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2003 DIGILAW 327 (BOM)

Kaveri Entertainment Limited v. N. R.

2003-03-20

D.G.KARNIK

body2003
JUDGMENT - KARNIK D.G., J.:---Heard. This petition is filed by Kaveri Entertainment Limited (hereinafter referred to as "the company") for approval of the Scheme of Arrangement (for short "the scheme") by which the company proposes to amalgamate and merge itself with Zee Telefilms Limited (hereinafter referred to as the transferee company). 2. Initially, the Company Application No. 430 of 2002 was filed by the company for directions under section 391(1) of the Companies Act, 1956 (for short "the Act") regarding the meetings of the share holders and creditors. By an order dated 13th September, 2002, the Court dispensed with the holding of the meeting of the share holders of the company on the ground that 100% of the equity share holders of the company had accorded their consent to the scheme. The Court also dispensed with the holding of the meeting of the creditors of the company in view of the averments made in paragraph No. 19 of the petition and the undertaking given by the company to issue individual notices to all its creditors at least 21 days before the final hearing of the petition filed for sanction of the scheme. The Court noted the said undertaking in paragraph 2 of its order in the following words: ".............and the undertaking given by the applicant to issue individual notices to all its creditors atleast 21 days before the date of final hearing of the petition filed for amalgamation of the scheme." (Emphasis supplied) 3. Subsequently, at the time of admission of the present company petition, this Court passed an order on 5th December, 2002 in terms of the minutes of the order prepared and submitted by the company. Paragraph 6 of the minutes of the said order reads as under: "In view of the averments and submissions made in paragraph 21 of the petition, notice of the date of hearing of the petition shall be sent by pre-paid letter posted under certificate of posting addressed to all those unsecured creditors to whom the petitioners owes an amount exceeding Rs. 5,00,000/- not less than 28 clear days before the date fixed for hearing of the petition." (Emphasis supplied) 4. 5,00,000/- not less than 28 clear days before the date fixed for hearing of the petition." (Emphasis supplied) 4. It is not clear from the minutes of the order as to whether attention of the Court was invited to the earlier undertaking given by the company and recorded in the order of the Court dated 13th September, 2002 in Company Application No. 430 of 2002 that the petitioner would give notice to all its creditors. It is however, clear that despite the undertaking earlier given by the company to give individual notices of the date of hearing to all the creditors, the Court was persuaded to dispense with issuing of the notice to those unsecured creditors to whom the company owed a sum of less than Rs. 5,00,000/-. 5. The provisions regarding the compromise arrangements and reconstructions of companies are contained in Chapter V of Part VI of the Act. They may be briefly summarised thus: A company which desires to enter into any arrangement with its members and/or creditors first makes an application to the Court under sub-section (1) of section 391 of the Act for directions for convening of the meeting or meetings of the members and/or creditors as the case may be, for considering the proposed scheme of arrangement. On such an application, the Court issues directions for convening of separate meetings of the members and/or creditors or different classes of members and/or creditors as the case may be. In the said meetings of the members and/or creditors, the scheme of arrangement is required to be approved by majority in number representating ¾th in value of the creditors or class of creditors or members or class of members as the case may be. After the scheme is approved by the all concerned in their respective meetings a petition is presented to the Court for sanctioning of the scheme of arrangement. If the Court is satisfied that the scheme is just and fair and not prejudicial to the interest of the members or class of members or creditors or a class of creditors as the case may be, then the Court may sanction it. If the Court is satisfied that the scheme is just and fair and not prejudicial to the interest of the members or class of members or creditors or a class of creditors as the case may be, then the Court may sanction it. While sanctioning the scheme, the Court does not act merely as rubber stamp nor does it go merely by the ipse dixit of the majority of the shareholders or creditors who might have voted for the scheme but, it has to consider pros and cons of the scheme with a view to find out whether the scheme is fair, just and reasonable and it not contrary to any provisions of law and does not violate any public policy. Reference in this regard may be made to the observations of the Honble Supreme Court in (Mihir M. Mafatlal v. Mafatlal Industries Ltd.)1, reported in A.I.R. 1997 S.C. 506, (at paragraph Nos. 28 and 28-A of the report). 6. Sub-section (2) of section 391 of the Act requires that the resolution approving the scheme of arrangement should be passed by majority in number representing ¾th in value of the creditors or class of creditors and/or members of class of members as the case may be. If the resolution granting approval to the scheme of arrangement is passed by more than ¾ in value of the creditors but, is not carried by the majority in number of the creditors, the scheme would not be approved by the Court. The majority in number of the creditors is provided in the section for safeguarding the interests of the large number of small creditors whose voice is often lost amongst small number of big creditors. The conditions of approval by majority in number and ¾th in value of credit are cumulative. 