1993 (2) TMI 269 - HC - Companies Law

Summary

Issues Involved:

1. Payability of interest to unsecured creditors under the scheme.
2. Impact of moratorium periods under the Karnataka Relief Undertakings (Special Provisions) Act, 1977, and the Industrial Reconstruction Bank of India Act, 1984, on the company's liabilities.
3. Court's power to modify or enforce the scheme under Section 392 of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Payability of Interest to Unsecured Creditors under the Scheme:

The appellant-company contested the order directing it to pay interest at 6% per annum on the amount due to its creditors. The scheme sanctioned by the court on April 13, 1973, provided two alternatives for unsecured creditors: accept 50% of the amount due within three months of production commencement or receive the full amount in four equal instalments without interest. The company argued that the scheme, being a judicial pronouncement, did not provide for interest payment and should be enforced strictly according to its terms. However, the court held that the company's failure to make payments as per the scheme rendered the denial of interest irrelevant. The court emphasized that the scheme's silence on interest did not preclude the court from granting equitable relief to creditors under Section 392 of the Companies Act, 1956.

2. Impact of Moratorium Periods on the Company's Liabilities:

The company contended that its liabilities were suspended during the moratorium periods under the Karnataka Act and the Central Act. Specifically, the liability was claimed to be suspended from October 7, 1977, to October 6, 1987, and again from July 17, 1989, to March 5, 1991. The court rejected this contention, stating that Section 5 of the Karnataka Act only suspended liabilities temporarily. Once the notification ceased, the liabilities revived and were enforceable as if the notification had never been issued. Therefore, the liability existed all along, and its enforcement was merely postponed, not extinguished.

3. Court's Power to Modify or Enforce the Scheme under Section 392 of the Companies Act, 1956:

The court highlighted its wide supervisory powers under Section 392 of the Companies Act, 1956, which allows it to issue directions or make modifications necessary for the proper working of the scheme. The court cited several precedents, including S.K. Gupta v. K.P. Jain and Sudarsan Chits (I.) Ltd. v. G. Sukumaran Pillai, to emphasize that the purpose of a scheme is to avoid the civil death of a company and to ensure the rights of creditors are protected. The court concluded that it had the equitable power to direct the payment of interest to creditors who were deprived of their money due to the company's default. Consequently, the court upheld the order directing the company to pay interest from the date of the application at the rate of 6% per annum.

Conclusion:

The appeals were dismissed, affirming the lower court's order for the company to pay interest to its unsecured creditors. The court's decision underscored the broad supervisory powers under Section 392 of the Companies Act, 1956, and the equitable principles guiding the enforcement of schemes of arrangement.