Bombay High Court
In Re: New Kaiser-I-Hind Spinning And ... vs Unknown on 26 April, 1968
Equivalent citations: [1968]38COMPCAS701(BOM)
JUDGMENT Kotval, C.J.
1. These are all appeals arising out of several proceedings taken in the winding up of a limited joint stock company known as the New Kaiser-I-Hind Spinning & Weaving Co. Ltd., Bombay, which was engaged in the business of running a cotton mill. The appeals raise common questions of fact and law and the principal parties thereto are also common and were represented by the same counsel. It will be convenient therefore to dispose of all the appeals by one common order.
2. This company was at one time being run by a management which for the sake of convenience and brevity we shall call the J.K. group or as it is called in the judgment of the court below in Appeal No. 98 of 1967 as the Singhania group. On 21st June, 1965, a petition for winding up of the company was filed being Petition No. 39 of 1965 by a concern named Indualal and Co. and by an order of this court a provisional liquidator was appointed, who took charge of the company on the 2nd August, 1965. In consequence the working of the mills stopped as from the 6th of August, 1965. On the 16th August, 1965, an agreement was arrived at between the Singhania group and another group, which for the sake of convenience and brevity we shall call the "Jalan group". The principal persons in this group are Sanwarmal Todi, Jagannath Agarwal, K. M. Goenka and Nandlal Jalan. The agreement was that the Jalan group was to buy over the controlling shares belonging to the J.K. group and thus obtain the control and management of the company. We will presently refer to the detailed terms of this agreement but for the time being it may be stated that the Singhania group had agreed to sell 25,625 ordinary (equity) shares of Rs. 100 each which they owned to the Jalan group at a price of Rs. 10 per share payable in a certain manner and on completion of the transaction the directors of the Singhania group were to resign as the directors of the company as the Jalan group would direct. By the agreement the secured and unsecured creditors of the company were divided into four categories and provision was made for the repayment of the debts of the four categories. Of these, the first category were M/s. J. K. (Bombay) Private Ltd. and other J.K. concerns and as regards them it was provided that a sum of Rs. 3,46,501 had been advanced by J. K. (Bombay) Private Ltd., for purchase of certain shares held by the company as investments and that these shares had been pledged by the company with the Punjab National Bank and the company should get the shares released from the Punjab National Bank and hand them over to J.K. (Bombay) Private Ltd. The company on its part acknowledged that a sum of Rs. 48,13,899 was due to the J.K. concerns as listed in Schedule "B" attached to the agreement and that the credits would be repaid out of 50% of the profits of the company commencing after the expiry of two years from the date of a second mortgage (agreed to be executed) but in any event not later than 30th June, 1980, as provided in a private agreement reached between Gopalkrishna Singhania (of the J.K. group) and Nandlal Jalan, Todi and Agarwal of the Jalan group. This agreement is dated 16th August, 1965, and is annexed to the main agreement dated 16th August, 1965. On the 19th October, 1965, the company took out a judge's summons for considering this agreement between the Singhania group and the Jalan group and after calling for meetings of creditors to consider the arrangement, the company applied on the 23rd December, 1965, for sanction by the Court of the scheme. This was Company Petition No. 113 of 1965. On 17th February, 1966, by an order made by Mr. Justice Mody the scheme was sanctioned subject to certain modifications and as a result of the sanctioning of the Scheme no winding-up order was made but the Petition No. 39 of 1965 for winding up the company was allowed to be withdrawn by a separate order passed on the 20th February, 1966. Thereafter the Kaiser-I-Hind Mills started working as from 1st April, 1966, under the new management of the Jalan group.
3. It appears that the new management had arranged for a loan of Rs. 50 lakhs from the Punjab National Bank on conditions that the Central and the Government of the State of Maharashtra guaranteed a moiety of that loan, but the Central Government declined to furnish a guarantee though the State Government agreed. As a result, there was some delay in the implementation of the Scheme and for that and diverse other reasons the Jalan group and the Singhania group fell out. Disputes arose between them. A suit came to be filed in the city civil court and on the 27th February, 1967, Company Application No. 14 of 1967 was presented before this court by Messrs. J. K. Private Ltd., Bombay. That application was by way of a judge's summons praying inter alia that Nandlal Jalan, Sanwarmal Todi, Jagannath Agarwal and K. M. Goenka (the Jalan group) should be ordered to pay forthwith to the J.K. group the first instalment payable under the scheme sanctioned on the 17th February, 1966. That application was supported by an affidavit in which the J.K. group made strong allegation against the new management of the Kaiser-I-Hind Mills (the Jalan group) and alleged that they were backing out of the agreement which ought to be enforced against them and the company. That application was argued before Mr. Justice Thakkar on several days between 12th June, 1967, and 16th June, 1967. In the meanwhile the new management - (the Jalan group) - closed down the mills on the 14th June, 1967, alleging that they had no funds to run the mills and it was impossible to carry on the company. The Company Application No. 14 of 1967 contained prayers for several reliefs Nos. (a) to (u), but in the course of arguments on the 15th June, 1967, counsel on behalf of the J.K. (Bombay) Private Ltd. being faced with certain difficulties of securing the presence of parties before the court gave up the prayers (g) to (p) contained in the judge's summons dated 27th February, 1967. This fact is noted in the minutes of that day as well as in the order passed by Mr. Justice Thakkar on the 15th June, 1967, and has been adverted to by. Mr. Justice Vimadalal in his order dated 6th November, 1967, on Company Application No. 14 of 1967 (paragraph 1). On the 16th June, 1967, Mr. Justice Thakkar also ordered that the notice should be served on the Jalan group afresh because the said prayer had been given up. On the same day, i.e., 16th June, 1967, the company itself took out a judge's summons that the company be wound up under the provisions of section 392(2) of the Companies Act as the scheme could not be worked. This judge's summons is Company Application No. 21 of 1967. On 17th June, 1967, the company itself also filed a winding-up petition praying that the company be wound up under the provisions of section 433 of the Companies Act. This substantive petition for winding-up preferred by the company itself is Company Petition No. 82 of 1967. On the 19th June, 1967, one of the creditors of the company, Messrs. Lalji Thakersey and Co., appeared in Company Application No. 14 of 1967 and filed and affidavit opposing the Company application No. 14 of 1967 and praying that the said application should be dismissed. We mention this fact here because from the granting of Company Application No. 14 of 1967 an appeal has been preferred by the said Messrs. Lalji Thakersey and Co. and that appeal is appeal No. 96 of 1967.
4. We have said that after the new management (the Jalan group) took charge of the company it restarted the mills on 1st April, 1966, and thereafter disputes arose between the new management (the Jalan group) and the old management (the J.K. group). While these disputes were going on, an employee of the company one L. A. Chaugule claiming to be a creditor of the company gave statutory notice to the company on the 23rd February, 1967, claiming payment of retrenchment compensation due to him in terms of clause (3) of the scheme and on the 24th December, 1967, after the Company Application No. 14 of 1967 had been presented, this creditor filed an application praying that the scheme should not be sanctioned and that the company, which was in a commercially insolvent condition and unable to pay its debts should be wound up. That application was obviously under section 392(2) of the Companies Act, and it is application No. 19 of 1967.
5. All these applications came up for hearing before Mr. Justice Vimadalal and by an order passed by him on the 6th November, 1967, he allowed the Company Application No. 14 of 1967, and ordered the Jalan group to comply with the conditions of the scheme and passed other ancillary orders. By a separate order he dismissed the Company Application No. 21 of 1967 for the winding-up of the company under section 392(2) of the Companies Act.
6. Against the allowance of Company Application No. 14 of 1967, two appeals have been filed in this court, one by the creditor, Lalji Thakersey and Co. being Appeal No. 96 of 1967 and the other by the company itself, being Appeal No. 97 of 1967. Against the dismissal of Company Application No. 21 of 1967, namely, the company's own application for winding it up under section 392(2) of the Companies Act, the company has filed Appeal No. 98 of 1967. We have already said that the company had also presented a substantive Petition No. 82 of 1967 for its own winding-up under section 433 of the Companies Act. By an order passed on the 18th October, 1967, Mr. Justice Vimadalal ordered that this petition should be adjourned for hearing till four weeks after he had passed orders on Application No. 14 of 1967 and the Company's Application No. 21 of 1967. The latter orders, as we have said, were all passed on the 6th November, 1967, but the winding-up petition under section 433 has not been heard because in the meanwhile the appellants in Appeals Nos. 96, 97 and 98 had obtained stay of this order. The substantive winding-up Petition No. 82 of 1967 under section 433 of the Companies Act is thus still pending before the learned single judge, but against the order dated October 18, 1967, adjourning that petition the company has preferred appeal to this court being Appeal No. 100 of 1967.
7. On 12th April, 1967, the creditor, L. A. Chaugule, had filed Company Application No. 19 of 1967 for winding-up of the company under section 392(2) of the Companies Act. That application was dismissed by Mr. Justice Vimadalal by an order passed by him in Chambers on 4th October, 1967. Against the dismissal of his application the creditor, Chaugule and filed Appeal No. 86 of 1967.
8. For the sake of convenience, we give below in tabular form how the five appeals before us arise :
1. Company Application No. 14 of 1967 (allowed) - Appeal No. 96 of 1967 by creditor, Lalji Thakersey and Co.
2. Company Application No. 14 of 1967 (allowed) - Appeal No. 97 of 1967 by the company itself.
3. Application No. 21 of 1967 for winding-up the company under section 392(2) of the Companies Act (dismissed) - Appeal No. 98 of 1967 by the company itself.
4. Company Petition No. 82 of 1967 for winding up the company under section 433 of the Companies Act (adjourned) - Appeal No. 100 of 1967 by the Company itself.
5. Application No. 19 of 1967 by the creditor, L. A. Chaugule (dismissed) - Appeal No. 86 of 1967 by the creditor.
9. All these matters substantially arise out of the non-implementation of the scheme sanctioned by the court on the 17th February, 1966, and before we set forth the position taken by the respective parties, it is necessary to refer to the terms of that scheme. It is annexed as a schedule to the order or Mr. Justice Mody dated 17th February, 1966, and the operative part of the order recites. "THIS COURT DOTH PASS JUDGMENT AND DOTH HEREBY SANCTION the compromise or arrangement set forth in paragraph five of the petition herein with certain modifications as approved by this Hon'ble Court and which compromise or arrangement with the said modifications is set out in the schedule hereto annexed AND DOTH HEREBY DECLARE the same to be binding on the unsecured creditors of the said company and also on the said company ......" The scheme recites that there were secured and unsecured creditors of the company, the secured creditors being the Punjab National Bank Ltd., who had advanced loans against the pledge and hypothecation accounts and demand loans secured by goods or mortgage of the fixed assets and pledge account with Messrs. R. Ratilal and Co. secured by cotton and that both these accounts shall be continued by the company. The unsecured creditors have been divided into four categories, their debts aggregating to Rs. 1,01,39,900. The first category comprised the concerns of the J.K. group. The second category aggregating about Rs. 10,33,000 comprised public authorities to whom amounts were due, as for example, the Municipal Corporation to whom water charges, rates and taxes were due, the Collector of Sales Tax to whom sales tax dues had to be paid, the Commissioner of Income-tax on account outstanding demands of income-tax and other demands, the Bombay Port Trust on account of ground rent and the Collector of Bombay also on account of ground rent and several other parties whom the company was liable to pay and who possessed statutory powers of recovery from the company. The third category was comprised of suppliers of cotton to the mills who had not been paid the amount due to the being Rs. 6,84,897.10. The fourth category was comprised of other sundry creditors such as suppliers of stores to the company and various other creditors who had supplied stores and articles. The employees of the company were put in a separate category by themselves because a special arrangement had been arrived at between the new management and the Union of workers acting on behalf of the employees as regards the payment of retrenchment compensation and other dues to the employees.
10. In category I, provision has been made for satisfaction of the debts of the J.K. group. In clause (i) it is provided that a sum of Rs. 3,46,501 was paid by J.K. (Bombay) Private Ltd. to the company for the purchase of certain shares held by the company and that those shares were pledged by the company with the Punjab National Bank Ltd. The company on its part agreed to redeem those shares and hand them over to J.K. (Bombay) Private Ltd. within 90 days from the date of the order sanctioning the scheme. Clause (ii) is important and runs as follows :
"The sum of Rs. 48,13,899 is due to J.K. concerns and others whose names are set out in schedule B to the agreement, exhibit "A" hereto. The said amounts with interest at the rate of 1/4th per cent. per annum will be repaid by the company in annual instalments of an amount equal to 50% of the profits of the company, commencing after the expiry of two years from the date of the second mortgage but in any event not later than 30th June, 1980, as provided in the said agreement being exhibit "A" hereto and the said amount with interest as aforesaid will be secured by a second mortgage of the company's assets."
11. The third clause provides that the second mortgage shall be in the form of a debenture trust deed. The whole of this arrangement was subject to the Controller of Capital Issues granting section to the second mortgage being created by the company in favour of the J.K. group.
