Document Fragment View

Matching Fragments

The Backdrop:

3. A company known as Bhavnagar Vegetable Products Limited, having a total paid up capital of approximately Rs. 30 lacs, incurred huge losses in the year ending on December 31, 1975. The profits and loss account of the company for the period ending December 31, 1975 reveals a loss of Rs. 201.71 lacs. And the total liabilities as and by way of secured and unsecured loans including current liabilities were around 315.75 lacs. Thus, the entire capital of the Company, its reserves and surpluses were washed away and its secured debts and other liabilities were so huge that neither the shareholders nor the creditors were likely to get any money. One of the creditors instituted a petition on February 2, 1976 under Section 433 read with Section 439 of the Indian Companies Act, 1956 (hereinafter referred to as the Act) for winding up the said company. The petition was admitted on February 16, 1976. In the course of the proceedings, an attempt was made to evolve a Scheme in order to prevent the Company from being wound up and in order that the shareholders, creditors and workers could retrieve a portion of what was due to them. A scheme was proposed by appellant TIL, the details of which are set out in paragraph 11 of the judgment of the learned Company Judge, which has given rise to the present appeal. Before the Scheme could be sanctioned under Section 391 of the Act, respondent No. 1-the NDDB proposed a Scheme of its own the details of which have been set out in paragraph 17 of the judgment of the learned Company Judge. Thus, there were in the field two competitive Schemes. It so transpired that before NDDB presented its scheme the TIL scheme came up for consideration before all classes of creditors, shareholders and workers. The meetings envisaged by the relevant provisions of the Act were called and the requisite majority voted in favour of the acceptance of the TFL scheme. On October 4, 1976 the Chairman appointed by the Court to preside over this meeting submitted his Report, On October 21, 1976 the appellant (TIL) instituted a petition for sanctioning the scheme. Before final orders could be passed by the Court, NDDB proposed its own scheme. Thus, the scheme proposed by the appellant-TIL, which was sanctioned by the requisite majority, remained unsanctioned. The learned Company Judge, who was seized of the matter at the relevant time, issued appropriate directions in Company petition No. 9 of 1978 filed by NDDB for calling the meetings of the shareholders, creditors and workers in order to consider the scheme sponsored by the NDDB. Strangely enough the equity shareholders who were prepared to accept 10 paise per share under the TIL scheme and bad accepted the offer for payment at that rate in the course of the meetings called to consider the TIL scheme in 1976, refused to vote for the NDDB Scheme whereby they were offered Rs. 10/ - per share in place of 10 paise per share. In other words, though they were offered a price which was 100 times the price offered by TIL, they did not accept the offer. The NDDB revised its offer upwards by offering Rs. 15/- per share in place of Rs. 10/- per share. The equity shareholders who were prepared to accept 10 paise per share from TIL in 1976 were not prepared to accept Rs. 15/- per share from NDDB. Thus, the scheme as sponsored by NDDB did not secure necessary majority as required by Section 391(2) of the Act. The resultant position was that the TIL Scheme which offered 10 paise per share to the equity shareholders, secured the requisites majority and could have been sanctioned, whereas, the scheme sponsored by NDDB, whereby 100 times the price offered by TIL (which was subsequently raised to 150 times) could not secure the requisite majority from the equity shareholders. It appears that, meanwhile, TIL also increased its offer from 10 paise per share to Rs. 10/- per share as against Rs. 15/-per share offered by NDDB. Thus, the appellant-TIL who had obtained consent of the equity shareholders and secured the requisite majority in respect of a scheme offering 10 paise per share, was itself prepared to offer Rs. 10/- per share when the NDDB scheme entered the Held of competition The appellant however, did not agree to step up the price upto Rs. 15/- per share. Meanwhile, one more development took place. The Banks, to whom the Company owed a very large sum by way of secured loans of the order of Rs. 80 lakhs, which had initially lent support to TIL'S Scheme, withdrew their support. In the course of hearing of a Summons taken out by NDDB, learned Counsel for M/s. Velji Shamji & Co. the sponsor of TIL Scheme-made a statement before the Court that in view of withdrawal of the support by the Banks, the scheme as put forward by TIL was not practicable. Under the circumstances, the Court placed on record that TIL on whose behalf no body appeared before the Court on that day, was out of the picture as a party sponsoring the scheme before the Court. The order passed by the learned Company Judge is in the following terms:

