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During the pendency of the further proceedings, the first petitioner herein with one Sri Varaha Venkatesh propounded a scheme of arrangement and approached this Court in C.A No. 1074/2008 for a direction to the respondent company to convene the meeting of the shareholders as also the secured and unsecured creditors, to appoint a Chairman for the meeting and fix the schedule for the same.The creditors have consented to the scheme while the shareholders have voted against the scheme.
During the pendency of the petition, an amendment has been introduced only to the petition and the propounder of the scheme who was the second petitioner has been deleted and the present petitioners No. 2 to 5 have been brought on record.The filing of the petition had been advertised and was also notified to the Regional Director, Ministry of Corporate Affairs, and the Official Liquidator, who have filed their response indicating deficiency in the scheme.
The shareholders are also represented by their counsel and have opposed the scheme.
The correctness and validity of the scheme would however not be considered at that stage since the law laid down by the Hon’ble Supreme Court in the case of Rainbow Denim Ltd. v. Rama Petrochemicals Ltd. is that the validity of the scheme would be considered by the High Court only after the consideration and approval of the scheme by the shareholders and the creditors.
The validity of the proposed scheme in the background of the events which have unfolded in the instant case requires to be considered by this Court in this petition.
The manner in which the instant case has proceeded would throw up several inconsistencies which have to be noticed since the same would be relevant for the purpose of considering whether the scheme is bona fide in relation to the revival of the company and whether the actual propounder of the scheme is entitled to do so keeping in view the provision contained in Section 391 of the Act.
Further, in a company which is in liquidation, the Official Liquidator in his capacity as representing the company in the absence of the Board of Directors is also entitled to propose such scheme of arrangement.
Secondly, the legal requirement is that even if such a scheme is proposed and is approved by a majority of the shareholders or creditors or their respective classes who may have voted in favour of the scheme by the requisite majority, the Court has to consider the pros and cons of the scheme.In the above backdrop, the facts in the instant case would reveal that the Chairman of the Meeting held on 15.04.2009 has reported that the creditors who were present and voted have approved the scheme of arrangement.
The vote against the scheme by the shareholders is 100%. The said shareholders have further appeared before this Court and opposed the scheme by referring to the balance sheets and contending that except for paying amounts to the petitioners herein and similarly placed creditors, the scheme does not augur well for the company and the interest of the shareholders of the company has not been kept in view, moreso when one of them is also a creditor.
The investment made by the company is the asset created but the same has not been accounted for in the scheme.Varaha Venkatesh is the man behind the scheme who has his personal agenda and not the interest of the company.Technically, the petitioners herein who are seeking sanction of the scheme being the creditors no doubt constitute one of the categories contemplated in Section 391 of the Act.To understand the very scheme itself and to decide the acceptability, the manner in which it has been proposed and the Part to be performed by the propounder in reviving the company requires to be noticed.The first applicant therein is stated to have agreed for the proposal and as such has consented to the scheme.
Since majority of the investors/allottees/creditors have expressed their willingness for a One Time Settlement at 1.5 times their dues, the second applicant is interested in revival of the company and proposed scheme of arrangement.Varaha Venkatesh is the propounder of the scheme and the first applicant has only consented to the same and has no role to play in the process of revival.
No change has been made in the scheme and the fact that he is the person who would be bringing in the money remains un-altered though presently petitioner Nos.
The response filed on behalf of the Regional Director has also raised the said question of a person other than the one contemplated under Section 391 of the Act having propounded the scheme as the same is not permissible in law.
A similar scheme had arisen for consideration before this Court in the case of Sri.Kashinath Dikshit v. Surgicals and Pharmaceuticals Company Limited 55), except that the first petitioner therein was a shareholder.
