9911796707
TMI Blog1969 (12) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose the company had set up textile mills divided into two units described as Unit No. I and Unit No. II. Since 1913 one Hiralal Trikamlal was its managing agent. Hiralal Trikamlal has three sons, Manubhai, Chandulal and Linubhai, and two daughters, Shardaben and Shantaben, all of whom are very much concerned in this petition. In 1957 the firm of Hiralal Trikamlal & Sons was appointed as managing agents of the company. One Gopaldas P. Parikh was appointed as a director of the company in the year 1959. Up to 1st January, 1966, Manubhai Hiralal and Chandulal Hiralal as partners of Hiralal Trikamlal & Sons were in active management of the affairs of the company and since that date Linubhai Hiralal along with Gopaldas P Parikh took over the active management of the company. It appears that since 1962 the company was in financial doldrums and its losses were mounting up from year to year. The workers of the company went on strike on 2nd April, 1968, as their wages for nearly two months were in arrears with the result that the company was obliged to close the mills. The first petition praying for winding up the company was filed in April, 1968. The immovable properties of the company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r advertising the petition in various newspapers and a notice was also directed to be issued to the Central Government as envisaged by section 394-A of the Companies Act. In the advertisement issued in the newspapers it was stated that the court would take up this petition for hearing on 8th March, 1969, and anyone interested in the company may come and appear either to oppose or support the petition. The hearing of the petition had to be adjourned from time to time as the petitioner had not submitted the latest financial position of the company as required by the proviso to section 391(2) of the Companies Act. The petitioner experienced difficulty in disclosing the latest financial position of the company because the provisional liquidator was in charge of the company and it appears that the books of accounts of the company were not written, as also the petitioner being creditor had no access to the books of accounts of the company. On a judge's summons taken out by the petitioner, the court gave certain directions and appointed auditors to prepare the statement showing the latest financial position of the company. After the auditors submitted detailed reports disclosing the lates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said claims are to be satisfied as provided in the scheme. The dues of the workers are to be paid by certain stages. Some of the detailed features of the scheme will be examined while considering the objections raised by those contesting the scheme. Before the court accords its sanction to any scheme of compromise and arrangement, it would normally expect to be satisfied about three important matters, namely, (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented ; and (iii) whether the arrangement is such as a man of business would reasonably approve. As the scheme was very vehemently contested and a number of contentions have been raised by Mr. Vakil, these three aspects have been vigorously debated and they will be considered while considering those objections. Mr. S. B. Vakil, who was the principal contender at the hearing of this petition, contested the scheme on the following grounds : (1)The petitioner has not satisfied the requirement contained in the proviso to section 391(2) by not making necessary disclosures at the proper time and it being a condition precedent to the court's exercise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scretion in favour of such a scheme. These grounds will be dealt with in the order in which they are set out. Re. Ground No. 1. Section 391(1) and (2) reads as under : "391. Power to compromise or make arrangements with creditors and members.-(1) Where a compromise or arrangement is proposed- (a)between a company and its creditors or any class of them; or (b)between a company and its members or any class of them ; the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs. (2) If a majority in number representing three-fourths in value of the creditors, or class of creditors or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em, the court on the application of the company or any creditor or member of the company or in the case of the company which is being wound up, of the liquidator, order a meeting of the creditors or members or any class of them as the case may be. Such an application shall be moved by judge's summons supported by affidavit to which the proposed scheme of compromise and arrangement should be annexed. The judge's summons can be moved ex pate unless the petition is by some one other than the company in which case, a notice to the company has to be served. The court may give various directions at the hearing of this summons set out in rule 69. Once these directions are given, application under section 391(1) would be disposed of. Nothing further is required to be done until after the meetings directed to be convened are held and the chairman submits his report, whereafter a substantive petition for sanctioning the scheme can be filed as envisaged by section 391(2) and rule 79. Before the court can accord sanction to the scheme, the petitioner or the company must disclose latest financial position of the company and the latest auditor's report as required by the proviso to sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial position of the company a notice to the company is made obligatory under rule 68. This notice to the company is made obligatory because only the company would be able to disclose the latest financial position. It is no doubt true that a compromise or arrangement can be proposed by either a creditor or a member of the company but it is essentially a compromise or arrangement between the company and its creditors or between the company and its members and if the application is made by some one other than the company it was considered desirable that a notice should be given to the company before direction for convening the meetings are given. Merely because a notice is to be given to the company under rule 68 before directions are given and because the advocate of the company has to file the form of advertisement and statement accompanying the notice as required by Form No. 35 in which order convening the meetings has to be made, it cannot be said that the disclosures ought to be made at that stage. Mr. Vakil however urged that in this application under section 391(1), judge's summons for seeking directions for convening the meeting to consider the proposed scheme of compromis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative to the winding up of the company. The material facts required to be disclosed would also include the information which would help the court in determining the class of creditors or members whose separate meetings should be convened and their values to be properly determined. Affidavit in support of the judge's summons moved under section 391(1) has to be drawn up in Form No. 34 -a perusal of which shows that in the affidavit the party seeking the directions of the court which would of necessity be either the company or its creditor or member, must set out the circumstances that have necessitated the proposed compromise and arrangement, the object sought to be achieved by it, the terms of the compromise and arrangement, the effect if any of the compromise and arrangement on the material interests of the directors managing director, managing agent, secretaries and treasurers or manager of the company and when the compromise and arrangement affects the interest of the debenture-holders its effect on the material interests of the trustees of the debenture trust deed. It must further be disclosed in affidavit that classes of creditors or members with whom the compromise or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vit of Mr. Patel is in the prescribed form and it sets out various details necessary for giving proper directions. It may be mentioned that Mr. Patel had annexed the latest balance-sheet of the company upto 31st March, 1967, to the affidavit. He had also stated the dues of the managing agents, Indequip group of companies and dues of the managing director as well as the members of his family and the effect of the scheme on their claims. Therefore, whatever was necessary at that stage was disclosed in the affidavit and nothing further was required to be done at that stage. Mr. Vakil further urged that the proposed scheme is to be considered by the members and creditors of the company and when they are considering the scheme, they should ordinarily have all the relevant information about the financial position of the company so that they can bring to bear upon the subject their independent (intelligent) commercial judgment as to whether the scheme should or should not be approved. If the matter is viewed from this angle, urged Mr. Vakil, it would indicate that disclosure should be made at the stage when the application is filed under section 391(1) because that information would be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering the evidence in the case it was observed that it was impossible to say that the creditors had full and fair knowledge of all the relevant facts on which they could come to an intelligent decision or that they had applied their independent mind to the scheme. In my opinion, no proposition of law can be deduced from the aforementioned case as suggested by Mr. Vakil that the disclosure ought to be made at the initial stage. It is always a question of fact whether the creditors and members did consider the scheme in the various meetings after getting the relevant information which would help in judging the scheme on its merits. But it cannot be said that as discloures were not made at the initial stage when the directions were given by the court the requirements of the proviso were not complied with. Looking to the language of the proviso especially its