9911796707
TMI Blog1968 (11) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 1965, one of its creditors, M/s. Indulal & Co., filed a petition for winding up. On August 2, 1965, the court appointed a provisional liquidator. On August 6, 1965, the cotton textile mills of the company stopped working and the provisional liquidator took charge thereof. On August 16, 1965, an agreement was made between the J. K. group and Nandlal Jalan and two others (hereinafter referred to as the Jalans), under which the latter agreed to take over the company's management on terms and conditions therein set out. The agreement provided that the J. K. group should sell to the Jalans at Rs. 10 per share the said block of shares held by the former, that the J. K. group thereafter should resign as directors and accept as directors the nominees of the Jalans, that the company should execute a second legal mortgage of its fixed and other assets in favour of the J. K. group and certain other unsecured creditors named in schedule 'B' to the agreement in consideration of which those creditors agreed not to claim interest at more than ¼% and not to demand repayment of their debts except in the manner set out in the agreement and schedule 'C' thereto, and that the transactions there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement was made between the company, the Jalans and the workers' union, which, inter alia, provided that the new management would employ 2,700 out of the total 4,200 workers and pay to the rest retrenchment compensation. Agreements with the largest group of unsecured creditors on the one hand and the workers on the other having been thus secured, the company took out on October 19, 1965, a summons submitting a scheme for the sanction of the High Court. It would seem that though the other creditors of the company were willing to accord their consent to the said scheme, the bank was not, unless two cash credit accounts under which the company owed to it Rs. 19 lakhs were paid off and a term loan of Rs. 26.5 lakhs secured by a first mortgage of the company's fixed assets was reduced by Rs. 5 lakhs. To remove the bank's objection the Jalans had, therefore, to make an immediate financial arrangement. On February 14, 1966, an agreement between the company (still under the old management), the Jalans and Sushil Investment (P.) Ltd., a company under the control of the Jalans, was made whereunder Sushil Company agreed to pay off the said cash credit accounts and also to pay Rs. 5 lakhs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctioning the scheme; (b)J. K. concerns and others to whom Rs. 48.39 lakhs were due and who were mentioned in schedule 'B' to the agreement dated August 16, 1965. Clause (2) provided that this amount was to be secured by a second mortgage of the company's assets in consideration whereof the creditors would accept payment in the manner provided by the agreement dated August 16, 1965, annexed as exhibit A to the scheme. Sub-clause (3) of clause (2) provided that if the Controller of Capital Issues gave his sanction the second mortgage should be in the form of a debenture trust deed and the company should issue debentures of the said amount of Rs. 48.13 lakhs of Rs. 100 each to these creditors ranking pari passu. Category 2 creditors were the Bombay Municipal Corporation, the Collector of Sales Tax, the Commissioner of Income-tax, the Bombay Port Trust, the Collector of Bombay, the Life Insurance Corporation, the Employees' State Insurance Corporation, the workers, their co-operative society, and, lastly, the Tata Power Company Ltd. These were to be paid off within the time specified against their names. Category 3 creditors were 15 in number and were the suppliers of cotton and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e secured by a debenture trust deed or a second mortgage. This naturally meant that finance to work the mills had to be procured and that was why clause (4) provided that the Jalans would provide the requisite finance. There is reason to believe, and it so appears from the record also, that in the early stages, at any rate, there was a genuine desire on the part of the Jalans to implement the scheme. In March, 1966, the company's solicitors were instructed to prepare a draft debenture trust deed, which, after it was ready, was sent to the Singhanias for approval. Likewise, the mills were restarted on April 1, 1966, after spending, it was said, Rs. 5 lakhs for setting the machinery into working order. May 17, 1966, was, under the scheme, the due date for payment in full to category 2 creditors and for payment of the first instalment to categories 3 and 4(a) and (b) creditors. It is undisputed that the company made these payments. What remained, therefore, to be implemented were the following : (i) the execution of the second mortgage or the debenture trust deed, (ii) the transfer of the said investment shares and (iii) providing finance for working the mills. Regarding the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and proceeded with the execution of the debenture trust deed. But it asked the Controller to keep the matter in abeyance as the Jalans, rightly or wrongly, alleged that though Rs. 48.13 lakhs were stated in the scheme to be due to the J.K. group, they were not entitled to that amount by reason of their having committed several fraudulent acts during the period of their management. We may mention that in the order made by the company judge in the summons for directions taken out later on by the appellants he held that the affidavit of Goenka in which these allegations were made was not in conformity with Order XIX, rule 3, of the Code of Civil Procedure, and that, therefore, they could not be taken notice of, that assuming that these allegations were true, the said alleged acts were of certain individuals, that the company's obligation was not affected thereby and that the proper remedy was to take proceedings against those individuals. As regards the said investment shares, the company got those shares released and handed them over to J. K. (Bombay) (P.) Ltd. but failed to hand over the transfer deeds therefor. There