TMI Blog1966 (8) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... 952, a petition for winding up of the company was filed by two creditors of the company, Harihar Ramakrishna Karandikar and Anandibai Karandikar. On February 2, 1954, D.B. Phatak presented a scheme for reconstruction of the company, but the attempt to revive the company was given up as the scheme could not be worked out. On August 13, 1954, the learned District Judge, Poona, ordered the company to be wound up. The company had constructed a building called "Pioneer House" on the Laxmi Road, Poona. D.B. Phatak, the managing director of the company, made a claim that the building was of his private ownership and, therefore, on June 6, 1955, the official liquidators filed Civil Suit No. 835 of 1955 against him and another person for a declaration that the building as well as the land under it were of the ownership of the company. The trial court held by its judgment dated July 24, 1956, that the building belonged to the company but that the land under the building belonged to D.B. Phatak. The official liquidators did not challenge that part of the decree which was against the company but D.B. Phatak filed Appeal No. 537 of 1956 in the District Court, Poona, to challenge the correctne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the agreement of sale and it was willing to pay to the official liquidators the sum of Rs. 19,000 and odd which was in its hands after the appropriation of Rs. 47,000 paid by it as earnest under the agreement of sale. The official liquidators had also in their hands a sum of about Rs. 24,000 from out of the rent of the "Pioneer House". Thus the amount available for distribution amongst the creditors of the company was about Rs. 43,000 in addition to the sale proceeds of the vacant plot, amounting to Rs. 1,85,000. ( d )That the company will issue debentures of the value of Rs. 2,02,500 to the depositors and other creditors of the company in partial satisfaction of the amount due to them. The debentures would be repayable at the end of ten years and the interest at 7 per cent, per annum could, at the option of the company, be capitalised during the first three years. ( e )That the creditors should forgo twenty-nine paise in a rupee in consideration of the interest paid by the company on the debentures. ( f )That D.B. Phatak, the managing director of the company, will transfer the land under the building called "Pioneer House", Laxmi Road, Poona, to the company for a consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man, V. R. Phadke, to the District Court shows that all the nine shareholders of the Pioneer Dyeing House Limited consented to the scheme. The meeting of the depositors and the creditors, which was held separately from the meeting of the shareholders, was attended by 124 persons representing claims of the value of Rs. 4,38,004. Thirty-six creditors appeared personally and 88 appeared through proxies. Seven creditors representing claims of the value of Rs. 43,345 opposed the scheme whereas others holding a total claim of Rs. 2,31,399 consented to the scheme. On the material date, the company held deposits of the value of Rs. 5,00,000 and the other debts amounted to Rs. 2,50,000. The meetings of the shareholders and the creditors of the Maharashtra Textiles Limited, which was the largest single creditor of the Pioneer Dyeing House Limited, were held separately on January 19, 1965. The report of the chairman at exhibit 248 shows that all the shareholders gave their consent to' the scheme. In the meeting of the creditors, 13 creditors attended personally and 23 by proxies. Thirty-five creditors consented to the scheme, whereas one creditor opposed the scheme. The learned District J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, though the opinion of the creditors or members of the company must be given due weight, such an opinion does not conclude the question whether the scheme must be accepted. The opinion of the majority is only one of the elements in the case, to be considered by the court which is called upon to sanction the scheme. Mr. Mistry, who appears on behalf of the respondents, who propounded the scheme, did not initially dispute the proposition that the court may refuse to sanction a scheme even if the requisite majority had agreed to adopt it. During the closing stages of his argument, however, he contended that, though the court may have jurisdiction to go beyond the verdict of the majority, the court would not be justified in refusing to sanction the scheme unless it appeared that the consent of the majority was obtained by misrepresentation or by suppression of material facts. In view of this submission, it becomes necessary to examine the authorities cited at the Bar bearing on the question as to what is the extent of the jurisdiction of the court in refusing to sanction a scheme to which the majority of the shareholders or creditors have agreed. Sub-sections (1) and (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2 of the Joint Stock Companies Arrangement Act, 1870, which is reproduced in the judgment of Lindely L.J. at page 236, is in material respects similar to sub-section (2) of section 153 of the Indian Companies Act, 1913, and sub-section (2) of section 206 of the English Companies Act, 1948. In a passage at page 238 Lindley L.J. observes as follows : "...what the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the majority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide , and whether they are coercing the minority in order to promote interests adverse to those of the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the court to sanction a resolution which has been passed approving of a compromise or arrangement ? I shall not attempt to define what elements may enter into the consideration of the court beyond this, that I do not doubt for a moment that the court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith ; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the court may take into consideration I will not attempt to forecast." In In re English, Scottish and Australian Chartered Bank [1893] 3 Ch. 385 , during the winding up proceedings of a chartered banking company, a scheme of reconstruction was proposed under which a new bank was to be established which would defray some of the liabilities of the old bank. The scheme was accepted by the trial court and the appeal filed against that decision was heard by a Bench consisting of Lindley L.J., Lopes L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n mind the word 'reasonably' is a relative term : it means reasonably with regard to the particular circumstances of the case. What is reasonable in one case might be unreasonable in another. The reasonableness must be always regarded with reference to other alternatives." In Dorman Long Co., In re : South Durham Steel and Iron Co., In re [1934] 1 Ch. 635, two petitions were filed under section 153 of the English Companies Act, 1929, which, in all material respects, corresponds to section 153 of the Indian Companies Act, 1913. Maugham J., who dealt with the petitions, says at the outset of his judgment that it was plain that the duties of the court under section 153 are two-fold (page 655): "The first is to see that the resolutions are passed by the statutory majority in value and number, in accordance with section 153, sub-section (2), at a meeting or meetings duly convened and held. Upon that depends the jurisdiction of the court to confirm the scheme. The other duty is in the nature of a