opening words : "Provided that no order sanctioning any compromise or arrangement shall be made..." and the location of the proviso in the scheme of section 391 and especially the fact that section 391(1) and section 391(2) envisage two distinct and independent stages when the court is called upon to apply its mind to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n No. 11 of 1969 for a direction that the provisional liquidator who is in charge of the company should supply the latest financial position and all material facts pertaining to the said company. The court gave certain directions as a result of which Mahendra M. Patel & Company, Chartered Accountants, were appointed as auditors to prepare the latest financial position of the company and to submit the auditor's report. It transpired that the books of accounts for certain period were not written and under the supervision of the provisional liquidator, the ex-directors of the company were permitted to complete the books of accounts. Thereafter the chartered accountants prepared the latest balance-sheet upto 29th July, 1968. Company Application No. 23 of 1968, was filed under section 391(1) on 27th June, 1968. The mills of the company are closed from 2nd April, 1968. Therefore, when the books of accounts till 29th July, 1968, are prepared and auditors have audited the books, it cannot be gainsaid that the latest financial position and latest auditor's reports have been disclosed by the petitioner. The requirement of the proviso has certainly been complied with. But Mr. Vakil urged that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of attack was that the proposed scheme is not a proper alternative to an order for winding up the company in view of the fact that the company is guilty of giving a number of fraudulent preferences in favour of the Union Bank of India, the Regional Provident Fund Commissioner and five other creditors, namely, (1) Indian Electro Chemicals Ltd., (2) Dyestuffs and Chemicals Private Ltd., (3) Indequip Ltd., (4) Amarshi Damodar, and (5) Messrs. Atul Cotton Traders, which can only be investigated and avoided in winding up proceedings. The contention is that the proposed scheme was put forth by the directors of the company in order to shield themselves and to prevent investigation of their misdeeds, misfeasance and non-feasance during their management of the affairs of the company. It was very vehemently contended that if the petition for sanctioning the scheme is rejected, the only alternative open to the court would be to wind up the company. If the company is wound up the official liquidator would be able to investigate the management carried on by the directors of the company. The official liquidator would also be able to avoid fraudulent preference alleged to have been granted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surotam Hathising and Linubhai Banker. Undoubtedly, Gopaldas P. Parikh was the boss of the whole show. Indian Electro Chemicals Ltd. filed Summary Suit No. 789 of 1968. Dyestuffs and Chemicals Private Ltd. filed Summary Suit No. 790 of 1968. Indequip Ltd. filed Summary Suit No. 791 of 1968, Messrs. Amarshi Damodar filed Summary Suit No. 768 of 1968 and Messrs. Atul Cotton Traders filed Summary Suit No. 977. 1968 against the company for recovering their respective claims as set out above. All these suits were filed on 15th April, 1968. On the next day, the board of directors of the company resolved to suffer consent decrees in all these suits. The company suffered consent decrees for the full amounts claimed by each creditor. So far no serious objection could have been taken; but the company over and above suffering consent decrees without investigating the exact amount payable to each of the creditors, the directors went further and created charges in favour of each of the creditors for its respective claims over the movable and immovable properties of the company. The suits were filed by Mr. B. A. Kayastha, who, it was urged, is an associate of Messrs I. M. Nanavati & Company Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry serious objection to the suffering of the decrees but for the manner in which they were suffered ; but the most undesirable part is of giving charges in favour of select and chosen creditors. If these charges could not have been avoided except in winding up proceedings as fraudulent preferences, no alternative would have been left but to reject the scheme and wind up the company. However, I would presently point out that charges created in favour of the aforementioned creditors no more subsist. After the charges were created in favour of the aforementioned live creditors, an application was made to the Registrar of Companies in each case for registering the charges as required by section 125 in Part V of the Companies Act. However, Gopaldas P. Parikh filed an affidavit at page 590 of the record in which he has stated that, even though the applications were made to the Registrar of Companies in respect of the charges created in favour of the aforementioned five creditors, the said charges are not registered. The Registrar of Companies was summoned to the court to find out whether the charges were registered by him or not. The Registrar informed the court in the presence of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsued and he undertook to intimate to the Registrar that the application for registration of the charge is cancelled. Mr. S. N. Shelat, learned advocate who appeared for Messrs. Atul Cotton Traders and Messrs. Amarshi Damodar, filed two statements of appearance at pages 694 and 695 signed on behalf of the aforementioned two creditors accepting the scheme and the charges in their favour stand cancelled. It may also be mentioned that the aforementioned two creditors by their two letters dated 15th October, 1969, at pages 533 and 534 of the record have informed the court that they accept the scheme, which in terms means that the charge in their favour would be ineffective and of no consequence. Then remains the case of Indian Electro Chemicals Ltd. Mr. C. C. Gandhi, learned advocate appearing for the Indian Electro Chemicals Ltd., at the earlier stage of hearing stated that he would oppose the scheme on behalf of his clients. Subsequently, during the course of hearing a statement signed by Mr. C. C. Gandhi, advocate for the Indian Electro Chemicals Ltd., has been filed at page 702 of the record to which is annexed a letter from the clients of Mr. Gandhi whereby they informed the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the Provident Fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true that the mortgage deed in favour of the Central Board of Trustees was executed on May 21, 1968, when the petition for winding up the company was pending in the court. It is, at any rate, executed within six months prior to the institution of the petition which is now pending and in which prayer for winding up the company is made. If that petition succeeds, investigation will have to be made whether the mortgage in favour of the Central Board of Trustees would amount to a fraudulent preference within the meaning of section 531 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustee. It was held that the transfer cannot be avoided as fraudulent preference because it was found that the trustee made the conveyance not with the intention or view or object whatever it may be called preferring any person in whose favour the transfer was made but for the sole purpose of shielding himself. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could not in such circumstances be fraudulent preference. This decision has been followed in In re M. I. G. Trust Ltd. [1933] Ch. 542; 3 Comp. Cas. 345 (CA). Reference may also be made to In re F. L. E. Holdings Ltd. [1967] 1 WLR 1409; [1968] 38 Comp. Cas. 214 (Ch. D.) In that case a passage from Buckley on the Companies Acts, 13th Edition (1957), is quoted which shows that as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill have to be complied with by the Board of Directors that may come into existence if the scheme is sanctioned. But Mr. Vakil could not point out to me any specific case of either embezzlement or of fraud. A very general statement was made that there are several acts of mismanagement which must be investigated in winding up proceedings. Such an allegation is rather vague and devoid of details. On such a vague allegation, the scheme cannot be rejected. But it was urged that even the debt which the company owes to the aforementioned five creditors requires to be verified and checked up ; and that also cannot be done, unless the official liquidator in winding up proceedings proceeds to verify the claims lodged with him by the creditor. In order to ascertain and verify the debts owed by the company to the aforementioned five creditors, one need not resort to the extreme provision of the winding up of the company. Those debts can be verified by an order of this court by the official liquidator as court officer, and such a direction can be given while sanctioning the scheme. As for the vehemence with which a grievance was made that there are several acts of mismanagement and misfeasance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Pioneer Dyeing House Ltd. v. Dr. Shankar Vishnu Marathe [1967] 37 Comp. Cas. 546; [1967] 69 Bom. L.R. 261 (Bom.).One of the grounds for opposing the scheme in that case was that the object of the scheme was to cover the deeds of the delinquent directors. It was observed that if the scheme is sanctioned, the winding up order will stand set aside, the liquidators will be discharged, there will be none to prosecute the misfeasance summons against the erring directors and the assets of the company will once again fall into the hands of persons whose rectitude is under a cloud; and that cannot be permitted under the cloak of a scheme of reconstruction. It would undoubtedly be so if the scheme is put forth as a cloak to cover the misdeeds of the directors. (But it will be a question of fact in each case as to whether it is so). In the aforementioned case the first scheme proposed was rejected and after a lapse of a period