Gujarat High Court
Rajeev vs Official on 7 October, 2011
Author: Jayant Patel
Bench: Jayant Patel
Gujarat High Court Case Information System
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OJA/8/2009 65/ 65 JUDGMENT
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
O.J.APPEAL
No. 8 of 2009
In
COMPANY
PETITION No. 275 of 2008
In
COMPANY APPLICATION No. 446 of 2008
For
Approval and Signature:
HONOURABLE
MR.JUSTICE JAYANT PATEL
HONOURABLE
MR.JUSTICE R.M.CHHAYA
=========================================================
1
Whether
Reporters of Local Papers may be allowed to see the judgment ?
2
To
be referred to the Reporter or not ?
3
Whether
their Lordships wish to see the fair copy of the judgment ?
4
Whether
this case involves a substantial question of law as to the
interpretation of the constitution of India, 1950 or any order
made thereunder ?
5
Whether
it is to be circulated to the civil judge ?
=========================================================
RAJEEV
S MARDIA AND RASIK S MARDIA - Appellant(s)
Versus
OFFICIAL
LIQUIDATOR OF MARDIA STEEL LTD (IN LIQUIDATION) & 8 - Opponent(s)
=========================================================
Appearance
:
PARTY-IN-PERSON
for Appellant(s) :
1,
OFFICIAL LIQUIDATOR for Opponent(s) : 1,
MR ROSHAN DESAI for
Opponent(s) : 1,
MR SAURABH G AMIN for Opponent(s) : 1,
MR PS
CHAMPANERI Ffor Opponent(s) : 2,
MRS MAUNA M BHATT for Opponent(s)
: 3,
NOTICE SERVED for Opponent(s) : 4, 8,
MR YN RAVANI for
Opponent(s) : 5,
MR SHALIN N MEHTA for Opponent(s) : 6,
MR KB
PUJARA for Opponent(s) : 7,
MR SACHIN D VASAVADA for Opponent(s) :
9,
=========================================================
CORAM
:
HONOURABLE
MR.JUSTICE JAYANT PATEL
and
HONOURABLE
MR.JUSTICE R.M.CHHAYA
Date
: 07/10/2011
CAV
JUDGMENT
(Per : HONOURABLE MR.JUSTICE JAYANT PATEL) The present appeal is directed against the order dated 02.02.2009 passed by the learned Company Judge in Company Petition No.275/08 whereby the scheme for compromise and arrangement preferred by the appellants has not been sanctioned and the petition is dismissed.
The facts as it emerges from the scheme of revival and compromise (hereinafter referred to as "the scheme" for the sake of convenience) is that Mardia Steel Ltd. (now in liquidation) (hereinafter referred to as the "the Company") on 21.04.1998 had approached to BIFR under Sick Industrial Companies Act, 1985 (SICA) being Reference No.100/98. There were various proceedings before BIFR which may not be of much relevance in the present proceeding. However, it is relevant to the extent that in the proceeding before the BIFR in the year 2001, BIFR had ordered for change in the management of the Company and the operating agency (IFCI). Thereafter, the advertisement was issued as per the direction of BIFR. In response to the said advertisement, the Company made an offer for One Time Settlement but no other scheme or proposal was received by the operating agency. Ultimately, bank and financial institutions in October 2001 rejected the offer made by the Company and sought for direction of BIFR. After hearing the parties, BIFR passed an order in April 2002 and recommended for winding up of the Company. One of the pertinent aspect which may be deserved to be recorded is that BIFR being one of the expert body at the relevant point of time opined that the Company cannot be revived and winding up should be made of the Company. Pending the proceedings before this Court, after Reference was received by BIFR, a revival proposal was submitted by the Company to IFCI which took the same into consideration, but as no decision was rendered by the financial institution, on 23.07.2003, High Court appointed Provisional Liquidator and ordered for winding up. Thereafter, Official Liquidator was appointed by the High Court and he issued necessary advertisement in the newspaper inviting offers to sale the assets of the Company situated in various locations and he received certain offers for some plants of the Company against which the applications were moved by the erstwhile promoters in the High Court for staying of the sale of the assets. At that stage, the scheme for rehabilitation was proposed by the ex-promoters for consideration. The attempt was made by the ex-promoters of the company proposing the scheme of compromise to its secured and unsecured creditors in the year 2005 being Company Application No.312/05, Company Petition No.158/05 and 172/05 before the High Court of Gujarat (hereinafter referred to as the "High Court"). However, the same could not be implemented as it could not get the sanction of High Court for want of requisite statutory majority of the creditors. Hence, the High Court directed vide its order dated 18.09.2006 to the official liquidator to have a fresh valuation of the properties of the Company and to invite fresh tenders for the auction which was to be completed by January 2007. The advertisement were issued inviting tenders and the auction took place on 23.01.2007 and 13.06.2007 aggregating the total bidding amount of Rs.63.67 crores. The ex-promoters of the Company once again proposed the scheme of revival/restructure of the Company vide Company Application No.557/06 to the High Court. The High Court vide its order dated 22.01.2007 ordered for convening of the meeting of secured creditors, unsecured creditors and shareholders of the Company on 10.03.2007 and also directed the Official Liquidator to proceed further for the auction of the property, but the auctions were not finalised by the Official Liquidator with a view to see that irreversible situation may not arise or new equities may not be created in event the Court considers the question for according sanction to the scheme. The Bank of Rajasthan, one of the secured creditor of the Company, moved the Division Bench of this Court to stay the operation of the order dated 22.01.2007 of the learned Company Judge and accordingly on 05.03.2007, the Division Bench stayed the operation of the order of the learned Company Judge dated 22.01.2007 to convene the meeting of the Company. The ex-promoters of the company moved to the Apex Court against the order of the Division Bench of this Court and the Apex Court redirected the matter to this Court vide its order dated 10.11.2007 to decide within one month, which is stated to be pending.
Pending the appeal before the Division Bench, the present scheme has been preferred by Rajeev Mardia and Rasiklal Mardia (hereinafter referred to as "Mardia brothers") and initiated the present proceedings. It has been so declared that in view of the present proceedings, earlier scheme shall be abandoned and the Division Bench of this Court shall be accordingly informed about the same.
On 04.08.2008, Mardia brothers preferred Company Applications No.446, 447 and 448 of 2008. On 11.08.2008, the learned Company Judge after hearing the application, ordered for convening of the meeting of all classes of creditors and shareholders. However, the meetings were to be separately convened of the unsecured creditors, equity shareholders and secured creditors of the Company for consideration of the scheme. As per the applicants therein, who are appellants herein, notices of the meeting were sent individually to all unsecured creditors, equity shareholders and secured creditors as required by the order together with the scheme of arrangement with the explanatory statement as required under section 393 of the Act and form of proxy. The notice of the meeting was also advertised as directed by the said order in Indian Express English daily and Jansatta Loksatta Gujarati daily, both Ahmedabad edition. On 04.09.2008 and on 29.09.2008, the said meeting of unsecured creditors, equity shareholders, and secured creditors of the Company were duly convened and the report was submitted by the Chairman about the results of the meeting. The meeting of unsecured creditors was attended by 39 unsecured creditors in total together with others representing the claim of Rs.9,25,29,202.28. Out of 39 votes cast, one was found to be invalid and the remaining 38 unsecured creditors have voted in favour of the scheme. None of the unsecured creditors voted against the scheme. Thus, the Resolution approving the proposed scheme was approved unanimously by the unsecured creditors of the Company present and voted at the meeting. The meeting of the equity shareholders of the Company was attended by 27 equity shareholders of the Company entitled to Rs.16,92,60,230/- being the value of the 16926023 equity shares of Rs.10/- each. Out of 27 ballot cast, there were two held to be invalid and all the remaining equity shareholders voted in favour of the scheme. None of the equity shareholders voted against the scheme. Thus, the resolution approving the proposed scheme of arrangement was approved unanimously by the equity shareholders of the Company present and voting in the meeting. The meeting of the secured creditor was attended by 9 secured creditors claiming to the total dues of Rs.188,04,00,0000. All the 9 secured creditors present at the meeting participated in the meeting and voted in favour of the scheme. Thus, the resolution approving the proposed scheme of arrangement was approved unanimously by the secured creditors of the Company present and voting at the meeting. In the main Company Petition No.275/08 for sanction of the scheme, notice was given to the Central Government. The procedure prescribed under section 10(2) of the Companies Act (hereinafter referred to as "the Act") was declared as not required to be followed. The advertisement was also given in Loksatta Jansatta and India Express, both Ahmedabad edition on 28.10.2008.
