TMI Blog1979 (4) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... in the sale of the company's factory at Nagpur. Mr. Bhatt, learned counsel, appeared for SICOM and opposed the applications. Mr. Mulay also appeared for the Bank of Maharashtra, but without notice, at the fag end of the hearing and adopted- the arguments of Mr. Bhatt. Since I am dismissing the company's application at the threshold of section 391(1) of the Companies Act, 1956, it is necessary that I should indicate my reasons for the same. The brief background of the case is that the company is a mini-steel plant located at Nagpur. The company was incorporated on 21st June, 1972. It appears, that the mini-steel plant which is the only business of the company was commissioned in May, 1974. From June, 1975 to December, 1975, it was temporarily closed down. Subsequently, it resumed operations and again closed down from about September 1, 1976. The pro forma balance-sheet as at June 30, 1978, shows that the share capital of the company was Rs. 18,19,000; the reserves and surplus were Rs. 9,56,768; the secured loans were of the range of Rs. 97,67,697 and the unsecured loans stood at Rs. 3,87,694; the current liabilities including sundry creditors and deposits were Rs. 10,14,358. As ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf-yearly rests. SICOM did not remain satisfied merely by making demands for payment of the principal amount and interest, but in exercise of its powers under the deed of mortgage, it appointed a receiver without intervention of the court on or about March 17, 1975, for collecting rents and profits. The receiver sought to give the factory on leave and licence. According to SICOM, the factory could be rented out on a monthly rent of Rs. 1,00,011 and that it could obtain Rs. 10 lakhs by way of deposit from the hirer for the due performance of the agreement. This action of the receiver was resisted by the company on the basis that the receiver had no power to give the factory on leave and licence. The company was ultimately successful in this contention in the proceedings taken out by the company under section 69A of the Transfer of Property Act. The judgment in favour of the company in these proceedings was delivered on August 24, 1978. It is the case of the company that it made repeated representations to SICOM with proposals to restart the plant, rescheduling of instalments and freezing of interest as contemplated by the various guidelines given by the Industrial Development Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra, by their joint letter dated March 10, 1979, addressed to Hariganga Steel Alloys Ltd., Nagpur, communicated their acceptance of the offer at the increased price of Rs. 71,00,000. I am informed that SICOM and the Bank of Maharashtra have not only received earnest money but part of the price also. Before I started with the judgment, I was informed that the Akola Civil Court has vacated the interim injunction on Friday, the 30th March, 1979. The present summons have been taken out on March 29, 1979, and were placed for orders on March 30, 1979, when I heard counsel on both sides. Mr. Khambatta, learned counsel appearing for the company, took me through the proposed scheme. The draft scheme envisages the giving out of the factory on leave and licence basis for working for a period of 7 years on a monthly compensation of Rs. 1,00,000 and for a further period of 3 years on the same terms and conditions at the option of the parties. The licensee is to bear the municipal taxes and pay other outgoings in respect of the factory and thus it appears that the amount of compensation of Rs. 1,00,000 is intended to be paid to the company in full without any deduction. The party's name is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is in the interest of justice that a short relief under section 391(6) should be given to the company, so that it can get better price. Mr. Bhatt, learned counsel appearing for SICOM, earnestly urged that the proposed scheme is not bona fide and is unworkable, and so far as SICOM is concerned, it is not interested in the scheme at all, and having regard to the events which have transpired, third party's rights have intervened as the property has been sold and earnest money and part of the price is received. In the circumstances, there is no purpose in giving directions for holding a meeting of the secured creditors. Even otherwise, SICOM and the Bank of Maharashtra together represent three-fourths in value of the secured creditors and hence on that ground also I should dismiss the judge's summons. The following are the relevant provisions relating to a scheme of compromise or arrangement with which we are concerned in this matter : "390. Interpretation of sections 391 and 393. In sections 391 and 393, ( a ) the expression 'company' means any company liable to be wound up under this Act.....". "391. Power to compromise or make arrangements with creditors and me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld for considering the proposed compromise or arrangement;.....". "71. Application for stay. An application under sub-section (6) of section 391 for stay of the commencement or continuation of any suit or proceeding against the company may be moved by a judge's summons ex parte , provided that where a petition for winding up the company or a petition under section 397 or 398 is pending, notice of the application shall be given to the petitioner in such petition". "72. Application to vacate or vary order of stay. Where an order has been made staying the commencement or continuation of any suit or proceeding under sub-section (6) of section 391, any person aggrieved by such order may apply to the court by a judge's summons to vacate or vary such order. Notice of the application shall be given to the applicant at whose instance the order of stay was made and to such other persons as the court may direct". Mr. Khambatta has made a point that the proposed scheme should be sent to the creditors for ascertaining their reaction and when the proposed scheme is returned by them with or without modification, then the court should scrutinize the same. But this is one aspect of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has