TMI Blog1987 (5) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... t there were numerous creditors of the company who were not paid and that the company was doing no business for want of funds and loss of credibility. It was stated that the company was not complying with the provisions of the Companies Act, 1956 (for short "the Act"), and there were allegations of mismanagement by the directors of the company. It was also stated that it appeared that on getting wind of the intention of the creditors to file a winding up petition and other applications for preservation of the assets of the company, the company "transferred its valuable tenancy rights in its Connaught Place office to a third party on receipt of huge underhand payment with a view to defraud its creditors" . In the reply mentioned above, the company detailed the circumstances and the efforts put in by the directors to revive the company and put it back on its feet. It referred to the liability to the Punjab National Bank and also to a writ petition (CW No. 834 of 1973), which was decided by this court and a direction issued to the Central Government to transfer the land and building to the company for certain amount. This judgment is dated August 28, 1974. The company stated that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on filed by M/s Lalit Trading Company, as it is unable to run the business any more, due to extreme financial difficulties. Further, the board authorised Shri H. L. Seth to state full difficulties to the court including the maximum sacrifices suffered by him and the present management in running the unit for over 11 years". On the date this resolution was passed, the Punjab National Bank instituted a suit in this court against the company and the guarantors for recovery of about Rs. 25 lakhs with future interest. This is Suit No. 109 of 1979. There were in all 9 defendants. Defendants Nos. 2 and 3 are respectively H. L. Seth and R. K. Seth. It will be appropriate to set out the reliefs only to understand the nature of the suit. These are: "It is, therefore, respectfully prayed that this hon'ble court may be pleased to award/grant to the plaintiff: ( a )a preliminary decree in terms of Order 34, rule 4, against defendant No. 1 (being principal debtor) and defendants Nos. 2 and 3 (being guarantors) jointly and severally for Rs. 24,87,547 95 plus further interest as claimed in para 22 above; ( b )a preliminary decree against defendant No. 1 (being principal debtor) and defenda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication (CA No. 527 of 1983) under section 391 of the Act and sought directions to convene separate meetings of the unsecured creditors and of the equity and preference shareholders of the company for the purpose of considering and/or approving with or without modification a scheme of arrangement proposed to be made between the company and the unsecured creditors and the contributories of the company. Punjab National Bank, being a secured creditor, was outside the proposed scheme of compromise or arrangement. This application was filed through Mr. R. K. Talwar, advocate for Seth. It was mentioned that the authorised capital of the company was Rs. 50 lakhs divided into 40,000 equity shares of Rs. 100 each and 10,000 10% cumulative preference shares of Rs. 100 each, and further that the issued capital of the company was Rs. 30,91,900 consisting of 10,000 10% cumulative preference shares of Rs. 100 each and 20,919 equity shares of Rs. 100 each. It was further stated that the issued, called and paid-up capital of the company was Rs. 18,62,900 consisting of 3,527 10% cumulative preference shares of Rs. 100 each and 14,802 equity shares of Rs. 100 each and that the calls in arrears we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was stated from the side of Seth that he was still assessing the viability of the scheme and that in case the liabilities of the company exceeded a particular limit, he might be interested in pursuing his scheme and if these liabilities were beyond that limit, he might have to drop the scheme. The court observed that it was strange that this stand was being taken after having moved the scheme but that the position should have been assessed earlier, and that the applicant should not have rushed to the court with the scheme without ascertaining what matters of the company he had to tackle. In the order dated May 21, 1984, it was observed that the official liquidator as well as the Central Government had pointed out that the scheme was ex facie highly vague and generalised and did not bring out detailed particulars. The company owned an industrial plot of land measuring over 55,000 sq. yards and building sheds at Faridabad for the establishment of a factory which had been allotted to the company by the Government of India, Ministry of Rehabilitation. The entire machinery of the company for manufacture of cycles was stated to be lying idle. It was stated that the value of the land h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 30,000 was issued in favour of one P. N. Seth and that was to be encashed only on no objection by the High Court regarding transfer of shares. The amount of Rs. 2,39,000 was to be paid immediately on approval of the scheme. Various account payee cheques totalling this amount were issued in favour of various transferors of shares with the condition that these cheques would be encashed only on the scheme being approved by the High Court and shares transferred in the names of Misra and Arneja and/ or their nominees and the factory premises of the company being handed over to Misra and Arneja. Under another term of the agreement, Misra and Arneja also agreed to buy credits amounting to Rs. 