The report was filed by the Official Liquidator and the objections were also filed by the Regional Director on behalf of the Central Government to the approval of the scheme. However, the pertinent aspect is that the Official Liquidator in the report dated 25.11.2008, did point out that the scheme does not contain any provisions for settlement or payment of any statutory preferential claims of the Government like Income Tax, Sales Tax, Excise, Municipal Corporation, Gujarat Electricity Board, revenue dues, etc. and it was submitted that the statutory claims of the Government dues is a separate class of the creditors and no compromise or arrangement is proposed in respect of such claimants in the proposed scheme. It was further submitted that if the sanction may not bind the preferential creditors as a class, the Company will have to honour its liabilities towards them for which there is no express provision of the scheme as proposed. The Official Liquidator also submitted in the report that certain specified liabilities by the scheme is to be transferred to two separate private limited companies, whereas the liability of the Company towards preferential creditors shall remain with the Company and consequently, the statutory preferential claims of the Government dues shall then be enforcible only against the remaining assets of the Company which would be detrimental to the interest of the Government dues being statutory preferential claims.
On behalf of the Central Government also the affidavit was filed by the Deputy Registrar of Companies, contending inter alia that the scheme is silent about reemployment of ex-workers after revival. It was also submitted that the sponsor of the scheme is to bring the fund of Rs.5 crore only by way of capital and the scheme is silent about the fund to be brought in the event of shortfall. It was also submitted that the petitioner be directed to clarify as to how Rs.10530 lakhs will be raised while the paid up capital of ADPL and KDPL are Rs.1 lakh each only and the sponsor of the scheme are to bring only Rs.5 crore by way of capital. It was opined that the scheme appears to be a ploy to dispose of the properties of the Company in liquidation by taking out liquidation. The learned Company Judge thereafter, has passed the impugned judgment whereby the petitions for sanction of the scheme has been dismissed. Under the circumstances, the present appeal before us.
We may record that initially in the present appeal, on 19.02.2009, the Division Bench of this Court (Coram : R.M. Doshit and M.D.Shah, J.J.) had admitted the appeal and below the interim application being Civil Application No.54/06 in OJ Appeal No.8/09, the Division Bench of this Court had granted relief in terms of para 4(B), whereby the direction was issued to implement the revival scheme pending the OJ Appeal and thereafter, the another application was submitted by the appellant herein being Civil Application No.85/09 wherein this Hon'ble Court (Coram : R.M.Doshit and M.D.Shah, J.J.) had further passed the interim order on 13.03.2009 whereby the Official Liquidator was directed to handover the possession as soon as possible, but not later than 10 days from the said date. It appears that thereafter, as the Division Bench had directed, on 19.03.2009 the possession of the property at Vatva, on 20.03.2009 the possession of the property at Chancharwadi, Ratlam (MP) and Sayla were handed over by the Official Liquidator pursuant to the aforesaid interim orders passed. It may also be recorded that against the aforesaid both the interim orders passed by the Division Bench of this Court of directing implementation of the scheme of revival and of handing over of the possession, the matters were carried before the Apex Court being Civil Appeal Nos. 8149/09 to 8150/09 and in those appeals, the Apex Court vide order dated 07.12.2009, observed thus -
"Prima facie, we are not satisfied with the manner in which the impugned order has been passed by the Division Bench of the High Court. As and by way of illustration, we may state that in the impugned order, the High Court has observed that "though the objection has been raised in respect of the outstanding statutory dues of the Company and outstanding dues of the the workmen, the objection appears to be vague." We do not know the basis on which such a statement has been recorded by the High Court. We are not even sure as to whether notices were issued to the workmen as well as to the concerned Revenue Departments. There is nothing to indicate that whether any amount towards income tax is outstanding and whether provision is made to that effect in the Revival Scheme. It is important to bear in mind that today in the guise of sponsoring Revival Scheme, many promoters seek possession of the assets. Revival Scheme is an alternative to winding up. It is welcome. However Courts have to be circumspect. They must check the financial viability of the sponsor to revive. They must make provision for outstanding dues (be it of workmen or the exchequer). Notices have to be given by the Court (s) to Revenue Authorities and the workmen.
In the circumstances, we set aside the impugned orders and we remit the matter to the High Court for de novo consideration in accordance with law. We make it clear that the High Court will provide for all outstanding dues of the Revenue Department in the proposed Scheme if at all it undertakes the exercise of accepting the Revival Scheme propounded by respondents. The High Court will give notices to the Commissioner of Income Tax as well as Commissioner of Sales Tax etc. before making any provision for outstanding dues in its orders. Similarly, if the Unions are not representing the workmen, the High Court will see to it that proper steps are taken for representation of the workmen's case. He High Court will also examine the Financial Statements, if any, to arrive at the conclusion as to what is the amount of salaries pending as payable by the Company to its workers and correspondingly the High Court will make a provision for such salaries in the Revival Scheme. All this exercise will be undertaken only if the Division Bench comes to the conclusion that the proposed Scheme is financially viable under the provisions of the Companies Act.
Mr.B.V. Desai, learned counsel appearing on behalf of the Torrent Power Company, has put in appearance (caveat). He states that even the outstanding amounts due and payable to Torrent Power Company have not been taken into account. We direct the Division Bench to make a provision for all these dues in the Revival Scheme if at all it thinks that the Scheme proposed by Mardia Brothers is financially viable.
We give liberty to the Regional Director, Western Region, Ministry of Corporate Affairs, to intervene in the matter to the extent of the outstanding dues payable by the Company to the Central Government (excise and income tax dues).
We express no opinion on the merits of the case.
Subject to the above, the Civil Appeals are disposed of with no order as to costs"
We may also record that after the aforesaid order passed by the Apex Court, this Court vide order dated 14.10.2010, directed to join the Income Tax department, Sales Tax department, Central Excise, Arcil, Torrent Power Ltd. and State of Gujarat as party and additionally ESI Corporation as party respondent and notices were issued to them. Thereafter, the appeal is finally heard by us.
We have heard Mr.Rasiklal Mardia on behalf of the appellant who is appearing as party-in-person, Roshan Desai for OL, respondent no.1, Mr.P.S.Champaneri, Assistant Solicitor General for the Regional Director, respondent no.2, Ms. Mauna Bhatt for respondent no.3 Income Tax department, Ms.Moxa Thakker, learned AGP for Sales Tax department and State of Gujarat, respondents 4 and 8, Mr.Y.N. Ravani for Central Excise, Mr.Shalin Mehta for respondents no.6.1 and 6.2 ARCIL, Mr. Pujara for respondent no.7, Mr.Sachin Vasavada for respondent no.9 ESI Corporation and Mr.Mihir Joshi with Mr.Saurabh Amin for the intervener shareholders.
