Karnataka High Court
The Karnataka Industrial Areas vs Hegde & Golay Ltd(In Liquidation) on 4 April, 2013
Equivalent citations: 2013 (3) AKR 727
Bench: N.Kumar, B.Manohar
®
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 04TH DAY OF APRIL 2013
PRESENT
THE HON'BLE MR. JUSTICE N.KUMAR
AND
THE HON'BLE MR. JUSTICE B.MANOHAR
OSA No.25 of 2012
c/w
OSA No.26 of 2012
OSA No.25/2012
BETWEEN:
THE KARNATAKA INDUSTRIAL AREAS
DEVELOPMENT BOARD
NO14/13, 2ND FLOOR,
R P BUILDING
NRUPATHUNGA ROAD
BANGALORE-560001
REPRESENTED BY ITS CEO&EM ...APPELLANT
(By Sri. S VIJAYASHANKAR, SENIOR COUNSEL FOR
Sri P V CHANDRASHEKAR, ADVOCATE)
AND:
1. HEGDE & GOLAY
LTD (IN LIQUIDATION)
2
REPRESENTED BY THE
OFFICIAL LIQUIDATOR
ATTACHED TO THE
HON'BLE HIGH COURT OF
KARNATAKA, 4TH FLOOR,
D&F WING, KENDRIYA
SADANA, KORAMANGALA,
BANGALORE-560034,
NOW AT 12TH FLOOR,
RAHEJA TOWERS,
M G ROAD,
BANGALORE-560001,
NOW HEGDE & GOLAY LTD,
R/AT AREESHYLA,
KANAKAPURA ROAD,
BANGALORE-560062
2. MRS RASHMI HEGDE GOPI
D/O LATE B T SHANKAR HEGDE,
R/AT SREESHYLA,
KANAKAPURA ROAD,
BANGALORE-560062. ...RESPONDENTS
( By Sri. UDAYA HOLLA, SENIOR COUNSEL FOR
Sri V JAYARAM, ADVOCATE FOR OL-R1 )
This OSA is filed under Section 483 of the Companies
Act, 1956 r/w Section 4 of the Karnataka High Courts Act,
1961, praying to set aside the order dated 16.9.2009 passed
in Co.P No.109/2007 in CA No.324/2007 in Co.P
No.8/1980.
OSA No.26/2012:
BETWEEN:
THE KARNATAKA INDUSTRIAL
AREA DEVELOPMENT BOARD,
3
NO.14/13, II FLOOR, R.P. BUILDING,
NRUPATHUNGA ROAD,
BANGALORE-01
REP BY ITS CEO & EM. ...APPELLANT
(By Sri S VIJAYASHANKAR, SENIOR COUNSEL FOR
Sri P V CHANDRASHEKAR, ADVOCATE)
AND:
1. HEGDE & GOLAY LTD
REGD OFFICE AT SREESHYLA
KANAKAPURA ROAD,
BANGALORE-560 062
BY ITS DIRECTOR
RASHMI HEGDE GOPI
2. THE OFFICIAL LIQUIDATOR
ATTACHED TO THE HON'BLE
HIGH COURT OF KARNATAKA,
12TH FLOOR, RAHEJA TOWERS,
M.G.ROAD,
BANGALORE-560 001. RESPONDENTS
(By Sri UDAYA HOLLA, SENIOR COUNSEL FOR
Sri M SAJI P JOHN, ADV.
Sri. V JAYARAM FOR OL -R2 )
This OSA is filed under Section 483 of the Companies
Act, 1956 r/w Section 4 of the Karnataka High Courts Act,
1961, praying to set aside the order dated 31.5.2012 passed
in CA No.1425/2011 in Co.P No.109/2007.
These OSAs coming on for orders this day,
N KUMAR J, delivered the following:
4
JUDGMENT
Both these appeals are taken up together as the parties to the proceedings are the same as well as the subject matter. Therefore, they are disposed off by this common order.
2. The 1st respondent - Hegde & Golay Ltd. (for short hereinafter referred to as 'the Company') was incorporated on 2.7.1965 under the provisions of the Companies Act, 1956 under the name and style of M/s.Superweld Electrode Company Private Limited. Subsequently the name was changed to M/s.Hegde and Golay Private Limited w.e.f. 3.1.1969, which was converted into a public limited company w.e.f. 14.8.1974. The registered office of the company was situated at Shreeshyla, Kanakapura Road, Bangalore-560 062. The company was incorporated to carry on the business of iron founders, mechanical engineers and manufacturers of welding electrodes, implements and machinery, machinists, iron and 5 steel converters etc. The company, an Indo-Swiss Joint Enterprises, was well known in the market for wrist watches, electronic wrist watches, electronics and master clocks, etc. The paid up share capital of the company was Rs.50 lakhs divided into fifty thousand equity shares of Rs.100/- each fully paid up. The promoters of the company, late B T shankar Hegde, Smt.Shaila S Hegde, Smt.Neena R Shetty, Smt.Rashme Hegde Gopi and Smt.Radika Thapa, were holding 43840 equity shares of Rs.100/- each in the paid up share capital of the company. The balance shares of 6160 were held by Shreeshyla Electronic Private Limited (1160 shares) and Tata Press Limited (5000 shares).
