Powers of CLB, inter alia, to grant interim reliefs pertaining to matters which is/are not a part or subject matter of company petition.
The CLB cannot exercise its inherent powers to pass orders without jurisdiction or in utter disregard to orders passed by the Supreme Court or the High Court; an interim order passed by the CLB without jurisdiction and without giving reasons and in utter disregard to the orders passed by the Supreme Court and the High Court cannot be sustained.
HIGH COURT OF BOMBAY
Shree Ram Urban Infrastructure Ltd.
v.
R. K. Dhall
Company Appeal No. 45 of 2009
In
Company Application No. 138 of 2009
In
Company Petition No. 45/297-298/CLB/MB/2009
With
Company Application No. 847 of 2009
September 11, 2009
RELEVANT EXTRACTS:
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3. The questions of law arising in this appeal are:
(i) Whether the Company Law Board can grant interim reliefs pertaining to matter/s which is/are not a part or subject matter of the petition, more so, in view of the decision of the Hon¡ ble Apex Court in Shanti Prasad Jain v/s. Kalinga Tubes Ltd. etc., reported in AIR 1965 SC 1535, and the decision of this Court in appeal no.35 of 2009 dated 16th July 2009;
(ii) whether the Company Law Board under Regulation 44 of the Company Law Board Regulations, 1991, has the powers to extend time granted by this Court for a specific purpose or grant reliefs without assigning any reason where reliefs are neither prayed for nor any submissions are made in the company application in support of grant of such reliefs.
7 I have considered the submissions advanced on behalf of the senior Advocates appearing for the appellant as well as respondent no.1. Admittedly, the company petition was filed on 14th may, 2009 and served on the appellant on 16th May, 2009. An application for interim reliefs was to be made by the petitioners on 21st May, 2009. In the meantime at the meeting of the Board of Directors held on 18th May 2009, a decision in relation to the issue of convertible warrants of equity shares on preferential basis was taken. Since the said decision was taken subsequent to the filing of the petition, admittedly it did not form the subject matter of the petition. However, on 21st May, 2009 respondent no.1 tendered Company Application No. 95 of 2009 before the Company Law Board and inter alia sought to restrain the appellant from giving effect to the decision in relation to the issue of convertible warrants, taken at the Board meeting of the appellant held on 18th May, 2009. This relief sought by respondent no.1 was granted by the Company Law Board by its order dated 22nd May, 2009. The said order dated 22nd May, 2009, passed by the Company Law Board was set aside by this Court by its order dated 16th July, 2009 in Appeal No.35 of 2009 which was also filed by the present appellant. This Court in its said order dated 16th July, 2009 whilst setting aside the order of the Company Law Board dated 22nd May, 2009, inter-alia held/observed/ directed as follows:
i) The Decision taken by the Board of Directors in its meeting held on 18th May, 2009 had not been challenged in the main petition. In paragraph 35 of the decision of the Hon¡ ble Apex Court in the case of Shantiprasad Jain (supra) the Hon’ ble Apex Court has observed that the matters which were not part of the petition cannot be taken into account for considering the interim application.
ii) No reason has been recorded by the Company Law Board which necessitated issuance of an injunction as is ordered against the appellant and its Board of Directors. It would be a different matter if the Board were to consider all relevant aspects for grant or non grant of interim reliefs such as prima facie case, balance of convenience and irreparable loss and record its opinion one way or the other on the contentious issue.
iii) In the circumstances the only option available to the Court is to set aside the impugned order and to relegate the parties for reconsideration of application on its own merits in accordance with law.
iv) The impugned decision is manifestly wrong and untenable. The appropriate course is to set aside the impugned decision and instead relegate the parties before the Board for reconsideration of the application no.95 of 2009, which will have to be considered on its own merits and in accordance with law after giving fair opportunity to both sides to file the affidavit and/or to amend the pleadings, as may be advised if permissible by law.
v) Upon submission of the Counsel for the respondents, that the respondents may consider taking the matter in appeal an order directing the appellant to maintain status quo for a period of two weeks, is ordered directing the appellant not to precipitate the matter with regard to preferential issue for a period of two weeks.
7 After the aforesaid order was passed by this Court on 16th July, 2009, respondent no.1 admittedly preferred an SLP before the Hon’ble Supreme Court of India being SLP (Civil) No(s) 177715-17716/09 impugning the order passed by this Court dated 16th July, 2009.
