TMI Blog1969 (12) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956, for sanctioning, a scheme of compromise and arrangement between the creditors and members of Maneckchowk Ahmedabad Manufacturing Company Limited (hereinafter referred to as the company) and the compromise proposed by the company in Company Application No. 23 of 1968 and approved by the creditors and members of the company. The company was incorporated in the year 1892 and it was manufacturing cotton yarn and cotton textiles. For that purpose the company had set up textile mills divided into two units described as Unit No. I and Unit No. II. Since 1913 one Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben, all of whom are very much concerned in this petition. In 1957 the firm of Hiralal Trikamlal Sons was appointed as managing agents of the company. One Gopaldas P. Parikh was appointed as a director of the company in the year 1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal Sons were in active management of the affairs of the company and since that date Linubhai Hiralal along with Gopaldas P Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme of compromise and arrangement as approved by the creditors and members as provided by rule 79 of the Companies (Court) Rules, 1959, because the company as represented by the provisional liquidator was not willing to file the substantive petition. The court granted leave to file this substantive petition, whereupon the petitioner filed substantive petition on 1st February, 1969. The petition was admitted on 3rd February, 1969. The court gave directions for advertising the petition in various newspapers and a notice was also directed to be issued to the Central Government as envisaged by section 394-A of the Companies Act. In the advertisement issued in the newspapers it was stated that the court would take up this petition for hearing on 8th March, 1969, and anyone interested in the company may come and appear either to oppose or support the petition. The hearing of the petition had to be adjourned from time to time as the petitioner had not submitted the latest financial position of the company as required by the proviso to section 391(2) of the Companies Act. The petitioner experienced difficulty in disclosing the latest financial position of the company because the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , namely, Union Bank of India and the Regional Provident Fund Commissioner. After Unit No. II is scrapped, the open land is to be let out to the intending lessee which will fetch a steady income. It is proposed to restart Unit No. I of the mills of the company. The secured creditors are to be paid in full in the manner set out in the scheme. The balance of 50 per cent, of the claim of the unsecured creditors are to be frozen for a period of two years and thereafter the said claims are to be satisfied as provided in the scheme. The dues of the workers are to be paid by certain stages. Some of the detailed features of the scheme will be examined while considering the objections raised by those contesting the scheme. Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, ( i ) whether the statutory provisions have been complied with or not; ( ii ) whether the class or classes have been fairly represented ; and ( iii ) whether the arrangement is such as a man of business would reasonably approve. As the scheme was very vehemently contested and a number of contentions have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings were properly conducted, in fact the scheme is not approved by a statutory majority of creditors and members ; but assuming that the other view is possible, the court on the analysis of votes recorded at the meeting should not exercise its discretion in favour of the scheme so as to impose it on the dissenting members and creditors. (9)The scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable; the court should not exercise its discretion in favour of such a scheme. These grounds will be dealt with in the order in which they are set out. Re. Ground No. 1. Section 391(1) and (2) reads as under : "391. Power to compromise or make arrangements with creditors and members. (1) Where a compromise or arrangement is proposed ( a )between a company and its creditors or any class of them; or (b)between a company and its members or any class of them ; the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company. The contention is that this disclosure should be made at the time when the petition is filed under section 391(1) and as that has not been done, the court should ignore whatever is disclosed after the petition for sanctioning the scheme is filed under section 392(2). Sections 391(1) and 391(2) refer to two distinct stages. Whenever a compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the court on the application of the company or any creditor or member of the company or in the case of the company which is being wound up, of the liquidator, order a meeting of the creditors or members or any class of them as the case may be. Such an application shall be moved by judge's summons supported by affidavit to which the proposed scheme of compromise and arrangement should be annexed. The judge's summons can be moved ex pate unless the petition is by some one other than the company in which case, a notice to the company has to be served. The court may give various directions at the hearing of this summons set out in rule 69. Once these directions are given, application und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disclosure ought to be made at the initial stage when an application is filed under section 391(1). But as the summons under subsection (1) is to be moved ex parte, objection can be taken about the non-disclosure at the initial stage only at the time when the court proceeds to accord sanction to the scheme and, therefore, the proviso is engrafted to sub-section (2). It was urged that an application under section 391(1) can be made by a creditor or member who may not be in possession of the latest financial position of the company a notice to the company is made obligatory under rule 68. This notice to the company is made obligatory because only the company would be able to disclose the latest financial position. It is no doubt true that a compromise or arrangement can be proposed by either a creditor or a member of the company but it is essentially a compromise or arrangement between the company and its creditors or between the company and its members and if the application is made by some one other than the company it was considered desirable that a notice should be given to the company before direction for convening the meetings are given. Merely because a notice is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be properly drawn up while giving directions for convening meetings, and it would be impossible to do so in the absence of disclosure about the latest financial position of the company, at that stage. It was further urged that material facts which ought to be disclosed as required by the proviso would include all the relevant facts which would go to show that the company is liable to be wound up and that the compromise and arrangement is fair and reasonable and is not mala fide and that it would be a proper alternative to the winding up of the company. The material facts required to be disclosed would also include the information which would help the court in determining the class of creditors or members whose separate meetings should be convened and their values to be properly determined. Affidavit in support of the judge's summons moved under section 391(1) has to be drawn up in Form No. 34 a perusal of which shows that in the affidavit the party seeking the directions of the court which would of necessity be either the company or its creditor or member, must set out the circumstances that have necessitated the proposed compromise and arrangement, the object sought to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he creditors in whom the then directors were vitally interested. It was urged that this affidavit does not disclose the fact that various petitions praying for winding up the company were presented and were pending; nor the fact that the company had executed two mortgages, one in favour of the Union Bank of India in January 1968 and the other in favour of the Regional Provident Fund Commissioner in May 1968 ; and that the company had incurred losses in the last year to the tune of Rs. 45 lakhs and odd. The affidavit of Mr. Patel is in the prescribed form and it sets out various details necessary for giving proper directions. It may be mentioned that Mr. Patel had annexed the latest balance-sheet of the company upto 31st March, 1967, to the affidavit. He had also stated the dues of the managing agents, Indequip group of companies and dues of the managing director as well as the members of his family and the effect of the scheme on their claims. Therefore, whatever was necessary at that stage was disclosed in the affidavit and nothing further was required to be done at that stage. Mr. Vakil further urged that the proposed scheme is to be considered by the members and creditors of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the creditors were prevented from putting questions. Even though these grounds were considered, it may be stated that on the facts found in the Chariman's report no weight was attached to the aforementioned objections. Reference was also made to In re Bharati Central Bank Ltd. [1949] ILR 1 Cal. 127. The question raised before the court was whether the creditors and members