Mel Properties Pvt Ltd vs Mineral Enterprises Ltd & Anr

[Arising out of Common Order dated 5th November, 2018 passed by the National Company Law Tribunal, Bengaluru Bench in CA (CAA) No.54/BB/2018, CA (CAA) No.55/BB/2018 and CA (CAA) No.56/BB/2018.]

IN THE MATTER OF:

MEL Windmills Pvt. Ltd. Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India. ...Appellant

Vs

1. Mineral Enterprises Limited Having its registered office at Khanija Bhavan, West Wing, 3rd Floor, No. 49, Race Course Raod, Bangalore - 560001. Karnataka, India.

2. MEL Properties Private Limited, Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India. ....Respondents

Present:

For Appellant: Mr. Gopal Krishnan, Advocate. For Respondents: Mr. Rajiv Ranjan, Sr. Advocate with Mr. Aditya Narayan with Ms. Nimita Kaul and Ms. Amrita Sarkar, Advocates for R-1. Mr. Ashok Mathur, Advocate for R-2.

With -2-

Company Appeal (AT) No. 05 of 2019

[Arising out of Common Order dated 5th November, 2018 passed by the National Company Law Tribunal, Bengaluru Bench in CA (CAA) No.54/BB/2018, CA (CAA) No.55/BB/2018 and CA (CAA) No.56/BB/2018.]

IN THE MATTER OF:

MEL Properties Private Limited Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India. ...Appellant

Vs

1. Mineral Enterprises Limited Having its registered office at Khanija Bhavan, West Wing, 3rd Floor, No. 49, Race Course Raod, Bangalore - 560001. Karnataka, India.

2. MEL Windmills Pvt. Ltd., Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India. ....Respondents

Present: For Appellant: Mr. Ashok Mathur, Advocate. For Respondents: Mr. Rajiv Ranjan, Sr. Advocate with Mr. Aditya Narayan with Ms. Nimita Kaul and Ms. Amrita Sarkar, Advocates for R-1. Mr. Gopal Krishnan, Advocate for R-2.

with

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -3-

Company Appeal (AT) No. 06 of 2019

[Arising out of Common Order dated 5th November, 2018 passed by the National Company Law Tribunal, Bengaluru Bench in CA (CAA) No.54/BB/2018, CA (CAA) No.55/BB/2018 and CA (CAA) No.56/BB/2018.]

IN THE MATTER OF:

1. Mineral Enterprises Limited Having its registered office at Khanija Bhavan, West Wing, 3rd Floor, No. 49, Race Course Raod, Bangalore - 560001. Karnataka, India. ...Appellant

Vs

1. MEL Windmills Pvt. Ltd., Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India.

2. MEL Properties Private Limited, Having its registered office at #28 (Old No. 485), 10th Cross, 15th Main RMV, S. S. Nagar, Bangalore - 560080. Karnataka, India ....Respondents

Present:

For Appellant: Mr. Rajiv Ranjan, Sr. Advocate with Mr. Aditya Narayan with Ms. Nimita Kaul and Ms. Amrita Sarkar, Advocates.

For Respondents: Mr. Gopal Krishnan, Advocate for R-1. Mr. Ashok Mathur, Advocate for R-2.

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -4-

BANSI LAL BHAT, J.

These appeals arise out of common order dated 5th November, 2018

passed by the National Company Law Tribunal, Bengaluru Bench

(hereinafter referred to as 'Tribunal') in C.A. (CAA) No. 54/BB/2018, C.A.

(CAA) No. 55/BB/2018 and C.A. (CAA) No. 56/BB/2018 by virtue whereof

the Tribunal declined to sanction the scheme of demerger on the ground

that several issues were pending finalization and certain investigations were

pending in relation to the business of the demerged company. However,

liberty was granted to file afresh after the pending investigations are

disposed of. Since, the parties and subject matter are common, all the three

appeals were heard together and are proposed to be disposed of by a

common judgment.

2. For better understanding of the issues involved, it would be

appropriate to briefly notice the factual matrix. The Appellants in all the

three appeals who were petitioners before the Tribunal, sought an order for

sanctioning the scheme of demerger in terms whereof the wind energy

generation business of 'Mineral Enterprises Ltd.' (the Demerged Company)

was sought to be separated and given to 'MEL Windmills Pvt. Ltd.' (Resulting

Company No.1) whereas the real estate, shares and security investments of

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -5-

'Mineral Enterprises Ltd.' were sought to be given to 'MEL Properties Pvt.

