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TMI Blog1980 (9) TMI 221X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,600 shares of Rs. 100 each and the shares are fully paid up. The main object of SFC is to manufacture and sell insecticides and pesticides. SFC commenced business of manufacturing and selling of insecticides and pesticides ever since its incorporation. It has set up three units in the States of Tamil Nadu, Karnataka and Andhra Pradesh. The unit in Karnataka State which is in Mysore City is running. The unit in Guntur in the State of Andhra Pradesh which has been taken on lease, has commenced manufacturing insecticides and pesticides. The necessary plant and machinery have been acquired for the unit in the Madras City in the State of Tamil Nadu, and the Karnataka Bank Ltd. has agreed to finance the said unit on the basis of hypothecation of land, structure and machinery. Owing to natural calamities in the State of Andhra Pradesh like severe cyclones, the recoveries were very poor and the outstandings due to SFC had increased. Another unit of SFC at Warangal was closed on account of unforeseen financial difficulties. It is stated that as the State of Andhra Pradesh is predominantly dependent on agriculture SFC has immense profit potentialities. SFC has to recover debts to the tune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annexed to the application did not set out several particulars with regard to discharge of the debts, whereupon I gave directions on December 17, 1978, that the respondents should serve a notice on the SFC calling upon it to furnish particulars which they allege were not mentioned in the scheme and that SFC should furnish the information within two weeks after service of such notice and also file an additional affidavit furnishing the said particulars and serve the copies of the same on the respondents. Accordingly, notice was served on SFC for furnishing the details, and the SFC furnished the details as mentioned in the annexures. SFC also filed an affidavit on December 16, 1978, stating that as per the directions of the court, a statement giving full details of liabilities, projected profits and a list of creditors and a schedule of repayment have been furnished. Copies of the same have been filed as annexures to the said affidavit. Thereafter, when the company application, C.A. No. 142/78, came up for hearing, the same was opposed by respondents Nos. 1 and 2 but supported by the 3rd respondent, bank. Sri V.K. Damle, the learned counsel for the 1st respondent, raised three ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnataka Bank Ltd. should repay the ordinary creditors according to a reasonable schedule and if the said condition was not fulfilled, they were opposed to the scheme or compromise. There was a dispute with regard to the value of the debt of the Central Insecticides and Fertilisers, the petitioner in C.P. No. 10/79, and the chairman decided that the value of the debt of Central Insecticides and Fertilisers, Bombay, was determined as Rs. 98,722.26 for the purpose of the meeting of the ordinary creditors. The chairman reported that the Central Insecticides and Fertilisers, the petitioner in C.P. No. 10/79, and Indo Advertising, the petitioner in C.P. No. 7/78, voted against the proposed scheme of compromise and the values of their debts are mentioned as Rs. 98,722.26 and Rs. 65,784.44 respectively aggregating to Rs. 1,64,506.70. Four other creditors, (1) Doris (India) Engineers Pvt. Ltd., Madras, (2) Samanto Laminates Pvt. Ltd., Hyderabad, (3) Kanoria Chemicals Industries Ltd., Calcutta, and (4) The Central Scientific Supplies Co. Ltd., Hyderabad, did not file authorisations as required under section 187 of the Companies Act and r. 70(2) of the Companies (Court) Rules, 1959, and their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company should not be allowed to run for the benefit of the bank at the cost of ordinary creditors. Sri Venkata Rao Sawarikar, the learned counsel for the Karnataka Bank, contended that the bank sent a letter approving the scheme and agreed to take on a pro rata basis along with unsecured creditors even in respect of its secured debt, and the bank agreed to further finance the company as the bank wants to see that the company survives, and that the petitions for winding-up have been filed only with a view to pressurise and coerce the bank to pay the debts due by the SFC to the creditors who filed the petitions for a winding-up. Sri V. K. Damle, the learned counsel for the 1st respondent raised the following objections: ( 1 )that the company petition, C.P. No. 15/79 filed by SFC does not comply with the requirements of sections 391 and 393 of the Companies Act. ( 2 )the unsecured class of creditors were not fairly and properly represented at the meetings of the ordinary creditors. ( 3 )Majority of creditors represented by the bank were not acting bona fide. ( 4 )The scheme proposed by SFC is such that a man of business acting in his own interest will not approve of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,02,143.61. But I am unable to accept his submission. Sri Damle contended that both in the scheme and in the balance-sheets, the Karnataka Bank was shown as secured creditor for Rs. 67 lakhs odd, and that the bank never raised any objection to the same. Therefore, it cannot be treated as a secured creditor for Rs. 57 lakhs odd, and as an ordinary creditor for Rs. 10 lakhs odd. Sri Venkata Rao Sawarikar submits that there was no admission on the part of the bank that it is a secured creditor for Rs. 67 lakhs. In the counter in C. P. No. 6/78, it is mentioned in paras. 