G.V.Films Limited v. Metage Special Emerging Market Fund Limited

Limited. The said arrangement is for the demerger of the G.V.FilmsLimited (hereinafter referred to as a Parent Company) and thereby tocreate two more companies viz., G.B.Studio City Limited and G.V.NewMedia Technologies Limited (hereinafter referred to as OffspringCompanies). 3. The short facts which are necessary for the disposal ofthese appeals would be as follows:-3.1 :- The petitioner company is the parent company viz.,G.V.Films Limited, incorporated under the Companies Act, 1956. Itproposes the demerger and to form the Offspring Companies known asG.V.Studio City Limited and G.V.New Media Technologies Limited. Themain objects of the said parent company are to carry on the businessas film producers (sound and / or silent), hippodrome & circusproprietors of cinema houses, theatres, concert halls and pictureplaces and studios and also to provide for musical, dramatic andathletic performances for amusements and / or entertainment for bothprivate and public. 3.2:- It also has the right of purchasing or owning, acquiringproperties, lands and properties and to hotel management, acquire orlease TV Channels, radio and TV Stations inside or outside the Indiaand to produce Tele serials and to exhibit movies or serials or anyfilm on Satellite, Internet, cablenet or any other means ofcommunication. 3.3 :- “The said parent company's authorized sum capital as on 30th June 2007 is Rs.20,00,00,00,000 divided into 200,00,00,000 EquityShares of Rs.10/- each. The issued, subscribed and paid up capitalof the parent company as on 30th June 2007 is Rs.348,22,00,000/-divided into 34,82,20,000 Equity Shares of Rs.10/- each share.4. The circumstances which necessitated the demerger of the saidcompany as G.V.Studios and G.V.New Media Technologies (OffspringCompanies) are to enable the said division to grow as focusedbusiness entities and attract capital/ strategic investors andfacilitate the offspring companies in becoming major market playersin the relevant business. 5. It is also stated by the petitioner that the demerger willensure better operational management and result in greater synergiesof operations and focus on accelerated growth of individual units andwill also ensure higher returns to the shareholders, creditors andemployees and is also in general public interest. Therefore, it hasenunciated a scheme of programme for demerger of the parent companyinto offspring companies. When they have sought for approval of thesaid scheme, the petitioner company was directed by this court inC.A.No.3066 of 2007, in its order dated 29.11.2007, to convene a https://hcservices.ecourts.gov.in/hcservices/ meeting of the Equity Share Holders of the petitioner company for thepurpose of considering, and if thought fit, approving, with orwithout modification, a scheme of Arrangement between the parentcompany and offspring companies. For that purpose, Hon’bleMr.Justice K.Govindarajan (Retd) was appointed to act as a Chairmanof the said meeting and to report the results thereof. 6. Accordingly, a meeting of the Equity Share Holders wasconvened as per the requirements made in Section 396 of the CompaniesAct and each of the Equiry Share Holders of the Company were informedthrough certificate of posting, and a notice was also advertised inthe English daily “The Hindu Business Line” on 29.12.2007 and inTamil daily “Malai Murasu” on 29.12.2007 as per the directions of theCourt. Accordingly, on 24.01.2008, the meeting of the Shareholdersof the petitioner company was duly convened in accordance with thesaid order of this court at New Woodlands Hotel Private Limited,No.72 – 75, Dr.Radhakrishnan Salai, Mylapore, Chennai-600 004, andHon’ble Mr.Justice K.Govindarajan (Retd) presided over the saidmeeting. 7. In the said meeting of the Equity Shareholders, somemodification was proposed in Clause 2 of Section 1 of Part IV of theScheme and the said amendment was duly approved, and a report hasbeen filed by the said Chairman of the meeting before this Court on30.01.2008. 8. In the meeting of the Equity Shareholders of the petitionercompany, 787 Equity Shareholders exercised their votes either inperson or by proxy, and the total number of votes cast were7,86,61,306. Out of said votes cast, 689 shareholders holding7,84,85,906 Equity Shares of Rs.10 each, voted in favour of themodified Scheme as proposed in the meeting. Three (3) shareholdersholding 1,75,400 Equity Shares of Rs.10/- each, voted against thesaid resolution, and the remaining 95 shareholders cast invalidvotes. Therefore, the petitioner had sought for approval of thescheme of arrangement as modified and approved by the EquityShareholders held on 24.01.2008. 9. The further case of the petitioner would be that the proposedarrangement in between the petitioner company (parent company) andthe said offspring companies will not affect the creditors bothsecured and unsecured. As per the orders passed by this court on29.11.2007 in C.A.NO.3066 of 2007, the petitioner company wasdirected to convene a meeting of the secured creditors of thecompany for the purpose of considering and approving with or withoutmodification of the scheme of arrangement between the parent companyand offspring companies, and the said order was to the effect thatHon’ble Mr.Justice K.Govindarajan (Retd) would act as the Chairman ofthe said meeting and report the results thereof to this court inaccordance with Section 393 of the Companies Act 1956. https://hcservices.ecourts.gov.in/hcservices/

10. Notice was sent to the secured creditors by prepaid post andcertificate of posting on 28.12.2007, and the notice of convening themeeting of the secured creditors was advertised in all the editionsof the Tamil Daily “Malai Murasu” on 29.12.2007 and in all editionsof the English Daily “The Hindu Business Line” on 29.12.2007. OneSmt.A.Sushila Devi moved this Court by way of an Application inC.A.No.199 of 2008 in C.A.No.3065 of 2007 praying for postponing themeeting to be convened on 24.01.2008, till the liability due to herwas crystallized. The meeting was postponed by this court by anorder dated 23.01.2008 and subsequently the said A.Sushila Devi inC.A.No.199 of 2008 reported settlement arrived at between thepetitioner company and herself on 07.03.2008, and accordingly,C.A.No.199 of 2008 filed by her was dismissed as withdrawn. 11. Since the meeting ordered by this court was redundant, thecourt granted four weeks' time to the petitioner company to getconsent from other secured creditors. Accordingly, consent of threesecured creditors viz., Citi Bank, State Bank of India and TheLakshmi Vilas Bank Limited, were obtained for the proposed scheme ofarrangement, and they also submitted their consent for the saidscheme. The proposed scheme of arrangement would take effect from 1stJuly 2007, the appointed Date, under the provisions of Sections 391to 394 of the Companies Act, 1956. The scheme of arrangement will bebeneficial to all the companies involved in the scheme, including theshareholders of the said companies. Therefore, the petitionercompany prays for the scheme of arrangement between G.V.Films Limited(parent company) and G.V.Studio City Limited and G.V.New MediaTechnologies Limited (Offspring companies) enclosed with the saidpetition , be sanctioned by this court with effect from 01.07.2007,so as to combine all shareholders and creditors of the petitionercompany. 12. The contention of the respondents 1 and 2 would be that theyare Bond holders under the Deed of Trust dated 20.04.2006, executedby the petitioner and the respondents 1 and 2 in which the Bank ofNew York, London Branch, was appointed as the Trustee, and the saidTrust Deed contains terms and conditions of the Bond and theinterests of the respondents 1 and 2, in the issue of ForeignCurrency Convertible Bond (hereinafter referred to as FCCB) ondollars. 13. One of the important terms under which the Bonds have beenissued to the respondents 1 and 2, is a right available to them toget the bond converted into shares including the right available toconvert it into Global Depository Receipts (GDR). Those bonds werepaid in Dollars, and the entire covenant and interest are categorizedin the said Deed of Trust produced in Annexure B of the affidavitfiled by the respondents 1 and 2. https://hcservices.ecourts.gov.in/hcservices/