A comparative study of the two Schemes reveals that the Scheme proposed by NDDB was far more beneficial to practically all interests than the TIL Scheme as originally proposed. Under the TIL Scheme depositors claiming at principal amount of Rs. 7,500/ - and below were to receive 30 per cent and the rest 20 per cent of the principal amount, without interest, whereas under the NDDB Scheme the whole of the principal amount was offered within one month from the effective date, without interest. It was only at the meeting that TIL agreed to pay 50 per cent of the principal amount with 12 per cent interest to all the depositors. This offer was further enhanced after the introduction of the NDDB scheme to payment of the whole of the principal amount in four equal installment, with interest after the first installment at 14 per cent per annum. So far as other unsecured creditors are concerned TIL offered 20 per cent of the principal amount without interest in five yearly installment as against the NDDB offer of payment of principal amount in full within one month from the effective date. TIL has not upgraded its offer so far as the other unsecured creditors are concerned. The employees were to be treated as paid off from 1st November 1975 and were to be paid 50 per cent of the compensation upto 31st December 1975 under the TIL Scheme whereas under the NDDB Scheme all permanent employees were to be paid full salary from 1st November 1975 to 31st December 1978 and others were to receive gratuity. The offer underwent an upward revision only after the workers there attended to vote against the Scheme at the TIL Meeting. NDDB also revised their Scheme to bring it in line with the TIL scheme. So far as the preference shareholders are concerned TIL agreed to pay them Rs. 10 per share whereas NDDB offered Rs. 25 per share straightway. Even the subsequently ungraded offer made by TIL does not offer the preference shareholders more than Rs. 20 per share. Thus, even at the NDDB offers Rs. 5 per share extra as compared to TIL. Equity shareholders were to receive a paltry Rs. 0.10 ps. per equity share under that TIL Scheme but NDDB offered Rs. 10 per equity share and hence TIL was compelled to raise its offer to Rs. 10 per share to which NDDB reacted by raising it to Rs. 15 per share. It will thus appear from the above that the Scheme initially proposed by TIL was far from fair and equitable. It was only after NDDB entered the field that TIL was compelled to revise its Scheme upward. Even so it does not match the NDDB Scheme in all respects....
The learned Company Judge by his closely reasoned judgment and order dated January 20, 1981 (which is presently under challenge) granted the prayer for substitution of NDDB as a party in place of appellant TIL subject to upgrading of original TIL Scheme, to bring it in conformity with the NDDB Scheme. It is this order which has given rise to the present appeal by the appellant-TIL. Thus, the appellant-TIL who had made a statement to the effect that it was no longer interested in the Scheme presented by it during the course of the hearing and who had applied for the refund of Rs. 75,000/-deposited by it at the time of the presentation of the Scheme in pursuance to the provision contained in the Scheme, is now objecting to the order passed by the Court sanctioning the request of the original sponsor of TIL Scheme, for substituting NDDB as a party in place of TIL. Even now, be it noted, TIL is not prepared to offer the same scheme as is being offered by NDDB under which scheme the shareholders, creditors and workers and every one stands to benefit. TIL is not prepared to offer similar terms in its scheme. TIL is not able to secure support of secured creditors and Banks to whom the company is indebted to the tune of Rs. 80 lacs. Appellant TIL itself does not want to go ahead with the schema or compromise. Yet TIL has preferred the present appeal in order to challenge the legality of the order passed by the learned Company Judge sanctioning the prayer for substitution and the consequent sanction accorded to the Scheme in favour of the NDDB. It may be stated that during the course of hearing before this Court, learned Counsel for a Section of the workers who had originally opposed the prayer for substitution, has made a statement to the effect that the workers do not any more oppose the substitution of NDDB in the original Scheme subject to upward modification in the Scheme. Thus, there is no objection on the part of the workers or the secured creditors or other creditors, all of whom stand to benefit by the order passed