Sections 177 and 178

Voting by show of hands

[2003] 43 SCL 186 (Kar.)

HIGH COURT OF KARNATAKA

Kirloskar Electric Co. Ltd., In re

N. KUMAR, J.

COMPANY PETITION NOS. 97, 270 and 271 OF 2002

FEBRUARY 13, 2003

Section 391 of the Companies Act, 1956, read with section 19(2) of the Banking Regulations Act, 1949 - Compromise and arrangement - Whether Court cannot act as a Court of appeal and sit in judgment over informed view of concerned parties to compromise as same would be in realm of corporate and commercial wisdom of parties - Held, yes - Whether, though convening of a meeting is a must to confer jurisdiction on Court to accord sanction of scheme under Act, but when there are different classes of shareholders as well as creditors of company and if any particular class is numerically very small and if they on coming to know of scheme voluntarily, unconditionally, give their consent or approval in writing to such a scheme, calling such class of members or creditors to a meeting to express their mind by way of casting vote would not be necessary - Held, yes - Whether Court in proceeding under section 391 cannot hold enquiry and go into question of entitlement of brands, names and trademarks and such a matter can be initiated either in civil court or before appropriate form and sanctioning of scheme would in no way put fetters on power of Court or forum adjudicating same - Held, yes - Whether when secured creditors have approved scheme, whereunder property of company would be sold and mode of utilizing said sale proceeds is reasonable and in best interest of company, objection by one financial institution does not carry much weight, as interest of that institution is also taken care of and is fully protected - Held, yes - Whether, where, proposed scheme is not found to be violative of any provisions of law nor is it contrary to public policy and members and creditors of companies has acted bona fide and in good faith and not coercing minority in order to promote any interest adverse to that of latter, it is open to Court to scrutinise scheme with a view to find out whether better scheme could have been adopted by parties - Held, no

Section 177 of the Companies Act, 1956 - Meeting and proceedings - Voting to be by show of hands in first instance - Whether voting for or against motion subject to conditions stipulated in vote is no voting in eye of law - Held, yes - Whether in construing whether a resolution is passed by three-fourths majority present and voting, what is to be taken into consideration in calculating majority is not number of persons present and voting, but number of valid votes polled in such meeting which includes only votes which are indicating mind of voter for or against resolution - Held, yes

Facts

In this petition, the petitioners, namely, KECL being transferor-company and KSPL and BCAL being transferee-companies sought sanction of proposed scheme of arrangement. The main objective of said scheme was to address the weakness KECL without relying on the external debt for funding of rehabilitation needs and to leverage the internal assets of the company to the extent possible. The KECL convened meeting of shareholders, secured creditors, unsecured creditors as contemplated under section 391. Out of 17 members who attended the meeting of secured creditors 12 members representing 81 per cent in value of total votes, voted for the scheme unconditionally and 3 secured creditors representing 19 per cent voted against the said scheme. Two secured creditors voted for the scheme subject to certain conditions, and, therefore, their votes were held invalid. The preference shares of the company were held by only one shareholder, viz., IDBI Ltd. No meeting was convened as such as instead a letter was sent seeking their approval. In reply, IDBI accepted the scheme subject to modifications. However, they did not suggest any modification or additions in the scheme. The transferee-companies also convened the aforesaid meetings and the members and creditors—secured and unsecured— unanimously approved the scheme.

After admission of the aforesaid three company petitions, the company was directed to take out advertisement and also notice was ordered to the Regional Director. In pursuance of the aforesaid notice, the Regional Director of the Company’s Affairs filed its statement raising objections that the scheme of arrangement was approved only by 58.31 per cent of secured creditors of company who were present and voted in the meeting, which was much below the three-fourths majority mark. It was also contended that no preference shareholders’ meeting was held for approval of the scheme and, therefore, legal formalities had not been completed and complied with as required under section 392. Thus, the sanction sought for could not be granted.

A company KPL raised an objection that word trademark ‘Kirloskar’ belonged to them and KECL was permitted user of the trademark under an agreement which now stood terminated and, therefore, KECL had no right to transfer said name or trademark to KSPL under the proposed scheme since it was opposed to provisions of Trade and Merchandise Act and would affect their interest. Hence, that company sought for deletion of such offending clause from the scheme.

Another Bank ‘T’ contended that KECL owed a sum in lakhs to the bank and was indebted heavily and the same had been treated as non-performing assets. Under the scheme, the estate of the company in Bangalore was proposed to be sold which would substantially dilute the level of security for the facilities intended to be extended to the new entities. The restructuring would also mean that the banks would have to provide further non-fund based facility. And as they were not willing to assume further exposure, they sought for rejection of the scheme.

Held

Where a scheme is put forward by a company for the sanction of the Court, in the first instance, the Court has to direct holding of meeting of creditors or class of creditors, or members or class of members who are concerned with such a scheme. Once the majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement, the Court gets jurisdiction to sanction the scheme. Once such a compromise is sanctioned by the Court, it would be binding on all the creditors or class of creditors, or members or class of members, as the case may be, which would also necessarily mean that even on dissenting creditors or class of creditors or dissenting members or class of members, such sanctioned scheme would remain binding. [Para 35]

Before sanctioning such a scheme even though approved by a majority of the concerned creditors or members, the Court has to be satisfied that the company or any other person moving such an application for sanction under sub-section (2) of section 391 has disclosed all the relevant matters mentioned in the proviso to sub-section (2) of the section. So far as the meetings of the creditors or members, or their respective classes for whom the scheme is proposed are concerned, it is enjoined by section 391(1)(a) that the requisite information as contemplated by the said provision is also required to be placed for consideration of the concerned voters so that the parties concerned before whom the scheme is placed for voting can take an informed and objective decision whether to vote for the scheme or against it. [Para 36]

The Company Court, which is called upon to sanction such a scheme is not merely to go by the ipse dixit of the majority of the shareholders or creditors or the respective classes who might have voted in favour of the scheme with the requisite majority but the Court has to consider the pros and cons of the scheme with a view to find out whether, the scheme is fair, just and reasonable and is not contrary to any provision of law and it does not violate any public policy. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is a unconscionable or an illegal scheme or is otherwise unfair and unjust to the class of shareholders or creditors for whom it is meant. The Court is not to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme being approved by the majority. [Para 37]

However, the question remained whether the Court has jurisdiction like an Appellate Authority to minutely scrutinise the scheme and arrive at an independent conclusion whether the scheme should be sanctioned or not when the creditors and members have approved the scheme as required by section 391(2). The Court has to keep in view the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by requisite majority. The Court certainly would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. To that extent the jurisdiction of the Company Court is peripheral and supervisory and not appellate. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of section 392. The propriety and the merits of the compromise and arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasonable judgment and agree to be bound by such a compromise or arrangement. [Para 38]

Sub-section (2) of section 391 requires that a scheme of compromise or arrangement must be approved by majority of creditors/members representing three-fourths in value of the creditors or class of creditors, or members or class of members, present and voting either in person or where proxies are allowed, by proxy. There is no difficulty in understanding the word ‘present’ as the creditors or members should be physically present in person or through their proxy in the meeting. The problem arises in the context of the word ‘voting’. Voting is formal expression of will or opinion by the person entitled to exercise the right on the subject or issue in question. Voting is explained as the expression of one’s will, preference or choice in regard to the decision to be made by the body as a whole upon any proposed measure or proceeding. Right to vote means right to exercise the right in favour or against the motion or resolution. A member present and voting may remain neutral, indifferent, unbiased or impartial not engaged on either side. Voting has to be either in the affirmative or negative, i.e., ‘yes’ or ‘no’ on the ballot paper or voting paper. One is not supposed to write anything except putting ‘yes’ or ‘no’ either in favour of the proposition or against the proposition. In addition to the same, if any suggestion, condition, reservation or stipulation is written stating that the expression of the will or opinion either for or against the proposition is subject to those things, then the votes have to be necessarily treated as invalid or void, as such votes are no votes leading either way. [Para 43]

Voting for or against the motion subject to the conditions stipulated in the vote is no voting in the eye of law. Therefore, voting understood in a proper perspective, it could be either in the affirmative or in the negative, Therefore, in construing whether a resolution is passed by three-fourths majority present and note, what is to be taken into consideration in calculating the majority is not the number of persons present and voting, but the number of valid votes polled in such meeting. The number of valid votes includes only votes which are indicating the mind of the voter for or against the resolution. Therefore, by ‘voting’, the mind, intention, preference of the voter must be clearly expressed. There should not be any ambiguity and scope for interpretation. It should be clear, unqualified and pointing. In this context, a voter who is not present at the meeting, who is present and not voting, present and voting by casting a blank ballot, and casting a ballot with conditions and stipulations, all stand on the same footing. It is no ‘voting’ in the eye of law. Therefore, the proper construction to be placed in calculating whether any resolution is approved or passed by three-fourths majority present and voting necessarily means the value of the valid votes and on the basis of the same whether the resolution has been passed with three-fourths majority. [Paras 43 & 44]

In the instant case, though 17 persons voted in the meeting, it was found that two secured creditors gave consent to the scheme subject to certain modifications. Therefore, the Chairman of the meeting had rightly treated those two ballots as invalid, because the said two creditors were not expressing their will or opinion in favour of the resolution unconditionally. The said votes were not votes leading either way and, therefore, they would not be taken into consideration either for or against the scheme. Therefore, though 17 persons voted in the said meeting, as the 2 votes cast were invalid, in order to determine the majority what was to be taken into considerations was only the value of 15 creditors who voted in the said meeting. The value of such 15 creditors was 1833959275. The 12 out of the 15 creditors voted for the scheme and the value of those creditors was 1477391975. The value of the 3 votes cast against the scheme was 356567300. Therefore, it was clear that the scheme was approved by a majority of 80.56 per cent which was above the three-fourths majority required under law, as the value of the valid votes against the scheme was 19.44 per cent. In that view of the matter, it could not be said that the secured creditors had not approved the scheme by a three-fourths majority as required under law. [Para 44]

The requirement that the scheme should be approved by the requisite majority has been held to be directory and not mandatory. If the company has stopped its business, a large number of employees and workers have become jobless, plant and machineries have been resting and losses have been mounting, the scheme presented is a viable alternative even if the same is not approved by three-fourths majority, Courts have sanctioned such schemes. Principle underlying the same appears to be that a scheme under section 391 cannot be regarded as an alternative mode of liquidation; it is only an alternative to liquidation. [Para 45]

In the instant case, the company had been declared as a sick industry under the provisions of the Board for Industrial and Financial Reconstruction (BIFR) and having regard to the losses suffered by them and the money that was required to make the unit viable, no financial institution or no private entrepreneur had come forward to revive the industry and the only course left was for the BIFR to recommend to the High Court for winding-up of the company. In those circumstances, if the company itself with the assistance of its members and creditors as a whole and with the active support of the labour put-forth a scheme of reconstruction for revival of the company and as aforesaid when all the shareholders, unsecured creditors had approved such a scheme with overwhelming majority and even the secured creditors as aforesaid had approved the scheme with three-fourths majority of persons present and who had cast valid votes, the Court could not blindly by technical interpretation refuse to sanction the scheme on the ground of non-compliance of section 391(2). [Para 46]

