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2007 DIGILAW 361 (RAJ)

In Re: TCI Infrastructure Finance Ltd. v. .

2007-02-19

SHIV KUMAR SHARMA

body2007
JUDGMENT 1. - The petitioner TCI Infrastructure Ltd. has submitted this petition under Sections 391 and 393 of the Companies Act, 1956 ('Act of 1956') for sanctioning scheme of compromise/arrangement with the secured creditors of the company. 2. TCI Infrastructure Finance Ltd. (hereinafter shall be referred as the petitioner company) was originally incorporated as TCI Housing Finance Company Limited on 18-5-1995 changed to TCI Infrastructure Finance Limited on 22-4-1996 having its registered office at Meghalaya Tower, Church Road, Jaipur. 3. The position authorised issued, subscribed and paid up capital of the petitioner company as on 31-3-2006 is detailed out in para No. 2 of the petition. 4. The main objects of the petitioner company as set out in the object clause of its Memorandum of Association, have been detailed out in para No. 4 of the petition. 5. The petitioner company incurred heavy losses resulting into large deficit in cash flow and adversely affected the liquidity position. Due to various difficulties faced by the petitioner company a necessity was felt for settlement of the dues with the secured creditors. For this purpose an elaborate Scheme of compromise arrangement has been prepared in order to enter into a compromise with the secured creditors of the petitioner company. The Board of Directors of the petitioner company in its meeting dated 10-5-2005 approved the proposed scheme of compromise/arrangement unanimously passing a resolution. The resolution is enclosed as Anncxure C with the petition. 6. The petitioner company filed company application before this Court for direction as to the method of convening, holding and conducting the meetings of the secured creditors of the petitioner company. The said application was registered as S.B. Company Application No. 20 of 2006. This Court on 26-5-2006 allowed the said application and a direction was issued for calling the meetings of the secured creditors on 5-7-2006. On a request by the nominee of the HUDCO the meeting of the secured creditor was scheduled to be held on 17-7-2006. On this date also the meeting could not be held. This Court on 11-8-2006 ordered for holding meeting of the secured creditors on 12-9-2006 and also passed order on an application filed by the counsel for the applicant company for seeking amendment in the scheme of compromise. 7. As per the order of this Court the meeting of the secured creditors was held on 12-9-2006 at the registered office of the Company. 7. As per the order of this Court the meeting of the secured creditors was held on 12-9-2006 at the registered office of the Company. Two secured creditors namely SASF and BIL voted in favour of the proposed scheme of arrangement and HUDCO voted against the scheme. The value of the secured creditors who voted in favour of the scheme was 1300.25 lakhs. The value of debt of secured creditor who voted against the scheme was Rs. 377.30 lakhs. The objections filed by M/s. HUDCO were also enclosed by the Chairman of the meeting held on 12-9-2006 along with the report. 8. In these circumstances the petitioner company filed the above company petition for sanctioning the compromise arrangement so as to be binding on the secured creditors of the company. The notice of this petition was issued by this Court on 20-10-2006 to the Regional Director and simultaneously the notice was also ordered to be published in daily News Papers in Hindustan Times and Dainik Bhaskar Jaipur Edition. The notices were published in the news papers on 10-11-2006. 9. After service of notice the Regional Director, Northern Region, Ministry of Company Affairs, Noida, filed affidavit and stated that in the meeting dated 12-9-2006, out of 3 secured creditors who participated in voting, one secured creditor namely HUDCO having their debts aggregating to Rs. 377.30 lakhs voted against the scheme. 10. HUDCO, one of the secured creditor, who voted against the scheme filed objections on 20-11-2006. It was stated in the objection petition that IDBI advanced a term loan of Rs. 11 crores and objector HUDCO company advanced term loan of Rs. 4 crores. The petitioner company created charge in favour of the Financial Institutions and the same were duly registered with the Registrar of Companies under Section 125 of the Companies Act. In addition of the charge created by the petitioner company, Shri Ashok Agarwal, Managing Director of the petitioner company had also given his personal guarantee by executing guarantee bond dated 23-3-2000 in favour of HUDCO. The petitioner company also taken a loan of Rs. 4.77 crores from State Bank of India, Jaipur for undertaking the project for the construction of Pali Bye-pass in Rajasthan. IDBI, HUDCO and SBI are the three principal creditors of the petitioner company. The petitioner company also taken a loan of Rs. 4.77 crores from State Bank of India, Jaipur for undertaking the project for the construction of Pali Bye-pass in Rajasthan. IDBI, HUDCO and SBI are the three principal creditors of the petitioner company. Out of these three principal creditors, the petitioner company pre-paid the amount of the State Bank of India and one Bhoruka Investment Ltd. was inducted before the date of launching of scheme. 