9911796707
TMI Blog1999 (6) TMI 417X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors have filed suits and some have obtained decrees against the company. Some creditors have also filed criminal proceedings against the directors of the company under section 138 of the Negotiable Instruments Act, 1881 in respect of cheques issued by the company which were dishonoured on presentation. 2. In this background the company filed an application under sections 391(1) and 393 of the Companies Act, 1956 ('the Act') seeking to convene a meeting for approval of a scheme of compromise/arrangement with a defined class of creditors. The creditors were defined in clause 1.5 of the scheme as follows : "1.5 'Creditors' means persons other than subsidiaries and associate concerns of the Company, who had financial claims against the Company as on June 30, 1996 arising out of :- (i )Inter Corporate Deposits made with the Company, or (ii)Bill discounting facilities availed by the Company, irrespective of whether those persons have instituted proceedings against the Company, inter alia, by way of suits or petitions for winding up of the Company, for recovery of such claims, and have or have not obtained decrees or orders by consent or otherwise in their favour for payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed in principle to modify the scheme and suggested certain clauses e.g., the basis would be the outstanding as on 31-3-1997 (instead of 1996) and rate of interest would be 15 per cent per annum as desired by the creditors subject to the company's Board's sanction. Thereafter at the request of the creditors it was agreed that the company should send modifications/amendments in writing so that the board of directors of the concerned creditors could consider the same. Accordingly, the Chairman adjourned the meeting till 7-4-1998. 5. On 30-3-1998 the Chairman issued notices of the meeting to be held on 7-4-1998 to the creditors for approving the scheme of arrangement and/or compromise incorporating therein several modifications to the original scheme of arrangement. The modifications included inter alia a re-definition of the term 'creditors'. Under the new definition 'creditors' would include 'subsidiaries and sister companies of the company having financial claims against the company on account of inter corporate deposits as reflected in the books of account of the company'. This was a class which has been expressly excluded from the original scheme. This was not a modification su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.459,89,2111.94 3.Videocon International Ltd. (Formerly known as Videocon Narmada Electronics Ltd.)785,99,4893.42 4.Tapti Machines Pvt. Ltd.340,72,3301.48 5.Bennett, Coleman & Co. Ltd.975,76,6404.25 8. In May, 1998 the company filed an application under sections 391, 393 and 394 of the Act asking for approval of the modified scheme. Kirloskar Investment & Finance Ltd. (Kirloskar) filed an application seeking to propound a different scheme between the company and the unsecured creditors. Kirloskar also filed an application for rejection of the modified scheme as propounded by the company. 9. All three applications were taken up for hearing on 17-6-1998. In the course of hearing several creditors filed letters and affidavits signifying that they had changed their minds subsequent to the meeting. Some creditors who had earlier opposed the scheme sought to support the modified scheme while others who had earlier approved the scheme sought to oppose it. 10. Hearing was concluded on 15-9-1998, judgment was delivered on 24-12-1998 dismissing Kirloskar's applications and allowing the application of the company. The learned Judge sanctioned the scheme under section 391(2) and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oughly unreasonable, absolutely unjust, basically unfair and exploitative in character" and "it would be a waste of time of the Court even to prima facie examine the scheme-See Mansukhlal v. M.V. Shah, Official Liquidator [1976] 46 Comp. Cas. 279 (Guj.), N.A.P. Alagiri Raja & Co. v. N. Guruswamy [1989] 65 Comp. Cas. 758 (Mad.) and K.R. Balasubramanyan v. Bellary Spg. & Wvg. Co. Ltd. [1995] 84 Comp. Cas. 830 (Kar.). 14. But if the Court in exercise of its discretion orders that the views of the particular class of creditors or members are to be ascertained at a meeting to be called, held and conducted in a particular manner, the meeting must be called, held and conducted of the named class of creditors or members of the manner directed by the Court. 15. This is exemplified in the case of English, Scottish & Australian Chartered Banks, In re [1893] 3 Ch. 385 cited by the company, where a company in liquidation was sought to be reconstructed under the supervision of the Joint Stock Companies Arrangement Act, 1870. Directions were given by the learned Judge directing meetings to be held of the creditors and shareholders ascertain whether they consented to the scheme. The largest numb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like." 17. In other words, the scheme must be approved not only by the majority in number, but such a majority which also represents three-fourths value of the class of creditors present and voting. An application can be made for approval of the scheme only if the prescribed majority approves the scheme at the meeting. Conversely if the prescribed majority does not approve the scheme, no application for approval of the scheme can be made. This interpretation follows from the scheme of section 391(2) as well as from the Rules. 