of ten years after the order for winding up was made another scheme was proposed which when examined disclosed a number of defects. In the facts and circumstances of this case, it does not appear that the scheme is put forth with a view to shield the directors of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mill was granted. Mr. Vakil however urged that this permission was cancelled and even the company has admitted that it was withdrawn and is no more effective and no fresh permission is applied for or obtained. In this connection Mr. Vakil first referred to the report of the court of inquiry constituted by the Government of Gujarat under section 100(1) of the Bombay Industrial Relations Act presided over by Mr. D. M. Vin which has inquired into some aspects concerning the company. The report of the court of inquiry is published in the Gujarat Government Gazette, Part I-L, dated 10th October, 1968. The company appeared in this inquiry and filed its statement, part of which is reproduced in the report. In para. 5 of the report it is stated that the Government of India, Ministry of Commerce, permitted scrapping of the mill but that permission was subsequently withdrawn at the instance of the Textile Labour Association. Relying on this statement of the company before the court of inquiry, it was urged that even according to the company the permission was withdrawn and no fresh permission is granted. Mr. D. C. Gandhi for the company urged that what is sought to be culled out from the rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be scrapped and the very foundation of the scheme is knocked out. The contention appears to be entirely without merits. It cannot even be disputed that the Government of India by its letter dated 1/4th October, 1966, did grant permission to scrap the whole mills. This permission was to be held in abeyance as per the letter of the Government of India dated 15-12-1966 till April, 1967. The query of Mr. Vakil may have been directed to the Textile Commissioner and the reply of that office that no such permission is granted cannot be accepted in the face of the letter dated l/4th October, 1966. The period during which the permission was held in abeyance having expired and no order having been made either cancelling or revoking the permission, the permission would be good and valid and the company was justified in proceeding on the basis that it has got a valid permission to scrap Unit No. II. It may incidentally be mentioned that the permission was held in abeyance on an objection raised by the Textile Labour Association representing the workers of the company. The Textile Labour Association has entered into an agreement with the company and has accepted the scheme ; when the Textile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The contention of Mr. Vakil is that, as part of the scheme it is not open to the court to sanction reorganization of the share capital which includes reduction, increase and issue of fresh capital. It was urged that if the scheme of compromise and arrangement envisages reorganization of share capital, it cannot be sanctioned as part of the scheme and the provision of the Companies Act which prescribe the procedure for reduction of share capital and increase of share capital and issue of fresh capital must be specifically and strictly complied with. On the other hand, it was urged by Mr. Gandhi that section 391 provides a complete code for the reconstruction of the company which may include reorganization of its capital as part of the scheme of compromise and arrangement. In other words, it was urged that if the scheme of compromise and arrangement includes in its ambit reorganization of the share capital then it can be carried out as part of the scheme of compromise and arrangement and it is not at all necessary to go through the whole gamut of the procedure prescribed for the reduction of share capital and for issue of fresh capital. There seems to be considerable force in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme under section 391 without going through the procedure prescribed under section 100 onwards, it may be that reduction of share capital in a given case may adversely affect the creditors and the creditors would have no chance to object to the same. It is manifestly clear that reduction of share capital in certain circumstances may adversely affect the creditors but if reduction of share capital is brought about as part of the scheme of compromise and arrangement between the company and its members yet as this prescribed procedure for affecting reduction of share capital has to be gone through even though it forms part of a scheme of compromise and arrangement, the creditors will have a chance to object to the same if it adversely affects them. Such would not be the case where the capital is increased or the rights of various classes of shareholders are altered or changed. The reorganization of capital as envisaged in section 390 would certainly include increase and reduction of share capital, but reduction of share capital can be brought about by arrangement between the company and members yet it will have direct impact on the creditors and therefore a specific provision is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 despite the fact that for some of those things included in the compromise another procedure is prescribed in the Companies Act and which has not been carried out. It, therefore, appears that section 391 is a complete code which provides for sanctioning of the scheme of compromise and arrangement. If such a scheme of compromise and arrangement includes increase of share capital, it can be done as a part of the reorganization of the share capital, which would be part of the arrangement that would be brought about between the company and its members. In case of reduction of share capital, in view of rule 85, the procedure prescribed under section 100 and onwards will have to be gone through. Looking at the matter from a slightly different angle, it appears that section 391 is a special provision for sanction of a scheme of reconstruction of companies, of amalgamation of companies and for a scheme of compromise and arrangement. The scheme of compromise and arrangement, or for that matter even the scheme of amalgamation of two companies, may envisage reorganisation of share capital of one or the other company. The Companies Act no doubt makes provision for reduction of share capital s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles of association provides that the company may by ordinary resolution in general meeting alter the conditions of its memorandum by increase of its share capital, by such amount as it thinks expedient by issuing new shares as may be necessary. The company can also divide and consolidate its shares. Thus the company has reserved powers to itself to increase the share capital by ordinary resolution in a general meeting. Now, when share capital is increased and fresh shares are issued, such issue would be governed by section 81. Section 81 provides that such fresh issues should be offered to persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. The procedure for making the offer is also set out in section 81(1). It was urged that even if it be assumed that the company has power to increase the share capital, fresh share capital can be issued only to the existing shareholders in proportion to the capital paid up on those shares on that date. The scheme envisages increase of share capital by converting 50 per cent, of the claim of the unsecured c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in satisfaction of the 50 per cent, of their claims. Mr. Vakil urged that before sub-section (1A) of section 81 can come into play, it must be shown that the special resolution has been passed in the general meeting of the company. Mr. Vakil urged that the meeting of the company to be a general meeting must be of all the members of the company entitled to attend and vote and the resolution to be a special resolution must satisfy all the requirements of section 189 of the Companies Act. It was urged that if the members of the company did not meet together at one place to consider the resolution but divided themselves and met in two separate meetings, it cannot be said that the proposal for further issue of shares was considered in the general meeting of the company. There are two classes of members of the company. They are : (1) holders of ordinary shares ; and (2) holders of redeemable cumulative preference shares. Article 5(b) of the articles of association of the company provides that the cumulative preference shares shall not entitle the holders thereof to be present at or to vote either in person or by proxy at any general meeting of the company unless a resolution is to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be an idle formality. It would be more so on the facts of this case because preference shareholders were not ordinarily entitled to attend and vote at the meeting but for the eventuality that the interest payable on preference shares is in arrears. Therefore, in my opinion, it cannot be said that the resolution adopted was not adopted at a general meeting. Even if it be said that joint deliberation of all those who are entitled to participate in the meeting is of the essence of a general meeting, it cannot be said that two classes of persons one of whom in ordinary circumstances was not entitled to attend the meeting deliberated in a different meeting and both adopted the same resolution, there was no joint deliberation. In fact when one class of members are likely to overwhelm the other class, to safeguard the interest of the other class, deliberations are held in separate meetings, but a common resolution is adopted by both the meetings and in each meeting it was passed with statutory majority. It can never be said that the resolution was not adopted at a general meeting. Reference was made to Sharp v. Dawes [1876] 2 QBD 26. In that case a meeting was called by the secretary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the resolution approving the scheme were more than three times the votes cast