still to consider the circumstances before giving its approval, though the fact that three-fourths in value have agreed to accept the scheme would be a strong circumstance in favour of sanctioning the scheme by the court. The scope of inquiry by the court cannot be laid down by any rigid principles or formulae or on the basis of judicial decisions. The circumstances to be taken into account would vary from case to case. Some of the outstanding circumstances are : ( a )the proposal for the scheme was made in good faith, ( b )the scheme is fair and reasonable, ( c )the scheme will yield to a smooth and satisfactory working, ( d )the scheme does not offend public or commercial morality, ( e )the scheme is not detrimental to the interests of the creditors or members or public interest; ( f )the scheme does not violate the Companies (Acceptance of Deposits) Rules, 1975, or nullifies the protection afforded under these Rules. Thus the trend of the judicial decisions shows that the court must examine the scheme on its own merits and is not bound to treat the scheme as a fait accompli. In doing so, the court would not be substituting its judgment for the commercial judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed scheme is contrary to the Companies (Acceptance of Deposits) Rules, 1975. ( vii ) Whether the company has made any firm commitment to arrange for payment of instalments or there are reasonable prospects of the company making profits to honour the instalments, otherwise the scheme is bound to fissile. The aforesaid are some of the circumstances to be borne in mind. Obviously, it is not possible to make an exhaustive list of the circumstance because they might differ from case to case. I think that the court's role under section 391(1) is no less important than under section 391(2). A very special role is entrusted to the court under sections 391 to 394 more particularly after the amendment of these provisions in 1965. Section 392 enjoins the court to supervise the scheme and, therefore, it is all the more necessary to examine the bolts and nuts of the scheme at the stage it is launched. At the threshold, the court can satisfy itself of the viability of the scheme and if it has any doubt, it should not hesitate either to reject the scheme as proposed or ask for additional material to safeguard the interests of all concerned or even make necessary observations while giving dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this valuable term of the offer. This discrepancy is of importance and makes me somewhat hesitant to believe or trust the company. Thirdly, the letter does not mention about any "nominee", but the draft scheme does. This is a strong circumstance affecting the credibility of the offer. Fourthly, in answer to a query as to how Kontact International happen to make the offer by the said letter, Mr. Khambatta, after taking instructions from the chairman, Shri R.B. Makharia, sitting in court, informed that the Kontact International had made the offer pursuant to the advertisement of SICOM and the Bank of Maharashtra and that the offer was personally made to the company by one Hirak Kasatia on behalf of Kontact International. Now, SICOM and the Bank of Maharashtra had advertised for sale of the factory and not for leasing it out or giving it on leave and licence basis. Furthermore, the advertisement appeared on January 15, 1979, and the last date for inviting offers expired on February 7, 1979. It does not stand to reason that a genuine party could act on a stale and expired advertisement in the manner suggested on behalf of the company. These factors destroy my confidence in the propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng institutions. The money in their coffers is public money. The past interest, as indicated above, of SICOM is of the order of Rs. 16,24,000 as on December 31, 1978, and that of Bank of Maharashtra stood at Rs. 75,405.23 as on December 31, 1978. The future interest payable to SICOM for seven years works out to Rs. 80.23 lakhs as per the statement handed over by Mr. Bhatt. The future interest for seven years in respect of Bank of Maharashtra and Bank of Baroda is likely to be not less than Rs. 100 lakhs on the basis of their outstanding dues stated above. Thus the company desires not to pay about Rs. 180 lakhs. This is not a moratorium but confiscation of public money. I agree that the soundness of the scheme is not to be judged from the fact whether creditors will receive full payment or not. To my mind, this aspect of the scheme is clearly detrimental to public interest. The amount of Rs. 71 lakhs realised from the sale can be ploughed back into the main stream of economic development and future loss of about Rs. 180 lakhs, eliminated or at least minimised. The above discussion shows that the scheme is not workable with regard to the class of secured creditors. As regard the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Halsbury's Laws of England, 3rd Edn., Vol. 1, pp. 5 6). The word "suit" takes its colours and forms its pattern from the above definition of "action". Both words are synonymous. Conceptually also there is no difference between them". Proceedings" mean legal proceedings and not private action. Thus the sale by SICOM and Bank of Maharashtra is not in a "suit" or "proceeding" within the meaning of section 391(6), but by virtue of the rights created in their favour by the company. In support of this summons, a point was made by Mr. Khambatta that the price obtained is inadequate and that I should grant stay under section 391(6) so that proper value can be fetched. I am not impressed by the bare assertion. The company's own case is that the fixed assets of the company are valued at Rs. 66,96,736 as per the pro forma balance-sheet as at 30th June, 1978. Even on the basis of the audited balance-sheet as on June 30, 1977, the fixed assets were valued at Rs. 67,06,236. SICOM has taken care to obtain the valuation report of the fixed assets of the company from M/s. M. N. Dastur Company Pvt. Ltd., Calcutta. Mr. Khambatta pointed out from the report the observation made by the valuers ..... X X X X Extracts X X X X X X X X Extracts X X X X
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