Gujarat High Court
Veljee Shamjee, Girish Manilal Jhala ... vs Veljee Shamjee on 18 August, 1981
Equivalent citations: [1984]55COMPCAS107(GUJ)
Bench: A.M. Ahmadi, M.P. Thakkar
JUDGMENT Ahmadi, J.
1. Messrs. Veljee Shamji & Co., a registered partnership firm, filed Company Petition No. 5 of 1976, under s. 433 read with s. 439 of the Companies Act, 1956 (for short "the Act") for winding up the Bhavnagar Vegetable Products Ltd. (for short "the company"). The said company was incorporated in 24th November, 1945, under the Indian Companies Act, 1913, as applicable to the then State of Bhavnagar. The nominal capital of the company is Rs. 50 lakhs divided into 25,000 equity shares of Rs. 100 each and 25,000 ten per cent. cumulative redeemable preference shares of even value. The paid up capital of the company is Rs. 29,98,600 consisting of 17,492 equity shares of the value of Rs. 100 each and 12,494 cumulative redeemable preference shares of Rs. 100 each, full paid up. The redeemable preference shares were redeemable on par on 31st October, 1976, under the special resolution dated 24th June, 1967. There is also a sum of Rs. 575 received on forfeited shares.
2. The company was incorporated to manufacture, extract, refine, prepare for the market, stores, sell, purchase, transport, export, import and generally deal in all kinds of oils and oil products; to carry on all the mechanical and chemical process for extraction of oil from oil-seeds and for refining and dehydrogenating the same; and for the manufacture of vanaspati or vanaspati ghee. Immediately after its incorporation it set up a plant at Bhavnagar and had a promising start. Initially the company flourished and made substantial profits but by about the end of 1974 and the beginning of 1975, it encountered rough weather and was soon on the rocks having been compelled to close its manufacturing activity by about November, 1975. While the going was good, the company built up a high reputation so far as its financial stability and economic viability is concerned and, consequently, attracted large deposits, largely from middle class depositors. Unfortunately, by about the end of 1974, the company faced financial difficulties and lost its reputation in the market. The audited accounts of the company up to the end of October, 1974, reveal liabilities to the tune of Rs. 87,46,095 to sundry creditors. Besides, the company was indebted in the sum of Rs. 58,00,000 (approximately) to Messrs J. H. Rayner and Co., Ltd. The company had obtained loans from banks which were to the tune of Rs. 3,16,00,000. The profit and loss account of the company for the period ending on 31st December, 1975, revealed a loss of Rs. 201.71 lakhs and the total liabilities as and by way of secured and unsecured loans including current liabilities were around Rs. 315.75 lakhs. The result was that the entire capital of the company, its reserves and surpluses were swept away. The inevitable result was cessation of business and manufacturing activity by about the beginning of November, 1974.
3. The petitioner, M/s. Veljee Shamji & Co., was working as commission agent-cum-broker for the company and was entitled to receive commission aggregating Rs. 33,826.89 as per the bills submitted from time to time to the company. The details of the brokerage dues have been set out in the statutory notice served on the company dated 1st September, 1975. The petitioning creditors were also working as agents for Messrs J. H. Rayner & Co. Ltd., of Rayner House, 39, Hutton, Garden, London, ECIN 8BX, U.K. The partners of the petitioning creditors had a power-of-attorney from their principals, M/s. J. H. Rayner Co. Ltd. The said principals had entered into two contracts with the company dated 4th November, 1973, and 23rd November, 1973, whereby the company undertook to supply 1,000 metric tonnes of groundnut-hand-picked kernels (Bombay type) by March/April, 1974, at the price mentioned in the contracts. The U. K. Company paid a sum of Rs. 59,91,938 as pre-shipment advance to the company under the aforesaid two contracts. The allegation is that the company failed to ship the goods as per the contracts and also failed to refund the pre-shipment advance and thus failed to honour its contractual as well as financial obligations. The petitioning creditors not having been paid their commission of Rs. 33,826.89, which was indisputably due to them, served the company with a statutory notice demanding their dues on 1st September, 1975 (exhibit 'B'). The company admittedly received this notice but failed to meet the demand therein by either paying or tendering the amount or compounding the same to the satisfaction of the petitioning creditors. The petitioning creditors, therefore, filed the aforesaid petition praying that the company which was in insolvent circumstances and unable to meet its financial obligations be wound up.
4. The said petition came up for admission on 4th February, 1976, when the court directed notice pending admission to issue on the company calling upon it to show cause why the petition should not be admitted. This notice was served on the company on or about 7th February, 1976, but no appearance was entered on behalf of the company till 16th February, 1976, on which date the notice was made returnable. Thereupon, the petition was admitted on 16th February, 1976, and usual advertisements were directed to be published in the Government Gazette and local dailies. The date of hearing was fixed on 29th March, 1976, but before that date, on 8th March, 1976, the official liquidator was appointed provisional liquidator, who immediately took charge of the assets of the company. Shortly thereafter on 20th March, 1976, the court gave directions to invite offers for running the plant during the pendency of the petition. Although the company did not enter an appearance by 29th March, 1976, as the advertisement in the Gujarat Government Gazette was not published in time due to some confusion, advertisement was directed to be issued afresh and the date of hearing was fixed on 13th September, 1976.
5. In between, in response to the directions given on 20th March, 1976, the petitioning creditors filed Company Application No. 74 of 1976, on 12th July, 1976, under s. 391(1) of the Act, sponsoring a scheme on behalf of M/s. Tungabhadra industries Ltd. (for short "TIL"). The usual directions were given on 16th July, 1976, for convening separate meetings of the shareholders, the secured and unsecured creditors, etc., of the company. Before the chairman of the meetings submitted his report on 4th October, 1976, the company was ordered to be wound up by an order dated 15th September, 1976. On receipt of the report from the chairman of the meetings the petitioning creditors filed a substantive petition under section 391(2) on 21st October, 1976, which was heard from time to time and, lastly, on 1st July, 1977. On that date two other parties, Shri Balvantrai Oil Processing Co-operative Society Ltd. and Shri Jashbhai Nagjibhai Patel requested the court to postpone then hearing to enable them to put forward their own schemes offering better terms than the scheme sponsored on behalf of TIL. The court acceded to this request whereupon two petitions were filed under s. 391(1) of the Act on 21st July, 1977, being Company Applications Nos. 75 and 76 of 1977. Once again the usual directions were given in the said two applications for convening meetings of different interests to consider the scheme propounded by the said two parties. However, before the meetings could be held in pursuance of the directions given in the aforesaid two applications, the National Dairy Development Board (for short "NDDB") entered the field by filling Company Application No. 110 of 1977 on 26th August, 1977, under s. 391(1) of the Act, proposing its own scheme. Suitable directions were given in that application on 29th August, 1977, for convening meetings, etc. Pursuant to the directions of the court, meeting of creditors, etc., were held between 8th October, 1977, and 15th October, 1977, to consider the schemes propounded by three different parties under the aforesaid three separate applications. Ultimately, on 1st November, 1977, the chairman of the meetings presented his report to the court but no substantive petition was filed under s. 391(2) of the Act within the prescribed time by the first two applicants; only NDDB presented a substantive petition under s. 391(2) of the Act on 9th December, 1977. As that petition was filed beyond the statutory period, by Company Application No. 168 of 1977 condonation of delay was sought which was granted on 16th December, 1977. The above facts disclose that there are two competing schemes in the field, one of TIL and the other of NDDB.
6. The official liquidator appointed to work as the provisional liquidator of the company moved Company Application No. 151 of 1977, for inviting proposals from interested parties for running the plant of the company during the interim period till the final disposal of the winding-up petition and/or sanction of the schemes of compromise and arrangement proposed by different parties. That application was granted by the court by its order dated 19th December, 1977, and the official liquidator was directed to hand over the plant of the company to NDDB on the terms and conditions set out in the order whereunder NDDB was permitted to run the plant till 30th June, 1978, with option to renew the lease for a further period or periods and on such terms and conditions as the court thought fit to impose. The NDDB has been running the plant in pursuance of the said arrangement since then, and has paid the company over ninety lakhs by way of lease money. In running the plant on lease, NDDB has incurred substantial losses of over Rs. 80 lakhs.
7. The two company applications preferred under section 391(2) of the Act, one sponsoring the scheme of TIL and the other of NDDB could not be heard for one reason or the other. In the meantime under the aforesaid arrangement NDDB was running the plant of the company on lease. Before this interim arrangement was made in pursuance of the court's order of 19th December, 1977, the Union of India had on 14th November, 1977, filed Company Application No. 155 of 1977, for permission under s. 15A of the Industries (Development and Regulation) Act, 1951, to make, or cause to be made, an investigation into the possibility of running or restarting the industrial undertakings of the company by such person or body or persons as the Government of India may appoint for that purpose and further praying that till the report under the said provisions is received, and decision taken thereon by the Central Govt. the industrial undertaking or its management should not be transferred or handed over to any party or person whether in the winding-up proceedings or otherwise. Several affidavits were filed opposing the said Company Application including those by TIL, the United Commercial Bank. The State Bank of Saurashtra and the workmen of the company. The State Govt. supported the plea of the Central Govt. The official liquidator did not commit himself but merely pointed out existing circumstances to show that the intervention of the Central Govt. at that stage was not desirable. Before the court decided upon the interim arrangement to permit NDDB to run the plant on hire basis, the application of the Central Govt. was heard. The learned Additional Standing Counsel for the Central Govt. after some discussion in court made a statement that in view of the contemplated interim arrangement, the Central Govt. was not inclined to press for immediate permission but would revive the application at a later stage. The court, while according sanction to NDDB to run the plant on lease, kept the application of the Central Govt. pending. Thereafter, when the substantive petitions under s. 391(2) of the Act were set down for hearing, the learned Additional Standing Counsel for the Central Govt. was called upon to clarify whether the Central Govt. desired that orders should be passed on its application. The learned Additional Standing Counsel for the Central Govt. stated at the bar that he was instructed by Shri I. A. Siddiqi, Director (Vanaspati) in the Ministry of Civil Supplies and Co-operation, Government of India, to inform the court that "the Government of India does not press the summons at this stage and that if necessary it will take out a fresh summons in the light of the orders this court may make so far as the two competing schemes are concerned". On this statement, the said summons was disposed of.
8. One further development which took place in the course of the hearing of Company Petition No. 9 of 1978, filed by NDDB, may be taken note of at this stage as it has some relevance on the question whether the scheme sponsored on behalf of TIL survives for consideration by this court. In the course of the hearing it was alternatively suggested that if the court finds any legal flaw in sanctioning the NDDB scheme, the court may examine the possibility of selling the assets of the company to NDDB. The court felt that before any direction could be given to the official liquidator to take out a judge's summons for the above purpose, the court should have the valuation of all the assets of the company made by expert valuers. The official liquidator was, therefore, directed to get two valuers jointly, one to be suggested by the body of secured creditors and the other by NDDB. In pursuance of this order the valuation of the assets of the company was undertaken and the report is on the record of the case. At that time the following statement came to be made on behalf of the petitioning creditor who had sponsored the scheme of TIL :
"Mr. B. J. Shelat for M/s. Velji Shamji & Co., the petitioners, states that in view of the withdrawal of support by the bank to TIL, the scheme as put forward by his client is not practicable. In view of this, it is recorded that TIL on whose behalf nobody has appeared today is out of the picture as a party sponsoring the scheme before this court."
It may here be mentioned that during the pendency of the applications sponsoring the competing schemes an order was made on 1st November, 1977, in Company Application No. 131 of 1977, preferred by its workmen, that both TIL and NDDB should deposit a sum of Rs. 75,000 each with the official liquidator to meet with the demand of the workmen. It was understood that each party sponsoring the scheme, which deposits the amount as directed by the court for payment to workmen, would be reimbursed fully in case the scheme sponsored by such party is not approved by the court. In pursuance of this direction and having regard to the statement made by Shri B. J. Shelat on behalf of the party sponsoring the scheme of TIL on 22nd December, 1978, TIL took out a Company Application No. 279 of 1979, on 29th December, 1979, for the refund of Rs. 75,000 on the premises that it was out of the picture. This company application was supported by affidavit filed by Mr. Dalal, the constituted attorney of TIL. In view of this development which took place during the pendency of the two competing schemes, it was strongly argued on behalf of NDDB that TIL was no more in the picture and hence there was no question of granting approval to the scheme propounded on behalf of TIL.
