1970 (12) TMI 61 - HC - Companies Law

Summary

Issues Involved:
1. Application for sanction of a scheme to liquidate debts under rule 79 of the Companies (Court) Rules, 1959, read with section 391(2) of the Companies Act.
2. Financial incapacity and continuous losses of the companies.
3. Proposals for repayment schemes by Premier Motors and Premier Credit and Motors.
4. Objections to the proposed schemes.
5. Classification of creditors and validity of meetings.
6. Bona fides and feasibility of the proposed schemes.
7. Compliance with statutory requirements under section 391 of the Companies Act.
8. Examination of the latest financial positions and auditors' reports.
9. Role and interests of directors.
10. Decision on the sanctioning of the schemes.

Issue-wise Detailed Analysis:

1. Application for Sanction of a Scheme to Liquidate Debts:
Two connected applications were made under rule 79 of the Companies (Court) Rules, 1959, read with section 391(2) of the Companies Act, each for the sanction of a scheme to liquidate debts.

2. Financial Incapacity and Continuous Losses of the Companies:
Premier Motors and Premier Credit and Motors faced continuous losses due to various reasons, including substantial cuts in allotment quotas, high taxes, and embezzlement. Premier Motors had 710 depositors with deposits amounting to Rs. 33,50,000, while Premier Credit and Motors had 711 depositors with deposits amounting to Rs. 27,50,000.

3. Proposals for Repayment Schemes:
Premier Motors proposed a scheme to pay unsecured creditors 60% of the amount due in installments, while Premier Credit and Motors proposed to pay 35% of the amount due. Both schemes intended to provide a breathing time and partial repayment to creditors without total liquidation of debts.

4. Objections to the Proposed Schemes:
A minority of creditors vehemently opposed the schemes, arguing that they were attempts to deceive creditors and protect the directors' misdeeds. They questioned the financial capacity of the companies and the fairness of the schemes.

5. Classification of Creditors and Validity of Meetings:
The court overruled objections regarding the classification of creditors, stating that all unsecured creditors, irrespective of the time their debts matured, had common interests. The meetings were held properly, and no prejudice to any section of creditors was found.

6. Bona Fides and Feasibility of the Proposed Schemes:
The court examined whether the schemes were bona fide and feasible. It found that if a company could pay its debts fully, no scheme altering contracts should be sanctioned. The information provided by the companies was insufficient to prove their ability to fulfill the promises made in the schemes.

7. Compliance with Statutory Requirements:
The court emphasized the need for compliance with the proviso to section 391 of the Companies Act, which requires disclosure of all material facts, including the latest financial position and auditors' reports. The companies failed to provide the latest audited balance-sheets and accounts.

8. Examination of Latest Financial Positions:
The court found that the unaudited balance-sheets and profit and loss accounts provided by the companies were unreliable and did not support the claims of profitability. The financial position indicated that the companies were unlikely to fulfill the promises made in the schemes.

9. Role and Interests of Directors:
The court noted that the directors included persons who were interested as unsecured creditors, which was contrary to the statements made in the notices sent to creditors. The court found that the directors were managing the companies' affairs in an unauthorized manner and that an inquiry by the Central Government was pending.

10. Decision on the Sanctioning of the Schemes:
The court dismissed the applications for sanctioning the schemes, finding that the schemes were not beneficial to the creditors and were attempts to delay liquidation and prevent further investigation. The court vacated the interim orders and allowed the payments made so far to be treated as a discharge of liabilities to the extent of payments made.

Conclusion:
The court dismissed the applications for sanctioning the schemes proposed by Premier Motors and Premier Credit and Motors, concluding that the schemes were not bona fide, feasible, or beneficial to the creditors. The court emphasized the need for compliance with statutory requirements and reliable financial information. The interim orders were vacated, and the payments made during the proceedings were treated as a discharge of liabilities.