12. This provision of the scheme has to be read along with the agreement which is referred to in clause (ii) of category I. That agreement is exhibit "A" and is entered into between Gopalkrishna Singhania called the vendor (J.K. group) and the three members of the Jalan group, Nandlal Jalan, Sanwarmal Todi and Jagannath Agarwal called the purchasers. The agreement provides that the Jalans were to purchase the 25,625 ordinary shares owned by the J.K. group in the New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. and that the purchase price of the shares will be Rs. 10 per share. It also provides that the vendor, namely, the J.K. group, shall procure and accept the appointment of such persons as directors of the said company as the purchasers shall direct and that the J.K. group will also procure the consent and confirmation of the various creditors whose names are set out in schedule B. If the company secures the amount due to the vendors by a second legal mortgage, the vendors, J.K. group, agreed that they will not claim interest on the amount due to them at a rate higher than 1/4% per annum and will not demand immediate payment of the said amounts respectively due to them by the company. Certain personal guarantees given by the partners of one of the J.K. concerns were to be discharged by the company. The agreement also stipulated that it was conditional upon the orders being obtained from the Bombay High Court vacating the appointment of the official liquidator (appointed on 2nd August, 1965) and allowing the petitioners in Company Petition No. 39 of 1965 to withdraw the petition.
13. The sum and substance of this agreement between J.K. group and the Jalan group was thus that the J.K. group were enabled to convert the amount of Rs. 48,28,899, which was an unsecured debt, into a secured debt, secured by a second mortgage of the company's assets and they in their turn were to sell their controlling shares to the Jalans to enable the Jalans to obtain the management and control of the company. The J.K. group thus gave up a substantial part of the interest on the amount due to them and their control over the company. They also agreed to defer the repayment of the indebtedness of the company to them by instalments extending upto but not later than 30th June, 1980. These annual instalments were to be paid out of 50% of the profits of the company. The expression "profits" was carefully defined in paragraph 3 of the schedule "C" to the agreement. The J.K. group also stipulated for another advantage, namely, that their sum of Rs. 3,46,501, would be returned to them by the company within 90 days from the date of the order sanctioning the scheme.
14. In exhibit "B" attached to the scheme there is set forth an agreement between the workers through the Rashtriya Mill Mazdoor Sangh and the company. The workers it appears had upon the closure on the 6th August 1965 of the Mills, claimed retrenchment compensation and the agreement provides for the retrenchment compensation and accrued leave with wages during the period and how and on what terms it has to be paid.
15. Now, as we have indicated, the expectations of the parties did not materialise and disputes arose between the J.K. group and the Jalan group and though the mills were re-started on the 1st April, 1966, and an attempt was made to run it, the attempt failed. Ultimately, the parties came to court by the filing of the Application No. 14 of 1967, but at the hearing various other affidavits and documents were read. At the outset Mr. Bhatt on behalf of the J.K. Group wanted that each appeal should be heard separately and that the parties should not be allowed to refer to any pleading or affidavit or document in any other appeal. At any rate, he urged that Appeals Nos. 96 and 97 which arise out of the Application No. 14 of 1967, should be heard separately and Appeal No. 98 should be heard separately because it arose out of the Application No. 21 of 1967. At the hearing, however, we had over-ruled this objection of Mr. Bhatt and had informed counsel that we would give our reasons later. We are unable to accept this contention of Mr. Bhatt for the simple reason that the conduct of all these matters was not kept separate before the learned single judge and in his own orders also the learned single judge has referred to his findings in the other orders. In his order on Company Application No. 14 of 1967, paragraph 1, the learned judge observed as follows :
"Before I do so, it may, however, be mentioned that the parties have freely referred to affidavits filed in the different applications relating to the mill-company in the course of their arguments, as the same have been incorporated and adopted in the affidavits filed in the said applications."
16. In the same order the learned judge referred to his order in Company Application No. 21 of 1967, thus "in view of the fact even at the date when the scheme was sanctioned, the learned judge (Mr. Justice Mody) knew and has stated so in his judgment in clear terms that the company is in insolvent circumstances, and in view of the conclusions at which I have arrived in the order delivered by me to-day in Company Application No. 21 of 1967, to the effect that the scheme has not become unworkable, but it is the new management itself which has deliberately tried to create a situation which would show that it is unworkable, I must reject that contention of Mr. Laud also." The learned judge thus clearly refers to his findings in the connected Application. In his order on Company Application No. 21 of 1967, also the learned judge made a similar remark : "It may be mentioned that, in the course of the hearing of this judge's summons, the parties have freely used the affidavits filed in the different applications relating to the mill-company, as the same have been referred to and incorporated in the affidavits filed in the said applications." In view of this conduct of the cases before the learned single judge we do not think that at the appellate stage counsel for one of the parties can claim that the other party shall now be confined exclusively to the pleadings contained in the affidavits filed in that petition alone and not refer to the affidavits filed in the other applications. Moreover, even the paper books which have been prepared are so prepared that it would be impossible to argue a particular appeal upon the pleadings and documents in that appeal. In fact, Mr. Bhatt himself was compelled to refer to several affidavits in the connected appeals in arguing a particular appeal. We are unable to accept this submission of counsel.
17. Now in claiming enforcement and implementation of the scheme J.K. (Bombay) Pvt. Ltd. have in substance alleged that the scheme as sanctioned by Mr. Justice Mody is binding upon the company and the new management who had undertaken to implement it and had partially implemented it by buying 25,625 ordinary (equity) shares of the company from the J.K. group. Thus the scheme has been partially implemented and now the company and the new management are dishonestly backing out. They have made allegations of deliberate mismanagement and maneuvering against the Jalan group and of having gone back upon their representations to the court made at the time when the scheme was sanctioned. They have pointed out that at the time when the scheme was to be sanctioned the Jalan group had painted a very rosy picture before the company court and made it appear that the company could be worked and the scheme satisfactorily implemented, but having got into the management and control, they have turned round, taken the assets of the company; converted them into cash and have diverted them to their own friends or partisans; deliberately brought the company into the state in which it is to-day. The most paying part of the company's business, viz., the processing plant has been leased out to Badri Prasad Jhunjhunwala and others on very liberal terms, thus causing great loss to the company. Having deliberately brought about such a position they should not be allowed to back out of the scheme, because of the position they have themselves induced. Particularly they alleged that the Jalans preferred a company known as Sushil Investments Private Limited in which their friends and relations are interested at the cost of the parties to the scheme, the other creditors and especially the J.K. group. They had promised by the scheme to bring in the necessary finances and they should be ordered to implement that promise and run the mills.
18. On the part of the Jalan group the principal allegations have been that the J.K. group while they were in the management had committed various frauds which the Jalans discovered after they took charge of the company that they applied to the Controller of Capital Issues for sanctioning the execution of the draft debenture trust deed, but for certain reasons no sanction could be obtained. They have alleged that in spite of their best efforts the company is to-day insolvent, its whole substratum is gone and it is impossible to implement a scheme which is unworkable. The working of the scheme is dependent on the mills making profits and it is impossible for the mills to be run at a profit under the circumstances. The scheme moreover cannot be implemented because to implement it would bring them into conflict with the provisions of the Securities Contracts (Regulation) Act 42 of 1956. They tried their best to arrange for finance for the company with the Punjab National Bank, but because the Central Government failed to give the requisite guarantee (though the State Government had agreed), the necessary finance could not be obtained. They have alleged that even at the time when the scheme was sanctioned the company was in an insolvent condition and that fact was also noted by the learned judge who sanctioned the scheme, but he felt that since the majority of the unsecured creditors of the company had agreed to the scheme he ought to sanction it. Their undertaking was merely to secure finance for the company and not to bring in finance themselves much less to pay anything to the company themselves. They have denied the allegations regarding the processing plant and have said that the arrangement made by them was a proper and business-like arrangement for the running of the processing unit.
19. Now the learned single judge disposed of the Applications Nos. 14 and 21 of 1967, by two separate orders passed on the same day, namely, 6th November, 1967. In his order in Application No. 14 he held that the allegation which the new management had made against the old management of fraud had not been made out and that in any case the frauds alleged by the new management were merely committed by certain individuals and the company could not possibly be affected by any acts of fraud which some individuals, who were at one time in the management of the mill-company, are alleged to have committed on that company. At any rate, the pleading as to fraud on the part of the Jalan group was wanting in particulars and was too vague and general to be considered. He observed that, "it was not a proper pleading of fraud at all and does not show that the new management has acquired any definite personal knowledge of the acts of fraud alleged by it against the old management." He also accepted the contention of counsel that "the company is incapable of perpetrating a fraud". He Further held that "assuming that the old management had committed the frauds alleged against it, the proper remedy of the new management is not to scuttle the scheme on that ground, but to take proceedings under the appropriate provisions of the Companies Act against the individuals who committed those frauds".
20. He then proceeded to consider the contention on behalf of the Jalan group and the company that the company was commercially insolvent and he should take that into consideration and refuse to enforce the scheme. He came to the conclusion that "the scheme has not become unworkable, but it is the new management itself which has deliberately tried to create a situation which would show that it is unworkable" and that the new management had agreed to bring in the necessary finance for the purpose of running the mills and after failing to carry out their obligation under the scheme and starving the mills of finance, the new management could not be heard to urge that the scheme should not be enforced because the company was commercially insolvent and that was no ground for refusing to enforce the scheme. He held that there was no reason why the J.K. group "should not be placed in the situation in which they would have been if the new management had, instead of making an attempt to scuttle the scheme, worked the scheme, as, in my opinion, they would have done as stated above." The learned judge negatived the contention that the implementation of the scheme would give rise to illegality as being contrary to the provisions of the Securities Contracts (Regulation) Act, 1956 (Act No. 42 of 1956). He also held that the scheme once it is sanctioned by an order of the court under section 391 of the Companies Act becomes an order of the court and no question of illegality could arise in respect of the same except in the form of an appeal from the order sanctioning the scheme and that it is binding on all the parties to it. In the sequel he ordered that "the Jalan group, who have purchased the shares from the Singhania group, should bring in 'the necessary finance required for running the mill' as they have undertaken to do by clause 4 of the scheme as sanctioned by the court. In my opinion, it is not enough that they should procure finance from banks or other parties. It was an obligation which they had undertaken under the scheme to provide the necessary finance required for running the mills, which must mean that they must, in any event, bring in their own finance for that purpose in addition to any finance which they may or may not procure from elsewhere". He also ordered the cancellation of the agreement of lease as to the processing unit of the company which the new management had given.
21. In his order passed in Company Application No. 21 of 1967, the learned judge dealt with the question of the unworkability of the scheme and negatived the contention of the Jalan group that the company was commercially insolvent and that it was impossible to implement the Scheme. He came to the conclusion that "it is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme" and that "the mere fact that, in view certain difficulties, it may not be possible to work the mill for sometime, would not justify a winding-up order under section 392(2)". He reiterated that it was the Jalan group which had deliberately tried to create a situation in which they could come forward and say that the scheme was unworkable, so that they may not be required to bring in any further finances for ruining the mills. Finally he ordered that "on considering the facts discussed by me above, I have come to the conclusion that, if the new management brings in the necessary funds, which it has undertaken to do under the provisions of clause (4) of the scheme, and terminates the hiring agreement in favour of Badriprasad Jhunjhunwalla and others in respect of the processing unit by giving three months' notice, as under the terms of that agreement it is entitled to do, it will still be possible to run the mills, and to carry out the provisions of the scheme."
22. As regards the mismanagement by the new management, he upheld the three charges against the new management, (1) that the loss alleged to have been incurred by the company was due to the fact that the new management had given on lease the processing unit which was the most profitable part of the working of the mills to their own nominees consisting of Badriprasad Jhunjhunwalla and others at a cheap rate to the detriment of the interests of the company; (2) that the new management had failed to carry out clause (4) of the scheme and had deliberately deprived the company of finances; and (3) that the new management had failed to purchase the cotton requisitioned for it by the Government for the purpose of running the mills thereby bringing about the alleged insolvent position of the company.
23. So far as the creditor, Chaugule's application is concerned, he dismissed it on the short ground that the applicant had not been able to place before him any material which it could be said that the scheme had become unworkable, except two things, firstly that Chaugule himself claimed Rs. 9,606, and secondly that there was a bold statement in has affidavit unsupported by any affidavits or figures that the company was commercially insolvent. He held that the creditor had not given any details on which he based his allegation of commercial insolvency. Therefore, he dismissed the application of Chaugule.
24. These findings have been challenged on behalf of the creditor, Lalji Thakersey and Co., by Mr. Nariman in Appeal No. 96 of 1967, and by Mr. Sorabjee on behalf of the company in Appeal No. 97 of 1967, and in Appeal No. 98 of 1967. Mr. Nariman has urged that the order which the learned judge passed has misconstrued the provisions of the scheme and particularly clause (4) thereof, and that the stipulation was not that the Jalans were to bring in their own finance but that they had only undertaken to provide finance and they had made an honest attempt to do so. At any rate, they cannot be compelled to bring in finance if they are unable to do so. The orders which the learned Judge passed are clearly unsustainable and impossible to be implemented in practice, because unless finance is forthcoming the mills cannot run. He also urged that the company was in a hopelessly insolvent condition and was so even on the date on which the scheme was sanctioned by Mr. Justice Mody, a fact which the learned judge himself recognised in the order which he passed. At that time all the parties expected that the company may turn the corner but that expectation has failed. He took us through the pleadings of the parties and through a considerable volume of correspondence which had been filed by the company to show what steps it took to revive the company and what its condition is, to show commercial insolvency. He contended that the scheme is unworkable and is impossible to be implemented and at any rate the application No. 14 of 1967 is an application praying that the scheme should be implemented partially in favour of the J.K. group and that ought not to be permitted having regard to the circumstances here. He also raised the issue, decided against him, that the agreement to transfer the management shares is illegal having regard to the provisions of the Securities Contracts (Regulation) Act, 1956 (Act No. 42 of 1956). He denied that the Jalan group had in any way been guilty of mismanagement or misconduct in relation to the affairs of the company, but in any case, even assuming that the three grounds upon which the learned single judge based his findings were correct, they were not sufficient to hold that the company was not insolvent.