8 Respondent no.1 also moved the Company Law Board by way of Company Application No. 138 of 2009 seeking amendments of the Company Petition. Respondent no.1 by the said amendment application sought to add to the petition the facts pertaining to the decision of the Board of Directors of the appellant dated 18th May 2009 and also seek reliefs against the said decision. The said Company Application was served on the appellant on 23 rd July, 2009 and was circulated for urgent reliefs on 27th July, 2009. At the request of the appellant, the Company Law Board by its order dated 27th July, 2009, placed the amendment application on 6th August, 2009, for hearing i.e. after 10 days. The learned Member of Company Law Board inter alia also passed the following order on the oral application of respondent no.1. ½ Till the amendments to the petition are completed and interim prayer is heard the respondents are directed not to precipitate the matter as envisaged by Justice Khanwilkar at Bombay High Court and the said two weeks extension given by the Hon’ble High Court is further extended till interim relief in this petition is decided by this Bench. This order is issued under Rule 44 of the Company Law Board Regulations, 1991.
9 When the aforesaid order dated 27th July, 2009, was passed by the Company Law Board, the order passed by this Court dated 16th July, 2009, setting aside a similar order passed by the Company Law Board on 22nd May, 2009, was admittedly before the Company Law Board. However, the Company Law Board has clearly disregarded the order passed by this Court dated 16th July 2009 and in effect passed the same order on 27th July 2009 which
becomes clear from the following:
i) Though the amendment application pertaining to the decision of the Board of Directors of the appellant dated 18th May 2009 was not allowed on 27th July 2009 and, therefore, was not part of the petition on 27th July 2009 the Company Law Board disregarded the decision of the Hon’ble Apex Court in Shanti Prasad Jain (supra), observing that the matters which were not part of the petition cannot be taken into account for considering the interim application and the decision of this Court dated 16th July, 2009, setting aside a similar earlier order of the Company Law Board and once again passed the same interim order, pertaining to the decision of the Board of Directors of the Appellant dated 18th May,2009. ii) Though in the order of this Court dated 16th July 2009 whilst setting aside the earlier order of the Company Law Board dated 22nd May, 2009, it was categorically observed that no reason has been recorded by the Company Law Board which necessitated issuance of the injunction order dated 22nd May, 2009 and that it would be a different matter if the Board were to consider all the relevant aspects for grant or non grant of interim relief such as prima facie case, balance of convenience and irreparable loss and record its opinion one way or the other on the contentious issue, the Company Law Board in its impugned order once again passed an interim order having the same effect as that of its earlier interim order dated 22nd May, 2009, without giving any reasons and without considering all the relevant aspects. iii) The earlier order of injunction dated 22nd May, 2009, passed by the Company Law Board against the appellant in application no.95 of 2009, was set aside by this Court as being manifestly wrong and untenable and it was categorically observed by this Court that the said application no.95 of 2009 will have to be considered on its own merits in accordance with law after giving fair opportunity to both sides to file the affidavit/s and/or to amend the pleadings, as may be advised if permissible by law. Despite the said order of this Court, an oral application was made for the same reliefs prayed for in application no.95 of 2009 and orders having effect of the reliefs sought in application no.95 of 2009 were passed without giving fair opportunity to both sides to file the affidavits and/or to amend the pleadings pending hearing and final disposal of application no.95 of 2009.
10 Respondent no.1 was well aware that the order of status quo granted against the appellant for a period of two weeks by an order of this Court dated 16th July, 2009, was only to enable the respondent no.1 to prefer an appeal from the said order dated 16th July, 2009 pursuant to which an SLP was in fact filed before the Hon¡ ble Supreme Court impugning the order of this Court dated 16 th July 2009. The Company Law Board wrongly proceeded to extend the said order, that too on an oral application of respondent no.1 and without giving any reasons in support thereof. The Company Law Board has in the impugned order recorded that the order is issued under Rule 44 of the Company Law Board Regulations 1991. Rule 44 of the Company Law Board Regulations reads as under: ½ 44. Saving of inherent power of the Bench: Nothing in these Rules shall be deemed to limit or otherwise affect the inherent power of the Bench to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the Bench. Apart from the fact that the Company Law Board cannot use its inherent power to extend the time granted by this Court to the first respondent no.1 for a specific purpose, the Company Law Board cannot exercise its inherent powers to pass orders without jurisdiction or in utter disregard to the orders passed by the Hon’ ble Apex Court or the High Court.