9. Further developments which took place on different dates thereafter may now be briefly recapitulated. On 15th February, 1980, the representatives of the various creditor banks as well as Gujarat State Finance Corporation (GSFC) informed the court in no uncertain terms that they supported the NDDB scheme. They also pointed out that is view of the developments set out in the preceding paragraph, the TIL scheme was no more in the picture. The learned counsel for TIL asked for time to clarify its position. On the two subsequent dates fixed for hearing, no one appeared on behalf of TIL. On 29th February, 1980, the learned counsel for M/s. Velji Shamji & Co., the sponsor of the TIL scheme, caused a flutter when he informed the court that his client no longer supported the TIL scheme but on the contrary supported the NDDB scheme. However, on 4th March, 1980, TIL clarified that if continued to be interested in the scheme sponsored on its behalf and would press for its acceptance. On the very same day by Company Application No. 106 of 1980, a Judges summons was taken out by NDDB for (a) substitution of its name in place of M/s. Velji Shamji & Co., the sponsor of the TIL scheme; and (b) for modification of the said scheme to bring it in line with the NDDB scheme. Hot on the heels of this judge's summons, that is, on 13th March 1980, M/s. Velji Shamji and Co. filed Company Application No. 114 of 1980, praying for the substitution of NDDB for TIL in the scheme sponsored by it and for the modification of the TIL scheme to bring it in conformity with the NDDB scheme. The reason for this sudden shift in its attitude is ascribed to (a) the refusal on the part of the nationalised banks, the statutory creditors and GSFC to support the TIL scheme; (b) the huge investment already made by NDDB for running the plant during the interregnum, and (c) public interest demanded that the NDDB scheme should not be rejected on technical grounds as such rejection would prove detrimental to the interests of all concerned. Thus, while considering the question of according approval to either of the two competing schemes, this court is also called upon to decide if, in the facts and circumstances of the case and having regard to the interests of all concerned including the labour, it would permit substitution as prayed for in the aforesaid two company applications, should it, for technical reasons, find itself unable to approve the NDDB scheme.
10. During the course of the hearing it was rightly pointed out by Mr. Cooper, the learned counsel for TIL, that the two petitions for sanction of the schemes were advertised under r. 80 of the Rules way back in November, 1976, and December, 1978, but the hearing could not be completed on those dates or immediately thereafter for one reason or the other and as considerable time had since elapsed it would be proper to give intimation of the hearing of the said two petitions and the judge's summons for substitution by fresh advertisement. Accordingly, fresh advertisements were directed to be inserted in the very same newspapers intimating all concerned to attend court to state their points of view in the changed circumstances. Pursuant to this order passed by me on 14th March, 1980, the necessary advertisements appeared in the newspapers and in response there to representatives of various interests made their submissions before me on the merits and demerits of two competing schemes.
* * * *
A comparative study
48. A comparative study of the two schemes reveals that the scheme proposed by NDDB was far more beneficial to practically all interests than the TIL scheme as originally proposed. Under the TIL scheme depositors claiming the principal amount of Rs. 7,500 and below were to receive 30 per cent. and the rest 20 per cent. of the principal amount, without interest, whereas under the NDDB schemes the whole of the principal amount was offered within one month from the effective date, without interest. It was only at the meeting that TIL agreed to pay 50 per cent. of the principal amount with 12 per cent. interest to all the depositors. This offer was further enhanced after the introduction of the NDDB scheme to payment of the whole of the principal amount is four equal instalments with interest after the first instalments at 14 per cent. per annum. So far as other unsecured creditors are concerned TIL offered 20 per cent. of the principal amount without interest in five equal yearly instalments as against the NDDB offer of payment of principal amount in full within one month from the effective date. TIL has not upgraded its offer so far as the other unsecured creditors are concerned. The employees were to be treated as laid off from 1st November, 1975, and were to be paid 50 per cent. of the lay off compensation up to 31st December, 1975, under the TIL scheme whereas under the NDDB scheme all permanent employees were to be paid full salary from 1st November, 1975, to 31st December, 1975, and others were to receive gratuity. The offer underwent an upward revision only after the workers threatened to vote against the scheme at the TIL meeting. NDDB also revised their scheme to bring it in line with the TIL scheme. So far as the preference shareholders are concerned TIL agreed to pay them Rs. 10 per share whereas NDDB offered Rs. 25 per share straightway. Even the subsequently upgraded offer made by TIL does not offer the preference shareholders more than Rs. 20 per share. Thus, even at present NDDB offers Rs. 5 per share extra as compared to TIL. Equity shareholders were to receive a paltry Rs. 0.10 per equity share under the TIL scheme but NDDB offered Rs. 10 per share to which NDDB reacted by raising it to Rs. 15 per share. It will thus appear from the above that the scheme initially proposed by TIL was far from fair and equitable. It was only after NDDB entered the field that TIL was compelled to revise its scheme upwards. Even so it does not match the NDDB scheme in all respects. Therefore, it is intriguing that all the aforesaid interest voted for the TIL scheme. Similarly M/s. Rayner & Co. Ltd. which accepted the TIL scheme voted against the NDDB scheme offering the same terms. Speaking broadly, it seems to me that this was largely due to proxy votes and behind the curtain manoeuvres.
Know thy sponsors
49. TIL is a public limited company belonging to the Birla group which is engaged in the business of manufacture, sale and export of vegetable oils, oil cakes, hydrogenated vegetable oils, i.e., vanaspati, washing soap and other by-products made from oil. It supplies technical know-how relating to the said business to foreign concerns and is extending its activity to Philippines involving a project cost of rupees six crores. Financially it is a sound concern; its assets far exceed its liabilities and its sales turnover at the end of September 30, 1975, was to the tune of Rs. 28,99,21,627.
50. NDDB on the other hand has been set up by the Ministry of Agriculture and is registered under the Societies Registration Act. It is carrying on multifarious activities all over the country mainly in the field of development of dairy industry. According to NDDB the Government of India is seriously considering a proposal to evolve a national policy on edible oils. It is proposed to obtain 2,50,000 tonnes of vegetable oil as gift from co-operatives in the USA and to utilise the sale proceeds therefrom for stimulating production of oil seeds and oil within the country and to build up an efficient system of procurement, processing and marketing of oil in the State of Gujarat. Depending upon the final outcome of the policy decision to be taken by the Government of India as to the instrumentality through which the long-term national policy on edible oil should be implemented, the proposed scheme would be implemented by the specific agency if so set up or alternatively by NDDB or its nominee. Financially it too is sound.
The fiscal indiscipline
51. The company was incorporated in 1945 under the 1913 Act. It set up a plant in Bhavnagar and had a promising start. In the years that followed it flourished and made huge profits and earned a good reputation for financial stability in the market. But alas, by the end of 1974 and the beginning of 1975, because of the misdeeds of those in management, the edifice built over the last three decades began to fall apart and there was a total cessation of business by November, 1975. The audited accounts of the company at the end of October, 1974, showed that the company was indebted to the banks in the sum of Rs. 3,16,00,000, to M/s. J. H. Rayner & Co. Ltd. in the sum of Rs. 58,00,000 and to sundry creditors in the sum of Rs. 87,46,095. The profit and loss account of the company for the period ending 31st December, 1975, shows that the company had incurred heavy losses to the tune of Rs. 201.71 lakhs and the total liabilities were in the vicinity of Rs. 315.75 lakhs. The liabilities have by the passage of time multipied, notwithstanding the receipt of compensation from NDDB, which must be in the vicinity of over Rs. 90 lakhs by now, which amount is subject to income-tax liabilities. The valuation report submitted by M/s. Dixit and Bhate of CHEMCON in July, 1979, shows that the total assets are worth Rs. 68,51,979 only. It becomes immediately clear from the above figures that as liabilities were far in excess of the assets the value of the equity share of the company stood reduced to zero on the date of the institution of the petition. It may at this stage be pointed our that it is generally believed that this tragedy befell the company mainly due to misdeeds of then directors of the company who, it is alleged, siphoned out the company's money for their personal gains and thereby denuded the company of the vital financial support needed to run the plant; but as this is a matter under investigation by the CBI which has filed charge-sheets in a few cases, I do not think it proper to dilate on the subject. Suffice it to say that by the end of December, 1975, the company was financially wrecked.
Submissions at the bar
52. We have had fairly comprehensive picture of the two competing schemes. I will now indicate in brief the view points of the different interests, including the sponsors of the two schemes, as projected in the submissions of their learned counsel. The submissions of Mr. K. S. Nanavati, the learned counsel for NDDB, run thus : NDDB is a non-profit-making institution aimed at advancing the cause of research in different fields and in making available consumer goods at competitive prices. Its object is to benefit both the producer and the consumer by eliminating the middlemen who takes away a big slice and thereby spirals the prices of various commodities. TIL on the other hand is floated with the object of profit-making and it cannot have the interest of consumers or producers at heart but would on the contrary try to exploit them with a view to boosting up its profit-margin. Under the TIL scheme the total offer is to the tune of Rs. 1,19,94,000 while under the NDDB scheme the offer is to the tune of Rs. 2,86,51,000, that is, Rs. 96,00,000 more than what is offered by TIL. If NDDB enters the edible oil market on no-profit-no-loss basis, both the groundnut growers and consumers will benefit by the elimination of the middleman whose removal from the scene will help stabilise the prices at a reasonable level.
That is why the nationalised banks, including the Dena Bank with whom over 75 per cent. of the equity shares are pledged, the secured creditor, GSFC, the preference-shareholders in value though not in number, the principal unsecured creditor, M/s. Rayner & Co., some of the depositors and even M/s. Sidhrani and Musa Adam of Rashtriya Mazdoor Sangh, have desired NDDB to be in the management saddle. Mr. J. I. Mehta, the learned counsel who spoke on behalf of all the nationalised banks, made it absolutely plain that the nationalised banks would not support TIL in management and that they would lend their wholehearted and unreserved support to NDDB to run the plant of the company. Lastly, counsel pointed out that earlier TIL had declared that it was out of the picture when it realised that the nationalised banks had withdrawn support and that is why after the order of 22nd December, 1978 TIL too out a company Application No. 279 of 1979, dated 29th December, 1979, for withdrawal of the deposit money. The situation has since worsened as TIL's sponsor, M/s. Veljee Shamji and Co. (the petitioning creditor), has withdrawn support and has thrown its lot with NDDB. In these circumstances, Mr. Nanavati contends that NDDB should be substituted in place of TIL.
53. Mr. B. R. Shah, the learned advocate for the liquidator, argued that if the nationalised banks, GSFC, the statutory creditors and the principal creditor, M/s. Rayner & Co., do not support the TIL scheme and decided to take their remedy outside the liquidation proceedings, it would be practically impossible for the liquidator to liquidate the assets and in any case having regard to the fiscal condition of the company, no other creditor or member of the company except the secured creditor would receive anything towards their dues. He also emphasised that the original sponsor of TIL had lost confidence in the capacity of TIL to operate the scheme without the support of the secured creditors and this fact should weigh with the court in deciding whether or not to permit substitution as prayed by NDDB.
54. Mr. Cooper, the learned counsel for TIL, countered the submissions made by Mr. Nanavati and Mr. Shah by pointing out that the NDDB scheme was a dead scheme as it did not receive statutory recognition and could not be approved under s. 391 of the Act. The effort at substitution is nothing short of seeking back-door entry. Since NDDB had failed to sell its scheme at the meetings of the different interests held for according approval thereto, the subsequent success in winning over a few creditors and M/s. Sidhrani and Musa Adam, the office bearers of the Rashtriya Mazdoor Sangh, cannot infuse life into a dead scheme. In the circumstances, it would be a fraud on the statute if the TIL scheme is by passed by allowing substitution as prayed for in the summons taken out by NDDB and Velji Shamji and Co., because the court would be doing indirectly that which the statute does not directly permit. Again, if till is capable of working the scheme, there is no reason why it should be refused the opportunity to do so particularly when its scheme has been approved by the creditors/members as well as worker/employees of the company at the meetings held for that creditors having regard to their furniture trade prospects depending on who will be in the management of the company. The equity shareholders had refused to sell their shares to NDDB and they cannot be compelled to do so and the mere fact that approximately 75 per cent. of the shares are pledged with Dena Bank is not a valid consideration for the simple reason that it would be open to Dena Bank to exercise its rights as a pledge. If the nationalised banks and the secured creditors do not support the TIL scheme, they can remain outside the scheme. There can be no question of exercise of power under s. 392(1)(b) of the Act as it contemplates an existing scheme which has received sanction and which in the opinion of the court requires modification. He, therefore, submitted that unless the court gives sanction to the TIL scheme which has received statutory recognition, there can be no question of invoking s. 392(1)(b) because under that provision there can be modification of an existing scheme. Under the circumstances, counsel submitted, no valid reason exists for substituting NDDB as the sponsor of the TIL scheme which has received statutory recognition.
55. Mr. Vakharia who represents Mr. Subodh Mehta, President of the Bhavnagar Kamdar Sangh, claims that the majority of the workers employees have joined the said union and they do not approve of NDDB as the sponsor of the scheme. According to him, the approach of the officials of NDDB towards the workers is rude, insulting and inhuman and hence the workers are disinclined to work under such highbrow bosses. During the short period that NDDB has been in management of the plant and machinery of the company under the interim arrangement approved by the court, it has suffered substantial losses because of the mismanagement on the part of those incharge of the plant and yet the management has throughout tried to throw the blame on the workers/employees of the company by propagating that the workers/employees refused to co-operate with the management. The management has by a series of acts of omission and commission alienated the workers who have lost confidence in NDDB to smoothly run the plant and machinery of the company under the scheme proposed by it. Mr. Vakharia, therefore, made it clear that the workers/employees of the company who were the members of the Bhavnagar Kamdar Sangh are totally opposed to NDDB being in the management saddle.
