OSA 55, 66, 67 & 68/2003
5.Corporation Bank George Town Branch Rep. By its Senior Manager 49 Armenian Street Chennai 600 001.
6.The Regional Director Southern Region Dept. of Company Affairs Shastri Bhavan, Haddows Road Chennai 600 006.
7.The Registrar The Registrar of Companies Shastri Bhavan, Haddows Road Chennai 600 006.
8.The Official Liquidator The Official Liquidator's Office High Court, Madras 600 104. .. Respondents in OSA 56, 57, 58 & 59/2003
9.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
10.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 in OSA 63/2003 & 5th respondent in OSA 64/2003
11.RSL Industries Ltd.
Rep. By its Director S.Ramaswamy "Sethu House"
Original side appeals preferred under Order XXXVI Rule 11 of O.S. Rules against the order dated 29.1.2003 of this Court in Company Application Nos.146 of 2003 and 508 and 524 of 2002 in C.P.No.242 of 2001, 499, 521 and 1937 of 2002 and 137 of 2003 in CP 239 of 2001, 502 and 522 of 2002 and 140 of 2003 in CP 240 of 2001, and 505, 523 and 1940 of 2002 in CP 241 of 2001.
For Appellants : Mr.A.K.Mylsamy For Respondents : Mr.Karthick Seshadri for R1 in OSA 60 to 63/2003 Mr.Arvind Subramaniam for R Mr.M.Udhaya Bhanu Senior Panel Counsel for R2 Mr.S.R.Sundar for Official Liquidator COMMON JUDGMENT (Judgment of the Court was delivered by M.CHOCKALINGAM, J.) All these appeals have arisen from a common order made by the learned Single Judge of this Court in Company Application Nos.499, 500, 502, 503, 505, 506, 508, 509, 521, 522, 523, 524, 1937 and 1940 of 2002 and 137, 140, 143 and 146 of 2003 in Company Petitions 239 to 242 of 2001.
2.The above company applications were filed by four banking companies namely Corporation Bank, Dhanalakshmi Bank Limited, State Bank of India and Lakshmi Vilas Bank Limited whereby an order in C.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 company applications can be stated thus:
(a) M/s.RSL Industries, a public limited company and incorporated under the Indian Companies Act, availed loans from various banks including Corporation Bank and other financial institutions. The said company availed a foreign currency loan of 200 million USD in order to meet its high cost borrowals from various financial institutions and other money lenders and thus the Corporation Bank was one of the secured creditors. Availing the financial facilities, the company cleared its loan from Industrial Development Bank of India (IDBI) to the extent of Rs.12.75 crores. The said loan was released on the belief of the representation of the company and also in good faith that a mortgage was to be executed in order to secure the dues, but it was not done. It was also agreed that the loan should be repaid within a period of six years in 20 quarterly instalments. Despite many a demand and personal contacts, neither the amount was paid nor regularised the account, nor the company obtained the documents from IDBI.
(b) While the matter stood thus, the company has made an arrangement for scheme of amalgamation/demerger. C.P.No.239 of 2001 was filed seeking approval of the scheme of arrangement of merger of the textile division with RSL Textile India Limited, the transferee company. C.P.No.241/2002 was filed for amalgamation of RSL Industries with Ramco Super Leather Limited. An order of approval was made by the Court on 6.12.2001.
(c) Before making such arrangement for a scheme of amalgamation/demerger, notice should have been issued to the creditors before approval of the scheme. But, keeping the Corporation Bank in darkness and without its knowledge, the company has sought for approval of the scheme by making publication in Business Line and Dinamalar. The petitioner has sent a lawyer's notice on 10.1.2002 for regulrisation of the account.
(d) The charge that was created by the company in favour of the Corporation Bank was not limited to Textile Division alone. The loan availed was not only utilised to pay back the liability if the IDBI, but also several other borrowers. Hence the intention of the company to frame a scheme without notice to the creditor Bank was only an attempt with a malafide intention to dilute the security available. But the charge created in favour of the bank shall continue till the satisfaction of the charge by payment of loan amount. The Court is empowered to refuse the approval of the scheme if it was not in the public interest. The scheme was opposed to public interest since no care to protect the money advanced by public sector bank was shown.
