CP/163/2012 of Indovation Technologies Limited Vs - on 31 December 2012

O R D E R

Indovation Technologies Limited, Hyderabad, entered into ascheme of arrangement with its shareholders to effect reduction andrestructuring of its capital. Sanction of this court under Sections 391 and394 of the Companies Act, 1956 (hereinafter, ‘the Act of 1956’) is soughtfor giving effect to the said scheme.

The petitioner company was originally incorporated asPriyadarshini Thread Limited on 06.01.1984 in the State of AndhraPradesh. Its name was subsequently changed to ‘IndovationTechnologies Limited’ and a fresh certificate of incorporation was issuedon 30.03.2012. Its Registered Office is situated at Hyderabad. Its mainobjects, as set out in its Memorandum of Association, include, inter alia,carrying on the business of software designing, development,customization, etc.; conceiving, planning, surveying, designing, studyingand evaluating all steps, processes, techniques and methods for settingup infrastructure projects, facilities, etc.; promoting and developinginfrastructure projects in areas such as State and National Highways,Flyovers, Elevated Roads, etc.; and managing, undertaking, carrying onand engaging in the business of real estate development, area estate andsite development, etc. As per its audited balance sheet dated 31.03.2012,its net profit for the financial year 2011-12 was Rs.39,440/- but theaccumulated losses carried forward after adjusting this profit wereRs.10,35,65,214/-.

The petitioner company is a listed public company. Its authorizedshare capital as on 31.03.2012 was Rs.3,00,00,000/- comprising30,00,000 equity shares of Rs.10/- each. The issued and subscribedcapital of the company was Rs.2,67,03,000/- divided into 26,70,300

equity shares of Rs.10/- each. The paid up capital of the company wasRs.2,56,78,000/- divided into 25,67,800 equity shares of Rs.10/- each.The Board of Directors of the petitioner company at its meeting held on14.02.2012 approved the scheme of arrangement.

The petitioner company filed Company Application No.773 of 2012for the purpose of convening a meeting of its shareholders to consider thescheme of arrangement. By order dated 29.06.2012 passed therein, thisCourt appointed Kancharlapalli Siva Rama Prasad, Advocate, as theChairperson of the meeting of the shareholders of the petitioner companyto be convened on the stipulated date at its Registered Office. TheChairperson submitted his report stating that the said meeting wasattended by 20 shareholders in person, holding shares of the value ofRs.3,03,870/- comprising 30,387 equity shares of Rs.10/- each, and 4shareholders, through proxies, holding shares of the value ofRs.1,35,62,580/- divided into 13,56,258 equity shares of Rs.10/- each,aggregating to the total share value of Rs.1,38,66,450/- comprising13,86,645 equity shares of Rs.10/- each. The resolution put to theshareholders for approval of the scheme of arrangement was passedunanimously and no votes were cast against the resolution. Only 1 votewas found to be invalid. The report further reflects that the notice of themeeting was published in the Hyderabad Editions of Business Standard(English daily) and Andhra Bhoomi (Telugu daily) dated 13.07.2012 andnotices were also served individually upon all the equity shareholders ofthe petitioner company. The Chairperson also filed an affidavit of serviceas required by Rule 76 of the Companies (Court) Rules, 1959 detailingthe service of notices upon the shareholders of the petitioner company.7,788 letters were said to have been despatched individually in thisregard to the shareholders.

The petitioner company has no secured creditors. The existingeight unsecured creditors expressed their approval of the scheme throughletters of consent. This Court took note of these facts and by the orderdated 29.06.2012, passed in Company Application No. 773 of 2012,dispensed with the meeting of the creditors of the petitioner company.