The Court on taking note of the above contention in the background of the law, with reference to the scheme has answered as hereunder:
Petitioners have produced a copy of the scheme of arrangement, which they want it to be sanctioned by this Court.In that, it is stated that one of the shareholders of the company as on the date of winding up order, namely, one Sri Kashinath Dikshit has identified Sri N.J Patel with a view to revive the company, and the said person is willing to settle the claims of the creditors of the company with a view to revive the company provided the entire share capital of the company is transferred to him and to his nominees in consideration of his settling the claims of the creditors of the company.
One of the shareholders of the company in liquidation is the first petitioner in this company petition. He has identified the second petitioner to revive the company in liquidation. The second petitioner is neither a member nor a creditor of the company. He is willing to settle the claims of the creditors of the company with a view to revive the company in liquidation, provided the entire share capital of the company is transferred in his favour an his nominees.
In order to attract Section 391 of the Act, it is necessary that a compromise or arrangement between a company and its creditors or any class of them, or between the company or its members or class of them should propose a compromise or arrangement.
When such a scheme is proposed, and the sanction is requested, the Court will have to be satisfied as to the prima facie, that the scheme of arrangement is genuine, bona fide and would be in the interest of the company and its creditors and the application is filed by a person, who is authorised under the provisions of Section 391 of the Act.
The Court was further pleased to observe: “Section 391(1) itself by a specific and positive provision prescribes, who can move an application under it. Only the creditor or member of that company or a liquidator in the case of company being wound up is entitled to move an application proposing compromise or arrangement. By necessary implication any one other than those specified in the section would not be entitled to move such an application.”
The second petitioner, who is the propounder for the sanction of scheme of arrangement is neither a member nor a creditor of the company.
The first petitioner through a member of the company in liquidation, is not the propounder under the scheme.In the court’s opinion, the petition filed for sanction of scheme of arrangement is not maintainable under Section 391 of the Act.
Since the petitioners have subsequently amended this petition and since the counsel for the petitioners contended that the Court could exercise its power for the proper implementation of the scheme, the matter is examined further.Strangely, the resolution passed elsewhere, but only extracted in the petition has also been amended in the petition by deleting the name of Sri.
Varaha Venkatesh and his business acumen had been stated to indicate that he has the capacity to revive the company.
As noticed, the petitioners herein are themselves the creditors who have agreed to receive 1.5 times of their dues as One Time Settlement by way of refund of the amount which was subscribed by them for allotment of flats to be built by the company.
It would be abnormal to accept that they themselves would invest the money to revive the company so as to clear their own dues and that of the others and that too by refunding more than what was paid by them.
Further, on the deposited amount being disbursed, there is no other indication as to how the company would be revived and the manner in which the activities of the company would be carried on by the petitioners.
On the petitioners having come on record, that aspect of the matter in the scheme does not see any change.The petitioners therefore are name lenders to the propounder who is behind the veil for mutual benefit and the interest of the company is not protected.
In the instant case, though it is contended that the company does not possess any assets, there are other aspects relating to the property wherein the project of the Company in liquidation was being implemented.The company had undertaken to construct the apartment in Sy. No. 79/4, III Block, Jayanagar, Bangalore by entering into an agreement to purchase the land from one Sri Shankar Reddy under the agreement dated 26.01.1981 However, the construction is stated to have been put up in Sy. No. 79/5B regarding which a claim is raised by Sri Narayan and others.
The ultimate result in the litigation or any understanding with actual owner would decide the fortunes of the Company in liquidation.The revival of the company is also mired in uncertainties and the pointer therefore is to the speculative business interest of the original propounder which becomes relevant.
All the above aspects and the perusal of the scheme would indicate that the petitioners herein are not the actual propounders of the scheme so as to revive the company for the benefit of the company or its members. Such responsibility has to be discharged keeping in view the interest of the company for its revival. Mere settling the outstanding’s of certain class of persons to the detriment of the company or its members is not the object.
The prayer made by the petitioners is therefore liable to be rejected, which is accordingly done. They would be entitled to seek refund of the amount deposited with the Official liquidator, who shall pay the same under acknowledgment.As a result, the petition was dismissed. No order as to costs.