9911796707
TMI Blog1982 (2) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... , of the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 judgment and state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a meeting. The rights and inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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 24th March, 1979, incurred substantial liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 alia, to sundry creditors, fixed depositors and distributors by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 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 affidavit dated June 22, 1981, in support of the judge's summons for convening a meeting in respect of the old proposal shows that the company's paper mill could start only in 1977 and for several reasons the viability of the company was severely eroded resulting in its closure within three months of trial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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, the reconstruction and revival of the applicant will be much quicker..". Which of the nationalised banks or financial institutions or when the State Government has offered to provide loans is kept vague. The difference between Rs. 160 lakhs and Rs. 90 lakhs suggested by IRCI is nearly Rs. 70 lakhs. The Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anctioned 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 the same, though approved by the creditors. The exercise of these powers depends on the facts of each case. I think that when the court gives directions ex parte, its responsibility is not in any manner less. Such responsibility becomes heavier in the working out of section 391, which involves the interest of a large n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roach 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. Their presence personally or by proxies in a meeting of creditors is expected to be in favour of the proposal, regardless of the merits of the proposal. But in the case of fixed depositors, apart from their relationship with the company being one of a borrower and lender, the fixed depositors act on certain representatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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 deposit shall be made in full on or before 1st day of April, 1975, and such repayment shall be without prejudice to any action that may be taken under the Reserve Bank of India Act, 1934, for the acceptance of such deposit in contravention of such direction. (4) Where any deposit is accepted by a company after the commencement of the Companies (Amendment) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 relevant in this case. Rule 3 deals with "Acceptance of deposits by companies". Rule 3A was added with effect from 1st April, 1978, and reads as follows : "3A. Maintenance of liquid assets.-(1) Every company shall, before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than ten per cent, of the amount of its deposits maturing during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn 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 company is prohibited from directly or indirectly inviting deposits either by itself or through any other agency unless the 1975 Rules are complied with. Sub-section (3) of section 58A deals with deposits accepted before the enactment of section 5 8A. It is incumbent on a company to repay every deposit in accordance with the terms of such deposit. Every such deposit is not permitted to be renewed by the company unless such dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 percent: of the amount of its deposits maturing during the year ending on 31st day of March next following. To this extent the repayment of the deposits is being secured. Under clause (c) of rule 8, consent of the depositor is required for conversion into secured debentures of the amount of the deposit required to be repaid before the expiry of the period for which it was accepted. Rule 10 requires filing of return with the Registrar of Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 financially becomes incapable to pay the fines, the depositors can pursue their remedy; otherwise the laudable object of securing the repayment of the deposit out of the fines will be annihilated. I am not impressed by the company's technical objection to my deciding these questions on the ground that there is no material before the court or the question does not arise in the present application. The material about the contravention of the above provisions is ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