18. The relevant rule is rule 79 of the Company (Court) Rules, 1959, an extract of which is set out verbatim : "Petition for confirming compromise or arrangement.-Where the proposed compromise or arrangement is agreed to, with or without modification as provided by sub-section (2) of section 391, the company, (or its liquidator, as the case may be), shall, within seven days of the filing of the report by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the Court to accord its sanction to a scheme is that it should have been passed by a majority as required under section 153(2) of the Companies Act. . . . In other words, unless the Court is satisfied that the same has been approved by the statutory majority and in a manner provided by law, it is not open to the Court to give any sanction to it." (p. 297) 22. The decision of the Division Bench in Nand Prasad's case (supra) was upheld by the Supreme Court in Arjun Prasad v. Shantilal Shankarlal Shah AIR 1962 SC 1192. The Supreme Court said that if in law the requisite 3/4th majority as required was not there "no further action can be taken by the Court in the matter". 23. In Coimbatore Cotton Mills Ltd., In re [1980] 50 Comp. Cas. 623 (Mad.) it was said : "(i )The Court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The Court should not usurp the right of the members or creditors to decide whether they approve the scheme or not. Therefore, if a class whose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be allowed. 28. First, the provisions of the statute were ignored from the outset. Although section 393(1) requires that where a meeting of creditors or a class of creditors is called under section 391, every notice calling the meeting shall also be accompanied with a statement setting forth the terms of the compromise and explaining its effect, and in the advertisement of the notice, the place at which and the manner in which the creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid, no advertisement was published of the meeting to be held on 7-4-1998 nor of the substance of the modified scheme. 29. Second, the meeting of 7-4-1998 was not held in the manner directed by the Court. The Court had directed the holding of the meeting of the class of creditors as mentioned in the original scheme, the definition of which expressly excluded subsidiaries and associates of the company. No meeting was held as directed by the Court as the subsidiaries and associates were allowed to participate. Not only that, the original scheme which was directed to be considered was in fact not voted upon at all. 30. It is true that the Court by its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handed up to him by the company. The appellants have criticised the chart by saying it did not include those who had changed their minds from approval to disapproval of the scheme. But irrespective of the correctness or incorrectness of the chart, the Court could have re-opened the process of voting which had been completed in the meeting. 35. The importance of the meeting under section 391 is not only clear from the language of section 391 itself, but also from the Companies (Court) Rules which relate to compromises or arrangements under section 391. All make provisions for the holding of meetings. The form of the application to convene a meeting under section 391 has been specified in rule 67. Rule 68 provides for service on the company where the company is not the applicant. Rule 69 of the Rules sets out the direction that the Court may give upon hearing the application : "Directions at hearing of summons - Upon the hearing of the summons or any adjourned hearing thereof the Judge shall, unless he thinks fit for any reason to dismiss the summons, give such directions as he may think necessary in respect of the following matters :- (1) determining the class or class of credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 391 may deprive persons covered thereby of rights which they are otherwise legally entitled to. As far as creditors are concerned, as in this case, it may reduce the contractual rate of interest and debar the immediate recovery of the debts by legal action. That is why the facility or power of making arrangements under section 391 between the company and its creditors or members binding on all the creditors or members including any dissidents must be exercised in terms of the section. The Legislature has prescribed the manner of exercise of the power. In order to bind or to deprive another of his rights irrespective of such persons' opposition the power conferred is to be exercised in that manner and in no other way. There is no question of substantial compliance. 