11. The objector company HUDCO raised following objections- (a) Non-disclosure of important and relevant and material facts. It was obligatory on the part of the petitioner company to have disclosed in the explanatory statement about the status of all the secured creditors of the company which may have enabled the other secured creditors to arrive at an informed decision about the scheme. The petitioner company was also liable to disclose the materially important fact as to why a special favour had been accorded by the petitioner company to one of the secured creditor, the State Bank of India, Jaipur which had been pre-paid in full their entire outstanding separately and prematurely on 28-3-2006 by the petitioner company against their loan of Rs. 4.77 crores and as to why the scheme under Section 391 was being proposed for the other identically situated secured creditors, IDBI and HUDCO proposing to pay an unreasonably low amount @ 47.50 per cent only of the outstanding principal amount under the proposed scheme. It was submitted that the petitioner company has not assigned any reason as to why this important and material fact was not disclosed in the explanatory statement of the scheme and therefore it can be said that the decision of the secured creditors voting in favour of the scheme was not an informed decision. The company has also not disclosed the fact about the pendency of cases against it. It was not disclosed that Recovery application which had been filed by HUDCO against the petitioner company was pending before the Debts Recovery Tribunal, Delhi for recovery of Rs. 4,37,95,832 wherein the sum of Rs. 3,77,29,630 is the outstanding Principal amount and the sum of Rs. 60,66,202 is the interest due as up to 30-6-2004. It was also not disclosed that three criminal cases under Section 138 of the Negotiable Instruments Act were pending against Shri Ashok Agarwal, Managing Director and other Directors of the petitioner company. 4,37,95,832 wherein the sum of Rs. 3,77,29,630 is the outstanding Principal amount and the sum of Rs. 60,66,202 is the interest due as up to 30-6-2004. It was also not disclosed that three criminal cases under Section 138 of the Negotiable Instruments Act were pending against Shri Ashok Agarwal, Managing Director and other Directors of the petitioner company. (b) Discrimination between the secured creditors. One of the secured creditor, SBI had been prematurely prepaid in full their entire outstanding separately on 28-3-2006 by the petitioner company against their loan of Rs. 4.77 crores whereas the scheme was being proposed for the other identically situated secured creditors, IDBI and HUDCO proposing to pay an unreasonably low amount @ 47.50 per cent of the outstanding Principal amount under the proposed scheme. The petitioner company has grossly discriminated between IDBI (SASF) and HUDCO in the matter of payment of the proposed settlement amount. Out of the settlement amount of Rs. 5,17,50,000 (five crores seventeen lakhs and fifty thousand) to be paid to IDBI, the petitioner company had already paid to IDBI (SASF) a sum of Rs. 4,67,50,000 in advance prior to 31-3-2006 as is apparent from the balance sheet of the petitioner company because of the receipt of the aforesaid sum, IDBI (SASF) stands more benefited than HUDCO as IDBI would derive interest on the said amount of Rs. 4,67,50,000 (four crore sixty seven lakhs and fifty thousand) whereas HUDCO would receive the settlement amount itself after sanction of the scheme. Thus in fact, IDBI (SASF) stands paid more amount than HUDCO which is grossly discriminatory as between the same class of creditors. (c) Unfair means adopted by the petitioner company for obtaining 3/4th majority vote. The Company BIL M/s. Bhoruka Investment Ltd. had ostensibly been inducted as a secured creditor by the petitioner company TCIFL to secure/obtain a three-fourth majority vote required for approval of the proposed scheme. This is evident from the fact that loan amount of Rs. 210.75 lakhs has been taken by the petitioner company from the said M/s. BIL on 31-3-2006 under the agreement dated 31 -3-2006 which is the cut off date in the proposed scheme and also the charge is shown to have been registered with the ROC on the same date i.e., 31-3-2006. 