25. Supplementing these arguments Mr. Sorabjee urged that the motives of the management are wholly irrelevant where a prayer is made to wind up a company and the question as to who brought about that position is hardly relevant in considering whether the company should be wound up or not. He also urged that the application being under section 392(2) of the Companies Act, that section provided a summary remedy and so far as the company was concerned it was entitled to object, that complicated questions of fact which were in dispute between the Jalan and the J.K. groups ought not to have been allowed to influence the prayer of the company to wind it up.
26. Mr. Bhatt in reply to these arguments raised a preliminary objection that so far as Appeal No. 96 of 1967 was concerned, several parties had been noticed upon the judge's summons dated 27th February, 1967 an they had appeared and were parties before the learned single judge. They were the principal directions of the company and they have not appealed against the orders of the learned single judge and therefore they at least would be bound by those orders. He then pointed out that the entire position of the company to-day was due to the misconduct and mismanagement of the Jalan group after they had taken charge of the company and they should not be allowed to take advantage of their own wrong doing. Moreover, the Jalan group is blowing hot and cold at the same time because when they wanted to get the scheme passed before Mr. Justice Mody they had alleged that the company was in a solvent state and it could be resuscitated and run for the benefit of all concerned, but now having got control and management they have turned round and alleged that it is in a commercially insolvent condition. That condition is induced by their own conduct in parting with the most lucrative part of its business, namely, the processing plant which they had leased out to Badriprasad Jhunjhunwalla. They had declared it to be a very profitable and paying unit before Mr. Justice Mody but now they say that it was a burden to the company and therefore it was leased out to Jhunjhunwalla, much to the detriment of the interests of the company. He controverted the contention that the scheme was unworkable in itself or in any way illegal. On the other hand, he alleged that the new management was estopped from urging that the scheme was illegal or unworkable, by the order of Mr. Justice Mody sanctioning it and that the creditor, Lalji Thakersey and Co. who have obtained advantage for themselves cannot now be allowed to go back and challenge the scheme. He also urged that the J.K. group under the agreement itself had become secured creditors or at least charge-holders and that therefore they could not be defeated simply because the Company was being wound up. Alternatively, he urged that the J.K. group were already secured creditors and in any event he prayed that the charge of the J.K. group should be recognised even though the company be wound up. He also urged that the company cannot apply for winding up without a proper resolution passed by its shareholders.
27. Now, both the Applications Nos. 14 of 1967 and 21 of 1967 were applications made under the provisions of section 392(2) read with (1) of the Companies Act. The J.K. group wanted the implementation of the scheme sanctioned by this court to the extent that the second mortgage in their favour should be implemented and the agreement, entered into between the Singhania group and the Jalan group on the 15th August, 1965, (exhibit A) appended to the scheme, should be enforced. The reply on behalf of the company and the creditor has been that, having regard to the position of the company, its financial situation and liabilities, it is impossible to implement the scheme or even to work the company and its mills at a profit. Therefore, it should be wound up under the provisions of section 392(2) (we ignore for the moment the application under section 433 of the Companies Act).
28. Section 392 is a new section incorporated in the Companies Act of 1956 (Act I of 1956). It was considered that there was a lacuna in the previous Act in so far as there was no express power given to the High Court to supervise the carrying out of a compromise or arrangement, or to modity the same or to order the winding up of the company if necessary, where no application for winding up as such was filed, under section 433. Sub-sections (1) and (2) of section 392 provide as follows :
"(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 arrangement; and
(b) may, at the time of making such order or at any time therefore, give such directions in regard to any matter or make such modifications in the compromise arrangement as it may consider necessary for the proper working of 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, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act."
29. Thus where a scheme is once sanctioned by the High Court the section provides for two alternatives, (1) where the scheme can be worked without modification, the court is given the power to supervise the carrying out of the compromise or arrangement and (2) if the scheme cannot be worked as it is, then, the court has the power (a) to give such directions as it may consider necessary for the proper working of the compromise or arrangement or (b) make such modifications in the compromise or arrangement as it may consider necessary also for the proper working of the compromise or arrangement. These are the powers conferred by sub-section (1) which contemplates only the working of the scheme or working it with directions and modifications.
30. But there may be a case where despite a scheme, the scheme cannot at all be worked satisfactorily with or without modifications. That case is contemplated in sub-section (2) and in such a case the court is given the power to make an order winding up the company and if it passes such an order that order is deemed to be an order made under section 433 of the Act. The power moreover can be exercised by the court "either on its own motion or on the application of any person interested in the affairs of the company." In that view, much of the argument directed to attack of the application made by Lalji Thakersey & Co., a creditor of the company, and attacking his locus stand to apply loses its force since once the matter is before the court and the court considers the circumstances, it can even act suo motu. Therefore, whether a creditor has locus standi to apply or not is hardly material. It will also be noticed that the power is a very wide power and is a discretionary power. Since we are hearing an appeal, we must bear in mind that it is such a discretionary power that the learned single judge has exercised in this case and declined to wind up the company and on the other hand, ordered the implementation of the scheme.
31. The fundamental assumption in the two orders passed by the learned single judge on Company Application No. 14 of 1967 as well as on Company Application No. 21 of 1967, is that by the compromise or arrangement evidenced by the scheme the new management were under a liability or obligation themselves to furnish the finances to carry on the company. The whole argument is founded upon clause (4) of the schedule to the order of Mr. Justice Mody dated 27th February 1966. Clause (4) provides as follows :
"4. Management of the Company :
The said purchasers will provide the necessary finance required for running the mills."
32. The agreements was that the Jalans should provide the necessary finance and not that the Jalans shall themselves furnish the necessary finance. It is one thing to say that a party shall furnish the necessary fiance required for running the mills and another thing to say that they will provide or make provision for it. It seems to us clear upon the terms of this clause that the Jalans had only undertaken to equip the company with the necessary finance wheresoever procured and not that they themselves were under a liability to pay it. Secondly, the expression "will provide" does not mean "shall or must provide in any event". Though the liability to provide is there, it is the normal commercial liability to make their best efforts to provide; not to pay up in any event. There are moreover no sanctions laid down for failure to provide. The clause in our opinion lays down nothing more than the normal duty of a managing agent or other person in charge of management of a company to make financial provision to run the company.
33. That this is really so is clear from the other provisions of the scheme itself, viz., the provisions of the agreement between the J.K. group and the Jalan group, exhibit A to the scheme and particularly schedule C thereto which lays down the principal terms of the second mortgage. In clause 4(d) of schedule C to the scheme, it is provided that in the event of the company obtaining a loan from certain Corporations or the Central or the State Governments or a State Corporation or any scheduled bank the company "shall be entitled to create a first or prior charge over the fixed assets of the company upon such terms and conditions as may be agreed to between the company and the said financial institutions ........." It is also provided that in that event "the security of the second mortgagees over the fixed assets shall be subject to the first or prior charge or mortgage in favour of the said financial institution and that subject only to the said first or prior charge no other terms or conditions of second mortgage shall be affected. It is clear from this provision that it was within the contemplation of the parties that the Jalans in order to provide the necessary finance were entitled to negotiate with the said financial institutions for loans. The provisions of clause 4(e) of schedule C also contemplate the borrowing of loans from any other firm, company or person because by that clause safeguards are laid own for the security of the second mortgagees. These clauses therefore show that though the provision was that the Jalans should provide the necessary finance the parties contemplated that they would try to raise the finances like any ordinary business house from financial institutions and other persons, firms or companies and that they were under no legal obligation to pay themselves to provide finance in any event, even if negotiations failed.
34. In fact this position constitutes the real weakness or lacunae in the scheme and even before Mr. Justice Mody that weakness or lacunae was pointed out at the time when he passed the order sanctioning the scheme. The learned judge has recorded in the order itself the objection which was then taken by certain creditors before him :- "But another point which he argued was that the court should hold that the scheme is unworkable, or is at least not in the interests of the general body of unsecured creditors, because the persons who are contemplated under the scheme to replace the present management have not specifically agreed to provide adequate finance for the working of the mills of the company. He further pointed out that there is not guarantee in the scheme given by the new management or anybody else that the amounts due to the unsecured creditors would assuredly be paid even at the postponed date. These contentions of Mr. Shah cannot be said to be totally without any foundation." These remarks in the order of the learned judge themselves show that even at that date the parties contemplated that the Jalans would try to secure finance to run the mills but no guarantee was given by them or by anybody else and they had not "specifically agreed to provide adequate finance for the working of the mills of the company".
35. In his order in Company Application No. 21 of 1967 the learned judge after quoting clause 4 noticed this passage from the judgment of Mr. Justice Mody to being with. Then he proceeded to discuss the conduct of the parties, and held that the Singhanias have fulfilled their part of the contract, but the Jalans had not and gave his findings on the second contention of Mr. Bhatt, counsel for the J.K. group. He held inter alia :
".............. in view of the fact that the new management has, in breach of the obligation undertaken by it under clause 4 of the scheme failed to invest any longer a single rupee by way of finance for the purpose of running the mills, I am not satisfied that the mills cannot be run for want of finance."
36. The words we have underlined clearly show that the learned judge thought that the new management was under an obligation to invest, that is to say, to provide the finance themselves and they had failed to do so. Therefore, the learned judge stated in the penultimate paragraph of his judgment "It is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme", and he passed the final order : "On considering the facts discussed by me above, I have come to the conclusion that, if the new management brings in the necessary funds, which it has undertaken to do under the provisions of clause 4 of the scheme ............. it will still be possible to run the mills and to carry out the provisions of the scheme." It will thus be seen that thought the learned judge noticed the remark of Mr. Justice Mody in his order that there was not guarantee given by the new management that the amount due to the unsecured creditors would assuredly be paid and that they "had not specifically agreed to provide adequate finance for the working of the mills", the learned judge came to the conclusion that they were "under an obligation" to do so or had "undertaken" to do so under the provisions of the scheme.
37. The same reasoning was adopted in his order on Company Application No. 14 of 1967. He referred to his findings in his order on Company Application No. 21 of 1967 and held :
"................ in view of the conclusion at which I have arrived in the order delivered by me today in regard to Company Application No. 21 of 1967 to the effect that the scheme has not become unworkable, but it is the new management itself which has deliberately tried to create a situation which would show that it is unworkable, I must reject that contention of Mr. Laud also. The company was in the same tight financial circumstances even at the time when the scheme was sanctioned by the court. That was the very reason why it was provided in the scheme that the new management was to bring in the necessary finance for the purpose of running the mills. When the situation is viewed in that background, it is quite clear that, after failing to carry out their obligations under the scheme and starving the mills of finance, the new management cannot be heard to urge that the scheme should not be enforced because the company is commercially insolvent, and that is no ground for refusing to enforce the scheme."
38. In the same order the learned judge made the point clearer in the final order which he passed "I order that the Jalan group, who have purchased the shares from the Singhania group should bring in 'the necessary finance required for running the mill', as they have undertaken to do by clause 4 of the scheme as sanctioned by the court. In may opinion, it is not enough that they should procure finance from the banks or other parties. It was an obligation which they had undertaken under the scheme to provide the necessary finance required for running the mills, which must mean that they must in any event bring in their own finance for that purpose in addition to any finance which they may or may not procure from elsewhere." We have already shown that by the terms of the scheme itself the contemplation of the parties was that the new management should make provision for finance or arrange finance and that they could do it either by getting the finance from other parties or if they so chose by providing it by themselves. In that view we think that the learned judge erred in his construction of clause 4 and in the order which he passed.
39. The order, moreover, in our opinion, is incapable of being carried out and is incapable of supervision and enforcement. The new management, we shall, presently show, have stated that they made efforts to procure finance, were able to procure it to some extent, but not to the extent that the large indebtedness of the company required. They have also alleged that in this respect the J.K. group were responsible for foiling their efforts to procure the finance, and that the position of the company is such that no reasonable financier would advance moneys to such a company. We shall presently show that having regard to all the circumstances and the conduct of the parties this contention is borne out.
40. Bearing in mind the crucial fact that the new management had not themselves given a binding undertaking to provide finance to run the mills, we proceed to consider the position of the company and the mills in the light of all the circumstances. The authorised capital of this company is Rs. 1 crore divided into 45,000 equity shares of Rs. 100 each, 15,000 preference shares of Rs. 100 each and 40,000 unclassified shares or Rs. 100 each. The latter class remains unclassified because it was not subscribed. The issued and paid up capital of the company is Rs. 60 lakhs consisting of 45,000 equity shares of Rs. 100 each and 15,000 preference shares of Rs. 100.