14. The proposed scheme of arrangement by the petitioner wouldbenefit only the promoters and the major shareholders of thepetitioner company, and nobody else would stand to benefit by thescheme. Without considering the terms and conditions of the bond asper the Trust Deed held by the respondents 1 and 2, the proposedscheme cannot be proceeded . The entire scheme would vitally affectthe interests of the respondents 1 and 2 since the Subscribed andPaid-up capital of the petitioner company stands reduced by153,96,35,247/-. The resulting companies (offspring companies)G.V.Studios City Division and G.V.New Media Technologies Divisionwould take 39,13,73,237 and 125,93,07,858 respectively and out ofthis amount, the resultant transfer would be Rs.28,60,91,755/- forthe Studio Division and Rs.125,93,07,858/- for the New Media Divisionin respect of fixed assets. If it is so, the petitioner companywould be left with hardly any business or assets supporting theobligations under the Bond, and the respondents 1 and 2 would be leftwith no other option than to share little quantum of money ifconverted into shares of the company. 15. The provisions of Section 101 to 103 of the Companies Actshould have been complied with since there is a reduction of capitaltaken place. Therefore, the scheme of arrangement suggested would bein violation of provisions of Section 101 to 103 of the CompaniesAct. 16. The petitioner company had approached this court withouteven considering the interests of the unsecured creditors in generaland the respondents 1 and 2 in particular, and they would standcompletely jeoparadized by this scheme and arrangement. Thepetitioner company had deliberately moved the said application onlyfor convening the meeting of the secured creditors knowing fully wellthat it would not be in a position to obtain consent of therespondents 1 and 2 and other unsecured creditors. Since, no meetingof the secured creditors was held as per the directions of this courtalso, the scheme of arrangement cannot be approved. Therefore, theproposed scheme of arrangement being a dubious one may not beapproved by the court. 17. The third respondent had also raised similar contention inhis affidavit. According to him, a similar Deed of Trust was enteredinto by the petitioner company with the third respondent on23.10.2006, in which the Bank of New York, London Branch, wasappointed as the Trustee under the Trust Deed. The said FCCB was inthe form of Euro Bonds. The third respondent has also raisedobjections similar to that of the objections of the respondents 1 and2. https://hcservices.ecourts.gov.in/hcservices/

18. The fourth respondent had stated in his objections that hebeing a Shareholder, did not receive any notice of the meeting inrelation to the Scheme of Arrangement proposed by the petitionercompany. 19. The fourth respondent was having 36,100 number of equityshares. It is also stated that the Group of Companies held by oneG.Venkateswaran viz., the petitioner, Sujatha Estates (P) Limited,Sujatha Films Limited, Sujatha Productions(P) Limited and ArunaInternational Private Limited during the year 1987 and 1990, andthose group of companies claimed to have 7,80,000 equity shares ofM/s.Shaw Wallace Company Limited and those 7,80,000 equity shares ofShaw Wallace were taken away in an Income Tax raid held in thepremises of the Group of Companies belonging to Mr.G.Venkateswaranfor the income tax due to the tune of Rs.380 lakhs. 20. In order to pay the income tax arrears, the saidG.Venkateswaran requested the fourth respondent to enter into anagreement of sale of shares, and it was entered into between them on09.11.1987, under which 7,80,000 equity shares in M/s.Shaw WallaceCompany which were seized by the Income-tax Department, were agreedto be purchased for a total consideration of Rs.663 lakhs. Accordingly, funds were arranged, and Rs.380 lakhs tax arrears werepaid on 30.11.1987, by way of Pay Order drawn on Bank of Barodafavouring Income Tax Department for the specific purpose of releasing7,80,000 shares held in Shaw Wallace Company Limited from the custodyof Income Tax Department in order to facilitate the transfer of thoseshares in favour of the fourth respondent. Subsequently, it wasfound that the said Mr.G.Venkateswaran and the remaining fourcompanies were lawful owners of only 174,399 shares and not theentire 780,000 shares. Ultimately, the said 174,399 shares alonewere transferred to the fourth respondent and the saidG.Venkateswaran and four companies had agreed on 24.01.1990, to makegood loss for the fourth respondent. Accordingly, 13,43,700 sharesof the companies viz., Sujatha Estates (P) Limited, Sujatha FilmsLimited, Sujatha Productions(P) Limited and Aruna InternationalPrivate Limited were deposited with the fourth respondent as per theletters written on 14.02.1990 and 26.02.1990. After that, the saidG.Venkateswaran passed away in the year 2003, and therefore, thefourth respondent had filed a suit in this court in C.S.No.915 of2006 for a decree for accounts and for other reliefs like selling theshares referred to above and paying over the sale proceeds to thefourth respondent company against the petitioner company and fourother companies. Therefore, the fourth respondent would thus become acreditor having shares of the share holders as pledgee of thepetitioner company. The scheme of arrangement as proposed by thepetitioner would certainly affect all the creditors including thefourth respondent. The proposed scheme of arrangement is violativeof provisions of law and also contrary to public policy. The fourthrespondent would come as one of the secured creditors, and the https://hcservices.ecourts.gov.in/hcservices/ direction of the court to convene a meeting of the secured creditorson 24.01.2008 at 10.30 a.m., was not informed to the fourthrespondent. The non participation or the non conduct of the saidmeeting of the secured creditors of the company would vitally affectthe decision relating to the scheme of arrangement. Even assumingthat the fourth respondent is not a secured creditor, but only anunsecured creditor, meeting of the unsecured creditors of the companywas not convened which is fatal to the approval of the scheme. 