Ltd.' (Resulting Company No.2). Admittedly, the Demerged Company in

para IV (h) of its application CA (CAA) No. 56 of 2018 disclosed the factum of

pendency of certain proceedings in relation to the mining business of the

Demerged Company which on clarification turned out to be investigations

registered as Spl. CC No. 12/2016 and Spl. CC No. 471/2016 arising out of

charge sheet lodged by Special Investigation Team, Karnataka Lokayukta

Police before 23rd Additional City Civil & Sessions Court, Bangalore Urban at

Bangalore wherein proceedings are stated to have been stayed by Hon'ble

High Court of Karnataka. According to Appellants the said proceedings have

no bearing and cannot be an impediment in considering approval of the

scheme of demerger.

3. It is submitted by learned counsel for the Appellants that the

Company Applications were filed by the Demerged Company and the

Resulting Companies praying for dispensation of meetings of their creditors

and shareholders by duly producing consent affidavits in support of the

scheme from 100% of the Shareholders of each company and 100% of the

Creditors of the Resulting Companies and 97.18% of the Demerged

Company. It is further submitted that the Demerged Company alongwith

the Resulting Companies proposed the separation of the business

undertakings of the Demerged Company in respect of its (i) wind energy

generation through windmills; and (ii) real estate, shares and securities

investments from the Demerged Company and vesting the same in the

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -6-

Resulting Company No. 1 and Resulting Company No. 2, respectively. The

scheme of demerger was proposed due to distinct nature of the activities

carried out by the Demerged Company and the nature of risk and dynamics

involved in the said activities being distinct and necessitating different

management approaches. The scheme of demerger was proposed to focus

on accelerated growth and profitability posing a good option for business

viability. It is further submitted on behalf of Appellants that the Tribunal, in

terms of the impugned order rejected the prayers made in the applications

filed under Section 230 and 232 of the Companies Act, 2013 r/w Rule 3 of

the Companies (Compromises, Arrangements and Amalgamations) Rules,

2016 rejecting the scheme itself at the very threshold stage when the sole

question before it for consideration was whether a case was made out for

dispensing with the meetings of the Shareholders and Creditors. Learned

counsel for Appellants further submits that the impugned order was passed

without hearing the parties on the said issue and without considering the

terms of demerger scheme. The impugned order is assailed on the ground

that it's a non-speaking order and the Tribunal has overstepped its

jurisdiction. It is further submitted that the question of sanction of the

scheme of demerger could not have been decided at the preliminary stage

and without eliciting the views of the Stakeholders including the concerned

regulatory authorities. The Tribunal ought to have directed meetings to be

convened and notices to be issued to the concerned authorities in terms of

the statutory provisions. Lastly it is contended that the demerger scheme

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -7-

proposed by the Appellants was not with regard to the business of Mining

which had to continue with the Demerged Company. Therefore, the pending

investigations against the Director of the Demerged Company would

continue post the demerger without adversely impacting the scheme of

demerger.

Appellants in Company Appeal (AT) No. 04 of 2019 and Company

Appeal (AT) No. 05 of 2019 figure as Respondents No. 1 and 2 in Company

Appeal (AT) No. 06 of 2019. They have supported proposal for scheme of

demerger by 100 percent voting.

4. We have given our anxious consideration to the submissions made at

the bar and also scanned through the record. The relevant provisions of the

Companies Act, 2013 are reproduced hereinbelow:-

"230. Power to compromise or make arrangements

with creditors and members

(1) Where a compromise or arrangement is proposed--

(a) between a company and its creditors or any class

of them; or

(b) between a company and its members or any class

of them, the Tribunal may, on the application of the

company or of any creditor or member of the

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -8-

company, or in the case of a company which is

being wound up, of the liquidator, order a meeting

of the creditors or class of creditors, or of the

members or class of members, as the case may be,

to be called, held and conducted in such manner as

the Tribunal directs.

Explanation.--For the purposes of this sub-section,

arrangement includes a reorganisation of the company's

share capital by the consolidation of shares of different

classes or by the division of shares into shares of different

classes, or by both of those methods.