The petitioner company filed its audited balance sheet for thefinancial year 2011-12. Perusal thereof reflects that the petitionercompany obtained unsecured loans from its Directors to the tune ofRs.7,17,79,915/- and a deposit from a dealer of Rs.3,51,103/-. These twocomponents are shown under the caption ‘Long Term Liabilities’ in thebalance sheet. The break-up of the unsecured loans from Directors isfurnished, reflecting that A.Ramesh Babu, K.Sandhya andM.Ramanamma, Directors of the petitioner company, advanced loans ofRs.1,17,79,915/-, Rs.3,00,00,000/- and Rs.3,00,00,000/- respectively tothe petitioner company. Their individual letters of consent are filedwherein, while acknowledging the amount due and payable to them bythe petitioner company, these Directors expressed their approval andconsent vis-à-vis the scheme of arrangement. In so far as the dealer’sdeposit of Rs.3,51,103/- is concerned, letter dated 11.05.2012 addressedby the dealer, viz., Vinayaka Engineering, Hyderabad, is placed onrecord reflecting that the said concern had a deposit of Rs.3,51,103/- withthe petitioner company as on 31.03.2012 and that it gave its consent tothe proposed restructuring of the company through the scheme.

The ‘Trade Payables’, as per the balance sheet dated 31.03.2012,comprise expenses payable of Rs.9,91,976/- and sundry creditors ofRs.47,42,945/-. The details of the sundry creditors are furnished andreveal that Aptus Industries Limited was owed a sum of Rs.24,19,466/-while Boston Teknowsys (India) Limited was owed Rs.23,23,479/-,totaling Rs.47,42,945/-. Aptus Industries Limited, speaking through itsDirector under letter dated 18.05.2012, acknowledged that a sum ofRs.24,19,466/- was payable to it by the petitioner company and that,having gone through the proposed scheme, it gave its consent thereto.This letter is supported by a copy of the resolution passed by the Board ofDirectors of the said company on 14.05.2012 authorizing the Director ofthe company to sign and deliver the subject consent letter. Similarly,Boston Teknowsys (India) Limited, speaking through its ManagingDirector, furnished letter dated 23.04.2012 acknowledging thatRs.23,23,479/- was due to it and stating that, having gone through the proposed scheme, it gave its consent thereto. This letter is supported bythe certified copy of the resolution dated 18.04.2012 passed by the Boardof Directors of the said company authorizing the Managing Director of thecompany to sign and deliver the subject consent letter.

As regards the expenses payable valued at Rs.9,91,976/-,confirmation letter dated 20.06.2012 is placed on record by the petitionercompany stating that the said sum comprised salaries payable ofRs.64,147/-, audit fee payable of Rs.50,000/-, office expenditure payableof Rs.11,324/- and raw-material purchases payable of Rs.8,66,505/-. Thepetitioner company further stated that it had paid the salaries ofRs.64,147/- and also the office expenses of Rs.11,324/-. In this regard,cash vouchers for the sums of Rs.950/- towards Sweeper charges,Rs.1,856/- towards the stationery purchases, Rs.4,728/- towardsconveyance expenditure, and Rs.3,790/- towards office expenditure, areplaced on record. Details of the payment of salaries to employees werealso set out in the confirmation letter. In so far as the audit fee payable isconcerned, letter dated 15.06.2012 of M.M.Reddy & Co., CharteredAccountants, is filed reflecting that the said firm, being the auditors of thepetitioner company, acknowledged that they were to be paid Rs.50,000/-towards audit fees and that, having gone through the scheme, they gavetheir consent thereto. Lotus Industries furnished letter dated 15.06.2012stating that it had supplied raw-material to the petitioner company to thetune of Rs.8,66,505/- and that, having gone through the scheme, it gaveits consent thereto.

The company petition was admitted on 12.09.2012 and the date ofhearing of the petition was directed to be advertised in the HyderabadEditions of Business Standard (English daily) and Andhra Bhoomi(Telugu daily), as required by Rule 80 of the Companies (Court) Rules,1959. Notice was also ordered to the Central Government under Section394-A of the Act of 1956.

