2007 (8) TMI 447 - SC - Companies Law

Whether the compromise put forward under section 391 of the Companies Act could be accepted by the court without reference to the fact that it is a company in liquidation and without considering whether the compromise proposed as intending to take the company out of liquidation contemplates the revival of the company and whether it puts forward a proposal for revival and whether such a proposal also satisfies the element of public interest and commercial morality the elements required to be satisfied for the court to stop the winding up proceeding in terms of section 466 of the Act? Whether in the case of a company which had been ordered to be wound up a compromise or arrangement made under section 391 of the Act could be accepted on the basis that the said arrangement has been approved by the relevant meeting of the creditors members and so on? Whether the court was concerned with anything more than such a decision taken by the concerned members and creditors of the company? Held that - Appeal allowed in favour of remand. This court do appreciate this aspect of the matter having taken the view that the arrangement has to go back to the meeting of members creditors etc. of the company in terms of section 391 of the Act and once it is adopted or adopted with modifications with the requisite majority at the meeting the arrangement would require a fresh scrutiny by the Company Court thereafter we cannot avoid interfering with the decision of the Division Bench on the ground put forward by learned Senior Counsel of benefit to the workers.

Summary

Issues Involved:
1. Winding up of the company.
2. Viability and revival of the company.
3. Approval and modification of the scheme under section 391 of the Companies Act.
4. Locus standi of the appellants.
5. Role and jurisdiction of the Company Court and Division Bench.
6. Public interest and commercial morality.
7. Procedural compliance under sections 391 to 394A and section 466 of the Companies Act.
8. Estoppel and maintainability of appeals.
9. Impact on workers and creditors.

Detailed Analysis:

1. Winding up of the company:
The company, M/s. Shreeniwas Cotton Mills Limited (SCML), was ordered to be wound up by the Company Court on 25-7-1984 under section 433 of the Companies Act due to financial difficulties. The Official Liquidator took charge of the company's affairs.

2. Viability and revival of the company:
The Division Bench emphasized the need to consider the viability of reopening the mills or any portion of it and running it profitably without disposing of immovable assets. The State Bank of India Capital Markets Limited's viability report indicated that only a section of the spinning division could be restarted and operated as viable.

3. Approval and modification of the scheme under section 391 of the Companies Act:
The scheme proposed by Rangnath Somani and others was initially approved by the creditors, contributories, and workers. However, the Division Bench found the scheme not bona fide and dismissed it. Later, a modified scheme was proposed involving LBPL, which included the development and transfer of SCML's properties by LBPL for revival. The Company Court rejected this modified scheme, viewing it as a disposal of the company's assets rather than a revival.

4. Locus standi of the appellants:
The respondents challenged the locus standi of the appellants, arguing they were not creditors, contributories, or debenture-holders. The appellants contended they had been involved in the original scheme and had a vested interest. The court upheld the appellants' locus standi, noting their involvement and the directions of the Division Bench.

5. Role and jurisdiction of the Company Court and Division Bench:
The Company Court must ensure that any scheme proposed under section 391 aims at the revival of the company. The Division Bench's decision on 4-4-1995, which emphasized the revival of the company, was binding. The Company Court must consider whether the compromise or arrangement genuinely intends to revive the company.

6. Public interest and commercial morality:
The court must ensure that the scheme satisfies public interest and commercial morality, especially in the context of a company under liquidation. The Division Bench's order dated 4-4-1995 highlighted the need for revival in the interest of workers, creditors, and the public.

7. Procedural compliance under sections 391 to 394A and section 466 of the Companies Act:
The court held that sections 391 to 394A must be read in conjunction with section 466. The Company Court must consider whether the scheme proposes a genuine revival of the company and satisfies public interest and commercial morality.

8. Estoppel and maintainability of appeals:
The respondents argued that Rangnath Somani was estopped from filing an appeal as he had accepted the Division Bench's decision and received possession of the assets. The court rejected this argument, noting that receiving possession did not preclude him from appealing.

9. Impact on workers and creditors:
The court acknowledged the workers' union's argument that interference would delay benefits to the workers. However, it emphasized the need for procedural compliance and proper scrutiny of the scheme.

Conclusion:
The Supreme Court allowed the appeals, set aside the judgments of the Division Bench and the Company Court, and remanded the matter to the Company Court. The Company Court was directed to reconvene a meeting of the members, creditors, etc., in terms of section 391 to consider the modifications and ensure the scheme's approval by the requisite majority. The Company Court must then scrutinize the scheme for compliance with legal requirements and public interest. The parties were directed to appear before the Company Court for further directions.