41. Now, long before the scheme itself was adumbrated and even on the date on which it was sanctioned, there is not doubt that the company's indebtedness and its financial position were such that it was commercially insolvent. This fact can hardly be disputed. It is reflected in the order of Mr. Justice Mody in sanctioning the scheme itself. Nevertheless, the scheme was sanctioned for reasons which the learned judge has himself stated as follows :
"But the basic fact remains that the company to-day appears to be in an insolvent condition. The unsecured creditors are therefore bound to suffer. Whether a winding-up order or the scheme is more advantageous to them is for the unsecured creditors themselves to decide. The voting at the various meetings and the arguments advanced before me show that a large majority of the unsecured creditors are in favour of acceptance of the scheme. The scheme has become more favorable to the unsecured creditors with the said amendments incorporated therein. I do not think that I should endanger the desire of the majority of the unsecured creditors by accepting the contentions of Mr. Shah and refusing to sanction the scheme."
42. Two things appear clear from this order (1) that the learned judge even at the date of sanctioning the scheme considered that the company was insolvent and (2) that what really weighed with him was that a large section of the unsecured creditors desired to continue the working of the company. It seems that the principal parties to the agreement or compromise at that time believed that the company which was almost dead could be revived and managed to persuade the majority of the creditors and the court that it could be revived. In the sequel we shall show that their hopes have been belied and that the company today is in worse position. It is commercially insolvent and its substratum is completely gone.
43. The fact that it was insolvent on the date of the sanctioning of the scheme is virtually conceded even on behalf of the Singhania group as can be seen from the affidavit to Gopalkrishna Singhania dated 8th August, 1967, filed in answer to the Company's Petition No. 82 of 1967 under section 433 of the Companies Act (in Appeal No. 100 of 1967). In paragraph 9 this is what a person who was at that time a director and the chairman of the company says :
"I say that at the date of the said order dated 17th February, 1966, the petitioner-company was commercially insolvent and but for the obligation undertaken by the newly appointed directors to run the mills and to provide the necessary finance, this Hon'ble Court would never have sanctioned the scheme. The said scheme cannot be implemented and worked unless the said newly appointed directors provide the necessary finance. I say that the attitude now taken up by the newly appointed directors and at their instance by the petitioner-company constitutes a breach on their part of the said obligation ..........."
44. It seems to us that in view of this important admission made by the erstwhile chairman of the company, there is very little to decide in these appeals except the question whether the new management had undertaken the obligation to provide the necessary finance, which as we have shown above they had not.
45. But we do not propose to rest our decision on only that admission, but to examine the position of the company as it appears on the record. In reply to the Company Application No. 14 of 1967, in answer to the affidavit supporting the judge's summons dated 27th February, 1967, one of the directors of the Jalan group, Krishna Murari Goenka, has filed his affidavit on the 11th April, 1967. The affidavit in support of the judge's summons runs into 50 pages and the affidavit in replay into about 70 pages. There was a further affidavit filed by way of a rejoinder on behalf of the J.K. group jointly by Gopalkrishna Singhania and Balkrishna Kedia which runs into a further 60 pages and a sur-rejoinder filed on the 12th June, 1967, on behalf of the Jalan group by their director, Krishna Murari Goenka. These affidavits deal mostly with the charges and counter-charges flung at each other by the two rival groups, the facts and figures pertaining to the company being only incidentally given.
46. In substance, the Jalan group have alleged that (1) before they took over, 4,000 workers of the mills had been unemployed for nearly 8 months and after they took over under the scheme, they re-started the mills on the 1st April, 1966, but due to the closure of the mills for a period of eight months on account of the pendency of the winding-up petition (No. 39 of 1965) its machinery had substantially deteriorated and it took nearly three months to put right the machinery in the various departments of the mills at a cost of about Rs. 5 lakhs. Only about 40,000 spindles and 900 looms could be worked on the reopening, but by September, 1966, additional machinery which was lying idle was reconditioned and made ready for working. (2) When the mills re-started in April, 1966, the cotton season was partially over and cotton of the requisite quality was not available in the market. (3) Moreover the prices of cotton in the local market had been soaring higher than the ceiling fixed by the Textile Commissioner. (4) The labour cost also went up particularly due to the cost of the living index going up by several points and due to the dearness allowance being linked up with the cost of living index. (5) The devaluation of the Indian rupee had by then taken place and the prices of various items of stores particularly dyes and chemicals went up considerably. (6) Under these circumstances the company's machinery which was repaired and reconditioned could not be put to active use and all these factors affected the running of the unit which became uneconomic and the mills could only be run at a heavy loss of about Rs. 2,50,000 per month. (7) In the financial year ending 31st March, 1967, the company suffered an estimated loss of Rs. 28.44 lakhs according to the provisional balance-sheet.
47. These allegations have been denied on behalf of the J.K. group. They have denied that the company was unable to pay its debts and alleged that primarily the unsound financial position of the company was due to the failure of the new management to provide the necessary finance for running the mills. They have alleged that the newly appointed directors have so conducted the affairs of the company that they gradually withdrew all the available moneys from the company and diverted them to their associate firms and companies. They allowed Messrs. Sushil Investment Private Ltd. to withdraw moneys from the company to the latter's detriment. Having accomplished that objective they began with ulterior motive to seek the winding-up of the company.
48. The Singhania group denied that the reasons put forward by the new management for the alleged loss were correct. The allegations were moreover vague and unreal and in any event the directors of the new management were well aware even on the date of the scheme that the textile industry was passing through a crisis and that the reasons which they have now given for the financially unsound position of the company were well known to them. In regard to the non-availability of cotton they have denied the same and alleged that when cotton was available the new management failed to lift it.
49. One of the major charges that they have levelled against the new management is as regards their conduct regarding the processing plant of the mills - a charge which, as we said, found favour with the learned single judge. They have alleged that the processing plant was the most paying asset of the company, but as soon as the new management took over, they granted a lease of the processing plant in favour of a "nominee firm" of one Jhunjhunwalla at a nominal charge of Rs. 50,000 per month thus depriving the company of its most profitable unit. In the year 1964-65 the company had earned Rs. 17.12 lakhs by doing outside processing work done by the company in the processing plant after the entire processing work of the company's own production had been completed, but between 1st April, 1966, and 31st March, 1967, the company is shown to have received by way of the lease money or rent of the processing plant only a sum of Rs. 4,80,000, and the company is shown to have paid to the processing unit processing charges amounting to Rs. 21.77 lakhs. Thus while the company in the previous year had earned a net income of Rs. 17.12 lakhs out of processing unit the company is alleged to have incurred a liability or debt of Rs. 17 lakhs in favour of the lessees of the processing house during the period April 1, 1966, to March 31, 1967. This charge the new management have denied and have pointed out that they had not granted a lease but it was only a leave and licence agreement made with Badriprasad Jhunjhunwalla and others and the whole agreement was made after the new management had negotiated with the Textile Commissioner as well as the excise authorities "for separating the processing unit from the composite mill" and after obtaining the sanction from the excise authorities. The compensation of Rs. 50,000 per month charged was not only adequate but was more than reasonable and the licensees were under the agreement with the company under an obligation "in the first instance to process the entire production of the mill at costs. It is only for surplus capacity that may be available to the licensees for processing outside cloth that the licensees were paying a handsome amount of Rs. 50,000 per month to the company as monthly compensation for the use of the building and machinery of the process house." All the expenses such as water power, steam, wages, maintenance etc., were charge to the licensees separately. The working of the processing unit, according to the licensees, for eleven months showed a loss and not profit.
50. The director of the new management further alleged generally that "As regards details of estimate of working of the petitioner-company given in the affidavit dated 29th January, 1966, by Jagannath Agarwal (in support of the Company Application No. 14 of 1967), I repeat as hereinbefore stated that the same was only an estimate, and not an assurance or representation as alleged. The applicant-company has intentionally ignored a big change in the position of the textile industry that has taken place since Jagannath Agarwal made his affidavit ............ In spite of economies and for reasons and factors beyond the control of the new management the mill is running at a monthly loss of Rs. 1 to 1 1/2 lakhs."
51. In the light of these voluminous pleadings we turn to examine the position as revealed from the affidavits and correspondence filed on behalf of the company and the new management. We have already shown that on 17th February, 1966, the date of sanctioning of the scheme, Mr. Justice Mody considered that the company was insolvent. On that date, with a paid-up capital of Rs. 60 lakhs its unsecured debts alone aggregated to a sum of Rs. 1,01,39,900. Besides that, the secured debts amounted to about Rs. 49 lakhs. In Company Application No. 21 of 1967, the company had itself shown that its unsecured creditors were to the extent of Rs. 103 lakhs and secured creditors to the extent of Rs. 49,00,000, and that the depreciated book value of its assets would be about Rs. 43 lakhs if depreciation is calculated upto the date of the application, i.e., 15th June, 1967. The total indebtedness, therefore, was almost two and a half times the paid-up capital of the company. So far as the profits of the company are concerned none of the audited balance-sheets or profit and loss accounts have been placed before us or brought to our notice. For the year ending 31st March, 1967, it is clear that the company suffered a loss of Rs. 28.77 lakhs as stated in the affidavit of K. M. Goenka. The mills were finally closed down for good on 14th June, 1967, by the new management. Its 4,000 workers have not been and cannot be discharged without payment of compensation with the result that their further claims for lay off compensation or closure compensation under the industrial laws, as the case may be, is daily mounting. The workers, we are told, have in satisfaction of their claims taken possession of the factory premises and are squatting on it and preventing any director from going in. From 14th June, 1967, till to-day these overhead and capital charges must run into several lakhs of rupees. The company does not appear to have any reserve or other funds from which its indebtedness can be paid. Its machinery, which has been lying idle, will cost several lakhs of rupees to be put in order again. When the new management re-started the mills on 1st April, 1966, it cost the new management Rs. 5 lakhs to put 60% of the machinery, in order. We cannot imagine that any reasonable or prudent businessman would decide to sink money into or run such a mill. It is clear that the company is insolvent, its entire capital wiped out and its substratum gone.
52. Such correspondence as has been placed before the court shows how this position was reached. There is no doubt that from about September, 1966, there arose a crisis in the textile industry for want of Indian cotton and on 14th September, 1966, the Indian Cotton Mills Federation of Bombay passed several resolutions of which notice was given to all the mills (vide exhibit D). In their circular the Federation have stated : "The committee of the Federation at their meeting held on 14th September, 1966, gave careful consideration to the situation that had developed in regard to the supply and prices of Indian cotton. The efforts to have a scheme or regulatory measures for Indian cotton for the season 1966-67 acceptable to all the interests concerned, viz., the growers, trade, industry and Government did not bear any results. The Textile Commissioner has, therefore, been informed by the Federation that the industry is no longer bound by its assurance to buy cotton throughout the season at the appropriate ceiling price. The committee decided that voluntary measures should now be adopted in order to try and maintain prices of cotton within the ceilings". The circular also directs that mills which have stocks in excess of the permissible limits should not make any further purchase till their stocks go below the permissible limits, but mills which had stocks less than the prescribed limits could buy from the market "provided that they are able to obtain cotton at prices not above the statutory ceiling laid down by the Textile Commissioner". In paragraph 7 of the circular it was stated : "If, in spite of these efforts, a mill is not able to obtain cotton, it should give notice of closure stating in notice that it was offence to buy cotton at prices over the statutorily fixed ceiling and that the mill was not in a position to get cotton within ceilings. The matter should also be simultaneously reported to the Textile Commissioner, the Federation and the Regional Millowner's Associations concerned." In paragraph 8 it was stated : "The committee of the Federation had decided that mills which are forced to resort to closure due to non-availability of cotton at ceiling prices should be reimbursed by the Federation of the lay off compensation to labour which they are required to pay."
53. In compliance with this resolution, on the 22nd October, 1966, the new management through the mill manager put up a notice informing their employees and also informing the Textile Commissioner and others and the labour union that they were unable to purchase cotton at prices over the statutorily fixed ceiling which is in contravention of law, but they were making efforts to purchase cotton or secure it on loan from other mills, but "the present stocks of cotton are expected to last upto November 18, 1966, and if the efforts to secure cotton do not succeed, the management will be constrained to stop working of III shift of the spinning department of the mills".
54. On the 23rd November, 1966, the Indian Cotton Mills' Federation pointed out several facts and in a press note stated that the total supply or cotton will be no more than 60 lakhs bales against the requirement of 66 lakhs and that "this gap clearly brings out the necessity for reduction of spindle working by 10 per cent. at least". They also pointed out that the prices of cotton were ruling very high upto 50 per cent. over the ceiling and that sporadic closure of mills was taking place in various parts of the country for want of cotton. They announced that in order to meet the abnormal situation all mills in India should be closed for a period of 15 days from 19th December, 1966, to 2nd January, 1967, and as from 3rd January, 1967, there should be a reduced working of spindles in all the mills. They also blamed the cotton control for the situation that had arisen and urged that if the cotton control were lifted thereof would be prospects of a larger production of cotton. In a further circular issued on the 25th November 1966, the Federation withdraw its offer to compensate mills as closure due to non-availability of cotton and their injunction to mills not to buy cotton at prices above the ceiling.