against it. Therefore, sub-clauses (b) and (c) of sub-section (2) of section 189 are strictly complied with. It was, however, urged that clause (a) is not properly complied with inasmuch as in the notice convening the meeting, intention to move the resolution as a special resolution was not set out. Taking a very strict view of sub-section (2)(a) of section 189, it might appear that the requirement therein contained is not properly complied with. The question then is whether clause (a) is mandatory in terms or it is merely directory. If it is mandatory, different considerations might arise. If it is held to be directory, the doctrine of substantial compliance would come into play. It is not inconceivable that part of the section may be directory and part of the section may be mandatory. It cannot be gainsaid that clauses (b) and (c ) of sub-section (2) are certainly mandatory. The notice of certain duration must be given and resolution must be adopted by a statutory majority. This requirement could, by no stretch of imagination, be said to be directory ; otherwise sub-section (2) may lose all its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the manner of publication appears to be directory and, so long it is substantially complied with, that would be enough for the purpose of providing the taxpayers a reasonable opportunity of making their objections. It would thus appear that part of section 131(3) was held to be mandatory while part of it was held to be directory. Approaching the subject from this angle, it would appear that clause (a) of sub-section (2) appears to be directory and not mandatory. The purpose behind making this provision appears to be to convey definite information about matters to be considered at the ensuing meeting. The explanatory note to be annexed will enable members to understand and appreciate the object behind the proposed resolution. The intention being a state of mind in this case the state of mind of a corporate body is required to be set out for the benefit of the members of the corporate body. The question then is whether the requirement of setting out this intention in the notice could be said to be such mandatory requirement, the failure to comply with it would invalidate the resolution. The purpose behind enacting this provision and its nature and the intention of the legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 172. As for the explanatory note as envisaged by section 173(2) it must be stated that the whole scheme annexed to the notice and production and cash flow statement and statement under section 393(1) would provide sufficient material as to be an adequate substitute for explanatory statement as envisaged by section 173(2) and, therefore, also, the proceedings of the meeting would not be invalid or proceedings would not be vitiated. The above discussion would establish that the resolution for increasing the share capital of the company has been adopted in a general meeting of the members of the company and the resolution satisfies all the requisites of a special resolution. It would appear that the requirements of section 81(1A) of the Companies Act are fully satisfied and it would be lawful for the company to issue further ordinary shares as part of the scheme to both holders of ordinary shares and persons other than present holders of ordinary shares of the company but all of whom should be unsecured creditors of the company and further shares should be issued only in satisfaction of 50 per cent, of the claim of each unsecured creditor. It was next contended that the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if the company is wound up, the unsecured creditors are likely to get nothing and their claims are merely chose-in-action which are entirely worthless in respect of which shares of Rs. 250 fully paid up will be issued in proportion to the claims and the shares would thus be issued at a discount. The other limb of the argument was that the shares are issued otherwise than for cash because they would be in payment of claims which cannot be realized. Reliance was placed on a statement in the affidavit of the petitioner that in the event of the winding up the unsecured creditors are not likely to get anything looking to the assets and liabilities of the company and the claim of the secured creditors and preferential creditors. Undoubtedly there is a statement to that effect in the affidavit of the petitioner. Does it necessarily imply that if the shares are issued against the claim of the unsecured creditors, the issue is either at a discount or for no consideration ? It will be presently pointed out that in order to write off the loss of capital the share capital is being reduced by reducing the face value of ordinary shares of Rs. 1,000 fully paid up to Rs. 250 fully paid up and cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contributory and to insist upon his contributing Rs. 250 into the assets of the company. Reliance in this connection was placed on In re Anglo-Moravian Hungarian Junction Railway Company [1873] 8 Ch. App. 768. In that case one Dent, a subscriber to the memorandum of association of a limited company, subscribed for 100 shares. The articles of association recited that Even, who assigned the concession to the company, had agreed to cause fully paid up shares to be allotted to all the persons subscribing the memorandum. Subsequently GBP 4,000 fully paid up shares were issued to Even for work done by him for the company and Even requested the company to allot 100 shares out of the same to Dent. Subsequently the company was ordered to be wound up and the official liquidator placed Dent on the list of contributories for 100 shares and made calls upon him to pay the amount. The contention of Dent was that the shares allotted to him were fully paid up shares and, therefore, he was not liable to pay anything as contributory. His further contention was that even though he had subscribed for 100 shares, as the shares were allotted to him at the instance of Even and that the shares were fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orandum of association ; the effect being, to discharge" the company from an equivalent amount of debt, due from the company to the contractor." This is exactly the position in the case before me. For each share issued to the unsecured creditor the liability of the company for the amount equivalent to the face value of the share would stand discharged or the company would be discharged from equivalent amount of debt due from the company to the unsecured creditor. Such arrangement, in my opinion, is quite legitimate and can be the subject-matter of compromise and arrangement between the company and its members and creditors and, if it is otherwise reasonable and fair, must be given effect to At any rate, it cannot be thrown out on the ground that on the one hand the share would fetch no price if it is sold in the market and the claim of the creditor being a chose-in-action has a debatable value or is of no value. Reference in this connection may be made to the Ooregum Gold Mining Co. of India Ltd. v. George Roper and Charles Henry Wallroth [1892] AC 125 (HL) . At page 136, their Lordships have observed that a company is free to contract with an applicant for its shares ; and when h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare capital and that cannot be done without following the procedure as prescribed in section 100 onwards of the Companies Act, even if it be done as part of the scheme. I have already pointed out above that reorganization of the share capital can be carried out as a part of a scheme of compromise and arrangement under section 391 without following the whole gamut of the procedure prescribed for the same in other parts of the Companies Act. However, rule 85 makes a special departure in case of reduction of share capital when it is to be carried out as part of the scheme of compromise and arrangement. Rule 85 which I have already referred to earlier, provides that when reduction of share capital is to be effected as part of a scheme of compromise and arrangement, procedure prescribed for the same in the Companies Act and Rules should be carried out as stated earlier. This provision is made for very good reasons. It unmistakably indicates that reorganization of share capital can be brought about as part of the scheme of compromise and arrangement. But even if it is to be done as part of the scheme of compromise and arrangement this special provision in rule 85 enjoins a duty to carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital and both can be considered and approved simultaneously. This is borne out by the observations in In re Tata Iron and Steel Co. Ltd. [1928] 30 Bom. LR 197; AIR 1928 Bom. 80. In that case it was contended that the scheme which effects alteration in the memorandum or articles of association without proceedings having been taken under the Act in the manner laid down by the Act for the purpose of effecting such an alteration cannot be sanctioned unless separate proceedings are taken for alteration in the memorandum and articles of association. Negativing this contention, it was held that where the Act lays down express procedure for altering the memorandum it is doubtful whether it is not necessary to follow that procedure before applying for sanction under section 120, but where that is not so, the court can under section 120 sanction the scheme which alters the memorandum. In In re Katni Cement and Industrial Co. Ltd. [1937] 7 Comp. Cas. 348 ; [1937] 39 Bom. LR 675 (Bom.) a scheme of amalgamation was proposed between the said company and merger of all the cement companies to be named as Associated Cement Companies Ltd. Before this merger could be made it became necessary to reorg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51 WR 514." It does appear well settled that where the scheme of compromise and arrangement comprises within its ambit reduction of share capital, the procedure for reduction must be gone through but if it is shown that the procedure prescribed under section 100 onwards has been carried out simultaneously while submitting the scheme for approval