MUSHIR ALAM, J.-The petitioner Messrs Caravan East Fabrics Ltd. Has filed instant petition under sections 284 to 288 of the Companies Ordinance, 1984, seeking following relief-
(a) To order to call a meeting of all the shareholders and creditors for the purpose of discussing and to vote on the 'Scheme of Arrangement' field herewith in terms of section 284(1) and (2) of the Companies Ordinance, rescheduling and conversion into equity of all outstanding liabilities of the petitioner.
(b) Official Assignee of this Honourable Court may be directed to conduct the meeting of the shareholders and the creditors along with Mr. Husnain Abid Ali (ACA) who has been nominated as financial controller and that the Official Assignee may please be authorized to chair the meeting of creditors of the petitioner and report the outcome to this Honourable Court.
(c) Pending disposed of this petition and the finalization of the proposed "Scheme- of Arrangement" all suits, cases, appeals, execution application, proceedings both criminal and civil and all orders and proceedings may kindly be suspended/stayed
(d) Approve/sanction the Scheme of Arrangement after the outcome in the meeting ordered.
(e) Award any other relief deemed just and proper.
2. Along with petition, two applications have been filed, one being C.M.A. No. 3065 of 2002 under section 284(5) of the Ordinance, 1984 seeking restraining orders against all pending " proceedings against the petitioner's Company. Another being C.M.A. No. 3066 of 2002 under Rules 953 to 955 SCCR (O.S) read with rule 55 of the 'Companies (Court) Rules, 1997', seeking meeting of the creditors of the company consenting or non-consenting.
3. On C.M.A. No. 3066 of 2002, meeting was directed to be held vide order, dated 2-12-2002, under the chairmanship of Official Assignee of this Court with cochairmanship of Hasnain Abid Ali the financial controller and facilitator. The meeting was directed to be held after due notice to all the creditors along with all the copy of the scheme of arrangement and to finalize the issue of scheme of arrangement attached to the petition.
4. It appears that meeting as directed above was held, Official Assignee has filed a reference, dated 16-1- 2003 available at pate 209 of the file which reads as under:- The Official Assignee/Chairman was informed by the aforesaid creditors, that they had. Received notices with schedule of arrangement. During the meeting representatives of Askari Commercial Bank Ltd., and Al-Baraka Bank Ltd., representing 15.90% of the creditors present in the meeting i.e. 14.5% of the total creditors mentioned in the schedule of arrangement, voted against the schedule of arrangement, while remaining creditors voted in favour of the scheme of arrangements, (85.5%) this position' in writing is annexed as 'A'. The representatives of both nonconsenting Banks stated that both will file their objections in writing. Later on. The Official Assignee/Chairman subsequently had received written objections of both Banks, through their Advocate Messrs Mohsin Tayebbally & Co., original' letter dated 6-1-2003 is annexed as 'B'
5. Along with report, objections of the non- consenting creditors were also filed. The petitioner filed counter-affidavit to the objections on 3-4-2003. It has come up for haring of C-M.A. No. 3065 of 2002 under rules 953 to 955 CSSR (O.S.) read with rule 55 of the Companies (Court) . Rules, 1997 and or the hearing of the Official Assignee's Report, dated 16-1-2003 as well Main Application.
6. It may be observed that, relief prayed for at Serial Nos. (a) and (b) of the prayer clause, as reproduced above, have since been achieved. Even the prayer (c) seeking restraining in respect of cases pending against (he petitioner company is also operating. For all practical purposes only prayer (d) needs to be examined and consider by the Court.
7. Mr. Asim Massoor learned counsel for the petitioner contended that, on the application of the petitioner, the Court directed to hold meeting of all the creditors, which meeting was held, on appeal was filed. The order, dated 2- 12-2002 has become final, no exception could be taken now.
According to the learned counsel, result of the meeting is manifest, statutory majority of the creditors has approved the scheme, and, therefore it should be sanctioned by the Court.
8. It was pointed out that the report of the Official Assignee that more than 3/4th per cent of the total creditors have approved the scheme and the objectors representing Only 15.90%'are opposing of the same, It was, therefore urged that, with and will of the majority is to prevail and the scheme of arrangement as proposed would be approved.
9. Mr. Asim, further stated that, since the Court directed to hold meeting of the creditors without distinction as to the secured and unsecured creditors, therefore, objectors who were present in the meeting are bound by the majority decision.
10. Mr. Arshad- Tayebally, learned counsel, appearing for the objectors Askari Commercial Bank Ltd., and Al-Baraka Islamic Bank Ltd., has raised three-fold objections firstly, the meeting was not held properly. Secondly, the mandatory requirement of 3/4th of the majority of the different class of creditors was not secured separately and thirdly that, the Court would not act as a post office and sanctions the scheme mechanically. According to him, Court must examine the fairness and otherwise propriety of scheme and to all see that it is not prejudicial and or oppressive of any class of the creditors.