(2) The company or any other person, by whom an

application is made under subsection (1), shall disclose to

the Tribunal by affidavit--

(a) all material facts relating to the company, such as

the latest financial position of the company, the

latest auditor's report on the accounts of the

company and the pendency of any investigation or

proceedings against the company;

(b) reduction of share capital of the company, if any,

included in the compromise or arrangement;

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -9-

(c) any scheme of corporate debt restructuring

consented to by not less than seventy-five per cent.

of the secured creditors in value, including--

(i) a creditor's responsibility statement in the

prescribed form;

(ii) safeguards for the protection of other secured

and unsecured creditors;

(iii) report by the auditor that the fund

requirements of the company after the

corporate debt restructuring as approved shall

conform to the liquidity test based upon the

estimates provided to them by the Board;

(iv) where the company proposes to adopt the

corporate debt restructuring guidelines

specified by the Reserve Bank of India, a

statement to that effect; and

(v) a valuation report in respect of the shares and

the property and all assets, tangible and

intangible, movable and immovable, of the

company by a registered valuer.

(3) Where a meeting is proposed to be called in pursuance

of an order of the Tribunal under sub-section (1), a notice

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -10-

of such meeting shall be sent to all the creditors or class of

creditors and to all the members or class of members and

the debenture-holders of the company, individually at the

address registered with the company which shall be

accompanied by a statement disclosing the details of the

compromise or arrangement, a copy of the valuation report,

if any, and explaining their effect on creditors, key

managerial personnel, promoters and non-promoter

members, and the debenture-holders and the effect of the

compromise or arrangement on any material interests of

the directors of the company or the debenture trustees,

and such other matters as may be prescribed:

Provided that such notice and other documents shall

also be placed on the website of the company, if any, and

in case of a listed company, these documents shall be sent

to the Securities and Exchange Board and stock exchange

where the securities of the companies are listed, for

placing on their website and shall also be published in

newspapers in such manner as may be prescribed:

Provided further that where the notice for the meeting is

also issued by way of an advertisement, it shall indicate

the time within which copies of the compromise or

arrangement shall be made available to the concerned

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -11-

persons free of charge from the registered office of the

company.

(4) A notice under sub-section (3) shall provide that the

persons to whom the notice is sent may vote in the meeting

either themselves or through proxies or by postal ballot to

the adoption of the compromise or arrangement within one

month from the date of receipt of such notice:

Provided that any objection to the compromise or

arrangement shall be made only by persons holding not

less than ten per cent. of the shareholding or having

outstanding debt amounting to not less than five per cent.

of the total outstanding debt as per the latest audited

financial statement.

(5) A notice under sub-section (3) along with all the

documents in such form as may be prescribed shall also

be sent to the Central Government, the income-tax

authorities, the Reserve Bank of India, the Securities and

Exchange Board, the Registrar, the respective stock

exchanges, the Official Liquidator, the Competition

Commission of India established under sub-section (1) of

section 7 of the Competition Act, 2002, if necessary, and

such other sectoral regulators or authorities which are

likely to be affected by the compromise or arrangement

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -12-

and shall require that representations, if any, to be made

by them shall be made within a period of thirty days from

the date of receipt of such notice, failing which, it shall be

presumed that they have no representations to make on

the proposals.

(6) Where, at a meeting held in pursuance of sub-section

(1), majority of persons representing three-fourths in value

of the creditors, or class of creditors or members or class of

members, as the case may be, voting in person or by proxy

or by postal ballot, agree to any compromise or

arrangement and if such compromise or arrangement is

sanctioned by the Tribunal by an order, the same shall be

binding on the company, all the creditors, or class of

creditors or members or class of members, as the case

may be, or, in case of a company being wound up, on the

liquidator and the contributories of the company.

