be 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. Moreover, it should not be violative of any provisions of law and not opposed to
public policy.
In the aforesaid circumstances, the approval of the scheme could be done only in case of majority resolution passed by the shareholders.
However, the report of the chairman would go to show that there were some objectors in the meeting and the said opposition was negligible.
Therefore, there is no question of any unanimous approval.
As far as the requisites of the statutory provisions contemplated u/s 391 are concerned, for better understanding Section 391 has to be
extracted as follows:
Section 391 of the Companies Act deals with power to compromise or make arrangement with creditors and members. Sub-section (1) and its
proviso reads as follows:
(1) Where a compromise or arrangement is proposed:
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
The court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being
wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to
be called, held and conducted in such manner as the court directs:...
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 to 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.
It is true that respondents Nos. 1 to 3 are FCCB holders with the petitioner-company, and the value of the bonds should have been paid by
the petitioner-company on maturity. Indisputably, they are coming under the class of unsecured creditors. Any compromise between parties should
have been mutually agreed between them. It cannot be unilaterally decided by the debtor himself. The petitioner-company is the person of liability
to their unsecured creditors, viz., respondents Nos. 1 to 3. The liability to pay respondents Nos. 1 to 3 as unsecured creditors should have been
agreed in the case of settlement. The scheme of arrangement proposed by the petitioner-company with the offspring companies would amount to
transfer of the liability of paying the bonds or to retain them by transferring its assets to the offspring companies. Therefore, the non convening of
meeting and no attempt taken by the petitioner-company to convene such meeting of unsecured creditors would violate the provisions of Section
391(1) (a) of the Act. That would also violate the provisions of Section 62 of the Indian Contract Act. When the liabilities are to be transferred
from one person to another person, mutual consent is necessary for substitution or alteration or novation of such contract. In this case, respondents
Nos. 1 to 3 and other unsecured creditors were not at all met and their consensus was not obtained. Hence, production of consent letter of 1 or 2
unsecured creditors will not mean that all the remaining unsecured creditors'' rights would also be protected in case of approval of demerger. The
violation of Section 62 of the Indian Contract Act is also warranted. It is also brought to the notice of this Court that the proposed demerger
programme involves reduction of capital of the company, and in such circumstances, the procedure prescribed under the Act, viz., Sections 100 to
104 of the Act, should have been followed. It is categorically mentioned that no specific resolution has been passed for reduction of capital by the
petitioner-company nor any such resolution has been produced.
As already pointed out, the service of notice to the shareholders for the meeting held on January 24, 2008, is not adequate and the certificate
of posting issued to the fourth respondent who is holding nearly 38,100 shares, will not serve the purpose, and no proof has been filed in that
regard. The recent production of bill from The Hindu Business Line would only depict certain towns of the country and it does not mention all
editions issued from important cities from all over the country. No other documents have been produced to show that the cities mentioned in the
said bill were only the place of editions of the said The Hindu Business Line newspaper. Even though the said publication was ordered by the
court, the petitioner-company should have asked for paper publication for effective information to its shareholders. The petitioner-company was
not prevented from seeking permission from the court to convene a meeting with the unsecured creditors whose rights are also prejudiced due to
the demerger of the petitioner-company. It is also brought to the notice of this Court that the demerger would tantamount to transfer of assets of
the petitioner-company as per the definition of demerger u/s 391 of the Companies Act. The definition of merger would be thus according to
Section 2(19AA) of the Income Tax Act:
(19AA) ''demerger'', in relation to companies, means the transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the
Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that:
(i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the
resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the
liabilities of the resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values
appearing in its books of account immediately before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate
basis;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein
immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or
companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any
undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under Sub-section (5) of Section 72A by the Central Government in this
behalf.
Explanation 1.-For the purposes of this clause, ''undertaking'' shall include any part of an undertaking, or a unit or division of an undertaking or a
business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2.-For the purposes of this clause, the liabilities referred to in Sub-clause (ii) shall include:
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in Clause (a) or Clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the
demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of
such demerged company immediately before the demerger.
As per the aforesaid definition, the demerger of the company would amount to transfer. Therefore, the right and liabilities of the unsecured
creditors should also have been cared by the petitioner-company by taking appropriate steps in accordance with law. Otherwise, the rights of the
said class of creditors would be jeoparadised or prejudiced by demerger of the petitioner-company.
It has also been argued by the respondents that the petitioner-company must show with authentic proof that there would not be any prejudice.