7. It is noticed in more and more of the cases, that the applicant companies have been seeking dispensation of the holding of the meeting of the creditors. Often such orders are obtained on draft minutes of the order. The conditions of approval by majority in number and ¾th in value of credit are cumulative. 7. It is noticed in more and more of the cases, that the applicant companies have been seeking dispensation of the holding of the meeting of the creditors. Often such orders are obtained on draft minutes of the order. While obtaining such orders on summons for directions (i.e. on the company application first made under section 391(1) of the Act) a representation is made to the Court that individual notices of final hearing of the petition would be given to all the creditors and the Court is then persuaded on the basis of such representation to dispense with the holding of the meeting of the creditors. Subsequently, when the company petition filed under section 391(2) of the Act comes up for admission, orders are sought to dispense with issuance of the individual notices to the creditors having a credit below a certain sum (in this case Rs. 5,00,000). At such time representation is made to the Court that creditors having credit above that sum form 75% or more of the total debt of the company without disclosing that such creditors who hold more than ¾ in value of the credit do not constitute majority in number of the creditors. In the present petition also, it was not disclosed to the Court what was the number of the creditors to whom the company owed more than Rs. 5,00,000/- and what was number of creditors to whom the company owed less than Rs. 5,00,000/-. The break up figures given at Exhibit F (page 256) of the petition does not show number of creditors to whom the company owes more than Rs. 5,00,000/-. It however, discloses the total number of creditors as 53. The company has given notice to only 7 creditors. The company has neither held a meeting of the creditors nor given notice to the majority in number of the creditors. Majority of the creditors are thus kept in the dark of the proposed scheme of arrangement. This is not in consonance with the object of sub-section (2) of section 391 of the Act which ordinarily requires approval by majority in number of the creditors representing more than ¾th in value of the credit. Majority of the creditors are thus kept in the dark of the proposed scheme of arrangement. This is not in consonance with the object of sub-section (2) of section 391 of the Act which ordinarily requires approval by majority in number of the creditors representing more than ¾th in value of the credit. When the Court dispenses with the holding of the meeting of the creditors on the undertaking given by the company to give notice of hearing to all the creditors, the Court assumes that the creditors to whom individual notice is issued would appear if he has any objections and further assumes implied sanction by the creditors or majority of them on the basis of their not raising of the objection at the hearing of the petition. As this is one of the reasons for which I am not inclined to sanction the present scheme of arrangement. 8. The order dated 5th December, 2002 passed by this Court at the time of admission of this company petition required the petitioner company to give to all the creditors to whom the petitioner company owed an amount exceeding sum of Rs. 5,00,000/-, a notice of not less than 28 clear days of the date fixed for hearing of the petition. Balance sheet as on 30th September, 2002 annexed to the petition at Exhibit B-1 and Schedule 4 thereto shows that the petitioner company had obtained unsecured loan of Rs. 21,42,059/- from a related party. The name of the party from whom the loan was obtained was neither disclosed in the balance sheet nor disclosed in the petition. It is admitted that notice of hearing of the present petition has not been given to the related party who is an unsecured creditor. Learned Counsel for the petitioner company orally submitted that the related party is the transferee company itself and since the transferee company has not objected to the sanctioning of the scheme and has itself filed another petition namely Company Petition No. 1118 of 2002 for sanctioning of the scheme in the capacity of the transferee company, no notice was necessary to be given to the transferee company. The petitioner had sought dispensation of the holding of the meeting of the creditors on giving a solemn undertaking to the Court to issue individual notices of hearing to all the creditors but, had subsequently sought dispensation of even issuing notices to the majority of the creditors (notice of hearing has not been issued to 45 out of 53 creditors). The petitioner company was to wriggled out of that undertaking taking advantage of the order of this Court dated 5th September, 2002 (which incidently was passed on the minutes prepared by the petitioner company) by which the issuing of individual notices of hearing to the creditors to whom the company owed less than Rs. 5,00,000/- was dispensed with. In these circumstances. I would interpret strictly the order of this Court dated 5th December, 2002 dispensing the notices. The majority in number of the creditors have no notice of the petition and the Court must protect their interest. 9. For these reasons, the company petition is dismissed. Request of the learned Counsel to furnish a copy of the order authenticated by the company Registrar is granted. Company petition dismissed. -----