9911796707
TMI Blog1999 (6) TMI 417X X X X Extracts X X X X X X X X Extracts X X X X ..... tors have filed suits and some have obtained decrees against the company. Some creditors have also filed criminal proceedings against the directors of the company under section 138 of the Negotiable Instruments Act, 1881 in respect of cheques issued by the company which were dishonoured on presentation. 2. In this background the company filed an application under sections 391(1) and 393 of the Companies Act, 1956 ( the Act ) seeking to convene a meeting for approval of a scheme of compromise/arrangement with a defined class of creditors. The creditors were defined in clause 1.5 of the scheme as follows : "1.5 Creditors means persons other than subsidiaries and associate concerns of the Company, who had financial claims against the Company as on June 30, 1996 arising out of : ( i )Inter Corporate Deposits made with the Company, or ( ii )Bill discounting facilities availed by the Company, irrespective of whether those persons have instituted proceedings against the Company, inter alia, by way of suits or petitions for winding up of the Company, for recovery of such claims, and have or have not obtained decrees or orders by consent or otherwise in their favour for pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company agreed in principle to modify the scheme and suggested certain clauses e.g., the basis would be the outstanding as on 31-3-1997 (instead of 1996) and rate of interest would be 15 per cent per annum as desired by the creditors subject to the company s Board s sanction. Thereafter at the request of the creditors it was agreed that the company should send modifications/amendments in writing so that the board of directors of the concerned creditors could consider the same. Accordingly, the Chairman adjourned the meeting till 7-4-1998. 5. On 30-3-1998 the Chairman issued notices of the meeting to be held on 7-4-1998 to the creditors for approving the scheme of arrangement and/or compromise incorporating therein several modifications to the original scheme of arrangement. The modifications included inter alia a re-definition of the term creditors . Under the new definition creditors would include subsidiaries and sister companies of the company having financial claims against the company on account of inter corporate deposits as reflected in the books of account of the company . This was a class which has been expressly excluded from the original scheme. This was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Videocon Leasing Industrial Finance Ltd.459,89,2111.94 3. Videocon International Ltd. (Formerly known as Videocon Narmada Electronics Ltd.)785,99,4893.42 4. Tapti Machines Pvt. Ltd.340,72,3301.48 5. Bennett, Coleman Co. Ltd.975,76,6404.25 8. In May, 1998 the company filed an application under sections 391, 393 and 394 of the Act asking for approval of the modified scheme. Kirloskar Investment Finance Ltd. (Kirloskar) filed an application seeking to propound a different scheme between the company and the unsecured creditors. Kirloskar also filed an application for rejection of the modified scheme as propounded by the company. 9. All three applications were taken up for hearing on 17-6-1998. In the course of hearing several creditors filed letters and affidavits signifying that they had changed their minds subsequent to the meeting. Some creditors who had earlier opposed the scheme sought to support the modified scheme while others who had earlier approved the scheme sought to oppose it. 10. Hearing was concluded on 15-9-1998, judgment was delivered on 24-12-1998 dismissing Kirloskar s applications and allowing the application of the company. The learned Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s any order at all, if, for instance the scheme propounded was ex facie "thoroughly unreasonable, absolutely unjust, basically unfair and exploitative in character" and "it would be a waste of time of the Court even to prima facie examine the scheme See Mansukhlal v. M.V. Shah, Official Liquidator [1976] 46 Comp. Cas. 279 (Guj.), N.A.P. Alagiri Raja Co. v. N. Guruswamy [1989] 65 Comp. Cas. 758 (Mad.) and K.R. Balasubramanyan v. Bellary Spg. Wvg. Co. Ltd. [1995] 84 Comp. Cas. 830 (Kar.). 14. But if the Court in exercise of its discretion orders that the views of the particular class of creditors or members are to be ascertained at a meeting to be called, held and conducted in a particular manner, the meeting must be called, held and conducted of the named class of creditors or members of the manner directed by the Court. 15. This is exemplified in the case of English, Scottish Australian Chartered Banks, In re [1893] 3 Ch. 385 cited by the company, where a company in liquidation was sought to be reconstructed under the supervision of the Joint Stock Companies Arrangement Act, 1870. Directions were given by the learned Judge directing meetings to be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like." 17. In other words, the scheme must be approved not only by the majority in number, but such a majority which also represents three-fourths value of the class of creditors present and voting. An application can be made for approval of the scheme only if the prescribed majority approves the scheme at the meeting. Conversely if the prescribed majority does not approve the scheme, no application for approval of the scheme can be made. This interpretation follows from the scheme of section 391(2) as well as from the Rules. 