1968 (4) TMI 79 - HC - Companies Law

Summary

Issues Involved:
1. Appointment of provisional liquidator and cessation of mill operations.
2. Agreement between Singhania group and Jalan group for transfer of shares and management.
3. Sanctioning and implementation of the scheme by the court.
4. Disputes and allegations of mismanagement between Singhania and Jalan groups.
5. Financial difficulties and insolvency of the company.
6. Legal implications of the scheme under the Securities Contracts (Regulation) Act.
7. Validity of the winding-up petition without a resolution from shareholders.

Issue-wise Detailed Analysis:

1. Appointment of Provisional Liquidator and Cessation of Mill Operations:
A petition for winding up the company was filed on 21st June 1965, leading to the appointment of a provisional liquidator on 2nd August 1965. Consequently, the mill's operations ceased from 6th August 1965.

2. Agreement Between Singhania Group and Jalan Group for Transfer of Shares and Management:
On 16th August 1965, an agreement was reached between the Singhania group (J.K. group) and the Jalan group. The Jalan group agreed to buy 25,625 ordinary shares from the Singhania group at Rs. 10 per share. The agreement included provisions for the repayment of debts to secured and unsecured creditors and stipulated that the Singhania group would resign as directors upon completion of the transaction.

3. Sanctioning and Implementation of the Scheme by the Court:
The scheme was sanctioned by the court on 17th February 1966 with modifications. This led to the withdrawal of the winding-up petition and the resumption of mill operations under the new management from 1st April 1966. However, the new management faced financial difficulties due to the refusal of the Central Government to guarantee a loan from Punjab National Bank, contributing to delays and disputes.

4. Disputes and Allegations of Mismanagement Between Singhania and Jalan Groups:
Disputes arose between the groups, leading to allegations of mismanagement by the Jalan group. The Singhania group accused the Jalan group of backing out of the agreement, converting company assets into cash, and diverting funds. The Jalan group countered with allegations of fraud by the Singhania group and claimed the scheme was unworkable due to the company's insolvency and external factors affecting the textile industry.

5. Financial Difficulties and Insolvency of the Company:
The company faced severe financial difficulties, with losses amounting to Rs. 28.44 lakhs for the financial year ending 31st March 1967. The mill was closed again on 14th June 1967 due to a lack of funds. The company's total indebtedness was significantly higher than its paid-up capital, and it was unable to secure the necessary finance to continue operations.

6. Legal Implications of the Scheme Under the Securities Contracts (Regulation) Act:
The Jalan group argued that the scheme's implementation would conflict with the Securities Contracts (Regulation) Act, 1956. The court, however, held that the scheme, once sanctioned, became an order of the court, and no question of illegality could arise except through an appeal from the order sanctioning the scheme.

7. Validity of the Winding-Up Petition Without a Resolution from Shareholders:
The court considered whether the company could apply for winding up without a resolution from its shareholders. It was held that under section 392(2), the court has the power to wind up the company suo motu or on the application of any interested person. The court ultimately decided to wind up the company due to its insolvency and the unworkability of the scheme.

Conclusion:
The court allowed the appeals against the implementation of the scheme and ordered the winding up of the company under section 392(2) of the Companies Act. The court found that the company was commercially insolvent, its substratum was gone, and the scheme could not be worked satisfactorily with or without modifications. The company was ordered to be wound up, and the liquidator was directed to act on the minutes.