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TMI Blog1968 (4) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, who took charge of the company on the 2nd August, 1965. In consequence the working of the mills stopped as from the 6th of August, 1965. On the 16th August, 1965, an agreement was arrived at between the Singhania group and another group, which for the sake of convenience and brevity we shall call the "Jalan group". The principal persons in this group are Sanwarmal Todi, Jagannath Agarwal, K. M. Goenka and Nandlal Jalan. The agreement was that the Jalan group was to buy over the controlling shares belonging to the J.K. group and thus obtain the control and management of the company. We will presently refer to the detailed terms of this agreement but for the time being it may be stated that the Singhania group had agreed to sell 25,625 ordinary (equity) shares of ₹ 100 each which they owned to the Jalan group at a price of ₹ 10 per share payable in a certain manner and on completion of the transaction the directors of the Singhania group were to resign as the directors of the company as the Jalan group would direct. By the agreement the secured and unsecured creditors of the company were divided into four categories and provision was made for the repayment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons the Jalan group and the Singhania group fell out. Disputes arose between them. A suit came to be filed in the city civil court and on the 27th February, 1967, Company Application No. 14 of 1967 was presented before this court by Messrs. J. K. Private Ltd., Bombay. That application was by way of a judge's summons praying inter alia that Nandlal Jalan, Sanwarmal Todi, Jagannath Agarwal and K. M. Goenka (the Jalan group) should be ordered to pay forthwith to the J.K. group the first instalment payable under the scheme sanctioned on the 17th February, 1966. That application was supported by an affidavit in which the J.K. group made strong allegation against the new management of the Kaiser-I-Hind Mills (the Jalan group) and alleged that they were backing out of the agreement which ought to be enforced against them and the company. That application was argued before Mr. Justice Thakkar on several days between 12th June, 1967, and 16th June, 1967. In the meanwhile the new management - (the Jalan group) - closed down the mills on the 14th June, 1967, alleging that they had no funds to run the mills and it was impossible to carry on the company. The Company Application No. 14 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion No. 14 of 1967 had been presented, this creditor filed an application praying that the scheme should not be sanctioned and that the company, which was in a commercially insolvent condition and unable to pay its debts should be wound up. That application was obviously under section 392(2) of the Companies Act, and it is application No. 19 of 1967. 5. All these applications came up for hearing before Mr. Justice Vimadalal and by an order passed by him on the 6th November, 1967, he allowed the Company Application No. 14 of 1967, and ordered the Jalan group to comply with the conditions of the scheme and passed other ancillary orders. By a separate order he dismissed the Company Application No. 21 of 1967 for the winding-up of the company under section 392(2) of the Companies Act. 6. Against the allowance of Company Application No. 14 of 1967, two appeals have been filed in this court, one by the creditor, Lalji Thakersey and Co. being Appeal No. 96 of 1967 and the other by the company itself, being Appeal No. 97 of 1967. Against the dismissal of Company Application No. 21 of 1967, namely, the company's own application for winding it up under section 392(2) of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s annexed as a schedule to the order or Mr. Justice Mody dated 17th February, 1966, and the operative part of the order recites. "THIS COURT DOTH PASS JUDGMENT AND DOTH HEREBY SANCTION the compromise or arrangement set forth in paragraph five of the petition herein with certain modifications as approved by this Hon'ble Court and which compromise or arrangement with the said modifications is set out in the schedule hereto annexed AND DOTH HEREBY DECLARE the same to be binding on the unsecured creditors of the said company and also on the said company ......" The scheme recites that there were secured and unsecured creditors of the company, the secured creditors being the Punjab National Bank Ltd., who had advanced loans against the pledge and hypothecation accounts and demand loans secured by goods or mortgage of the fixed assets and pledge account with Messrs. R. Ratilal and Co. secured by cotton and that both these accounts shall be continued by the company. The unsecured creditors have been divided into four categories, their debts aggregating to ₹ 1,01,39,900. The first category comprised the concerns of the J.K. group. The second category aggregating about & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides that the second mortgage shall be in the form of a debenture trust deed. The whole of this arrangement was subject to the Controller of Capital Issues granting section to the second mortgage being created by the company in favour of the J.K. group. 