CORAMTHE HONOURABLE MR v. The Dhanalakshmi Bank Ltd Coimbatore Branch Cross Cut Road

2.The Registrar of Companies Shastri Bhavan, II Floor 26, Haddows Road, Chennai 600 006.3.The Regional Director Department of company Affairs 26, Haddows Road, Chennai 6.4.The Official Liquidator High Court, Madras 104... Respondents in OSA 55, 66, 67 & 68/2003(Applicant & Respondents 2 to4) Corporation Bank George Town Branch Rep. By its Senior Manager 49 Armenian Street Chennai 600 001. The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar The Registrar of Companies Shastri Bhavan, Haddows Road Chennai 600 006. The Official Liquidator The Official Liquidator's Office High Court, Madras 600 104... Respondents in OSA 56, 57, 58 & 59/2003 (Applicant & Respondents 2 to 4) Kotak Mahindra Bank Ltd Rep. By its Branch Manager M.Sethuraman No.68, Oppanakkara Street Coimbatore 641 001. (substituted in the place of Lakshmi Vilas Bank as per order of Court dated 17.8.2009 in memos in OSA 60 to 63/2003).. 1st respondent in OSA 60, 61, 62 & 63/2003(Applicant) RSL Textiles (India) Ltd., Rep. By its Director M.Kumarappan "Sethu House" 28, Dr.Alagappa Road Chennai 600 084... 2nd Respondent in OSA 60 & 62/2003 & 3rd respondent https://hcservices.ecourts.gov.in/hcservices/ in OSA 63/2003 & 5th respondent in OSA 64/2003 (2nd Respondent) RSL Industries Ltd. Rep. By its Director S.Ramaswamy "Sethu House" 28, Dr.Alagappa Road Chennai 600 084.. 2nd Respondent in OSA 61 & 63/2003(1st Respondent) Ramco Super Leathers Ltd Rep. By its Director S.Palaniappan "Sethu House" 28, Dr.Alagappa Road Chennai 600 084... 3rd Respondent in OSA 60, 61 & 62/2003 & 5th Respondent in OSA 65/2003(3rd Respondent) The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar The Registrar of Companies Shastri Bhavan, Haddows Road Chennai 600 006. The Official Liquidator High Court, Madras 600 104. State Bank of India Rep. By its Dy.General Manager Commercial Branch, Trichy Road Coimbatore 641 018. The Dhanalakshmi Bank Rep. By its Chief Manager Cross-Cut Road Coimbatore Branch, Coimbatore... Respondents 4 to 8 in OSA 60, 61, 62 & 63/2003 (Respondents 4 to 8) State Bank of India Commercial Branch Rep. By its Chief Manager 35/E Kattabomman Street Coimbatore 641 006. / Trichy Road, Coimbatore 641 018 (in O.S.A.No.65/03) https://hcservices.ecourts.gov.in/hcservices/ The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006. The Registrar of Companies Block II, Shastri Bhavan Chennai 600 006. The Official Liquidator High Court, Kuralagam, Madras 600 104... Respondents 1 to 4 in OSA 64 & 65/2003(3rd Party & Respondents 2 to 4)Original side appeals preferred under Order XXXVI Rule 11 of O.S.Rules against the order dated 29.1.2003 of this Court in 1)C.A.No.146/03 in C.P.No.242 of 20012)C.A.No.499/02 in C.P.No.239 of 20013)C.A.No.502/02 in C.P.No.240 of 20014)C.A.No.505/02 in C.P.No.241 of 20015)C.A.No.508/02 in C.P.No.242 of 20016)C.A.No.521/02 in C.P.No.239 of 20017)C.A.No.522/02 in C.P.No.240 of 20018)C.A.No.523/02 in C.P.No.241 of 20019)C.A.No.524/02 in C.P.No.242 of 200110)C.A.No.1937/02 in C.P.No.239 of 200111)C.A.No.1940/02 in C.P.No.241 of 200112)C.A.No.137/03 in C.P.No.239 of 200113)C.A.No.140/03 in C.P.No.240 of 200114)C.A.No.143/03 in C.P.No.241 of 2001 respectivelyFor Appellantsin all the Appeals: Mr.A.K.Mylsamy For Respondents: Mr.Karthick Seshadri for R1 in OSA 60 to 63/2003 Mr.S.Sethuraman for Corporation Bank Mr.M.Udhaya Bhanu Senior Panel Counsel for R2 Mr.S.R.Sundar for Official LiquidatorCOMMON JUDGMENT(Judgment of the Court was delivered by M.CHOCKALINGAM, J.)All these appeals have arisen from a common order made by thelearned Single Judge of this Court in Company Application Nos.499,500, 502, 503, 505, 506, 508, 509, 521, 522, 523, 524, 1937 and 1940 https://hcservices.ecourts.gov.in/hcservices/ of 2002 and 137, 140, 143 and 146 of 2003 in Company Petitions 239 to242 of 2001. 2.The above company applications were filed by four bankingcompanies namely Corporation Bank, Dhanalakshmi Bank Limited, StateBank of India and Lakshmi Vilas Bank Limited whereby an order inC.P.Nos.239 to 242 of 2001 dated 6.12.2001 was sought to be set aside.3.The case of the petitioners bank in the above companyapplications can be stated thus:(a) M/s.RSL Industries, a public limited company and incorporatedunder the Indian Companies Act, availed loans from various banksincluding Corporation Bank and other financial institutions. Thesaid company availed a foreign currency loan of 200 million USD inorder to meet its high cost borrowals from various financialinstitutions and other money lenders and thus the Corporation Bankwas one of the secured creditors. Availing the financial facilities,the company cleared its loan from Industrial Development Bank ofIndia (IDBI) to the extent of Rs.12.75 crores. The said loan wasreleased on the belief of the representation of the company and alsoin good faith that a mortgage was to be executed in order to securethe dues, but it was not done. It was also agreed that the loanshould be repaid within a period of six years in 20 quarterlyinstalments. Despite many a demand and personal contacts, neitherthe amount was paid nor regularised the account, nor the companyobtained the documents from IDBI. (b) While the matter stood thus, the company has made anarrangement for scheme of amalgamation/demerger. C.P.No.239 of 2001was filed seeking approval of the scheme of arrangement of merger ofthe textile division with RSL Textile India Limited, the transfereecompany. C.P.No.241/2002 was filed for amalgamation of RSLIndustries with Ramco Super Leather Limited. An order of approvalwas made by the Court on 6.12.2001. (c) Before making such arrangement for a scheme ofamalgamation/demerger, notice should have been issued to thecreditors before approval of the scheme. But, keeping the CorporationBank in darkness and without its knowledge, the company has soughtfor approval of the scheme by making publication in Business Lineand Dinamalar. The petitioner has sent a lawyer's notice