Indian Kanoon - Search engine for Indian Law

Gujarat High Court

In Re: Maneckchowk And Ahmedabad ... vs Unknown on 10 December, 1969

JUDGMENT

1. Messrs. ludequip Limited (hereinafter referred to as the petitioner) has filed this petition under section 391(2) of. the Companies Act, 1956, for sanctioning a scheme of compromise and arrangement between the creditors and members of Maneckchowk & Ahmedabad Manufacturing Company Limited (hereinafter referred to as the company) and the compromise proposed by the company in Company Application No. 23 of 1968 and approved by the creditors and members of the company. The company was incorporated in the year 1892 and it was manufacturing cotton yarn and cotton textiles. For that purpose the company had set up textile mills divided into two units described as Unit No. 1 and Unit No. 11. Since 1913 one Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben, all of whom are very much concerned in this petition. In 1957 the firm of Hiralal Trikamlal & Sons was appointed' as managing agents of the the company. One Gopaidas P. Parikh was appointed as a director of the company in the year 1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal & Sons were in active management of the affairs of the company and since that date Linubhai Hiralal along with Gopaldas P. Parikh took over the active 11 management of the company. It appears that since 1962 the company was in financial doldrums and its losses were mounting up from year to year. The workers of the company went on strike on 2nd April, 1968, as their wages for nearly two months were in arrears with the result that the company was. obliged to close the mills. The first petition praying for winding up the company was filed in April, 1968. The immovable properties of the company were attached by the Collector at the instance of the Regional .Provident Fund Commissioner and Employees' State Insurance Corporation. The company filed Company Application No. 23 of 1968 on 27th June, 1968, under section 391(1) seeking directions for convening the meeting of its creditors and members for considering and if thought fit for approving with or without modifications a scheme of compromise and arrangement proposed it. Before the court gave directions on the aforementioned application, one Chandulal Hiralal as power of attorney holder of Shardaben and Shantaben and others filed Company Petition No. 24 of 1968 on 4th july, 1968, praying for an order for winding up the company. Two other petitions for the same reliefs were filed on 12th July, 1968, being Company Petition No. 28 of 1968 by Ambica Dyes and Chemicals and Company Petition No. 29 of 1968 by Popular Dyestuffs and Chemical Company. On the application filed by the company under section 391(1), the court gave direction on 4th July, 1968, for convening meetings. The petitioners in Company Petition No. 24 of 1968 filed Company Petition No. 35 of 1968 on 29th July, 1968, for appointment of a provisional liquidator which petition was granted by the court and official liquidator attached to this court was appointed as provisional liquidator of the company and since then the provisional liquidator is in possession of the assets of the company. The meetings of the unsecured creditors and members of the company were held on 5th and 6th October, 1968, and final meeting of the secured creditors was held on 9th December, 1968. The chairman appointed by the court to preside over these meetings submitted his report on 16th December, 1968. Thereafter the petitioner applied for and obtained leave in Company Application No. 1 of 1969 on 13th January, 1969, to file substantive petition under section 391(2) of the Companies Act for sanctioning the scheme of compromise and arrangement as approved by the creditors and members as provided by rule 79 of the Companies (Court) Rules, 1959, because the company as represented by the provisional liquidator was not willing to file the substantive petition. The court granted leave to file this substantive petition, whereupon the petitioner filed substantive petition on I st February, 1969. The petition was admitted on 3rd February, 1969. The court gave directions for advertising the petition in various newspapers and a notice was also directed to be issued to the Central Government as envisaged by section 394-A of the Companies Act. In the advertisement issued in the newspapers it was stated that the court would take up this petition for hearing on 8th March, 1969, and anyone interested in the company may come and appear either to oppose or support the petition. The hearing of the petition had to be adjourned from time to time as the petitioner had not submitted. the latest financial position of the company as required by the proviso to section 391(2) of the Companies Act. The petitioner experienced difficulty in disclosing the latest financial position of the company because the provisional liquidator was in charge of the company and it appears that the books of accounts of the company were not written, as also the petitioner being creditor had no access to the books of accounts of the company. On a judge's summons taken out by the petitioner, the court gave certain directions and appointed auditors to prepare the statement showing the latest financial position of the company. After the auditors submitted detailed reports disclosing the latest financial position of the company the petition was set down for bearing.

2. At the hearing of the petition Mr. R. N. Oza appeared for the Union Bank of India, a secured creditor of the company, Mr. B. R. Shah appeared for the Employees' State Insurance Corporation, Mr. S. N. Shelat appeared for two creditors, namely, M/s. Atul Cotton Traders and M/s. Amarshi Darnodar, Mr. C. C. Gandhi appeared for Indian Electro Chemical Limited, Mr. R. M. Gandhi and Mr. R. P. Bhatt appeared for the Regional Provident Fund Commissioner and Mr. S. B. Majumdar appeared for the Textile Labour Association and they all supported the scheme. Mr. S. B. Vakil appeared for the creditors who had filed Company Petition No. 24 of 1968 for winding up the company and for Messrs. East India Company instructed by Messrs. Amibubhai Divanii and for Asia Electric India Private Limited and opposed. the scheme. Mr. B. J. Shelat appeared for Ambica Chemicals and Dyes, petitioner in Petition No. 28 of 1968 and Popular Dyestuffs and Chemicals, petitioner in Company Petition No. 29 of 1968 - both of whom are the creditors of the company and opposed the scheme. Mr. L. T. Shah appeared for the provisional liquidator who submitted to the orders of the court.

3. The scheme as finally submitted to the court for its sanction envisages reorganization of the share capital of the company which includes reduction of the share capital by reducing the face value of the ordinary share of Rs. 1000 fully paid to Rs. 250 fully paid, and preference share of Rs. 100 fully paid to Rs. 25 fully paid. The scheme also envisages increase of share capital by issue of shares to the unsecured creditors of the company excluding the workers to the tune of 50% of the verified claim of each unsecured creditor. The scheme envisages dismantling and scrapping of Unit No. 11 of the mills of the company and the sale proceeds to be utilised towards the payment to the secured creditors, namely, Union Bank of India and the Regional Provident Fund Commissioner. After Unit No. 11 is scrapped, the open land is to be let out to the intending lessee which will fetch a steady income. It is proposed to restart Unit No. 1 of the mills of the company. The secured creditors are to be paid in full in the manner set out in the scheme. The balance of 50 per cent. of the claim of the unsecured creditors are to be frozen for a period of two years and thereafter the said claims are to be satisfied as provided in the scheme. The dues of the workers are to be paid by certain stages. Some of the detailed features of the scheme will be examined while considering the objections raised by those contesting the scheme.

4. Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented; and (iii) whether the arrangement is such as a man of business would reasonably approve. As the scheme was very vehemently contested and a number of contentions have been raised by Mr. Vakil, these three aspects have been vigorously debated and they will be considered while considering those objections.

Mr. S. B. Vakil, who was the principal contender at the hearing of this petition, contested the scheme on the following grounds :

(1) The petitioner has not satisfied the requirement contained in the proviso to section 391(2) by not making necessary disclosures at the proper time and it being a condition precedent to the court's exercise of jurisdiction under section 391(2), the present petition must fail.

(2) The proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving,a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors which can only be investigated and avoided in winding up proceedings.

(3) The proposed scheme envisages scrapping of Unit No. 11 and part of Unit No. 1 of the mills of the company and, in the absence of a permission for scrapping a textile mill, it would be illegal to sanction the scheme.

(4) The proposed scheme envisages reorganisation of the share capital of the company, including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form.

(5) In the absence of proper directions for convening separate meetings of different classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members.

(6) A proper statement as required by section 393(1) and as directed by the court's order, dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

(7) The meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members.

(8) Even if it be held that the meetings were properly conducted, in fact the scheme is not approved by a statutory majority of creditors and members; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting members and creditors.

(9) The scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable; the court should not exercise its discretion in favour of such a scheme. These grounds will be dealt with in the order in which they are set out.

Re. Ground No. 1. Section 391(1) and (2) reads as under :

"391. Power to compromise or make arrangements with creditors and members. - (1) Where a compromise or arrangement is proposed -

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them; the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors or members, or class of members, as the case any be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of In the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company.

PROVIDED that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under C-105 sub-section (1), has disclosed to the court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest,auditor's report ''on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like."

5. The contention is that before the court can proceed to consider whether the scheme of compromise and arrangement should be sanctioned or not, the party sponsoring the scheme must disclose to the court by an affidavit or otherwise all material facts relating to the company, such as, the latest financial position of the company, latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. It is undoubtedly true that before the court can accord sanction to a proposed scheme of compromise and arrangement, between the company and its creditors or any class of them; or between the company and its members or any class of them, approved by a majority in number representing three-fourths in value of the creditors or class of Creditors or members or class of members, as the case may be, present and voting either in person or, where the proxies are allowed, by proxy, the court must be satisfied amongst other things that company or the sponsor of the scheme has disclosed all material facts relating to the company. The contention is that this disclosure should be made at the time when the petition is filed under section 391(1) and as that has not been done, the court should ignore whatever is disclosed after the petition for sanctioning the scheme is filed under section 392(2). Sections 391(1) and 391(2) refer to two distinct stages. Whenever a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the court on the application of the company or any creditor or member of the company or in the case of the company which is being wound up, of the liquidator, order a objecting of the creditors or members or any class of them as the case may be. Such an application shall be moved by judge's summons supported by affidavit to which the proposed scheme of compromise and arrangement should be annexed. The judge's summons can be moved ex parte unless the petition is by some one other than the company in which case, a notice to the company has to be served. The court may give various directions at the hearing of this summons set out in rule 6,9. Once these directions are given, application under section 391(1) would be disposed of. Nothing further is required to be done until after the meetings directed to be convened are held and the chairman submits his report, whereafter a substantive petition for sanctioning the scheme can be filed as envisaged by section 391(2) and rule 79. Before the court can accord sanction to the scheme, the petitioner or the company must disclose latest financial position of the company and the latest auditor's report as required by the proviso to sub-section (2). Proviso is annexed to sub-section (2) which envisages a a distinct stage from sub-section (1). The submission is that disclosures as required to be made by the proviso should be made at the stage of seeking directions under sub-section (1) of section 391. The submission would stand negatived apart from anything else by the very language in which the proviso is cast and its location in the scheme of section 391. Firstly, the proviso is engrafted to sub-section (2) which envisages a distinct stage from sub-section (1); secondly, the opening words of the proviso: " provided no order sanctioning any compromise or arrangement shall be made by the ,court unless would manifestly indicate the intention of the legislature that the disclosure is to be made at the stage when the court is called upon to sanction the scheme. If the submission had any merit in it, it was perfectly open to the legislature to engraft the proviso to sub-section (1) and in that event, the language would be " provided no direction shall be given for convening meeting unless ". Undoubtedly that has not been done. If sub-sections (1) and (2) of section 391 envisage two distinct stages, namely, (i) giving direction for convening the meeting for considering the proposed scheme and (ii) the independent stage when the court would be called upon to consider whether the scheme should or should not be sanctioned and if the disclosure is to be made before the court at the time when the court is called upon to sanction the scheme, it is not possible to accept the submission that the disclosure ought to be made at the initial stage when an application is made under section 391(1).

6. Mr. Vakil however urged that disclosure as envisaged by the proviso has to be made either by the company or by any other person by whom application has been made under sub-section (1) which,gives strong indication that the disclosure ought to he made at the initial stage when an application is filed under section 391(1). But as the summons under sub-section (1) is to be moved exparte, objection can be taken about the non-disclosure at the initial stage only at the time when the court proceeds to accord sanction to the scheme and, therefore, the proviso is engrafted to section (2). It was urged that an application under section 391(1) can made by a creditor or member who may not be in possession of the latest financial position of the company a notice to the company is made obligatory under rule 68. This notice to the company is made obligatory by use only the company would be able to disclose the latest financial position. It is no doubt true that a compromise or arrangement can be proposed by either a creditor or a member of the company but it is essentially a compromise or arrangement-between the company and its creditors or between the company and its members and if the application is made, by some one other than the company it was considered desirable that a. notice should be given to the company before direction for convening the meetings are given. Merely because a notice is to be given to the company under rule 68 before directions are given and because the advocate of the company has to file the form of advertisement and statement accompanying the notice as required by Form No. 35 in which order convening the meetings has to be made, it cannot be said that the disclosures ought to be made at that stage. Mr. Vakil however urged that in this application under section 391(1), judge's summons for seeking directions for convening the meeting. to consider the proposed scheme of compromise and arrangement would be moved ex parte and the court would not be able to give proper directions in the absence of material disclosures as envisaged by the proviso and, therefore, even though the language of the proviso and its location may apparently indicate that the disclosure has to be made at the stage when the court is called upon to consider the scheme, for very good reasons, the court should interpret the proviso to mean that the disclosure should and ought to be made at the initial stage. It was urged that when an ex parte judge's summons is moved under sub-section (1) and the court is required to give direction for convening the meeting, the court has to determine, amongst other things, class or classes of creditors and class or classes of members whose meetings have to be convened and has to determine the value of the creditors and/or members or creditors or members of any class as the case may be, and the court would not be able to do it unless the latest financial position including the auditor's report is disclosed to the court. It was also urged that in order to enable the court to give proper statement under section 393(1)(a) which must accompany the notice convening the meeting so as to give those who are to attend the meeting, the necessary information to enable them to cast their votes intelligently, it is absolutely necessary that the aforementioned disclosures should be made at that stage. It was very vehemently urged that the sanction of the court to the scheme is of secondary importance, its approval by the creditors and 9' members whose vital interest in the company are really at stake is of primary importance; and unless the scheme is properly considered by different classes of creditors and members, it cannot be taken up for consideration by the court. Therefore, the distinct and homogeneous class of. creditors and members should be properly drawnup while giving direction for convening meetings, and it would be impossible to do so in the absence of disclosure about the 'latest financial position of the company, at that stage. It was further urged that material facts which ought to be disclosed as required by the proviso would include all the relevant facts which would go to show that the company is liable to be wound up and that,the compromise and arrangement is fair and reasonable and is not mala fide and that it would be a proper alternative to the winding up of the company. The material facts required to be disclosed would also include the information which would help the court in determining the class of creditors or members whose separate meetings should be convened and their values to be properly determined.

7. Affidavit in support of the judge's summons moved under section 391(1) has to be drawn up in Form No. 34-a perusal of which shows that in the affidavit the party seeking the directions of the court which would of necessity be either the company or its creditor or member, must set out the circumstances that have necessitated the proposed compromise and arrangement, the object sought to be achieved by it, 'the terms of the compromise and arrangement, the effect if any of the compromise and arrangement on the material interests of the directors managing director, managing agent, secretaries and treasurers or manager of the company and when the compromise and arrangement affects the interest of the debenture-holders its effect on the material interests of the trustees of the debenture trust deed. It must further be disclosed in affidavit that classes - of creditors or members with whom the compromise or arrangement is to be made and if the compromise and arrangement is between the company and its members it should further be stated whether any creditor or class of creditors are likely to be affected by it. The affidavit must show that different kinds of meetings of different classes of persons are required to be convened. It is obligatory upon the applicant under section 391(1) to set out the aforementioned facts in the affidavit in support of the judge's summons. The aforementioned facts, if properly disclosed, would enable the court to give proper directions as envisaged by rule 69 and the absence of the latest financial position of the company or the latest auditor's reports would not be handicap in the court giving proper directions. In my opinion, the details required to be mentioned in the affidavit have been so prescribed to enable the court to give proper directions and no disclosures are required to be made as required by the proviso at that stage. The form in which the affidavit is required to be made further.. strengthens the conclusion that,the proviso is not come into play when the court deals with the petition under section 1(1) but it comes into play only at the later stage.

8. It was however urged that if the court is going to on the affidavit y support of the judge's summons in Company Application No. 23 of 1968, f@r reaching : a conclusion that relevant information was disclosed in the affidavit, it, would be necessary to consider in detail the affidavit of B. L. Patil, the constituted attorney of the company who filed his affidavit in support of the judge's summons. It was urged that the affidavit of Patel didnot disclose the fact that the company had suffered consent deer" and charges were created on the properties of the company indicating that the company was guilty of giving fraudulent preferences in favour of the creditors in whom the then directors were vitally interested. It was urged that this affidavit does not disclose the fact that various petitions praying for winding up the company were presented and were pending, nor the fact that the company had executed two mortgages, one in favour of the Union Bank of India in January 1968 and the other in favour of the Regional Provident Fund Commissioner in May 1968; and that the company had incurred losses in the last year to the tune of Rs. 45 lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and it sets out various details necessary for giving proper directions. It may be mentioned that Mr. Patel had annexed the latest balance-sheet of the company upto 31st March, 196,7, to the affidavit. He had also stated the dues of the managing agents, Indequip group of companies and dues of the managing director as well as', the members of his family and - the effect of the scheme on their claims. Therefore, whatever was necessary at that stage was disclosed in the affidavit and nothing further was required to be done at that stage.

9. Mr. Vakil further urged that the proposed scheme is to be considered by the members and creditors of the company and when they are considering the scheme, they should ordinarily have all the relevant information about the financial position of the company so that they can bring to bear upon the subject their independent (intelligent) commercial judgment as to whether the scheme should or should not be approved. If the matter is viewed from this angle, urged Mr. Vakil, it would indicate that disclosure should be made at the stage when the application is :filed under section 391(1) because that information would be available to the creditors and members in their meeting. It was contended that if the creditors and members are called upon to vote upon the scheme without supplying them necessary information which would help them in judging the scheme in its proper perspective, their approval of the scheme in sheer ignorance of the relevant facts would be of no avail. The approval of the scheme by the creditors and members must be after bringing to bear upon the subject their intelligent judgment based upon full disclosure as to the existing stage of affairs of the company and its future which is sought to be assured by the, proposed scheme of compromise and arrangement. Mr. Yakil referred to In re Travancors National & Quilon Bank Ltd. I An objection was raised before the court considering the scheme that as the scheme was not based upon correct information as to the affairs of the company and has not had the intelligent support of the body. of creditors who are supposed to have given assent to the scheme and there is no guarantee that the realizations therein promised would be realised. Referring to two English cases it has been observed that any scheme which is approved must prima facie appear to the based on correct information and data. However, having thus observed (1) [1939] 9 Comp. Cas. 14 (Mad.) the court further proceeded to observe that this does not mean that the application for sanctioning the scheme should be rejected on the ground that sufficient information was not supplied at the meeting of the creditors when they approved the scheme. This would not bear out the submission that the disclosure must be made at the initial stage. Reference was also made to In re Calcutia Industrial Bank Ltd. 1 wherein an objection was taken that the books of accounts of the company were not available at the meeting of the creditors and that the creditors were prevented from putting questions. Even though these grounds were considered, it may be stated that on the facts found in the Chariman's report no weight was attached to the aforementioned objections. Reference was also made to In re Bharati Central Bank Ltd." The question raised before the court was whether the creditors and members who had unanimously approved the scheme had full information of all the aspects and were acting honestly and in good faith at the meeting. After considering the evidence in the case it was observed that it was impossible to say that the creditors had full and fair knowledge of all the relevant facts on which they could come to an intelligent decision or that they had applied their independent mind to the scheme. In my opinion, no proposition of law can be deduced from the aforementioned case as suggested by Mr. Vakil that the disclosure ought to be made at the initial stage. It is always a question of fact whether the creditors and members did consider the scheme in the various meetings after getting the relevant information which would help in judging the scheme on its merits. But it ,cannot be said that as diseloures were not made at the initial stage when the directions-were given by the court the requirements of the proviso were not complied with.

10. Looking to the language of the proviso especially its opening words Provided that no order sanctioning any compromise or arrangement shall )made. . . " and the location of the proviso in the scheme of section 391 and' especially the fact that section 391(1) and section 391(2) envisage two distinct and independent stages when the court is called upon to apply its mind to the proposed scheme of compromise and arrangement and the contents of the affidavit required to be drawn up in prescribed form in support of the judge's summons under section 391(1) it is not possible to accept the submission of Mr. Vakil that disclosures as required by the proviso shonld be mad@, at the intial stage when the application is made under section 391(1). In Play judgment, these disclosures are required to be made when filed under section 391(2) for sanctioning the scheme and must b6: available when the. court proceeds to examine the scheme to find out - whether sanction should be accorded to it or not. (1) [1948] 18 Comp. Cas. 144 (Cal.) (2) 1991] Cal. 127.

