TMI Blog1998 (3) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of agreement of sale and paid firstly to the preferential creditors and secondly to the unsecured creditors of the petitioner, in final satisfaction of all claims, the principal amounts due to them as on 31-3-1996 as per the audited accounts of the petitioner-company. 2. The petitioner is a company incorporated under the Companies Act and has its registered office at B-2 Laxmi Industrial Estate, Goregaon (West), Bombay-400 090, ('Bedrock'). Bedrock was incorporated on or about 5-4-1979 as a Private Ltd. Co. registered under No. 21169 of 79 with the Registrar of Companies, Maharashtra. The authorised capital of Bedrock is ₹ 25 lakhs divided into 25,000 equity shares of the face value of ₹ 100 each. The issued, subscribed and paid up capital of Bedrock is ₹ 15 lakhs divided into 15,000 equity shares of ₹ 100 each. The objects for which Bedrock was formed are set forth in the Memorandum and articles of association of the company. The main objects for which the company was incorporated are as follows : 1. To enter into partnership in the business carried on by Shri Narayan Prasad Poddar, Shri Dharaprasad Poddar, Shri Mahabir Prasad Poddar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -5-1993, the CLB directed that the 12th and 13th Annual General Meeting of Bedrock be convened separately under the Chairmanship of Mr. T.D. Sugla, a retired Judge of the Bombay High Court. Two winding up petitions had also been filed by Matushree Investments Pvt. Ltd. and Matushree Finance Pvt. Ltd. being Company Petition Nos. 513 of 1991 and 611 of 1991, praying that the said two Companies be wound up on the ground that it would be just and equitable to do so under section 433( f ) of the Act. These companies were major shareholders in Bedrock holding approximately 39 per cent of the issued and subscribed share capital of Bedrock. By an order dated 29-1-1992, Official Liquidator, High Court, Bombay, was appointed as the Provisional Liquidator of the two compa-nies. By an order dated 14-7-1993 this Court also directed the representa-tive of the Official Liquidator to vote for the election as directors of Arunkumar Poddar. C.J. Halwasia and Kamalkumar Poddar, at the 12th Annual General Meeting. The said meeting was held on 15-7-1993 and the three persons mentioned above were elected as directors of Bedrock. The 13th Annual General Meeting of Bedrock was also held immediately therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le proceeds towards the satisfaction of the debts due to the creditors of the company. Thus, on 6-12-1993 Company Application No. 876 of 1993 was filed in this Court seeking directions to convene a meeting of the secured/ preferential and unsecured creditors of the company to consider the scheme of compromise suggested by Bedrock. The scheme provided, inter alia, the sale of the Goregaon property. The proceeds from the sale were to be used for payment to the creditors. The payment was to be made on the principal amounts due to the creditor as on 31-3-1993 as per the audited accounts of Bedrock. The value of the Goregaon property which had been lying unutilised since 1987 was estimated to be approximately 4.68 crores as per the valuation report dated 4-6-1992. This proposed agreement shall be referred to as 'the 1993 Agreement'. 6. On 8-12-1993 this court directed that the meetings of the secured, preferential and unsecured creditors be held on 19-2-1994. This meeting and the subsequent meeting were adjourned for various reasons. On application made by Bedrock the meeting to be held on 19-2-1994 was adjourned to 16-4-1994. This meeting was further adjourned to 28-6-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of the Goregaon property. As a result of the settlement amongst the Poddar family members credit balances appropriated by the Central Bank of India from a family concern of the Poddar family viz,, Poddar Sales Corpn. have been accepted by the Bank as discharge of the liability of Bedrock. The documents of title of the property had been returned to Bedrock by 31-3-1996. As a result of this, Poddar Sales Corpn. became an unsecured creditor of Bedrock to the extent of the amount which was due to the Central Bank of India as on 31-3-1996. Some of the unsecured creditors have also settled their claims against Bedrock. Thus, some of the creditors have ceased to be creditors of Bedrock on 31-3-1996. As a result of the aforesaid developments, as on 31-3-1996, Bedrock did not have any secured creditors. Summary Suit No. 2399 of 1992 filed by MSSIDC had also been settled. The Company Petition filed by the MSSIDC had also been withdrawn in the year 1995. In view of the above modification of the 1993 agreement, was sought to provide that the preferential creditors will be paid the principal amount due as on 31-3-1996 as per the audited accounts of Bedrock and the unsecured creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of the decree was stayed on payment of a sum of ₹ 50 lakhs by the applicant company. Thereafter another sum of ₹ 60 lakhs was paid on 3-12-1997 whilst the matter was being heard in Appeal. 