on10.1.2002 for regulrisation of the account. (d) The charge that was created by the company in favour of theCorporation Bank was not limited to Textile Division alone. The loanavailed was not only utilised to pay back the liability if the IDBI,but also several other borrowers. Hence the intention of the companyto frame a scheme without notice to the creditor Bank was only anattempt with a malafide intention to dilute the security available.But the charge created in favour of the bank shall continue till thesatisfaction of the charge by payment of loan amount. The Court isempowered to refuse the approval of the scheme if it was not in thepublic interest. The scheme was opposed to public interest since nocare to protect the money advanced by public sector bank was shown. https://hcservices.ecourts.gov.in/hcservices/ (e) The company had two major divisions, leather and textile,whose operations were carried out independently and performance wasalso monitored. But the over all management was by the common Boardof Directors. There was no separate banking operation and consortiumarrangement. The present spinning off and merger according to thecompany, had resulted in bifurcation of assets. The cash flow andcash accrual and the repayment capacity of the bank were taken intoaccount at the time of granting of the loan. Now, they have beenaltered and tampered with. The balance sheet of these two companiesdo not reveal any profit. Hence it would be quite clear that thescheme was only to defraud the bank. It has caused greater hardshipon the bank, and they will be put to irreparable loss. No prejudiceor hardship would be caused if the scheme is not accepted. Thecompany has not produced previous balance sheets or profit and lossaccount of the Ramco Super Leather Limited. While the liability ofthe bank under the foreign currency loan of Rs.1700 lakh was beingtransferred to the books of the company which has very insufficientcapital, the bank is an interested party and aggrieved by the schemeof amalgamation. 4.In the affidavit in support of the application made byDhanalakshmi Bank Limited, it was averred that along with SBI andLakshmi Vilas Bank Limited and in consortium have extended workingcapital credit facility to the company for textile division; that theState Bank of India and Lakshmi Vilas Bank jointly got bank guaranteesetting out terms and conditions; that firstly, it was agreed thatthe charge by way of hypothecation of the current assets of thetextile division of the company created in favour of these threebanks should rank pari passu inter-se the banks without any referenceor priority to them; that secondly, among the three banks, State Bankof India shall be the lead bank in respect of their dealings; thatthe hypothecation charge of the current assets of the company'stextile division in favour of the three banks was duly registeredwith Registrar of Companies; that it was clear in one of the clausescontained in the working capital consortium agreement dated12.1.2001, executed by the company in favour of the three banks thatduring the currency of the working capital credit facilitiesextended, the company should not without the prior permission of theState Bank of India, the lead bank, formulate any scheme ofamalgamation or reconstruction or effect any change in its capitalstructure, etc.; that the company without placing before the Courtthe fact that it has no right to evolve any scheme of arrangement foramalgamation or reconstruction without obtaining prior permission ofthese banks through the lead bank, has obtained the order dated6.12.2001, which has caused great injury and hardship to the banksand also caused prejudice to the rights and interest, and hence itwas to be set aside.5.Equally, the State Bank of India in the course of the affidavitin support of the application has stated that they have not beenprovided with the petition and other materials relied upon by RSLIndustries Limited for obtaining sanction of the scheme; that the RSLIndustries which comprised of two divisions namely textiles andleather, was granted a foreign currency loan of Rs.24.50 crores; thatit was specifically averred that Rs.13.46 crores should be availed bythe leather division and Rs.11.54 crores should be availed by the https://hcservices.ecourts.gov.in/hcservices/ textile division; that the company has created a second charge on thecurrent assets of the textile and leather divisions of RSL Industriesas collateral security; that RSL Industries was also granted workingcapital limit of Rs.10.80 crores for its textile division; that theforeign currency loan was secured by the primary security by way offirst charge over the factory land and building and the machinery andpari passu first charge over the entire fixed assets of leatherdivision and pari passu first charge over the entire fixed assets ofVijayalakshmi Mills; that the bank was the leader of the consortiumof banks which granted credit limits to the textile division of RSLIndustries; that the Canara Bank was the other leader of consortiumof banks which granted credit limits to the leather division of RSLIndustries; that the leather division used the major part of the loanfor its modernisation; that after demerger, security cover wasreduced to 101%; that the profit of textile division was Rs.0.37crore per annum and the profit of leather division was Rs.8.98 croresper annum; that though the foreign currency loan was granted to boththe divisions, under the demerger scheme, all the liabilities havebeen allocated to the textile division; that the respondent companyhas applied and obtained the approval from this Court withoutprojecting the proper facts regarding their liabilities to theircreditors and also neglected to obtain consent or no objection letterfrom the State Bank of India or from other financial institutions fordemerger; that it would be quite clear from clause 42(a) and (b) thatthe borrower shall not during the subsistence of the liability of theborrower to the bank under or in respect of any of