IRAA Clothing Private Limited Vs

Kishore Vemulapalli, Member (Judicial)

This Bench is convened via Video Conferencing.

The present Scheme is a Scheme of Compromise or Arrangement between IRAA Clothing Private Limited (Applicant Company) and it’s Specified Creditors (as defined under the Scheme). This Scheme of Arrangement read with the proposed amendment as set out in the C.A. No. 204 of 2022 is inter-alia proposed to enter into an arrangement with its Specified Creditors, those Unsecured Creditors of the Applicant Company, whose outstanding debt is Rs.25,00,000 or above as at March 31, 2021.

The Board of Directors of the Applicant Company has approved the Scheme in its meeting held on September 22, 2021 respectively and the appointed date is fixed at April 1, 2021 as set out in the Scheme.

The Authorized Share Capital of the Applicant Company as on March 31, 2022 is Rs.8,50,00,000/- divided into 85,00,000 Equity Shares of Rs.10/- each. Issued, Subscribed and Paid-up Share Capital of the Applicant Company is Rs.8,07,00,000/-divided into 80,70,000 shares of Rs.10/- each fully paid-up.

The counsel to the Applicant Companies submits that the rationale for the Scheme is as follows:

i. The Company was initially set up to pursue a project in the field of textile accessories and garments manufacturing and selling the same to open market customers under the various brands of the customers.

ii. The Company was set up to pursue a business as a leading 'Back- Room Manufacturer for Major Brands'. Over 15 years of its existence, the Company has earned a turnover of over 1000 Crores and spread over more than 500 clients. Inherent to this nature of business, the Company has to take financial risk with an exposure to large corporates in terms of receivables, inventory obsolescence and the like. These risks are normally factored in pricing and are generally supported by commercial banks. The banks take close view of the nature of risk, pricing, security and tenure; which by itself is an expertise of the lenders.

iii. Germane to the business is a process of mitigation where wider spread of clients play a major role, backed by equity, non-recourse funding and at times insurance cover. It is well known that in projects of these nature, the commercial banks and the supply chain almost become partners; and play a major role.

iv. The performance of the Company was adversely affected majorly because of the turbulent economic conditions. The downturn was majorly attributable to loss of business during the pandemic, delayed recovery of debts and cost of interest. The liquidity was further impacted by repayment of loans taken for acquiring plant and machinery.

v. An economic down turn makes a major cause of risks surfacing and needing a balanced approach. The RBI guidelines also provide for meeting with the risks caused by a general economic down turn and the risks crystalized by inefficient or obsolete technology or a pure traditional credit risk. In the instant case, while the risk accumulated and got crystallized at the peak of economic down turn, mainly triggered by pandemic and locked down.

vi. In view of the financial conditions of the Company, in the event the Company is dragged into corporate insolvency resolution process, under the waterfall mechanism the unsecured creditors will barely receive any returns. This Scheme is proposed vis a vis insolvency process, although the unsecured creditors will receive payment in a staggered manner in accordance with the timelines set out in the Scheme, they will be receiving the entire undisputed principal amount after a set off of an agreed counter claim (if any) without any deduction or sacrifice from such unsecured creditor, as the case may be.

vii. The Company and its business support over 500 families and this includes a team of highly qualified 50 executives who can run the business as entrepreneurs.

viii. The Business of the Company has potential for sustainable and profitable growth and is capable of attracting investors, strategic partners. The Company’s cash flows have been over-burdened due to the delays in cash flow and the debt obligations undertaken by the Company based on normal commercial prudence.

ix. In view of the above, the Company has devised a Scheme which upon approval will provide for staggered satisfaction of all liabilities to its stakeholders.

x. It is envisaged that if the Obligations are restructured in terms of the present Scheme, a profitable survival of the Company will be ensured and it shall lead to application of resources of the Company in a more efficient and profitable manner rather than such resources of the Company being attributed to several litigation proceedings wherein the Company is defending itself against the Obligations to its creditors.

xi. If the Obligations of the Company are restructured in accordance with terms of this Scheme, it will ensure successful survival of the Company and shall lead to revival of the business, regeneration of income and overcome the temporary financial/liquidity difficulties.