18. The relevant rule is rule 79 of the Company (Court) Rules, 1959, an extract of which is set out verbatim : " Petition for confirming compromise or arrangement. Where the proposed compromise or arrangement is agreed to, with or without modification as provided by sub-section (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1959 Pat. 293 where the Division Bench said : ". . . These authorities firmly establish that one of the essential conditions to give jurisdiction to the Court to accord its sanction to a scheme is that it should have been passed by a majority as required under section 153(2) of the Companies Act. . . . In other words, unless the Court is satisfied that the same has been approved by the statutory majority and in a manner provided by law, it is not open to the Court to give any sanction to it." (p. 297) 22. The decision of the Division Bench in Nand Prasad s case ( supra ) was upheld by the Supreme Court in Arjun Prasad v. Shantilal Shankarlal Shah AIR 1962 SC 1192. The Supreme Court said that if in law the requisite 3/4th majority as required was not there "no further action can be taken by the Court in the matter". 23. In Coimbatore Cotton Mills Ltd., In re [1980] 50 Comp. Cas. 623 (Mad.) it was said : "( i )The Court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority did not approve either the original or the modified scheme at the meeting. 27. If one keeps these principles in mind and applies them to the facts, it is clear that the appeals must be allowed. 28. First, the provisions of the statute were ignored from the outset. Although section 393(1) requires that where a meeting of creditors or a class of creditors is called under section 391, every notice calling the meeting shall also be accompanied with a statement setting forth the terms of the compromise and explaining its effect, and in the advertisement of the notice, the place at which and the manner in which the creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid, no advertisement was published of the meeting to be held on 7-4-1998 nor of the substance of the modified scheme. 29. Second, the meeting of 7-4-1998 was not held in the manner directed by the Court. The Court had directed the holding of the meeting of the class of creditors as mentioned in the original scheme, the definition of which expressly excluded subsidiaries and associates of the company. No meeting was held as directed by the Court as the subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary but at the same time relied on the votes cast at the meeting which had not been changed subsequently. The learned Judge worked out the majority relying, according to counsel for the company, on a chart handed up to him by the company. The appellants have criticised the chart by saying it did not include those who had changed their minds from approval to disapproval of the scheme. But irrespective of the correctness or incorrectness of the chart, the Court could have re-opened the process of voting which had been completed in the meeting. 35. The importance of the meeting under section 391 is not only clear from the language of section 391 itself, but also from the Companies (Court) Rules which relate to compromises or arrangements under section 391. All make provisions for the holding of meetings. The form of the application to convene a meeting under section 391 has been specified in rule 67. Rule 68 provides for service on the company where the company is not the applicant. Rule 69 of the Rules sets out the direction that the Court may give upon hearing the application : "Directions at hearing of summons - Upon the hearing of the summons or any adjourned hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangements between the company and the creditors or members of the company. It is to be distinguished from section 392 which gives power to the High Court to enforce compromises and arrangements arrived at under section 391. A scheme framed under section 391 may deprive persons covered thereby of rights which they are otherwise legally entitled to. As far as creditors are concerned, as in this case, it may reduce the contractual rate of interest and debar the immediate recovery of the debts by legal action. That is why the facility or power of making arrangements under section 391 between the company and its creditors or members binding on all the creditors or members including any dissidents must be exercised in terms of the section. The Legislature has prescribed the manner of exercise of the power. In order to bind or to deprive another of his rights irrespective of such persons opposition the power conferred is to be exercised in that manner and in no other way. There is no question of substantial compliance. 