discretionary power, and it has been the subject of two decisions in the Court of Appeal the first being the case of In re Alabama, New Orleans, Texas and Pacific Junction Ry. Co. [189 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposals .......... but there may be more important considerations." It was held in that case that the position of the company was misrepresented in the meeting of the shareholders and creditors of the company and, therefore, the view of the majority could not be accepted. It was further held that, even if the resolutions passed by the shareholders and creditors had been passed after a disclosure of the true position, the scheme could not be accepted, because amongst other things, the company was hoplessly insolvent. Bharati Central Bank Ltd., In re [1949] ILR 1 Cal. 127, is the decision of a single judge who held that, in sanctioning a scheme of arrangement under section 153, the court is not bound to follow the decision of the creditors and shareholders approving the scheme. It must be satisfied that the provisions of the Act have been complied with, that the scheme is a reasonable and workable one, that the creditors and shareholders had sufficient information with regard to the affairs of the company before approving the scheme, that the creditors and shareholders acted in good faith in approving the scheme and that there are no considerations of public interest which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution. By "reasonable" is generally meant that the arrangement can reasonably be supposed by sensible business people to be for the benefit of the class which they represent. The court will also not sanction the scheme if the facts which would have influenced the decision of the majority were not known or disclosed to the majority, or if the sponsors of the scheme have misrepresented the true position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry into the conduct of the delinquent directors, the court would be slow to give its sanction to the scheme. Considerations such as those mentioned above must be taken into account by a court before a scheme is sanctioned but, in the very nature of things, it is not possible to enumerate exhaustively the circumstances which a court is entitled to take into consideration. In our opinion, therefore, there is no substance in the submission of Mr. Mistry that the decision of the majority must necessarily lead to the inference that the scheme is for the benefit of that class which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that his income was less than the minimum taxable. The total debts of the company can be taken roughly at Rs. 7,44,000, If the personal debts of the managing director amounting to Rs. 1,57,000 which under the scheme are passed on to the company are added to it, the total liability of the company would come to Rs. 9,01,000. About Rs. 1,20,000 were paid by the liquidators as interim dividend and, therefore, a sum of Rs. 7,81,000 is still due from the company by way of debts. As against these debts, the assets of the company consist of a vacant plot of three acres which under the scheme is to be sold for Rs. 1,85,000, another plot of three acres which yields a monthly rent of Rs. 2,100, a building on the Laxmi Road which yields an income of Rs. 1,300 per month and about Rs. 43,000 which are lying to the credit of the company as rent of the building on the Laxmi Road. Under clause ( f ) of the scheme, Rs. 1,87,000 would have to be paid to the creditors in partial satisfaction of their dues at 25 paise in a rupee. The sale proceeds, therefore, of the three acres of land at Yerandavana shall have been used for the purpose of paying debts partially. Under clause ( g ) of the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company may be able to raise capital for its business must be excluded. Therefore, if the scheme is accepted, all that can happen is that the evil day will be postponed. We see no justification for prolonging the agonies of the creditors any more. It seems to us certain that even if the scheme is accepted, the company will have to face a fresh challenge to its solvency within a short time. The second reason why the scheme cannot be sanctioned is that its object appears to us to be to cover the deeds of delinquent directors. In Civil Suit No. 835 of 1955 which was filed by the official liquidators against the managing director and another person for a declaration that the building called "Pioneer House" on the Laxmi Road, Poona, is of the ownership of the company, the trial court held that the managing director had made a false claim to the building, that he had manipulated accounts to suit his convenience and that he had not acted in the best interests of the company. The decree of the trial court was confirmed in appeal by the Extra Assistant Judge, Poona, who also held that the managing director was guilty of fraud. The managing director had filed an appeal in this court from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rees to transfer the land under the building "Pioneer House" to the company for a consideration of Rs. 47,000. It is difficult to appreciate that men of business knowing their interest would agree to such a provision. The managing director had made a false claim to the building which belongs to the company. He agreed to sell the building to Yeshwant Mutual Insurance Company Limited and took an earnest of Rs. 47,000 from them. He put the insurance company in possession and during the course of the last few years that company has recovered by way of rent an amount larger than the one which it had paid by way of earnest. The insurance company has been taken over by the Life Insurance Corporation of India which has very properly taken the view it will not enforce the agreement of sale. It is contended that the amount paid by way of earnest has already been recovered in the shape of rent. It would be clear from these facts that the managing director has wrongly appropriated to himself the sum of Rs. 47,000. It, therefore, seems to us strange that he should be said to have transferred the land to the company for a consideration of Rs. 47,000. The company today is in possession of the bui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why the scheme should not be sanctioned. That reason is by no means the least important. After the trial court decided Suit No. 835 of 1955, in respect of the building at Laxmi Road, the official liquidators filed a misfeasance summons on November 2, 1957, against the managing director and three other directors of the company. The misfeasance summons was stayed during the pendency of the second appeal filed by the managing director in this court. The fact that the misfeasance proceedings were taken against the directors of the company is not shown to have been disclosed to the shareholders and creditors of the company. While considering the scheme, it was highly relevant whether the conduct of the managing director and the other directors was such that the fate of the company could be put in their hands. If the creditors were told that a court of law had held that the managing director was guilty of fraud as against the company and if they were further told that misfeasance proceedings were taken against the directors, their decision on the approval of the scheme could have been easily otherwise. It is urged by Mr. Mistry that it was the duty of the official liquidators to discl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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