55. On the 3rd of December, 1966, the Textile Commissioner by a circular informed all cotton textile mills that all mills "shall observe an extra holiday per week and this extra holiday will be on the day preceding the normal weekly holiday" and that lay off compensation for the workman observing extra holiday will be regulated by section 25-C of the Industrial Disputes Act and that the extra holiday will apply to the spinning and weaving departments of the mills. It may be stated here that this has specifically been alleged by the company as one of the causes which had added to the losses of the company, for not only was there an extra holiday per week resulting in the loss of production, but the company had to pay the lay off compensation for that holiday. The Textile Commissioner also limited the working of more shifts by any company, than the company was used to working during the period July to September 1966, and lastly the Textile Commissioner ordered : "No mill shall put up a closure notice or resort to closure without the prior permission in writing of the Textile Commissioner." These circulars and the action taken under them clearly show that an unexpected and a serious burden was imposed upon the company in so far as it had to reduce its working by one day in the week, had to pay workers the lay off compensation even though they did not work and despite losses they could not close down the mills. These circulars of the Federation and the Textile Commissioner amply establish the claim of the new management that the financial position of the company worsened due to an unforeseen depression and crisis in the textile trade; and due to want of cotton and the curbs imposed upon the activity of the textile industry in general. On the one hand cotton was not available and men and machinery lay idle; on the other hand the mills had to continue to pay their employees and bear the overhead expenses and could not close down. The new management could hardly be blamed for the inevitable and mounting losses, incurred as a result of such controls.
56. The steps they took to meet situation are further shown from the letters which the new management addressed to the authorities. By a letter written on the 7th December, 1966, to the Textile Commissioner, the company pointed out that they were carrying on with cotton of lesser count then they needed after they had put up a closure notice because of instructions of their Federation, and that they could only continue to work till the 10th of that month (December, 1966). The company by this letter informed the Textile Commissioner : "Our mill is facing closure positively from 10th of this month when no stocks either in process or in godown will be left out except few bales of 60s count. This enforced working in last 20 days has been at the cost of process stock. We fail to understand as to how we shall keep the mills working since we have not received a single bale till to-day the 7th December, 1966, nor any requisition order. Your circular clearly indicates that no mill will be allowed to stop without prior permission in writing from your office. Hence we request you to accord your permission for closure from 10th until we receive the cotton of various counts as reported." In paragraph 6 of this letter the new management prayed that they should be permitted to work six days in a week instead of five days "since we are not in a position to do so in view of our proposed reduced working". They further stated in paragraph 7 : "You are aware that this mill is losing very heavily and if we have closed down for a day more in a week, the extra burden of nearly Rs. 80,000 per month on account of lay off compensation will positively insert (sic inflict ?) the killing blow and we shall not be able to survive. It will not be out of place to mention that our working funds are exhausting rapidly and if our problem on its individual merit is not processed and taken care of, the ultimate result would be closure of this mill for a longer period." In this letter to the Textile Commissioner the new management made its problems very clear. Not only had the want of cotton affected its working and therefore its profits, but it was incurring heavy loss of Rs. 80,000 per month, and was in dire financial stringency.
57. On 8th December, 1966, the company informed the Textile Commissioner that if cotton of certain counts "is not requisitioned for us by to-day evening to enable us to bring the said cotton for mixing before 10th, please take notice that we shall have to close the mill from 10th December, 1966". On the next day 9th December, 1966, the company sent a telegram to the Commerce Minister at New Delhi to the same effect and followed it up by a letter of the same date to the Textile Commissioner. On 12th December, 1966, they pointed out to the Textile Commissioner that the market price of cotton was between Rs. 1,500 to Rs. 1,650 per candy depending upon the variety and that they urgently required requisitioned cotton from Government. They intimated that they had purchased some cotton at high price. This again shows that the company was making its best efforts to manage them to close down and on the other had Government was unable to supply them cotton at the controlled rate and they were forced to buy at exorbitant prices in the market. It establishes clearly why the company continued to incur losses.
58. The response of the authorities did not exactly solve their problem as the company had hoped. On 13th December, 1966, the Textile Commissioner informed the company by a telegram that the exemption from the additional one day closure could not be granted to them. On the 15th December, 1966, the company further pointed out to the Textile Commissioner that the cotton which was offered for sale by the trade was quoted beyond the ceiling and the difference was between Rs. 100 to Rs. 500 per candy depending upon the variety. They stated that they were given a definite assurance that cotton from the requisitioned stock would be allotted to them by Government, but "till date not a single bale allotments has come. On enquiry, we have been told that officers are still busy in carrying out requisition at various centres and we shall soon get the news about the allotment". They confirmed also a telegram sent by them to the Commerce Minister at Delhi. The company also made it clear that "this mill cannot sustain any further burden of loss beyond what we are already incurring. Still there seems to be no positive interest or response from any circle. This additional loss, if added, would make the total quantum very high and within the next one to two months we will have no working capital". They have even prayed that "the labour union should be directed to forego lay-off compensation and let the labour also contribute to this calamity". On the 20th December, 1966, they again reiterated all these facts and prayed to the Commerce Minister that they should be exempted from the extra one day closure but on the 21st December, 1966, they received a reply from Mr. D. N. Shiveshwarkar, Deputy Director (Cotton) No. (15-A)/66/Cotton, informing them that the observance of the extra holiday was compulsory and no exemption was being granted to any mill.
59. On 23rd December, 1966, Ordinance No. 13 of 1966 came to be issued which made it obligatory to continue undertakings in spite of want of any article or thing for the production or manufacture of an essential commodity which of course included cotton. What were till then merely directions of Government now became law. On the 24th December, 1966, there followed an order called the Cotton and Staple Fibre Textile Mills (Regulation of Working) Order, 1966, laying down inter alia the obligation on every employer to close his undertaking for an extra day per week. The company once again asked for exemption under the power vested in the Textile Commissioner under this Order and on the 25th December, 1966, they were informed by a telegram that no exemption was possible. On the 24th January, 1967, the company made a long representation to the Textile Commissioner forwarding copies to the Commerce Minister of the Government of Indian and to the Labour Minister of the State Government, in which it reiterated all the facts about the working of the company. It referred to the condition under which it was working, namely, the scheme sanctioned by the court and pointed out that its losses were heavy and increasing. It also recounted the entire history of the correspondence with the Textile Commissioner and prayed that the company should be given assistance in different ways. It also prayed in this letter for supply of terene fibre so that they could manufacture goods made of material other than cotton.
60. All these show the extreme limits to which the new management went in its attempt to carry on having regard to the directions of the authorities and the law. There are further letters written to the Textile Commissioner and other authorities dated 31st January, 1967, 2nd February, 1967, 3rd February, 1967, 7th February, 1967, 13th and 14th February, 1967, and 15th February, 1967. It appears that one of the directors interviewed the Additional Textile Commissioner on the 15th February, 1967, and what transpired at the meeting is recorded in a letter written on that day to the officer concerned. In that letter it is stated inter alia "when the facts were clearly placed before your goodself and the position was explained that there is absolutely no stock of cotton in the mill and if permission is not granted, the mill will close down. Instead of any help, you intimated that in case we cannot manage to run the mill we may close down". The Additional Textile Commissioner must have known that this oral permission given by him could not be availed of in view of the Ordinance which had been passed earlier. The remaining correspondence (exhibit D) shows their efforts to continue to carry on. On the 16th April, 1967, there came into force the Essential Commodities (Amendment) Act, 1967, which replaced the Ordinance No. 13 of 1966 and virtually re-enacted its provisions with certain amendments (sic) closed down the mill but by that time Company Application No. 14 of 1967 had been filed. The mill was closed down while arguments in that application were going on.
61. All these letters were written in the ordinary course of business and do not appear to be inspired or motivated. Many of them have been replied to by the authorities concerned. The whole correspondence viewed in the light of the Ordinance and the orders of the authorities to which we have referred, appears to be perfectly genuine. We have dealt with that correspondence at some length only in order to show that there was voluminous evidence to justify the stand of the company that due to the accute shortage of cotton and the controls and regulations the Mill could not work at its full capacity nor could it close down any part of its activity and for all these reasons its losses continued to mount. So far as we can see there is no answer to this correspondence. The learned judge in his order on Company Application No. 21 of 1967 has not referred to a single one of these letters in dealing with this charge against the company.
62. Then we return to the other charge found against the new management, that they deliberately failed to lift cotton when it was available and are now only making an excuse that there was no cotton. On this question the learned Judge has held inter alia : "............ in view of the fact that the new management has failed to purchase the cotton requisitioned for it from various parties by the Government, I am not satisfied that the mills cannot be run on account of the non-availability of cotton". In coming to this conclusion the learned judge relied upon only one letter dated 24th April, 1967, to the Textile Commissioner from the company and he held that the letter shows that "the Textile Commissioner's office had complained that the company were not taking delivery of cotton requisitioned for them from other parties, and the company were at pains, in the said letter, to explain away their default in lifting the cotton requisitioned by the Government for the purpose of enabling the new management to run the mills". We do not think that this letter should have been read in isolation. We have shown that from September, 1966, the company had been clamouring for allotment of requisitioned cotton to them but not a single bale had been allotted them. On 14th March, 1967, they sent the following telegram to the Textile Commissioner among others :
"For cotton we are starving and crying since July, 1966, but no action has been taken by your office nor any requisitioning done except 100 bales L. 147 against our deposit with ICMF for 2000 bales in January/February stop. We understand that many profitable mills have been supplied with requisitioned cotton whereas our mill which is making loss is made to suffer further. We demand proper justice failing which closure of this mill will be solely due to non-availability of raw material and any legitimate assistance from authorities which please note - New Kaiser-I-Hind Mills."
63. Thereafter it appears that a committee of the Federation met the Textile Commissioner and some sort of an assurance was given by the Textile Commissioner which the Federation communicated to all its members by its letter dated 3rd April, 1967, when 50 bales seem to have been allotted to this company, but even that was not of the quality which the company wanted. This is clear from another telegram dated 22nd April, 1967, to the Textile Commissioner and others : "Having failed to obtain transport permit of 50 bales to-day and to get required types of cotton duly requisitioned in spite of several approaches to yours Mr. Viswanathan, Mr. Mathur and Mr. A. I. Fernandes we have to-day put up notice stopping third shift in spinning from Monday 24th until further orders", and in a letter written confirming that telegram the company made it clear that they were being allotted cotton of a quality which they did not require. Their letter No. 24/20 dated 24th April, 1967, inter alia states : "The most vital point for consideration is that in spite of our regular and repeated intimation, the requisitioning for us is being done in a way that the available cotton will not help us to run the mill. You are fully aware that the mixings are prepared with superior and inferior grade of cotton in a particular ratio. When superior cotton is to available, the mill cannot feed inferior cotton alone in a particular mixing. In our case the requisitioning has been on the line that whatever cotton was available has been allotted to us". It is this letter which was followed by letter No. 25/23 dated 24th April, 1967, on which alone the learned judge has relied. In fact the letter of the 24th April, 1967, which we have quoted above, is referred to in the letter of the 25th April, 1967. It has not been established that the objection taken by the mills was incorrect, frivolous or inspired and in the letter of the 24th April, 1967, they have clearly explained why they were not able to make use of the cotton which was being offered to them. There is nothing to show that that explanation is incorrect. We do not think, therefore, that it was a reasonable inference to draw from the letter of the 25th April 1967, that the new management had failed to purchase the cotton requisitioned for them. Their objection to quality appears to be reasonable and if so, they had a right to reject inferior cotton and to ask that the proper quality be supplied to them. It is not suggested ............ anywhere that they deliberately or dishonestly declined the offer. At any rate, this letter in isolation, picked out from a bunch of about 25 letters, cannot furnish a true picture as to the conduct of the new management, even assuming that that conduct was material, which in our opinion it was not, as we shall presently show.
64. The correspondence strongly supports the case of the company that due to the various circumstances, particularly the want of cotton, the control orders and the executive orders and legislation in aid of labour, the company suffered losses despite the best efforts of the new management. We are unable to accept the charge that the company failed to lift the cotton deliberately and cannot be heard to say that the mills could not make profits for want of cotton. The letter dated 25th April, 1967, moreover does not establish that till then the management could be blamed, which is a charge levelled against the new management by the J.K. group. The position of the company must have further deteriorated since the closure in April, 1967, for we are informed that further amounts of compensation to labour have accumulated and other liabilities in the shape of recurring charges have arisen. How such a company could possibly continue to work at a profit it is difficult to see. It is only it runs at a profit that the scheme can be implemented.
