9911796707
TMI Blog1974 (12) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... ital clause of the memorandum of association, the issued, subscribed and paid up capital was Rs. 2,22,500. In all, 890 shares each of Rs. 250 fully paid were subscribed. The main object for which the company was incorporated was spinning of cotton yarn. In course of time, it had an installed capacity of 14,000 spindles. The company was registered under the Industries (Development and Regulation) Act, 1951, on 26th October, 1953, under registration certificate bearing No. R/10( a )/509 No. R/23(1)/461. Initially, the company was progressing well, but subsequently in the early fifties it weathered a heavy storm and on 27th of April, 1957, it was forced to close down its business. The Government of India appointed a committee of inspection under the chairmanship of Shri Arvind Mafatlal for technical examination of the spinning unit of the company to ascertain whether it can be restarted. The committee submitted its report on 18th February, 1958 ; fortunately those then in management and control of the affairs of the company restarted the spinning unit of the company on 28th January, 1958. But it had again to weather a heavy storm and its financial difficulties multiplied with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecured creditor filed Company Petition No. 9 of 1965 for winding up the company. The performance first of the private management and then Authorised Controller had led the company on the date of its closure to accumulated loss of Rs. 36,63,175. Then starts the chequered history of litigation keeping this productive unit unproductive and unutilised for a span of nine years with indescribable miseries of unemployed workmen which, to put it mildly, a developing country can ill afford. Whatever that may be, it would be necessary to refer to some of the proceedings which were commenced against the company or some persons who were in management at one or other time. The first shot was fired by the State Government through the Authorised Controller by filing Civil Application No. 308 of 1964 in the City Civil Court at Ahmedabad challenging the creation of the equitable mortgage by the directors in favour of Shri Rajendrakumar Maneklal and others. However, this application was withdrawn in 1970, when the State Government filed in the High Court, Suit No. 2 of 1970, for an identical prayer. After the petition for winding up the company was made, the court appointed the official liquidator a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners sending the receipt in favour of the official liquidator. A further direction was given that the interest realised by the liquidator on the said amount be returned to the intending purchaser after 8 weeks. In 1970, Shri Rajendrakumar Maneklal and one other took out judge's summons for taking misfeasance proceedings against the Authorised Controller, Shri Ambalal Mulchand Shah. A question about the proper stamp on the summons arose and it was finally decided in 1973 and the requisite stamp was affixed. It was numbered as Company Application No. 48 of 1973. Shri Rajendrakumar Maneklal and six others took out judge's summons in Company Application No. 42 of 1971, against the official liquidator for a declaration that the equitable mortgage passed in favour of the applicant by the company on 14th July, 1959, is valid and legal and for incidental reliefs. The liquidator took out judge's summons in Company Application No. 12 of 1973, for obtaining directions as required by rule 139 of the Companies (Court) Rules, 1959, to exercise powers under section 457 of the Companies Act. This summons was granted on 21st September, 1973. Under the directions given in this summons, the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors. Various meetings of different classes of members and creditors were held on different dates and were adjourned from time to time and it will not be necessary to clutter the record to refer to each meeting in detail, save and except that a meeting of the workmen, who were in employment of the company till the company closed down represented through their representative textile labour association was convened pursuant to the directions given in Company Application No. 86 of 1972. This meeting was actually held on 15th October, 1972, but it had to be adjourned to await a report of an expert who would give technical advice about the conditions of the spinning unit of the company, whether it can be restarted. Before the meeting could be convened, the petitioner took out a judge's summons in Company Application No. 44 of 1973 praying for direction that the liquidator be directed to verify the claims of the creditors belonging to the class of labour workmen on the basis of the claim lodged with him. It is at this stage that the matter came up before me. When Company Application No. 44 of 1973 was taken up for giving appropriate directions to the liquidator, I had an opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asking the sponsor to state in no uncertain terms that the scheme is for re-starting and rejuvenating a sick unit to be used for productive purposes and not for sharing the bones and hide because flesh was already eaten away. The sponsor acted, I must frankly confess, a little positive by saying that he would amend the scheme by offering 50 per cent, to the workmen who cannot be re-employed and continuity of service to workmen who are willing to join and who are below the age of superannuation. An assurance was given that if the scheme goes through an undertaking would be given to the court to restart the sick unit. Some ray of hope appeared in the eyes of the workmen who appeared at the hearing of the matter in the court without understanding even a bit of what was going on. It was at one stage necessary to disclose to them who are putting impediments in the path of progress and I was inclined to give direction that everybody must address the court in Gujarati so that the role of each one can be thoroughly exposed. However, frankly it must be again confessed that wiser counsel prevailed and we reached a very satisfactory conclusion and the end of the judgment will clearly disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cancelled and " this " letter revives the registration certificate mentioned above. In other words, the licence stands there again as effective as it was before this cloud of revocation cast its shadow on its validity. The last hope of getting scramble of dismantled company so as to make unearned profit disappeared and the sponsor was left with no alternative but to come out frankly with the definite and constructive proposals for restarting the mill with whatever obligation it involved. After thus removing all the intermediate impediments, the matter was set down for examining the scheme on merits with the alterations and modifications proposed by the sponsor to bring the scheme in conformity with the discussion in the court. Initially, the scheme may be examined from the standpoint of legal formalities that ought to be completed before the court proceeds to examine the scheme on its merits. By a catena of decisions, it is now well-established that before the court sanctions a scheme, it will normally need to be satisfied on three points : (1) whether the statutory provisions have been complied with ; ( ii ) whether the class or classes affected by the scheme have been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng was attended by 19 shareholders, 17 in person and two by proxy; their aggregate holding was 493 shares. It may be recalled at this stage that the issued, subscribed and paid up capital of the company consists of 890 shares of Rs. 250 each fully paid. It would thus appear that more than 50 per cent, or to be exact about 55 per cent, of the equity shareholders attended the meeting and the report shows that the scheme as then proposed, especially the provision affecting the equity shareholders, namely, that each one will transfer his share to the sponsor or his nominee on payment of Rs. 10 per share was unanimously approved. Next meeting was of the secured creditors. The State of Gujarat claiming to be the secured creditor under three mortgages executed by the Authorised Controller in its favour, two dated 15th June, 1965, and the third dated 3rd July, 1965, for an aggregate amount of Rs. 16,42,263-86 attended through its officer in the Industries, Mines and Power Department. Similarly, one Smt. Subodhkumari Rajendrakumar Sheth attended the meeting on behalf of Shri Rajendrakumar Maneklal and his companion creditors who claim to be secured creditors under the equitable mortgage d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tunity. In fact, initially, my reaction was that this sponsor is a protege of Shri Rajendrakumar Maneklal who has been asked to put forth an entirely unfair scheme to provide a cloak and sheath to the misdemeanour both of the past private management as well as the Authorised Controller to save them from exposures in winding-up proceedings. But the scheme has been changed, modified or resurrected much beyond its original undesirable shape and I have reason to believe that, in the course of examination of the scheme, possibly the sponsor's intentions have changed for the better and he has now ceased to provide a cloak or sheath to cover the mismanagement of some people at the cost of public money and public interest. With certain modifications, the State of Gujarat has accepted the scheme as it is being finally sanctioned. So also Shri Rajendrakumar Maneklal and his companion creditors through Mr. C.C. Gandhi, learned advocate, has unreservedly accepted the scheme as is now being sanctioned and, therefore, it can be said with confidence that the secured creditors or those claiming to be secured creditors have accepted the scheme as it is now being sanctioned. The next important cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is submitted for the necessary action". It would thus appear that the consideration of the scheme and acceptance or rejection remained inconclusive and in terms the Ahmedabad Municipal Corporation agreed to submit to the orders of the court. But the chairman, in paragraph 9 of his report, further observed that Mr. A.K. Zaveri further stated that subject to what has been recorded as the statement of the case of the Corporation, the Corporation approved the scheme. The stand appears to be slightly self-contradictory but it would reveal one fact that the Corporation did not actually oppose the scheme or firmly rejected the scheme but probably warned to keep all its options open so that proper arrangements can be worked out at the time of final sanctioning of the scheme and that the Corporation may not have the misfortune or ignominy of rejection of the scheme on account of its recalcitrance. Now, at the hearing of the scheme, Mr. G. N. Desai, learned advocate, appeared and argued the point for some time and then Mr. M. D. Pandya took over. It was contended that, on the date of winding-up, the company was m arrears to the tune of Rs. 73,945"09 and that there is no dispute about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e block of the company and affairs of the company is handed over to the sponsor. The Corporation reaffirms that it has a charge and does no' waive it and that in the event of any breach of the terms of the compromise, it would be free to enforce the charge". When this concession to the scheme on behalf of the Corporation was being discussed, Mr. Pandya made a further statement that the Corporation has no objection to the court fixing date of first instalment and reasonable spread-over of instalments and a further reasonable modification of the terms suggested by the Corporation so as to make it workable by providing a breathing time to the sponsor of the scheme for payment. Mr. Pandya made it distinctly clear that in order to be helpful so that a sick unit restarts, the Corporation would submit to the scheme as may be reasonably modified by the court and would accept the scheme and come within the scheme and remain in the scheme. I then asked Mr. Pandya what about the charge which the Corporation is not willing to waive and to that Mr. Pandya answered that while retaining the charge in its statutory form, the Corporation concedes and states that it would not unilaterally proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. The