who had unanimously approved the scheme had full information of all the aspects and were acting honestly and in good faith at the meeting. After considering the evidence in the case it was observed that it was impossible to say that the creditors had full and fair knowledge of all the relevant facts on which they could come to an intelligent decision or that they had applied their independent mind to the scheme. In my opinion, no proposition of law can be deduced from the aforementioned case as suggested by Mr. Vakil that the disclosure ought to be made at the initial stage. It is always a question of fact whether the creditors and members did consider the scheme in the various meetings after getting the relevant information which would help in judging the scheme on its merits. But it cannot be said that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctioning the scheme it definitely appears to be mandatory in character and must be strictly complied with. The question is whether in fact it has been complied with or not. When the present petition was filed, the company was in charge of the provisional liquidator. The petitioner being a creditor could not produce documents showing latest financial position of the company. In order to make available latest financial position of the company and latest auditor's report, the petitioners took out a judge's summons in Company Application No. 11 of 1969 for a direction that the provisional liquidator who is in charge of the company should supply the latest financial position and all material facts pertaining to the said company. The court gave certain directions as a result of which Mahendra M. Patel Company, Chartered Accountants, were appointed as auditors to prepare the latest financial position of the company and to submit the auditor's report. It transpired that the books of accounts for certain period were not written and under the supervision of the provisional liquidator, the ex-directors of the company were permitted to complete the books of accounts. Thereafter the chartered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It may be mentioned that the petitioner has filed the affidavit of Gopaldas P. Parikh at page 506 of the record to which is annexed the clarifications submitted by the directors to the queries raised by the auditors. However, it is not necessary to go into them at this stage. Suffice it to say that proper disclosures in their broad outlines have been made so as to comply with the proviso to section 391(2). In my judgment, therefore, the first ground of attack is without merits and must be negatived. Reg. Ground No. 2. Second ground of attack was that the proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only be investigated and avoided in winding up proceedings. The contention is that the proposed scheme was put forth by the directors of the company in order to shield themselves an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no room for doubt that Gopaldas Parikh was vitally interested in the aforementioned five creditors. The first petition for an order for winding up the company was filed in the year 1967 being Company Petition No. 27 of 1967. That was withdrawn on 24th April, 1968. By that time, another petition filed for winding up the company was pending. During the pendency of this petition, it appears that the aforementioned five creditors filed suits against the company which was then being managed by Anil Parikh, son of Gopaldas P. Parikh, Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of 1968. Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed Summary Suit No. 977. 1968 against the company for recovering their respective claims as set out above. All these suits were filed on 15th April, 1968. On the next day, the board of directors of the company resolved to suffer consent decrees in all these suits. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in suffering decrees conducted themselves in a manner unbecoming a custodian of the interest of the company. Their action in giving charges would very adversely hit the other unsecured creditors. The directors preferred between creditors and creditors and especially preferred those in whom they were vitally interested and could certainly be stigmatized as guilty of giving fraudulent preferences. Mr. Gandhi who appeared for the petitioner made no attempt to defend this action of the directors in suffering decrees. One may not take a very serious objection to the suffering of the decrees but for the manner in which they were suffered ; but the most undesirable part is of giving charges in favour of select and chosen creditors. If these charges could not have been avoided except in winding up proceedings as fraudulent preferences, no alternative would have been left but to reject the scheme and wind up the company. However, I would presently point out that charges created in favour of the aforementioned creditors no more subsist. After the charges were created in favour of the aforementioned live creditors, an application was made to the Registrar of Companies in each case for reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn. There is also the affidavit of Prabhakar L. Khale, Director of Dyestuffs and Chemicals Private Ltd., at page 495 to which is annexed the resolution at page 497, which is to the same effect. There is also an offer on behalf of Dyestuffs and Chemicals Private Ltd. not to claim the remainder of its 50 per cent, dues if the scheme is sanctioned. The charge in favour of Dyestuffs and Chemicals Private Ltd. is relinquished. Further affidavit is filed by Mr. Khale in which he has stated that the application for registration will not be pursued and he undertook to intimate to the Registrar that the application for registration of the charge is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance at pages 694 and 695 signed on behalf of the aforementioned two creditors accepting the scheme and the charges in their favour stand cancelled. It may also be mentioned that the aforementioned two creditors by their two letters dated 15th October, 1969, at pages 533 and 534 of the record have informed the court that they accept the scheme, which in terms means that the charge in their favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty was given towards this cash loan of Rs. 13 lakhs. By no stretch of imagination such a mortgage could be styled as a fraudulent preference. It was next contended that the deed of mortgage executed by the company in favour of the Central Board of Trustees for the Provident Fund on May 21, 1968, would be a fraudulent preference given to the said trustees. It appears that Rs. 15,05,418.37 were due and payable by the company in respect of the provident fund contribution and Rs. 47,693.80 for administration charges to the Regional Provident Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the Provident Fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosing an intention to prefer the creditor but it would appear that he has acted under the compulsion of the circumstances, may be of his own creation. Reference in this connection may be made to Sharp (Official Receiver) v. Jackson [1899] AC 419 (HL). In that case it was found that the trustee had committed breaches of trust and was insolvent, and, on the eve of his bankruptcy, he conveyed an estate to make good the breaches of trust, this transfer was sought to be avoided as fraudulent preference in a bankruptcy proceeding against a trustee. It was held that the transfer cannot be avoided as fraudulent preference because it was found that the trustee made the conveyance not with the intention or view or object whatever it may be called preferring any person in whose favour the transfer was made but for the sole purpose of shielding himself. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on record. It is true that the auditors have stated that in view of the state of accounts they are not in a position to express opinion whether the accounts give a fair view in respect of the balance-sheet as on 31st March, 1968, and 29th July, 1968, and profit and loss accounts. They have also stated that they were not able to obtain all the information and the explanation which was necessary. They have also stated that the books of accounts have not been kept as required by law. They have also set out certain queries in their report. Those queries will have to be complied with by the Board of Directors that may come into existence if the scheme is sanctioned. But Mr. Vakil could not point out to me any specific case of either embezzlement or of fraud. A very general statement was made that there are several acts of mismanagement which must be investigated in winding up proceedings. Such an allegation is rather vague and devoid of details. On such a vague allegation, the scheme cannot be rejected. But it was urged that even the debt which the company owes to the aforementioned five creditors requires to be verified and checked up ; and that also cannot be done, unless the offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial Bank Ltd. s case ( supra ) , wherein it is observed that the creditors, left to themselves, do not appreciate the importance of many things unless it is 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. Reference was also made to Pioneer Dyeing House Ltd. v. Dr. Shankar Vishnu Marathe [1967] 37 Comp. Cas. 546; [1967] 69 Bom. L.R. 261 (Bom.) . One of the grounds for opposing the scheme in that case was that the object of the scheme was to cover the deeds of the delinquent directors. It was observed that if the scheme is