TMI Blog1948 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... is Rs. 4,45,000 as on the 31st August, 1947. The uncalled capital is. therefore, Rs. 1,42,000 as on that date. The company has 14 branches, one of which is in Bogra in Eastern Pakistan. On the 16th September, 1947, the present petition was presented before Clough, J. The allegations in the petition may be summarised as follows: The present management is said to have taken control of the company in October, 1939, and it is claimed that the position of the company improved immensely since then and certain figures are mentioned in a table set out in paragraph 6 of the petition purporting to show the progressive improvement of the company during the years 1940 to 1946. Reference is then made to the communal disturbances and various strikes in Calcutta and elsewhere since August, 1946, which seriously affected various banks, names of some of which are set out in paragraph 7 of the petition. In August, 1947, there was a strike of the employees of the head office of the company which added to its difficulties. It is said that from August, 1946, to the 31st August, 1947, the company made payments to various creditors and depositors to the extent of Rs. 60,00,000 which is said to amount t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount to Rs. 46,49,000 ( i.e., Rs. 47,43,000 minus Rs. 94,000). On this computation the assets exceed the liabilities by Rs. 4,16,000. After setting out its position brought about, according to the company, by circumstances over which it had no control, the company expresses its desire, said to be supported by a large body of creditors and depositors, to place a scheme of arrangement for gradual payment of the liabilities. The scheme, a copy of which was annexed to the petition, may be summarised as follows: ( i )Sundry liabilities for salaries, allowances for office expenses, legal charges and house rent will not be affected by the scheme but shall be paid in full (clause 3). ( ii )Secured creditors to the extent of their securities will not be affected by the scheme (clause 14). ( iii )All depositors up to Rs. 50 and all staff provident fund, staff security, bill collection proceeds for which advices had been received or drafts or pay orders issued against bill proceeds or cash payment shall be converted into current account to be paid within four months from date of sanction (clause 4). ( iv )The creditors will give up all arrears of interest and will not be entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent to which the unsecured debts were likely to be realised. On the 11th October, 1947, a petition for winding-up of the company was presented before Clough, J., on behalf of Bhupati Nath Dutta, Jaharlal Dutta and Pashupati Nath Dutta who claimed to be creditors of the company for the total sum of Rs. 1,63,705-12-6. Clough, J., admitted that petition and fixed the 29th November, 1947, for its hearing and gave directions for advertisements. At the same time, upon the application of the petitioning creditors supported by Gopi Lall Shaw who also claimed to be a creditor and for reasons recorded in the minutes, namely, the probability that preferential payments had been made and the fact, appearing from the letter of the company's attorneys dated the 7th October, 1947, that the books of the company had not been till then made over to the auditor appointed as far back as the 16th September, 1947, the learned Judge appointed the official receiver as provisional liquidator to forthwith take possession of the company's assets and books. The learned Judge directed that notice of appointment of the provisional liquidator should be given by Tuesday the next ( i.e., the 14th October, 1947) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f discussion which at times was attended with considerable heat. Mr. Sailendra Nath Mukherjee (who is shown in the attendance list to be a creditor for Rs. 5-1) representing himself and as a proxy holder of creditors of the total value of about Rs. 70,000 proposed certain modifications and Mr. Benoy Krishna Dutt, a creditor of the value of Rs. 10,314-10-3, seconded the amendments. The net result of the amendments, so far as they concerned the creditors, was that the creditors would get 70 per cent. instead of 80 per cent. as proposed in clause 6 and take, in shares, 30 per cent. instead of 20 percent., as proposed in clause 7 of the scheme. The proposed amendment also increased the percentage of writing off of share capital from 30 per cent. as proposed in clause 10 to 50 per cent. After prolonged discussions, and no other amendment having been moved, the Chairman put the scheme with the amendments to vote and the meeting unanimously adopted the scheme, as amended, nobody raising his hand in disapproval of the scheme or the amendments and the Chairman accordingly declared the amended scheme to be unanimously carried and dissolved the meeting. The Chairman records that thereafter 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlal Dutt. To start with, it is said that the report of Mr. D.N. Guha Roy was not made available for inspection at the head office a fortnight before the creditors' meeting was held. This is supported by B. Pal Choudhury, Ram Kumar Agarwalla and Sankarlal Agarwalla. Mr. Guha Roy sent his report to the company's solicitors on the 8th November, 1947, which was just a fortnight before the date of the meeting. The company's solicitors on that very date wrote to the provisional liquidator who was in possession of the head office to afford immediate facilities for making the report available for inspection to all concerned. On the 14th November, 1947, the company's solicitors wrote again to the provisional liquidator pointing out that no reply had been receive from him to the earlier letter and again