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TMI Blog1982 (2) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... finalisation of the proposal for reconstruction assistance made by the Industrial Reconstruction Corporation of India Ltd". In support of this summons, the company relies upon the affidavit of Narayan Prasad Jalan, a principal officer of the company, affirmed on 29th September, 1981. In order to appreciate the above prayers, it is necessary to revert to the background of the order dated 26th June, 1981, which is sought to be vacated by prayer ( b ) or stayed by prayer ( c ) and for considering prayer ( d ) to propound a fresh scheme on the edifice of the letter of "Industrial Reconstruction Corporation of India Ltd". In Company Application No. 173 of 1981, the company took out summons for directions to convene a meeting under section 391 of the Companies Act, 1956, supported by an affidavit of the said Narayan Prasad Jalan affirmed on 22nd June, 1981. The learned company judge, Parekh J., by his order dated 26th June, 1981, ordered convening of a meeting of the secured creditors on 26th September, 1981, at 11 a.m ; for the purpose of considering, and if thought it, of approving with or without modifications, the scheme of compromise or arrangement proposed to be made between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is then submitted in paragraph 5 of the said affidavit that by virtue of the aforesaid events, all of which had occurred after the passing of the order dated 26th June, 1981, the very basis of the scheme of compromise or arrangement propounded by the company under section 391 of the Companies Act has been altered. Moreover, by reason of funds to the extent of Rs. 160 lakhs that are likely to be made available to the company by various financial institutions, nationalised banks and the State Government, the reconstruction and the revival of the company will be much quicker. Furthermore, on finalisation of the proposal for reconstruction by IRCI, the company will have to modify the scheme or will have to propound a fresh scheme in accordance with the terms and conditions stipulated by the Government. It was under these circumstances that the company did not proceed with convening the meeting of the creditors in pursuance of the aforesaid directions of this court given on 26th June, 1981. However, after arguing the matter fully, Shri Vajifdar, learned counsel appearing for the company, reconstructed his arguments and that of his predecessor, Shri Subramaniam, before the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners in that petition, stated that his petition and some of the other petitions in which he appeared, were adjourned on the ground of the scheme proposed by the company for compromise with its unsecured creditors. I feel that the reliance on IRCI's letter dated 27thJuly, 1981, seems to be an after-thought because the company's letter dated 20th March, 1981, addressed to IRCI is a simple application for seeking financial assistance. Secondly, there is no mention in the affidavit in support of the proposed scheme that the company was seeking financial assistance from IRCI. It appears that the letter of IRCI has become handy and it is being made use of in keeping the winding-up petitions at bay and for gaining time. The company's stand that by virtue of the IRCI's letter, the very basis of the proposal for compromise is altered or the proposal requires to be modified or a fresh proposal is required to be initiated in accordance with the terms and conditions stipulated by IRCI, was no justification in not carrying out the directions of the court, especially when the winding-up petitions were being got adjourned on the ground that the company had taken directions for convening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Maharashtra is required to declare the company a relief undertaking. On ordinary principles of financing a company in bankruptcy (the present company is liable to be wound up as the company has approached the court under section 391 of the Companies Act). IRCI is not going to release Rs. 89'50 lakhs from its kitty unless the company fulfils the stiff conditions indicated in the letter dated July 27, 1981, and executes the documents, specified in the letter dated 31st July, 1981, or such other conditions which IRCI might like to impose to safeguard its money. The learned counsel could not satisfy how the company was going to repay the moneys of the unsecured creditors, in other words, about the workability of the proposal. No attempt was made to show what amendments or alterations are intended to be made in the old proposal. The whole burden of the song was that I should grant time to amend the old proposal as the company was going to receive Rs. 89.50 lakhs from IRCI for reconstruction. We may have a look at the old proposal of compromise. The preamble to the old proposal for compromise reads thus: "IPCO Paper Mills Ltd. (hereinafter referred to as 'the company') had prior to 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elate to interest on principal amounts due and payable as on March 24, 1979". The secured creditors are ( a ) the United Bank of India : Rs. 67,97,805 + Rs. 33,29,350 = Rs. 1,01,27,155 inclusive of the guarantee for deferred payment credits from machinery suppliers; ( b ) Dena Bank Rs. 54,78,721 + Rs. 14,42,211 =Rs. 69,20,932 inclusive of guarantee of SICOM including interest up to March 31, 1981; ( c ) Bank of Baroda: Rs. 24,50,933 including interest up to March 31,1979; and ( d ) Maharashtra State Financial Corporation: Rs. 12,96,631. The