3. An extent of 7 acres 1 gunta of land in Sy.Nos.81/1, 81/2-A, 81/2-B, 82/4-A and 82/2 (part) of Doddakallasandra village, Uttarahalli Hobli, Bangalore South Taluk (hereafter referred to as `schedule property') was allotted by the Karnataka Industrial Areas Development Board (for short hereinafter referred to as `the Board') to the 6 company vide letter dated 19.5.1972. The possession of the schedule property was handed over to the company as per possession certificate dated 23.8.1972. However, no lease- cum-sale agreement came to be executed.
4. The State Bank of India, the secured creditor of the company, initiated winding up proceeding against the company during the year 1980 and filed Company Petition No.8/1980 before this Court. By order dated 26.7.1985, the company was wound up. The Official Liquidator was appointed as Liquidator of the company. Against the said order of winding up, company filed OSA No.18/1985 and the same came to be dismissed by an order dated 19.11.1985. After the winding up order was passed and the Liquidator took charge of the assets of the company, the Board filed Co.A No.56/2005 in Co.P No.8/1980 for a direction to the company to release the schedule property out of the list of assets of the company and not to take possession of the same and for other reliefs. However, the said application came to be withdrawn on 13th April, 2005. Subsequently, 7 one more application was filed in Co.A No.335/2005 for the same purpose, which was dismissed for non-prosecution. Subsequently, on a report submitted by the Official Liquidator in OLR No.865/2006, he made a request to the Company Court to permit him to sell the schedule property. By order dated 9.1.2007, the report of the Official Liquidator was accepted and he was permitted to sell the schedule property by inviting tenders and thereafter to conduct inter se bidding among the tenderers without fixing the reserve price, but fixing the EMD amount of Rs.10 crores. It was at that stage, Co.A.No.324/2007 was filed by one Smt.Rashmi Hegde Gopi, shareholder of the company in liquidation, requesting the Company Court to convene a meeting of equity shareholders, secured and unsecured creditors of the company for approving a scheme of arrangement. In support of the said application, it was contended that the promoters have now come up to revive the company and have formulated a scheme of arrangement and have advised to take all necessary steps to move the 8 Company Court for approval of the scheme. Accepting the said case, the application was allowed. One Sri Shankar was appointed as Chairman, who was directed to convene a meeting of the secured creditors at 10.00 a.m., unsecured creditors at 11.00 a.m. and equity shareholders at 12.00 noon on 30th July, 2007 at Hotel Capitol, Raj Bhavan Road, Bangalore-560 001. The Chairman was also directed to issue individual notices to equity shareholders, secured creditors and unsecured creditors mentioning the time, date and place of the meeting. He was further directed to take out notice of the meeting by way of paper publication. Accordingly, the meeting was convened. The Chairman submitted his report. Out of six shareholders, who attended the meeting, all the six persons exercised their votes, the total number of ballot polled was six. The total number of votes cast in favour of the resolution was forty five thousand being forty five thousand equity shares of Rs.100/- each held by them. Therefore, the resolution was passed unanimously. 9
5. Thereafter Co.P No.109/2007 was filed by the said promoters/shareholders seeking sanction of the scheme of arrangement. The promoters contended that they would bring in the required amount for revival of the company and implementation of the scheme. They have approached the State Bank of India (SBI), the major secured creditor of the company for one time settlement of Rs.10 crores of the amount due to secured creditors and have deposited in all Rs.5 crores in a No Lien Account. The Karnataka State Financial Corporation has agreed for one time settlement amount of Rs.19,42,830.75. It has been paid by the promoters and duly acknowledged by the Corporation. In terms of the order passed by the Court, notice of the said petition was published in the newspaper. It was also served on the Regional Director and the Official Liquidator. The Board filed its statement of objections to the petition for sanction of the scheme of arrangement contending that the schedule property belongs to them. Neither the lease-cum- sale agreement nor sale deed was executed in favour of the 10 company in liquidation. Under the Regulations Governing the Disposal of Lands by Karnataka Industrial Areas Development Board, 1969, the lands are allotted by the Board on lease-cum-sale agreement basis and sale deeds are issued only after implementation of the project and satisfactory completion of all the terms and conditions of allotment. Compliance with the terms and conditions of allotment is essential keeping in view the object and purpose of the Karnataka Industrial Areas Development Act, 1966. As the company in liquidation does not have any sale deed as of day it is the Board which is the owner of the lands. They have no objection for revival of the company in liquidation subject to terms and conditions of allotment of the Board. They wanted the Court to note the no objection of the Board for revival of company in liquidation subject to the terms and conditions of allotment.
6. In fact, in Co.P No.109/2007, the Board was arrayed as the 2nd respondent. The Company Court taking note of the fact that the secured creditor, State Bank of 11 India, has been paid a sum of Rs.5 crores and assured a payment of the balance amount of Rs.5 crore and they have no objection to the scheme, proceeded to pass the order on 16th September, 2009 sanctioning the scheme of arrangement. It further held that the said sanctioned scheme is binding on the petitioner/respondent company its share holders, secured creditors and unsecured creditors. It was made clear that the said sanctioning of the scheme is subject to the settlement of the income-tax dues as well as other statutory dues that may arise and the Official Liquidator was directed to invite claims and the petitioner was directed to settle all those claims.