requesting him to give immediate facilities for making the report available for inspection and in the meantime to direct anybody calling at the head office to obtain inspection at the solicitors' office. In fact Jaharlal Dutt obtained a copy from the company's solicitors. Seeing that the other complaining creditors are appearing through the same attorneys no substantial hardship appears to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors had no opportunity of considering the scheme, that the books of the company were not available at the meeting so that the report of Mr. Guha Roy could not be verified, that bona fide creditors were prevented from taking part in the meeting or putting questions by the directors and a large number of employees of the company who acted in a high-handed manner, and that all on a sudden the Chairman closed the meeting without taking the votes of the opposing creditors. These allegations are supported by Hari Sadhan Banerjee who says that the management with the help of their henchmen and many outsiders masquerading as creditors created a pandemonium and had their own way. Learned counsel for one of the opposing creditors commented that if the creditors unanimously accepted the amended scheme why should 8 or 10 of them immediately thereafter signify their opposition to the Chairman. The Chairman of the meeting is an able member of the Bar well known, I am happy to say, for his integrity and sense of fairness and I am certainly not prepared to distrust his report on vague allegations such as have been made in the affidavits in opposition. That there was some heat in the discussion a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court to determine whether they can properly be proxy holders. Again seeing that the amended scheme was passed unanimously, the non-disclosure of the names of the proxy holders do not make any difference but I am adverting to these matters so that in future more attention is paid to them. In my judgment in the case of In re Pioneer Commercial Bank, Ltd. delivered on the 31st March, 1947, I adverted to the principles laid down by Lindley, L.J., in the two well-known cases therein referred to for the guidance of the Court in the matter of sanctioning schemes. Mr. R. Chaudhuri appearing for the company drew my attention to the fact that the observations of Lindley, L.J., were made at a time when under the English Companies Act then in force a scheme was a part of the winding-up proceedings and submitted that the law has been further liberalised in that it now permits schemes even without winding-up and, therefore, the principles laid down by the eminent Lord Justice should also be further liberalised and the Court should give greater sanctity to the opinion of the requisite statutory majority of creditors. I do not think that the circumstance referred to by Mr. Chaudhuri, namely, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about by the Great War when financing institutions like banks made large profits. In the next place the management should have during those heydays built up a more substantial reserve fund instead of indulging in spectacular show of success by declaring dividends in violation of the mandatory provisions of section 277K of the Companies Act. That section enjoins that every banking company shall, out of the declared profits of each year and before any dividend is declared, transfer a sum equivalent to not less than twenty per cent. of such profits to the reserve fund until the amount of the said fund is equal to the paid-up capital. Dividend is to be declared on profits. If the amount to be added to the reserve fund is to represent 20 percent, of the profits then only the balance of 80 per cent. of the profits remains available for dividend. It follows, therefore, that dividend cannot legally be more than four times the amount to be transferred to reserve. In 1942, Rs. 350-8-10 minus Rs. 1954-7=Rs. 154-4-3 was added to the reserve fund whereas Rs. 2,073, i.e., 4 per cent . of the current paid-up capital of Rs. 51,834 which is more than four times Rs. 154-4-3, was spent in divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Jaharlal Dutt, one of the opposing creditors, had taken a copy of the petition and could have drawn the attention of the creditors to the discrepancies. This only shows that creditors, left to themselves, do not appreciate the importance of many things unless it is brought to their notice. It is then said that the petition was not before the creditors at the meeting and they had the correct figures in Mr. D.N. Guha Roy's report, and were, therefore, not misled. They were misled in that the company's conduct in putting up wrong figures before the Court was not brought to their notice. The object of having the affairs of the company investigated by an independent auditor was to bring all material facts relating to the management as well as the present financial position of the company to the notice of the creditors so as to enable them to make up their minds whether they should at all enter into any arrangement with such a company. It cannot be denied that, by reason of the absence of any comment in the report, this aspect of the matter was not brought to the notice of the creditors. The opposing creditors filed an affidavit affirmed by Mr. P.K. Mitra, an incorporated accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the same with Rs. 3,98,153 and the sum of Rs. 19,013-10-6 representing profit made on the building a/c was credited in the profit and loss account. The entries in the miscellaneous detail book at page 82, the clean cash book at page 74 and the profit and loss subsidiary cash book at page 207 fully support Mr. Chaudhuri's explanation. It is, therefore, clear that the sale proceeds of the building are accounted for in the