Before we advert on the facts of the case, it would be relevant to consider the statutory provisions and concerned case law on the subject so as to undertake judicial scrutiny of the scheme.
Section 391 of the Act provides for the consideration of the scheme of compromise or arrangement with the creditors and the members. Section 391(1)(a) provides for creditors and the class of creditors for the purpose of consideration of the scheme and it further provides for the binding effect of the scheme on all creditors if so sanctioned by the Company Court. Proviso to sub section (2) provides that no order for sanctioning the scheme shall be made by the Court unless the Court is satisfied that the Company has disclosed all material facts relating to the Company such as financial position of the Company, the latest auditors report on the accounts of the Company, the pendency of any investigation proceedings in relation to the Company and the like. Section 392 of the Act provides for the power with the Company Court to enforce the compromise and arrangement including that of the power to supervise or to carry out the compromise of the scheme. Of course, such aspect may arise only after the scheme is so sanctioned by the Company Court. Section 393 of the Act provides for information as to the compromises or arrangements with creditors and members of the Company. It provides for the manner in which the scheme is to be made known to the creditors or the members (shareholders) of the Company as the case may be. However, the pertinent aspect is that the information including that of material interests of the Director, Managing Director or the Manager of the Company and the effect of those interest in the compromise or arrangement is required to be reflected and non-disclosure thereof has been made as an offence punishable. Section 394 provides for facilitating the reconstruction and amalgamation of the Companies and it also provides for the manner of consideration of the scheme by the Company Court and the effect thereof upon the sanction granted by the Court. The relevant aspect is that in section 394(1) by second proviso, it has been provided that no order for dissolution of any transferor Company shall be passed unless the report is submitted by the OL to the effect that the affairs of the Company have not been conducted in the manner prejudicial to the interest of the members or public interest. Section 394A inserted in the statute book by the amendment Act No.11/03 provides for the mandatory requirement on the part of the Company Court to give notice of every application made under sections 391 or 394 to the Central Government and the consideration of the representation if any made by the Central Government.
In the case of Miheer H.Mafatlal Vs. Mafatlal Industries Ltd. reported in (1997) 1 SCC 579, the Apex Court had an occasion to consider the role of the Court while considering the scheme before its sanction by the Court. At paras 28 and 29, it has been by the Apex Court thus -
"28. The relevant provisions of the Companies Act, 1956 are found in Chapter V of Part VI dealing with 'Arbitration, Compromises, Arrangements and Reconstructions'. In the present proceedings we will be concerned with the Sections 391 and 393 of the Act. The relevant provisions thereof read as under :
"391.(1) where a compromise or arrangement is proposed -
(a) between a company and its creditors or any class of them ; or
(b) between a company and its members or any class of them ;
the Court may, on the application of the Company or of any creditor or member of the company, or in the case of to company which is being wound up, of the liquidator, order a meeting of creditors or class of creditors, or of the members or class of members, 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, or class of members, as the case may be, where proxies are allowed under the rules made under section 643, 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, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company :
Provided that no order sanctioning any compromise or arrangement shall made by the Court unless the is satisfied that the company any other person by whom an application has been made under-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts 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 under sections 235 to 251, and the like.
393.(1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under section 391, -
(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect : and in particular, stating any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons;
and
(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statements aforesaid."
The aforesaid provisions of the Act show that compromise or arrangement can be proposed between a company and its creditors or any class of them or between a company and its members or any class of them. Such a compromise would also take in its sweep any scheme of amalgamation/merger or one company with another. When such a scheme is put forward by a company for the sanction of the Court in the first instance the Court has to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme and once the majority in number representing three-fourths in value of creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval to any compromise or arrangement thus put to vote, and once binding to all creditors or class of creditors or members or class of members, as the case may be, which would also necessarily mean that even to dissenting creditors or class of creditors or dissenting members or class of members such sanctioned scheme even though approved by a majority of the concerned creditors or members the Court has to be satisfied that the company or any other person moving such an application for sanction under sub-Section (2) of Section 391 has disclosed all the relevant matters mentioned in the provision to sub-section (2) of that Section. So far as the meetings of the creditors or members, or their respective classes for whom the Scheme is proposed are concerned, it is enjoined by Section 391(1) (a) that the requisite information as contemplated by the said provision is also required to be placed for consideration of the concerned voters so that the parties concerned before whom the scheme is placed for voting can take an informed and objective decision whether to vote for the scheme or against it. On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at once clear that the Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the concerned company, has to act merely as rubber stamp and must almost automatically put its seal of approval on such a scheme. t is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in view by the Company Court its sanction. It is, of course, true that so far as the Company Court is concerned as per the statutory provisions of Sections 391 and 393 of the Act the question of voidability of the scheme will have to be judged subject to the rider that a scheme sanctioned by majority will remain binding to a dissenting minority of creditors or members as the case may be, even though they have not consented to such scheme and to that extent absence of their consent will have to effect the scheme. It can be postulated that even in case of such a Scheme of Compromise and Arrangement put up for sanction of a Company Court it will have to be seen whether the proposed scheme is lawful and just and fair to the whole class of creditors or members including the dissenting minority to whom it is offered for approval and which has been approved by such class of persons with requisite majority vote.
29. However further question remains whether the Court has jurisdiction like an appellate authority to minutely scrutinise the scheme and to arrive at an independent conclusion whether the scheme should be permitted to go through or not when the majority of the creditors or members or their respective classes have approved the this aspect the nature of compromise or arrangement between the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the concerned parties to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be called out from the provisions of Section 392 of the Act which reads as under :
"392, (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it -
(a) shall have power to supervise the carrying out of the compromise or arrangement ; and
(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working or the compromise or arrangement.(2)
If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, and such an order shall be deemed to be an order under section 433 of this Act.
(3)The provisions of this shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Act under section 153 of the Indian Companies Act, 1913 (7 of 1913), sanctioning a compromise or an arrangement."
Of course this Section deals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operates. It is obvious that the supervisor cannot ever be treated as the author or a policy maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the Scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement. The Court cannot, therefore, undertake the exercise of scrutinising the scheme placed for its sanction with a view to finding out whether a better scheme could have been adopted by the parties. This exercise remains only for the parties and is in the realm of commercial democracy permeating the activities of the concerned creditors and members of the company who in their best commercial economic interest by majority agree to give green signal to such a compromise or arrangement. The aforesaid statutory scheme which is clearly discernible from the relevant provisions of the Act, as seen above, has been subjected to a series of decisions of different High Courts and this Court as well as by the Courts in England which had also occasion to consider schemes under pari material English Company Law. We will briefly refer to the relevant decisions on the point. But before we do so we may also usefully refer to the observations found in the oft-quoted passage in Bucklay on the Companies Act 14th Edition. They are as under :
"In exercising its power of sanction the Court will see, first that the provisions of the statute been complied with, second,that the class was fairly represented by those who attended the meeting and that he statutory majority are acting bona fide and are not coercing the minority in to promote interest adverse to those of the class whom they purposed to represent, and thirdly, that the arrangement is such as intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.
The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which is empowered to bind, or some blot is found in the Scheme."
