TMI Blog1975 (5) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of compromise and arrangement and through Shri Rajendrakumar Maneklal filed Company Application No. 43 of 1972, under section 391(1) of the Companies Act, 1956, praying for directions for convening the meetings of the equity shareholders and different kinds of creditors and others having a claim against the company for examining and, if thought fit, for approving with or without modification a scheme of compromise and arrangement proposed on behalf of Shri Chhotalal Devchand Shah. That was not a scheme with any laudable object of restarting or infusing fresh life into an otherwise dead unit. In fact, the scheme originally conceived was a further attempt at dividing the booty of a company which had fallen on evil days. It was somewhere in August, 1973, that the matter came up before me when the sponsor of the scheme had taken out judge's summons in Company Application No. 44 of 1973, praying for certain directions that I had a chance to examine the scheme in its various ramifications. The scheme as it was then propounded was thoroughly unconscionable, absolutely unjust, basically unfair and exploitative in character and I was of the opinion that it would be a waste of the valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in store. A ghastly calamity of unprecedented character occurred on 16th December, 1974. The court was informed that when the liquidator went to the mill premises and formally handed over possession of the immovable properties of the company to the sponsor, Chhotalal Devchand Shah, and immediately thereafter when a celebration was arranged in which workmen were participating, Chhotalal suffered thrombosis (cerebral haemorrhage) and he was removed to the hospital, he lost his consciousness and he never revived his consciousness and unfortunately passed away on 26th December, 1974. The wheels unfortunately again came to a standstill. No one could, even visualise in his calmer moments what again would be the position of the company. The workmen bemoaned their lot, the shareholders and the creditors watched the situation with dismay, everybody was a silent spectator to an otherwise helpless situation. Some time after when the court believed that the shock to the members of the family of Chhotalal must have lost some of its sting, the court directed that the matter be placed on board to decide what should be done. Time was taken by Mansukhlal Shah, the son of Chhotalal Shah, to broo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annath Bhatt, Sanwarmal Bhagwandas Todi, Motilal Ramdutt Todi and Babulal Bhagwandas Todi. In that affidavit, it is further stated that in view of the unfortunate tragedy, the time schedule as envisaged in the scheme would become otiose and, therefore, consequential modifications will have to be made in order to bring the scheme upto date for its effective implementation. The proposed modifications are set out in paragraphs 12( a ) to 12( g ). Annexed to the affidavit are the bio-data of Vinubhai J. Bhatt and Sanwarmal Bhagwandas Todi. When the application came up for admission before the court, the situation appeared to be slightly puzzling; the court toying with the idea whether the modification sought as far as substitution of sponsor is concerned is of such a basic nature that before any action can be taken on the application, the party should be referred back to the creditors and members of the company for their approval of the proposed modification. Before that problem could be disposed of, the court had to deal with the request of Mr. I. M. Nanavati who was till then appearing for Mansukhlal C. Shah to permit him to retire in view of what was stated by Sanwarmal Bhagwandas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of Mansukhlal Shah, dated 1st May, 1975, to which were annexed copies of the advertisements as they appeared in the Indian Express and Gujarat Samachar. Mr. B.R. Shah also referred to his own affidavit in which he has stated that pursuant to the said advertisement, he has not received any notice or intimation from any person expressing his intention to support or oppose the summons. Mr. B.R. Shah also relied upon the affidavit dated 7th May, 1975, of Sanwarmal Bhagwandas Todi in which he has given in unmistakable and categorical terms an undertaking taking over all the rights and liabilities under the scheme and almost substituting himself in place of Chhotalal Devchand Shah, further stating that he would be responsible while implementing the scheme to the same extent as Chhotalal Devchand Shah, had he been alive, would have been responsible. He has also stated that the fidelity deposit made by late Chhotalal Devchand Shah with the Registrar of the court in the amount of Rs. 50,000 as guarantee for proper and effective implementation of the scheme and the consequence of his failure, viz ., that the deposit to be forfeited to the State, be transferred to his name because h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promise and arrangement and whether any of them who has the substantial interest is not before the court, the analysis only disclosed that all those who are vitally interested are very much before the court and their wishes can be ascertained here. Viewed from this angle, the wider question of the width and amplitude of the court's power under section 392 of the Companies Act need not be examined in this case. However, I would like to examine The content of the power of the court under section 392. It is undoubtedly true that the scheme proposed under section 391 is a scheme of compromise and arrangement between a company and its creditors or between a company and its members. There can be a scheme which may be between the company and its creditors alone. There can as well be a scheme which can be between the company and its members alone. One can envisage a comprehensive scheme, affecting the rights, dunes and obligations of the creditors and members of a company. The scheme with which the court is concerned here is of a comprehensive nature affecting the creditors and members of a company. Section 391(1) postulates that where a scheme of compromise or arrangement is proposed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asses affected by the scheme have been fairly represented; and ( iii ) whether the arrangement is such as a man of reason would reasonably approve. At this stage, the court would seek the reasonableness or the fairness on the compromise offered, the feasibility or viability, both economic and financial of the scheme, with a view to ascertaing its smooth implementation and whether those who have come forth with the scheme are persons who would inspire confidence of the court, whether they would carry out the obligations or not. Undoubtedly, the scheme is always between the company and its creditors and/or members. A compromise or arrangement has to be between two parties between whom there are rights and obligations; but it is equally true that when a sponsor of the scheme takes over the implementation of the scheme, he does it in the name of the company. Mr. B.R. Shah, therefore, urged that the personality of the sponsor is hardly a relevant consideration. The court should be concerned with the scheme on its merits and the duty to implement it is on the sponsor himself. He, therefore, urged, and with some emphasis, that the sponsor of the scheme does not hold a position of prestige ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a situation arises where the court is called upon to decide who is running the show, who is responsible for certain acts and omissions of the company, who is the very ego and centre of the company, the veil of corporate personality has to be lifted to find out the person. Viewed from this angle, the position of a sponsor of the scheme of compromise and arrangement is of such a vital nature that if there is a complete substitution of the sponsor, the modification sought for substitution is of a basic nature and before sanctioning such a modification, the matter will have to be examined with care and attention. What is the basic modification which the court may in a given case not grant on its own but refer back to the person interested in the company and vitally affected by the scheme of compromise and arrangement must be judged from this test: Is it such a change or is it such a fact which would have influenced the decision of those attending the meeting called for approving the scheme before deciding whether they would approve or not approve ? Viewed from this angle, could it ever be said that the personality of the sponsor would not affect or influence the decision of those vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement is sanctioned by it. The court has a continuing supervision over the implementation of compromise and arrangement. Unenvisaged, unanticipated, unforeseen or even unimaginable hitches, obstruction and impediments may arise in the course of implementation of a scheme of compromise and arrangement and if on every such occasion, sponsors have to go back to the parties concerned for seeking their approval for a modification and then seek the approval of the court, it would be a long-drawn out, protracted, time-consuming process with no guarantee of result and the whole scheme of compromise and arrangement may be mutilated in the process. Parliament has, therefore, thought it fit to trust the wisdom of the court rather than go back to the interested parties. If the parties have several times to decide the modification with the democratic process, the good part of an election machinery apart, the dirt may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise and arrangement may be so twisted and torn out of context as to be thoroughly useless and may be jettisoned. In order, therefore, to guard against this eventuality a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstanding of the court's power is not correct and assuming that every basic change in a scheme of compromise or arrangement must have the concurrence of those affected or interested in the scheme of compromise and arrangement, let me see whether, on the facts of this case, the petitioner has been able to satisfy me that every such interested person has accorded his approval to the proposed modification. The Government of Gujarat is a secured creditor and Mr. M. I. Hava of M/s. Bhaishanker Kanga Girdharlal appeared for the State of Gujarat and accorded its consent to the proposed modifications. Rajendra Kumar Maneklal and his relations claim to be secured creditors and Mr. C.C. Gandhi and Mr. A.C. Gandhi, the learned advocates appearing for them, accord their consent to the proposed amendment. Mr. D.K. Trivedi appeared on behalf of Mr. G.N. Desai who appeared for the Ahmedabad Municipal Corporation and straightaway consented to the proposed modification. Mr. R.A. Mehta appeared for Mr. K.G. Vakharia for the Employees' State Insurance Corporation and consented to the modification. The Textile Labour Association, the representative of minor employees, appeared through advocates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compliance but an overwhelming compliance even if the other view of the matter is to be taken. Would the court accept the modification on its own merits because even if the parties accept, the discretion is still with the court to accept or reject the same. The court may look upon with respect the views expressed ; but, in the ultimate analysis, it is the unfettered discretion of the court to make modifications in the scheme of compromise and arrangement and the court would be guided by the sole consideration whether it is necessary for the proper and satisfactory working of the compromise and arrangement. Whilst sanctioning the scheme of compromise and arrangement, the guiding consideration with the court was two-fold. In the days of mounting unemployment, if under a scheme of compromise and arrangement, employment is offered to those who richly deserve it and those who had spent a part of their useful life in running this company and who for a decade have the misfortune of being unemployed, should they have a respite in the process of starvation by getting back the employment ? and in the economic malaise of this country, should a productive unit be allowed to be crucified at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment manufactures something in these days of short supply of every commodity except the human being, at a time when the prices go on soaring impelled by the harsh law of supply and demand, a productive unit which would produce something tangible, something useful and in this case yarn which would help augmenting the commodity market in this article, would be, to some extent, adding to the economic growth of this country. The scheme would provide employment and one has only to meet an unemployed man to know what employment means to him. It is an attempt at wiping some tears from some eyes. All these factors go to make the industry and if the priorities of various interests in the company are to be re-devised, an attempt may be made with the greatest respect to the time-honoured view to reverse the priorities. The priorities as at present in vogue with reference to interest in a company are creditors and shareholders. Employees and consumers of the product find no place in this table. I may in this connection refer to an observation by Prof. Gower in his principles of Modern Company Law, third edition, page 62, which reads as under: "The vexed question of the relationship betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairly high. Mansukhlal Shah is being nominated on the board of directors, so also Vinubhai Bhatt. Vinubhai Bhatt is at present associated with a unit manufacturing yarn and having an installed capacity of 2000 spindles. Todi Group and Associates is neither a firm nor company. It is an association of persons. But it appears that this group has both the financial wherewithal and the technical know-how and they would be able to implement the scheme. An unconditional undertaking has been filed by Sanwarmal Todi to implement the scheme in all its manifestations. He is acceptable to the various interests that appeared at the hearing of this summons. Therefore, the modification deserves to be accepted. Sanwarmal Todi will be personally responsible for reporting the progress of the implementation of the scheme in the first year every month and subsequently every three months for the entire period the scheme is being implemented. The court would give a direction for appointing a director on the board of directors to be constituted as herein indicated. Subject to this future direction, the board of directors as proposed in the affidavit of Sanwarmal Todi is hereby affirmed, with this fur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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