56. Mr. J. C. Bhatt, who appeared for NDDB at a later stage, pointed out in his reply that the agreement which TIL had reached with 91 per cent. of the equity shareholder is of no relevance as the shareholders have no interest whatsoever and their whishes need not even be ascertained because if the company is wound up, they are certain to bet nothing, as the value of the company's total assets is far less that the claim of the secured creditors. In the circumstances, what is offered to the equity shareholders under the scheme is more or less by way of a gift. The equity shareholders cannot transfer their shares without the court's sanction in view of s. 536(2) of the Act. Mr. Bhatt pointed out that Mr. Navlakha, an employee of the Birlas, had gone round and collected proxies with the help whereof TIL was successful in defeating the NDDB scheme at the meeting of the equity shareholders. While assuming the court that the grievance of the workmen would be examined and redressed, Mr. Bhatt submitted that NDDB was prepared to pay the workmen in full outside the scheme. In brief, his submission was that the objections against the plea for substitution are not well-founded and the court should disregard them.
Statutory requirements :
57. Chapter V of the Act deals with compromises, arrangements and reconstructions of companies which are liable to be wound up under the Act. Section 391 of the Act provides that where 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 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. Sub-s. (2) of s. 391 next provides that if a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company. This sub-section has two-fold significance, namely, (i) that the compromise or arrangement must be approved by the requisite majority present and voting at the meeting; and (ii) it must be sanctioned by the court.
58. A scheme of compromise or arrangement can be proposed on the summons taken our either by a creditor or a member of the company or by the liquidator if the company is being wound up. On receipt of such a summons the court has to give directions for convening meetings of the members, or class of members, or creditors, or different classes of creditors, under the chairmanship of a person appointed by the court. Once this direction for convening meetings is given, the function of the court under s. 391(1) of the Act ends. Thereafter, on receipt of the report of the chairman as to the outcome of the meetings, if the scheme has received statutory recognition, i.e., has been approved by the requisite majority, an application under s.391(2) of the Act for sanctioning the scheme will have to be moved. At that stage the court would address itself on three points, namely : (i) whether the statutory provisions have been complied with; (ii) whether the class or classes affected by the scheme were fairly and properly represented at the meetings; and (iii) whether the arrangement is such as a man of business would reasonably approve, that is, whether the scheme is fair and reasonable and does not hurt any class or classes of persons affected thereby. While considering the scheme, in addition to the above, the court will also examine its effect on the workers/employees of the company with a view to safeguarding their interests. The section confers a wide discretion on the court in the matter of the according its sanction to the compromise or arrangement between the company and its creditors/members. The court is not bound to superadd its seal to the scheme or arrangement merely because it has received approval of the requisite majority at the meetings held for that purpose. The use of the expression "if sanctioned by the court" in s. 391(2) clearly suggests that the discretion conferred on the court is of the widest amplitude and regardless of the fact that the scheme has been approved by the requisite majority, the court will refuse to put its seal thereto if its purpose is not bona fide but merely to shield the misdeeds of the ex-directors or if it oppresses the minority or is otherwise inequitable. Only a scheme which is fair and reasonable and propounded in good faith will receive the court's approval provided the abovementioned three conditions are satisfied. Once the court sanctions the scheme it acquires statutory force and becomes binding on all the members, creditors and contributories including the liquidator, their dissent at the meetings notwithstanding.
59. In re Sidhpur Mills Co. Ltd. AIR 1962 Guj 305, Miabhoy J. succinctly explained the function of the court while exercising power under s. 391(2) of the Act. He observed (headnote) :
"The function of the court is two-fold. The first function is to determine whether the statutory requirements as laid down in section 391 of the Companies Act have been complied with. The requirements which have been laid down in section 391 are the sine qua non for sanctioning the scheme. However, even if the statutory requirements have been complied with, that does not mean that the court must sanction the scheme as a matter of course. The Legislature has purposely left the discretion with the court in this respect. The court should apply its judicial mind to the scheme and reach a conclusion of its own. It must consider whether it is in the interest of the company as a whole and of the class of persons for whom the majority acts and whether the scheme is such that it must be pushed through. Therefore, the correct approach to a case is to bear in mind that the court is neither called upon merely to register a decision of the majority, nor is it called upon to act in such a manner that the minority will create a stalemate and thereby retard the progress which the majority has legitimately and reasonably a right to except and make. The court must test the scheme not from the point of view of a lawyer or an accountant or an expert, but it must look at it from the point of view of a reasonable and a fair minded person. When dealing with a company which is dealing in commerce or industry or with similar activities, the scheme has got necessarily to be looked at from the point of view of a prudent commercial man."
These oft-quoted observations clearly lay down that the scheme must be scrutinised by the court from the point of view of a prudent commercial man and not an expert. The attitude of the court must not be of a sceptic who is our to find faults but of a reasonable and prudent businessman whose insistence is not for an ideal scheme but a workable scheme which would help revive the sick unit. Every circumstance which a reasonable and prudent businessman is expected to bear in mind while approving the scheme must be taken into consideration by the court and thereafter if the court finds that the majority has acted fairly and honestly and has not oppressed the minority in any manner whatsoever, it will proceed to accord sanction to the scheme.
60. In re Maneckchowk & Ahmedabad Mfg. Co. Ltd. [1970] 40 Comp Cas 819 (Guj), the court reiterated that in exercising its discretion in sanctioning a scheme of compromise with members and creditors under s. 391(2) of the Act, it 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 and determine that it is a reasonable and while doing so, it will certainly weigh the wishes of the majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one and the court must be satisfied that the majority was acting in a bona fide and honest manner and in the interest of the class that it represented at the meeting. If the scheme is such as a fair-minded 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.
61. In Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp Cas 227 (Guj), the court, while dealing with the question of according sanction to a scheme under s. 391(2) of the Act, observed that in exercising its discretion in according sanction, the court will consider, firstly, whether the statutory provisions have been complied with; secondly, whether the classes were fairly represented by those who attended the meeting and whether the majority were acting bona fide; and, thirdly, whether the scheme is such as a man of business would reasonably approve. It was pointed out that the court must be carefully however, to see that the principles laid down are never so narrowly interpreted as to reduce it to a mere registering agency and preventing it from seeing whether there is such an objection to it that any reasonable man might say that he could not approve it. While examining the scheme the court must bear in mind the interest of that small class of shareholders and dissident members, who, for obvious reason, cannot and do not participate in the meetings or in the proceedings before the court and who took upon the court to protect their interests even if they are not before it. The court pointed out that it is a hard reality that the leadership of a company is sometimes vested in the hands of the few businessman occupying strategic positions of great power and such businessman often promote schemes which may appear at first sight to be prudent and beneficial to the shareholders but which may in fact conceal the clever design to promote their personal interests at the cost of innocent investors. Since these business magnates usually hold controlling interest in the equity capital of the company or can procure proxies in diverse ways and since the few shareholders who personally attend the meeting do not necessarily represent the well informed opinion, such schemes are often pushed through even with more than the statutory majority. The well informed class of shareholders, such as, financial institutions, statutory corporations, etc., scrutinise the scheme with an expert's eye and it is presumed to act bona fide and for the benefit of the company as a whole. It must, therefore, be realised that before the court sanctions a scheme, it must not only be satisfied that the statutory provisions have been complied with but must also be satisfied that the minority is not unduly oppressed and that those who are promoting the scheme are not doing so merely to advance their personal interests at the cost of innocent investors.
62. Having clearly understood the width and amplitude of the court's power under s. 391 of the Act, we may now go to the next important provisions, namely, s. 392, the relevant part whereof reads as under :
"392. (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it -
(a) shall have power to supervise the carrying out of the compromise or arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter to make such modifications in the compromise or arrangement as it may consider necessary for the power working of the compromise or arrangement."
The rest of the sub-sections are not material for our purpose.
63. Under s. 392(1)(b) of the Act, the court has power, at the time of making an order sanctioning the scheme, to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the scheme. The court can exercise this power and modify the scheme of compromise or arrangement with a view to making it effective and workable. A power of the widest amplitude is conferred on the court by this provision to make such modification in the scheme as it might consider necessary, either at the time of sanctioning the scheme or at any time thereafter, with a view to making the working of the scheme efficient and smooth. As pointed out in the case of Bank of Baroda Ltd. [1976] 46 Comp Cas 227 (Guj), the role which the courts have to play in this country is more vital and potent; it is not only an inquisitorial and supervisory role but also a pragmatic role which requires the forming of an independent and informed judgment as regards the feasibility or proper working of the scheme. The submission of Mr. Cooper, that the plea for the exercise of power under s. 392(1)(b) of the Act cannot be entertained in the absence of a sanctioned scheme, runs counter to the plain language of s. 392(1)(b) of the Act which in terms states that the court may at the time of making the order sanctioning a compromise or arrangement under s. 391 or at any time thereafter give directions in regard to any matter or make such modifications in the scheme as it may consider necessary for the proper working thereof. It is, therefore, abundantly clear that the power can be exercised by the court at the time of sanctioning of the scheme or thereafter. If, in the facts and circumstances of a given case, the court is satisfied, while sanctioning the scheme under s. 391(2) of the Act, that for the proper working of the scheme certain modifications are necessary, it may simultaneously modify the scheme in exercise of the powers conferred upon it by aforesaid sub-section. In exercising power under s. 392(1)(b) of the Act, the court must be governed by the paramount consideration that the modification is necessary for the proper working of the scheme.
64. The next question to be considered is whether the court can in exercise of power conferred upon it by s. 392(1)(b) of the Act substitute one sponsor for another while sanctioning the scheme under s. 391(2) of the Act. A scheme under s. 391 is a compromise or arrangement between a company and its creditors or between a company and its members. The question then is, if the scheme is between a company, which is a juristic personality, and its members and creditors, can it be said that the personality of the sponsor is of secondary importance and the court can while exercising power under s. 392(1)(b) of the Act substitute one sponsor for another even though the scheme proposed by the sponsor sought to be substituted did not receive approval at the meetings of the diverse interests called for considering the scheme ? Even though a company is undoubtedly a juristic personality, it is well known that the whole show is monitored by the human machinery which is the decision-making body so far as the day to day management is concerned. The observations of Viscount Haldane L.C. in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705 (HL), may be recalled with advantage (at p. 713) :
"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation."
These observations were quoted with approval in Mansukhlal v. M. V. Shah, Official, Liquidator, Liquidator of Hathising Mfg. Co. Ltd. (In Liquidation) [1976] 46 Comp Cas 279 (Guj). The learned judge, after reproducing the aforesaid observations, proceeded to observe that the human machinery is the alter ego but because of the fiction of law the company is independent of the persons constituting it. But, when a situation arises where the court is called upon to decide who is running the show, who is responsible for certain acts and omissions of the company, who is the very ego and centre of the company, the veil of corporate personality has to be lifted to find out the person. Mr. Cooper placed emphasis on the following observations made by the learned judge (at p. 289-290) :
"Viewed from this angle, the position of a sponsor of the scheme of compromise and arrangement is of such a vital nature that if there is a complete substitution of the sponsor, the modification sought for substitution is of a basic nature and before sanctioning such a modification, the matter will have to be examined with care and attention."
and submitted that the substitution of NDDB for TIL would be a modification of a basic nature which the court will not allow unless there are compelling reasons to do so, particularly in a case of the present type where the scheme proposed by NDDB has been thrown out at the meetings convened for approving the scheme. In making this submission Mr. Cooper overlooks the observations of the Supreme Court S. K. Gupta v. K. P. Jain [1979] 49 Comp Cas 342, on this important aspect which may be reproduced at this stage (at p. 359) :
"Strictly speaking, omission of the original sponsor (of a scheme of compromise or arrangement) and substituting another one would not change the 'basic fabric' of the scheme. The scheme in this case is one by which a compromise is offered to the unsecured creditors of the company and whoever comes in as sponsor would be bound by it. Undoubtedly, a sponsor of the scheme enjoys an important place in the scheme of compromise and/or arrangement but basically the scheme is between the company and its creditors or any class of them, or the company and its members or any class of them, and not between the sponsor of the scheme and the creditor or member. The scheme represents a contract sanctified by court's approval between the company and the creditors and/or members of the company. The company may as well be in charge of directors and the implementation of the scheme may come through the agency of the directors but that would not lead to the conclusion that during the working of the scheme the directors cannot be changed. If the scheme has to be ultimately implemented by the company as part of its contract and yet its directors can be changed according to its articles of association, we see no difference in the situation where a sponsor is required to be changed in the facts and circumstances of a case. Therefore, it is not possible to accept the submission that as and by way of modification one sponsor of a scheme cannot be substituted for another sponsor."
These observations of the Supreme Court leave no doubt that substitution of the original of a scheme by another one is not a change of such basic character as would affect the very fabric of the scheme. Dealing with the observations in Mansukhlal's case [1976] 46 Comp Cas 279, which at first blush give the impression that the substitution of one sponsor by another is a change of a basic character, the Supreme Court explained (at p. 360 of 49 Comp Cas) :
"This procedure was also followed by the Gujarat High Court in Mansukhlal's case [1976] 46 Comp Cas 279 and by referring to that part of the judgment, the High Court held that that judgment itself is an authority for the proposition that substitution of the sponsor is a vital change of a basic nature and cannot be ordered by the court acting under section 392 and must be referred to a meeting of the creditors or members. With respect, this is not fair reading of the judgment. At pages 290-291, the scope and ambit of the power of the court under s. 392 has been precisely set out and it is concluded that the power to modify would comprehend the power to substitute one sponsor for the other if he is found otherwise fit and competent."
