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TMI Blog1970 (12) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 divided into equity shares of Rs. 100 each. It was alleged that there had been a continuous loss for four years prior to applying under section 391(1)of the Act, on May 16, 1967, in the company's business of selling motor cars, trucks, buses and automobile parts on account of substantial cuts in the allotment of quotas of cars and chassis of trucks and buses, the Chinese and Pakistan aggressions, and high taxes. Therefore, the company was said to be unable to meet the demands of its depositors as and when the periods of deposits matured. The second application No. 26 of 1969 under rule 79 of the Companies (Court) Rules, results from Company Application No. 25 of 1969 made under section 391(1) of the Act by an allied concern known as M/s Premier Credit and Motors (P.) Ltd. (hereinafter referred to us "the Credit Motors"). The grounds for the application of the Credit Motors were that there were about 711 similar depositors with various deposits amounting to Rs. 27,50,000 whose deposits could not be paid back. The fully paid up capital of the Credit Motors was Rs. 6,00,000 divided into equity shares of Rs. 100 each. The business of this company appears to have been to invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme, but the creditors were to have a claim against the assets of the company, including the five lakhs set apart and the profits accruing therefrom, in case 60% of the repayment of the capital assured to the unsecured creditors could not take place. A briefer but similar scheme was put forward by the Credit Motors with only four terms. The second of these was that the unsecured creditors will be paid by the company 35% of the amount due in the following manner: ( a )10% within three months of the sanctioning of the petition by this court, ( b )12% within one year from the date of the payment of the first installment, ( c )balance 12% within one year from the date of the payment of the second installment. The fourth condition of the scheme was that the existing board of directors shall continue to function and was to be empowered to realise the outstanding dues of the company. The first and the third conditions provided that the contractual rate of interest shall cease on the date of the filing of the petition and that the scheme would not be applicable to the liabilities of the company incurred after the filing of the petition. Apparently, the object of the two scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able period of time, the voluntary liquidation of the company, and, thereupon, the company was to be wound up and its assets distributed to the depositors pro rata. The new scheme made it clear that the directors of the Premier Motors and Credit Motors were to be the same. A similar revised scheme was put forward on behalf of the Credit Motors on November 27, 1967. In this also it was provided that 100% of the value of the unsecured deposits as they stood on May 15, 1967, together with the interest and contractual rate of interest up to that date, will be paid back to the unsecured creditors, and, thereafter, interest at the rate of 6% will be paid out of the assets of the company and future profits. The other conditions were similar to the one indicated above relating to the management of the Premier Motors. It became clear that the management of the two companies was really the same. It appears that a number of depositors of the two companies are also common. On 8th of October, 1968, each of the two revised schemes was ordered to be placed for consideration before a meeting of unsecured creditors, shareholders, and directors of each company to be held at Delhi under the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be disputed. One of the conditions of the scheme is "that the account books held in the custody of the Central Bureau of Investigation be made available to sales tax and income-tax departments for the proper assessment and proper determination of liabilities". It is difficult to see how this condition could be binding upon the Central Bureau of Investigation. The fixed and current assets of the company, as shown in the balance-sheet on 30th November, 1968, are valued at Rs. 31,67,028: But, the total expected realisation from the sales of the assets is estimated at Rs. 24,88,096. It is thus clear, from the statements in the proposed scheme, as passed at the meeting of the creditors, that the company is unable to satisfy the debts of its unsecured creditors even if the company was to be wound up. Trade and current liabilities are shown at Rs. 1,69,130.30 and Rs. 2,65,636.35 are shown as debts due to Credit Motors so that the outstanding liabilities to unsecured creditors are shown at Rs. 32,73,901.75 n.P. There is a statement in the scheme that a payment of 64% can be made out of the assets after deducting 5% already shown as paid. One of the modes of payment agreed upon was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally or by proxies by 496 depositors only, the value of whose deposits were Rs. 19,42,950 out of the total number of 711 depositors who had deposited Rs. 27,50,000. Sri Dinanath Dinesh, a depositor, who was then working as the chairman of the board of directors on behalf of the unsecured creditors, explained the position to the meeting. It was mentioned in the report that Sri P.L. Tandon, a chartered accountant of Kanpur, also explained the financial position of the company, as it appeared from the provisional balance-sheet of 30th November, 1968, and how a distribution of 40% of the unpaid balance could be made to the creditors. After several creditors had asked questions and addressed the meeting, the scheme was shown to have been unanimously passed after electing Sri R.K. Vaish, Sri Dinanath Dinesh, and Sri H.C. Bahri as directors of the company. It may be mentioned that these were the three representatives of the unsecured creditors of the Premier Motors elected for their board of