Karnataka High Court
S.M. Holding Finance Private Limited vs Mysore Machinery Manufacturers Ltd. ... on 4 January, 1991
Equivalent citations: ILR1991KAR2672, 1991(3)KARLJ447
JUDGMENT K. Jagannatha Shetty, J.
1. This petition is filed under section 391(2) of the Companies Act, 1956, by the petitioner, S. M. Holding Finance Private Limited, who is the petitioner in the matter of Mysore Machinery Manufacturers Limited (in liquidation).
2. The object of the petition is to obtain sanction of the court to a compromise or arrangement whereby the debts of the company (in liquidation), i.e., secured, preferential and unsecured and wages of labour are discharged. That apart, the shareholders of the company (in liquidation) will be repaid their shareholding.
3. It is averred that the company was incorporated under the then Mysore Companies Act (XVIII of 1938) on September 23, 1946, with a nominal capital of Rs. 100,00,000 divided into 10,00,000 equity shares of Rs. 10 each, of which 5,00,000 equity shares were issued and Rs. 10 was paid-up on each share issued.
4. The objects for which the company was formed are set out in the company's memorandum of association. In brief they are :
(i) to carry on the business of iron founders, mechanical engineers and manufacturers of agricultural implements and textile machinery, etc.,
(ii) to carry on the business of structural engineering, general jobbing, casting and machining works, the manufacture of malleable castings for vacuum brakes, and other fittings for the railways and other commercial purposes.
5. The company commenced business in 1946-47. All through, it had poor performance. As per the printed annual report of the company made for the year ending December 31, 1982, the accumulated loss of the company was about Rs. 61.52 lakhs, as against the paid-up capital and free reserves of Rs. 9.10 lakhs. There was no provision made in the balance-sheet towards certain statutory claims and liabilities for the earlier period. The industrial relations were also disturbing with several industrial disputes pending in the Labour Court and the Industrial Tribunal for adjudication. The labour union representing workmen had at that time submitted a charter of demands for revision of wage scales and other demands. The labour atmosphere was not good. The then existing management was not keen on continuing the affairs of the company. At this juncture, viz., during early 1983, there was a change in the management. Consequently, a new board of directors was formed which included several professionals in the field of textile engineering, marketing and law. Mr. S. M. Shetty, industrialist, was appointed as a chairman of the company. After the new team took over the management, a comprehensive plan for rehabilitation and revival was drawn up involving modernising the then infrastructure and diversion into additional fields. As a part of the plan, the new management pumped in fresh investment of Rs. 41 lakhs by way of increasing the paid-up capital of the company and secured additional financial limits from a consortium of bankers amounting to about Rs. 200 lakhs offering personal guarantee of the chairman and his wife. In order to maintain cordial industrial relations and to raise productivity, the company entered into several settlements with the workers on various pending issues. A team of experienced professional managers was inducted to ensure the revival of the company. As a part of its expansion, modernisation and diversification programme, the company expanded the product range. Several new models of looms such as underpick loom and a new silk loom (Japanese type) were introduced. Work on the development of automatic and semi-automatic looms was also commenced. The company also increased the scope of the fabrication shop by taking up orders for mild steel fabrication and processing machines such as poly vinyl chloride coating plant. Likewise, the foundry department was equipped with several new machines such as shot blasting machine, storage bunkers, sand storage hopper, cupola, etc. Similarly, the machine shop was strengthened by installing a new gear hobbing machine. H.M.T. drilling machine, vertical milling machine, etc. In order to take care of frequent power cuts, two diesel generators were installed. The inspection department was also equipped with testing equipment such as a universal testing machine and sand testing machine, etc. Several new machines and conveyer belt systems were still in the process of being commissioned. The management also took steps to export its products to countries such as Bangladesh and Mauritius. Despite all these rehabilitory schemes, diversification, rejuvenating measures adopted by the company, the working results were not sufficient to match the additional investment made by way of increase of capital and bank advances. The company was not able to sustain its efforts for viability despite fresh investments because of several hurdles which thwarted its efforts. They include steep increase in the cost of raw materials, non-availability of raw materials at the appropriate time from agencies such as the Steel Authority of India Limited, Coal India Limited, etc., low productivity and continuance of power cut. In addition to the above, the Central Government of India made several drastic changes in the textile policy which affected adversely the powerloom sector. As a result of change in textile policy, several varieties, like dhoties and sarees even with small borders, doria cloth and shirting, which were hitherto mainly manufactured by the decentralised but unorganised powerloom industry were reserved exclusively for handloom thereby disturbing and shrinking the powerloom sector. Further, for the purposes of evaluation and awarding of Governmental incentives, the powerloom sector was equated on par with the organised and centralised composite mill sector. These accentuated the recession in the market already existing for the powerloom weaving machinery. These factors contributed to reduction in the demand for powerlooms. Further, the company had to face unsuccessfully