(e) The company had two major divisions, leather and textile, whose operations were carried out independently and performance was also monitored. But the over all management was by the common Board of Directors. There was no separate banking operation and consortium arrangement. The present spinning off and merger according to the company, had resulted in bifurcation of assets. The cash flow and cash accrual and the repayment capacity of the bank were taken into account at the time of granting of the loan. Now, they have been altered and tampered with. The balance sheet of these two companies do not reveal any profit. Hence it would be quite clear that the scheme was only to defraud the bank. It has caused greater hardship on the bank, and they will be put to irreparable loss. No prejudice or hardship would be caused if the scheme is not accepted. The company has not produced previous balance sheets or profit and loss account of the Ramco Super Leather Limited. While the liability of the bank under the foreign currency loan of Rs.1700 lakh was being transferred to the books of the company which has very insufficient capital, the bank is an interested party and aggrieved by the scheme of amalgamation.
4.In the affidavit in support of the application made by Dhanalakshmi Bank Limited, it was averred that along with SBI and Lakshmi Vilas Bank Limited and in consortium have extended working capital credit facility to the company for textile division; that the State Bank of India and Lakshmi Vilas Bank jointly got bank guarantee setting out terms and conditions; that firstly, it was agreed that the charge by way of hypothecation of the current assets of the textile division of the company created in favour of these three banks should rank pari passu inter-se the banks without any reference or priority to them; that secondly, among the three banks, State Bank of India shall be the lead bank in respect of their dealings; that the hypothecation charge of the current assets of the company's textile division in favour of the three banks was duly registered with Registrar of Companies; that it was clear in one of the clauses contained in the working capital consortium agreement dated 12.1.2001, executed by the company in favour of the three banks that during the currency of the working capital credit facilities extended, the company should not without the prior permission of the State Bank of India, the lead bank, formulate any scheme of amalgamation or reconstruction or effect any change in its capital structure, etc.; that the company without placing before the Court the fact that it has no right to evolve any scheme of arrangement for amalgamation or reconstruction without obtaining prior permission of these banks through the lead bank, has obtained the order dated 6.12.2001, which has caused great injury and hardship to the banks and also caused prejudice to the rights and interest, and hence it was to be set aside.
5.Equally, the State Bank of India in the course of the affidavit in support of the application has stated that they have not been provided with the petition and other materials relied upon by RSL Industries Limited for obtaining sanction of the scheme; that the RSL Industries which comprised of two divisions namely textiles and leather, was granted a foreign currency loan of Rs.24.50 crores; that it was specifically averred that Rs.13.46 crores should be availed by the leather division and Rs.11.54 crores should be availed by the textile division; that the company has created a second charge on the current assets of the textile and leather divisions of RSL Industries as collateral security; that RSL Industries was also granted working capital limit of Rs.10.80 crores for its textile division; that the foreign currency loan was secured by the primary security by way of first charge over the factory land and building and the machinery and pari passu first charge over the entire fixed assets of leather division and pari passu first charge over the entire fixed assets of Vijayalakshmi Mills; that the bank was the leader of the consortium of banks which granted credit limits to the textile division of RSL Industries; that the Canara Bank was the other leader of consortium of banks which granted credit limits to the leather division of RSL Industries; that the leather division used the major part of the loan for its modernisation; that after demerger, security cover was reduced to 101%; that the profit of textile division was Rs.0.37 crore per annum and the profit of leather division was Rs.8.98 crores per annum; that though the foreign currency loan was granted to both the divisions, under the demerger scheme, all the liabilities have been allocated to the textile division; that the respondent company has applied and obtained the approval from this Court without projecting the proper facts regarding their liabilities to their creditors and also neglected to obtain consent or no objection letter from the State Bank of India or from other financial institutions for demerger; that it would be quite clear from clause 42(a) and (b) that the borrower shall not during the subsistence of the liability of the borrower to the bank under or in respect of any of the aforesaid credit facilities without the written consent of the bank, effect any scheme of amalgamation or reconstitution etc.; that RSL Industries has not paid the half yearly interest on the foreign currency loan of Rs.1.15 crores which became due on 17.9.2001 and quarterly interest working capital loan on and from 30.9.2001; that the State Bank of India wrote a letter on 18.9.2001 which was replied on 4.10.2001; that it was stated in the reply that the amalgamation/demerger schemes were not finalised and not taken to the High Court and agreed that it will arrange for a consortium meeting at the earliest; that RSL Industries Limited intentionally withheld and suppressed the material fact that as on 4.10.2001, the petition filed by RSL Industries was pending before the Court praying for demerger/amalgamation; that the State Bank of India sent a letter on 29.11.2001 requiring convening of consortium meeting, but there was no response at all and thus the company failed and neglected to conduct the consortium meeting with mala fide and withheld the information; that the State Bank of India also issued a notice to the respondent company on 2.4.2002; that the reply notice dated 4.4.2002, was sent raising unsustainable claims and making misleading averments; that it has not whispered about the approval or the knowledge of merger by other banks; that only shareholders meeting has been convened; that the demerger sanctioned by the Court was highly advantageous to the consortium banks which have financed to leather division as the security position is increased by three folds; that the leather division has availed greater proportion of loan and under the present scheme, the benefit under the loan was transferred to the transferee company which was already chocking for profit with the onerous liability; and that as per agreement, clause 25(2) read with clauses 26 to 29 provide that the primary security cannot be dealt with without specific instructions from the State Bank of India.