the aforesaidcredit facilities without the written consent of the bank, effect anyscheme of amalgamation or reconstitution etc.; that RSL Industrieshas not paid the half yearly interest on the foreign currency loan ofRs.1.15 crores which became due on 17.9.2001 and quarterly interestworking capital loan on and from 30.9.2001; that the State Bank ofIndia wrote a letter on 18.9.2001 which was replied on 4.10.2001;that it was stated in the reply that the amalgamation/demergerschemes were not finalised and not taken to the High Court and agreedthat it will arrange for a consortium meeting at the earliest; thatRSL Industries Limited intentionally withheld and suppressed thematerial fact that as on 4.10.2001, the petition filed by RSLIndustries was pending before the Court praying fordemerger/amalgamation; that the State Bank of India sent a letter on29.11.2001 requiring convening of consortium meeting, but there wasno response at all and thus the company failed and neglected toconduct the consortium meeting with mala fide and withheld theinformation; that the State Bank of India also issued a notice to therespondent company on 2.4.2002; that the reply notice dated 4.4.2002,was sent raising unsustainable claims and making misleadingaverments; that it has not whispered about the approval or theknowledge of merger by other banks; that only shareholders meetinghas been convened; that the demerger sanctioned by the Court washighly advantageous to the consortium banks which have financed toleather division as the security position is increased by threefolds; that the leather division has availed greater proportion ofloan and under the present scheme, the benefit under the loan wastransferred to the transferee company which was already chocking forprofit with the onerous liability; and that as per agreement, clause25(2) read with clauses 26 to 29 provide that the primary securitycannot be dealt with without specific instructions from the State https://hcservices.ecourts.gov.in/hcservices/ Bank of India. 6.Lakshmi Vilas Bank also filed an affidavit stating that thecompany approached them to extend credit facilities to its textiledivision jointly with the State Bank of India and Dhanalakshmi Bankunder the consortium agreement; that the facilities were secured by acharge over the movable and immovable assets of the textile division;that the first respondent issued a letter of undertaking among otherloan documents that it would not effect any change in theconstitution without applicant's prior permission during the currencyof the credit limit; that the permission of the lead bank wasnecessary in the event of any formulation of any scheme ofarrangement or reconstitution; that had notice been issued, the leadbank would have had discussions with the other consortium members andthereupon would have offered its opinion and permission; that theorder dated 6.12.2001, was made on the suppression of the fact by thecompany as to its liability to the applicant and the requirement ofthe prior approval; that the scheme of arrangement and the scheme ofamalgamation was prejudicial to the interest of the banks and assuch, they are liable to be set aside. 7.The respondent filed separate counter affidavit in all theabove applications stating that a note on the scheme was sent by thecompany to all the banks of the consortium headed by State Bank ofIndia on 18.9.2001 simultaneously; that the notice for approval ofthe scheme of demerger by the shareholders was advertised in thenewspapers also; that even after the demerger ordered, they havenegotiated bills of RSL Textiles India during January 2002 andadjusted the outstanding of the limits sanctioned by it to thetextile division of RSL Industries; that on 10.7.2002, there was aconsortium meeting at Coimbatore which was attended by all theapplicants; that if the agreement is violated, it is open to theapplicants to recall the loan; that the allegation that the companyhas suppressed its liability to the bank is not correct; that thecompany has created a first charge on their fixed assets for Rs.67crores and the balance available was only Rs.7 crores to cover thesecond charge; that under the circumstances, there was no dilution ofthe security as contended by the applicants; that the personalguarantee executed by the Directors before and after demerger isstill in force; that no direction was given by the Court to sendnotice to the secured creditors; that it is the responsibility of thebank to convene the consortium meeting; that the company has notsuppressed the existing charge; that the bank has been all alongpassive spectator of the steps taken by the companies foramalgamation and demerger; that due to failure of IDBI to return thedocument to the company for creating a charge in favour of theapplicant for the loan sanctioned by it, the company could not honourits commitment, and hence all the applications have got to bedismissed.8.Advancing arguments on behalf of the appellants, the learnedCounsel would submit that it is pertinent to point out that clause4.4 of the scheme provides that the rights of the secured creditorsare not affected by the scheme unless they agree otherwise; that theabsolute prohibition imposed by the secured creditors that withouttheir prior permission, no amalgamation or reconstruction should take https://hcservices.ecourts.gov.in/hcservices/ place is contrary to Section 376 of the Companies Act, whichprohibits entering of any agreement prohibiting reconstruction,amalgamation with any other body corporate or body corporate is void;that pursuant to the news item published in Business Line, State Bankof India the lead bank of the consortium wrote to the appellant aboutthe hiving off of the textile division and amalgamation of leatherdivision with the transferee; that the secured creditors are notaffected by the scheme of arrangement/amalgamation since theirsecurities are kept in tact and they have not been diluted, and themeeting convened is only of the shareholders and not of thecreditors; that