Proof of publication in the newspapers having been filed, it isstated that no objections were received from any party. No shareholder orcreditor of the petitioner company has come before this Court opposing the scheme.

The Regional Director, South Eastern Region, Ministry ofCorporate Affairs, Hyderabad, filed affidavit dated 12.10.2012 stating thatas per the report dated 09.10.2012 of the Registrar of Companies, AndhraPradesh, the petitioner company was regular in filing its statutory returnsand no complaints, investigations or inspections were pending against it.He further stated that the scheme of arrangement had been examinedand it was decided not to object thereto.

The petitioner company produced letter dated 10.04.2012 of theBombay Stock Exchange, wherein its Manager and Deputy Managerstated that the Exchange noted the confirmation given by the petitionercompany that the scheme would not in any way violate or override orcircumscribe the provisions of the SEBI Act, 1992, the SecuritiesContracts (Regulation) Act, 1956, the Depositories Act, 1996, theCompanies Act, 1956 or the provisions of the Listing Agreement or theRequirements of the Bombay Stock Exchange. The ‘No Objection’ of theBombay Stock Exchange was accordingly conveyed with limitedreference to those matters having bearing on listing/de-listingrequirements within the provisions of the Listing Agreement. A photocopyof the information displayed by the Stock Exchange with regard to themeeting of the petitioner company proposed to be held on 14.02.2012 isalso produced which reflects that the petitioner company had informedthe Bombay Stock Exchange that its Board of Directors would hold ameeting on 14.02.2012 to consider restructuring of the company,including reduction of capital.

Now, the scheme of arrangement: The petitioner company wasinitially involved in the business of spinning and weaving. However, dueto discouraging market trends it went through a difficult time andaccumulated losses to the tune of Rs.10,36,04,654/- as on 31.03.2011.This resulted in 100% erosion of its net worth. It was thereupon referred tothe Board for Industrial and Financial Reconstruction (BIFR). The BIFRopined that the petitioner company should be wound up. Winding upproceedings were accordingly initiated by this Court in R.C.C.No.11 of

2002. During the pendency of these proceedings, the petitioner companysettled the claims of all its secured creditors. When this fact was broughtto the notice of this Court, the winding up proceedings were closed byorder dated 21.04.2006. The petitioner company was however unable toraise any finance so as to undertake business activities on a large scaleor diversify its activities. The proposed scheme therefore aims at enablingthe company to clean up its balance sheet so that it coulddevelop/diversify its business and increase its net worth. The petitionercompany proposes to venture into information technology andinfrastructure activities.

In this regard, the restructuring of the petitioner company’s capitalstructure is proposed as under. The unsecured loans amounting toRs.7,17,79,915/- standing in its books of account as on31.03.2011/31.03.2012 are to be converted into equity share capital ofRs.7,17,79,900/- comprising 71,77,990 fully paid up equity shares ofRs.10/- each. Upon such conversion, the accumulated losses ofRs.8,77,12,110/- out of the total accumulated losses of Rs.10,36,04,654/-were to be neutralized and set off against the paid up capital resulting in areduction of Rs.8,77,12,110/- from its paid up capital. In consequence, theissued, subscribed and paid up capital of the petitioner company wouldbe reduced to Rs.97,45,790/- divided into 97,45,790 equity shares ofRe.1/- each. The said capital was proposed to be further consolidatedinto Rs.97,45,790/- divided into 9,74,579 paid up equity shares of Rs.10/-each. Every shareholder of the petitioner company, whose name appearson the Register of members on the record date, was to receive one equityshare of Rs.10/- each in lieu of every 10 equity shares of Rs.10/- eachheld by him/her earlier in the company. Thereafter, the petitionercompany proposed to raise further capital through preferential issue forinfusing fresh funds into the company. This infusion of fresh funds aims ataugmenting the resources of the company and its net worth. In thisregard, the petitioner company plans to issue 15,00,000 equity shares ofRs.10/- each for cash at par on preferential basis, aggregating toRs.1,50,00,000/-.