6.Lakshmi Vilas Bank also filed an affidavit stating that the company approached them to extend credit facilities to its textile division jointly with the State Bank of India and Dhanalakshmi Bank under the consortium agreement; that the facilities were secured by a charge over the movable and immovable assets of the textile division; that the first respondent issued a letter of undertaking among other loan documents that it would not effect any change in the constitution without applicant's prior permission during the currency of the credit limit; that the permission of the lead bank was necessary in the event of any formulation of any scheme of arrangement or reconstitution; that had notice been issued, the lead bank would have had discussions with the other consortium members and thereupon would have offered its opinion and permission; that the order dated 6.12.2001, was made on the suppression of the fact by the company as to its liability to the applicant and the requirement of the prior approval; that the scheme of arrangement and the scheme of amalgamation was prejudicial to the interest of the banks and as such, they are liable to be set aside.
7.The respondent filed separate counter affidavit in all the above applications stating that a note on the scheme was sent by the company to all the banks of the consortium headed by State Bank of India on 18.9.2001 simultaneously; that the notice for approval of the scheme of demerger by the shareholders was advertised in the newspapers also; that even after the demerger ordered, they have negotiated bills of RSL Textiles India during January 2002 and adjusted the outstanding of the limits sanctioned by it to the textile division of RSL Industries; that on 10.7.2002, there was a consortium meeting at Coimbatore which was attended by all the applicants; that if the agreement is violated, it is open to the applicants to recall the loan; that the allegation that the company has suppressed its liability to the bank is not correct; that the company has created a first charge on their fixed assets for Rs.67 crores and the balance available was only Rs.7 crores to cover the second charge; that under the circumstances, there was no dilution of the security as contended by the applicants; that the personal guarantee executed by the Directors before and after demerger is still in force; that no direction was given by the Court to send notice to the secured creditors; that it is the responsibility of the bank to convene the consortium meeting; that the company has not suppressed the existing charge; that the bank has been all along passive spectator of the steps taken by the companies for amalgamation and demerger; that due to failure of IDBI to return the document to the company for creating a charge in favour of the applicant for the loan sanctioned by it, the company could not honour its commitment, and hence all the applications have got to be dismissed.