9. It is also the case of Bedrock that all the meetings convened and held for considering the compromise agreement have been adjourned on the specific orders of this Court. The meetings were convened and postponed as follows : 16-4-1994, 28-6-1994, 12-11-1994, 15-3-1995, 13-6-1995, 28-9-1995, 30-3-1996, 15-6-1996,5-9-1996,4-11-1996,23-1-1997, 13-3-1997,3-4-1997 and 28-4-1997. 10. Relying on the aforesaid facts it is submitted by Mr. Chagla that on 31-3-1996 there was no secured creditor. Two of the three preferential creditors had approved the scheme in the meeting held on 30-3-1996. So far as MSSIDC is concerned, they were unsecured creditors. However, the meeting could not be held for want of quorum. In the meantime, ex parte application was made for modification of the scheme. The purpose was to bring the compromise agreement upto date i.e. , 31-3-1996. In the meeting held on 28-4-1997 of the preferential and the unsecured creditors, the majority has approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 30-11-1996. In default of payment of either of the instalments, decree was to become executable forthwith. Since there was a default in making payment of the aforesaid amount by 30-11-1996 the decree became executable. It was in these circumstances that an application for extension of time was made before the learned single Judge. Mr. Chagla submits that Bedrock was not doing well. Thus, the compromise agreement was to put the company on a sounder financial footing. 12. Mr. Thakkar, on the other hand, submits that the purpose of a scheme of compromise or agreement should be to revive the company. The object of the scheme should not be to sell the only surviving asset and to profiteer from the sale proceeds. It is submitted that the sole aim of the agreement is to deprive MSSIDC of the benefit of the decree. It is submitted that in order to succeed in the design the petitioners have not held any meetings from 1993 till 1996. Pursuant to the orders dated 15-2-1994 and 16-2-1994 the petitioner company proposed to hold the meeting of the unsecured creditors of the company at the Indian Merchants Chamber Churchgate, Bombay on 19-2-1994 at 2.00 p.m. This was, however, postponed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange from Jan. 1990 to March 1990. The due dates of payment by the petitioner company were April to June, 1990. Thus, the petitioners were indebted to MSSIDC in the sum of ₹ 1,08,44,389.69 ps. Since the petitioners failed to discharge the liability, the MSSIDC was also con-strained to file petition for winding up being company petition No. 38 of 1990. It is submitted that the suit was decreed in favour of MSSIDC on the basis of the consent terms on 1-9-1995. On the very same date in view of the consent terms MSSIDC withdrew the Company Petition. Having achieved that purpose, the petitioners are now trying to wriggle out of the decree. It is submitted that the petitioners are seeking the sanction of the compromise agreement only to profiteer from the sale of the Goregaon property and to defeat the decree which has been passed against it. It is further submitted that there is delilerate misstatement in the amended scheme about the value of the claim of MSSIDC. It is further submitted that the petitioners have deliberately included their family members and secured creditors by styling them as unsecured creditors. This has been done merely to create a false majority to mislead t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k as discharge of the liability of Bedrock. It is also asserted that the firm Poddar Sales Corpn. (now being the entitlement of the outgoing share-holders and directors of Bedrock in the family settlement referred to above viz. the Santosh Kumar and Vimal Kumar Group) became an unsecured creditor of Bedrock to the extent of the aforesaid amounts due to the secured creditors. In the affidavit while discussing the agreement entered into between Bedrock and the Poddar Tyres Ltd., the said concern is described as another company of the Poddar family and now under the same management as of Bedrock. Mr. Thakkar submits that these aver-ments categorically show that Poddar Sales Corpn. and Poddar Tyres Ltd. are not bona fide unsecured creditors of Bedrock. It is submitted that they ought not to be included in the class of unsecured creditors. It is submitted that if these two creditors are excluded, by no stretch of imagination can it be said that the agreement has been approved by the requisite majority of the unsecured creditors. It is submitted that the timing of the applica- tion for modification of the scheme clearly shows that the debts were first created by the petitioner compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in accordance with law. A perusal of the statement attached to this report would show that MSSIDC is stated to have voted for the proposed scheme. Not only this, the amount of credit is shown as ₹ 90,17,416.35 ps. This amount is clearly at variance with the amount due and recognised by Bedrock itself in the consent terms dated 1-9-1995. 