39. As was said in Gujarat Electricity Board v. Girdharlal Motilal AIR 1969 SC 267 by the Supreme Court : "These provisions confer a power on the State Electricity Board to purchase the property of the licensee but that right can be exercised only in the manner provided in the Act and not in any other way. It must be remembered that the provisions in question empower the State Electricity Board to interfere with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to section 391 would be the one enunciated by Lindley M.R. in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, 671 that : ". . . the power conferred by it must like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole and it must not be exceeded. These contentions are always implied, and seldom, if ever, expressed." 42. When there are a few creditors, the Court may not think it necessary to resort to the elaborate procedure of calling a meeting to be supervised by a Chairman etc. The Court may itself hold the 'meeting' and ascertain the views of the creditors who must be summoned to the 'meeting' to signify their approval/dissent in the manner provided in the order 'convening' the 'meeting'. It has also been held in Mazola Theatres (P.) Ltd. v. New Bank of India Ltd. [1975] 1 ILR 1 (Delhi) that the Court may pass an order for ascertainment of the views of the members of a company without calling any meeting at all. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd proper'. The Vice-Chancellor approved the proposal put forward by the liquidator. The creditors appealed. One of the grounds was that a portion of the scheme could be effected only under section 425 of the Companies Act, 1985. The Court of Appeal upheld the decision of the Vice-Chancellor by stating that it was wholly impossible to go through the procedure of a scheme under section 425 in the facts of the case. 45. The decision does not assist the company. The provisions of section 425 were not in fact resorted to. It is implicit in the decision that had section 425 been resorted to, a meeting would have had to be called. The procedure which was in fact followed was one permissible under the Insolvency Act similar to section 557 of our statute which cannot apply if the company wants the scheme to be a binding one. 46. In Tea Corporation Ltd., In re 1904(1) Ch. 12, cited by the company was a decision which dealt with a scheme of arrangement under an English statute namely, the Joint Stock Companies Arrangement Act, 1870. The statutory provision allowed a compromise or an arrangement to be proposed with the company which was in the course of being wound up under the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber or in value. Nevertheless, the company presented an application for sanction of the scheme. At the hearing several of the unsecured creditors filed affidavits indicating their consent to the scheme. The Court noted that the required number of unsecured creditors had consented to the scheme. There was no finding as to whether the requisite value had been obtained under section 391(2). The Court directed advertisements to be issued in connection with the hearing of the application for sanction. One of the unsecured creditors appeared and submitted that since the requisite majority had not been obtained the Court had no jurisdiction to sanction the scheme. The learned Judge held that section 391(2) is not cast in negative form whereas the proviso to section 391(2) is cast in the negative form. As section 391(2) except the proviso is not prohibitory in character, it is possible to treat it as merely permissive. When section 391(2) is not prohibitory in character it definitely appears to be directory and said that the substantial compli-ance with the provisions of section 391(2) was, therefore, sufficient. In arriving at this conclusion the learned Judge relied upon the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the context of the decisions referred to in support. 53. Of the two decisions cited in support of the passage, one was Dynevor, Dyffryn & Neath Abbey Collieries Co., In re [1879] 11 Ch. 605. The company had resolved to be wound up voluntarily. An order was passed by Court directing meetings of the creditors to consider an arrangement proposed between the company and its debenture-holders. At the meeting a majority of more 3/5th of the creditors approved the arrangement. The trustee liquidators took out a summons to obtain the sanction of the Court. The Court sanctioned the scheme and directed that the scheme was binding on the creditors, debenture-holders and contributories of the company. Subsequently a general meeting of the company was held at which the arrangement was approved by an extraordinary resolution. Some debenture-holders appeared. One of the objections taken was that the meeting of the contributories or ordinary shareholders was held and the scheme approved unanimously after the order affirming the scheme. The particular statute which was being construed was section 2 of the Joint Stock Companies Arrangement Act, which according to the Court of Appeal only requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Group C) approved an arrangement by a show of hands. A poll was demanded of this group. This was refused by the liquidator. The meeting was cones-quently aborted. Combined meetings were thereafter directed to be held. At these meetings the scheme was approved but Group "C" was completely swamped by the other groups. An application was made for sanction of the scheme. It was contended that Group 'C' was in the same position as one of the other groups. This was negatived by the learned Single Judge who held that Group 'C' clearly constituted a separate class and as they had had no separate meeting other than the aborted meeting, it was held to be fatal and the scheme was rejected. Subsequent to the order a meeting was called of Group "C" and the necessary approval of that class was obtained. A fresh petition was made for sanction of the Scheme. It was then held, United Provident Assurance Co. Ltd., In re 1911 WN 40 that the Court may sanction a scheme under the fresh petition without requiring fresh meetings of the other classes who had already approved the scheme. 