11 The submission advanced by Mr. Bookwala, Senior Advocate on behalf of respondent no.1 that the appellant company has abandoned its decision taken at the meeting of the Board of Directors on 18th May 2009 is not admitted by the appellant. The submission of Mr.Bookwala that the impugned order was passed because the appellant asked for time to file an affidavit, needs to be forthwith rejected. An interim order passed by the Company Law Board without jurisdiction and without giving reasons and in utter disregard to the orders passed by the Hon’ ble Supreme Court and this Court, cannot be sustained on the ground submitted by Mr. Bookwala. For the very same reasons, the decision in the case of Dr. Bais Surgical and Medical Institute Private Limited (supra) will be of no assistance to respondent no.1.
12 Before I part with this order, I am inclined to observe that one of the main pillars on which the legal system in any society rests, is Judicial discipline. If judicial discipline is not adhered to the legal system would fail. One of the cardinal principles of judicial discipline is that every judicial officer, be it a member of a Tribunal or the Judge of any Court has to respect and follow the directions/decisions of a Court which is above it in the hierarchy, even if his view differs on a particular issue. No order of any judicial officer/Judge is expected to even remotely give an impression that it is trying to overreach the order of a higher court. Unfortunately, the impugned order falls short of such expectation.
13 In view of the aforesaid, I pass the following order :
i) Both the questions of law raised in paragraph three above are answered in the negative.
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[2009] 94 SCL 219 (BOM.)
HIGH COURT OF BOMBAY
Reliance Communications Ltd., In re
A.M. KHANWILKAR, J.
COMPANY APPLICATION NOS. 438, 439, 757 TO 762 OF 2009
AND COMPANY PETITION NOS. 487 AND 488 OF 2009
JULY 18, 2009
Section 391, read with section 211, of the Companies Act, 1956 - Compromise and arrangement - Whether possibility of violation of accounting standard cannot be basis to straightway disapprove a scheme of arrangement - Held, yes - Whether while considering a scheme of arrangement propounded by company, same will have to be tested on touchstone of provisions of Act which do not completely prohibit deviation of accounting standard subject to disclosures in terms of section 211 - Held, yes - Petitioners, i.e., demerged company and resulting company, filed petition to obtain sanction of scheme of arrangement between them and their respective shareholders and creditors whereunder optic fiber undertaking of demerged company would stand transferred to and vested in resulting company with effect from appointed date in terms of scheme - Board of directors of petitioners approved scheme of arrangement - Requirement of holding meetings of sole secured creditor of demerged company and unsecured creditors of both companies had been dispensed with by an order of Court - Scheme was unanimously approved by equity shareholders of both companies - Respective stock exchanges also approved proposed scheme - However, intervenor who claimed to be a shareholder of demerged company filed an intervention application at behest of one ‘R’ opposing scheme of arrangement on grounds that demerged company had failed to furnish valuation report and it should be directed to first furnish valuation report before proceeding with hearing of petition; that disclosures made in scheme with respect to value of optic fiber undertaking were vague and were not transparent; and that accounting treatment proposed to be followed by demerged company for accounting difference between consideration and net book value was not in line with accounting standards - Whether since applicant was not personally present to oppose scheme in meeting of equity shareholders, objections then raised by such applicant either before Registrar of Companies/Regional Director or for that matter, before High Court, at time of opposing scheme which was put for sanction of Court, were clearly an afterthought - Held, yes - Whether since applicant had filed his intervention applications and objections to proposed scheme at behest of person who was neither a shareholder nor a creditor of either company, bona fides of applicant to intervene in proceedings would be questionable - Held, yes - Whether since valuation report was available for inspection before meeting of shareholders was held and, moreover, scheme had been approved with an overwhelming majority of shareholders of both companies, there was no reason to adjourn matter for reason stated by intervenor - Held, yes - Whether having regard to fact that companies had produced audited books of account till 31-3-2008 and unaudited books till 31-12-2008 which disclosed all relevant information coupled with fact that valuer had also referred to figures of value of assets of optic fiber undertaking, it was neither a case of vagueness nor of non-transparent disclosure made by companies - Held, yes - Whether since companies assured to abide by provisions of section 211, objection as regards deviation from accounting standards was to be rejected - Held, yes - Whether, therefore, objections raised by intervenor were to be rejected and proposed scheme was to be sanctioned - Held, yes
Circulars and Notifications : Notification issued by Ministry of Corporate Affairs, dated 31-3-2009
FACTS