In the case of Re. Alabama, New Orleans Texas and Pacific Junction Railway Company reported in 1891 (1) Chancery Division 213 the relevant observations regarding the power and jurisdiction of the Company Court which is called upon to sanction a scheme of arrangement or compromise between the company and its creditors or shareholders were made by Lindley, L.J. as under:
"What the court has to do is to see, first of all, that the provisions of that stature have been complied with; and, secondly, that the minority has been acting bona fide. The court also has to see that the minority is not being overdone by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by businessman.
The court must look at the scheme, and see whether the Act has been complied with, whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable on or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve it."
To the Similar effect were the observations of Fry, L.J., which read as under "The next enquiry is : Under what circumstances is the court to sanction a resolution which has been passed approving of a companies or arrangement ? I shall not attempt to define what elements my enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proportion was made in good faith; and, further, it must be so far fair ad reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the court may take into consideration I will not attempt to forecast."
In Anglo-continental Supply Co. Ltd. Re. (1992) 2 Ch. 723, Asthury, J., a century later reiterated the very same propositions as under :
"Before giving its sanction to a scheme of arrangement the court will see firstly that the provisions of the statute have been complied with; secondly that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order of the class whom they purport to represent; and, thirdly, that the arrangement is such as a man of business would reasonably approve."
Learned Single Judge of the Calcutta High Court in the case of Re. Mankam Investments Ltd. and others (1995) 4 Comp LJ 330 (Cal.) relying on a catena of decisions of the English Courts and Indian High Courts observed as under on the power and jurisdiction of the company Court which is called upon to sanction a scheme of merger and amalgamation of companies.
"It is a matter for the shareholders to consider commercially whether amalgamation or merge is beneficial or not. The court is really not concerned with the commercial decision of the shareholders until and unless the court feels that proposed merger is manifestly unfair or is being proposed unfairly and/or to defraud the other shareholders. Whether the merged companies will be ultimately benefitted or of expenses is a matter for the shareholders to consider. If three there will be some economies in the matter of expenses is a matter for the shareholders to consider, certainly, there will be some economies in the matter of maintaining accounts, filing of returns and various other matters. However, the court is really not concerned with the exact details of the matter and if the shareholders approved the scheme by the requisite majority, then the court only looks into the scheme as to find out that it is not manifestly unfair and/or is not intended to do fraud or do injustice to the other shareholders."
We may also in this connection profitably refer to the judgment of this Court in the case of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and others 1995 Supp. (1) SCC 499 wherein a Bench of three learned judges speaking through Sen, J. on behalf of himself and Venkatachaliah, CJ., and with which decision Sahai, J., concurred Sahai, J., in his concurring judgment in the aforesaid case has made the following pertinent observations in this connection in paras 3 and 6 of the Report :
"But what was lost sight of was that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction.
Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle "prudent business management test"
or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of foreign company then test is not only whether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure the merger shall not result in impeding promotion of industry or shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalised economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective.
Reliance on English decisions Hoare & Co. Ltd. Re 1933 All ER Rep 105, Ch. D and Bugle Press Ltd. Re. 1961 Ch 270 that the power of the court is to be satisfied have complied with or that the classes were fully represented and the arrangement was such as man of business would reasonably approve between two private companies may be correct and may normally be adhered to but when the merger is with a subsidiary of a foreign company then economic interest of the country may have to be given precedence. The jurisdiction of the court in this regard is comprehensive."
Sen, J. Speaking for himself and Venkatachaliah, CJ., also towed the line indicated by Sahai, J., about the jurisdiction of the Company Court while sanctioning the Scheme and made the following pertinent observations (SCC P. 528, para 84).
"An argument was also made that as a result of the amalgamation, a large share of the market will be captured by HLL. But there s nothing unlawful or illegal about this. The Court will decline to sanction a scheme of merger, if any tax fraud or any other illegality is involved. But that is not the case here. A company may, on its own, grow up to capture a large share of the market. But unless it is shown that there is some illegality or fraud involved in the scheme, the Court cannot decline to sanction a scheme of amalgamation. It has to be borne in mind that this proposal of amalgamation arose out of a sharp decline in the business of TOMCO. Dr Dhavan has argued that TOMCO is not yet a sick company. That may be right, but TOMCO at this rate will become a sick Company, unless something can be done to improve its performance. In the last two years, it has sold its investments and other properties. If this proposal of amalgamation is not sanctioned, the consequence for TOMCO may be very serious. The shareholders, the employees the creditors will all suffer. The argument that the Company has large cotton mills and jute mills in India have become sick and are on the verge of liquidation, even though they have large assets. The Scheme has been sanctioned almost unanimously by the shareholders, unsecured creditors and preference shareholders of both the Companies. There must exist very strong reasons for withholding of sanction may turn out to be disastrous for 60,000 shareholders of TOMCO and also a large number of its employees.
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 emerged :
1.
The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meeting 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 fair to the class as whole so as to legitimately blind even the dissenting members of that class.
4. That all the 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 provision of 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 of to 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.
9. Once the aforesaid broad parameters about the requirements 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 that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a Scheme of Compromise and Arrangement are not exhaustive but only broadly illustrative of the contours of the Court's jurisdiction."
The aforesaid observations made by the Apex Court shows that the jurisdiction of the Court is earmarked on the said aspects as reproduced hereinabove. One is as to whether the procedure supporting the scheme has been complied with and the requisite meeting as contemplated have been held. The second is whether the requisite majority has approved or not. The third is whether at the meeting, the concerned creditors or the members or any class of them had the relevant material to arrive at the informed decision. The fourth is that all necessary materials indicated by section 393(1)(a) was placed before the voters at the meeting or not. The fifth is that the requisite material as contemplated by the proviso of sub-section (2) of section 391 is placed before the Court and the Court is satisfied about the same. The sixth is that the proposed scheme is not in violation of any provisions of law or not contrary to the public policy. As observed by the Apex Court, the real purpose of underlying the scheme can be seen by the Court by piercing the veil of apparent corporate purpose underlying the scheme and the Court can judiciously X-ray the same. The 7th is that the Court has to satisfy itself that the members or the creditors or a class of them were acting in bonafide and in good faith. The eighth is that the scheme as a whole is to be just, fair and reasonable from the point of view of prudent men of business taking commercial decision beneficial to the class represented by them. The last as observed by the Apex Court is that the Court would not sit in appeal over the commercial wisdom of the majority class of persons for whose benefit the scheme has been framed and the court would not refuse to sanction as if sitting in appeal, but would rather consider the scheme in it supervisory jurisdiction. But at the same time, it has been observed by the Apex Court that the aforesaid parameters and the ambit of the jurisdiction are not exhaustive, but are only broadly illustrative of certain aspects of the courts jurisdiction.
In the case of Meghal Homes (P) Ltd. Vs. Shree Niwas Girni K.K.Samiti reported at (2007) 7 SCC 753, it was observed by the Apex Court at paras 50 to 52 as under -
"25. It is a well settled rule of interpretation that provisions in an enactment must be read as a whole before ascertaining the scope of any particular provision. This Court has held that it is a rule now firmly established that the intention of the legislature must be found by reading the statute as a whole. In Principles of Statutory Interpretation by Justice G.P. Singh, it is stated:
"The rule is referred to as an "elementary rule" by VISCOUNT SIMONDS; a "compelling rule" by LORD SOMERVELL OF HARROW; and a "settled rule" by B.K. MUKHERJEE, J."
(See pages 31 and 32 of the Tenth Edition) When we accept this principle, what we have to do is to read Sections 391 to 394A not in isolation as canvassed for by learned counsel for the respondents, but with reference to the other relevant provisions of the Act.