The second objection raised was that no meeting of the preference shareholders was convened to consider the scheme and there was no resolution passed approving the said scheme and, therefore, the requirement of section 391(1) was not complied with. [Para 47]

The meeting contemplated under section 391 is analogous to an extraordinary general meeting of the company inasmuch as three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders where it is unanimous or by a three-fourths majority must be obtained in a meeting summoned on the orders of the Court under section 391. That is in accordance with the general principle that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirements of a meeting. Secondly, written resolutions instead of those passed in meeting are capable of being registered, e.g., section 192. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of action of the members enables the Court to secure the consent of the overwhelming majority of the shareholders outside the meeting which is sufficient to show that the resolution is supported by virtually all the members of the company. In these three ways substantial compliance rather than a formal compliance meets the requirements of the statute. A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting being called does not arise at all. [Para 49]

Therefore, it becomes clear that convening of a meeting is a must to confer jurisdiction on the Court to accord sanction of a scheme under the Companies Act. But, when there are different classes of shareholders as well as creditors of the company, if any particular class is numerically very small and if they on coming to know of the scheme voluntarily, unconditionally, give their consent or approval for such a scheme, calling such class of members or creditors to a meeting to express their mind by way of casting vote would be an empty formality. If a copy of the scheme propounded stating the terms of the compromise or arrangement and explaining its effects is sent and acknowledged by that class of members or creditors who are numerically small and if they give their consent to such a scheme in writing, there is no necessity in law to convene the meeting of such class of shareholder creditors. The said consent letter or approval given can be acted upon and is sufficient to show that they have approved the scheme. [Para 49]

In this context, in the facts of the case, it was not in dispute the entire preference shares in the company were held by IDBI. By a letter, the company brought to the notice of the IDBI the aforesaid scheme and further informed that as they were the only preference shareholder, no separate meeting of preference shareholders had been convened and therefore IDBI was requested to convey their approval or otherwise to the proposed scheme. Along with the said letter, a copy of the scheme was also sent for reference. IDBI agreed with the scheme of arrangement saying that modifications, if any, would be stipulated by them in the Court itself. However, the IDBI did not stipulate any modifications or additional conditions. The hearing of the company petition had been duly notified in the newspaper and the IDBI did not appear before the Court to suggest any modifications or to impose any additional conditions before the High Court. Under these circumstances, when the sole preferential shareholder had given their consent in writing approving the scheme even before convening of the meeting and had not opposed the scheme at the hearing before the Court, it was obvious that they had also approved the scheme proposed by the company. Under these circumstances, it could not be said that the company had not complied with the legal requirement of holding a meeting of the preferential shareholder. Thus, the company had complied with section 391(1). [Para 50]

The third objection was raised by KPL regarding a clause on use of trademark, contained in the scheme of arrangement. [Para 51]

The offending clause provided that all the brand trade mark/s, the registered trade mark/s, and benefits of permitted user agreements of the petitioner-company would be available to the KSPL to manufacture products being currently manufactured by the company so long as new company held not less than 51 per cent of the paid-up equity capital of KSPL. It also made it clear that no separate deed or document was required for such permission and the offending clause itself was to be construed as such agreement. It also made it clear that the same was subject to approval of the scheme by the High Court. The said clause proceeded on the assumption that the company owned brands, trade marks, registered trade marks and benefits under a permitted user agreement and the same was sought to be made available to KSPL under the terms of the scheme for which also approval of the scheme by the Court was sought for. Therefore, in the instant proceedings, what the Court had to consider was whether that clause was legal and valid and it contravened any law for the time being in force. On the face of it, it did not contravene any provisions of law, but, if as contended by KPL, those brands, trade marks, fell into their ownership and they had given the same to the company under a permitted user agreement and if they were objecting to transfer of those rights to KSPL, then, the Court had to go into the question whether it was against any law. [Para 54]

In view of the disputed facts, in a proceeding under section 391, the Court could not hold enquiry and go into the question as to who was entitled to the ownership of those brands, names and trade marks. It was totally outside the purview of section 391. However, any sanction to be accorded by the Court to the scheme could not be construed as taking away the right of KPL, if they had any. Therefore, to that extent, the interest of KPL had to be protected. Therefore, it was made clear that the order of sanctioning the scheme by the Court would in no way affect the rights/interests of KPL in respect of the brand name, trade mark or user agreement of theirs. It was always open to them to initiate appropriate legal proceedings either in the civil court or before appropriate forum to protect their rights in respect of brand name, trade mark, etc. If any such proceedings were initiated, the authorities who were empowered to decide shall decide the rights independently on merits and in accordance with law without in any way being influenced by any of the observations made by the Court in its order and the sanctioning of the scheme by the Court would in no way put fetters on the power of the Court or the forum to go into these disputed questions. It would not be open to the company to contend in the proceedings that as the scheme containing the aforesaid offending clause was approved by the Court, the authorities could not go into the legality or validity of those transactions. [Para 54]

Therefore, with that reservation the interest of KPL was fully protected and the said objection could not come in the way of sanctioning of the scheme by the High Court and sanctioning of the scheme would not amount to contravening the provisions of the Trade Marks Act, 1999. [Para 54]

Sofar as the contention of Bank ‘T’ that if the proposed scheme was sanctioned, their interest in company as second charge creditors would suffer, was concerned, the bank ‘T’ was one of the secured creditors. All that the secured creditor would be interested in was in repayment of the loan borrowed by the company. The scheme envisaged repayment of 312 lakhs immediately after the sale of land. Insofar the balance amount was concerned, the bank was given first pari passu charge for Rs. 555 lakhs on the fixed assets and a second pari passu charge on current assets and for the balance amount, if would have a first pari passu charge on the current assets and a second pari passu charge on fixed assets. Thus, the interest of the bank was completely taken care of. If the company was wound up, the bank being a second charge holder, was not sure of getting back its full money having regard to the extent of liability of the company. Moreover, the time to be consumed for such payment was unpredictable. Insofar as their objection regarding shifting of the unit and objection to the sale of the property was concerned, they could not have any say in such matter. The propriety and the merits of the compromise or arrangement has to be judged by the parties who as sul juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court could not, therefore, undertake the exercise of scrutinizing the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. [Para 58]

This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial and economic interest by majority agree to give green signal to a compromise or arrangement. In the instant case, a consortium of 22 financial institutions had been formed under the scheme for the purpose of selling the assets of the company and for discharge of the liability of the company. When secured creditors had approved the scheme, whereunder the property of the company would be sold and the mode of utilizing the said sale proceeds was reasonable and in the best interest of the company, objection by one such financial institution did not carry much weight, as the interest of Bank T was also taken care of and was fully protected. There was no substance in the said objections raised by the bank. As such, the same was rejected. [Para 58]

From the aforesaid discussions, it became clear that all the three companies involved in the scheme of reconstruction had complied with the legal requirements of section 391(1)(a) inasmuch as all of them had called the meetings of the shareholders and creditors of the company and placed before them the scheme for approval. Further, the material on record disclosed that the shareholders and creditors of the company had approved the aforesaid scheme by the requisite three-fourths majority as required under section 391(2). In fact, no shareholder or creditor of the company had complained either in the aforesaid meetings or before the Court that the scheme which was approved adverse to their interest and that their interest was not taken care of by the majority while approving the resolution. The proposed scheme was not found to be violative of any provisions of law nor was it contrary to public policy. The members and the creditors of the companies had acted bona fide and in good faith and not coercing the minority in order to promote any interest adverse to the latter. [Para 59]

It was to be taken note of that the matter was before the BIFR. The BIFR was unable to rehabilitate the company. It was, in that context, at their suggestion, the company had come forward with the scheme to rehabilitate and restructure the company to the satisfaction of all the members, creditors and workforce. The only alternative to the scheme was winding- up of the company, in which event, neither the creditors nor the members and the workmen would be benefited. [Para 59]

Therefore, taking into consideration all circumstances of the case, an opportunity was to be given to the company to restructure the company as suggested in the scheme which would be beneficial for one and all. As a whole, the scheme was just, fair and reasonable. It was not open to the Court to undertake the exercise of scrutinizing the scheme with a view to find out whether a better scheme could have been adopted by the parties. When the creditors and members of the company, who in their best commercial and economic interest by a majority, agree and approve the scheme, the discretion of the Court is to be exercised in approving such a scheme. Under these circumstances, the scheme was fair, just, bona fide, honest and it took into consideration the interest of the members, the creditors, the workmen and that was the best that could be done under the circumstances and was the only mode in which winding-up of the company could be prevented. [Para 61]

Cases referred to

Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (para 39) and Arvind Mills Ltd. [2002] 111 Comp. Cas. 118 (para 44).

K.G. Raghavan for ICICI, Udaya Holla for objector Cauvery Gears Pvt. Ltd.; R.B. Deshpande for Objector R.P. Enterprises; Vishwanath Shendge, ACGSC, for ROC; H.S. Srinivasa Murthy for applicant in CA 793/2002-Opposing Creditor. Samarthna Associates for objector.

Order

1. Company Petition No. 97/2002 is filed by Kirloskar Electric Company Ltd. to obtain sanction of this Court to the scheme of arrangement whereby the Company may be restructured by addressing its weaknesses and by leveraging the internal assets of the Company, to reduce outside liabilities on manufacturing operations, rationalise the debt burden on manufacturing units to long term sustaining level, rationalise the work force and bring the employee cost in line with the industry norms, restore bankability of business units and achieve long term viability under given economic and industry scenario.

2. Under the scheme of arrangement, the petitioner-Company, namely, Kirloskar Electric Company Limited, would be the transferor Company and the Kaytee Switchgear Pvt. Ltd. and Best Trading and Agencies Limited, are the transferee companies. For the purpose of brevity, Kirloskar Electric Company Limited is referred to as the ‘Company’ or (KECL) in this order.

3. The petitioner-Company was incorporated as a Public Limited Company on 26-7-1946 under the Mysore Companies Act at Bangalore having its registered office at industrial Suburb, Rajajinagar, Bangalore-10. The authorised share capital of the Company is Rs. 700,000,000 (Rupees Seven Hundred Million) divided into 40,000,000 (Forty Million) Equity shares of Rs. 10.00 each and 3,000,000 (three Million) preference shares of Rs. 100.00 each. The issued, subscribed and paid-up share capital is Rs. 25,268,817 (twenty five million two hundred and sixty eight thousand eight hundred and seventeen) Equity Shares of Rs. 10.00 each and 1,800,000 (One million eight hundred thousand) Preference Shares of Rs. 100.00 each.

4. The object of the Company is to manufacture electric apparatus and appliances required for or capable of being used in connection with the generation, distribution, supply, accumulation and employment of electricity, produce a wide range of electricity motors, alternators, traction equipment, rotating machines, transformers, switch gears, voltage regulators, industrial electronics, automotive controls, etc., and other manufacturing activity as set out in the Memorandum and Articles of Association.

