In Re: Kaveri Entertainment Ltd.; ... vs Unknown
2003 Latest Caselaw 464 Bom

JUDGMENT

D.K. Deshmukh, J.

1. Admit.

1.1 Heard finally by consent of parties.

2. The facts that are relevant and necessary for deciding these two appeals are that Kaveri Entertainment Ltd., which is the appellant in Appeal (L.) No. 314 of 2003 (hereinafter referred to as 'Kaveri') is a company incorporated under the Companies Act, and so in Zee Telefilms Ltd. (hereinafter referred to as 'Zee Telefilms') which is the appellant in Appeal (L.) No. 313 of 2003, Kaveri is a wholly owned subsidiary of the Zee Telefilms. The authorised, issued, subscribed and paid up capital of Kaveri as on 31 March 2002, i.e., the date of the last audited balance-sheet is as under:

           Share capital                                              Rs.
Authorised 
     50,000 equity shares of Rs. 10 each                         5,00,000
     Issued, subscribed and paid up 50,000 equity shares of
     Rs. 10 each fully paid up                                   5,00,000
 
 

2.1 The authorised, issued, subscribed and paid up capital of Zee Telefilms as on
31 March 2002, i.e., the date of the last audited balance-sheet is as under:
          Share capital                                              Rs.
Authorised
50,00,00,000 equity shares of Re. 1 each                      50,00,00,000
25,00,000 cumulative redeemable preference shares of
     Rs. 100 each                                             25.00.00.000
                                                              ------------
                                                     Total    75,00,00,000
Issued, subscribed and paid-up 41,25,05,012 equity
  shares of Re. 1 each fully paid-up                          41,25,05,012
     Less: Calls in arrears                                         67,000
                                                              ------------
                                                     Total    41,24,38,012

 

3. The entire capital of Kaveri is held by Zee Telefilms and its nominees. The Board of directors of Kaveri passed a resolution deciding to approve a scheme of amalgamation of Kaveri with Zee Telefilms. The shareholders of Kaveri by letter dated 1 June 2002, gave their no objection to the scheme of amalgamation. Company Application No. 430 of 2002 was moved by Kaveri before this court. By that application, Kaveri sought an order of the court dispensing with the requirement of holding meeting of the shareholders of Kaveri for the purpose of approving the scheme of amalgamation on the ground that 100 per cent of equity shareholders in value of Kaveri have accorded their consent to the scheme of amalgamation. In paragraph 19 of the affidavit filed in support of Company Application No. 430 of 2002 -- it was stated that Kaveri had 53 unsecured creditors aggregating to Rs. 3,91,37,455 and that there are no secured creditors. It was stated that Kaveri is a profit-making company and that it has not defaulted on its obligation to make payment to the creditors. At Exh. F to the affidavit a statement was given, wherein a summary of the unsecured creditors was given. A perusal of Exh. F to the affidavit shows that unsecured creditors up to Rs. 25,000 are 30 in number and they represent 0.49 per cent of the total amount outstanding against Kaveri. Creditors from Rs. 25,001 to Rs. 50,000 are five in number and they represent 052 per cent of the total amount outstanding. There are six creditors from Rs. 50,001 to Rs. 1 lakh and they represent 1.24 per cent of total amount outstanding. There are six creditors from Rs. 1,00,001 to Rs. 10 lakhs and they represent 4.12 per cent of total amount outstanding. It further shows that from Rs. 10,00,001 to Rs. 25 lakhs, there are two creditors and they represent 7.43 per cent of total amount outstanding and from Rs. 25,00,001 and above there are four creditors, who represent 86.11 per cent of total amount outstanding. It was further stated in paragraph 19 that under the scheme of amalgamation, the rights of existing members and creditors of Kaveri are not sought to be affected in any manner save as expressly provided in the scheme. Paragraph 19 of the affidavit filed in support of Company Application No. 430 of 2002 reads as under:

"19. As on 31 March 2002, there are unsecured creditors of the applicant aggregating to Rs. 3,58,74,221.45, list whereof is annexed as Exh. G. There are no secured creditors. Under the scheme of amalgamation, the rights of the existing members and creditors of the applicant are not sought to be affected in any manner save as expressly provided in the scheme. The applicant undertakes that at the time of admission of the petition for sanctioning the scheme of amalgamation, if directed by this Hon'ble Court, individual notice of hearing of the petition to the unsecured creditors of the applicant will be issued. It is respectfully submitted that such orders or directions if passed or granted will not cause any prejudice, and will avoid unnecessary proliferation of notices and cumbersome procedures. There is no likelihood that any secured or unsecured creditors of the applicant/Zee Telefilms will be prejudiced as a result of the proposed scheme being sanctioned. The latest audited accounts for the year ended 31 March 2001 of the Zee Telefilms indicate that the company is in a solvent position. The assets of the amalgamated company will be more than sufficient to meet the liabilities of the applicant as and when they accrue or arise, together with obligations of Zee Tele-films. In the premises, I say and submit that holding and convening of the meeting of the unsecured creditors be dispensed with."