21. The petitioner cannot seek for the demerger of the companiesunder the scheme of arrangement without the consent of the creditorswhen the liabilities of the company are sought to be transferred toits division, and therefore, if the scheme is approved without theconsent of the class of creditors whose rights are also transferredand they will be vitally affected. The unsecured creditors as awhole were not consulted and thus the scheme without the approval ofthe creditors will be ineffective and the scheme is thus contrary tothe established procedures under Section 391 of the Companies Act. 22. The Scheme of Arrangement does not disclose materialparticulars like what are all the liabilities that are to betransferred to the offspring companies viz., G.V.Studios City Limitedand G.V.New Media Technologies Limited, whose liabilities are soughtto be transferred. It has also not disclosed the transfer of fixedassets, and thereby the creditors whose liabilities are to bedischarged by the petitioner company are deprived of the assets andwhat would be the recourse once the scheme is sanctioned are also notgiven. Therefore, the creditors are thus vitally affected by thescheme of arrangement of demerger and without approval of the classof unsecured creditors by convening a meeting. 23. It cannot be said that the scheme of arrangement is inaccordance with law and not prejudicial to the share holders nor tothe creditors both secured and unsecured. Therefore, the demergerproposed by the scheme of arrangement is not tenable in law andtherefore, the confirmation of the scheme need not be granted. 24. Learned Single Judge on hearing both sides had elaboratelydiscussed the various pointed raised before her and had come to theconclusion of disallowing the claim of the petitioner company’sscheme of arrangement for demerger. Aggrieved against the saidorder, the present appeals have been preferred by the petitionercompany. 25. Heard Mr.K.Ravi, learned counsel for M/s.Rugan and Arya,appearing for the appellant, Mr.Aravind P.Dadar, learned SeniorCounsel for Mr.Venkatavaradhan, appearing for respondents 1 and 2,Mr.T.K.Baskar, learned counsel appearing for the third respondent andMr.T.K.Seshadhri, learned Senior Counsel for Mr.Srinath Sridevan, https://hcservices.ecourts.gov.in/hcservices/ appearing for the fourth respondent. 26. Learned counsel for the appellant/petitioner company (hereinafter referred to as petitioner company or parent company) wouldsubmit in his argument that rejection of the scheme of arrangementproposed by the petitioner, by the learned Single Judge is contraryto all canons of law when the scheme of demerger was approved by anoverwhelming share holders present and all secured creditors of thecompany have given assent. He would further submit in his argumentthat the demerger proposed by the petitioner is not a transfer sincethe group of companies would face the liabilities as that of theparent company. He would further submit that the learned SingleJudge failed to appreciate the basic fact that three objectors viz.,3 FCCB holders, the respondents 1 to 3, are not at all prejudiced andwill not be worse off by sanctioning the Scheme of Demerger in viewof the readiness and willingness expressed by all the three companies(parent company and offspring companies) to jointly and severallycontinue to shoulder all the obligations under the FCCBs by executinga Supplementary Trust Deed as contemplated in the FCCB conditions. Hewould further submit in his argument that even otherwise the maturityof those bonds either Dollar bonds entered with respondents 1 and 2or the Euro Bonds entered with the third respondent, would be only inthe year 2012. In the mean while they can exercise their right todemand equity shares of any company instead of their bonds, aftergetting permission from the Reserve Bank of India and therefore theycannot have any objection. He would further submit that there willnot be any prejudice caused to the respondents 1 to 3. He wouldfurther submit that the scheme would not result in reduction of theprice in conversion of FCCB bonds by its holders, since any reductionin conversion price would be informed to all the FCCB holders to getmore shares. He would also submit in his argument that the fact thatthe erstwhile Chairman of the petitioner company is stated to havetaken an advance of Rs.380 lakhs from the fourth respondent in theyear 1987 for and on behalf of his Group companies towards sale ofShaw Wallace Shares held by him and his companies would show that theclaim of the fourth respondent against the petitioner company is onlya speculative one. As regards the other submissions of the fourthrespondent that only a portion of the said shares of M/s.Shaw Wallacewere given to them and the said petitioner company is liable to paythe remaining sum towards the payment made by him to the Income Taxdepartment, no document has been produced to show the liability ofthe said Chairman on behalf of the petitioner company to the fourthrespondent. He would also submit in his argument that theadvertisement regarding the court convened meeting of the shareholders as ordered by the previous learned Single Judge of this courtwas perfectly alright, and the finding of the learned Single Judgethat the meeting convened on the basis of the order was erroneous andinadequate is not sustainable. He would again submit in his argumentthat according to the orders passed by this court, an advertisementwas given in Hindu Business Line in all the editions of the country https://hcservices.ecourts.gov.in/hcservices/ and in the vernacular daily viz., Malai Murasu, in all editions andaccordingly 787 share holders attended, and thereby a major portionof the share holders voted in favour of the modified scheme asproposed in the meeting and less number of share holders against thesaid resolution. In the said meeting, with some modification, thescheme of arrangement of demerger of the petitioner company wasapproved under the Chairmanship of Hon’ble Mr.Justice K.Govindarajan(Retd). He would also submit that the report of the Hon’ble Judgewas filed immediately, and it would depict the intention of the shareholders who are the owners of the company. Demerger as a scheme ispossible, and there is no impediment for granting approval, since thethree secured creditors have also given their consent for the saidscheme. He would also submit that the objections of FCCB holdersare also not sustainable because they can at any time change thehands of those bonds, and the condition that they should haveconsulted for the demerger of the petitioner company is notnecessary, and the basic conditions in the Trust Deed would be thatof contractual relationship, and if at all they would be entitled tothe said amount of conversion on maturity in the year 2012, and theycannot preclose the said bonds nor oppose the demerger of the companywhich is inter se. It can be objected only by the share holders ofthe company to which a prompt meeting was held as per the orders ofthis court on 24.01.2008, and the majority of the share holdersapproved the scheme with modification. He would also submit that therequisites of Section 391 of the Act have also been complied with,and there was no violation of the said provisions nor any act doneagainst public policy, and no prejudice would be caused to anybodydue to demerger of the petitioner company. Learned Single Judge hasaccepted the notional reduction of share capital to which the shareholders would not be entitled to any payment. However, the learnedSingle Judge failed to note the meeting of the unsecured creditorswas not mandatory when such reduction was found only as notional one. However, the respondents 1 and 2 have filed a suit before the LondonCourt exercising their right over the said bonds invoking thejurisdiction of the London Courts. He would also submit thataccording to the agreement in between the parties, Eurobonds can beconverted into equity shares and the said stipulation for conversionwas not challenged till