1978 (10) TMI 110 - HC - Companies Law

Issues Involved:
1. Winding up of Star Tile Works Ltd.
2. Proposal for reconstruction of the company under Section 391 of the Companies Act.
3. Sanctioning of the proposed scheme of reconstruction.
4. Compliance with statutory provisions.
5. Reasonableness and fairness of the scheme.
6. Role and responsibilities of the Registrar of Companies and the Company Law Board.

Detailed Analysis:

1. Winding up of Star Tile Works Ltd.
Star Tile Works Ltd., Kallai, Calicut, was ordered to be wound up by an order of this court dated July 23, 1976, as the company was unable to pay its debts. The winding-up order resulted in the termination of employment for many employees, causing significant hardship to their families.

2. Proposal for Reconstruction of the Company under Section 391 of the Companies Act
A group of employees, with the assistance of an expert, prepared a project report and a scheme to restart the company. They sought the cooperation of major creditors and shareholders, who agreed to accept lesser sums and defer payments. Consequently, Application No. 239 of 1977 was filed under Section 391 of the Companies Act to convene a meeting of the creditors and shareholders.

3. Sanctioning of the Proposed Scheme of Reconstruction
The court directed the official liquidator to prepare a list of creditors and members, which was submitted. Meetings of the creditors and members were held on March 18, 1978, where the scheme, with slight modifications, was unanimously approved. The applicant then moved Company Application No. 272 of 1978 for an order to sanction the scheme.

4. Compliance with Statutory Provisions
The court reviewed compliance with Section 391 of the Companies Act, which requires disclosure of all material facts, including the latest financial position and auditors' reports. The court must be satisfied that the scheme is in the best interests of the company, its members, and creditors.

5. Reasonableness and Fairness of the Scheme
The court referred to several precedents to determine the principles for approving a reconstruction scheme. The scheme must be fair, reasonable, and accepted by a majority of creditors and shareholders acting in good faith. The scheme proposed included:
- Transfer of shares from the managing director and relatives to the workers.
- Utilization of provident fund amounts for purchasing shares and working capital.
- Settlement of debts with major creditors accepting lesser sums over a period.
- Payment of statutory liabilities like provident fund and taxes by the reconstructed company.

The court found the scheme to be fair and reasonable, noting that the creditors' pressure on the company was reduced, and the new management, comprising workers, had a vested interest in the company's success. The court emphasized the importance of giving the scheme a fair trial, as it could benefit the employees and their families, aligning with public interest.

6. Role and Responsibilities of the Registrar of Companies and the Company Law Board
The court criticized the indifferent attitude of the Regional Director, Company Law Board, and the Registrar of Companies, noting their failure to assist in evaluating the scheme's feasibility and fairness. The court highlighted the need for these authorities to actively monitor companies' financial health and take timely actions to prevent such predicaments.

Conclusion
The court sanctioned the scheme, emphasizing the need for a fair trial. The existing board of directors was allowed to continue managing the company until a new board was elected by the workers who purchased the shares. The new board was directed to seek court approval for any significant financial decisions and to engage all staff and workers employed at the time of the winding-up application. The court granted a stay on the winding-up proceedings for six months, allowing the new board to move for an extension if necessary. No costs were awarded for Application No. 272 of 1978.

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