12. This provision of the scheme has to be read along with the agreement which is referred to in clause (ii) of category I. That agreement is exhibit "A" and is entered into between Gopalkrishna Singhania called the vendor (J.K. group) and the three members of the Jalan group, Nandlal Jalan, Sanwarmal Todi and Jagannath Agarwal called the purchasers. The agreement provides that the Jalans were to purchase the 25,625 ordinary shares owned by the J.K. group in the New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. and that the purchase price of the shares will be ₹ 10 per share. It also provides that the vendor, namely, the J.K. group, shall procure and accept the appointment of such persons as directors of the said company as the purchasers shall direct and that the J.K. group will also procure the consent and confirmation of the various creditors whose names are set out in schedule B. If the company secures the amount due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1st April, 1966, and an attempt was made to run it, the attempt failed. Ultimately, the parties came to court by the filing of the Application No. 14 of 1967, but at the hearing various other affidavits and documents were read. At the outset Mr. Bhatt on behalf of the J.K. Group wanted that each appeal should be heard separately and that the parties should not be allowed to refer to any pleading or affidavit or document in any other appeal. At any rate, he urged that Appeals Nos. 96 and 97 which arise out of the Application No. 14 of 1967, should be heard separately and Appeal No. 98 should be heard separately because it arose out of the Application No. 21 of 1967. At the hearing, however, we had over-ruled this objection of Mr. Bhatt and had informed counsel that we would give our reasons later. We are unable to accept this contention of Mr. Bhatt for the simple reason that the conduct of all these matters was not kept separate before the learned single judge and in his own orders also the learned single judge has referred to his findings in the other orders. In his order on Company Application No. 14 of 1967, paragraph 1, the learned judge observed as follows : "Before I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad undertaken to implement it and had partially implemented it by buying 25,625 ordinary (equity) shares of the company from the J.K. group. Thus the scheme has been partially implemented and now the company and the new management are dishonestly backing out. They have made allegations of deliberate mismanagement and maneuvering against the Jalan group and of having gone back upon their representations to the court made at the time when the scheme was sanctioned. They have pointed out that at the time when the scheme was to be sanctioned the Jalan group had painted a very rosy picture before the company court and made it appear that the company could be worked and the scheme satisfactorily implemented, but having got into the management and control, they have turned round, taken the assets of the company; converted them into cash and have diverted them to their own friends or partisans; deliberately brought the company into the state in which it is to-day. The most paying part of the company's business, viz., the processing plant has been leased out to Badri Prasad Jhunjhunwala and others on very liberal terms, thus causing great loss to the company. Having deliberately brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Nos. 14 and 21 of 1967, by two separate orders passed on the same day, namely, 6th November, 1967. In his order in Application No. 14 he held that the allegation which the new management had made against the old management of fraud had not been made out and that in any case the frauds alleged by the new management were merely committed by certain individuals and the company could not possibly be affected by any acts of fraud which some individuals, who were at one time in the management of the mill-company, are alleged to have committed on that company. At any rate, the pleading as to fraud on the part of the Jalan group was wanting in particulars and was too vague and general to be considered. He observed that, "it was not a proper pleading of fraud at all and does not show that the new management has acquired any definite personal knowledge of the acts of fraud alleged by it against the old management." He also accepted the contention of counsel that "the company is incapable of perpetrating a fraud". He Further held that "assuming that the old management had committed the frauds alleged against it, the proper remedy of the new management is not to scu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat purpose in addition to any finance which they may or may not procure from elsewhere". He also ordered the cancellation of the agreement of lease as to the processing unit of the company which the new management had given. 21. In his order passed in Company Application No. 21 of 1967, the learned judge dealt with the question of the unworkability of the scheme and negatived the contention of the Jalan group that the company was commercially insolvent and that it was impossible to implement the Scheme. He came to the conclusion that "it is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme" and that "the mere fact that, in view certain difficulties, it may not be possible to work the mill for sometime, would not justify a winding-up order under section 392(2)". He reiterated that it was the Jalan group which had deliberately tried to create a situation in which they could come forward and say that the scheme was unworkable, so that they may not be required to bring in any further finances for ruining the mills. Finally he orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alans were to bring in their own finance but that they had only undertaken to provide finance and they had made an honest attempt to do so. At any rate, they cannot be compelled to bring in finance if they are unable to do so. The orders which the learned Judge passed are clearly unsustainable and impossible to be implemented in practice, because unless finance is forthcoming the mills cannot run. He also urged that the company was in a hopelessly insolvent condition and was so even on the date on which the scheme was sanctioned by Mr. Justice Mody, a fact which the learned judge himself recognised in the order which he passed. At that time all the parties expected that the company may turn the corner but that expectation has failed. He took us through the pleadings of the parties and through a considerable volume of correspondence