can, therefore, be no doubt that the company failed to implement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany could give such a prior charge to the bank and not to the two Governments. But the objection was technical and was raised for creating an obstacle in the way of the company getting the said advance from the bank. It really made no difference to the creditors whether the prior charge was given in favour of the bank or the two Governments. The result was that the Central Government declined to give its guarantee and the further advance of Rs. 25 lakhs became unavailable. Even the provisional guarantee given by the State Government for a year in the first instance expired in July, 1967. The position which ultimately emerged was that the company got advances of Rs. 43 lakhs from Sushil Co. of which Rs. 23 lakhs were paid to the bank. Rs. 20 lakhs, however, remained with the company presumably for meeting immediate payments under the scheme, the expenses needed to restart the mills and for other urgent purposes. The company obtained from the bank an advance of Rs. 25 lakhs on the provisional guarantee of the State Government and subsequently a further advance of Rs. 20 lakhs on a further charge over its fixed assets. It was contended that though the company obtained Rs. 45 lakhs f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they may or may not procure from elsewhere. He also directed the company to obtain sanction from the Controller of Capital Issues and to execute the debenture trust deed within three weeks. In accordance with this view he dismissed the winding up petitions filed by the company and others. In the appeals against these orders the appeal court held that as Singhania himself had admitted in his affidavit that the company was commercially insolvent at the date when the scheme was approved and that the scheme could not be worked unless the Jalans provided the necessary finance there was nothing more to decide except as to whether the Jalans had undertaken an obligation to provide finance. The appeal court answered that question holding that "there was no binding obligation or duty undertaken by the Jalans to pay anything to the company or to compulsorily provide finance", that the company had become commercially insolvent, that no reasonable or prudent person would invest any of his monies in the company, that its capital and reserves had been wiped out, that its substratum had disappeared inasmuch as its business of manufacturing cotton cloth could no longer be carried on with profit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the Jalans who had failed to carry out their obligation to find the finance, acceding to their prayer for winding up was tantamount to acceding to their default. He, firstly, argued that no winding up order should at all have been passed and the scheme ought to have been ordered to be implemented as the company judge did, and, secondly, in the alternative, that even if the company were to be wound up, it should be so done subject to the implementation of the rights and obligations of the parties. The learned Attorney-General adopted these contentions and in addition urged that schedule ' B ' creditors were entitled to a charge on the company's assets not merely on the said second mortgage being executed, but irrespective of it and in praesenti under the scheme and the said agreement of August 16, 1965. As regards financing the company, the contention was that under clause (4) of the scheme the Jalans were bound to bring in their own monies required for working the mills and that they could not contend that because they could not procure finance on the credit of or on the security of the assets of the company, their obligation was over. The company judge agreed with this view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to provide finance required for running the mills so that from out of their profits the obligation to pay the creditors under clause (2)(ii) of the scheme could be met in the manner therein laid down. Therefore, the Jalans were to provide finance either on the credit of the company or on the security of its assets, or, if necessary, their own monies for running the mills in the commercial sense, i.e., with a reasonable prospect of making profits and not in all events and in all circumstances as the company judge appears to have thought, even if there was no prospect of running them at reasonable profit. Such a construction would be contrary to the fact that the creditors including the workers and those who had supplied stores and other materials knew that there was hardly any chance of their being paid, and, therefore, with few exceptions, were anxious that instead of taking the company into liquidation the mills should be restarted and their dues paid bit by bit. Thus, the assumption on which the scheme was made was that there was a possibility of running the mills successfully and that the creditors would be paid gradually out of the profits which the mills would make. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement as he thought that if that unit had not been parted with at a nominal consideration it was possible to run the mills at a profit and to implement the scheme. The appeal court rightly disagreed with the premises on which the said conclusion was arrived at. There could be no valid objection to the company entering into a lease or a licence agreement, for Singhania himself had, in September, 1965, asked permission from the Textile Commissioner to separate this unit and either to sell or lease it and the Textile Commissioner had assured him to consider the proposal favourably. The argument, none the less, was that in 1964-65 the company had earned Rs. 17.12 lakhs from processing work of outsiders after processing its own goods, that after entering into the said agreement the company had in 1966-67 paid Rs. 21.77 lakhs for processing its own goods and in the bargain got only Rs. 50,000 a month. On these figures it was urged that whereas the company earned a profit of Rs. 17 lakhs in 1964-65, it incurred a loss of a like amount in 1966-67 as a result of the aforesaid bargain. On