7. The relevant clause in the said scheme of arrangement with which we are concerned in this proceedings is clause 11, which reads as under:
"Upon the scheme becoming effective, the Company/Promoters shall pay the dues of the KIADB and the KIADB shall execute sale deed in favour of the Company in respect of the land allotted to the company."12
8. In spite of the letters written by the company to the Board calling upon them to execute the sale deed in terms of the aforesaid clause in the scheme, the sale deed was not executed by the Board. Then the company filed Co.P No.1425/2011 for a direction to the Board to execute the sale deed in respect of the schedule properties in favour of the company. In the affidavit filed in support of the said application, it was contended that the company is in the process of implementing the revival scheme sanctioned by the High Court. In terms of clause 11 of the scheme sanctioned by the High Court, the board is required to execute the absolute sale deed in favour of the company. The company has approached the Board to execute the sale deed. The company has written letters dated 21.10.2009, 10.3.2010, 18.9.2010, 20.12.2010, 9.3.2010 and 25.7.2011, none of which are replied. Therefore, it was contended that without the execution of the sale deed by the Board, the company cannot implement the scheme of arrangement sanctioned by the Court. The company is revived with an 13 objective of settling the legitimate liabilities of the company and to utilize the existing built up infrastructure to promote state artisans and assist them in their manufacture of handicrafts products (cottage industry). The cottage industries will be supported by the technical expertise and management skills of the NGO Shankara Foundation recognized as a vocational training and design centre by the State and Central Governments.
9. The Board entered appearance and filed a detailed statement of objections to Co.A No.1425/2011. It was contended that valuable scarce industrial land allotted at subsidized prices acquired from farmers is utilized for the industrial purpose so that the object of the KIAD Act is accomplished. The land is not meant for the purpose of enabling speculators to benefit from the unearned increase in the price. Except allowing the valuable industrial plot to lie vacant for almost four decades the company has done precious little. The purpose for which the plot is allotted was for the manufacture of special types of plated through holes, 14 printed circuits, ordinary circuits, electronic components, electronic wrist watches etc. is not implemented in the plot in question. No plan sanction is obtained. Not even a lease deed is secured. As per the Regulations Governing the Disposal of Lands by KIADB, 1969, sale deed will be issued only after the project is implemented. If the request of the company is considered, then it amounts to placing premium on default. The company would become owner of industrial plot and thereafter sell the property in the real estate market and thus earn the benefit of the unearned increase in the price. The company does not merit such a bonanza. If the request is considered it would set a bad precedent and dilute the role of the Board in monitoring and supervising the implementation of the projects in industrial areas.
10. It was further contended by the Board that the company has put up construction without the sanction of plan from the Board, which is mandatory under the Regulations. The company is using the industrial land as a cultural centre, which is not the purpose for which the 15 industrial land could be allotted. The plot is being let out on hire for private functions and celebrations. These are impermissible under the terms and conditions governing the allotment of industrial plot. However, further it was contended that schedule property was allotted by letter dated 19.5.1972. No lease-cum-sale agreement was executed in favour of the company. Unless the terms of allotment are complied with, demand for execution of sale deed is tenable. The Board is the owner of the land and the grant of land being subject to standard terms and conditions made applicable to all the allottees of the KIADB, no case is made out for defaulting company to get sale deed executed without implementing the industrial project.
11. For the said objections, the company filed its rejoinder. In the rejoinder, it was stated that the company had submitted necessary plans and sanctions to the respondent. On account of the fact that they did not reject the same within the time stipulated, there is a deemed approval and consequently the construction was carried out. 16 Copy of one of the applications dated 18.9.2010 submitted by the company was produced at Annexure-J. They denied that the industrial land is used for cultural centre that they let it out on hire for private functions and celebrations. They denied all other allegations.
12. The learned Company Judge passed the impugned order dated 31st May, 2012 directing the Board to receive a sum of Rs.3,07,651/- from the company and register the sale deed in favour of the company in respect of the schedule property. In the course of the impugned order, the learned Company Judge observed that the order dated 16.9.2009 passed by the Company Court in Co.P No.109/2007, wherein the scheme of arrangement was considered for approval does not, in anyway alter Clause No.11 of the scheme. The scheme, as proposed, has been approved by this Court. In the said petition, the Board was impleaded as second respondent. If the Board had any objection to the scheme of arrangement, they should have raised such contention at that juncture so that the same 17 would have enabled the Court to consider that aspect of the matter in the light of that contention, which has been put forth with regard to approval or otherwise of the scheme. In the absence of such objection, when the court has considered and approved the scheme in the form in which it had been brought before the Court and that too in the presence of KIADB, at this juncture all that is necessary is to see that the scheme is implemented as approved by this Court. Aggrieved by the said order, the Board has preferred OS No.26/2012 challenging the order dated 31st May, 2012 .
13. It is stated, in the order dated 16.9.2009 in Co.P No.109/2007, the learned Company Judge approved the scheme and held that it is binding on the company, its shareholders, secured and unsecured creditors. Therefore, it is not stated that the scheme is binding on the Board. Therefore, the Board was under the impression that the objection filed by them to the scheme is accepted and revival of the company was made subject to the terms and 18 conditions of the allotment. Therefore, the said scheme as approved was not binding on the Board. Therefore, they did choose to challenge the said order. Since, in the order dated 31.5.2012 passed in Co.A.No.1425/2011, the learned Company Judge has negated their contentions that the earlier order is not binding on them, they chose to file one more appeal in OSA No.25/2012 challenging the earlier order. That is how, both these appeals are filed together and placed before us for consideration.