8.Advancing arguments on behalf of the appellants, the learned Counsel would submit that it is pertinent to point out that clause 4.4 of the scheme provides that the rights of the secured creditors are not affected by the scheme unless they agree otherwise; that the absolute prohibition imposed by the secured creditors that without their prior permission, no amalgamation or reconstruction should take place is contrary to
Section 376 of the Companies Act, which prohibits 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 Bank of India the lead bank of the consortium wrote to the appellant about the hiving off of the textile division and amalgamation of leather division with the transferee; that the secured creditors are not affected by the scheme of arrangement/amalgamation since their securities are kept in tact and they have not been diluted, and the meeting convened is only of the shareholders and not of the creditors; that it remains to be stated that none of the creditors in response to the advertisement released by the company in Business Line and Dinamalar dated 14.10.2001 neither appeared before the Court nor opposed the scheme; that in the reply dated 4.10.2001, a note was enclosed explaining the necessity of hiving off the textile division and the merger of RSL Industries Ltd with Ramco Super Leathers Ltd.; that the balance sheet along with the auditor's report approved by the shareholders as on 31.3.2001 has been filed along with the company petition as Annexure B wherein all the details of the secured and the unsecured creditors are set out; that the meeting of the creditors has not been convened since their rights are not affected and more particularly, the secured creditors and the scheme of arrangement/amalgamation is between the appellant and its shareholders and not between the appellant and its creditors; that nothing prevented the secured creditors themselves convening a meeting to discuss about the scheme of arrangement/amalgamation; that the secured creditors did not point out any defect in the scheme; that even assuming that there is a technical violation of the agreement signed by the appellant with secured creditors by its failure to obtain prior permission for the amalgamation/arrangement the same will not affect the interest of the secured creditors since their security are in tact; that under such circumstances, the omission on the part of the appellant in not obtaining prior sanction from the secured creditors for the said arrangement/amalgamation did not affect the interest of the secured creditors; that it is not correct to contend that the appellant has obtained an order from this Court by suppressing material facts since all the relevant information as required under the Act has been placed before this Court; that after the order passed by this Court, the secured creditors have negotiated various bills of RSL Textile India Ltd., and released a portion of their amounts, and thus they are estopped from contending that the demerger is detrimental to their interest; that the order of the learned Single Judge is erroneous and hence it has got to be set aside.
9.The learned Counsel appearing for the respondent Bank has reiterated the very same contentions raised before the learned Single Judge and would submit that the appeals have got to be dismissed.
10.The Court paid its anxious consideration on the submissions made and also looked into all the materials available and in particular, 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 incorporated under the Indian Companies Act availed loans from various banks including Corporation Bank, Dhanalakshmi Bank, State Bank of India and Lakshmi Vilas Bank and other financial institutions. They were secured creditors of the said company. The company had two major divisions Leather and Textiles. The operations of both the divisions are carried out independently, and the performance was also monitored; but the over all management was by the common Board of Directors. The company availed foreign currency loan of 200 millions USD to meet its high cost borrowals. Out of the said sum availed, the company also cleared the dues from the Industrial Development Bank of India to the extent of 12.75 crores. Though it was agreed that the said entire loan should be paid within a period of six years in twenty quarterly instalments, there was default. Dhanalakshmi Bank along with State Bank of India and Lakshmi Vilas Bank and in consortium extended working capital credit facilities to the company for its textile division. The State Bank of India and Lakshmi Vilas Bank also got security documents as found in the terms and conditions. It was agreed inter se that the charge by way of hypothecation of the current assets of the textile division of the first respondent created in favour of these banks shall run pari passu inter-se the banks without any preference or priority to them. The State Bank of India shall be the lead bank in respect of the dealings. The hypothecation charge of the current assets of the textile division in favour of the banks was duly registered with the Registrar of Companies. One of the clauses in the working capital consortium agreement dated 12.1.2001, executed by the company in favour of these three banks, would clearly stipulate that during the currency of the working capital facilities extended by the banks, the company should not without the prior permission of the State Bank of India, the lead bank, inter alia, formulate any scheme of amalgamation or reconstruction or effect any change in its capital structure. The State Bank of India granted a foreign currency loan of Rs.24.50 crores out of which Rs.13.46 crores was availed by the leather division and 11.54 crores was availed by the textile division. Insofar as the collateral security for the foreign currency loan, the company has created a second charge on the current assets of the textile and leather division of RSL Industries. The company was also granted a working capital limit of Rs.10.80 crores for its textile division. Lakshmi Vilas Bank Limited also extended credit facilities and they were secured by a charge over the movable and immovable assets of the textile division.