abovementioned amounts (excluding the amounts guaranteed) will be repaid to the secured creditors in the following manner: "( i )No interest will be paid for a period of three years commencing from 1-4-1981 and ending 31-3-1984; ( ii )On and after 1-4-1984 interest will be paid at the rate of 9% per annum on the reducing balance payable every six months, the first such payment to be made on or before 31-6-1984; ( iii )The principal amount shall be repaid in 20 equal half yearly instalments, the first of which shall be paid on or before September 30, 1984". As on March 31, 1981, a sum of Rs. 3,06,67,677 was due and payable, inter al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the year ending 31-3-1981 Rs. Rs. Rs. Unsecured loans (including interest) 69,68,934 Fixed deposits 76,24,629 80,57,863 1,05,691 From banks against bills receivable discounted 47,008 54,059 4,24,928 Distributors' deposits 10,44,569 7,58,564 4,93,676 From others Current liabilities provisions ( a ) Current liabilities 26,24,658 47,82,209 1,21,69,378 Sundry creditors 1,02,31,342 1,41,05,958 Advances from customers 12,50,000 19,67,521 Others 6,99,956 The above comparative table shows a rise in the dues of the fixed depositors, "others", sundry creditors, except the fortunate distributors who received about Rs. 3,00,000 in 1980-81. Now, under the old proposal, only the principal amount of Rs. 1,98,92,958 as due on March 24, 1979, is offered to the unsecured creditors over a period of years depending upon the option they exercised. They were also asked to forgo about Rs. 1,08,00,000 by way of interest. The affida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others" on the above pages of the balance-sheets, the figure of Rs. 47,82,209 is represented as loans and deposits but not otherwise. During the course of the hearing, I was informed that the company is a trading company. Thus, the above-mentioned amount of Rs. 95,00,000 has been sucked in without the company having been revitalised and at present its manufacturing activities are at a standstill. At this stage, it is important to note what was the version of the company in its affidavit dated September 29, 1981 in support of the present application. In para 3, the hope expressed by the company was this: "...It is anticipated that within a period of about 2 months, the proposal for reconstruction assistance to be rendered to the applicant will be finalised and funds to the tune of about Rs. 160 lakhs will be made available to the applicant". In para. 5 of the said affidavit, it is stated : "...Moreover, by reason of funds to the extent of Rs. 160 lakhs that are likely to be made-available to the applicant as well as by various other forms of reconstruction assistance likely to be provided by IRCt, the financial institutions and nationalised banks and the State Government, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igilance and participation. This role starts the moment the court's jurisdiction is invoked from the stage of ex parte directions and continues if the scheme is sanctioned, until the creditors are paid in accordance with the sanctioned scheme; otherwise, the court on its own motion can wind up the company if the sanctioned scheme is found unworkable. The Legislature has thus given a role of real supervision and real participation. It is the duty of the court to see that the scheme it sanctions does not remain on paper but the same is sincerely implemented. To my mind, the duty cast on the court and the underlying object of the Legislature can be best attained if the court at the time of sanctioning the scheme also gives direction that the matter be placed before it from time to time, to enable the court to satisfy about the working of the scheme. Reverting to the question of the powers of the court, the court has the power to satisfy itself about the feasibility of a proposal of a scheme of compromise which has been put before the creditors, considered and approved by them. It has the power to make modifications, if necessary. It has also the power even to refuse to sanction th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of Rs. 7,58,564, "Others" of the value of Rs ; 47,82,209 and "Sundry creditors" of the value of Rs. 1,41,05,958. The banks are financial institutions and their case is entirely different. The other creditors are trade, sundry, promoters, their relatives, friends and associates. The trade or sundry creditors' approach and thinking is different because they have traded and dealt with the company. They might have made profits and earned from the company in the past. They might entertain a hope of future gain or profit. They have a kind of business relationship or business thoughtful-ness for mutual advantage which is totally absent in the case of fixed depositors. Many of them might think of giving up the past or future interest or even a part of the principal to oblige the company while the hearts of fixed depositors might sink. The trade creditors can possibly get relief in income-tax on the basis of capital loss if a scheme is sanctioned. The case of promoters, their relatives, friends and associates is, on the face of it, for different considerations, which would be difficult to fathom. The management would ultimately safeguard their interest in the best possible manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )such deposit is invited or is caused to be invited in accordance with the rules made under sub-section ( i ), and ( b )an advertisement, including therein a statement showing the financial position of the company, has been issued by the