11. As a second limb of the argument, it was contended that even if it be held that disclosures as required by the proviso are to be made at the stage when the court is considering the petition for sanctioning the scheme, in fact, no disclosures have been made in this case and therefore, the court should not accord sanction to the scheme. It was argued that the proviso being couched in the negative form is of a 'mandatory character and disclosures being a condition precedent to the court's exercise of jurisdiction for sanctioning the scheme, unless condition precedent is fully satisfied, the court will have no jurisdiction to sanction the scheme. It is true that the proviso is cast in the negative form. It is equally true that the court is precluded from according sanction to the scheme unless the disclosure as@ required by the proviso are made. As the proviso is prohibitory in character, it is not possible to treat it as merely permissive (vide High Commissioner for India and the High Commissioner for Pakistan v. L. M. Lall) The proviso was introduced in the year 1965 and as it is prohibitory in character and provides condition precedent to the court's exercise of jurisdiction for sanctioning the scheme it definitely appears to be mandatory in character and must be strictly complied with. The question is whether in fact it has been complied with or not. When the present petition was filed, the company was in charge of the provisional liquidator. The petitioner being a creditor could not produce documents showing latest financial position of the company. In order to make available latest financial position of the company and latest auditor's report, the petitioners took out a judge's summons in Company Application No. 11 of 1969 for a direction that the provisional liquidator who is in charge of the company should supply the latest financial position and all material acts pertaining to the said company. The court gave certail directions as a result of which Mahendra M. Patel & Company, Chartered Accountants, were appointed as auditors to prepare the latest financial position of the company and to submit the auditor's report. It transpired that the books of accounts for certain period were not written and under the supervision of the provisional liquidator, the ex-directors of the company were permitted to complete the books of accounts. Thereafter the chartered accountants prepared the latest balance-sheet upto 29th July, 1968. Company Application No. 23 of 1968, was filed under section 391(1) on 27th June, 1968. The mills of the company are closed from 2nd April, 1968. Therefore, when the books of accounts till 29th July, 1968, are prepared and auditors have audited the books, it cannot be gainsaid that the latest financial position and latest auditor's reports have been disclosed by the petitioner. The requirement of the proviso has certainly been complied with. But Mr. Vakil urged that the auditors did not get clarification on a number of points set out (1) (1948) 150 Bom. L.R. 649; A.I.R. 1948 P.C. 121. in the report under the heading " Notes forming part of the accounts f or the period 1st April, 1968, to 29th July, 1968." It was urged that, unless these points have been clarified, it cannot be said that the latest financial position of the company is made available to the court. It was also contended that looking to what the auditors have stated in the report, the latest financial position of the company is not capable of being ascertained at the present stage. It was also contended that the dues of certain creditors have not been properly verified and there is difference in the trial balance prepared by the auditors to the tune of Rs. 18,214 which the auditors have debited to the suspense account. It is undoubtedly true that the auditors have set out various queries in the report, but these queries did not in any Ymanner come in the way of proper appreciation of the latest financial position of the company as disclosed in their reports. There may be some difference here or there but that is not material because the court is not examining the accounts of the company or any allegation of embezzlement or defalcation. The court at this stage is concerned with the financial position of the company in its broad outlines. In fact, the court would primarily be concerned with the assets and liabilities of the company and a few minor details here or there would not be of any consequence while considering the scheme of compromise and arrangement. These details may be of importance when the claim of each creditor, qua the company is being considered; but while considering the scheme of compromise and arrangement, the court, more particularly, is concerned with the assets and liabilities of the company and they are admittedly set out in the reports submitted by the auditors. It may be mentioned that the petitioner has filed the. affidavit of Gopaidas P. Parikh at page 506 of the record to which is annexed the clarifications submitted by the directors to the queries raised by the auditors. However, it is not necessary to go into them at this stage. Suffice it to say that proper disclosures in their broad outlines have been made so as to comply with the proviso to section 391(2). In my judgment, therefore, the first ground of attack is without merits and must be negatived.

12. Reg. Ground No. 2. - Second ground of attack was that the proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent references in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only be investigated and avoided in winding up proceedings. The contention is that the proposed scheme was put forth by the directors of the company in order to shield themselves and to prevent investigation of their misdeeds, misfeasance and non-license during their management of the affairs of the company. It was very vehemently contended that if the petition for sanctioning the scheme is rejected, the only alternative open to the court would be to wind up the company. If the company is wound up the official liquidator would be able to investigate the management carried on by thf directors of the company. The official liquidator would also be able to avoid fraudulent preference alleged to have been granted by the directors of the company in favour of their chosen creditors as also in favour of the Union Bank of India and the Regional Provident Fund Commissioner and that neither this investigation 'could be made nor fraudulent preferences could be avoided if the scheme is sanctioned. In other words, it was urged that sanctioning of the scheme would provide a shield to the ex-directors of the company to cover ap their misdeeds which brought the company to '4' state of complete ruination. The charge is rather very serious and if prima f acie it could have been shown that the ex-directors were guilty of giving fraudulent preferences to their chosen creditors and further if these fraudulent preferences could not have been avoided except on the pain of winding up the company, 1 would have experienced considerable hesitation in further considering the scheme.

13. The company was indebted to the tune of Rs. 2,63,129'92 to Indian Electro Chemicals Ltd., Rs. 5,79,650 to Dyestuffs and Chemicals Private Ltd., Rs. 33,14,783 to Indequip Ltd., Rs. 3,38,267'96 to Messrs. Amarshi Darnodar and Rs. 1,86,225'50 to Messrs. Atul Cotton Traders. Gopaldas P. Parikh is vitally interested in the first mentioned three creditors and one Manubhai Amarshi, who carries on business under the name and style of Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders is a close friend of Gopaldas P. Parikh. Manubhai Amarshi has supplied cotton to the company, Indian Electro Chemicals Ltd., and Dyestuffs and Chemicals Private Ltd. had supplied goods and stores to the company; Indequip Ltd. had not only supplied goods and stores but also extended cash loans from its sharafl accounts to the company. Gopaldas P. Parikh holds large blocks of shares in the Indequip Ltd. and is virtually the owner of the Indian Electro Chemicals Ltd. and Dyestuffs and Chemicals Private Ltd. Thus there is no room for doubt that Gopaldas Parikh was vitally interested in the aforementioned five creditors. The first petition for an order for winding up the company was filed in the year 1967 being Company Petition No. 27 of 1967. That was withdrawn on 24th April, 1968. By that time, another petition filed for winding up the company was pending. During the pendency of this petition, it appears that the aforementioned five creditors filed suits against the company which was then being managed by Anil Parikh, son of Gopaldas P. Parikh, Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of 1968, Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed Summary Suit No. 977 of 1968 against the company for recovering their respective claims as set out above. All these suits were filed on 15th April, 1968. On the next day, the board of directors of the company resolved to suffer consent decrees in all these suits. The company suffered consent decrees for the full amounts claimed by each creditor. SO far no serious objection could have been taken; but the company over and above suffering consent decrees without investigating the exact amount payable to each of the creditors, the directors went further and created charges in favour of each of the creditors for its respective claims over the movable and immovable properties of the company. The suits were filed by, Mr. B. A. Kayastha, who, it was urged, is an associate of Messrs L. M. Nanavati & Company Associates and Mr. L. M. Nanavati has been throughout appearing for the company. In the suits Mr. Nanavati had not appeared for the company. Not only the suits were not contested, but even the plaints drawn up show very sketchy averments as to how the amounts were due. Apart from that, the company suffered decrees and created charges in favour of each of the aforementioned creditors. These decrees were suffered as stated earlier on 17th April, 1968, when winding up petition was pending against it and the mills of the company had already closed down. The creation of a. charge on immovable property would be a transfer of property which, in certain circumstances, either in winding up proceedings or insolvency proceedings, can be attacked as fraudulent preference and if so proved, the transfer can be declared to be void. The attempt of the then directors of the company, which included one Anil Gopaldas Parikh, son of Gopaldas P. Parikh, who was vitally interested in the creditors, was to give benefit or preference to the aforementioned creditors to the detriment of the other unsecured creditors of the company. On the face of it, the creation of the charge was fraudulent preference and having given when the petition for winding up was pending or having been given within a period of 6 months prior to the presentation of these petitions for winding up the company, it would certainly be fraudulent preference. The zeal evinced by the directors in these circumstances in suffering decrees smacks of giving an unfair advantage to the creditors in whom they were vitally interested and detrimental to the financial interest of the company. This conduct is unbecoming of a responsible director of a company. As between a company and director, it is fair to presume that there is a fiduciary relationship and if that presumption is proper, the directors in suffering decrees conducted themselves in a manner unbecoming a custodian of the interest of the company. Their action in giving charges would very adversely hit the other unsecured creditors. The directors preferred between creditors and creditors and especially preferred those in whom they were vitally interested; and could certainly be stigmatized as guilty of giving fraudulent preferences. Mr. Gandhi who appeared for the petitioner made no attempt to defend this action of the directors in suffering decrees. One may not take a very serious objection to the suffering of the decrees but for the manner in which they were suffered; but the most undesirable part is of giving charges in favour of select and chosen creditors. If these charges could not have been avoided except in winding up proceedings as fraudulent preferences, no alternative would have been left but to reject the scheme and wind up the company. However, I would presently point out that charges created favour of the aforementioned creditors no more subsist.

14. After the charges were created in favour of the aforementioned five creditors, an application was made to the Registrar of Companies in each case for registering the charges as required by section 125 in Part V of the Companies Act. However, Gopaldas P. Parikh filed an affidavit at page 590 of the record in which he has stated that, even though the applications were made to' the Registrar of companies in respect of the charges created in favour of the aforementioned five creditors, the said charges are not registered. The Registrar of Companies was summoned to the court to find out whether the charges were registered by him or not. The Registrar informed the court in the presence of the parties at the hearing of this petition that certain corrections had to be made in the form in which the applications were made and he had informed the directors of the company to make necessary corrections. But before these corrections could be made by the directors, a provisional liquidator was appointed with the result that the corrections were not made and charges were not registered; and unless the provisional liquidator makes the necessary corrections, the charges cannot be registered and the provisional liquidator informed the court that he does not wish to make corrections. If the scheme is sanctioned and the company gets going, the directors will be precluded from making corrections. If the corrections as suggested by the Registrar are not made, the charges cannot be registered and if the charges are not registered, they are void as provided in section 125 of the Companies Act.

15. It must further be noticed that the aforementioned five creditors have specifically given up their charges. Gopaidas P. Parikh as director of Indequip Ltd. has filed an affidavit at page 499 of the record. He has annexed the resolution of the Indequip Ltd. This resolution would show that Indequip Ltd. has accepted the scheme and has agreed to accept 50 per cent. of its dues in the form of shares and other 50 per cent. as provided by the scheme, which 1 would point out at a later stage. Indequip Ltd. has agreed not to claim and discharge the company from the liability of paying the amount if the scheme is to be sanctioned. The resolution further shows that the charge created in favour of Indequip Ltd. is relinquished and will not be enforced. In the affidavit of Gopaldas P. Parikh at page 590, has stated that Indequip Ltd. would not pursue the application for registering the said charge and the application should be deemed to have been withdrawn. There is also the affidavit of Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private Ltd., at page 495 to which is annexed the resolution at page 497, which is to the same effect. There is also an offer on behalf of Dyestuffs and Chemicals Private Ltd. not to claim the remainder of its 50 per cent. dues if the scheme is sanctioned. The charge in favour of Dyestuffs and Chemicals Private Ltd. is relinquished. Further affidavit is filed by Mr. Khale in which he has stated that the application for registration will not be pursued and he undertook to intimate to the Registrar that the application for registration of the charge is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance at pages 694 and 695 signed on behalf of the aforementioned two creditors accepting the scheme and the charges in their favour stand cancelled. It may; also be mentioned that the aforementioned two creditors by their two letters dated 15th October, 1969, at pages 533 and 534 of the record have informed the court that they accept the scheme, which in terms means that the charge in their favour would be ineffective and of no consequence. Then remains the case of Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing for the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated that he would oppose the scheme on behalf of his clients. Subsequently, during the course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the Indian Electro Chemicals Ltd., has been filed at page 702 of the record to which is annexed a letter from the clients of Mr. Gandhi whereby they informed the court that they do not oppose the scheme. Now, the scheme provides that 50 per cent. of the dues of the unsecured creditors of the Indian Electro Chemicals Ltd. will be converted into share capital by issue of shares and 50 per cent. will be paid in a certain manner after some period. Indian Electro Chemicals Ltd. does not oppose the scheme, meaning thereby that it is prepared to accept its dues in the manner provided in the scheme for payment to the unsecured creditors. The scheme does not provide for payment to Indian Electro Chemicals Ltd. as secured creditors., The scheme in fact treats Indian Electro Chemicals Limited as a secured creditor. If Indian Electro Chemicals Limited does not oppose the scheme it would only mean that it would accept the position' that it is not a secured creditor and that payment would be made to it ion, accordance with the provisions for the payment to other unsecured creditors@@ It would thus appear that all the five charges created by the decrees, which could have been avoided as fraudulent preferences in the event of the winding of the company, have been withdrawn, relinquished or cancelled and, at any rate, are void for want of registration and of no consequence in law. The result which Mr. Vakil seeks to achieve in winding up proceedings is achieved while sanctioning the scheme.

16. Turning next to the mortgage in favour of the Union Bank. and Regional Provident Fund Commissioner, it may be mentioned that Mr. Yakil, after perusing the documents produced by the bank with the affidavit of Mansukhlal Hiralal Trivedi at page 601, did not suggest that the mortgage in favour of the bank for Rs. 13,00,000 dated January 19, 1968, would be a fraudulent preference. Suffice it to say that the bank had advanced cash loan of Rs. 13 lakhs on the security of the State Government to the company and the mortgage security was given towards this cash loan of Rs. 13 lakhs. By no stretch of imagination such a mortgage could be styled as a fraudulent preference.

17. It was next contended that the deed of mortgage executed by the company in favour of the Central Board of Trustees for the Provident Fund on May 21, 1968, would be a fraudulent preference given to the said trustees. It appears that Rs. 15,05,418'37 were due and payable by the company in respect of the provident fund contribution and Rs. 47,693'80 for administration charges to the Regional Provident Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the Provident Fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true that the mortgage deed in favour of the Central Board of Trustees was executed on May 21, 1968, when the petition for winding up the company was pending in the court. It is, at any rate, executed within six months prior to the institution of the petition which is now pending and in which prayer for winding up the company is made. If that petition succeeds, investigation will have to be made whether the mortgage in favour of the Central Board of Trustees would amount to a fraudulent preference within the meaning of section 531 of the Companies Act. Mr. R. M. Gandhi, learned advocate who appeared for the Regional Provident Fund Commissioner, urged that the properties of the company were already attached by the revenue authorities at the instance of the Central Board of Trustees right f rom the year 1961-62 and the Central Board of Trustees gave further time to pay up the amount on the company executing the mortgage deed in favour of the Central Board of Trustees. Accordingly, the company executed the mortgage deed.. Mr. Gandhi, however, urged that, even apart from this, the circumstances in which the mortgage deed came to be executed would themselves indicate that it could not be avoided as a f raudulent preference. Mr. R. M. Gandhi referred to the arguments ed Mr. D. C. Gandhi in which he has stated that the directors of the company were threatened with prosecution and under the threat of prosecution they executed the mortgage deed. Mr. R. M. Gandhi, however, urged that; assuming that this submission is factually correct, yet, execution of the mortgage in favour of the Central Board of Trustees would not be a fraudulent preference. Mr. Gandhi urged that, in order to avoid a transfer 9 of property by a debtor in favour of the creditor on the ground of its being a fraudulent preference, it must be shown that the debtor with intent to prefer the creditor has transferred the property, and it must be a free and volitional act of the party. It refers to the state of mind of the debtor-and it must be shown that the debtor intended to prefer the creditor or acted in a manner solely with a view to prefer the creditor to the exclusion of others. If, therefore, it could be shown that the debtor acted under an apprehension that he would be prosecuted or under a threat of prosecution, the transfer of property by him could not be said to be a free volitional act of the debtor disclosing an intention to prefer the creditor but it would a pear that he has acted under the compulsion of the circumstances, may be of his own creation' Reference in this connection may be made to Sharp (Offical Receiver) v. Jackson. In that case it was found that the trustee had committed breaches of trust and was insolvent. and, on the eve of his bankruptcy, he conveyed an estate to make good the breaches of trust, this transfer was sought to be avoided as fraudulent preference in a bankruptcy proceeding against a trustee. It was held that - the transfer cannot be avoided as fraudulent preference because it was found that the trustee made the conveyance not with the intention or view or object whatever it may be called preferring any person in whose favour the transfer was made but for the sole purpose of shielding himself. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. 11 it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could. not in such circumstances be fraudulent preference. This decision has been followed in In re M. L G. Trust Ltd." Reference may also be made, (1) [1899] A.C. 419 (H. L.). (2) [1933] Ch. 542; 3 Comp. Cas. 345 (C. A.).to In re F. L. E. Holdings Ltd.' In that case a passage from Buckle@ on the Companies Acts, 13th Edition (1957), is quoted which shows that as preference.implies selection. and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure' e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings.,' is not for this purpose a voluntary payment. Viewed from this angle, the transfer by way of mortgage by directors in favour of the Central Board of Trustees would not prima facie appear to be fraudulent preference as it appears that it was done under the threat of imminent prosecution.

18. Recalling now the submission of Mr. Vakil that the company has been guilty of giving a number of fraudulent preferences they could not be investigated except in a winding up proceedings and, therefore, the scheme is not a proper alternative to winding up, does not carry conviction. The charges created by the decrees in favour of th a five aforementioned creditors, which certainly call for investigation, have been set aside without having taken recourse to the proceeding in winding up and two mortgages one in favour of the Union Bank of India and the other in favour of the Central Board of Trustees of Provident Fund have prima facie no tinge of fraudulent preference. Therefore, it is not possible to accept the - submission of Mr. Vakil that the fraudulent preferences given by the company would go unchallenged and uninvestigated if the scheme is sanctioned.

19. Mr. Vakil further urged that apart from this fraudulent preference given by the directors there are several acts of mismanagement pointed out by the auditors in their report which cannot be investigated and brought to light except in winding up proceedings. The accounts of the company were not written from December, 1967, and they were completed during the course of the proceedings in the court. They have been audited by Messrs. Mahendra Patel & Company, Chartered Accountants, and their detailed report is placed on record. It is true that the auditors have stated that in view of the state of accounts they are not in a position to express opinion whether the accounts give a fair view in respect of the balance-sheet as on 31st March, 1968, and 29th July, 1968, and profit and loss accounts. They have also stated that they were not able to obtain all the information and the explanation which was necessary. They have also stated that the books of accounts have not been kept as required by law. They have also set out certain queries in their report. Those queries will have to be complied with by the Board of Directors that may come into existence if the scheme is sanctioned. But Mr. Vakil could not point out to me any specific case of either embezzlement or of fraud. A very general statement was made that there are several acts of mismanagement which must be investigated in (1) (1967] 1 W. L. R 1409., [1968]38 Comp. Cdo. 214 (Ch. D.). winding up proceedings. Such an allegation is rather vague and devoid of details. On such a vague allegation, the scheme cannot be rejected. But it was urged that even the debt which the company owes to the aforementioned five creditors requires to he verified and checked up; and that also cannot be done unless the official liquidator in winding up proceedings proceeds to verify the claims lodged with him by the creditor. In order to ascertain and verify the debts owed by the company to the Aforementioned five creditors, one need not resort to the extreme provision of the winding up of the company. Those debts can be verified by an order of this court by the official liquidator as court officer, and such a direction can be given while sanctioning the scheme. As for the vehemence with which a grievance was made that there are several acts of mismanagement and misfeasance committed by the directors of the company that for the commercial morality and purity of administration of such a public company it is best to pass an order for winding up the company and investigate its affairs, it must be said that the last board of directors against whom Mr. Yakil with a very facile tongue and vituperative language made serious allegation came into the management of the affairs on 1st January, 1966, and prior thereto Mr. Chandulal Hiralal Banker, the constituted attorney of Mr. Vakil's client, was in active management of the company and even during that period the losses had mounted up to a considerable extent and a land deal in favour of one Bansidhar Private Limited prima facie appeared to be shady. The attitude adopted on behalf of Mr. Chandulal Banker totally fails to carry conviction in the matter and investigation, if need be made, should be made for a period much prior to 1 st January, 1966, when Chandulal and Manubhai were in active management of the company. But these are hardly considerations on which it can be said that the scheme approved by a statutory majority is not a proper alternative to winding up. It is not possible, therefore, to accept the submission of Mr. Yakil that !his scheme is a cloak put forth to cover the misdeeds of the directors because the cloak, if any, extends to the period when Chandulal and Manubhai were in active management of the company. It is true that if the court comes to the conclusion t hat the scheme is a cloak to cover the misdeeds of the company or is put forth with a view to shield the directors against the investigation into their mismanagement of the affairs of the company, the scheme cannot be accepted, only on the ground that it has been approved by the creditors and members. Reference in this connection may be made to In re Calcutia Industrial Bank Led.', wherein it is observed that the creditors, left to themseives, do not appreciate the importance of many things unless it is brought to their notice. The object of having the affairs of the company investigated by an independent auditor was to bring all material facts relating to the management as well as the (1) [1948] 18 Comp. Cas. 144 (Cal.). C-107 present financial position of the company to the notice of the creditors so as to enable them to make up their minds whether they should at all enter into any arrangement with such a company. Reference was also made to Pioneer Dyeing House Ltd. v. Dr. Shankar Vishnu Marathe 1. One of the grounds for opposing 'the scheme in that case was that the object of the scheme was to cover the deeds' of the delinquent directors. It was observed that if the scheme is sanctioned, the winding up order will stand set aside, the liquidators will be discharged, there will be none to prosecute the misfeasance summons against the erring directors and the assets of the company will once again fall into the hands of persons whose rectitude is under a cloud; and that cannot be permitted under the cloak of a scheme of reconstruction. It would undoubtedly be so if the scheme is put forth as a cloak, to cover the misdeeds of the directors. (But it will be a question of fact in each case as to whether it is so). In the aforementioned case the first scheme proposed was rejected and after a lapse of a period of ten years after the order for winding up was made another scheme was proposed which when examined disclosed a number of defects. In the facts and circumstances of this case, it does not appear that the scheme is put forth with a view to shield the directors of the company. When it comes to choosing between a scheme for reconstruction and an order for winding up after keeping all the circumstances of the case as also the question of commercial morality in view and if the scheme appears to be feasible and workable, it should be preferred to compulsory liquidation. The second contention of of Mr. Vakil, therefore, cannot be accepted.