today, and the respondents are bound by that. He would further submit in his argument that notices have beenpromptly given to the creditors as per the direction of this Court,and the meeting was postponed only due to the intervention of one ofthe secured creditors on 23.01.2008 by this court, and the petitionerwas directed to get consent from the secured creditors. He wouldalso submit that if really the court directed the convening of themeeting of the secured creditors and the unsecured creditors, thepetitioner would have complied with the same. For the mistake of thecourt, the petitioner company should not be penalized. He wouldfurther submit that the total value of the assets of the petitionercompany was 348.2 crores, out of which 156.93 crores were moved tothe offspring companies. The balance will be available to the parent https://hcservices.ecourts.gov.in/hcservices/ company, and 159.4 crores would be the general reserve, and thecapital would be 38.8 crores. He would further submit that the sharepremium account shows 95 crores and 30.5 crores was stated to be thegood will of the company. Since the aborted projects during 5 yearswas to the tune of 33 cores, it is good for the secured and unsecuredcreditors as well as bond holders that the demerger would bringflourishing results of the parent and offspring companies. He wouldfurther submit that even according to Sections 100 to 104 of the Act,no previous consent is necessary for the approval of the scheme fromthe creditors, and there is no material prejudice caused to the shareholders or creditors or the respondents. 27. He would also submit that respondents 1 to 3 have admittedlynot exercised their option to convert the bonds into shares, andtherefore, they would not be termed as share holders, and their bondswould mature only in the year 2012, and therefore there cannot be anyobjection nor any prejudice caused to the respondents 1 to 3 byvirtue of approval of the scheme of arrangement. He would cite ajudgment of the Hon’ble Apex Court reported in 1997 SC 506 betweenMiheer H.Mafatlal Vs. Mafatlal Industries Ltd in support of hiscase . The scheme contemplates reduction of capital and the issuedunpaid capital has not been reduced. The shares reduced are allottedto offspring companies demerged from the parent company, andtherefore there cannot be any prejudice to the share holders nor thecreditors. He would also submit that unless the bond holders viz.,respondents 1 to 3 opted for conversion, the petitioner cannothimself convert them into shares, and therefore, there is no questionof any prejudice caused to the respondents 1 to 3. However, he wouldsubmit in his argument that all the three companies are ready to giveundertaking to the share holders that no prejudice will be caused tothem and are also ready to give undertaking to creditors both securedand unsecured that they would jointly and severally pay theliabilities. All these reductions would be only in book adjustmentsand not actual loss caused to the share holders. Since the reductionof the share capital is only notional, there will not be anyprejudice to any one much less to the share holders, who haveparticipated and approved the scheme of arrangement and hadconsidered their right and had accepted for the same. He wouldfurther submit that even though demerger is not contemplated underthe Companies Act, it has been mentioned in Income Tax Act underSection 45, and therefore, the concept of demerger which has to beconsidered like that of amalgamation of companies, should have beenaccepted for the benefit of not only the company, but also its shareholders and the creditors. He would also cite a judgment of GujarathHigh Court reported in AIR 1970 Gujarath page 819 in support of hiscase. He would further submit that the fourth respondent is not atall its creditor, and he holds negligible share, and he was alsogiven notice, but he did not participate in the meeting of the share https://hcservices.ecourts.gov.in/hcservices/ holders and therefore, his objections cannot be accepted. Therefore,he would request the court to approve the scheme of arrangement, toset aside the order of the learned Single Judge and thus allow theappeal. 28. Mr.Arvind P.Dadar, learned senior counsel appearing forrespondents 1 and 2 would submit in his argument that the appellantcompany did not produce the latest accounts of its own even after thedemerger for approval. On going through the balance sheet of theappellant company and offspring companies, radical changes have takenplace after 2007, and the profit is shown to be 1 crore as on31.03.2008. 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 accountsat the time of filing the petition. Subsequently, it was shown to bea loss at 119.599 crores. When the status of the petitioner companywas found to be so, the meeting of the share holders cannot beconvened for reconsideration of their approval. He would furthersubmit in his argument that the provision under Section 391 of theCompanies Act has to scrupulously be followed for the purpose ofseeking approval of the scheme of arrangement. Latest financialaccounts or the Auditors report should have been produced atleast atthe appellate stage. He would cite a judgment of the Hon’ble ApexCourt reported in 1997 SC 506 for the said principle. He wouldfurther submit in his argument that nothing is mentioned in thescheme of arrangement about the liability to pay the creditors eithersecured or unsecured or the bond holders out of which they couldexercise their right. The scheme of arrangement without any meetingof the secured and unsecured creditors is a calculated fraud todeceive the share holders and creditors. He would also submit thatthe argument advanced before the learned Single Judge that theadvertisement for the convening of the share holders meeting was doneonly in Hindu Business Line of Chennai edition and not in countrywide editions. He would also submit that out of 85,540 shareholders, 787 shareholders only attended the meeting since there wasno proper publication. He would further submit that the shares ofthe petitioner company are through out India, and they have not beeninformed properly to the unsecured creditors and bond holders. Whenthe monies were given by the unsecured creditors and bond holders tothe petitioner company, the petitioner company has not informed themthat due to demerger, the benefits would go to the offspringcompanies but the liabilities were shown with the parent company, andhow the bond holders and the secured creditors and the unsecuredcreditors would get their money from the petitioner parent company isnot known. In the case of demerger which is diametrically opposed toamalgamation, the liabilities are with the parent company and theassets and profits are given to the offspring companies, which wouldaffect the rights of the share holders and creditors of the saidcompany. Normally, the big companies are not demerging and theoption of the petitioner company to demerge is without any reasonsand it should be with mutual consensus from the share holders of the https://hcservices.ecourts.gov.in/hcservices/ company who are sharing the ownership and that secured and unsecuredcreditors' consent is necessary for changing their claim from onecompany to another company. He would further submit that the sharecapital 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 31.03.2002. Share premium should be given sanctity like shares. According toSection 78 of the Act, share holders are entitled to the remainingsum