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TMI Blog1982 (10) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the appellant company, the petitioner in Company Petition No. 8/81 claimed a sum of Rs. 77,000 as due in Chit No. 66 of the Salem branch and the petitioner in Company Petition No. 49/81 claimed a sum of Rs. 32,500 as due in Chit No. 39 of 1981 of the Salem branch. There were a series of similar petitions from other persons seeking the same relief before the Company Judge some of whom did not later choose to press the petitions perhaps by reason of some understanding being reached. It is not now disputed that very huge sums are outstanding from the company to its subscribers and in the normal course the company will not be able to meet these liabilities. The appellant company was conducting a number of chits or kuries through its 133 branches. The company has ceased to function effectively for some time past and evidently whatever amounts are to be collected by the company from its subscribers cannot easily be collected in the present situation. It is in these circumstances that a plea that the company is unable to pay its debts has been urged and winding up sought. Before a winding up order was passed, one of the shareholders, Sri T. P. Ravindran, came up with Application No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application filed by the creditor, Sri T. P. Ravindran, as Application No. 703/81 in Application No. 491/81, for stay of the winding up petitions pending the settlement of the scheme. Against that, an appeal has been filed by Sri T. P. Ravindran as M.F.A. No. 521/81. We are dealing with that appeal separately. In a way the decision of the appeal will depend more or less on the decision of these appeals. Sri T. P. Ravindran has also challenged in M.F.A. No. 256/82, an order passed by the Company Judge on June 16, 1982, in Application No. 491/81. Pursuant to the scheme proposed, a meeting of the creditors of the company was directed to be held for ascertaining their consent to the scheme. Though the meeting was convened, there was pandemonium at that meeting and, consequently, the meeting could not transact the business for which it was convened. The learned judge, therefore, gave certain consequential directions for taking necessary steps for holding a proper meeting on the assumption that the meeting was not convened on March 3, 1982, in accordance with the directions earlier issued by the court. That order by the court is challenged by Sri T. P. Ravindran in M.F.A. No. 256/82, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement of scheme, No. 491/81. A counter-statement and an additional counter-statement were filed by the official liquidator on August 10, 1981, and August 11, 1981, respectively. It appears that, in the meanwhile, the creditor, who had filed Company Petition No. 13/81 and on whose application the provisional liquidator was appointed, had come to some understanding with the company so much so that a series of petitions along with C.P. No. 13/81 were dismissed by the court on September 2, 1981. Evidently because of this, the company sought withdrawal of its appeal against the order appointing the provisional liquidator. The Union of India and the Registrar of Companies, Kerala, thereupon filed the appeal M.F.A. No. 447/81 and on their motion the provisional liquidator appointed in C.P. No. 13/81 was directed to continue to function until further orders. Against this order special leave to appeal was sought from the Supreme Court and an order of stay of further proceedings was also obtained from the Supreme Court. In the meanwhile, the petitions, C.P. Nos. 8, 9 and 49/81, came up for hearing before the learned Company Judge and in those cases the court passed winding up orders. The of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the S.C.I., it is stated that the paid up capital is only Rs. 30,00,000. While so, the holding company S.C.I. has taken a sum of Rs. 10 - 44 crores from the S.T.C. The share capital of Rs. 30,00,000 in the S.C.I, is so structured that virtually Sri M. Velayudhan has control of the S.C.I. The origin of the S.C.I, which is now the company sought to be wound up is related to the suggestion made by the Reserve Bank of India to segregate the chits business of the Sudarsan Trading Company from its other activities. Thereupon the S.C.I, entered into an agreement with the S.T.C. on April 23, 1973, and the latter started the business of conducting chits and also took other chits that were being conducted by the S.T.C. Under the agreement, the S.C.I, undertook to maintain a current account between it and the S.T.C. and agreed to advance monies to the S.T.C. as and when required by it subject to a maximum of Rs. 15 crores. The amount so advanced was to be repaid interest free within a period of 15 years from the date of the advance and interest was to be charged at the rate of 6% per annum on the amount outstanding at the end of the 15th year, in case the amount was not repaid within the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office of the company was situate. The proxies had to be deposited 48 hours before the meeting at the registered office. A number of proxies were received before the appointed time. According to a report filed by Sri S. Sivaraman, at the meeting held on March 3, 1982, about 2,000 persons attended in person and two registers had been provided to mark attendance of those who attended the meeting. The chairman, Sri S. Sivaraman, reporting on the meeting submits : "Unfortunately there was an unnecessary stampede at the entrance and several persons forced their way in without entering the necessary particulars. It is possible that persons who are neither creditors nor proxies would also have entered and joined the assembly. A portion of the creditors' list which was kept on a bench near Mr. Subramanian was also snatched away by someone. That related to the Maharashtra creditors. But from the entries made, it became clear that there was sufficient quorum for the meeting which had been fixed at 20,000 creditors including proxies subject to a minimum of Rs. 6 crores in terms of value". That when the meeting commenced the public address system failed is an admitted fact. That made it di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be passed. Reference was made to the stay application filed in the application for settlement No. 491/81 and the rejection of the