39. As was said in Gujarat Electricity Board v. Girdharlal Motilal AIR 1969 SC 267 by the Supreme Court : "These provisions confer a power on the State Electr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he much larger percentage of persons of their own class. There was no question of such deprivation in National Tabacco Co. of India Ltd. s case ( supra ). The minority can, therefore, insist that the measures which are intended to protect them must be followed. The principle applicable to section 391 would be the one enunciated by Lindley M.R. in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, 671 that : ". . . the power conferred by it must like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole and it must not be exceeded. These contentions are always implied, and seldom, if ever, expressed." 42. When there are a few creditors, the Court may not think it necessary to resort to the elaborate procedure of calling a meeting to be supervised by a Chairman etc. The Court may itself hold the meeting and ascertain the views of the creditors who must be summoned to the meeting to signify their approval/dissent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romise or arrangement in exercise of that power under section 195 of the Insolvency Act rather than by way of a scheme under section 425. Section 195 of the Insolvency Act (similar to section 557 of the Companies Act) allows the Court to determine the wishes of the creditors in such manner as it thinks fit and proper . The Vice-Chancellor approved the proposal put forward by the liquidator. The creditors appealed. One of the grounds was that a portion of the scheme could be effected only under section 425 of the Companies Act, 1985. The Court of Appeal upheld the decision of the Vice-Chancellor by stating that it was wholly impossible to go through the procedure of a scheme under section 425 in the facts of the case. 45. The decision does not assist the company. The provisions of section 425 were not in fact resorted to. It is implicit in the decision that had section 425 been resorted to, a meeting would have had to be called. The procedure which was in fact followed was one permissible under the Insolvency Act similar to section 557 of our statute which cannot apply if the company wants the scheme to be a binding one. 46. In Tea Corporation Ltd., In re 1904(1) Ch. 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chairman submitted a report to the Court. The Court directed the secured creditors to indicate their stand directly before the Court. Each of the secured creditors filed his consent to the scheme. As far as the unsecured creditors meeting was concerned, admittedly the scheme was not passed by the requisite majority either in number or in value. Nevertheless, the company presented an application for sanction of the scheme. At the hearing several of the unsecured creditors filed affidavits indicating their consent to the scheme. The Court noted that the required number of unsecured creditors had consented to the scheme. There was no finding as to whether the requisite value had been obtained under section 391(2). The Court directed advertisements to be issued in connection with the hearing of the application for sanction. One of the unsecured creditors appeared and submitted that since the requisite majority had not been obtained the Court had no jurisdiction to sanction the scheme. The learned Judge held that section 391(2) is not cast in negative form whereas the proviso to section 391(2) is cast in the negative form. As section 391(2) except the proviso is not prohibitory in char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... class meetings to be held again." 52. The passage cannot be relied upon to dispense with the statutory requirement of having the scheme approved by the prescribed majority prior to the application for confirmation as far as this country is concerned particularly having regard to the judicial authority to the contrary. The passage quoted must be read in the context of the decisions referred to in support. 53. Of the two decisions cited in support of the passage, one was Dynevor, Dyffryn Neath Abbey Collieries Co., In re [1879] 11 Ch. 605. The company had resolved to be wound up voluntarily. An order was passed by Court directing meetings of the creditors to consider an arrangement proposed between the company and its debenture-holders. At the meeting a majority of more 3/5th of the creditors approved the arrangement. The trustee liquidators took out a summons to obtain the sanction of the Court. The Court sanctioned the scheme and directed that the scheme was binding on the creditors, debenture-holders and contributories of the company. Subsequently a general meeting of the company was held at which the arrangement was approved by an extraordinary resolution. Some debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here were four groups of shareholders namely, fully paid up shareholders (Group A), ordinary partly paid up shareholders (Group B), ordinary partly paid up shareholders who had also paid a further sum in advance (Group C) and finally holders of fully paid deferred shares (Group D). Separate meetings were called in respect of each of the four groups. One of the groups (Group C) approved an arrangement by a show of hands. A poll was demanded of this