sanctioned, the winding up order will stand set aside, the liquidators will be discharged, there will be none to prosecute the misfeasance summons against the erring directors and the assets of the company will once again fall into the hands of persons whose rectitude is under a cloud; and that cannot be permitted under the cloak o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged that there is no such permission. The company applied for such a permission and the letter of the Government of India, Ministry of Commerce, dated l/4th October, 1966, at page 175 of the record shows that such a permission was granted. It is stated in the letter that the Government of India have no objection to M/s. Maneckchowk Ahmedabad Manufacturing Company Mills, Ahmedabad, being scrapped. If the matter were to rest with this letter, it would indisputably appear that the permission to scrap the whole mill which would enable the company to scrap a part of the mill was granted. Mr. Vakil however urged that this permission was cancelled and even the company has admitted that it was withdrawn and is no more effective and no fresh permission is applied for or obtained. In this connection Mr. Vakil first referred to the report of the court of inquiry constituted by the Government of Gujarat under section 100(1) of the Bombay Industrial Relations Act presided over by Mr. D. M. Vin which has inquired into some aspects concerning the company. The report of the court of inquiry is published in the Gujarat Government Gazette, Part I-L, dated 10th October, 1968. The company appeare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant Director to the Textile Commissioner,I.L. Section. Finally, by the letter from the office of the Textile Commissioner dated 23 rd December, 1968, Mr. Vakil was informed that the Government of India had not permitted the management of the Maneckchowk Ahmedabad Manufacturing Company Limited to scrap their unit. These last three letters are at pages 318 to 320 of the record. Relying on these letters it was strenuously urged that no permission is granted or at any rate no valid permission is in force and if the permission is not in force or effective, Unit No. II cannot be scrapped and the very foundation of the scheme is knocked out. The contention appears to be entirely without merits. It cannot even be disputed that the Government of India by its letter dated 1/4th October, 1966, did grant permission to scrap the whole mills. This permission was to be held in abeyance as per the letter of the Government of India dated 15-12-1966 till April, 1967. The query of Mr. Vakil may have been directed to the Textile Commissioner and the reply of that office that no such permission is granted cannot be accepted in the face of the letter dated l/4th October, 1966. The period during which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The scheme also envisages fresh issue of share capital by converting 50 per cent, of the claim of the creditors by issue of fresh shares. As a necessary corollary the authorised, issued and subscribed share capital of the company would be increased. Thus the scheme envisages reorganization of the share capital of the company. There are certain specific provisions in the Companies Act which prescribe the procedure for the reduction of the share capital and for increase of the share capital. The issue of fresh share capital is governed by the Capital Issues (Control) Act, 1947. The contention of Mr. Vakil is that, as part of the scheme it is not open to the court to sanction reorganization of the share capital which includes reduction, increase and issue of fresh capital. It was urged that if the scheme of compromise and arrangement envisages reorganization of share capital, it cannot be sanctioned as part of the scheme and the provision of the Companies Act which prescribe the procedure for reduction of share capital and increase of share capital and issue of fresh capital must be specifically and strictly complied with. On the other hand, it was urged by Mr. Gandhi that section 391 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of compromise and arrangement includes reduction of capital special procedure in respect of reduction of capital must be gone through before it could be sanctioned as part of the scheme of compromise and arrangement. There seems to be good reason for making such a provision in rule 85. A scheme of compromise and arrangement may be between company and creditors or between the company and members. If the proposed scheme offers compromise or arrangement between the company and its members only and it envisages reducti6n of share capital which can be carried out as part of the scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object to the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise and arrangement between the company and its members yet as this prescribed procedure for affecting reduction of share capital has to be gone through even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the share capital of a company. If section 391 was subject to other provisions of the Act every time the scheme of compromise and arrangement is put forth for the sanction of the court, if it includes things for which specific provisions are made and that will have to be gone through before the scheme is sanctioned, it would result in unnecessary duplication of procedure and would be cumbersome. On the contrary, it appears that if the creditors and members of the company arrive at a certain compromise which the court considers fair, it can be sanctioned under section 391 despite the fact that for some of those things included in the compromise another procedure is prescribed in the Companies Act and which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of the scheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase of share capital, it can be done as a part of the reorganization of the share capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the scheme involves reduction of share capital, issue of fresh share capital and increase of share capital. It will be proper to dispose of first the question with regard to increase and issue of fresh capital. The memorandum of association of the company shows that the issued and subscribed capital of the company consisted of 788 ordinary shares each of Rs. 1,000 and 1,050 redeemable cumulative preference shares of Rs. 100 each. Thus the total issued and subscribed capital was Rs. 8,93,000. The preference shares were redeemable cumulative preference shares. Article 10 of the company's articles of association provides that the company may by ordinary resolution in general meeting alter the conditions of its memorandum by increase of its share capital, by such amount as it thinks expedient by issuing new shares as may be necessary. The company can also divide and consolidate its shares. Thus the company has reserved powers to itself to increase the share capital by ordinary resolution in a general meeting. Now, when share capital is increased and fresh shares are issued, such issue would be governed by section 81. Section 81 provides that such fresh issues should be offered to per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is wholly barred. It would only require special resolution to that effect passed by the company in the general meeting. If, therefore, a special resolution for issue of further shares after increasing the capital to persons other than the existing shareholders of the company is passed in a general meeting of the company, section 81 would not be contravened. In the present case, the scheme provides for issue of further shares and these further shares are to be issued to the persons other than the existing shareholders of the company. The further shares are to be issued to the creditors of the company in satisfaction of the 50 per cent, of their claims. Mr. Vakil urged that before sub-section (1A) of section 81 can come into play, it must be shown that the special resolution has been passed in the general meeting of the company. Mr. Vakil urged that the meeting of the company to be a general meeting must be of all the members of the company entitled to attend and vote and the resolution to be a special resolution must satisfy all the requirements of section 189 of the Companies Act. It was urged that if the members of the company did not meet together at one place to consider the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting of a class of members and general meeting of all members are two distinct things. In my opinion, what is of the essence of the matter is that the persons affected must have an opportunity to consider the proposal and deliberate together. If the deliberations are carried on by two distinct classes having distinct interests separately it cannot be said that the proposal has not been considered in a general meeting. A too narrow and strict view may necessitate first convening the meeting of two classes together and then for the purpose of the scheme separate meetings of each class. It, in my opinion, would be an idle formality. It would be more so on the facts of this case because preference shareholders were not ordinarily entitled to attend and vote at the meeting but for the eventuality that the interest payable on preference shares is in arrears. Therefore, in my opinion, it cannot be said that the resolution adopted was not adopted at a general meeting. Even if it be said that joint deliberation of all those who are entitled to participate in the meeting is of the essence of a general meeting, it cannot be said that two classes of persons one of whom in