13. In support of his submissions Mr. Thakkar relies on a judgment in the case of Hellenic General Trust Ltd., In re 1975 3 All ER 382. The relevant facts in that case were that a company which carried on business as an investment trust applied for the sanction of the Court to a scheme of arrangement under section 206 of the Companies Act, 1948 relating to the ordinary shares of the company. Those shares were held as to 53.01 per cent by another company (MIT) which was a wholly owned subsidiary of a Bank (Hambros), and as to 13.95 per cent by the National Bank of Greece SA (NBG). By the proposed arrangement the ordinary shares of the company were to be cancelled and new ordinary shares were to be issued to Hambros with the result that the company would become a wholly owned subsidiary of Hambros. The former shareholders of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant, and if the meetings are incorrectly convened or constituted, or an objection is taken to the presence of any particular creditors as having interests competing with the orders, the objection must be taken on the hearing of the petition for sanction and the applicant must take the risk of having the petition dismissed. That direction applies equally to meetings of shareholders. The question, therefore, is whether MIT, a wholly owned subsidiary of Hambros, formed a part of the same class as the other ordinary sharehold-ers. What is an appropriate class must depend on the circumstances but some general principles are to be found in the authorities. In Sovereign Life Assurance Co. v. Dodd the Court of Appeal held that for the purposes of an arrangement affecting the policy-holders of an assurance company the holders of policies which had matured were creditors and were a different class from policy-holders whose policies had not matured. Lord Esher MR said : ... they must be divided into different classes... because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ass meetings in the present case, MIT were in the camp of the purchaser. Of course this does not mean that MIT should not have considered as a separate class meeting whether to accept the arrangement. But their consideration will be different from the considerations given to the matter by the other shareholders. Only MIT could say, within limits, that what was good for Hambros must be good for MIT. Counsel for the company submitted that difficulties will arise in practice if every subsidiary or associated company may constitute a separate class. So far as a wholly owned subsidiary is concerned, there is no difficulty at all, and in most cases it will be sufficient to judge the class composition by reference to the shareholding... [Emphasis supplied] Thereafter Mr. Thakkar relies on a judgment of this Court in Company Petition No. 395 of 1994 connected with other matters decided on 3-4-1996. In view of the above Mr. Thakkar submits that the petition deserves to be dismissed. 14. In reply, Mr. Chagla submits that the whole scheme of compromise cannot be rejected merely because one creditor happens to object. His objection, according to Mr. Chagla, is wholly irrelevant. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by section 393(1)( a ) is placed before the voters at the meetings concerned as contemplated by section 391 sub-section (1). 5. That all the requisite material contemplated by the proviso of sub- section (2) of section 391 is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk of India. This property had been lying unutilised since 1987 and was valued at approximately ₹ 4.68 crores in the valuation report dated 4-6-1992. This Court by an order dated 8-12-1993 in Company Application No. 876 of 1993 had ordered the holding of the meeting of the creditors on 19-2-1994. The meetings were adjourned from time to time as follows : 16-4-1994, 28-6-1994, 12-11-1994, 15-3-1995, 13-6-1995, 28-9-1995, 30-3-1996, 15-6-1996, 5-9-1996, 4-11-1996, 23-1-1997, 13-3-1997, 3-4-1997 and 28-4-1997. Various litigations between the members of the Poddar family were settled in 1995. The liability towards the Central Bank of India was discharged by appropriating the credit balances of Poddar Sales Corpn. The documents of title of Goregaon property had been returned to Bedrock by 31-3-1996. Summary Suit No. 2399 of 1992 filed by MSSIDC was settled and a decree was passed in their favour on 1-9-1995. The Company Petition filed by MSSIDC was also withdrawn in terms of the consent terms. In October, 1995 Bedrock entered into an agreement with Poddar Tyres Ltd. (another Company of the Poddar Family and under the