SHARP INDUSTRIES LIMITED Vs. ADHESIVES AND CHEMICALS

JUDGEMENT

(1.) THE Petitioner has approached this Court to sanction the modified and amended scheme of compromise/arrangement as amended between Sharp industries Limited-the Petitioner Company and its secured, unsecured, statutory creditors and equity shareholders. It is also prayed that the reduction of the equity share capital in terms of the modified and amended scheme as approved by the special resolution passed by the equity shareholders of the Petitioner Company in their meeting held on 1st June 2005 be confirmed, and that, the order sanctioning the modified and amended scheme of compromise/arrangement be deemed to be an order confirming reduction in capital within the meaning of Section 102 of the Companies act, 1956.

(2.) THE Petitioner Company was incorporated on 9th March 1988 under the provisions of Companies act, 1956. The Certificate of commencement of business was granted by the Registrar of Companies, maharashtra, Mumbai on 9th March 1988. The authorised share capital of the Petitioner is 1,20,00,000 (One Crore Twenty Lakhs) equity shares of Rs. 10/- each. The issued, subscribed and paid up share capital is 1,08,16,382 (One Crore Eight lakhs Sixteen Thousand Three Hundred Eighty-two)equity shares of Rs. 10 each fully paid. The petitioner is engaged in the business of manufacturing, converting, processing, designing, buying, selling, exporting, importing and/or otherwise dealing in the packaging materials, printing by various printing processes including rotogravure Printing process way coating and lamination, slitting and sheeting of paper, board, plastic films, polythene, cellophane metal and aluminium foils, Manufacture of bags and pouch making and contract packing and related activities and other packing material used for packaging industrial consumers, commercial or domestic articles and materials, whether solid or liquid or gaseous. It is stated that the Petitioner's plants operated with high level of capacity utilisation of 82-85% each till December 2000. The Petitioner is an established manufacturer of flexible laminates. It is stated that Petitioner enjoys product approvals and continuous orders from prestigious clients like Hindustan Lever, Proctor and Gamble, dabur, Castrol, Prefect, etc. It is stated that the capacity utilisation sharply declined from the year 2001 onwards due to recession in the end-user segments and unhealthy competition, which resulted in continuous losses, erosion of working capital of the company, which in turn, affected production. The sales of the Petitioner during the year 2003 and current year 2003-2004 were mainly in the nature of job work sales due to complete erosion of the working capital, and declined from Rs. 144 crores for 18 months ended 31st December 2000 (annualized Rs. 96 crores) to Rs. 53 crores in year ended 31st December 2001. It is stated that with a view to overcome the adverse market situation, petitioner introduced new products based on holographic lamination and printing technology, for which, undertook substantial expenditure on product development. This experiment, however, did not materialise, for reasons beyond the control of the petitioner, which resulted in further financial pressure on the Petitioner incurring heavy losses in the year 2001. It is stated that the losses gradually eroded the available resources, as a result of which, Company entered the vicious cycle of lower sales due to restricted activity of working capital, which had cumulative effect of increase in losses by wiping out the working capital. It is then stated that during the nine months ended September 2003, the sales of the petitioner comprised mainly from job work that is toll manufacturing for other flexible packaging material manufacturing companies. To sustain itself, Petitioner obtained financial assistance from various banks and financial institutions, but the Petitioner was unable to service its long term debts and was unable to pay interest and instalments of the principal amount due to its creditors. Suffice it to observe that to overcome the adverse situation, Petitioner thought it advisable and expedient to restructure the debts. The Petitioner Company therefore made reference to the Board of Industrial and Financial reconstruction (BIFR) on the assertion that its accumulated losses has exceeded its net worth, as on 31st December 2002. The said reference however came to be rejected on 29th December 2003. Against that decision, Petitioner Company has preferred an appeal, which is still pending before the Appellate authority. In the meantime, the Petitioner Company had discussion with Banks and Financial institutions for financial restructuring. This effort paid dividends as the Asset Reconstruction company (India) Limited (ARCIL) registered with reserve Bank of India under Securitisation and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by their letter dated July 9, 2004 informed the Petitioner that the restructuring proposal submitted by them was under examination and may be considered acceptable, subject to approval from their management. Similarly, ICICI Bank Limited by its letter dated 5th April 2004 and State Bank of India vide letter dated 12th May 2004 informed the Petitioner that they have absolutely assigned their respective debts to ARCIL. In this backdrop, the Petitioner company propounded the present scheme of compromise/arrangement for restructuring the petitioner's debts vis-a-vis secured, statutory and unsecured creditors as also shareholders. The petitioner, anticipating that all the secured lenders may not enter into arrangement with ARCIL under the Act of 2002, proposed a scheme under sections 391 and 392 of the Companies Act, 1956 to cover all the lenders. The objects to be achieved by the present scheme of compromise are stated as follows:

(3.) AS the Petitioner Company is optimistic about overcoming the financial difficulty presently encountered on account of adverse market conditions, as it was already on the road of recovery on account of improved market conditions and being a viable corporate entity, capable of recovering itself from such set-backs, if the debts' level were to be reduced, has propounded the present Scheme. Under the Scheme, the paid up value of equity shares shall stand reduced to rs. 54,08,190/- (Rupees Fifty-four Lakhs Eight thousand One Hundred Ninety) i. e. by 95% i. e. by cancelling Rs. 9. 5 per equity share from the face value of Rs. 10/- each, held by the equity shareholders as on the record date to be fixed by the Board of Directors. The shares shall thereafter be consolidated and 20 existing equity shares of Rs. 0. 50 each, shall be merged into one share of Rs. 10/- each, as on the effective date and the paid up capital shall stand reduced to rs. 54,08,190/- (Rupees Fifty-four Lakhs Eight thousand One Hundred Ninety Only) comprising of 5,40,819 (Five Lakhs Forty Thousand Eight Hundred nineteen) equity shares of Rs. 10/- each.