In Re: I.C.I.C.I. Ltd. vs Unknown
2001 Latest Caselaw 991 Bom

JUDGMENT

D. G. Karnik, J.

1. ICICI Ltd. (hereinafter called the "transferor-company") which is the applicant herein has proposed a scheme of arrangement by way of amalgamation/merger into ICICI Bank Ltd. (hereinafter called as the "transferee-company").

2. By this petition under Section 391 of the Companies Act, 1956, the applicant seeks a direction to convene a meeting of the equity shareholders of the applicant-company. No direction is sought to convene a meeting of the creditors or any class of the creditors of the applicant-company. It was contended that merger of a company with another involves only an arrangement between the company and its members and as such it is not necessary to order convening of a meeting of the creditors or any class of them and it is not necessary to obtain their consent for the proposed amalgamation.

3. There are three types of arrangements which are common, namely, (i) An arrangement between a company and its members ; (ii) An arrangement between a company and its creditors ; and (iii) A composite scheme in which the members as well as creditors of the company are part of a compromise or arrangement.

4. It was contended that in the case falling under the first type, namely, an arrangement between a company and its members, meetings of the creditors need not be convened irrespective of whether the creditors are thereby affected or not. It is this proposition which is required to be decided in the present case.

5. In order to test this proposition, it is necessary to look into the scheme of Section 391 of the Companies Act. Under Sub-section (1) of Section 391, the company or its member or a creditor is required to make an application to the court where a compromise or arrangement is proposed between the company and its members or creditors or any class of them. On such application being made, the court may convene a meeting of the members or of the creditors or of any class of members or creditors, as the case may be. The word, "may" gives a discretion, to be judicially exercised, to the court to convene a meeting or to dispense with the meeting.

6. Sub-section (2) of Section 391 contemplates the sanction of compromise or arrangement by the court, if the majority in number and 3/4ths in value of the members/creditors attending the meeting approve the compromise or arrangement with the members and/or the creditors or any class of them. The proviso to Sub-section (2) imposes a condition that the court must be satisfied that all material facts relating to the company are disclosed. The compromise or arrangement, if sanctioned by the court, is to be binding on all the members and creditors.

7. Sub-section (3) of Section 391 lays down that the compromise or arrangement (hereinafter referred to as "the scheme") shall not be effective until a certified copy of the order of the court has been filed with the Registrar. Sub-section (4) imposes a condition that the copy of the order of the court shall be annexed to every copy of the memorandum of company issued after the certified copy of the order is filed with the Registrar under Sub-section (3). Sub-section (5) prescribes a penalty for not complying with Sub-section (4). Sub-section (6) lays down that the court, may order stay of the suits or proceedings against the company while the scheme is under consideration. Sub-section (7) makes a provision for an appeal against any order passed by the court.

8. Under Sub-section (2), the scheme can be sanctioned by the court only if the majority in numbers of the members or creditors or the class of creditors, as the case may be, representing 3/4ths in value of the members or creditors or a class of members or creditors, as the case may be, have agreed to the scheme. The holding of a meeting of the creditors is thus a sine qua non for passing of an order sanctioning any arrangement between the company and the creditors.

9. In my opinion, where the arrangement is purely between the company and its members, not adversely affecting the creditors or any class of them, the court is not bound to convene a meeting of the creditors. However, where the arrangement between the company and its members is likely to adversely affect the creditors, it would be proper for the court to exercise its judicial discretion to convene the meeting of the creditors, unless the majority of the creditors representing 3/4ths in value of the credit have otherwise given consent for the same.

10. In the case of Union of India v. Asia Udyog Pvt. Ltd. [1974] 44 Comp Cas 359 the Delhi High Court held that in a case where a transferor-company is proposed to be amalgamated with a transferee-company, the creditors are not entitled as of right to participate in the process of consideration of the sanction of the scheme of arrangement between the company and its members. The learned judge observed that this was an anomaly and it was desirable for appropriate authorities to remedy this situation, by an amendment The court observed at page No. 373 :

". . . an anomaly still appears to exist in the Act inasmuch as the creditors of the company which is being amalgamated are not entitled as of a right at any stage to participate in the process of the consideration or sanction of any compromise or arrangement proposed between the company and its members which may result in the amalgamation of the company by its absorption in the other or by the merger of the two to create a third. There is no provision for a notice to the creditors of any such proceedings at any stage either prior to the making of the order or subsequent thereto . . ."

11. This judgment was followed by the same court in the case of Tetesound India Ltd., In re [1983] 53 Comp Cas 926. At page 940, the court observed:

"It is, however, necessary to bear in mind that even though the creditors and other interests affected are not entitled to vote on the scheme of amalgamation, the court is bound in law, in dealing with a petition for a sanction of the scheme, to consider if the amalgamation would prejudicially affect the public interest, interest of the amalgamated company, the creditors of the transferor-company and various other interests affected by amalgamation and as to the best way in which their interests could be protected, even while sanctioning the scheme of amalgamation."

