9911796707
TMI Blog2003 (4) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... le Managing Director of the Respondent Company in liquidation, (hereinafter referred to as "the Petitioner"). According to the Petitioner, he is holding 9041 equity shares of Rs. 100 each. The Company in liquidation was incorporated, as a Private Limited Company on 19-5-1972. The founder member of the Company is Mr. L.B. Prasada Rao, who is the applicant in the other above mentioned two Company Applications (hereinafter referred to as the Applicant ). The authorised share capital of the Company in liquidation was Rs. 40 lakhs divided into 40,000 equity shares of Rs. 100 each. The issued, subscribed and paid up capital of the Respondent Company is Rs. 30 lakhs divided into 30,000 equity shares of Rs. 100 each. The share capital of the Company is held by 16 persons/shareholders. The Company was incorporated with the main object of manufacturing and sale of refractories of all kinds. The Company also proposed to carry on business as dealers, distributors, merchants, exporters and importers of all kinds of refractories also. In addition, it was also proposed to carry on the business of finishers, polishers, galvanisers, electroplaters, anodises, enamellers, thermo plastic coaters, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs by the Petitioner by himself and through his associates. ( b )Relocate the manufacturing unit/plant presently situated at 7/4 KM Stone, Nagarjuna Sagar Road, L.B. Nagar, Hyderabad (the same is necessitated as the area at which the present unit is located has over a period of time been converted into a residential area and manufacturing activity cannot be continued in view of the guidelines of the pollution control authorities). ( c )To sell the land and buildings, to defray the cost of relocation of the plaint/unit and its revival. ( d )To repay the secured and unsecured creditors within a period of one year from the date of sanction of the scheme by this Hon ble Court. ( e )To increase the equity capital of the Company and to issue secured debentures so as to maintain a debt equity ratio of 1: 1.72. ( f )Modernisation of manufacturing process so as to enhance the efficiency in terms of power consumption and optimal usage of plant and machinery. The cost of the rehabilitation scheme is as follows: Amount in lakhs 1. New land 2.00 2. Buildings 20.00 Amount in lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in liquidation and who filed the application in C.A. No. 665 of 2001, seeking to reject the petition, as the proposed scheme of arrangement/compromise was not approved by the requisite majority of the shareholders and the creditors. In the applica- tion, the applicant has stated that after the initial establishment and commencement of the business the Company went into expansion in the year 1981, but thereafter, it suffered due to the non-availability of the raw material due to the agitation in Assam. Hence, the Company in liquidation became sick. When the Petitioner approached the State Bank of Hyderabad, which is one of the secured creditors for rehabilitation, it did not accept the proposal for additional loan, but advised to increase the share capital of the promoter. Therefore, the Petitioner, in order to mobilise additional resources, negotiated with the applicant, who is impleaded as 1st Respondent in the application, who became the shareholder by contribution of additional share capital to the Company. This was in the year 1987 and the Petitioner was made Additional Director and later became the Executive Director. However, according to the Petitioner in the year 1989, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, buildings, plant and machinery at Rs. 35,35,366 knowing fully well that the real value of the property on the date of winding up order was Rs. 2.50 crores. ( iii )The details of the assets not specifically pledged and valued at Rs.37,46,332, which were non-performing assets in nature are not disclosed in the statement of affairs filed with the Official Liquidator. ( iv )The inventories of Rs. 51,90,000 as on 30-11-1993 shown under the head current assets in the balance sheet does not find place in the statement of affairs filed by the erstwhile Directors with the 2nd Respondent herein. This shows as to how the 1st Respondent has prepared and filed the statement of affairs with the 2nd Respondent without closing all the assets of the Company in liquidation on the date of winding up order. ( v )In the statement affairs filed, the details of inventory report dated 26-11-1993 filed by the Advocate Commissioner in O.S. No. 547 of 1993 on the file of Additional Subordinate Judge, R.R. District in the suit filed by the State Bank of Hyderabad, Dilsuknagar Branch against Electro Thermics Private Limited. ( vi )The fixed deposit amounts lying with the Company in liquidation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorisation and minimum charges during the disconnected periods. APSEB has raised a demand of Rs. 76,29,353 and ordered the Company to pay the dues on or before 20-5-1993. Your Company left with no alternative than to file a Writ petition before the Hon ble High Court saying that the Company s financial position is bad and is not in a position to pay the dues. Then the Court ordered 1/3rd of dues should be paid in two instalments within 4 weeks from the date of order i.e., 19-5-1993. Due to difficult financial position, the Company is not able to pay the two instalments in time. APSEB has disconnected the power supply on 29-6-1993 bringing the Company s operation to a standstill. The Company approached the APSEB again for sanction of instalments to pay the old dues. Negotiations with APSEB are in progress. This information was suppressed in the statement of affairs filed with the Official Liquidator