The objects and benefits arising from the scheme are set out inclause 2 of the scheme. The gist thereof is that the scheme would enablethe petitioner company to overcome its financial difficulties and enhanceits shareholders’ value by bringing in infusion of fresh funds and wouldhelp in reviving the company, which would be in the interest of itsemployees, shareholders, the exchequer and the society in general.Clause 3 of the scheme deals with the definitions of expressions used inthe scheme. Clauses 5, 6 and 7 furnish the details of the petitionercompany in terms of its incorporation, capital structure and objects. Themodalities of the scheme are set out in clause 8. In so far as the impact ofthe scheme on employees/workers is concerned, clause 14 of thescheme states that no adverse impact would be felt by theemployees/workers of the company and that they would, in fact, begenerally benefited by the infusion of fresh funds into the company whichwould be deployed in the business and thereby improve its financialposition. Clause 19 deals with the conditions which the scheme is subjectto. Clause 19.3 states that the scheme would come into effect inaccordance with the sequence provided thereunder in four steps. The firststep is the conversion of the unsecured loans of Rs.7,17,79,915/- intoequity share capital. The second step is the writing/setting off of theaccumulated losses against the issued, subscribed and paid up sharecapital. The third step is the consolidation of the reduced, issued,subscribed and paid up share capital of the company and the fourth andfinal step involves the preferential allotment of shares to prospectiveinvestors of the company. Though clause 24 of the scheme states thatnotwithstanding the reduction of the capital of the company pursuant tothe scheme, the company would not be required to add the words ‘andreduced’ to its name, this aspect needs further examination.

Clause 8(b)(vii) of the scheme states that the reorganization of thepetitioner company’s capital would be deemed to be in accordance withthe provisions of Sections 100 to 104 of the Act of 1956 and that the orderof this Court sanctioning the scheme shall be deemed to be an orderunder Section 102 of the Act of 1956 confirming the reduction of capital.

Thus, though the petitioner company in its prayer only sought thesanction of this Court under Sections 391 and 394 of the Act of 1956, ineffect, it is also seeking sanction of this Court for reduction of its capitalunder Section 102 of the Act of 1956 and allied provisions. This ordershall therefore be deemed to have been passed not only under Sections391 and 394 of the Act of 1956 but also under Section 102 thereof.

Normally, reduction of capital is to be effected by a company bypassing a special resolution at a meeting of its members. However, in thelight of the law laid down by this Court in NOVOPAN INDIA LIMITED, In re. (A.P.), G.V.K. HOTELS LTD., In re.[[1]];SUMITRAPHARMACEUTICALS AND CHEMICALS LTD., In re.(A.P.)[[2]];RAASICEMENT LTD., In re. (A.P.)[[3]]; setting out the intention to move aresolution as a special resolution in the notice to the shareholders is not amandatory requirement. Failure to comply with this requirement wouldtherefore not invalidate the resolution. As long as the shareholders wereput on notice of the proposed reduction of the share capital through thescheme of arrangement which was the subject matter for consideration atthe meeting and the same had been read over and explained to theshareholders who were present during the said meeting, there issubstantial compliance with Rule 85 of the Companies (Court) Rules,1959. However, the majority in numbers, as required by Section 189(2) ofthe Act of 1956, for the passing of a special resolution would have to besatisfied.

In the present case, the meeting of the shareholders convenedpursuant to the order of this Court was attended by 20 membersrepresenting the share value of Rs.1,38,66,450/- and no vote was castagainst the resolution. Therefore, the required majority for passing aspecial resolution was more than adequately fulfilled.

As pointed out by the Supreme Court in MIHEER H. MAFATLAL

V/s. MAFATLAL INDUSTRIES LTD.[[4]], it is not for the Company Courtto sit in judgment or appeal over the wisdom of the shareholders orcreditors of the company which is entering into a scheme of arrangement.