The petitioners, i.e., the demerged company and resulting company filed petition to obtain sanction of scheme of arrangement between them and their respective shareholders and creditors whereunder the optic fiber undertaking of the demerged company would stand transferred to and vested in the resulting company with effect from the appointed date in terms of the scheme. The board of directors of the petitioners approved the proposed scheme of arrangement. The Court dispensed with convening and holding of meeting of sole secured creditor of the demerged company and unsecured creditors of both companies. The Court, however, directed both the companies to serve individual notices to all the equity shareholders of respective companies and also to publish the notices in newspapers. Accordingly, notices of the meeting were sent to all the equity shareholders and the shareholders approved the proposed scheme with an overwhelming majority. The respective stock exchanges also approved the proposed scheme. The Regional Director opined that the scheme was not prejudicial to the interest of the shareholders and the public, but had adverted to the fact that complaints were received to oppose the proposed scheme. The Regional Director raised two points that clause 2.2 of the scheme dealing with the consideration did not quantify the net consideration payable by the resulting company on transfer of optic fiber undertaking from the demerged company; that clause 2.4.3 of the scheme was not in conformity with mandatory Accounting Standard-11, hence, resulting company was to be directed to comply with Accounting Standard-11 as applicable to it in respect of losses on account of changes in exchange rates relating to foreign currency loans. In the meanwhile, as a result of publications, one of the applicants, i.e., ‘A’ filed intervention application opposing scheme of arrangement. The applicant ‘A’, though claimed to be a shareholder of the demerged company, yet did not personally attend the meeting of the equity shareholders convened pursuant to the direction issued by the Court, but had opposed the scheme of arrangement by voting (through proxy) against the scheme. The applicant opposed proposed scheme at the behest of another objector ‘R’. According to the applicant, the petitioner-company failed to furnish the valuation report and, demerged company be directed to first furnish the valuation report before proceeding with the hearing of the petition; that it was not clear which parts of the optic fiber undertaking were lying with the demerged company and with RCIL (from whom assets were transferred as a result of earlier arrangement) and resulting company; that the disclosures made in the scheme with respect to value of the optic fiber undertaking were vague and were not transparent and the demerged company had not disclosed the book value of the assets which were transferred to resulting company through the subject scheme of arrangement; that the basis and methodology of valuation for the optic fiber undertaking was also not known; that it had not been disclosed whether the demerged company proposed to pay any user charges for use of the passive optic fiber undertaking to resulting company; that it was also not known when the demerged company would receive the consideration of Rs. 7,206 crores from the resulting company upon demerger of the optic fiber undertaking and if the consideration was not received upon demerger, whether resulting company would pay interest to the company, since the appreciation in the value of the assets demerged would only accrue to resulting company; that the accounting treatment proposed to be followed by the demerged company for accounting the difference between the consideration and the net book value was not in line with the accounting standards; that the demerged company’s proposal as mentioned in para 2.3.4 of the scheme to utilize the surplus amount for meeting the future foreign exchange losses was not relevant to the demerger. The scheme was also objected to by another applicant ‘W’, who was one of the creditors of the demerged company on ground that the demerged company had already substantial secured loan and had huge liability and in furtherance of the scheme would part with the assets worth Rs. 7,206 crores which might cause prejudice to the creditors.
HELD
Insofar as the objection of the applicant ‘A’, that if the valuation report was furnished, he might be in a position to point out several irregularities and illegalities in the proposed scheme and, therefore, the demerged company be directed to first furnish the valuation report before proceeding with the hearing of the petitions, was concerned, there was merit in the stand taken by the companies that that was a subtle attempt to prolong the hearing of the petitions with an ulterior design. Moreover, from the material on record, it could be inferred that the applicant had been set-up by another applicant ‘R’, who, in turn, had no locus to oppose the proposed scheme. There was substance in that grievance. Indeed, the said applicant was a shareholder and had opposed the scheme of arrangement by voting, albeit through proxy. However, he did not think it necessary to remain personally present in the meeting so as to educate the other shareholders about the shortcomings, drawbacks or irregularities and illegalities in the proposed scheme. The objections then raised by such applicant either before the Registrar of Companies/Regional Director or for that matter, before the High Court, at the time of opposing the scheme which was put for the sanction of the Court were clearly an afterthought and for the sake of it. It was too late in the day for such objector to contend that the scheme was unfair to him or other similarly placed persons. As a matter of fact, the applicant admitted that he was inspired to file applications before the High Court and to intervene to oppose the sanction of the proposed scheme only after