4,88,996 24 standing in the names of various persons in the company on paying Rs. 2,44,498 12, being 50% of the value of the credits. The names of the creditors/depositors were also annexed to the agreement. Again, payment was to be made on approval of the scheme, etc., by the High Court. There was yet another term in the agreement under which it was stated that the Punjab National Bank was a creditor of the company to the extent of Rs. 24,87,537 and that as per letter dated May 6, 1981, of the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or transfer of land and building to the company through the official liquidator by the Central Government as per judgment of the High Court dated January 15, 1985, in LPA No. 109 of 1974. This amount was deposited in the sums of Rs. 12,00,000 on May 24, 1985, and Rs. 4,36,707 78 on September 30, 1985. (6)Rs. 68,365 paid to the official liquidator on February 20, 1987, for purchase of non-judicial stamp papers for execution of sale deed by the Central Government in favour of the company. By judgment dated January 15, 1985, in LPA No. 109 of 1974, the appeal of the Union of India was dismissed and the Union of India was directed to transfer to the company property bearing No. 30, New Industrial Township, Faridabad, comprising of land and factory sheds constructed thereon subject to the company paying a sum of Rs. 4,71,080 along with arrears of rent and interest up to date. There was a dispute regarding the claim of interest by the Union of India and an application, being CM No. 721 of 1985, was filed in LPA No. 109 of 1974 seeking certain clarifications. By order dated May 17, 1985, the court directed deposit of Rs. 12,00,000 on or before May 31, 1985, which amount, as noted abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd., being more lucrative to both shareholders and depositors/creditors of the company made Misra and Arneja, and rather compelled them, also to offer far better terms than proposed in CA No. 26 of 1985. Seth also wanted to have the same terms offered to him and tried to go back on the agreement. At this stage, it will be appropriate to refer to some of the applications filed in these proceedings. CA No. 666 of 1984 is an application filed by Misra and Arneja in CA No. 527 of 1983, under which Seth had propounded a scheme of arrangement and reconstruction for the revival of the company. Misra and Arneja stated that they had entered into an agreement dated November 28, 1984, with Seth and set out some of the terms of the agreement in the application. It was prayed that Seth be directed to comply with the terms of the agreement and that Misra and Arneja be allowed to prosecute the appeal (LPA No. 109 of 1974) through the official liquidator. This application was disposed of by order dated December 3, 1984, which is as under: "The applicant who is interested in the revival of the company under the arrangement with the former directors of the company would be entitled to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38 equity shares along with transfer deeds had already been handed over to Misra and Arneja and that further share scrips and/or documents in respect of 8,962 equity shares and 2,000 preference shares had also since been delivered to Misra and Arneja. It was also noted that parties had completed the necessary documentation in respect of these transactions. Then the order proceeded to record that counsel for Seth confirmed that he would have no objection to these transfers being duly registered by the company in accordance with law as and when such registration was possible. It was also agreed that Misra and Arneja would be entitled to inspect the factory premises and that they would be entitled to take with them a chartered accountant or engineer or any other consultant to make an assessment of its valuation. It was also agreed that Misra and Arneja might, in consultation with Seth, enter into appropriate negotiations and correspondence with Punjab National Bank for settlement of the outstanding dues. Parties also agreed that the official liquidator would prepare an up-to-date statement of account of the expenditure incurred during the liquidation proceedings to enable Misra and Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er would remain in operation subject to the applicant (official liquidator) depositing Rs. 12 lakhs on or before May 31, 1985. It was submitted that the applicants were interested in revival/reconstruction of the company and under an arrangement with Seth had already acquired over 75% of the equity shareholding of the company and were thus anxious to deposit the amount of Rs. 12 lakhs before May 31, 1985, and were having in their possession two pay orders for Rs. 6 lakhs each in favour of the Registrar of this court. It was, therefore, prayed that Misra and Arneja be allowed to deposit the amount of Rs. 12 lakhs. The court directed issue of notice of the application to the official liquidator and it was ordered that subject to further directions that might be given by the Division Bench on the application seeking clarification, Misra and Arneja might deposit Rs. 12 lakhs in this court, but that the amount would, however, not be disbursed without notice to Misra and Arneja. CA No. 855 of 1985 was an application filed by Misra and Arneja on September 5, 1985. In this, certain details were given that under the agreement dated November 28, 1984, the applicants had so far paid a sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmission was also granted to the official liquidator to file a writ petition in the High Court at Chandigarh, if necessary. It was also directed that legal expenses so incurred would be borne by Misra and Arneja which would include