56. Far from supporting the view taken by the learned single Judge in S.M. Holding Finance (P.) Ltd.'s case (supra ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able since Onkarnath Rampal could always file an affidavit in his personal capacity denying his signature. Ultimately, the company submitted that it did not rely on the letter of Casion. The submission does not detract from the pitfalls which would have to be faced by Court if it does not follow the protective measures legislatively provided for correctly ascertaining the views of the creditors. 60. Take again the case of Marine Containers. It attended the meeting and voted in favour of the scheme. Then it filed an affidavit before the learned single Judge opposing the scheme. Before us it was stated by Counsel appearing on behalf of Marine Containers that written instructions had been given to him to support the scheme. When and where would this end? Even after the disposal of the matter by the learned single Judge the parties are vacillating. 61. An unreported judgment of a learned single Judge of the Karnataka High Court in Bangalore Plastic Fibre (P.) Ltd. (In liquidation) was cited by the company to submit that a meeting need not be held and the views of the creditors can be ascertained by affidavits. In that case no order for holding a meeting was passed. The Court dispense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , regard shall be had to the value of each creditor's debt. (3) When ascertaining the wishes of contributories, regard shall be had to the number of votes which may be cast by each contributory." 65. Section 557 is contained in Chapter V of the Act and is applicable when the Court is considering whether the company should be wound up or not (See M. Gordhandas & Co. v. M.W. Industries AIR 1971 SC 2600, 2605). That is not the issue before the Court now. Besides section 557 does not provide for a scheme binding on all the creditors or contributories of the company regardless of the wishes of a dissenting minority as provided by section 391(2). 66. The next submission of the company was that the Court could itself modify the scheme without any fresh meeting. This would be true if there were a duly approved scheme before the Court in the first place. This was the view expressed in the case of Bhavnagar Vegetable Products Ltd., In re [1984] 55 Comp. Cas. 107 (Guj.). This would also depend upon the nature of the modification. If the modification does not alter the basic structure, such as a change in the class of creditors, the Court will not itself modify the scheme but direct the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g for re-considering the scheme. The statute does not allow for this. What the company is in effect asking for is a fresh order under section 391(1) on the application presented by it on 18-12-1997. A meeting cannot now be directed on the financial picture obtaining in 1996-97. The position of the company and the creditors may have changed in the last two years. Several creditors' claims would have increased with the accumulation of interest. The company has produced its current audited balance sheet before us from which it is clear that there have been significant changes in its financial set up. In any event, the exercise would be a futile one unless the Court considers the scheme to be a viable one. 70. The company contended that if one took into consideration the several letters and affidavits filed, it was clear that the majority of the creditors approved the modified scheme and this must be given due weight by the Court in assessing the viability of a scheme. It relied on the observation of Vaisey, J. in Sussex Brick Co. Ltd., In re [1961] 1 Ch. 289: "Prima facie the Court ought to regard the scheme as a fair one inasmuch as it seems to me impossible to suppose that the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what would be a scheme of confiscation. The objective of this section is not confiscation. It is not that one person should be a victim, and that the rest of the body should feast upon his rights. Its object is to enable compromises to be made which are for the common benefit of the creditors as creditors, or for the common benefit of some class of creditors as such." 73. Judged from this point of view, we are of the opinion that the modified scheme does not meet this criterion. Firstly, the class of creditors intended to be covered by the scheme is not only uncertain but inappopriate. The submission of the company that the Court should not consider this aspect of the matter because the ground had not been taken in the Memorandum of Appeal filed by the appellants is untenable. Even if this were the case, when the Court is in effect determining whether or not to direct the meeting to consider the modified scheme, the issues are as such reopened. Not only will the Court have to be satisfied that the compromise is reasonable, genuine and not mala fide, it will also have to consider whether it would be proper to club together the votes of persons with conflicting interests. 