being persuaded by ‘M’, founder President of ‘R’. In the affidavit, he had candidly mentioned the date of such meeting on 11-7-2009. Notably, the said applicant was resident of Coimbatore in Tamil Nadu, but was able to prepare a detailed affidavit on the same day on 11-7-2009 to be sworn at Coimbatore and forward it for filing of the instant applications in the High Court, which was filed on 15-7-2009. On the same day, i.e., 15-7-2009, the applications of ‘R’ had been filed in the High Court. Indeed, there was no difficulty if the two objectors were to act in tandem. However, it was indisputable that ‘R’ was neither a shareholder nor a creditor of any of the two companies. In fact, the applicant had not minced words in stating that he was inspired to file objections by ‘M’, President of ‘R’. Since the applicant had filed his intervention applications and objections to the proposed scheme at the behest of the person who was neither a shareholder nor a creditor of either company, it would have to be considered with utmost circumspection. The bona fides of the applicant to intervene in the proceedings would become questionable. [Para 17]
Be that as it may, the grievance then made before the High Court about supplying valuation report as a condition precedent for hearing of the petitions, clearly overlooked that the notices regarding convening of the meeting of the equity shareholders of the demerged company were issued and published in time as directed by the Court. The same clearly mentioned that inspection of documents referred to therein were available at the registered office of the company up to one day prior to the date of the meeting. One of the documents referred to therein was valuation report. No reason was forthcoming as to what prevented the applicant to take inspection of the stated documents, especially when he thought it appropriate to vote at the meeting through proxy. If the applicant was serious about his objections to the proposed scheme, he was expected to personally remain present in the meeting so as to educate other shareholders who were likely to vote at the meeting about the illegalities or irregularities in the proposed scheme. As was noted earlier, the scheme had been approved with an overwhelming majority of shareholders of the demerged company and unanimously by the shareholders of the resulting company. The opposition constituted only a minscule fraction of 0.6784 per cent in number, representing 0.0001 per cent in value of the demerged company. In that, only 15 equity shareholders holding 2038 equity shares of Rs. 5 each fully paid-up representing in value sum of Rs. l0,190 voted against the scheme, whereas the overwhelming majority of the shareholders consciously voted in favour of the scheme. Accordingly, there was no reason to adjourn the matter for the reason stated by the said intervenor. If at all, the applicant was so keen, he ought to have approached the High Court well in advance to seek appropriate directions and not make such grievance for the first time on the date of hearing of the petition, the only purpose whereof would be to protract the hearing of the petition for reasons best known to him. The fact that the hearing could be rescheduled to a short date, could not be the basis to entertain the request of such applicant. Taking overall view of the matter, adjournment of the hearing of the petitions was not only avoidable but unwarranted. [Para 18]
As regards the two applications filed by ‘R’, said applicant was neither a creditor nor a shareholder of any of the company. It is well established that a person who is neither a shareholder nor a creditor of the company would have no locus. [Para 19]
Reverting to the objection filed by applicant ‘A’, while dealing with the issue of request for adjournment of hearing of the petitions, it was already noted that the two applications filed were clearly at the behest of a person who had no causal connection with the proposed scheme. Moreover, such applicant, though a shareholder, yet did not think it necessary to remain personally present in the meeting of the shareholders which considered the proposed scheme for approval. On that count alone, the applications filed by ‘A’ would have to be rejected. However, to reassure that the grievance made by the objector was not significant one, the issues that had been raised at the time of arguments were to be considered. [Para 20]
It might be noticed that as per the earlier schemes, the transfer of assets was made at the book value of Rs. 2,755 crores from RCIL to the demerged company. Later on, the towers and associated assets of the demerged company were transferred to the resulting company. It was the case of the applicant that RCIL sold to demerged company Passive Telecom Structure-Unlit Optic Fibers and other associated assets lying on 31-12-2007. The book value of the assets was Rs. 1,932 crores, but was sold only for Rs. 80 crores. As a result, RCIL declared a loss of Rs. 1,852 crores in its books. As aforesaid, all issues raised with regard to the said transfers were of no avail. However, the inquiry was to be confined to matters related to the scheme. [Para 21]