11. To elaborate. His first objection, It was contended that, the Court; vide order, dated 2-12-2002 directed holding of the meeting of the creditors, In terms of rules 60(1) of the Companies (Court)
Rules, 1997 the result of the meeting is to be placed before the Court, It was urged that, the objector at the very outset raised objection as to the manner in which meeting is being held. According to him, since the report of the O/A is placed on record, it is or this Court to decide whether the meeting as held was proper and in accordance with law otherwise, It was next contended that, consenting and non-consenting creditors belong to different class and meeting, if any, should have been held separately of all the classes of creditors, It was argued that one set of creditors cannot bind other set of creditors nor can one class of share holder bind different class of shareholder in support of his contention he has placed reliance on Guha and Manikin Trading and Banking Company v. Madhabendra Kumar Shakla and another AIR 1936 Calcutta 162 and Kohinoor Raiwind Mill Ltd. v. Kohinoor Gujar Khan Mills 2002 CLD 1314. In the first mentioned case, it was held that, depositors in Banking Company obtaining decree ceases to be depositors, therefore, not bound by the scheme sanctioned by other depositors, In the last mentioned case Court held that, Agreement by on class of creditors would not bind another class, not party to the agreement, It was contended that, scheme cannot be sanctioned by the Court merely because it has been approved by majority of a particular class of creditors, It was urged that, Court has to examine, whether it is in the Interest of all the other interest group or the class of a person that may be affected by the proposed scheme, It was stated that, the petitioners have not obtained approval of the scheme from is shareholders, whose interest is being varied. He took me through balance sheet show that, the shareholding of various shareholders has been reduced without their consent and approval, It was urged hat, the shares of Asset Investment Bank have been enhanced considerably irrespective of the fact that, it is no the secured creditor and further shareholding has been increased without there being any corresponding induction of capital or security.
12. Mr. Arshad Tayebally contends that, the scheme that tend to prejudicially affect rights of shareholder cannot be approved behind their back, In support of his contention he has places reliance on the case reported as Re-Hunza Central Textile and Woolen Mills Ltd. PLD 1976 Lah. 851. In the cited case it was held that meeting for the approval of proposed scheme must be meeting of such Class as would be effected by proposed compromise and not of other class, In cited case through proposed scheme of arrangement. Petitioner Company, sought reduction of share capital, it was held that compromise or arrangement under section 153 of Companies Act, 1913 does envisage reduction of share capital, in the manner provided by section 55 of Act of 1913 provided other conditions of section 153 Act of 1913 are fulfilled, It was further observed that, the arrangement of compromise is proposed between company and a class of its member must be agreed by majority of 3/4th in value of the class, In cited case, on examining the proposed scheme, Court came, to a conclusion that, the reduction of share capital was sought to strangulate opposition and to strengthen the control of the management over affairs of company by curbing any opposition to it, consequently petition was dismissed.
13. Mr. Arshad further contends that, the scheme is . Malicious and fraudulent inasmuch as the Asset Investment Bank is associated company of the petitioner, therefore, it has direct and conflicting interest as against secured creditors, It was next urged that the liability of Asset Investment Bank is inflated to earn inflated percentage on account of being creditors and so also to increase the shareholding in the proposed scheme of arrangement. According to him the amount of the credit does not correlate to the amount shown in the scheme and book of accounts in the balance sheet. According to him at different places different amounts are shown. He has drawn my attention to page 90 to the explanation of note-4 the amount shown is Rs. 30 millions, whereas, at page 107 the amount shown is Rs. 66,074,338. According to Mr. Arshad, inflated amount shown in nothing but to earn profit at he cost of secured creditors. He further argued that, admittedly the Asset Investment Bank is not a secured charge holder, it merely hold hypothecation of immovable property, whereas, the objector is a mortgage and has a charge over immovable, assets and property, backed by a mortgage decree pending execution. He contends that, the executions are pending since 20O2 and the petitioners are harvesting benefit on account of delay.
14. When it was suggested by the Court that, if the meeting of shareholders and different class of creditors may by called now. Mr. Arshad promptly responded that, the scheme cannot be approved and it is too late in the day to direct another meeting either of different class of members and or creditors, It was further urged that, satisfaction of the Court is necessary. Court does not sit merely as a post office but, has to examine the scheme, where the interest of one class is bargained at the cost of other class, where scheme is unfair and unreasonable, than such scheme cannot be approved, In support of his contention he has placed reliance on cases reported as, Hunza Central Asian Textile and Woolen Mills Ltd. PLD 1976 Lah. 850. Cited case is already discussed above, In the case of. Hamadul Haq v. Taj Company 1991 MLD 841 Court repelled the contentions that, where the scheme is proposed, the Court should preferably call the meeting of the creditors and thereby leave it to the creditors or members to consider the reasonableness, utility or practicality of the proposal made, as they are the best Judge of their interest, In said case petition was dismissed en the ground that neither the reasonableness nor the feasibility nor the utility of the proposed scheme was established, In re: Lipton Pakistan Ltd. 1991 CLC 818, scheme of amalgamation of companies was fourth to be reasonable and in consonance with the requirement of law, it was approved, In re: BTR PLC (BCLC) i.e. Butterworth Company Law Cases (1992) 2 Ch. D. Page 675 at 680) in said case also scheme was approved, and the criteria applied were same, as in cases from Pakistan jurisdiction, In the case of Re Empire Mining, (1890) L.R. Ch. D.
402 (Westlaw. Com) where the scheme between the company and its creditor was extended to the debenture holder, it was held that the Court has jurisdiction to deprive the debenture holders. Court may deprive dissentient debenture holder of. Their security and to sanction a scheme,"which provides that they shall accept fully paid shares in satisfaction of their claim, It was urged by Mr. Arshad that, in all the above-cited cases same principles throughout have been applied. Court has always vouched for the interest of all the class of members and creditors while sanctioning the scheme.
15. In the context of the judgment relied upon by him and discussed above, it was argued that, objectors have no commonality of interest with unsecured creditors. When attention of leaned counsel was drawn ter the case of. Re: Saadi Cement Ltd. And re: Pakland Cement Limited reported in 2002 CLC 1352 and 2002 CLC 1392 it was urged that, in said cases amount of secured creditors was fully secured. Whereas, in the instant case objectors are offered 2% and 6% shares respectively in the entire share capital according to Mr. Arshad, the entire credit liability and finance of the objectors would virtually by wiped out, in case the proposed scheme is allowed.