xii. The restructured Obligations to the Specified Creditors of the Company will improve the debt-equity ratio of the Company which in turn will improve the ability of the Company to service its creditors, raise additional debt for its plans outlined to in this Scheme and for its future projects/ initiatives.

xiii. The Company presently has approximately 400 employees. The restructuring of the Company will enable the Company to optimize its operations and financial position and thus the employees of the Company will also be benefited from such restructuring. In addition to the benefits to aforesaid employees, the restructuring of the Claims by the Company would enable better financial management and focus on accelerated growth of the Company, which in turn will also benefit the shareholders and creditors of the Company.

xiv. The Scheme will be in the best interest of shareholders, creditors, employees and other stakeholders of the Company in the long run of the Company.

The counsel for the Applicant Company submits that an amendment Company Application was filed for the revising the time period in regards to repayment mechanism of the Specified Creditors:

i. In Plan A: for a repayment period of 9 (nine) years as against the previous 12 (twelve) years which also included 2(two) years of moratorium;

ii. In Plan B: for redemption of preference shares after 9 (nine) years as against the previous 5 (five) years.

The Company Application No. 204/2022 on 06.08.2022 seeking amendment of the Scheme, the same was allowed by this Bench on 30.09.2022.

The Counsel for the Applicant Company submits that the Board of Directors of the Applicant Company in its meeting held on April 08, 2022 had approved the aforesaid amendment in the Scheme.

That there are 2 (two) Equity Shareholders of the Applicant Company. One of the Equity Shareholders of the Applicant Company holding 99% of the subscribed, issued, paid-up share capital of the Applicant Company has given its consent for the proposed Scheme. In view of the fact that the majority of Equity Shareholder of the Applicant Company has given its consent affidavit, the meeting of the Equity Shareholders of the Applicant Company is hereby dispensed with.

That there is 1 (one) Secured Creditor of the Applicant Company as on September 30, 2021. The Learned Counsel submits that the Secured Creditor of the Applicant Company will not be affected by the Scheme and shall be paid in their respective normal course of business as per the restructuring proposal as agreed by the Secured Creditor. This Bench hereby directs the Applicant Company to issue Notice by Registered Post-AD/ Speed Post/ Hand Delivery and/or through Email to its Secured Creditor of which are due and payable as on September 30, 2021, with a direction that they may submit their representations, if any, to the Tribunal and copy of such representations shall simultaneously be served upon the Applicant Company.

That there are 29 Specified Creditors of the Applicant Company, as on 31st March, 2021, to whom monies are due and payable aggregating approximately Rs.37,82,69,047 (Rupees thirty seven crores eighty two lakhs sixty nine thousand and forty seven). A meeting of the Specified Creditors of the Applicant Company be convened and held through video conferencing within 60 days from the date of this order for the purpose of considering and, if thought fit, approving, with or without modification(s) the proposed Scheme of Compromise or Arrangement between IRAA Clothing Private Limited and its Creditors. The Applicant Company shall make arrangement for e-voting on the said resolution and such voting shall be kept open for minimum 48 hours.

At least thirty (30) days before the said meeting of the Specified Creditors of the Applicant Company to be held as aforesaid, a notice convening the said meeting at the day, date and time aforesaid, together with a copy of the Scheme, a copy of the statement disclosing all material facts as required to be sent under Section 230 (3) of the Companies Act, 2013 read with Rule 6 of the Companies (Compromises, Arrangements and Amalgamations) Rule, 2016, the prescribed Form of Proxy and details of e-voting arrangements, shall be sent by Registered Post-AD/ Speed Post/ Hand Delivery and/or through Email, addressed to each of the Specified Creditors of the Applicant Company at their last known address or email addresses as per the records of the Applicant Company.

That at least thirty (30) days before the meeting of the Specified Creditors, of the Applicant Company to be held as aforesaid, a notice convening the said Meeting, indicating the date and time of meeting as aforesaid be published stating that copies of the Scheme and the statement required to be furnished pursuant to Section 230(3) of the Companies Act 2013 read with Rule 6 of the Companies (Compromises, Arrangements and Amalgamations) Rule, 2016 and the Form or Proxy can be obtained free of charge at the Registered Office of the Applicant Company.