74. In M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78. In our view, the secured creditors should not have been clubbed together with the unsecured creditors. Their interest would not be the same. This is another reason why the scheme could not be sanctioned. "If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members are not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant-company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditor as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company must take the risk of having it dismissed" (Per Desai, J. in Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 , 873 (Guj.). In fact, as observed in the last mentioned judgment "Generally speaking, the creditors of the company should be divided into three different classes, viz., secured creditors, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing them. In view of this clash of interest it would not be reasonable to include the subsidiaries of the company in the same class of other unsecured creditors. 81. Finally, the submission of Kirloskar and HDC that the scheme is speculative is of substance. According to the company the inter-corporate deposits and bill discounting outstanding as on 12-12-1997 with interest reckoned upto 31-3-1997 was Rs. 2,63,78,93,987. Some of the unsecured creditors have disputed the amounts stated by the company as due to them. The Chairman in his report has said : "Several disputes were raised regarding the quantum of debts as shown by the Company I had tried to resolve the dispute as regards the quantum of debt due to the creditors by directing that for the purpose of the meeting, the value of debts as per the books of account of the company would be the basis, except in those cases where a decree or order of a Court is there, in which case, that will be the basis, provided copies thereof are produced." 82. For the purpose of this judgment we proceed on the basis of the debts admitted by the company. With the accumulation of interest, now the amount would be about Rs. 400 crores. 83. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs covered by the said modified scheme. The money lying in the said account is adequate for payment of at least the first instalment as envisaged by the said modified scheme." 87. It is not clear as to the account on which this amount has been accumulated. There does not appear to be any reference in the balance sheet of the company to this. Be that as it may, the amount has now reached to Rs. 36 crores. The Fixed Deposit Receipt was produced before us, and we proceed on the basis that the amount is available for distribution to the creditors covered by the Scheme. 88. As far as source (3) was concerned the learned single Judge did not accept the company's claim because "It is doubtful whether funds would be available under this head at present having regard to the poor economic condition in the country and the turbulence in the financial market in the region." This finding has not been objected to by the company. 89. As far as source (4) is concerned, despite litigation, the sale of the Consumer Products Division has according to the company effectively been completed and the company has received the purchase price from the purchaser and has set aside a sum of Rs. 34 crores, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d surely not be interfered with in this application. The company, therefore, admittedly did not as on date enjoy the liberty to dispose of its property, even non-core property merely at its Will. In the event, therefore, the company was not able to sell its assets as it would have liked to, which possibility in the circumstances was quite real than the spirit of the proposed plan for cash flow would evaporate." 92. This leaves the Court with two out of the seven proposed sources. Compared to the overall admitted indebtedness to the unsecured creditors (excluding the subsidiaries) of about Rs. 400 crores which is required to be cleared, the amount of Rs. 70 crores is pitifully small. It would be unreasonable and impractical to allow a scheme based on such figures to survive. 93. Having come to the conclusion that even the modified scheme is not feasible and must fail, it is not necessary for us to consider the bona fides of the company in propounding the scheme nor its conduct.The learned single Judge had in fact noted the findings of the Company Law Board on an application filed by the Central Government against the company (C.P. No. 46 of 1996) to the following effect : "What i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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