Insofar as the instant scheme was concerned, the grievance was that the purpose of the scheme was to transfer unknown, unidentified and unclear assets from the demerged company to the resulting company. The valuation of the assets was shown at Rs. 7,206 crores. The arguments of ‘A’, that it was not clear as to which parts of the optic fiber undertaking were lying with the demerged company and which one was to be transferred to the resulting company; that the disclosures made in the scheme with respect to the value of the Optic Fiber Ltd. were vague and not transparent; further, that the demerged company had not disclosed the book value of the assets which were being transferred to the resulting company under the scheme of arrangement, would have to be rejected. It clearly overlooked the figures of the value of Optic Fiber Undertaking reflected in the books of account and more so, in the valuation report. The summary of valuation of OFC network of the demerged company as on 1-4-2008 revealed the relevant information. By no standards, it could be said to be vague. The grievance that the valuation was not transparent or that the company had not disclosed the book value of the assets was also without any substance. [Para 22]
Having regard to the fact that the petitioner-companies had produced the audited books of account till 31-3-2008 and unaudited books till 31-12-2008, which disclosed all the relevant information coupled with the fact that the valuer had also referred to the figures of the value of the assets of the Optic Fiber Undertaking, it was neither a case of vague disclosures nor of non-transparent disclosures made by the companies. [Para 23]
In respect of the objection about the basis and methodology of valuation of the Optic Fiber Undertaking which was proposed to be transferred, the valuation report was available for inspection before the meeting was held. If the applicant failed to avail of the said opportunity the company could not be blamed. The fact that the applicant had demanded the said valuation report on 7-7-2009 or for that matter, had insisted before the High Court to issue such direction to the company, it did not take the matter any further. The valuation report was already placed on record along with the affidavit of the Regional Director. The summary of valuation of specified tangible fixed assets, ‘Optical Fiber Network of the Demerged Company’, disclosed the basis and methodology adopted by the valuers. [Para 24]
There was no tangible material produced to question the opinion of the valuer regarding the basis and methodology adopted. No contrary opinion was forthcoming. More so, in the meeting of the equity shareholders, after due deliberations, the resolution was approved by an overwhelming majority of the shareholders of the demerged company and unanimously by the resulting company. Merely because the applicant had voted against the said resolution, it could not be the basis to undermine the wisdom of the stakeholders and the board of directors in approving the scheme. Their commercial decision could not be interfered with unless it was shown to be illegal, impermissible and against public policy. It was not the case of the applicant that the said scheme would be prejudicial or unfair to him alone. The stakeholders had approved of the scheme on the assumption that the same was fair and equitable to the class of shareholders as a whole. Besides, there was nothing on record to doubt the integrity and honesty of the independent expert appointed by the company for the purpose of valuation. The argument of the applicant that the same valuer was regularly appointed by the company for valuation purpose, could not be the basis to hold that the subject report submitted by the said valuer was dishonest or manipulated one. Such inference could not be drawn lightly in the absence of tangible material to substantiate the same. Significantly, it was noticed during the course of argument that the valuation was in excess of the net book value of the assets. Suffice it to note that the grievance made by the objectors, that the basis and methodology of valuation were not spelt out in the valuation report, was devoid of merits. [Para 25]
As regards the objections, that the scheme did not disclose whether the demerged company proposed to pay any user charges (lease rentals) for the use of passive optic fiber to the resulting company and in absence of such disclosure, the shareholders could not evaluate the merits and de-merits of the scheme, in the first place no such grievance or doubt was expressed by any shareholder who voted in favour of the scheme. Moreover, the scheme clearly spelt out the scope of arrangement. The scheme also mentioned the appointed date to mean 1-4-2008 or such other date as might have been decided by the High Court. The effective date was defined to mean the date on which the certified copy of the order of the High Court sanctioning the scheme of arrangement was filed with the Registrar of Companies. Clause 1.3 stipulated the date of taking effect and operative date. Clause 2.1 provided for transfer and vesting of Optic Fiber Undertaking of the demerged company in the resulting company. The manner in which the same had to be effected was provided in Clause 2.1.1 (a), (b), (c) and (d). It was an arrangement to transfer whole of the undertaking and properties of Optic Fiber Undertaking to be vested in and/or deemed to be transferred to and vested in the resulting company, subject to non-exclusive right of the demerged company to use the optic fiber. The consideration for such transfer was provided in clause 2.2. Clause 2.2.1 stipulated that the consideration for transfer and vesting of Optic Fiber Undertaking of the demerged company in the resulting company should be the fair value as might be determined by renowned valuers to be appointed mutually by the demerged company and the resulting company. It further provided that the valuers should assign values to each asset and liability of the Optic Fiber Undertaking which should be aggregated to determine the consideration for the transfer. [Para 26]