cut-throat competition from small entrepreneurs whose prices were lower due to nominal overheads and exemption from taxation and excise duty as compared to their high incidence in the case of the company. Added to this, the company also lost a substantial portion of the weaving market because of entry of advanced weaving machinery such as automatic looms, cop changing loom and sophisticated air jet and schultzerloom, etc., which were allowed to be imported liberally by the Government. All the above factors contributed to the total negation of profitability in the company's economic plans resulting in accumulation of cash losses. The mounting cash losses brought in shortage of working capital, eventually leading to financial crisis. This resulted in non-availability of requisite finance for carrying on the day to day operations of the company and to meet the fixed overhead obligations. The company was left with no option but to temporarily suspend its manufacturing activities during November, 1986, after a total failure of negotiations for labour reduction/re-organisation and lay off arrangements with the workers' union. Despite the best and sincere efforts and because of several factors and forces totally beyond the control of the management as explained above, the company was not in a position to meet the financial commitments with the suppliers, customers and bankers. The consortium of bankers were not willing to give further advances on account of total bleakness in the company's future. Raising of supplementary finance from public or other sources could not also be taken up due to the financial sickness and unviability of the company and mounting losses as a result of several factors explained earlier. In the meanwhile, one of the suppliers, namely, Karamchand Thapar and Brothers (Coal Sales) Limited, Bangalore, whose debts could not be repaid by the company filed a Company Petition No. 44 of 1986, under section 433(e) of the Companies Act before this court. The company pleaded for time to make payment of the admitted liability but since nothing could be arranged, this court made a winding up order on June 18, 1987. It is stated that it is not possible to revive the company for continuing the manufacturing activities. Any new plan of revival of manufacturing activities would call for further investment of one crore rupees by way of working capital in addition to necessary funds for settlement of labour claims, statutory liabilities, overdue secured and unsecured advances all amounting to Rs. 3.25 crores (approximately). But in the textile engineering industry in general and weaving in particular and the peculiar problems and inherent weakness in the company's structure, there was no reasonable basis that further efforts would be fruitful. In fact, such a huge investment attended with high incidence of risk would not be forthcoming at all from any quarter. This is more so because the factors as explained above which contributed to the sickness and unviability of the industry are beyond the control of any management. The summarised provisional balance-sheet of the company as per figures made available as on the date of winding up is as under :
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Liabilities Rupees Assets Rupees
in lakhs in lakhs
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(1) (2) (3) (4)
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Share capital 50.00 Fixed assets 148.61
Reserves and surplus 71.03 Investments 0.05
Secured loans from Current assets,
banks 288.00 loans and advances 111.01
Current liabilities Profit and loss
and provisions 163.91 account 313.27
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572.94 572.94
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6. The estimated realisable value of the assets and the particulars of the liabilities due by the company as on the date of the winding up order are as follows :
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Liabilities Rupees Assets Rupees
in lakhs in lakhs
---------------------------------------------------------------------
(1) (2) (3) (4)
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Paid-up share capital 50.00 (Estimate realisable
value) Land and
buildings 175.00
Secured loans to banks 288.00 Plant and machinery,
sheds, tools and
patterns 60.0
Workmen dues 90.80 Other assets 32.56
Statutory dues other than
PF and ESI 22.90
Unsecured creditors 51.11
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501.91 267.56
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7. Considering the net realisation of assets as against the estimated liability, it is obvious that the company may not be able to pay even 60% of the secured liability of the company. In such circumstances, the unsecured creditors and the statutory creditors may have to forgo their entire claim. Similarly, the interest of the shareholders will be totally lost. The petitioner is interested in obtaining at least a portion of the investment in the company which would otherwise have to be written off. This would be possible only if provision is made from out of the assets of the company for clearance of all liabilities including labour, secured creditors, unsecured creditors and preferential creditors. In the interest of the various classes of creditors as well as the petitioner's own interest, the petitioner has proposed the scheme of compromise or arrangement between the company creditors and the shareholders. The main object of the scheme is to generate the requisite finance for payment of labour, secured/unsecured creditor and statutory liabilities as well as to the members. One of the positive benefits of the scheme is the arrangement by which the entire class of labour would be able to receive their total dues within a period of six months from the date of approval of the scheme. This beneficial situation may not be ordinarily possible, if the present proceedings are continued. As such the scheme is drawn up keeping in view the interest of the large number of workmen who otherwise would have to wait for a long period to get their wages.