of the creditors and members, the court can, while sanctioning the scheme, sanction reduction of share capital. The important thing to find out would be whether the procedure for reduction of share capital wherever it is mandatory has been strictly carried out and wherever it is directory has been substantially complied with. Before one can find out as to what exact procedure should be followed for effecting reduction in share capital in a given case, it must be found out how the company proposes to reduce the share capital. The share capital of a company can be reduced in three distinct ways as set out in section 100. The. company for effecting reduction of share capital may extinguish or reduce the liability of any of its shares in respect of share capital not paid up ; either with or without extinguishing or reducing liability on any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital by way of cancellation of paid up share capital which is lost or is unrepresented by the available assets, the company will have to adopt a special resolution to be styled as resolution for reducing the share capital in a general meeting and then apply for confirmation of the reduction of share capital. For the reasons hereinbefore mentioned, I will hold that the company has given notice of 21 days' duration and the notice convening the meeting served upon the members disclosed the resolution that, while approving the scheme, the members should approve the reduction of share capital. Resolution approving the scheme has been passed with statutory majority. The only question would be whether the intention to move the resolution as special resolution in a general meeting to be attended by the ordinary shareholders and preference shareholders is set out in the notice convening the meeting or meetings. The reasons set out above while considering the case of issue and allotment of further share and the provision contained in section 81(1) and 81(1A) would mutatis mutandis apply here. I would, therefore, hold that the members of the company in a general meeting approved reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein that it can reduce both ordinary share capital as well as preference share capital unless specific provision to the contrary is made. Article 10 permits the company to increase its share capital and article 7 authorises the company to reduce its share capital by special resolution subject to confirmation by court and subject to the provisions of sections 100 to 104 of the Companies Act. Therefore, this company has retained to itself powers to reduce its share capital-meaning thereby that it can reduce both its ordinary and preference share capital-and there is no express provision to the contrary which says that the preference share capital cannot be reduced till the whole of the ordinary share capital is extinguished. Therefore, there is no substance in the contention that preference share capital can never be reduced. Considering the matter from all the aspects, there is no substance in the contention that the reorganization of share capital as contained in the proposed scheme of compromise and arrangement cannot be given effect to. In my opinion, the company has complied with the provisions of law and reorganization of share capital can be confirmed as part of the scheme. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly affect their minds and their judgment, they must be divided into different classes. "Class" must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest (vide Sovereign Life Assurance Co. v. Dodd [1892] 2 QB 573, (CA)). Speaking very generally, in order to constitute a class, members belonging to the class must form a homogeneous group with commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different groups or classes. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even if there are different groups within a class the interests of which are different from the rest of the class or who are to be treated differently in the scheme, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grouped together with other unsecured creditors. I shall separately deal with the objection in respect of each meeting raised by Mr. Vakil. As per the directions given by the court, a separate meeting of ordinary shareholders of the company was convened. In my opinion, equity or ordinary shareholders each holding fully paid shares of the company will form a separate class by themselves. They will also form a separate class in view of the identical compromise offered to them. It was however urged that there might be some creditors who may also be shareholders and their interest will conflict with the interest of shareholders who are not creditors and they should form a separate class. It was also urged that the managing director, Linubhai Banker, and ex-director, Gopaldas P. Parikh, should, form a separate class as also Indequip group of companies should also form a separate class. At page 244 of the affidavit in reply, the shareholding of Linubhai and his relation, Gopaldas P. Parikh, and the company in which Gopaldas P. Parikh is interested has been set out and it is stated that out of the total of 788 ordinary shares, 424 are held by these persons and they form a separate group. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the chairman could decide the objection raised, it appears that all the secured creditors who were present requested the chairman to direct that in view of the objection raised, and in view of the statement made by the representatives of the Indequip group of companies, which would include Indequip Limited, Indian Electro Chemicals Ltd., Dyestuffs and Chemicals Pvt. Ltd., that they would attend the meetings of secured and unsecured creditors but their votes in number and in value should be taken into consideration at the meeting of the unsecured creditors subject to the approval of the court. A direction to that effect has been given by the court. As a matter of fact, the votes of the aforementioned creditors, who at one stage claimed to be secured creditors, have not been taken into consideration at the meeting of secured creditors in view of the directions issued by the court. It should be so in view of certain later developments. The aforementioned five creditors have relinquished the charges created in their favour by the decree as also the charges are not registered as required by section 126 of the Companies Act, and are not now likely to be registered and they have beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate classes. If the meeting is not properly convened, the scheme approved at such meeting cannot be sanctioned. If two distinct classes of creditors are grouped together in one class and if there is no material for finding out who belonged to one class and what was the result of their voting and who belonged to the different and distinct class and what was their voting, the only course open to the court would be to direct separate meetings of those two classes. But if the report of the chairman provides ample material for finding out the number of preferential creditors who attended the meeting of unsecured creditors and what was the number and value of their votes then it can be separated from the number and value of the votes of the remaining unsecured creditors and the court may proceed to examine the result of the voting as if two separate meetings are called. A view was taken by me in the case of Anant Mills Ltd. If any creditor present at the said meeting would have said that the presence of the distinct class of creditors was either oppressive or not conducive to their deliberations all such objections could have been examined on merits. No such objection is raised. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not the creditors of the company. In my opinion, therefore, the classification suggested by Mr. Vakil is neither logical nor is based on any intelligible differentia, and has no rational nexus to the objects sought to be achieved while approving the scheme of compromise and arrangement. The broad division as stated by me earlier, and keeping in view what constitutes a class, would provide better and distinct classification. The court has ample material to find out from the report of the chairman the number and value of votes in respect of the two distinct classes of creditors grouped together and it would certainly be open to the court to do so. Therefore, there is no substance in the contention of Mr. Vakil that appropriate meetings of distinct classes of members and creditors were not held ; and, therefore, it is not possible to say that the proposed scheme has been approved by requisite majority of different classes of creditors and members. The contention must be negatived. Re. Ground No. 6.-The next ground of attack is that a proper statement as required by section 393(1) and as directed by the court's order dated 26th June, 1968, in Company Application No. 23 of 1968 was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company : Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture-holders, to supply the necessary particulars as to his material interests. (5)Every director, managing director, managing agent, secretaries and treasurers or manager of the company, and every trustee for debenture-holders of the company, shall give notice to the company of such matters relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees." One of the directions which the court gave while giving directions for convening meetings in Company Application No. 23 of 1968, was that the advocate for the company should file in the court within five days a form of advertisement, notice and the statement required by section 393 to accompany the notice to be addressed to members and creditors of the company. The first question is what should be the contents of the statements required by section 393. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect on his interest as creditor or member of the company. Therefore, the first part of clause (a) of section 393(1) is fully complied with. In respect of the latter part of clause (a), it must be stated that the material interest of director and managing director in their capacity as such or as a creditor or a member of the company will have to be stated in the statement; but the effect of the scheme on their interest will have to be disclosed to the extent that effect differs from the effect on the like interest of other creditor and member that would be made by the scheme. If there is no difference, it is not essential that the effect of the scheme on the interest of director and managing director and others need be set out in the statement. In order that the statement accompanying the notice may conform to the requirement of section 393, what should be its content has been considered by Miabhoy J. (as he then was) in In re Sidhpur Mills Co. Ltd. [1961] 2 GLR 681; AIR 1962 Guj. 305, 315. It has been observed in this connection as under : "In my judgment, the true legal position is that it is the duty of every officer of the company and the company to acquaint himself or itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o share capital and balance is to be frozen for a period of two years, whereafter it would be paid by instalments and, by this process, the company would be able to pay up its dues by 1970. In paragraph 7 it is stated that the managing director is a creditor of the company to the extent of Rs. 3,00,000 and he has agreed to convert 50 per cent, of his dues into share capital and has agreed to the payment of the balance by yearly instalment of Rs. 38,000 after 1972. In the last paragraph it is stated that the company proposes to scrap Unit No. II and the price realised on the sale of the scrap would provide some working capital and also enable the company to pay partly some of the dues of the creditors as detailed in the scheme. This statement is signed by Mr. R.L. Dave, in his capacity as Chairman appointed for the meeting, and Additional Registrar, High Court of Gujarat, Ahmedabad. The first objection of Mr. Vakil to this statement is that the statement is not settled by the Registrar as required by the order of this court dated 28th June, 1968. The order on the judge's summons seeking directions for convening meetings under section 393(1) is to be drawn up in Form No. 35. The ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the direction has been properly complied with. The next objection of Mr. Vakil was that this statement under section 393 ought not to have been signed by the Additional Registrar as Chairman of the meeting, because the Additional Registrar is an officer of the court and the statement issued under his signature was likely to convey a wrong impression to the members and creditors that the factual averments made in the statement had the sanction of the court. It is true that the Additional Registrar was not well advised in signing this statement. When a statement containing factual averments is signed by an officer of the court judgment of the recipient of the statement was likely to be influenced by the fact that the factual averments made in the statement have been sanctioned by the court. Therefore, such a statement ought not to have been signed by the Additional Registrar. But the mischief which was likely to be perpetrated by this statement having been signed by the Additional Registrar has been nullified by the direction given by the court in Company Application No. 55 of 1968 filed by Chandulal Hiralal Banker on behalf of his principals praying for a direction that the Addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 62.43 lakhs (sic) . Even Mr. Vakil could not urge that the statement as a fact is not true. In fact there is good evidence to show that the company had suffered loss to that extent till January 1, 1966, when the management changed. But it was urged that further loss suffered by the new management when they came to power from January 1, 1966, ought to have been set out. The omission to make certain statement, not required by law to be made, could not vitiate the statement nor the maker of the statement could be charged with making false or misleading statement on that account. It was then urged that the interest of family members of the managing director in the company as well as the effect on such interest of the scheme have not been set out in the statement. Section 393 only requires that the statement should contain material interest of the managing director and others set out in the section and not of the friends and relations of the managing directors and the other concerned persons : vide In re Sidhpur Mills Co. Ltd.'s case (supra). But Mr. Vakil took a very serious exception to the averment contained in the last para. of the statement that the price realised on the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their judgment in the matter. It is undoubtedly true that the company is under an obligation to set out the interest of the directors and managing director in the company and the effect on their interest by the scheme-more particularly when the effect is likely to be different from the effect on the interest of like nature on other creditors and shareholders. The question then is whether the interest of the directors and managing director in the company and the effect of the scheme on such interest has been set out in the statement or not. It may at once be stated that the interest of the directors and managing director in the company has been set out in the statement. The latter part of clause (h) of section 393(1) is required to be complied with only if the effect of the scheme on the interest of the directors and managing director is likely to be different from the effect of the scheme on the like interest of members and creditors in the company. If the effect is to be the same in respect of both categories of persons, in my opinion, it is not obligatory on the company to set out the effect in the statement. But it was urged that, in this case, the effect of the scheme on the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the estimated production statement, and cash flow statement, annexed to the scheme, contained misleading and incorrect information. I need not dilate upon it because I would have to advert to this submission when I consider the feasibility of the scheme. The statement under section 393 should be drawn up as to convey to the members and creditors sufficient information so that they may be able to bring to bear upon the scheme their intelligent judgment. They must have information which would help in considering the scheme on its own merits. In my opinion, in this case, the scheme as a whole as was annexed to the notice along with various statements and statement under section 393 gave the necessary information to the creditors and members so that they may be able to intelligently deliberate upon the scheme keeping in view the commercial feasibility of the scheme and on the material supplied they were in a position to decide intelligently whether the scheme should or should not be approved. It is of course true that some further information was sought at the meeting and Mr. Surottam Hatheesing, the Chairman of the company, till the date of the appointment of the provisional liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amifications of the scheme and brought to bear upon the subject their intelligent judgment. At the meeting of the ordinary shareholders of the company the question was put to Mr. Surottam Hatheesing as to who were the directors of the company who had sponsored the scheme to which reply was given that the scheme was sponsored by the board of directors consisting of L. H. Banker, S. P. Hatheesing, P. H. Raval and Shri N. M. Soparkar, the last two being Government-nominated directors. Thereafter, further questions were put by the members relating to the working of the company and particularly as to the assets and liabilities of the company. Mr. Hatheesing gave replies generally dealing with the topic but he further stated that detailed figures could not be given as the provisional liquidator is in charge of the company. Thereafter some questions were put in writing and the chairman then requested Mr. Hatheesing to give replies to these questions. Mr. Hatheesing disclosed his inability to reply to the questions for want of detailed information. Unfortunately questions given in writing are not annexed to the report of the chairman. It is, therefore, difficult to find out what were the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iginally proposed offered a compromise to the Union Bank of India- secured creditor of the company-undertaking to pay arrears of provident fund dues to the Central Board of Trustees-the other secured creditor-by monthly instalments of s. 40,000. At the meeting of the secured creditors, the compromise offered to both of them have undergone a change. The bank agreed to accept the scheme on its own terms as suggested in the annexure to its letter dated 8th October, 1968. It must be confessed that there is a radical change with regard to the mode of payment to the bank. The amendments proposed by the bank are at page 154 of the record and the amendments proposed by the Central Board of Trustees are at page 160 of the record. The adjourned meeting of the secured creditors was held on 8th December, 1968. At this meeting, the amendments proposed by the bank were considered by the sponsors and they were accepted. The amendments proposed by the Central Board of Trustees for Provident Fund have been accepted both by the bank as well as the sponsors and they have been incorporated in the final scheme submitted to the court for its sanction. The contention of Mr. Vakil is that unsecured credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They are: ordinary and preference shareholders and secured creditors, preferential creditors and unsecured creditors. The company has offered compromise to each class and, in my opinion, even though the compromise is incorporated in a comprehensive scheme, in fact, each class will have particularly to consider and if thought fit to approve that part of the compromise which is offered to it. In the process that class may deliberate upon the entire comprehensive scheme of compromise and