TMI Blog1979 (1) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... een Kumar for the Appellant. P. R. Mridul, R. L. Roshan, H. K. Puri, Vijai K. Bahl, Pramod Dayal, S.K. Gupta R.M. Gupta and K. N. Bhatt for the Respondent . JUDGMENT Desai, J. A private sector sick unit, Indian Hardware Industries Ltd. ('IHI' for short), engaged in manufacture of builders' hardware, now in a state of suspended animation since 1971, awaits the outcome of this appeal for infusion of life into it simultaneously providing a ray of hope to primarily the workmen who were rendered jobless and the unsecured and secured creditors whose hard earned money is locked up in it. A few facts will put the problem raised in this appeal in focus and proper perspective. M/s. Delhi Flour Mills Ltd. ('DFM' for short) was the holding company of which IHI was the subsidiary. Somewhere by the fall of 1971, functioning of IHI came to a halt and the huge debt was mounting up with the spiralling of interest. As the shares of DFM were closely held by relations of respondent No. 1 referred to as "Jain group" and as there were fratricidal disputes in the Jain family culminating in a litigation in the High Court of Delhi, IHI languished for want of attention. In the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were disposed of by a common judgment. The Division Bench was of the opinion that substitution of a new propounder in a scheme already sanctioned by the court in place of the original propounder of the scheme was a change of a basic nature which would not be comprehended in the expression "modification" as used in section 392 and, therefore, the company judge could not have granted such a substitution of the propounder of the scheme without referring back the proposed modified scheme to the creditors who had approved the original scheme. It was further of the opinion that though the transfer of 44,000 shares of IHI held by DFM in favour of the appellants may be complete as between the transferor and the transferee, the same would not clothe the appellants with the rights of a member unless their names were put on the register of members maintained by IHI and that the same having not been done, the appellants were not members of IHI. It was further of the opinion that the debt owed by IHI to DFM was not assigned according to law in favour of the appellants and, therefore, they were not creditors, and in view of the language of section 391 of the Companies Act, the appellants b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires, the definition of an expression given in a statute shall govern the meaning of the expression wherever used in the same statute. It was urged that the words "modify" and "modification", for the purpose of section 392, would include the making of additions and omissions and according to him additions and omissions in the context of section 392 would and could only mean additions and omission to the sanctioned scheme because section 392 operates at a stage subsequent to the sanctioning of the scheme under section 391(2). It was further urged that if the words "modify" and "modification" would include additions and omissions, the court would have plenary power to substitute one proponent for the other if in the opinion of the court the scheme cannot be worked satisfactorily without the necessary modification and in all such cases it would be imprudent to hold that the court will have to fall back to the cumbersome procedure of section 391 over again delaying for a considerable period the vital requirement of restarting a sick unit. It was submitted that the court committed a fallacy in importing the concept of Constitution while interpreting a provision of the Companies Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osing a compromise or arrangement between the company and its creditors or any class of them or between the company and its members or any class of them and seeking directions of the court to convene a meeting of each class of creditors and/or each class of members to whom the compromise or arrangement is offered. On the court's giving the directions, the meeting would be convened in which the, proposed scheme of compromise and/or arrangement would be submitted for consideration and each class will have to vote upon it and if the scheme is accepted by a majority in number representing three-fourths in value of the creditors or members or class of members, as the case may be, present and voting either in person or where proxy is allowed, by proxy, such approved scheme has to be placed before the court for sanction of the court as envisaged in section 391(2). Then comes section 392 which may be reproduced in extenso : " 392. Power of High Court to enforce compromises and arrangements. (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it ( a )shall have power to supervise the carrying out of the compromi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a member or creditor, ipso facto, an application for modification of such scheme sanctioned by the court under section 391(2) could not be made by any one other than a member or a creditor. Section 391 envisages a compromise or arrangement being proposed for consideration by members and/or creditors of a company liable to be wound up under the Companies Act, 1956. Compromise or arrangement has to be between creditors and/or members of the company and the company, as the case may be. It was always open to the company to offer a compromise to any of the creditors or enter into arrangement with each of the members. The scheme in this case is essentially a compromise between the company and its unsecured creditors. The scheme when sanctioned does not merely operate as an agreement between the parties but has statutory force and is binding not only on the company but even dissenting creditors or members, as the case may be. The effect of the sanctioned scheme is to supply by recourse to the procedure thereby prescribed the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity " [see J. K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuate this purpose the power of widest amplitude has been conferred on the High Court and this is a basic departure from the scheme of the U.K. Act in which provision analogous to section 392 is absent. The sponsors of the scheme under section 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme of compromise or arrangement to make alterations and modifications as proposed by the court. But the legislature foreseeing that a complex or complicated scheme of compromise or arrangement spread over a long period may face unforeseen and unanticipated obstacles, has conferred power of widest amplitude on the court to give directions and, if necessary, to modify the scheme for the proper working of the compromise or arrangement. The only limitation on the power of the court, as already mentioned, is that all such directions that the court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement. Sub-section (2) provides the legislative exposition as to who can move the court for taking action under section 392. Reference to section 391 in sub-section (2) of section 392 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 and situation, which is clearly envisage able, Parliament has conferred power on the court, not only to make modifications even at the time of sanctioning the scheme, but at any time thereafter during the period the scheme is being implemented. Conceding that, before the court sanctions the