Gujarat High Court
State Bank Of India vs Engg. Majdoor Sangh on 2 December, 1999
Equivalent citations: (2001)2GLR1032
Author: M.S. Shah
Bench: M.S. Shah
JUDGMENT M.S. Shah, J.
1. In all these applications the applicants have prayed for review of this Court's order dated 23-9-1997 passed by this Court (Coram: Hon'ble Mr. Justice S. D. Dave) in Company Petition No. 224 of 1996 sanctioning the scheme presented by Engineering Majdoor Sangh, Baroda, under Secs. 391 and 394 of the Companies Act, 1956 (hereinafter referred to as 'the Act'). Since these applications involve common question of law and fact, they are heard together and common judgment is being delivered in all these four applications.
2. It may be clarified at the outset that in Company Application Nos. 513 of 1997, 515 of 1997 and 516 of 1997 the applicants have prayed for the following main reliefs.
(i) This Court may review, quash and set aside the order dated 23-9-1997 sanctioning the Scheme of Compromise and/or arrangement proposed by the Engineering Majdoor Sangh.
(ii) This Court may direct appropriate action to be initiated against Shri K. W. Desai of Engineering Majdoor Sangh for making false statements on affidavit, concealing material facts, practising fraud on the Court and misleading this Court.
3. For the present, this Court is only dealing with the first prayer and the parties shall be at liberty to make appropriate submissions regarding the second prayer at the time of next hearing. It is necessary to make this segregation because the Company in question being Beclawat of India Ltd. was ordered to be wound up as far back as on 22-12-1992 and the properties of the Company were taken over by the Official Liquidator attached to this Court. However, by virtue of the order sought to be reviewed (i.e., the order dated 23-9-1997) possession of the properties of the Company was taken over by the Engineering Majdoor Sangh (hereinafter referred to as 'the Union'). After the Court passed order dated 23-9-1997, by order dated 23-10-1997 the Court recorded the statement made by the learned Counsel for Engineering Majdoor Sangh that they would restore back the possession and custody of the land, building and machinery of the unit in question to the Official Liquidator by 24-10-1997. Thus, though the possession and custody of the assets of the unit in question is with the Official Liquidator, the stalemate has continued for the last two years as neither the creditors nor any other parties are in a position to present any scheme under Section 391 and Section 394 of the Act nor is the Official Liquidator in a position to dispose of the assets of the Company with the result that neither the creditors nor workers are in a position to get their dues or even part thereof. For this reason, at the request of Mr. K. W. Desai, this Court has deferred consideration of the second question whether any action is required to be taken against Mr. K. W. Desai of the Engineering Majdoor Sangh, Baroda, so that any delay in deciding the said question does not prolong the stalemate existing for the last two years.
3. Before dealing with the contentions raised in these applications, a few facts leading to filing of these applications may be stated.
3.1 Some of the creditors of Beclawat of India Limited filed Company Petition Nos. 62, 63 and 64 of 1991 praying that the Company be wound up as it was unable to pay its debts. These Company petitions were admitted on 25-10-1991 and were allowed by this Court by order dated 22-12-1992. The Company was ordered to be wound up and the Official Liquidator was appointed as Liquidator of the Company in liquidation.
3.2 State Bank of India, a creditor of the Company, preferred Company Application No. 157 of 1992 wherein by order dated 22-7-1992 this Court permitted the said creditor to file a suit for recovery of its debts. The Bank accordingly filed Civil Suit No. 123 of 1992 against the Company and its guarantors for recovery of Rs. 63,86,645/- as well as for enforcement of the mortgaged security. In the said suit, the trial Court passed an interim order restraining the Company, its directors from dealing with and disposing of the assets of the Company in liquidation. The Engineering Majdoor Sangh, Baroda, preferred an application in the said suit for being joined as a party defendant. The said application was granted. The Union also filed an application in the said suit for dismissing the suit on certain grounds raised in the said application.