20. Re. Ground No. 3. - The third ground of attack was that the scheme proposes scrapping of Unit No. 11 and part of Unit No. 1 of the mill of the company and in the absence of a permission for scrapping a textile mills it would be illegal to sanction the scheme. The scheme envisages scrapping of Unit No. 11 of the mills of the company. The mills of the company are divided into two units described as Unit No. 1 and Unit No. 11. There are 501 looms and 13,488 spindles in Unit No. 1 and there are 308 looms and 23,160 spindles in Unit No. 11. The scheme proposes that Unit No. 1 with 400 looms and 15,000 spindles should be restored and Unit No. 11 comprising the rest of looms & spindles and machinery should be scrapped. Scrapping of Unit No. 11 is an integral and inseverable part of the scheme because by scrapping the company hopes to realise Rs. 14 lakhs which would go towards the discharge of debts of the bank and the central board of trustees of the provident fund. Mr. Yakil urged that a textile mill cannot be scrapped without the permission of the Central Government. No provision or statute was pointed out to the court which would show that textile mills cannot be scrapped without the permission of the Central Government. But it was 37 Comp. Cas. 546; 1967 69 Bom. L.R. 261 (Bom.). common ground that such a permission is essential before a textile mill be scrapped. Mr. D. C. Gandhi for the petitioner urged that the company has obtained such a permission while Mr. Vakil strongly urged that there no such permission. The company applied for such a permission and the letter of the Government of India, Ministry of Commerce, dated 1/4th October 1966, at page 175 of the record shows that such a permission was grants It is stated in the letter that the Government of India have no objection M/s. Maneckchowk & Ahmedabad Manufacturing Company Mills, Ahmedabad being scrapped. If the matter were to rest with this letter' it would indiputably appear that the permission to scrap the whole mill which wouenable the company to scrap a part of the mill was granted. Mr. Vakil ho@ ever urged that this permission was cancelled and even the company h@ admitted that it was withdrawn and is no more effective and no fresh permission is applied for or obtained. In this connection Mr. Yakil first referred to the report of the court of inquiry constituted by the Government Gujarat under section 100(1) of the Bombay Industrial Relations Act parceled over by Mr. D. M. Vin which has inquired into some aspects concerns the company. The report of the court of inquiry is published in the Gujarat Government Gazette, Part I-L, dated 10th October, 1968. The conpany appeared in this inquiry and filed its statement, part of which is r, produced in the report. In para. 5 of the report it is stated that the Government of India, Ministry of Commerce, permitted scrapping of the mill by that permission was subsequently withdrawn at the instance of the Texts', Labour Association. Relying on this statement of the company before. court of inquiry, it was urged that even according to the company the permission was withdrawn and no fresh permission is granted. Mr. D. C. Gand for the company urged that what is sought to be culled out from the report as an admission of the company is not accurate. Mr. Gandhi urged that th permission was at best kept in abeyance till April, 1967, and as no further order is made by the Government of India, the original permission became effective and is still effective. The letter of the Government of India at page 175 of the record shows that the permission to scrap the whole mill wa granted. At that stage, the Textile Labour Association, which is a representative Union of the workers of this company, opposed the grant of such pc] mission with the result that the Government of India, Ministry of Commerce by its letter dated 15th December, 1966, informed the company that th question of scrapping of the mills of the company would be further examined and the decision conveyed by the letter of the Government of dated 1/4th October, 1966, by which permission was granted was to beset(in abeyance till - April, 1967. This letter of the Government of India is a page 389 of the record. If the decision of the Government of India permission was held in abeyance for a certain period and if no order wars made, cancelling or revoking the permission, obviously after the period having expired, the permission would be good and valid. It was, however, urged that a later query with the Government of India disclosed that no. such permission as alleged by the company is granted. During the pendency of this petition Mr. Vakil for the contesting creditors addressed a letter to the Textile Commissioner on 29th November, 1968, inquiring whether the company has 'been granted permission to scrap the mill or any unit thereof or any prohibitory order has been issued against the company against scrapping the unit under the Cotton Textile Control Order, 1948. This letter of Mr. Vakil was forwarded by the Assistant Director to the Textile Commissioner, I.L. Section. Finally, by the letter from the office of the Textile Commissioner dated 23rd December,'@l. 1968, Mr. Vakil was informed that the Government of India had not permitted the management of the Maneekehowk & Ahmedabad Manufacturing Company Limited to scrap their unit. These last three letters are at pages 318 to 320 of the record. Relying on these letters it was strenuously urged that no permission is granted or at any rate no valid permission is in force and if the permission is not in force or effective, Unit No. 11 cannot be scrapped and the foundation of the scheme is knocked out. The contention appears to be entirely without merits. It cannot even be disputed that the Government of India by its letter dated 1/4th October, 1966, did grant permission to scrap the whole mills. This permission was to be held in abeyance as per the letter of the Government of India dated 15-12-1966 till April, 1967. The query of Mr. Yakil may have been directed to the Textile Commissioner and the reply of that office that no such permission is granted cannot be accepted in the face of the letter dated 1/4th October, 1966. The period during which the permission was held in abeyance having expired and no order having been made either cancelling or revoking the permission, the permission would be good and valid and the company was justified in proceeding on the basis that it has got a valid permission to scrap Unit No. 11. It may incidentally be mentioned that the permission was held in abeyance on an objection raised by the Textile Labour Association representing the workers of the company. The Textile Labour Association has entered into an agreement with the company and has accepted the scheme; when the Textile Labour Association accepted the scheme it is implicit that it agrees to scrapping of Unit No. 11 which would result in discharge of some of the workmen, yet, the textile Labour Association does not raise any objection to the scrapping of Unit No. 11. Therefore, also, it appears crystal clear that the permission for scrapping Unit No. 11 is good and valid and would be effective. Further, it may be mentioned that Mr. B. R. Shah, learned Assistant Govt. Pleader, appearing For the State of Gujarat, relying on the relevant files of the industries department, made a statement to the court that there is nothing on the record of the Government that permission granted by the Government of India is cancelled or set aside or withdrawn.

21. It is, therefore, not possible to accept the submission of Mr. Vakil that there is no valid permission for scrapping Unit No. 11 and scrapping of Unit No. 11 being an integral part of the scheme, the scheme cannot be sanctioned.

22. Re. Ground No. 4. - The next ground of attack of Mr. Yakil is that the proposed scheme envisages reorganization of the share capital of the company including reduction and increase of share capital, which cannot be done without going through the whole gamut of the procedure prescribed for the same and, as it is an inseverable part of the scheme, it would be futile to sanction the remainder of the scheme in its mutilated form. It is undoubtedly true that the scheme envisages reorganization of she share capital of the company. The share capital of the company is at present divided into 788 ordinary shares of each of Rs. 1,000 and 1,050 preference shares each of Rs. 100 fully paid. The scheme envisages reduction of share capital by REDUCING the face value of the ordinary shares of Rs. 1,000 to Rs. 250 and preference shares of Rs. 100 to Rs. 25. The scheme also envisages fresh issue of share capital by converting 50 per cent. of the claim of the creditors by issue of fresh shares. As a necessary corollary the authorised, issued and subscribed share capital of the company would be increased. Thus the scheme envisages reorganization of the share capital of the company. There are certain specific provisions in the Companies Act which prescribe the procedure for the reduction of the share capital and for increase of the share capital. The issue of fresh share capital is governed by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that, as part of the scheme it is not open to the court to sanction reorganization of the share capital which includes reduction, increase and-issue of fresh capital. It was urged that if the scheme of compromise and arrangement envisages reorganization of share ,capital, it cannot be sanctioned as part of the scheme and the provision of the Companies Act which prescribe the procedure for reduction of share capital and increase of share capital and issue of fresh capital must be specifically and strictly complied with. On the other hand, it was urged by Mr. Gandhi that section 391 provides a complete code for the reconstruction of the company which may include reorganization of its capital as part of the scheme of compromise and arrangement. In other words, it was urged that if the scheme of compromise and arrangement includes in its ambit reorganization of the share capital then it can be carried out as part of the scheme of compromise and arrangement and it is not at all necessary to go through the whole gamut of the procedure prescribed for the reduction of share capital and for issue of fresh capital. There seems to be considerable force in the contention of Mr. Gandhi that section 391 is a complete code. It provides for a scheme of reconstruction and amalgamation of companies. The scheme of reconstruction of a company may also include a compromise and arrangement between the company and its creditors or any class of them or between the company and its members or any class of them. Section 390(b) provides that the expression " arrangement " as used in sections 391 and 393 includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods. It is an inclusive definition. It was attempted to be urged that the arrangement herein defined does not include increase of share capital, so also it does not include reduction of share capital even though a specific provision made as to what procedure would be gone through when the scheme of compromise and arrangement provides for reduction of share capital. Rule 85 of the Companies (Court) Rules, 1959, provides that where a proposed compromise or arrangement involves a reduction of capital of the company, the procedure prescribed by the Act and the Rules relating to the reduction of capital and the requirements of the Act and these Rules in relation there to shall be complied with, before the compromise or arrangement, so far as it relates to reduction of capital, is sanctioned. If section 391 were not to be treated as complete code and if it is intended that various things that can be done by way of a scheme of compromise and arrangement, if they were to fall under different provisions of the Companies Act which prescribe certain procedure for doing the same and that procedure has to be gone through, it was not necessary to provide specifically that if the scheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85. A scheme of compromise and arrangement may be between company and creditors or between the company and members. If the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reduction of share capital which can be carried out as part of the scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a even case may adversely affect the creditors and the creditors would have no hence to object to the same. It is manifestly clear that reduction of share Capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise Led arrangement between the company and its members yet as this prescribed procedure for affecting reduction of share capital has to be gone through even though it forms part of a scheme of compromise and arrangement, the creditors will have a chance to object to the same if it adversely affects them. Such would not be the case where the capital is increased or the rights of various classes of shareholders are altered or changed. The reorganization of capital as envisaged in section 390 would certainly include increase and reduction of share capital, but reduction of share capital. can be brought about by arrangement between the company and members yet it will have direct impact on the creditors and therefore a specific provision is made in rule 85 that ever if reduction of share capital is to he effected as part of the scheme of compromise and arrangement, the procedure prescribed for reduction of share capital in the Companies Act and the Rules must be gone through before the scheme is sanctioned. This specific provision would indicate that other things such as increase of share capital simpliciter when sought to be carried must be done according to procedure prescribed for the same. It can also be done as part of a scheme of compromise and arrangement and the result can be achieved by following the procedure prescribed in section 391. Section 391 provides a complete code of putting through a scheme of compromise and arrangement which may even include reorganisation of share capital subject to the well recognized exception that. if reorganization of share capital included reduction of share capital, the prescribed procedure for effecting the same must be gone through in view of rule 85 before the scheme could be sanctioned. If rule 85 were not enacted, obviously, reduction of share capital could have been effected as part of the scheme of compromise and arrangement without going through the procedure prescribed in section 100 onwards. The very fact that a specific rule had to be enacted for this purpose indicates that section 391 is a complete code providing for all those things which can be included in a scheme of compromise and arrangement and all those things can be brought about by the procedure prescribed in section 391 onwards. The nature of compromise that can be entered into under section 391 is not defined. The definition of reorganization of capital is an inclusive definition which would not exclude reduction of share capital or increase of share capital which would also be a kind of reorganization of the share capital of a company. If section 391 was subject to other provisions of the Act every time the scheme of compromise and arrangement is put forth for the sanction of the court, if it includes things for which specific. provisions are made and that will have to be gone through be fore the scheme is sanctioned, it would result in unnecessary duplication of. procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certain compromise which the court considers fair, it can be@sanctioned under section 391 despite the fact that for some of those things included in they compromise another procedure is prescribed in the Companies Act and a which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of th escheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase of share capital, it can be done as a part of the reorganization of the sahre capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, the procedure prescribed under sction 100 and onwards will have to be gone through. Looking at the matter from a slightly different angle, it appears that section 391 is a special provision for sanction of a scheme of recontstruction of companes, of amalgamation of companies and for a scheme of compromise and arrangement. The scheme of compromise and arrangement, or for that matter even the scheme of amalgamation of two companies, may envisage reorganisation of share capital of one or the other company. The Companies Act no doubt makes provision for reduction of share capital simpliciter, increase of share capital simpliciter, or fresh issue of capital simpliciter without its being part of any scheme of compromise and arrangement. The scheme of compromise and arrangement can be brought about only between the company which is liable to be wound up under the Companies Act and its members or creditors. The special provision contained in section 391, namely, sanction of the scheme of compromise and arrangement would in my opinion exclude general provisions for reduction of share capital or for issue of fresh capital. It is well settled that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where the special provision does not apply : vide South India Corporation (P.) Ltd. v. Secretary Board of Revenue ([1964] 15 S.T.C. 74; A.I.R. 1963 S.C. 207) and C. Rajgopalachari v. Corporation of Madras ([A.I.R. 1964 S.C. 1172), Therefore, it appears that the provisions contained in section 391 is a complete code. As a necessary corollary, if the scheme of compromise and arrangement includes reorganization of share capital except reduction of share capital, it can be sanctioned as a part of the scheme of compromise and arrangement. In the case of reduction of share capital as part of the scheme of compormise and arrangement, rule 85 will have to be given full effect. The scheme has been approved by a statutory majority as will be presently pointed out and if the scheme is to be sanctioned as part of such a scheme, reorganisation of the share capital except the reduction of share capital can be sanction. It will, of course, be necessary to find out whether the procedure prescribed for effecting reduction of share capital has been gone through or not.

23. The reorganization of the share capital sought to be effected by the scheme involves reduction of share capital, issue of share capital and increase of share capital. It will be proper to dispose of first the question with regard to increase and issue of fresh capital. The memorandum of association of the company shows that the issued and subscribed capital of the company consisted of 788 ordinary shares each of Rs. 1,000 and 1,050 redeemable cumulative preference shares of Rs. 100 each. Thus the total issued and subscribed capital was Rs. 8,93,000.]' he preference shares were redeemable cu 'mulative preference shares. Article 10 of the company's articles of association provides that the company may by ordinary resolution in general meeting alter the conditions of its memorandum by increase of its share capital, by such amount as it thinks expedient by issuing new shares as may be necessary. The company can also divide and consolidate its shares. Thus the company has reserved powers to itself to increase the share capital by ordinary resolution in a general meeting. Now, when share capital is increased and fresh shares are issued, such issue would he governed by section 81 . Section 81 provides that such fresh issues should be offered to persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. The procedure for making the offer is also set out in section 81(1). It was urged that even if it be assumed that the company has power to increase the share capital, fresh share capital can be issued only to the existing shareholders in proportion to the capital paid up on those shares on that date. The scheme envisages increase of share - capital by converting 50 per cent. of the claim of the unsecured creditors into paid up share capital at the reduced value of shares. It is no doubt a fresh issue of capital to persons other than existing shareholders and it would also result in increase of capital; the company having power to increase its capital can further issue capital but it is urged that it can be done in the manner provided in section 81(1) and, if the schemed is sanctioned, it would result in contravention of section 81(1). Sub-section (I A) of section 81 provides as under: ' "81. (1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-section (1)) in any manner, whatsoever -

(a) if a special resolution to that effect is passed by the company in general meeting, or

(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy. exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made -C-108 by the board of directors in this behalf, that the proposal's most beneficial to the company."

24. There is a similar provision in article 15 of the articles of association the company. It would appear that sub-section (IA) permits issue of further shares to persons other than the existing ordinary shareholders of the company. It cannot, therefore, be said that issue of further shares to the persons other than the existing shareholders of the company is wholly barred. It would only require special resolution to that effect passed by the company in the general meeting. If, therefore, a special resolution for issue of further shares after increasing the capital to persons other than the existing shareholders of the company is passed in a general meeting of the company, section 81 would not be contravened. In the present case, the, scheme provides for issue of further shares and these further shares are to be issued to the persons other than the existing shareholders of the company. The further shares are to be issued to the creditors of the company in satisfaction of the 50 per cent. of their claims. Mr. Vakil urged that before sub-section (1 A) of section 81 can come into play, it must he shown that the special resolution has been passed in the general meeting of the company. Mr. Vacil urged that the meeting of the company to be a general meeting must be of all the members of the company entitled to attend and vote and the resolution to be a special resolution must satisfy all the requirements of section 189 of the Companies Act. It was urged that if the members of the company did not meet together at one place to consider the resolution but divided themselves and met in two separate meetings, it cannot be said that the proposal for further issue of shares was considered in the general meeting of the company. There are two classes of members of the company. They are: (1) holders of ordinary shares; and (2) holders of redeemable cumulative preference shares. Article 5(b) of the articles of association of the company provides that the cumulative' preference shares shall not entitle the holders thereof to be present at or to vote either in person or by proxy at any general meeting of the company unless a resolution is to be passed affecting their rights or privileges. Further issue of ordinary shares would not affect the rights or privileges of the holders of the preference shares. Therefore, if article 5(b) were to apply, the holders of the cumulative preference shares had no right to attend and vote at any general meeting. The general meeting of the company would be a meeting of ordinary shareholders of the company. Indisputably, such a meeting has been held and therein the scheme has been voted upon which includes issue of further shares. But it was urged that as the interest for more than two years payable on redeemable cumulative preference shares is in arrears, section 87(2)(b)(i) and article 119(b)(i) of the articles of association of the company would come into play and they would have a right to attend and vote at every general meeting. That of course is true.

25. The question then is if the holders of the preference shares met in a meeting separate from the meeting of the ordinary shareholders and in each meeting the proposal for further issue of shares was considered and voted upon by a majority of 75 per cent. of members present and voting, could it be said that special resolution has been adopted ? It was very vehemently urged that the concept of. a general meeting connotes consensus or meeting of minds and joint deliberation and that would be lacking in group or class meetings. It was urged that to interpret the concept of general meeting otherwise would permit the company to consult each individual shareholder to consider the proposal denying the benefit of joint deliberations and even if all shareholders agree to the proposal it cannot be said that there was a meeting of the minds which is of the essence of a general meeting. It was, therefore, urged that the meeting of a class of members and general meeting of all members are two distinct things. In my opinion, what is of the essence of the matter is that the persons affected must have an opportunity to consider the proposal and deliberate together. If the deliberations are carried on by two distinct classes having distinct interests separately it cannot be said that the proposal has not been considered in a general meeting. A too narrow and strict view may necessitate first convening the meeting of two classes together and then for the purpose of the scheme separate meetings of each class. It, in my opinion, would be an idle formality. It would be more so on the facts of this case because preference shareholders were not ordinarily entitled to attend and vote at the meeting but for the eventuality that the interest payable on preference shares is in arrears. Therefore, in my opinion, it cannot be said that the resolution adopted was not adopted at a general meeting. Even if it be said that joint deliberation of all those who are entitled to participate in the meeting is of the essence of a general meeting, it cannot be said that two classes of persons one of whom in ordinary circumstances was not entitled to attend the meeting deliberated in a different meeting and both adopted the same resolution, there was no' joint deliberation. In fact when one class of members are likely to overwhelm the other class, to safeguard the interest of the other class, deliberations are held in separate meetings, but a common resolution is adopted by both the meetings and in each meeting it was passed with statutory majority. It can never be said that the resolution was not adopted at a general meeting. Reference was made to Sharp v. Dazves 1. In that case a meeting was called by the secretary and only one shareholder attended, where a resolution was adopted making a call on the share and pursuant to this resolution a call was made which was challenged. It was (1) [1876] 2 Q.B.D. 26. the section may be mandatory. It cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly mandatory. The notice of certain duration must be given and resolution must be adopted by a statutory majority. This requirement could, by no stretch of imagination, be said to be directory; otherwise sub-section (2) may lose all its significance. Even giving of notice may be said to.be mandatory. But the question is whether failure to set out in the notice convening the meeting to move a particular resolution as a special resolution could be said to be mandatory. There'is no general rule for determining whether particular provision in a statute is a mandatory or directory. The court must look at the purpose for which the provision is made, its nature and intention of the legislature in making the provision, to (find out whether it is directory or mandatory. The use of the word 'shall' is not decisive of the matter. In Raza Buland Sugar Co. Lid. v. Municipal Board, Rampurl, the Supreme Court has in this connection observed as under :

"The question whether a particular provision of a statute which on the face of it appears mandatory-inasmuch as it uses the word 'shall' as in the present case-or is merely directory cannot be resolved by laying down any general rule and depends upon the facts of each case and for that purpose the object of the statute in making the provision is the determining factor. The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision, have all to be taken into account in arriving at the conclusion whether a particular provision is mandatory or ditctory."