16. Mr. Asim Mansoor, exercising right of rebuttal contends that, the company is moving towards progress and making recovery out of the deadlock. He contends that, all efforts are to be made to rescue a going concern rather than to kill it.
17. ' Mr. Asim Mansoor contended that, as per annual report 2005 there is upward trend, showing progress. He admitted that, still company is going in loss. To a specific query fill the Court as to the present market value of the share. Mr. Asim after obtaining instructions informed the Court that, on the date of arguments in the Stock Exchange, share of Rs. 10 face value is quoted at 3:10 per share.
18. Mr. Asim, responding to the objection of Mr. Arshad Tayebally that, the shareholder were not informed of the meeting, urged that, official assignee who attended and chaired the meeting was.
Also representative/Liquidator for Bankers Equity (under liquidation) one of the major shareholder.
19. Addressing to another objection of Mr. Arshad that, the Asset Investment Bank is a sister-ship or associated company of the petitioner, therefore, their consent may be of no value. Mr. Asim argued that, in law, there is no bar on the associated company to extend credit to the Sponsor Company i.e. That petitioner. According to him, objections raised in para. H to the objections filed later on cannot be taken into consideration.
20. Mr. Asim was confronted, as to the effect of the judgment and decree held by some of the creditors, and whether the objector formed different class of creditors, It was urged that, the term 'creditor' is of wide connotation, It encompasses all the categories of the creditors including secured as well as unsecured and so also a person merely having verifiable or otherwise claim against the Company. He contended that, since the Court directed holding of a meeting of all the categories of the creditors, therefore, no distinction between various categories of creditors could be drawn now, as regard the consenting and non-consenting (objectors) creditors, In support of his contention, he has relied upon the large number of cases as follows;--
(i) in re: Messrs Pakland Cement Limited through Director Shamim Musheq Siddiqui, 2002 CLD 1392;
(ii) In re: Messrs Saddi Cement Limited through Director, Shamim Musheq Siddiqui, 2002 CLD 1352;
(iii) Messrs Shakarganj Mills Limited and another v. Crescent Ujala Limited 2005 .CLD 36; (lv) Capital Assets Leasing Corporation Ltd. v. Integumation Multi Leasing, Corporation v. International Multi Leasing Corporation Ltd., 2003 CLD 1713; (v) International Multi Leasing Company v. Capital Assets Leasing Corporation Limited and another 2004 CLD 1; (vi) New Swadeshi Mills of Ahmedabad Ltd. v.
Dye-Chem Corporation, (1986) 59 Com. Cases 183 [Gujrat High Court]; (vii) Sudarsan Chits (India)
Ltd. v. Sukumaran Pillai and others 1985) 57 Com. Cases 85 [Kerala High Court]; (viii) In re: Pak Water Bottlers (Pvt:) Limited and 2 others 2003 CLD 1634; (ix) ACE Insurance Limited, in the matter of Judicial Miscellaneous No. 19 of 2001, 20O2 CLD 171; (x) Messrs Platinum Insurance Company Limited, Karachi through Managing Director v. Daewoo Corporation, Sheikhupura through Director, Administration and Finance, PLD 1999 SC 1; (xi) Messrs. Habib Bank Ltd. v. Messrs Golden Plastic (Pvt.) Ltd. 1991 MLD 124; (xii) International Finance Corporation, Washington D.C. 20433 U.S.A, v. Hala Spinning Ltd., Gulberg II, Lahore PLD 2000 Lah. 323; (xiii) Rauf B. Kadri v. State Bank of Pakistan and another PLD 2002 SC 111; (xiv) Hala Spinning Mills Ltd. v. International ' Finance, Corporation and another, 2002 SCMR 450; (xv) A.C.K. Krishnaswa mi v. Stressed Concrete Constructions Private Ltd.
(1964) 34 Com. (Madras High Court) (xvi) ' S. Krishnamurthy, Registrar of Companies, Punjab v.
Rohtak Hissor Transport Company (P.) Ltd. (1966) 36 Co. Cases 9 [Punjab High Court at Chandigarh]; (xviii In re: Alliance Bank > Limited v. Messrs Taj Company Limited and 2 others 1996 CLC 890; (xix) Registrar of Companies, Punjab v. Ajanta Lucky Scheme and Investment Company Private Ltd. And others (1974) 43 Com. Cases 314 [Punjab and Haryana High Court]; (xx) Kohinoor Textile Mills Ltd. Through Company Secretary v. Monopoly Control Authority through Chairman, Government of Pakistan, 2002 CLD 1844; (xxi) Messrs Industrial Development Bank of Pakistan v.
Messrs Sarela Cement Limited Company, 1993 CLC 1540.