51. We see no difficulty in reconciling the need to satisfy the requirements of both Sections 391 to 394A and Section 466 of the Companies Act while dealing with a Company which has been ordered to be wound up. In other words, we find no incongruity in looking into aspects of public interest, commercial morality and the bona fide intention to revive a company while considering whether a compromise or arrangement put forward in terms of Section 391 of the Companies Act should be accepted or not. We see no conflict in applying both the provisions and in harmoniously construing them and in finding that while the court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality.
52. We cannot understand the decision in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. (supra) as standing in the way of understanding the scope of the provisions of the Act in the above manner. We are therefore satisfied that the Company Court was bound to consider whether the liquidation was liable to be stayed for a period or permanently while adverting to the question whether the scheme is one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the properties, realize the assets and distribute the same in accordance with law."
The aforesaid shows that the Apex Court while observing that the Court would not sit in appeal over the commercial wisdom of the shareholders of the Company, it did emphasize that the Court will certainly consider whether there is a genuine attempt to revive the Company that has gone into liquidation and whether such revival is in the public interest and confirms to the commercial morality. It has been further observed by the Apex Court that the Court needs to consider as to whether the scheme is one for revival of the Company or whether it is a ruse to dispose of the assets of the company by private arrangement and if the court comes to the latter conclusion, as that of ruse to dispose of the assets of the Company by private arrangement, then it is the duty of the Court in which the properties are so vested on liquidation to dispose of the property, realise the assets and distribute the same in accordance with law.
In the case of Sesa Industries Ltd. Vs. Krishna H. Bajaj and others reported at 2011(3) SCC 218, the Apex Court had observed at para 34 after considering the provisions of section 391 that before sanctioning such a scheme (of course the said was the case of amalgamation/merger, but same procedure would apply even for scheme of arrangement) even though approved by a majority of the members or creditors concerned, the Court has to be satisfied that the company or any other person moving such an application for sanction under sub-section (2) of Section 391 has disclosed all the relevant matters mentioned in the proviso to the said sub-section. Further, at para 38 in the said decision, it has been observed by the Apex Court that the Court has to see that the provisions of the Act have been duly complied with; the statutory majority has been acting bona fide and in good faith and are not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purport to represent and the scheme as a whole is just, fair and reasonable from the point of view of a prudent and reasonable businessman taking a commercial decision.
In our view the principles on the criteria for exercise of power by the Court can be deduced from the aforesaid case law for the consideration of the scheme are as under:
The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meeting as contemplated by Section 391(1) (a) have been held.
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).
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 fair to the class as whole so as to legitimately bind even the dissenting members of that class.
That all the 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).
That all the requisite material contemplated by the provision of 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.
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 of to 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.
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.
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 requirements 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 that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
The court has to consider as to whether there is genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and confirms to the commercial morality.
The court has to consider as to whether it is a ruse to dispose of the assets of the Company by private arrangement and if yes, it is the duty of the court in which the properties are vested on liquidation to dispose of the properties, realise the assets and distribute the same in accordance with law.
Before sanctioning the scheme, even though approved by the majority of the members or creditors concerned, the court has to be satisfied that the company or any other person moving such application for sanction under subsection (2) of section 391 has disclosed all relevant matters mentioned in the proviso of the said sub-section.
The aforesaid as observed by the Apex Court in the case of Miheer Mafatlal (supra) are only illustrative and some facets for consideration of the scheme by the Court and cannot be termed as exhaustive.
The aforesaid takes us to examine as to whether in the present case requirements are satisfied or not and the effect there on the power and the jurisdiction of this Court under the Act for sanction of the scheme or otherwise.
Before we proceed to examine the other aspects, the scheme broadly had certain facets which may be worth recording in order to examine the aforesaid broad parameters observed in earlier paragraphs. Part I of the Scheme inter alia provides for existence of two Companies, viz., ADPL (Athithi Dwelling Private Ltd.) and KDPL (Karnavati Dwelling Private Ltd.) which are the companies having registered office at 183, Manekbaug Society, Ambawadi, Ahmedabad. KDPL is formed only on 06.04.2006 and its authorised share capital is of Rs.1 lakh only and it has no assets except cash on hand of Rs.77,320/- as on 31.03.2008. Its promoter and first Director of the Company who are Prem Rasiklal Mardia, wife of Rasiklal Mardia, one of the appellant herein, and Neena Rasiklal Mardia, daughter of Shri Rasiklal Mardia, one of the promoter of the scheme.
Similarly, ADPL is also formed on 06.04.2006 and authorised share capital is of Rs.1 lakh only. It has no assets except cash on hand of Rs.72,320/- as on 31.03.2008. One of the promoters and first Directors of the Company are Prem Rasiklal Mardia, wife of Rasiklal Mardia, one of the appellant herein, and Neena Rasiklal Mardia, daughter of Shri Rasiklal Mardia, one of the promoter of the scheme.
In the scheme, the definition of secured creditor includes all types of creditors having security by way of charge over the Company's assets and properties and it includes his nominee and assignee. Whereas, the definition of unsecured creditor at para 7.20 of the scheme is as under:
"Unsecured Creditors" means lenders of the company who have provided financial assistance without any security and who don not have any charge or any asset of the company. These also include Non Banking Finance Companies who have provided financial assistance by way of Bill Discounting and other business creditors and who do not have any charge of any asset of the company."
The pertinent aspect is that under the head of unsecured creditors being shown as a separate class, there is no inclusion of any preferential creditors referred to under section 530 of the Companies Act, viz., the creditors who have to recover the outstanding taxes and dues. To say in other words, the statutory creditors are not included in the definition of unsecured creditors who can also be said as a particular class by itself under Section 530 of the Act.
Part II of the scheme at para 8.1 refers to the payment of Rs.105.30 crore to the secured creditors on or before 31.01.2009. The said clause if read with clause 11.1(ii), it appears that the scheme provides for transfer of Changodar property and the production plant in favour of KDPL.
Clause 8.2 under Part II of the scheme refers to financial arrangement with the secured creditors but it does not refer to at all for any arrangement with the statutory creditors since they are not included under the head of unsecured creditors nor classified separately as statutory creditors.
Clause 10.2 of Part IV of the scheme provides for induction of the fund of Rs.5 crore by the Sponsor of the scheme and allotment of the share in exchange thereto by the Company.
Clause 11.1 of Part V of the scheme provides for transferring of the properties and assets in favour of 100% subsidiary companies, one is in favour of KDPL as referred to hereinabove and the another vide clause no.11.2 is for transfer of Vatva and Ratlam undertaking in favour of ADPL and as per the scheme, KDPL and ADPL after vesting of the property, has to settle the dues of the secured creditors in the manner as referred to in the scheme.
Clause 13.8 of Part VII of the scheme provides that all creditors under the scheme would be governed by the terms and conditions in the scheme and clause 13.9 provides that the creditors covered by the scheme would not be entitled to claim any payment save and except in accordance with the scheme of the compromise. To say in other words, if all creditors as classified in the scheme are considered, they may have right to recover the money as per the scheme, but if the statutory creditors are not stated to have been included under the scheme, their rights may get unaffected, but with the major consequences of the scheme of having transferring of the properties of all the major properties of the Company in favour of KDPL or ADPL as the case may be. If it is read that the scheme is to include statutory creditors under the head of unsecured creditors, without their being any settlement or terms offered to them, their rights shall get curtailed by virtue of clause 13.8 and 13.9 of the scheme.