26. In that case section 131(3) of the U. P. Municipalities Act came up for consideration. Section 131(3) is divided into two parts. The first part Ia' ys down that the Board shall publish proposals and draft rules along with a notice inviting objections to the proposals or the draft rules so published within a fortnight from the publication of the notice.'. The second part. provides for the manner of publication and that manner is according: to section 94(3). The condition of prior publication is always held to; be fflandatory. Yet, while considering the question of non-compliance with the, manner of publication as provided in. section 94(3), the Supreme Court observed that the requirement of p ublication is mandatory but. thdnner of publication appears to be directory and, so long it is substantially Complied' with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It wbtld thus appear that part of section 131(3) was held tobe mandatory.' the section may be mandatory. It cannot be gainsaid that clauses (b) and (c) of sub-section (2) are certainly mandatory. The notice of certain duration must be given and resolution must be adopted by a statutory majority. This requirement could, by no stretch of imagination, be said to be directory; otherwise sub-section (2) may lose all its significance. Even giving of notice may be said to be mandatory. But the question is whether failure to set out in the notice convening the meeting to move a particular resolution as a special resolution could be said to be mandatory. There is no general rule for determining whether particular provision in a statute is a mandatory or directory. The court must look at the purpose for which the provision is made, its nature and intention of the legislature in making the provision, to I find out whether it is directory or mandatory. The use of the word 'shall' is not decisive of the matter. In Raza Buland Sugar Co. Lid. v. Municipal Board, Rampurl, the Supreme Court has in this connection observed as under:

"The question whether a particular provision of a statute which on the face of it appears mandatory-inasmuch as it uses the word 'shall' as in the present case-or is merely directory cannot be resolved by laying down any general rule and depends upon the facts of each case and for that purpose the object of the statute in making the provision is the determining factor. The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision, have all to be taken into account in arriving at the conclusion whether. a particular provision is mandatory or detector."

27. In that case section 131(3) of the U. P:. Municipalities Act came up for, consideration. Section 131(3) is divided into two parts. The first part lays down that the - Board shall publish proposals and draft rules along with a notice inviting objections to the proposals or the draft rules so published. within a fortnight from the publication of the notice. The second part: provides for the manner of publication and that manner is according @to section 94(3). The condition of prior publication is always held to; be. Mandatory. Yet, while considering the question of non-compliance with then manner of publication as provided in. section 94(3), the Supreme Court observed that the requirement of publication is mandatory but. the manner of publication appears to be directory and, so long it is substantially complied' with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It Would thus appear that part of section 131(3) was held to be mandatory, (1) A.I.11. 1965 S.C. 895. M. While part of it was held to be directory. Approaching the subject from, this angle, it would appear that clause (a) of sub-section (2)@ a rs to be directory and not mandatory. The purpose behind making this provision appears to be to convey definite information about matters to be considered at,the ensuing meeting. The explanatory note to be annexed, will enable members to understand and. appreciate the object behind-the proposed resolution. The intention being a state of. mind in this case the state of mind of a corporate body is required to he set out for the benefit of the members of the corporate body. The question then is whether the requirement of setting out this intention in the notice could be said to he such mandatory requirement, the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its natural and the intention of the legislature and the general inconvenience that the failure to observe it is likely to cause to members all go to show that the requirement to set out the intention to move a resolution as special resolution could not be mandatory. The resolution ought to be adopted as special resolution and that requirement is mandatory. But the setting out of the requisite intention in the notice convening the meeting could not be mandatory but only directory. The absence of requisite intention in the notice was not likely to cause serious inconvenience to the members. Considering the provision in juxtaposition with clauses (b) and (c), it appears that the provision contained. in clause (a) is directory and it is sufficient if it is substantially complied with.

28. The notice convening the meeting to which the proposed scheme was annexed and various statements including the statement under section 393 (1)(a) annexed to it would give sufficient information to the members that they have to consider both increase' and reduction in share capital. That, in my opinion, would be substantial compliance with the provisions contained in sub-section (2)(a) and provisions contained in sub-sections (2)(b) and (2)(c) are strictly complied with. Therefore, the resolution adopted will have all the trimmings of a special resolution and it can be said with reasonable certainty that a special resolution at a general meeting as envisaged by clause (I A) of section 81 has been adopted. If such a resolution is adopted further issue of shares to persons other than the members of the company would be legal and valid even though it is done in contravefition of the provisions contained in section 81(1).

29. Incidentally it was contended that even if the special resolution was adopted at a general meeting as provided by section 81(1A), yet notice of that meeting was not given to the auditors as required by section 172(2Xiii) and the explanatory note as provided under section 173(2) was not annexed to the notice and, therefore, the resolution could not be said to have been adopted as a special resolution. Sub-section (3) of section 172 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting. Non-issue of the notice to the auditors, in my opinion, would be covered by sub-section (3) of section 172. As for the explanatory note as envisaged by section 173(2) it must be stated that the whole scheme annexed to the notice and production and cash flow statement and statement under section 393(1) would provide sufficient material as to be an adequate substitute for explanatory statement as envisaged by section 173(2) and, therefore, also, the proceedings of the meeting would not 'be invalid or proceedings would not be vitiated.

30. The above discussion would establish that the resolution for increasing 'I@the share capital of the company has been adopted in a general meeting of the members of the company and the resolution satisfies all the requisites of a special resolution. It would appear that the requirements of section 81(1A) of the Companies Act are fully satisfied and it would be lawful for the company to issue further ordinary shares as part of the scheme to both holders of ordinary shares and persons other than present holders of ordinary shares of the company but all of whom should be unsecured creditors of the company and further shares should be issued only in satisfaction of 50' per cent..of the claim of each unsecured creditor.

31. It was next contended that the issued and subscribed capital of the company would be raised by roughly Rs. 39 lakhs by converting 50 per cent. of the claims of the unsecured creditors into share capital and that would be in contravention of section 3 of the Capital Issues (Control) Act, 1947. It is indeed true that fresh capital cannot be issued without the permission of the Controller of Capital Issues as provided by section 3 of the said Act. The scheme envisages increase of capital by roughly Rs. 39 lakhs. Permission for issue of fresh capital is not obtained f rom the Controller of Capital Issues. However, that should not come in the way of the court considering the scheme because that part of the scheme can come into operation after obtaining the permission of the Controller of Capital Issues. That was the view taken by me in a similar situation' in In to New Commercial Mills Co. Ltd. "and I am informed that necessary permission b the Controller of Capital Issues was y obtained soon after the scheme was sanctioned by the court.

32. The second ground of attack of Mr. Yakil under the head of reorganization of share capital is that the company would be issuing fresh shares at a discount in contravention of section 79 and the court should not, therefore, sanction the scheme. The contention is entirely without merits. Section 79 provides that a company shall not issue shares at a discount except as provided in sub-section (2) thereof. Sub-section (2) provides that a company may issue shares at a discount if the issue is authorised by a resolution passed by the company in general meeting and sanctioned by the court and the resolution specifies the maximum rate of discount (not exceeding 10%, or such higher percentage as the Central Government may permit in any ,special case) at which the shares are to be issued and not less than one year has at th@ date of the issue elapsed since the date on which the company was entitled to commence business and the shares should be issued within two months after the date on which the issue" is sanctioned by the court. Mr. Vakil urged that 50 per cent. of the claims of the unsecured creditors are to be converted into shares; in other words, 50 per cent. of the claims of the unsecured creditors will be paid in the form of shares. Mr. Vakil had two fold objection to the issue of shares in this manner. The first limb of the argument was that, even according to the company, if the company is would; up, the unsecured creditors are likely to get nothing and their claims are merely chose-in-action which are entirely worthless in respect of which shares of Rs. 250 fully paid up : will be issued in proportion to the claims and the shares would thus be issued at a discount. The other limb of the argument was that the shares are issued otherwise than for cash because they would be in payment of claims which cannot be realized. Reliance was placed on a statement in the affidavit of the petitioner that in the event of the winding up the unsecured creditors are not likely to get anything looking to the assets and liabilities of the company and the claim of the secured creditors and preferential creditors. Undoubtedly there is a statement to that effect in the affidavit of the petitioner. Does it necessarily imply that if the shares are issued against the claim of the unsecured creditors, the issue is either at a discount or for no consideration ? It will be presently pointed out that in order to write off the loss of capital the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up and cumulative redeemable preference shares of Rs. 100 fully paidup to Rs. 2 5 fully paid up. After the reduction of the face value, the shares will be allotted and issued to the unsecured creditors in satisfaction of 50 per cent. of their claims. For every ordinary share of Rs. 250 issued, the claim of the unsecured creditors exactly to that extent will be wiped out. Unless an idle formality of the company paying Rs. 250 cash towards discharge of the liability of the unsecured creditor and then every unsecured creditor buying the shares of the company is to be insisted upon, it can never be said that the issue is either at a discount or for no consideration or for consideration otherwise than cash. In fact for every ordinary share of Rs. 250 issued, the liability of the company to the unsecured creditor would be proportionately decreased and wiped out. In other words, the company will get Rs. 250 for a share of Rs. 250. But it was urged that even a share of Rs. 250 of this company would not fetch anything in the market and when it is issued for a consideration of Rs. 250 to unsecured creditors the issue is based on mis representation. There again, I see no substance. A majority of unsecured creditors of the company, except very few represented by Mr. Vakil, have approved the, scheme and thereby agreed to accept the ordinary share of this company of Rs. 250 'as against. his claim of Rs. 250. There is no misrepresentation involved in such a transaction. The statement of the petitioner that in the event of the company being wound up the unsecured creditor is not likely to realise anything cannot be the foundation for a submission that as the claim is merely a chose-in-action and entirely,worthless it cannot provide consideration for issuance of the shares of the company nor could it be the foundation for a submission that the shares are issued for a consideration otherwise than cash or for no consideration. In this connection, it was lastly urged that, even though new ordinary shares issued at Rs. 250 would be fully paid up share, yet, in the event of the company being wound up, the liquidator would certainly inquire if anything was paid by the holder towards the share of Rs., 250 and in that event if his finding that the claim that was set off against the issue of shares was entirely worthless or of no value it would be open to the liquidator to treat such shareholder as contributory and to insist upon his contributing Rs. 250 into the assets of the company. Reliance in this connection was placed on In re Anglo-Aforavian Hullart' an jitizelion Railway Company I. In that case one Dent, a subscriber to the memorandum of association of a limited company, subscribed for 100 shares. The articles of association recited that Even,. who assigned the concession to the company, had agreed to cause fully paid up shares to be allotted all the persons subscribing the memorandum. Subsequently 4,000 fully paid up shares were issued to Even for work done by him for the company and Even requested the company to allot 100 shares out of the same to Dent. Subsequently the company was ordered to be wound up and the official liquidator placed Dent on the list of contributories for 100 shares and made calls upon him to pay the amount. The contention of Dent was that the shares allotted to him were fully paid up shares and, therefore, he was not liable to pay anything as contributory. His further contention was that even though he had subscribed for 100 shares, as the shares were allotted to him at the instance of Even and that the shares were fully paid up shares, he was not liable to pay as a contributory. Negativing this contention it was held as under..

" ......where a man, by subscribing to the memorandum of association contracts a liability to pay to the company the full amount of his shares, and by another contract agrees to receive a certain number of paid-up shares, so that he is to have two sets of shares, one on which he is to be liable, and one on which he is not to be liable, he cannot extinguish his liability on the shares for which he has subscribed by setting off against it that which, although it might be valuable to him, would not increase the capital of the company, and cannot therefore be assumed to be an equivalent, in money's worth, to the payment of this shares."

33. In fact the present case is simpler in which the company proposes to issue shares to unsecured creditors in satisfaction of its liability. Issue of one share of Rs. 250 fully paid-up to an unsecured crediotr would go to discharge an equivalent amount of debt owed by the company to the unsecured creditors. Such an arrangement brought about between the company and its creditors and members cannot be contested on hypothetical submission that the share has no value in the market nor the claim could ever be realised in the event of winding up. In fact the arrangement as proposed here is quite legal and valid that also becomes evident from the further observations from the judgment quoted above. The relevant observation is as under :

"The previous agreements between Even and the company are all before the court, and I find that in the particular agreement referred to, which is dated the 19th September, 1865, certain persons who are subscribers to the memorandum of association,being creditors of the contractor for work and labour done, or money advanced for preliminary expenses in respect of which he had a claim upon the company; and I do not say that the court would not give effect to such an arrangement. I must not be understood as deciding, to the prejudice of any of those persons, that if they were really creditors of the contractor for matters for which he was entitled to be paid by the company, they might not receive under those documents their payment in paid-up shares, and have those shares attributed to their subscription to the memorandum of association; the effect being, to discharge the company from an equivalent amount of debt, due from the company to the contractor.

This is exactly the position in the case before me. For each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor. Such arrangement, in my opinion, is quite legitimate and can be the subject-matter of compromise and arrangement between the company and its members and creditors and, if it is otherwise reasonable and fair, must be giiven effect to. At any rate, it cannot be thrown out on the one hand the share would fetch no price if iit is sold in the market and ther claim oof thhe creditor being a chose-in-action has a debatable value or is of no value. Reference in this connection may be made to the Ooregum Gold Mining Co. of India Lid. v. George Roper and Charles lottery IVallroth. At page 136, their Lordships have observed that a company is free to contract with', an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that under the Act of 1862 share may be lawfully issued as fully paid up for consideration which the company has to accept as representing in money's worth the nominal value of the shares. At another stage, it has been observed that not only may a share be allotted as fully paid up in respect of property, goods or services received by the company, but the controls will no. inquire in to the adequacy of the consideration, and certainly have required it to be proved that the consideration given was equivalent in cash value to the nominal another of the shares. Reference may also be made to Hilder v. Dexter 2. In that case, the company raised necessary working capital by issue of one-half of the share capital for cash,the other half being used f or the purpose of payment in shares credited as fully paid up for the concessions to be purchased by the company. Of course, after referring to the sections of the English Companies Act, the court reached a conclusion that a transaction of this nature is not prohibited; but the important observation was that in such a transaction the shares so issued could-not be said to have been issued either at a discount or for consideration other than cash. Reference was also made to Madanlal Fakirchand Dudhedia v. Shree Changdeo Sugar Mills Lid.' The subject-matter of dispute in that appeal before the Supreme Court was with regard to the agreement between the promoters and the company for paying them certain commission out of the net profits of the company. I fail to see how any portion of that judgment helps in deciding the controversy in the present case.

In view of the aforesaid discussion, in my opinion, the further issue of shares to unsecured creditors in satisfaction of their claims as provided in the scheme cannot be said to be issue of shares either at a discount or on misrepresentation or for no consideration or for consideration other than cash.

That takes me to the last attack under the head "reorganization of share capital", namely, that the scheme envisages reduction of share capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganization of the share.capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of reduction of share capital when it is to be carried out as part of the scheme of compromise and arrangement. Rule 85 which I have already referred to earlier, provides that when reduction of share capital is to - be effected as part of a scheme of compromise and arrangement, procedure prescribed for the same in the Companies Act and Rules should be carried out as stated earlier. This provision is made for very good reasons. It unmistakably indicates that reorganization of share capital can be brought about as part of the scheme of compromise and arrangement. But even if it is to be done as part of the scheme of compromise and arrangement this special provision in rule 85 enjoins a duty to carry out the procedure contained in section 100 onwards of the Companies Act. Ordinarily, reduction of share capital affects members of the company and it can be brought about', by a compromise or arrangement between the company and its members ignoring the creditors. Now, if reduction of share capital involves repayment of a part of paid up capital or extinguish or reduce the liability on any of the shares in respect of unpaid share capital it would adversely affect the creditors. Yet the creditors would have no voice in the matter. If the procedure as provided in section 100 onwards has got to be carried out the court could not sanction reduction of share capital unless the creditors are heard and provision is made for the creditors who object to the reduction. However, if the reduction of share capital does not involve either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up capital, the court can sanction the same without reference to the creditors. The creditors in such a case would not even be entitled to object to the proposed reduction as provided in section 102. In the instant case, admittedly, the reduction of share capital is by way of cancellation of share capital which is lost or is unrepresented by available assets. In such a case, creditors, even in a reduction simpliciter, are not entitled to object and it makes no difference if reduction is brought about by following the procedure prescribed in section 100 onwards or by way of a scheme of compromise and arrangement. Thus, if it can be done in a given set of circumstances as part of a scheme of compromise and arrangement, it has been properly done in this case aid while sanctioning the scheme ipso facto the reduction of share capital ought to be confirmed.

I am however prepared to proceed on the assumption that even if the proposed scheme of compromise and arrangement envisages reduction of share capital which is lost or is unrepresented by available assets the same cannot be done except by following the procedure specifically prescribed in section 100 onwards of the Companies Act. It is, therefore, necessary to find out whether the procedure therein prescribed has been carried out by the company or not. There is nothing objectionable in the company proposing a scheme of compromise and arrangement simultaneously proposing reduction of share capital and both can be considered and approved simultaneously. This is borne out by the observations in lit re Tala Iron and Steel Co. Lid. 1 In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having been taken under the Act in the manner laid down by the Act . for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alteration in the memorandum and articles of association. Negativing this contention, it was held that where the Act lays down express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure before applying for sanction under section 120, but where that is not so, the court can under section 120 sanction the scheme which alters the memorandum. In In re Kalni Cement and Industrial Co. Ltd. 2 a scheme of amalgamation was proposed between the said company and merger of all the cement companies to be named as Associated Cement Companies Ltd. Before this merger could be made it became necessary to reorganize the share capital and alter the rights conferred by the memorandum of association upon different classes of *******shareholders in the capital of the said company. This was proposed as a part of the scheme of amalgamation under section 153 of the Companies Act, 1913, which is Part' inateria with section 191 of the Companies Act, 1956. It is observed that the court under section 153 can sanction a scheme, even though it involves acts which, apart from such provisions, would be ultra vires the company; but this rule,is subject to the limitation that if the Companies Act contains express provision enabling the doing of any act in a particular way, the provisions of the enabling section, and not those of section 153, must be followed. Relying on this observation, it was urged that if there is provision for effecting reduction of share capital, it must be followed to the exclusion of section 391. Reference was also made to Bengal Bank Ltd. v. Suresh Chakravarthy 3, wherein it has been observed that a scheme involving reduction of capital must be carried out in accordance with the statutory provisions, relating to reduction. Reference was also made to Iisre Bharaii Central Bank Ltd. I wherein it has been observed as under :

...... where the Act expressly prescribes a special' procedure for reduction of capital, e.g., by section 55 and the several sections following it, a scheme involving a reduction of capital,.such as the one now before me does, cannot be sanctioned unless the procedure for reduction of capital has also been followed. Form No. 774 in Palmer's Company Precedents, 15th edition, Part 1, page 1264, shows that the reduction of capital and scheme may be considered by the shareholders at one and the same meeting and separate meetings (1) [1928]30 Bom. L.R. 197; A.I.R. 1928 Bom. 80. (2) [1937] 7 Comp. Cas. 348; [1937] 39 Bom. L.R. 675 (Bom.). (3) [1951] 21 Comp. Cas. 315 (Cal.). (4) [1949] I.L R. 2 Cal. 127. are not necessary and that the court may, by one and the same order, sanction a scheme in conjunction with reduction of capital, that is to say, under section 55 confirm the special resolution for reduction of capital, and, under section 153, sanction the scheme. If, however, the requirements of section 55 and other sections have not been complied with, the court may direct the application for sanction to stand over in order to enable the company to advertise the petition and otherwise comply with the requirements of the Act for reduction of capital, as was done in In re Cooper I."