3.1 In this paragraph, an undertaking was also given that at the time of admission of the petition for sanctioning the scheme of amalgamation, if directed by the court, individual notice of hearing of the petition will also be given to the unsecured creditors. In Company Application No. 430 of 2002 the court passed an order on 13 September 2002. In view of the consent given by the equity shareholders, holding of the meeting of shareholders was dispensed with and in view of averments made in para-graph 19 of the affidavit filed in support of Company Application No. 430 of 2002 and the undertaking given by Kaveri to issue individual notice to all the creditors of the date of final hearing of the petition, holding of the meeting of the creditors was also dispensed with. Thereafter, Company Petition No. 1117 of 2002 was filed in this court for sanction of the scheme of amalgamation. That petition came up for admission before the court on 5 December 2002. The petition was admitted for final hearing and it was fixed for final hearing on 23 January 2003. The court directed issuance of at least 21 clear days' notice before the date of final hearing of the petition, which was to be published in two newspapers. Notice was also directed to be served on the Regional Director, Company Law Board, as also to the Official Liquidator, Bombay High Court. It was further directed that, in view of the averments and submissions made in paragraph 21 of the petition, notice of date of hearing of the petition shall be sent to all those unsecured creditors to whom Kaveri owes amount exceeding a sum of Rs. 5 lakhs. Thus, issuance of individual notice to the unsecured creditors to whom Kaveri owes amount less than Rs. 5 lakhs was dispensed with.

4. Now, the court while dispensing with issuance of individual notice to the creditors to whom Kaveri owes an amount below Rs. 5 lakhs referred to the averments made in paragraph 21. Paragraph 21 reads as under:

"21. It is submitted that the petitioner has always been regular and prompt in making payment of the amount due to its creditors. The petitioner has not defaulted on its obligation to make payment. The petitioner is a profit-making company. The proposed scheme of amalgamation will not affect the creditors of petitioner inasmuch as the transferee company will in terms of the scheme of amalgamation take over all debts, duties, obligations and liabilities of the petitioner-company. The proposed scheme of amalgamation will not affect the creditors of the Zee Telefilms as they continue to be the creditors of the Zee Telefilms. In view of the aforesaid, it is submitted that notice of hearing of the petition be given to all the unsecured creditors to whom the petitioner owes amounts exceeding a sum of Rs. 5,00,000 only. It is, however, submitted that the petitioner shall cause the said notice of hearing of the petition to be published in Free Press Journal -- a widely circulated English daily and in Navshakti a widely circulated newspaper in Mara-thi language of which the general public at large, including all the unsecured creditors, will have knowledge. It is, therefore, submitted that the notice to the unsecured creditors to whom the petitioner owes amounts less than Rs. 5,00,000 be dispensed with. "

5. Thereafter, the Regional Director as also the official liquidator submitted their affidavits. They did not raise any objection to the scheme of amalgamation. It appears that none of the creditors to whom Individual notices were issued raised any objection to the scheme. Affidavits were also filed by Kaveri showing publication of the notice of the final hearing of the petition in newspapers. Insofar as Zee Telefilms is concerned, by virtue of order dated 13 September 2002, passed in Company Application- No. 431 of 2002, a meeting of the equity shareholders of Zee Telefilms was directed to be convened and necessity of holding a meeting of creditors of Zee Telefilms was dispensed with in view of what was stated in paragraph 21 of the affidavit filed in support of the company application. It appears that, thereafter, a meeting of the equity shareholders of Zee Telefilms was held and the Chairman's Report was submitted. Thereafter, Zee Telefilms filed Company Petition No. 1118 of 2002 seeking sanction to the scheme of amalgamation. That company petition also came up for admission before the court on 5 December 2002. That petition was admitted for final hearing. Public notice of the final hearing of the petition was directed to be given by publication in two newspapers. Notice to the Regional Director was also ordered. Individual notice of the final hearing of the petition was directed to be issued to the creditors to whom Zee Telefilms owes amount in excess of Rs. 25,00,000. Issuance of individual notice to the creditors owing less than Rs. 25,00,000 was dispensed with Individual notice to creditors below Rs. 25,00,000 was dispensed with in view of averments made in paragraph 23 of the petition. Paragraph 23 of the petition reads as under:

"23. No one will be prejudiced if the proposed scheme of amalgamation is sanctioned and the sanction of the said scheme will be in the interest of the transferor company, i.e., the petitioner and the transferee company, i.e., Zee Telefilms, and the general public. It is, therefore, just and equitable that the scheme be sanctioned as the same is bound to benefit both the companies."

6. Both the petitions came up for final hearing before the court on 20 March 2003. The learned Single Judge by order dated 20 March 2003 [see Kaveri Entertainment Ltd., In re (2004) 3 Comp LJ 365 (Bom)] dismissed the petition filed by Kaveri and so far as the petition filed by Zee Telefilms is concerned, in view of dismissal of the petition filed by Kaveri that petition being a petition by the transferee-company was also dismissed. In these appeals, these two orders passed by the learned Single Judge are challenged.

7. Learned counsel appearing for the appellant submits that the sole ground on which the petition filed by Kaveri has been dismissed by the learned Single Judge is that order dated 5 December 2002, dispensing with notice to the creditors of Kaveri to whom Kaveri owes amount less than Rs. 5 lakhs was secured by Kaveri by making misrepresentation to the court. Learned counsel submits that the very basis of this order that misrepresentation made to the court by Kaveri for securing the order dated 5 December 2002, is non-existent. It is further submitted that an undertaking given by Kaveri was to issue individual notices to the unsecured creditors of final hearing of the petition, if so directed by the court. When the court passed an order dated 5 December 2002, the court considered the statement made in paragraph 21 of the petition and then dispensed with issuance of individual notices to unsecured creditors below Rs. 5 lakhs, and, therefore, there is no question of there being any misrepresentation by Kaveri. It is also submitted that the learned Single Judge did not consider that the scheme of amalgamation was between the shareholders of Kaveri and Zee Telefilms and because of the scheme of amalgamation, interest of creditors was not likely to be adversely affected. It is further submitted that the creditors to whom Kaveri owed an amount in excess of Rs. 5 lakhs was more than 93 per cent of the total outstanding amount, the total outstanding amount being Rs. 3,91,37,455. Therefore, according to learned counsel, the liability of Kaveri towards unsecured creditors below Rs. 5 lakhs was negligible considering the total outstanding amount. It is further submitted that the scheme of amalgamation was for an amalgamation of Kaveri with Zee Telefilms, which is a much bigger company and a profit-making company, and, therefore, the interest of any creditors was not at all likely to be adversely affected. It is submitted that from the fact that no objection was raised by the creditors to whom Kaveri owes the maximum amount, i.e., to the extent of more than 93 per cent of the total out-standing amount did not raise any objection clearly demonstrate that the scheme was not likely to adversely affect their interest. It is also submitted that even if it is assumed that the learned Single Judge was justified in finding that individual notice of final hearing of the petition was required to be given to all the creditors of the company, then the learned Single Judge could have modified the order of admission and directed the company to serve individual notice even on those creditors to whom the company owes less than Rs. 5 lakhs and fixed the matter for final hearing. According to learned counsel, the learned Single Judge was not at all justified in dismissing the petition on that ground.

8. Learned counsel appearing for the Regional Director stated that the Regional Director has already filed an affidavit before the learned Single Judge and has raised no objection to the sanction of the scheme for amalgamation.