the fee payable to the counsel engaged by the official liquidator. It was also mentioned that the official liquidator might engage a senior counsel for the purpose in consultation with Misra and Arneja. CA No. 949 of 1985 is an application by Misra and Arneja seeking to place on record facts relating to settlement of dues of Punjab National Bank. This application was filed on September 25, 1985. It is stated in the application that Misra and Arneja had already acquired over 75% of the equity shareholding of the company by paying a sum of Rs. 3,20,000 on account of the value of 13,000 equity shares and 2,000 preference shares of the company. It is also mentioned that an amount of Rs 12,00,000 had also been deposited by these persons in terms of the order dated May 17, 1985, of the court which amount was towards cost of land and building of the company at Faridabad. Lastly, it is mentioned that the company owed a sum of over Rs. 60 lakhs to Punjab Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Sales) cum-Managing Officer, Faridabad, wherein he had calculated the amount of interest in pursuance of the order dated January 15, 1985, of the Division Bench in LPA No. 109 of 1974. A prayer was also made that the official liquidator be directed to furnish copies of the claims which he might have received in response to publication of notices as per the order dated July 25, 1985, in CA No. 26 of 1985. This application is pending only as regards the request of Misra and Arneja under section 536(2) of the Act. Again, Kelvinator of India Ltd. and Seth have submitted their replies. The reply of Seth though dated November 5, 1985, was filed only on April 5, 1986. CA No. 1016 of 1985 was filed by Misra and Arneja on October 30, 1985, praying that the official liquidator be directed to file a writ petition in the High Court at Chandigarh to challenge the land acquisition proceedings in terms of earlier orders of the court and further to file a caveat in the Supreme Court in respect of the S.L.P. filed by the Union of India against the judgment dated January 15, 1985, in LPA No. 109 of 1974. In CA No. 1017 of 1985 also filed by Misra and Arneja, more directions were sought to be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company for the purpose of considering the scheme of arrangement propounded in CA No. 26 of 1985. Various directions were given for the holding of both types of meetings. By this time, Seth and Misra and Arneja had fallen out and so, it appears, the necessity for directions arose. By a separate order dated April 15, 1986, meetings of the members and creditors of the company were also ordered to be held to consider the scheme propounded by Kelvinator of India Ltd. in CA No. 414 of 1985. H.R. Khera, who claimed to be a member of the company, had earlier been impleaded by an order in CA No. 58 of 1986 as a co-petitioner and propounder of the scheme in CA No. 414 of 1985 of Kelvinator of India Ltd. Mr. Khera, therefore, became a co-petitioner and propounder in that. Again, detailed directions were issued for the holding of the meetings. No meetings could be held as ordered and the chairman of the meetings, Mr. Justice Prakash Narain, a former Chief Justice of this court, submitted his interim report dated July 12, 1986. The chairman said that there was difference of opinion regarding the lists of shareholders and creditors which, he said, was not within his power to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the court for transfer. It was further stated that documents for transfer in respect of the remaining 8,962 equity shares and 2,000 preference shares had been delivered to Misra and Arneja on February 11, 1985. Seth confirmed having received payment of "agreed" consideration of Rs. 51,000 on November 28, 1984, and the balance of Rs. 2,69,000 on February 11, 1985, "in full and final settlement due against the said 13,000 equity shares and 2,000 preference shares", Seth also mentioned in this letter that "for effecting the transfer of these shares you may please file the same with the Hon'ble High Court, official liquidator" . The following para in this letter would be quite relevant: "I further assure you that to facilitate the transfer of shares, I hereby undertake that if for the registration of transfer of the shares, any further or additional document(s) is/are asked for by the Hon'ble High Court of Delhi/official liquidator, I shall furnish the same on demand without any hitch and hindrance. In case the High Court does not agree for the transfer of shares, I undertake to refund the amount of Rs. 3,20,000 on return of the aforesaid 15,000 nos. shares and connected docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be referred to. In CA No. 94 of 1987, it wanted to place on record another scheme and it was stated that it was so because the contesting parties, during all this period, improved upon their original respective schemes. It was stated that the present scheme contained amendments to the original scheme proposed by the applicant. The other application is CA No. 281 of 1987. The applicant, Kelvinator of India Ltd., wanted the court to pass an order that, in case the scheme propounded by Seth along with Misra and Arneja was rejected and that propounded by the applicant was approved, it would deposit within one week of such sanction a sum sufficient to cover the refund of investment with reasonable amount of interest to Misra and Arneja which amount in turn would be treated as a long term-loan to the company. Seth also filed an application (CA No. 300 of 1987) wherein it was stated that in view of the improved financial position of the company, the scheme originally propounded be amended so as to offer more to the