arrangement, then it would be open to that particular class to reject the compromise offered to it, if it felt that in comparison to other class of creditors and members it has not been given a fair deal or in view of the compromise offered to other class of creditors and members it may consider the compromise offered to it as unfair and disapprove the same. But even if the comprehensive scheme of compromise and arrangement is offered for consideration to various classes of creditors and members each class will have to consider and deliberate upon the compromise offered to it though in the process it may consider the feasibility of the whole scheme. But the requirements of law will be satisfied if ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their dues and deletion of clause 2(g) from the scheme. Clause 2(g) provides that the payment of arrears of wages and retrenchment compensation to the workers be deferred for a period of two years. These amendments were undoubtedly proposed at the meeting but it was urged that they were not properly proposed and seconded. There is no substance in this contention because the resolution passed at the meeting shows that the scheme was approved after incorporating the aforementioned amendments. Therefore, the contention of Mr. Vakil under this sub-head must be negatived. The third limb of the argument was that Indequip group of companies and two other creditors participated in the meetings of both secured creditors and unsecured creditors and this by no canon of construction of section 391 would be permissible. This aspect has already been considered while disposing of ground No. 5. Suffice it to say that Indequip group of companies and two other creditors were not allowed to vote at the meeting of the secured creditors. In fact, except the bank and provident fund authorities the other five secured creditors having now given up their charge and charges created in their favour having n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including the right to vote by proxy) on behalf of the body corporate which he represents as that body could exercise if it were an individual member, creditor or holder of debentures of the company." It would appear from the language of section 187 that if a company is a creditor of another company within the meaning of the Companies Act, it may authorise by resolution of its board of directors any person as it thinks fit to act as its representative at any meeting of the creditors or at any meeting of members of the company held in pursuance of the provisions of the Companies Act and such a person authorised by the resolution would be entitled to attend in person and by his presence, the company as creditor would be attending the meeting in person. Such a person authorised by the resolution to represent the company would also be entitled to vote by proxy. A proxy by such a person properly lodged would be a proxy on behalf of the company. It would thus appear that where a person authorised by the resolution of a board of directors of a company attends in person it is not necessary that he should also hold a proxy properly lodged for and on behalf of the company. On a true interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld in pursuance of the Act and a person authorised in this manner shall be entitled to exercise the same rights and powers (including the right to vote by proxy) on behalf of the company. Such a provision was not to be found in the Companies Act of 1913 and, therefore, this decision is not an authority for the proposition that a person authorised by a resolution of the board, before he can represent the company should also hold a proxy, especially after the introduction of section 187, and particularly subsection (2) of section 187 of the Companies Act. In my opinion, the provision contained in sub-section (2) is a complete answer to the contention of Mr. Vakil and it must stand negatived. Thus, there is no force in the contention that the meetings of the creditors and members were conducted in an irregular manner. Re. Ground No. 8.-The next ground of attack is that even if it be held that the meetings were properly conducted, in fact, the scheme is not approved by a statutory majority. There was also an alternative submission that, assuming that the other view is possible, the court on an analysis of votes recorded at the meeting should not exercise its discretion in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders present in person or by proxy 55 shareholders holding 456 preference shares voted in favour of the scheme while 16 shareholders holding 88 shares voted against the scheme. It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4ths in value of the total shares represented at the meeting by the members attending the meeting by person or proxy. Doubtful votes were not taken into consideration. Obviously, therefore, the scheme is approved by a statutory majority in the meeting of preference shareholders. The meeting of the secured creditors of the company was convened first on October 6, 1968, and was adjourned to various other days. The Union Bank of India and the Central Board of Trustees of the Provident Fund were the only secured creditors of the company and both of them have voted in favour of the scheme subject to the modifications suggested by them in respect of the compromise offered to each of them and the same has been accepted by the sponsors of the scheme and, therefore, the final scheme submitted to the court is approved by both the secured creditors which would indicate that the same has been approved b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended by the creditors who were suppliers of stores and cotton, workmen of the company and the depositors. The depositors are relations and members of the family and a few friends of the managing director, Linubhai Hiralal Banker. The total value of the debt represented by the creditors attending the meeting was to the tune of Rs. 1,11,05,004. The creditors representing the claim in the value of Rs. 94,94,502 voted in favour of the scheme. If the meeting of the unsecured creditors as a class is held to be valid, it would appear that as against the creditors representing the debts of the company to the tune of Rs. 94,94,502 who voted in favour of the scheme, only creditors representing debts to the tune of Rs. 9,52,185 voted against the scheme. Therefore, it would prima facie appear that majority of the unsecured creditors representing 3/4ths in value approved the scheme. It was very vehemently contended that preferential creditors and unsecured creditors were grouped together in one class and, therefore, the votes cast at such an illegal meeting approving the scheme cannot be taken into consideration by the court. As stated earlier, the workers of the company would be preferential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al creditors would form one distinct class. Employees' State Insurance Corporation would form another class. The remaining unsecured creditors would form a class by themselves. The next thing is to find out the votes and value of votes cast in each class to ascertain whether in each class the scheme is approved by statutory majority. It is very easy from the report of the Chairman to find out the total number of workers present and the value of their votes. It is equally easy to find out the value of the vote of Employees' State Insurance Corporation. The composite value of the affirmative votes cast in favour of the scheme at the meeting according to the report was Rs. 94,94,502. This is inclusive of the claim of workers as preferential creditors which was to the tune of Rs. 36,33,400. If the votes of the workmen representing in value the claim to the tune of Rs. 38,33,400 is deducted from the votes representing the debt of other unsecured creditors to the tune of Rs. 94,94,502 the balance would be Rs. 58,61,202 out of which vote representing the value of the claim of the Employees' State Insurance Corporation to the tune of Rs. 6,27,346 should be deducted which would leave a bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fresh meeting with proper clarification should be convened and consideration of the scheme should be postponed till such meeting is convened and result is notified to the court. It is undoubtedly true that at the stage of giving directions under section 391 it is the bounden duty of the sponsors of the scheme to place proper materials before the court so that the court can give accurate directions for convening separate meetings of distinct class of creditors and members. It must be confessed that such a case was not taken by the company when direction for convening the meeting of unsecured creditors was given and which included within its fold grouping together of such heterogeneous creditors as preferential creditors, Employees' State Insurance Corporation and other unsecured creditors. It would have been well and good if such distinct and separate meetings were convened in respect of each class of distinct creditors. But if error was committed yet the voting at the meeting can be properly analysed to find out which was the distinct class whose separate meeting could have been called and votes of each class can be ascertained, in my opinion, such an error would not be fatal. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair advantage by which they would have an octopus hold on the company. It was urged that if the scheme is approved, three companies in which Gopaldas Parikh has a controlling interest, namely, Indian Electro Chemicals Limited, Dyestuffs & Chemicals Private Limited and Indequip Limited, would be able to obtain ordinary shares of the company worth Rs. 20 lakhs and thereby they would have such a controlling voice in the affairs of the company that their misdeeds could not be brought to light and they would be able to ride rough shod over the other shareholders. It was also urged that Shardaben, Shantaben and Chandulal Banker who are contestants would be left to the tender mercy of Gopaldas Parikh and Linubhai Banker. In fact, even at the present stage, Indequip group of companies along with Linubhai Banker, and the members of his family hold 422 shares out of the total number of 738 ordinary shares of the company. If the scheme is sanctioned Indequip group of companies would be able to get allotment of shares worth Rs. 20 lakhs by conversion of their 50 per cent, claim against the company. It is not likely to tilt the balance in a different way. It cannot be said, therefore, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme of compromise and arrangement submitted for its sanction which is shown to have been approved by a statutory majority of creditors and members who are directly affected by the scheme. The burden, of course, of showing that the scheme is a fair and reasonable one initially lies on the petitioner. The petitioner must prima facie show that the scheme is pre-eminently fair and reasonable as a prudent and reasonable shareholder would approve of and not object to. In order to show prima facie that the scheme is fair and reasonable, it is open to the petitioner to submit that due weight must be accorded to the fact that the majority has recorded a decision in favour of the scheme and the court must not lightly ignore or set aside that decision. In In re Sidhpur Mills Co. Ltd.'s case (supra) Miabhoy J. (as he then was), in this connection, observed as under : "Therefore the scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, nor will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner and in the interests of the class that it purports to represent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be constructed on the land that will be vacated by scrapping of Unit II was considered exaggerated. Except making a statement in affidavit in reply that the estimate is exaggerated, no material is placed on record to reach the conclusion that the estimate is exaggerated. It was also urged that, in the year 1963, Rs. 3 lakhs will be received by way of deposits from the intending lessors and acceptance of deposit from the intending lessee would result in contravention of section 18 of the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947 (hereinafter referred to as the "Rent Act"), which prohibits a landlord from receiving any fine, premium or other like sum or deposit or any consideration other than the standard rent or the permitted increases, in respect of the grant, renewal or continuance of a lease of any premises. It was also urged that acceptance of deposit from the intending lessee by the landlord for granting lease would be a penal offence. It is unnecessary to decide this point in this case because it does not directly arise for consideration. Prima facie, however, it may be pointed out that Explanation I to section 18 of the Rent Act would show that receipt of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioning the scheme and that he is prepared to provide finance from his own resources and personal guarantees to be furnished by him subject to a condition that whatever additional funds are brought by him within the said period of 2 years from his resources or on his personal guarantees they should be secured against the block of the company and will have first preference of payment after the dues of the present secured creditors are paid off. At no stage, the ability of Gopaldas Parikh to provide additional finances was in any way seriously disputed before me. Looking to his connection with different companies and looking to the fact that various creditors have extended credit to the company to the tune of Rs. 74 lakhs on the personal guarantee of Gopaldas Parikh, it would be reasonable to believe that he would be able to procure finances as promised by him in his affidavit. It was next contended that production programme annexure and estimate production statement annexed to the same are based on exaggerated action of the efficiency of the machinery of the mills and the management. It was urged that the textile machinery of the company is very old and completely worn out and woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the Union Bank and the Central Board of Trustees of the Provident Fund have been given an unfair advantage and they are net expected to make any sacrifice which other interested persons are called upon to make in the scheme. It was urged that the bank does not agree to reduce its claim and insists upon continuance of its security and no relief is sought to be given even in payment of interest. It was also urged that the amount to be realised from the scrap of Unit No. II would be wholly appropriated towards the payments of the dues of the Union Bank and the Central Board of Trustees of the Provident Fund. That of course is true. It must, however, not be forgotten that the Union Bank of India is a secured creditor and can remain outside winding up and prima facie it appears that if it does realise its security, nothing would be left for other creditors and members. The Central Board of Trustees of the Provident Fund have given concession inasmuch as they have agreed to give up damages payable by the company on its failure to pay the provident fund contribution and that is an important concession. Further, both the secured creditors agreed to accept payment by instalments spre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then preferential creditors and thereafter unsecured creditors ; and if there is any balance, there would be pro rata distribution to the members. The present liabilities of the company are in the aggregate amount of Rs. 1,64,54,117. The company is indebted to the bank to the tune of Rs. 40 lakhs and roughly Rs. 22 lakhs are payable to the Central Board of Trustees of the Provident Fund. The company has to pay Rs. 8 lakhs to the Employees State Insurance Corporation and the preferential claim of the workers would come to Rs. 20 lakhs. Indequip Group of companies are creditors to the tune of Rs. 40 lakhs and there are other unsecured creditors to the tune of Rs. 15 lakhs. The remainder is the claim of the workers representing their non-preferential claim. If the assets of the company are sold, taking the best view of the matter, Rs. 28 lakhs may be realised by the sale of the machinery and the land may fetch, at the best available price, Rs. 35 lakhs. I have worked out the figure of Rs. 28 lakhs of the machinery on the basis that the company hopes to realise Rs. 14 lakhs by sale of the machinery after scrapping Unit No. II only. The company is the owner of the land admeasuring about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. This concession is made in the affidavit of Gopaldas Parikh. There is a similar concession made by Mr. Khale on behalf of Dyestuffs and Chemicals Private Ltd. which would reduce the liability of the company by another 3 lakhs of rupees. Thus the debt liability of the company would be roughly reduced by Rs. 23 lakhs. These concessions are made on behalf of Indequip Ltd. and Dyestuffs & Chemicals Pvt. Ltd. on the condition that the court sanctions the scheme. It the company is resuscitated, the members may also hope to earn dividend after a lapse of a few years. Now it must be confessed that the concession made by Gopaldas Parikh on behalf of the Indequip Ltd. and by Mr. Khale on behalf of the Dyestuffs and Chemicals Private Ltd. is not actuated by any altruistic motive because it is absolutely certain that in the event of the scheme being rejected and an order for winding up the company is being made, they as unsecured creditors are not likely to recover a farthing out of their total claim of nearly Rs. 46 lakhs. Their aporoach appears to be that when everything is likely to be lost part of it may be recovered by forgoing the other part of it. This concession is not by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in favour of the other five creditors, namely, Indian Electro Chemicals Ltd., Dyestuffs & Chemicals Private Ltd., Indequip Ltd., Messrs. Amarshi Damodar and Atul Cotton Traders, have been relinquished, by way of concession in the above. The result which Mr. Vakil seeks to achieve is obtained without the order of winding up being made. Thus, giving the matter my anxious thought the advantages and benefits that are likely to accrue by sanctioning the scheme far outweigh the imaginary or productive result which Mr. Vakil thinks can be achieved in winding up. Therefore, also, the scheme deserves to be sanctioned. Before sanctioning the scheme it is necessary to give specific directions subject to which I would accord sanction to the scheme. The court has power at the time of making an order sanctioning the scheme under section 392(1)(b) to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This power can be exercised not for substituting the scheme as approved by the creditors and members but for making the scheme of compromise and arrangement effective and workable. The only pre-condition i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the first instalment payable by the company to the Union Bank of India should commence six months after restarting of all the departments of Unit No. 1 under the scheme, and thereafter every succeeding instalment shall be paid from month to month. The company would be liable to pay interest at the agreed rate but not with quarterly rests. The interest should be simple interest payable from year to year at the agreed rate of interest. The default clause in the scheme by which, in the event of the company committing default in payment of any instalment, the whole of the amount payable to the bank would become due and payable at once, would stand deleted. Whenever the bank wants to sell any property of the company under the rights conferred on the bank in the scheme of compromise and arrangement the same shall not be exercised without prior permission of the court. It is not open to the Union Bank of India to go out of the scheme and proceed to realise the security without obtaining the prior permission of the court. Similarly, the monthly instalments payable to the Central Board of Trustees under the scheme would commence six month safter the restarting of all the departments o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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