The Court would only play a supervisory role to protect the interests of theshareholders and creditors to the extent prescribed under the provisionsof the Act of 1956. The Court would also ensure that the scheme is not inviolation of law and is not contrary to public interest. The petitionercompany is a listed company whose shares are traded on the StockExchange. To that extent, the scrutiny of this Court would be morestringent in the context of the interest of the general public who are theshareholders of this company. The scheme envisages that the existingshareholders, as on the record date, would receive one equity share ofRs.10/- for every 10 equity shares of Rs.10/- that they held earlier. Thisratio having already been accepted and approved by the requisitenumber of shareholders, at the meeting of the shareholders, the interest ofthe shareholders is deemed to have been adequately protected. Thepetitioner company has no secured creditors and the unsecured creditorshave already consented to the scheme as is evident from their letters ofconsent. Therefore, their interests are also taken care of.

In so far as public interest is concerned, the reduction of paid upcapital of the petitioner company appears to be necessary to set off theaccumulated losses. The unsecured loans as on 31.03.2012 are beingconverted into share capital and the petitioner company proposes to go infor an issue of preferential shares for raising funds. By these measures,the petitioner company aims at improving its net worth and enhancing thevalue of its shares. This restructuring of the petitioner company istherefore for a discernible purpose and an informed decision was madeby the shareholders who attended the meeting, in excess of the requirednumbers, approving the same. The trade creditors also adopted the sameview. It cannot therefore be said to be contrary to their interest.

However, as members of the general public trade in the shares ofthe petitioner company and as prospective buyers of such shares may notbe aware of the restructuring initiated by the petitioner company under thepresent scheme, involving drastic reduction and reconstruction of itsshare capital, it would be in their interest to be informed of the fact that thepetitioner company has undergone a metamorphosis in this regard and has restructured its capital. To this extent, it would be in the interest ofsuch future investors that the petitioner company indicate the fact that ithas initiated these measures by adding the words ‘and reduced’ to itsname for at least one full financial year. The petitioner company shallaccordingly indicate so, as required by Section 102(2) of the Act of 1956,from the date this sanction order is filed with the Registrar of Companies,Andhra Pradesh, till the end of the financial year 2013-14.

This Court therefore sanctions the subject scheme of arrangemeinvolving reduction and reconstruction of the petitioner company’s shacapital subject to the condition that the petitioner company adds to its namthe words ‘and reduced’ for the period upto and until the end of the financyear 2013-14; and also in its balance sheet, profit & loss account and tannexures thereto for the said financial year. A certified copy of this ordincluding the minute as approved, shall be delivered to the Registrar Companies, Andhra Pradesh, within 30 days from the date of receipt of torder. Notice of the registration by the Registrar of Companies, AndhPradesh, of this order and of the minute shall be published in the Hyderabeditions of ‘Business Standard’ (English Daily) and ‘Andhra Bhoomi’ (Telu Daily) within 14 days of the registration as aforestated.

ORDER CONFIRMING REDUCTION OF CAPITAL AND APPROVINGMINUTE

Upon the petition of Indovation Technologies Limited,Hyderabad, presented on the 23[rd] day of August, 2012, uponhearing Sri V.Harish Kumar, Advocate appearing for thePetitioner Company, and upon reading the said petition and theaffidavit in support thereof filed on the 23[rd] day of August, 2012and the exhibits therein referred to, the order on the summonsmade on the 29[th] day of June, 2012 in C.A. No.773 of 2012convening the meeting of the equity shareholders of thePetitioner Company, the report of the Chairperson appointedfor the meeting of the equity shareholders of the PetitionerCompany, upon perusing ‘Business Standard’ and ‘AndhraBhoomi’ (Hyderabad Editions) containing the notice of the dateof hearing of this petition, and the Court being satisfied withrespect to every creditor entitled to object to the reduction thateither his consent to the reduction has been obtained or hisdebt or claim has been discharged or has determined;

i.