(b) A letter of undertaking was also executed along with other documents stipulating that the company would not effect any change in the consortium without the prior permission during the currency of the credit. While the matter stood thus, the company has approved the scheme for arrangement and amalgamation on 6.9.2001. The Court gave direction for convening and holding the meeting of the shareholders on 10.9.2001. The publication was made on 14.9.2001 in Dinamalar and Business Line with regard to the convening and holding of the meeting of the shareholders. Accordingly, the meeting of the shareholders of the company was held on 8.10.2001. The reports of the Chairman were filed into the Court stating that the scheme was unanimously approved by the members on 9.10.2001. The company filed CP No.239 of 2001 before this Court under Sec.391 of the Companies Act for approval of the scheme of arrangement of undertaking of textile division with RSL Textiles (India) Limited, transferee company. Equally CP No.241/2002 was filed for amalgamation of RSL Industries Limited with Ramco Super Leather Limited. Company Petitions were filed to confirm the scheme approved by the members on 10.10.2001. An advertisement was effected in Dinamalar and Business Line on 14.10.2001. The Court granted sanction for the scheme of arrangement/amalgamation on 6.12.2001. All the four banking institutions, the secured creditors have challenged the said approval and sought to set aside the same.
12.As could be seen above, the four banking institutions who were the secured creditors, seek to set aside the order of approval of the scheme of arrangement of demerger/amalgamation placed by the appellant company on the following grounds.
(i) The scheme of arrangement of demerger/amalgamation was made without the prior permission of the secured creditors.
(ii) The said arrangement if approved, all secured creditors would lose their right to proceed against the securities originally furnished by RSL Industries for availing the loan.
(iii) Apart from meeting of the shareholders, meeting of the secured creditors should have also been convened and conducted.
(iv) The creditor banks from the commencement of the proceedings of the arrangement till it was approved by the Court, were kept in darkness.
(v) Even before the Court where the company sought the approval of the scheme, they suppressed all the necessary details, and if made, the Court would not have granted approval.
(vi) By the said arrangement, textile division was saddled with more liabilities.
(vii) Lastly, the said arrangement of demerger and amalgamation lacked bonafide.
13.Sec.391 of the Companies Act deals with power to compromise or make arrangement with creditors and members. Sub-section (1) and its proviso reads as follows:
"Where a compromise or arrangement is proposed
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.
Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like."
14.It is not in controversy that RSL Industries has two major divisions leather and textile which are run independently, but the over all management was under the same Board of Directors. When the company went for scheme of amalgamation/demerger, it sought approval of the scheme of arrangement of undertaking of the textile division with RSL Textiles India the transferee company, and for amalgamation of M/s.R.S.L. Industries with Ramco Super Leather Limited. The grievance of the secured creditors is that from the commencement of the proceedings of demerger and amalgamation, neither a notice was given to them, nor a meeting was convened or conducted, nor prior permission was obtained from them in order to come for such an arrangement of demerger and amalgamation. Pointing to Sec.391 of the Companies Act, the appellant company put forth a reply that what is all required was holding of the meeting of the shareholders and not of the secured creditors; that the publication in Dinamalar and Business Line for convening a meeting of the shareholders was made on 14.9.2001, and actually the meeting of the shareholders was held on 8.10.2001; that following the report of the Chairman that the scheme was unanimously approved by the members, the company petitions were filed to confirm the scheme; that the Court was satisfied that the legal requirements were satisfactorily fulfilled and then granted the relief of approval, and in such circumstances, it cannot be questioned now.
15.Admittedly, the agreement entered into by the company with the secured 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 movables and other assets and documents of title thereto or the goods movables and other assets covered by the documents except under and in accordance with the Bank's written instructions.
26.The Borrower shall (if so required by the Bank) display the Bank's name on the godown factory and other places approved by the Bank where such goods movables and other assets hypothecated and/or pledged to the Bank and against which limits for purposes of drawings have been fixed under and some/all of the aforesaid credit facilities have been stored indicating that such goods movables and other assets are hypothecated and/or pledged to the Bank.
27.In respect of credit facilities granted to the Borrower against pledge of goods movables and other assets all such goods movables and other assets shall be placed in the Bank's possession under its control and in such manner that such possession and control may be apparent and indisputable. In pursuance thereof, inter alia, the godown, factory and other places approved by the Bank in this respect where the goods movables and other assets that are pledged have been stored shall bear the Bank's name boards indicating that the goods movables and other assets lying therein are pledged to the Bank. Where the goods movables or other assets which are pledged with the bank are released to the Borrower on trust under a factory, mundy type pledge, or other basis or the limited purpose of facilitating the Borrower carrying on the manufacturing or other activity, the Borrower undertakes that the Bank's padlocks will be used on the godown factory or other place where they are stored and such godown, factory or other place will be locked by the Borrower when not in use and the keys thereof shall be returned to the Bank on demand and that the Bank's name boards shall be displayed on such factory, mundy or other place where such manufacturing or other activity is carried on indicating that the goods movables and other assets are pledged to the Bank. The Borrower further agrees that all sea, rail and other transport freights, demurrages, customs duties, terminal taxes, cartage, godown rents and all other charges and expenses paid or incurred by the Bank in obtaining actual physical possession of and in clearing storing and forwarding the said goods movables and other assets shall be debitable to the accounts of the Borrower and form a part of the aggregate amount secured.