11. These two judgments were followed by this court in the case of I. C. I. C. I. Ltd. v. Financial and Management Services Ltd. [1999] 98 Comp Cas 241 ; [1998] 29 CLA 371. The learned judge (in para. 20.1 of the judgment) quoted with approval a passage from the case of Asia Udyog (P.) Ltd. [1974] 44 Comp Cas 359.

12. I have my own doubts about the view taken by the Delhi High Court in expressing that the creditors have no right to participate in the process of consideration of the scheme of arrangement between the company and its members. Section 391(1) gives a discretion to the court to convene a meeting of the creditors or any class of them. The court would exercise the discretion by convening a meeting of the creditors if the creditors are likely to be adversely affected by an arrangement between the company and its members. Attending the meeting and voting are steps of participation in the process of consideration of the scheme. It is however not necessary to dwell further, in view of the undertakings given by counsel for the applicant and referred to later in this judgment.

13. I am of the firm view that while considering any scheme of arrangement or compromise proposed under Sections 391 to 394 of the Companies Act, the court is duty-bound to consider the interests of all the creditors. What importance should be given to the fact that the creditors are likely to be affected would vary from case to case but the judge would certainly treat whether the creditors are adversely affected or not as the relevant circumstance. How then the court is to ascertain as to whether the creditors are adversely affected ? If the creditors have no right of hearing at the time of hearing of the petition under Section 391 as held by the Delhi High Court and this court, (I have my own doubts about the correctness of this view) the only way of ascertaining whether the creditors are affected or not would be through the wishes of the creditors which may be expressed by them in a meeting which the court undoubtedly is entitled to convene under Sub-section (1) of Section 391. Therefore, the court would exercise discretion as a matter of course to convene meeting of the creditors of the company under Sub-section (1) of Section 391 unless the court is prima facie satisfied that the interests of the creditors are not likely to be adversely affected by the scheme. I am of the opinion that if an anomaly, as pointed out in Telesound India Ltd., In re [1983] 53 Comp Cas 926, by the Delhi High Court exists in Section 391, the courts would not fold their hands and wait for the Legislature to provide a cure, but would exercise their discretion under Sub-section (1) of Section 391, almost in every case in which creditors are likely to be affected, and convene a meeting of the creditors and ascertain their wishes by looking not only at the resolution passed in their meeting but looking at the entire report of the chairman of the meeting which is expected to contain the details of the proceeding in brief and the views expressed by the creditors in the meeting.

In the present case, it is not necessary for me, in my judicial discretion, to order convening of the meeting of the creditors or any class of them for two reasons, namely, (i) in my opinion the creditors of the transferor-company are not, prima facie, likely to be adversely affected ; and (ii) in view of the undertakings given by counsel for the transferor-company, as discussed below.

14. It was contended that the present scheme does not adversely affect creditors. The arrangement does not contemplate extinction or reduction of liability to any creditor nor are the terms of payment or other terms of credit proposed to be altered. All the assets to which the creditors could look forward to for repayment of their dues would remain intact and be transferred to and vest in the transferee-company, as in the proposed scheme of amalgamation all the existing assets and liabilities of the transferor-company are being transferred to the transferee-company. Therefore, the existing creditors can look to the same assets to which they look today for repayment of their debts. Not only that, the creditors of the transferor-company can also look to the assets of the transferee-company. The balance-sheet of the transferee-company was shown to me, which reveals that the assets of the transferee-company are more than its liabilities. According to learned counsel, the net worth of the transferee-company, is Rs. 1,444 crores after deducting all the liabilities from its assets. Thus, the creditors of the transferor-company can look to the additional assets of Rs. 1,444 crores for repayment of their debts. There is no change in the management because the transferee-company is a subsidiary of the transferor-company. The creditors of the transferor-company are thus prima facie not likely to be adversely affected.

15. Shri Kadam, learned counsel appearing for the applicant, on instructions from the applicant, submits and gives an undertaking to this court that if any objection is raised by any creditor at the time of hearing of the petition for sanction of the scheme under Section 391, the applicant would not raise any objection for granting hearing to the creditor or creditors on the ground that the creditor has no right of hearing. The undertaking given by Shri Kadam is recorded. Accordingly, the court while considering the sanction of the scheme would grant hearing to all objecting creditors and consider their objections, if any.

16. Shri Kadam also undertakes that the notice of hearing of the petition shall be given in English in two national newspapers, i.e., Times of India (all editions) and Economic Times (all editions) and also in regional languages in the leading regional newspapers in all regions of India where the creditors are located. This would sufficiently protect the interest of the creditors.

17. At the hearing of the petition, Commerzbank A. G. (who claims to have a claim against the applicant and hence, a creditor) appeared and sought leave to intervene and file an affidavit of Shri C. G. Pradeep Kumar. Intervenor has no locus to be heard on an issue whether the meeting of the creditors should be convened or not. The intervenor would be heard at the hearing of the petition for sanction of a scheme, if it satisfies the court that it is a creditor.

18. In view of this, I allow the application and direct that the meeting of the shareholders of the applicant-company be held and dispense with the holding of the meeting of the creditors. The minutes of the order convening the meeting of the shareholders submitted by the applicant are accepted, subject to the observations made in this order.

19. Parties to act on an ordinary copy duly authenticated by the company Registrar.