65. Next we turn to the charges levelled against the new management regarding the processing unit. This was made a major point in the arguments against the Jalan group and protracted arguments were addressed to us on it. It appears that soon after taking over the company, the new management represented to the Textile Commissioner an the excise authorities that they would like to separate the processing unit from the mill which till then was being run as a composite unit. The authorities considered the proposal favourably and permitted them to do so. Thereafter the new management entered into what they called a leave and licence agreement and what the J.K. group called a lease of the processing plant with a partnership firm consisting of Badriprasad Jhunjhunwalla and others. The terms of the agreements are not before us in detail nor has the agreement been filed but it appears from the respective affidavits of the parties that the processing plant was made over to Badriprasad Jhunjhunwalla in consideration of a payment of Rs. 6 lakhs a year, i.e., Rs. 50,000, per month. In return for this, the entire production of the textile mill was to be processed by that firm at cost and the transferees were free to take any outside work in addition after the company's processing work being completed. Now processing unit (sic) were initially made in paragraph 12(j) of the affidavit in reply to the Application No. 14 of 1967, by Gopalkrishna Singhania dated the 27th February, 1967. The government of the charges was that the Jalan group had themselves stated when the scheme was sanctioned that the processing unit was the most lucrative and paying section of the company's business. But soon after taking over they parted with that for a term of five years at a monthly rent or charge of Rs. 50,000; that the transaction in reality and substance was agreement to lease the plant for a period of five years; that the consideration for so leasing out the processing plant was most inadequate and the amount was not even sufficient to cover the amount of depreciation of the plant machinery and equipment of the said processing unit and other charges on the value of the said asset.
66. Reference is also made in this connection by Mr. Bhatt to an affidavit made by Gopalkrishna Singhania dated 8th August, 1967, in Company Application No. 21 of 1967, paragraph 10, wherein it was alleged that the loss incurred by the company after the new management took over was mainly due to the wrongful action on the part of the new management in purporting to grant a lease of the processing house of the company in favour of Badriprasad Jhunjhunwala who was "a nominee firm of the newly appointed directors" at a nominal charge of Rs. 50,000 per month. It was alleged that in the preceding year, i.e., 1964-65 the petitioner-company earned Rs. 17.12 lakhs from outside processing work done by the petitioner-company after carrying out the entire processing work in respect of the petitioner company's own production, but during the period April 1, 1965 to March 31, 1967 the company is shown to have received by way of lease money a sum of Rs. 4,80,000 and the petitioner-company is shown to have paid to the processing unit, processing charges amounting to Rs. 21,77,000. Therefore it was urged that the net result was that the petitioner-company in the previous year earned a net income of Rs. 17,12,000 our of the processing unit but for the subsequent period April 1, 1966 to March 31, 1967 the company is alleged to have incurred a liability or debt of Rs. 17 lakhs in respect of the losses of the processing house. It was alleged that the business of the processing unit is being attended to by the son of Nandlal Jalan (the principal director of the new management) and the transfer is mala fide, fraudulent, illegal and invalid besides being in flagrant breach of the provisions of the sanctioned scheme. It was suggested that Badriprasad Jhunjhunwala and others were merely nominees of the directors of the new management.
67. These allegations have been denied with vehemence and in equally strong language by the new management, vide paragraph 22 of the affidavit dated 11th April, 1967, of Krishna Murari Goenka. There it is stated that fraud has been perpetrated not by the new management but by the old management. The new management has alleged that the scheme to separate the processing departments from the spinning and weaving departments of the company was undertaken because when the processing house was a part of the composite unit a substantial capacity of the processing unit remained idle. They have stated that prior to the scheme the new management had made it a condition of taking over the management that Gopalkrishna Singhania should obtain the permission of the concerned authorities to the separation of the processing house unit from the composite unit so that the new management could either sell or lease the processing house unit or utilise the process house for processing the outside goods. After the appointment of the provisional liquidator and after the agreement dated the 16th April, 1965, Gopalkrishna Singhania wrote a letter dated 13th September, 1965, to the Textile Commissioner requesting him to grant permission for the separation of the process house in the event of the company being taken out of liquidation. The Textile Commissioner replied on the 5th October, 1965, assuring the company that "in the event of the company being taken out of liquidation the proposal for separation of the process house unit will be considered favourably". After the scheme was sanctioned and the company came out of liquidation the new management obtained the permission of the authorities and separated the unit. As to the terms it was stated that the compensation charged was not only adequate but was more than reasonable and that the licensees were under the agreement with the company "under an obligation in the first instance to process the entire production of the mill at cost. It is only for the surplus capacity that may be available to the licensees for processing outside cloth that the licensees were paying a handsome amount of Rs. 50,000 per month to the petitioner-company as monthly compensation for the use of the building and machinery of the process house. All other expenses like water, power, steam, wages, maintenance, etc., are charged to the licensees separately." As regards the allegation made against the new management that they had represented at the time when the scheme was to be sanctioned, in the affidavit dated 29th January, 1966, of Jagannath Agarwal, that the unit was a paying proposition the new management alleged that what they had stated there was an estimate and not an assurance or representation an alleged. They pointed out that the textile industry as a whole had been passing through very severe crisis due to the shortage of raw material, high cost of raw material and stores, higher wages and dearness allowance, depression in the sale of cloth rates, less export due to devaluation and several other factors. The new management after restarting the mills rationalised the spinning and weaving departments and also effected substantial economies. In spite of economies and for reasons and factors beyond the control of the new management the mill is runing at a monthly loss of Rs. 1 to 1 1/2 lakhs. The agreement entered into by the company with Badriprasad Jhunjhunwala and others is a leave and licence agreement and not a lease. They have denied the allegations of fraud, invalidity, illegality and mala fides. They also made an offer that they were ready and willing to offer the working of the processing unit to Gopalkrishna Singhania on a leave and licence agreement similar in terms and conditions to that given to Badriprasad Jhunjhunwalla and others. They have denied that the latter are their nominees or that the son of Nandlal Jalan is managing the processing plant.
68. This, as we have said, is one of the three charges which the learned judge has accepted in his judgment in Company Application No. 21 of 1967 and on the basis of that finding he ordered in Company Application No. 14 of 1967 that the lease should be cancelled. In the first place we are unable to see how in a proceeding under section 392 or under section 433, the lease could be ordered to be cancelled as the learned Judge has done. Much less could the lease have been cancelled without even hearing one party to it, viz., Badriprasad Jhunjhunwala. Secondly the learned judge accepted the allegation of the J.K. group that by the giving out of the processing unit, at a nominal rent of Rs. 50,000 per month, the company had incurred a liability of about Rs. 17 lakhs in favour of Badriprasad Jhunjhunwala and others instead of earning from the processing unit an income of Rs. 17.12 lakhs as in the year 1964-65. In accepting this accounting, it seems to us that the learned judge merely accepted the statements in the affidavit dated 8th August, 1967, of Gopalkrishna Singhania in Company Application No. 21 of 1967 and in Company Petition No. 82 of 1967 without giving serious thought to the affidavit of Krishna Murari Goenka dated 21st August, 1967, in Company Petition No. 82 of 1967 (paragraph 11) wherein the new management alleged : "As regards the figure of Rs. 17.12 lakhs received by the petitioner-company during the year 1964-65 the said figure represents the gross realisation on account of processing charges. Against these realisation what the petition-company had to spend is not stated. As regards the real position of the petitioner-company, I crave leave to refer to and rely on the balance-sheet and profit and loss account for that year and I crave leave to refer to the same when produced. I deny that the petitioner company has incurred a liability or debt as alleged of Rs. 17.12 lakhs in favour of the lessee of the process house. I deny that the processing unit earned a profit of Rs. 17.12 lakhs in the previous year. As I have stated above Rs. 17.12 lakhs (sic. "is") the gross profits without taking into account the monies which the petitioner company had to spend on colours, chemicals, dyes, labour, electricity, water, licence, compensation and other overheads, with regard to the processing unit." The learned judge treated this as a bare denial amounting to no denial at all and therefore held that the affidavit of Gopalkrishna Singhania dated 8th August, 1967, remained unrefuted. Another reason which prevailed with the learned judge in coming to this conclusion was that the affidavit of Goenka is : "Scrupulously silent on the question as to what was the amount which the company had to spend during that year for running the processing unit." As to that it has been explained before us that after the company was closed down the premises of the company had been taken procession of by the workers who are squatting on the premises and will not allow anyone from the management to enter or remove any thing from the premises. The workers are doing this pursuant to their claim to arrears of wages, retrenchment compensation and other claims which they have been trying to enforce by violence and threats of violence. On several occasions prior to the closing down of the mills the directors of the new management were confined for several hours at a time in the premises of the mills and threatened.
69. Now these are at best allegations and counter allegations between the parties. It is impossible to accept one or the other story without a further enquiry. It is no doubt true that at the time that the scheme was sanctioned both the rival groups were anxious to represent to the court that the company could work. As a matter or fact it was insolvent even on that date as found by the learned judge himself when sanctioning the scheme and it was only due to the persuasion of the two rival groups and because the learned judge was made to feel that the majority of the creditors were supporting the move, that the scheme was sanctioned. It is clear that the company was insolvent on that date and the position to day is no better. Whatever may be the charges proved against the new management - and in our opinion, none has been proved so far - we are unable to sustain the final conclusion of the learned single judge on this material that "............... I cannot help feeling that, if the processing unit had not been hired out to Badriprasad Jhunjhunwala and others at a nominal rent, it was possible to have run the mills at a profit, or, at any rate, without making a loss, and to work the scheme as contemplated." It is clear from what we have stated earlier that the mill is running at a tremendous loss of over Rs. 1 1/2 lakhs per month, that it is impossible that anyone would come to the financial assistance of such a company and that the contemplated financial assistance on the security of Government guarantees in not now forthcoming. The guarantee given by the Maharashtra State Government has also expired in July 1967. The entire substratum of the company is gone and it is in a hopelessly insolvent condition.
70. As to the charge that the new management failed to bring in finance, the circumstances are explained in the affidavit of K. M. Goenka dated 11th April, 1967 (vide paragraphs 11 and 14) on behalf of the Jalan group. They have counter-charged that the J.K. group had in the agreement dated 16th August, 1965, expressly provided that the partners of the firm J.K. would continue their personal guarantees to the Punjab National Bank but in breach of the said term they refused to agree to any modification of terms with the bank. The result was that Nandlal Jalan had to pay about Rs. 23 lakhs in all towards the reduction of the loan or for the clearing up of the balance of the cash credit account. The amount was deposited by Sushil Investments (Pvt.) Ltd. Though a subsequent affidavit was filed by Gopalkrishna Singhania by way of rejoinder on the 24th April, 1967, paragraph 11 of Goenka's affidavit was not specifically replied to see paragraph 18) and we accept the statements in Goenka's affidavit. But we do not think that these allegations and counter allegations are of much relevance since in our view there was no binding obligation or duty under-taken by the Jalans to pay anything to the company or to compulsorily provide finance.
71. Then we turn to some of the legal objections to the implementation of the scheme. It was urged on behalf of the creditor Lalji Thackersey and Co. and by the company itself in Appeal No. 97 of 1967, that the agreement to transfer the management shares in favour of the J.K. group was itself illegal having regard to the provisions of the Securities Contracts (Regulation) Act (Act No. 42 of 1956) and, therefore, the scheme as a whole must fail because an integral part of it, which cannot be separated from the rest of it, is rendered illegal. The contention was considered by the learned single judge in his judgment in Company Application No. 14 of 1967 and rejected - and in our opinion rightly. Now no doubt having regard to the provision of section 13 read with the definition "contract" in section 2(a) of "securities" in section 2(h) and of "recognised stock exchange" in section 2(f), every contract entered into after the date of the notification issued under section 13 otherwise than between members of a recognised stock exchange in the State or an area notified or through or with such member would be illegal. There is no doubt that the notification contemplated by section 13 was issued on 29th November, 1967. Section 23(1)(b) makes it an offence to enter into any contract in contravention of and of the provisions contained in section 13. Several points were made by Mr. Bhatt in his reply, based upon the terminology used in section 13. He has also urged that if any illegality arises, it arises because exhibit A has been appended to the scheme, but exhibit A is not directly concerned with the scheme because the scheme was between the creditors and the company and exhibit A is only a private agreement between two private parties unconnected with the company or the shareholders and that therefore no illegality would ensure. He also attempted to suggest that therefore no illegality would ensure. He also attempted to suggest that shares are not included in securities.
72. We do not propose to discuss all these contentions based upon the language and the provisions of the Securities Contracts (Regulation) Act (Act No. 42 of 1956). The whole of the controversy between the parties in these appeals arises because of applications made by either party under section 392 of the Companies Act read with section 391 or under section 433 of the Companies Act for winding up of the company. The scheme itself was sanctioned of February 17, 1966, under section 391. Now section 392 gives the High Court power by sub-section (1)(a) to supervise the carrying out of the compromise or arrangement and by sub-section (1)(b) to give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary. The J.K. group invokes sub-section (1). The Jalan group wants the winding-up of the company. The power to wind up is given to the High Court under sub-section (2) of section 392 subject to conditions therein stated that the compromise or arrangement sanctioned under section 391 "cannot be worked satisfactorily with or without modifications", or the court "may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company." When such an order to wind up a company is passed it is deemed to be made under section 433 of the Companies Act. There is nothing in the Securities Contracts (Regulation) Act (Act No. 42 of 1956) to suggest that it affects the powers of the High Court to pass orders under these sections nor is there anything in the provisions of the Act to suggest that a scheme sanctioned by the court under which shares are to be transferred would also be rendered nugatory by the operation of this regulating Act. The Act as its preamble states was brought into force to meet a specific evil, i.e., "to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith". We have no doubt that it would not affect the powers vested in the High Court under the Companies Act, nor especially would it affect the transactions already sanctioned and in force before the notification under section 13 was issued.