it remains to be stated that none of the creditors inresponse to the advertisement released by the company in BusinessLine and Dinamalar dated 14.10.2001 neither appeared before the Courtnor opposed the scheme; that in the reply dated 4.10.2001, a note wasenclosed explaining the necessity of hiving off the textile divisionand the merger of RSL Industries Ltd with Ramco Super Leathers Ltd.;that the balance sheet along with the auditor's report approved bythe shareholders as on 31.3.2001 has been filed along with thecompany petition as Annexure B wherein all the details of the securedand the unsecured creditors are set out; that the meeting of thecreditors has not been convened since their rights are not affectedand more particularly, the secured creditors and the scheme ofarrangement/amalgamation is between the appellant and itsshareholders and not between the appellant and its creditors; thatnothing prevented the secured creditors themselves convening ameeting to discuss about the scheme of arrangement/amalgamation; thatthe secured creditors did not point out any defect in the scheme;that even assuming that there is a technical violation of theagreement signed by the appellant with secured creditors by itsfailure to obtain prior permission for the amalgamation/arrangementthe same will not affect the interest of the secured creditors sincetheir security are in tact; that under such circumstances, theomission on the part of the appellant in not obtaining prior sanctionfrom the secured creditors for the said arrangement/amalgamation didnot affect the interest of the secured creditors; that it is notcorrect to contend that the appellant has obtained an order from thisCourt by suppressing material facts since all the relevantinformation as required under the Act has been placed before thisCourt; that after the order passed by this Court, the securedcreditors have negotiated various bills of RSL Textile India Ltd.,and released a portion of their amounts, and thus they are estoppedfrom contending that the demerger is detrimental to their interest;that the order of the learned Single Judge is erroneous and hence ithas got to be set aside.9.The learned Counsel appearing for the respondent Bank hasreiterated the very same contentions raised before the learned SingleJudge and would submit that the appeals have got to be dismissed.10.The Court paid its anxious consideration on the submissionsmade and also looked into all the materials available and inparticular, the common order under challenge.11.The following would emerge as admitted facts:(a) M/s.R.S.L. Industries, a public limited company and https://hcservices.ecourts.gov.in/hcservices/ incorporated under the Indian Companies Act availed loans fromvarious banks including Corporation Bank, Dhanalakshmi Bank, StateBank of India and Lakshmi Vilas Bank and other financialinstitutions. They were secured creditors of the said company. Thecompany had two major divisions Leather and Textiles. The operationsof both the divisions are carried out independently, and theperformance was also monitored; but the over all management was bythe common Board of Directors. The company availed foreign currencyloan of 200 millions USD to meet its high cost borrowals. Out of thesaid sum availed, the company also cleared the dues from theIndustrial Development Bank of India to the extent of 12.75 crores.Though it was agreed that the said entire loan should be paid withina period of six years in twenty quarterly instalments, there wasdefault. Dhanalakshmi Bank along with State Bank of India andLakshmi Vilas Bank and in consortium extended working capital creditfacilities to the company for its textile division. The State Bankof India and Lakshmi Vilas Bank also got security documents as foundin the terms and conditions. It was agreed inter se that the chargeby way of hypothecation of the current assets of the textile divisionof the first respondent created in favour of these banks shall runpari passu inter-se the banks without any preference or priority tothem. The State Bank of India shall be the lead bank in respect ofthe dealings. The hypothecation charge of the current assets of thetextile division in favour of the banks was duly registered with theRegistrar of Companies. One of the clauses in the working capitalconsortium agreement dated 12.1.2001, executed by the company infavour of these three banks, would clearly stipulate that during thecurrency of the working capital facilities extended by the banks, thecompany should not without the prior permission of the State Bank ofIndia, the lead bank, inter alia, formulate any scheme ofamalgamation or reconstruction or effect any change in its capitalstructure. The State Bank of India granted a foreign currency loanof Rs.24.50 crores out of which Rs.13.46 crores was availed by theleather division and 11.54 crores was availed by the textiledivision. Insofar as the collateral security for the foreigncurrency loan, the company has created a second charge on the currentassets of the textile and leather division of RSL Industries. Thecompany was also granted a working capital limit of Rs.10.80 croresfor its textile division. Lakshmi Vilas Bank Limited also extendedcredit facilities and they were secured by a charge over the movableand immovable assets of the textile division. (b) A letter of undertaking was also executed along with otherdocuments stipulating that the company would not effect any change inthe consortium without the prior permission during the currency ofthe credit. While the matter stood thus, the company has approvedthe scheme for arrangement and amalgamation on 6.9.2001. The Courtgave direction for convening and holding the meeting of theshareholders on 10.9.2001. The publication was made on 14.9.2001 inDinamalar and Business Line with regard to the convening and holdingof the meeting of the shareholders. Accordingly, the meeting of theshareholders of the company was held on 8.10.2001. The reports ofthe Chairman were filed into the Court stating