As it was a scheme for transfer of undertaking, non-mention of provision regarding the user charges by the demerged company for use of optic fiber, did not militate against the scheme. That was an arrangement post-demerger scheme to be evolved and adopted by the board of directors of the two companies, as might have suited them. Obviously, the board of directors would act in the best interest of the stakeholders of the respective companies. It would be a different matter, if the objectors were to substantiate that the valuation of the assets of the undertaking was hopelessly undervalued. That was not the case forthcoming from the objectors. As a Matter of fact, the objectors were at pains to point out that considering the earlier arrangements, it might appear that the assets worth Rs. 80 crores purchased from the petitioner were resold to the resulting company for value of Rs. 7,206 crores. If it was so, it was not a case of transfer of assets of the demerged company by suffering loss. The demerged company had been commensurately paid for the value of the assets. Once again, that was the commercial wisdom of the overwhelming majority of the shareholders of the demerged company and unanimous view of the shareholders of the resulting company. Suffice it to observe, that the grievance under consideration could not be the basis to disapprove of the proposed scheme. [Para 27]
As regards the grievance that it was not known when the demerged company would receive the consideration of Rs. 7,206 crores from the resulting company upon demerger of the optic fiber undertaking as per the scheme of arrangement and besides, if the consideration was not received, what was the quantum of interest to be paid by the demerged company was also not spelt out, even though the appreciation in value of the assets demerged would accrue to the resulting company, the companies were called upon to state whether it was possible to specify the quantum of interest in the scheme itself. In response thereto, the demerged company had stated on instructions that the Court might consider to specify the interest rate as not less than 1 per cent over and above the prevailing Benchmark Primary Lending Rate (BPLR) from the effective date until the realisation of the amount-in-question. In the opinion of the Reserve Bank of India, as could be discerned from its Annual Policy Statement, 2009-10, the system of BPLR had evolved in such a manner that it had lost its relevance as a meaningful reference rate as bulk of loans were advanced below BPLR. [Para 29]
On the same lines, press statement of the officials of the Reserve Bank of India had appeared in newspaper on 22-4-2009. In that backdrop, it was suggested that the Court might consider specifying the rate of interest to be not less than 1 per cent over and above the Benchmark Primary Lending Rate or not less than 1 per cent over and above the weighted average cost of debt of the demerged company, whichever was lower. It would be just and proper to accept the offer made by the companies, as it was seen that the average lending interest rate paid by the company was far less than the Benchmark Primary Lending Rate. The company could not be made to pay interest at a higher rate. Accordingly, on accepting the offer of the companies on the above terms, the scheme would stand modified to that limited extent. [Para 30]
Insofar as the time within which the said payment had to be made, although the scheme did not specify any specific time period, since that arrangement was not against any provision of law for the time being in force, the question of disapproving of the scheme on that count did not arise, for that was the commercial wisdom of the body of equity shareholders which would bind the stakeholders. As a matter of fact, the creditors were in no way affected by the said arrangement. There is no law which prohibits deferred payment by the subsidiary company in relation to the commitment under the scheme sanctioned by the Court, nor there is any law which prescribes for outer limit for such payment. The fact that the payment would be made in deferred manner, by itself, did not result in unfairness to the shareholders of the demerged company, in that the demerged company would be suitably compensated by way of interest as provided in clause 2.2-2 until the consideration was fully paid by the resulting company. Accordingly, the issue under consideration did not commend. [Para 31]
Regarding the objection about breach of accounting standard by the demerged company, assuming there was merit in that objection, the possibility of violation of accounting standard per secannot be the basis to straightway disapprove of the scheme inasmuch as observance of accounting standard is a norm, but violation thereof is not completely impermissible. It is regulated by the provisions of section 211. The companies assured to abide by the said regime to be followed as per section 211 even in the instant case. In other words, so long as necessary disclosures are made, the company cannot be faulted, even if there were to be deviations from the accounting standards, more so, to be made a ground to disapprove of the scheme. [Para 33]
While considering a scheme of arrangement propounded by the company, the same will have to be tested on the touchstone of provisions of the Act which, as aforesaid, do not completely prohibit the deviation of accounting standards subject to disclosures in terms of section 211. This does not mean that the authorities under the taxation law are precluded from lifting the veil or to prosecute the companies for violation of mandatory accounting standards. Those matters will have to be proceeded on their own merits in accordance with law, uninfluenced by the approval of the instant scheme. If the scheme resulted in breach of any mandatory accounting standards, all questions in that behalf would have to be addressed to at the appropriate stage in the concerned proceedings. [Para 34]