21. In cases mentioned at serial numbers (i) and (ii) viz re: Pak Land Cement Limited (2002 CLD 1392) and in re: Messrs Saudi Cement Limited 2002 CLD 1352; scheme of arrangement was approved by the majority of creditors having liabilities of over 97%. No objections were filed, scheme envisaged payment of the entire amount of principle as well as mark-up within 10 years, In addition of payment of entire liabilities, scheme also provided additional securities. Creditors were put on more advantageous position then before accordingly the scheme was approved. Case of Messrs Shakarganj Mills Limited and another 2005 CLD 36 is in relation of amalgamation and merger/ of two companies and objection of 0.01% were not given any credence, In the case of Capital Assdts Leasing Corporation Ltd. 2003 CLD 1713. It was ruled that, ground as to jurisdiction should have been raised in the first instance. Any ground not urged in the petition could not be raised subsequently, In the case of .International Multi Leasing Company 2004 CLD 1; effect of order of merger and amalgamation is outlined, It was held that, when the scheme is allowed by the Court, it does not merely operate as an agreement between the parties and the matter goes beyond the domain of contract, it becomes ' an order of the Court has the force of judicial pronouncement and assumes statutory force, It is binding not only on the company but also on dissenting creditors and members as the case may be. Case reported as New Swadeshi Mills of'
Ahmedabad Ltd. (1986) 59 Com. Cases 183, where it was noted that spite of giving ample time company was still making efforts but had not succeeded in persuading further financial assistance, company was ordered to be wound up. This case in fact goes against they petitioner company, In Sudarsan Chits (India) Ltd. (1985)^57 Com. Cases 85; in said case, principle laid down is that, even where scheme of __ settlement is made Court may proceed with the petition for winding up. It was also ruled that Court must study the scheme and make all endeavours to revive the company. If it were not possible then to bury it deep and distribute its assets, whether is available to the creditors, In re: Pak Water Bottlers (Pvt.) Limited and 2 others (2003 CLD 1634); it was a case of merger and amalgamation of three companies. Court examined the effect of adverse swa p ratio applicable to minority shareholders; It was further held that, only requirement for the sanction of the Scheme was that, it wound up, on the Liquidator and contributors of the company: Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the Company or any other person, by whom an application has been made under sub-section {1) has disclosed to the Court, by affidavit or otherwise, 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, the pendency of any investigation proceedings in relation to the company and the like.
(3) An order made under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar within thirty days and a copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made and filed as aforesaid, or in the case of a company not having a memorandum to every copy so issued of the instrument constituting or defining the constitution of the company.
(4) If a company makes default in complying with sub-section (3), the company and after officer of the company who is knowingly and will fully in default shall be liable to the fine which may extend to five hundred rupees for each copy in respect of which default is made.
(5) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as it thinks fit and proper until the application is finally disposed of.
(6) In this section the expression "company" means any company liable to be wound up under this Ordinance and the expression "arrangement" includes a re-organization of the share-capital of the company by the consolidation of shares of different classes or . By the division of shares into shares of different classes or by both those methods and for the purposes of this section unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as , other unsecured creditors.
26. Section 284 of the Companies Ordinance, 984, is a compete Code in itself, It provides a mechanism whereby a company in order to restructure or reorganize itself or its shares and capital or to achieve the object of amalgamation or merger with any number of companies or demerger or bifurcate its operation into two or more entities, may with the sanction of the Court, enter into any scheme compromise or arrangement with all or any set of stakeholders or any class thereof as specified in section 284 ibid namely:-
(i) Between a company and its creditors or any class of them,
(ii) . Between the company and its members or any class of them.
In case of a company being wound up, then liquidator with the sanction of Court, may enter into any scheme compromise or arrangement with all or any set of stakeholders specified above.
27. Companies Ordinance, 1984 does not define compromise or arrangement as used in section 284 ibid though extended meaning is assigned to 'arrangement'. From preponderance of precedent law as noted above, it appears that, the Courts have adopted progressive and dynamic approach of what should be included in the scheme should not be mala fide, oppressive unreasonable and unjust, In the case of Re: ACE Insurance Limited 2002 CLD 171; a foreign insurance company to meet the requirement of Insurance Ordinance, 2000 applied for the sanction to bifur cafe its operations in Pakistan and to convert its branch office into a public company. Cases of Messrs Platinum Insurance Company Limited PLD 1999 SC 1; Messrs Habib Bank Ltd. 1991 MLD 124; International Finance Corporation,' PLD 2000 Lahore 323, Rauf B. Kadri PLD 20O2 SC 11; Hala Spinning Mills Ltd. 2002 SCMR 450, A.C.K. Krishnaswa mi (1964) 34 Com. Cases 6; S. Krishnamurthy, Registrar of Companies, Punjab (1966) 36 Com. Cases 9; Re: Alliance Motors (Pvt.) Ltd., 1997 MLD 1966; have no relevance with the facts in instance cases. The entire last mentioned cases are for winding up.
Of a company, for failure to pay debts. Case of Messr^ United Bank Limited 1996 CLC 890; is also order in appeal in winding up proceedings. Similarly case cited as Registrar of Companies, Punjab (1974) 43 Com. Cases 314 is also in respect of proceeding in winding up matter. Case of Kohinoor Textile Mills (2002 CLD 1844); also has no relevance to the facts of present case. It is a case under Monopolies and Restrictive Trade Practice (Control and Prevention) Ordinance, 1970.0856 reported as Messrs Industrial Development Bank of Pakistan 1993 CLC 1540; also relates to winding up proceedings.
22. I have heard the arguments and perused the record.
23. As is manifest from the preamble, object of the Companies Ordinance, 1984 appears is to protect the interest of the creditors and investors and promotion of investment and development of economy and matter arising out of or connected therewith.
24. It appears that the Objector Banks have obtained mortgage decree against the petitioner, executions have be^n filed, It also appears from the record that, others creditors have also filed as many as seven suits, except one pending before the Banking Court, as all are pending in this Court, proceedings in executions, as well as in suits, have been stayed under section 284(5) ibid in instant proceedings, the petitioner has filed instant petition to seek approval of the scheme, whereby, it is proposed that, the principal dues of both secured and unsecured creditors may be converted into equity, and that all the creditors shall waive mark-up.
25. In order to appreciate the arguments of both the learned counsel. It will be beneficial to browse through section 284 of the Companies Ordinance, 1984:-
284. Power to compromise with creditors and members.-(1) Where compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application in a summary way of the company or of any creditor or member of the company or, in. The case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class or members, as the case may be, to be called, held and . Conducted in such manner as the Court directs.