5. The petitioner-Company has various manufacturing and other units at eleven places, they are :

Unit	Products	Location
Unit-1	Extra Large, Large and	Bangalore
	Medium AC Motors/Generators
Unit-2	Medium and Small AC Motors/	Hubli
	Generators
Unit-3	DC machines, Traction	Bangalore
	equipment
Unit-4	Industrial Electronics	Mysore
Unit-5	Transformers	Bangalore
Unit-7	Components for medium and small AC motors	Tumkur
Unit-10	Switchgears	Hebbal
Unit-12	Spares Division	Bangalore
PSG	Projects & Systems Group	Bangalore
REG	Renewable Energy Group (Wind Mills)	Karnataka and
		Tamil Nadu

6. The petitioner-Company has a dominant market position in large and medium sized rotating machines and traction equipments and over the years it has built reputation and the Company enjoys goodwill in the domestic and foreign markets and the Company was having sound financial position till about 1997-98. The Company’s profitability started getting affected from 1998-99 onwards on account of the recession in capital goods industry, downturn of infrastructure and core sectors, which are generally the end-users of the Company’s products. The other factors which lead to the decline in profitability are high level of debt, excess labour force and high employee cost, high interest cost, high level of receivables, continuing large losses, continuing poor financial situation and threat of legal cases from creditors/statutory authorities. Therefore, the Board of Directors of the petitioner-company felt that unless the debt of the Company is restructured the survival of the Company will be jeopardized. The main objective of the restructuring is to address the weakness of the Company without relying on the external debt for funding of rehabilitation needs and to leverage the internal assets of the Company to the extent possible. Further, they want to rationalize the workforce and bring the employee cost in line with industry norms, restore bankability of business units, achieve long term viability under given economic and industry scenario, achieve positive net worth situation as early as possible and keep options open for future possibilities of Joint Venture with Strategic Partners. Therefore, a detailed technical feasibility report for relocation and consolidation of manufacturing facilities has been made by the technical team of the petitioner-Company. The manufacturing Unit for large motors/generators (part of Unit-1) and DC machines and Traction equipment (Unit-3) will be consolidated at a new location to derive advantages of sharing of common facilities, minimizing material flow, higher productivity and reduction of employee costs. In this connection, ICICI (lead Institution) at the request of consortium of Banks and term lenders has obtained report from an independent technical consultant, who has confirmed the feasibility and rationale of relocation as proposed in the scheme. Therefore, they have formulated a scheme of arrangement between the petitioner-company and its members and creditors which is produced at Annexure-B.

7. In terms of the scheme, with a view to consolidate the production facility, to reduce overheads and to unlock the real asset value at Bangalore the following operational restructuring is proposed :

- Shift unit (1) (AC Machines - Small and Medium Plant) from Bangalore to Hubli.

- Shift Unit 1 (AC Machines - Large and Extra Large Plant) from Bangalore to a new location near Bangalore.

- Shift Unit 3 (DC Machines and Traction Plant) from Bangalore to a new location near Bangalore.

- Shift Unit 5 (Transformers Plant) from Bangalore to Mysore.

- Shift Unit 10 (Switchgear Plant) from Hebbal, Bangalore to Mysore.

- Shift PSG from Bangalore to Mysore.

Subsequent to such operational restructuring, there will be two Business Groups namely (i) Rotating Machine Group (RMG) at Hubli/New Locations near Bangalore, Tumkur. Spares Division in Bangalore and Wind Mills (REG) in Karnataka and Tamil Nadu and (ii) Static Equipment Group (SEG) at Mysore. The rationale for segregation into the two business groups is to consolidate operations based on the respective synergies and to develop the vehicle for exploring the joint venture/strategic alliance for the Rotating Machine Group.

8. Under the scheme, three entities are created to manage the existing assets of KECL, they are :

(i) “Rotating Machine Group” (RMG) means the following businesses being hived off to Kaytee Switchgear Private Limited:

(a) Extra Large and Large AC Motors/Generators

(Unit-1) at New Location near Bangalore.

(b) Medium and Small AC Motors/Generators (Unit-2) at Hubli.

(d) Component Unit (Unit-7) at Tumkur.

(e) Spares Division (Unit-12) at Bangalore, and

(f) Renewable Energy Group (REG) at Existing locations.

(ii) “Static Equipments Group” (SEG) means the following businesses which will remain with residual KECL:

(a) Industrial Electronics (Unit-4) at Mysore

(b) Transformers (Unit-5) at Bangalore to be shifted to Mysore

(d) Projects and Systems Group (PSG) (Unit-1) to be shifted to Mysore.

(iii) “Special Purpose Vehicle” (SPV) means an entity to which the non-manufacturing surplus assets and real estate to KECL will be transferred for liquidating/repayment of secured creditors liabilities and Statutory and other dues of the KEC. Best Trading & Agencies Limited (BCAL), a subsidiary company of KECL, incorporated under the Companies Act, 1956 is the entity identified for this purpose.

The other entities which are relevant is as under :

(i) “KEC-1” means the “Rotating Machine Group” or Kaytee Switchgear Private Limited (KSPL)

(ii) “Residual KEC” means the Company remaining after transfer of assets and liabilities to KEC-1 and SPV and

(iii) “New Location” means the new location for shifting of the existing plant at Unit-1 and Unit-3 as may be deemed fit by the management.

9. With effect from the appointed date, KECL will be de-merged/hived off into three entities so as to achieve the objectives of restructuring :

(a) Special Purpose Vehicle (SPV) to leverage Non-manufacturing Surplus Assets and real estate.

(b) KEC-1: (Hubli, New Location near Bangalore, Tumkur, Spares Division and REG in existing locations) called the Rotating Machine Group.

(i) Special Purpose Vehicle (SPV)

SPV will be carved out of KECL to comprise of surplus non-manufacturing and liquid assets such as real estate at Bangalore (other than a part of the land retained in residual KECL), Peenya, Pune and surplus machinery and group company advances and receivables. The total realizable amount from sale of such assets is estimated at Rs. 14,855 lakhs (net of cost of sales). The liabilities of secured lenders to extent of Rs. 12,159 lakhs besides other liabilities of Rs. 2,698 lakhs (including VRS, cost of shifting etc.) will also be transferred to SPV. The proceeds from sale of SPV’s assets will be utilized towards payments of its liabilities. The surplus assets transferred to SPV will have assured realization within time frame of about 18-36 months. Securitisation of such surplus assets will ensure repayment of major part of the existing term liabilities.

The details of assets to be transferred to SPV and amount of liabilities to be assigned are given below :—

Liabilities		Assets
Rs. in lakhs		Rs. in lakhs
Equity to ICICI/NCD	1	Property at Malleswaram*	11,600
holders & Residual		Land and Buildg. at Pune	200
KEC		Property at Peenya	800
Liabilities of Term		Surplus m/c	612
Lenders	9,223	Group advances	1,191
Liabilities of Banks		Group company recoveries	762
(WCTL)	2,935
Other Liabilities		Less : Cost of Sales	310
- VRS (part)	2,346
- Cost of Shifting	350
Total Liabilities	14,855	Total Assets	14,855

*Excludes part of the land retained in the Residual KEC :

The valuation of assets to be transferred to SPV is taken on the basis of Current Fair Market Value (FMV) of assets, with a view to facilitate the scheme, the charge holders will concede proportionate representation in the SPV to all the secured lenders irrespective of their existing charge position on the assets being transferred to SPV. The detailed break-up of liabilities of individual lenders to be transferred to SPV is given in the Annexure 1, to the scheme.

Residual KEC will hold the initial equity capital of SPV to the extent of 1% and the existing charge holders i.e., ICICI and NCD holders will hold the balance of 99 per cent of the equity in the proportion of their existing outstandings.

An asset sale committed will be constituted comprising of one representative each from the participating institutions/banks and one from KEC. The sale of any asset of SPV shall be with the approval of the members representing minimum of 75% in value of the total loan outstandings at any point of time in SPV.

The sale proceeds shall be appropriated first to meet cost of VRS, cost of shifting operations from the existing locations, etc. The amount remaining thereafter shall be utilized for payment to lenders in SPV proportionately.

No rent or other charges shall be payable to SPV by KECL or RMG from the appointed date to the date of vacation of the Malleswaram property. KECL and RMG shall vacate the premises within 9 (nine) months from the date of receipt of Rs. 2,696 lakhs from SPV towards the cost of shifting and voluntary retirement expenses.

(ii) KEC-1 (RMG)

KEC-1 will be Rotating Machine Group (RMG) with a business valuation of Rs. 19,000 lakhs on the basis of Discounted Cash Flow (DCF) method. The fixed assets of RMG together with current assets and current liabilities will be transferred to Kaytee Switchgear Private Limited. This Company will be assigned liabilities of Rs. 19,000 lakhs as under :—

Particulars	Rs. in lakhs
Equity to KECL	5,292
Equity to lenders of KEC (in lieu of)
Conversion of KECL (liabilities)	1,308
Net worth	6,600
Assignment (Transfer) of Liabilities of KECL to Rmg
i. Balance of Term Debt of secured term lenders and FITL	6,741
ii. WCTL to Banks	1,297
Sub Total	8,038
Working Capital of Banks	3,362
Overdue sundry Creditors	1,000
Grant Total	19,000

The break up of liabilities being transferred to KEC-1 (RMG) is given in Annexure-1.

The secured lenders will be allotted equity to the extent of 29% of the Company at Rs. 20.50 per share (inclusive of premium of Rs. 10.50) towards conversion of their dues, while balance 71 per cent will be allotted to Residual KEC at Rs. 33.88 per share (inclusive of a premium of Rs. 23.88). No party (Financial institutions/Banks or KECL) shall dispose of the shares held in RMG without the written consent of others, for a minimum period of three years from the date of allotment.

The assigned term debt and WCTL would be paid-off within a period of 8 years and the estimated cash generation of KEC-1 would ensure acceptable level of average Debt Service Coverage Ratio (DSCR). Term Lenders in RMG will have an option to convert upto 10 per cent of their dues in RMG to normal working capital Loan. In the event of such conversion, the corresponding amount of normal working capital of banks will be converted to WCTL.

(iii) Residual KECL - (SEG):

The residual Company after transferring the assets to SPV and RMG will essentially be Static Equipments Group (SEG). The residual liabilities in this Company will be mainly preference shares of Rs. 1200 lakhs, unpaid dividend on preference shares of Rs. 494 lakhs, WCTL of Banks of Rs. 986 lakhs besides normal working capital within Drawing Power (DP) of Rs. 858 lakhs.

The promoter stakeholders shall bring in a sum of Rs. 800 lakhs as equity in residual KEC over a period of two years from the effective date for meeting the restructuring funding needs for which residual KEC would make a preferential issue of equity to the promoter stakeholders at a price of Rs. 30 per share (inclusive of a premium of Rs. 20).

The Term debts retained in Residual KEC would be paid off within a period of 9 years and the estimated cash generations of the company would ensure acceptable level of Average-Debt Service Coverage Ratio (DSCR).