14. Sri S Vijayashankar, learned Senior Counsel assailing the impugned order, contended that the Board is not a party to the scheme of arrangement. When a public notice was given and as they were made parties to the proceedings, the Board filed its statement of objections insofar as clause No.11 of the scheme is concerned and stated that they have no objection in respect of the remaining portion of the scheme. Though in the order dated 16.9.2009 there is no reference to their objection, but while passing the order, the Company Court made it expressly 19 clear that the sanctioned scheme is binding only on the company, its shareholders, secured and unsecured creditors. It did not say that the said scheme is binding on the Board. Therefore, the scheme is not binding on the Board. The said order was not challenged by the Board. But when an application is filed purporting to implement the sanctioned scheme and to give effect to Clause No.11 of the scheme, the Board did object to the said application. However, the learned Company Judge over-ruling the said objection has issued the impugned direction, which is contrary to law and materials on record and therefore it requires to be set aside.
15. The learned Senior Counsel further contended that the learned Company Judge also proceeds on the assumption that the petition filed by the promoters of the company can maintain petition under Section 391 of the Companies Act. The petition is not maintainable and therefore the order passed in such a petition is void ab initio. He further contended that the scheme is described as scheme of arrangement, it is not a scheme of arrangement, 20 but it is a scheme of compromise. A compromise binds only the parties to the compromise. It is not binding on the third parties who are not parties to the compromise. On that score also the said scheme of compromise and the sanctioning of the said scheme do not in any way bind the Board. He also pointed out that the Regulation 15 of the Karnataka Industrial Area Development Regulations stipulates that an allottee of a industrial plot is considered as mere licensee, who has authority to enter upon the land allotted to him and starts construction of building. The licensee is also defined as person, who has authority only to enter upon the land allotted for the purpose of executing work thereon. Therefore, admittedly, when there is no lease-cum-sale agreement entered into between the Board and the Company and no sale deed is yet executed, the company being only an allottee, the licensee has no right in the schedule property. Section 14 of the Karnataka Industrial Area Development Act, 1960, empowers the board to resume possession of premises or part thereof including residential tenants in the 21 industrial area in the manner provided in Sections 34B. Section 34B of the Act empowers the Board to resume the possession of the premises on breach of terms and conditions of lease. Even after 40 years, the company has not complied with the terms and conditions of allotment. Therefore, they violated the terms and the said land is liable to be resumed. For the aforesaid reasons, the learned Senior Counsel submits that the impugned orders are liable to be sustained.
16. Per contra, Sri Udaya Holla, learned Senior Counsel appearing for the company contended that though the Board is not a party to the scheme, the Board was arrayed as second respondent in the company petition. The sanctioned scheme was approved in the presence of the Board. Assuming that their objection was not considered or over-ruled, as it is clear from Clause No.11 of the scheme, it hurt their interest and therefore they ought to have challenged the scheme insofar as Clause No.11 is concerned. For 30 long years, they kept quiet and therefore it is not 22 open to them to challenge the order at this juncture. Further, he contended that once the scheme is approved by the Court, it has statutory force. Therefore, clause No.11 in the scheme is fully binding on the Board and they are bound to obey the same. Further, he contended that because the scheme was sanctioned, the shareholders/ promoters raised funds and paid Rs.5 crores to the State Bank of India and they have paid the amount to all the secured creditors, on the assumption that by virtue of the order of sanctioning the scheme, they would be able to revive and rehabilitate the company. In fact, after sanctioning of the scheme, the company has written six letters calling upon the Board to execute the sale deed. It is only thereafter the Board before the Company Court contended that the company has not complied with the terms and conditions of the allotment. No construction is put upon the land allotted is also incorrect. In fact, Annexure-J to the rejoinder shows that a request was made to the Board for sanctioning of the plan and it is deemed to have been sanctioned. Therefore, the company 23 has put up construction. Hence, it is too late in the day to contend that there is violation of terms and conditions of allotment. For the last 40 years, the company is in possession of the schedule property. In fact, two applications filed for resumption of land were dismissed. It is that stage, the scheme was approved and therefore now the Board cannot say that they are the owner of the schedule property and the company has no right in the schedule property. Therefore there is no substance in the said contention.
17. In the light of the aforesaid facts and rival contentions, the points that arise for our consideration are as under:
1) Whether the scheme sanctioned by this Court binds the Board and the third party?
2) Whether the Company Court was justified
in issuing a direction to the Board to
execute the sale deed in respect of
schedule properties in favour of the
company in the facts of this case?
24
18. Point No.1: The salient features of the Scheme which is sanctioned by the Company Court discloses that the Company / Promoters shall pay each of the General Creditors the amounts which are due to them as mentioned in the Scheme within 180 days from the effective date. The General Creditors includes the Secured Creditors as well as the unsecured creditors. The money brought by the Promoters for the revival of the Company shall be appropriated towards discharge of the aforesaid debts. On payment of such amounts, General Creditors shall not proceed against the Company. Upon the Scheme becoming effective and payment of One Time Settlement (OTS) of its dues, the Secured Creditors shall relieve and release charge over the assets of the Company.
19. Clause 11 of the Scheme provides that upon the Scheme becoming effective, the Company / Promoters shall pay the dues of the KIADB and the KIADB shall execute the sale deed in favour of the Company in respect of the land allotted to the Company. Upon the Scheme being approved 25 by the Court, the winding up order dated 26.07.1985 shall stand recalled or set aside. Consequently, the Management of the Company shall stand vested with the Promoters. In pursuance of the notice issued in the petition filed for sanctioning of the Scheme, the KIADB filed its objection which is as under:
"1. Except paragraphs 8 and 14(11) there are no other averments made which is in reference to this Respondent. Further, in the Scheme at Annexure - A to the petition, except paragraph 4 of the preliminary and paragraph 11 of the Scheme, there is no reference to this Respondent. As such this Respondent does not intend to traverse the averments made in the petition.
