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TMI Blog1979 (1) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 meantime, M/s. Indian Smelting & Refining Co. Ltd. ("petitioning creditor" for short) filed a winding up petition against IHI in 1975 alleging that IHI was heavily indebted and was unable to pay its debts as and when they became due. After the dispute in the Jain family was resolved somewhere in 1974, a situation emerged in which one R. P. Jain and the members of his family acquired controlling interest in the holding company, DFM. Once R. P. Jain came into saddle, the DFM as holding company proposed a scheme of compromise/arrangement between IHI and its unsecured creditors and after the scheme was approved, the proponent of the scheme submitted Company Petition No. 86/74 to the company court for according sanction to the scheme and by order dated 15th October, 1975, the scheme was sanctioned. Some time after the scheme was sanctioned, DF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers 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 being neither members nor creditors of IHI, had no locus standi to move an application under section 392 for modification of the scheme because in the opinion of the court section 391 controls section 392 and either a member or a creditor or in the case of a company being wound up, a liquidator alone can file an application for modification. In accordance with this opinion, the appeal preferred by respondent ,No. 1 being Company Appeal No. 15/76 challenging the order of the company judge which granted modification/substitution of appellants as proponents was allowed and the application of the appellants for substitution was rejected. The Division Bench dismissed Company Appeal No. 16/76 preferred by the respondent, Jain, against the order of the company judge refusing to make an order for winding up of the company observing that even whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Mr. Lai Narain Sinha on the other hand on behalf of the respondents, while conceding that in an emergency the court can act on the application of any person, ordinarily the court would act on the application of a member or creditor of the company and in this blurred area some light is shed by the provision contained in rule 87 of the Companies (Court) Rules, 1959. Proceeding further, it was urged that sections 391 and 392 constitute a code and, therefore, if there was a qualification for proposing a scheme under section 391, the same qualification should be read in section 392 and any other approach would be self-defeating. It was submitted that, viewed from this angle, only a member or a creditor can maintain an application under section 392 and as the appellants are neither members nor creditors of the company, they have no locus standi to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 compromise or arrangement; and (b)may, at the time of making such order or at any time there after, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. (2) If the court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act......." At the outset it may be mentioned that though a large number of provisions of the Companies Act, 1956, are in pari material with the provisions of the Companies Act, 1948, of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ( Bombay) P. Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. [1969] 2 SCR 866, 891: [1970] 40 Comp. Cas. 689 (SC)]. Further, section 391(1) itself by a specific and positive, provision prescribes who can move an application under it. Only the creditor or member of that company or a liquidator in the case of a company being wound up is entitled to move an application proposing a compromise or arrangement. By necessary implication any one other than those specified in the section would not be entitled to move such an application. When a scheme is being considered by the court, in all its ramifications, for according its sanction, it would not be possible to comprehend all situations, eventualities and exigencies that may arise while implementing the scheme. When a detailed compromise and/or arrangement is worked out, hitches and impediments may arise and if there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 merely indicates which compromise or arrangement can be brought before the court for taking action under section 392. The reference to section 391 does not mean that all the limitations or restrictions on the right of an individual to move the court while proposing a scheme of compromise or arrangement have to be read in sub-section (2) merely because section 391 is referred to therein. Unlike section 391, section 392 does not specify that a member or creditor or in the case of a company being wound up, its liquidator, can move the court under section 392. On the other hand, the legislature uses the expression "any person interested in the affairs of the company" which has wider denotation than a member or creditor or liquidator of a company. In fact, the ambit of the power to act under section 392(2) can be gauged from the fact that the court can suo motu act to take action as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 contract between the company and the creditors and members; once the court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the court to modify, amend or correct or revise the contract the outer periphery or its limit on the power being that, after testing it on the anvil of probabilities, surrounding circumstances and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and, subject to this limit on the court's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation." If the court can suo motu act, it is immaterial as to who drew the attention of the court to a situation which necessitated court's intervention. Where the power is conferred on the court to take action on its own motion the information emanating from whatever sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 workable and that it can do so on its