3.3 The Engineering Majdoor Sangh filed Company Application No. 104 of 1994 before this Court proposing the scheme of compromise and/or arrangement between the workers of the said Company (in liquidation) as well as the unsecured creditors and other interested parties. The Court issued notice to the State Bank of India. The State Bank of India appeared and opposed the prayer of the Union for convening the meetings for considering the scheme. Admittedly, no notice was issued to the other creditors who were unsecured creditors or to the shareholders of the Company. The Union invited order of this Court to convene the meeting of the workers of the Company stating that they be termed as a "class of creditors". By order dated 6-3-1995 this Court directed the applicant to convene meeting of class of creditors but observed that the meeting will be held after giving due notice to the secured creditors.
3.4 Thereafter, the Union wrote a letter dated 24-4-1995 to the Chairman appointed for the said meeting Mr. P. V. Chacko, Assistant Registrar of this Court. The Union stated that the Court had granted the prayer to convene the meeting of class of creditors i.e. the workers and staff of the Company in service i.e., the members of Engineering Majoor Sangh, Baroda, for the purpose of voting on the proposed scheme and list of the members of the class of creditors was sent to the Chairman of the meeting. The S.B.I, through its Advocate Mr. R. M. Desai appeared at the meeting but they were not allowed to participate on the ground that the meeting was confined to the class of creditors which did not include the Bank. The meeting was ultimately held at Anand on 3-6-1995. Out of 73 persons present at the metting, 67 voted in favour of the scheme and 6 persons voted against the scheme. The Chairman of the meeting submitted his report which is to be found at page No. 78 of the paperbook in Company Petition No. 224 of 1996.
3.5 The Union filed Company Petition No. 224 of 1996 praying for sanction of the scheme of compromise or arrangement by virtue of Section 394 of the Act. It was mentioned in the said application that the applicant i. e., the Union tried utmost to find out whether there were any secured creditors on record and that since in the Official Liquidator's report, showing the assets and liability, the Official Liquidator had not shown any amount as liability towards secured creditors, no secured creditors were there as per the report of the Official Liquidator. Further, the applicant i. e., the Union through Mr. K. W. Desai, Special Duty Officer, went to the office of the Official Liquidator and orally enquired whether there were any secured creditors of the Company and it was found that there were no secured creditors of the Company. Under these circumstances, the notice of the meeting was issued pursuant to the order of the Court only to the workers being the class of creditors. In para 12 of the said application it was specifically mentioned that "notice of this petition need not be served on any person." It appears that when the said petition (No. 224 of 1996) came up for hearing, the learned Counsel for the Union and the Official Liquidator appeared. After hearing them, by order dated 23-9-1997 this Court allowed the petition and sanctioned the scheme presented by the Union without issuing any notice to any party. The Court also passed an order directing the Official Liquidator to hand over the assets to the Union and to make complete inventory of the assets of the company before handing over the assets. It is for review of the aforesaid order dated 23-9-1997 that the applicants have filed these applications.
4. These applications for review are filed by the following four categories of persons :-
4.1 Company Application No. 513 of 1997 is filed by State Bank of India on the ground that it is a secured creditor of the Company that separate meetings of secured creditors as well as unsecured creditors were not convened, nor were they given any notice of Company Petition No. 224 of 1996.
4.2 Company Application No. 515 of 1997 is filed by shareholders of the Company in liquidation on the ground that no meeting of shareholders was convened at all nor were they given any notice of Company Petition No. 224 of 1996. Hence the Scheme could not bind them.
4.3 Company Application No. 516 of 1997 is filed by one of the unsecured creditors of the Company in liquidation supported by other unsecured creditors whose list is annexed to the affidavit. The application also contains the statement on behalf of the unsecured creditors supporting the applicant that they oppose the scheme proposed by the Union in Company Petition No. 224 of 1996. They have also prayed for review on the ground that no meeting of unsecured creditors was convened or held and notice of Company Petition No. 224 of 1996 not having been issued to them and for non-compliance with Rule 80, the order dated 23-9-1997 was a nullity as the scheme could not bind the creditors without giving them an opportunity of being heard.