2. The Company in liquidation was allotted an extent of 07 acres 01 gunta of land in Sy.Nos.81/1, 81/2A, 812B, 82/4A and 82/2 part of Doddakallasandra Village, Uttarahalli Hobli, Bangalore South Taluk, as per Allotment letter dated 19.05.1972. A copy of the allotment letter is herewith produced and marked as Annexure - A. Neither the Lease-cum-Sale Agreement not sale deed was executed in favour 26 of the Company in liquidation. However, possession was handed-over to the Company as per Possession Certificate dated 23.08.1972. A copy of the Possession Certificate is herewith produced and marked as Annexure - B.
3.. Under the Regulations Governing the Disposal of Lands by Karnataka Industrial Areas Development Board, 1969 the lands are allotted by this Respondent on Lease-cum-Sale Agreement basis and Sale Deeds are issued only after implementation of the project and satisfactory completion of all the terms and conditions of allotment. Compliance with the terms and conditions of allotment is essential keeping in view the object and purpose of Karnataka Industrial Areas Development Act, 1966. As the Company in liquidation does not have any sale deed as of day it is this respondent which is the owner of the lands.
4. Under the circumstances, this Respondent has no objection for revival of the Company in liquidation subject to the terms and conditions of allotment of the respondent".27
20. From the aforesaid objection, it is clear the Board had no objection for sanction of the Scheme subject to the terms and conditions of allotment of the schedule land by the Board to the Company. In other words, they objected to Clause - 11, where it is stated that upon the Scheme becoming effective, the Company / Promoters shall pay the dues of the KIADB and KIADB shall execute the sale deed in favour of the Company in respect of the land allotted to the Company. In other words, execution of the sale deed is subject to the terms and conditions of allotment and not in terms of Clause - 11. The Board was the second respondent in the Company Petition No.109/2007. In the order which is passed according to sanction of the Scheme on 16th September 2009, there is no reference to this objection at all. Probably, the Company Court did not rightly go into the said question as that cannot be the subject matter of the proceedings under Section 391 of the Companies Act. Therefore, while passing the order, it made it clear that the Scheme of Arrangement sanctioned by the Court is binding 28 on the Respondent Company, the Share-Holders, Secured Creditors and Un-secured Creditors. Therefore, consciously, the Company Court did not hold that the Scheme of Arrangement is binding on the Board. In other words, to that extent, the said Scheme which was produced before the Court stood amended. As there was no order holding that the Scheme is binding on the Board, the Board cannot be said to be the aggrieved party. Therefore, they did not choose to challenge the said order. It is in this context, it is necessary to look into the statutory provisions of Section 391 to deal with the power to compromise or make arrangements with the creditors and members:
"391. Power to compromise or make arrangements with the creditors and members:-
(1) Where a compromise or arrangement is proposed -
(a) between a company and its creditors or any class of them, or 29
(b) between a company and its members or any class of them, the [Tribunal] 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 [Tribunal] directs.
(2) If a majority in number representing three-
fourths in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed [under the rules made under sections 643], by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the [Tribunal], 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 contributions of the company:
30
[Provided that an order sanctioning any compromise or arrangement shall be made by the [Tribunal] is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the [Tribunal], by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under section 235 to 351, and the like].
(3) An order made by the [Tribunal] under sub- section (2) shall have no effect until a certified copy of the order has been filed with the Registrar.
(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a complicity any not having a memorandum, to every copy so issued of the instrument 31 constituting of defining the constitution of the company.
(5) If default is made in complying with sub- section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to [one hundred rupees] for each copy in respect of which default is made.
(6) The [Tribunal] may, at any time after an application has been made to it under this section stay the commencement or continuation of any suit or proceeding against the company on such terms as the [Tribunal] thinks fit, until the application is finally disposed of".
21. The aforesaid provision provides for a compromise or arrangement between a Company and its Creditors or any class of them or between a Company and its members or any class of them. Therefore, a compromise or arrangement under Section 391 of the Companies Act can only among the aforesaid persons. No outsider / third party 32 can be a party to such compromise or arrangement in a petition filed under Section 391 of the Companies Act.
22. Section 392 of the Companies Act deals with the power of the Court to enforce compromise and arrangement, which reads as under:
"392. Power of Tribunal to enforce compromise and arrangement :-
(1) Where the Tribunal 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 an 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 or arrangement.33
(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned under Section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under Section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of the Companies (Amendment) Act, 2001 sanctioning a compromise or an arrangement.
23. A reading of the aforesaid provision makes it very clear after a compromise or an arrangement is sanctioned by the Court, the Court shall have power to supervise the carrying out of the compromise or arrangement. Further, it may either at the time of making such order or at any time thereafter, give such directions in 34 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 or arrangement.
24. A harmonious reading of these two provisions makes it clear the power is vested in the Court to sanction a compromise or arrangement and at the time of according such sanction or subsequent thereto, may issue directions for implementing the Scheme which is approved including the power to make such modifications in the Scheme, if it considers it necessary for the proper working of the compromise or arrangement. If the Court is issuing any directions for the implementation of the terms of the Scheme, it can issue directions only to persons who are bound by the terms of the scheme. In other words, those who are parties to the scheme and in respect of the matters which are the subject matters of a compromise or an arrangement and any dispute arising between the parties which is resolved by such compromise or arrangement. That power cannot be extended to issue directions to persons who 35 are not parties to the Scheme or who are not bound by the order of the Court sanctioning the Scheme and which are extraneous to the said compromise or arrangement.
