TMI Blog2007 (8) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... rned members and creditors of the company? Held that:- Appeal allowed in favour of remand. This court do appreciate this aspect of the matter, having taken the view that the arrangement has to go back to the meeting of members, creditors, etc. of the company in terms of section 391 of the Act and once it is adopted or adopted with modifications with the requisite majority at the meeting, the arrangement would require a fresh scrutiny by the Company Court thereafter, we cannot avoid interfering with the decision of the Division Bench on the ground put forward by learned Senior Counsel of benefit to the workers. - CIVIL APPEAL NOS. 3179-3184 WITH 3569-3571 OF 2005 AND 4377 OF 2006 - - - Dated:- 24-8-2007 - G.P. MATHUR AND P.K. BALASUBRAMANYAN, JJ. R. Mohan, C.A. Sundaram, C.S. Vaidyanathan, Shyam Diwan, Aspi Chinoy, Iqbal Chagla, Dr. Abhishek M. Singhvi, Anil B. Diwan, R.F. Nariman, Ms. Indu Malhotra, Rakesh Dwivedi, Mukul Taly, Ms. Rohini Musa, Jatin Zaveri, Ms. Haripriya Padmanabhan, Senthil Jagadeesan, E.C. Agrawala, Mahesh Agarwal, Rishi Agrawala, Gaurav Goel, Amit Sharma, Ms. Neha Aggarwal, Ms. Purnima Bhat, P.H. Parekh, Pallav Shishodia, Sameer Parekh, Sumit Goel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs union and three of the parties who had submitted their offers in response to the advertisement issued by the Official Liquidator pursuant to the direction of the Company Court dated 1-9-1994. Notwithstanding the pendency of the appeals, a meeting as directed by the Company Court was held and a scheme was approved by the creditors, contributories and workers. An application for sanctioning the scheme was also filed. But, meanwhile, on 4-4-1995, the Division Bench of the High Court allowed the appeal against the order dated 1-9-1994 and set aside the direction for convening a meeting to consider the scheme proposed. The Company Application filed in that behalf was thus dismissed. In the view of the Division Bench, the scheme proposed was not a bona fide one since it was not on the basis of any viability report regarding the revival of the company and there was a failure to disclose the latest financial position of the Company. The court also found that even on the showing of Rangnath Somani, the value of the land belonging to SCML would be approximately Rs. 200 crores if unencumbered and that itself was a very conservative valuation. The court was of the view that the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it answered : "It is not possible to reopen the mills or any portion of it without disposing of the immovable assets of the Company. In our opinion, it would be unviable to revive the weaving and the processing sections of the above mill on account of the reasons summarized below." For the moment, we are not concerned with those reasons and therefore we are not adverting to them at this stage. In answer to the second query posed, the answer was: "It is not possible to restart the entire mill. Only a section of the spinning division with 21420 spindles can be restarted and operated as viable, details of which are given below." The details are not relevant for the moment. In answer to the third query regarding the surrender of shareholding if the offer comes from a shareholder, the report stated that the said matter rested with the court and its discretion. Regarding query No. 4, it was reported that since revival plan envisaged the functioning of the spinning section alone, the machi-nery in the weaving and processing sections and part of the machinery in the spinning section had to be sold or scrapped. A sale of such machinery was estimated to fetch a price of approximate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were required for settling the affairs of the Company, the additional funds would have to be brought in by SCML. In other words, on payment of Rs. 78 crores and handing over a built up area of 70,000 square feet or on paying Rs. 97.50 crores in all, LBPL was to get the right to develop and deal with the lands of SCML. Based on this Memorandum of Understanding, the three Somani cousins filed Company Application No. 4 of 2004 propounding a scheme and seeking directions from the Company Court for convening a meeting to consider the amended scheme. The amendment to the earlier scheme presented, included the replacement of paragraph 1.5 of the original scheme which had indicated that sale of the assets or properties of SCML was not envisaged and the scheme was for revival of the textile mill unit of SCML by a provision that the scheme envisaged development and transfer of SCML s properties by LBPL for revival of SCML. Another amendment was to clause 5.1. This was by deleting the salient features for scheme for revival of the mills and providing in its place that the aim was that after discharging the liabilities of all creditors as per the scheme, if extra funds are available with SCML ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection of the Company Court, they were not considered since in appeal, the auction process was stayed. The Division Bench, on 15-12-2004, passed an order directing the Somanis, LBPL and the various interveners who had made offers, to place their proposals for rehabilitation on record. It was also directed that those interested in purchase of the property should file affidavits placing on record whether they were prepared to make a down payment of a specified sum for release to the workers. The court also directed the Somanis holding the major shares (again we are not concerned with their inter se dispute here) to state whether they would be willing to accept any such better scheme. Some affidavits were filed and in its affidavit, LBPL stated that in addition to the payment of Rs. 45 crores to the workers, LBPL would set up a spinning unit and a garment unit at the cost of Rs. 40 crores on the 7,50,000 square feet coming to them under the Scheme, and would construct and transfer to a Workers Trust a 30,000 square feet unit, housing a school and other accommodation at a cost of Rs. 15-20 crores. Rangnath Somani, the eldest of the cousins filed an affidavit showing that the