which had been filed by the company to show what steps it took to revive the company and what its condition is, to show commercial insolvency. He contended that the scheme is unworkable and is impossible to be implemented and at any rate the application No. 14 of 1967 is an application praying that the scheme should be implemented partially in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. That condition is induced by their own conduct in parting with the most lucrative part of its business, namely, the processing plant which they had leased out to Badriprasad Jhunjhunwalla. They had declared it to be a very profitable and paying unit before Mr. Justice Mody but now they say that it was a burden to the company and therefore it was leased out to Jhunjhunwalla, much to the detriment of the interests of the company. He controverted the contention that the scheme was unworkable in itself or in any way illegal. On the other hand, he alleged that the new management was estopped from urging that the scheme was illegal or unworkable, by the order of Mr. Justice Mody sanctioning it and that the creditor, Lalji Thakersey and Co. who have obtained advantage for themselves cannot now be allowed to go back and challenge the scheme. He also urged that the J.K. group under the agreement itself had become secured creditors or at least charge-holders and that therefore they could not be defeated simply because the Company was being wound up. Alternatively, he urged that the J.K. group were already secured creditors and in any event he prayed that the charge of the J.K. group sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 433 of this Act." 29. Thus where a scheme is once sanctioned by the High Court the section provides for two alternatives, (1) where the scheme can be worked without modification, the court is given the power to supervise the carrying out of the compromise or arrangement and (2) if the scheme cannot be worked as it is, then, the court has the power (a) to give such directions as it may consider necessary for the proper working of the compromise or arrangement or (b) make such modifications in the compromise or arrangement as it may consider necessary also for the proper working of the compromise or arrangement. These are the powers conferred by sub-section (1) which contemplates only the working of the scheme or working it with directions and modifications. 30. But there may be a case where despite a scheme, the scheme cannot at all be worked satisfactorily with or without modifications. That case is contemplated in sub-section (2) and in such a case the court is given the power to make an order winding up the company and if it passes such an order that order is deemed to be an order made under section 433 of the Act. The power moreover can be exercised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the normal duty of a managing agent or other person in charge of management of a company to make financial provision to run the company. 33. That this is really so is clear from the other provisions of the scheme itself, viz., the provisions of the agreement between the J.K. group and the Jalan group, exhibit A to the scheme and particularly schedule C thereto which lays down the principal terms of the second mortgage. In clause 4(d) of schedule C to the scheme, it is provided that in the event of the company obtaining a loan from certain Corporations or the Central or the State Governments or a State Corporation or any scheduled bank the company "shall be entitled to create a first or prior charge over the fixed assets of the company upon such terms and conditions as may be agreed to between the company and the said financial institutions ........." It is also provided that in that event "the security of the second mortgagees over the fixed assets shall be subject to the first or prior charge or mortgage in favour of the said financial institution and that subject only to the said first or prior charge no other terms or conditions of second mortgage shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scuss the conduct of the parties, and held that the Singhanias have fulfilled their part of the contract, but the Jalans had not and gave his findings on the second contention of Mr. Bhatt, counsel for the J.K. group. He held inter alia : "in view of the fact that the new management has, in breach of the obligation undertaken by it under clause 4 of the scheme failed to invest any longer a single rupee by way of finance for the purpose of running the mills, I am not satisfied that the mills cannot be run for want of finance." 36. The words we have underlined clearly show that the learned judge thought that the new management was under an obligation to invest, that is to say, to provide the finance themselves and they had failed to do so. Therefore, the learned judge stated in the penultimate paragraph of his judgment "It is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme", and he passed the final order : "On considering the facts discussed by me above, I have come to the conclusion that, if the new management brings in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken under the scheme to provide the necessary finance required for running the mills, which must mean that they must in any event bring in their own finance for that purpose in addition to any finance which they may or may not procure from elsewhere." We have already shown that by the terms of the scheme itself the contemplation of the parties was that the new management should make provision for finance or arrange finance and that they could do it either by getting the finance from other parties or if they so chose by providing it by themselves. In that view we think that the learned judge erred in his construction of clause 4 and in the order which he passed. 