8. The scheme of the compromise and/or arrangement was given in detail in annexure B to the petition. As per the scheme, it envisages the following modus operandi for the clearance of the liabilities :
(a) On approval of the scheme, all the assets of the company other than land shall be jointly realised by the company in liquidation, SM Property Developers/bankers within a period of six months from the date of approval. The estimated value of such realisation is about Rs. 95 lakhs.
(b) SM Property Developers shall, within a period of six months from the date of approval of the scheme, arrange for obtaining the necessary clearance for the proposed group housing project from the required Government and other authorities.
(c) On approval of the group housing project and securing all necessary clearances or within a period of six months from the date of approval of the scheme, whichever is later, SM Property Developers shall advance a sum of Rs. 50 lakhs. The balance amount of Rs. 270 lakhs would be given in nine half-yearly instalments of Rs. 30 lakhs each.
(d) However, SM Property Developers would make all efforts to arrange for quickening the process of developing and marketing the housing project and any consequent early realisation would be proportionately utilised in accelerating the payments due to the company to enable earlier discharge of the liabilities.
(e) SM Property Developers should be permitted to arrange for marketing of the housing project either on their own or upon collaboration with others subject to the fact that the conveyance of the undivided interest in the land should be as per the provision of the scheme.
(f) Thus, the total realisation out of the company's assets would be about Rs. 415 lakhs, which is being proposed to be utilised for the following payments as per the provision of this scheme :
Rs. in lakhs
1. Reimbursement of expenses of official liquidator 1.20
2. The scheme proposes to pay the total dues of workmen as worked out in para 5.2(b) supra 90.80
3. Secured creditors-bankers. The scheme proposes to pay in total the funded loan outstanding as on December 31, 1982, and subsequent release of principal amount of loan along with simple interest at 6% till the date of the winding up order. (Interest is applicable to sick units) 230.00
4. Preferential creditors :
Statutory dues other than PF and ESI 22.00
5. Unsecured creditors at 75% of the principal amounts
due on and up to the date of the winding up order 38.33
6. Expenses on maintenance of security in the
interrumgnum period and scheme implementation costs. 2.67
7. Shareholders at 60% of the paid-up value of share
capital. 30.30
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415.00
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(g) The amount of Rs. 95 lakhs to be recovered on sale of assets of the company other than land shall initially be utilised as under :
Expenses incurred by official liquidator 1.20
Complete labour dues 90.80
Maintenance expenses for the interregnum
period and scheme operation costs 2.67
Balance cash/provision to be kept in reserve
with any of the consortium of bankers 0.33
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95.00
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However, realisation, if any, in excess of the estimated values shall be exclusively paid to the secured creditors against their dues.
(h) The first instalment of Rs. 50 lakhs from SM Property Developers shall be utilised as under :
(Rs. in lakhs) Payment of statutory dues 22.00 10% of the secured creditors 23.00 10% of the unsecured creditors 3.83 Balance cash/provision to be kept in reserve with any of the consortium of bankers 1.17
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50.00
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(i) The balance amount due to the secured and unsecured creditors shall be paid in half-yearly instalment each of 10% for the next 4 1/2 years out of the amount to be paid by SM Property Developers against the balance consideration due detailed as under :
Each instalment of Rs. 30 lakhs shall be paid by SM Property Developers as under :
(Rs. in lakhs) 10% of secured creditors 23.00 10% of unsecured creditors 3.83 Balance cash/provision to be kept in reserve with any of the consortium of bankers 3.17
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30.00
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(j) On total payment to all the creditors, the surplus of generation estimated at Rs. 30 lakhs shall be paid to the shareholders in proportion to the paid up value of shares of Rs. 50.00 lakhs.
(k) The secured creditors being the consortium of bankers have to release the land phase-wise from the security to the extent of 10% upon receipt of each instalment of 10% of their dues. Upon such completion of the initial payment and each half-yearly instalment and consequent release by the bankers of the land from the security on a phase-wise manner, the company in liquidation has to execute conveyance of the proportionate undivided interest in the land. Each of these proportionate conveyances of the undivided interest in the land would be valued proportionately to the total consideration. The conveyances have to be executed by the company in liquidation in favour of SM Property Developers or its nominees/purchases.
(l) In addition to reimbursement of maintenance expenses already incurred by the official liquidator, SM Property Developers would provide for necessary security expenses for the interregnum period.
(m) SM Property Developers shall also bear all the expenses for development of land including those connected with obtaining clearance from several Government authorities.
(n) SM Property Developers should also be permitted to represent and to do such other things as would be necessary for the purpose of obtaining clearances of the Group Housing Project.
(o) The scheme will come into operation on the requisite majority of the creditors approving the same and the same being sanctioned by the court with or without modifications.