after payments were made to the creditors in the case of windingup of the company. Therefore, the shares are concerned with theassets of the company in the case of demerger. He would furthersubmit that as regards the demerger of the petitioner company,parental company is shown to have only liabilities and not asprofits, and it will certainly affect the share holders and itscreditors. The good will of the company amounting to Rs.30 croreswould wipe out in the case of demerger and by virtue of demerger suchasset belonging to the share holders would certainly amount todetriment and prejudice to the share holders and creditors. Theparent company would be certainly reduced to its capital. When thereis no reduction of liability, it would affect not only the shareholders but also bond holders and creditors. The good will to thetune of Rs.30 crores money was wiped off and it would certainlyprejudice the rights of share holders and the respondents 1 to 3. Hewould also submit that the paid up share capital was reduced by 90%,and nothing was explained in the scheme of arrangement. He wouldfurther submit that as per the letter of offer issued by thepetitioner company to the respondents 1 and 2, the promise given bythe petitioner company was that 140% of the value of the bonds willbe given at the time of maturity. In such circumstances, he wouldfurther submit that the bond holders would be very much concernedabout the assets, out of which the money could be paid to the bondsheld by the respondents 1 and 2. He would further submit that oncedemerger had taken place, the petitioner company would not get assetssince demerger is a transfer under Section 2(19) (AA) of Income TaxAct. The argument advanced by the appellant that demerger was not atransfer is not correct and therefore undertaking given by all thecompanies and group of companies will not serve the purpose, andprejudice would be caused to the respondents creditors. As perSection 62 of the Contract Act, by mutual consent, contract could bedone and when the liability cannot be changed by the debtor andespecially when the FCCB were held by the respondents 1 and 2 , thepetitioner company ought to have convened a meeting of the unsecuredcreditors so as to avoid prejudice to any one of the parties and notto have undone the contract. Therefore, the approval of the schemeof arrangement may not be ordered, and the learned Single Judge isright in rejecting the claim of the appellant. 29. The learned counsel Mr.T.K.Baskar appearing for the thirdrespondent in his argument stated that the third respondent hadobtained Euro bonds and he is standing on the same footing like thatof the respondents 1 and 2 and the Reorganisation of the petitioner https://hcservices.ecourts.gov.in/hcservices/ company by virtue of demerger would certainly affect the rights ofthe third respondent, and it would be amounting to breach ofcontract. He would further submit that the agreement reached inbetween the petitioner and the third respondent by virtue of theTrust Deed entered into between them would go to show that onmaturity, the petitioner company had agreed to pay 175 crores andbecause of the demerger proposed by the petitioner company, theassets would go to the offspring companies, and how the thirdrespondent would get his maturity amount from out of the Euro bondswill be in dark. He would further submit that every aspect regardingthe liability to pay the amount to the third respondent should begiven in the scheme of arrangement; otherwise, the scheme ofarrangement cannot be approved and therefore, the demerger sought forby the petitioner company need not be approved and the appeal bedismissed. 30. Mr.T.K.Seshadhri, learned Senior counsel appearing for thefourth respondent would submit in his argument that the fourthrespondent is an unsecured creditor and he has filed a suit forrecovery of money and the application filed by the petitioner companyto reject the plaint was dismissed, and an appeal has been preferredbefore a Division Bench of this Court against the said order. It wasalso dismissed, and now the suit is pending before this court. Therefore, the liability to pay the said amount as claimed in thesuit cannot simply be shifted to the offspring companies by virtue ofdemerger scheme. He would refer to the points relied upon by thelearned Single Judge and had sought for the confirmation of the orderpassed by the learned Single Judge and for dismissal of the appeals. 31. We have given anxious thought to the arguments advanced on allthe sides and the point for consideration in these appeals would bewhether the decision reached by the learned Single Judge that thescheme of arrangement proposed by the petitioner company cannot beapproved since it is in violation of the statutory provisons andprejudicial to the share holders as well as the secured creditors ofthe company would be sustainable or not. 32. As far as the present cases are concerned, the admitted factswould be that the petitioner company was in existence as per theincorporation under the Companies Act, 1956 and the respondents 1 and2 have purchased Dollar bonds as per the offer circular given by thepetitioner company and the Trust Deed entered into between them andthe said Dollar bonds to the said value were still possessed by therespondents 1 and 2, and their maturity value is in the year 2012. Similarly the third respondent had obtained Euro bonds to the valuementioned in the offer circular as well as Trust Deed entered intobetween them which would also be in existence for its maturity till2012. It has been categorically agreed by the petitioner company andthe respondents 1 to 3 that the maturity value of 140% of the bondswould be paid by the petitioner company. It is seen that by virtue https://hcservices.ecourts.gov.in/hcservices/ of the bond issued by the petitioner company, the respondents 1 to 3being the foreign bodies, are having right over the petitionercompany. According to the further agreement i.e., the Trust Deed,the said bonds given, at any time can be converted into shares of thepetitioner company. Hon’ble Thiru Justice K.Govindarajan (REtd)headed as a Chairman, and a meeting was convened on 24.01.2008 and areport has also been filed. Similarly yet another order was passedby this court for convening a meeting of the secured creditors towhich one of the secured creditors had asked the court forpostponement by filing an application in C.A.199 of 2008, and thesaid meeting was postponed, and thereafter she had settled her claimwith the petitioner company, and she had withdrawn the C.A.199 of2008. The said C.A. was dismissed as withdrawn by order dated09.03.2008. Thereafter, no meeting of the secured creditors wasconvened, and as such, it was directed by this court to get consentof the secured creditors within the stipulated time and it has beenobtained by the petitioner company. The consent of the 3 securedcreditors viz., Citi Bank, Lakshmi Vilas Bank Limited and State Bankof India, were also obtained for the demerger of the company. 33. As far as the convening of the meeting is concerned, it hasbeen objected by the respondents that the meeting of the shareholders was not properly convened since proper notice was not givento all the share holders. It is further contended that out of 84,540share holders, only 787 share holders attended the meeting and itshows that the publication in the paper was not properly done nor thenotice of the convening of the said meeting was properly given to theshare holders. 