37.During the currency of these presents the shareholding of such of the shareholders in the Borrower who are its Directors at present and the principal shareholders and promoters of the Borrower shall not be varied without the previous written consent of the Bank first obtained.
42(b):- The Borrower shall not during the subsistence of the liability of the Borrower to the Bank under or in respect of any of the aforesaid credit facilities without the written consent of the Bank effect any scheme of amalgamation or reconstitution."
16.From the above clauses, it would be quite evident that the company has agreed not to deal with the goods movables and other assets and documents of title thereto or the goods movables and other assets covered by the documents except under and in accordance with the bank's written instructions and not to deal with the security without the bank's written instruction and also agreed that during the subsistence of the liability of the borrower to the bank under or in respect of any of the credit facilities without the written consent of the bank it shall not effect any scheme of amalgamation or reconstitution.
17.Pointing to the above clauses and in particular clause 42(b), the learned Counsel for the respondent bank secured creditors would submit that without the written consent of the secured creditors banks, the company should not effect any scheme of amalgamation or reconstitution what is now sought for. Answering to the above, the learned Counsel for the appellants would submit that it is true that the agreement contained those clauses, but they were not followed, and apart from that they are invalid and inoperative; that so long as the securities were kept in tact and also the liabilities were equally carried to the transferee company, no prejudice would be caused to the secured creditors. The learned Counsel also took the Court to the clauses in the scheme of arrangement which stipulates that the charges created by the company prior to 6.12.2001 will continue to be in tact and subsist till the satisfaction of the charge, and when the security and charge continued even after the demerger, the creditor banks could not have any grievance or complaint about the same. According to the counsel, even assuming that there was a violation of the said agreement, so long as the banks' rights were not affected, it should not have any grievance, and it is always open to the banking companies to take steps for recovery of the money; that they have also taken steps accordingly before the Recovery Tribunal; that having exercised their right, now the banking companies should not be allowed to raise a contention that the stipulations in the agreement were violated by the company, and the same has got to be rejected. Attractive though the arguments of the learned Counsel for the appellant, this Court is unable to agree with the same for more reasons than one.
18.A reading of the entire clauses under the agreement would clearly indicate that the appellant company should not without the consent of the bank, effect any scheme of amalgamation or reconstitution. Having executed the agreement with the above clauses, the borrower company if allowed to effect a scheme of amalgamation or demerger without the approval of the secured creditors, needless to say it might even affect the interest of the company. The two divisions of the appellant company were granted with foreign currency loan of Rs.24.50 crores by one of the banking institutions namely State Bank of India, out of which Rs.13.46 crores was availed by the leather division and Rs.11.54 crores was availed by the textile division. Thus it could be evident that the major part of the loan was to the leather division. Apart from that, the textile division availed working capital limit of Rs.10.80 crores. The first charge was over the factory land and building and machinery and the fixed assets of the leather division and also the charge over the entire fixed assets of Vijayalakshmi Mills. The current assets of the textile and leather divisions were given as the second charge. The State Bank of India which led the consortium, gave loan to the textile division, and the Canara Bank the leader of the other consortium, granted loan to the leather division. Admittedly, while the foreign currency loan was granted to both divisions, by operation of the demerger scheme, all liabilities were transferred to the textile division. No doubt, this will stand highly advantageous to the consortium banks who have financed the leather division. Under such circumstances, the contention put forth by the appellants' side that the charge in favour of the banks would continue to subsist till the satisfaction of the charge, and they remained in tact cannot be accepted. Equally the contention that the agreement for prior consent for amalgamation or reconstruction was not valid cannot also be accepted. At no stretch of imagination, it could be termed as a technical violation of the pari passu agreement. Having agreed not to go for amalgamation or reconstruction without the written consent of the secured creditor banks and when the banks are able to show that the security position could not continue as it originally stood, the contentions put forth by the appellant company that the interest of the secured creditors would not be affected has to be rejected.