group. This was refused by the liquidator. The meeting was cones-quently aborted. Combined meetings were thereafter directed to be held. At these meetings the scheme was approved but Group "C" was completely swamped by the other groups. An application was made for sanction of the scheme. It was contended that Group C was in the same position as one of the other groups. This was negatived by the learned Single Judge who held that Group C clearly constituted a separate class and as they had had no separate meeting other than the aborted meeting, it was held to be fatal and the scheme was rejected. Subsequent to the order a meeting was called of Group "C" and the necessary approval of that class was obtained. A fresh petition was made fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The signatures obtained by the Court, on a visual assessment appear to be the same as the signature on the affidavit and differ markedly from the signature on the letter alleged to have been written by Casion. The company at first asserted that Casion was under liquidation and therefore Onkarnath Rampal was incompetent to file any affidavit as Director. The submission is un-acceptable since Onkarnath Rampal could always file an affidavit in his personal capacity denying his signature. Ultimately, the company submitted that it did not rely on the letter of Casion. The submission does not detract from the pitfalls which would have to be faced by Court if it does not follow the protective measures legislatively provided for correctly ascertaining the views of the creditors. 60. Take again the case of Marine Containers. It attended the meeting and voted in favour of the scheme. Then it filed an affidavit before the learned single Judge opposing the scheme. Before us it was stated by Counsel appearing on behalf of Marine Containers that written instructions had been given to him to support the scheme. When and where would this end? Even after the disposal of the matter by the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributories of the company, as proved to it by any sufficient evidence; ( b )if it thinks fit for the purpose of ascertaining those wishes, direct meeting of the creditors or contributories to be called, held and conducted in such manner as the Court directs; and ( c )appoint a person to act as Chairman of any such meeting and to report the result thereof to the Court. (2) When ascertaining the wishes of creditors, regard shall be had to the value of each creditor s debt. (3) When ascertaining the wishes of contributories, regard shall be had to the number of votes which may be cast by each contributory." 65. Section 557 is contained in Chapter V of the Act and is applicable when the Court is considering whether the company should be wound up or not ( See M. Gordhandas Co. v. M.W. Industries AIR 1971 SC 2600, 2605). That is not the issue before the Court now. Besides section 557 does not provide for a scheme binding on all the creditors or contributories of the company regardless of the wishes of a dissenting minority as provided by section 391(2). 66. The next submission of the company was that the Court could itself modify the scheme without any fresh meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of ascertaining the views of the creditors covered by the said Scheme afresh and the Chairman of the said meeting be directed to make a further report to this Hon ble Court on the result of such voting." 69. This submission of the company is also unacceptable. The meeting has already been held pursuant to the orders passed under section 391(1). There is no scope for, in effect, passing another order for holding an adjourned meeting in this proceeding for re-considering the scheme. The statute does not allow for this. What the company is in effect asking for is a fresh order under section 391(1) on the application presented by it on 18-12-1997. A meeting cannot now be directed on the financial picture obtaining in 1996-97. The position of the company and the creditors may have changed in the last two years. Several creditors claims would have increased with the accumulation of interest. The company has produced its current audited balance sheet before us from which it is clear that there have been significant changes in its financial set up. In any event, the exercise would be a futile one unless the Court considers the scheme to be a viable one. 70. The company co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to it, or such an objection to it as that any reasonable man might say that he could not approve of it." Or as said by Bowen, L.J. in somewhat more picturesque fashion : "Now I have no doubt at all that it would be improper for the Court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supported by sensible business people to be for the benefit of that class as such, otherwise the sanction of the Court would be a sanction to what would be a scheme of confiscation. The objective of this section is not confiscation. It is not that one person should be a victim, and that the rest of the body should feast upon his rights. Its object is to enable compromises to be made which are for the common benefit of the creditors as