(2) If a majority in number representing three- ' fourths in value of the creditors or class of creditors, or members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree-to any compromise or arrangement the compromise or arrangement shall, if sanctioned by the Court be binding on all the creditors or the class of creditors or on all the members or class of members, as the case may be, and also on the company, or, in the case of a company in the course of being of compromise or arrangement.
Progressive approach was necessary to accommodate diversity of situations with flexibility to facilitate variety of compromise or arrangement ranging from a complex merger of number of business entities (see re Lipton Pakistan Ltd. 1991 CLC 818 and Pak Water Bottlers (Pvt.) Ltd. And 2 others 2003 CLD 1634. Demerger or bifurcation of one business entity into two or several (See re ACE Insurance 2002 CLD 171). Restructuring, conversion or variation of share and share capital including a re-organization of the share-capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods. Compromise or arrangement may also envisage composition either with shareholders or class or shareholders or with creditors or any-class of creditors as may be conducive for the well- being survival, progress and or to rescue the company. Scheme of compromise or arrangement between company and creditors may envisage for debt restructuring as was done in the case of Pakistan Cement Limited (2002 CLD 1392) and in re: Saadi Cement Limited (2002 CLD 1352). In cited case scheme envisaged payment of the entire amount of principal as well as mark-up within 10 years, more/than the statutory majority of the creditors approved the scheme, as the Creditors were put on more advantageous position then before. Scheme may envisage conversion of debt into equity or share wholly or in part, may convert shares or any part into debenture or bond (see Heron International Re. NV (1994} 1 BCLC 664 Ch. D.
28. Whatever the nature of scheme may be, foremost and preliminary step is to make application to the Court, seeking direction to call a meeting of specified class of stakeholder or interest group to consider and approve or otherwise the proposed scheme with or without any modification.
Usually the Court, at the motion of person interested to seek enforcement of proposed scheme, may call the meeting of specified class of person, It is necessary that, meeting of concerned categories of stakeholders, interest group' or "persons and or class of person that might be affected by the proposed scheme of reorganization, settlement, compromise, amalgamation, merger or demerger, as the case may be, is called. Applicant seeking sanction and approval of the Court has to be careful while requesting a meeting of the concerned stakeholders, interest groups or class of persons. If applicant chooses to call a meeting of a particular class of person leaving out other class of person whose rights or interest is affected or where joint meeting of person having diverse or conflicting interests is called to secure statutory majority, then applicant runs possible risk of rejection of petition, It was so held in the case reported &s Commers Bank AG v.
Arvind Mills Ltd. (2002) 110 Comp. Cases 539 (Guj), it was further held that, commonality of interest constitutes a separate class, It is for the applicant to indicate class to which scheme is proposed.
Where the classes are not properly formed, the sponsor of the scheme runs the risk of the Court refusing its sanction. A wholly owned subsidiary was held to be a separate class see re: hellenic & General Trust Ltd. (1975) 3 All ER 382. In cited case, Templeman, J. Stressed that, it is the responsibility of the applicant to see that, the class meetings are properly constituted, It was held That the majority shareholder being a . Wholly owned subsidiary of the outside purchaser for the share, constituted a separate class, from the other shareholders and that, accordingly scheme failed, It was also suggested that, a parent company owning 50 per cent or more share of the subsidiary company could be assumed to have a commonality of interest.
29. On examination of cases cited at bar and referred herein, it could be said that in proceedings under section 284 ibid, what constitutes a class,, invariably is a moot question. Company Court is required to examine the case of divergent stakeholders in a Company, may it be shareholders or creditors; or any class of either of them. Court has to find out if there is different classes' inter se.
Before sanctioning the scheme, Court must examine whether respective interest, of all the classes are taken due care of inequitable, just and fair manner. Broadly speaking and seemingly creditors may form one class and shareholder another. Language of section 284 ibid, demonstrates that, law recognized different classes amongst creditors and shareholders inter se. Each class of shareholders and or creditors may have different level and nature of rights and interest vis-a-vis company and even against each other. Creditors composing the different classes must show to the satisfaction of the Court that they have different and or conflicting interest distinct from the other.
30. In the instant case, as the record shows, petitioner company chose to call the joint meeting of all the creditors without any distinction. Result -of the joint meeting is mentioned in the report of Official Assignee as reproduced above, It is to be examined whether the Objector Banks, in fact formed a different and distinct class of creditors.
31. Term 'creditors' is of wide connotation, In corporate parlance creditor is a class of persons to whom company is indebted or owes a sum of money. Creditors may be preferential creditors, secured creditors and unsecured-creditors, In the case in hand, it appears that last two categories of creditors are pitched against each other.
32. It may be observed that, the objections based on classification, jurisdiction or otherwise must be raised at the very earliest opportunity. Objections rose immediately on receipt of notice of proposed scheme of compromise or settlement are usually .Given due consideration, In case objections are not raised at the first available opportunity, same may not be considered by the Court. (See Capital Assets Leasing Corporation Ltd. (2003 CLD 1713), Alston Power Bottlers Ltd. v.
State Bank of India (2002) 112 Comp. Cases 674). In instant case, it may be noted that, the Objector Banks have raised objections in the very first meeting, based on classification and manner in which joint meeting of different class of creditors was being convened.
33. For most objection of Mr. Arshad Tayebally, learned counsel that, the Objector Banks are different category of creditors, It was pointed out first that, the Objector Banks are not only .The secured creditors but so also hold decree in their favour and petitioner has obtained stay of execution proceedings other creditors are unsecured creditors. Secondly one of the major creditors 'Asset Investment Bank' is Associated Company of the petitioner- company holding over 24% share in the petitioner's company.