25. The Supreme Court in the case of Punjab National Bank Limited -vs- Sri Bikram Cotton Mills Limited and another reported in AIR 1970 SC 1973 dealing with the binding nature of a composition under Section 391 of the Companies Act held as under:
"13. A binding obligation created under a composition under Section 391 of the Companies Act, 1956, between the company and its creditors does not affect the liability of the surety unless the contract of suretyship otherwise provides. As observed in Halsbury's Laws of England, Volume 6, 3rd Edition, Article 1555 at page 771:
"A scheme need not expressly reserve the rights of any creditors against sureties for debts of the company, as such rights are unaffected by a scheme".36
It was in Re.Garner's Motors Limited 1937 Chancery 549 that the scheme when sanctioned by the Court has a statutory operation and the scheme does not release other persons not parties to the scheme from their obligations.
26. Reliance was also placed on the judgment of the Apex Court in the case of Ashok Paper Mills Kamgar Union - vs- Union of India and others reported in (1997) 3 Company Law Journal page 55 (SC) where it has been held that:
"The financial institution when it is called upon to build up India as an industrial country among world nations, it is under a duty to ensure industrial growth of the country. When scheme framed was approved by this Court, it is but its duty to see that the same is implemented. It is unfortunate that such an attempt has not been made by the IDBI. It instead of doing it, it has been a self help to the persons managing, etc. Therefore, they directed all the persons and institutions concerned should participate in the implementation of the scheme and Finance Secretary, Ministry of Finance, Government of 37 India, is directed to ensure that the legal conditions are fulfilled and the mill is rehabilitated and both, phase I and phase II of the scheme, are given effect to".
27. That was the case where IDBI who participated in the meeting called for framing a scheme for rehabilitation. After the scheme had been approved by the Apex Court, they wanted to back out of the contract and refused to pay a sum of Rs.10 Crores. It is in that context, the Apex Court held that IDBI is a party to the Rehabilitation Scheme and the Scheme having been approved by the Apex Court, it has a duty to lend money to the Company in liquidation for rehabilitation and thereby they were trying to enforce the terms of the scheme under Section 392 of the Companies Act against a person who was a party to the scheme.
28. The Apex Court while dealing with the power under Section 392 in the case of S.K.Gupta and another - 38 vs K.P.Jain and another reported in (1979) 3 SCC 54 held at para 14 as under:
"14. Sub-section (2) provides the legislative exposition as to who can move the Court for taking action under Section 392. Reference to Section 391 in sub-section (2) of Section 392 merely indicates which compromise or arrangement can be brought before the Court for taking action under Section 392. The reference to Section 391 does not mean that all the limitations or restrictions on the right of an individual to move the Court while proposing a scheme of compromise or arrangement have to be read in sub-section (2) merely because Section 391 is referred to therein. Unlike Section 391, Section 392 does not specify that a member or creditor or in the case of a company being wound up, its liquidator, can move the Court under Section 392. On the other hand, the legislature uses the expression 'any person interested in the affairs of the company' which has wider denotation than a member or creditor or liquidator of a company. In fact, the ambit of the power to act under Section 392 (2) can be gauged from the fact that the Court 39 can suo motu act to take action as contemplated by Section 392 (1) or it may act on an application of any person interested in the affairs of the company".
Again, at Paragraph No.16, it is held as under:
"It follows as a corollary that if the compromise or arrangement can be worked as it is or by making modifications, the Court will have no power to wind up the company under Section 392(2). Now, if the arrangement or compromise can be worked with or without modification, the Court must undertake the exercise to find out what modifications are necessary to make the compromise or arrangement workable and that it can do so on its own motion or on the application of any person interested in the affairs of the company. If such be the power conferred on the Court, it is difficult to entertain the submission that an application for directions or modification cannot be entertained except when made by a member or creditor. It would whittle down the power of the Court in that it cannot do so on its own motion".40
29. Reliance is also placed on the judgment of Divya Vasundhara Financiers Limited -vs- K.N.Samant and others reported in 1990 (69) Company Cases page 646 where it has been held as under:
"It is true that a scheme of compromise or arrangement sanctioned by the Court under section 391 of the Companies Act, 1956, is between a company and its creditors or any class of them and between the company and its members or any class of them and they can be said to be parties to the scheme and the scheme is binding on them. But so far as Section 392 of the Companies Act, 1956, is concerned, the powers of the High Court for enforcing the compromise or arrangement extend to general supervision for carrying out the compromise or arrangement and the Court can, at the time of making an order under Section 391 or even subsequently, give directions in regard to matters which are necessary for the proper working of the compromise or arrangement. Section 392(1)(b) of the Companies Act nowhere provides that directions can be given by the company court only against parties to the scheme and against no one 41 else. The only requirement of a direction under section 392(1)(b) is that such direction must be necessary for the proper working of the compromise of arrangement.
Section 6 of the Specific Relief Act, 1963, is not a bar to powers of the company court under section 392(1)(b) of the Companies Act. A scheme of compromise or arrangement has to be supervised by the court with a view to seeing that the scheme is fully implemented, without impediment. In that process, if there are any obstructions by persons who have prima facie no right, title or interest in the company's property, such obstructions can be eradicated by issuing suitable directions. So far as that power is concerned, it is an independent power available to the Court in connection with the scheme of compromise and arrangement and such power cannot be fettered by the provisions of general law such as those contained in Section 6 of the Specific Relief Act".