Clause 13.22 under the same head of Part V of the scheme provides that if the scheme is not sanctioned by the Court and/or the orders not being passed as aforesaid, before 31.03.2009, or within such further period as may be considered by the applicant, without their being any limitation, the scheme shall stand revoked, cancelled and be of no effect.
The auditors report produced at Annexure-B of the Chartered Accountant Shri D.C. Bothra and Company dated 26.04.2003, provides for information at para 5 (e) where there is reference to doubtful debts of Rs.83.25 lakhs, advances to the suppliers at Rs.63.92 lakhs, unabsorbed excise MODVAT/CENVAT claim of Rs.271.23 lakhs and Income Tax payment of Rs.99.50 lakhs which is stated to be not to accrue due to the accumulated losses etc. But the pertinent aspect is that in the auditors report, there is reference to the outstanding statutory dues, but under the scheme there is no inclusion thereof and the further aspect is that the statutory dues as stated in the auditors report whether meets with the full disclosure or not.
It is with the aforesaid points incorporated in the scheme, the matter is to be further considered. As recorded earlier, KDLP and ADLP are two subsidiary companies who have come into existence in the year 2008 with the share capital of Rs.1 lakh and balance available of Rs.77320/- and Rs.72320/- as on 31.03.2008. Total amount may come to Rs.1,50,000/-. The immovable properties of the company, viz., of Changodar project, Vatva and Ratlam project are to vest in these two companies, may be with the liability of the secured creditors of a specified amount as against the share capital of Rs.1 lakh by each of the Company. The same would create a situation of transfer of immovable properties of the company in favour of the aforesaid two subsidiary company against the nominal amount of Rs.2 lakh that too in the form of equity shares of the concerned Company. Such may result into two consequences; one would be immovable properties of the Company if sold by the Company or even by the Official Liquidator, all creditors of the company will have the right for distribution of the amount in accordance with law, i.e., in the category of secured creditors, statutory creditors and unsecured creditors. As against the same, the properties are so contemplated to be transferred to the aforesaid two companies who is to settle the dues of only secured creditors and that too of a specified class. It is true that the secured creditors may have first right to recover the money from the sale of the properties of the Company, but frustrating the right thereby of the statutory and unsecured creditors over the surplus balance which may remain after satisfaction of the dues of the secured creditor is an another aspect and that too at the instance of the debtor, viz., the Company. In our view, it may result into a transfer of the property by a debtor which is a Company frustrating the rights of the creditors, may be statutory or unsecured creditors. Such may result into a fraudulent transfer as provided under section 531 of the Act. Section 531 of the Act for ready reference reads as under:
"531 Fraudulent Preference:
1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly:
Provided that, in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months, of a reference to three months.(2)
For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by the Tribunal, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual."
The aforesaid provision takes care of invalidity of the transfer of the movable or immovable property within three months before the presentation of the winding up petition.
Similar provision exists under section 54 of the Provincial Insolvency Act. Of course under the Companies Act as well as under the Provincial Insolvency Act the bonafide transactions can be validated by the Court. But the pertinent aspect is that the spirit of the provisions of section 531, 531A, 532 and 533 of the Act provides for no preference by the debtor to a particular creditor resulting into curtailment of the right under the law nor the transfer of the property of the debtor to a particular creditor in a manner which may result into curtailment of the rights under the law of the other creditors. It is not a matter where on account of the situation so created by disposal of the property and non-availability of the money to be recovered from the Company by a statutory or unsecured creditor, but in the scheme, if by volition, the Company which is a debtor proposes to transfer practically all major immovable properties to these two other Companies, viz., KDPL and ADPL, may be with certain liabilities of the Company qua secured creditors of a particular category, such in our view may result into a preference given to a particular class of creditors as well as such may result into transfer of properties which runs counter to some of the aforesaid statutory provisions of the Act and the same can also be termed as a preference amongst the creditor by the debtor which may frustrate the legitimate lawful right of the statutory creditor and also unsecured creditor for getting the amount available after the satisfaction of the dues of the secured creditors and if taken to its logical end, it would also adversely affect the rights of the share holders for ultimate distribution of the amount in the event the balance exist after satisfying the dues of all the classes of the creditors.
It also appears to us that by virtue of the scheme of revival, if majority of the immovable properties are transferred to the Companies may be subsidiary companies, then such may be contrary to the public policy inasmuch as what is not found valid by law as per the above referred provisions of the Companies Act, viz., under Sections 530 and 531 of the Act and others, naturally, would be against the public policy. The aforesaid is coupled with the facts narrated hereinabove that those two Companies viz., KDPL and ADPL are formed by wife of Shri Rasiklal Mardia and other close relatives of Shri Rasiklal Mardia and Shri Rajeev Mardia who are the proposer of the scheme and such Companies are having inadequate financial capacity to satisfy the debts of even secured creditors as on the date on which the transfer is sought to be effected by the present scheme. Under the circumstances, the scheme as it is would not meet with the test as to be considered in light of the above referred principles and more particularly clause 6 operate against the proposed scheme for which the sanction is sought of the Company Court.
The next aspect is the requirement of the procedure to be followed for consideration of the scheme by the Court before sanction is accorded. As observed earlier, section 391 provides for consideration of the scheme for a class of creditors. It is true that as per the procedure undertaken prior to the consideration of the petition for sanction, the secured creditors by requisite majority present and voting at the meeting and the unsecured creditors by requisite majority present and voting at the meeting and the shareholders present and voting at the meeting have approved the scheme. Therefore, the Court may not sit in appeal over the commercial wisdom of such creditors or the shareholders for acceptance of the scheme. However, as observed earlier, the scheme nowhere provides for inclusion of statutory creditors under the class of unsecured creditors.
In the first OL report dated 25.11.2008, at para 6, it has been stated as under:
"It is further most respectfully submitted that the scheme as proposed does not contain provision for settlement of statutory preferential claims of the Government like Income Tax, Sales Tax, Customs, Excise, Municipal Corporation, Gujarat Electricity Board, Revenue, etc. It is submitted that the statutory claims of Government dues under section 530(1)(a) of the Companies Act, is a separate class of creditors and no compromise or arrangement is proposed in respect of such claims in the proposed scheme. Therefore, the scheme, if sanctioned, may not bind the preferential creditors "as a class" and the Company shall have to honour its liabilities towards them for which there is no express provision in the scheme as proposed. This becomes important since certain assets of the Company with certain specified liabilities shall stand transfer to two separate private limited companies, whereas the liabilities of the company towards preferential creditors shall remain with the company. The statutory preferential claims of the Government dues shall be then enforceable only against the remain assets of the Companies. To this extent the scheme appears to be detrimental to the interest of the Government dues being statutory preferential claims"
The aforesaid report was very much there before the learned Company Judge when the impugned decision was taken.
After the above referred orders passed by the Apex Court, the OL has filed another report dated 05.07.2010 wherein debt of various statutory creditors are specified in the statement at Annexure-B which shows that as per the OL, the claim received can be classified as under:
Sr. Amount (in crores) No. (Rs.)
1. IOC 0.10
2. Sales Tax 1.73
3. Central Excise AR-III, Div-II 1.54
4. Deputy Commissioner of Income Tax Circle-IV 36.31
5. Assistant Commissioner of Sales Tax, Unit 21 0.17
6. Assistant Commissioner of Sales Tax, Unit-21 0.01
7. Central Excise AR-III Division II Ahmedabad I 0.19
8. Commissioner of Central Excise, Ahd -I 0.0079
9. Central Excise, Range-III, Division-II, Ahmedabad 1.22
10. Commissioner of Sales Tax 5.26
11. PGVCL 0.02
12. Gujarat Electricity Board 4.77
13. Commissioner of Central Excise and Customs, Ratlam 1.82
14.