that the scheme wasunanimously approved by the members on 9.10.2001. The company filedCP No.239 of 2001 before this Court under Sec.391 of the CompaniesAct for approval of the scheme of arrangement of undertaking of https://hcservices.ecourts.gov.in/hcservices/ textile division with RSL Textiles (India) Limited, transfereecompany. Equally CP No.241/2002 was filed for amalgamation of RSLIndustries Limited with Ramco Super Leather Limited. CompanyPetitions were filed to confirm the scheme approved by the members on10.10.2001. An advertisement was effected in Dinamalar and BusinessLine on 14.10.2001. The Court granted sanction for the scheme ofarrangement/amalgamation on 6.12.2001. All the four bankinginstitutions, the secured creditors have challenged the said approvaland sought to set aside the same.12.As could be seen above, the four banking institutions who werethe secured creditors, seek to set aside the order of approval of thescheme of arrangement of demerger/amalgamation placed by theappellant company on the following grounds. (i) The scheme of arrangement of demerger/amalgamation was madewithout the prior permission of the secured creditors. (ii) The said arrangement if approved, all secured creditorswould lose their right to proceed against the securities originallyfurnished by RSL Industries for availing the loan. (iii) Apart from meeting of the shareholders, meeting of thesecured creditors should have also been convened and conducted. (iv) The creditor banks from the commencement of the proceedingsof the arrangement till it was approved by the Court, were kept indarkness. (v) Even before the Court where the company sought the approvalof the scheme, they suppressed all the necessary details, and ifmade, the Court would not have granted approval. (vi) By the said arrangement, textile division was saddled withmore liabilities. (vii) Lastly, the said arrangement of demerger and amalgamationlacked bonafide.13.Sec.391 of the Companies Act deals with power to compromise ormake arrangement with creditors and members. Sub-section (1) and itsproviso reads as follows:"Where a compromise or arrangement is proposed (a) between a company and its creditors or any class ofthem; or(b) between a company and its members or any class 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 undersections 235 to 251, and the like." https://hcservices.ecourts.gov.in/hcservices/

14.It is not in controversy that RSL Industries has two majordivisions leather and textile which are run independently, but theover all management was under the same Board of Directors. When thecompany went for scheme of amalgamation/demerger, it sought approvalof the scheme of arrangement of undertaking of the textile divisionwith RSL Textiles India the transferee company, and for amalgamationof M/s.R.S.L. Industries with Ramco Super Leather Limited. Thegrievance of the secured creditors is that from the commencement ofthe proceedings of demerger and amalgamation, neither a notice wasgiven to them, nor a meeting was convened or conducted, nor priorpermission was obtained from them in order to come for such anarrangement of demerger and amalgamation. Pointing to Sec.391 of theCompanies Act, the appellant company put forth a reply that what isall required was holding of the meeting of the shareholders and notof the secured creditors; that the publication in Dinamalar andBusiness Line for convening a meeting of the shareholders was made on14.9.2001, and actually the meeting of the shareholders was held on8.10.2001; that following the report of the Chairman that the schemewas unanimously approved by the members, the company petitions werefiled to confirm the scheme; that the Court was satisfied that thelegal requirements were satisfactorily fulfilled and then granted therelief of approval, and in such circumstances, it cannot bequestioned now. 15.Admittedly, the agreement entered into by the company with thesecured creditors contained the following clauses. Clauses 25(2), 26,27, 37 and 42(b) read as follows:"25(2). The borrower shall not deal with the goods movablesand other assets and documents of title thereto or thegoods movables and other assets covered by the documentsexcept under and in accordance with the Bank's writteninstructions.26.The Borrower shall (if so required by the Bank) displaythe Bank's name on the godown factory and other placesapproved by the Bank where such goods movables and otherassets hypothecated and/or pledged to the Bank and againstwhich limits for purposes of drawings have been fixed underand some/all of the aforesaid credit facilities have beenstored indicating that such goods movables and other assetsare hypothecated and/or pledged to the Bank.27.In respect of credit facilities granted to the Borroweragainst pledge of goods movables and other assets all suchgoods movables and other assets shall be placed in theBank's possession under its control and in such manner thatsuch possession and control may be apparent andindisputable. In pursuance thereof, inter alia, thegodown, factory and other places approved by the Bank inthis respect where the goods movables and other assets thatare pledged have been stored shall bear the Bank's nameboards indicating that the goods movables and other assetslying therein are pledged to the Bank. Where the goodsmovables or other assets which are pledged with the bankare released to the Borrower on trust under a factory,mundy type pledge, or other basis or the limited purpose offacilitating the Borrower carrying on the manufacturing orother activity, the Borrower undertakes that the Bank's https://hcservices.ecourts.gov.in/hcservices/ padlocks will be used on the godown factory or other placewhere they are stored and such godown, factory or otherplace will be locked by the Borrower when not in use andthe keys thereof shall be returned to the Bank on demandand that the Bank's name boards shall be displayed on suchfactory, mundy or other place where such manufacturing orother activity is carried on indicating that the