books. The comment, however, remains that the system of book keeping adopted by this company is extremely slipshod and loose as admitted by Mr. D.N. Guha Roy and the keeping of large sums in suspense account or unadjusted for such a long period cannot but be regarded as inefficient management giving rise to suspicion. The next item commented on is the account of Eastern Agency. The books of 1947 contain an account headed Eastern Agency. The address of the firm or the name of the proprietor or parties are not given at the account head. The absence of these particulars in the books of 1947, may, however, be explained by the fact that the accounts have been brought forward form 1946. This account was opened on the 3rd January, 1946, as the account opening from No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. This account struck Mr. Guha Roy and he called for explanation. On explanation being furnished he found that this account was secured by shares to the extent of about Rs. 2,31,749 and by hypothecation of goods valued at Rs. 39,000. The total security is thus valued by Mr. D.N. Guha Roy at Rs. 2,70,000. The shares which are said to be security for this overdraft account, are said to have been pledged with Messrs. Sohonlal Pachisia whose claim, according to their statement is Rs. 1,71,000. Therefore the available balance of security for this overdraft account is only about Rs. 1 lac. Several bundles of contracts, mainly issued by Messrs. Sohonlal Pachisia, were produced showing the purchase and sale of shares and it is said that the outstanding shares are on account of the. Eastern Agency account. There is nothing to connect the Eastern Agency account with these outstanding shares except the entry on the brown paper folders containing the contracts and in a few cases entry "Eastern Agency A/C" in red ink on a few contracts. I have been referred to the security register of this company. That register has an account of Eastern Agency which contains entries, apparently made at once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t I cannot shut my eyes to glaring mismanagement of public funds such as this account of Eastern Agency seems, on its face, to suggest. To assist in stifling investigation, which I feel is called for in this case, will be to put a premium on what may eventually turn out to be blatant dishonesty. Leniency in such a case will not, in my judgment, enure in the long run for the benefit or welfare of our banking concerns. If the huge overdraft due by the Eastern Agency is not realised, which eventuality I think is likely, the amended scheme cannot possibly be implemented. Further, even if I assume that all the assets will be realised, there can be no question that considerable time will elapse before they will come in. Under the scheme the following sums will be required to implement clause 4: Rs. 49,000 for creditors up to Rs. 50, Rs. 28,275 for staff provident fund and Rs. 400 for staff security making up Rs. 77,675. I am leaving out the bill collections. Further, under clause 6( a ) the sum of Rs. 2,71,000 will be required within six months after sanction. Thus to carry out this scheme it will be necessary for the company to realise Rs. 3,48,675 within six months. There is only Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables compiled from the figures shown in Mr. D.N. Guha Roy's report to show that the scheme is not feasible. I agree with Mr. Chaudhuri that the scheme of those tables is not tenable and correct and is rather misleading. On the other hand, Mr. R. Chaudhuri made an attempt to show that the assets had been valued by Mr. D. N. Guha Roy in a very conservative and cautious way and that out of Rs. 11,74,000 due by the Eastern Agency after deducting the value of securities at the present market rate, and then making an allowance of 25 per cent. for possible risk of non-collection, a sum of Rs. 6,48,000 will still be realised and even if of it is left out, Rs. 3,24,000 will certainly be realised. Even on this basis there will be a deficit of Rs. 11,000. Then Mr. Chaudhuri gets from Mr. D.N. Guha Roy that some amount will be received from the secured creditors after they sell the securities and satisfy their claims in full and the net deficit of Rs. 11,000 may be wiped out. It is an attractive paper calculation evidencing considerable ingenuity in jugglery with figures but it leaves me cold. This calculation does not take into account the establishment and other expenses which will have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to Eastern Agency account. In view of the aforesaid findings I am bound to refuse my sanction to the proposed scheme which is not guaranteed by any financier, I, therefore, dismiss the company's application under section 153 for sanction of the proposed scheme with one set of costs to the opposing creditors- That the company is unable to pay its debts is obvious and is not denied. The petitioning creditors' debt is not in dispute. The advertisements have been duly published, I, therefore, make the winding-up order. The petitioning creditors will get the costs out of the assets. The other creditors will get one set of costs. The company's application for vacating the order for appointment of provisional liquidator is dismissed with one set of costs. Notice of further proceedings to be given to the petitioning creditors. I appoint Mr. A.B. Gupta, chartered accountant, and failing him Mr. N.C. Chakrabarty, incorporated accountant, as the official liquidator on usual remuneration and security to the satisfaction of the Registrar to be furnished within one month. Premium to be paid out of the assets. Liberty to the official liquidator to act in the meantime on counsel's en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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