3 and 4 that the SFC was liable to the bank under various heads of account as on December 14, 1978, to the extent of Rs. 64,92,746.06 and that the SFC had hypothecated and pledged all its movable and immovable assets with the bank, and as such, the bank is the only secured creditor of the company. In the counter-affidavit, the only allegation is that the SFC owes to the bank to the extent of Rs. 64 lakhs odd, but there is no admission that it was a secured creditor to the extent of Rs. 67 lakhs odd. In the statement relating to the projected profits and pro rata repayment schedule, under the head "Liabilities" Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the debt of the bank as an ordinary creditor for the sum of Rs. 10,02,143.61 should be ignored. It is next contended by Sri Damle that the bank is a separate class of creditor, whether secured or unsecured, and that the bankers' rights are not similar to (those of) unsecured creditors as the bank has assumed full control over the affairs of the company and, therefore, the bank should not have been allowed to take part in the meeting of the ordinary creditors. But, I find no merit in this submission. As already held by me, the bank is both a secured and an unsecured creditor to the extent of the amounts mentioned in the chairman's report, and, therefore, the bank was rightly allowed to take part at the meeting of the ordinary creditors. It was next contended by Sri Damle that the preferential creditors did not approve of the scheme by the requisite majority, as the value of their debts was shown as nil. There is no merit in this submission. Though the value of the debts of the preferential creditors was shown as nil, all of them voted in favour of the scheme. Therefore, there is no substance in the contention of Sri Damle that the preferential creditors did not approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexure VI that the Karnataka Bank was willing to advance funds. It is contended by Sri Damle that the value of the debtors was not correctly disclosed. His submission is that in the list of debtors, some debts were disclosed, and that in the list of debtors, it is not mentioned how many debts are bad or doubtful or disputed or what legal action has been taken in respect of the said debtors. But in the petition, the total number of debtors was mentioned and the total value of the debts due to the company was shown as Rs. 43,25,747.04. The company, thus, disclosed the total number of the debtors and also the value of their debts, and it cannot be said that there was a non-disclosure of any material fact relating to the aforesaid debts. It is next submitted by Sri Damle that no details or data were furnished with regard to the estimation or calculation of the profits. He submitted that the figures relating to the profits for the years 1979-80, 1980-81 and 1981-82 vary and that one of the units, namely, the Madras unit, has not yet started functioning, and that the profits mentioned are speculative and imaginary and unrealistic, and that the profits earned by SFC during the years 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the bank was properly classified as an unsecured creditor along with the other unsecured creditors. The submission of Sri P. R. Ramachandra Rao and Sri Damle is that the majority of creditors did not act bona fide. This contention is based on the basis that the bank being the major creditor, did not act bona fide, and that it was supporting the scheme of compromise only with a view to delay the winding-up and to benefit the bank, and that the profits earned by the bank or the debts realised by the debtors will go into the hands of the bank, and, therefore, there are no bona fides on the part of the bank. As already held by me, the bank has got sufficient interest in SFC and it has approved the scheme, and the bank is interested in seeing that the company is kept alive and does not suffer a civil death. When a financial institution like the bank has approved the scheme after assessing the potentialities of the SFC, the court can take into consideration the aforesaid fact in sanctioning the scheme. Sri Venkata Rao Sawarikar contended that these petitions for winding-up were filed only with a view to pressurise the bank to pay the debts of the said petitioners. Even otherwise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one, though it is none of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members." (p. 821) Again his Lordship observed that (headnote ibid ) : " 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, then, if the scheme is such as a fair-minded person, reasonably acquainted with the facts of the case as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it. While examining the scheme, the court should, keeping in view all the aspects of the matter, prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise while implementing the scheme. When a detailed compromise and/or arrangement is worked out, hitches and impediments may arise and if there was no provision like the one in section 392, the only obvious alternative would be to follow the cumbersome procedure as provided in section 391(1), viz ., again by approaching the class of creditors or members to whom the compromise and/or arrangement was offered to accord their sanction to the steps to be taken for removing such hitches and impediments. This would be unduly cumbersome and time consuming and, therefore, the legislature in its wisdom conferred power of the widest amplitude on the High Court under section 392 not only to give directions but to make such modification in the compromise and/or arrangement as the court may consider necessary, the only limit on the power of the court being that such directions can be given and modifications can be made for the proper working of the compromise and/or arrangement. The purpose underlying section 392 is to provide for effective working of the compromise and/or arrangement once sanctioned and over which the court must exercise continuous supervision [see section 392(1)], and if over a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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