That the publication of Notice of the Meeting shall be advertised in two local newspapers viz. ‘Business Standard’ in English language and translation thereof in 'Navshakti' in Marathi language, both circulated in Mumbai at least 10 days before the meeting.

That Ms. Archana Sunil Biyani, the Ld. Authorised Representative, the Director of the Applicant Company be appointed as the Chairman of the meeting of Specified Creditors of the Applicant Company, convened in pursuance of Tribunal’s directions, to consider and approve the proposed Scheme.

That independent Company Secretary shall be appointed as the Scrutinizer of the meeting of the Specified Creditors of the Applicant Company or any adjournment or adjournments thereof.

That the Chairman appointed for the aforesaid meeting to issue the advertisement and send out the notice of the meetings referred to above. The said Chairman shall have all powers as per Articles of Association and also under the Companies Act, 2013 in relation to the conduct of the meetings, including for deciding procedural questions that may arise or at any adjournment thereof or any other matter including an amendment to the Scheme or resolution, if any, proposed at the meeting by any person(s).

That the quorum of the aforesaid meeting of the Specified Creditors shall be 5 creditors.

That the quorum of the aforesaid meeting of the Specified Creditors shall be 5 Specified Creditors. In case the required quorum as stated above is not present at the commencement of the meeting, the meeting shall be adjourned by 15 (fifteen) minutes and thereafter the persons present shall be deemed to constitute the quorum.

That the value and number of shares of each Specified Creditors shall be in accordance with the books/ register of the Applicant Company where the entries in the books / register are disputed, the Chairman of the Meeting shall determine the value for the purpose of the aforesaid meetings and his decision in that behalf would be final.

That there are 253 (Two Fifty Three) Unsecured Creditors (other than Specified Creditors) of the Applicant Company as on 30th September, 2021. The Learned Counsel submits that the Unsecured Creditors of Applicant Company will not be affected by the Scheme and shall be paid in their respective normal course of business. This Bench hereby directs the Applicant Company to issue Notice by Registered Post-AD/ Speed Post/ Hand Delivery and/or through Email to all its Unsecured Creditors of the Applicant Company, respectively which are due and payable as on September 30, 2021, with a direction that they may submit their representations, if any, to the Tribunal and copy of such representations shall simultaneously be served upon the Applicant Company, as the case may be. The Notice shall state that “If no representation / response is received by the Tribunal from Unsecured Creditor(s), within a period of thirty days from the date of receipt of such notice, it will be presumed that Unsecured Creditor(s) has no representation/ objection to the proposed Scheme as per Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016”.

That the Applicant Company is further directed to serve notices along with copy of Scheme upon the (i) Central Government through the office of Regional Director, Western Region, Mumbai; (ii) Registrar of Companies, as per Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and ((iii) concerned Income Tax Authority within whose jurisdiction the Applicant Company [PAN:AAJCS2299D] assessments are made, and the Nodal authority in the Income Tax Department having jurisdiction over such authority i.e. Pr. CCIT, Mumbai, Address:- 3rd Floor, Aayakar Bhawan, Mahrishi Karve Road, Mumbai – 400 020, Phone No. 022-22017654 [E-mail: Mumbai.pccit@incometax.gov.in, and (iv) concerned GST Authority(s) within whose jurisdiction the Applicant Company [GSTIN: 27AAJCS2299D1Z4] assessments are made with the direction that they may submit their representations, if any, within a period of 30 (thirty) days from the date of the receipt of such notice to the Tribunal with copy of such representations shall simultaneously be served to the concerned Applicant Company. The Notice shall state that “If no representation / response is received by the Tribunal from Unsecured Creditor(s), within a period of thirty days from the date of receipt of such notice, it will be presumed that Unsecured Creditor(s) has no representation/ objection to the proposed Scheme as per Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016”.

Applicant Company will file affidavit of service in the Registry proving dispatch or notices upon Creditors publication of notices in newspapers and notices to Regulatory Authorities.