by erstwhile Board of Directors. I reserve my right to take appropriate action either civil or criminal against the persons who have submitted the false statement of affairs of the Company in liquidation with the 2nd Respondent herein. ( viii )Further, in the Creditors List ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Chairperson by the Superintending Engineer (Operation) R.R. Circle, Mint Compound, Hyderabad, but the Chairperson did not take note of the contents of the said letter and treated that the amount due to the Electricity Board is Rs. 17,46,858-03 paise. According to the applicant, if the dues of the Electricity Board are taken into account, the persons voted in favour of the scheme comes to only 45.37 per cent, while voted against the scheme comes to 54.63 per cent. Thus, the required majority of three-fourths as contemplated under the provisions of the Act, is not available to the Petitioner. Hence, sought for rejection of the Scheme presented by the Petitioner. 6. The other application - CA No. 539 of 2002 is filed by the same applicant in CA No. 665 of 2001, Sri L.B. Prasada Rao, who is the founder member of the Company in liquidation, seeking sanction of the modified scheme/compromise, which in effect submitted with the modification of the scheme presented by the Petitioner in CP No. 112 of 2001. According to the applicant, as the scheme proposed by the Petitioner is detriment to the interest of the shareholders, he has come up with the present modified scheme, as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to the learned Counsel, as on date, the Company is closed and the possibility of realising the entire amounts due to the creditors as well as to the workers is remote. The interest of the shareholders also is only a negative value as on date. If the scheme is approved and the Petitioner is allowed to rehabilitate the Company in liquidation, the Petitioner is prepared to discharge the debts due to the creditors as per the settlement including the dues to the workers and in the process even the shareholders value would also increase. According to the learned Counsel, the negative value may become positive, may be by few rupees, which would be beneficial to them also. Therefore, the learned counsel sought for approval of the scheme of arrangement/compromise. 8. The learned Counsel also contended with reference to the modified scheme proposed by the applicant that as the scheme was not referred, as required under the provisions of the Act, for consideration and approval of the shareholders and creditors, the said modified scheme could not be considered as a scheme for approval. Hence, sought for rejection of the application filed by the applicant. Even with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orkers, the applicant proposed to engage any of the workers willing to work at the place of relocation of the Unit, whereas the Petitioner did not make any such proposal. The learned Counsel also contended that though the modified scheme was not referred for consideration of the creditors, according to the learned Counsel, as the original scheme proposed by the Petitioner was referred for consideration and therefore, the modified scheme need not be referred for further consideration, as admittedly, the modified scheme proposed by the applicant is beneficial to all, as the applicant is prepared to pay of the workers in full, apart from the payment as proposed by the Petitioner to others. Further other shareholders are also offered payment. Therefore, the learned Counsel sought for approval of the modified scheme. 11. On behalf of the workers, a separate application has been filed, opposing the scheme proposed by the Petitioner. According to the learned Counsel for the workers, separate meeting for approval of the scheme was not called for, as contemplated under the provisions of the Act. According to the learned Counsel, the workers, who could be constituted as preferential cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Pradesh State Financial Corporation. Though the said secured creditor tried to dispose of the assets of the Company by issuing publications for the sale of the assets of the Company, but could not dispose of the assets. At this stage the Petitioner has come up with a scheme of rehabilitation, which is opposed by the opposite party, who has also come up with an alternative proposal of modified scheme. 14. Insofar as the scheme proposed by the Petitioner, he did not consider it appropriate to pay off the other shareholders, though he had proposed to pay the creditors partially, including the workers dues. Admittedly, the valuable asset of the Company is the land, where the Unit is established. Though the buildings are also referred, they may not be of much value. The land is about 2 acres. The realisable value of the said land along with buildings as stated by the Petitioner in his proposed rehabilitation scheme is at about Rs. 70 lakhs; whereas the opposite party had shown the value of the same at about Rs. 250 lakhs. In fact, even the opposite party proposed to pay off the workers dues in full, as determined by the Official Liquidator, apart from paying the secured cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bringing additional share capital by them. This will result in shutting the voice of the opposite party forever, who are bound by the decisions of the Board of Directors, who are in majority. The above factors clearly show that the proposed scheme is beneficial to the Petitioner and his associates by the sale of the valuable assets of the Company and to make profits to themselves or to bring back the surplus proceeds to the Company as their share capital. The scheme is not intended to benefit the workmen, as usual in the revival of a Company in a scheme of compromise or arrangement. The Petitioner proposed to pay only a part of the amount due to the workmen, while the opposite party offered to pay the full amount of dues to the workers. Therefore, on the face of it, the scheme of arrangement/compromise proposed by the Petitioner, in comparison with the alternative scheme proposed by the applicant is biased, unreasonable and inequitable and intended to benefit only the Profounders of the scheme. 