2019 (4) TMI 141 - HC - Companies Law

Revival of company - Seeking to permit the applicant and its members to clear the dues in terms of the application - authority of person who has made an application seeking scheme of revival - pierce the veil and judiciously X-ray the same - HELD THAT - This application is filed by an entity whose background is unknown. It is also not clear as to whether it has the support of large number of stated 1127 permanent workers who are working with the respondent company. It is a mandatory provision spelt out u/s 391 of the Companies Act that no order sanctioning any compromise or arrangement shall be made unless the Court is satisfied that the person who has made an application has disclosed to the court all material facts relating to the company such as the latest financial position of the company, the latest auditors report of the accounts of the company, the pendency of any investigations etc. No such relevant information or details or financial statements are forthcoming alongwith the present application. On the bonafide of the petitioner one cannot help noticing that the applicants essentially seek to take over the assets and management of the respondent Company. The scheme envisages reduction of the share capital of the existing shareholders from the value of each share being ₹ 10 to ₹ 1 per share. It seeks allotment of fresh share capital to the ex. employees and to the creditors to the company so that the said fresh allottees would be the majority shareholders. The Company Court has to satisfy itself that the Members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith. There is nothing to show that the applicant represents the majority of the Ex. workers of the respondent company. He purports to act for and on behalf of a class of creditors, namely, the workers to take over the management of the company. The Scheme seeks to replace the present management by reducing their share capital and allotting shares to the workers/creditors. The scheme can neither be termed to be just, fair or reasonable. The scheme completely lacks bona fide.

Issues Involved:
1. Recall of winding-up order and approval of the revival scheme for the company.
2. Compliance with Section 391 of the Companies Act, 1956.
3. Bona fides and genuineness of the revival scheme.
4. Representation and support of the majority of the company's workers.
5. Disclosure of all material facts and financial information.
6. Fairness and reasonableness of the proposed scheme.

Issue-Wise Detailed Analysis:

1. Recall of Winding-Up Order and Approval of the Revival Scheme:
The application CA 1948/2017 was filed under Section 391 of the Companies Act, 1956, by Eastern Medikit Ltd. Employees Welfare Munch (Regd.) to recall the winding-up order and approve the revival of M/s. Eastern Medikit Limited (EML) under the proposed revival scheme. The application CA 297/2018 was filed by All Eastern Medikit Employees Union under Rule 9 of the Company (Court) Rules, 1959, seeking permission for the applicant and its members to clear the dues in terms of the application.

2. Compliance with Section 391 of the Companies Act, 1956:
Section 391 allows for a compromise or arrangement between a company and its creditors or members, subject to court approval. The court must be satisfied that all relevant material facts, including the latest financial position and auditor's report, are disclosed. The judgment referenced several precedents, including Premier Motors (P.) Ltd. v. Ashok Tandon & Ors., emphasizing the need for full disclosure and the court's duty to ensure the genuineness and bona fides of the scheme.

3. Bona Fides and Genuineness of the Revival Scheme:
The court examined the bona fides of the proposed scheme, noting that the applicant sought to take over the assets and management of the respondent company. The scheme involved reducing the share capital of existing shareholders and issuing fresh shares to ex-employees and creditors, effectively changing the company's control. The court referenced Miheer H. Mafatlal v. Mafatlal Industries Ltd., highlighting the need to pierce the veil of the apparent purpose to ascertain the real intent behind the scheme.

4. Representation and Support of the Majority of the Company's Workers:
The court noted that the application was filed by an entity with an unknown background and lacked clarity on whether it had the support of the majority of the 1,127 permanent workers employed by the respondent company. The court emphasized the importance of representing the majority of the workers or creditors in such schemes.

5. Disclosure of All Material Facts and Financial Information:
The court found that the application did not provide the necessary material facts, such as the latest financial position, auditor's reports, or details of any pending investigations. The absence of such information was a significant factor in the court's decision, as full disclosure is a mandatory requirement under Section 391.

6. Fairness and Reasonableness of the Proposed Scheme:
The court determined that the proposed scheme was neither just, fair, nor reasonable. It lacked bona fides and sought to replace the current management by significantly reducing the share capital of existing shareholders and issuing new shares to workers and creditors. The court concluded that the scheme was not in the best interest of the company or its stakeholders.

Conclusion:
The applications CA 1948/2017 and CA 297/2018 were dismissed. The court held that the proposed revival scheme lacked bona fides, did not represent the majority of the company's workers, and failed to disclose all necessary material facts and financial information. The scheme was deemed neither just, fair, nor reasonable, and the court emphasized the importance of full compliance with Section 391 of the Companies Act, 1956.

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