said application. In that order, the reason why the discretion could not be exercised in favour of the company had been indicated. The court found that in the interests of the creditors, the company should be wound up without any further delay. The amount payable to about 50,000 creditors was quite huge. The assets said to be realisable from the debtors were mostly debts secured only by personal guarantees. The court found that it may not be easy to realise them. Of course that the company could not meet its current demands or even function effectively was evident in the circumstances. In these circumstances, the learned judge directed winding up of the company. There are certain facts which are more or less admitted or proved in the case. That the company was unable to carry on its business of conduct of chits or kuries regularly is a fact on which there could be no dispute now. Since the prized subscribers remain unpaid for a long period of time, the credibility of the company as a kuri company must be taken to be seriously affected. Reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany may no longer be feasible or economical and, therefore, it may be in the interests of the company that it disbands its establishment, conserves whatever assets it has and, then, functions only to effectively distribute such assets to its creditors and if there is something left over, pay that equitably to its shareholders. In such a case, there would be no purpose in trying to keep alive the company and allow it to continue its uneconomic functioning. That may only result in further liabilities being created against the company necessarily causing corresponding reduction in the distributable assets. But it may be possible that a company which at the moment is in adversity and is passing through evil days could be successfully revived by reason of change of circumstances and on account of factors which may make it possible for the company to function economically once it is revived. No doubt at the moment it may be that it is unable to meet its liabilities. But if there is reasonable, if not certain, prospect of its revival and effective and commercially successful functioning, then a short wait by the creditors may be worthwhile. They may then get better returns. It should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recurring commitment on that account and the availability of resources for the same, and whether such recommencement of the business of the company is likely to reduce further the distributable assets of the company. These may be broad guidelines but they cannot be applied to a case as one would apply a precise mathematical formula. The overall circumstances of a case may enable the court to reach a correct decision on the question whether it will be in the best interests of the creditors to approve a scheme for revival rather than affirm the warrant of death of the company. Now, let us examine the facts. Sudarsan Chits (India) Limited, a wholly owned subsidiary of Sudarsan Trading Company Limited, undertook an obligation to divert an amount not exceeding Rs. 15 crores of its working capital as interest free loan to the holding company repayable after 15 years. Pursuant thereto, it diverted 10.44 crores. It was not as if the company had any capital to justify such a diversion, for its share capital was only Rs. 30,00,000. It cannot be said that there was any other source of working capital, for, in the business of chits, the foreman collects chit subscriptions and pays it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are convincingly told that the Sudarsan Chit Company, once a flourishing company, is back again on its feet, any revival would have no beneficial impact. The court if it enables the company to start afresh again without making proper safeguards would be taking the responsibility for the company adopting any measures which may mislead the public into reposing confidence in the company. Therefore, any recommencement of the chits must be such as would not result in any loss to the innocent public. The question is, should the Sudarsan Chits (India) Limited which has certainly lost the confidence of the people and which has huge liabilities be allowed to function again ? If it is to be permitted, what safeguards should be taken to see that a further generation of creditors do not face the same fate as the existing creditors ? Learned counsel, Sri Venugopal, appearing for the appellants in these appeals, presented the case for the appellants thus: When, pending consideration of petitions for winding up of a company, a scheme for keeping the company as a going concern is presented to any court, the application so made under section 391 of the Companies Act should be considered as an alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade and a period of one year immediately following the date of the winding up order are to be excluded. Section 391 of the Act appears in Chapter V, Part VI, providing for "Arbitration, compromises, arrangements and reconstructions". Section 433 and subsequent sections to which we have referred appear in Chapter II of Part VII of the Companies Act. The compromise or arrangement proposed between a company and its creditors or any class of them is to be considered in accordance with section 391 of the Companies Act. The compromise or arrangement proposed need not be in respect of a company which is being wound up. It is profitable to quote section 391 here: "Section 391. Power to compromise or make arrangements with creditors and members. (1) Where a compromise or arrangement is proposed ( a )between a company and its creditors or any class of them; or ( b )between a company and its members or any class of them the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to hear appeals from the decisions of that court, or if more than one court is so empowered, to the court of inferior jurisdiction. The provisions of sub-sections (3) to (6) shall apply in relation to the appellate order and the appeal as they apply in relation to the original order and the application". There is nothing in section 391 that prohibits proceedings for winding up being continued or a winding up order passed merely because a scheme or arrangement has been proposed. Of course, if the scheme or arrangement is accepted by the court and, accordingly, settlement proceedings commenced, that would serve to avoid winding up. That does not mean that merely because