39. The order, moreover, in our opinion, is incapable of being carried out and is incapable of supervision and enforcement. The new management, we shall, presently show, have stated that they made efforts to procure finance, were able to procure it to some extent, but not to the extent that the large indebtedness of the company required. They have also alleged that in this respect the J.K. group were responsible for foiling their efforts to procure the finance, and that the position of the company is such that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal parties to the agreement or compromise at that time believed that the company which was almost dead could be revived and managed to persuade the majority of the creditors and the court that it could be revived. In the sequel we shall show that their hopes have been belied and that the company today is in worse position. It is commercially insolvent and its substratum is completely gone. 43. The fact that it was insolvent on the date of the sanctioning of the scheme is virtually conceded even on behalf of the Singhania group as can be seen from the affidavit to Gopalkrishna Singhania dated 8th August, 1967, filed in answer to the Company's Petition No. 82 of 1967 under section 433 of the Companies Act (in Appeal No. 100 of 1967). In paragraph 9 this is what a person who was at that time a director and the chairman of the company says : "I say that at the date of the said order dated 17th February, 1966, the petitioner-company was commercially insolvent and but for the obligation undertaken by the newly appointed directors to run the mills and to provide the necessary finance, this Hon'ble Court would never have sanctioned the scheme. The said scheme cannot be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ton season was partially over and cotton of the requisite quality was not available in the market. (3) Moreover the prices of cotton in the local market had been soaring higher than the ceiling fixed by the Textile Commissioner. (4) The labour cost also went up particularly due to the cost of the living index going up by several points and due to the dearness allowance being linked up with the cost of living index. (5) The devaluation of the Indian rupee had by then taken place and the prices of various items of stores particularly dyes and chemicals went up considerably. (6) Under these circumstances the company's machinery which was repaired and reconditioned could not be put to active use and all these factors affected the running of the unit which became uneconomic and the mills could only be run at a heavy loss of about ₹ 2,50,000 per month. (7) In the financial year ending 31st March, 1967, the company suffered an estimated loss of ₹ 28.44 lakhs according to the provisional balance-sheet. 47. These allegations have been denied on behalf of the J.K. group. They have denied that the company was unable to pay its debts and alleged that primarily the unsound fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eged to have incurred a liability or debt of ₹ 17 lakhs in favour of the lessees of the processing house during the period April 1, 1966, to March 31, 1967. This charge the new management have denied and have pointed out that they had not granted a lease but it was only a leave and licence agreement made with Badriprasad Jhunjhunwalla and others and the whole agreement was made after the new management had negotiated with the Textile Commissioner as well as the excise authorities "for separating the processing unit from the composite mill" and after obtaining the sanction from the excise authorities. The compensation of ₹ 50,000 per month charged was not only adequate but was more than reasonable and the licensees were under the agreement with the company under an obligation "in the first instance to process the entire production of the mill at costs. It is only for surplus capacity that may be available to the licensees for processing outside cloth that the licensees were paying a handsome amount of ₹ 50,000 per month to the company as monthly compensation for the use of the building and machinery of the process house." All the expenses such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of compensation with the result that their further claims for lay off compensation or closure compensation under the industrial laws, as the case may be, is daily mounting. The workers, we are told, have in satisfaction of their claims taken possession of the factory premises and are squatting on it and preventing any director from going in. From 14th June, 1967, till to-day these overhead and capital charges must run into several lakhs of rupees. The company does not appear to have any reserve or other funds from which its indebtedness can be paid. Its machinery, which has been lying idle, will cost several lakhs of rupees to be put in order again. When the new management re-started the mills on 1st April, 1966, it cost the new management ₹ 5 lakhs to put 60% of the machinery, in order. We cannot imagine that any reasonable or prudent businessman would decide to sink money into or run such a mill. It is clear that the company is insolvent, its entire capital wiped out and its substratum gone. 52. Such correspondence as has been placed before the court shows how this position was reached. There is no doubt that from about September, 1966, there arose a crisis in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e labour union that they were unable to purchase cotton at prices over the statutorily fixed ceiling which is in contravention of law, but they were making efforts to purchase cotton or secure it on loan from other mills, but "the present stocks of cotton are expected to last upto November 18, 1966, and if the efforts to secure cotton do not succeed, the management will be constrained to stop working of III shift of the spinning department of the mills". 