Somanis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant in Civil Appeal Nos. 3171-3181 was asso-ciated with the original Scheme for which approval was sought from the Company Court and that the appellant therein had in fact deposited a sum of Rs. 18 crores as per the direction of the court and had also furnished a bank guarantee for Rs. 10 crores and had allegedly discharged certain creditors of the Company and what was sought in the present case was a modification of the earlier Scheme in which the appellant was involved and in this situation the locus standi of the appellant could not be denied. It was also pointed out that there was a specific direction by the Division Bench to the appellant and others to present their Schemes/Proposals before the court and they had filed affidavits in that behalf. The Company Court was bound to consider their proposals in the light of the directions of the Division Bench. The Division Bench in the present round also could not go back on what had been ordered by earlier Division Bench. This gave the appellants sufficient locus standi . The appellants in both these sets of appeals had also submitted proposals pursuant to the directions of the court and had also responded to the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad some locus standi . In a sense, LBPL, which is now sought to be associated in the modified Scheme also stands on the same footing as the appellant in Civil Appeal Nos. 3179-3181 of 2005 and we are not invited to hold that LBPL has no locus standi in this proceeding as no such argument was raised before us. Considering the aspects involved, in the context of the order for liquidation of the company and the attempt to sponsor a scheme for acceptance by the Company Court, we are of the view that the two sets of appeals could not be dismissed as appeals by persons who have no locus standi to maintain them. Surely, to the extent the Division Bench has held that their objections are irrelevant, they can certainly appeal to this Court in an attempt to show that their objections are indeed relevant. Whether their claim is meritorious, is another matter. 14. The right of Rangnath Somani to maintain his appeal being Civil Appeal No. 4377 of 2006, is challenged on the ground that he was a co-sponsor of the Scheme which has been accepted and approved by the Division Bench and therefore he cannot claim to be a person aggrieved by the decision of the Division Bench entitled to challe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suffice it to say that, we are not inclined to accept the argument on behalf of the respondents that Rangnath Somani is estopped from filing an appeal against the decision of the Division Bench. Anyway, since we have held that the appeals by the other two appellants are maintainable, the question that arises will have to be examined by this Court and in that context, we find it not proper to turn away Rangnath Somani from the portals of this Court on the ground of estoppel. Thus, we overrule the objections to the maintainability of these appeals. 16. Now to recapitulate, the Company was ordered to be wound up on 25-7-1984 and the Official Liquidator was directed to take possession of the assets of the Company. Once an order of liquidation had been passed on an application under section 433 of the Companies Act, the winding up has to be either stayed altogether or for a limited time, on such terms and conditions as the court thinks fit in terms of section 466 of the Act. If no such stay is granted, the proceedings have to go on and the court has to finally pass an order under section 481 of the Act dissolving the Company. In other words, when the affairs of the Company had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and large, the High Courts are seen to have taken the view that the right of the Official Liquidator to make an application under section 391 of the Act was in addition to the right inhering in the creditors, the contributories or members and the power need not be restricted to a motion only by the liquidator. For the purpose of this case, we do not think that it is necessary to examine this question also in depth. We are inclined to proceed on the basis that the Somanis, as contributories or the members of the Company, are entitled to make an application to the Company Court in terms of section 391 of the Act for the purpose of acceptance of a compromise or arrangement with the creditors and members. 17. The question in this case really is whether the compromise put forward under section 391 of the Companies Act could be accepted by the court without reference to the fact that it is a company in liquidation and without considering whether the compromise proposed as intending to take the company out of liquidation, contemplates the revival of the company and whether it puts forward a proposal for revival and whether such a proposal also satisfies the element of public interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning a Scheme under section 391 of the Act in the case of a company that is ordered to be wound up, is the revival of the company. Strictly speaking, in the light of that order of a Division Bench, which was binding on the subsequent Division Bench, no question arises in this case especially when we notice that the decision of the earlier Division Bench dated 4-4-1995 was sought to be challenged in this Court by way of a petition for Special Leave to Appeal and that challenge was repulsed and the petition was dismissed. Therefore, as far as this case is concerned, the contours of the enquiry to be made by the Company Court was drawn by the decision of the Division Bench dated 4-4-1995. Hence, what is relevant for the court to consider was whether the proposal or the modified compromise or arrangement put forward was for revival of the company. 