Case Note & Summary
The petitioner, Ashok Organics Industries Ltd., incorporated in 1973, filed a petition under Sections 391 and 394 of the Companies Act, 1956, seeking sanction of a scheme of arrangement between the company, its shareholders, secured and unsecured creditors, and its promoters/guarantors. The company had accumulated liabilities exceeding its assets, leading to a reference before the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985, registered as Case No.195 of 2002. The promoters proposed the scheme to revive the company by infusing funds and settling creditor dues. The board of directors resolved on 9 September 2005 to propose the scheme. By order dated 28 October 2005 in Company Application No.690 of 2005, the court directed meetings of equity shareholders, secured creditors, and unsecured creditors; these were held on 12 December 2005. The chairman's report indicated that 55 shareholders holding 97,24,155 shares (80.46% of total share capital) voted in favour; three secured creditors representing Rs.193,32,69,980 (80.05% of secured debt) voted in favour, while one representing Rs.48,19,12,447 (19.95%) voted against; and 42 unsecured creditors representing Rs.10,87,94,030 (99.91% of unsecured debt present) voted in favour, with no votes against. The scheme thus received the statutory majority. The petition was presented on 9 January 2006.
Dena Bank, a secured creditor, filed an affidavit opposing the scheme and raising a preliminary objection to maintainability, arguing that the petition was not maintainable due to the pendency of BIFR proceedings and the overriding effect of Section 32 of SICA. It also contended that the scheme was unfair and one-sided, proposing to scale down its admitted debt of over Rs.48 crores to a mere Rs.4 crores, amounting to an extinguishment of over 90%, and was against public interest as it involved public debt. An unsecured creditor, Nu-Tech Corporate Services Ltd., also opposed maintainability on similar grounds, claiming the company could have proposed the scheme before BIFR but feared winding-up. Nu-Tech further alleged that the company did not approach with clean hands, suppressed the BIFR reference, and failed to give notice of the scheme meeting to it or the court receiver appointed in a related suit, and that the company had defaulted on lease rentals and flouted an undertaking. The Regional Director filed an affidavit stating the scheme was not prejudicial to shareholders and creditors. The court delivered an oral judgment on 8 November 2006, but the available text does not include the final operative part, making the outcome and ratio decidendi unavailable from the provided excerpt.
Headnote
A) Company Law - Scheme of Arrangement - Maintainability When BIFR Proceedings Pending - Sections 391 and 394 Companies Act, 1956; Sections 22 and 32 Sick Industrial Companies (Special Provisions) Act, 1985 - Petitioner company had a pending reference before BIFR under SICA. Objection was raised that the petition for sanction of a scheme of arrangement was not maintainable due to the overriding effect of SICA provisions. The Court heard arguments on the preliminary objection. (Paras 15-17)
B) Company Law - Scheme of Arrangement - Fairness and Public Interest - Section 391 Companies Act, 1956 - Dena Bank opposed the scheme on the ground that it proposed scaling down of its admitted debt from Rs.48,19,12,447 to Rs.4 crores, an extinguishment of over 90%, detrimental to secured and unsecured creditors and against public interest as a nationalised bank. (Paras 16)
C) Company Law - Scheme of Arrangement - Notice to Creditors and Clean Hands - Section 391 Companies Act, 1956 - Unsecured creditor Nu-Tech contended that no notice of the scheme meeting was given to it or the court receiver, and that the petitioner suppressed material facts regarding the BIFR reference and pending litigation. (Paras 17-22)
D) Company Law - Scheme of Arrangement - Approval by Requisite Majority - Section 391 Companies Act, 1956 - Meetings of equity shareholders, secured creditors and unsecured creditors held on 12-12-2005 approved the scheme with more than three-fourths in value voting in favour, as per the chairman’s report. (Paras 10-13)
Issue of Consideration
Whether a petition under Sections 391 and 394 of the Companies Act, 1956 for sanction of a scheme of arrangement is maintainable when the company has a pending reference before BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, in view of the overriding effect of Section 32 of SICA.