54. On the 23rd November, 1966, the Indian Cotton Mills' Federation pointed out several facts and in a press note stated that the total supply or cotton will be no more than 60 lakhs bales against the requirement of 66 lakhs and that "this gap clearly brings out the necessity for reduction of spindle working by 10 per cent. at least". They also pointed out that the prices of cotton were ruling very high upto 50 per cent. over the ceiling and that sporadic closure of mills was taking place in various parts of the country for want of cotton. They announced that in order to meet the abnormal situation all mills in India should be closed for a period of 15 days from 19th December, 1966, to 2nd January, 1967, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue to pay their employees and bear the overhead expenses and could not close down. The new management could hardly be blamed for the inevitable and mounting losses, incurred as a result of such controls. 56. The steps they took to meet situation are further shown from the letters which the new management addressed to the authorities. By a letter written on the 7th December, 1966, to the Textile Commissioner, the company pointed out that they were carrying on with cotton of lesser count then they needed after they had put up a closure notice because of instructions of their Federation, and that they could only continue to work till the 10th of that month (December, 1966). The company by this letter informed the Textile Commissioner : "Our mill is facing closure positively from 10th of this month when no stocks either in process or in godown will be left out except few bales of 60s count. This enforced working in last 20 days has been at the cost of process stock. We fail to understand as to how we shall keep the mills working since we have not received a single bale till to-day the 7th December, 1966, nor any requisition order. Your circular clearly indicates that no mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cur losses. 58. The response of the authorities did not exactly solve their problem as the company had hoped. On 13th December, 1966, the Textile Commissioner informed the company by a telegram that the exemption from the additional one day closure could not be granted to them. On the 15th December, 1966, the company further pointed out to the Textile Commissioner that the cotton which was offered for sale by the trade was quoted beyond the ceiling and the difference was between ₹ 100 to ₹ 500 per candy depending upon the variety. They stated that they were given a definite assurance that cotton from the requisitioned stock would be allotted to them by Government, but "till date not a single bale allotments has come. On enquiry, we have been told that officers are still busy in carrying out requisition at various centres and we shall soon get the news about the allotment". They confirmed also a telegram sent by them to the Commerce Minister at Delhi. The company also made it clear that "this mill cannot sustain any further burden of loss beyond what we are already incurring. Still there seems to be no positive interest or response from any circle. This a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are further letters written to the Textile Commissioner and other authorities dated 31st January, 1967, 2nd February, 1967, 3rd February, 1967, 7th February, 1967, 13th and 14th February, 1967, and 15th February, 1967. It appears that one of the directors interviewed the Additional Textile Commissioner on the 15th February, 1967, and what transpired at the meeting is recorded in a letter written on that day to the officer concerned. In that letter it is stated inter alia "when the facts were clearly placed before your goodself and the position was explained that there is absolutely no stock of cotton in the mill and if permission is not granted, the mill will close down. Instead of any help, you intimated that in case we cannot manage to run the mill we may close down". The Additional Textile Commissioner must have known that this oral permission given by him could not be availed of in view of the Ordinance which had been passed earlier. The remaining correspondence (exhibit D) shows their efforts to continue to carry on. On the 16th April, 1967, there came into force the Essential Commodities (Amendment) Act, 1967, which replaced the Ordinance No. 13 of 1966 and virtuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cotton to them but not a single bale had been allotted them. On 14th March, 1967, they sent the following telegram to the Textile Commissioner among others : "For cotton we are starving and crying since July, 1966, but no action has been taken by your office nor any requisitioning done except 100 bales L. 147 against our deposit with ICMF for 2000 bales in January/February stop. We understand that many profitable mills have been supplied with requisitioned cotton whereas our mill which is making loss is made to suffer further. We demand proper justice failing which closure of this mill will be solely due to non-availability of raw material and any legitimate assistance from authorities which please note - New Kaiser-I-Hind Mills." 63. Thereafter it appears that a committee of the Federation met the Textile Commissioner and some sort of an assurance was given by the Textile Commissioner which the Federation communicated to all its members by its letter dated 3rd April, 1967, when 50 bales seem to have been allotted to this company, but even that was not of the quality which the company wanted. This is clear from another telegram dated 22nd April, 1967, to the Textile C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64. The correspondence strongly supports the case of the company that due to the various circumstances, particularly the want of cotton, the control orders and the executive orders and legislation in aid of labour, the company suffered losses despite the best efforts of the new management. We are unable to accept the charge that the company failed to lift the cotton deliberately and cannot be heard to say that the mills could not make profits for want of cotton. The letter dated 25th April, 1967, moreover does not establish that till then the management could be blamed, which is a charge levelled against the new management by the J.K. group. The position of the company must have further deteriorated since the closure in April, 1967, for we are informed that further amounts of compensation to labour have accumulated and other liabilities in the shape of recurring charges have arisen. How such a company could possibly continue to work at a profit it is difficult to see. It is only it runs at a profit that the scheme can be implemented. 