According to the scheme, the manufacturing operations of the main plant in Bangalore have to be shifted and the premises vacated. Certain expenditure like payments towards Statutory dues, workers’ dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location, etc., is involved. This requirement of funds has to be met out of the sale proceeds of the land, as no financial institution/Bank is willing to advance fresh funds for payment towards such expenditure.

The Company intends to sell a part of the land measuring about 31000 square metres at the Bangalore main plant to a party with whom an agreement has been entered into for a sale price of approximately Rs. 2000 lakhs. The sale proceeds are to be utilised to meet certain expenditure such as payments towards statutory dues, workers’ dues, part of cost of VRS, purchase of land at the new location, construction of buildings and shifting of the plant and machinery to the new location etc.

The details of the asset (part of the Malleswaram land) retained in Residual KEC and amount of liabilities assigned are given below :

Liabilities		Assets
Existing Liabilities	Rs. in Lakhs	Sale price for	Rs. in Lakhs
CST, Sales Tax, Entry		part of Bangalore	2000
Tax etc.	302	Complex land
Salary Arrears	446
PF, Income Tax etc.,	133	Less : Cost of
Gratuity	439	Sales	50
Total	1320
Other Liabilities
VRS (Part)	180
Cost of Shifting	450
Total	630
Total Liabilities	1950	Total Assets	1950

10. The Company filed C.A. No. 134/2002 under section 391 of the Companies Act requesting this Court to permit them to convene a meeting of the shareholders, secured creditors and unsecured creditors for the purpose of considering and, if thought fit, approving, with or without modifications, the said Scheme of Arrangement. The said permission was granted by this court by an order dated 14-3-2002. The meeting was held under the Chairmanship of Mr. Vijay R. Kirloskar. Notices of the meeting were duly advertised in the English daily “Times of India” and Kannada daily “Prajavani”. The meeting was convened on 26-4-2002 and it was held at the registered office. The Chairman of the meeting has filed his report. In the said meeting 18 secured creditors of the company attended the meeting and the total of their debt is Rs. 2,53,36,43,491. The creditors suggested certain amendments and sought modification of the scheme. The modified scheme was approved in the said meeting by a majority of 1,47,73,91,975 votes in favour and 35,65,67,300 votes against the said resolution. Out of the 18 secured creditors who attended the meeting 12 secured creditors represented 81 per cent in value of the total votes polled by Secured creditors present and voting have voted for the scheme unconditionally as against 3 secured creditors representing 19 per cent voted against the said scheme. Two secured creditors, Bank of India and Bank of Baroda voted for the scheme subject to certain conditions. Their approval being conditional, their votes have been held invalid. All other secured creditors approving the scheme have voted for the scheme of arrangement unconditionally.

11. The meeting of the unsecured creditors was attended either personally or by proxy by 401 unsecured creditors of the company and the total value of their debt is Rs. 25,29,76,149.07. The scheme was approved by a majority of 24,91,52,868.10 votes against 38,23,280.97 votes.

12. The meeting of the equity shareholders was attended either personally or by proxy by 910 equity sharesholders of the company entitled together to 1,42,25,793 equity shares of Rs. 10.00 aggregating to Rs. 14,22,57,930.00. The scheme was approved by a majority of 1,42,22,428 votes against 424 votes.

13. The preference shares issued by the company are held by one share- holder only viz., IDBI Limited. No meeting as such was convened to ascertain their view. Instead by a letter dated 18-4-2002 they were requested to convey their approval or otherwise of the proposed scheme. In reply thereto by their letter dated 26-7-2002 they stated that in principle agreement to the company’s demerger proposal is accepted by them subject to the modification of the scheme or additional conditions, if any, as may be stipulated by them in the ensuing High Court hearing. However, they have not suggested any modification or additional condition to be stipulated in the scheme. Thus, all the legal formalities have been complied with by the petitioner-company.

14. It is also pertinent to point out the petitioner-company being a sick company, a reference has been made under section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 to the BIFR by its application dated 26-3-2002 and the matter is now pending before BIFR.

15. Thereafter, the petitioner-company sought for sanctioning of the scheme by this Court. However, this Court by an order dated 22-10-2002 rejected the petition on the ground that the transferee companies have not sought permission of this Court for convening the meeting of their shareholders and creditors to consider and approve the scheme formulated by the petitioner-company and as the scheme would affect the interest of the members of the said companies. Aggrieved by the said order the petitioners preferred an appeal in O.S.A. No. 108/2002 before the Division Bench of this Court. On a representation made by the petitioner-company the transferee companies would make necessary application under section 391 of the Companies Act seeking permission of the Court to convene the meeting of their shareholders and creditors and only if the scheme of arrangement is approved in those meetings their request for sanction of the scheme could be considered, the order passed by the Company Judge was set aside and the matter was remanded back to this Court. That is how this petition is before me.

16. The transferee Company No. 1 - Kaytee Switchgear Pvt. Ltd. was incorporated on 2-3-1983 at Bangalore under the provisions of the Companies Act, 1956, having its registered office at Industrial Suburb Rajajinagar, Bangalore - 560 010. The main object of this transferee Company is to carry on the business of manufacturing, processing, formulating, repairing, fitting, erecting, using, importing, exporting, buying, selling or otherwise dealing in all kinds and types of Control Gear, Switch Gear, Switches, Staters, Switch Boards, Panels, Contractors, Push Button Switches, etc. as clearly set down in the Memorandum and Articles of Association which is produced along with Company Petition No. 270/2002. The authorized share capital of this transferee Company is Rs. 3 Crores and the subscribed capital is Rs. 2,000 divided into 200 equity shares of Rs. 10 each.

17. The Kaytee Switchgear Private Limited, the petitioner in COP 270/2002, made an application in CA 1044/2002 before this Court under section 391 of the Companies Act seeking permission of this Court to call for the meetings of the shareholders are creditors of the Company to consider and approve the scheme. By an order dated 31-10-2002 this Court granted the permission sought for and directed the meetings of the shareholders and creditors to be held on 1st of December, 2002. Accordingly, notices were issued to the shareholders and meeting was held on 1st of December, 2002. The said meeting was attended by two equity shareholders of the said Company entitled together to 200 shares of the value of Rs. 2000.00 and the scheme of arrangement was unanimously approved. The Chairman of the meeting has filed his report. Thereafter, they have filed COP 270/2002 seeking sanctioning of the scheme.

18. The transferee Company No. 2 - Best Trading and Agencies Limited was incorporated on 2-5-1988 in Delhi, as Best Credits Private Limited, under the provisions of the Companies Act, 1956. Subsequently, vide a fresh certificate consequent on change of name dated 18-6-1999, it was incorporated as Best Trading and Agencies Ltd. at Bangalore having its registered office at Industrial Suburb Rajajinagar, Bangalore. The main object of the said Company is to carry on the business of agency of all kinds and to act as traders, dealers, importers, exporters, merchants, wholesalers, retailers, stockists, distributors and other business as mentioned in the Memorandum and Articles of Association annexed along with Company Petition No. 271/2002. The authorised share capital of this Company is Rs. 1 Crore and the subscribed capital is Rs. 1000 divided into 100 equity shares of Rs. 10 each.

19. Similarly, Best Trading and Agencies Limited, the petitioner in COP 271/2002, also filed an application in CA No. 1048/2002 under section 391 of the Companies Act seeking permission of the Court to call for the meeting of the shareholders and creditors of the company, consider and approve the scheme. By an order dated 31-10-2002 the permission sought for was granted and the meeting was directed to be held on 1st December, 2002. Accordingly, the meeting was held on 1st December, 2002 and the said meeting was attended by four equity shareholders entitled together to 100 shares to the value of Rs. 1,00,000 and the shareholders and creditors of the company have unanimously approved the scheme of arrangement. The Chairman of the meeting has filed his report before this Court. It is thereafter the present COP 271/2002 is filed for sanctioning of the scheme.

20. After admission of the aforesaid three Company Petitions, the Company was directed to take out advertisement and also notice was ordered to the Regional Director, Department of Company Affairs, Chennai.

21. In pursuance of the aforesaid notice, the Regional Director of Company Affairs appeared and filed his statement of objections. The two main objections raised are that though the scheme of arrangement was approved by the requisite majority of unsecured creditors and equity shareholders, it was approved only by 58.31 per cent of the secured creditors of the said company present and voting in the meeting with certain modifications. Secondly it was contended that the entire preference share capital of the Company is held by IDBI. No preference share- holders meetings was held for approval of the scheme nor the same was dispensed with by this court nor the Company obtained written consent of the IDBI in this regard. Therefore, they contend as the legal formalities have not been complied with as required under section 392 of the Companies Act the sanction sought for cannot be granted.

22. Yet another objection is from the Kirloskar Proprietary Limited. They contend that the word trade mark “Kirloskar” belongs to them: The KECL was the permitted user of the trade mark “Kirloskar” under an agreement which has been terminated on 24-1-2001 which termination has been accepted by the said Company. Therefore, they have no right to transfer the said name or trade mark or the benefits of the permitted user agreement to Kaytee Switchgear Private Limited. Not only the same is opposed to the provisions of the Trade and Merchandise Act but also the said property do not belong to them as it belongs to the Kirloskar Proprietary Limited. If the scheme as propounded by the Company is approved it would mean that this Court has granted permission for such transfer which is prohibited by law and it would also affect their interest and therefore they want Clause (2) in para 3 of the scheme to be deleted.

23. A reply was filed to the said objections by the KECL contending that the said dispute is of a civil nature, it cannot be decided in these proceedings. They contend the word “Kirloskar” and the trade mark “Kirloskar” belongs to them exclusively. The objectors right to take action against the company on the ground of alleged violation also remains unaffected and therefore they have prayed for rejection of the said objections.

24. Another secured creditors ICICI Bank Limited has filed an application requesting the Court to modify the scheme by enabling them to hold upto 19 per cent of the shareholding in the transferee company by themselves and in their names and further to nominate such person or persons as the applicant may deem fit to hold the shareholding in the transferee company such that their shareholding put together does not exceed 56 per cent of the shareholdings to which the applicant company is entitled to under the scheme. KECL has no objection for granting the said objection and modifying the scheme accordingly.

25. Yet another objection is filed by State Bank of Travancore. They contend the Company owes a sum of Rs. 1,030.98 lakhs to the bank. Under the scheme the estate of the Company in Bangalore is proposed to be sold. This will substantially dilute the level of security for the facilities. Even after the clearing of Rs. 312 lakhs as proposed in the scheme, the remaining Fund Based Exposure of Rs. 697 lakhs would remain a Non- Performing Asset, which position is not acceptable to the bank and therefore they have sought for rejection of the application for sanction.