4.4 Company Application No. 530 of 1997 is filed by 34 persons whose services were earlier terminated but by award dated 13-3-1991 passed by the Labour Court at Nadiad, in Reference No. 21 of 1985, the Company was ordered to reinstate them in service with 50% back wages. That award came to be challenged in Special Civil Application No. 3844 of 1991 and while admitting the petition this Court granted interim stay of execution of the award qua the back wages on condition that 25 % of the back wages be paid to the concerned workmen. No interim stay was granted in respect of reinstatement. However, in view of the fact that the Company ultimately came to be wound up, the said persons did not get any back wages at all nor did they get the benefit of the order of reinstatement, although there was no stay against the award for reinstatement.
5. At the hearing of these applications, as stated earlier in para 2 hereinabove, it was made clear to the learned Counsel for the applicants as well as to Mr. K. W. Desai appearing for the Union that the present hearing is confined to the first prayer of the applicants i. e., for review of the order dated 23-9-1997 and the second prayer regarding action to be taken against Mr. K. W. Desai will be considered later on.
6. The applicants in all these four applications have made a common cause and have submitted that the order dated 23-9-1997 is required to be recalled as me same was a nullity and suffered from errors apparent on the face of the record in view of the following grounds :-
6.1 Despite specific provisions of Section 391(1) of the Act, no meeting of the secured creditors, no meeting of the unsecured creditors, no meeting of the shareholders of the Company was convened or held and that even 34 workers in whose favour the order of reinstatement and percentage of back wages was operating were not given any notice of the meeting, and therefore, there was complete breach of the mandatory provisions of Section 391(1) of the Companies Act. It is submitted that the scheme proposed by the Union and sanctioned by the order dated 23-9-1997 affected not only the workers, but also the secured creditors, unsecured creditors and the shareholders as will be clear from the relevant clauses of the scheme extracted hereafter and still no meeting of their respective class was convened or held. The relevant clauses of the scheme are as under :-
"(1) Total paid-up shares of all class shall be forfeited by writing off its value which is practically nil today for the reason that the Company is wounded up by the consent of the Directors...."
(5) New Management shall accpet total liabilities and assets of the Company (7) All the creditors including State Bank of India will be paid their dues without interest in ten equal yearly instalments and first instalment will be paid after 12 months from the date of commencement of production.
(8) Before deciding payable amount to the creditors the new management shall enjoy every right to negotiate and settle by deduction the dues of every creditors including the State Bank of India on every reasonable, commercial, industrial and legal grounds."
6.2 It is also submitted that there was also breach of the mandatory provisions of Rule 80 which reads thus :-
"(80) The Court shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same papers in which the notice of the meeting was advertised or in such other papers as the Court may direct, not less than 10 days before the date fixed for the hearing."
No such notice as required by Rule 80 was ever published and still the Union sought an order from this Court for sanctioning the scheme which was to bind the secured creditors, unsecured creditors, the equity shareholders and all other persons.
7. In reply, Mr. K. W. Desai appearing for Special Duty Officer of Employees Majdoor Sangh of Baroda has submitted as under :-
7.1 These applications suffer from delay, and therefore, they deserve to be dismissed.
7.2 The scope of review is very limited. Even if there was any error and even if there was non-compliance with the provisions of law, it was open to the applicants to prefer an appeal. The present applications do not raise any ground which would warrant review of this Court's order dated 23-9-1997.
7.3 The Court had inherent powers under Rule 9 of the Company Court Rules to sanction the scheme without issuing notice to any creditors or shareholders and that the Court was well within its powers to sanction the scheme on the basis of the resolution passed at the meeting of class of creditors consisting of the workers of the company in liquidation.
7.4 In any case, there was no injustice to any party as under the scheme the Union had agreed to repay the dues of the creditors and the workers, the value of the shares was nil, and therefore, there was full justification for sanctioning the scheme even without issuing any notice to the secured creditors, unsecured creditors or to the shareholders. Since there is no miscarriage of justice, the applications deserve to be dismissed.
8. Having heard the learned Counsel for the parties this Court is of the view that for the reasons indicated hereinafter, the order dated 23-9-1997 passed in Company Petition No. 224 of 1996 is required to be recalled.
8.1 Before dealing with the contentions on merits, the preliminary objection about delay in filing these applications may be dealt with.