30. In the aforesaid case, it was found that certain persons had encroached upon some of the properties which 42 had vested in the Court Committee. An officer of the Court was appointed to take an inventory of the immovable properties of the company and to ascertain whether any encroachment on the immovable properties had been effected by any persons or parties. The Court officer found in his report that as far as the immovable properties in question were concerned, some encroachers were found squatting on the land and had put up huts thereon. The Court Committee filed an application before the Company Court under Section 392 of the Companies Act seeking suitable directions for removal of the alleged encroachment on the company's properties by the respondents concerned. The respondents questioned the jurisdiction of the Court in the matter and, inter alia, put up the plea of adverse possession. In that context, it was held as under:
"That the basis of the scheme sanctioned by the Court under Section 391(2) of the Companies Act, and to ensure the proper working of which the Court committee was appointed, was to ensure payment to all the creditors within a reasonable 43 time, to complete and / or dispose of the outstanding incomplete projects, to sell the properties and liquidate the investments and to disburse the amounts recovered to the creditors. Thus, the Court Committee was charged with the duty to realize the value of the properties and to disburse the amount realized amongst the creditors. For this purpose, the Court Committee had obtained the approval of the Court to accept the offer of one 'U' to purchase the properties in dispute on an "as is where is" basis, hand over vacant and peaceful possession thereof to 'U', and complete their little on receipt of the balance purchase price. This could not be done unless the squatters were cleared off. This impediment, sought to be removed by the application, fell within the supervisory jurisdiction of the Court under Section 392 of the Companies Act, through its Court Committee, and called for a direction for the proper working of the scheme of compromise or arrangement."
31. Section 391 is a complete code by itself. It deals with right of the Companies to enter into compromise or 44 arrangement to itself and its creditors or in class of them and between itself and its members or in class of them. It covers restructuring, merger, demerger and hiring of a unit by the company. Once scheme of compromise and arrangement falls squarely within the four corners of the Section, it can be sanctioned. The words of the Section are very wide. A scheme is binding on the members and creditors of a Company. Once the scheme or compromise and arrangement under this Section is approved by statutory majority, it binds the dissenting minority, the Company and also the liquidator, if the Company is in winding up. Under Section 391 of the Act, the persons who are bound by the scheme and the order of the Court sanctioned in the scheme or the arrangement are its creditors and its members. Person who do not fall under any of these categories are third parties. Their presence is not necessary for the Court to accord sanction to the scheme.
45
32. Section 392 is concerned, it is supervisory in nature. The said power is exercised to give effect to the order according sanction to the compromise or arrangement. Under Section 392, the Court has powers to give directions even to the third parties to the compromise or arrangement. The only requirement for direction is that such direction must be necessary for the proper working of the compromise or arrangement. Even if there are any claims of the properties by persons who have no manner of right, title or interest over the property, whose conduct is effecting the interest of the company then either suomoto or by an application made by any person interested in the affairs of the company, the Company Court has power to issue such directions so as to protect the interest of the company and to give effect to the sanctioned scheme. The Court can order for eviction of persons who have prima facie no right, title or interest in the Company properties by issuing suitable directions. Where the revival scheme of the Company in liquidation could not be implemented without getting vacant 46 possession of the Company premises from tenants, the Court had the widest powers under the Section even to order eviction of tenants. However, the rights of a third party claiming independent title or interest of his own in any property cannot be effected by seeking mere directions under Section 392(1)(b). Third party rights cannot be resolved in a compromise among the aforesaid persons. Therefore, when the Court passes an order approving the scheme, the said order of the Court as well as the scheme binds only among such persons. But that power cannot be intended to resolve dispute between the third parties and the company or to enforce rights between the company, its creditors, its members and third parties. The said power cannot be exercised by issuing directions to persons who have independent propriety rights over the properties, so as to affect such rights. The proper course against such a third party would be to file a substantive suit.
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33. Therefore, in the instant case, it is clear that the Company was allotted a site by the Board 40 years back. Therefore, we have to find out what is the nature of right the company acquired under such allotment. Regulation 15 of the Karnataka Industrial Areas Development Board Regulations, 1969 deals with the rights of allottee as a licensee, which reads as under:
"15. Allottee as a Licensee:
Till the agreement for lease, sale or lease-cum- sale is executed, the allottee will be considered as a mere licensee who shall have licence and authority only to enter upon the land allotted to him and to start construction of buildings or works and will have no power to legally alienate his interest except to the extent allowed by the Board for raising loans. No sub-division of the plot will be allowed without the permission of the Board given in writing."
34. A reading of the aforesaid provision makes it very clear, till the agreement for lease or lease-cum-sale is 48 executed, the position of the allottee would be as a mere licensee who shall have licence and authority only to enter upon the land allotted to him and to start construction of buildings or and will have no power to legally alienate his interest except to the extent allowed by the Board for raising loans. Therefore, by an allotment, the allottee do not acquire any interest in the immovable properties. When an allotment is made under the provisions of the Karnataka Industrial Areas Development Act, 1966, the Board has the power to resume possession of the premises or part thereof or the residential tenement as in the manner provided under Section 34B. Section 34B reads as under:
"34B : Resumption of the possession of premises including the residential tenements on breach of terms and conditions of lease or holding without authority:
(1) Where the Board is of the opinion that an allottee of any premises or part thereof or residential tenement in an industrial area or industrial estate has violated any of the terms or 49 conditions of allotment or holds it without any authority it may, without prejudice to Section 25 give notice to such allottee and Banks or Financial Institutions, in whose favour the Board has permitted the mortgage or leasehold rights of the premises, or residential tenement specifying the breaches of the terms and conditions of the allotment calling upon the allottee to remedy such breaches within a time stipulated in the notice.
