Case Note & Summary
The Pharmaceutical Products of India Limited (PPIL), a company incorporated under the Companies Act, 1956, filed two company petitions under Section 391 seeking sanction of a scheme of arrangement with its secured and unsecured creditors and Wanbury Limited. PPIL was in severe financial distress; its accumulated losses exceeded its net worth, and the Board for Industrial and Financial Reconstruction (BIFR) had recommended winding up by order dated 27 October 2004. An appeal against that recommendation was pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). Wanbury Limited, described as the world’s largest producer of Metformin with a global presence in APIs, came forward as a strategic partner to revive PPIL. The board of directors of PPIL resolved on 14 April 2005 to propose a scheme of arrangement. The scheme detailed the outstanding dues of six secured creditors — Asset Reconstruction Company (India) Limited (ARCIL), Industrial Investment Bank of India (IIBI), Unit Trust of India (UTI), Bank of India (BOI), Bank of Baroda (BOB), and Union Bank of India (UBI) — totalling Rs. 176.57 crores. In full settlement, the secured creditors were to receive consideration comprising Rs. 2.40 crores in cash, 64,668 equity shares of Wanbury at a premium, zero coupon non-convertible debentures (NCDs) worth Rs. 2.42 crores, zero coupon optionally fully convertible debentures (OFCDs) worth Rs. 5.82 crores, and two immovable properties owned by PPIL — a building at Marwah Industrial Estate, Mumbai, and another building at Turbhe, Navi Mumbai, owned through a partnership firm. The scheme stipulated that upon acceptance of this consideration, the balance outstanding would be treated as unsecured loans and the secured creditors would rank equally with other unsecured creditors for the unpaid portion. The scheme was to become binding on all secured creditors once a majority of lenders agreed at a meeting. Payment of consideration was conditional upon orders from the AAIFR or other competent forum facilitating a merger or transfer of PPIL’s assets to Wanbury free of encumbrances, and upon obtaining necessary shareholder approvals under Section 81(1A) of the Companies Act for the issue of shares and debentures. The petition also included a scheme for unsecured creditors. At the hearing, advocates for the petitioner, certain objectors (including UTI), and interveners appeared. The court, after considering the petitions, disposed of them by a common judgment, impliedly sanctioning the schemes as they were not expressly rejected and the judgment noted the petitions were being disposed of.
Headnote
A) Companies Act, 1956 - Section 391 - Scheme of Arrangement - Revival of Sick Company - Petitioner company had accumulated losses exceeding net worth and BIFR recommended winding up - Wanbury Limited, a global API manufacturer, proposed to act as strategic partner for revival - Board of directors resolved to frame a scheme of arrangement with secured creditors (six) offering consideration in cash, shares, debentures, and properties to settle Rs. 176.57 crore dues (Paras 1-5). B) Companies Act, 1956 - Section 391 - Terms of Scheme - Secured Creditors' Settlement - Secured creditors to receive cash, equity shares of Wanbury, NCDs, OFCDs, and two buildings owned by petitioner as full settlement - Outstanding balance to be treated as unsecured loans - Scheme binding on all secured creditors upon majority agreement at lenders' meeting (Paras 3.1-3.3, 3.8). C) Companies Act, 1956 - Section 81(1A) - Issue of Securities - Requirement of Shareholder Approval - Scheme conditional upon approvals from shareholders of PPIL and Wanbury under Section 81(1A) for issue of shares, OFCDs, NCDs, and orders from AAIFR or competent forum for merger or asset transfer (Paras 3.4, 9.1).
Issue of Consideration
Whether the scheme of arrangement under Section 391 of the Companies Act, 1956, for settlement of dues of the petitioner company with its secured and unsecured creditors, as agreed with Wanbury Limited, should be sanctioned by the court?
Law Points
- Scheme of arrangement under Section 391 of the Companies Act
- 1956
- sanction of court
- binding effect on creditors
- revival of sick company
- settlement of dues through cash and securities
- conditions for scheme implementation
