1966 (8) TMI 76 - HC - Companies Law

Summary

Issues Involved:
1. Whether the court is bound by the decision of the majority of shareholders and creditors when sanctioning a reconstruction scheme.
2. Whether the scheme for reconstruction of the company is feasible and reasonable.
3. Whether the scheme covers the deeds of delinquent directors.
4. Whether the scheme's provisions, such as selling property by private treaty and transferring personal debts to the company, are reasonable and practical.
5. Whether the non-disclosure of misfeasance proceedings against directors affects the validity of the scheme.

Issue-wise Detailed Analysis:

1. Whether the court is bound by the decision of the majority of shareholders and creditors when sanctioning a reconstruction scheme:
The court is not bound to accept the view of the majority of shareholders and creditors. Section 153(2) of the Indian Companies Act, 1913, states that a compromise or arrangement shall bind all concerned "if sanctioned by the Court." The court must ensure that statutory provisions are complied with, the class was fairly represented, the statutory majority acted bona fide, and the arrangement is reasonable. The court's role is not merely to register the decision of the majority but to ensure that the scheme is fair and reasonable.

2. Whether the scheme for reconstruction of the company is feasible and reasonable:
The scheme cannot be sanctioned as the company is in a state of hopeless insolvency with assets valued at Rs. 6,73,000 and liabilities amounting to Rs. 7,24,500. The company lacks running capital and liquid assets, making it impossible to function. The liabilities shown ignore many other liabilities, such as arrears of tax. The total debts of the company are approximately Rs. 7,44,000, and if the personal debts of the Managing Director amounting to Rs. 1,57,000 are added, the total liability would be Rs. 9,01,000. The company's assets are insufficient to meet these liabilities, and it has no means to pay even the interest on outstanding debts.

3. Whether the scheme covers the deeds of delinquent directors:
The scheme appears to cover the deeds of delinquent directors. The trial court held that the Managing Director made a false claim to the building, manipulated accounts, and acted against the company's interests. The scheme's sanction would set aside the winding-up order, discharge the liquidators, and leave no one to prosecute the misfeasance summons against the erring directors. This would allow the assets of the company to fall back into the hands of persons whose rectitude is under a cloud.

4. Whether the scheme's provisions, such as selling property by private treaty and transferring personal debts to the company, are reasonable and practical:
The scheme includes several unreasonable and impractical provisions:
- Selling the vacant plot at Yerandavana by private treaty for Rs. 1,85,000 without inviting public offers or formal valuation is arbitrary and unreasonable.
- Transferring the land under the building "Pioneer House" to the company for Rs. 47,000 is unjustifiable, especially since the Managing Director had wrongly appropriated this amount.
- The company undertaking to discharge the personal liabilities of the Managing Director amounting to Rs. 1,57,000 is utterly unreasonable.
- The scheme does not visualize where and with what equipment the company will conduct its business, making it unrealistic and impractical.

5. Whether the non-disclosure of misfeasance proceedings against directors affects the validity of the scheme:
The non-disclosure of misfeasance proceedings against the directors is a material fact that should have been disclosed to the shareholders and creditors. The creditors' decision on the approval of the scheme could have been different if they were aware of the directors' fraudulent conduct and the pending misfeasance proceedings. The failure to disclose such important information undermines the validity of the scheme.

Conclusion:
The appeal is allowed, and the winding-up proceedings will continue. The respondents are directed to pay the costs of the appeal and the proceedings in the District Court. The receiver is discharged, and the rule in Civil Application No. 2793 of 1965 stands discharged with costs.