goodsmovables and other assets are pledged to the Bank. TheBorrower further agrees that all sea, rail and othertransport freights, demurrages, customs duties, terminaltaxes, cartage, godown rents and all other charges andexpenses paid or incurred by the Bank in obtaining actualphysical possession of and in clearing storing andforwarding the said goods movables and other assets shallbe debitable to the accounts of the Borrower and form apart of the aggregate amount secured.37.During the currency of these presents the shareholdingof such of the shareholders in the Borrower who are itsDirectors at present and the principal shareholders andpromoters of the Borrower shall not be varied without theprevious written consent of the Bank first obtained.42(b):- The Borrower shall not during the subsistence ofthe liability of the Borrower to the Bank under or inrespect of any of the aforesaid credit facilities withoutthe written consent of the Bank effect any scheme ofamalgamation or reconstitution."16.From the above clauses, it would be quite evident that thecompany has agreed not to deal with the goods movables and otherassets and documents of title thereto or the goods movables and otherassets covered by the documents except under and in accordance withthe bank's written instructions and not to deal with the securitywithout the bank's written instruction and also agreed that duringthe subsistence of the liability of the borrower to the bank under orin respect of any of the credit facilities without the writtenconsent of the bank it shall not effect any scheme of amalgamation orreconstitution. 17.Pointing to the above clauses and in particular clause 42(b),the learned Counsel for the respondent bank secured creditors wouldsubmit that without the written consent of the secured creditorsbanks, the company should not effect any scheme of amalgamation orreconstitution what is now sought for. Answering to the above, thelearned Counsel for the appellants would submit that it is true thatthe agreement contained those clauses, but they were not followed,and apart from that they are invalid and inoperative; that so long asthe securities were kept in tact and also the liabilities wereequally carried to the transferee company, no prejudice would becaused to the secured creditors. The learned Counsel also took theCourt to the clauses in the scheme of arrangement which stipulatesthat the charges created by the company prior to 6.12.2001 willcontinue to be in tact and subsist till the satisfaction of thecharge, and when the security and charge continued even after thedemerger, the creditor banks could not have any grievance orcomplaint about the same. According to the counsel, even assumingthat there was a violation of the said agreement, so long as the https://hcservices.ecourts.gov.in/hcservices/ banks' rights were not affected, it should not have any grievance,and it is always open to the banking companies to take steps forrecovery of the money; that they have also taken steps accordinglybefore the Recovery Tribunal; that having exercised their right, nowthe banking companies should not be allowed to raise a contentionthat the stipulations in the agreement were violated by the company,and the same has got to be rejected. Attractive though the argumentsof the learned Counsel for the appellant, this Court is unable toagree with the same for more reasons than one. 18.A reading of the entire clauses under the agreement wouldclearly indicate that the appellant company should not without theconsent of the bank, effect any scheme of amalgamation orreconstitution. Having executed the agreement with the aboveclauses, the borrower company if allowed to effect a scheme ofamalgamation or demerger without the approval of the securedcreditors, needless to say it might even affect the interest of thecompany. The two divisions of the appellant company were grantedwith foreign currency loan of Rs.24.50 crores by one of the bankinginstitutions namely State Bank of India, out of which Rs.13.46 croreswas availed by the leather division and Rs.11.54 crores was availedby the textile division. Thus it could be evident that the majorpart of the loan was to the leather division. Apart from that, thetextile division availed working capital limit of Rs.10.80 crores.The first charge was over the factory land and building and machineryand the fixed assets of the leather division and also the charge overthe entire fixed assets of Vijayalakshmi Mills. The current assetsof the textile and leather divisions were given as the second charge.The State Bank of India which led the consortium, gave loan to thetextile division, and the Canara Bank the leader of the otherconsortium, granted loan to the leather division. Admittedly, whilethe foreign currency loan was granted to both divisions, by operationof the demerger scheme, all liabilities were transferred to thetextile division. No doubt, this will stand highly advantageous tothe consortium banks who have financed the leather division. Undersuch circumstances, the contention put forth by the appellants' sidethat the charge in favour of the banks would continue to subsist tillthe satisfaction of the charge, and they remained in tact cannot beaccepted. Equally the contention that the agreement for priorconsent for amalgamation or reconstruction was not valid cannot alsobe accepted. At no stretch of imagination, it could be termed as atechnical violation of the pari passu agreement. Having agreed notto go for amalgamation or reconstruction without the written consentof the secured creditor banks and when the banks are able to showthat the security position could not continue as it originally stood,the contentions put forth by the appellant company that the interestof the secured creditors would not be affected has to be rejected.19.As could be seen from the available materials, the companycould issue directions for conduct of a meeting of the shareholderson 10.9.2001. Consequently, publication was made on 14.9.2001 inDinamalar and