The main legal point established in the judgment is that under Sec. 391 of the Companies Act, it is essential to disclose all material facts relating to the company's financial position and obtain consent from secured creditors before seeking approval for a scheme of amalgamation. The scheme should not affect the rights of the secured creditors and should be in the public interest.

M. Chockalingam, J.

All these appeals have arisen from a common order made by the learned Single Judge of this Court in Company Application Nos.499, 500, 502, 503, 505, 506, 508, 509, 521, 522, 523, 524, 1937 and 1940 of 2002 and 137, 140, 143 and 146 of 2003 in Company Petitions 239 to 242 of 2001.

2. he above company applications were filed by four banking companies namely Corporation Bank, Dhanalakshmi Bank Limited, State Bank of India and Lakshmi Vilas Bank Limited whereby an order in C.P.Nos.239 to 242 of 2001 dated 12. 2001 was sought to be set aside.

3.The case of the petitioners bank in the above company applications can be stated thus:

(a) M/s.RSL Industries, a public limited company and incorporated under the Indian Companies Act, availed loans from various banks including Corporation Bank and other financial institutions. The said company availed a foreign currency loan of 200 million USD in order to meet its high cost borrowals from various financial institutions and other money lenders and thus the Corporation Bank was one of the secured creditors. Availing the financial facilities, the company cleared its loan from Industrial Development Bank of India (IDBI) to the extent of Rs.12.75 crores. The said loan was released on the belief of the representation of the company and also in good faith that a mortgage was to be executed in order to secure the dues, but it was not done. It was also agreed that the loan should be repaid within a period of six years in 20 quarterly instalments. Despite many a demand and personal contacts, neither the amount was paid nor regularised the account, nor the company obtained the documents from IDBI.

(b) While the matter stood thus, the company has made an arrangement for scheme of amalgamation/demerger. C.P.No.239 of 2001 was filed seeking approval of the scheme of arrangement of merger of the textile division with RSL Textile India Limited, the transferee company. C.P.No.241/2002 was filed for amalgamation of RSL Industries with Ramco Super Leather Limited. An order of approval was made by the Court on 12. 2001.

(c) Before making such arrangement for a scheme of amalgamation/demerger, notice should have been issued to the creditors before approval of the scheme. But, keeping the Corporation Bank in darkness and without its knowledge, the company has sought for approval of the scheme by making publication in Business Line and Dinamalar. The petitioner has sent a lawyers notice on 1. 2002 for regulrisation of the account.

(d) The charge that was created by the company in favour of the Corporation Bank was not limited to Textile Division alone. The loan availed was not only utilised to pay back the liability if the IDBI, but also several other borrowers. Hence the intention of the company to frame a scheme without notice to the creditor Bank was only an attempt with a malafide intention to dilute the security available. But the charge created in favour of the bank shall continue till the satisfaction of the charge by payment of loan amount. The Court is empowered to refuse the approval of the scheme if it was not in the public interest. The scheme was opposed to public interest since no care to protect the money advanced by public sector bank was shown.

(e) The company had two major divisions, leather and textile, whose operations were carried out independently and performance was also monitored. But the over all management was by the common Board of Directors. There was no separate banking operation and consortium arrangement. The present spinning off and merger according to the company had resulted in bifurcation of assets. The cash flow and cash accrual and the repayment capacity of the bank were taken into account at the time of granting of the loan. Now, they have been altered and tampered with. The balance sheet of these two companies do not reveal any profit. Hence it would be quite clear that the scheme was only to defraud the bank. It has caused greater hardship