The order sought to be reviewed was passed on 23-9-1997 without issuing any notice to any party, and therefore, the affected parties would not be in a position to learn about such an order immediately. Some of them did make a grievance orally before the Court on 23-10-1997 and that is why the Court required the Union to return possession of the assets of the Company to the Official Liquidator. Thereafter, Company Application Nos. 513, 514 and 515 of 1997 came to be filed in November, 1997 and Company Application No. 530 of 1997 by the affected workers came to be filed in the first week of December, 1997. Under the circumstances, there was no delay, or at least no unreasonable delay, in filing of the present applications for review of the order dated 23-9-1997.
9. The scheme in question was presented under the provisions of Section 391(1) read with Section 394 of the Companies Act. Sub-sections (1) and (2) of Section 391 provide as under :-
"391(1). where a compromise or arrangement is proposed - (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them;
The Court may, on the application of the Company or of any 'creditor or member of the Company, or, in the case of a company which is being wound up, of the liquidator, or a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.
(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members, or class of members, as the case 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 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 fact 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 Secs. 235 to 251 and the like."
The expression 'class of creditors or members' has come to be interpreted in a catena of decisions. As per the settled legal position, one test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The Company will ordinarily be expected to offer an identical compromise to persons belonging to one class; otherwise, it may be discriminatory. At any rate those who are offered substantially different compromises, each will form a different class. Even if there are different groups within a class, the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. The group styled as a class should ordinarily be homogenous and must have commonality of interest and the compromise offered to them must be identical. Creditors can be divided into three categories of preferential creditors, secured creditors and unsecured creditors.
In Miheer H. Mafatlal v. Mafatlal Industries Ltd., 1996 (87) Comp. Cases 792 their Lordships of the Supreme Court drew support from the following passage on the concept of a class from Palmer's Company Law, (24th Edn).
"What constitutes a class : The Court does not itself consider at this point what class of creditors or members should be made parties to the scheme. This is for the Company to decide, in accordance with what the Scheme purports to achieve. The application for an order for meetings is a preliminary step, the applicant taking the risk that the classes which are fixed by the Judge, usually on the applicant's request, are sufficient for the ultimate purpose of the Section, the risk being that if in the result, and we emphasise the words 'in the result', they reveal inadequacies, the scheme will not be approved."
It is thus clear that all the classes of persons whose interests were sought to be affected by the scheme in question were entitled to be called at the meeting of the respective class of creditors which meetings were unfortunately not convened. It was for the petitioner-Union which had filed Company Application No. 104 of 1994 to request the Court to convene the meetings of secured creditors, unsecured creditors and shareholders. Far from making any such request, the petitioner-Union confined its prayer for a direction that only a meeting of a class of creditors i. e., the workers be convened. The petitioner-Union thus took the risk of making such a request, and therefore, the Court merely granted that request and subsequently even at the time of filing Competition No. 224 of 1996 the petitioner-Union made an express statement in me petition that notice of the petition was not required to be issued to any party.
10. The Court proceeded to pass the order on 23-9-1997 without passing any order for issuing advertisement under Rule 80 of the Company Court Rules.
The object underlying the rule is very clear. The persons who are sought to be affected by the scheme must get an opportunity of opposing the scheme. In the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. (supra) the Apex Court in terms observed that it is for the concerned class of creditors and members to decide whether the scheme is acceptable to them or not. As regards the role of the Company Court, the Apex Court observed that the Court is not to sit in appeal over the wisdom of the concerned class of creditors and members regarding the merits of the scheme, it is absolutely necessary for the sanctioning Court to see to it that all the requisite statutory procedure for supporting such scheme has been followed and the requisite meeting as contemplated by Section 391(1)(a) of the Act has been held and that the scheme put up before the Court is backed up as required by the majority view under Section 391(2). The Apex Court has thus clearly laid down that the requisite meeting as contemplated by Section 391(1)(a) and the requisite majority voted as required by Section 391(2) are mandatory. Where a scheme is to operate differently on different classes of creditors, separate meeting of each class must also be held.