34. According to the learned counsel for the appellant, thiscourt had ordered for the publication of the convening of the meetingin Hindu Business Line at Chennai edition wherein it has beeneffected through out India. The learned counsel produced a bill forthe said payment of the money for the publication to Hindu BusinessLine before this court establishing that it has been publishedthrough out the country in all the editions. No doubt, Malai Murasupublication was done in vernacular language within the State. Thesaid production of the bill to the effect that it had been publishedthrough out India cannot be relied upon since the Bill mentions onlysome of the cities of our country, and it is not mentioned thereinthat it was made in all the editions through out India. The saidbill would disclose that it has been published in the editions of NewDelhi, Bombay, Calcutta, Bangalore and other cities, and it neversaid that through out India. Therefore, it cannot be taken as thatit was published through out India and by virtue of the publication,every one of the share holders would be presumed to have beeninformed. https://hcservices.ecourts.gov.in/hcservices/

35. It is an admitted fact that the fourth respondent is holding38,100 shares with the petitioner company. He has categoricallymentioned that he was not served with any notice and he had notattended the meeting conducted on 24.01.2008. Since the petitionerhas not produced any proof that he has served notice properly on thefourth respondent, the submission that 787 share holders attended themeeting and it was an overwhelming one cannot be accepted. Thefurther submission of the petitioner company that the fourthrespondent is possessing only lesser extent of shares was not a pointraised before the learned single judge. Merely because the court haspassed the orders that it has been only in respect of Chennaiedition, the argument that the petitioner company had not publishedin all the editions all over India is not acceptable, and theparticipation of the limited share holders would go to show that ithas not been properly published by the petitioner company. 36. As regards the claim of the respondents 1 to 3 that they arealso the creditors of the petitioner company, and their rights havebeen affected by virtue of the demerger proposals, and the liabilityof the petitioner company has been washed away because of thedemerger, and they cannot claim the amount due under the bondsexecuted by the petitioner company in case of demerger are concerned,such arguments of the learned counsel for the respondents 1 to 3cannot be simply brushed aside. The liability to pay either in theform of shares at the option of the bond holders viz., respondents 1to 3, or to repay the matured amount on maturity of those bonds wouldbe only by the petitioner company and if at all the liability istransferred, the same ought to have been done with the consensus ofthe creditors and the share holders. If the bond holders viz.,respondents 1 to 3, opt for conversion of their bonds into shares ofthe company, a different consideration would come into play, and theyhave to be considered only as share holders. Till then, therespondents 1 to 3 should have been considered as creditors of thepetitioner company, whose liabilities should have been consideredonly with consensus arrived at with those creditors also. 37. It is an admitted fact that there was no meeting convened bythe petitioner company for getting consensus of the unsecuredcreditors or to frame any scheme within the scheme arrangement ormodify the said scheme of arrangement or for the due payment of debtspayable to the unsecured creditors. It cannot be taken shelter bythe petitioner company that the said meeting of the unsecuredcreditors was not ordered by the court, and if ordered, the companywould have conducted the meeting. The said argument cannot besustained. It is for the petitioner company to show to court beforegetting approval that nobody would be prejudiced by virtue ofdemerger proposal. The petitioner company did not ask for theconvening of the meeting of the unsecured creditors nor asked forreconvening of the secured creditors meeting. The respondents arehaving the bonds and they are coming under the category of creditors, https://hcservices.ecourts.gov.in/hcservices/ and they would be certainly affected if liabilities are transferredto the offspring companies without the consent of the respondents orthe liability alone are kept with the parent company, and the assetshave been transferred to the offspring companies. Such a transfer ofassets detrimental to the unsecured creditors would be certainlyamounting to act of prejudice. The obligation cast upon thepetitioner company under the Trust Deed entered into between thepetitioner company and the respondents 1 to 3 should not have beenbreached or violated by the scheme of arrangement proposed by thepetitioner company. 38.In this behalf, the learned counsel for the respondents 1 and2 cited a judgement of the Hon’ble Apex Court in Miheer H.MafatlalVs. Mafatlal Industries Limited reported in AIR 1997 SC 506explaining the scope of Court while dealing with amalgamation scheme. The Apex Court considering various judgments have indicated thescope as follows:- “ 1. The sanctioning Court has to see to it that all therequisite statutory procedure for supporting such a schemehas been complied with and that the requisite meetings ascontemplated by Section 39(1)(a) have been held. 2. That the scheme put up for sanction of the Court isbacked up by the requisite majority vote as required bySection 391, sub-section (2). 3. That the concerned meetings of the creditors ormembers or any class of them had the relevant material toenable the voters to arrive at an informed decision forapproving the scheme in question. That the majoritydecision of the concerned class of voters is just and fairto the class as a whole so as to legitimately bind even thedissenting members of that class. 4. That all necessary material indicated by Section 393(1) (a) is placed before the voters at the concernedmeetings as contemplated by Section 391, sub-section (1) 5. That all the requisite material contemplated by theproviso to sub-section (2) of Section 391 of the Act isplaced before the Court by the concerned applicant seekingsanction for such a scheme and the court gets satisfiedabout the same. 6. That the proposed scheme of compromise and arrangementis not found to be violative of any provision of law and isnot contrary to public policy. For ascertaining the realpurpose underlying the Scheme with a view to be satisfied on https://hcservices.ecourts.gov.in/hcservices/ this aspect, the Court, if necessary, can pierce the veil ofapparent corporate purpose underlying the scheme and canjudiciously X-ray the same. 7. That the Company Court has also to satisfy itself thatmembers or class of members or creditors or class ofcreditors, as the case may be, were acting bona fide and ingood faith and were not coercing the minority in order topromote any interest adverse to that of the lattercomprising of the same class whom they purported torepresent. 