shareholders as well as to the creditors of the company. It was the submission of Mr. Ved Vyas, Senior Advocate, in CA No. 158 of 1987, that the schemes propounded by S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recall the order calling the meeting of creditors. In the present case before me, in CA No. 26 of 1985 and CA No. 414 of 1985, the court directed by detailed orders holding of separate meetings of the members and creditors of the company. The matter, however, came back to the court on the interim report of the chairman of the meetings for settling in effect the list of creditors and shareholders of the company. I do not find any pressing reason in the application of Subhash Chander (CA No. 158 of 1987) to recall the orders calling for the meetings. I need not, therefore, discuss the merits or otherwise of both the schemes. No prejudice is likely to be caused to Subhash Chander, if the meetings as ordered are held. After all, ultimately, it is the court who is to sanction the schemes. At that stage, the applicant, Subhash Chander, will have ample opportunities to contend that the proposed schemes should not be sanctioned and that he will be entitled to raise such objections to the schemes as are permissible under the law. I will note that Mr. Ved Vyas did get support from Mr. P.C. Khanna, Senior Advocate, appearing for Seth. Mr. Khanna contended that at the time when the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void". Mr. Vohra said that as between the transferor and transferees of the shares in question, the agreement was valid and proper consideration had passed. He said that the transfer of shares was in no way against the interest of the company or against any other member or creditor and that there was no reason why the court should not validate the transaction. Mr. Vohra said that the court was given vast powers under subsection (2) of section 536 of the Act in order that the interests of the company in winding up were not harmed in any way. He said that the idea was that the shares, which had not been fully paid up, should not be allowed to be transferred so that "men of straw do not find a perch on the register of members" . He said this was not so in the present case as the shares were fully paid up and the association of Misra and Arneja in the proceedings in the case showed that they were in a position to revive the company and had already got substantial interest in the affairs of the company. Mr. Khanna, learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons why no order for specific performance should be made in such a case. If before any question of a winding-up has arisen, V contracts to sell shares in a company to P, and then, after a winding-up order has been made, V sues P for specific performance, I think that any court would be most reluctant to force upon P, who had agreed to take a fully effective transfer of the shares, a transfer that, although valid as between him and the vendor, would be void as against the company. Counsel for the plaintiff was not able to contend for any contrary view; and in my judgment it would require remarkable circumstances to support making a decree in such a case. This plainly is not such a case, and in my judgment the claim for specific performance must fail". Reference may, however, be made to a decision of the Supreme Court in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43 (SC). In this case, a lady, Ruxmani, executed a registered gift deed donating certain shares in various limited companies to Vasudev, her brother. She also signed several blank transfer forms apparently intended to be filled in by Vasudev so as to enable him to obtain the transfer of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for ' registration ' of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of company law, has to be provided, as indicated by section 28, by the articles of the company, and, in the absence of such specific provisions on the subject, regulations contained in Table ' A' of the First Schedule to the Companies Act apply" . The court also observed as under (at page 52): "The requirements of form or mode of transfer are really intended to ensure that the substantial requirements of the transfer have been satisfied. They subserve an object. In the case before us, the requirements of both section 122 and section 123 of the Transfer of Property Act were completely met so as to vest the right in the donee to obtain the share certificates in accordance with the provisions of the company law. We think that such a right is in itself 'property' and separable from the technical legal ownership of the shares. The subsequent or ' full rights of ownership ' of shares would follow as a matter of course by compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Though this judgment of the Supreme Court is a landmark and sets a different trend in the law of contract, yet the principles laid down therein cannot be applied to the present case. The following observations in para 90 of the report would be relevant and are as under (at page 857 of Comp Cas): "This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between the parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for recovery of Rs. 24,87,547 95. Seth had been the direct beneficiary of this settlement with the bank. On receipt of this amount, the suit of the bank was satisfied and the guarantors including Seth were released from their liability and their documents of title returned to them. It was contended by Seth that he would stand subrogated in place of bank in respect of the property of the company for which the bank was mortgagee. This contention is quite meaningless. No particulars of the mortgage property were