34. As could. Be synthesized from the reported cases on the subject, many are referred herein, "Class" in common parlance means a homogeneous section of people, grouped together, may be on account of common trade and common attribute, such as status, rank, and position or like.
Person belonging to one class has number of common characteristic, which bind or classify them to form a kind of unit on account of commonality of interest. Creditors is a term of wide connotation, there may be various categories of creditors. For the purposes of section 284 ibid, there is no distinction between the unsecured creditors who may have filed suits or obtained decrees and Other unsecured creditors who may not have filed any proceeding nor obtained any decree. (See section 284(6) ibid). See also Jalpaiguri Banking and Trading Company Ltd. Re: (1935)
5 Company Cases 335 and Hari Charan Karanjia v. Ulipur Bank Ltd. (1942) 12 Comp. Cases 110-AIR 1942 Cal. 442. In the case reported as Premier Motors (Pvt.) Ltd. v. Ashok Tondon, (1971) 41 Com.
Cases 656, while maintaining above view, Allahabad High Court, in consideration of the fact, that, In winding up, the interest of whole class of unsecured creditors would have to be dealt with on the same footing. Hence their interests are common irrespective of the time when their debts mature for payment of all the unsecured creditors, In this view of the matter, it could be conversely said for the purposes of -section 284 ibid that ''secured creditors' also constitute a separate and distinct class. Irrespective of the fact, whether they have filed suits or obtained decrees and other secured creditors who may not have filed any proceeding nor obtained any degree. Applying the analogy of Premier Motors (Pvt.) Ltd., (1971) 41 Com. Cases 656, (supra) to the secured creditors, it could be said that, not only in winding up, the interest of whole class of secured creditors would have to be dealt with on the same footing. After securing State revenue, salaries/wages/dues of the employees and insurance respectively, secured creditors have precedence over general or unsecured creditors. Even in case's where the assets of a company are sold whether under money or a mortgage decree,/secured creditors' have, priority after the State Revenue (see section 405 of the Ordinance, 1984, Order XXXIV, rule 13 read with section 73, C.P.C.). Thus it could be seen that, interest of secured creditors are common, irrespective of the time when charge on the property of the company was created or whether they have filed suit and- obtained decree or not, interest of all the secured creditors is usualiy alike and common.
35. Examining the case of the Objector-Banks, in the flight of above, objectors having first charge of hypothecation of stock and plant and machinery and a registered charge on land and building indeed they are secured creditors and thus form a distinct class. (See note 8.3 page 24 of the annual report for the year 2005f. Objector banks comprises of above 14% of total secured debt, It is also noted- that the Asset Investment Bank and Industrial Capital Modaraba are subsidiary company of the petitioner holding above 24.2305% shares and 03% shares respectively in the petitioner-Company. Thus subsidiary companies jointly hold over 2.7% shares in the petitioner's company. Looking at their investment-or the liability towards petitioner's company, in its annual report 2005, out of the total unsecured' liability of Asset Investment Bank Limited alone is claimed to be Rs: 22,961804 which represent almost 44% of the total liability.
36. As, regard the function power and discretion of the Court to sanction or otherwise a scheme.
Supreme Court of India after surveying large number of clause-laws and treaties has synthesized such power and function in the case reported as Miheer II Mafatlal v, Mafatlal Industries Ltd. AIR 1997 Su preme Court 507 at page 520.
In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the Company Court has clearly got earmarked. The following broad contours of such jurisdiction have merged:-
(1) The sanctioning Court has to see to it that all the requisite statutory procedure. For supporting such a scheme, has been complied with an 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 menders 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 not 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.
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 the ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
37. Keeping in sight legal position as stated above,. Scheme of Arrangement as proposed by the petitioner's Company may be examined to appreciate the rival contentions of both the learned counsel, scheme runs as, follows- SCHEME OF ARRANGEMENT (5.1) To overcome the persistent threat of close down and to safeguard the interest of major creditors and other concerned with the company, the following scheme of arrangement is offered for purview.
(5.2) As disclosed in the annual accounts the management of the company has been able to impress the major creditors for the conversion of their principal dues into equity and the same is under their active consideration.
(5.3) Thus the management of the company has formulated a scheme of arrangement whereby the financial institutions will be offered 13,803,737 ordinary shares of Rs. 10 each in lieu of the total principal debts of Rs. 138,037,370. The mark-up due to them shall be waived.
(5.4) The Capital position of the company before the after the incorporation of the scheme will be as follows:-- Particulars Share % Equity Issue New Share % Capital Linder The Scheme Capital Assessm ent 24,230,500 24.23 66,074,340 90,304,840 37.94 Investment Bank Ltd. Banker Equity Ltd 14,230,500 14.23 14,230,500 5.98 / 2006 Caravan East Fabric Ltd. V. Askari Commercial Bank C.L.963 (Mushir Alam, J.)
Habib Bank Ltd 9,487.000 9.49 9,487,000 3.99 Bank of Khyber 9,487,000 9.49 9,487,000 3.99 National Asset Leasing Corporation Ltd. 6,500,000 t. 6.50 31,683,880 38,183,880 16.04 First General Leasing Modaraba 5,500,000 6.50 5,500,000 2.31 Industrial Capital Modaraba 3,000,000 3.00 8,779,330. 11,779,330 4.95 Directors 5,410,000 5.41 5,410,000 2.27 Individuals (including General Public) 52,150,000 22.15 0 22,150,000 9.31 First Custodian Modaraba 5,000 0.001 5,000 Askari Commercial Bank Ltd. 13,039,000 ' 13,039,000 5.48 Albaraka Islamic Bank Ltd.. 6,195,000 6,195,000 2.60 Lease Pak Ltd. 9,738850 9,738,850 4.09 Dada bhoy Leasing Company Ltd. 2,526,970 2,526,970 1.06 100,00,000 100. 138,037,037 238,037,370 100 The dues of the financial institution have been rounded off to Rs. 10.