a settlement or scheme has been presented to the court under section 391 of the Act and the court orders notice on it, its hands are stayed in regard to its powers contemplated under section 443 of the Act. In support of counsel's plea it is said that a proposal for settlement or compromise, when noticed by the court, operates as an alternative mode of winding up and, therefore, until the court finally pronounces on that mode, it would be improper for the court to order winding up and thereby cause the civil dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould mean that the company is then not under liquidation. Therefore, to say that proceeding under section 391 operates an alternative mode of liquidation as contended by the learned counsel, Sri Venugopal does not appear to us to be correct. Counsel's contention is said to be supported by certain observations of Venkataramana Rao J. in Travancore National and Quilon Bank Ltd., In re [1939] 9 Comp. Cas. 14 (Mad.). The learned judge was considering an application under section 153 of the Indian Companies Act, 1913 (corresponding to section 391 of the Companies Act, 1956), by three creditors of the Travancore National and Quilon Bank Ltd., purporting to be on behalf of a large body of creditors of the said bank in the petition for winding up of the bank which was pending. In the application, the prayer was for an order for calling for a meeting of the creditors for considering and approving a scheme of arrangement proposed to be made with or without modification. The registered office of the bank was in Quilon within the jurisdiction of the Travancore State though it had the central office at Madras. Owing to an unprecedented run on the bank, the bank was obliged to adjourn its bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rresponding section of the English Act has always been employed to give effect to a scheme of compromise already arranged in a simultaneous winding up abroad". No doubt it has been said by the learned judge that a scheme under section 153 provides an alternative mode of winding up. The idea the learned judge seems to convey in that context is that the provisions of the Act with regard to winding up being applicable to an unregistered company, a provision to avert a winding up must be treated as a provision with respect to winding up. With that proposition we respectfully agree. A provision which would serve as an alternative mode of winding up would be a provision with respect to winding up. The observations of Vaughan Willams J. in London Chartered Bank of Australia, In re [1893] 3 Ch 540 at 546 may be quoted here : "The scheme of arrangement under the Act of 1870 is as I have had occasion to point out in several cases an alternative mode of liquidation which the law allows the statutory majority of creditors to substitute for the pending winding up, whether voluntary or under the court, just as the Bankruptcy Act, 1869, allowed the creditors the substituted liquidation by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a majority in number representing three-fourths in value of such creditors or class of creditors present either in person or by proxy at such meeting shall agree to any arrangement or compromise, such arrangement or compromise shall, if sanctioned by an order of the court, be binding on all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company.' By section 3 of that Act, the word 'company' was defined to mean 'any company liable to be wound up under the Companies Act, 1862'. It will be seen that even this Act made no provision for any arrangement or compromise between the company and its members. But what is more important to note is that under this Act, the scheme could be proposed only when the company was' in the course of being wound up, either voluntarily or by or under the supervision of the court' and that no provision was made for a scheme when the company was not actually being wound up. Further, and this is also very important, the powers of the court to direct meetings to be summoned and to sanction the scheme were 'in addition to any other of its powers' which must mean, since the company was 'in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kruptcy which was actually pending. In the headnote of this case, the reporter omitted the word ' pending ' and in later times, Judges in England as well as in India quoted the sentence from the head-note and applied it generally to every case of a scheme irrespective of whether the scheme was made in course of a pending winding up or otherwise as if a scheme was always an alternative mode of winding up, even where there was no winding up. For example, one may refer to the case of Madan Gopal v. Peoples Bank of Northern India Ltd. [1935] 16 Lah. 1029; 5 Comp. Cas. 313 , where the observations of Vaughan Williams J. are "quoted in bald form and applied to a case where there was no winding up at all". That under the provisions of the Companies Act, 1956, a scheme under section 391 cannot be said to be an alternative mode of liquidation but only an alternative to liquidation has been said by Tek Chand J. in Himalaya Bank Ltd. v. Roshan Lai Mehra [1961] 31 Comp. Cas. 333 (Punj.). Reference was made in that context to the decision of the Madras High Court in In re Travancore National and Quilon Bank Limited [1939] 9 Comp. Cas. 14 (Mad.) also. The learned judge observes thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment could not be treated as a specie of liquidation. It appears to us that the observations by Vaughan Williams J. must be limited to the context of the English Acts with which the learned judge was dealing and understood in the background of the Act. The view expressed by the Full Bench of the East Punjab High Court that the provision in section 391 is not a provision relating to winding up, but is plainly a provision which relates to settlement not necessarily limited to the companies which are being wound up, has our concurrence. Even in respect of companies which are being wound up, proceedings under section 391. operate as modes the adoption of which may serve to avert winding up and if adopted, winding up of the company may be avoided. We, therefore, see no reason to find that merely because a petition under section 391 of the Act is pending consideration, the order of winding up could not be passed. Now we will come to the other ground urged by learned counsel, Sri Venugopal. According to