scheme, it partakes the character of an emerging cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 391 and 392 operate though they may be complementary to each other. Two subsections of section 392 have to be harmoniously read and sub-section (2) clearly indicates the power of court to take action suo motu while taking action under sub-section (1). Again this approach is inconsistent with the language employed in section 392(2) in that the court can wind up the company under section 392(2) if and only if it is satisfied that the compromise and/or arrangement sanctioned by it cannot be satisfactorily worked with or without modifications. The court has to reach an affirmative conclusion before acting under section 392(2) that the compromise and/or arrangement cannot be worked satisfactorily with or without modification (see J . K. (Bombay ) P. Ltd. [1970] 40 Comp. Cas. 689 (SC). It follows as a corollary that if the compromise or arrangement can be worked as it is or by making modifications, the court will have no power to wind up the company under section 392(2). Now, if the arrangement or compromise can be worked with or without modification, the court must undertake the exercise to find out what modifications are necessary to make the compromise or arrangement work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. The appellants contended that they and their friends have purchased 44,000 equity shares of IHI from its former holder DFM and they have also taken an assignment of the debt in the amount of Rs. 23 lakhs owed by IHI to DFM, from DFM. Respondent, Jain, contended that the assignment is not valid as it fails to comply with section 130 of the Transfer of Property Act and as the names of the appellants are not put on the register of IHI, they have not acquired the status of member of IHI and, therefore, they being neither creditors nor members of IHI, they have no locus standi to maintain the application under section 392. The stand taken by the respondent, Jain, in this behalf is wholly ambivalent. Some time after the scheme was sanctioned on 15th October, 1975, the appellants assert that they purchased the 44,000 equity shares of IHI from DFM and they simultaneously took assignment of the debt. Thereafter the respondent, Jain, filed Company Application No. 190/76 in which he sought a direction under section 392(2) for winding up the company. In inviting the court to grant his prayer for winding up the company, the averment made is that since sanction of the scheme by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamine a very serious contention raised by Mr. Mridul who appeared at a later stage of hearing for the respondent, Jain, that unless names of the appellants are put on the register of IHI they do not become members and as the assignment on which the appellants rely does not comply with the requirements of section 130 of the Transfer of Property Act, the assignee's title to the debt assigned has not become complete, and, therefore, the appellants are not creditors of IHI. We may in passing say that the factum of assignment or the sale of shares was never seriously questioned but we are prepared to proceed on the assumption that even if it be so, in the circumstances herein discussed and the ambivalence of the respondent, Jain, the appellants could certainly be said to be persons sufficiently interested both in the company, IHI, and the scheme in respect of it so as to be able to maintain an application under section 392(1). Lastly, in this connection it must be remembered that if DFM whose scheme was sanctioned and not challenged by the respondent, Jain, started implementing the scheme and after getting into the saddle by constituting the board of directors as desired by it, it co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, while "variation" is defined in section 2(31) to include "abrogation". The definition of cognate words is noted by us to arrive at a true meaning of the word "modification". The High Court nowhere refers in its judgment to the definition of "modify" and "modification" given in the very statute and proceeded to examine the content and meaning of the word used in a provision in the same statute which, unless the context otherwise requires, must bear the same meaning as set out in the definition section. The noticeable feature of this definition is that it is inclusive definition and where in a definition clause the word "include" is used, it is so done in order to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be construed as comprehending not only such things which they signify according to their natural import, but also those things which the interpretation clause declares that they shall include [See Dilworth v. Commissioner of Stamps [1899] AC 99, 105 (PC)]. Where in the definition section of a statute a word is defined to mean a certain thing, wherever that word is used in that statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king of additions and omissions. In the context of section 392 "modification" would mean addition to the scheme of compromise and/or arrangement or omission therefrom solely for the purpose of making it workable. Reading section 392 by substituting the definition of the word "modification" in its place, if something can be omitted or something can be added to a scheme of compromise by the court on its own motion or on the application of a person interested in the affairs of the company for the proper working of the compromise and/or arrangement, we see no justification for cutting down its meaning by a process of interpretation and thereby whittle down the power of the court to deal with the scheme of a compromise and/or arrangement for the purpose of making it workable in the course of its continued supervision as ordained by section 392(1). Strictly speaking, omission of the original sponsor and substituting another one would not change the "basic fabric" of the scheme. The scheme in this case is one by which a compromise is offered to the unsecured creditors of the company and whoever comes in as sponsor would be bound by it. Undoubtedly, a sponsor of the scheme enjoys an impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 23 lakhs which IHI owed to DFM, from the creditor DFM. Again, as between the transferor and transferee the assignment is complete. The only objector is respondent holding 1,000 equity shares representing 1.25 per cent, of the issued and subscribed capital. An advertisement was directed to be inserted by the order of the court in newspapers in respect of the application for substitution/modification made by the appellants inviting every one interested in the company or in the scheme of compromise and/or arrangement to come and lodge objection, if it was so desired, against substitution/modification prayed by the appellants. None including the petitioning-creditor except the respondent, Jain, has lodged such an objection. This procedure was also followed by the Gujarat High Court in Mansukhlal's case [1976] 46 Comp. Cas. 279 (Guj.) and by referring to that part of the judgment, the High Court held that that judgment itself is an authority for the proposition that substitution of the sponsor is a vital change of a basic nature and cannot be ordered by the court acting under section 392 and must be referred to a meeting of the creditors or members. With respect, this is not a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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