Time is needed to analyze the reasons behind the company's problems and determine whether the business is worth saving. A plan to revive the business has thus been developed and an assessm ent of the future cash flow and profitability .Has been made. Let the creditors be given an opportunity to evaluate and decide their future.
Considering the outcome of the closure (as disclosed in Chapter 4 of this report) the company proposes to seek permission of Court under section 284(1) of the Companies Ordinance, 1984 to call for the meeting of class of creditors (financial institutions) for approval of the scheme.
38. When scheme of any compromise or arrangement is placed before the Court for sanction, It is clear that, the Court is not merely to sit idol and pass order mechanically, It is function of the sanctioning Company Judge to see and be satisfied that, (a) all the requisite statutory procedure for supporting proposed scheme of settlement or compromise has been duly observed, (b) That the requisite meetings of the concerned class of stakeholders within the contemplation of section 284(1) of the Companies Ordinance, 1984 have' been held and conducted in accordance with law.
(c) That all necessary material referred in proviso to sub-section (2) That all necessary material referred in proviso to sub-section (2) of section 284 ibid was laid before the target class of stakeholders at the statutory meetings and so also before the sanctioning Court, (d) That the proposed Scheme has been approved by the statutory majority in number representing 3/4th (75%) in value of the concerned stakeholder or class thereof, as envisaged by sub-section (2) of section 284 ibid, (e) That the majority decision of the concerned crass of stakeholder is just fair and equitable legitimately bind the dissenting members of that class of stakeholder, (f) That the proposed Scheme does not infringe any provision of law and is not against public policy
39. In event joint meeting of broad-spectrum of stakeholders of divergent interest inter se is called and held, then it is duty of Court to see that meeting was not called with aim to assert and win over 75% of statutory majority as a whole, to earn sanction of scheme to the detriment of minority sub- class of stakeholder within that particular class of stakeholders, having otherwise conflicting interest.
40. Once the sanctioning Company Court is satisfied that all the requirements of law as noted above, are complied with, then hardly any justification or discretion remains with Court to refuse.
Sanction to the proposed scheme.
41. Applying the principles as discussed above in the instant case, in my opinion the proposed scheme of arrangement must fail for more than one reason, as elucidated below.
42. In instant case, petitioner chose to call joint meeting of all the creditors together. Admittedly there are two separate and distinct classes of creditors, as discussed in paras. 33 to 35 above, one comprising of Objector-Bank, being secured creditors comprising 15.90?/o of the total number of creditors present in the meeting. Other category comprised of unsecured creditor commanding 85.5% of total number in value, It may be observed that out of 14 creditors 10 creditors are existing shareholders of the petitioner- Company including Assets Investment Bank Limited (AIBL), one of the major unsecured creditors, AIBL alone hold almost 24% share capital in the petitioner's company (see para 5.4 of the proposed scheme as reproduced above) and represent almost 44% of total debt. Annual report placed on record shows that AIBL also have two directors on the board on the petitioner's company. Looking at the interest of unsecured creditors in the petitioner's company their natural inclination towards the petitioner's company is quite understandable.'
Where subordinated creditors have an interest in the company and otherwise have no interest or charge over the assets and property of the company, then they would, constitutes a different class.
Therefore, in my opinion joint meeting of secured creditors having charge over assets and property of the company and unsecured- creditors who are also a subordinated creditor, having no charge over the assets and property of the petitioner's company was improperly convened by the petitioner's company. Both secured and unsecured creditors have no commonality of interest. As observed in para 28 above, where applicant chooses to call, a meeting of a particular class of person leaving out other class of persons whose rights or interest is affected. And or where a joint meeting of Stakeholders having diverse or conflicting interest is called to win over statutory majority then such exercise is always viewed with suspicion, In such a situation applicant runs potential risk of rejection of petition, In the instant case, applicant chose to call the joint meeting of creditors of conflicting interest, having no commonality of interest inter se. In my opinion joint meeting of secured and unsecured creditors was not properly constituted. Joint meeting was called knowing fully well that unsecured creditors having clear-cut over all statutory majority will easily ride over the wishes and stampede the interest of minority secured creditors aimed at defeating mortgage decrees in their favour. As noted above, scheme of arrangement will not be sanctioned merely because it has been approved by seemingly homogenous majority of stake holder, unless sponsors satisfies the sanctioning Court that the scheme is fair and equitable, which the petitioner failed to establish in this case.
43. . Proposed scheme of arrangement is between the petitioner's company and its creditors.
Neither the meeting of shareholder was called nor was their approval of the scheme sought.
Though it is not always necessary to call meeting of such class of person to which scheme is not targeted. However where proposed scheme between one set of stakeholder also affects or varies rights and interest of any other set of stakeholder, then it is necessary to call meetings of affected class of person and seek approval of proposed scheme from such class of stakeholders as well. If such course is not adopted and affected class is neglected, then also the sponsors of the Scheme of arrangement may fail to secured the approval of the Court.
44. Examining the present cases, as per annual report for the year 2000 out of total 524 share holders 506 are individual shareholders representing 25.555% five financial institutions representing 63.935%, three Modarabas representing 8.505% and .005% are being held by others, In the Annual report of the year 2005 position almost remains the same with minor variation, total has reduced to 515 shareholders. 506 are individual shareholders representing 25.555%, five financial institutions representing 63.930% three Modaraba representing 8.505% and .005% are being held by others.