Even at the appellate stage, they have not produced any proof of accounts. However, the balance-sheet of the petitioner-company as derived from
the website of the company in the internet has been produced by respondents Nos. 1 and 2. The net profit shown as per the account ending with
March 31, 2007, was shown to be Rs. 17,59,70,000 whereas it was found to be Rs. 1,21,19,000 for the year ending with March 31, 2008. It
deteriorates with a loss of Rs. 119,15,19,000 for the year ending with March 31, 2009, The said accounts/balance-sheet would clearly depict that
the result of demerger which is very much detrimental to the parent company, viz., the petitioner-company, and the liabilities of the company
attached with the parent company to which the unsecured creditors, viz., respondents Nos. 1 to 3 are to be paid by the said company would
certainly be jeoparadised or prejudiced in case the approval of the scheme of arrangement of demerger is ordered.
It is also brought to the notice of this Court that the demerger would make the goodwill of the company wiped out and the goodwill of the
petitioner-company to the tune of Rs. 30 crores should have been wiped out for the simple reason of demerger. The said goodwill is also an asset
of the company, and if it is lost by merely approving the scheme of merger it would also be a loss not only to the shareholders but also prejudicial
to the creditors. It was the argument advanced by learned Counsel for the petitioner-company that the fourth respondent was not at all either a
secured creditor or an unsecured creditor, and therefore, he cannot attack or question the scheme of arrangement. The fourth respondent is
admittedly a shareholder who is holding 30,100 shares with the petitioner-company, and he had complained that the service of notice was not
made to him for the meeting convened on January 24, 2008.
It is the case of the fourth respondent that he had filed a suit, and the application filed by the petitioner-company to reject the plaint was
dismissed, and the appeal preferred by the petitioner-company before a Division Bench in O.S.A., was also dismissed, and the suit is pending for
his claim. Whether the fourth respondent is an unsecured creditor, who is entitled to the claim made in the suit or not is to be decided in the suit. In
the mean while, he could be considered as a shareholder and his objection should have been heard. In the event of his claim in the suit being
decreed in his favour, he would also be prejudiced by the act of demerger. The said stand taken by the fourth respondent cannot be brushed aside
since he would also be affected in the event of the liability mounting with the petitioner-company and the assets have been transferred to the
offspring companies.
In the aforesaid circumstances, the decision of the hon''ble Bombay High Court reported in [1995] 82 Comp Cas 437 (Bharat Synthetics Ltd.
v. Bank of India), is as follows (headnote):
(i) that undisputably no meeting of the creditors and shareholders had been held, nor consent of the requisite number of creditors, obtained. The
requirements, such as that the meetings of the concerned were duly held and conducted, that the scheme was accepted by a competent majority,
that it was for a common advantage, reasonable, prudent and proper in every aspect, were mandatory.
(ii) That, moreover, the company had not placed before the court its authenticated latest financial position, as required under Sub-section (2) of
Section 391 of the Companies Act, 1956.
(iii) That, on the facts, the banks'' apprehension that the merger would jeopardise their claims was justified, and sanction had to be refused.
Following the said judgment, this Court in an earlier occasion, found in O.S.A. Nos. 55 to 68 of 2003 between the Ramco Super Leathers
Ltd. and Others Vs. The Dhanalakshmi Bank Ltd. and Others, , came to a conclusion as follows (page 455):
Though no specific provision has been made for ascertaining the wishes of the creditors in a scheme of arrangement between the company and its
members, the court is entrusted with the duty to ascertain whether the scheme would affect the interest of the creditors to such an extent that the
holding of their meeting is essential, and if the court in appraisement of the facts and circumstances is of the view that the interest of the creditors
would be adversely affected if the scheme is approved, then it has to refuse to sanction the scheme since what is involved is a public interest. The
banking institutions from whom the appellant-company availed different kinds of loan facilities were nationalised banks and also public sector
undertaking. Needless to say if any loss occasioned to these institutions, it would ultimately affect the public interest. In the case on hand, it is very
clear that the scheme placed before the court for approval would no doubt affect the interest of the secured creditors.
On a overall consideration of the facts and circumstances of the case, for ascertaining the real purpose of the scheme, by piercing the veil of
apparent corporate purpose underlying the scheme and also by scrutinising the same judiciously in the light of the dictum laid down by the hon''ble
apex court, we are of the considered view that the approval sought for by the petitioner-company for the demerger with its two offspring
companies is prejudicial to respondents Nos. 1 to 4 and the said scheme of arrangement is also violative of the provisions of Section 391 of the
Companies Act, Sections 100 to 104 of the Act and Section 62 of the Indian Contract Act. Therefore, the rejection of approval of the scheme of
arrangement by the learned single judge is in order, and we are unable to see anything to disturb the finding of the learned single judge.
In the result, the three O. S. As are dismissed confirming the order of the learned single judge and leaving the parties to bear their respective
costs.