ordinary circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al by issue of further shares to unsecured creditors. In the notice convening the meeting it was stated that the meeting is specifically convened to consider the proposed scheme and to approve the same with or without modification. The production programme after the mill is restarted along with the production estimate and cash flow statements were also annexed to the notice convening the meeting. Thus the notice convening the meeting gave information to the members that the meeting is being convened for considering the proposed scheme which included both reduction and increase of share capital. The votes cast in favour of the resolution approving the scheme were more than three times the votes cast against it. Therefore, sub-clauses ( b ) and ( c ) of sub-section (2) of section 189 are strictly complied with. It was, however, urged that clause ( a ) is not properly complied with inasmuch as in the notice convening the meeting, intention to move the resolution as a special resolution was not set out. Taking a very strict view of sub-section (2)( a ) of section 189, it might appear that the requirement therein contained is not properly complied with. The question then is whether clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. Section 131(3) is divided into two parts. The first part lays down that the Board shall publish proposals and draft rules along with a notice inviting objections to the proposals or the draft rules so published within a fortnight from the publication of the notice. The second part provides for the manner of publication and that manner is according to section 94(3). The condition of prior publication is always held to be mandatory. Yet, while considering the question of non-compliance with the manner of publication as provided in section 94(3), the Supreme Court observed that the requirement of publication is mandatory but the manner of publication appears to be directory and, so long it is substantially complied with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It would thus appear that part of section 131(3) was held to be mandatory while part of it was held to be directory. Approaching the subject from this angle, it would appear that clause ( a ) of sub-section (2) appears to be directory and not mandatory. The purpose behind making this provision appears to be to convey definite information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as adopted at a general meeting as provided by section 81(1A), yet notice of that meeting was not given to the auditors as required by section 172(2)( iii ) and the explanatory note as provided under section 173(2) was not annexed to the notice and, therefore, the resolution could not be said to have been adopted as a special resolution. Sub-section (3) of section 172 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting. Non-issue of the notice to the auditors, in my opinion, would be covered by sub-section (3) of section 172. As for the explanatory note as envisaged by section 173(2) it must be stated that the whole scheme annexed to the notice and production and cash flow statement and statement under section 393(1) would provide sufficient material as to be an adequate substitute for explanatory statement as envisaged by section 173(2) and, therefore, also, the proceedings of the meeting would not be invalid or proceedings would not be vitiated. The above discussion would establish that the resolution for increasing the share capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y permit in any special case) at which the shares are to be issued and not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business and the shares should be issued within two months after the date on which the issue is sanctioned by the court. Mr. Vakil urged that 50 per cent, of the claims of the unsecured creditors are to be converted into shares; in other words, 50 per cent, of the claims of the unsecured creditors will be paid in the form of shares. Mr. Vakil had twofold objection to the issue of shares in this manner. The first limb of the argument was that, even according to the company, if the company is wound up, the unsecured creditors are likely to get nothing and their claims are merely chose-in-action which are entirely worthless in respect of which shares of Rs. 250 fully paid up will be issued in proportion to the claims and the shares would thus be issued at a discount. The other limb of the argument was that the shares are issued otherwise than for cash because they would be in payment of claims which cannot be realized. Reliance was placed on a statement in the affidavit of the petitioner that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for issuance of the shares of the company nor could it be the foundation for a submission that the shares are issued for a consideration otherwise than cash or for no consideration. In this connection, it was lastly urged that, even though new ordinary shares issued at Rs. 250 would be fully paid up share, yet, in the event of the company being wound up, the liquidator would certainly inquire if anything was paid by the holder towards the share of Rs. 250 and in that event if his finding that the claim that was set off against the issue of shares was entirely worthless or of no value it would be open to the liquidator to treat such shareholder as contributory and to insist upon his contributing Rs. 250 into the assets of the company. Reliance in this connection was placed on In re Anglo-Moravian Hungarian Junction Railway Company [1873] 8 Ch. App. 768. In that case one Dent, a subscriber to the memorandum of association of a limited company, subscribed for 100 shares. The articles of association recited that Even, who assigned the concession to the company, had agreed to cause fully paid up shares to be allotted to all the persons subscribing the memorandum. Subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andum of association, being creditors of the contractor for work and labour done, or money advanced for preliminary expenses in respect of which he had a claim upon the company, are to be paid what is due from him to them in paid-up shares of the company ; and I do not say that the court would not give effect to such an arrangement. I must not be understood as deciding, to the prejudice of any of those persons, that if they were really creditors of the contractor for matters for which he was entitled to be paid by the company, they might not receive under those documents their payment in paid-up shares, and have those shares attributed to their subscription to the memorandum of association ; the effect being, to discharge" the company from an equivalent amount of debt, due from the company to the contractor." This is exactly the position in the case before me. For each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor. Such arrangement, in my opinion, is quite legitimate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court was with regard to the agreement between the promoters and the company for paying them certain commission out of the net profits of the company. I fail to see how any portion of that judgment helps in deciding the controversy in the present case. In view of the aforesaid discussion, in my opinion, the further issue of shares to unsecured creditors in satisfaction of their claims as provided in the scheme cannot be said to be issue of shares either at a discount or on misrepresentation or for no consideration or for consideration other than cash. That takes me to the last attack under the head "reorganization of share capital", namely, that the scheme envisages reduction of share capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganization of the share capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd while sanctioning the scheme ipso facto the reduction of share capital ought to be confirmed. I am however prepared to proceed on the assumption that even if the proposed scheme of compromise and arrangement envisages reduction of share capital which is lost or is unrepresented by available assets the same cannot be done except by following the procedure specifically prescribed in section 100 onwards of the Companies Act. It is, therefore, necessary to find out whether the procedure therein prescribed has been carried out by the company or not. There is nothing objectionable in the company proposing a scheme of compromise and arrangement simultaneously proposing reduction of share capital and both can be considered and approved simultaneously. This is borne out by the observations in In re Tata Iron and Steel Co. Ltd. [1928] 30 Bom. LR 197; AIR 1928 Bom. 80. In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having been taken under the Act in the manner laid down by the Act for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the reduction of capital and scheme may be considered by the shareholders at one and the same meeting and separate meetings are not necessary and that the court may, by one and the same order, sanction a scheme in conjunction with reduction of capital, that is to say, under section 55 confirm the special resolution for reduction of capital, and, under section 153, sanction the scheme. If, however, the requirements of section 55 and other sections have not been complied with, the court may direct the application for sanction to stand over in order to enable the company to advertise the petition and otherwise comply with the requirements of the Act for reduction of capital, as was done in In re Cooper [1902] 51 WR 514." It does appear well settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany affected by reduction and who is entitled to object to the reduction. The procedure goes so far as to make provision by order of the court for payment to the dissenting creditors. That procedure is mandatory, where the proposed reduction involves diminution of liability in respect of unpaid share capital or payment to any shareholder of any paid up share capital. That is not the case here. It is common ground that reduction is by way of cancellation of the paid up share capital which is lost or is unrepresented by available assets. Unless, therefore, the court otherwise directs, the procedure prescribed under sub-section (2) of section 101 is not mandatory in this case. Therefore, in order to effect reduction of share capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned, I will hold that the company has given notice of 21 days' duration and the notice convening the meeting served upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets of the company. In my opinion, there is no substance in this contention. The provision in the Companies Act at the relevant time showed that the company could have two kinds of share capital ordinary share capital and preference share capital. Section 100 provides that subject to the confirmation by the court, a company limited by shares, may if so authorised, by its articles by a special resolution reduce its share capital in any way. Section 100, therefore, enables the company to reduce its share capital. The word "share capital" is a genus of which "equity and preference share capital" are species. If the company has power to reduce its share capital as provided in its articles of association, it is implicit therein that it can reduce both ordinary share capital as well as preference share capital unless specific provision to the contrary is made. Article 10 permits the company to increase its share capital and article 7 authorises the company to reduce its share capital by special resolution subject to confirmation by court and subject to the provisions of sections 100 to 104 of the Companies Act. Therefore, this company has retained to itself powers to reduce its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed. It is always a moot question what constitutes a class. Buckley on the Companies Ads, 13th edition, page 406, has observed that it is a formidable difficulty to say what constitutes a "class" of creditors. The creditors composing the different classes must have different interests. When one finds a different state of fact existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes. "Class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd [1892] 2 QB 573, (CA)). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not proper. But I do not see much substance in it for the reasons to be presently mentioned. So also, I do not see much substance with regard to the directions given for holding the meeting of secured creditors. It was very vehemently urged that there was a conglomeration of persons with heterogeneous interest who were grouped together in the class of unsecured creditors. Generally speaking the creditors of the company should be divided into three different classes, viz. , secured creditors, preferential creditors and unsecured creditors. The workers of the company each to the extent of the first Rs. 1,000 of his claim in winding up, would be a preferential creditor and indisputably they would form a separate and distinct class. They were grouped together with other unsecured creditors. I shall separately deal with the objection in respect of each meeting raised by Mr. Vakil. As per the directions given by the court, a separate meeting of ordinary shareholders of the company was convened. In my opinion, equity or ordinary shareholders each holding fully paid shares of the company will form a separate class by themselves. They will also form a separate class in view of the identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal Provident Fund Commissioner. When the meeting of the secured creditors was held on October 6, 1968, seven creditors were present including the Union Bank of India, the Regional Provident Fund Commissioner and the aforementioned 5 creditors. The chairman has reported that at the commencement of the meeting the bank took objection to any other creditor attending the meeting on the ground that there was no other secured creditor of the company holding pari passu charge on the assets of the company with the bank and this objection was submitted in writing to the chairman. As on that date the charges created by the decrees in favour of the aforementioned 5 creditors were subsisting, obviously those five creditors would be secured creditors. Before the chairman could decide the objection raised, it appears that all the secured creditors who were present requested the chairman to direct that in view of the objection raised, and in view of the statement made by the representatives of the Indequip group of companies, which would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Pvt. Ltd., that they would attend the meetings of secured and unsecured cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere some of them are to be treated in a manner different from the rest and have different interests which might conflict. It is unfortunate that the company did not take proper directions with regard to the convening of the meeting of unsecured creditors. In the class of the unsecured creditors, the workers of the company who, as stated earlier, would be preferential creditors, have been grouped together with other unsecured creditors. The only defect appears to be in grouping together the workers who are preferential creditors of the company with other unsecured creditors. In respect of the workers different compromise is offered while to the remaining unsecured creditors a distinct compromise is offered. That will also make them two distinct and separate classes. If the meeting is not properly convened, the scheme approved at such meeting cannot be sanctioned. If two distinct classes of creditors are grouped together in one class and if there is no material for finding out who belonged to one class and what was the result of their voting and who belonged to the different and distinct class and what was their voting, the only course open to the court would be to direct separate me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on credit would not form a separate and distinct class. This is so because identical compromise is offered to them. Similarly, Linubhai Banker who was the managing director and members of his family and Manubhai and members of his family who was in active management prior to January 1, 1966, who are creditors of the company, would not form a separate and distinct class. The compromise offered to them is identical with the other unsecured creditors. Asia Electric Company need not form a class because no compromise is offered to it. The Union Bank of India has agreed to pay Asia Electric Company out of the sale proceeds of the blading system supplied by the said creditor. The shareholders who are creditors are in no way in a distinct class from the shareholders who are not the creditors of the company. In my opinion, therefore, the classification suggested by Mr. Vakil is neither logical nor is based on any intelligible differentia, and has no rational nexus to the objects sought to be achieved while approving the scheme of compromise and arrangement. The broad division as stated by me earlier, and keeping in view what constitutes a class, would provide better and distinct classific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement. (4)Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company : Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture-holders, to supply the necessary particulars as to his material interests. (5)Every director, managing director, managing agent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it may be stated that the effect of the scheme on his interests is identical as the effect on the interest of other creditors and members of the company, if the scheme is sanctioned. Therefore, a mere perusal of the statement annexed to the notice would show that it conforms with the requirement set out in section 393(1)( a ). The essential requirement is that the creditors and members who are to assemble in the meeting should have advance information of the proposed scheme of compromise and arrangement and its effect on their interest as members and creditors. As the whole of the proposed scheme was annexed to the notice, anyone having a bare perusal of the scheme would be able to find out what was intended to be done by the scheme of compromise and arrangement and what would be its effect on his interest as creditor or member of the company. Therefore, the first part of clause ( a ) of section 393(1) is fully complied with. In respect of the latter part of clause ( a ), it must be stated that the material interest of director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pees, as disclosed by the experience of selling Anant Mills of Ahmedabad and Rajratna Mills. It is further stated that prior to the present management, the company was being managed by the managing agency firm of Hiralal Trikamlal Sons and when the board of directors took over the management of the company, there were accumulated losses of Rs. 62.43 lakhs. It is also stated that the machinery of the company is old and worn out and requires renovation and looking to the heavy losses, it is not possible to carry out renovation. In paragraph (5) it is stated that, in the circumstances, the board of directors have proposed a scheme of compromise and arrangement. In paragraph 6 it is stated that the share capital of the company is to be reduced and portion of dues of the creditors is to be converted into share capital and balance is to be frozen for a period of two years, whereafter it would be paid by instalments and, by this process, the company would be able to pay up its dues by 1970. In paragraph 7 it is stated that the managing director is a creditor of the company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent, of his dues into share capital and has agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, he would have to settle the statement. When the statement is signed by the Additional Registrar in his said capacity, it can be said that he has settled the same. Mr. Vakil, however, urged that the statement appears to have been prepared by the company and the Additional Registrar has not applied his mind to the contents of the statement with the result that false and misleading statements have crept into the statement and it is a case of non-application of mind. In fact direction given by the court shows that the statement in the first instance has to be furnished by the advocate of the company and there is nothing on the record to show that it was not furnished by the advocate of the company. The Additional Registrar having signed it would mean that he has settled the same. Therefore, the direction has been properly complied with. The next objection of Mr. Vakil was that this statement under section 393 ought not to have been signed by the Additional Registrar as Chairman of the meeting, because the Additional Registrar is an officer of the court and the statement issued under his signature was likely to convey a wrong impression to the members and creditors th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany utilised the opportunity and the forum for carrying on propaganda in favour of the scheme so as to prejudicially influence the judgment and decision of the creditors and members who were to attend the meetings. It was urged that material facts were suppressed with ulterior end in view of obtaining approval of the scheme by the members and creditors. Mr. Vakil took serious exception to the averments in the statement that Anant Mills and Rajratna Mills of Petlad have been sold for an amount varying from 12.50 lakhs to Rs. 20 lakhs. I fail to see how exception can be taken to these averments because it is not suggested that these facts are untrue. It was further contended that the averments in the statement that the previous management was responsible for the loss suffered by the company to the tune of Rs. 62.43 lakhs ( sic ) . Even Mr. Vakil could not urge that the statement as a fact is not true. In fact there is good evidence to show that the company had suffered loss to that extent till January 1, 1966, when the management changed. But it was urged that further loss suffered by the new management when they came to power from January 1, 1966, ought to have been set out. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement or it prejudicially influenced the judgment of creditors and members. The last objection of Mr. Vakil under this head of attack is that the effect of the scheme on the material interests of directors and managing director has not been clearly set out in the statement. It was strenuously urged that annexing of the statement as required under section 293 of the notice convening meeting is obligatory and absence of it would vitiate the proceedings of the meeting. It was further urged that the statement must contain in clear and unambiguous terms the effect of the provisions of the scheme on the interest of the directors and managing director so that the members and creditors may have full information about the change that would be brought about by approving the scheme, and which change may influence their judgment in the matter. It is undoubtedly true that the company is under an obligation to set out the interest of the directors and managing director in the company and the effect on their interest by the scheme more particularly when the effect is likely to be different from the effect on the interest of like nature on other creditors and shareholders. The question the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director of the company at the relevant time. That, of course, is true. But Anil Gopaldas is merely a director and he had no other interest in the mills company and, therefore, there was nothing to be disclosed in respect of his interest and the effect of the scheme on his interest. The interest of the managing director, Linubhai Banker, is disclosed and the effect of the scheme on his interest is also disclosed and it can be said with reasonable certainty that the effect on his interest is in no way different from the effect of the scheme on the interest of other creditors and members. Therefore, there is no substance in the allegation that necessary disclosure as required by section 393(1)( a ), later part, has not been made. As a second limb of the argument, it was urged that the production programme, annexed with the estimated production statement, and cash flow statement, annexed to the scheme, contained misleading and incorrect information. I need not dilate upon it because I would have to advert to this submission when I consider the feasibility of the scheme. The statement under section 393 should be drawn up as to convey to the members and creditors sufficient informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the chairman who presided over the meetings. Requirements for convening proper meetings are contained in rules 69, 70, 73, 74, 75 and 76. The requirements of these rules appear to have been properly complied with. Mr. Vakil had a four-fold objection to the procedure adopted by the chairman at various meetings. The first objection is that the management failed to furnish relevant information to the creditors and members at the meeting with the result that the creditors and members had not enough information to intelligently deliberate upon the proposed scheme. It was urged that the chairman did not insist upon the management to furnish relevant information sought for by the members and creditors and, in the absence of the information, it cannot be said that the creditors and members were fully apprised of the various ramifications of the scheme and brought to bear upon the subject their intelligent judgment. At the meeting of the ordinary shareholders of the company the question was put to Mr. Surottam Hatheesing as to who were the directors of the company who had sponsored the scheme to which reply was given that the scheme was sponsored by the board of directors consisting of L. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer at a later stage. It is undoubtedly true that the creditors and members called upon to deliberate upon the scheme of compromise and arrangement should have full and fair knowledge of all the relevant facts on which they can come to an intelligent decision (vide In re Bharati Central Bank Ltd.'s case ( supra )) . But, in my opinion, in the facts and circumstances of this case, it is not possible to accept that the members and creditors could not bring to bear upon the scheme an intelligent judgment for want of relevant information. The second limb of the argument was that the amendments which had been proposed to the original scheme by the secured creditors, namely, Union Bank of India and Central Board of Trustees of the Provident Fund, have not been adopted according to the correct legal procedure. The scheme as originally proposed offered a compromise to the Union Bank of India secured creditor of the company undertaking to pay arrears of provident fund dues to the Central Board of Trustees the other secured creditor by monthly instalments of s. 40,000. At the meeting of the secured creditors, the compromise offered to both of them have undergone a change. The bank agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ratified by all other class before it can be sanctioned by the court. It is implicit in section 391 that the company may offer compromise to one of its class of members or creditors and approval by statutory majority of that class alone is necessary before it can be submitted for sanction of the court. The court while according its sanction to such a scheme may consider whether this compromise affects any one other than the class to which it is offered. If it does not, it is not at all necessary that such a compromise should be ratified and approved by a statutory majority by other class of creditors and members. If this is the correct interpretation of section 391, in my opinion, it furnishes a complete reply to the contention of Mr. Vakil. The company in this case has two classes of members and three classes of creditors. They are: ordinary and preference shareholders and secured creditors, preferential creditors and unsecured creditors. The company has offered compromise to each class and, in my opinion, even though the compromise is incorporated in a comprehensive scheme, in fact, each class will have particularly to consider and if thought fit to approve that part of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compromise offered to it and its judgment disclosed by its voting will have to be considered in respect of that part of the compromise affecting it. Viewed from this angle, there is no force in the contention of Mr. Vakil that the amendments which had been passed at the meeting of the