It is thus clear that the observations in Mansukhlal's case [1976] 46 Comp Cas 279 on which considerable reliance was placed by Mr. Cooper in support of his argument, that a substitution of one sponsor by another affected the basic character of the scheme and cannot be allowed in exercise of the power conferred by s. 392(1)(b) of the Act, as it is not a modification, in the strict sense of the term, necessary for the efficient and smooth working of the scheme, is not a fair reading of the judgment as explained by the Supreme Court in the above-quoted paragraph. It is made amply clear by the Supreme Court that the substitution of a sponsor does not affect the basic fabric of the scheme and it would be open to the court to permit such substitution under s. 392(1)(b) of the Act if the circumstances of the case so demand. The result of the above discussion is that Parliament has in its wisdom armed the court with powers of the widest amplitude and if, on the facts and in the circumstances of the case, it appears to the court that its refusal to substitute the sponsor would ultimately truncate the scheme or adversely affect its working, there is nothing in the Act or in decided cases to fetter the court's power to modify the scheme to achieve the paramount objective of reviving the sick unit in a manner conducive to the interest of all concerned.
65. Mr. Cooper next argued that the court must decide the question of according sanction to the scheme on the basis of the circumstances prevailing at the time when the meeting was called for the purpose of considering the scheme and it would not be open to it to take subsequent developments into consideration. In support of this submission he strongly relied on the following passage from the judgment of Miabhoy J., in Sidhpur Mills Co. Ltd., In re, AIR 1962 Guj 305, 311 :
"It (the scheme) must be tested from the point of view of an ordinary reasonable shareholder, acting in a business like manner, taking within his comprehension and bearing in mind all the circumstances prevailing at the time when the meeting was called upon to consider the scheme in question. I am emphasizing the last point because an argument was made by Mr. Amin that certain circumstances or events which took place after the scheme had been considered should be taken into account. I do not wish to be understood to say that, in no case post facto circumstances or events cannot be taken into account, but, on the whole. I have come to the conclusion that, whilst, in some rare and exceptional cases, the court may take into consideration subsequent events to protect the interests of the company or the shareholders, as a general rule, the court should consider the resolution on the footing of the circumstances which were in existence at the time when the scheme was formulated, deliberated upon the approved."
The meetings of the members and creditors of the company were held in September, 1976, to consider the TIL scheme. At that time there was no other scheme in the picture. The NDDB scheme was presented to the court subsequently and the meetings were called to consider the said scheme in October, 1977, at which a representative of TIL was allowed to remain present and participate in the discussions. Certainly, Mr. Cooper cannot expect this court to ignore the subsequent development and sanction the scheme on the basis of circumstances prevailing in September, 1976. The upgrading of the two schemes which tool place at the NDDB meetings also cannot be ignored. If Mr. Cooper reads the observations of Miabhoy J. to mean that the subsequent events which took place at the NDDB meetings also cannot be considered, I am afraid he is placing too narrow a construction on the passage relied upon. Even from the above quoted passage it becomes clear that the learned judge was aware that no hard and fast rule could be laid down in this behalf and that in some rare and exceptional cases a departure from the general rule may be permissible in the interest of the company or its shareholders. If it is the submission of Mr. Cooper that the circumstances prevailing in September, 1976, when the TIL scheme was debated alone should be considered and the subsequent events that took place at the meetings held in October, 1977, to consider the NDDB scheme should be ignored, I reject the same out of hand. I am not prepared to give such a narrow meaning to the observations of Miabhoy J. reproduced earlier.
66. Mr. Cooper, however, emphasised that the court will not impose its decision on a vast majority of the members who rejected the NDDB scheme while exercising its discretion under s. 391(2) of the Act. Referring to the observations In re Manekchowk & Ahmedabad Mfg. Co. Ltd. [1970] 40 Comp Cas 819 (Guj), he submitted that the court must treat it as cardinal that its function does not extend to usurping the view of the members and if the scheme is otherwise fair and reasonable it must respect the majority vote cast at the meeting. This board general principle of law is indisputable but its application must necessarily depend on the facts of each case. In the first place, the scheme is between the company and its members. We have already seen that even though the sponsor of the scheme plays an important role, his substitution would not effect the basic fabric of the scheme. In fact, in the instant case, it is difficult to understand how the scheme, in so far as it concerns the members, will be affected if TIL is substituted by NDDB. By the substitution of NDDB the rights of the members will not be adversely in any manner; on the contrary, the NDDB offer is better. It is, therefore, clear that by substitution of the sponsor the provision of the scheme concerning the members is not sought to be altered to their detriment. If at all, it will stand improved.
67. Now, out of 17,492 equity shares, 2,593 shares are held by Ratilal Gandhi and his group; 1,666 shares are held by Javerbhai Jamnadas Thakkar and his group; and 11,679, share are held by Mohmadhusein M. Merchant and his group and only 1,553 shares are held by sundry shareholders. While considering the two competing schemes I have pointed out that notwithstanding the fact that NDDB offered to pay at the rate of Rs. 15 per equity share as against TIL's offer of Rs. 10 per equity share, the equity shareholders, for some inexplicable reason, spurned the NDDB offer. This was sought to be explained by Mr. Cooper by projecting the personality of the promoter of the TIL scheme as a far more astute businessman. This explanation is far from convincing. As pointed out earlier, under the TIL scheme the shares have to be transferred to TIL on payment of the price offered by TIL. Similar is the provision in the NDDB scheme. In fact, NDDB has offered a better price. Besides, the financial capacity to pay the price is not doubted. Ordinarily, therefore, the equity shareholders would opt for the NDDB scheme whereunder they would receive Rs. 15 per share as against Rs. 10 offered by TIL. It cannot be forgotten that before NDDB entered the field, TIL had offered a paltry 10 paise per share to the equity shareholders and even this flea-bite payment was approved at the meeting held to consider the TIL scheme. The shares are tightly held by three groups and the voting pattern shows that the NDDB scheme was rejected by proxy votes. There are serious charges of misconduct and misfeasance against the ex-directors of the company who own the bulk of the equity shares. A CBI enquiry is pending against them, Mr. Nanavati, therefore, charged that here was a secret deal between the Birlas and the ex-directors of the company whereunder the Birlas have agreed to shield the ex-directors for their misdeeds once their scheme goes through. Be that as it may, it is crystal clear that there is more than meets the eye in the equity shareholders rejecting the better offer made by NDDB. The subtle intrigues the precede the meetings are difficult to know as they are carried out on the sly but the rejection of an obviously beneficial offer is bound to raise eyebrows. But under the scheme the equity shareholders do not have any lasting interest. They are to be paid off and it should be of little concern to them who buys them. In the earlier part of this judgment it has been clearly brought out that the company was financially broke and was unable to pay its debts. The value of the company's assets was clearly insufficient to pay off even the secured creditor. Therefore, if the assets of the company were liquidated the ordinary shareholders could not except to receive anything for their shares. The offer to pay them a certain price per share is, therefore, clearly gratuitous or in the nature of a gift. In Re : Broomsfield Guild Pottery Society [1898] WN 80, it was said that if the company is insolvent and the scheme provides for the transfer of its business to another company, it is not necessary for the scheme to be approved by a meeting of ordinary shareholders, because they would receive nothing if the company were wound up and so they have no rights which are affected by the scheme. This principle was reiterated In re Tea Corporation Ltd., Sorsbie v. Same Co. [1904] 1 Ch D 12. In that case it was found as a fact that the value of the company's assets was such as to negative the notion that the ordinary shareholders had any financial interest in them. The ordinary shareholders did not vote in favour of the scheme at the meeting. The ordinary shareholders did not vote in favour of the scheme at the meeting. It was held that their dissent from the scheme was immaterial as they had no interest in the assets of the company and whatever was offered to them under the scheme was clearly in the nature of a gift. No decision disapproving this view is shown to me. So it matters little who pays the gift-money - TIL or NDDB.
68. It was, however, contended by Mr. Cooper that 91 per cent. of the equity shareholders had agreed to sell their shares to TIL outside s. 391 of the Act. He, therefore, argued that there was no scope for substituting NDDB for TIL since the equity shareholders had refused to sell their shares to NDDB. In the first place this arguments overlooks the provision in sub-s. (2) of s. 536 of the Act which, inter alia, provides that in the case of a winding up by or subject to the supervision of the court, any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void. Therefore, even if TIL has secured such an agreement from 91 per cent. of the shareholders (presumably the three groups holding the bulk of the equity holding) such an agreement would be void unless the court otherwise orders. In fact, such an agreement betrays the intrigues on the part of TIL to corner the shares and lends credence to the allegation of a secret deal between the ex-directors and TIL. Secondly, once a scheme is approved by the court, it receives statutory recognition and such an agreement executed in favour of TIL would not stand in the way of its implementation.
69. Mr. Vakharia vehemently argued that the wishes of the workers/employees must be respected and the fact that the workers had disapproved the NDDB Scheme cannot be ignored. He complained that the highhanded, rude and insulting behaviour of the officials of NDDB who are presently manning the unit had totally alienated the workers and if NDDB remains in the management saddle there will not be any industrial peace and that will jeopardise the smooth working of the unit under the scheme. Now, under the TIL scheme as originally proposed all the workers/employees were to be treated as laid off from 1st November 1975, and they were to be paid only 50 per cent. of their respective salaries/wages up to 31st December, 1975, in full and final settlement of all their claims in two equal instalments. Subsequently at the meeting TIL upgraded the offer by agreeing to pay up to 9th March, 1976, instead of 31st December, 1975. As against this NDDB offered to pay full salary/wages to all workers/employees from 1st November, 1975, to 8th March, 1976, within three months form the effective date. It agreed to pay gratuity to those workers whose services were terminated prior to the closure. At the NDDB meeting TIL once again upgraded the offer and NDDB also matched its offer accordingly. It will be seen from the above that but for the appearance of NDDB on the scene the workers would have received a raw deal. TIL was to exploit them and they would not have got a better deal but for the emergence of NDDB. At the hearing of this matter Mr. Nanavati went so far as to say that NDDB would pay the workers/employees outside the scheme fully, if they so desire. At the time when the meetings were called to consider the schemes offered to them, the workers/employees were represented by the office bearers of the Rashtriya Mazdoor Sangh and they voted for the TIL scheme even though the NDDB scheme had initially offered a better deal. Subsequently the workers/employees were divided into two groups on the Bhavnagar Kamdar headed by Mr. Subodh Mehta making its appearance. The said Sangh has entered an appearance through Mr. Vakharia and its President, Mr. Subodh Mehta, has filed a detailed affidavit pointing out the manner in which NDDB has dealt with the employees/workers. The office bearers of the Rashtriya Mazdoor Sangh have sine changed their approach towards NDDB on realising their mistake. At the hearing of this petition they appeared and stated that they have no objection if NDDB is substituted for TIL, in fact, they favoured the substitution; It clearly emerges from the above that there are two rival unions in the field one favouring TIL and the other favouring NDDB in management. Thus, the workers are divided on the question as to who should be in the ultimate management of the unit.
70. It will appear from the above discussion that the main objection of the Bhavnagar Kamdar Sangh is that the behaviour of the officers of NDDB who were in charge of the management was rude and unbecoming towards the workmen employed in the unit. While appreciating the grievance of the workmen, after the petitions was heard, the officers who were in the management have been replaced by others. I delayed the disposal of the summons to make sure if even after this change the grievance persists. Since then the working is smooth and there are no serious complaints. It must be realised that the burden of the song in the affidavit of Mr. Subodh Mehta is that the officials of NDDB who were in management behaved in a rude and insulting manner with the workmen and hence the workmen did not want NDDB in management. This objection can be and has been overcome by replacing the officers manning the key and sensitive posts in the unit. Therefore, this does not appear to be a strong ground for rejecting the substitution summons.
71. The other raised in the affidavit of Mr. Subodh Mehta is that during the interim period NDDB had suffered substantial losses because of mismanagement and want of experience in this line. The fact that it has suffered losses cannot be disputed. Mr. Vakharia, therefore, submitted that the workers/employees can never opt in favour of an inefficient management and would be justified in opting for stability to avoid recurrence of a similar situation within a short period. According to him the workers were inclined to opt for TIL not because there was any secret understanding with that concern but because they were satisfied that TIL would provide stable and efficient management having regard to its past experience in this field. It was, therefore, urged with considerable vehemence by Mr. Vakharia that the court should not foist on the workers an inefficient management which can promise nothing but a recurrence of the present situation within a few years and thereby worsen the plight of the workers. It must immediately be conceded that the welfare of the workmen under a particular scheme or management is a relevant consideration, more particularly when the court is deciding the question of substitution, and if the court is satisfied that a particular management will not be able to deliver the goods and the scheme will soon be on the rocks it will refuse to stake the future of the company and its workmen by opting in its favour. What we have then to see is whether there is justification in the apprehension expressed by Mr. Vakharia on behalf of one of the trade unions.