34. It does appear well settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously', while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanct ion reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory has been substantially complied with.

35. Before one can find out as to what exact procedure should be followed for effecting reduction in share capital in a given case, it must be,'found out" how the company proposes to reduce the share capital. The share capital of a company can be reduced in three distinct ways as set out in section 100. The company for effecting reduction of share capital may extinguish or reduce the liability of any of its shares in respect of share capital not paid up; either with or without extinguishing or reducing liability on any of its shares cancel any paid up share capital which is lost, or is unrepresented by available assets; or with or without extinguishing or reducing liability on any of its shares, pay off the paid-up share capital which is in excess of the wants of the company. The reduction of the share capital can be effected by a spe@ial resolution at a general meeting which must be sanctioned by the court. Section 101 provides that, if the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital, the provisions therein prescribed shall have effect, subject to the powers of the court having regard to the special circumstance's in the case to direct that the provisions of subsection (2) shall not apply as regards any class or classes of creditors.

36. In the present case the share capital is not reduced by extinguishing or reducing the liability of any of the shares of the company, in respect of the capital not paid up or by paying off any paid up share capital which is in excess of the wants of the company. The reduction is effected by cancelling the paid up capital which is lost or is unrepresented by available assets. When the capital is reduced by cancelling any paid up share capital which is lost or is otherwise unrepresented by available assets, it is not inanlatory to follow the procedure prescribed in subsection (2) of section 101 unless the court so directs, The procedure prescribed under sub-section (2) of section 101 requires service of the notice of the petition filed for confirming the reduction of capital on every creditor of the company affected by reduction and who is entitled to object to the reduction. The procedure goes so far as to make provision by order of the court for payment to the dissenting creditors. That procedure is mandatory, where the proposed reduction involves diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital. That is not the case here. It is common ground that reduction is by way of cancellation of the paid up share capital which is lost or is unriper assorted by available assets. Unless, therefore, the court otherwise directs, the procedure prescribed under sub-section (2) of section 101 is not mandatory in this case. Therefore, in order to effect reduction of share capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned, 1 will hold that the company has given notice of 21 days' duration and the notice convening the meeting served upon the members disclosed the resolution that, while approving the scheme, the members should approve the reduction of share capital. Resolution approving the scheme has been passed with statutory majority. The only question would be whether the intention to move the resolution as special resolution in a general meeting to be attended by the ordinary shareholders and preference shareholders is set out in the notice convening the meeting or meetings. The reasons set out above while considering the case of issue and allotment of further share and the provision contained in section 81(1) and 81(1A) would mulatis mulandis apply here. 1 would, therefore, hold that the members of the company in a general meeting approved reduction of share capital by a special resolution which has been passed by statutory majority and while approving the scheme the members simultaneously approved, reduction of share capital by a special resolution. Therefore, the procedure prescribed in sections 100 and 101 has been carried out by the company,@, and section 102 would not be attracted and therefore while sanctioning the scheme the court can sanction the reduction of share capital. 1 would, the fore. hold that the mandatory procedure prescribed for reduction of t,@e share capital has been strictly complied with. Therefore, the company 40 carried out the, procedure prescribed for reduction of share capital and, the same can be simultaneously confirmed while sanctioning the scheme which I hereby prpose to do.

37. I may notice the last submission of Mr. Vakil under the head of "reorganization of share capital". A very feeble attempt was made to urge that the company cannot reduce preference share capital. Mr. Vakil approached the problem from a number of angles such as that by reduction or preference share capital without wholly extinguishing the ordinary share capital, the holders of preference shares who are entitled to preferential payment from the assets of the company in winding up are relegated to the extent of cancellation of part of preference share capital behind the ordinary share-holders which can never be done. It was also urged that an ordinary share-holder would be paid Rs. 250 from the assests of the company in winding up without paying full amount of Rs. 100 to the preference share holders which holder of the preference shares would be entitled to receive in the distribution of the assets of the company. In my opinion, there is no substance in this contention. The provision in the Companies Act at the relevant time showed that the company could have two kinds of share capital - ordinary share capital and preference share capital. Section 100 provides that subject to the confimation by the court, a company limited by shares, may be authorised, by its articles by a special resolution reduce its share capital in any way. Section 100, therefore, enables the company to reduce its share capital. The word "share capital" is a genus of which "equity and preference share capital" are species. If the company has power to reduce its share capital as provided in its articles of association, it is implicit therein that it can reduce both ordinary share capital as well as preference share capital unless specific provision to the contrary is made. Article 10 permits the company to increase its share capital and article 7 authorises the company to reduce its share capital by special resolution subject to confirmation by court and subject to the provisions of sections 100 to 104 of the Companies Act. Therefore, this company has retained to itself powers to reduce its share capital - meaning thereby that it can reduce both its ordinary and preference share capital - and there is no express provision to the contrary which says that the preference share capital cannot be reduced till the whole of the ordinary share capital is extinguished. Therefore, there is no substance in the contention that preference share capital can never be reduced.

38. Considering the matter from all the aspects, there is no substance in the contention that the reorganization of share capital as contained in the proposed scheme of compromise and arrangement cannot be given effect to. In my opinion, the company has complied with the provisions of law and reorganization of share capital can be confirmed as part of the scheme.

39. Re. Ground No. 5 - The next ground of attack of Mr. Yakil was that in the absence of proper directions for convening separate meetings of different ,classes of creditors and members of the company, appropriate meetings of distinct classes of members and creditors were not held and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. When a scheme of compromise and arrangement is proposed between the company and its creditors or any class of them; or between the company and its members or any class of them, the party sponsoring the scheme must move the court for proper directions by the judge's summons under section 391 for convening the meetings of different classes of creditors and members. It is at this stage that proper classification of members and creditors must be made. There is little difficulty in defining different classes of members. A formidable difficulty arises in deciding and defining different classes of creditors.

40. When the judge's summons is taken out for seeking directions for convening meetings a duty is cast on the company to put proper materials before the court so that the court may give proper directions for separate meetings of different classes of creditors and members. If the creditors and members are not properly Mssified and if the meeting of the proper class of creditors and members is not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed.

41. It is always a moot question what constitutes a class. Buckley on the Companies Acts, 13th edition, page 406, has observed that it is a formidable difficulty to say what constitutes a " class " of creditors. The' creditors composing the different classes must have different interests. When one finds a different state of fact existing among different creditors which may differently affect their minds and their judgment, they must he divided into different classes. "Class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd 1). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with communality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that can 'be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even if there are different groups within a class the interests of which are different from the rest of the class or who re to be treated differently in the scheme, such grou be a ps must treated as separate classes for the purpose of the scheme. Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interest and their claims are capable of being ascertained by any common system of valuation. The group styled as a class shoud ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical. This will provide rational indicia for determining the peripheral boundaries of classification. The test as stated earlier would be that a class must be confined to those persons whose rights are not so similar as to make it impossible for them to consult together with a view to their common interest.

42. In this case, the court gave directions on the judge's summons taken out under section 391(1). The directions were to the effect that separate meetings of ordinary shareholders, preference shareholders, secured creditors and unsecured creditors of the company should be called on the dates mentioned in the notice. The court, thus at the instance of the company, directed four separate meetings to be held. The ordinary shareholders themselves will form one class; so also the preference shareholders will form one class. In the case of each of them the compromise offered to each member belonging to the class is identical. Similarly, the meeting of the secured creditors is also properly directed to be held. The real difficulty arose with regard to the meeting of the unsecured creditors. Of course, Mr. Vakil has attempted to urge that even in respect of the meeting of preference share-holders, directions are not proper. But 1 do not see much substance in it for the reasons to be presently mentioned. So also, 1 do not see much substance with regard to the directions given for holding the meeting of secured creditors. It was very vehemently urged that there was a conglomeration of persons with heterogeneous interest who were grouped together in the class of unsecured creditors. Generally speaking the creditors of the company should be divided into three different classes, viz., secured creditors, preferential creditors and unsecured creditors. The workers of the company each to the extent of the first Rs. 1,000 of his claim in winding up, would be a preferential creditor and indisputably they would form a separate and distinct class. They were grouped together with other unsecured creditors.

43. I shall separately deal with the objection in respect of each meeting raised by Mr. Vakil.

44. As per the directions given by the court, a separate meeting of ordinary shareholders of the company was convened. In my opinion, equity or ordinary shareholders each holding fully paid shares of the company will form a separate class by themselves. They will also form a separate class in view of the identical compromise offered to their. It was however urged that there might be some creditors who may also be shareholders and their interest m,ill conflict with the interest of shareholders who are not creditors and they should form a separate class. It was also urged that the managing director, Linubhai Banker, and ex-director, Gopaldas P. Parikh, should, form a separate class as also Indequip group of companies should also form a separate class. At page 244 of the affidavit in reply, the shareholding of Linubhai and his relation, Gopaldas P. Parikh, and the company in which Gopaldas P. Parikh is interested has been set out and it is stated that out of the total of 788 ordinary shares, 424 are held by these persons and they form a separate group. It is difficult to understand how the interest of these shareholders is different from the other shareholders. But it was urged that Indequip group of companies are very big creditors of the company and they will be supporting the proposal for converting half of their claim in the share capital so as to clamp down their octopus hold. on the company and therefore they would be vitally interested in supporting the scheme and should form a separate class. Again, 1 see no substance in this contention. The compromise offered to the ordinary shareholders, whether creditor or not, is the same as any other shareholder. Therefore, in my opinion, the ordinary shareholder will form a separate class and proper directions in this behalf are given.

45. For the reasons which are mentioned above, in my opinion, there is no substance in the contention that all the preference shareholders will not form a class by themselves. In fact all the preference shareholders of the company would form a separate and independent class and their meeting is properly convened.

46. The Union Bank of India and the Regional Provident Fund Commissioner as representing the Central Board of Trustees are secured creditors of the company. They will certainly form a class. But it was urged that Indian Electro' Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., 'lndequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders became secured creditors by virtue of charges created in their favour by the decrees obtained by them against the company and, therefore, they would be secured creditors and should have been grouped with the Union Bank of India and the Regional Provident Fund Commissioner. When the meeting of the secured creditors was held on October 6, 1968, seven creditors were present including the Union Bank of India, the Regional Provident Fund Commissioner and the aforementioned 5 creditors. The chairman has reported that at the commencement of the meeting the bank took objection to any other creditor attending the meeting on the ground that there was no other secured creditor of the company holding Pari Passu charge on the - assets of the company with the bank and this objection was submitted in writing to the chairman. As on that date the charges created by the decrees in favour of the aforementioned 5 creditors were subsisting, obviously those five creditors would be secured creditors. Before the chairman could decide the objection raised, it appears that all the secured creditors who were present requested the chairman to direct that in view of the objection raised, and in view of the statement made by the representatives of the Indequip group of companies, which, would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Pvt. Ltd., that they would attend the meetings of secured and unsecured creditors but their votes in number and in value should be taken into consideration at the meeting of the unsecured creditors subject to the approval of the court. A direction to that effect has been given by the court. As a matter of fact, the votes of the aforementioned creditors, who at one stage claimed to be secured creditors, have not been taken into consideration at the meeting of secured creditors in view of the directions issued by the court. It should be so in view of certain later developments. The aforementioned five creditors have relinquished the charges created in their favour by the decree as also the charges are not registered as required by section 126 of the Companies Act, and are not now likely to be registered and they have become void. Obviously, therefore, the aforementioned 5 creditors would be unsecured creditors and would certainly not be entitled to attend the meeting, of the secured creditors. The report of the chairman also shows that they did not vote at the meeting of the secured creditors and, in my opinion, they have been rightly grouped with the unsecured creditors. The Union Bank of India and the Central Board of Trustees. represented by the Regional Provident Fund Commissioner are undoubtedly secured creditors of the company and they would form a single class and their meeting is properly convened.

47. That takes me to the meeting of unsecured creditors convened under the directions of the court. Mr. Yakil took serious exception to grouping together all the workmen of the company and other unsecured creditors some of whom may be suppliers of goods and some of whom may be depositors or persons who had advanced cash loan to the company, in one class. There is considerable force in this contention of Mr. Vakil. In the affidavit filed by Chandulal Hiralal Banker, at page 208 he has stated that in the context of a scheme of compromise or arrangement between the company and its creditors, the creditors of a company can be divided into at least three broad classes-secured creditors, unsecured creditors and preferential creditors. In Palmer's Company Law, 21 st edition, at page 700, it is observed that creditors can be divided into three categories (which may themselves overlap) of preferential creditors, secured creditors and unsecured creditors. It is further observed that unsecured creditors will normally form a single class except where some of them are to be treated in a manner different from the rest and have different interests which might conflict. It is unfortunate that the company did not take proper directions with regard to the convening of the meeting of unsecured creditors. In the class of the unsecured creditors, the workers of the company who, as stated earlier, would be preferential creditors, have been grouped together with other unsecured creditors. The only defect appears to be in grouping together the workers who are preferential creditors of the company with other unsecured creditors. In respect of the workers different compromise is offered while to the remaining unsecured creditors a distinct compromise is offered. That will also make them two distinct and separate classes. If the meeting is not properly convened, the scheme approved at such. meeting cannot be sanctioned. If two distinct classes of creditors are grouped together in one class and if there is no material for finding out who belonged to one class and what was the result of their voting and who belonged to the different and distinct class and what was their voting, the only course open to the court would be to direct separate meetings of those two classes. But if the report of the chairman provides ample material for finding out the number of preferential creditors who attended the meeting of unsecured creditors and what was the number and value of their votes then it can be separated from the number and value of the votes of the remaining unsecured creditors and the court may proceed to examine the result of the voting as if two separate meetings are called. A view was taken by me in the case of Anant Mills Ltd. If any creditor present at the said meeting would have said that the presence of the distinct class of creditors was either oppressive or not conducive to their deliberations all such objections could have been examined on merits. No such objection is raised. The defect as far as the meeting of unsecured creditors is concerned, appears to be that the preferential and other unsecured creditors have been grouped together. The workers are preferential creditors' in winding up but not otherwise who would form a separate class. Instead of remitting the scheme to separate meetings of unsecured and preferential creditors in my opinion, there is ample material in the report of the Chairman from which the votes in number and value representing the preferential creditors can be separated from the votes and value of the votes representing the other unsecured creditors. As this is quite possible and which would be worked out while considering the ground (1) Unreported. of attack that the scheme is not approved by a statutory majority in each class, it is not necessary to direct a separate meeting of preferential creditors and other unsecured creditors. Mr. Yakil, however, urged that in fact there should have been seven separate meetings of persons who were grouped together in the meeting of unsecured creditors, viz. (a) workers of the company who would be preferential creditors; (b) Linubhai Banker & members of his family; (c) Indequip group of companies; (d) Manubhai Banker & members of his family; (e) depositors and persons who have advanced cash loan and supplied stores and cotton to the company; (f) Asia Electric Company and (g) shareholders who are also creditors and those who are not. It is undoubtedly true that the workers of the company as preferential creditors would form a 'distant and separate class. But the depositors who had supplied goods and cotton to the company on credit would not form a separate and distinct class' This is so because identical compromise is offered to them. Similarly, Linubhai Banker who was the managing director and reimburse of his family anwanubhai and members of his family who was in active management prior To January 1, 1966, who are creditors of the company, would not form a separate and distinct class. The compromise offered to them is identical with the other unsecured creditors. Asia Electric Company need not form a class because no compromise is offered to it. The Union Bank of India has agreed to pay Asia Electric Company out of the sale proceeds of the blading system supplied by the said creditor. The shareholders who are creditors are in no way in a distinct class from the shareholders who are not the creditors of the company. In my opinion, therefore, the classification suggested by Mr. Vakil is neither logical nor is based on any intelligible differential, and has no rational nexus to the objects sought to be achieved while approving the scheme of compromise and arrangement. The broad division as stated by me earlier, and keeping in view what constitutes a class, would provide better and distinct classification. The court has ample material to find out from the report of the chairman the number and value of votes in respect of the two distinct classes of creditors grouped together and it would certainly be open to the court to do so. Therefore, there is no substance in the contention of Mr. Vakil that appropriate meetings of distinct classes of members and creditors were not held; and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different clakses of creditors and members. The contention must be negatived.

48. Re. Groittid No. 6. - The next ground of attack is that a proper statement as required by section 393(1) and as directed by the court's order dated 26th June, 1968, in Company Application No. 23 of 1968 was not sent along with the notice convening the meetings of members and creditors of the company.

Section 393 reads as under :

"393. Information as to cotitprontises or arraiigemels with creditors and inembers. -

(1) Where a meeting of creditors or any class of creditors, or of members or any class of members is called under section 391, -

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.

(3) Where& notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is ' in default, shall be punishable with fine which may extend to five thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company..

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treaurers, manager or trustee for debenture-holders, to supply the necessary particulars as to his material interests.

(5) Every director, managing director, managing agent, secretaries and treasurers or manager of the company, and every trustee for debeture-holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the prposes of this section; and if he fils to do so, he shall be punishable with fine which may extend to five hundred rupees."

49. One of the directions which the court gave while directions for convening meetings in Company Application No. 23 of 1968, was that the advocate for the company should file in the court within five days a form of advertisement, notice and the statement required by section 393 to accompany the notice to be addressed to members and creditors of the company. The first question is what should be the contents of the Statements required by section 393. the statement under section 393 must contain the terms of the compromise and arrangement simultaneously explaining dits effect on certain interests. It must particularly contain any material interests of the directors, managing director, managing agent, secretaries and treasurers or manager of the company whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from on the like interests of other persons. The whole of the scheme of compromise and arrangement was annexed to the notice convening the meeting. the statement as required by section 393 annexed to the notice, does explain its effect on the interest of the creditors and members. At the relevant time, there were no managing agent, secretary, treasurer or manager of the compnay. Therefore, the company was obliged to disclose material interests of the directors and managing director in their capacity both as director and managing director and also as member or creditor of the company and the effect of the scheme on their interests only in so far as that effect is different from the effect on the like interests of other persons. The scheme directly did not have any effect on the interests of the directors either as director or as a member or creditor in a manner different from the manner in which the scheme would have effect on the interest of other creditors and members. The interest of the managing director as creditor of the company is set out in paragraph 7 of the statement and it may be stated that the effect of the scheme on his interests is indentical as the effect on the interest of other creditors and members of the company, if the scheme is sanctioned. Therefore, a mere perusal of the statement annexed to the would show that it conforms with the requirement set out in section 393(1)(a). The essential requirement is that the creditors and members who are to assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their as members and creditors. As the whole of the proposed scheme was annexed to the notice, anyonis having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company. Therefore, the first part of clause (a) of section 393(1) is fully complied with. In respect of the latter part of clause (a), it must he stated that the material interest of director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of the scheme on their interest will have to be disclosed to the extent that effect differs from the effect on the like interest of other creditor and member that would be made by the scheme. If there is no difference, it is not essential that the effect of the scheme on the interest of director and managing director and others need be set out in the statement. In order that the statement accompanying the notice may conform to the requirement of section 393, what should be its content has been considered by Miabhoy J. (as he then was) in In re Sidhpur Mills Go. Lid. 1 It has been observed in this connection as under:

"In my judgment, the true legal position is that it is the duty of every officer of the company and the company to acquaint himself or itself with the material interests of every other concerned person, such as the director, managing partner or manager of the company, and to mention that interest and to explain its effect in the statement. That is the primary duty which has been cast upon the concerned persons ......... In my judgment, therefore, the true construction of clause (a) to section 393 of the Indian Companies Act is that it requires the material interests which every person concerned possesses not only in the company, but also in the scheme, to be stated by all the other persons concerned and if the latter part of clause (a) applies, then, the effect thereof must also be mentioned."

50. After referring to the aforementioned observations Mr. Vakil raised four-fold objection to the statement which was annexed to the notice. Before 1 refer to these objections, the recitals made in the statement may be briefly : referred to. In paragraph (1) it is mentioned that he copy of the scheme of compromise and arrangement is annexed to, the notice. In paragraph (2) it is stated that the company is in serious financial difficulties and as against the total assets of Rs. 1,26,54,147 its present liabilities are to the tune of Rs. 1,30,89,493. In paragraph (3) it is stated that several winding' up petitions are filed in the High Court and as the company is unable to, meet with its liabilities, the court in all probability may direct the winding up of the company. In paragraph 4 it is stated that if the, company is ordered to be wound up and is sold as a running concern, it may not fetch more than 17 to 20 lakhs, of (1) [1961] 2 G.L.R. 601; A.I.R, 1962 Guj. 305, 315@; C-111 rupees, as diselosed by the experience of selling Anant Mills of Ahmedabad and Rajasthan Mills. It is further stated that prior to the present management, the company was being managed by the managing agency firm of Hiraial Trikamial & Sons and when the board of directors took over the management of the company, there were accumulated losses of Rs. 62,43 lakhs. It is also stated that the machinery of the company is old and worn out and requires renovation and looking to the heavy losses, it is not possible to carry out renovation. In paragraph (5) it is stated that, in the circumstances, the board of directors have proposed, a scheme of compromise and arrangement. In paragraph 6 it is stated that the share capital of the company is to be reduced and portion of dues of the creditors is to be converted into share capital and balance is to be frozen for a period of two years, whereafter it would be paid by installments and, by this process, the company would be able to pay up its dues by 1970. In paragraph 7 it is stated that the managing director is a creditor of the company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent. of his dues into share capital and has agreed to the payment of the balance by yearly installment of Rs. 38,000 after 1972. In the last paragraph it is stated that the company proposes to scrap Unit No. 11 and the price realised on the sale of the scrap would provide some working capital and also enable the company to pay partly some of the dues of the creditors as detailed in the scheme. This statement is signed by Mr. R. L. Dave, in his capacity as Chairman appointed for the meeting, and Additional Registrar, High Court of Gujarat, Ahmedabad.