11. Admittedly, in the instant case no separate meeting of secured creditors, unsecured creditors and shareholders of the Company in liquidation were convened or even ordered to be convened. In fact, a meeting of only one class of creditors, workers was convened. Admittedly, no notice under Rule 80 of the Company Court Rules was published or ordered to be published.
Mr. K. W. Desai appearing for the Union is not in a position to dispute any of the aforesaid factual aspects although affidavit-in-reply is filed by him on behalf of the Union. The aforesaid factual aspects are not disputed even at the hearing of these applications. All that is contended is that in view of Rule 9 of the Company Court Rules, the Company Court has inherent powers to give such directions or pass such orders as may be necessary for meeting the ends of justice or to prevent the abuse of process of the Court.
12. The aforesaid submission overlooks the important aspect that all that Rule 9 does is to save the inherent powers of the Court but the Rule does not and cannot abrogate the provisions of the statute particularly Section 391 of the Companies Act which is the Parent Act. Even in the context of Section 151 of the C.P.C. the Apex Court has held in Cotton Corporation of India v. U. I. Bank Ltd., AIR 1983 SC 1272, that the inherent powers under Section 151 of the Code of Civil Procedure, 1908 cannot be exercised in derogation of the express provisions contained in the other Sections of the Code. In view of the aforesaid settled legal position, reliance on Rule 9 of the Company Court Rules cannot advance the petitioner-Union's case any further.
13. The contention of Mr. Desai that the scheme deserves to be sanctioned cannot be examined on merits. The following statement in Palmer's Company Law para 12.027 (25th Edition) has been repeatedly cited and followed by various Courts :-
"The Court has no power to usurp the right of the class of members of creditors to decide whether they approve the scheme. If therefore, a class whose interests are affected by a scheme neither assents to the scheme nor approves it at a meeting in accordance with the Section, the Court cannot confirm the scheme even if it considers that the class concerned is being fairly dealt with, or that it would approve the scheme."
In the case of Miheer H. Mafatlal Ltd. (supra), the Hon'ble Supreme Court has reiterated the above principle and has held in terms that the role of the Court is confined to that of an umpire in cricket and the game is to be played by the affected parties and not by the Court.
In view of the aforesaid principles laid down in case of Miheer H. Mafatlal (supra) it is not for this Court to evaluate the merits of the scheme which was sanctioned by this Court by order dated 23-9-1997. Once, it is found that the scheme was sanctioned without considering and complying with the mandatory provisions of Section 391 of the Companies Act, and Rule 80 of the Company Court Rules, it must be held that the order dated 23-9-1997 was vitiated by errors of law apparent on the face of the record and the case clearly falls within the scope of review.
14. Accordingly, the order dated 23-9-1997 in Company Petition No. 224 of 1996 is hereby recalled. Since Company Petition No. 224 of 1996 was filed without any meeting of the secured creditors, unsecured creditors or shareholders of the Company in liquidation the Company Petition itself is liable to be dismissed and is accordingly dismissed.
15. As already stated above, the question as to whether any action should be taken against Mr. K. W. Desai shall be considered hereafter at the next hearing which shall take place on 22-12-1999. It is clarified that pendency of this application for considering the aforesaid question does not preclude any of the parties or any creditors, members, or any other persons from moving any other scheme or proceedings in respect of the assets of the Company.
16. The question as to what costs should be awarded to the applicants and from whom, shall be considered at the next date of hearing while considering the question whether any action is to be taken against Mr. K. W. Desai. The Court cannot, however, help observing that even after the Court had pointed out to Mr. K. W. Desai appearing for the Union that in view of the admitted non-compliance with the mandatory statutory provisions of Section 391(1) of the Companies Act, 1956 and Rule 80 of the Company Court Rules, whether there was any possible ground on which the prayer for review could be opposed and that the Court was prepared to consider the prayer for review separately from the prayer for taking any action against Mr. Desai; even then Mr. K. W. Desai wasted considerable time of this Court by persisting with untenable arguments in respect of the prayer for review and thereby wasted about four hours of valuable judicial time.
17. Order recalled; petition dismissed.