THIS COURT DOTH ORDER:

1. That the reduction of the share capital of the above company resolved on and effected by the special resolution passed at thecourt convened meeting of the Petitioner Company held on the 4[th]day of August, 2012, which resolution was in the words and figuresfollowing viz:

“RESOLVED THAT pursuant to Sections 391 & 394 and other applicableprovisions, if any of the Companies Act, 1956 the Scheme of Arrangement ofIndovation Technologies Limited (Formerly known as Priyadarshini ThreadLimited), the terms of which Scheme is laid before the meeting and which is dulyinitialed by the Chairman of the meeting for the purpose of identification, be andis hereby approved, subject however, to such alterations and modificationthereof, if any, as may be directed by the Hon’ble High Court of Andhra Pradesh,Hyderabad.”

be and the same is hereby confirmed.

2. That the minute set forth in the schedule hereto be and is herebyapproved.approved.

3. That a certified copy of this order including the minute as approvedbe delivered to the Registrar of Companies, Andhra Pradesh,within 30 days from the date of receipt of the order.be delivered to the Registrar of Companies, Andhra Pradesh,within 30 days from the date of receipt of the order.4. That notice of the registration by the Registrar of Companies,Andhra Pradesh, of this order and of the said minute be publishedonce each in ‘Business Standard’ and ‘Andhra Bhoomi’(Hyderabad Editions) within 14 days of the registration asaforesaid.Andhra Pradesh, of this order and of the said minute be publishedonce each in ‘Business Standard’ and ‘Andhra Bhoomi’(Hyderabad Editions) within 14 days of the registration asaforesaid.

Note - The sanction is subject to the condition that the petitioner companyadds to its name the words ‘and reduced’ for the period upto anduntil the end of the financial year 2013-14; and also in its balancesheet and profit & loss account and the annexures thereto for thesaid financial year.adds to its name the words ‘and reduced’ for the period upto anduntil the end of the financial year 2013-14; and also in its balancesheet and profit & loss account and the annexures thereto for thesaid financial year.

Dated this, the day of December, 2012

SCHEDULE

IN THE HIGH COURT OF JUDICATURE OF ANDHRA PRADESHAT HYDERABAD(ORIGINAL JURISDICTION)IN THE MATTER OF THE COMPANIES ACT,1956AND

IN THE MATTER OF INDOVATION TECHNOLOGIES LIMITED

COMPANY PETITION NO.163OF 2012

The authorised capital of Indovation Technologies Limited, Hyderabad, shallhenceforth be Rs.2,47,45,790/- comprising Rs.97,45,790/-,divided into 9,74,579 equityshares of Re.10/-each, and Rs.1,50,00,000/-, divided into 15,00,000 preferential shares of Rs.10/- each; its issued, subscribed and paid up capital is presently Rs.97,45,790/-comprising 9,74,579 fully paid up equity shares of Rs.10/- each, reduced from theauthorized share capital of Rs.3,00,00,000/-divided into 30,00,000 equity shares ofRs.10/- each; the issued and subscribed capital of Rs.2,67,03,000/- divided into26,70,300 equity shares of Rs.10/- each; and the paid up capital of Rs.2,56,78,000/-divided into 25,67,800 equity shares of Rs.10/- each.

The name of the company shall henceforth be ‘Indovation Technologies Limited‘(and reduced)’ for the period upto and until 31.03.2014; and shall be so reflected in itsbalance sheet, profit & loss account and the annexures thereto for the financial yearending 31.03.2014.

The company petition is ordered accordingly.

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SANJAY KUMAR, J.

31[st] DECEMBER, 2012.PGS/VGSR

(1997) 88 Company Cases 596

(1997) 88 Company Cases 619

(1999) 98 Company Cases 835

(1996) 87 Company Cases 792 = (1997) 1 SCC 579