(7) An order made by the Tribunal under sub-section (6)

shall provide for all or any of the following matters,

namely:--

(a) where the compromise or arrangement provides for

conversion of preference shares into equity shares,

such preference shareholders shall be given an

option to either obtain arrears of dividend in cash

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -13-

or accept equity shares equal to the value of the

dividend payable;

(b) the protection of any class of creditors;

(c) if the compromise or arrangement results in the

variation of the shareholders' rights, it shall be

given effect to under the provisions of section 48;

(d) if the compromise or arrangement is agreed to by

the creditors under sub-section (6), any proceedings

pending before the Board for Industrial and

Financial Reconstruction established under section

4 of the Sick Industrial Companies (Special

Provisions) Act, 1985 shall abate;

(e) such other matters including exit offer to dissenting

shareholders, if any, as are in the opinion of the

Tribunal necessary to effectively implement the

terms of the compromise or arrangement:

Provided that no compromise or arrangement shall

be sanctioned by the Tribunal unless a certificate by

the company's auditor has been filed with the

Tribunal to the effect that the accounting treatment, if

any, proposed in the scheme of compromise or

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -14-

arrangement is in conformity with the accounting

standards prescribed under section 133.

(8) The order of the Tribunal shall be filed with the

Registrar by the company within a period of thirty days of

the receipt of the order.

(9) The Tribunal may dispense with calling of a meeting of

creditor or class of creditors where such creditors or class

of creditors, having at least ninety per cent. value, agree

and confirm, by way of affidavit, to the scheme of

compromise or arrangement.

(10) No compromise or arrangement in respect of any buy-

back of securities under this section shall be sanctioned by

the Tribunal unless such buy-back is in accordance with

the provisions of section 68.

(11) Any compromise or arrangement may include takeover

offer made in such manner as may be prescribed:

Provided that in case of listed companies, takeover offer

shall be as per the regulations framed by the Securities

and Exchange Board.

(12) An aggrieved party may make an application to the

Tribunal in the event of any grievances with respect to the

takeover offer of companies other than listed companies in

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -15-

such manner as may be prescribed and the Tribunal may,

on application, pass such order as it may deem fit.

Explanation.--For the removal of doubts, it is hereby

declared that the provisions of section 66 shall not apply to

the reduction of share capital effected in pursuance of the

order of the Tribunal under this section.

x..x..x..x

232. Merger and amalgamation of companies

(1) Where an application is made to the Tribunal under

section 230 for the sanctioning of a compromise or an

arrangement proposed between a company and any such

persons as are mentioned in that section, and it is shown

to the Tribunal--

(a) that the compromise or arrangement has been

proposed for the purposes of, or in connection with,

a scheme for the reconstruction of the company or

companies involving merger or the amalgamation of

any two or more companies; and

(b) that under the scheme, the whole or any part of

the undertaking, property or liabilities of any

company (hereinafter referred to as the transferor

company) is required to be transferred to another

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -16-

company (hereinafter referred to as the transferee

company), or is proposed to be divided among and

transferred to two or more companies, the Tribunal

may on such application, order a meeting of the

creditors or class of creditors or the members or

class of members, as the case may be, to be called,

held and conducted in such manner as the Tribunal

may direct and the provisions of sub-sections (3) to

(6) of section 230 shall apply mutatis mutandis."

5. On a plain reading of the aforesaid provisions it comes to fore that the

Tribunal, while dealing with an application under Section 230 of the Act, on

being satisfied that the compromise or arrangement has been proposed in

connection with a scheme for the reconstruction of the company or

companies involving merger/ amalgamation of two or more companies and

under the scheme property or liabilities of the transferor company is

required to be transferred to transferee company or divided among/

transferred to two or more companies is required to order meeting of the

creditors or members, as the case may be, to be called. Sub-section (9)

thereof empowers the Tribunal to dispense with calling of a meeting of

creditors where such creditors, having at least 90% value agree to and

confirm the scheme of compromise or arrangement. The creditors/

members are required to file an affidavit stating that they agree to and

confirm the scheme of compromise or arrangement. It is abundantly clear

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -17-

that where the creditors/ members having at least 90% value signify their

consent to the scheme of compromise or arrangement by filing affidavits, the

Tribunal will have the discretion to dispense with calling of meeting of

creditors/ members. This is to be done at the very threshold stage and

precedes an order by the Tribunal under Sub-Section (6) sanctioning a

compromise or arrangement which can be passed by the Tribunal only after

majority of the persons representing three-fourths in value of the creditors

or members as the case may be agree to any compromise or arrangement.