72. Let us first focus our attention to the affidavit of Mr. Subodh Mehta dated 14th March, 1980. By that affidavit Mr. Mehta has tried to question the NDDB claim made in the affidavit of Mr. Rangwala by relying on certain articles appearing in magazines and journals criticising the project popularly known as "operation flood" undertaken by NDDB based on the import of milk products. Without the necessary factual basis or foundation it would not be permissible for a court of law to act on certain articles projecting the view points of a few. A court of law acts on facts duly proved and not on individual opinions based on unauthenticated information.
73. After the fresh notice of hearing was issued Mr. Mehta filed another detailed affidavit dated 31st March, 1980, inter alia, contending that (i) NDDB had incurred substantial financial losses during the interim working of the unit; (i) there had been gross mismanagement in purchasing of groundnuts, cotton seeds, oil cakes, etc., and in the disposal of waste products because of want of expertise in this field; and (iii) the approach of the officers of NDDB manning the unit was rude, insulting and unbecoming towards the workers. I have already dealt with the last ground earlier and need not dwell on it any more. The first two points are interconnected and may be dealt with together. Now it is an admitted fact that NDDB has incurred losses during the working of the unit as and by way of an interim arrangement but at the same time it must be remembered that it has paid almost a crore of rupees by way of compensation. Its capacity to withstand the losses and at the same time pay a substantial amount by way of compensation speaks of its financial soundness. In the affidavit in rejoinder the purchasing policy of NDDB has been explained by its treasurer, Mr. Rangwala. The main reason for the heavy losses incurred by NDDB, in the opinion of Mr. Mehta, is its defective purchasing policy. According to Mehta, NDDB paid a price higher than the market price in purchasing groundnuts through Balwantrai Mehta Oil Processing Co-operative Society Limited in 1978. He points out that Mr. H. Gohil of the Gujarat Co-operative Marketing Federation had also questioned the action of NDDB purchasing groundnuts through the aforesaid society which was out to exploit the growers. Mr. Rangwala in his rejoinder points our that in 1978 NDDB purchased 18,000 tonnes of groundnuts and out of its total purchases only 400/500 tonnes were purchased through the said society while most of the remaining stock was purchased through the Gujarat Oil Growers Co-operative Federation with a view to eliminating the middlemen. Similarly, the purchases of cotton seeds were made through the said Federation. It would appear from the above that the allegation that the bulk of the purchases were made through the Balwantrai Mehta Oil Processing Co-operative Society is not well founded. There is no basis for the allegation that the groundnut purchase were sub-standard. It must also be remembered that NDDB is not in a position of introduce long-term changes and instal new machinery for the simple reason that it has been permitted to work the unit as a stop-gap measure till the scheme to a snap strike notwithstanding the assurance given to court, which hampered production programme of NDDB. In the circumstances, it cannot be said that NDDB incurred losses because of lack of expertise in the field and defective purchasing policy. To my mind, the allegation of mismanagement has been made on hearsay and is without foundation.
Conclusion :
74. With the factual panorama clear and the statutory perspective explained, we come face to face with the core question whether or not, in the said facts and circumstances, substitution of NDDB in place of TIL is warranted. The scrutiny of the salient features of the TIL scheme, as originally presented to this court, has clearly shown that TIL was out to exploit practically all the interests, including the workmen, and the offer made by it under the said scheme could hardly be said to be fair and equitable. But for the introduction of the NDDB scheme, I daresay, TIL would not have upgraded its scheme. The NDDB scheme, though beneficial, was rejected by the use of proxy power. Now, as observed earlier, a scheme under s. 391 of the Act is essentially between the diverse interests on the one hand and the company on the other and the personality of the sponsor, though important, is not woven into the basic fabric of the scheme and it is always open to court to substitute one sponsor by another, if the facts and circumstances of the case so warrant. But, it must be realised that it is the TIL scheme which has received statutory clearance and not the NDDB scheme. There is, therefore, no question of according sanction to the NDDB scheme, the fact that it offers a better deal notwithstanding.
75. However, it cannot be overlooked that the financial institutions, viz., the nationalised banks and GSFC, have in no uncertain terms refused to support TIL though they initially voted in its favour before NDDB made its appearance. Technically, the TIL scheme stands duly approved even by these institutions but the court can ill-afford to ignore the subsequent developments. After the financial institutions voted in favour of the TIL scheme, NDDB entered the arena and the financial institutions voted in favour of its modified scheme. NDDB has since offered to deposit a sum of rupees one crore with the nationalised banks. TIL has expressed its inability to match this revised NDDB offer. So the financial institutions, particularly the nationalised banks, are disinclined to trade with TIL. Besides, they had not voted in favour of the TIL scheme in the absence of a better alternative. Can TIL effectively and smoothly implemented its scheme, if approved, without the co-operation of the financial institutions, particularly the nationalised bank ? The answer is not far to seek. The TIL scheme was originally sponsored by the petitioning creditor, M/s. Shamji Velji & Co. On an earlier occasion, when the banks withdrew support to the TIL scheme. Mr. B. J. Shelat, the learned counsel for the petitioning creditor, has informed the court that "in view of the withdrawal of the support by the bank to TIL, the scheme as out forward by his client was not practicable". The subsequent conduct of TIL in applying for the withdrawal of the deposit money of Rs. 75,000 from court betrays want of confidence on its part to run the unit under the said scheme without the support of the banks. If this was the situation in December, 1979, how does one account for TIL's revived interest in its scheme ? To my mind, it is because of the huge amount of accumulated compensation money, now in the hands of the official liquidator received from NDDB under the interim arrangement. If the TIL scheme is from NDDB under the interim arrangement. If the TIL scheme is approved and the winding-up order is revoked, TIL hopes to lay its hands on this huge amount of nearly a crore of rupees. But as things presently stand, the nationalised banks are not willing to co-operate with TIL. If at one stage TIL felt that it cannot run the unit under its scheme without the support of the banks and decided to withdraw, it is difficult to understand how it can hope to implement the scheme now.
76. It must be borne in mind that in response to the advertisement issued by the official liquidator some time in November, 1977, NDDB alone showed interest in running the plant on an interim basis. It is because of the interest shown by NDDB that the employees/workers of the company were re-employed and were able to earn their living. Otherwise their plight would have been ruesome. It is under this interim arrangement that NDDB paid compensation to the official liquidator at the rate of Rs. 3 lakhs per month. Even after the expiry of the duration of the interim arrangement and notwithstanding the loss, NDDB continued to provide employment to the workers by running the unit up to date. Thinking retrospect, the office-bearers of the Rashtriya Mazdoor Sangh realised their mistake in opposing NDDB and that is why at the hearing they supported the prayer for substitution. In the meantime, another trade union headed by Mr. Subodh Mehta entered the field and it is opposed to NDDB being the management saddle. I have dealt with this inter-union rivalry in the earlier part of this judgment and do not think it necessary to restate the facts. Suffice it to say that on the question of substitution the workers are divided. None the less it cannot be forgotten than since the last about three years it is NDDB which has provided bread to the hungry workmen of the unit.
77. The statutory creditors, such as the taxation Departments, municipality, electricity board, etc., who are outside the scheme, have also favoured NDDB. The nationalised banks and GSFC have made it clear that they favour the substitution of NDDB for TIL. LIC, which holds a sizable number of preference shares, also prefers NDDB. Thus, the well-informed class which, it must be presumed, must have carefully considered the question of substitution having regard to its interest and the long-term interest of the company, has favoured NDDB. If all these creditors do not support TIL it is naive to think that TIL would have a smoothsailing. If as a result of considerable effort put in by all concerned, a fair, reasonable and workable scheme emerges, as in the present case, every endeavour must be made by the court to revive the sick unit by according approval to the scheme. But if it is realised that a workable scheme is likely to be truncated because the financial institutions and the statutory creditors are opposed to a particular sponsor and are unwilling to do business with him, should not the court substitute the sponsor to salvage the scheme in larger public interest rather than allow it to wither away ? In such a situation if the court refuses to adopt a pragmatic approach and insists on the same sponsor implementing the scheme on the erroneous belief that he forms part of the basic structure of the scheme, the scheme is bound to face rough weather and if it capsizes (a risk not worth taking) it will prove disastrous to all interests, particularly the labour, for we will be back to square one.
78. On the one hand NDDB is a non-profit making body operating in the co-operative field while on the other hand TIL has profit-making as its objective. The NDDB objective is to benefit the producers as well as consumers by eliminating the middleman who is generally responsible for hiking up the prices of consumer goods and thereby offer the same at competitive rates. As its objective is not profit-making it can certainly offer its products at a price which is lower than that of a private enterpreneur such as TIL, and at the same time indirectly curb the monopolistic tendencies. Besides, it has the backing of the nationalised banks, GSFC, LIC and the statutory creditors. From the very outset it put up a fair and a reasonable scheme evincing no desire to exploit any interest. TIL, on the contrary, initially put up an unreasonable, unfair and inequitable scheme with a view to exploiting every interest. A comparative study of the two schemes as initially proposed, undertaken in the earlier part of this judgment, highlights this difference. TIL did not hesitate to employ unfair and dubious methods, such as, exhorting the equity shareholders to refuse to sell their shares to NDDB under the scheme, entering into agreements outside the court to purchase the shares, purchasing proxies and using proxy-power to defeat the more beneficial NDDB scheme. That seems to be the reason why the well-informed class of creditors is not favourably inclined towards TIL. If, having regard to this background, the nationalised banks, GSFC, LIC and the statutory creditors have lost confidence in the capacity of TIL to run the plant under the scheme, they cannot be blamed. Even the petitioning creditor who sponsored the TIL scheme expressed want of confidence in TIL and not only withdrew but moved a separate summons to substitute NDDB for TIL.
79. The principles which should guide a court in a situation like the present one may now be outlined. Once a fair, reasonable and bona fide scheme emerges, it should be the endeavour of the court to push it through. If there are obstacles which threaten the smooth working of the scheme, the court should try to remove them. A scheme under the Act is essentially between the members/creditors on the one hand and the company on the other and is not in the nature of a tripartite agreement between the members/creditors, the company and the sponsor of the scheme. Therefore, even though the sponsor enjoys a position of importance in any scheme of compromise or arrangement under the Act, his position is not so sacrosanct that the court cannot substitute him by another in exercise of the power under s. 392(1)(b) of the Act. Of course, the court will not lightly substitute the sponsor of the scheme unless it is satisfied that refusal to exercise the discretionary power will result in the otherwise workable scheme being defeated. If the court is on the horns of a dilemma, whether to substitute the sponsor or run the risk of throttling the successful implementation of the scheme, the court will certainly prefer the former course. Speaking generally, the purpose of presenting a scheme is not only to benefit the members/creditors of the company but also to subserve public interest and if this objective cannot be satisfied without substituting the sponsor, the sponsor must yield. Therefore, in cases where the court is satisfied that the scheme cannot be successfully implemented without substituting or changing the sponsor, the court will, without doubt, lean in favour of substitution for the obvious reason that it is preferable to implement the scheme under another sponsor (management) rather than allow it to be defeated altogether. It is the scheme which is of paramount importance and not the sponsor who promotes it. If the situation in a given case demands that the sponsor must be substituted to save the scheme, the court should not hesitate to do so and the sponsor who is replaced should not grudge it because the endeavour of all, including the court, should be to achieve the main objective, namely, to revive the sick unit in public interest. If this approach of the court is correct its effort should be to salvage the scheme and to save it from sinking by substituting the sponsor (TIL) whose stewardship is not acceptable to the nationalised banks, GSFC, LIC and the statutory creditors as well as the petitioning creditor who originally sponsored the TIL scheme. All these well-informed class of creditors have refused to co-operate with TIL but have extended their whole-hearted co-operation to NDDB. So far as the equity shareholders are concerned, as pointed out earlier, they do not have any lasting interest in the future of the company as they are to be paid off under both the scheme and it matters little who buys them. Besides, having regard to the company's insolvent circumstances the equity shareholders have no subsisting financial interest in the company and hence what they are to receive under the scheme is clearly in the nature of a gift. So far as the preference shareholders are concerned, out of 12,492 fully subscribed shares, LIC alone holds shares of the value of Rs. 10 lakhs. Besides, at the NDDB metting four shareholders holding 10,017 shares voted in favour of NDDB as against eight shareholders holding only 158 shares who opposed, which shows that NDDB is acceptable to the former who hold the majority of shares. So far as the unsecured creditors/depositors are concerned, their interest is not likely to be jeopardise if substitution is allowed. So far as the workers/employees are concerned, as pointed out earlier, they are divided because of interunion rivalry. NDDB is, therefore, prepared to treat them outside the scheme. It must also be remembered that when the question of running the unit on interim basis was under consideration, NDDB was the only part which came forward to serve public interest, namely, to revive the unit, go into production and offer employment to the workers who were rendered jobless on the closure of the unit. Since then it has invested a substantial amount in reviving the unit and has paid a huge amount by way of compensation also. Undaunted by the loss suffered by it during the interim period, it did not leave the workers in the lurch by withdrawing after the expiry of the lease period but exhibited optimism and confidence by continuing to run the unit even thereafter. It was heartening to learn from Mr. Nanavati that NDDB has almost reached the break-even point. It is true that for sometime the workers had certain misgivings and they had resorted to a snap strike but, as stated earlier, their grievance was against the personnel manning the unit. The top brass in the management of the unit underwent a change to redress their grievance and in order to watch their performance I allowed some time to pass. The unit has since been working smoothly without any serious labour problem. In fact, NDDB has increased the percentage of D.A. payable to the workers on the summons moved by the Rashtriya Mazdoor Sangh which shows that the labour-management relations are fast improving. It will appear from the above that by and large NDDB is acceptable to all concerned and since it is assured co-operation from the financial institutions, there is do difficulty in substituting it as the sponsor of the scheme which has received statutory approval.