26. In reply to the said objection the Company has stated when the scheme has been approved by the majority of the secured creditors at the instance of one secured creditor the same cannot be rejected. They further contend the objector-bank has a second charge on the fixed assets including the real estate at Bangalore. Its first charge is only on the current assets. But under the proposed scheme the objector-bank will be getting first pari passu charge on fixed assets and a second pari passu charge on the current assets for a total amount of Rs. 555.00 lakhs and the first pari passu charge on the current assets and a second pari passu charge on fixed assets for Rs. 426.00 lakhs and the balance of Rs. 22.00 lakhs will be equity. The objector thus gets improved security cover under the proposed scheme. The sale of real estate at Bangalore will not dilute the security as contended by the objector but the sale proceeds will be used for paying off the loans as per the scheme. The remaining security remains intact and is quite adequate to cover the liabilities assigned to the Rotating Machine Group as well as the KECL. Therefore, it is submitted that the said objection has no substance.

27. The employees of the Kirloskar Electric Company Employees Association have filed an affidavit stating that the employees have no objection of or sanction of the scheme. All that has been said in the affidavit is that the management has mutually agreed with the Union that Voluntary Retirement Scheme will not be forced on the workmen.

28. The order passed by the BIFR in case No. 320/2002 of M/s. Kirloskar Electric Company Limited is also placed on record. It discloses that M/s. Kirloskar Electric Company Limited has been declared as a sick industrial company in terms of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. They have further observed that the Company could make the net worth exceed the accumulated losses within a reasonable period on their own as per the rehabilitation package to be formulated and submitted by them under section 17(2) of the Act. Further a direction was issued to the Company to discuss the rehabilitation package with all secured creditors and other concerned parties and reach an agreement on the reliefs and concessions envisaged from them. A direction was issued to the company not to dispose of any fixed asset or current assets of the company without the consent of the secured creditors and the BIFR and they have issued other directions in this regard. That is how the petitioner-company has formulated the scheme and has obtained the approval of the shareholders and the secured creditors.

29. Learned senior counsel for the petitioner P. Chidambaram, submitted that the scheme is approved by the shareholders and the creditors by three-fourths majority present and voting and therefore the legal requirement of section 391(1) of the Act has been complied with. Elaborating the contention, he submitted, insofar as the secured creditors are concerned, for the purpose of three-fourths majority what is to be taken into consideration is the total number of valid votes polled and out of those votes whether the scheme is approved by three-fourths majority. If a secured creditor is present and has not voted and if voted the said vote has become invalid, then the said vote cannot be taken into consideration. Therefore, he submits, the secured creditors who were present and cast a valid vote have approved the scheme by three-fourths majority, as such, the legal requirement is complied with. In so far as preferential shareholders are concerned, the entire preference shares are held by one secured creditor, namely, IDBI, who have given their consent for the scheme in writing and therefore non-convening the meeting of the preference shareholder under the aforesaid circumstances would not vitiate the legal requirement contemplated under section 391(1) of the Act. Coming to the objections regarding violation of Trade Mark Act is concerned, he submitted, there is no transfer of a trade mark involved under the scheme. Even if it amounts to a transfer, the rights of the Kirloskar Proprietary Concern, which claims to be the proprietor of the trade mark, would in no way be affected by this Court according the sanction of the scheme, as the Kirloskar Proprietary Concern could always initiate legal proceedings to protect their interest, if any, and while according sanction, this Court may explicitly make this position clear so as to protect the interest of the Kirloskar Proprietary Concern. Insofar as the modification suggested by the secured creditors ICICI is concerned, he submitted, the same can be modified, as it would not in any way affect the working of the scheme. Insofar as the objection of State Bank of Travancore is concerned, he submitted, the Bank had only second charge on the property. Now, under the scheme, they would get a first charge on the property and to this effect an agreement has been entered into between all the secured creditors creating a pari passu charge on the property and therefore the apprehension expressed by the Bank is wholly misconceived. Therefore, he submitted, as all the legal requirements have been complied with and the scheme do not contravene any law and it is made with bona fide intention and good faith and the shareholders, creditors and the workman have given their consent for sanction of the scheme, there is no impediment for sanction of the scheme.

30. Per contra, Smt. Madumita Bagachi, learned Additional Central Government Standing Counsel, submitted if the total number of votes cast in the secured creditors meeting is taken into consideration, the scheme is not approved by three-fourths majority of creditors present and voting, and therefore, there is non-compliance of section 391(2) of the Act. Secondly, she contended, admittedly, no meeting is convened of the preference shareholders, as such, the legal requirement contemplated under section 391(1) of the Act is not complied with. Compliance of sections 391(1) and 391(2) of the Act is a condition precedent for the Court considering sanction of the scheme, as such the scheme cannot be sanctioned.

31. Learned counsel appearing for Kirloskar Proprietary Limited, submitted, Clause 2 of Part III of the scheme read as a whole provides for transfer of the trade marks which are permitted to be used by the Company, in favour of the transferee companies and therefore it violates the provisions of the Trade Marks Act. Once sanction is granted by this Court, the right to challenge such assignment would be lost to the Kirloskar Proprietary Limited. Therefore, he submits, as the aforesaid clause in the scheme is contrary to law, the Court should not grant the sanction of the scheme.

32. Learned counsel Sri K.G. Raghavan, appearing for ICICI, submitted, under the original agreement, the entire share to be allotted to ICICI Ltd. was to be held by them. Subsequent thereto by the approval granted by the RBI on 2-5-2002, ICICI Ltd. has been merged with ICICI Bank, which is governed by Banking Regulations Act, 1949. Section 19(2) of the said Act, prohibits holding of 56 per cent of the share capital. Therefore, they have proposed a modification to the effect that 19 per cent of shares could be held by ICICI Bank and 37 per cent of shares could be held by their nominees and accordingly have sought for modification of the scheme to that extent.

33. Learned counsel appearing for State Bank of Travancore submitted, the Bank had a charge on the property of the Company which is now sought to be sold under the terms of the scheme. If scheme is sanctioned and the property is sold, the interest of the Bank would suffer and therefore to the extent of the scheme provide for the sale of the property mortgaged to them cannot be sanctioned.

34. In view of the aforesaid rival contentions, the following points arise for my consideration:

“(i) whether the scheme put up for sanction is approved by majority of secured creditors as required under section 391(2) of the Act ?

(ii) Whether non-convening of the meeting of the preference shareholders violate the statutory requirement contemplated by section 391(1) of the Act ?

(iii) whether the sanctioning of the scheme amounts to contravening the provisions of the Trade Marks Act ?

(iv) whether the modification of the scheme suggested by the secured creditor ICICI is reasonable ?

(v) whether sanctioning of the scheme resulting is sale of portion of the property at Bangalore would substantially dilute the security offered to State Bank of Travancore ?

(vi) whether the scheme requires to be sanctioned with or without modification ?”

35. Before I deal with the aforesaid points for determination, it is necessary to keep in view the limited scope of the jurisdiction of the Company Court which is called upon to sanction the scheme of amalgamation as per the provisions of section 391 read with section 393 of the Act. The aforesaid provisions of the Act provides that compromise or arrangement can be proposed between a Company and its creditors or any class of them, or between a Company and its members or any class of them. When a scheme is put forward by a Company for the sanction of the Court, in the first instance the Court has to direct holding of meetings of creditors or class of creditors, or members or class of members who are concerned with such a scheme. Once the majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement the Court gets jurisdiction to sanction the scheme. Once such a compromise is sanctioned by the Court, it would be binding on all the creditors or class of creditors, or members or class of members, as the case may be, which would also necessarily mean that even to dissenting creditors or class of creditors or dissenting members or class of members, such sanctioned scheme would remain binding.

36. Before sanctioning such a scheme even though approved by a majority of the concerned creditors or members, the Court has to be satisfied that the Company or any other person moving such an application for sanction under sub-section (2) of section 391 has disclosed all the relevant matters mentioned in the proviso to sub-section (2) of the section. So far as the meetings of the creditors or members, or their respective class for whom the scheme is proposed are concerned, it is enjoined by section 391(1)(a) that the requisite information as contemplated by the said provision is also required to be placed for consideration of the concerned voters so that the parties concerned before whom the scheme is placed for voting can take an informed and objective decision whether to vote for the scheme or against it.

37. The Company Court, which is called upon to sanction such a scheme is not merely to go by the Ipse Dixit of the majority of the shareholders or creditors or the respective classes who might have voted in favour of the scheme with the requisite majority but the Court has to consider the pros and cons of the scheme with a view to find out whether the scheme is fair, just and reasonable and is not contrary to any provision of law and it does not violate any public policy. No Court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is a unconscionable or an illegal scheme or is otherwise unfair and unjust to the class of shareholders or creditors for whom it is meant. The Court is not to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme being approved by the majority.

38. However, the question remains whether the Court has jurisdiction like an Appellate Authority to minutely scrutinise the scheme and arrive at an independent conclusion whether the scheme should be sanctioned or not when the creditors and members have approved the scheme as required by section 391(2). The Court has to keep in view the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority. The Court certainly would not act as a Court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the Company who have ratified the scheme by the requisite majority. To that extent the jurisdiction of the Company Court is peripheral and supervisory and not appellate. The supervisory jurisdiction of the Company Court can also be culled out from the provisions of section 392 of the Act. The propriety and the merits of the compromise and arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasonable judgment and agree to be bound by such a compromise or arrangement.

39. In this regard, it is useful to refer to the observations found in the oft-quoted passage in Bucklay on the Companies Act, 14th Edition. They are as under :

“In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of this interest, might reasonably approve.

The Court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the Court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considering the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the Scheme.”

The observations of Fry, L.J. in this regard is also useful, which reads as under :

“The next enquiry is - Under what circumstances is the Court to sanction a resolution which has been passed approving of a compromise or arrangement? I shall not attempt to define what elements may enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast.”

After reviewing the entire case law, the Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 has laid down the following broad contours defining the jurisdiction of the Company Court in these matters, which is as hereunder :

“1. The sanctioning Court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held.

2. That the scheme put up for sanction of the court is backed up by the requisite majority vote as required by section 391, sub-section (2).

3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.

4. That all necessary material indicated by section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by section 391, sub-section (1).

5. That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.

6. That the proposed scheme of compromise and arrangement is no found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.

7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.

8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.

9. Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.

The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a Scheme of Compromise and Arrangement are not exhaustive but only broadly illustrative of the contours of the Court’s jurisdiction.” (p. 520)

40. In the background of this legal position, I have to examine the scheme placed before this court for sanction, in the light of the objections raised for its sanction.

41. Regarding Point No. (i) :

It is not in dispute that the unsecured creditors and shareholders have approved the scheme by three-fourths majority. The dispute pertains to the majority of secured creditors. The total number of secured creditors present were 18 in number and their value is 2533643491. Out of 18 present, one abstained from voting. Therefore, it is 17 persons whom were present and have voted. The value of the one secured creditor who was present and who did not vote is 309821941. The total value of secured creditors present and voting is 2223821550. There were 2 invalid votes, value of which is 389862275. Therefore, the total number of valid votes cast is 15 and their value is 1833959275. Out of the valid vote cast, 12 voted for the resolution and their value is 1477391975, 3 persons voted against the resolution and their value is 356567300. If the total secured creditors present and voted is taken into consideration and the votes held in favour of the said resolution out of them is taken into consideration, the resolution is passed by 58.31 per cent which is below the three-fourths majority mark. If out of the valid votes cast, votes polled for resolution is taken into consideration, it would be 80.58 per cent well above the three- fourths mark. The number of votes voted against the resolution out of the valid votes is taken into consideration, the value of votes would be 19.44 per cent.