73. The court under the Companies Act has been invested with extensive powers of prevention of oppression by a majority, of the minority interests of shareholders under sections 397 and 398 read with section 402. One of the powers is to compel the purchase of the shares or interests of any members of the company by other members thereof or by the company (vide clause (b) of section 402). Surely it is not to be supposed that even these powers are affected by the Securities Contracts (Regulation) Act. Before the learned single judge considerable discussion took place as to whether the scheme sanctioned amounts to a contract or is an order of the court. We do not propose to enter into that discussion, for in our opinion where the powers under section 391 or section 392 are being invoked we do not think that any provision of the Securities Contracts (Regulation) Act affects any of those powers of the court. If the provisions of that Act of not apply, the question whether a scheme is a contact or not, to which these provisions would be attracted, would not arise. With respect we uphold the decision of the learned single judges on this question.
74. As a corollary to the above argument it was also urged by Mr. Nariman that the scheme should be considered only as a whole and since the J.K. group have given up prayers (g) to (p) of the judge's summons (Company Application No. 14 of 1967), no direction can be given as to the implementation of only that part of the scheme which is in their favour namely that they should have a second mortgage to the extent of their indebtedness of the company in their favour of Rs. 48 lakhs and odd. It was urged that a direction as to a part of the scheme should not be given in the circumstances. Upon the finding we have reached there is no question of giving direction as to a part of the scheme. We do not propose to implement the scheme at all for the simple reason that the company is not a company which can possibly work. It is insolvent and its substratum is gone, quite apart from the fact that in its present condition to allow a second mortgage to be given to the J.K. group would mean completely depriving the remaining unsecured creditors of any share or dividend in the liquidation.
75. The scheme was sanctioned by Mr. Justice Mody under the powers conferred by section 391. Its enforcement or implementation is governed by the provisions of sub-sections (1) and (2) of section 392, which we have quoted above. These provisions are comparatively new being incorporated for the first time by Act I of 1956 and there is very little authority to indicate their construction. Mr. Bhatt has argued that the words in sub-section (2) "cannot be worked satisfactorily" are not to be found in the provisions of sub-section (1). Therefore, he urged a two-fold argument (1) that in considering an application under sub-section (1) such as the J.K. group had made, which was and application to enforce the scheme, the court cannot set aside the entire scheme and hold that it cannot be worked satisfactorily. He urged that the Appellation No. 14 of 1957 should be considered independently and apart from the other applications for winding up, etc., and (2) that the question whether the company is solvent or not, cannot legally be considered in deciding that application.
76. We are unable to accept this construction of section of 392. Section 392 appears in an independent chapter dealing with arbitration, compromises, arrangements and reconstructions and was obviously intended to make comprehensive provisions on that subject. So far as compromise and arrangements are concerned, the provisions which govern are sections 391, 392 and 393. These sections have to be read together, because section 392 refers back to a compromise or arrangement sanctioned under section 391 and makes provision for its enforcement. We cannot also read sub-section (1) of section 392 divorced from sub-section (2) as was urged. The two provisions are complementary. We have already said that an analysis of these two sub-sections shows that between them they contemplate two categories of schemes (compromise or arrangement) :
(i) where the scheme can be worked and that is the subject-matter of the provisions of sub-section (1); and
(ii) where the scheme cannot be worked satisfactorily and that is the subject-matter of the provisions of sub-section (2).
77. Under category (i) there are further two possible alternatives given to the court, (1) that contemplated in sub-clause (a) of sub-section (1) by which where the scheme can be worked, the court is given the power to supervise the carrying out of the compromise or arrangement, and (ii) by sub-clause (b) where the scheme cannot as framed be worked but can be worked by partial qualification, where the power is given to the court (a) to given such directions in regard to any matter, or (b) to make such modifications in the compromise or arrangement as it may consider necessary. Both the above powers are "for the proper working of the compromise or arrangement". It will thus be seen that sub-section (1) deals with the cases where a compromise or arrangement sanctioned under section 391 can be worked fully or partially by modifications or giving of directions. Sub-section (2) however contemplates a case where the scheme cannot be worked satisfactorily with or without modifications, that is to say, where the scheme (sic) despite any endeavour to modity it or any endeavour to implement by proper supervision or giving suitable directions, in such a case the court is given the power to make an order winding up the company. This power is a discretionary power, because of the use of the word "may" in sub-section (2), and having regard to the context in which it is used. It is not essential that the company should be wound up even if the scheme does not work satisfactorily, but it is clear that the court must consider the question whether the company ought to be wound up in such a contingency. This power of course can be exercised suo motu by the court or on the application of a person interested in the affairs of the company.
78. Any order passed for the winding up of a company under section 392 of the Act is "deemed to be an order made under section 433 of this Act". In other words, if an order for winding up a company is passed under section 392 it is for all purposes an order under section 433. There was considerable argument advanced on the basis of these words in sub-section (2) as to whether the court in passing a winding-up order must have regard to the conditions laid down in section 433 and 434 for the winding up of a company by the court. By the use of the words "shall be deemed to be an order made under section 433 of this Act" in sub-section (2) of section 392, it seems to us that the court when it considers whether the company should be wound up or not, may have regard to the requirements of sections 433 and 434 to the extent it is possible to do so though the powers under section 392 are wider than the powers under section 433. The effect of these provisions is that where a compromise or arrangement is sanctioned under section 391 and the court comes to the conclusion that the scheme cannot be worked satisfactorily with or without modifications, the court has a discretion to wind up the company. In doing so it will have regard to the normal principles governing winding-up, particularly those laid down in section 433 and 434. We cannot, therefore, accept the contention of Mr. Bhatt that his clients' application for implemention of the scheme must be looked at on its own and in isolation and the position of the company and its capacity to fulfil that scheme ought not to enter into computation.
79. It is clear from what we have stated above that the scheme sanctioned by Mr. Justice Mody cannot possibly be worked in the present case, much less satisfactorily and whatever modifications may be attempted it is impossible for the company to fulfil that scheme having regard to the fact that it is commercially insolvent and the very substratum of the company has disappeared, not to speak of the fact that no reasonable party will finance it or take the risk of running what remains of its business, namely the machinery housed in certain buildings. We also hold that the court would not exceed its powers if in a case like this where an application is made for winding up the company in answer to an application to enforce the scheme, to consider the circumstances of the company and order its winding up.
80. In view of this we need not further consider the arguments advanced on behalf of the Jalan group by Mr. Nariman based upon the present section 536(1) of the Companies Act which is analogous to section 227(a) of the old Companies Act, that the transfer of the shares in favour of the J.K. group after the commencement of the winding-up would be void. It was contended that under section 441(2) the winding up of a company would commence with the presentation of a petition for winding up and therefore it would be illegal to enforce the transfer of the shares in view of section 536. Mr. Nariman had relied on the following cases : Tulsidas Jasraj Parekh v. Industrial Bank of Western India (A.I.R. 1931 Bom. 2; 32 B.L.R. 953). Gorakhpur Electric Supply Co. Ltd., Official Liquidator v. Siemens (India) Ltd. (), Andhra Bank Ltd. v. D. P. Narayana Rao Provisional Liquidator, Godavari Sugar and Refineries Ltd. and one passage from Buckley on the Companies Acts, 13th edition, at page 493. In our opinion, since the company is financially not in position to implement the scheme at all, it is not necessary to consider whether implementing a part of it would be legal or illegal.
81. Next, on behalf of the J.K. group, it was urged that the company cannot apply for its winding-up as it has done in Company Petition No. 82 of 1967 and in Company Application No. 21 of 1967 without a valid resolution passed by the members of the company. Since, as we have said, section 392(2) gives in express terms the power to the court to wind up the company suo motu by the use of the words "either on its own motion or on the application of any person interested ........", the objection can at the most arise in respect of the application under section 433 of the Companies Act made by the company to wind it up, i.e., Company Petition No. 82 of 1967, which is the subject-matter of Appeal No. 100 of 1967. In so far as we propose to exercise the power given to the court under section 392(2), we do not think that this contention can be entertained. No doubt, under section 433(1) read with section 439(a) a petition may be presented by a company only after the requisite resolution to voluntarily wind up the company is passed by the shareholders, but the statute does not show that the directors of the company cannot present such an application if the board of directors decides to wind up the company. This view no doubt finds some support from the decision of a single judge of the Pepsu High Court in In re Patiala Banaspati and Allied Products Co. (A.I.R. 1953 Pepsu 195), but the view there taken is in conflict with English precedents and with the view of Buckley on the Companies Acts, (see pages 462-463). "It has been held in Ireland that directors are not entitled to present a winding up petition in the company's name without the authority of a general meeting, though a general meeting can ratify their action in having done so. But in England this decision has not been followed and orders have been made on the petition of a company presented by the agency of its directors without the authority of a general meeting. In such a case the petition should allege the resolution of the directors to present the petition." This view was also accepted by a Division Bench of the Madras High Court in State of Madras v. Madras Electric Tramways Ltd. ([1955] 25 Comp. Cas. 378. A.I.R. 1956 Mad. 131), where Chief Justice Rajamannar referred to similar passages from Palmer's Company Precedents (see page 133) and to the decision of the English courts in In re City Equitable Fire Insurance Co. Ltd. ([1925] 1 Ch. 407). The Madras High Court also declined to follow the decision in In re Patiala Banaspati Etc. Co.'s case (A.I.R. 1953 Pepsu 195). We prefer the view taken in State of Madras v. Madras Electric Tramways Ltd. ([1955] 25 Comp. Cas. 378; A.I.R. 1956 Mad. 131). The contention, therefore, must fail.
82. Then it was argued that since the scheme was sanctioned after due consideration by Mr. Justice Mody and at that time also it was argued before the learned judge that the company was insolvent, but notwithstanding that plea the learned judge sanctioned the scheme, the parties are estopped from raising the plea of commercial insolvency of the company in the present proceedings or challenging the scheme. Mr. Bhatt relied on the decision in Nicholl v. Eberhardt Company ([1889] 59 L.J. Ch. 103), which was under section 2 of the British Companies Amalgamation Act which counsel said was in terms similar to section 391(2). An alternative to this part of the argument was that the creditor Lalji Thakersey who had been a party to the proceedings when the scheme was sanctioned and had obtained an advantage for himself is doubly estopped and cannot now, having taken advantage of the scheme, turn round and say that it should not be sanctioned. On behalf of the J.K. group reference was made in this respect to a decision of this court in Govind Waman Shanbhag v. Murlidhar Shrinivas Shanbhag , and to a decision in Chhaganlal Kishoredas v. Bai Harkha ([1909] I.L.R. 33 Bom. 479). Reference was also made to the decision in Seth Badri Prasad v. Seth Nagar Mal. ([1959] 29 Comp. Cas. 229; [1959] Supp. 1 S.C.R. 769).
83. Now we have already held that we are unable to find any illegality in the scheme, but nevertheless, we do not think that any principle of estopped can be attracted in the present case, for the simple reason that the conditions and circumstances which have arisen since the passing of the decree have to be taken into account in exercising our powers under section 392(2). The very fact that section 392 refers to the implementation or enforcement of it, shows that the mere order sanctioning it would not estop parties to it from raising grounds which they are entitled to raise under section 392. No doubt, Mr. Justice Mody has observed in his order : "But the basic fact remains that the company to-day appears to be in an insolvent condition" and nevertheless he sanctioned the scheme because he felt that a majority of the unsecured creditors had voted in favour of sanctioning the scheme. It does not follow that the parties cannot, relying upon the subsequent developments and the changed situation, say that the scheme should not be implemented. Were we to accept any such contention, the provision of section 392 would be rendered largely ineffective. It was urged that Lalji Thakersey, the creditor, had actually taken advantage under the scheme in so far as he had got one instalment of the amount paid to him out of the amount due to him. Nevertheless we do not think that in the face of the positive provisions of section 392 we can bar him from pleading that on the date on which Company Application No. 14 of 1967 was filed, the company ought to be wound up and the scheme not implemented. In view of this it is unnecessary to go into the question whether the scheme as passed by Mr. Justice Mody was illegal and void in the inception or it was merely contrary to law. We have however already shown that in our opinion there is no illegality.
84. Another contention of Mr. Bhatt has been that the J.K. group have already become secured creditors and that, therefore, even if winding-up takes place, his clients should be treated as if they were secured creditors. He relied upon a decision in Allan Brothers & Co. v. Shaik Jooman Sons & Co. [A.I.R. 1925 Rang. 189] The stipulation in favour of the J.K. concerns is to be found in clause (ii) under category I of the scheme stated in the following terms : "The sum of Rs. 48,13,899 is due to J.K. concerns and others whose names are set out in Schedule B to the agreement exhibit A hereto. The said amounts with interest at the rate of 1/4th per cent. per annum will be repaid by the company in annual instalments of an amount equal to 50% of the profits of the company, commencing after the expiry of two years from the date of the second mortgage but in any event not latter than 30th June, 1980, as provided in the said agreement being exhibit A hereto and the said amount with interest as aforesaid will be secured by a second mortgage of the company's assets." In exhibit A which is annexed to the scheme, the relevant stipulation is to be found in clause 3(c) : "That the vendor will procure the consent or confirmation from the various creditors whose names are set out in schedule B hereunder written to the effect that in consideration of the said company securing the amounts respectively due to them by a second legal mortgage of the fixed and other assets of the said company as hereinafter more particularly stated the said creditors will not claim interest on the amounts respectively due to them by the said company as on the date of the said second mortgage at a rate higher than 1/4% per annum from the date of execution of the said second mortgage and will not demand immediate payment of the said amount ...." Under clause 6(b) it is recited : "The purchasers shall cause the said company to execute in favour of the various creditors of the said company whose names are set out in schedule B hereunder written a second legal mortgage over." Thus the parties expressly contemplated the execution of a further document before a second legal mortgage could arise. In schedule "C" the terms of the mortgage deed are set out.