by the learned Company Judge. The only opposition to the order passed by the learned Company Judge now comes from two quarters, namely, (1) TIL-who does not want to go ahead with the scheme and (2) from a Section of Equity Shareholders-who were prepared to accept 10 paise per share from TIL but are not prepared to accept Rs. 15/-per share from NDDB. The equity shareholders, who have their own reasons for adopting this seemingly suicidal stance which is inconsistent with their self-interest, have preferred a separate appeal which we shall deal with in due course. So far as the present appeal is concerned, it is preferred by TIL, who does not want to go ahead with the Scheme and thus has no under-standable reason to challenge the order, which is not prejudicial to it. Since TIL does not want to go ahead with the Scheme, whatever order has been passed by the learned Company Judge cannot in any way cause any prejudice to TIL. Yet TIL has challenged the legality of the said order on grounds to which we will advert to in due course. The first question, however, arises as to whether TIL can be said to be an aggrieved party who has a right to challenge the order passed by the learned Company Judge granting the prayer for substitution of NDDB in place of TIL in the original Scheme sponsored by Messrs Veiji Shamji & Company, which has been upgraded to bring it in conformity with the NDDB Scheme as it has finally emerged. We, on our part, are unable to see what interest TIL can have in questioning or challenging the legality of the order passed by the learned Company Judge, whereby a company is being resurrected and as a result of which an industrial unit which has ceased production will be able to start production, provide employment to hundreds of workers, and benefit shareholders, workers, secured creditors and unsecured creditors i.e. all concerned. In fact, as pointed out earlier, at the earlier stage the sponsor of the TIL Scheme had placed on record that TIL was out of picture. TIL itself had prayed for the withdrawal of Rs. 75000/- deposited in pursuance to the TIL Scheme. TIL scheme, even after the modification it was prepared to make daring the course of the hearing, is less advantageous to all concerned than NDDB Scheme. The TIL Scheme is not workable as submitted by TIL itself inasmuch as NDDB Scheme visualises payment of Rs. 80 lacs to the nationalised banks with interest at 15 % after one year on the outstanding amount and visualises a deposit of Rs. 1 crore to be paid immediately and even payment of all costs and expenses upto Rs. 3 lacs to the Nationalised Banks. TIL scheme does not envisage deposit of Rs. 1 crore in connection with the dues of the nationalised Banks. The nationalised Banks do not support the TIL Scheme and it is conceded that TIL will not be able to work without co-operation of these Banks. What is more important is the fact that the Court cannot sanction a scheme which is less favourable to all concerned and prejudicial to all concerned when a more beneficial and more advantageous scheme has been offered by the NDDB. In any view of the matter, therefore, the scheme which has been proposed by TIL cannot be sanctioned by the Company Court. Nor has TIL any legal right to insist that its scheme should be sanctioned notwithstanding the fact that it is not as good as the scheme offered by NDDB and in fact is much inferior to the scheme, offered by NDDB and which is not acceptable to any one except equity shareholders in respect of whose share of the face value of Rs. 100/- it offered 10 paise per share, which the equity shareholders were prepared to accept (the same shareholders are not ready to accept Rs. 15/-per share under the scheme pursuant to substitution). All the workers are now unanimously with the NDDB Scheme and TIL scheme is not acceptable to them. Thus, it is abundantly clear that the Court cannot sanction the TIL Scheme as it is not acceptable to any one but the equity shareholders. So far as workers are concerned, all of them are now unanimously supporting the scheme sanctioned by the learned Company Judge by substitution of NDDB in place of TIL. None of the creditors has preferred an appeal. Thus, all the creditors have accepted the order of substitution. At the cost of repetition, it may be stated that admittedly, TIL Scheme is not workable. TIL is not prepared to deposit Rs. 1 crore which the NDDB is prepared to do and the Banks having withdrawn their support TIL Scheme is not workable. Under the circumstances it is difficult to comprehend how TIL can feel aggrieved by the order passed by the learned Company Judge. It would appear to us that TIL is not even an aggrieved party. Nor has TIL anything to gain by preferring this appeal in the sense that even assuming that the order passed by the learned Company Judge is set aside TIL does not