210.75 lakhs has been taken by the petitioner company from the said M/s. BIL on 31-3-2006 under the agreement dated 31 -3-2006 which is the cut off date in the proposed scheme and also the charge is shown to have been registered with the ROC on the same date i.e., 31-3-2006. This induction of M/s. Bhoruka Investment Ltd. as a secured creditor of the petitioner company was thus evidently with an underlying purpose to obtain the three-fourths majority vote of the secured creditors along with the vote of SAFS (IDBI) to oust the vote of HUDCO which was not in favour of the proposed scheme. Since out of the combined outstanding of IDBI and HUDCO the value of vote of IDBI was amount to only 74.27 per cent which was evidently below the required value of vote required for the purpose of approval of the scheme under Section 391 of the Companies Act, therefore as mentioned above, the petitioner company had inducted BIL as a secured creditor to overcome this barrier to get the approval of the scheme which is further fortified from the fact of M/s. BIL agreeing to receive back only 47.5 per cent of the loan amount on the same date i.e., 31-3-2006 under the proposed scheme which act is beyond the rationale and comprehension of any prudent man. The reasons obvious for the aforesaid action is because Shri Ashok Agarwal is a common director in both the companies. TCIFL and BIL and to save itself as its Director Ashok Agarwal from the outcome of the proceedings for Recovery pending before the Debts Recovery Tribunal, New Delhi against the petitioner and Shri Ashok Agrawal and also to save Shri Ashok Agarwal from the outcome of the three criminal proceedings under Section 138 of the Negotiable Instruments Act filed by HUDCO against Shri Ashok Agarwal and other directors. (d) Non-disclosure of the fact about the personal benefit accruing to Mr. Ashok Agarwal, the Managing Director of the petitioner company required otherwise to be disclosed under Section 393(a) of the Companies Act. There is no disclosure of the fact that Shri Ashok Agarwal who is the Managing Director of TCIFL was a guarantor to the loan given by HUDCO and he would obviously benefit if the scheme is sanctioned as all the cases against him shall stand abated. There is no disclosure of the fact that Shri Ashok Agarwal who is the Managing Director of TCIFL was a guarantor to the loan given by HUDCO and he would obviously benefit if the scheme is sanctioned as all the cases against him shall stand abated. (e) Non-mention of the source of funds/cash in flow for payment of the settlement amounts under the scheme. (f) The scheme, is oppressive as it seeks to compel the secured creditors to make sacrifice of not only 51.50 per cent of the outstanding Principal amount but the whole of the interest, costs and expenses as well. 12. Finally HUDCO stated that the proposed scheme as approved in the meeting dated 12-9-2006 is unjust, unfair, oppressive and against the fundamentals of good conscience and equity and it deserved to be rejected. 13. I have heard learned Counsel for the parties and weighed contents of the petition, objections and rejoinder placed for my perusal. 14. In Miheer H. Mafatlalv. Mafatlal Industries Ltd., (1997) 1 SCC 579 following broad contours of the jurisdiction of the Company Court have been laid down for sanctioning the scheme: (1) The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(a) have been held. (2) The scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-section (2). (3) The meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. (4) All necessary material indicated by Section 393(1)(a) is placed before the voters at the meetings concerned as contemplated by Section 391, Sub-section (1). (5) All the requisite material contemplated by the proviso of Sub-section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same. (5) All the requisite material contemplated by the proviso of Sub-section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same. (6) The proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not unconscionable, nor contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. (7) The Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter compromising the same class whom they purported to represent. (8) The scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. (9) Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of Section 392. Of course this Section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operate. The supervisor cannot ever be treated as the author or a policy-maker. Consequently, the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eye and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. 