8. That the scheme as a whole is also found to be just,fair and reasonable from the point of view of prudent men ofbusiness taking a commercial decision beneficial to theclass represented by them for whom the scheme is meant. The aforesaid parameters of the scope and ambit of thejurisdiction of the Company Court which is called upon tosanction a Scheme of Compromise and Arrangement are noexhaustive but only broadly illustrative of the contours ofthe Court’s jurisdiction."In the aforesaid judgment, it has been categorically mentioned thatthe creditors or class of creditors has to be considered. The schemeproposed should be found to be just, fair and reasonable from thepoint of view of prudent men of business taking a commercial decisionbeneficial to the class represented by them for whom the scheme ismeant. Moreover, it should not be violative of any provisions of lawand is not opposed to public policy. 39. In the aforesaid circumstances, the approval of the schemecould be done only in case of majority resolution passed by the shareholders. However, the report of the Chairman would go to show thatthere were some objectors in the meeting and the said opposition wasnegligible. Therefore, there is no question of any unanimousapproval. 40. As far as the requisites of the statutory provisionscontemplated under Section 391 are concerned, for betterunderstanding Section 391 has to be extracted as follows:- “ Section 391 of the Companies Act deals with power tocompromised or make arrangement with creditors andmembers. Sub Section (1) and its proviso reads asfollows:- Where a compromise or arrangement is proposed https://hcservices.ecourts.gov.in/hcservices/ (a) between a company and its creditors or any class ofthem; (b) between a company and its members or anyclass of them; The Court may, on the application of the company or of anycreditor or member of the company, or, in the case of acompany which is being wound up, of the liquidator, order ameeting of the creditors or class of creditors, or of themembers or class of members, as the case may be, to becalled, held and conducted in such manner as the courtdirects. Provided that no order sanctioning any compromise orarrangement shall be made by the Court unless the Court issatisfied that the company or any other person by whom anapplication has been made under Sub-section (1) hasdisclosed to the Court, by affidavit or otherwise, allmaterial facts relating to the company, such as the latestfinancial position of the company, the latest auditor’sreport on the accounts of the company, the pendency of anyinvestigation proceedings in relation to the company underSection 235 to 251 and the like. “41.It is true that the respondents 1 to 3 are the FCCB holderswith the petitioner company, and the value of the bonds should havebeen paid by the petitioner company on maturity. Indisputably, theyare coming under the class of unsecured creditors. Any compromise inbetween parties should have been mutually agreed in between them. Itcannot be unilaterally decided by the debtor himself. The petitionercompany is the person of liability to their unsecured creditors viz.,the respondents 1 to 3. The liability to pay the respondents 1 to 3as unsecured creditors should have been agreed in the case ofsettlement. The scheme of arrangement proposed by the petitionercompany with the offspring companies would amount to transfer of theliability of paying the bonds or to retain them by transferring itsassets to the offspring companies. Therefore, the non convening ofmeeting and no attempt taken by the petitioner company to convenesuch meeting of unsecured creditors would violate the provisions ofSection 391 (1)(a) of the Act. That would also violate the provisionsof Section 62 of the Contract Act. When the liabilities are to betransferred from one person to another person, mutual consent isnecessary for substitution or alteration or novation of suchcontract. In this case, the respondents 1 to 3 and other unsecuredcreditors were not at all met and their consensus was not obtained. Hence, production of consent letter of 1 or 2 unsecured creditorswill not mean that all the remaining unsecured creditors rights wouldalso be protected in case of approval of demerger. The violation ofSection 62 of the Contract Act is also warranted. It is also broughtto the notice of this court that the proposed demerger programmeinvolves reduction of capital of the company, and in such https://hcservices.ecourts.gov.in/hcservices/ circumstances, the procedure prescribed under the Act viz., Sections100 to 104 of the Act, should have been followed. It iscategorically mentioned that no specific resolution has been passedfor reduction of capital by the petitioner company nor any suchresolution has been produced. 42. As already pointed out, the service of notice to the shareholders for the meeting held on 24.01.2008 is not adequate and thecertificate of posting issued to the fourth respondent who is holdingnearly 38,100 shares, will not serve the purpose, and no proof hasbeen filed in that regard. The recent production of bill from HinduBusiness Line would only depict certain towns of the country and itdoes not mention all editions issued from important cities from allover the country. No other documents have been produced to show thatthe cities mentioned in the said bill were only the place of editionsof the said Hindu Business Line newspaper. Even though the saidpublication was ordered by the court, the petitioner company shouldhave asked for paper publication for effective information to itsshare holders. The petitioner company was not prevented from seekingpermission from the court to convene a meeting with the unsecuredcreditors whose rights are also prejudiced due to the demerger of thepetitioner company. It is also brought to the notice of this courtthat the demerger would tantamount to transfer of assets of thepetitioner company as per the definition of demerger under Section391 of the Companies Act. The definition of merger would be thusaccording to Section 2(19AA) of Income Tax Act."2(19AA) "demerger" in relation to companies, means thetransfer, pursuant to a scheme of arrangement under sections391 to 394 of the Companies Act, 1956 ( 1 of 1956), by ademerged company of its one or more undertakings to anyresulting company in such a manner that-(i) all the property of the undertaking, beingtransferred by the demerged company, immediately before thedemerger, becomes the property of the resulting company byvirtue of the demerger;(ii) all the liabilities relatable to the undertaking,being transferred by the demerged company, immediatelybefore the demerger, become the liabilities of the resultingcompany by virtue of the demerger;(iii) the property and the liabilities of theundertaking or undertakings being transferred by thedemerged company are transferred at values appearing in itsbooks of account immediately before the demerger;(iv) the resulting company issues, in consideration of https://hcservices.ecourts.gov.in/hcservices/ the demerger, its shares to the shareholders of the demergedcompany 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 beforethe demerger, or by a nominee for, the resulting company or,its subsidiary) become shareholders of the resulting companyor companies by virtue of the demerger,otherwise than as a result of the acquisition of theproperty or assets of the demerged company or anyundertaking thereof by the resulting company;(vi) the transfer of the undertaking is on a going concernbasis;(vii) the demerger is in accordance with the conditions, ifany, notified under sub-section (5) of section 72A by theCentral Government in this behalf.Explanation 1 – For the purposes of this clause,"undertaking" shall include any part of an undertaking, or aunit or division of an undertaking or a business activitytaken as a whole, but does not include individual assets orliabilities or any combination thereof