directors presumably because the creditors who had actually interested themselves especially in the affairs of both the allied companies and collected proxies were common. It may be mentioned here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner in which the deposits were accepted almost up to the time when the applications under section 391(1) of the Act were filed, when the inability of the companies to meet their liabilities must be evident to the directors, was pointed out. It was urged that the real object of each scheme was to throw a cloak of legal protection over the misdeeds of the directors committed in the past. Attempts were made to take me into the details of individual transactions in the past and during the pendency of the proceedings in this court under section 391 of the Act. The extent to which the unsecured creditors were informed of the actual position and financial capacity of each company to repay the loans, before they agreed to the scheme, was questioned. It was submitted that at least the Premier Motors was a sound profit making concern which could very well repay all its unsecured creditors and the rates of interest contracted for. It was, therefore, submitted that the mere passing of the schemes by a majority of creditors in each case was insufficient. It was urged that before the scheme is sanctioned by this court it has to be satisfied: firstly, that the unsecured creditors who gave their c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to holders of fully-paid shares". The question, however, in such cases is not whether some distinction between rights of different unsecured creditors can be made out, but, whether the holding of a meeting of a set of creditors, treated as a single class, is likely to adversely affect the interest of any part of that class viewed apart from others in it. In the case before me, the interests of all the unsecured creditors, irrespective of the time when their debts matured, appear to be identical. The company alleges inability to pay any of its unsecured creditors according to contracts of the same kind with identically similar terms. It could get some relief, if any at all, through an arrangement or a scheme for the discharge of its obligations to all the members of this class on the same grounds. The interests of every one of the whole of this class of creditors required a consideration of the question whether a scheme for repayment of all debts is not more advantageous to each one of them than to wind up the company. In a winding-up, the interests of this whole class will have to be dealt with on the same footing. Hence, their interests are common irrespective of the time when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company under sections 235 to 251, and the like". I have already indicated how each scheme provided for a regular audit of the accounts and assures the unsecured creditors that they will be given copies of the audited balance-sheets every year. It is, therefore, very surprising that, in spite of several opportunities given to the companies to put forward their latest accounts so as to enable the court to judge the exact paying capacity of each company, it has not been found possible by them to file balance-sheets beyond 30th June, 1969, and that too after orders had been passed specifically calling for further information. On 31st March, 1969, applications were filed on behalf of each of the two companies for sanctioning the schemes under rule 79 of the Companies (Court) Rules read with section 391(2) of the Act without filing the necessary balance-sheets containing the information required for sanctioning the schemes. On 13th February, 1970, after hearing arguments at some length, it was indicated by this court to the companies and the creditors supporting the schemes that the schemes for the liquidation of debts were much too vague and required clarification before they could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and its ability to abide by the undertakings given in the schemes was being tested and time was being given to enable the company to supply the information required for compliance with the proviso to section 391 of the Act. The order ended as follows: "It is also necessary to have the latest balance-sheets and the statement of accounts and the affairs of the company in view of the proviso to section 391 of the Companies Act. Learned counsel for the company will supply these details by the 20th July, 1970, on which date the case will be listed for further orders". As a result of further time prayed for and granted, for supplying the necessary information and then for filing counter-affidavits and rejoinder affidavits, the applications were actually taken up for hearing again in October, 1970. The information supplied to this court with regard to the financial position of each company, which is certainly not the latest as required by the proviso to section 391(2) of the Act, may now be considered. The last audited balance-sheet of the Premier Motors relates to the year ending on 30th June, 1966, and shows a profit of Rs. 5,602.16 after payment of dividend for 1964-65 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is said to be the more profitable of the two companies. If this is the true state of affairs, it appears that even the Premier Motors is not likely to be able to fulfil the promises held out of repayment in full to the unsecured creditors. Even its scheme appears to be nothing more than an attempt to ward off an inevitable liquidation. It may be mentioned here that, this is exactly the conclusion stated in a representation filed on behalf of the Company Law Board, under section 394A of the Act, against the scheme of the Premier Motors. The Central Government's stand also is that this is a fit case for a winding-up. So far as the Credit Motors is concerned, it was stated, in the very first clause of the earlier scheme of July 15, 1968, that the company was not carrying on any business at all It has not been said anywhere that the business has