own motion or on the application of any person interested in the affairs of the company. If such be the power conferred on the court, it is difficult to entertain the submission that an application for directions or modification cannot be entertained except when made by a member or creditor. It would whittle down the power of the court in that it cannot do so on its own motion. Mr. Sinha referred to rule 87 of the Companies (Court) Rules and urged, that it throws some light on the question as to at whose instance the court can act under section 392. The rule is procedural in character and at any rate the rule cannot circumscribe the power conferred by the section. Hence, rule 87 is of no assistance. Assuming that the court would not act on its own, the next question is: could it act under section 392(1) on the application of any person interested in the affairs of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the court, DFM has sold its interest to Shri S. K. Gupta and others who wanted to operate the scheme as if they were the substitutes for DFM. Another averment is that DFM was not entitled to sell its shares because it was the propounder of the scheme. Therefore, the raisond etre for moving the application under section 392(2) was the sale of shares of IHI held by DFM to the appellants. When the appellant filed Company Application No. 193/76 under section 392(1), in order to show their newly acquired or subsisting interest in the scheme so as to enable them to move the application under section 392, it was averred that the appellants have purchased 41,800 shares of IHI from DFM and the balance of holding of DFM to the tune of 2,200 equity shares have been purchased by the nominee of the appellants. It is further averred that the amount standing in the name of DFM in the books of IHI has also been taken over by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 could have transferred its shares to the appellants and the appellants could have as well taken over the management and implemented the scheme and no one, at any rate the respondent, Jain, holding only 1,000 equity shares, i.e., 1.25% of the issued capital, could have objected to it. The objection at this stage is equally futile. Therefore, with respect, the High Court was in error in holding that the appellants had no locus standi to maintain an application under section 392(1). The next important contention is that the sponsor or propounder of a scheme is such an integral part of the whole scheme or an important element of the "basic structure" of the scheme that its substitution changes, alters or amends the scheme in almost its entirety and such a thing cannot be done by way of modification under section 392. The word "modification" must be given, according to the respondent and according to the High Court, a restrict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 statute, it shall mean what is stated in the definition unless the context otherwise requires. But where the definition is an inclusive definition, the word not only bears its ordinary, popular and natural sense whenever that would be applicable but it also bears its extended statutory meaning. At any rate, such expansive definition should be so construed as not cutting down the enacting provisions of an Act unless the phrase is absolutely clear in having the opposite effect [See Jobbins v. Middlesex County Council [1949] 1 KB 142 (CA)]. Where the definition of an expression in a definition clause is preceded by the words "unless the context otherwise requires", normally the definition given in the section should be applied and given effect to but this normal rule may, however, be departed from if there be something in the context to show that the definition should not be applied (see Khanna J. in Indira Nehru Gandhi v. Raj Narain [1975] Supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic" 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 important place in the scheme of compromise and/or arrangement but basically the scheme is between the company and its creditors or any class of them, or the company and its members or any class of them, and not between the sponsor of the scheme and the creditor or member. The scheme represents a contract sanctified by court's approval between the company and the creditors and/or members of the company. The company may as well be in charge of directors and the implementation of the scheme may come through the agency of the-directors but that would not lead to the conclusion that during the working of the scheme the directors cannot be changed. If the scheme has to be ultimately implemented by the company as part of its contract and yet its directors can be changed according to its articles of association, we see no difference in the situation where a sponsor is required to be changed in the facts and circumstances of a case. Therefore, it is not possible to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fair reading of the judgment. At pages 290-291, the scope and ambit of the power of the court under section 392 has been precisely set out and it is concluded that the power to modify would comprehend the power to substitute one sponsor for the other if he is found otherwise fit and competent. As an additional string to the bow, it was observed, as it is being done here also, that no one has come forward to object to the substitution and that would further strengthen the hands of the court. Such observation cannot be construed to mean that the court lacks the power to make such a modification without reference back to the creditors and/or members, as the case may be. In the background of these unimpeachable facts the conclusion is inescapable that the appellants have a subsisting and vital interest in the fate and future of IHI and they are the appropriate persons who could and should be substituted in place of the original sponsor. In passing it was said that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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