MP Electricity Board 0.14
15. Gujarat Electricity Board, Division Surendranagar 6.69
16. Commissioner of Central Excise, Surendranagar 0.70
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Total 60.67
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Additionally, there is reference to the intimation received from Torrent Power Limited for the alleged outstanding of Rs.3.49 crore for which the reference is made by OL in the report at Paragraph 5. Hence, total would approximately come to Rs.64 crores.
If the aforesaid is considered with the scheme and more particularly the details given of the outstanding dues of the secured creditors in the audit report, in Schedule VII of current assets, loans and advances, the total is shown of Rs.4,43,09,455/- as on 31.03.2003. Further, in the scheme, under Part II, the outstanding debt of the secured creditor is shown as of 196.23 crore to be settled against Rs.105.30 crore and for unsecured creditors, no figure is quantified at clause 8.2 under Part II coupled with the further aspects in the auditor report showing the doubtful debt of Rs.0.83 crores as against unabsorbed excise MODVAT/CENVAT claim at Rs.2.71 crores and not likely liability of Income Tax at Rs.0.99 crores. Such details as incorporated in the scheme by way of auditors report as well as the proposed scheme for revival does not include the aforesaid amount of Rs.64 crore as the alleged claim of statutory creditors. No disclosure or no consideration of such claim in the scheme would result into two situation; one is that those who have considered the scheme, may be secured creditors or unsecured creditors, or the shareholders were not made aware about the liability or in any case liability of Rs.64 crore of the statutory creditors and the another is that no money or amount is offered in the scheme to the statutory creditors contemplating to recover Rs.64 crore. Additionally, the third consequence would be that the so called scheme of revival is not at all put in consideration before the statutory creditors who may be termed as a separate class by themselves against the creditors in general.
If the matter is considered on the ground of requisite procedure to be followed under section 391 of the Act, it appears that there is no disclosure of the dues or in any case, probable dues of statutory creditors for the amount of Rs.64 crores and such would vitiate the decision arrived at by the voters at the meeting, may be of the secured creditors or unsecured creditors or shareholders. Since the decision so taken could not be said as a unfair decision for approving the scheme in question since there was no disclosure on the said aspects. Out of the dues of statutory creditors for the amount of Rs.64 crores the voters at the meeting had no occasion to consider the said aspect and hence, it can be said that the decision may be different, had the aforesaid fact brought to the notice of the secured or unsecured creditors or shareholders at the concerned meeting. It has the relevance because the so called debt of the statutory creditors represents an amount of Rs.64 crore as against the settlement to be offered to the secured creditor of Rs.105.30 crores. In our view, such could be said as non-disclosure of a material fact for the affairs of the company which may have stake or affect decision as may be taken by the secured or unsecured creditor or the shareholders at the meeting. Under the circumstances, it can be said that the requisite consideration of the scheme in a fair manner by the secured creditors, unsecured creditors and the shareholders which is the sine qua non has been vitiated. Consequently, it can be said that the requisite procedure for consideration of the scheme has not been followed as required under section 391 of the Act before the sanction is accorded. Such would attract the application of the above referred principle vide clause no.3 read with clause no.12.
Apart from the above, when the scheme includes no consideration whatsoever by the creditors representing the class of statutory creditors, it can also be said that the mandatory requirement for prior consideration of the scheme before the sanction is accorded, by the concerned creditors has not been followed.
We may not be understood to mean that the Company has no power to classify the creditors generally or in particular. If the Act is to be considered as it is, it provides for the classification of type of creditors, one is secured creditors, the another is workers who may have pari passu charge with the secured creditors, third is preferential creditors (popularly known as statutory creditors) and the fourth is unsecured creditors (excluding the statutory creditors). It is true that in normal parlance, the creditors are broadly classified into only two categories, the secured creditors and unsecured creditors, but for the purpose of the Companies Act and more particularly the Companies which are already ordered to be wound up and the liquidation proceedings are going on and for which the scheme for revival has been submitted, there is no reason for not to separately classify the creditors who are covered by the provisions of section 530 of the Act. An ongoing Company for which there is a scheme of merger or amalgamation and the consideration of the scheme for the purpose might stand on different footing since it may be said that such statutory creditors' rights for separate classification under section 530 of the Act have not accrued on account of no winding up order passed by the Company Court. But in a case where the Company is already ordered to be wound up and the liquidation proceedings have commenced, keeping in view the provisions of section 530 of the Act, it can be said that the preferential creditors stand by a separate class amongst creditors may be generally in popular language might be treated as considered under the unsecured creditors. Thus, the preferential creditors in any case have a special right under section 530, which would march over the rights of other unsecured creditors may be later to the secured creditors. Therefore, it appears that section 391(1)(a) provides for the scheme of arrangement between a Company and its creditors and the language used is "or any class" and hence it would include the classes of the creditors as known to law. As observed earlier, in a case where the scheme of arrangement is offered to the creditors of a Company for which winding up order is already passed and the liquidation proceedings are going on, such scheme would be required to be considered by the four categories of the creditors of the Company, viz., (1) secured creditors, (2) workmen (3) Preferential creditors (statutory creditors) and (4) unsecured creditors.
Since there is no consideration of the scheme whatsoever by the preferential or secured creditors, it can be said that the mandatory requirement for consideration of the scheme by the requisite class of creditors as per section 391 has not been followed. Further, as observed earlier, under the scheme, no arrangement is proposed to be made with such class of preferential creditors and by specific definition under the scheme the restricted meaning has been given of the word unsecured creditors. Therefore, it can be said that the scheme is defective to that extent and if the principles of fairness in the scheme is to be read, then it can also be said that the scheme would run unfair to the statutory creditors to whom no arrangement is offered for satisfying their debt or even probable debt. We are inclined to take such a view for the reason that the Act recognises the special right of such class of preferential creditors in a case where Company is ordered to be wound up. If the scheme offers arrangement for payment to the unsecured creditors whose right are later to the preferential creditors, there is no reason why such arrangement should not be offered to the preferential creditors, unless the recovery of the amount by such preferential creditor is stayed or prohibited by the competent forum known to law, or that the amount to be recovered by such preferential creditors is subjudiced and a prohibitory order is passed in favour of the Company. We cannot lose sight of the important aspect that such preferential creditors are representing the Government and semi-Government authorities whose money are public money or they are rather representing the debt of the crown or the State in the present case or its instrumentality. If such an interpretation is not made for making provision for arrangement at the scheme of revival of the Company, which is already ordered to be wound up, it would not only frustrate the additional right conferred by the statute (the Act in the present case) by virtue of provisions of section 530, but it may also in our view run against the public interest if such claimants are totally ignored and no arrangement is offered to the creditors representing the dues of the State or its instrumentality. Under the circumstances, the above referred principles vide clause no.10 would have a role to play while considering the scheme.
Further, it can hardly be said that dues of the State or its instrumentalities are to be paid or recovered, a citizen though may have a right to challenge the same before the Court of law and if any prohibitory order is passed against the recovery or implementation of the order to the statutory authorities, it might stand on different footing, but in absence thereof, if such debts are ignored or no arrangement is offered whatsoever to such class of creditors, it would also stake at the commercial morality of the promoters of the scheme more particularly in a welfare State like our country wherein public money ultimately is to be used for the benefit of all the citizens in general.
