1968 (11) TMI 63 - SUPREME COURT

Whether the mills did not yield profits because of the Jalans having parted with the processing unit to Jhunjhunwalas?

Whether the closure of the mills was due to the Jalans having starved them of finance?

Whether a scheme sanctioned by the court being binding on the company, its shareholders and the creditors, anything done contrary to its provisions is ultra vires the company?

Held that:- The Jalans gave several reasons why the accounts could not be produced. Whether they were true or not, even if the accounts had been produced they could not have thrown any light as no separate accounts were kept of the income and expenditure of the unit in 1964-65. But then if the unit was the most profit-yielding unit and had made large profit in 1964-65 one wonders why Singhania should have applied for permission to sell or lease it. It is also difficult to believe that the Jalans would let out the unit at a norminal consideration only a month after they had restarted the mills as in the beginning at any rate they were genuinely interested in working the mills and implementing the scheme unless of course the allegation that Jhunjhunwalas were their nominees was true. But, as the appeal court has rightly said, no proof was offered in support of that allegation.

It was not as if the mills had to be worked even if their working resulted in loss. Assuming that the Jalans were under an obligation to bring in finance including their own monies, they could not be said to be under an obligation to bring in finance even if the working of the mills showed no reasonable prospect of profit. If the mills could not be worked except at a loss the company would be justified in ceasing to work them. The very object of the company being to manufacture cloth, if the mills had to be closed that would mean that the very object for which the company existed and which also was the assumption on which the scheme was framed ceased to exist.

The claim urged on behalf of schedule 'B' creditors that they had a charge irrespective of the proposed mortgage and were entitled to be treated as secured creditors cannot therefore be upheld.There is no question of the appellants having done something on the faith of an act, the court, the appellants and the other schedule ' B ' creditors having agreed to a postponement of repayment to them in consideration of an agreement between them and the company providing for a second mortgage in their favour.

On the findings by the appeal court that the company was commercially insolvent and that the scheme could not satisfactorily be worked with or without modifications, the only alternative for that court was to pass the winding-up order under section 392(2). The appeal court was right in ordering winding up of the company and we uphold that order