Final order
80. The upgraded TIL scheme which has been approved by the statutory majority is sanctioned on the following terms and conditions :
(a) NDDB will stand substituting for TIL and the two judge's summons taken out for that purpose, namely, Company Application No. 106 of 1980 and Company Application No. 114 of 1980, are accordingly made absolute;
(b) in respect of each and every interest, the offer made by the finally upgraded TIL scheme will stand further upgraded according to the offer made under the upgraded NDDB scheme, to the extent the latter is beneficial to the concerned interest;
(c) so far the workers/employees are concerned, they will be paid on the basis that they are outside the scheme but in no case will the payment be less than what they would have received under clause (b) above;
(d) if any workman has not been employed as per the condition imposed by the interim arrangement dated 19th December, 1977, or has been unjustly removed thereafter, liberty to such workman to apply within two months from today;
(e) the amount of Rs. 75,000 deposited by TIL pursuant to the court's order in Company Application No. 131 of 1977 shall be refunded to it by the official liquidator as prayed for by Company Application will stand disposed of accordingly;
(f) the official liquidator shall retain the accumulated compensation money till further orders. If any amount due from NDDB by way of compensation, the same should also be paid to the official liquidator at an early date;
(g) within a fortnight from today NDDB will file an undertaking in court that it will sue and/or prosecute the ex-directors of the company for misappropriation, misfeasance, etc., if there is prima facie evidence against them or if this court so directs;
(h) this court reserves unto itself the right to direct institution of civil proceedings against and/or prosecution of the ex-directors of the company for criminal acts allegedly committed by all or any of them in connection with the affairs of the company, independently of clause (g) above;
(i) all the expenses incurred by the official liquidator for and on behalf of the company shall be borne by the company after this order becomes effective;
(j) subject to the aforesaid terms and conditions, the winding-up order passed by this court on 15th September, 1976, and the interim arrangement for the running of the unit made by its order dated 19th December, 1977, shall stand revoked and terminated from the date of filing of the undertaking under clause (g) above or at the end of 31st January, 1981, whichever is later;
(k) on the revocation of the winding up order, the official liquidator will, subject to the terms and conditions of this order, give possession of the company to NDDB along with the relevant records;
(l) the scheme will be implemented and carried out under this court's supervision and subject to the directions that this court may give from time to time for the better and efficient execution of the scheme;
(m) if any difficulty is experienced in the execution or implementation of the scheme hereby approved and modified or any doubt arises as regards the true meaning and scope of any of the terms imposed by this order, parties will be at liberty to apply for further directions;
(n) a copy of the finally approved scheme together with the modifications accepted by this order will be separately filed; and
(o) a certified copy of this order will be filed with the Registrar of Companies as required by sub-s. (3) of s. 391 of the Act.
81. In the result, therefore, Company Petition No. 57 of 1976, preferred under s. 391(2) of Act, for according sanction to the TIL scheme is allowed subject to the modifications made from time to time as also the modifications sought and granted by the two judges summons, viz., Company Applications Nos. 106 and 114 of 1980, vide cls. (a) and (b) hereinabove. So far as Company Petition No. 9 of 1978 is concerned, alternative prayers can survive. If I had not been inclined to substitute NDDB for TIL I would have certainly given serious thought to the second alternative regarding sale of the unit. Thereafter, Company Petition No. 9 of 1978 does not survive and stands disposed of accordingly; in so far as Company Application No. 279 of 1979, is concerned, as observed earlier, it is disposed of as per clause (e) above.
82. There shall be no order as to costs so far as the parties who appeared at the hearing are concerned save and except the official liquidator who will receive costs from the company quantified at Rs. 2,000. Liberty to Central Government to take out a separate summons for quantification of its costs.
JUDGMENT OF DIVISION BENCH THAKKAR J.
83. At times an illustration can simplify a complicated question and can have a more telling effect than any other mode of communication. The present is an occasion to do so in order to bring into focus the real issue and in order to clearly hear the heart throbs of the real problem. Visualize a patient on his death bed. A doctor (Dr. NDDB) has a medicine which will cure him, is prepared to administer it to the patient, and to save his life. Another doctor (Dr. TIL) who was consulted earlier is not in a position to offer any effective medicine or save the life of the patient and confesses that such is the case. A learned judge permits doctor-NDDB to go ahead and save the life of the dying man whose life is precious to his family as also to the society. The doctor who admittedly is neither willing to save the life, nor has the capacity to do so, Dr. TIL, objects to the order of the learned judge and prefers an appeal on the ground that the patient had consulted him earlier and had agreed to be treated by him (Dr. TIL) before Dr. NDDB was brought in. Such is the true scope of this appeal preferred by a company, Tungabhadra Industries Ltd. (hereinafter referred to as "the TIL"), which it self is not prepared to offer terms as good as the terms offered by its rival, National Dairy Development Board (hereinafter referred to as "the NDDB") by way of a scheme to resurrect an economically ruined oil & vegetable products manufacturing unit. The appellant-company, TIL, in terms, admits that it is not in a position to implement even its own less attractive scheme (offering something less to creditors, as also to shareholders) as the secured creditors and nationalised banks do not support it. Not prepared to offer the terms offered by its rival, not prepared to implement its own scheme which is much inferior and is admittedly unworkable, what locus stand has the appellant to challenge by way of this appeal an order sanctioning a scheme by the learned company judge ? What is motivation ? Dog in the manger philosophy ? We are not told what interest the appellant has in challenging the impugned order. All that we are told is that on a microscopic examination of the relevant provisions (ss. 391 and 392 of the Companies Act) in the light of the interpretation canvassed by the appellant the learned company judge had no jurisdiction to order substitution of its rival in the place of the appellant (notwithstanding the law laid down by the Supreme Court in S. K. Gupta's case [1979] 49 Comp Cas 342) as sponsor of the scheme to resurrect the company whereby life is being infused into a dead industrial unit and hundreds of workers will get employment, consumers will get more consumer goods and the State will get more revenue. We are not prepared to do it, but our rivals cannot be allowed to do it in view of the hair splitting technical pleas we have at our command-say the appellants. That is the crux of the question. So far as the legal contentions are concerned we see no substances in the same for reasons we shall presently indicate.
The back drop
84. A company known as Bhavnagar Vegetable Products Ltd., having a total paid up capital of approximately Rs. 30 lakhs incurred huge losses in the hear ending on December 31, 1975. The profit and loss account of the company or the period ending December 31, 1975, reveals a loss of Rs. 201.71 lakhs. And the total liabilities as and by way of secured and unsecured loans including current liabilities were around Rs. 315.17 lakhs. Thus, the entire capital of the company, its reserves and surpluses were washed away and its secured debts and other liabilities were so huge that neither the shareholders nor the creditors were likely to get any money. One of the creditors instituted a petition on February 2, 1976, under s. 433 read with s. 439 of the Companies Act, 1956, (hereinafter referred to as "the Act"), for winding up the said company. The petition was admitted on February 16, 1976. In the course of the proceedings, an attempt was made to evolve a scheme in order to prevent the company from being wound up and in order that the shareholders, creditors and workers could retrieve a portion of what was due to them. A scheme was proposed by appellant, TIL, the details of which are set out in paragraph 11 of the judgment of the learned company judge, which has given rise to the present appeal. Before the scheme could be sanctioned under s. 391 of the Act, respondent No. 1-the NDDB - proposed a scheme of its own the details of which have been set out in paragraph 17 of the judgment of the learned company judge. Thus, there were in the field two competitive schemes. It so transpired that before NDDB presented its scheme the TIL scheme came up for consideration before all classes of creditors, shareholders and workers. The meetings envisaged by the requisite majority voted in favour of the acceptance of the TIL scheme. On October 4, 1976, the chairman appointed by the court to preside over this meeting submitted his report. On October 21, 1976, the appellant (TIL) instituted a petition for sanctioning the scheme. Before final orders could be passed by the court, NDDB proposed its own scheme. Thus, the scheme proposed by the appellant-TIL, which was sanctioned by the requisite majority, remained unsanctioned. The learned company judge, who was seized of the matter at the relevant time, issued appropriate directions in Company Petition No. 9 of 1978, filed by NDDB for calling the meetings of the shareholders, creditors and workers in order to consider the scheme sponsored by the NDDB. Strangely enough the equity shareholders who were prepared to accept 10 paise per share under the TIL scheme and had accepted the offer for payment at that rate in the course of the meetings called to consider the TIL scheme in 1976, refused to vote for the NDDB scheme whereby they were offered Rs. 10 per share in place of 10 paise per share. In other words, though they were offered a price which was 100 times the price offered by the TIL, they did not accept the offer. The NDDB revised its offer upwards by offering Rs. 15 per share in place of Rs. 10 per share. The equity shareholders who were prepared to accept 10 paise per share from TIL in 1976 were not prepared to accept Rs. 15 per share from NDDB. Thus, the scheme as sponsored by NDDB did not secure necessary majority as required by s. 391(2) of the Act. The resultant position was that the TIL scheme which offered 10 paise per share to the equity shareholders, secured the requisite majority and could have been sanctioned, whereas, the scheme sponsored by NDDB, whereby (though) 100 times the price offered by TIL (was offered) (which was subsequently raised to 150 times) it could not secure the requisite majority from the equity shareholders. It appears that, meanwhile, TIL also increased its offer from 10 paise per share to Rs. 10 per share as against Rs. 15 per share offered by NDDB. Thus, the appellant-TIL who had obtained consent of the equity shareholders and secured the requisite majority in respect of a scheme offering 10 paise per share, was itself prepared to offer Rs. 10 per share when the NDDB scheme entered the field of competition. The appellant, however, did not agree to step up the price up to Rs. 15 per share. Meanwhile, one more development took place. The banks, to whom the company owed a very large sum by way of secured loans of the order of Rs. 80 lakhs, which had initially lent support to TIL's scheme, withdrew their support. In the court of hearing of a summons taken out by NDDB, learned counsel for M/s. Velji Shamji & Co. - the sponsor of TIL scheme - made a statement before the court that in view of withdrawal of the support by the banks, the scheme as put forward by TIL was not practicable. Under the circumstances, the court placed on record that TIL on whose behalf nobody appeared before the court on that day, was out of the picture as a party sponsoring the scheme before the court. The order passed by the learned company judge is in the following terms :
"Mr. B. J. Shelat, for Messrs. Velji Shamji & Co., the petitioners, states that in view, of the withdrawal of support by the bank of TIL, the scheme as put forward by his client is not practicable. In view of this, it is recorded that TIL on whose behalf nobody has appeared today is out of the picture as a party sponsoring the scheme before this court."