51. The first objection of Mr. Vakil to this statement is that the statement is not settled by the Registrar as required by the order of this court dated 28th June, 1968. The order on the judge's summons seeking directions for convening meetings under section 393(1) is to be drawn up in Form No. 35. The order in fact is drawn up in Form No. 35 and one of the directions thereby given is that the advocate for the company should file in the court within the prescribed time, the draft form of advertisement, notice and statement to accompany the notice and the same should be settled by the Registrar of the court. It was urged that the statement may have been submitted by the company but it is not settled by the Registrar. It was urged that specific contention has been raised in the affidavit in reply that the statement is not settled by the Registrar and there is no denial thereof and that the perusal of the statement would show that, at any rate, it is not settled by the Registrar. There is no substance in this contention. Rule 2(11) of the Companies (Court) Rules, 1959, defines " Registrar " to mean, in the the High Court, the Registrar of the High Court, and includes among others such other officer as may be authorised by the Chief Justice to per form all or any of the duties assigned to the Registrar under the Rules.

52. The Honourable Chief justice has authorised the Additional Registrar of this High Court to perform all or any of the duties assigned to the Registrar under the Rules. Therefore, the Additional Registrar will have all powers conferred on the Registrar under the Rules. In this ' case Mr. R. L. Dave who was appointed Chairman of the meeting is Additional Registrar of the High Court and to whom the work under the Companies Act is assigned by the Honourable Chief justice and, therefore, the Additional Registrar would have to perform the functions of the Registrar and, therefore, he would have to settle the statement. When the statement is signed by the Additional Registrar in his said capacity, it can be said that he has settled the same. Mr. Vakil, however, urged that the statement appears to have been prepared by the company and the Additional Registrar has not applied his mind to the contents of the statement with the result .that false and misleading statements have crept into the statement and it is a case of non-application of mind. In fact direction given by the court shows that the statement in the first instance has to be f arnished by the advocate of the company and there is nothing on the record to show that it was not furnished by the advocate of the company. The Additional Registrar having signed it would mean that he has settled the same. Therefore, the direction has been properly complied with.

53. The next objection of Mr. Yakil was that this statement under section 393 ought not to have been signed by the Additional Registrar as Chairman of the meeting, because the Additional Registrar is an officer of the court and the statement issued under his signature was likely to convey a wrong impression to the members and creditors that the factual averments made in the statement had the sanction of the court. It is true that the Additional Registrar was not well advised in signing this statement. When a statement containing factual" averments is signed by an officer of the court judgment of the recipient of the statement was likely to be influenced by the fact that the factual averments made in the statement have been sanctioned by the court. Therefore, such a statement ought not to have been signed by the Additional Registrar. But the mischief which was likely to be perpetrated by this statement having been signed by the Additional Registrar has been nullified by the direction given by the court in Company Application No. 55 of 1968 filed by Chandulal Hiralal Banker on behalf of his principals praying for a direction that the Additional Registrar and - Chairman appointed to preside over the meetings! should withdraw the statement issued under his signature and to send a@ fresh statement as required by section 393. A further prayer was made that till the said company application is disposed of the Chairman may be resttained from holding meetings.' While rejecting this application Mehta J. on 30th September, 1968, gave an oral direction: that the Chairman at the inception of each meeting should inform the creditors and members as the case may he present and attending the meeting that even though the statement sent to them is signed by him he does not vouchsafe the truth of the factual averments made therein and no inference should be drawn from the. fact that the statement is signed by the officer of the court. He was further directed to explain that contents of the statement were not either true to his own knowledge or were not the view of the court; but they were factual averments made and view expressed by the sponsors of the scheme. Under the directions of Mehta J. the Chairman made this clarification at, the inception' of each meeting. He has so stated in his report submitted to the court. Therefore, no damage is done by the error committed by the court officer in signing the statement annexed to the notice convening the meeting.

54. It was next contended that this statement contained various false and misleading statements and further contained some averments and recitals. for carrying on propaganda in favour of the scheme. It was urged that while complying with the statutory requirements, the company utilised the opportunity and the forum for carrying on propaganda in favour of the scheme so as to prejudicially influence the judgment and decision of the creditors and members who were to attend the meetings. It was urged that material facts were suppressed with ulterior end in view of obtaining approval of the scheme by the members and creditors. Mr. Vakil took serious exception to the averments in the statement that Anant Mills and Rajasthan Mills of Petaled have been sold for an amount varying from 1250 lakhs to Rs. 20 lakhs. 1 fail to see how exception can be taken to these averments because it is not suggested that these facts are untrue. It was further contended that the averments in the statement that the previous management was responsible for the loss suffered by the company to the tune of Rs. 62'43 lakhs (sic). Even Mr. Vakil could not urge that the, statement as a fact is not true. In fact there is good evidence to show that the company had suffered loss to that extent till January 1, 1966, when the management changed. But it was urged that further loss suffered by the new management when they came to power from January 1, 1966, ought to have been set out. The omission to make certain statement, not required by law to be made, could not vitiate the statement nor the maker of the statement could be charged with making false or misleading statement on that account. It was then urged that the interest of family members of the managing director in the company as well as the effect on such interest of the scheme have not been set out in the statement. Section 393 only requires that the statement should contain material interest of the managing director and others set out in the section and not of the friends and relations of the managing directors and the other concerned persons: vide In re Sidhpur Mills Co. Ltd.' But Mr. Vakil (1) (196112 G.I.R. 681; A.I.R. 1962 Guj. 305. 49 took a very serious exception to the averment contained in the last para. of the statement that the price relived on the sale of the scrap of Unit 11 of the mills would provide some working capital. It was very vehemently urged that the cash-flow statement annexed to the scheme shows that the company expects to realise Rs. 14 lakhs by sale of the scrapo of Unit No. 11 of the company's mills and it further shows that Rs. 14 lakhs are to be forthwith paid to the secured creditors of the company, namely, Union Bank of India and Central Board of Trustees of the Provident Fund. It is true that the amount realised by the company by sale of scrapping of Unit No. 11 is to be appropriated towards the discharge of the liability of the company to its secured creditors, namely, Union Bank and the provident fund authorities. It is true therefore that no part of it would be available for running the mills. But the cryptic statement made the last para. of the statement annexed to the notice would go to show that if the liability of the company to its secured creditors is discharged the company would be able to arrange for cash in view of the reduced liability of the company from other sources for running the mills. The statement made in paragraph 8 has to be read in this background. There is no suppression of the fact that the amount realised by sale of the scrap is to be utilised towards discharging the liability because it is so stated in the cash-flow statement annexed to the scheme. In my opinion, therefore, there is no substance in the contention that the statement contained false and misleading statements of facts with a view to obtain the approval of the scheme of compromise and arrangement or it prejudicially influenced the judgment of creditors and members.

55. The last objection of Mr. Yakil under this head of attack i 's that the effect of the scheme on the material interests of directors and managing director has not been clearly set out in the statement. It was strenuously urged that annexing of the statement as required under section 293 of the notice-convening meeting is obligatory and absence of it would vitiate the proceedings of the meeting. It was further urged that the statement must contain in clear and unambiguous terms the effect of the provisions of the scheme on the interest of the directors and managing director so that the members and creditors may have full information about the change that would be brought about by approving the scheme, and which change any influence their judgment in the matter. It is undoubtedly true that the company is under an obligation to set out the interest of the directors and managing director in the company and the effect on their interest by the scheme-more particularly when the effect is likely to 'be different from the effect on the interest of like nature on other creditors and shareholders. The question then is whether the interest of the directors and managing director in the company and the effect of the scheme on such interest has 'been set out in the gtatementor not. It may at once be stated that the interest of the directors and managing director in the company has been set out in the statement. The latter part of clause (h) of section 393(1) is required to be complied with only if the effect of the scheme on the interest of the directors and managing director is likely to be different from the effect of the scheme on the like interest of members and creditors in.,the company. If the effect is to be the same in respect of both categories of persons, in my opinion, it is not obligatory on the company to set out the effect in the statement. But it was urged that, in this case, the effect of the scheme on the@interest of the directors and managing director.,is going to be of such a revolutionary character that it should have been set out in the statement. To illustrate this point, it was urged that Gopaldas P. Parikh is virtually the owner of the companies, namely, Indequip Ltd., Indial" Electro Chemicals Private Ltd., Dyestuffs and Chemicals Private Ltd. and these three companies are creditors of the mills company to the tune of more than Rs. 42 lakhs. . It was then pointed out that under the scheme 50 per cent. of their claim would be converted into share capital. Therefore, the effect of the scheme in the words of Mr. Vakil would be that Gopaldas P. Parikh as virtual owner of the three aforesaid companies would have shareholding in the mills company to the tune of Rs. 20 lakhs and, therefore, thereby Gopaldas P. Parikh would establish his octopus hold on the mills company to the detriment of other creditors and shareholders. It was urged that the interest of Gopaldas P. Parikh should have been set out in the statement. But I am afraid, the argument has its genesis in the obsession of the contesting creditors with Gopaldas P. Parikh which never remained concealed throughout the hearing of this petition. At the relevant time when the scheme was sponsored, Gopaldas P. Parikh was not the director of the company. He had long ceased to be director of the mills company. If he was neither the director nor managing director, his interest was not required to be disclosed in the statement. But it was urged that Anil Gopaldas Parikh, son of Gopaldas P. Parikh, was a director of the company at the relevant time. That. of course, is true. But Anil Gopaldas is merely a director and he had no other interest in the mills company and, therefore, there was nothing to be disclosed in respect of his interest and the effect of the scheme on his interest. The interest of the managing director, Linubhai Banker, is disclosed and the effect of the scheme on his interest is also disclosed and it can be said with reasonable certainty that the effect on his interest is in no way different from the effect of the scheme on the interest of other creditors and members. Therefore, there is no substance in the allegation that necessary disclosure as required by section 393(1)(a), later part, has not been made.

56. As a second limb of the argument, it was urged that the production programme, annexed with the estimated production statement, and cash flow I statement, annexed to the scheme, contained misleading and incorrect information. I need not dilate upon it because I would have to advert to this submission when I consider the feasibility of the scheme.

57. The statement under section 393 should be drawn up as to convey to the members and creditors sufficient information so that they may be able to bring to bear upon the scheme their intelligent judgment. They must have information which would help in considering the scheme on its own merits. In my opinion, in this case, the scheme as a whole as was annexed to the notice along with various statements and statement under section 393 gave the necessary information to the creditors and members so that they may be able to intelligently deliberate upon the scheme keeping in view the commercial feasibility of the scheme and on the material supplied they were in a position to decide intelligently whether the scheme should or should not be approved. It is of course true that some further information was sought at the meeting and Mr. Surottam Hatheesing, the Chairman of the company, till the date of the appointment of the provisional liquidator, was unable to, furnish that information. But the information sought was not of such a vital character that non-availability of it would have come in the way of the creditors and members deliberating upon the scheme. Therefore, considering the matter from all the. aspects, in my opinion, the statement as required by section 393 was annexed to the notice convening the meetings and the provisions of section 393 have been duly complied with.

58. Re. Ground No. 7. - The next ground of attack was that the meetings of creditors and members were conducted in an irregular manner and, therefore, the votes recorded at such meetings cannot be relied upon to show that the scheme has been approved by the requisite majority of creditors and members. In Company Application No. 23 of 1968, the court gave directions for convening separate meetings of ordinary and preference shareholders and secured and unsecured creditors. The court also gave a direction that the notice of the meeting should be advertised and a notice convening meeting showing time, place of meeting, together with the copy of the proposed scheme of compromise and arrangement and statement required under section 303 and form of proxy, should be served by a prepaid letter under certificate of posting to each ordinary and preference shareholder and individual notice to the creditors whose debts-exceeded Rs. 1,000. individual notices to the creditors having a claim of less than Rs. 1,000 was dispensed with. These directions have been complied with and an affidavit to that effect has been filed by the chairman who presided over the meetings. Requirements for convening proper meetings are contained in rules 69, 70, 73, 74, 75 and 76. The requirements of these rules appear toT have been : properly complied with. Mr. Vakil had a four-fold objection to the procedure adopted by the chairman at various. meetings. The first objection is that the management failed to furnish relevant information to the creditors and members at the meeting with the result that the creditors and members had not enough information to intelligently deliberate upon the proposed scheme. It was urged that the chairman did not insist upon the management to furnish relevant information sought for by the members and creditors and, in the absence of the information, it cannot be said that' the creditors and. members were fully apprised of the various ramifications of the scheme and brought to bear upon the subject their intelligent judgment. At the meeting of the ordinary shareholders of the company the question was put to Mr. Surottam Hatheesing as to who were the directors of the company who had sponsored the scheme to which reply was given, that the scheme was sponsored by the board of directors consisting of L. H. Banker, S. P. Hatheesing, P. H. Raval and Shri N. M. Soparkar, the last two being Government-nominated directors.. Thereafter, further questions were put by the members relating to the working of the company and particularly as to the assets and liabilities. of the company. Mr. Hatheesing gave replies generally dealing with the topic but he further stated that detailed figures could not be given as the provisional liquidator is in charge of the company. Thereafter some questions were put in writing and the chairman then requested Mr. Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his inability to reply to the questions forwent of detailed information, Unfortunately questions given in writing are not annexed to the report of the chairman. It is, therefore, difficult to find out what were the questions put and what would be the effect of the failure of the chairman of the company to give replies to the same. However, no objection appears to have been taken by the ordinary shareholders that, in the absence of information sought for, they would not be able to consider the scheme in its various aspects. Exactly similar thing happened at the meeting of the unsecured creditors. The question is whether the information sought for both by the ordinary shareholders and unsecured creditors was of such a vital nature as to affect the' deliberations of the ordinary shareholders and creditors on the merits of the scheme. The first information sought was as to the assets and liabilities of the company and the exact figures have been set out in the statement annexed to the notice. Therefore, the information in this respect is certainly given both to the members and creditors. In respect of the other information sought, it is unfortunate that the exact nature of the information sought is not available and, therefore, it is not possible to come to the conclusion that in the absence of such information the creditors and members were unable to deliberate upon the scheme. The creditors and members attending did not consider the information vital enough in the absence of which they could not consider the scheme on merits. If that was the situation, they would have declined to approve the scheme. The scheme is approved except by very few creditors whose opposition is grounded on factors entirely irrelevant to the merits of the scheme and to which 1 would refer at a later stage. It is undoubtedly true that the creditors and members called upon to, deliberate upon the scheme of compromise and arrangement should have full and fair knowledge of all the relevant facts on which they can come to an intelligent decision (vide In re Bharati Central Bank Ltd. 1). But, in my opinion, in the facts and circumstances of this case, it is not possible to accept that the members and creditors could not bring to bear upon the scheme an intelligent judgment for wani of relevant information.

59. The second limb of the argument was that the amendments which had been proposed to the original scheme by the secured creditors, namely, Union Bank of India and Central Board of Trustees of the Provident Fund, have not been adopted according to the correct legal procedure. The scheme as originally proposed,offered a compromise to the Union Bank of India-secured creditor of the company-undertaking to pay arrears of provident fund dues to the Central Board of Trustees-the other secured creditor-by monthly instalments of Rs. 40,000. At the meeting of the secured creditors, the compromise offered to 'both of them have undergone a change. The bank agreed to accept the scheme on its own terms as suggested in the anflexure to its letter dated 8th October, 1968. It must be confessed that there is a radical change with regard to the mode of payment to the bank. The amendments proposed by the bank are at page 154 of the record and the amendments proposed by the Central Board of Trustees are at page 160 of the record. The adjourned meeting of the secured creditors was held on 8th December, 1968. At this meeting, the amendments proposed by the bank were considered by the sponsors and they were accepted. The amendments proposed by the Central Board of Trustees for Provident Fund have been accepted both by the bank as well as the sponsors and they have been incorporated in the final, scheme submitted to the court for its sanction. The contention of Mr. Yakil is that unsecured creditors and members approved the scheme as originally proposed and the amendments made in the scheme 'in respect of the compromise offered to the secured creditors have not been considered by the unsecured creditors as well as by the members of the company. According to Mr. Yakil if a comprehensive scheme of compromise and arrangement is offered to various classes of members and creditors and if some class of members and creditors approved the comprehensive scheme and if subsequently in respect of. one other class the scheme is modified at the suggestion of the other class. the modified scheme should again be submitted to the remaining class of 'creditors and shareholders. This approach to the problem ignores the very structure of section 391 of the Companies Act. Section 391 permits the company or anyone proposing the scheme to offer comprOmise between the company and its members or any class of them, and between the company and its creditors or any class of them. In other words, there can be a compromise between a. company and one class of its creditors or members and that compromise can he arrived at a@ between the company and that class of members or creditors only and it 'need not be approved or ratified by other class of members or creditors not affected by the same. The compromise has to be considered by the class which is to be affected by the compromise and to which the compromisers offered. Requirements of section 391 do not imply that every compromise between a company and one of its class of creditors or members should be approved and ratified by any other class before, it can be sanctioned by the court. It is in section 391 that the company may offer compromise to one of its class of members or creditors and approval by statutory majority of that class alone is necessary before it can be submitted for sanction of the court. The court while according its sanction to such a scheme may consider whether this compromise affects any one other than the class to which it is offered. If it does not, it is not at all necessary that such a compromise should be ratified and approved by a statutory majority by other class of creditors and members. If this is the correct interpretation of section 391, in my opinion, it furnishes a complete reply to the contention of Mr. Yakil. The company in this case has two classes of members and three classes of creditors. They are.. ordinary and preference shareholders and secured creditors, preferential creditors and unsecured creditors. The company has offered compromise to each class and, in my opinion, even though the compromise is incorporated in a comprehensive scheme, in fact, each class will have particularly to consider and if thought fit to approve that part of the compromise which is offered to it. In the process that class may deliberate upon the entire comprehensive scheme of compromise and arrangement, then it would be open to that particular class to reject the compromise offered to it, if it felt that in comparison to other class of creditors and members it has not been given a fair deal or in view of the compromise offered to other class of creditors and members it may consider the compromise offered to it as unfair and disapprove the same. But even if the comprehensive scheme of compromise and arrangement is offered for consideration to various classes of creditors and members. each class will have to consider and deliberate upon the compromise offered to it though in the process it may consider the feasibility of the whole scheme. But the requirements of law will be satisfied if each class deliberated upon and approved that part of the compromise offered to it. In the present case, ordinary shareholders were offered a compromise by which the nominal value of the ordinary share was to be reduced and the same was the case with regard to the preference shareholders. Excluding the preferential creditors, namely, workers of the company, other unsecured creditors were offered a compromise that 50 per cent of their claim will be converted into share capital with the reduced nominal value of the share and the balance of 50 per cent. would be, paid by instalments after a period of 2 years. Therefore, this would show that each class is offered a distinct separate compromise. The secured creditors were offered a compromise that they would be paid in full but the mode of payment would be by instalments. This aspect was before the mind of the unsecured creditors and members. If the mode of payment with regard to secured creditors as suggested in the proposed scheme is altered at the instance of the secured creditors, in my opinion, it is not necessary that before the scheme can be submitted to the court for its sanction. the amended compromise offered to the secured creditors should be ratified and approved by the unsecured creditors, preferential creditors and members of the company. Even though an all-pervasive scheme of compromise and arrangement comprising within its folds various different promises offered to different class of creditors and members is offered 4 approval, in effect every class will 'have to consider the compromise offered to it and its judgment disclosed by its voting will have to be considered in respect of that part of the compromise affecting it. Viewed from this angle, there is no force in the contention of Mr. Vakil that the amendments which had been passed at the meeting of the secured creditors have not been passed according to the correct legal procedure. In this connection, Mr. Vakil had also contended that the amendment proposed at the meeting of the unsecured creditors were also not properly adopted. Three amendments were proposed at the meeting of unsecured creditors and members of the company relating to the payment to the Employees' State Insurance Corporation; payment to Indequip group of companies to be deferred till cotton merchants and suppliers of stores referred to in clauses 2(e),and 2(f) are paid their dues and deletion of. clause 2(g) from the scheme. Clause 2(g) provides that the payment of arrears of wages and retrenchment compensation to the workers be deferred for a period of two years. These amendments were undoubtedly proposed at the meeting but @it was urged that they were not properly proposed and seconded. There is no substance in this contention because the resolution at the meeting shows that the scheme was p. approved after incorporating the aforementioned amendments. Therefore, the contention of Mr. Vakil under this sub-head must be negatived.