secured creditors have not been passed according to the correct legal procedure. In this connection, Mr. Vakil had also contended that the amendment proposed at the meeting of the unsecured creditors were also not properly adopted. Three amendments were proposed at the meeting of unsecured creditors and members of the company relating to the payment to the Employees' State Insurance Corporation ; payment to Indequip group of companies to be deferred till cotton merchants and suppliers of stores referred to in clauses 2( e ) and 2( f ) are paid their dues and deletion of clause 2( g ) from the scheme. Clause 2( g ) provides that the payment of arrears of wages and retrenchment compensation to the workers be deferred for a period of two years. These amendments were undoubtedly proposed at the meeting but it was urged that they were not properly proposed and seconded. There is no substance in this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act or not) may ( a )if it is a member of a company within the meaning of this Act, by resolution of its board of directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the company, or at any meeting of any class of members of the company ; ( b )if it is a creditor (including a holder of debentures) of a company within the meaning of this Act, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of any creditors of the company held in pursuance of this Act or of any rules made thereunder, or in pursuance of the provisions contained in any debenture or trust deed, as the case may be. (2) A person authorised by resolution as aforesaid shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were an individual member, creditor or holder of debentures of the company." It would appear from the language of section 187 that if a company is a creditor of another company within the meaning of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case is decided under the provisions of the Companies Act of 1913, Undoubtedly, in that case it is held that, though the person who was authorised by the directors of the creditor company to represent the said company at the meeting was present in person at the meeting, the company could not be regarded as having been present at the meeting in person, within the meaning of section 153, and, as that person was also not a proxy, the vote cast by him at the meeting was void. But in this very case the effect of the provisions contained in section 187(2) is left open. It is observed that in the Companies Act of 1956 a provision has been introduced under which a company which is a creditor of another company may by resolution of its directors authorise such person as it thinks fit to act as its representative at any meeting of the creditors of the company held in pursuance of the Act and a person authorised in this manner shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the company. Such a provision was not to be found in the Companies Act of 1913 and, therefore, this decision is not an authority for the proposition that a perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f votes of the two ordinary shareholders holding three shares was considered doubtful. Excluding the doubtful votes the analysis would show that 80 ordinary shareholders holding 5/8 ordinary shares cast valid votes in favour of the scheme and 32 ordinary shareholders holding ordinary shares cast valid votes against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of ordinary shareholders. The meeting of the preference shareholders was attended by 71 preference shareholders either in person or by proxy holding 544 preference shares. Out of the aforementioned 71 preference shareholders present in person or by proxy 55 shareholders holding 456 preference shares voted in favour of the scheme while 16 shareholders holding 88 shares voted against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the secured creditors. In fact the charge created by the bank in their favour having not been registered by the Registrar of Companies on the date of the meeting or subsequent thereto and they having specifically relinquished the charges in their favour could by no stretch of imagination be said to be secured creditors and, therefore, they were rightly not permitted to vote at the meeting of the secured creditors. Even if they are considered to be secured creditors, they having approved and consented to the scheme, there is no negative vote at the meeting of secured creditors. It can, therefore, be said with reasonable certainty that the scheme has been approved by the secured creditors of the company by more than the statutory majority. That takes me to the meeting of unsecured creditors. As stated earlier, the meeting of unsecured creditors was attended by the creditors who were suppliers of stores and cotton, workmen of the company and the depositors. The depositors are relations and members of the family and a few friends of the managing director, Linubhai Hiralal Banker. The total value of the debt represented by the creditors attending the meeting was to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Insurance Corporation against the company on that date was to the tune of Rs. 6,27,346. The workmen and Employees' State Insurance Corporation, being the preferential creditors, would form one class. It may be that as the compromise offered to the Employees' State Insurance Corporation is slightly different from the compromise offered to the workmen of the company, the workmen and the Employees' State Insurance Corporation may each form a distinct class. The remaining unsecured creditors would comprise suppliers of cotton and stores and depositors. An entirely identical compromise is offered to the suppliers of cotton, stores and depositors and, therefore, they can be conveniently grouped together in one class. Their rights are not so dissimilar as to make it impossible for them to consult each other for their own interest. Thus, the workers being preferential creditors would form one distinct class. Employees' State Insurance Corporation would form another class. The remaining unsecured creditors would form a class by themselves. The next thing is to find out the votes and value of votes cast in each class to ascertain whether in each class the scheme is approved by statutory ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the court to analyse the votes at a meeting attended by such heterogeneous creditors as unsecured creditors, preferential creditors and Employees' State Insurance Corporation and arrive at a positive finding. It was further urged that it would not be possible to find out how the judgment of each class of creditors must have been affected or influenced by deliberation in such a meeting of heterogeneous creditors and it was further contended that the workers who are vitally interested in the restarting of the mills of the company must have caused an over-powering influence on the deliberations at the meeting and the judgment of other creditors would be adversely affected. The submission was that if once an error is committed in convening the meetings, nothing further can be done and either the court should ignore the decision arrived at such a meeting or at best fresh meeting with proper clarification should be convened and consideration of the scheme should be postponed till such meeting is convened and result is notified to the court. It is undoubtedly true that at the stage of giving directions under section 391 it is the bounden duty of the sponsors of the scheme to place prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r unsecured creditors as a class have approved the scheme. As stated above, the workers as being preferential creditors, the Employees' State Insurance Corporation and other unsecured creditors each as a class has approved the scheme by statutory majority and, therefore, there is no substance in the contention that the scheme is not approved by statutory majority. The alternative submission of Mr. Vakil may now be considered. It was urged that even if it be held that the scheme has been approved by different classes of creditors and members in their respective meetings by statutory majority, the court on an appropriate analysis of voting would not impose such a scheme on the dissentient members and creditors. The submission was that the scheme is so designed as to help Gopaldas Parikh and his protege, Linubhai Banker, to cover their misdeeds and to give them unfair advantage by which they would have an octopus hold on the company. It was urged that if the scheme is approved, three companies in which Gopaldas Parikh has a controlling interest, namely, Indian Electro Chemicals Limited, Dyestuffs Chemicals Private Limited and Indequip Limited, would be able to obtain ordinary shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andulal Banker as a power of attorney holder of Shardaben, and Shantaben who is the principal contender, opposed the scheme tooth and nail not because he had the interest either of the company or creditors and members at heart but because he had to leave the active management when Gopaldas Parikh and Linubhai Banker stepped in and because of his personal vendetta against both of them. In this view of the matter it is not possible to accept the submission of Mr. Vakil that the scheme should not be imposed upon dissentient members. Re. Ground No. 9. The last ground of attack was that the scheme is not commercially and economically viable or feasible and is in fact unfair and unreasonable. Before I proceed to consider this contention on merits, the approach to the scheme of compromise and arrangement