85. Yet another development took place later on. On March 29, 1979, the appellant, TIL, took out a summons which was registered as Company Application No. 279 of 1979, praying for the refund of earnest money deposit of Rs. 75,000 on the premise that it was out of picture. This application was supported by an affidavit sworn by one Dalal, a constituted attorney of TIL. Thus, there was no question of granting approval to the scheme as proposed by TIL. Meanwhile, on February 15, 1980, learned counsel for M/s. Velji Shamji & Co., which had sponsored the TIL scheme, informed the court that his client no longer supported the scheme proposed by TIL and went to the length of stating that his the scheme proposed by TIL and went to the length of stating that his client supported the NDDB scheme. On that very day, the NDDB took out a judge's summons for substitution of its name in place of M/s. Velji Shamji & Co. - the sponsor of the TIL scheme - and for modification of the said scheme to bring it in line with the NDDB scheme. So also M/s. Velji Shamji & Co. - original sponsor of TIL scheme - took out a judge's summons on March 13, 1980, which was registered as Company Application No. 114 of 1980, making a similar request for the substitution of NDDB for TIL in the scheme sponsor by it, subject to it being modified in conformity with the NDDB scheme. The prayers made in these two company applications, one by original sponsor of TIL scheme, and another by NDDB, were opposed by (1) equity shareholders, (2) a section of the workers, and (3) appellant, TIL. It may be placed on record that appellant, TIL itself had not made any application for sanctioning of any scheme. The sponsor of the application, petitioning-creditor Velji Shamji & Co. who had originally prayed for the sanction of the TIL scheme, not withdrew its support from TIL and prayed for the substitution of NDDB for TIL subject to modification of the original TIL scheme by upgrading kit to bring it in conformity with the NDDB scheme, which offered better terms to all concerned. A comparative study of the two schemes has been made by the learned company judge. We can do no better than quote the passage (para 48 at p. 117 supra) :
"A comparative study of the two schemes reveals that the scheme proposed by NDDB was far more beneficial to practically all interest than the TIL scheme as originally proposed. Under the TIL scheme depositors claiming the principal amount of Rs. 7,500 and below were to receive 30 per cent. and the rest 20 percent. of the principal amount, without interest, whereas under the NDDB scheme the whole of the principal amount was offered within one month from the effective date, without interest. It was only at the meeting that TIL agreed it at 50 per cent. of the principal amount with 12% interest to all the depositors. This offer was further enhanced after the introduction of the NDDB scheme to payment of the whole of the principal amount in four equal instalments, with interest after the first installment at 14 per cent. per annum. So far as other unsecured creditors are concerned, TIL offered 20 per cent. of the principal amount without interest in five equal yearly instalments as against the NDDB offer of payment of principal amount in full within one month from the effective date. TIL has not upgraded its offer so far as the others unsecured creditors are concerned. The employees were to be treated as laid off from 1st November, 1975, and were to be paid 50 per cent. of the lay off compensation up to 31st December, 1975, under the TIL scheme, whereas under the NDDB scheme all permanent employees were to be paid full salary from 1st November, 1975, to 31st December, 1978, and others were to receive gratuity. The offer to 31st December, 1978, and others were to receive gratuity. The offer under went an upward revision only after the workers there attended to vote against the scheme at the TIL meeting. NDDB also revised their scheme to bring it in line with the TIL scheme. So far as the preference shareholders are concerned, TIL agreed to pay them Rs. 10 per share whereas NDDB offered Rs. 25 per share straightway. Even the subsequently upgraded offer made TIL does not offer the preference shareholders more than Rs. 20 per share. Thus, even at present NDDB offers Rs. 5 per share extra as compared to TIL. Equity shareholders were to receive a paltry Rs. 0.10 per equity share under the TIL scheme but NDDB offered Rs. 10 per equity share and hence TIL was compelled to raise its offer to Rs. 10 per share to which NDDB reacted by raising it to Rs. 15 per share. It will thus appear from the above that the scheme initially proposed by TIL was far from fair and equitable. It was only after NDDB entered the field that TIL was compelled to revise its scheme upwards. Even so it does not match the NDDB scheme in all respects."
86.The learned company judge by his closely reasoned judgment and order dated January 20, 1981 (which is presently under challenge), granted the prayer for substitution of NDDB as a party in place of appellant, TIL, subject to upgrading of original TIL scheme, to bring it in conformity with the NDDB scheme. It is this order which has given rise to the present appeal by the appellant-TIL. Thus, the appellant-TIL, who had made a statement; to the effect that it was no longer interested in the scheme presented by it during the course of the hearing, and who had applied for the refund of Rs. 75,000 deposited by it at the time of the presentation of the scheme in pursuance to the provision contained in the scheme, is now objecting to the order passed by the court sanctioning the request of the original sponsor of TIL scheme, for substituting NDDB as a party in place of TIL. Even now, be it noted, TIL is not prepared to offer the same scheme as is being offered by NDDB under which scheme the shareholders, creditors and workers and every one stands to benefit. TIL is not prepared to offer similar terms in its scheme. TIL is not able to secure support of secured creditors and banks to whom the company is indebted to the tune of Rs. 80 lakhs. Appellant, TIL, itself does not want to go ahead with the scheme or compromise. Yet, TILL has preferred the present appeal in order to challenge the legality of the order passed by the learned company judge sanctioning the prayer for substitution and the consequent sanction accorded to the scheme in favour of the NDDB. It may be stated that during the course of hearing before this court, learned counsel for a section of the workers who had originally opposed the prayer for substitution, has made a statement to the effect that the workers do not any more oppose the substitution of NDDB in the original scheme subject upward modification in the scheme. Thus, there is no objection on the part of the workers or the secured creditors or other creditors, all of whom stand to benefit by the order passed by the learned company judge. The only opposition to the order passed by the learned company judge now comes from two quarters, namely, (1) TIL - who does not want to go ahead with the scheme and (2) from a section of equity shareholders - who were prepared to accept 10 paise per share from TIL but are not prepared to accept Rs. 15 per share from NDDB. The equity shareholders, who have their own reasons for adopting this seemingly suicidal stance which is inconstant with their self-interest, have preferred a separate appeal which we shall deal with in due course. So far as the present appeal is concerned, it is preferred by TIL, who does not want to go ahead without the scheme and thus has no understandable reason to challenge the order, which is not prejudicial to it. Since TIL, who does not want to go ahead with the scheme and thus has no understandable reason to challenge the order, which is not prejudicial to it. Since TIL does not want to go ahead with the scheme, whatever order has been passed by the learned company judge cannot in any way cause any prejudice to TIL. Yet, TIL has challenged the legality of the said order on grounds, to which we will advert in due course. The first question, however, arises as to whether TIL has challenge the order passed by the learned company judge granting the prayer for substitution of NDDB in place of TIL in the original scheme sponsored by Messrs. Velji Shamji & Co., which has been up graded to bring it in conformity with the NDDB shame, as it has finally emerged. We, on our part, are unable to see what interest TIL can have in questioning or challenging the legality of the order passed by the learned company judge, whereby a company is being resurrected, and as a result of which an industrial unit which has ceased production will be able to start production, provide employment of hundreds of workers, and benefit to shareholders, workers, secured creditors and unsecured creditors, i.e., all concerned. In fact, as pointed out earlier, at the earlier, at these earlier stage the sponsor of the TIL scheme had placed on record that TIL was out of the picture. TIL itself had prayed for the withdrawal of Rs. 75,000 deposited in pursuance of the TIL scheme. The TIL scheme, even after modification it was prepared to make during the courses of the hearing, is less advantageous to all concerned than the NDDB scheme. The TIL scheme is not workable as submitted by TIL itself inasmuch as NDDB scheme visualized payment of Rs. 80 lakhs to the nationalised banks with interest at 15% after one year on the outstanding amount and visualises a deposit of Rs. 1 crore to be paid immediately and even payment of all costs and expenses up to Rs. 3 lakhs to the nationalised banks. TIL scheme does not envisage deposit of Rs. 1 crore in connection with the dues of the nationalised banks. The nationalised banks do not support the TIL scheme and it is conceded that TIL will not be able to work without the co-operation the these banks. What is more important is the fact that the court cannot sanction a scheme which is less favorable to all concerned and prejudicial to all concerned when a more beneficial and more advantageous scheme which has been proposed by TIL cannot be sanctioned by the company court. Nor has TIL any legal right to insist that its scheme should be sanctioned, notwithstanding the fact that it is not as good as the scheme aforesaid by NDDB and in fact the fact that it is not as good as the scheme offered by NDDB and which is not acceptable to any one except equity shareholders in respect of whose the of the face value of Rs. 100 it offered 10 paise per share, which the equity shareholders were prepared to accept to accept (the same shareholders are nor ready to accept Rs. 15 per share under the scheme pursuant to substitution). All the workers are now unanimously with the NDDB scheme and TIL theme is not acceptable to them. Thus, it is abundantly clear that the court cannot sanction the TIL scheme as it is not acceptable to any one but the equity shareholders. So far as the workers are concerned, all of them are now unanimously supporting the scheme sectioned by the learned company judge by substitution of NDDB in place of TIL the learned company judge by substitution of NDDB in place of TIL. None of the creditors has preferred an appeal. Thus, all creditors have accepted the order of substitution. At the costs of repetition, it may be stated that, admittedly, TIL scheme is not workable. TIL is not prepared to deposit Rs. 1 crore, which the NDDB is prepared to do, and the banks having withdrawn their support to TIL, the scheme is not workable. Under the circumstances, it is difficult to comprehend how TIL can feel aggrieved by the order passed by the learned company judge. It would appear to us that Til is not even an aggrieved party. Nor has TIL can anything to gain preferred this appeal in the sense that even assuming that the order passed by the learned company judge is set aside, TIL does not stand to benefit, for, its original scheme, which is much inferior, does not get automatically sanctioned and the court can never accord sanction to it, when NDDB has offered a much superior scheme which is beneficial to all concerned including equity shareholders who are, for some ulterior reason, opposing the prayer for substitution. All the same, since the appeal has been admitted and legal submissions have been urged by TIL to the effect that the order passed by the learned company judge is one which cannot be lawfully passed, we will processed to deal with the submission urged by learned counsel for the appellant-TIL notwithstanding the fact that even if TIL succeeds it gets no benefit, except and save the satisfaction that the NDDB scheme is frustrated and injury is caused to secured creditors, unsecured creditors, and workers, all of whom stand to lose and an industrial unit which has started functioning will have to be closed down. All that we wish to say is that it is difficult to comprehend how the appellant-TIL, can feel aggrieved by the order passed by the learned company judge which does not in any way cause prejudice to while it benefits all concerned. Still we will deal with the legal submissions urged by learned causal for the appellant, TIL.
87. Is substitution of NDDB as sponsor in place of TIL illegal notwithstanding the law laid down by the Supreme Court in S. K. Gupta's case [1979] 49 Comp Cas 342 ?
88. The first submission urged on behalf of the appellant is that the order for substitution of the sponsor is the original scheme, as modified subsequently, is contrary to law. It may be mentioned that the question whether substitution of one party for another in a scheme is competent whether substitution of one party for another in a scheme is competent or not, is no more a question which is res integra. It is concluded by a decision of Supreme Court in S. K. Gupta v. K. P. Jain [1979] 49 Comp Cas 342. The Supreme Court has taken the view that on a true interpretation of the Act the court has power to modify the compromise or an arrangement proposed between a company and its creditors or class of creditors or between its members or class of members and that in purchase of the said power of modification, the court has power to deal with the scheme of compromises or arrangement for the purposes of making it workable and it has power of modification, one sponsor for another. In other words, the Supreme Court has taken the view that in exercises of powers under s. 391 read with s. 392 of the Act, it is competent to the court to substitute one party sponsors instead of some other party as sponsor. The proposition which emerges from S. K. Gupta's case [1979] 49 Comp Cas 342, cannot and has not been questioned. The Supreme Court has also observed in the course of its original sponsor of a schemes of compromises or arrangement and substituting another one in his place would not change the basic fabric of the scheme. This is also a proposition which cannot, therefore, be questioned before us. Even some counsel for the appellant-TIL has contended that the order passed by the learned company judge substituting the name of NDDB as sponsor implies of TIL is contrary to law.
89. For a proper appreciation of the submission urged in this context, it is desirable to reproduce ss. 391 and 392 of the Act which are part of Chap. V which deals with arbitration, compromises, arrangement and reconstructions, in so far as they are material :
"391(1). Where a compromise or arrangement is proposed -
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being would up, of the liquidator, order a meeting of the creditors of or class of creditors, or of the members or class of member, as the case may be, to be called, held and conducted in such manner as the court directs.
(2) If a majority in a number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as to cases may 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 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 would 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 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 of on the accounts of the company, the tendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like. ....
392(1). Where a High Court makes an order under section 391 sanctioning a compromises or an arrangement in respect of a company, it -
(a) shall have power to supervise the carrying out of the compromise or arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise of arrangement.
(2) If the court aforesaid is satisfied that a compromises or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any say person interested in the affairs of the company makes as order winding up the company, and such and order shall be deemed to the an order makes under section 433 of this Act ......"
90. What is the true ratio of S. K. Gupta's case [1979] 49 Comp Cas 342(SC) ? Does the power to substitute depend on whether it is exercised "before" or "after" the scheme is sanctioned ?