45. In the meeting of the creditors Jt is noted that out of 8 creditors that participated, four are also the shareholders namely Assets Investment holding 24.2305%. Industrial Capital Modaraba representing 3%, National Asset Leasing representing 6.487%. Even if consent of said creditors is construed to be consent of shareholders as well, then in terms of percentage they hardly represent 33.775% of the total shareholders, which percentage is far below the statutory 75% requirement of the total value of the shareholders. Contention of Mr, Asim Mansoor that, Official Assignee is also Official Liquidator for the Banker Equity holding 14.2305%. Arguments are fallacious firstly, for the reasons that, the Official Assignee was appointed to chair and hold meetings of the creditors and not in his capacity to represent Banker's Equity. Secondly even if presence of Official Assignee in the meeting of creditors is also considered to be on behalf of Bankers Equity, then too, statutory majority is not achieved. Examining the para 5.4 of the scheme as reproduced above, it may be noted that share holding of shareholders has been varied without obtaining their consent and without there being any corresponding induction of capital or security. Trend of change in the shareholding is also quite visible. Balance-sheet at page 107 (relevant page 155) of the file, show that, the shareholding of the Bankers Equity Limited has been reduced from 14.23% to 5.98%, of Habib Bank from 4.99% to 3.99%, of Bank of Khyber from 9.49% to 3.99% and that of the individual from 22.15% to 9.13 per cent. Shares of Asset Investment Bank Limited have been enhanced considerably irrespective of the fact hat AIBL is not the secured creditors. The scheme of creditors that has immediate effect on the right and interest of majority of the shareholders: it is settled position in law that, meeting for the approval of proposed scheme must be meeting of such class of stakeholders as would be directly affected by the proposed compromise and not that of any other class, In instant case such principal is violated, therefore, the proposed scheme could not be approved.
46. It may be observed that share capital has been enhanced fr6m Rs. 100,000,000 to Rs.
238,037,370, there seems to be no corresponding effort or steps brought on record from the date of filing of the petition till date of arguments by the petitioner-Company to secure permission from the Federal Government tb enhance the capital nor meeting of shareholders has been called to seek approval on such count. .
47. In present case, through proposed scheme of arrangement, petitioner-Company seeks to increase its share capital. Though scheme of arrangement and compromise within the contemplation of section 284 ibid do envisages increase in share capital or composition of share capital and or conversion of debt into equity. But such could be achieved by fulfilling requirement and following procedure provided under law. In present case scheme proposes to increase capital by more than double, requirement of section 86 ibid read with Regulations Nos. 14 to 16 of the 'Regulations' For Management of Companies Limited By Shares' have not been complied with. As observed above, arrangement proposed between company and a class of its member must be agreed by majority of 3/4th in value of the class affected. I am of the opinion that, the conversion of debt into equity thereby increasing its capital is being sought to eat up the debt of the secured creditors {i.e. Objector- Banks) ravenously. I have also examined the current Annual report for the year 2005, I am not satisfied that, proposed scheme tends to improve the over all liquidity of the company. Proposed scheme is clearly unfair and prejudicial to the rights .And interest of majority shareholders and secured creditors.
48. Examining the proposed scheme from another view point, and to see how far it is fair, just and equitable. Objector Banks are the secured creditors represent 15.90% of total creditors (both secured and unsecured) they hold decree in their favour, execution proceedings are pending.
Askari Commercial Bank Limited holds a decree in the sum of Rs. 17.993 Million including mark-up and other charges of Rs. 4.954 Millions. Al-Baraka Islamic Bank Limited holds a decree in the sum of Rs. 8.480. Million including mark-up artal other charges of Rs. 2 285 Millions. Both the decrees carry mark-up at 14% from the date suit till recovery and decree for sale of mortgaged immovable property of the petitioner's company. The scheme, proposes that the principal debt secured and unsecured may be converted into equity and shares corresponding to principal liability is proposed- to be issued and the mark-up shall be written off. Liability of Askari Commercial Bank Limited in the sum of Rs. 17.993 Million is reduced to Rs. 13.039 Million mark-up and other charges of Rs. 4.954 Millions are written off. Liability of Al-Baraka Islamic Bank Limited in the sum of Rs. 8.480 Million is reduced to Rs. 6,195,000 and mark-up and other charges of Rs. 2.285 Millions .Are written off. Mr. Asim Mansoor on the query of the Court, after obtaining instruction had informed that, on the date of arguments shares of the petitioner's company are quoted at Rs. 3.10 on the stock exchange. This means that, if the scheme is approved then the secured creditors shall further be plunge into 69% deficit of their total credit liability besides wiping out entire security, which is only hope of recovery of the debt. In the case of Pakland Cement Limited 2002 CLD 1392 and In re: Saadi Cement Limited 2002 CLD 1352 scheme envisaged payment of the entire amount of principal as well as mark-up within 10 years, more security was also introduced and the creditors were put on more advantageous position more than the statutory majority of the creditors approved the scheme, then before, it was for this reason Court also approved the scheme, In contra in instant case not only the entire mark-up is eaten upon, principal amount has been slashed down upto 69%, beside the security wiped out wholly. Scheme cannot be said nothing short of brazen onslaught on the secured creditors, it amounts to swindling the investment of the creditors, In my opinion if such schemes of arrangements are approved, it will encourage reckless companies to make heavy borrowings and outclass the secured creditors by creating dubious or unverifiable credit liability of their associate or crony companies or delinquent directors and on such brazen strength get the scheme of arrangement approved. The proposed scheme is patently not only unfair and unjust but a mala fide attempt to deprive the secured creditors of the finance, therefore, on this count also it cannot be approved.
49. In view of the foregoing discussion, petition along with all pending applications is dismissed with costs. Interim orders of stay of proceedings also stand vacated.