(p) The proceedings of the liquidation have to be stayed during the pendency of execution and completion of the scheme.
9. That by the order of this court in the above matter on 20th and 31st January, 1989, the petitioner was directed to convene a meeting of employees/workmen, creditors, viz., secured, preferential statutory creditors, unsecured and members of the company for the purpose of considering and if thought fit, approving with or without modification the said compromise or arrangement and the said order directed that Sri Kora Chandy, advocate and failing him Sri Premchand Gupta, advocate, should act as chairman of the said meeting and should report the result thereof to this court.
10. Notice of the meeting was sent individually to all the creditors and members and workers' union as required by the order together with a copy of the compromise/arrangement and the statement required under section 393 and a form of proxy. The notice of the meeting was also advertised as directed by the said order in the newspaper Deccan Herald on February 16, 1989.
11. It is also on record to show that on March 13, 1989, a meeting of the workers and employees, secured creditors, preferential statutory creditors, unsecured creditors and members of the company in liquidation, duly convened in accordance with the said order was held at Sree Rameshwara Kalyana Mandira, 3rd Main Road, Chamarajpet, Bangalore-18, and the said Sri Kora Chandy, advocate, acted as the chairman of the meeting. The chairman appointed by this court has reported the result of the meeting in his Report No. 1, dated March 16, 1989, and Report No. 2, dated April 12, 1989, which is annexed as annexure C to the petition.
12. The said meeting was attended by secured creditors, workers and employees, preferential statutory creditors, unsecured creditors and members, either personally or by proxy and the quorum fixed by the court for all the meetings was present. The total value of their debts/shares is detailed as follows :
No. Value (in lakhs)
Workers and employees 282 90.80
Secured creditors 3 288.00
Preferential statutory creditors 4 22.00
Unsecured creditors 66 29.84
Members 27
(4,15,607 shares) 41.56
13. The said compromise/arrangement was read and explained by the said chairman, Sir Kora Chandy, advocate, to the meeting and the question submitted to all the meetings was whether the scheme was approved by those two who attended it or not. The result of the voting upon the question at the aforesaid meetings are as follows :
"(a) Secured creditors :
The meeting of secured creditors was adjourned by the chairman and upon the report of the chairman this court directed them to indicate their stand directly before the court. Initially, the Corporation Bank, vide its memo dated June 1, 1989, opposed the scheme. Subsequently, the Corporation Bank, vide its memo dated January 19, 1990, filed its consent to the scheme. The Canara Bank, vide its memo dated December 6,. 1989, filed its consent to the scheme and the Karnataka Bank Ltd., vide its memo dated September 20, 1989, filed its consent to the scheme. In effect all the secured creditors have consented to the scheme."
So far as the unsecured are concerned, the result of the voting is as follows :
(d) Unsecured creditors :"No. of votes held valid : 66 No. who voted in favour of the scheme 38 No. who voted against the scheme 28
Whether the test of 3/4th majority in no.
has been satisfied No. Value of debts of those who voted in favour of the scheme Rs. 13,57,513 Value of debts of those who voted against the scheme Rs. 16,27,864 Whether the test of 3/4th majority in value has been satisfied No.
14. Subsequently, the following unsecured creditors who had originally voted against the scheme signified their consent to the scheme as detailed below :
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Sl. Name of the unsecured Amount Date of No. creditors (Rs.) affidavit
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1. Sree Hari Enterprises, 29/4, Nehru Nagar, Bangalore-20. 10,906.00 27-2-90
2. Anil Agencies, 19/2, MRR Lane, Bangalore-2. 80,990.00 13-6-90
3. Geethu Enterprises, Seshamahal Buildings, Vasavi Temple Road, V. V. Puram, Bangalore-4. 2,15,600.00 13-6-90
4. Esbee Wire and Allied Industries Pvt. Ltd., 179, D. Rajappa St., Bangalore-2. 8,802.57 3-7-90
5. Esbee Industrial Corporation, 179, D. Rajappa Street, Bangalore-2. 81,638.88 -do-
6. Kamal Steel and Metal Corporation, 1/8, N. R. Road Cross, Bangalore-2. 60,918.55 -do-
7. Ess Ess Steels, 258, 14th Main, 24th Cross, BSK-II Stage, Bangalore-70. 1,88,560.00 -do-
8. Noble Hardware Mart, 2/1, MRR Road, Bangalore-2. 53,285.16 10-7-90
9. Bipsi Blades and Turners Pvt. Ltd., 84, II Stage, Yeshwanthpur, Bangalore-72. 1,16,072.69 18-7-90
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9,17,773.85
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15. This court has taken on record the affidavits of the unsecured creditors. Consequently, the required number of unsecured creditors who have consented to the scheme/arrangement comes to 76.2 per cent.