Once the companies concerned approach the Tribunal for sanctioning of a

compromise or an arrangement, the Tribunal, at the very outset is required

to order a meeting of the creditors/ members to be held for according

consideration to the proposed scheme. This is a sine quo non for proceeding

further and any order of sanctioning or refusing to sanction such

compromise or arrangement by the Tribunal would be without jurisdiction

unless the Tribunal has dispensed with calling of such meeting of creditors/

members in terms of Sub-section (9). It is manifestly clear that at the stage

of calling of meeting of creditors/members for consideration of the scheme of

compromise or arrangement the Tribunal is not required to examine the

merits of the scheme qua the proposed compromise/ arrangement. Any

such indulgence on the part of Tribunal would fall foul of the provision

engrafted in Section 230 (1) of the Act and would be without jurisdiction.

6. As noticed elsewhere in this judgment, the Tribunal declined to

sanction the proposed scheme of demerger, albeit on account of several

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -18-

issues pending finalization, without either considering prayer for

dispensation of meeting of creditors and members of the three Appellant

Companies or in the alternative directing convening of a meeting of the

creditors and members of these companies for considering the proposed

scheme of demerger. The mandate of law engrafted under Section 230(1) of

the Act requiring the Tribunal to order calling of meeting of the creditors/

members of the concerned companies not being complied with and the

mandatory provisions being observed in breach, the impugned order cannot

be supported. The Tribunal, at the very threshold stage, was not required to

venture into the merits of the proposed scheme of demerger which had to be

examined only after obtaining the consent of creditors/members with

requisite majority. For proper exercise of jurisdiction vested in the Tribunal

it was imperative either to call the meeting of creditors/ members for

consideration of the proposed scheme of demerger or to dispense with such

meeting by invoking Sub-section (9) of Section 230 as 100% of shareholders

of each company, 100% of creditors of Resulting Companies and 97.18% of

creditors of the Demerged Company had filed consent affidavits. The

Tribunal failed to adhere to the mandate of law which was mandatory and

imperative in nature. This goes to the root of the impugned order which

cannot be sustained.

7. Apart from what has been stated hereinabove, the pending issues

could not be construed as an impediment in sanctioning the proposed

scheme of demerger. It is so for more than one reason. First being the case

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -19-

of Appellants - Petitioners before the Tribunal, that the demerger scheme

proposed by the Appellants was not with regard to business of Mining which

would continue with the Demerged Company and the pending investigation

would continue unhindered against the Director of the Demerged Company

without having any impact on the proposed scheme of demerger. Second,

because pendency of investigation would not stand as a legal impediment in

sanctioning the proposed scheme of demerger for any civil action or criminal

proceedings in respect of past events/ transactions. In identical

circumstances, the Hon'ble Gujarat High Court sanctioned the modified

composite scheme of arrangement in terms of its judgment dated 1st March,

2007 rendered in Company Petition Nos. 9 and 10 of 2006 titled "Core

Health Care Limited Vs. Nirma Limited." reported in 2007 SCC Online

Guj 235. Relevant portion thereof reads as under:-

"89. From this judgment, it would be clear that the

scheme can always be sanctioned subject to and without

prejudice to the liability, if any, in the civil and criminal

proceedings in respect of the past transactions. The

argument of objectors that the scheme is vague and

incomprehensible should not detain this court

unnecessarily because the scheme is clear, nobody either

raised an objection in the meetings held for the purpose or

at the time of the discussion that the scheme was vague

and incomprehensible. The liability, if any, of the board,

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019 -20-

directors, management, etc., in civil and criminal

proceedings would continue, and I accordingly so order."

8. For the foregoing reasons the impugned order cannot be supported.

The Tribunal seriously erred in dismissing the application on merit when the

stage of consideration of the proposed scheme of demerger was yet to arrive.

The impugned order suffers from serious legal infirmity and the same is set

aside. The appeals are accordingly allowed. The matter is remanded back

to the National Company Law Tribunal, Bengaluru Bench for proceeding

further in the matter in the light of observations made hereinabove and the

provisions of law and pass appropriate orders after hearing the parties.

A copy of this judgment be sent to National Company Law Tribunal,

Bengaluru Bench for information and appropriate action.

[Justice Bansi Lal Bhat] Member (Judicial)

[Balvinder Singh] Member (Technical) NEW DELHI

27th May, 2019

AM

Company Appeal (AT) No.04 of 2019, 05 of 2019 & 06 of 2019