Employees' State Insurance Corporation was shown as the secured creditor. The meeting was held by the sponsor of the scheme with one Mr. V. N. Kachru, Deputy Regional Director, Employees' State Insurance Corporation, Ahmedabad, on the same day at 12-30 p.m. He presented a letter dated 17th September, 1972, which spelt out the terms on which the Employees' State Insurance Corporation would accept the scheme. The total claim of the Corporation is Rs. 10,859 55 payable with running interest at 6 per cent, per annum. The Corporation insisted upon full payment immediately. The sponsor accepted the suggestion and the Corporation has accorded its approval to the scheme. Next meeting was with the officers of the Sales Tax Department. But no one attended the meeting and the meeting was adjourned to 18th October, 1972. At the reconvened meeting on 18th October, 1972, one Shri Maharaja attended on behalf of the Commissioner of Sales Tax and produced a letter showing the terms on which the Sales Tax Commissioner approves the scheme. The claim of the sales tax department has been set out in detail in the relevant portion of the scheme. The sponsor had offered to pay whatever is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matters have been remanded to the Sales Tax Officer. Had proper appeal been preferred, for 1963 assessment also, the same outcome may have easily come. Now, such a procedural wrangle cannot be allowed to stand in the way of proper justice being done. As part of the scheme, the court directs the Commissioner of Sales Tax to exercise his suo motu revisional jurisdiction and set aside the ex parte assessment for the year 1963 and remand the proceeding back to the Sales tax Officer to be disposed of along with the proceedings for the assessment for the years 1964 and 1965. After the liability is thus computed, if necessary by way of appeals and revisions after the assessment is done by the Sales Tax Officer, the sponsor should pay. There are two assessments for the year 1962, one in the amount of Rs. 2,620 17 and another in the amount of Rs. 462.20. There is no dispute about this amount and this amount must be paid off within one month from the date of court sanctioning the scheme. For the assessments for the years 1963, 1964 and 1965, after the Sales Tax Officer determines the liability, and if the sponsor accepts the liability, the amount shall be paid within six months from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsor got the date extended for convening the meeting. Recalling here the fact that by the order dated 14th August, 1973, the original application itself was rejected by the court; subsequently, however, by an order in Company Application No. 50 of 1973, order dismissing Company Application No. 43 of 1972, was reviewed and Company Application No. 43 of 1972 was restored to file and directions were given for convening the meeting of the workmen. Pursuant to the direction, Mr. Parekh convened the meeting on 16th December, 1973, at 10-30 a.m. 163 workmen attended the meeting in person. Mr. R. M. Shukla and Mr. N. A. Vyas, officers of the textile labour association, were also present. By this time the scheme had undergone a change in relation to workmen. The sponsor agreed that if the registration licence is restored, he with one approved industrialist, shall restart the spinning unit of the company and the sponsor shall pay 50 per cent, of the labour dues including gratuity and closure compensation, retrenchment compensation, bonus, etc., to such workers who have already reached the age of retirement or do not propose to join service of the mill or to their heirs, assignees and execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the unit starts and makes profit, shareholders get return and in this case a share of Rs. 250 is made available for Rs. 10. I suggested that the initial offer of 50 per cent, of the dues to the workmen may be accepted but in the event the unit makes profits and declares dividend of 10 per cent, from then onwards an amount equal to the amount of dividend should be set apart for paying to the workers for the balance of 50 per cent, of their dues, the idea being that worst sufferers and least capable of suffering the consequences of mismanagement should be paid back their hard earned dues. When this was discussed, Mr. I. M. Nanavati suggested that this would be a long drawn out spell and the sponsor will have to go on keeping accounts and workers will have to wait, may be even for a long period and that in fact some round sum should be worked out to be paid in praesenti in equal instalments. All the concerned persons including Mr. Shukla of the textile labour association suggested that it should be 75 per cent, of the dues and that should be accepted as fair and just. Alternatively, it was also suggested that in case workmen want 100 per cent, of the dues, an option should be given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that each class was fairly represented. In fact the scheme has been approved unanimously. There was no attempt on the part of the majority to impose itself upon the minority or which has been coerced by statutory majority into falling in line. However, I must frankly say that as far as the equity shareholders and unsecured creditors are concerned, what the sponsor offers is Hobson's choice. In the winding-up, the State of Gujarat and Shri Rajendrakumar Maneklal and his companion creditors claiming to be secured creditors would eat away very vital of the residue of the company's assets, and one has to recall huge carried forward loss at this stage. Thereafter, come the preferential creditors like the workmen, Employees' State Insurance Corporation, possibly the Sales Tax Commissioner and several others in their line. Necessarily, therefore, nothing would be available to the unsecured creditors and equity shareholders. Therefore, even though whatever is offered to them is so negligible as to merit discussion they had choice between something and nothing. They had but an option either to get nothing or to get something which is paltry. But then nothing can be done for them. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had done by a mere notice of the court for cancelling the order revoking the licence. Dead seems to have turned in the grave. Everybody now is in a mood to help in resurrecting and resuscitating a dead unit. It was once said that its spindles cannot work. It was said that licence cannot be revived. It was said that huge investment would be necessary before smoke can rise through the chimney of the mill. A very ghastly picture was drawn. It was a nightmare. When initially I suggested a change from scrapping to running, it was dubbed as a wild dream. But I am satisfied that all those clouds of unthinking mind, not prepared to make venturesome approach, have been dispelled and to the credit of everyone who has now appeared, i t must be stated that a very vital and positive contribution is being made to run the unit. How would a businessman look at the scheme. I am not thinking of a businessman of today who wants those profits before doing anything without earning profit. For that type of businessman there is no place in the scheme sanctioned by the court; but an honest businessman with genuine commercial judgment can feel very happy as to how by judicial process and legal contrivance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now I wish I should not have done it. If the sponsor comes with a detailed scheme and he is tied down to an undertaking to the court, it is his responsibility to know wherefrom finances would be brought and today finances come from such diverse sources that it would be inadvisable to expect the sponsor to disclose them in his own interest. It should not be the worry of the court at all. In fact an intermediate worry of this sort lost the scheme in Rajnagar Mills case and I am satisfied that I am not going to raise the question of the financial viability or the capacity of the sponsor to bring finances to run the scheme. He has been sitting in this court. He appears to be a typical businessman. He knows his responsibility. He has agreed to give an undertaking to the court that he would run the mill as per the scheme and schedule annexed to it and that he has modified the scheme with liability to run and what it means and is further conscious of the consequences of an undertaking and its breach. It is his worry to find out finances and I am not interested in exploring from where he is going to bring it. In fact, hereafter, I am not going to permit anyone to pose that question. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquid finances. Therefore, the question of financial capacity of the sponsor need not detain me any more. As the scheme is likely to be spread over a long period, it is but meet that the court should have a continuous supervision over the scheme and that, therefore, within one month from the date of the sanctioning of the scheme, the sponsor should take out judge's summons inviting the court's directions for reconstituting the board of directors. He may suggest his own nominee and the court would also nominate a director. If the textile labour association is interested in the appointment of its own nominee on the board, it may as well make its own recommendation. That brings me to the most important part of the scheme. The scheme as is now sanctioned by the court is primarily a scheme to restart a closed production unit, a sick unit which even the Government of India did not want to touch under its plan of taking over sick textile units to be run by the National Textile Corporation. Its segregation was complete and everyone shunned it. This apathy has been the cause of its suspended animation over a long period of nine years. The agony of unemployed workmen is immeasurable. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforementioned conditions is sanctioned and it should be annexed to this judgment: "( a )The sponsor shall give an undertaking to the court to run the company in accordance with the scheme herein sanctioned and especially specific undertaking to restart the spinning unit of the company according to the phased out programme as annexed to the scheme. The sponsor shall also deposit Rs. 50,000 with the Registrar of the court as guarantee money for faithfully and scrupulously implementing the scheme and agreeing that in the event of his committing breach of the relevant and important provisions of the scheme, the amount shall stand forfeited to the State to be utilised in the manner as directed by the court. ( b )The sponsor shall specify in the undertaking that he would not scrap the mill but would start and run it and that is the fundamental understanding and basic postulate on which the scheme is sanctioned. It would be open to him to sell old and scrap machinery with a view to replacing it by new one and he should strive to expand spindlage to 25,000 spindles. The court recommends that the Government should favourably consider such a request for making the unit economically viab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sponsor should pay up the amount of tax found due within six months from the date on which the ring frame department of the spinning unit of the company starts functioning or the date of assessment order, whichever is later. If the sponsor chooses to prefer appeal as advised by the legal adviser against the assessment orders made by the Sales Tax Officer he should abide by the order made by the appropriate authority under the Act itself. The sponsor should pay up the amount of tax found due on two assessments for the year 1962, which is not in dispute. ( f )The sponsor with the help of the official liquidator should deter mine the amount payable to the workmen. It must be separately done in respect of those who are re-employed and those who are not re-employed according to the relevant directions on the point. Fifty per cent, of the amount found due should be paid to the workmen as per the programme of payment to be worked out by the sponsor and the textile labour association. For the balance of 50% at the option of workmen individually or collectively, the sponsor should either pay 25% of the total claim in full and final settlement to those workmen who want the payment at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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