19.As could be seen from the available materials, the company could issue directions for conduct of a meeting of the shareholders on 10.9.2001. Consequently, publication was made on 14.9.2001 in Dinamalar and Business Line, and the meeting of the shareholders of the company was held on 8.10.2001. The report of the Chairman was filed into the Court as to the unanimous approval of the scheme by the members the next day 9.10.2001. The company petitions were filed on 10.10.2001 and advertisement was made on 14.10.2001. The scheme of amalgamation/demerger was approved by the Court by an order dated 6.12.2001. At this juncture, it is pertinent to point out that the State Bank of India, the leader of the consortium, wrote to the company on 18.9.2001 wherein it is stated "Please convene a consortium meeting immediately to discuss all the developments that are taking place and possible repercussions of merger/take over as the case may be". The same was replied on 4.10.2001, stating "Please note that we had planned to inform the bankers after the scheme was finalised and taken by the High Court before which the News Item has appeared in the News Paper. As advised by you, we would arrange for a Consortium Meeting at the earliest to discuss the developments." In the former letter by the State Bank of India, there was a request for convening a meeting of the consortium immediately, and the latter namely reply by the company would indicate that the scheme was not finalised and the company would arrange for a consortium meeting at the earliest to discuss the developments. It is pertinent to point out that the proceedings were pending before the Court even on 4.10.2001. This would make it clear that the company has come with a false reply that the scheme was finalised. Though the appellant company gave an assurance for convening a meeting at the earliest, neither it convened a meeting, nor put the secured creditors on notice as to the developments. Even on 29.11.2001, the next communication was addressed by the State Bank of India to the company reiterating its earlier request for arranging a consortium meeting. It is pertinent to point out that this second communication was also addressed pending proceedings before the Court. But till an order of approval was made by the Court on 6.12.2001, no reply was issued by the company. All the above circumstances would clearly indicate that the intention of the appellant company was to keep the secured creditors banks in utter darkness.
20.It is pertinent to point out that the secured creditors were neither added as parties nor put on notice as to the proceedings before the Court for demerger and amalgamation. It was contended by the learned Counsel for the appellants that the secured creditors need not be added as parties in the petition for demerger or amalgamation and even the Court do not order any notice to the secured creditors, but it ordered publication and also the convening a meeting of the shareholders which was actually done, and in such circumstances, it cannot be found to be defective. This contention cannot be accepted. The appellant company as stated above has entered into agreements with the specific stipulations that without the prior consent it would not go for amalgamation or reconstitution. Having agreed so and in particular when the secured creditors have demanded consortium meeting more than once before and pending the proceedings before the Court, the appellant company has not only kept them in darkness, but also not placed the real situation before the company Court. Placing all the materials regarding the liability of the creditors becomes all the more important to satisfy the Court to or not to grant the approval for the proposed compromise or arrangement when 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 can refuse sanction for any compromise or arrangement unless it is satisfied that the company or any such person by whom an application has been made under sub-section (1) has disclosed to the Court by affidavit or otherwise, all material facts relating to the company such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251 and the like. In the instant case, the emphasis has to be laid on the words "by affidavit or otherwise all material facts relating to the company such as the latest financial position of the company". This would include the charges created over the assets and existing liabilities at the time when the applications were made. In the instant case, had the company brought to the notice of the Court the latest financial position including the existing liability of the company and the charges created over the securities in respect of the liability, it is highly doubtful whether the Court would have granted the approval as asked for. Sec.391 of the Companies Act envisages the convening and conduct of the meeting of the shareholders. Nowhere it states that the creditors must be put on notice or they should also participate in the meeting.