42. In the light of these aforesaid facts, the question for consideration is: whether “present” and “voting” means even those persons who cast the votes and whose votes were found to be invalid ought to be taken into consideration or it is among the valid votes cast three-fourths majority is to be taken into consideration.

43. Sub-section (2) of section 391 requires that a scheme of compromise or arrangement must be approved by majority of creditors/members representing three-fourths in value of the creditors or class of creditors, or members or class of members, present and voting either in person or where proxies are allowed, by proxy. There is no difficulty in understanding the word ‘present’ as the creditors or members should be physically present in person or through their proxy in the meeting. The problem arises in the context of the word ‘voting’. Voting is formal expression of will or opinion by the person entitled to exercise the right on the subject or issue in question. Voting is explained as the expression of ones will, preference, or choice in regard to the decision to be made by the body as a whole upon any proposed measure or proceeding. Right to vote means right to exercise the right in favour of or against the motion or resolution. A member present and voting may remain neutral, indifferent, unbiased or impartial not engaged on either side. Voting has to be either in the affirmative or negative i.e., ‘yes’ or ‘no’ on the ballot paper or voting paper. One is not supposed to write anything except putting ‘yes’ or ‘no’ either in favour of the proposition or against the proposition. In addition to the same, if any suggestion, condition, reservation or stipulation is written stating that the expression of the will or opinion either for or against the proposition is subject to those things, then, the votes have to be necessa-rily treated as invalid or void, as such votes are no votes leading either way. A vote cast without indicating the mind of the voter either for or against the resolution is no voting at all. Similarly, voting for or against the motion subject to the conditions stipulated in the vote is no voting in the eye of law. Therefore, voting understood in a proper perspective, it could be either in the affirmative or in the negative. Therefore, in construing whether a resolution is passed by three-fourths majority present and voting, what is to be taken into consideration in calculating the majority is not the number of persons present and voting, but the number of valid votes polled in such meeting. The number of valid votes includes only votes which are indicating the mind of the voter for or against the resolution.

44. Therefore, by “voting”, the mind, intention, preference of the voter must be clearly expressed. There should not be any ambiguity and scope for interpretation. It should be clear, unqualified and pointing. In this context, a voter who is not present at the meeting, who is present and not voting, present and voting by casting a blank ballot, and casting a ballot with conditions and stipulations, all stand on the same footing. It is no “voting” in the eye of law. Therefore, in my opinion, the proper construction to be placed in calculating whether any resolution is approved or passed by a three-fourths majority present and voting necessarily mean the value of the valid votes and out of the same whether the resolution has been passed with three-fourths majority. This view of mine is supported by a judgment of the Gujarat High Court in the case of Arvind Mills Ltd. [2002] 111 Comp. Cas. 118, where it has been held as under :

“Thus it will be seen from the above that a member present and voting may remain neutral, indifferent, unbiased, impartial, not engaged on either side. Voting is formal expression of will or opinion by the person entitled to exercise the right on the subject or issue in question has to be either in the affirmative or negative, that is yes or no. On the ballot paper or voting paper one is not supposed to writ anything, except putting a “X”, “V” either in favour of the proposition or against the proposition and any writing suggesting condition or reservation cannot be said to be an expression of will or opinion either for or against the proposition and those votes have to be necessarily treated as invalid or void as such votes are no votes leading either way.

It need hardly be said that the votes cast on the proposition and voting thereof are to be construed in the ordinary and usual sense and that mean “expressing the will, mind or preference; casting or giving a vote.” They do not include the votes or ballots, that do not cast a vote on the proposition legally or void votes may not be counted either for or against the proposition submitted even though they may have been even received, placed in the ballot box and constitute sum of the total number of ballots. A bare attempt to vote by depositing blank ballot containing any writing is not effective and cannot be included in the total count upon the 3/4ths majority is to be estimated. Only those ballots that express voters points with such clearing that the ballot can be counted for or against can be counted in total. The requirement contemplates two ballots only, one affirmative and the other negative. To adopt any other rule would be to say that three ballots were contemplated one affirmative, one negative and the other neither affirmative or negative but forming a new class into which all ballots for any reason void must go....”

Applying the aforesaid principles to the facts of this case, if we look into the voting pattern, though 17 persons voted in the meeting, it was found 2 secured creditors (1) Bank of Baroda, (2) Bank of India, have voted for the resolution. But the Bank of Baroda in the ballot paper mentioned that the vote is for the resolution with modifications below :

“(1) we may agree for demerger on principle subject to final approval by higher authorities with regard to stock verification etc.

(2) we will not agree for equity participation letter to the company has already been submitted.”

Insofar as Bank of India is concerned, have also cast their vote for the resolution subject to the modifications suggested by them which was annexed to the ballot paper. There they have suggested 13 modifications to the scheme and it is made clear they are giving consent to the scheme subject to the aforesaid modifications. Therefore, the Chairman of the meeting has rightly treated those two ballots as invalid, because the said two creditors were not expressing their will or opinion in favour of the resolution unconditionally. The said votes are not votes leading either way and therefore they cannot be taken into consideration either for or against the scheme. Therefore, though 17 persons voted in the said meeting, as the 2 votes cast were invalid, in order to determine the majority what is to be taken into consideration is only the value of 15 creditors who voted in the said meeting. The value of such 15 creditors is 1833959275 which is not in dispute 12 out of the 15 creditors voted for the scheme and the value of those creditors is 1477391975. The value of the 3 votes cast against the scheme is 356567300. Therefore, it is clear that the scheme is approved by a majority of 80.56 per cent which is above the three-fourths majority required under law, as the value of the valid votes voted against the scheme is 19.44 per cent. In that view of the matter, it cannot be said that the secured creditors have not approved the scheme by a three-fourths majority as required under law.

45. It is also relevant to point out at this juncture the requirement that the scheme should be approved by the requisite majority has been held to be directory and not mandatory. If the Company has stopped its business, a large number of employees and workers has become jobless, plant and machineries were resting and losses were mounting, the scheme presented is a viable alternative even if the same is not approved by three-fourths majority, Courts have sanctioned such schemes. Principle underlying the same appears to be a scheme under section 391 cannot be regarded as an alternative mode of liquidation it is only an alternative to liquidation.

46. In the instant case, the Company has been declared as a sick industry under the provisions of BIFR and having regard to the losses suffered by them and the money that is required to make the unit viable, no financial institution or no private entrepreneur has come forward to revive the industry, the only course that would be left is for the BIFR to recommend to the High Court for winding up of the Company. In those circumstances, if the Company itself with the assistance of its members and creditors as a whole with the active support of the labour puts-forth a scheme of reconstruction for revival of the Company and as aforesaid when all the shareholders, unsecured creditors have approved such a scheme with overwhelming majority and even the secured creditors as aforesaid have approved the scheme with three-fourths majority of persons present and who have cast a valid vote, the Court cannot blindly by technical interpretation refuse to sanction the scheme on the ground of non-compliance of section 391(2) of the Companies Act. It is also to be remembered here that 2 creditors whose votes have held to be invalid have also voted for the scheme. Under these circumstances, I am satisfied that the secured creditors also have approved the scheme with three-fourths majority as required under section 391(1) of the Companies Act. As such, there is compliance with the said statutory requirement also.

47. Regarding Point No. (ii) :

The second objection raised was that no meeting of the preference shareholders are convened to consider the scheme and there is no resolution passed approving the said scheme and therefore the requirement of section 391(1) of the Companies Act is not complied with. As such, the Court cannot accord sanction to the scheme.

48. Therefore, the question for consideration is : convening of a meeting of the members and creditors of the Company, or any class of them, to consider and approve the same is mandatory?

49. The meeting contemplated under section 391 is analogous to an extra-ordinary general meeting of the Company inasmuch as three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders where it is unanimous or by a three-fourth majority, must be obtained in a meeting summoned on the orders of the Court under section 391. This is in accordance with the general principals that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirements of a meeting. Secondly, written resolutions instead of those passed in meeting are now capable of being registered e.g., section 192 of the Companies Act. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of action of the members enables the Court to hold the consent of the overwhelming majority of the shareholders outside the meeting is sufficient to show that the resolution was supported by virtually all the members of the Company. In these three ways substantial compliance rather than a formal compliance meets the requirements of the statute. A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all. The Supreme Court in the case of Miheer H. Mafatlal (supra), dealing with this question has held as under :

“. . . Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of small number of persons who will all be willing to be bound by the scheme. In that case it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is however, necessary for at least one class meeting to be held in order to give the Court jurisdiction under the section.”

Therefore, it becomes clear that convening of a meeting is a must to confer jurisdiction on the Court to accord sanction of a scheme under the Companies Act. But, when there are different classes of shareholders as well as creditors of the Company, if any particular class is numerically very small and if they on coming to know of the scheme voluntarily, unconditionally, give their consent or approval for such a scheme, calling a meeting of such class of members or creditors to a meeting to express their mind by way of casting vote in a meeting would be an empty formality. If a copy of the scheme propounded stating the terms of the compromise or arrangement and explaining its effects is sent and acknowledged by that class of members or creditors who are numerically small and if they give their consent to such a scheme in writing, there is no necessity in law to convene the meeting of such class of shareholders or creditors. The said consent letter or approval given can be acted upon and is sufficient to show that they have approved the scheme.

50. In this context, in the facts of the case, it is not in dispute the entire preference shares in the Company is held by Industrial Development Bank of India. By a letter dated 18th April, 2002, the Company brought to the notice of the IDBI the aforesaid scheme and further informed that as they are the only preference shareholder, no separate meeting of preference shareholders has been convened and therefore IDBI was requested to convey their approval or otherwise to the proposed scheme. Along with the said letter, a copy of the scheme was also sent for reference. Acknowledging the said letter, IDBI wrote on 26th July, 2002. The said letter reads as under :

“Proposal for demerger - Please refer to your request for IDBI’s approval for the company’s proposed demerger scheme filed before the High Court of Karnataka.

IDBI’s in principle agreement to the company’s demerger proposal may be conveyed at the ensuing High Court hearing. The final approval shall be subject to the modifications to the scheme or additional conditions, if any, as may be stipulated by IDBI.”

However, the IDBI, did not stipulate any modifications or additional conditions. The hearing of this Company Petition has been duly notified in the newspaper and the IDBI did not appear before the Court to suggest any modifications or to impose any additional conditions before the High Court. In other words, the IDBI have agreed to the scheme proposed by the Company. Under these circumstances, when the sole preferential shareholder has given their consent in writing approving the scheme even before convening of the meeting and have not opposed the scheme at the hearing before this Court, it is obvious that they have also approved the scheme proposed by the Company. Under these circumstances, it cannot be said that the Company has not complied with the legal requirement of holding a meeting of the preferential shareholder. Thus, the Company has complied with section 391(1) of the Companies Act.