creditors, or for the common benefit of some class of creditors as such." 73. Judged from this point of view, we are of the opinion that the modified scheme does not meet this criterion. Firstly, the class of creditors intended to be covered by the scheme is not only uncertain but inappopriate. The submission of the company that the Court should not consider this aspect of the matter because the ground h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the scheme are secured creditors in the sense that the inter-corporate deposits made by them were secured by shares either in the company or in the company s subsidiaries. Even according to the company at least six of the creditors who are covered by the scheme had made advances to the company against pledge of shares, namely : 1. Colgate Palmolive (I) Ltd. 2. Maharashtra Apex Corporation 3. Deccan Tobacco Processors 4. Benett Coleman Co. Ltd. 5. Andhra Pradesh Paper Mills Ltd. 6. Nippon Denro Ispat Ltd. 78. In our view, the secured creditors should not have been clubbed together with the unsecured creditors. Their interest would not be the same. This is another reason why the scheme could not be sanctioned. "If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members are not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting as constituting a class is of the applicant-company and if meetings are incorrectly convened or constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the parent company and the subsidiary could have been the same persons with the same outlook and the same judgment" Hellenic General Trust Ltd., In re [1975] 3 All. ER 382. Section 370 of the Act, which deals with loans etc., to companies under the same management recognizes this community of interest between the parent and subsidiary companies. Indeed, the modified scheme provides that the subsidiary creditors would not be paid until the other creditors were repaid. The other creditors would be more concerned in protecting their debts and recovering them. In view of this clash of interest it would not be reasonable to include the subsidiaries of the company in the same class of other unsecured creditors. 81. Finally, the submission of Kirloskar and HDC that the scheme is speculative is of substance. According to the company the inter-corporate deposits and bill discounting outstanding as on 12-12-1997 with interest reckoned upto 31-3-1997 was Rs. 2,63,78,93,987. Some of the unsecured creditors have disputed the amounts stated by the company as due to them. The Chairman in his report has said : "Several disputes were raised regarding the quantum of debts as shown by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired sum. In fact the fund available is much less. 86. As far as source (1) is concerned, according to the appellants the company s balance sheets did not show that the company would be able to put aside Rs. 2.5 crores every month out of its profits. The company sought to counter this criticism by saying that Kirloskar in its scheme had relied on the source. The learned single Judge rejected this objection by saying : "It is on record that as on date the sum of Rs. 27,83,05,392.26 inclusive of accrued interest is lying in the said account and the same is available for payment to the creditors covered by the said modified scheme. The money lying in the said account is adequate for payment of at least the first instalment as envisaged by the said modified scheme." 87. It is not clear as to the account on which this amount has been accumulated. There does not appear to be any reference in the balance sheet of the company to this. Be that as it may, the amount has now reached to Rs. 36 crores. The Fixed Deposit Receipt was produced before us, and we proceed on the basis that the amount is available for distribution to the creditors covered by the Scheme. 88. As far as so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on which the orders were passed. Incidentally the company had made an application earlier Shaw Wallace Co. Ltd. v. Drap Leasing Finance (P.) Ltd. [C.P.No. 297 of 1996] praying for, inter alia , a moratorium on the payment of its dues on the basis of a "proposed cash flow plan." The application was rejected on 16-9-1997. The learned Judge said : "Even if I was to assume, that there were sufficient non-core properties in the disposal of the company, the sale proceeds of which would liquidate a major portion of its debts, the "ifs and buts" which could include the restraint on the sale of properties imposed by Court, could surely not be interfered with in this application. The company, therefore, admittedly did not as on date enjoy the liberty to dispose of its property, even non-core property merely at its Will. In the event, therefore, the company was not able to sell its assets as it would have liked to, which possibility in the circumstances was quite real than the spirit of the proposed plan for cash flow would evaporate." 92. This leaves the Court with two out of the seven proposed sources. Compared to the overall admitted indebtedness to the unsecured creditors ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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