85. Now we are at a loss to understand how upon these stipulations the J.K. group cloud ever possibly become a secured creditor under the sanctioned scheme as it stands. The scheme itself contemplated the execution of a further document after sanction of the Controller of Capital Issues. The stipulation in the scheme also is that the J.K. group will be secured by a second mortgage of the company's assets. Obviously, therefore, they were not so secured.
86. It is clear that a mere agreement to execute a mortgage cannot create a mortgage or a charge. This is settled law as can be seen from the decision of the Privy Council in Hukamchand Kasliwal v. Radha Kishen Moti Lal Chamaria. (). In that case the agreement provide that the executant A should give a regular mortgage of his immovable property for money advanced by B and on behalf of B the creditor, the argument was as follows : "The argument presented on behalf of the plaintiffs was to the effect that the plaintiffs have a valid and enforceable contract, that it is specifically enforceable, and that it entitles the plaintiffs in the winding-up of the company to the same priority as the plaintiffs would have had if a mortgage had been executed at the time of the advance." The Privy Council disposed of this argument as follows :
"Their Lordships are of opinion that the terms of the said agreement of 14th February, 1920, which relate to the immovable property of the company, do not constitute a mortgage or charge upon such property within the meaning of sections 58 and 100, T.P. Act, 1882. So far as the immovable property was concerned, the said agreement merely created a right in the plaintiffs to obtain another document, viz., a regular deed of mortgage of the said immovable property which was to be executed by the company."
87. No doubt in that case the property was an immovable property and here it is the assets of the company which are partly movable and partly immovable, but in principle we can see no distinction between the two cases. The agreement cannot give raise to a mortgage in favour of the J.K. group. The agreement contained in the scheme has merely created a right in the J.K. group to obtain another document, namely, a regular deed of mortgage of the assets of the company. The case in Allan Brothers & Co. v. Shaik Jooman and Sons & Co. (A.I.R. 1925 Rang. 189) is distinguishable upon the facts. In that case there was an order passed on 6th February, 1924, that the decree shall be payable by instalments of Rs. 10,000 per mensem and that the respondent should give as security a second mortgage on 23A, Phayre Street and the court held that this order of 6th February, 1924, had not been set aside and "if the appellant acquired the position of a second creditor by virtue of that order, he has not lost it since". The decree in that case was thus construed to imply that the appellant "was granted the position of a secured creditor" by its very terms and it was assumed and not challenged that thereby the appellant had acquired the position of a secured creditor. This is clear from the remark of the learned Chief Justice ".... and if the appellant acquired the position of a secured creditor by virtue of that order, he has to lost it since." We do not think, therefore, that the Rangoon case can support the argument that in the present case the J.K. group have already become secured creditors. They had merely an agreement that a second mortgage would be executed in their favour and nothing more.
88. As part of the above argument emphasis was also put upon clause 4, "other provisions", and sub-clause (a) of schedule C to the scheme which recites the principal terms of the second mortgage. In clause (a) it is provided that if at any time during the continuance of the security the company shall be wound up by an order of the court or voluntarily, then "... the entire money due and owing on the security of the second mortgage deed to the second mortgages shall immediately on the happening of any such respective events forthwith become payable notwithstanding anything contained in the second mortgage deed ... and remedies shall be available to the second mortgagees as would be available to them under the second mortgage deed or by law upon default being made in payment of the mortgage debt". Relying on this clause Mr. Bhatt urged that if the company is to be wound up, the J.K. group must to be held to be secured creditors as upon a second mortgage and therefore in the event of an order being passed for winding up, in the winding-up proceedings the J.K. group must be classed as secured creditors in terms of the scheme. The argument begs the entire question. The question first of all is, is the scheme enforceable ? and that necessarily implies that the scheme including the schedule C has not yet come into force. The question is whether it should be brought into force and yet it is sought to be argued that one of its terms must be forthwith enforced, as if it had been brought into force. We cannot accept this argument.
89. We hold that having regard to all the circumstances the compromise or arrangement contained in the scheme sanctioned by Mr. Justice Mody was not enforceable and therefore could not be worked satisfactorily with or without modifications. It was impossible to work it having regard to the fact that its enforcement or implementation depended upon the company making profits. The entire scheme is based upon the assumption that the company would work and make profits out of which the creditors could be paid off, but as we have shown, the company is commercially insolvent and, in our opinion, always was so, since the date of the scheme, (we say so with the greatest respect to the observations of Mr. Justice Mody) and its substratum is completely gone. To-day it has only the outward form of a company and there is no semblance of a business left. It is impossible to carry out the objects for which the company was established. There is no question, therefore, of supervising the carrying out of the compromise or arrangement or of carrying out the same with any modifications. The compromise or arrangement sanctioned and contained in the scheme cannot be worked satisfactorily at all with or without modifications and the only proper order to pass in the present case is to wind up the company known as the New Kaiser-I-Hind Spinning & Weaving Co. Ltd.
90. The result may be unfortunate to one or the others party, but that cannot be helped, though we may say that in our opinion there is little to choose between the two contending groups who were fighting for control of the company. Each group was seeking its own benefit and was hardly interested in the benefit of the company qua the company. The J.K. group having managed the company for a long time had seen its inter workings and realised that it was impossible bring up the company to a healthier position and work it for profit. They, therefore, decided to clear out of the company so long as they could recover their debts from the company in preference to other creditors. It was a substantial sum of Rs. 48,38,899 and they managed to persuade the Jalan group to take over the company stipulating for themselves to get a security for themselves at the cost of the unsecured creditors of more than twice the value. They also persuaded the Jalan group to take over the company by offering to sell them their controlling share holding at the low price of Rs. 10 per share. Perhaps that attracted the Jalan group which for a time felt that they were making an easy bargain and would be able to set the company on its feet again by procuring finances and running it to their profit in which case the value of the shares would have also risen, but after the controlling shares were transferred and the Jalan group took over the company the expectations of the Jalan group were not realised and they found that the company was in a worse commercial position than they had thought it was in, before they entered into the agreement with the J.K. group. What is more, it does appear that a period of severe depression in the textile industry and want of cotton worsened the position. In that predicament the attitude of the authorities who had controlled the purchases of cotton and fixed its price was most unhelpful and contributed to further losses of the company, with the result that the Jalan group found it impossible to implement the scheme and decided to give a go-by to their agreement with the J.K. group. We think that the only proper thing they could do in the circumstances was to apply for liquidation of the company. They also had sought their own advantage but their calculations failed. Neither of these two groups can be credited with seeking the advantage of the company or its workers or the interests of the other unsecured creditors of the company.
91. In the several proceedings which commenced no doubt each of the two groups started violently to blame the others making all kinds of allegations against each other, the J.K. group charging the Jalan with deliberate breach of their agreement and fraudulent conduct and an attempt to make money for themselves by mismanaging the company. The Jalan group retorted that the position of the company was brought on by the fraudulent conduct of the J.K. group in the past and by their obstructionist attitude in the implementation of the scheme. These charges and counter charges are all at the stage of allegations and counter allegations and there is no proof of them as such. We have come to our conclusions only on the face of the affidavits filed. If a case is made out for the winding-up of a company, as we have held has been made out in the present case, upon such material as has been placed before us, we do not think that these allegations and counter-allegations can affect the issue; nor can the motives of either of the two groups, the one in presenting the application for winding up of the company and the other in seeking to enforce the scheme, can be taken into consideration. In Bachharaj Factories Ltd. v. Hirjee Mills Ltd. ([1955] 25 Comp. Cas. 227 251; 57 Bom. L.R. 378), there were also similar allegations made against the directors of the company and Chief Justice Chagla disposed of the allegations at page 392 as follows :
"But as we read the judgment of the learned judge, the main reason which has weighed with him is that the petitioners have not come to this court with clean hands, and Mr. Mathalone wanted to satisfy us that the motive of the petitioners in closing down the mills was selfish, that they were largely responsible for bringing about an impasse in the affairs of the mills, and the court will not make an order at the instance of a party which is guilty of mala fides. We have not permitted Mr. Mathalone to go into the merits of these allegations about the mala fides of the petitioners because in our opinion these allegations are entirely irrelevant. If the petitioners have made out a case of for the winding-up of the company, if they have placed materials before the court which satisfy the court that the company is insolvent, if they have placed materials before the court which satisfy the court that the substratum of the company is gone, it is difficult to understand what the motive of the petitioners has got to do with the question whether an order of winding-up should be made or not. If the petitioners were to stand to benefit by the order, undoubtedly the court would say that a party cannot derive benefit by its own wrong. But when an order of winding-up is made and the liquidator is appointed, the court passes that order in the interest of the company, in the interest of the shareholders, and in the interest of the creditors, and except for the rather doubtful benefit that ordinarily the petitioners' solicitors are in conduct of the proceedings no benefit whatever accrues to the petitioners. Therefore, in our opinion, what the learned judge should have considered was whether on the materials placed before him by the petitioners - and the materials in this case are overwhelming and they are indisputable - a case had been made out or not for the winding-up of the company. The learned judge should not have taken into consideration how wicked the petitioners were or how evil their actions had been."
92. In a later passage the Chief Justice observed (page 393) ([1955] 25 Comp. Cas. 227, 252; 57 Bom. L.R. 378) :
"There is not the slightest possibility of the working ever being resumed under the present dispensation. We take it that the learned judge was thinking of the allegations of the company that the mills suddenly came to a standstill because of the machinations of the petitioners. But the stark truth remains, for which there is no answer or no explanation, that the mills have no money whatsoever which would enable them to be run."
93. That, in our opinion, exactly sums up the position in the present case also.
94. In the result, we pass the following orders :
Appeal No. 96 of 1967 : We allow this appeal and dismiss the Application No. 14 of 1967 made on behalf of the J.K. Group to implement the scheme. On the other hand we allow the Company Application No. 21 of 1967 for winding up of the company under section 392(2).
Appeals Nos. 97 of 1967 and 98 of 1967 : Appeal No. 97 of 1967 is the company's appeal against the order in Application No. 14 of 1967 and Appeal No. 98 of 1967 arises out of Company Application No. 21 of 1967. Both these appeals are allowed. The Company Application No. 21 of 1967 is allowed.
Appeal No. 100 of 1967 : This appeal is directed against the order passed on Company Petition No. 82 of 1967. This was the company's own application for winding it up under section 433 of the Companies Act. Consequent upon the orders passed on Company Application No. 14 and Company Application No. 21 of 1967, the learned judge merely ordered that this company petition should stand over until four weeks after the order on Applications Nos. 14 and 21 of 1967. The company has appealed against this order of the learned single judge standing over its application for winding up under section 433 of the Companies Act. At the hearing, however, counsel for all the parties including Mr. Bhatt on behalf of the J.K. Group and counsel for such creditors, as have appeared, agreed that we should not order the Company Petition No. 82 of 1967 to be further heard, but that it should be disposed of here, and since we have allowed Company Application No. 21 of 1967 and ordered the company to be wound up under section 392(2) of the Companies Act and since that winding-up will now be deemed to be a winding-up under section 433, no further order need be passed on Company Petition No. 82 of 1967. The company is ordered to be wound up.
Appeal No. 86 of 1967 : This is an appeal by the creditor Chaugule against the dismissal of his application to pay him Rs. 9,000 and odd or alternatively to wind up the company under section 392 of the Companies Act. Since we have allowed the Company's Application and ordered the winding-up of the company under section 392(2), Chaugule's Application No. 19 of 1963 will also have to be allowed. Appeal No. 96 of 1967 which is against the dismissal of Chaugule's application will, therefore, also be allowed and the company must be ordered to be wound up under section 392(2). So far as the debt of Chaugule is concerned, he will now rank as a creditor of the company and will be entitled to prove his debt as such and take his rank in the list of creditors in accordance with law.
95. There then remains the question of costs.
96. In Appeal No. 100 of 1967 and Appeal No. 86 of 1967 the costs of the company shall come out of the assets of the company.
97. In Appeals Nos. 96, 97 and 98 of 1967 the costs of the appellants in each of the appeals shall be payable by the respondent Messrs. J.K. (Bombay) Pvt. Ltd.
98. At this stage Mr. Bhatt applies for leave to appeal to the Supreme Court. Since this is a reversing decision and the valuation is undoubtedly of the requisite amount, he is entitled to leave as of right. Leave granted. Certificate to issue.
99. Mr. Bhatt prays that the operation of the order for winding up of the company should be stayed to enable him to lodge the appeal to the Supreme Court. We are unable to grant any stay in this matter. Stay is refused.
100. Liquidator to act on the minutes.