company, in such form and in such manner as may be prescribed. (3)( a )Every deposit accepted by a company at any time before the commencement of the Companies (Amendment) Act, 1974, in accordance with the directions made by the Reserve Bank of India under Chapter III-B of the Reserve Bank of India Act, 1934, shall, unless renewed in accordance with clause ( b ), be repaid in accordance with the terms of such deposit. ( b )No deposit referred to in clause ( a ) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under sub-section (1) were in force at the time when the deposit was initially accepted by the company. ( c )Where, before the commencement of the Companies (Amendment) Act, 1974, any deposit was received by a company in contravention of any direction made under Chapter III-B of the Reserve Bank of India Act, 1934, repayment of such depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine Explanation. For the purposes of this section ' deposit' means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. 58B. Provisions relating to prospectus to apply to advertisement The provisions of this Act relating to a prospectus shall, so far as may be, apply to an advertisement referred to in section 58A". Before we consider the scheme of these provisions, it is necessary to bear in mind the rules, relevant for our purpose, made by the Central Government under section 58A in consultation with the Reserve Bank of India, called "Companies (Acceptance of Deposits) Rules, 1975". These rules came into force from February 3, 1975. The term "deposit" is denned by rule 2( b ). "Deposit" means any deposit of money with, and includes any amount borrowed by, a company. Various kinds of borrowings mentioned in clauses ( i ) to ( x ) of this sub-rule ( b ) are excluded and these are not releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ositors, of deposits into secured debentures in accordance with the guidelines issued by the Government of India from time to time regarding the issue of "rights" debentures. Rule 13 is again important and requires filing of Return of Deposits with the Registrar. It reads as follows : "13. (1) Every company to which these rules apply, shall, on or before the 30th day of June, of every year, file with the Registrar, a return in the form annexed to these rules and furnishing the information contained therein as on the 31st day of March of that year, duly certified by the auditor of the company. (2) A copy of the return shall also be simultaneously furnished to the Reserve Bank of India". Rule 11 provides lore penalty for contravention of the above rules with fine. These provisions are simple and clear and do not present difficulty in understanding the object and scope of the same. Sub-section s (1) and (2) of section 58A empower the Central Government to prescribe the limits up to which a company may invite or accept deposits from the public or from its members. It makes it obligatory for a company to invite deposits by issue of an advertisement in a prescribed form. The comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not less than twice the amount of the unpaid deposit. If the fine is realised, the court trying the case is required to pay the amount of the deposit to the person to whom the repayment was to be made. On such payment being made by the court, the liability of the company to its depositor is discharged to the extent the amount is paid by the court. Every officer of the company who is in default is also liable to be punished with imprisonment for a term extending to five years and also liable to fine. The provisions for repayment being made within the time-limits fixed by law, the repayments being required to be made in full, the repayments being required to be made without there being a demand for the same, the repayments being sought to be secured out of heavy fines on the company and every officer of the company being exposed to jail sentence up to five years and fine, are indicative of the intention of the Legislature to safeguard the deposits from the public and the members of the company. Under rule 3 A of the 1975 Rules, a company is required, before the 30th day of April of each year, to deposit or invest in various accounts and securities a sum not less than 10 percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1956, long before the present directors were appointed. All possible steps are being taken to regularise the same, but it may take quite some time before much can be done in this regard". In the balance-sheets for the years 1979-80 and 1980-81, the auditors' report repeats that in each of these two years the company has not complied with the directives issued by the Reserve Bank of India and/or the provisions of section 58A and the rules framed thereunder. For both these years, the board of directors continued to be the same as per the year 1978-79 except that Shri S. J. Parekh joined the board of directors in the year 1979-80 and all of them remained silent about the above remarks of the auditors in the directors' report. Though the provisions of section 621 of the Companies Act, 1956, are there for taking cognizance of the above breaches for the last three years, yet there is inaction. The rights of the depositors are thus maimed and crippled. It is patent in the case before me that what is given by the lawmakers is taken away by the enforcement machinery. It may fee advisable to give the right to take action to the aggrieved depositors, so that before a company financial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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