by the court should be made clear. How should the court approach a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair and reasonable one initially lies on the petitioner. The petitioner m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members. Approaching the scheme from this angle, let me find out whether it is feasible and workable. It is not necessary to bring to bear upon the subject the expertise of textile magnates. The court must be prima facie satisfied that the scheme in its broad outlines is a reasonable and fair one and that it is feasible and workable. The first objection was that the estimate of receipts and outgoings made in the cash flow statement annexed to the scheme is factually incorrect and cannot be conceived even in the realm of possibility. The estimate of rent of godowns to be constructed on the land that will be vacated by scrapping of Unit II was considered exaggerated. Except making a statement in affidavit in reply that the estimate is exaggerated, no material is placed on record to reach the conclusion that the estimate is exaggerated. It was also urged that, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no income can be expected. In this connection, I would like to point out that Gopaldas Parikh has filed his affidavit at page 500 of the record in which he has stated that he is connected with about 24 companies and he would be in a position to arrange finances to the extent of Rs. 10 lakhs for restarting Unit No. I of the mills of the company. There is a similar affidavit of Surotam Hatheesing at page 498 who is connected with two mills and live other companies. He is also a managing director of Arvind Mills Ltd. It is nowhere suggested that these persons would not be able to provide finances as indicated by them in their respective affidavits. It is also proper to refer at this stage to another affidavit of Gopaldas Parikh in which he has stated that he would be able to arrange liquid finance to the tune of Rs. 10 lakhs for the working of the mills for two years from the date of sanctioning the scheme and that he is prepared to provide finance from his own resources and personal guarantees to be furnished by him subject to a condition that whatever additional funds are brought by him within the said period of 2 years from his resources or on his personal guarantees they shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers and tried to point out discrepancies between the two. There are some discrepancies but they are not of material nature. After all two experts are bound to differ in their estimates and unless the difference is of an unbridgeable character, it is not the function of the court to examine the scheme like that of an expert in the textile industry. Suffice it to say that Chandraprasad Desai, whose claim as an expert was not very seriously disputed and cannot be disputed, has expressed an opinion that Unit No. I can be profitably worked and that, in my opinion, along with the fact of approval by creditors and members, would be sufficient to come to the conclusion to say that the scheme is workable and feasible. The next question is whether the scheme is a reasonable and a fair one. The scheme offers compromise of an equitable character to the members and unsecured creditors. But it was urged that the Union Bank and the Central Board of Trustees of the Provident Fund have been given an unfair advantage and they are net expected to make any sacrifice which other interested persons are called upon to make in the scheme. It was urged that the bank does not agree to reduce its claim an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and natural corollary. The company can at this stage be undoubtedly said to be commercially insolvent and in respect of such a commercially insolvent company, the creditor would be entitled to an order for winding up the company ex debito instias. But when in respect of such a company, a scheme of compromise and arrangement is offered, the court should, in my opinion, evaluate the position firstly of creditors and secondly of members in winding up and in the scheme and should weigh the advantages that may accrue in either course to be adopted by the court and find out which way the balance tilts. If the matter is approached from this angle, in my opinion, the conclusion in this case is inescapable. If the company is ordered to be wound up, the liquidator would dispose of the assets of the company and will have to apply first the receipts for discharging the dues of the secured creditors and then preferential creditors and thereafter unsecured creditors ; and if there is any balance, there would be pro rata distribution to the members. The present liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sanctioned, the secured creditors and preferential creditors would be paid in full. The unsecured creditors would get 50 per cent. of their claim in the shape of ordinary shares of the company and the balance of 50 per cent. would be paid by instalments commencing after a period of two years after restarting of all the departments of Unit No. I. Unit No. I would be restarted under the scheme and would provide employment to roughly 1,000 workers. These aspects cannot be lost sight of even on a humanitarian ground. The company would be resuscitated. The debt liability of the company would be considerably reduced because the Indequip Ltd., which is the biggest unsecured creditor roughly to the tune of Rs. 40 lakhs, has agreed under a compelling necessity and not out of altruistic motive to forgo balance of 50 per cent. of its dues after recovering 50 per cent in the shape of ordinary shares of the company. This concession is made in the affidavit of Gopaldas Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the liability of the company by another 3 lakhs of rupees. Thus the debt liability of the company would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms that they would remain outside the winding up and realise their security in full. If they come under the scheme which they have agreed to do they could be paid by instalments and keeping in view some of the conditions which I propose to impose while sanctioning the scheme, the liability of the company to pay running interest may be reduced to some extent. The Central Board of Trustees of the Provident Fund have agreed to forgo damages to the tune of Rs. 6 lakhs in the event of the scheme being sanctioned. The only thing that was harped upon by Mr. Vakil was that, in the event of winding up, various inquiries can be made into the misdeeds of the ex-directors and fraudulent preferences can be avoided. I have already pointed out that the mortgage in favour of the bank and Central Board of Trustees of the Provident Fund cannot be avoided as fraudulent preferences. The charges created by decrees in favour of the other five creditors, namely, Indian Electro Chemicals Ltd., Dyestuffs Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished, by way of concession in the above. The result which Mr. Vakil seeks to achieve is obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll. Such a power to take unilateral action to the detriment of other interested persons bound by the scheme with a view to destory the scheme given to the bank and Central Board of Trustees of the Provident Fund, would always keep the scheme at the tender mercy of those two creditors and it would not be conducive to the healthy working of the scheme of compromise and arrangement. Therefore, I consider it just and proper for the proper working of the scheme of compromise and arrangement to direct the following modifications to be made in the scheme and, subject to these modifications, the scheme would be sanctioned. Under the scheme, the dues of the bankers are to be paid by monthly instalments commencing from the specified date. The date has become almost unmeaning when the scheme is being sanctioned. Some instalments holiday is absolutely necessary to give a breathing time to the company. In my opinion, the first instalment payable by the company to the Union Bank of India should commence six months after restarting of all the departments of Unit No. 1 under the scheme, and thereafter every succeeding instalment shall be paid from month to month. The company would be liable to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company on their own concession in the event the scheme is finally sanctioned and is worked. The directors to whom the management of the company would be restored by the provisional liquidator on the scheme being sanctioned are restrained from registering taking any steps hereafter pursuant to the applications already made in respect of charges created in favour of Indequip Ltd., Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Private Ltd., Messrs. Amarshi Damodar and Messrs. Atul Cotton Traders by the decrees of the City Civil Court, Ahmedabad. In the event of the scheme being finally sanctioned the Union Bank of India should pay to Asia Electric India Private Ltd. from the amount realised from the sale of scrap of Unit No. II of the mills of the company whole or a portion of its claim proportionate to the amount realised from sale of blading system, being part of the power plant of the company, sold by the said creditors to the company and having a charge on it for the unpaid price. Sanction is hereby accorded to the scheme of compromise and arrangement, copy of which is annexed to this judgment subject to the aforementioned modifications and directions. The cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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