16. In so far as the members are concerned, the result of voting is as follows :
Total number of equity shares held by all the members whose votes were held valid. 4,15,607 Total number of equity shares of those who voted in favour of the scheme. 4,15,059 Total number of equity shares of those who opposed the scheme. 548 Whether the test of 3/4th majority in number of equity shares is satisfied Yes
17. The petitioners, in view of the above, sought the sanctioning of the compromise/arrangement for the benefit of the company, creditors, labourers and members. This court by its order dated September 14, 1990, ordered the petitioners to take out an advertisement in one issue in the Deccan Herald on or before September 22, 1990. The petitioners took out the advertisement in one issue of the Deccan Herald on September 22,1990. The copy of the Deccan Herald is produced and the same is taken on record.
18. In response to the notice of petition one of the unsecured creditors, viz., Karam Chand Thapar and Bros. (Coal Sales) Ltd., Badami House, N. R. Square, Bangalore, has filed objections opposing the petition. The main objection of this unsecured creditor was that the majority of the unsecured creditors totally denounced the scheme on the ground that only 60% of the principal amount due to each of the unsecured creditors would be paid spread over in instalments stretching over 4 1/2 years and more and that no interest was contemplated to be paid and for various other reasons. In this connection, the objector-petitioner has voted against the said proposal at the meeting held on March 13, 1989. As could be seen from the statement of objections, the representative Mr. M. M. Kaval's name, present at the meeting, is not found in the statement of the chairman of the meeting. Further it is submitted that the valuation arrived is not based on any present criteria of valuation as per the Rules of the Bangalore City Corporation and/or of the estimates of the property developers, Bangalore. It is further alleged that there was no 3/4th majority voting in favour of the scheme and as such the court has no jurisdiction under section 391 of the Companies Act, to approve the scheme.
19. Learned counsel, Mr. Kolekar, appearing for the unsecured creditors, has strenuously contended that this scheme was not approved by the 3/4th majority of the unsecured creditors in the meeting held on September 13, 1989. The unsecured creditors who opposed the scheme in the meeting later filed their individual affidavits in the court agreeing for approval of the scheme which could make 3/4th of the unsecured creditors, is not a valid one for 3/4th should vote in the meeting convened on March 13, 1989. As there was no 3/4ths of the unsecured creditors voting in the meeting convened and held, there is no valid approval of the scheme by the unsecured creditors as required under section 391(2) of the Companies Act. This court should not accede to the request of the petitioner and grant the prayer sought for in the petition. Further, learned counsel has urged that in any event the alleged approval by the unsecured creditors by agreeing to the approval of the scheme by a mode other than what is contemplated by the provision of the Act is not binding on the objecting creditors. Learned counsel has further submitted that if a class whose interests are affected by a scheme does not assent to the scheme to approve it at a meeting convened in accordance with the provision of section 391(2), the court will have no jurisdiction to confirm the scheme, even if the unsecured creditors have otherwise approved the scheme, other than in the meeting convened and held for the said purpose. In support of the submissions, learned counsel cited the following decisions :
1. Vasant Investment Corporation Ltd. v. Official Liquidator, Colaba Land and Mill Co. Ltd. [1981] 51 Comp Cas 20 (Bom),
2. Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., In re [1980] 50 Comp Cas 623 (Mad),
3. N. A. P. Alagiri Raja and Co. v. N. Guruswamy [1989] 65 Comp Cas 758 (Mad).
20. Learned counsel, Mr. A. N. Jayaram, appearing for the petitioner had strenuously contended that an arrangement contemplated under section 391 of the Act is not the same as a scheme under section 395 of the Act and it involves different considerations and a different approach. The arrangement which is now sought in this petition can be sanctioned by this court if its fairness is established. When once the court finds that the compromise/arrangement is fair then notwithstanding the technical defect in approval of the scheme of 3/4ths majority in a meeting, but which has been approved subsequently by the opposing unsecured creditors, the court should exercise its discretion in sanctioning the scheme of compromise/arrangement. Further, he argued that if the scheme as a whole is fair and reasonable, the court shall not investigate into the commercial merits and demerits of the scheme which is the function of those who are interested in the arrangement.