Law Points
- Maintainability of scheme under sections 391 and 394 of Companies Act
- 1956 when reference pending before BIFR under SICA
- Overriding effect of section 32 of SICA
- Requirement of clean hands by petitioner
- Fairness and public interest in scheme
- Notice to creditors and court receiver
- Approval by requisite majority
Case Details
2006 LawText (BOM) (11) 45
COMPANY PETITION NO.108 OF 2006 WITH COMPANY APPLICATION NO.690 OF 2006
Mr. Shyam Mehta with R.A. Shah, N.C. Parekh, Ms. Manisha Poladia, Ms. Deeksha Dadwal i/b. Mansukhlal Hiralal & Co. for petitioner; Mr. Darius Kambhata, Senior Advocate i/b. Mr. Jay Bhatia for Dena Bank; Mr. Dipen Merchant, Senior Advocate i/b. S.K. Srivastav & Co. for Nu-Tech Corporate Services Ltd.; Mr. C.J. Joy, i/b. S.S. Sarkar for Regional Director; Ms. Reeta Rahimtulla i/b. M/s. Manilal Kher Ambalal & Co. for ARCIL
Ashok Organics Industries Ltd.
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Nature of Litigation
Petition under Sections 391 and 394 of the Companies Act, 1956 for sanction of a scheme of arrangement between the company, its shareholders, secured and unsecured creditors, and promoters/guarantors.
Remedy Sought
The petitioner company sought the court's sanction to the scheme of arrangement (Annexure J) with or without modification, declaring it binding on the company and its secured and unsecured creditors.
Filing Reason
The company had accumulated liabilities and its assets fell short of liabilities, leading to a reference to BIFR. The scheme was propounded to revive and rehabilitate the company by infusing funds and settling dues of creditors in a more fructuous manner.
Previous Decisions
The BIFR had registered a reference (Case No.195 of 2002) and directed a special investigative audit. In Company Application No.690 of 2005, this Court directed convening of meetings of shareholders and creditors, which were held on 12-12-2005; the scheme was approved by the requisite majorities.
Issues
Whether the petition under Sections 391 and 394 of the Companies Act, 1956 is maintainable given the pendency of proceedings before the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, particularly in view of Section 32's overriding effect.
Whether the scheme of arrangement is fair and in the public interest, considering the objection of Dena Bank that the proposed scaling down of its admitted debt of Rs.48,19,12,447 to Rs.4 Crores is detrimental and contrary to public interest.
Whether proper notice of the meetings was given to all creditors, specifically Nu-Tech Corporate Services Ltd. and the Court Receiver appointed in related proceedings.
Whether the petitioner company approached the court with clean hands, given the alleged suppression of material facts regarding the BIFR reference and pending litigation.
Submissions/Arguments
Petitioner contended that the scheme was bona fide, supported by the requisite majority, not prejudicial to shareholders and creditors, and necessary for revival, ensuring smooth operations and continuous employment.
Dena Bank argued that the petition was not maintainable due to the pendency of BIFR proceedings and the overriding effect of Section 32 of SICA; the scheme was unfair and against public interest as it scaled down debt by over 90%.
Nu-Tech argued that the petition was not maintainable because of the live BIFR reference; the company could have proposed the scheme before BIFR but feared winding-up; no notice was given to Nu-Tech or the Court Receiver; the company suppressed material facts and did not approach with clean hands.
Judgment Excerpts
On perusal of the said report it is found that 56 equity shareholders holding 106,45,825 shares exercised voting by ballot. ... all the 55 shareholders holding 97,24,155 shares constituting 80.46% of the total share capital voted in favour of the scheme and none voted against.
the scheme was approved by the requisite majority in number of secured creditors of the petitioner company representing more than 3/4th in value of secured debt present at the said meeting and voted in favour of the said scheme of arrangement.
the present petition is not maintainable because the petitioner is a company which has invoked the jurisdiction of Board of Industrial Finance and Reconstruction (BIFR), the Authority set up under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
Procedural History
The petitioner company was incorporated on 13-02-1973. It commenced business in 1973 and subsequently accumulated liabilities exceeding its assets, leading to a reference to BIFR by letter dated 04-02-2002, registered as Case No.195 of 2002. BIFR directed a special investigative audit. On 09-09-2005, the board of directors resolved to propose a scheme of arrangement. Company Application No.690 of 2005 was filed and by order dated 28-10-2005, the court directed meetings of equity shareholders, secured creditors, and unsecured creditors. Meetings were held on 12-12-2005 and the scheme was approved by the requisite majorities. The petition was presented on 09-01-2006. Dena Bank and Nu-Tech Corporate Services Ltd. filed affidavits opposing the scheme and raising preliminary objections to maintainability. The Regional Director filed an affidavit in support. The matter was heard and oral judgment delivered on 08-11-2006.
Acts & Sections
- Companies Act, 1956: 391, 394
- Sick Industrial Companies (Special Provisions) Act, 1985: 22, 32, 15(1)