Even in the instant case, the petitioners undertook that they would not plead the approval of the instant scheme as a defence in the income-tax proceedings - either pending or to be resorted to by the appropriate authority. Accordingly, the issue under consideration needed no further elaboration. [Para 37]
As regards the objection that the company’s proposal in para 2.3-4 of the scheme that losses on account of changes in exchange rates, relating to loans/liabilities denominated in foreign currencies taken/incurred which had been or were debited to profit and loss account of any year upto the year ending 31-3-2011 might as determined by the board of directors and to the extent the balances were available, be adjusted by a corresponding withdrawal from the general reserves of the demerged company, was not relevant to the scheme of demerger. Insofar as that provision in the scheme was concerned, none of the authorities had objected to said provision. According to the companies, it was imperative to make provision regarding loss on account of changes in exchange rates. The company had relied on the notification issued by the Ministry of Corporate Affairs, dated 31-3-2009, which supported the case of the companies. [Para 39]
A priori, the issue raised by the objectors regarding irrelevance of clause 2.3.4. was without any substance. [Para 40]
As regards the objection of the Regional Director that the scheme did not quantify the net consideration payable by the resulting company to the demerged company, in response to that objection, the petitioners had already disclosed that the net consideration of Optic Fiber Undertaking was Rs. 6,718.87 crores. In that view of the matter, the said objection stood answered. [Para 41]
As regards the second objection raised by the Regional Director that clause 2.4-3. of the scheme was not in conformity with mandatory Accounting Standard-11 prescribed by the Institute of Chartered Accountants of India, the petitioners undertook that they would not only follow the accounting Standard-11 but also Accounting Standard-5 in its letter and spirit. Assurance so given by the petitioners was to be accepted. The Regional Director had no other objection to any other clause in the scheme. [Para 43]
As regard the contention of ‘W’, except that creditor no other creditor had come forward to oppose the instant scheme. The apprehension of the creditor was completely misplaced. Notably, the scheme did not affect the claim of unsecured creditors at all. Besides, the demerged company would receive consideration from the resulting company in lieu of transfer of specified undertaking on the basis of valuation of the said assets already done. [Para 44]
Be that as it may, as had been rightly contended by the petitioners, the objection of the creditor was not bona fide. The creditor claimed outstanding amount of around Rs. 75 lakhs, which debt was almost over four years old. That creditor had not resorted to any legal action for recovery of its outstanding dues for reasons best known to it. Besides, it was argued that the applicant had made incorrect statement in affidavit on oath that he had not been served with the notice, whereas personal notice was dispatched to the applicant in addition to the publication in terms of the direction given by the Court. It was possible that the notice so dispatched had not reached the applicant. Assuming that the applicant had not been served with the notice, that alone could not be the basis to set aside the order passed by the High Court to dispense with convening of meeting of the unsecured creditors. [Para 45]
Moreover, it was seen that notice regarding hearing of the petition was duly published in the specified newspapers as per the order of the Court. In that sense, the grievance of the applicant about non-service of notice on him would not vitiate the entire action. The only apprehension of the said objector was that the interest of the creditors would be compromised. As mentioned earlier, it was not a scheme of arrangement to affect the claim of the unsecured creditors. Moreover, the transfer of assets of the demerged company was for a consideration. The claim of the applicant was only around Rs. 75 lakhs (Rupees Seventy-five lakhs), subject to proving the same. As a result, even the objection taken by the said applicant/creditor did not take the matter any further. [Para 46]
Taking an overall view of the matter, there was no substance in the objections taken by the intervenors/objectors. In that view of the matter, the petitions should succeed, subject to modification of the scheme as mentioned earlier and upon accepting the undertaking given by the petitioners. [Para 47]
CASE REVIEW
Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (para 17); Hindalco Industries Ltd. [2009] 94 SCL 1 (Bom.) (para 33) and Ajmera Realty & Infra India Ltd. Company Petition No. 63 of 2009 dated 21-3-2009] (para 22) followed.
CASES REFERRED TO
Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (para 17), Hindalco Industries Ltd. [Company Petition No. 293 of 2009, dated 22-6-2009] (para 19), Ajmera Realty & Infra India Ltd. [Company Petition No. 63 of 2009, dated 21-3-2009] (para 22), CIT v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326 (SC) (para 34) and Jindal Iron & Steel Co. Ltd. v. Asstt. CIT [Company Application No. 123 of 2004, dated 2-9-2004] (para 35).
Iqbal Chagla, Janak Dwarkadas for the Petitioner. Mohammed Shafiq and Satendra Kumar for the Creditor. N. Venkataraman for Shareholders and Intervenors. C.J. Joy, P. Khosla and S.K. Mohapatra for Regional Director.