9. Now, perusal of the order of the learned Single Judge shows that, according to the learned Single Judge, while securing the order dated 13 September 2002, dispensing with the meeting of the creditors, an undertaking was given to the court to issue individual notice of hearing of the petition to all the creditors and, according to the learned Single Judge, the order dated 5 December 2002, dispensing with issuance of individual notices to the creditors below Rs. 5 lakhs does not show that attention of the court was invited at that stage to the undertaking given in the affidavit in support of Company Application No. 430 of 2002. According to the learned Single Judge, in the affidavit filed in support of Company Application No. 430 of 2002, there was an undertaking given by Kaveri to issue individual notices to all the creditors. However, perusal of paragraph 19 of the affidavit filed in support of Company Application No. 430 of 2002 which has been quoted above shows that an undertaking that was given was to issue individual notices of hearing of the petition to all the creditors, if directed by the court. It was not an absolute undertaking. However, this aspect of the matter is totally lost sight of by the learned Single Judge. It is further to be seen here that in the order dated 5 December 2002, the court has in terms referred to the contents of paragraph 21 of the petition. Perusal of paragraph 21 of the petition, which has been quoted above, shows that Kaveri had stated that it is a profit-making company. That its amalgamation with Zee Telefilms, which holds all its shares, will not adversely affect the creditors of Kaveri, because they will now become creditors of Zee Telefilms Ltd., and considering all these averments, issuance of individual notice to the creditors below Rs. 5 lakhs was dispensed with. Along with the petition, Kaveri had also filed at Exh. F the details of the creditors, which showed that individual notice of hearing of the petition was being given to the creditors to whom the company owes more than 93 per cent of the total outstanding amount. Thus, we find that there was no misrepresentation made by the company and there was no question of the court making the order dispensing with individual notice to the creditors below Rs. 5 lakhs because of any misrepresentation.

10. It is further to be seen that the learned Single Judge has also referred to provisions of Sub-section(2) of Section 391 of the Companies Act, but perusal of the provisions of Sub-section(2) of Section 391 shows that it relates to approval of the scheme by the shareholders and the creditors in the meeting of the shareholders and the creditors. In the present case, holding of the meeting of the shareholders and the creditors was dispensed with by order dated 13 September 2002, and the learned Single Judge has nowhere found that the order dated 13 September 2002, dispensing with holding of the meeting of the shareholders and the creditors was secured by any misrepresentation. In our opinion, once holding of meeting of the creditors is dispensed with and, as the learned Single Judge does not find that the order dated 13 September 2002, was secured by practising any misrepresentation by Kaveri, then all the references in the order to the provisions of Sub-section(2) of Section 391 and alleged non-disclosure of number of creditors to whom the company owes less than Rs. 5 lakhs was totally unnecessary. In our opinion, the fact that none of the creditors to whom individual notices were given and to whom the company, i.e., Kaveri, owes bulk of money raised any objection to the scheme of amalgamation as also the fact that though public notice of hearing of the petition was given by publication in the newspapers none of the creditors raised any objection before the court was enough to show that the creditors did not have any objection to the sanction of the scheme. Had there been the possibility of the proposed scheme causing any prejudice to the interest of the creditors of the company, the creditors to whom Kaveri owes amounts in excess of Rs. 5,00,000 would have been the first to raise objection to the scheme. Admittedly, individual notices of the petitions have been served on the creditors of Kaveri to whom Kaveri owes Rs. 5,00,000 and more. It is nobody's case that there is anything in the proposed scheme which would result in causing prejudice to the interest of only those creditors to whom Kaveri owes less than Rs. 5,00,000, while it protects the interest of those creditors to whom Kaveri owes amounts in excess of Rs. 5,00,000. We find that the learned Single Judge has totally misdirected himself in passing the impugned order. It is further to be seen here that in any case the learned Single Judge was not at all justified in dismissing the petition. Even if it is assumed that the learned Single Judge was justified in holding that order dispensing with individual notices to the creditors below Rs. 5 lakhs was not proper, it was always open to the learned Single Judge to recall that part of the order and direct the company to issue individual notices even to those creditors to whom company owes less than Rs. 5 lakhs and then fix the matter for final hearing. It was staled by learned counsel appearing for the petitioner that on behalf of the petitioner-company, an offer was made that if the court so directs, individual notices on those creditors can always be served at this stage. We find that there are no reasons disclosed in the impugned order for not following that course of action.

11. Taking overall view of the matter, in our opinion, there was at all no justification for the learned Single Judge to dismiss the petition. In these circumstances, there-fore, the order dated 20 March 2003, passed in Company Petition No. 1117 of 2002 [Kaveri Entertainment Ltd., In re (2004) 3 Comp LJ 365 (Bom): (2003) 57 CLA 127 (Bom)] is set aside. Company Petition No. 1117 of 2002 is granted in terms of prayer Clauses (a) to (g). As also order dated 20 March 2003, passed in Company Petition No. 1118 of 2002 is set aside. That petition is also granted in terms of prayer Clauses (a) to (f).

11.1 Costs of Rs. 5,000 to the Regional Director, and costs of Rs. 2,500 to the Official Liquidator to be paid by the petitioners within four weeks from today.

11.2 Appeals disposed of.