The attempt was made by Mr.Mardia, appearing as party in person, to contend that the preferential creditors or the statutory creditors would fall in the category of unsecured creditors and therefore, had they any objection to the scheme, they would have responded to after the public advertisement by opposing it or otherwise. It was submitted that in absence thereof, the learned Company Judge was not justified in rejecting the scheme.
The contention prima facie appears to be attractive, but upon close scrutiny, is of no substance. At the first instance as observed earlier, a restricted definition has been given in the scheme of unsecured creditors which as it is does not include the preferential creditors or statutory creditors. Therefore, it does not lie in the mouth of the proposer of the scheme to contend that the statutory creditors or preferential creditors would fall in the category of unsecured creditors. The aforesaid is coupled with the circumstance that there is no reflection of the data in the scheme for the outstanding amount recoverable or may be recoverable by such preferential creditors. Further, the matter cannot be decided on a ground that since there was failure on the part of preferential creditors to object to the scheme after the public advertisement, it would be deemed that the rights are waived, if any, nor can be decided on the ground that it would be deemed that the mandatory procedure is followed. In our view, before a sanction is accorded by the Court, it is mandatory for the Court to examine and consider as to whether the requisite procedure for consideration of the scheme by all concerned with full and fair disclosure of the information of the affairs of the Company are followed or not. If the mandatory procedure is not followed or that the scheme is not at all offered for arrangement to a particular specified class of creditors, the Court would be justified in declining the sanction unless there are extraordinary valid circumstances demonstrated before the Court that even if interest is so represented or considered, it would not materially affect the financial interest over the stake of such class of creditors which in any case is lacking in the present case. Hence, the same cannot be accepted.
The attempt was made by the party in person to contend that ARCIL, one of the secured creditors is representing the debt of about 1400 crores and if all secured creditors are classified generally the share of such preferential creditors would be a negligible share. In any case even if their objection is considered, the statutory requirement of consent of the requisite majority would be satisfied and therefore, this Court in spite of the objections raised by the preferential creditors, may accord sanction to the scheme.
Again, the contention may prima facie appear to be attractive but upon a close scrutiny, for the reasons stated hereinafter, is without any substance. One is that it is not a matter where any arrangement whatsoever is offered to the preferential creditors and they are objecting simultaneously with the other creditors. The second is that in view of the observations made by us hereinabove and as per the language used by the Parliament under section 391 (1)(a), there is reference to any class of them which includes class of creditors and as observed by us there are four classes of creditors which may be required to consider the scheme in a case where the Company is already ordered to be wound up and the liquidation proceedings are going on. Such would mean that the scheme of arrangement may be offered to all such classes of the creditors separately or in any case consideration of the scheme by all such classes of creditors. If the scheme provides for no classification for such preferential creditors separately, or even remotely under the head of unsecured creditors, it can neither be gainsaid that such preferential creditors would fall in the category of unsecured creditors nor can be accepted as included under the head of unsecured creditors, in view of the observations made by us hereinabove for preferential creditors being a separate class in case of a Company which is ordered to be wound up and the liquidation proceedings are going on. The outstanding debt of ARCIL if considered as per the schedule at item nos.1,2, 3 and 4 under Part II clause 8.1 (ii) of the Scheme, it would come to approximately Rs.147 or 148 crore. As against the same, the so called outstanding dues of the preferential creditors is of Rs.64.70 crore and therefore also, if the objections are considered as that of the preferential creditors, it cannot be said that the statutory requirement of representing a class of creditors for approving the scheme is satisfied.
Under the circumstances, it appears to us that mere no raising of the objection in response to the public advertisement by the preferential creditors or on behalf of the preferential creditors, should not over weigh the mandatory requirement of offering the arrangement or consideration of the arrangement by a creditor of a separate class before the sanction is granted by the Court. Hence, the said attempt cannot be countenanced.
Apart from the aforesaid, we cannot lose sight of the aspect that the total debt of the Company even if considered as it is of the secured creditors, comes to Rs.196.23 crore. If added with the claim of the preferential creditors of Rs.64 crores, it would come to Rs.260.93 crores, roughly Rs.261 crores plus the debt of the other unsecured creditors. As against the same, the fresh fund sought to be inducted by the proposed scheme is of only Rs.5 crore which comes to about only 1.91 % of the total liability of the Company and that too with the fact that the amount of Rs.5 crore is not deposited with the OL or the Court by showing the genuineness of offer of the promoter of the scheme but is only by showing the letter of the sponsor. It is true that during the course of the hearing, the party in person did orally submit that the amount of Rs.5 crore can be deposited if it is so ordered by this Court or if the final decision is to take place within some time failing which the deposit may be refunded, but in our view, even if it is considered that there is availability of Rs.5 crore, which may be inducted in the funds or corpus of the Company, it is a very very negligible amount against the total outstanding of the creditors even as incorporated in the scheme coupled with the so called preferential creditors whose claim is not at all considered in the scheme.
In view of the aforesaid observations and discussions, we find that apart from the aforesaid statutory infirmities under the scheme for non-consideration of the claim of the preferential creditors and no arrangement being offered to the statutory creditors and non consideration thereof by the statutory creditors directly and indirectly affecting the decision by the secured and unsecured creditors and share holders at the meeting, the important features of the scheme providing vesting of the major immovable properties of the Company into two subsidiary Companies of the same group and thereby giving preference to a particular class of creditors, viz., ARCIL, by keeping away other creditors including preferential creditors and unsecured creditors, an impression may be gathered that the scheme is either a ploy or a ruse to dispose of the assets of the Company that too running counter to the statutory provisions of section 530 and others of the Act and consequently against the public interest as observed earlier and therefore, it may call for a duty on the part of the Court in which the properties are vested on liquidation to dispose of the property and to realise the assets and distribute the same in accordance with law. Hence, the above referred principle vide clause no.11 will also have a role to play.
In view of the aforesaid observations and discussions and the findings recorded by us, we find that the ultimate decision taken by the learned Company judge for declining the sanction to the scheme does not call for interference. Hence, the appeal fails and therefore, dismissed.
On the aspect of interim orders dated 19.02.2009 and 13.03.2009, it appears that vide order dated 19.02.2009 as recorded hereinabove, direction was issued to implement the scheme, but the Court specifically provided that the implementation and operation of the revival scheme will be subject to the result of the appeal. Further, in the interim order dated 13.03.2009, the possession of the assets was ordered to be handed over, but that too has to be interpreted and construed subject to the final order which may be passed in the appeal by the Court. In any case, both the impugned orders are expressly set aside by the Apex Court as per the order dated 08.12.2009 in the above referred Civil Appeals No.8149/09 and 8150/09. The attempt was made to contend that pursuant to the interim orders passed for handing over of the possession and implementation of the scheme, the properties as per the scheme were transferred to KDPL and ADPL and thereafter, ARCIL (one of the creditor representing the interest of the secured creditors as an assignee) has exercised the power under the SARFAESI Act and has taken over the possession of the property coupled with the circumstance of OJ CA No.246/11 preferred by Official Liquidator to get back the assets of the Company in liquidation. However, in the said Civil Application Court may be required to examine the rights if any of the ARCIL as may be available in law which may fall outside the scope of the present appeal. But we find it sufficient to declare that both the interim order passed in the present appeal, in view of the orders passed by the Apex Court dated 07.12.2009 and in view of the dismissal of the present appeal would no more remain in operation and the rights if any by virtue of any interim order in the present appeal accordingly have come to an end of the parties concerned.
Considering the facts and circumstances, there shall be no order as to costs.
(JAYANT PATEL, J.) (R.M. CHHAYA, J.) *bjoy Top