stand to benefit, for, its original scheme, which is much inferior, does not get automatically sanctioned and the Court can never accord sanction to it when NDDB has offered a much superior scheme which is beneficial to all concerned including equity shareholders who are, for some ulterior reason, opposing the prayer for substitution. All the same, since the appeal has been admitted and legal submissions have been urged by TIL to the effect that the order passed by the learned Company Judge is one which cannot be lawfully passed, we will proceed to deal with the submissions urged by learned Counsel for the appellant TIL notwithstanding the fact that even if TIL succeeds it gets no benefit except and save the satisfaction that the NDDB scheme is frustrated and injury is caused to secured creditors, unsecured creditors, and workers, all of whom stand to lose and an industrial unit which had started functioning will have to be closed down. All that we wish to say is that it is difficult to comprehend how the appellant TIL, can feel aggrieved by the order passed by the learned Company Judge which does not in any way cause prejudice to it while it benefits all concerned. Still we will deal with the legal submissions urged by learned Counsel for the Appellant TIL.

Is the order vulnerable on the ground that if seeks to do something indirectly which it could not have done directly?

7. The submission which is urged is that the learned Company Judge should not have authorised a scheme indirectly which was rejected by the shareholder and the creditors. The argument is that one cannot be permitted indirectly to do what cannot be done directly. It is contended that since the Scheme sponsored by the NDDB had been rejected at the meeting of the shareholders and the creditors, NDDB cannot be substituted in place of original sponsor by the order of the Court, such is the submission, amounting to giving a back door entry to NDDB. Now, as discussed earlier, the Scheme which has been sanctioned by the Court by substituting NDDB in place of TIL is admittedly vastly beneficial to the shareholders as also to the creditors and the workers. In fact, barring the equity shareholders, no one has taken exception to the sanctioning of the Scheme. So far as the shareholders are concerned, one wonders how any one can object to being paid compensation at Rs. 15/-per share instead of compensation at the rate of 10/-paise per share. Equity share holders were prepared to accept 10 paise per share from TIL and even now are prepared to accept Rs. 10/- per share from TIL. They are, however, not prepared to accept Rs. 15/- per share from NDDB. Do Rs. 15/-per share coming into the pocket of the shareholders have less value than 10 paise per share merely because Rs. 15/- come from NDDB, while 10 paise come from TIL? The learned Company Judge was perfectly justified under the circumstances in suspecting that there was some underhand dealing involved in it. No person would ever object to payment of Rs. 15/- per share if he is willing to accept 10 paise per share. And no shareholder is concerned with the question as to from whose pocket the value of the share comes from. For a shareholder what is material is the money that he gets and not from whose pocket the money comes. Therefore, it is obvious that the objection of the shareholders, is one which cannot be countenanced by the Court. It is too late in the day for the Courts to countenance such a submission. It would not have found favour in the times of Shylock the Jew. It is inconceivable that any Court would countenance it even for a moment today. It is the clear that the objection of the equity shareholders (with which we are concerned in the allied appeal which is being disposed of along with this appeal) is rooted in some evil design and is not bona fide. The Court would, therefore, refuse to entertain a protest from the quarters of the shareholders. The Court may well tell the shareholders that notwithstanding your desire to be content with 10 paise per share, the Court will sanction a scheme whereby you will get 150 times the amount you were prepared to accept and that your intrigues cannot prevent the Court from infusing life in a dying industrial unit, for, the Court cannot be unaware of this dimension of the matter. While the Court would be anxious to protect the interest of the shareholders, the Court would not create a situation where the shareholders inflict harm on themselves and also harm on all concerned. The existence of an industrial unit today is not a matter concerning the rights of the shareholders only. It is a matter in which the entire society, the consumers, the workers, the revenue and the welfare state, have a stake. The objection raised on the part of the shareholders must, therefore, be repelled unhesitatingly. But it must be realised