same management of the Applicant Company) as a consignme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ert, a meticulous accountant or a fastidious counsel would do it. Navjivan Mills Co. Ltd v. Kohinoor Mills Co. Ltd. [ l972 ] 42 Comp. Cas. 265; Justice Vyas in Smt. Saroj G. Poddar v. T. Mathew [Company Petition No. 395 of 1995] also reiterated the above view when considering the ambit of the power of the Court. Justice Vyas has, however, further observed that the Court is not bound to superadd its seal to the scheme merely because it has received approval of the requisite majority at the meeting held for that purpose. The Court will refuse to put its seal thereto if its purpose is not bona fide but merely to shield the mis-deeds of the ex-directors or is otherwise inequitable. Therein Justice Vyas had an occasion to examine two claims put forward for the revival of the company. Both the schemes had proposed to sell a part of the immovable property. These were referred to as the 'Mathew Scheme' and the 'Poddar Scheme'. After examining the whole facts situation it was observed as follows : Is the Mathew Scheme propounded in good faith and is it viable ? These are the next questions to be answered. ( a )As mentioned above, while dealing with the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have informed the Court as to why, when the scheme was to become effective after sanction by the Court, they had started implementing the scheme. Thus, both petitions came to be dis-missed. The scheme was not sanctioned. Mr. Thakkar also relied upon Hellenic General Trust Ltd.'s case ( supra ) in support of his submission that the class of creditors was not properly constituted. To this, the reply of Mr. Chagla was that Poddar Sales Corpn. and Poddar Tyres were two wholly independent Private Ltd. Companies which had nothing to do with Bedrock. I have carefully examined the facts narrated by both the sides. I am unable to hold that Poddar Sales Corpn. has nothing to do with Bedrock. In the pleadings it is clearly stated that Poddar Sales Corpn. is a family concern of Poddars. It is also clearly mentioned that the equitable mortgage of the Goregaon property was created by Bedrock and the Central Bank of India had a lien on the accounts of Poddar Sales Corpn. It was for this reason that Poddar Sales Corpn.'s credits were appropriated by the Central Bank of India. In my view, the modification sought by the 1996 agreement is not bona fide. Debts were due to the Central Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 30-11-1996. ₹ 5 lakhs were paid. The sum of ₹ 1,10,000 was not paid as agreed. Instead Bedrock resorted to taking out Notice of Motion being Notice of Motion No. 591 of 1997 for extension of the time granted under the decree. Having failed before the single Judge, Appeal Lodging No. 187 of 1997 was filed (Appeal No. 693 of 1997). It was only on the directions of the Division Bench that further sums of money were paid. From the aforesaid conduct of Bedrock it becomes apparent that all-out efforts have been made to defeat the decree which has been passed in favour of MSSIDC. Further, on the one hand, it is asserted that Bedrock entered into an arrangement with Poddar Tyres Ltd. in October, 1995. Yet the list of creditors attached with the 1993 scheme would clearly show that Bedrock was indebted to Poddar Tyres Ltd. in the sum of ₹ 21,24,030.27. Thus, it becomes apparent that there were business transactions between Bed- rock and Poddar Tyres Ltd. before October, 1995. It is the pleaded case of Bedrock that the modification of 1993 agreement is sought on the ground that during the pendency of the original application for the sanction of the 1993 scheme certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctober, 1995, Bedrock entered into an exclusive agency agreement to sell the products of Poddar Tyres Ltd. in the Southern and Western States of Gujarat, Karnataka, Madras, Tamil Nadu, Kerala and Andhra Pradesh. It is stated that by virtue of the aforesaid agreement, Bedrock sells the products of Poddar Tyres Ltd. and forwards the amount received to Poddar Tyres Ltd. It is also the case that the average outstanding dues of Bedrock to Poddar Tyres Ltd. from October, 1995 have been in the region of ₹ 4 crores. Computing it as on 31 -3-1996, the liability of Poddar Tyres Ltd. has been shown. It is stated that as a result of the arrangement with Poddar Tyres Ltd. there are hopes of reviving Bedrock. It is the case of Bedrock that in the arrangement with Poddar Tyres Ltd. the entire invoicing is done in the name of Bedrock. The amounts collected on behalf of Poddar Tyres Ltd. is to be refunded to the said Company by Bedrock. In this process there is a running credit balance in favour of Poddar Tyres Ltd. in the region of ₹ 4 crores. In my view, the aforesaid stand of Bedrock clearly shows that even the arrangement with Bedrock is only an internal family affair. Bedrock canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tyres Ltd. from the time of the arrangement entered into in October, 1995 are to the tune of ₹ 4 crores per month. [Emphasis supplied] From a perusal of the above it leaves no manner of doubt that Poddar Tyres Ltd. is only a part and parcel of Bedrock and Poddar Sales Corpn. The aforesaid transactions narrated in paragraph 12 are not reflected in the balance-sheets and the statement of accounts which has been attached with the agreement and on the basis of which the Chairman's report has been given. Thus, the submission of Mr. Thakkar to the effect that Bedrock is merely a conduit for Poddar Tyres Ltd. cannot easily be brushed aside. Applying the principles laid down by the Supreme Court in Miheer H. Mafatlal's case ( supra ) (Principal No. 6), I am constrained to hold that the three masks viz., Bedrock, Poddar Sales Corpn. and Poddar Tyres Ltd. are three aspects of the same entity. I see no difference between the faces behind the mask. I am, therefore, unable to agree with Mr. Chagla that the observations made in the case of Hellenic General Trust Ltd.'s ( supra ) would not be applicable in the facts and circumstances of the present case. In my view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Directors may decide. 21. Before proceeding any further, it would be apt to notice that Bedrock and Poddar Tyres Ltd. are described as Companies of the Poddar Family under the same management. Thus, it becomes apparent that Poddar Tyres Ltd. are unsecured creditors and will also be beneficiaries of the proceeds of the sale of Goregaon property. It is also a matter of record by now that the Goregaon property has been attached on an application made by MSSIDC. Thus, if the property is to be sold at present on 'as is where is basis' and on 'as is what is basis', the same would be sold through the Court. Thus, obviously public auction would be the most appropriate mode of sale of the said property. However, if the property is not under attachment, on the Scheme being sanctioned by this Court, the property can be sold by Bedrock and the proceeds can be utilised by Bedrock at the sole discretion of the board of directors. Another important fact which would show lack of bona fides of Bedrock is that although the scheme is sought to be sanctioned on the basis of the credit balances due on 31-3-1996, yet the present value of the Goregaon property has not been disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the outset without calling a meeting of the Creditors. The Court does not function as a rubber stamp or Post Office and it is incumbent upon the Court to be satisfied that the scheme is genuine, bona fide and in the interest of creditors of the company. 23. All out efforts have been made by Bedrock to defeat the decree in favour of MSSIDC. I am of the considered opinion that the two-fold purpose of the 1993 and 1996 agreements is merely to profiteer from the sale of the Goregaon property and at the same time to defeat the rightful claim of MSSIDC. This point of view of mine has been further reinforced when at the time of hearing, a draft proposed modification was submitted before this Court by the learned Counsel Mr. Chagla. The draft proposed modification is as under : (1) Clause 8 of the Scheme (Exh. to the petition) is modified as under :- ( a )Provided, however, that the Company shall pay interest at the rate of % p.a. to MSSIDC Ltd. as under : ( i )On ₹ 1,10,00,000 (Rupees One crore ten lakhs) for the period from 1-12-1996 to 9-7-1997; ( ii )On ₹ 60,00,000 for the period from 9-7-1997 to 3-12-1997. A perusal of the above clearly show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fides is required, and unless than (sic) can be established if there is anything like deception practised on the Court, the Court ought not to go into the merits of the case, but simply say we will not listen to your application because of what you have done.' Lord Scrutton L.J. observed : 'It has been for many years the rule of the Court and one which it is of the greatest importance to maintain, that when any applicant comes to the Court to obtain relief on an ex parte statement, he should make a full and fair disclosure of all the material facts, facts not law... The applicant must state fully and fairly the facts and the penalty by which the Court enforces that obligation is that if it finds out that the facts have been fully and fairly stated to it, the Court will set aside any action which it has taken on the faith of the imperfect statement.' 11. In Req. v. Garland [ 1870 ] 39 LJ QB 86, it has been held : 'Where a process is ex debito justice, the Court would refuse to exercise its discretion in favour of the applicant where the applications are found to be wanting in bona fides.' Thus, it becomes apparent that a party seeking ..... X X X X Extracts X X X X X X X X Extracts X X X X
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