been re-started after holding of the meeting on 24th February, 1969. The provisional unaudited balance-sheet together with profit and loss accounts for the year ending on 31st May, 1967, shows a loss of Rs. 11,14,075.08. A similar balance-sheet and profit and loss accounts from 1st June, 1968, to 30th November, 1968, shows a loss of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointments. Section 255(1) of the Act lays down the mode in which the directors are to be appointed and contains a saving clause showing that they may also be appointed "as otherwise expressly provided in the Act". Learned counsel for the companies could not explain how the present de facto directors come within the saving clause. No interim orders were passed by this court authorising these directors to manage the affairs of the companies. The complaints made by the objecting creditors to the manner in which the directors have been dealing with properties and funds of the two companies in an unauthorised manner and the pendency of an enquiry by the Central Government, which is admitted by all the parties, also indicate that it is better to order winding-up in the interests of creditors so that the illegalities committed in the management of the two companies are not concealed and those who may be found to have misappropriated the funds or properties of the two companies are ordered to make good the losses or are otherwise dealt with in accordance with law. No report of the enquiry ordered by the Central Government has been filed probably because it has not been concluded. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know and understand where their advantage lies. It was contended that it was more advantageous for the unsecured creditors to receive payments under the schemes placed before this court instead of a recourse to the procedure for the compulsory winding-up of the two companies. But, as I have already indicated above, the information placed before this court is neither enough nor of such a character as to enable it to hold, with any confidence, that the companies will be able to carry out even the assurances contained in the schemes. It seems to me that, so far as the Credit Motors are concerned, a delay in winding up a concern which has not been carrying on business for more than two years, may only diminish the assets which may be available for liquidation of debts and not increase its resources so as to improve its paying capacity. So far as the Premier Motors is concerned, it may be possible to avert a winding-up provided the profit making capacity of the company is really that which is claimed for it although the unaudited balance-sheets and the profit and loss accounts up to the middle of 1969 do not prove this claim. The first contention advanced in support of the schemes, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compromise must be a compromise which can, by reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it. Now, I have no doubt at all that it would be improper for the court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such, otherwise the sanction of the court would be a sanction to what would be a scheme of confiscation". Fry L.J. observed: "I shall not attempt to define what elements may enter into the consideration of the court beyond this, that I do not doubt for a moment that the court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the court may take into consideration I will not attempt to forecast". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, thought that the scheme ought to be confirmed. Lopes L.J. also gave, among the reasons for approving the scheme, the considerations that the Australian creditors had almost unanimously approved the scheme and that no one could know better the state of things in Australia than the Australian creditors. He said: "They are there upon the spot, they know all the details connected with the bank, they know all the circumstances which are likely to make the bank a flourishing concern or the contrary, and it appears to me that nobody in this country, or anywhere else except Australia, can express a view so cogent with regard to this matter as these Australian creditors". Smith L.J., although supporting the judgment of Vaughan Williams L.J., "in the main", thought that it was hypercritical of the judgment of the Court of Appeal in In re Alabama [1891] 1 Ch. 213 (CA) . In the third important English case on the subject, In re Dorman Long Co. [1934] Ch. 635; [1935] 5 Comp. Cas. 30 , 33, 34 (Ch. D.) , Maugham j. said about such cases; "It is plain that the duties of the court are two-fold. The first is to see that the resolutions are passed by the statutory majority in valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upon the facts of each particular case, such as: the kind of persons who pass the resolution, the information with which they were supplied, the circumstances in which they accorded their approval. Such presumptions are only meant to operate as aids for the courts in deciding where the advantage of a set of creditors lies. They do not displace the duty of the court to judge for itself whether a scheme is fair and reasonable or bona fide . In the cases before me there is nothing to show that the majority of unsecured creditors are astute well informed businessmen. On the other hand, the objecting creditors point out, from the long lists of unsecured creditors and their addresses supplied, that the overwhelming majority appear to be petty depositors of lower middle classes who, it is submitted, are likely to have invested their life long savings attracted by the high returns offered. Among them, there seem to be many women. Some of the deposits could, therefore, represent provision made for the maintenance of dependants. It appears from the lists of few proxy-holders and the depositors who were present at each of the two meetings that many proxies were collected by a few interes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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