that the present appellant is not the guardian-ad-litem of the shareholders. The present appellant-TIL is a limited company which has proposed the scheme which admittedly cannot work and which is admittedly less attractive than the scheme proposed by NDDB. One can best describe the attitude of TIL as the dog in the manger attitude, for, the appellant TIL can have no grievance if a dying company is reconstructed and if the shareholders creditors, workers, and the National economy benefits, whilst it loses nothing. Is it mere jealousy which makes it persist in opposing the scheme by preferring this appeal? We do not know. But one thing is clear viz. that TIL does not want to offer the same terms as NDDB offers. TIL is not prepared to offer a scheme which will go through. TIL is not in a position to offer a scheme which will go through. What interest then has TIL in challenging the order passed by the learned Company Judge sanctioning the scheme which it does not want to push through itself and is not in a position to push through? We are unable to comprehend how TIL can contend that by substitution of NDDB in place of TIL as sponsor amounts to giving back door entry to NDDB. The argument completely overlooks the basic aspect of the real problem. What was accepted by the shareholders and the creditors was a scheme offering them certain terms. They were not concerned with the question through whom they were going to be paid under the Scheme. The identity of the sponsor would not be a basic element of the Scheme. It has been observed in S.K. Gupta's case (supra) that identity of the sponsor is not something basic in the structure of the scheme. Whether or not it is essence of the scheme or a basic element in the scheme, is a question of fact depending on the circumstances of every case. Even if one were to proceed on the assumption that in certain cases it may be a basic element in the scheme, whether or not it is a basic element is a question which can be examined by the Court. In the present case, it is an undisputed position that NDDB is financially far more sound and has greater financial backing than TIL. It is not contended that TIL is financially preferable to NDDB from the standpoint of the persons who are going to get their dues under the scheme. It is not even contended by TIL that NDDB is not in a position to fulfil the obligations undertaken by it under the Scheme. Neither the creditors, nor the workers nor the Banks nor the secured creditors have objected to the scheme on this count, before us. Even TIL has not contended to this effect. Apart from the fact that TIL is neither representative nor guardian ad litem of the interest of the shareholders or creditors or workers, where is the question of identity of the sponsor being a basic element in the scheme? What was agreed to at the meeting of the shareholders and creditors was an arrangement under which they were going to get compensation in respect of their rights. The essence of the matter was the monetary compensation which they were going to get. It was not the essence of the agreement or compromise as to from whose pocket the compensation was going to come. In a given case if the sponsor sought to be substituted does not have the financial capacity to meet with the obligations undertaken by it, it may stand on a different footing. With such a hypothetical case we are not concerned in the present matter. So far as the present appellant is concerned, it is an admitted position that the financial viability of NDDB and its position to meet with its obligations under the Scheme is not questioned by any one. Not even by the shareholders. Under the circumstances, how can TIL, who offered a much less attractive Scheme which the Court was not prepared to accept because it was against the interest of the shareholders, creditors and workers and which TIL itself, in any case, was not prepared to upgrade in order to bring it in conformity with the more beneficial Scheme offered by the NDDB, challenge the order passed by the learned Company Judge on this score? There is no question of granting sanction to a scheme rejected by the shareholders and the creditors. In fact, sanction is being accorded to a scheme which was accepted by the shareholders and creditors with an upward modification of monetary benefits in favour of all concerned parties, namely, share holders, creditors and workers. The only modification which is made is that in place of TIL (which is not prepared to go ahead with the Scheme and which admits that it is not in a position to implement the scheme because the secured creditors and banks have withdrawn their support) NDDB (which is in a position to implement the scheme) is being substituted. It is thus evident that the submission urged on behalf of the appellant (TIL) is altogether lacking in merits.