21.In the instant case, a meeting of the shareholders was convened and conducted and was also reported to the Court. But it is made clear in the proviso that no sanction of the compromise or arrangement should be given by the Court unless and until it is satisfied that all material facts relating to the company in respect of the latest financial position of the company was disclosed by affidavit or otherwise. It is in the nature of a warning to the Court that all the material facts relating to the company as to the latest financial position of the company if not placed, the Court should not sanction an order of compromise or arrangement. It is a case where not only the secured creditors were kept in darkness from the commencement of the proceedings as to the scheme of demerger or amalgamation till it was approved by the Court by an order dated 6.12.2001, despite the stipulations in the loan agreement that the company would not make any amalgamation or reconstruction without the prior permission or consent of the secured creditors and also request for convening a consortium meeting many a time, but also the appellant company by not placing all the materials and relevant facts before the Court had sought the approval of the scheme. The company has not even disclosed the above factual position to its shareholders. The answer by the appellant is that it was neither mandatory nor necessary. It is not the case of the appellant that the shareholders when they were called for the meeting pursuant to the orders of the Court, were put on notice as to the entire financial position of the company. No material was placed before the Court that any such statement was furnished to the shareholders. If all the material particulars regarding the latest financial position of the company including the existing liability and the charges created for those liabilities were placed before the Court, the Court could have ordered notice to the secured creditors also and could have given them an opportunity to put forth their contentions. It was contended by the learned Counsel for the appellant that the secured creditors had a thorough knowledge of the proceedings in Court since proper publications were effected, and if really they had got any objection, they should have approached the Court, but not done so. It is true that the publications were effected as per the orders of the Court. But in the case on hand, when all the secured creditors have issued communications to the company calling for a meeting and having given a reply that the consortium meeting will be convened and that too pending the proceedings in Court, the appellant cannot be permitted to put forth a contention as stated above.
22.Under the above stated facts and circumstances, the decision of the Apex Court reported in 1995 COMPANY CASES VO.82 PAGE 37 (BHARAT SYNTHETICS LTD. V. BANK OF INDIA AND ANOTHER) has got to be applied, wherein it is held as follows:
"..(i) that undisputedly no meeting of the creditors and shareholders had been held, nor consent of the requisite number of creditors, obtained. The requirements, such as that the meetings of the concerned were duly held and conducted, that the scheme was accepted by a competent majority, 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 the court its authenticated latest financial position, as required under sub-section (2) of
section 391 of the Companies Act;
(iii) that, on the facts, the banks' apprehension that the merger would jeopardise their claims was justified, and sanction had to be refused."
23.The Supreme Court has held in a decision reported in (1997) 1 SUPREME COURT CASES 579 (MIHEER H. MAFATLAL V. MAFATLAL INDUSTRIES LTD.) as follows:
"
Section 394 casts an obligation on the Court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basis principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle of 'prudent business management test' or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalised economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective."
24.It is true that Sec.391 of the Companies Act does not mandate holding of the meeting of the creditors in a scheme of arrangement between the company and its members and equally a meeting of the members in a scheme of arrangement between the company and its creditors. Though not specific provision has been made for ascertaining the wishes of the creditors in a scheme of arrangement between the company and its members, the Court is entrusted with the duty to ascertain whether scheme would affect the interest of the creditors to such an extent that the holding of their meeting is essential, and if the Court in appraisement of the facts and circumstances is of the view that the interest of the creditors would be adversely affected if the scheme is approved, then it has to refuse to sanction the scheme since what is involved is a public interest. The banking institutions from whom the appellant company availed different kinds of loan facilities were nationalised banks and also public sector undertaking. Needless to say if any loss occasioned to these institutions, it would ultimately affect the public interest. In the case on hand, it is very clear that the scheme placed before the Court for approval would no doubt affect the interest of the secured creditors. Having flouted the binding clauses in the agreement creating the charge and having kept the creditors under darkness as to the entire proceedings of the scheme despite their request for the consortium meeting and also having not placed before the Court all material facts which would enable the Court to or not to approve the scheme and all the more when it is apparently clear that the scheme of amalgamation if approved would certainly affect the public interest, naturally the secured creditors should have been heard before approval. However, taking into consideration the facts and circumstances, the learned Single Judge has modified the original order to the effect that the approval will be valid and effective subject to the approval by the secured creditors. This Court is unable to see any reason to disturb the said finding of the learned Single Judge.
25.In the result, all these original side appeals are dismissed confirming the order of the learned Single Judge and leaving the parties to bear their costs.
nsv