65. Next we turn to the charges levelled against the new management regarding the processing unit. This was made a major point in the arguments aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new management in purporting to grant a lease of the processing house of the company in favour of Badriprasad Jhunjhunwala who was "a nominee firm of the newly appointed directors" at a nominal charge of ₹ 50,000 per month. It was alleged that in the preceding year, i.e., 1964-65 the petitioner-company earned ₹ 17.12 lakhs from outside processing work done by the petitioner-company after carrying out the entire processing work in respect of the petitioner company's own production, but during the period April 1, 1965 to March 31, 1967 the company is shown to have received by way of lease money a sum of ₹ 4,80,000 and the petitioner-company is shown to have paid to the processing unit, processing charges amounting to ₹ 21,77,000. Therefore it was urged that the net result was that the petitioner-company in the previous year earned a net income of ₹ 17,12,000 our of the processing unit but for the subsequent period April 1, 1966 to March 31, 1967 the company is alleged to have incurred a liability or debt of ₹ 17 lakhs in respect of the losses of the processing house. It was alleged that the business of the processing unit is being at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available to the licensees for processing outside cloth that the licensees were paying a handsome amount of ₹ 50,000 per month to the petitioner-company as monthly compensation for the use of the building and machinery of the process house. All other expenses like water, power, steam, wages, maintenance, etc., are charged to the licensees separately." As regards the allegation made against the new management that they had represented at the time when the scheme was to be sanctioned, in the affidavit dated 29th January, 1966, of Jagannath Agarwal, that the unit was a paying proposition the new management alleged that what they had stated there was an estimate and not an assurance or representation an alleged. They pointed out that the textile industry as a whole had been passing through very severe crisis due to the shortage of raw material, high cost of raw material and stores, higher wages and dearness allowance, depression in the sale of cloth rates, less export due to devaluation and several other factors. The new management after restarting the mills rationalised the spinning and weaving departments and also effected substantial economies. In spite of economies and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , I crave leave to refer to and rely on the balance-sheet and profit and loss account for that year and I crave leave to refer to the same when produced. I deny that the petitioner company has incurred a liability or debt as alleged of ₹ 17.12 lakhs in favour of the lessee of the process house. I deny that the processing unit earned a profit of ₹ 17.12 lakhs in the previous year. As I have stated above ₹ 17.12 lakhs (sic. "is") the gross profits without taking into account the monies which the petitioner company had to spend on colours, chemicals, dyes, labour, electricity, water, licence, compensation and other overheads, with regard to the processing unit." The learned judge treated this as a bare denial amounting to no denial at all and therefore held that the affidavit of Gopalkrishna Singhania dated 8th August, 1967, remained unrefuted. Another reason which prevailed with the learned judge in coming to this conclusion was that the affidavit of Goenka is : "Scrupulously silent on the question as to what was the amount which the company had to spend during that year for running the processing unit." As to that it has been explained bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new management failed to bring in finance, the circumstances are explained in the affidavit of K. M. Goenka dated 11th April, 1967 (vide paragraphs 11 and 14) on behalf of the Jalan group. They have counter-charged that the J.K. group had in the agreement dated 16th August, 1965, expressly provided that the partners of the firm J.K. would continue their personal guarantees to the Punjab National Bank but in breach of the said term they refused to agree to any modification of terms with the bank. The result was that Nandlal Jalan had to pay about ₹ 23 lakhs in all towards the reduction of the loan or for the clearing up of the balance of the cash credit account. The amount was deposited by Sushil Investments (Pvt.) Ltd. Though a subsequent affidavit was filed by Gopalkrishna Singhania by way of rejoinder on the 24th April, 1967, paragraph 11 of Goenka's affidavit was not specifically replied to see paragraph 18) and we accept the statements in Goenka's affidavit. But we do not think that these allegations and counter allegations are of much relevance since in our view there was no binding obligation or duty under-taken by the Jalans to pay anything to the company or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 391 or under section 433 of the Companies Act for winding up of the company. The scheme itself was sanctioned of February 17, 1966, under section 391. Now section 392 gives the High Court power by sub-section (1)(a) to supervise the carrying out of the compromise or arrangement