1968 (11) TMI 63 - SC - Companies Law

Whether the mills did not yield profits because of the Jalans having parted with the processing unit to Jhunjhunwalas? Whether the closure of the mills was due to the Jalans having starved them of finance? Whether a scheme sanctioned by the court being binding on the company, its shareholders and the creditors, anything done contrary to its provisions is ultra vires the company? Held that - The Jalans gave several reasons why the accounts could not be produced. Whether they were true or not, even if the accounts had been produced they could not have thrown any light as no separate accounts were kept of the income and expenditure of the unit in 1964-65. But then if the unit was the most profit-yielding unit and had made large profit in 1964-65 one wonders why Singhania should have applied for permission to sell or lease it. It is also difficult to believe that the Jalans would let out the unit at a norminal consideration only a month after they had restarted the mills as in the beginning at any rate they were genuinely interested in working the mills and implementing the scheme unless of course the allegation that Jhunjhunwalas were their nominees was true. But, as the appeal court has rightly said, no proof was offered in support of that allegation. It was not as if the mills had to be worked even if their working resulted in loss. Assuming that the Jalans were under an obligation to bring in finance including their own monies, they could not be said to be under an obligation to bring in finance even if the working of the mills showed no reasonable prospect of profit. If the mills could not be worked except at a loss the company would be justified in ceasing to work them. The very object of the company being to manufacture cloth, if the mills had to be closed that would mean that the very object for which the company existed and which also was the assumption on which the scheme was framed ceased to exist. The claim urged on behalf of schedule B creditors that they had a charge irrespective of the proposed mortgage and were entitled to be treated as secured creditors cannot therefore be upheld.There is no question of the appellants having done something on the faith of an act, the court, the appellants and the other schedule B creditors having agreed to a postponement of repayment to them in consideration of an agreement between them and the company providing for a second mortgage in their favour. On the findings by the appeal court that the company was commercially insolvent and that the scheme could not satisfactorily be worked with or without modifications, the only alternative for that court was to pass the winding-up order under section 392(2). The appeal court was right in ordering winding up of the company and we uphold that order

Issues Involved:
1. Winding up of the respondent company.
2. Obligations under the agreement between the J.K. group and the Jalans.
3. Implementation and validity of the sanctioned scheme.
4. Financial arrangements and obligations of the Jalans.
5. Execution of the second mortgage or debenture trust deed.
6. Commercial insolvency of the company.
7. Rights and obligations of Schedule 'B' creditors.
8. Impact of winding-up order on the scheme and creditors' rights.

Issue-wise Detailed Analysis:

1. Winding up of the respondent company:
The appeals were directed against the High Court of Bombay's order for the winding up of the respondent company. The company was in financial distress, with liabilities exceeding assets, leading to a winding-up petition by a creditor, M/s. Indulal & Co., and the appointment of a provisional liquidator. Despite attempts to revive the company through agreements and schemes, the High Court eventually ordered its winding up due to commercial insolvency and the unworkability of the scheme.

2. Obligations under the agreement between the J.K. group and the Jalans:
An agreement was made on August 16, 1965, between the J.K. group and the Jalans, wherein the Jalans agreed to take over the company's management. The agreement included terms for the sale of shares, resignation of J.K. group directors, and execution of a second mortgage to secure debts owed to Schedule 'B' creditors. The Jalans were to provide necessary finance for running the mills, but disputes arose regarding the implementation of these obligations.

3. Implementation and validity of the sanctioned scheme:
The scheme, sanctioned by the High Court on February 17, 1966, aimed at repaying secured and unsecured creditors and restarting the mills. It included provisions for the repayment of debts, execution of a second mortgage, and financial arrangements by the Jalans. However, the scheme's implementation faced challenges, including disputes over interest payments and delays in obtaining necessary approvals.

4. Financial arrangements and obligations of the Jalans:
The Jalans entered into an arrangement with Sushil Investment (P.) Ltd. to finance the company, including paying off cash credit accounts and securing further loans. Despite initial efforts to restart the mills and make payments to creditors, the Jalans faced difficulties in providing additional finance, leading to the closure of the mills in June 1967. The company judge and the appeal court had differing views on the extent of the Jalans' financial obligations under the scheme.

5. Execution of the second mortgage or debenture trust deed:
The execution of the second mortgage or debenture trust deed was a critical component of the scheme to secure repayment of debts to Schedule 'B' creditors. Disputes over interest payments and delays in obtaining necessary approvals hindered the execution. The appeal court ultimately held that the company and the Jalans were not obligated to execute the second mortgage due to the company's commercial insolvency.

6. Commercial insolvency of the company:
The company was commercially insolvent at the time the scheme was sanctioned, and its financial condition deteriorated further, leading to the closure of the mills. The appeal court found that the company's assets and liabilities were such that it could not meet its obligations, and the scheme could not be implemented satisfactorily. The company's commercial insolvency was a key factor in the decision to order its winding up.

7. Rights and obligations of Schedule 'B' creditors:
Schedule 'B' creditors were unsecured creditors who were to be secured by a second mortgage under the scheme. The appeal court rejected the contention that Schedule 'B' creditors had already become secured creditors under the scheme, holding that their rights were incomplete without the execution of the second mortgage. The court also held that the company could not be compelled to execute the mortgage as it would violate the principle of pari passu distribution among unsecured creditors.

8. Impact of winding-up order on the scheme and creditors' rights:
The winding-up order nullified the scheme and the obligations under it, including the execution of the second mortgage. The appeal court held that once a winding-up order is passed, the company's assets must be distributed pari passu among creditors, and no new or incomplete rights could be created or completed. The court upheld the principle that the status of creditors should be determined as of the date of the winding-up order, and Schedule 'B' creditors remained unsecured.

Conclusion:
The Supreme Court upheld the appeal court's order for winding up the company, finding that the scheme could not be satisfactorily worked and the company was commercially insolvent. The court dismissed the appeals with costs, affirming that the winding-up order was necessary and proper under the circumstances.

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