60. The third limb of the argument was that Indequip group of companies and - two other creditors participated in the meetings of both secured creditors and unsecured creditors and this by no canon of construction of section 391 would be permissible. This aspect has already been considered while disposing of ground No. 5. Suffice it to say that Indequip group of companies and two other creditors were not allowed to vote at the meeting of the secured creditors. In fact, except the bank and provident fund authorities the other five secured creditors having now given u they charge any charges created in their favour having now been relinquished or were void from their very inception for want of registration under section 125 they would be unsecured creditors and, therefore, the value of their vote should not be taken into consideration while considering whether the scheme has been approved by a statutory majority of the secured creditors. It may be mentioned that after the aforementioned five creditors are excluded from the category of secuped predators., only two secured creditors remain, namely, the bank and the provident fund authorities and both of them have approved the scheme and, therefore, no illegality attaches to the proceedings of the meeting of the secured creditors where the aforementioned five creditors initially attended the meeting. It must be distinctly made. clear that Indequip group of companies and two other creditors were not permitted to vote at the meeting of the secured creditors and in final analysis the votes of the remaining creditors, namely, Mis. Amarshi Damodar and Atul Cotton Traders, have been excluded while computing the voting at the meeting of the secured creditors.

61. The last limb of the argument under this sub-head is that those creditors who are companies within the meaning of the Companies Act should have lodged their resolution and proxy as required by section 187 before they could attend and vote at the meeting. Section 187 of the Companies Act reads as under:

"187. Representation of corporations at meetings of companies and of creditors. - (1) A body corporate (whether a company within the meaning of this Act or not) may (a) if it is a member of a company within the meaning of this Act, by resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company, or at any meeting of any class of members of the company;

(b) if it is a creditor (including a holder of debentures) of a company within the meaning of this Act, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of any creditors of the company held in pursuance of this Act or of any rules made thereunder, or in pursuance of the provisions contained in any debenture or trust deed, as the case may be.

(2) A person authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were an individual member, creditor or holder of debentures of the company."

62. It would appear from the language of section 187 that if a company is a creditor of another company within the meaning of the Companies Act, it may authorise by resolution of its board of directors any person as it thinks fit to act as its representative at any meeting of the creditors or at any meeting of members of the company held in pursuance of the provisions of the Companies Act and such a person authorised by the resolution would be entitled to attend in person and by his presence, the company as creditor would be attending the meeting in person. Such a person authorised by the resolution to represent the company would also be entitled to vote by proxy. A proxy by such a person properly lodged would be a proxy on behalf of the company. It would thus appear that where a person authorised by the resolution of a board of directors of a company attends in person it is not necessary that he should also hold a proxy properly. lodged for and on behalf of the company. On a true interpretation of section 187 it appears that where a company is a creditor of another company, the first company by resolution of the board of directors may authorise any person to attend the meeting of the creditors of the other company of which it is a creditor. In such circumstances, the authority conferred by @he resolution would enable the person so authorised to attend the meeting on behalf of the creditor company. Such appearance of the person so authorised would indicate the presence of the company as creditor in person looking to the language of section 187. Such 'a person need not hold proxy on behalf of the company. In fact he himself can nominate a representative to vote by proxy and his vote by proxy would bind the company by whose resolution he is authorised to attend the meetings. Mr. Yakil, however, urged that even if there is a resolution authorising the person to attend a meeting of the creditors of the debtor company on behalf of the creditor company, he' should not only be authorised by a resolution but he should also lodge proxy on behalf of the creditor company. In my opinion, this is not borne out by the language of section 187. Mr. Vakil, however, referred to Arjun Prasad v. Shantilal Shanharw Shah '. The question that arose for consideration of the Supreme Court was as to the manner in which the creditor company can validly cast its vote at the meeting of the creditors held under the provisions of section 153 of the Companies Act of 1913. It would appear that the case is decided under the provisions of the Companies Act of 1913. Undoubtedly, in that case it is held that, though the person who was authorised by the directors of the creditor company to represent the said company at the meeting was present in person at the meeting, the company could not be regarded as having been present at the meeting in person, within the meaning of section 153, and, as that person was also not a proxy, the vote cast by him at the meeting was void. But in this very case the effect of the provisions contained in (1) [1962] 32 Comp. Cas. 149 (S.Q). section 187(2) is left open. It is observed that in the Companies Act of 1956 a provision has been introduced under' which a company which is a creditor of another company may by resolution of its directors authorise slich person as it thinks fit to act as its representative at any meeting of the creditors of the company held in pursuance of the Act and a person authorised in this manner shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the company. Such a provision was not to be found in the Companies Act of 1913 and, therefore, this decision is not an authority for the proposition that a person authorised by a resolution of the board, before he can represent the company should also hold a proxy, especially after the introduction of section 187, and particularly sub-section (2) of section 187 of the Companies Act. In my opinion, the provisional,. contained in sub-section (2) is a complete answer to the contention of Mr. Vakil and it must stand negatived. Thus, there is no force in the contention that the meetings of the creditors and members were conducted in an irregular manner.

63. Re. Ground No. 8. - The next ground of attack is that even if it be held that the meetings were properly conducted, in fact, the scheme is not approved by a statutory majority. There was also an alternative submission that, assuming that the other view is possible, the court on an analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting creditors and members. 1 will first examine the first part of the submission that the scheme is not approved by the statutory majority of the creditors and members. Before the court can accord sanction to the scheme of compromise and arrangement, it must be approved by a majority in number representing 3/4ths in value of the creditors or class of creditors or members or a class of members, as the case may be, present and voting, either in person or where proxies are allowed by proxy. The submission is that neither the creditor nor the members have approved the scheme of compromise and arrangement by Majority in number representing 3/4ths in value. Ordinary and plain meaning of section 391(2) is that the scheme of compromise and arrangement must be approved by a majority in number of each class of creditors and each class of members and the affirmative votes must represent 3/4ths in value of the shares or debt represented by the person attending the meeting either in person or by proxy.

64. The issued and subscribed capital of the company consists of 788 ordinary shares each of Rs. 1,000 fully paid, and 1,050 redeemable cumulative ?reference shares each of Rs. 100. In all 117 ordinary shareholders holding 597 ordinary shares attended the meeting of the ordinary shareholders by person or proxy. Eightyone shareholders holding 522 equity shares voted n favour of the scheme and 34 ordinary shareholders holding 72 ordinary shares voted against the scheme. The validity of votes of the two ordinary shareholders holding three shares was considered doubtful. Excluding the doubtful votes the analysis would show that 80 ordinary shareholders holding 518 ordinary shares cast valid votes in favour of the scheme and 32 ordinary shareholders holding 71 ordinary shares cast valid votes against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of ordinary shareholders.

65. The meeting of the preference shareholders was attended by 71 preference shareholders either in person or by proxy holding 544 preference shares. Out of the aforementioned 71 preference shareholders present in person or by proxy 55 shareholders holding 456 preference shares voted in favour of the' scheme while 16 shareholders holding 88 shares voted against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Doubtful votes were not taken into consideration. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of preference shareholders.

66. The meeting of the secured creditors of the company was convened first on October 6, 1968, and was adjourned to various other days. The Union Bank of India and the Central Board of Trustees of the Provident Fund were the only secured creditors of the company and both of them have voted in favour of the scheme subject to the modifications suggested by them in respect of the compromise offered to each of them and the same has been accepted by the sponsors of the scheme and, therefore, the final scheme submitted to the court is approved by both the secured creditors which would indicate that the same has been approved by a statutory majority. It may be mentioned here that Asia Electrical India Pvt. Ltd. Company holds a charge for the. price of the blading system supplied by it to the company. The said creditor claims to be the creditor of the company to the tune of Rs. 1,48,471'20 and has filed a suit to recover the said amount in the High Court of Maharashtra against the company. A representative of the said creditor attended the first meeting of the secured creditors but did not attend the subsequent meetings when the secured creditors finally voted upon the scheme. It may, however, be mentioned that under the scheme Unit 11 of the mills of the company is to be scrapped and sold and the realization there from is to be shared by the Union Bank of India and the Central Board of Trustees of the Provident Fund. The scrapping of Unit No. 11 includes scrapping of the blading system which is part of the power plant of' the company. Therefore, blading system will also be sold. Out of the price realised by the sale of the blading system the Union Bank has agreed to pay the amount payable to Asia Electric India Pvt. Ltd. Company. At any rate, it cannot be said that Asia Electric Company claiming to be secured creditor of the company has voted against the scheme. Indian Electro Chemicals Ltd, Dyestuffs and Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders had at one stage claimed to be the secured 'creditors. They were not recognised as such and they were not permitted to vote at the meeting of the secured creditors. In fact the charge created by the bank in their favour having not been registered by the Registrar of Companies on the date of the meeting or subsequent thereto and they having specifically relinquished the charges in their favour could"@j@' by no stretch of imagination be said to be secured creditors and, therefore, they were rightly not permitted to vote at the meeting of the secured creditors. Even if they are considered to be secured creditors, they having approved and consented to the scheme. there is no negative vote at the meeting of secured creditors. It can, therefore,. be said with reasonable certainty that the scheme has been approved by the secured creditors of the company by more than the statutory majority.

67. That takes me to the meeting of unsecured creditors. As stated earlier, the meeting of unsecured creditors was attended by the creditors who were suppliers of stores and cotton, workmen of the company and the depositors. The depositors are relations and members of the family and a few friends of the managing director, Linubhai Hiraial Banker. The total value of the debt represented by the creditors attending the meeting was to the tune of Rs. 1,11,05,004. The creditors re resenting the claim in the value of Rs. 94,94,502 voted in favour of the scheme. If the meeting of the unsecured creditors as a class is held to be valid, it would appear that as against the creditors representing the debts of the company to the tune of Rs. 94,94,502 who voted in favour of the scheme, only creditors representing debts to the tune of Rs. 9,52,185 voted against the scheme. Therefore, it would prima facie appear that majority of the unsecured creditors representing 3/4ths in value approved the scheme.

68. It was very vehemently contended that preferential creditors and unsecured creditors were grouped together in one class and, therefore, the votes cast at such an illegal meeting approving the scheme cannot be taken into consideration by the court. As stated earlier, the workers of the company would be preferential creditors; so also, the Employees' State Insurance Corporation would be 'a preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditor of the company and they should not have been grouped together with the other unsecured creditors. For the reasons stated hereinabove, the creditors of the company would fall broadly into three distinct classes, namely, secured creditors, preferential creditors and other unsecured creditors. Separate meeting of secured creditors has been convened and they have approved the scheme. The error appears to have been committed in convening the joint meeting of preferential and unsecured creditors. But the report of the Chairman would help in finding out the debts represented by the preferential creditors and the debts represented by other unsecured creditors in the meeting of unsecured creditors. The report ,of the Chairman would show that out of 1955 creditors including both I$. preferential and unsecured creditors, who attended the meeting, 1055 creditors inclusive of both the classes representing Rs. 94,94,502 voted in favour of the scheme. It would further appear from the report that the workmen of the company forming a class of preferential creditors who attended the meeting represented their claim to the tune of Rs. 36,33,400. The claret of the Employees' State Insurance Corporation against the company on that date was to the tune of Rs. 6,@7,346. The workmen and Employees' State Insurance Corporation, being the preferential creditors, would form one class. It may be that as the compromise offered to the Employees' State Insurance Corporation is slightly different f rom the compromise offered to the workmen of the company, the workmen and the Employees' State Insurance Corporation may each form a distinct class. The remaining unsecured creditors would comprise suppliers of cotton and stores and depositors. Apentirely identical compromise is offered to the suppliers of cotton, stores and depositors and, therefore, they can be conveniently grouped together in one class. Their rights are not so dissimilar as to make it impossible for them to consult each other for their own interest. Thus, the workers being preferential creditors would form one distinct class. Employees' State Insurance Corporation would form another class. The remaining unsecured creditors would form a class by themselves. The next thing is to find out the votes and. value of votes cast in each class to ascertain whether in each class the scheme is approved by statutory majority. It is very easy from the report of the Chairman to find out the total number of workers present and the value of their votes. It is equally easy to find out the value of the vote of Employees' State Insurance Corporation. The composite value of the affirmative votes cast in favour of the scheme at the meeting according to the report was Rs. 94,94,502. This is inclusive of the claim,: of workers as preferential creditors which was to the tune of Rs. 36 - 33,400. If the votes of the workmen representing in value the claim to the of Rs. 38,33,400 is deducted f rom the. votes representing the debt of other unsecured creditors to the tune of Rs. 94,94,502 the balance C-1 Is would be Rs. 58,61,202 out of which vote representing the value of the claim of the Employees' State Insurance Corporation to the tune of Rs. 6,27,346 should be deducted which would leave a balance of Rs. 52,33,756. The unsecured creditors being suppliers of stores and cotton and depositors and excluding preferential creditors who attended the meeting and voted in favour of the scheme represented the debt in the value of Rs. 52,33,756. The value of the claim of the creditors who voted against the scheme was Rs. 9,82,185. It would immediately appear that the unsecured creditors excluding the preferential creditors, namely, the workmen and Employees' State Insurance Corporation have approved the scheme by more than the statutory majority.

69. The workmen of the company who attended the meeting unanimously voted in favour of the scheme, and the value of their claim was Rs. 36,33,400. Similarly, Employees' State Insurance Corporation whose claim was in the amount of Rs. 6,27,346 has accepted the scheme. Thus the workmen of the company who would be preferential creditors forming a distinct class of creditors of the company have approved the scheme by more than a statutory majority. So also, the Employees' State Insurance Corporation who would be a distinct class of creditor of the company has accepted the scheme. It thus becomes crystal clear that the preferential creditors of the company have approved the scheme by more than the statutory majority.

70. At this stage one submission of Mr. Vakil may be noticed. It was very vehemently urged that if the preferential creditors and unsecured creditor's each form a distinct class, separate meetings of each class ought to have been convened and it is not open to the court to analyse the votes at a meeting attended by such heterogeneous creditors as unsecured creditors, preferential creditors and Employees' State Insurance Corporation and arrive at a positive finding. It was further urged that it would not be possible to : find out how the judgment of each class of creditors must have been affected or influenced by deliberation in such a meeting of heterogeneous creditors and it was further contended that the workers who are vitally interested in the restarting of the mills of the company must have caused an over-powering influence on the deliberations at the meeting and the judgment of other creditors would be adversely affected. The submission was that if once an error is committed in convening, the' meetings, nothing further can be done and either the court should ignore the decision arrived at such a meeting or at best fresh meeting with proper clarification should be convened and consideration of the scheme should be postponed till such meeting is convened and result is notified to the court. It is undoubtedly true that at the stage of giving directions under section 391 it is the bounden duty of the sponsors of the scheme to place proper materials before the court so that the court can give accurate directions for convening separate meetings of distinct class of creditors and members. 'It must De concessional that such a case was not taken by the company when direction for convening the meeting of unsecured creditors was given and which included within its fold grouping together of such heterogeneous creditors as preferential creditors, Employees' State Insurance Corporation and other unsecured creditors. It would have been well and good if such distinct and separate meetings were convened in respect of each class of distinct creditors. But if error was committed yet the voting at the meeting can be properly analysed to find out which was the distinct class whose separate meeting could have been called and votes of each class can be ascertained, in my opinion, such an error would not be fatal. There is absolutely no allegation that one class of creditors imposed '@themselves on the other class or that the majority coerced the minority into acceptance of the scheme. In the absence of slightest allegation to that effect and in the absence of any allegation that there were no free, frank and fair deliberations, in my opinion, it is not necessary to order a fresh meeting of the distinct class of creditors. If there was the slightest doubt in my mind that one class of creditors, namely, preferential creditors, by their sheer majority imposed themselves on the minority or the minority were coerced into approving the scheme, 1 would have certainly ordered separate meetings of preferential creditors and unsecured creditors. But the analysis of the votes would show that except the principals of Chandulal Hiralal Banker who is practically the only contesting creditor and whose stubborn opposition to the scheme is attributable not to inherent demerits of the scheme but to the personal feuds and vengeance and no other unsecured creditor, representing. any substantial interest opposed the scheme in the meetings of unsecured creditors, framing or the hearing of their petition, it is not necessary to order. In these circumstances, in my opinion, the analysis of the vote at the unsecured creditors' meeting after separating the preferential creditors f rom other unsecured creditors should be taken into consideration to find out whether the preferential creditors as a class have approved the scheme and whether other unsecured creditors as a class have approved the scheme. As stated above, the workers as being preferential creditors, the Employees' State Insurance Cor ration and& other unsecured creditors each as a has, approved the scheme by statutory majority and, therefore, there is no substance in the contention that the scheme is not approved by statutory majority.

71. The alternative submission of Mr. Yakil may now be considered. It was urged that even if it be held that the scheme has been approved by different classes of creditors and members in, their respective meetings by statutory majority, the court on an appropriate analysis of voting would not impose such a scheme on the dissentient members and creditors. The submission was that the scheme is so designed as to help Gopaldas Parikh and his protege, Linubhai Banker, to cover their misdeeds and to give the "m' unfair advantage by which they would have an octopus hold on the company. It was urged that if the scheme is approved, three companies in which Gopaldas Parikh has a controlling interest, namely,. Indian Electro Chemicals Limited, Dyestuffs & Chemicals Private Limited and Indequip Limited, would be able to obtain ordinary shares of the company worth Rs. 20 lakhs and thereby they would have such a controlling voice in the affairs of the company that their misdeeds could not be brought to light and they would be able to ride rough shod over the other shareholders. It was also urged that Shardaben, Shantaben and Chandulal Banker who are contestants would be left to the tender mercy of Gopaldas Parikh and Linubhai Banker" In fact, even at the present stage, Indequip group of companies along with Linubhai Banker, and the members of his family hold 422 shares out of the total number of 788 ordinary shares of the company. If the scheme is sanctioned Indequip group of companies would be able to get allotment of shares worth Rs. 20 lakhs by conversion of their 50 per cent. claim against the company. It is not likely to tilt the balance in a different way. It cannot be said, therefore, that the scheme is designed for obtaining a controlling voice in the affairs of the, company. On the contrary, if the scheme is sanctioned, number of other creditors would become holders of shares and would be able to influence the management in the affairs of the company. Therefore, on this account, the scheme cannot be rejected. Even at the cost of repetition, it must be mentioned that the scheme is opposed by a very few creditors and an infinitesimally small number of shareholders. The fact that the scheme has been approved by a requisite majority of shareholders is undoubtedly a strong argument in its favour, unless it is shown that their approval was not obtained fairly and the terms of the scheme are not such as a reasonable man may accept. The approval of a scheme by statutory majority of creditors and members is not decisive of the matter. But it is equally true that due weight should be attached to the choice indicated by the creditors and members who are vitally interested in the company and the scheme affecting the company. Further, on the analysis of the votes cast at the meeting, the salient feature that comes out to the surface is that the scheme was opposed especially by those who, apart from the merits of the scheme, are personally opposed to Gopaldas Parikh and Linubhai Banker. The feud appears to be more between the blood relations rather than between the creditors and members who have offered their best commercial judgment to the scheme on its merits. It is an inescapable conclusion that Chandulal Banker as a power of attorney holder of Shardaben, and Shantaben who is the principal contender, opposed the scheme tooth and nail not because he had the interest either of the company or creditors and members at heart but because he had to leave the active management when Gopaldas Parikh ands Linubhai Banker stepped in and because of his persona vendetta against both of them. In this view of the matter it is not possible to accept the submission of Mr. Vakil that the scheme should not be imposed upon dissentient members.

72. Re. Gro und No. 9. - The last ground of attack was that the scheme is not commercially and economically viable or fealible and is in fact unfair and unreasonable. Before 1 proceed to consider this contention on merits, the approach to the scheme of compromise and arrangement by the court should be made clear. How should the court approach a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair and reasonable one initially lies on the petitioner. The petitioner must prima facie show that the scheme is pre-eminently fair and reasonable as a prudent and reasonable shareholder would approve of and not object to. In order to show prima facie that the scheme is fair and reasonable, it is open to the petitioner to submit that due weight must be accorded to the fact that the majority has recorded a decision in favour of the scheme and the court must not lightly ignore or set aside that decision. In In re Sidhpur Mills Co. Lid. 1 Miabhoy J. (as he then was), in this connection, observed as under :

"Therefore the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, nor will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner and in the interests of the class that it purports to represent, then, if the scheme is such as a fairminded person,'reasonably acquainted with the facts of the case, as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it."