Business Line, and the meeting of the shareholders ofthe company was held on 8.10.2001. The report of the Chairman wasfiled into the Court as to the unanimous approval of the scheme bythe members the next day 9.10.2001. The company petitions were filedon 10.10.2001 and advertisement was made on 14.10.2001. The scheme https://hcservices.ecourts.gov.in/hcservices/ of amalgamation/demerger was approved by the Court by an order dated6.12.2001. At this juncture, it is pertinent to point out that theState Bank of India, the leader of the consortium, wrote to thecompany on 18.9.2001 wherein it is stated "Please convene aconsortium meeting immediately to discuss all the developments thatare taking place and possible repercussions of merger/take over asthe case may be". The same was replied on 4.10.2001, stating "Pleasenote that we had planned to inform the bankers after the scheme wasfinalised and taken by the High Court before which the News Item hasappeared in the News Paper. As advised by you, we would arrange fora Consortium Meeting at the earliest to discuss the developments."In the former letter by the State Bank of India, there was a requestfor convening a meeting of the consortium immediately, and the latternamely reply by the company would indicate that the scheme was notfinalised and the company would arrange for a consortium meeting atthe earliest to discuss the developments. It is pertinent to pointout that the proceedings were pending before the Court even on4.10.2001. This would make it clear that the company has come with afalse reply that the scheme was finalised. Though the appellantcompany gave an assurance for convening a meeting at the earliest,neither it convened a meeting, nor put the secured creditors onnotice as to the developments. Even on 29.11.2001, the nextcommunication was addressed by the State Bank of India to the companyreiterating its earlier request for arranging a consortium meeting.It is pertinent to point out that this second communication was alsoaddressed pending proceedings before the Court. But till an order ofapproval was made by the Court on 6.12.2001, no reply was issued bythe company. All the above circumstances would clearly indicate thatthe intention of the appellant company was to keep the securedcreditors banks in utter darkness. 20.It is pertinent to point out that the secured creditors wereneither added as parties nor put on notice as to the proceedingsbefore the Court for demerger and amalgamation. It was contended bythe learned Counsel for the appellants that the secured creditorsneed not be added as parties in the petition for demerger oramalgamation and even the Court do not order any notice to thesecured creditors, but it ordered publication and also the conveninga meeting of the shareholders which was actually done, and in suchcircumstances, it cannot be found to be defective. This contentioncannot be accepted. The appellant company as stated above has enteredinto agreements with the specific stipulations that without the priorconsent it would not go for amalgamation or reconstitution. Havingagreed so and in particular when the secured creditors have demandedconsortium meeting more than once before and pending the proceedingsbefore the Court, the appellant company has not only kept them indarkness, but also not placed the real situation before the companyCourt. Placing all the materials regarding the liability of thecreditors becomes all the more important to satisfy the Court to ornot to grant the approval for the proposed compromise or arrangementwhen placed before the Court in view of Sec.391 of the Companies Act.While exercising its powers under Sec.391 of the Act, the Court canrefuse sanction for any compromise or arrangement unless it issatisfied that the company or any such person by whom an applicationhas been made under sub-section (1) has disclosed to the Court byaffidavit or otherwise, all material facts relating to the company https://hcservices.ecourts.gov.in/hcservices/ such as the latest financial position of the company, the latestauditor's report on the accounts of the company, the pendency of anyinvestigation proceedings in relation to the company under Sections235 to 251 and the like. In the instant case, the emphasis has to belaid on the words "by affidavit or otherwise all material factsrelating to the company such as the latest financial position of thecompany". This would include the charges created over the assets andexisting liabilities at the time when the applications were made. Inthe instant case, had the company brought to the notice of the Courtthe latest financial position including the existing liability of thecompany and the charges created over the securities in respect of theliability, it is highly doubtful whether the Court would have grantedthe approval as asked for. Sec.391 of the Companies Act envisagesthe convening and conduct of the meeting of the shareholders.Nowhere it states that the creditors must be put on notice or theyshould also participate in the meeting. 21.In the instant case, a meeting of the shareholders wasconvened and conducted and was also reported to the Court. But it ismade clear in the proviso that no sanction of the compromise orarrangement should be given by the Court unless and until it issatisfied that all material facts relating to the company in respectof the latest financial position of the company was disclosed byaffidavit or otherwise. It is in the nature of a warning to theCourt that all the material facts relating to the company as to thelatest financial position of the company if not placed, the Courtshould not sanction an order of compromise or arrangement. It is acase where not only the secured creditors were kept in darkness fromthe commencement of the proceedings as to the scheme of demerger oramalgamation till it was approved by the Court by an order dated6.12.2001, despite the stipulations in the loan agreement that thecompany would not make any amalgamation or reconstruction without theprior permission or