not constituting abusiness activity.Explanation 2 – For the purposes of this clause, theliabilities referred to in sub-clause (ii) shall include-(a) the liabilities which arise out of the activities oroperations of the undertaking;(b) the specific loans or borrowings (including debentures)raised, incurred and utilised solely for the activities oroperations of the undertaking; and(c) in cases, other than those referred to in clause (a) orclause (b), so much of the amounts of general ormultipurpose borowings, if any, of the demerged company asstand in the same proportion which the value of the assetstransferred in a demerger bears to the total value of theassets of such demerged company immediately before thedemerger."43. As per the aforesaid definition, the demerger of the companywould amount to transfer. Therefore, the right and liabilities ofthe unsecured creditors should also have been cared by the petitioner https://hcservices.ecourts.gov.in/hcservices/ company by taking appropriate steps in accordance with law. Otherwise, the rights of the said class of creditors would bejeoparadised or prejudiced by demerger of the petitioner company. 44. It has also been argued by the respondents that thepetitioner company must show with authentic proof that there wouldnot be any prejudice. Even at the appellate stage, they have notproduced any proof of accounts. However, the balance sheet of thepetitioner company as derived from the website of the company in theinternet has been produced by the respondents 1 and 2. The netprofit shown as per the account ending with 31.03.2007 was shown tobe Rs.17,59,70,000/- whereas it was found to be Rs.1,21,19,000/- forthe year ending with 31.03.2008. It deteriorates with a loss ofRs.119,15,19,000/- for the year ending with 31.03.2009. The saidaccounts/balance sheet would clearly depict that the result ofdemerger which is very much detrimental to the parent company viz.,the petitioner company, and the liabilities of the company attachedwith the parent company to which the unsecured creditors viz., therespondents 1 to 3 are to be paid by the said company wouldcertainly be jeoparadised or prejudiced in case the approval of thescheme of arrangement of demerger is ordered. 45. It is also brought to the notice of this court that thedemerger would make good will of the company wiped off and the goodwill of the petitioner company to the tune of Rs.30 crores shouldhave been wiped off for the simple reason of demerger. The said goodwill is also an asset of the company, and if it is lost by merelyapproving the scheme of merger it would also be a loss not only tothe share holders but also prejudicial to the creditors. It was theargument advanced by the learned counsel for the petitioner company that the fourth respondent was not at all either a secured creditoror an unsecured creditor, and therefore, he cannot attack or questionthe scheme of arrangement. The fourth respondent is admittedly ashare holder who is holding 30,100 shares with the petitionercompany, and he had complained that the service of notice was notmade to him for the meeting convened on 24.01.2008. 46. It is the case of the fourth respondent that he had filed asuit, and the application filed by the petitioner company to rejectthe plaint was dismissed, and the appeal preferred by the petitionercompany before a Division Bench in O.S.A., was also dismissed, andthe suit is pending for his claim. Whether the fourth respondent isan unsecured creditor, who is entitled to the claim made in the suitor not is to be decided in the suit. In the mean while, he could beconsidered as a share holder and his objection should have beenheard. In the event of his claim in the suit being decreed in hisfavour, he would also be prejudiced by the act of demerger. The saidstand taken by the fourth respondent cannot be brushed aside since hewould also be affected in the event of the liability is mounting withthe petitioner company and the assets have been transferred to the https://hcservices.ecourts.gov.in/hcservices/ offspring companies. 47. In the aforesaid circumstances, the decision of the Hon’bleApex Court reported in 1995 82 Comp cas 37 (Bharat Synthetics Ltd.,Vs. Bank of India and another) is as follows:- “ (i) that undisputedly no meeting of the creditors andshareholders had been held, nor consent of the requisitenumber of creditors, obtained. The requirements, such asthat the meetings of the concerned were duly held andconducted, that the scheme was accepted by a competentmajority, 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 thecourt its authenticated latest financial position, asrequired under Sub-section (2) of Section 391 of theCompanies Act; (iii) that, on the facts, the banks’ apprehension thatthe merger would jeopardize their claims was justified, andsanction had to be refused.”Following the said judgment, this court in an earlier occasion, foundin O.S.A.55 to 68 of 2003 between the Ramco Super Leathers Ltd., Rep.by its Director S.Palaniappan and others Vs. The Dhanalakshmi BankLimited and others, came to a conclusion as follows:- “ Though not specific provision has been made forascertaining the wishes of the creditors in a scheme ofarrangement between the company and its members, thecourt is entrusted with the duty to ascertain whetherscheme would affect the interest of the creditors tosuch an extent that the holding of their meeting isessential, and if the court in appraisement of thefacts and circumstances is of the view that theinterest of the creditors would be adversely affectedif the scheme is approved, then it has to refuse tosanction the scheme since what is involved is a publicinterest. The banking institutions from whom theappellant company availed different kinds of loanfacilities were nationalized bank and also publicsector undertaking. Needless to say if any lossoccasioned to these institutions, it would ultimatelyaffect the public interest. In the case on hand, it isvery clear that the scheme placed before the Court forapproval would no doubt affect the interest of thesecured creditors.” https://hcservices.ecourts.gov.in/hcservices/

48. On a overall consideration of the facts andcircumstances of the case, for ascertaining the real purposeof the scheme, by piercing the veil of apparent corporatepurpose underlying the scheme and also by scrutinising thesame judiciously in the light of the dictum laid down by theHon’ble Apex court, we are of the considered view that theapproval sought for by the petitioner company for thedemerger with its two offspring companies is prejudicial tothe respondents 1 to 4 and the said scheme of arrangement isalso violative of the provisions of Section 391 of theCompanies Act, Sections 100 to 104 of the Act and Section 62of the Indian Contract Act. Therefore, the rejection ofapproval of the scheme of arrangement by the learned SingleJudge is in order, and we are unable to see anything todisturb the finding of the learned Single Judge. 49. In the result, the three O.S.As are dismissed confirming theorder of the learned single judge and leaving the parties to beartheir respective costs. Sd/-Asst.Registrar/True Copy/Sub.Asst.RegistrarNvsriToThe Sub Assistant Registrar, Original Side, High Court, Chennai - 1046 CCs to Mr.Rugan and Arya,Advocate,SR.70395,70394, 703961 CC to Mr.R.Venkatavaraddan,Advocate,SR.708641 CC to Mr.T.K.Bhaskar,Advocate,SR.70793Pre-Delivery Judgment in O.S.A NOS. 51, 434 AND 435 OF 2009GV (CO)SS (21.1.10) https://hcservices.ecourts.gov.in/hcservices/

21.12.2009