and by sub-section (1)(b) to give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary. The J.K. group invokes sub-section (1). The Jalan group wants the winding-up of the company. The power to wind up is given to the High Court under sub-section (2) of section 392 subject to conditions therein stated that the compromise or arrangement sanctioned under section 391 "cannot be worked satisfactorily with or without modifications", or the court "may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company." When such an order to wind up a company is passed it is deemed to be made under section 433 of the Companies Act. There is nothing in the Securities Contracts (Regulation) Act (Act No. 42 of 1956) to suggest that it affects the pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in their favour of ₹ 48 lakhs and odd. It was urged that a direction as to a part of the scheme should not be given in the circumstances. Upon the finding we have reached there is no question of giving direction as to a part of the scheme. We do not propose to implement the scheme at all for the simple reason that the company is not a company which can possibly work. It is insolvent and its substratum is gone, quite apart from the fact that in its present condition to allow a second mortgage to be given to the J.K. group would mean completely depriving the remaining unsecured creditors of any share or dividend in the liquidation. 75. The scheme was sanctioned by Mr. Justice Mody under the powers conferred by section 391. Its enforcement or implementation is governed by the provisions of sub-sections (1) and (2) of section 392, which we have quoted above. These provisions are comparatively new being incorporated for the first time by Act I of 1956 and there is very little authority to indicate their construction. Mr. Bhatt has argued that the words in sub-section (2) "cannot be worked satisfactorily" are not to be found in the provisions of sub-section (1). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 391 can be worked fully or partially by modifications or giving of directions. Sub-section (2) however contemplates a case where the scheme cannot be worked satisfactorily with or without modifications, that is to say, where the scheme (sic) despite any endeavour to modity it or any endeavour to implement by proper supervision or giving suitable directions, in such a case the court is given the power to make an order winding up the company. This power is a discretionary power, because of the use of the word "may" in sub-section (2), and having regard to the context in which it is used. It is not essential that the company should be wound up even if the scheme does not work satisfactorily, but it is clear that the court must consider the question whether the company ought to be wound up in such a contingency. This power of course can be exercised suo motu by the court or on the application of a person interested in the affairs of the company. 78. Any order passed for the winding up of a company under section 392 of the Act is "deemed to be an order made under section 433 of this Act". In other words, if an order for winding up a company is passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Act which is analogous to section 227(a) of the old Companies Act, that the transfer of the shares in favour of the J.K. group after the commencement of the winding-up would be void. It was contended that under section 441(2) the winding up of a company would commence with the presentation of a petition for winding up and therefore it would be illegal to enforce the transfer of the shares in view of section 536. Mr. Nariman had relied on the following cases : Tulsidas Jasraj Parekh v. Industrial Bank of Western India (A.I.R. 1931 Bom. 2; 32 B.L.R. 953). Gorakhpur Electric Supply Co. Ltd., Official Liquidator v. Siemens (India) Ltd. (), Andhra Bank Ltd. v. D. P. Narayana Rao Provisional Liquidator, Godavari Sugar and Refineries Ltd. and one passage from Buckley on the Companies Acts, 13th edition, at page 493. In our opinion, since the company is financially not in position to implement the scheme at all, it is not necessary to consider whether implementing a part of it would be legal or illegal. 81. Next, on behalf of the J.K. group, it was urged that the company cannot apply for its winding-up as it has done in Company Petition No. 82 of 1967 and in Company Application No. 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53 Pepsu 195). We prefer the view taken in State of Madras v. Madras Electric Tramways Ltd. ([1955] 25 Comp. Cas. 378; A.I.R. 1956 Mad. 131). The contention, therefore, must fail. 82. Then it was argued that since the scheme was sanctioned after due consideration by Mr. Justice Mody and at that time also it was argued before the learned judge that the company was insolvent, but notwithstanding that plea the learned judge sanctioned the scheme, the parties are estopped from raising the plea of commercial insolvency of the company in the present proceedings or challenging the scheme. Mr. Bhatt relied on the decision in Nicholl v. Eberhardt Company ([1889] 59 L.J. Ch. 103), which was under section 2 of the British Companies Amalgamation Act which counsel said was in terms similar to section 391(2). An alternative to this part of the argument was that the creditor Lalji Thakersey who had been a party to the proceedings when the scheme was sanctioned and had obtained an advantage for himself is doubly estopped and cannot now, having taken advantage of the scheme, turn round and say that it should not be sanctioned. On behalf of the J.K. group reference was made in this respect to a dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied upon a decision in Allan Brothers & Co. v. Shaik Jooman Sons & Co. [A.I.R. 1925 Rang. 189] The stipulation in favour of the J.K. concerns is to be found in clause (ii) under category I of the scheme stated in the following terms : "The sum of ₹ 48,13,899 is due to J.K. concerns and others whose names are set out in Schedule B to the agreement exhibit A hereto. The said amounts with interest at the rate of 1/4th per cent. per annum will be repaid by the company in annual instalments of an amount equal to 50% of the profits of the company, commencing after the expiry of two years from the date of the second mortgage but in any event not latter than 30th June, 1980, as provided in the said agreement being exhibit A hereto and the said amount with interest as aforesaid will be secured by a second mortgage of the company's assets." In exhibit A which is annexed to the scheme, the relevant stipulation is to be found in clause 3(c) : "That the vendor will procure the consent or confirmation from the various creditors whose names are set out in schedule B hereunder written to the effect that in consideration of the said company securing the amounts respectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the meaning of sections 58 and 100, T.P. Act, 1882. So far as the immovable property was concerned, the said agreement merely created a right in the plaintiffs to obtain another document, viz., a regular deed of mortgage of the said immovable property which was to be executed by the company." 87. No doubt in that case the property was an immovable property and here it is the assets of the company which are partly movable and partly immovable, but in principle we can see no distinction between the two cases. The agreement cannot give raise to a mortgage in favour of the J.K. group. The agreement contained in the scheme has merely created a right in the J.K. group to obtain another document, namely, a regular deed of mortgage of the assets of the company. The case in Allan Brothers & Co. v. Shaik Jooman and Sons & Co. (A.I.R. 1925 Rang. 189) is distinguishable upon the facts. In that case there was an order passed on 6th February, 1924, that the decree shall be payable by instalments of ₹ 10,000 per mensem and that the respondent should give as security a second mortgage on 23A, Phayre Street and the court held that this order of 6th February, 1924, had not been set asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument. 89. We hold that having regard to all the circumstances the compromise or arrangement contained in the scheme sanctioned by Mr. Justice Mody was not enforceable and therefore could not be worked satisfactorily with or without modifications. It was impossible to work it having regard to the fact that its enforcement or implementation depended upon the company making profits. The entire scheme is based upon the assumption that the company would work and make profits out of which the creditors could be paid off, but as we have shown, the company is commercially insolvent and, in our opinion, always was so, since the date of the scheme, (we say so with the greatest respect to the observations of Mr. Justice Mody) and its substratum is completely gone. To-day it has only the outward form of a company and there is no semblance of a business left. It is impossible to carry out the objects for which the company was established. There is no question, therefore, of supervising the carrying out of the compromise or arrangement or of carrying out the same with any modifications. The compromise or arrangement sanctioned and contained in the scheme cannot be worked satisfactorily at all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. They also had sought their own advantage but their calculations failed. Neither of these two groups can be credited with seeking the advantage of the company or its workers or the interests of the other unsecured creditors of the company. 91. In the several proceedings which commenced no doubt each of the two groups started violently to blame the others making all kinds of allegations against each other, the J.K. group charging the Jalan with deliberate breach of their agreement and fraudulent conduct and an attempt to make money for themselves by mismanaging the company. The Jalan group retorted that the position of the company was brought on by the fraudulent conduct of the J.K. group in the past and by their obstructionist attitude in the implementation of the scheme. These charges and counter charges are all at the stage of allegations and counter allegations and there is no proof of them as such. We have come to our conclusions only on the face of the affidavits filed. If a case is made out for the winding-up of a company, as we have held has been made out in the present case, upon such material as has been placed before us, we do not think that these allegations a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The learned judge should not have taken into consideration how wicked the petitioners were or how evil their actions had been." 92. In a later passage the Chief Justice observed (page 393) ([1955] 25 Comp. Cas. 227, 252; 57 Bom. L.R. 378) : "There is not the slightest possibility of the working ever being resumed under the present dispensation. We take it that the learned judge was thinking of the allegations of the company that the mills suddenly came to a standstill because of the machinations of the petitioners. But the stark truth remains, for which there is no answer or no explanation, that the mills have no money whatsoever which would enable them to be run." 93. That, in our opinion, exactly sums up the position in the present case also. 94. In the result, we pass the following orders : Appeal No. 96 of 1967 : We allow this appeal and dismiss the Application No. 14 of 1967 made on behalf of the J.K. Group to implement the scheme. On the other hand we allow the Company Application No. 21 of 1967 for winding up of the company under section 392(2). Appeals Nos. 97 of 1967 and 98 of 1967 : Appeal No. 97 of 1967 is the company's appeal agains ..... X X X X Extracts X X X X X X X X Extracts X X X X
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