19. In that context, it is clear that the State Bank of India Capital Markets Limited had pointed out that it was not possible to revive the entire business of the SCML and that a part of the spinning industry could be retained and revived by disposing of the machinery related to the other activities carried on by SCML and by sale of a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SNCML and proceeds from the sale will be utilized to pay off the workers and the creditors if required." It was stated that: "In the event, if after paying all creditors of SNCML funds are available with SNCML, then SNCML will start such viable industry in any part of Maharashtra." According to the contesting respondents, the Scheme as sought to be modified is a Scheme that takes care of all the liabilities of SCML and also contemplates the setting up of some viable industry in any part of Maharashtra by the company. This was enough to recognize a scheme under section 391 of the Companies Act. It was not feasible to revive the mills as a whole as was clear from the materials and in that context what was possible was to save the godown and the office building of SCML, discharge all liabilities and if any excess fund is left, to start an industry in any part of Maharashtra and there was nothing wrong with the acceptance of such a scheme. It was during the course of the hearing before the Division Bench that two alternatives were proposed in an affidavit filed on behalf of the LBPL, not a member or creditor of the Company, but which was associated with the proposal put forward b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some viable industry in some part of the State of Maharashtra, if funds are available, was sought to be replaced by a commitment to start an industry in rural Maharashtra that also at the cost of Rs. 20 crores. Though, one of the Somani cousins agreed to these proposals, another cousin attempted to object to that proposal and is objecting to it before us. Similarly, the amendment by way of an affidavit on behalf of the LBPL contemplated the starting of an industry in the Mill land by LBPL and not by the company-in-liquidation. Thus, the company-in-liquidation, did not intend taking up any revival activity in the properties belonging to SCML other than retaining the office building it had and the godown it had away from the mill lands. It is difficult to conceive of this as a revival of SCML, a company-in-liquidation. This is more in the realm of disposal of the assets of the company-in-liquidation, no doubt, with a view to pay off all the creditors, debenture-holders and workers from the funds generated out of the sale of the lands in favour of LBPL. Going by the test laid down by the Division Bench in its order dated 4-4-1995, which has become final inter parties and the object o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself 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 latter comprising of the same class whom they purported to represent. 8.That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9.Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction." (p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be noted that it was not a fresh scheme that was being mooted, but it was a proposal for an amendment of the scheme already considered by the Division Bench when it passed the order dated 4-4-1995. It was the plain duty of the Division Bench on the latter occasion to keep in focus the suggestions earlier made. 24. It was argued before us on behalf of the appellant that sections 391 to 394A were procedural provisions and when once a company was under liquidation, the Chapter dealing with winding up applied and the only provision or substantive provision conferring power of stopping the winding up was conferred on the court by section 466 of the Act, and unless the court is satisfied that the Company is being taken out of liquidation by way of revival and that it will sub-serve public interest and will conform to commercial morality, the court cannot accept a scheme proposed under section 391 of the Act. The argument on the side of the respondents is that section 391 is a self-contained code and read with section 392 of the Act, which was peculiar to our Act, it was clear that a Company Court could approve, independently of section 466 of the Act, a scheme and could take th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the properties, realize the assets and distribute the same in accordance with law. 26. But before that, we think that another step has to be taken in this case. What has now been accepted by the Division Bench, is not the scheme as modified by the general meeting as contemplated by section 391 of the Act. At least two of the modifications having ramifications are based on undertakings or statements made on behalf of LBPL and there appears to be difference of opinion on that modification even among the Somanis. There is also the question whether the proposals of a person who is not one of those recognized by section 391 of the Act, could be accepted by the Company Court while approving a scheme. We are of the view that the scheme with the modifications as now proposed or accepted, has to go back to the General Meeting of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsors of the arrangement and that objection cannot be brushed aside. 28. We find that the modifications proposed alters the position of the shareholders vis-a-vis the Company. Instead of the company reviving the spinning unit as recommended by the State Bank of India Capital Markets Limited, as adopted in the General Meeting, now the Company will have nothing to do with the mill lands, and the whole of the mill lands will pass on to LBPL on LBPL paying a value of Rs. 97.50 crores to SCML and LBPL will start an industry of its own in that property. This cannot be considered to be a modification in the scheme necessary for the proper working of the compromise or arrangement. This is a modification of the scheme itself. Same is the position regarding the provision of replacing the resolution passed that if any surplus amounts are available, SCML would start a viable industry in any part of the State of Maharashtra, by a commitment that SCML would establish an industry in any part of the State of Maharashtra on an investment of Rs. 20 crores. This again is an obligation cast on the members of SCML and we are of the view that this cannot also be taken to be a modification which th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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