73. This must be the approach of the court while examining the scheme and the court should, keeping in view all the aspects of the matter, prefer a living scheme to compulsory liquidation bringing about an end to a company. Reference may be made to Lawrenc Dawson v. J. Hormasji 9. Cunliffe J. has observed as ittder :

74. The court is of course not a mere machine for re&tration. It will look into the proposed scheme much as a court of appeal will canvass, if asked to do so, the, decision of a jury, to ascertain if there was reasonable evidence to support their verdict; but it will, 1.think, always also prefer a living scheme to a compulsory liquidation bringing about an end to a company, and usually without any hope of payment in full."

75. The court in exercising its discretion under section 321(2) must treat it as cardinal that its function does not extend to usurping the view of the members or creditors. It must look at the scheme to see that it is a reasonable one and while so doing, the court will be strongly influenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the sche 'me must be a fair and equitable one though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.

76. Approaching the scheme from this angle, let me find out whether it is feasible and workable. It is not necessary to bring to bear upon the subject the expertise of textile magnates. The court must be prima facie satisfied that the scheme in its broad outlines is a reasonable and fair one and that it is feasible and workable. The first objection was that the estimate of receipts and outgoings made in the cash flow statement annexed to the scheme is factually incorrect and cannot be conceived even in the realm of possibility. The estimate of rent of godowns to be constructed on the land that will be vacated by scrapping of Unit 11 was considered exaggerated. Except making a statement in affidavit in reply that the estimate is exaggerated, no material is placed on record to reach the conclusion that the estimate is exaggerated. It was also urged that, in the year 1963, Rs. 3 lakhs will be received by way of deposits from the intending lessors and acceptance of deposit from the intending lessee would result in contravention of section 18 of the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947 (hereinafter referred to as the " Rent Act "), which prohibits a landlord from receiving any fine, premium or other like sum or deposit or any consideration other than the, standard rent or the permitted increases, in respect of the grant, renewal or continuance of a lease of any premises. It was also urged that acceptance of, deposit from the intending lessee by the landlord for granting lease would be a penal offence. It is unnecessary to decide this point in this case because it does not directly arise for consideration. Prima facie, however, it may be pointed out that Explanalion 1 to section 18 of the Rent Act would show that receipt of rent in advance for premises let out for the purpose other than residence would not come within the mischief envisaged in section 18. If the premises let out are for the purpose other than residence, advance rent da 'n be taken by the landlord and if the lease is for a longer period, it would be open for the landlord to contract that the advance rent taken would be given credit for for the period which is just preceding the expiry of the lease. Such an agreement, if entered into between the landlord and tenant in respect of the premises leased for a purpose other than residence, would enable the llandlord to take advance rent and also continue to recover the rent for the initial period of the lease. Therefore, even though what is styled as rent deposit, it in effect appears to be advance rent to be taken from the intending lessee and prima facie it does not appear that such an action would be in contravention of section 18. It was also contended that Rs. 25,000 are expected to be received by sundry receipts, but there is no source disclosed. The amount is not very large and a textile mill can hope to get it by way of sundry receipts. It was, however, urged that there is no cash capital with the company and initially a large cash amount would be required for restarting the mill and if the realisation from the scrap of Uniot No. II is to be paid straightway to the secured creditors, there would be no cash capital with the company to start Unit No. I and unless the Unit No. I starts no income can be expected. In this connection, I would like to point out that Gopaldas Parikh has filed his affidavit at page 500 of the record in which hhe has stated that he is connected with about 24 companies and he would be in a position to arrange finances to thhe extent of Rs. 10 lakhs for restarting Unit No. I of the mills of the company. There is a similar affidavit of Surotam Hathessing at page 498 who is connected with two mills and five other compannies. He iis alsoo a managing director of Arvind Mills Ltd. It iis niowhere suggested that these persons would not be able to provide finances as indicated by them in their respective affidavits. It is also proper to refer at this stage to another affidavit of Gopaldas Parikh in which he has stated that he would be able to arrange liquid finance to thhe tune of Rs. 10 lakhs for the working of the mills for two years from the date of sanctioning the scheme and that he is prepared to provide finance from his own resources and personal guarantees to be furnished by him subject to a condition that whatever additional funds are brought by him within the said period of 2 years from his resources or on his personal guarantees they should be secured against the block of the company and will have first preference of payment after the dues of thee present secured creditors are paid off. At no stage, the ability of Gopaldas Parikh to provide additional finances was in any way seriously disputed before me. Looking to his connection with different companies and looking to the fact that various creditors have extended credit to the company to the tune of Rs. 74 lakhs on the personal guarantee of Gopaldas Parikh, it would be reasonalbe to believe that he would be able to procure finances as promised by him in his affidavit.

77. It was next contended that production programme annexure and estimate production statement annexed to thhe same are based on exaggerated action of the efficiency of the machinery of the mills and the management. It was urged that the textiler machinery of the company is very old and completely wprn out and would not work at the expected efficiency and the estimated production cannot be obtained. Reference in this connection was made to the observations made by the court of inquiry appointed to inquire into the closure of the mills in Inquiry Case (IC.1167) wherein it is observed that the mills is very old with equally old machinery and that there is no other alternative but to scrap the mill. It is true that the machinery is very old; and it is also true that when both the units worked the company suffered loss and, therefore, apparently, it would appear that when one of the two units is to be scrapped the other unit could not be profitably worked. But it appears that uneconomic working of the two units apart from being the result of depreciation in the textile industry was to a considerable extent attributable to the division of the mills into two units in two separate sheds which raised labour ratio to an uneconomic level. Once Unit No. 11 is scrapped the other Unit can be profitably worked. An expert like Chandraprasad Desai general manager of Arvind Group pf Mills,' was one of the opinion tha t Unit No. 1 can be profitably worked and estimated production can be obtained. Gopaldas Parikh consulted Candraprasad Desai and a reply received from Chandraprasad Desai is at page 503. Annexed thereto are the monthly working of the mills and estimated production statement. Mr. Vakil compared these two statements with statements annexed to the scheme submitted to the creditors and members and tried to point out discrepancies between the two. There are some discrepancies but they are not of material nature. After all two experts are bound to differ in their estimates and unless the difference is of an unbridgeable character, it is not the function of the court to examine the scheme like that of an expert in the textile industry. Suffice it to say that Chandraprasad Desai, whose claim as an expert was not very seriously disputed and cannot be disputed, has expressed an opinion that Unit No. 1 can be profitably worked and that, in my opinion, along with the fact of approval by creditors and members, would be sufficient to come to the conclusion to say that the scheme is workable and feasible.

78. The next question if whether the scheme is a reasonable and a fair one. The scheme offers compromise of an equitable character to the members and unsecured creditors. But it was urged that the Union Bank and the Central Board of Trustees of the]Provident Fund have been 'given an unfair advantage and they are not expected to make any sacrifice which other interested persons are called upon to make in the scheme. It was urged that the bank does not agree to reduce its claim and insists upon continuance of its security and no relief is sought to be given even in payment of interest. It was also urged that the amount tobe realised from the scrap of Unit No. 11 would be wholly appropriated towards the payments of the dues of the Union Bank and the Central Board of Trustees of the Provident Fund. That of course is true. It must, however, not be forgotten that the Union Bank of India is a secured creditor and can remain outside winding up and prima facie it appears that if it does realise its security, nothing would be left for other creditors and members. The Central Board of Trustees of the Provident Fund have given concession inasmuoh as they have agreed to give up damages payable by the company on its failur to pay the provident fund contribution and that is an important concession. Further both the secured creditors agreed to accept payment by instalments spread out over a long period. It, therefore, cannot he said that the bank and the Central Board of Trustees of the Provident Fund are given unfair advantage in the scheme to the detriment of the interests of the other unsecured creditors and members. Now, if the scheme is sanctioned, the company is likely to be enormously benefited and obtain substantial benefit to which 1 would presently refer. It must be distinctly understood that the advantages sought to be extended and concession sought to be granted are subject to an important reservation that the proposed advantages and concessions would be extended or made if and only it the scheme is sanctioned. Considering all these aspects, in my opinion, the scheme is a reasonable and fair one and, on the present material, it can be said that it is commercially sound and economically viable. Therefore it is not possible to accept the contention of Mr. Vakil that the scheme is neither fair nor reasonable nor workable.

79. I should like no w to dwell upon the important aspect why the scheme should be approved. There are two alternatives before the court : (1) to sanction the scheme, or (2) to reject the scheme and as a necessary corollary to wind up the company by passing appropriate orders on three winding 'up petitions which are pending before the court. If the scheme is to be rejected the only alternative is to wind up the company, and it was urged with utmost vehemence that for an insolvent company, winding up is its inevitable fate and natural corollary. The company can at this stage be undoubtedly said to be commercially insolvent and in respect of such a commercially insolvent company, the creditor would be entitled to an order for winding up the company ex debito instias. But when in respect of such a company, a scheme of compromise and arrangement is offered, the court should, in my opinion, evaluate the position firstly of creditors and secondly of members in winding up and in the scheme and should weigh the advantages that may accrue in either course to be adopted by the court and find out which way the balance tilts. If the matter is approached from this angle, in my opinion, the conclusion in this case is inescapable. If the company is ordered to be wound up, .the liquidator would dispose of the assets of the company and will have to apply first the receipts for discharging the dues of the secured creditors and then preferential creditors and thereafter unsecured creditors and if there is any balance, there would be pro rata distribution to the members. The present liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40 lakhs and roughly Rs. 22 lakhs are payable to the Centra Board of Trustees of the Provident Fund. The company has to pay Rs. 8 lakhs to the Employees' State Insurance Corporation and the preferential claim of the workers would come to Rs. 20 lakhs. Indequip Group of companies are creditors to the tune of Rs. 40 lakhs and there are other unsecured creditors to the tune of Rs. 15 lakhs. The remainder is the claim of the workers representing their non-prefeiential claim. If the assts of the company are sold, taking the best view of the matter, Rs. 28 lakhs may be realised by the sale of the machinery and the land may fetch, at the bes available price, Rs. 35 lakhs. 1 have worked out the figure of Rs. 23 lakhs of the machinery on the basis that the company hopes to realise Rs. 14 lakhs by sale of the machinery after scrapping Unit No. 11 only. The company is the owner of the 'land admeasuring about 59,000 sq. yds. These are approximate estimates. It would immediately appear that the claim of the secured creditors and preferential creditors would not be paid in full by the sale of the assets of the company at the market price. After satisfying the claim of secured creditors and preferential creditors there will be no residue and the unsecured creditors are not likely to get a farthing, and even a part of the claim of the preferential creditors, in my opinion, would remain unsatisfied. Therefore, there is no vestige of a chance for the unsecured creditors to get anything towards their claim in the event the company is ordered to be wound up. Even Mr. Vakil could not by any logic work out the figures to show that looking to the present liabilities of the company towards the secured creditors and preferential creditors in the event of winding up, unsecured creditors were not likely to' get even a fraction of one per cent. towards their dues. In the event of winding up the mills will be closed down and would be disposed of and, if they are disposed of by scrapping the machinery, there is no question of restarting the mill even by the purchaser. As a necessay consequence the workers would be unemployed and starvation would be their only lot. The company would be dissolved and would come to a dead end. This consequence woul 'd generally follow in the event of an order of winding up the company being made and taken to its logical end.

80. If, on the other hand, the scheme is sanctioned, the 'secured creditors and preferential creditors would be paid in full. The unsecured creditors would get 50 per cent. of their claim in the shape of ordinary shares of the company and the balance of 50 per cent. would be paid by instalments commencing after a period of two years afterrestarting of all the departments of Unit No. 1. Unit No. 1 would be restarted under the scheme and would provide employment to roughly 1,000 workers. These aspects cannot be lost sight of even on a humanitarian ground. The company would be resuscitated. The debt liability of the company would be considerably reduced because the Indequip Ltd., which is the biggest unsecured creditor roughly to the tune of Rs. 40 lakhs, has agreed under a compelling necessity and not out of altruistic motive to forgo balance of 50 per cent. of its dues after recovering 50 per cent in the shape of ordinary shares of the company. This concession is made in the affidavit of Gopaldas Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the liability of the company by another 3 lakhs of rupees. Thus the debt liability of the company would be roughly reduced by Rs. 23 lakhs. These concessions are made on behalf of Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the condition that the court sanctions the scheme. It the company is resuscitated, the members may also hope to earn dividend af ter a lapse of a few years. Now, it must be confessed that the concession made by Gopaldas Parikh on behalf of the Indequip Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private Ltd. is not actuated by any altruistic motive because it is absolutely certain that in the event of the scheme 'being rejected and an order for windiiigup the com 'any is being made, they as unsecured creditors are p not likely to recover a farthing out of their total claim of nearly Rs. 46 lakhs. Their' aporoach appears to be that when everything is likely to be lost part of it may be recovered by forgoing the other part of it. This concession is not by way of gift or as an inducement to the court to sanction the scheme. They are actuated by their approach as a man of business of sound commercial instinct. They may get 50 per cent. by agreeing to - the scheme while they would lose everything if the scheme is rejected. It is under a compelling necessity that they have made this offer. Nonetheless it would be beneficial to the company. When thus the consequence that would follow in the event of sanctioning the scheme or in the event of winding up order being made directly affecting the creditors and members, undoubtedly, the balance in favour of the scheme considerably tilts and thaz should be a very important circumstance which would influence the court's decision while considering the scheme on its own merits.

81. It must also be pointed out that if the scheme is not sanctioned and an order for winding up is made, the secured creditors, namely, the Union Bank of India and the Central Board of Trustees of the Provident Fund, have declared their, unequivocal intention to remain outside the winding up and they would insist on realising their security in full and, in that event, nothing would be left because the experience of this court, while considering , the offers for purchase of a textile Till in this city for the last one year, shows that the price realised is hardly attractive. If the scheme is sanctioned the secured creditors have agreed to be bound by the scheme, while in the winding up, they have expressed in no uncertain terms that they would remain outside the winding up and realise their security in full. If they come under the scheme which they have agreed to do they could be paid by instalments and keeping in view some of the conditions which 1 propose to impose while sanctioning the scheme, the liability of the company to pay .running interest may be reduced to some extent. The Central Board of Trustees of the Provident Fund have agreed to forgo damages to the tune of Rs. 6 lakhs in the event of the scheme being sanctioned. The only thing that was harped upon by Mr. Vakil was that, in the event of winding up, various inquiries can be made into the misdeeds of the ex-directors and fraudulent preferences can be avoided. I have already pointed out that the, mortgage in favour of the bank and Central Board of Trustees of the Provident Fund cannot be avoided as f raudulent preferences. The charges created by decrees in favour of the other five creditors, namely, Indian Electro Chemicals Ltd., Dyestuffs & Chemicals Private Ltd., Indequip Ltd :, Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished, by way of concession in the above. The result which Mr. Vakil seeks to achieve is obtained without the order of winding up being made. Thus, giving the matter my anxious thought the advantages and benefits that are I.Akely to accrue by sanctioning the scheme far outweigh the imaginary or productive result which Mr. Yakil thinks can be achieved in winding up. Therefore, also, the scheme deserves to be sanctioned.

82. Before sanctioning the scheme it is necessary to give specific directions subject to which 1 would accor 'd sanqtion to the scheme. The court - as power at the time of making an order sanctioning the scheme under seetion 392(1)(b) to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This power can be exercised not f or substituting the scheme as approved by the creditors and members but for making the scheme of compromise and arrangement effective and workable. The only pre-condiltion in the exercise of the power under section 392(1)(b) is that the court can make modifications for the proper working df the compromise and arrangement. In other words, the court can modify the scheme of compromise and arrangement so as to make it effective and workable. It has become necessary to exercise this power because the scheme was considered by the creditors and members prior to December, 1968, and it was hoped that it would go through in the early part of the year 1969. For various rea?ons, the hope has not materialised with the result that certain consequential modifications will have to be made in the scheme to make it effective and workable. Some modifications have also become necessary in order to restrict the powers of the bank and Central Board of Trustees of the Provident Fund to throw overboard th scheme at their sweet will and pleasure.

83. The scheme gives discretion to the bank in the event of the bank in its absolute discretion feeling that its rights as secured creditors are in jeopardy or its guarantee is impaired, to take any action as a secured creditor. The scheme also gives an option to the bank and Central Board of Trustees of the Provident Fund to recover the whole amount at once if the default in payment of instalment is committed. While sanctioning the scheme if these provisions are retained, it would give veto to the bank and the Central Board of Trustees of the Provident Fund to play ducks and drakes with the scheme at their sweet will. Such a power to take unilateral action to the detriment of other interested persons bound by the scheme with a view to destory the scheme given to the bank and Central Board of Trustees of the Provident Fund, would always keep the scheme at the tender mercy of those two creditors and it would not be conducive to the healthy working of the scheme of compromise and arrangement. Therefore, 1 consider it just and proper for the proper working of the scheme of compromise and arrangement to direct the following modifications to be made in the scheme and, subject to these modifications, the scheme would be sanctioned.

84. Under the scheme, the dues of the bankers are to be paid by monthly instalments commencing from the specified date. The date has become almost unmeaning when the scheme is being sanctioned. Some instalments holiday is absolutely necessary to give a breathing time to the company. In my opinion, the first instalment payable by the company to the Union Bank of India should commence six mouths after restarting of all the departments of Unit No. 1 under the scheme, and thereafter every succeeding instalment shall be paid from month to month. The company.would be liable to pay interest at the agreed rate but not with quarterly rests. The interest should be simple interest payable from year to year at the agreed rate of interest. The default clause in the scheme by which, in the event of the company committing default in payment of any instalment, the whole of the amount payable to the bank would become due and payable at once, would stand deleted. Whenever the bank wants to sell any property of the company under the rights conferred on th'e bank in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the ourt. It is not open to.the Union Bank of India to go out of the scheme and proceeo to realise the security without obtaining the prior permission of the court.

85. Similarly, the monthly instalments payable to the Central Board of Trustees under the scheme would commence six month safter the restarting of all the departments of Unit No. 1. The company should pay simple interest on the outstanding amount at the rate agreed upon between the company and the Central Board of Trustees of the Provident Fund. The clause in thd scheme giving option to the Central Board of Trustees of the Provident Fund to recover the whole of the amount due to it in the event of the company committing default in payment Df monthly instalments would stand deleted. The Central Board of Trustees of the Provident Fund would not be entitled to recover damages as conceded in letter No. BPF-1969/44878-M Education and Labour Department, Government of Gujarat, dated 18th June, 1969. Whenever the Central Board of Trustees of the Provident found want to sell any property of the company under the rights conferred on the board in the scheme of compromise and arrangement the 'same shall not be exercised without prior permission of the court. It is not open to the board to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court.

86. The claim of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs Chemicals Private Ltd., MIS. Afflarshi Damodar and Mls. Atul,Cotton Traders shall be verified by the official. liquidator as court officer. After ascertaining the amount, half the verified claim will be converted into share capital of the company. The balance of 50 per cent. of the verified claim payable to Indequip Ltd. and Indian Electro Chemicals Ltd. shall not be payable by the company on their own concession in the event the scheme is finally sanctioned and is worked.

87. The directors to whom the management of the company would be restored by the provisional liquidator on the scheme being sanctioned are restrained from registering taking any steps hereafter pursuant to the applications already made in respect of charges created in f avour of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders by the decrees of the City Civil Court, Ahmedabad.

88. In the event of the scheme being finally sanctioned the Union Bank of India should pay to Asia Electric India Private Ltd. from the amount realised from the sale of scrap of Unit No. 11 of the mills of the company whole or a portion of its claim proportionate to the amount realised from sale of blading system, being part of the power plant of the company, sold by the said creditors to the company and having a charge on it for the unpaid price.

89. Sanction is hereby accorded to the scheme of compromise and arrangement, copy of which is annexed to this judgment subject to the aforemention'ed modifications and directions. The court hereby accords sanction to the reduction of share capital as envisaged in the scheme.

90. All the parties who appeared at the hearing should bear their respective costs, except the official liquidator whose costs should come out of the company. The costs payable to the official liquidator is quantified at Rs. 1,000.

91. The provisional liquidator is in charge of the company. The directions for return of possessionof the company will be given hereafter on judge's summons being taken out by the petitioner or the company. The operation of the order sanctioning the scheme is stayed till loth January, 1970, as two directors, namely, East India Company, and one other creditor, namely, Pratapsinh Vasantlal, intend to prefer an appeal against this order. The company to pay the expenses incurred by the provisional liquidator on the bills subn-iitted by him.

92. Orders accordingly.