him, the discretion of this court should not be exercised to order winding up when the court has chosen to issue notice on the proposal to settle a scheme. That will be a question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the feasibility of revival of the company on the lines suggested by Sri Venugopal. A note has been submitted by counsel on behalf of the company as to how such revival could be effected. We would consider whether that is worth a trial. What we have said above about the present condition of the company is sufficient to indicate that if the winding up order is vacated, that by itself will not enable the company to function effectively and there would be no reasonable prospect of all the creditors being paid substantially, let alone fully within any reasonable period of time. Whatever driblets may come in by way of realisation of out standings would be eaten up "by the recurring operational expenses of the company unless it be that fresh business is canvassed by the company. That would be impracticable so long as something demonstrative is not done to inspire confidence in the customers, despite the long history of default. It will be too much to' expect that by being allowed to open the offices again and function in the normal way, new subscribers will flock in to subscribe to new chitties. In this background, the question that we mainly deliberated on and on which also we hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give better return to the creditors, we are inclined to give a trial to this and an opportunity to see whether this could result in an effective functioning bringing in better returns than now to the creditors of the company. In this view, we have discussed the whole question of commitment, administration and management, duties and responsibilities of the liquidator and consequential orders to be passed by this court, We are happy to record that there is a large measure of agreement with what we propose, from the appellant company, the Company Law Board, the Registrar of Companies and the body of creditors represented before us. Of course, we are aware that this agreement on the part of the respondents is only because they are also interested in seeing that if ' by any means the company could be resuscitated, that should be attempted before finally sealing its fate. Accordingly, we make the following directions: Obligations to be undertaken by the holding company: 1.For the entire amount of Rs. 10.44 crores due from the holding company to the appellant company, a security bond will be executed securing assets sufficient and adequate to cover the said amount. This shall be done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l undertake not to start any new chit business directly by itself or indirectly through its subsidiaries other than the appellant company or otherwise. ADMINISTRATION 1.The affairs of the appellant company shall be managed by its board of directors, but a person nominated by this court to function as an additional director of the company will have to be taken in by the appellant company into its board. Such person shall not only sit on the board of directors as a director but also keep a watch over the affairs of the company and shall advise the company. In case any decision of the company is, according to the said additional director, not in the interests of the body of the creditors or of the company, such resolution shall not be enforced until orders of this court thereon are obtained. Such person shall have access to all the books and other records of the company in all the offices, shall have power to oversee the functioning and report to this court from time to time. He shall see that the relations of the official liquidator who is being appointed as the provisional liquidator by this judgment vis-a-vis the company is smooth and effective. The additional director so app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the wholehearted participation of the holding company, now speaking through the appellant company, any scheme for survival may not be realistic or effective. If the appellant company which of course necessarily depends upon the holding company to support it is unable to agree to these conditions, we think it will be adverse to the interests of the creditors to attempt any other arrangement and, therefore, we consider the alternative to be only to affirm the winding up order passed by the learned company judge. It is only because we are assured by learned counsel, Sri K.K. Venugopal, appearing for the appellant company, that the holding company would do its best thought, it is not a party to this appeal, and the appellant company will be able to persuade the holding company to act so that we have chosen to impose obligations on the holding company as a condition precedent for further action in this case. In these circumstances, the appellant company and the holding company must, undertake within a period of two weeks that they are willing to abide by the conditions imposed in this judgment and undertake the obligations under the judgment. If there is any default in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Madras High Court, as the additional director. 5.On the expiry of four weeks from this date, if the amount of Rs. 25,00,000 is paid by the holding company into a separate account as directed herein and for that reason the winding-up order is held up in abeyance and further the provisional liquidator commences his functions with restricted powers, the provisional liquidator shall expeditiously hand over the offices taken possession of together with the books, records and other materials so taken over to the nominee or nominees of the board of directors after preparing inventory of such materials if required by the appellant company. Expenses, if any, incurred by the official liquidator may be claimed and appropriate orders will be passed thereon by this court. The expenses that the provisional liquidator will have to incur for filing suits may be claimed from time to time from the company. If there is any dispute, the matter should be brought to this court for necessary orders. We make it clear that we are only holding the winding up in abeyance and on consideration of the quarterly reports if at any time we find that a stage is reached when under the arrangement that we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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