51. Regarding Point No. (iii):

The third objection is raised by the Kirloskar Proprietary Limited (hereinafter referred to as the ‘KPL’ for short). Their objection is to the paragraph 2 in part III of the scheme, which reads as under :

“2. It has been mutually agreed between the Company and KSPL (RMG) that all the brand/s trade mark/s, the registered trade mark/s and benefits of permitted user agreements of KECL shall be available to KSPL for manufacture of products being currently manufactured by the Company so long as KECL holds not less than 51 per cent of the paid up equity capital of KSPL. The present covenant shall serve as requisite consent for use of the brand name/trade mark without requiring the execution of any further deed or document as to assignment and permitted user of the said brand name/trade mark, subject, however to approval of instant Scheme or Arrangement by the Hon’ble Court.”

Their contention is that they are the owners of the trade mark “Kirloskar”; the Company is the permitted user of the said trade mark; and by a letter dated 24-1-2001 they have terminated the agreement permitting/licensing the use of KPL’s trade mark “Kirloskar”. Therefore, the Company has no right to use the said trade mark nor is entitled to allow the use of said trade mark by Kaytee Switchgear Pvt. Ltd. or to any other person. It is also stated by them that even if the scheme is approved by the Court, the said scheme or any clause thereof, cannot effect KPL’s paramount statutory and common law rights. Therefore, they submitted that if the scheme is to be approved by the Court, the aforesaid objectionable part of the scheme is to be deleted.

52. The Company has filed its objections contending that the contentions raised by KPL do not in any way require to be heard in this petition, as the issue of Company’s right of use of the trade mark “Kirloskar” does not alter the corporate entity of the Company which remains intact irrespective of the name and style under which it carries on its business, nor does it effect the proposed scheme of arrangement. As the Company’s identity as a corporate entity remains unaffected even after the scheme, the KPL’s right to take action against the Company on the ground of alleged violation also remains unaffected. They have also contended that the KPL does not manufacture any goods and in fact those trade marks originally belong to the Company who in turn assigned in favour of the KPL for the benefit of the group. The said assignment was without any consideration. The Company has been doing business under the name and style of “Kirloskar” for over 50 years, and therefore, they requested the Court to reject the said objection of the KPL. Learned counsel for the Company contended that all those disputed questions cannot be gone into in a proceedings under section 391 of the Act. If the KPL has any grievance against the petitioner in this regard, it is always open to them to initiate appropriate legal proceedings in the Civil Court or in any other Court and can agitate their rights, and sanctioning of the scheme by this Court would in no way take away those rights and he further submitted this Court could clarify the said legal proposition to protect the interest of the KPL.

53. Per contra, learned counsel appearing for KPL submitted, as the offending clause in the scheme amounts to transfer of interest in the user agreement, it is prohibited in law. The Court cannot accord sanction to a scheme which contains a clause which is forbidden by law. Therefore, he submits that the said clause to be deleted from the scheme.

54. The offending clause provides that all the brand/s, trade mark/s, the registered trade mark/s, and benefits of permitted user agreements of KECL shall be available to the KSPL to manufacture products being currently manufactured by the Company so long as KECL holds not less than 51 per cent of the paid up equity capital of KSPL. It also makes it clear no separate deed or document is required for such permission and the offending clause itself is to be construed as such agreement. It also makes it clear that the same is subject to approval of the scheme by this Court. The said clause proceeds on the assumption that the Company owns brands, trade marks, registered trade marks and benefits under a permitted user agreements and the same is sought to be made available to KSPL under the terms of the scheme for which also approval of the scheme by this Court is sought for. Therefore, in the present proceedings, what the Court has to consider is whether that clause is legal and valid and it contravenes any law for the time being in force. On the face of it, it does not contravene any provisions of law, but, if as contended by KPL those brands, trade marks, fall in to their ownership and they have given the same to the Company under a permitted user agreement and if they are objecting to transfer of those rights to KSPL, then, the Court has to go into the question whether it is against any law. The Company has denied the right of KPL, as claimed by them. On the contrary, they contend that this brands and trade marks belong to them, they are using it for the last 50 years, it is they who have assigned it in favour of KPL, without consideration for the benefit of the group, and therefore, KPL has no right to the same. In view of these disputed facts, in a proceeding under section 391 of the Act, this Court cannot hold enquiry and go into the question who is entitled to the ownership of these brands, names and trade marks. It is totally outside the purview of section 391. However, any sanction to be accorded by this Court to the scheme cannot be construed as taking away the right of KPL, if they have any. Therefore, to that extent, the interest of KPL has to be protected. Therefore, it is made clear that this order of sanctioning the scheme by this Court would in no way effect the rights/interests of KPL to the brand name, trade mark or user agreement of theirs. It is always open to them to initiate appropriate legal proceedings either in the Civil Court or before appropriate forum to protect their rights in respect of brand name, trade mark, etc. If any such proceedings are initiated, those authorities who are empowered to decide shall decide those rights independently on merits and in accordance with law without in any way being influenced by any of the observations made by this Court in this order and the sanctioning of the scheme by this court would in no way put fetters on the power of the Court or the forum to go into these disputed questions. It will not be open to the Company to contend in those proceedings that as the scheme containing the aforesaid offending clause is approved by this Court, those authorities cannot go into the legality or validity of those transactions. Therefore, with this reservation the interest of KPL is fully protected and the said objection cannot come in the way of sanctioning of the scheme by this Court and sanctioning of the scheme would not amount to contravening the provisions of the Trade Marks Act.

55. Regarding Point No. (iv)

The fourth objection pertains to the modifications sought by ICICI Limited. Under the terms of the scheme, ICICI Limited, which is one of the secured creditors is to be given 56 per cent of the equity share capital in the Special Performance Vehicle while other creditors to together will hold 43 per cent of the shares and 1 per cent would be held by Residual KEC. When the said scheme was put to vote at the meeting of the creditors of the Company on 26-4-2002, ICICI Limited was to be allotted the aforesaid 56 per cent of the equity shares. However, subsequent thereto by the approval granted by the Reserve Bank of India on 2-5-2002, ICICI Limited has been merged with ICICI Bank. ICICI Bank is now governed by the Regulations (which governs Banking Companies) under the Banking Regulation Act, 1949. Section 19(2) of the Banking Regulation Act, 1949, stipulates that a banking company cannot hold shares in any company, whether as pledge, mortgagee or an absolute owners thereon, for an amount exceeding 30 per cent of the paid up share capital of the Company or 30 per cent of its own paid up share capital and reserves. In the light of the said subsequent event and the legal position and in view of the accounting standards and norms required to be maintained by it, it has become essential that the above scheme be modified by additionally permitting the ICICI Bank Limited to hold up to 19 per cent of the share holding in the SPV by themselves and by permitting ICICI Bank Limited to nominate such person or persons as they may deem appropriate for the allotment and for holding the remaining shares in the SPV such that their shareholding and their nominee put together does not exceed 56 per cent of the shareholdings to which ICICI Bank Limited is entitled under the scheme. The Company has no objection for the proposed modification by the secured creditor. Accordingly, the scheme stands modified enabling the ICICI Bank Limited to hold 19 per cent of the shareholding in the SPV by themselves and in their names and further to nominate such person or persons, as they may deem fit, to hold the shareholding in the SPV, such that their shareholding put together does not exceed 56 per cent of the shareholdings to which they are entitled under the scheme. To this extent, the terms of the scheme stands modified.

56. Regarding Point No. (v) :

The State Bank of Travancore opposing the scheme contends that the Company is due in a sum of Rs. 1,030.98 lakhs and the same has been treated as a Non Performing Assets; the Company is heavily indebted; the Company is not able to service its debts for a long time; even after the proposed restructuring, it is not possible for the Company to service the debts and the proposed scheme will only postpone the repayment; the valuable real estate of the Company in Bangalore is proposed to be sold as part of the arrangement which will substantially dilute the level of the security for the facilities proposed to be extended to RMG and residual KECL entities; the Company has been incurring losses for a long time and shifting of units away from Bangalore cannot make the operations profitable; even after clearing of Rs. 312 lakhs as proposed in the scheme, remaining Fund Based Exposure of Rs. 697 lakhs will remain a Non Performing Asset, which position is not acceptable to them; the restruc-turing will also mean that the Banks will have to provide further non-fund based facility; they made it very clear that they are no willing to assume further exposure and therefore, they have sought for rejection of the scheme.

57. The Company has filed its reply. It is contended by the Company that the shifting of the operations of the Bangalore Unit to a new location is necessary to make available the real estate at the existing unit for paying off the debts in Special Purpose Vehicle. The shifting will also improve the operational efficiencies as common processes will be integrated and shared. The units of Mysore, Hubli and Tumkur will continue at the existing locations. Under the scheme, the Bank is given first pari passu charge for Rs. 555 lakhs on the fixed assets and a second pari passu charge on the current assets and for the balance amount it will have a first pari passu charge on the current assets and second pari passu charge on fixed assets. Since Debt Servicing Capital Ratio is at acceptable level and RMG and residual KECL both are profitable companies, account of the Bank will not be a Non Performing Asset. It was also submitted that the Company has not sought for any higher non-fund based facility than the sanctioned existing limits. Thus, the Bank’s interest remain unaffected and are in fact better protected and as such there is no legally justifiable reason for the Bank to object the scheme.

58. The Bank is one of the secured creditors. All that the secured creditor would be interested is in repayment of the loan borrowed by the Company. The scheme envisages repayment of 312 lakhs immediately after the sale of land at Bangalore. In so far the balance amount is concerned, the Bank is given first pari passu charge for Rs. 555 lakhs on the fixed assets and a second pari passu charge on current assets and for the balance amount, it will have a first pari passu charge on the current assets and a second pari passu charge on fixed assets. Thus, the interest of the Bank is completely taken care of. If the Company is wound up, the Bank being a second charge holder, is not sure of getting back its full money having regard to the extent of liability of the Company. Moreover, the time to be consumed for such payment is unpredictable. Insofar as their objection regarding shifting of the unit and objection to the sale of the Bangalore property is concerned, they cannot have any say in this matter. The proprietary and the merits of the compromise or arrangement have to be judged by the parties who as sub juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot therefore undertake the exercise of scrutinizing the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the Company who in their best commercial and economic interest by majority agree to give green signal to a compromise or arrangement. In the instant case, a consortium of 22 financial institutions has been formed under the scheme for the purpose of selling the assets of the Company and for discharge of the liability of the Company. When these secured creditors have approved the scheme, where under the property of the Company will be sold and the mode of utilizing the said sale proceeds is reasonable and in the best interest of the Company, objection by one such financial institution do not carry much weight, as the interest of State Bank of Travancore is also taken care of and is fully protected. I do not find any substance in the said objections raised by the Bank. As such, the same is rejected.