these figures only the company judge directed the company to terminate the said agreement. The fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a little later on enhanced them, dealers in cotton charged prices in excess of the ceiling prices. Even the Textile Commissioner had to acquiesce in the mills purchasing cotton at prices nearly 20% more than even the enhanced ceiling prices. Realising the difficulties in which its member mills were placed, the Federation at first evolved a policy of voluntary restraint and advised its members not to purchase cotton in excess of their requirements for three months, to purchase only at ceiling prices and to close down the mills or reduce their spindleage if it was not possible for them to get cotton at ceiling prices. The Federation even agreed to reimburse the mills of lay-off compensation if they were forced to close down for a while. Not only the prices of cotton but all other stores had spiralled up partly due to devaluation of the rupee on June 6, 1966, and partly due to the stock of cotton being less than the demand and the Government's insistence to avoid unemployment that the mills should work at their full quota. As the position worsened after September, 1966, the Federation revoked its earlier policy and permitted its members to buy cotton at prices above the ceiling price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited removal of cotton therefrom. On February 15, 1967, the company put up a notice of closure owing to want of cotton. A few days later it requested the Textile Commissioner for requisitioning 2,000 bales stating that the company was not in a position to buy cotton at excess prices. The reply was that 150 bales were requisitioned for it, that the question of requisitioning 350 bales more was under consideration but that the company should appreciate that it cannot go on requisitioned cotton only. The implication was that the company must manage to buy cotton even at exorbitant prices. So far out of 2,000 bales demanded only 200 bales had been allotted to the company. Even in respect of these bales the sellers would not permit their sample survey to ascertain their quality. In March, 1967, the spinning department was partially closed causing labour unrest. The cotton position in April, 1967, as explained by the company in its letter of April 25, 1967, was as follows : 1,282 bales were allotted to the company between February 15, 1967, and April 20, 1967, out of which the company took delivery of 200 bales. No survey by sample was allowed in respect of 732 bales. Survey made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to pay a large amount by way of retrenchment compensation. The closure of the mills was followed by workers' unrest culminating in hunger strikes and prevention of the directors from entering the mills and disposal by them of cotton, cloth and other articles. If the scheme were to be worked as directed by the company judge it meant paying of the retrenchment compensation, putting the machinery once again in working order, etc., requiring large amounts to meet these claims and expenses. The argument, however, was that the Jalans were to thank themselves for this calamity. But, surely, they could not be blamed, however badly they might have behaved in other respects, for the closure of the mills which was due to reasons beyond their control, viz., the price; rise due to devaluation which overtook them only two months after they restarted the mills, the impossibility of getting cotton at reasonable prices, and the imposition of the extra holiday which meant both loss of production and the burden of lay-off compensation. It is, therefore, not fair to say that the Jalans were responsible for the closure of the mills either on the ground of failure to lift the cotton or by their h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmitted by the appellants, there can be no doubt that the company had been running the mills at a loss and its liability for retrenchment had swelled to a large figure. Under section 392 of the Act the High Court which has sanctioned the scheme has the power to supervise the carrying out of it and to give directions in regard to any matter or to make modifications in it as it may consider necessary for its proper working. But if the court is satisfied that the scheme cannot be worked satisfactorily with or without modifications, it can either suo moto or on an application by any person interested in the company's affairs order its winding up. Both Mr. Sen and the learned Attorney-General contended that the company judge was right in holding that the scheme could have been worked but for the defaults of Jalans, that the company judge was right in giving directions under section 392(1) compelling the Jalans and the company to implement their obligations and that no winding up order in exercise of power under section 392(2) should have been passed. We have examined the circumstances in which and the reasons why the company closed the mills and held that their closure was for reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Jalans should bring in their monies nor the terms upon which they would be repaid. It was, therefore, nebulous and vague and impossible of being enforced. In the absence of any enquiry as to whether the mills could be worked at profit no court would compel a party to furnish monies without even specifying how much and for how long he should provide. If such a direction was not possible, no direction could also be given under section 392(1) to work the scheme as its implementation depended on the mills working at profit. The only course left to the court was, as the appeal court did, to pronounce that in the circumstances then prevailing the scheme could not be satisfactorily worked and therefore a winding-up order under section 392(2) had become inevitable. By the time the appeal court passed its order, the mills having been closed since June, 1967, a huge amount had become payable as retrenchment compensation. But it was urged that assuming that a winding up order in these circum stances could be passed it had to be subject to the rights and obligations