(2) If the allottee fails to remedy the breaches within the time so stipulated, the Board shall serve a notice upon the allottee under intimation to such Bank or Financial Institutions to show cause within thirty days from the date of service of notice, why the possession of the premises or part thereof or residential tenement should not be resumed.
(3) After considering the cause, if any, shown by the allottee and after giving him an opportunity of being heard, the Board may pass such orders, as it deems fit.
(4) Where the Board passes an order under sub-
section (3), for resuming possession of the 50 premises or part thereof or residential tenement in the industrial area it may, by notice in writing, order any allottee to surrender and deliver possession thereof to the Board or any person dully authorized in this behalf within the date specified in the notice.
(5) If any allottee refuses to surrender or deliver the possession of the premises or part thereof or residential tenement within the time specified in the notice, the Board or any officer authorized by it in this behalf may resume the possession of the premises or part thereof or residential tenement free from all encumbrances and for that purpose may use force as may be necessary".
35. The aforesaid provision makes it clear when the allottee violates any of the terms or conditions of the allotment and fails to remedy the breaches within the time so stipulated, the Board may resume the allotted land. In the instant case, the company is the allottee. Admittedly, no lease-cum-sale agreement has been executed between the parties. The secured creditors filed a company petition for 51 winding up of the company and the company was ordered to be wound up. The Official Liquidator took possession of the assets of the company including the schedule land. An attempt was made by him by filing two applications for seeking permission for resumption of the land. One application was withdrawn, second application was dismissed for non-prosecution. Subsequently, on the report submitted by the official liquidator, the schedule property was brought to sale. Therefore, it is clear the Board is contending that the Company has violated the terms of allotment. They intended to resume the land. When the scheme was propounded including the schedule land, as the subject matter of the scheme provided for payment of balance amount and execution of the sale agreement by the Board to the company, they filed written objections. When the Court accorded sanction, because of the said objections, the Court made it clear that the order according sanction is not binding on the Board. As the Board was not bound by the said order, the interest of the Board was not effected. 52 Therefore, they did not challenge the order as they had no objection for the scheme being approved subject to the rights as stipulated under the terms of law. Finally, when an application was filed for direction to the Board to execute the sale deed, they objected to the said application. The learned Company Judge proceeded on the assumption that the Board did not object to the Clause before the scheme was approved is a factual error. Even otherwise, the learned Company Judge did not carefully look into the order granting sanction where it was expressly provided that the order of sanction binds the company, the petitioner, the shareholders and the creditors only. Nowhere, it is mentioned that it binds the Board. The learned single Judge failed to notice though the allotment was made 40 years back, no lease-cum-sale agreement was executed. On the contrary, an attempt was made by the Board to resume the land on the ground that there is violation of the terms of allotment which clearly shows that there existed a dispute between the Board and the Company regarding the schedule property. That dispute 53 cannot be resolved by the term of the scheme without the Board being a party to the scheme. Admittedly, the Board is the owner of the schedule property. The position of the Company is only that of a licensee. It had not acquired any interest in the schedule property. Admittedly, there is violation of the terms of the allotment. The Company had a right to resume the schedule property. Twice an attempt was made to enforce the said right. These aspects are not considered by the learned Company Judge while passing the impugned order directing the Board to execute the sale deed. The order granting approval to the scheme did not make the scheme binding on the Board. In that view of the matter, the scheme sanctioned by the Board as it does not bind the Board, which is a third party to the scheme, the impugned order passed by the learned Company Judge directing the Board to execute the sale deed in favour of the Company cannot be sustained. Accordingly, the impugned order passed by the learned Company Judge on 31st May 2012 is 54 hereby set aside and the Company Application No.1425/2011 is dismissed.
36. As we are holding that the order passed by the Company Court in Company Petition No.109/2007 is not binding on the Board, the Board cannot be said to be aggrieved person and therefore, at the instance of the Board, the said ordered dated 16th September 2009 cannot be set aside. The interest of the Board is protected by the declaration granted by us that the said order and the scheme which is approved by that order do not bind the Board to any extent whatsoever.
37. In the light of what we have stated above, it is wholly un-necessary for us to go into the question whether a promoter can maintain a petition under Section 391 of the Companies Act or not?
38. Firstly, in the statement of objections filed by the Board, they said no objection for the scheme being approved 55 subject to their rights in respect of the schedule property being kept in tact. Therefore, it is not open to them now to contend that the application itself is not maintainable. Even otherwise, as we have held that the said order does not bind the Board to any extent whatsoever, they have no right to challenge the maintainability of the petition as they are not aggrieved parties. However, we make it clear now that the winding up order has been recalled, the company has been rehabilitated and the Management of the company is now vested with the shareholders, they have right to proceed against the KIADB to get the sale deed executed in their name. They have to work out their remedy in accordance with law and not by way of filing application in these company proceedings. Therefore, the order passed by us in these appeals will not in any way affect the rights of the company. If and when they try to enforce such rights, the Authorities or the Courts shall adjudicate such rights independently and in accordance with law on merits without in any way being influenced by the orders of this Court. 56
39. Accordingly OSA No.25 of 2012 dismissed. OSA No.26 of 2012 allowed.
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