21. Learned counsel has further argued that though in the meeting of the unsecured creditors there was no 3/4ths majority voting and approving the scheme, subsequently, the persons opposing have ratified and approved the scheme by filing individual affidavits in the court. By the said ratification, the approval of the scheme was made up by 3/4th of the majority of the unsecured creditors. That being so, Karamchand Thapar and Bros. (Coal Sales) Ltd., who are objectors/unsecured creditors, cannot put an obstacle for sanctioning of the scheme of arrangement on technical grounds. In support of the contentions, learned counsel for the petitioner has cited the decision in -
1. Bhupendra Kumar Munchand v. Official Liquidator [1975] ILR 1975 Kar 1106,
2. B. V. Gupta v. Bangalore Plastics (C.A. No. 1676 of 1981 in C.P. Nos. 12, 16 and 19 of 1979-19-8-81 (Kar)), (3) Mazola Theatres Pvt. Ltd. v. New Bank of India [1975] ILR Delhi 1.
22. The contention of the petitioner given in the petition clearly goes to establish that the scheme is for compromise/arrangement between the company (now in liquidation) and the secured creditors/unsecured creditors. The liabilities and assets given as on the date of liquidation indicate that the company may not be able to pay even 60% of the secured creditors and in those circumstances, statutory creditors as well as the unsecured creditors may have to forgo their entire claim. As per the scheme the petitioner would generate the requisite fund to meet all the liabilities of the company by a quick competitive disposal of all the assets of the company excepting the land with the active participation of the bankers who hold a charge on the assets. In so far as the land given by the company is concerned, it would be entrusted to the property developers mentioned in the scheme who are a public limited company to develop the plot into a suitable group housing project after the receipt of the necessary governmental clearance.
23. The main object of the scheme is to generate the requisite finance for payment of labour, secured/unsecured creditors and statutory liabilities and as well as to the members. It is seen from the arrangement in the scheme that the entire class of labourers who ceased to be employees ever since the closure of the company which went into liquidation would be able to receive their total dues within a period of six months from the date of approval of the scheme.
24. The secured creditors, Corporation Bank, Canara Bank and Karnataka Bank, have filed memos on January 19, 1990, December 6, 1989, and September 20, 1989, in this court consenting to the scheme which were taken on record by this court. These consent memos were filed by the secured creditors when this court asked them to indicate their stand directly to the court when the secured creditors meeting was adjourned by the chairman and upon his report to this court. In effect the secured creditors have consented to the scheme. The workmen and the employees have also voted in favour of the scheme. In the meeting of the unsecured creditors, there was no 3/4th majority in passing the resolution and subsequently a number of dissenting unsecured creditors filed their affidavits into court consenting for the scheme. The preferential and statutory creditors and members have in the meeting convened voted in favour of the schedule.
25. The court must look at the scheme and see whether the Act has been complied with, whether the majority is bona fide and whether the scheme is a reasonable one or whether there is any reasonable objection to it or such an objection to it that any responsible person might say that he could not approve it. A reasonable compromise will be a compromise which can, be reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it. On a proper reading of section 391, it is clear that the object of the section is not confiscation. Although in a meeting held under this section it is perfectly fair for every one to do and express what is best for himself, yet this court has to see what is reasonable and just, as regards to the interest of the whole class. What is to be considered by this court is not whether there is a loss of mere nominal, legal right but whether what has been done is beneficial in a business sense.
26. I have examined the scheme of compromise/arrangement. The scheme is primarily directed at injecting health into a sick company. In this case, separate meetings were called for the compromise scheme, convening both secured and unsecured creditors. The secured creditors have all consented to the scheme whereas the unsecured creditors did not pass the scheme by 3/4th majority, but later by filing individual affidavits consented to the scheme which was by 3/4th majority.
27. It is seen that when the statute confers discretionary power on the court, such power has to be exercised judicially as and when an occasion arises and that, therefore, ordinarily discretion must be brought to bear on every case as and when it comes up before this court. As already noticed in this case, the company had stopped its business, a large number of employees and workmen remained jobless, the losses have mounted up, the plant and machinery are deteriorating. Therefore, it would be in the interest of the company itself to allow the scheme sponsored by it. The scheme of compromise/arrangement has devised a living workable one, which provided early relief to all concerned and infused life into a sick company. I am of the view that the scheme of compromise/arrangement is not only lair and reasonable, but also beneficial to both sides.
28. Nevertheless the point raised by learned counsel, M. Kolekar, for the objecting unsecured creditor, that there was no approval of the scheme by three-fourths majority of the value in the meeting held on March 13, 1989, and consent of those unsecured creditors subsequently by filing affidavits in the court to make up three-fourths majority is not legal and as such the court has no jurisdiction to sanction the scheme is to be answered. In fact I have examined the contentions of both counsel for the petitioner and the objectors/unsecured creditors. It is relevant to quote section 391(2) of the Companies Act, which would give a clear indication of the legislative intendment. Section 391(2) of the Companies Act reads :
"391. (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 also on the company; or in the case of a company which is being wound up, on the liquidator, and contributories of the company :
Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the court, by affidavit or otherwise; all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company; the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like."