15. In Hindustan Lever v. State of Maharashtra [2003] 48 SCL 630 , the Apex Court indicated that the jurisdiction of the Company Court while sanctioning the scheme is supervisory only. While exercising its power in sanctioning the scheme of amalgamation the court is to satisfy itself that the provisions of statute have been complied with, that the class was fairly represented by those who attended the meeting; that the statutory majority was acting bona fide and not in an oppressive manner and that the arrangement is such as which a prudent, intelligent or honest man or a member of the class concerned and acting in respect of the interest might reasonably take. While examining as to whether the majority was acting bona fide, the court would satisfy itself to the effect that the affairs of the company were not being conducted in a manner prejudicial to the interest of its members or to public intent. The basic principle underlying such a situation is none other than the broad and general principle inherent in any compromise or settlement entered into between the parties, the same being that it should not be unfair, contrary to public policy and unconscionable or against the lawonce these things are satisfied the scheme has to be sanctioned as per the compromise arrived at between the parties. The court would have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their eye open give their approval, even if, in the view of the court a better scheme could have been framed. 16. Bearing the above principles in mind I proceed to weigh the scheme as well as the objections raised by the secured creditor HUDCO that had debts aggregating to Rs. 377.30 lakhs. The petitioner company appears to have accorded favour to one of the Secured Creditor, the State Bank of India that had been pre-paid in full their entire outstanding separately and prematurely on 28-3-2006 against their loan of Rs. 4.77 crores. The instant scheme has however been proposed for the identically situated secured creditors viz. IDBI and HUDCO proposing to pay low amount @ 47.50 per cent only of the outstanding principal amount. This material fact has not been disclosed in the explanatory statement of the scheme. It also appears that Recovery Application filed by HUDCO against the petitioner company in Debts Recovery Tribunal, Delhi and Criminal Cases under Section 138 of the Negotiable Instruments Act against the Managing Director and other Directors of the petitioner company are pending but this fact has also been withheld and the petitioner company did not choose to disclose it in the petition. 17. Indisputably Mr. Ashok Agarwal is a common Director in the petitioner company and M/s. Bhoruka Investment Ltd. (BIL) and loan amount of Rs. 210.75 lakhs has been borrowed by the petitioner company from BIL on 31-3-2006 which is the "Cut off date" in the proposed scheme and also the charge is shown to have been registered with the Registrar of Companies on the same date i.e., 31-3-2006. 18. 210.75 lakhs has been borrowed by the petitioner company from BIL on 31-3-2006 which is the "Cut off date" in the proposed scheme and also the charge is shown to have been registered with the Registrar of Companies on the same date i.e., 31-3-2006. 18. I also noticed that the scheme seeks to compel the Secured Creditors to make sacrifice 51.50 per cent of the outstanding Principal amount as well as the interest, costs and expenses. 19. Learned Counsel for the petitioner company took me through the balance sheet of the petitioner company and canvassed that the petitioner company was running into losses and is not able to repay the debts due to the secured creditors. The amount proposed to be paid under the scheme in one time settlement shall be arranged by the promoters from their relatives and friends. It was also contended that since the majority of creditors had voted in favour of the scheme the court would have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of creditors who voted in favour of the scheme. 20. It is difficult to subscribe the view canvassed by the learned Counsel for the petitioner company. In Miheer H. Mafatlal's case (supra) the Supreme Court propounded that the Company Court which is called upon to sanction a scheme has not merely to go by the ipse dixit of the majority of shareholders or creditors who might have voted in favour of the scheme by requisite majority but the court has to consider the pros and cons of the scheme. 21. I am conscious of the fact that jurisdiction of Company Court is peripheral and supervisory and not appellate and the court does not have expertise to delve deep into the commercial wisdom exercised by the creditors. The Company Court while granting sanction to the scheme acts like an umpire in a game of cricket. The umpire in a game of cricket however minutely considers the movements of bat and ball. The Umpire has to adjudge as to whether the ball before being caught by a fielder, touched the ground or not? Whether the ball before being held by the wicket keeper, got snicked by the bat or the pad? Whether the bowler bowled 'no-ball' or 'wide ball? 22. The Umpire has to adjudge as to whether the ball before being caught by a fielder, touched the ground or not? Whether the ball before being held by the wicket keeper, got snicked by the bat or the pad? Whether the bowler bowled 'no-ball' or 'wide ball? 22. Having closely considered the pros and cons of the scheme, I notice many 'wide balls' and 'no balls' in it. The objections raised by HUDCO, goes in the root of the matter and take the scheme out of the purview of fairness. 23. As a result of the above discussions, the petition stands rejected.Petition dismissed. *******