91. It is conceded that s. 391 read with section 392 in the context of the law laid down by the Supreme Court in S. K. Gupta's case empowers the High Court to make an appropriate order or to give appropriate directions or make such modifications, compromises or arrangements only "after" such compromise or arrangement has been sanctioned. In other words, the arrangement or compromise can be tackled by the court under s. 392 of the Act. Counsel submits that the court cannot modify the compromises or arrangement by firsts substituting one sponsor for another sponsor and sanction the scheme thereafter. The court can only action the scheme without modification. And, if a scheme is sanctioned, then only the sanctioned scheme can be modified in exercise of the powers under s. 392 of the Act as interpreted by the Supreme Court is S. K. Gupta's case [1979] 49 Comp Cas 342. Now, it is no doubt true that the question of substitution arose in S. K. Gupta's case "after" the scheme was sanctioned under s. 391 of the Act. While that position is, as a matter of fact, true, the ratio of the decision in S.K. Gupta's case does not turn on the question whether or not the substitution of sponsor and modification in this behalf was sought "before" or "after" the according of sanction under s. 391 of the Act. The question before the Supreme Court was not whether one sponsor can be substituted for another, provided, and only provided, the scheme proposed by the original sponsor has been already sanctioned under s. 391 of the Act and a modification, by way of substitution of original sponsor by another sponsor arose subsequent to the sanction in point of time. No such question has arisen for the very goods reason that the question of substitution arose "after" the sanctioning of the Scheme. There is, however, nothing in S. K. Gupta's case which would look to suggest that sanctioning the scheme of the original sponsor is a condition precedent for exercising the power of substitution under s. 392 of the Act and that such substitution can only follow on the heels of sanction accorded to the scheme proposed by the original sponsor in which the original accorded to the scheme proposed by the original sponsor in which the original sponsor in which the original sponsor figures as a pretty to the compromise. Such a proposition does not emerge from S. K. Gupta's case [1979] 49 Comp Cas 342 (SC). In our opinion, on a true interpretation of section 391 read with section 392 of Act in light of the law laid down by the Supreme Court in S. K. Gupta's case, the power of modification by substituting one sponsor by another, can be exercises by the court at the point of time when the question of sanctioning the scheme arises. There is no warrant for reading the aforesaid two provisions in an extremely restricted fashion as is suggested by learned courses for the appellant (TIL). By doing so the court would be annulling itself the power to resurrect or breathe new life in a company facing extinction, and would be denying to itself the power to relieve the distress of the workers, creditors and shareholders, (and at the same time augment the supply of consumer goods and enrich the public exchequer) without harming the cause of any one else. The would be denying to itself the power to do good to all concerned without any determent to any individual or collective interest. Chapter V of the Companies Act deals the arbitration, compromises, arrangements and reconstructions. The very birth of ss. 391 and 392 has a purpose. Theses provisions have been disjoined with a view that a productive unit is saved from economic disaster and is brought back to life. The anxiety underlying this objective is understandable. If a productive unit dies, it results in incalculable harm to the society, to the economy, to the workers, to the shareholders, to the creditors, and the banking institutions which serve the public by extending credit to the industrial units. If the industry thrives, the consumers would get more supplies, the workers would get employment, the States may get more revenue and the augmented public funds could be employed for a nation building purpose. The large investments made by the banking institutions would be would be lost if a sinking company is allowed to die. On the other hand, if a rescue operation is carried out under the powers conferred by ss. 391 and rescue operation is carried out under the powers conferred by ss. 391 and 392 of the Act by infusing new blood and new life, all concerned stand to benefit. And there will be one more industrial unit producing more goods for the consumers. Availability of more goods would mean availability of goods at a more reasonable price. It will mean more employment an age when unemployment on a large scale is the bane of the society. It will bring in more revenue by way of sales tax, income-tax and other taxes. How then shall we construe sections 391 and 392 ? Shall we construe them in a manner so that the industrial unit can be resurrected ? Or shall we interpret them in a fault finding manner with a hair-splitting attitude in order to hold that no such power exists in the court ? Shall we interpret it in such a manner that the relevant provision take place of life saving drug or shall we interpret the provisions in such a manner that they take place of a placebo with no curative power and with no potency ? No doubt, if the provisions are not capable of a construction other than the one that no such power exists, the court may raises its hands in helplessness. But, if the provisions are capable of such an interpretation so as to make the meaningful and purposeful, there is no compulsion to adopt an approach which would render the provisions practically worthless in a situation like the present one. The law has to be evolved continuously in a dynamic manner with a forward looking approach. This does not mean that if the provisions are not susceptible to such interpretation even on making an approach informed with the desire to make them purposeful rather than purposeless, and impossible construction should be placed not the provisions. In our opinion, however, the provisions are capable of being interpreted in the manner in which the learned company judge has interpreted the same. There is nothing in these provisions which countermands such a construction. In fact, clays (b) of sub-section (1) if section 392 makes it abundantly clear that the powers conferred by section 392 may be exercised "at the time of making such order or at any time thereafter." The provisions, therefore, envisage exercises of power at this very point of time of making the order, meaning thereby, "before" the order is passed. This expression which follows, namely, "at any time thereafter" lends further support to this construction, namely, that before the order is signed the power can be exercised under the earlier part of the provision and after order is signed, the power can be exercised under the second part of the provision. The expression "or at any time thereafter" leaves no room for doubting the score that the preceding part contemplates exercises of power at a point of time prior to the making of the order. It is, therefore, abundantly clear that while making the order under section 391 of the Act sanctioning the scheme of compromises or arrangement the court thus undoubted authority to modify the compromises or arrangement by substituting one sponsor for another. That the power of modification includes power of substituting the original sponsor by a new sponsor is a proposition which is not capable of being disputed in view of the law laid down by the Supreme Court in S. K. Gupta's case [1979] 49 Comp Cas. 342. We therefore, do not see any substance in the first submission urged by the learned counsel for the appellant-TIL in this behalf.
92. Is the order vulnerable on the ground that it seeks to do something indirectly which it could not have done directly ?
93. The submission which is urged is that the learned Company Judge should not have authorised a scheme indirectly which was rejected by the shareholders and the creditors. The argument is that one cannot be permitted indirectly to do what cannot be done directly. It is contended that since the scheme sponsored by the NDDB has been rejected at the meeting of the shareholders and the creditors, NDDB cannot be substituted in place of the original sponsor by the order of the court; such is the submission, amounting to giving a back door entry to NDDB. Now, as discussed earlier, the scheme which has been sanctioned by the court be substituting NDDB in place of TIL is admittedly vastly beneficial to the shareholders as also to the creditors and the workers. In fact, barring the equity shareholders, no one has taken exception to the sanctioning of the scheme. So far as the shareholders are concerned, one wonders how any one can object to being paid compensation at Rs. 15 per share instead of compensation at the rate of 10 paise per share. Equity shareholders were prepared to accept 10 paise per share form TIL and even now are prepared to accept Rs. 10 per share from TIL. They are, however, not prepared to accept Rs. 15 per share from NDDB. Do Rs. 15 per share coming into the pocket of the shareholders have less value than 10 paise per share merely because Rs. 15 come from NDDB, while 10 paise come from TIL ? The learned company judge was perfectly justified under the circumstances in suspecting that there was some under hands dealing involved in it. No person would ever object to payment of Rs. 15 per share if he is willing to accept 10 paise per share. And no shareholder is concerned with the question as to from whose sprocket the value of the share comes from. For a share holder what is material is the money that he gets and not from whose pocket the money comes. Therefore, it is obvious that the objection of the shareholders is one which cannot be countenance by the court. It is too late in the day for the courts to countenance such a submission. It would not have found favour in the times of Shylock the Jew. It is inconceivable that any court would countenance it even for a moment today. It is thus clear that the objection of the equity shareholders (with which we are concerned in the allied appeal which is being disposed of along with this appeal) is rooted in some evil design and is not bona fide. The court would, therefore, refuse to entertain a protest from the quarters of the shareholders. The court may well tell the shareholders that notwithstanding your desire to be content with 10 paise per share, the court will sanction a scheme whereby you will get 150 times the amount you were prepared to accept and that your intrigues cannot prevent the court form infusing life into a dying industrial unit. For, the court cannot be unaware of this dimension of the matter. While the court would be anxious to protect he interest of the shareholders, the court would not create a situation where the shareholders inflict harm on themselves and also harm on all concerned. The existence of an industrial unit today is not a matter concerning the rights of the shareholders only. It is a matters in which the entire society, the consumers, the workers, the revenues and the welfare state, has a stake. The objection raised on the part of the shareholders musts, therefore, be repelled unhesitatingly. But it must be realised that the present appellant is not the guardian-ad-litem of the shareholders. The present appellant-TIL is a limited company which has proposed the scheme which admittedly cannot work and which is can best describe the scheme proposed by NDDB. One can best describe the attitude of the TIL as the dog in the manager attitude, for the appellant-TIL can have no grievance if a dying company is reconstructed and if the shareholders, creditors, workers and the national economy benefits, whilst it loses nothing. Is it mere jealousy which makes it persist in opposing the scheme by preferring this appeal ? We do not know. But one thing is clear, viz., that TIL does not want to offer the same terms as NDDB offer. TIL is not prepared to offer a scheme which will go through. TIL is not in a position to offer a scheme which will go through. What interest then has TIL in challenging the order passed by the learned company judges sanctioning the scheme with it does not want to push through itself and is not in a position to push through ? We are, unable to comprehend how TIL can contend that by substitution of NDDB in place of TIL as sponsor amounts to giving back door entry to NDDB. The argument completely overlooks the basic aspect of the real problem. What was accepted by the share holders and the creditors was a scheme offering them certain terms. They were not concerned with the question through whom they were going to be paid under the scheme. The identity of the sponsor would not be a basic element of the scheme. It has been observed in S. K. Gupta's case [1979] 49 Comp Cas 342 that identity of the sponsor is not something basic in the structure of the scheme. Whether or not it is the essence of the scheme or a basis element in the scheme, is a question of a fact depending on the circumstances of every case. Even if one were to proceed on the assumption that in certain cases it may be a basic element in the scheme, whether or not it is a basic element is a question which can be examined by the court. In the present case, it is an undisputed position that NDDB is financially far more sound and has greater financial backing than TIL. It is not contended that TIL is financially preferable to NDDB from the standpoint of the persons who are going to get their dues under the scheme. It is not even contended by TIL that NDDB is not in a position to fulfil the obligations undertaken by it under the scheme. Neither the creditors, not the workers, nor the banks, not the secured creditors haves objected to the scheme on this count, before us. Even TIL has not contended to this effect. Apart from the that TIL is neither representative nor guardian ad item of the interest of the shareholders or creditors or workers, where is the question of identity of the sponsor being a basic element in these scheme ? What was agreed to at the meeting of the shareholders and creditors was as arrangement under which they were going to get compensation in respect of their rights. The essence of the matter was the monetary compensation which they were going to get. It was not the essence of the agreement or compromise as to from whose pocket the compensation was going to come. In a given case if the sponsor sought to be substituted does not have the financial capacity to meet with the obligations under taken by it, it may stand on a different footing. With such a hypothetical cases we are not concerned in the present matter. So far as the present appellant is concerned, it is an admitted position that the financial viability of NDDB and is position to meet with its obligations under the scheme is not questioned by any one. Not even by the shareholders. Under the circumstances, how can TIL, who offered a much less attractive scheme which the court was not prepared to accept because it was against the interest of the shareholders, creditors and worker and which TIL itself, in any case, was not prepared to up grade in order to bring it in conformity with the more beneficial scheme offered by the NDDB, can challenge the order passed by the learned company judge on this score ? There is no question of granting sanction to a scheme rejected by the shareholders and the creditors. In fact, sanctions being accorded to a scheme which was accepted by the shareholders and creditors with an upward modification of monetary benefits in favour of all concerned parties, namely shareholders, creditors, and workers. The only modification which is made is that in place of TIL, which is not prepared to go ahead with the scheme and which admits that it is not in a position to implement the scheme because the secures creditors and banks have withdrawn their support (NDDB which is in a position to implement the scheme), is being is substituted. It is thus evident that the submission urged on behalf of the appellant (TIL) is altogether lacking in merits.
94. Does it amount to compelling the shareholders to sell their shares and is it invalid on that account ? Is the impugned order illegal on that account ?
95. It was lastly contended that unless the sponsor agreed, the scheme should not have been sanctioned because it amount to compelling the shareholders to sell their share to NDDB against their choice. Pray, who is TIL to raise an objection on this score ? The shareholders are not minors and TIL is neither their natural guardian nor guardian appointed by the court. This argument is wholly misconceived. No one is compelling the shareholders to sell their share to NDDB. The shareholders have, at a duly convened meeting, agreed to sell their shares at 10 paises per share. All that the court is sanctioning is a sale of shares at the rates of Rs. 15 per shares instead of at 10 paise per share. Is it compulsion or is sit something done in order to confer a windfall benefit on the shareholders ? We have discussed at length the ramification of the matter pertaining to the identity of the purchaser of the shares, from the standpoint of the shareholders who had agreed to sell their share at 10 paise per share. What was the essence of the matter was the price to be paid to them and not the identity of the party from whose pocket the price was to come. 10 paise per share from TIL could not be of greater value to the shareholders then Rs. 15 per share from NDDB. There is, therefore, no question of shareholders being obliged to sell their shares. The court has sanctioned a shame under which they had agreed to sell their shares at 10 paise per share by directing that instead of 10 paises they should be paid at Rs. 15 per share. Incidentally, the modification effected by the court is to be the effect that the value of the shares should be paid by NDDB and not by TIL who is not prepared to pay this value for the shares. Under the circumstances, we cannot accede to this argument which is altogether divided of any substance. There were the only submission urged on behalf of the appellant. We see no substance in any one of them. The appeal, therefore, fails and is dismissed.
96. We may state that we have passed an order dismissing the appeal and refusing certificate of fitness to appeal to the Supreme Court of India on July 8, 1981, on which date we passed the order in the following terms :
I "Appeal is dismissed for reasons which will follow hereafter.
II Appellant will pay the costs of the respondents as also the workers.
III Counsel for appellant orally applies for certificate of fitness to appeal to the Supreme Court of India. Certificate is refused as the matter does not involve any substantial question of law of general importance which in the opinion of this High Court needs to be decided by the Supreme Court.
IV Counsel for the appellant applies for stay of the operation of the order dismissing the appeal in order to enable the appellant to appeal to the Supreme Court after obtaining special leave. We refuses the prayer for stay in view of the fact that Mr. K. S. Nanavati for respondent No. 1 makes a statement in the same terms as he made on 6-4-1981 in C.A. No. 21 of 1981, in O.J. Appeal No. 6/81 when the appeal Was admitted and interim relief was refused which will hold good till expire of fifteen days from the date of signing of judgment."