29. Section 391(2) is not cast in negative form whereas the proviso to section 391(2) is cast in negative form. As section 391(2) except the proviso is not prohibitory in character, it is possible to treat it as merely permissive. When section 391(2) is not prohibitory in character it definitely appears to be directory.
30. Apart from that, in considering its nature, its design and the consequence which follow do give the expression of intendment of the Legislature.
31. It is settled law that a mandatory enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled subsequently; even when there is complete non-compliance with a directory provision, it has been held in many cases as not affecting the validity of the act done in breach thereof (See State of U.P. v. Manbodhan Lal Srivastava, ).
32. Now, I consider the decision cited by Mr. Kolekar, learned counsel for the objector unsecured creditor. In the decision in N. A. P. Alagiri Raja and Co. v. N. Guruswamy [1989] 65 Comp Cas 758 (Mad), the question for consideration was whether in the case of a company which is being wound up only the official liquidator can file application under section 397, or even in such a case the creditor or any class of creditors or members can file an application. in that context, it has been observed as follows (at pages 767, 769) :
"An order under section 391(1) has to be made only after the court considers the feasibility or otherwise of the proposed scheme or settlement and the bona fides of the applicant and the application. It cannot be said that at the stage of filing an application under section 391(1), the court is not called upon to consider the feasibility or otherwise of the proposed scheme or settlement and that will have to be decided first in the meeting of the creditors or shareholders as the case may be and then only when it comes before the court for confirmation or sanction of the arrangement under clause (2) of section 391, the court will have to be satisfied about the reasonableness of the compromise and the public interest or the creditors' interest"
33. It is further observed (at page 769) :
... at the stage of the sanctioning of the compromise or arrangement after the meeting of the creditors, different considerations arise and different conditions as provided in sub-section (2) will have to be satisfied. The court will not only have to be satisfied that the meeting was attended by the 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, and that they have agreed to the compromise of the proposal, but will also have to be satisfied that all the material facts relating to the company, such as the latest financial position of the company, the latest audited report of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251 and the like are placed before the court."
34. In the decision in Vasant Investment Corporation Ltd. v. Official Liquidator, Colaba Land and Mill Co. Ltd. [1981] 51 Comp Cas 20 (Bom), the court has observed as follows (at page 29) :
"Hence, if at a meeting called to consider a scheme under section 391, the scheme is passed by the requisite majority, then it becomes binding on all the members of the company, irrespective of the question whether they have expressly consented to it or not. Hence, under section 391 of the Companies Act, it is not necessary for the court to ascertain whether all the members of a company have expressly consented to the scheme. Under the section, once the scheme is passed by the requisite majority, all the members become bound by it."
35. None of the decisions support the contention of the respondent objector and as such they do not help him.
36. Mr. A. N. Jayaram, learned counsel for the petitioner in support of his contention, as already pointed out relied on the decision of our High Court in B. V. Gupta v. Bangalore Plastics (Company Application No. 1676 of 1981, in Company Petitions Nos. 12, 16 and 19 of 1979, dated August 19, 1981). He brought to the notice of the court the observation made in para 13 of the judgment. It reads as follows :
"Section 391 of the Act is an important provision made in the Act in regard to repatriation, compromise and reconstruction and amalgamation of schemes so that the interest of several members of the company or companies and creditors-secured and unsecured are safeguarded in any scheme of reconstruction, amalgamation or compromise which is going to be approved by the court under section 394 of the Act. Ordinarily, the convening of meetings of members and creditors is a must. Discretion to waive must be under exceptional circumstances."
37. In the decision in Mazola Theatres (P.) Ltd. v. New Bank of India Ltd. [1975] ILR 1975 1 (Delhi), the court has observed as follows :
"The meeting contemplated in section 391 is analogous to an extra-ordinary general meeting of the company, in as much as a three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders whether it is unanimous or by a three-fourths majority, must be obtained in a meeting summoned on the orders of the court under section 391. This is in accordance with the general principle, that members must act in a general meeting. Inroads have, however, been made on this formal doctrine. Firstly, the consent of all or virtually all the shareholders given even outside a meeting is sufficient to comply with the requirements of a meeting. Secondly, written resolutions instead of those passed in meetings are now capable of being registered, e.g., section 192 of the Companies Act. Thirdly, the doctrine of lifting the veil of incorporation and looking at the reality of the action of the members enables the court to hold that consent of the overwhelming majority of the shareholders outside the meeting is sufficient to show that the resolution was supported by virtually all the members of the company. In these three ways substantial compliance rather than formal compliance meets the requirements of the statute."