59. From the aforesaid discussions, it becomes clear that all the three Companies involved in this scheme of reconstruction have complied with the legal requirements of section 391(1)(a) of the Act inasmuch as all of them have called the meetings of the shareholders and creditors of the Company and placed before them the scheme for approval. Further, the material on record discloses that the shareholders and creditors of the Company have approved the aforesaid scheme by the requisite three-fourths majority as required under section 391(2) of the Act. In fact, no shareholder or creditor of the Company has complained either in the aforesaid meetings or before this Court that the scheme which is now approved is adverse to their interest and that their interest is not taken care of by the majority while approving the resolution. The proposed scheme is not found to be violative of any provisions of law nor is it contrary to public policy. The members and the creditors of the Companies have acted bona fide and in good faith and not coercing the minority in order to promote any interest adverse to that of the latter. The interest of Kirloskar Proprietary Limited is taken care of making it clear that the sanction of the scheme by this court could in no way affect their rights. The modifications suggested by ICICI Bank has not been opposed by the Companies, as such, the scheme stands modified to the extent of the modifications suggested by ICICI Bank. The interest of the secured creditor, namely, the State Bank of Travancore is fully taken care of by making a provision for the repayment of the loan to the extent of Rs. 312 lakhs and providing sufficient security for the remaining 555 lakhs and other amounts due to them from the Company. It is also to be taken note of here that the matter is before the BIFR. The Board is unable to rehabilitate this Company. It is in that context, at their suggestion, the Company has come forward with the scheme to rehabilitate and restructure the Company to the satisfaction of all the members, creditors and workforce. The only alternative for the scheme is winding up of the Company, in which event, neither the creditors nor the members nor the workmen would be benefited.

60. Broadly speaking, the scheme contemplates that the value of the large real estate assets belongs to the Company, the land and building in Malleswaram at Bangalore will have to be unlocked upon implementation of operational restructuring. The real estate value can be suitably leveraged for reducing the debt burden on manufacturing operations. An asset sale committee has been constituted comprising of one representative each from the participating institutions/banks and one from the Company. The sale of any asset of SPV shall be with the approval of members representing minimum of 75 per cent in value of the total loan outstanding at any point of time in SPV. The sale proceeds shall be appropriated first to meet cost of VRS, cost of shifting operations from the existing locations etc. The amount remaining thereafter shall be utilised for payment to lenders in SPV proportionately. The entire overdue compound interest, penal interest and liquidated damages has been waived of by all the secured creditors. RMG undertakes to engage on and from the effective date all permanent employees of KECL engaged in its RMG on the same terms and conditions on which they are employed as on the effective date by KECL without any interruption of services as a result of the transfer. RMG agrees that the services of all such employees with KECL up to the effective date shall be taken into account for purposes of all retirement benefits including retrenchment compensation to which they may be eligible in KECL on the effective date. However, such of the employees who would not accept the transfer and those who are found surplus will accept voluntary retirement as per the Rules of the Company. That is how the interest of the workforce is taken care of under the scheme. The secured creditors having come forward to waive of all the compound interest, penal interest and liquidated damages have shown their eagerness to participate and assist the Company in restructuring, so that the money lent by them can be recovered. Therefore, all the secured creditors have been associated in the asset sale committee which is entrusted with the responsibility of selling the assets of the Company and utilizing the proceeds and appropriating the same towards discharge of the debts due to them by the Company. A portion of the amounts due to them is sought to be adjusted by allotment of equity to those secured creditors. Thus, the interest of the creditors have been taken care of completely under the scheme. Insofar as the interest of the shareholders are concerned, if restructuring of the Company is not done, the only option is winding up of the Company in which event shareholders interest is completely ruined. On the contrary, if the scheme is worked out, they stand to gain, the Company will be fully functioning and their interest is protected, and, therefore, they cannot have any grievance whatsoever. In fact, the shareholders and creditors of the transferee companies have unanimously approved the scheme.

61. Therefore, taking into consideration all circumstances of the case, an opportunity is to be given to the Company to restructure the Company as suggested in the scheme which would be beneficial for one and all. As a whole, the scheme is just, fair and reasonable. It is not open to this court to undertake the exercise of scrutinizing the scheme with a view to find out whether a better scheme could have been adopted by the parties. When the creditors and members of the Company, who in their best commercial and economic interest by a majority agree and approve the scheme, the discretion of this court is to be exercised in approving such a scheme. Under these circumstances, I am satisfied that the scheme is fair, just, bona fide, honest and it takes into consideration the interest of the members, the creditors, the workmen and this is the best that could be done under the circumstances and the only mode in which winding up of the Company could be prevented.

Accordingly, I pass the following :

Order

All the three Company Petitions are allowed.

This Court doth hereby sanction the arrangement set forth in the scheme produced as Annexure O to the petitions and doth hereby declare the same to be binding on all the creditors, members of the petitioner-Companies and also on the companies subject to the following modifications :

(a) the ICICI Bank Limited is permitted to hold upto 19 per cent of the shareholding in the SPV by themselves and they are permitted to nominate such person or persons as they may deem appropriate for the allotment and for holding the remaining shares in the SPV to the extent of 37 per cent so that their shareholding and their nominees put together does not exceed 56 per cent of the shareholding to which ICICI Bank Limited is entitled under the scheme; and

(b) the sanctioning of the scheme by this court would in no way affect the rights/interest of the Kirloskar Proprietary Limited to the brand name, trade mark or user agreement of theirs, if they have any. It is always open to them to initiate appropriate legal proceedings to protect their rights in respect of brand name, trade mark etc. If any proceedings are initiated, the authorities before whom such rights are agitated are empowered to decide those rights independently on merits and in accordance with law without in any way being influenced by any of the observations made by this court in this order. It is made clear that the sanctioning of the scheme by this Court would in no way put fetters on the powers of such authorities to go into those disputed questions.

The Companies do file with the Registrar of Companies a certified copy of this order within thirty days from this day.

[2003] 43 SCL 186 (Kar.)

HIGH COURT OF KARNATAKA

Kirloskar Electric Co. Ltd., In re

N. KUMAR, J.

COMPANY PETITION NOS. 97, 270 and 271 OF 2002

FEBRUARY 13, 2003

Facts

Held

The third objection was raised by KPL regarding a clause on use of trademark, contained in the scheme of arrangement. [Para 51]

Cases referred to

Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506 (para 39) and Arvind Mills Ltd. [2002] 111 Comp. Cas. 118 (para 44).

Order

5. The petitioner-Company has various manufacturing and other units at eleven places, they are :

Unit	Products	Location
Unit-1	Extra Large, Large and	Bangalore
	Medium AC Motors/Generators
Unit-2	Medium and Small AC Motors/	Hubli
	Generators
Unit-3	DC machines, Traction	Bangalore
	equipment
Unit-4	Industrial Electronics	Mysore
Unit-5	Transformers	Bangalore
Unit-7	Components for medium and small AC motors	Tumkur
Unit-10	Switchgears	Hebbal
Unit-12	Spares Division	Bangalore
PSG	Projects & Systems Group	Bangalore
REG	Renewable Energy Group (Wind Mills)	Karnataka and
		Tamil Nadu

- Shift unit (1) (AC Machines - Small and Medium Plant) from Bangalore to Hubli.

- Shift Unit 1 (AC Machines - Large and Extra Large Plant) from Bangalore to a new location near Bangalore.

- Shift Unit 3 (DC Machines and Traction Plant) from Bangalore to a new location near Bangalore.

- Shift Unit 5 (Transformers Plant) from Bangalore to Mysore.

- Shift Unit 10 (Switchgear Plant) from Hebbal, Bangalore to Mysore.

- Shift PSG from Bangalore to Mysore.

8. Under the scheme, three entities are created to manage the existing assets of KECL, they are :

(i) “Rotating Machine Group” (RMG) means the following businesses being hived off to Kaytee Switchgear Private Limited:

(a) Extra Large and Large AC Motors/Generators

(Unit-1) at New Location near Bangalore.

(b) Medium and Small AC Motors/Generators (Unit-2) at Hubli.

(d) Component Unit (Unit-7) at Tumkur.

(e) Spares Division (Unit-12) at Bangalore, and

(f) Renewable Energy Group (REG) at Existing locations.

(ii) “Static Equipments Group” (SEG) means the following businesses which will remain with residual KECL:

(a) Industrial Electronics (Unit-4) at Mysore

(b) Transformers (Unit-5) at Bangalore to be shifted to Mysore

(d) Projects and Systems Group (PSG) (Unit-1) to be shifted to Mysore.

The other entities which are relevant is as under :

(i) “KEC-1” means the “Rotating Machine Group” or Kaytee Switchgear Private Limited (KSPL)

(ii) “Residual KEC” means the Company remaining after transfer of assets and liabilities to KEC-1 and SPV and

(iii) “New Location” means the new location for shifting of the existing plant at Unit-1 and Unit-3 as may be deemed fit by the management.

9. With effect from the appointed date, KECL will be de-merged/hived off into three entities so as to achieve the objectives of restructuring :

(a) Special Purpose Vehicle (SPV) to leverage Non-manufacturing Surplus Assets and real estate.

(b) KEC-1: (Hubli, New Location near Bangalore, Tumkur, Spares Division and REG in existing locations) called the Rotating Machine Group.

(i) Special Purpose Vehicle (SPV)

The details of assets to be transferred to SPV and amount of liabilities to be assigned are given below :—

Liabilities		Assets
Rs. in lakhs		Rs. in lakhs
Equity to ICICI/NCD	1	Property at Malleswaram*	11,600
holders & Residual		Land and Buildg. at Pune	200
KEC		Property at Peenya	800
Liabilities of Term		Surplus m/c	612
Lenders	9,223	Group advances	1,191
Liabilities of Banks		Group company recoveries	762
(WCTL)	2,935
Other Liabilities		Less : Cost of Sales	310
- VRS (part)	2,346
- Cost of Shifting	350
Total Liabilities	14,855	Total Assets	14,855

*Excludes part of the land retained in the Residual KEC :

(ii) KEC-1 (RMG)

Particulars	Rs. in lakhs
Equity to KECL	5,292
Equity to lenders of KEC (in lieu of)
Conversion of KECL (liabilities)	1,308
Net worth	6,600
Assignment (Transfer) of Liabilities of KECL to Rmg
i. Balance of Term Debt of secured term lenders and FITL	6,741
ii. WCTL to Banks	1,297
Sub Total	8,038
Working Capital of Banks	3,362
Overdue sundry Creditors	1,000
Grant Total	19,000

The break up of liabilities being transferred to KEC-1 (RMG) is given in Annexure-1.

(iii) Residual KECL - (SEG):

The details of the asset (part of the Malleswaram land) retained in Residual KEC and amount of liabilities assigned are given below :

Liabilities		Assets
Existing Liabilities	Rs. in Lakhs	Sale price for	Rs. in Lakhs
CST, Sales Tax, Entry		part of Bangalore	2000
Tax etc.	302	Complex land
Salary Arrears	446
PF, Income Tax etc.,	133	Less : Cost of
Gratuity	439	Sales	50
Total	1320
Other Liabilities
VRS (Part)	180
Cost of Shifting	450
Total	630
Total Liabilities	1950	Total Assets	1950