consent of the secured creditors and also requestfor convening a consortium meeting many a time, but also theappellant company by not placing all the materials and relevant factsbefore the Court had sought the approval of the scheme. The companyhas not even disclosed the above factual position to itsshareholders. The answer by the appellant is that it was neithermandatory nor necessary. It is not the case of the appellant thatthe shareholders when they were called for the meeting pursuant tothe orders of the Court, were put on notice as to the entirefinancial position of the company. No material was placed before theCourt that any such statement was furnished to the shareholders. Ifall the material particulars regarding the latest financial positionof the company including the existing liability and the chargescreated for those liabilities were placed before the Court, the Courtcould have ordered notice to the secured creditors also and couldhave given them an opportunity to put forth their contentions. It wascontended by the learned Counsel for the appellant that the securedcreditors had a thorough knowledge of the proceedings in Court sinceproper publications were effected, and if really they had got anyobjection, they should have approached the Court, but not done so.It is true that the publications were effected as per the orders ofthe Court. But in the case on hand, when all the secured creditorshave issued communications to the company calling for a meeting and https://hcservices.ecourts.gov.in/hcservices/ having given a reply that the consortium meeting will be convened andthat too pending the proceedings in Court, the appellant cannot bepermitted to put forth a contention as stated above. 22.Under the above stated facts and circumstances, the decisionof the Apex Court reported in 1995 COMPANY CASES VO.82 PAGE 37(BHARAT SYNTHETICS LTD. V. BANK OF INDIA AND ANOTHER) has got to beapplied, wherein it is held 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 that themerger would jeopardise their claims was justified, andsanction had to be refused."23.The Supreme Court has held in a decision reported in (1997) 1SUPREME COURT CASES 579 (MIHEER H. MAFATLAL V. MAFATLAL INDUSTRIESLTD.) as follows:"Section 394 casts an obligation on the Court to besatisfied that the scheme for amalgamation or merger was notcontrary to public interest. The basis principle of suchsatisfaction is none other than the broad and generalprinciples inherent in any compromise or settlement enteredbetween parties that it should not be unfair or contrary topublic policy or unconscionable. In amalgamation ofcompanies, the courts have evolved, the principle of'prudent business management test' or that the scheme shouldnot be a device to evade law. But when the court isconcerned with a scheme of merger with a subsidiary of aforeign company then the test is not only whether the schemeshall result in maximising profits of the shareholders orwhether the interest of employees was protected but it hasto ensure that merger shall not result in impeding promotionof industry or shall obstruct growth of national economy.Liberalised economic policy is to achieve this goal. Themerger, therefore, should not be contrary to thisobjective."24.It is true that Sec.391 of the Companies Act does not mandateholding of the meeting of the creditors in a scheme of arrangementbetween the company and its members and equally a meeting of themembers in a scheme of arrangement between the company and itscreditors. Though not specific provision has been made forascertaining the wishes of the creditors in a scheme of arrangementbetween the company and its members, the Court is entrusted with theduty to ascertain whether scheme would affect the interest of thecreditors to such an extent that the holding of their meeting isessential, and if the Court in appraisement of the facts and https://hcservices.ecourts.gov.in/hcservices/ circumstances is of the view that the interest of the creditors wouldbe adversely affected if the scheme is approved, then it has torefuse to sanction the scheme since what is involved is a publicinterest. The banking institutions from whom the appellant companyavailed different kinds of loan facilities were nationalised banksand also public sector undertaking. Needless to say if any lossoccasioned to these institutions, it would ultimately affect thepublic interest. In the case on hand, it is very clear that thescheme placed before the Court for approval would no doubt affect theinterest of the secured creditors. Having flouted the bindingclauses in the agreement creating the charge and having kept thecreditors under darkness as to the entire proceedings of the schemedespite their request for the consortium meeting and also having notplaced before the Court all material facts which would enable theCourt to or not to approve the scheme and all the more when it isapparently clear that the scheme of amalgamation if approved wouldcertainly affect the public interest, naturally the secured creditorsshould have been heard before approval. However, taking intoconsideration the facts and circumstances, the learned Single Judgehas modified the original order to the effect that the approval willbe valid and effective subject to the approval by the securedcreditors. This Court is unable to see any reason to disturb thesaid finding of the learned Single Judge.25.In the result, all these original side appeals are dismissedconfirming the order of the learned Single Judge and leaving theparties to bear their costs. Sd/Asst.Registrar/true copy/Sub Asst.RegistrarnsvToThe Sub Assistant Registrar,Original Side,High Court, Madras.14 ccs To Mr.M.Udaya Bhanu, Advocate, SR.Nos.39268 to 392811 cc To Mr.S.R.Sundar, Advocate, SR.390711 cc To Mr.K.Rajasekaran, Advocate, SR.390821 cc To Mr.S.Sethuraman, Advocate, SR.389621 cc To Mr.Karthik Seshadri, Advocate, SR.388311 cc To Mr.A.K.Mylsamy, Advocate, SR.389431 cc To Mr.T.K.Bhaskar, Advocate, SR.39331.OSA Nos.55 to 68 of 2003RL(CO)SRA(18/9/2009)