38. In the said decision, it is further observed as follows :
"A third exception to the rule that all the shareholders of a company must cast their votes in a formally called meeting is made by the doctrine of acquiescence. If all the shareholders acquiesce in a certain arrangement, the question of a meeting having been called does not arise at all."
39. In the backdrop of this decision as well as on proper interpretation of section 391(2) which is not mandatory, but directory and there has been substantial compliance that three-fourths value of the unsecured creditors have agreed to and approved the scheme, the contention of the objector that there was no proper compliance with the Act and that the court has no jurisdiction to sanction the scheme will have to be rejected. As already noticed, once the scheme is held to be reasonable and proper, merely because there is one objector to the approval of the scheme, who is none other than the sole dissenter, the court should not refuse to sanction the scheme. What the court could do in such circumstances is to give protection to the dissenter, by amending the scheme. The above views of mine receive support from Palmer's Company Law, volume 1, twenty-third edition, para 79-13, which reads :
"... The court will not, however, upset a scheme for minor irregularities, as where consent of a class has been subsequently obtained, and where the necessary majority of one class was absent when the petition was presented, the court allowed a fresh petition to be presented subsequently when the necessary majority was later obtained, without requiring the other class meetings to be held again."
40. As already noticed all the acts have been done in conformity with the provisions of the Companies Act, and the Central Government to whom notice was issued, appeared through counsel and stated that they have nothing to say with regard to the approval of the scheme by this court.
41. The applicant in Company Application No. 1 of 1989 is the Regional Provident Fund Commissioner, Karnataka Bhavishya Nidhi Bhavan, Bangalore. In their objection statement they have stated that the petitioner has filed a memo which was recorded by this court wherein they have given an undertaking to clear all outstanding dues in respect of its preferential statutory creditor and as such the applicant shall have no objection to compromise the scheme.
42. On behalf of the workmen Mr. M. C. Narasimhan, appeared and submitted that the scheme may be sanctioned, so that the employees and workmen would be paid their dues as provided in the scheme.
43. The dissenting unsecured creditor, Karamchand Thapar and Brothers (Coal Sales) Ltd., Bangalore, has opposed the sanctioning of the scheme. According to them, a large sum of money is due by the company. They are not agreeable to the arrangement as to the payment of 60 per cent. of the money due to the unsecured creditors. To protect the interest of the dissenting unsecured creditors the court can make an order in exercise of the power under section 392(1), and make modification in the compromise or arrangement while sanctioning the scheme. In other words, the power of the court under section 392 is wide enough to give effect to the sanctioned scheme by amending the scheme and not by substituting a new scheme. This power can be exercised suo motu without any application. In exercise of that power, it cannot be doubted, that the company court can issue necessary directions with a view to remove an impediment, difficulty or obstruction which may arise in the working of such a scheme or arrangement. Thus when approving the scheme of compromise/arrangement the court may, by the order giving its approval, make provision for the benefit of the dissenting creditors and pass orders by way of amendment of the scheme, which is incidental and necessary to ensure that the scheme is carried out. In order to protect the dissenting unsecured creditor, this court both order that the scheme by which the payment of 60 per cent. of the amount to the unsecured creditor is not binding on this dissenting unsecured creditor.
44. In the result, I accord sanction to the scheme propounded by the petitioner subject to the modification that the clause in the scheme as to the payment of 60 per cent. of the amount due to the unsecured creditor is not binding on the objector/dissenting unsecured creditor, Karamchand Thapar and Bros. (Coal Sales) Ltd., Badami House, Sri Narasimharaja Square, Bangalore 2. The said dissenter shall be paid the entire amount due within a period of two years with interest on his making a claim within one month. If this claim is not admitted and this claim is rejected either partially or in entirety, then it is open to him to approach this court for adjudication of his claim and it on such adjudication it is found that the company is liable, he shall be paid accordingly within a period of two years with interest.
45. The order of winding up of this company by this court in Company Petition No. 44 of 1986, dated June 18, 1987, is rescinded. The company is taken out of liquidation proceedings.
46. All costs and charges and expenses of the applicant/petitioner incidental to the preparation, formulation and negotiation of the scheme of reconstruction and all costs charges and expenses incurred by him in the course of winding up proceedings leading to this sanction of the scheme including the fees of the legal advisers and chartered accountants, shall be borne and paid by the company.
47. The official liquidator is directed to hand over possession of the entire undertaking of this company and all the assets including the books of account and all records to the applicant/petitioner within two weeks from today.
48. The applicant/petitioner shall pay all the winding up expenses it any to the official liquidator. Liberty is reserved to all concerned to apply to this court if there is any difficulty in the implementation of the direction contained in this order.