given. If reference is made to the bank suit, it will be seen that only some items of the machinery of the company had been mortgaged to the bank. Moreover, it is quite clear that the credits held by the bank were to be assigned to Misra and Arneja. There was in fact a tripartite agreement between the bank, Seth, Misra and Arneja under which Misra and Arneja became creditors of the company in respect of the amounts due to the bank. It appears to me that the agreement was entered into bona fide and in the interest of the company. It is just that when now prices of land have gone up and other shareholders and creditors are likely to get more under the two schemes than what Seth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Seth who received whole of the amounts under the agreement and Misra and Arneja had to meet more liabilities than was agreed to under the agreement. The objections of Mr. Khanna to the agreement are absolutely of no avail. The question then arises whether a direction is to be issued to the official liquidator to register the transfer of shares in question. As noted above, it has not been pointed out whether transfer of such shares would be against the interest of the company in any way. Rather it is apparent that the agreement was entered into between the parties honestly and in the ordinary course of business. The law which makes transfer of shares and alteration in the status of members void operates for the benefit of the company and its creditors and not for the benefit of any third party. There has not been any opposition by the official liquidator to such a transfer of shares being registered. In fact, he himself sought directions on the request of Misra and Arneja regarding transfer of shares in their names. After the passing of the winding up order, the official liquidator is to conduct the proceedings in winding up the company and perform such duties in reference there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the provisions contained in section 108 of the Act were imperative. The court held that the words "shall not register a transfer of shares "appearing in subsection (1) of section 108, were mandatory in character and that the mandatory character was strengthened by the negative form of the language. The court was, however, dealing with the question thus raised with reference to a company which was not in winding up. The Act thus does not prescribe any principles for the court to register the transfer of shares in the case of a company in winding up. Nevertheless, I am of the opinion that the principles as contained in section 108 of the Act regarding execution of the instrument of transfer and payment of stamp duty in general should be applied. One argument of Mr. Khanna was that the instrument of transfer of shares should have been lodged within two months as provided under section 108 of the Act. This could not be so inasmuch as the agreement for transfer of shares qua the company is in itself void and unless the court validates, there will be no question of lodging the transfer deeds within the stipulated period of two months. All these provisions would be applicable in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany shall, as far as possible, be estimated according to the value thereof on the date of the order of the winding up of the company. Directions given at the hearing of summons under rule 69 are to be drawn up in Form No. 35. It. says that the value of each member or creditor shall be in accordance with the books of the company, and, where the entries in the books are disputed, the chairman shall determine the value for purpose of the meeting. It is not disputed that the statement of affairs as required under sub-section (1) of section 454 of the Act was filed giving the details of the debts and liabilities of the company. I am of the view that the creditors named in the statement of affairs be taken to be the creditors for the purpose of the meetings in question except where the credits have been lawfully transferred. In the present case, there is no dispute that the credits amounting to Rs. 4,88,996 24 as mentioned in annexure "D" to the agreement dated November 28, 1984, were rightly transferred to Misra and Arneja. This has been admitted in the replies filed by Seth in CAs Nos. 949 of 1985 and 963 of 1985. Misra and Arneja will have to be treated as creditors in place of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was interwoven with the sanctioning of the scheme. I am not able to agree with his submission in view of what I have discussed above. I would, therefore, direct as under: (1)The official liquidator will substitute the names of Misra and Arneja and their nominees as per the transfer deeds on record in place of the members as per annexures A and B to the agreement dated November 28, 1984, in the register of members of the company subject, however, that Misra will produce requisite permission from the Reserve Bank of India for his being brought on record as a member of the company. (2)Misra and Arneja will be treated as the creditors of the company in place of those mentioned in annexure D to the aforesaid agreement as well as in place of Punjab National Bank in respect of the debts as appearing in the statement of affairs filed under section 454 of the Act. (3)The members appearing in the list of members of the company and the creditors as given in the statement of affairs and as amended as per (1) and (2) above will be the members and creditors entitled to vote. These lists of members and creditors shall be submitted by the official liquidator to the chairman. (4)Meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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