of the parties. The contention was that irrespective of the second mortgage which the company had to execute, schedule 'B' cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed that he and the future mutawallis would pay the said allowances. The wakfs were held invalid as creating a perpetual succession of estates. The question was whether the agreements to pay allowances also fell along with them. The Privy Council held that they did not, that they were valid and enforceable and that the direction in the agreements to pay the allowances out of the income of the settled properties showed an intention to create a charge. In both these decisions the Board came to the conclusion that there was a clear intention on the part of the parties to create a charge in praesenti. The argument of the learned Attorney-General was that if an agreement indicated a property out of which a debt is to be paid and an intention to subject it to a charge in praesenti, the court must find the charge. Certain other decisions were also brought to our notice but it is not necessary to burden this judgment with them because in each case the question which the court would have to decide would be whether the agreement in question creates a charge in praesenti. Clause (2)(ii) of the scheme first sets out Rs. 48.13 lakhs as being due to schedule 'B' creditors and then provides tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights and obligations under such a scheme. The order of the appeal court was, therefore, wrong inasmuch as it could pass a winding up order only after the company had been made to perform its obligations under the scheme, that is, after it had been made to execute the debenture trust deed or the second mortgage. Reliance in this connection was placed upon the decision in Premila Devi v. Peoples Bank of Northern India Ltd.. [1938] 4 All ER 337; [1939] 9 Comp. Cas. 1; AIR 1938 PC 284, where the respondent bank had issued A and B shares of which Rs. 50 on each such share out of the face value of Rs. 100 were called up. The bank being in difficulty, a scheme was prepared which was sanctioned by the court. Later on the scheme was amended and that also was sanctioned by the court. The scheme so amended provided that further calls on A and B shares should not exceed 25% which included 20% already called by the directors between the passing of the original and the amended scheme and provided further that the balance of 5% call should be payable in 5 instalments payable each half year. The directors, however, resolved that the said 5% should be paid on February 26, 1933, ignoring the amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment between the parties : it becomes binding on the company, the creditors and the shareholders and has statutory force, and therefore, the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of section 391 of the Act, a scheme is statutorily binding even on creditors and shareholders who dissented from or are opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the court even if the shareholders and the creditors acquiesce in such alteration (of. Premila Devi's case (supra)). The effect of the scheme is "to supply by recourse to the procedure thereby prescribed the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity" (Palmer's Company Law, 20th Ed., page 664). Sub-section (2) of section 391 of the Act allows the decision of the majority prescribed therein to bind the minority of creditors and shareholders and it is for that reason that a scheme is said to have statutory operation and cannot be varied by the shareholders or the creditors unless such variation is sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the memorandum of the company issued after the certified copy of the order has been filed with the Registrar, and subsection (5) provides penalty for default of this requirement. These subsections were presumably introduced to ensure notice of the order sanctioning the scheme to persons dealing with the company so that they may deal with the company henceforth with the knowledge of the scheme. But the sub-sections do not mean that the scheme becomes part of the constitution of the company. Sub-section (4) clearly lays down that a copy of the order is to be annexed to a copy of the memorandum issued after its certified copy has been filed with the Registrar, that is, after the operation of the scheme commences. A scheme, therefore, is not to be considered, for instance, as modifying existing special rights attached to shares unless such modification is provided for in the scheme (cf. In re Downing (T. H.) & Co. [1940] 1 All ER 333; also Buckley on the Companies Acts (13th Ed.), page 411). The contention, therefore, that the scheme becomes part of the company's constitution or of its memorandum, and, therefore, a winding-up order cannot be passed except in conformity with the alte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industrial Bank of Western India AIR 1931 Bom. 2; 32 Bom. LR 953, 967). Similarly, in In re Anglo-Oriental Carpet Manufacturing Company [1903] 1 Ch 914, it was held that even where a company had executed a trust deed and issued debentures creating a charge on its assets but the charge had not been registered as required by the Companies Act by the time the company had passed an extraordinary resolution for voluntary winding-up the debenture-holders were not, as against the joint body of creditors, secured creditors. It is thus well established that once a winding-up order is passed the undertaking and the assets of the company pass under the control of the liquidator whose statutory duty is to realise them and to pay from out of the sale-proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed among them pari passu. No new rights can thereafter be created and no uncompleted rights can be completed, for doing so would be contrary to the creditors' right to have the proceeds of the assets distributed among them pari passu. But Mr. Sen's argument was that the appellants had acquired under the scheme a vested righ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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