16. Coming to the legal aspects, the contention of the Petitioner is that as the majority of the shareholders and creditors have approved the scheme (though not three-fourths of them pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above provision shows that when a scheme of arrangement/compromise is proposed between a Company and its creditors or any class of them or its members or any class of them, on an application of the Company or any of the creditor or member of the Company, by an order of the Court, a meeting of the creditors, class of creditors, or members or class of members, would be called for their consideration of the proposed scheme for approval or otherwise. It is only after the decision at such meeting, sub-section (2) would come into play. If at such meeting, a majority in number, representing three-fourths in value of the creditors, or class of creditors or members, or class of members, as the case may be, present and voted either in person or through proxies, and agreed any compromise or arrangement, if sanctioned by the Court, be binding on all the creditors, class of creditors, or members or class of members, as well as the Liquidator, if the Company is ordered to be wound up. Here, it is not in dispute that the proposed scheme offered by the Petitioner was referred by calling a meeting of the shareholders as well as the creditors. Admittedly, in the shareholders meeting the proposed s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anction to any scheme of compromise or arrangement it would normally expect to be satisfied about three important matters, namely, ( a ) whether the statutory provisions have been complied with or not; ( b ) whether the class or classes have been fairly represented; and ( c ) whether the arrangement is such as a man of business would reasonably approve. It was also held that Sections 391(1) and 391(2) of the Companies Act, 1956 refer to two distinct stages. Whenever a compromise or arrangement is proposed between a Company and its creditors or any class of them or between a company and its members or any class of them, the Court on the application of the Company or any creditor or member of the Company or in the case of a Company which is being would up, of the liquidator, has to order a meeting of the creditors or members or any class of them, as the case may be, to be held. After the approval of the scheme or arrangement at the meeting referred to above, then only the second stage would start and the matter would come before the Court for consideration. It was held that when it comes to choosing between a scheme for reconstruction and an order for winding up, after keeping of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors the State of Gujarat with certain modifications accepted the scheme, as it is being finally sanctioned. The other secured creditor, the Petitioner and his companion creditors, unreservedly accepted the scheme as sanctioned. The Ahmedabad Municipal Corporation as well as the Sales Tax Department, who claimed certain amounts due, have also accepted the terms for their payment, as determined after discussion in Court and thus they also accepted the scheme. The Employees State Insurance Corporation also accepted as the sponsor was agreeable to pay the amount in full immediately. On an objection raised that the sponsor has not satisfied the Court about his financial ability, it was held that if the sponsor comes with a detailed scheme and is tied down to an undertaking to the Court, it is his responsibility to know wherefrom finances would be brought and today finance comes from such diverse sources that it would be inadvisable to expect the sponsor to disclose them in his own interest. Therefore, the Court sanctioned the scheme, as there was nothing in the way of sanctioning it. But, it was sanctioned not as originally proposed but as amended and modified and has accepted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme to the creditors, who had approved the original scheme. When the said orders of the Division Bench are assailed before the Apex Court in the appeal, the Apex Court while considering the above issue, observed as under: "When a scheme is being considered by the Court, in all its ramifications, for according its sanction, it would not be possible to comprehend all situations, eventualities and exigencies that may arise 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 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally the scheme is between the Company and its creditors or any class of them, or the Company and its members or any class of them, and not between the sponsor of the scheme and the creditor or member. The scheme represents a contract sanctified by Court s approval between the Company and the creditors and/or members of the Company. The Company may as well be in charge of directors and the implementation of the scheme may come through the agency of the directors but that would to lead to the conclusion that during the working of the scheme the directors cannot be changed. If the scheme has to be ultimately implemented by the Company as part of its contract and yet its directors can be changed according to its articles of association, we see no difference in the situation where a sponsor is required to be changed in the facts and circusmtances of a case. Therefore, it is not possible to accept the submission that as and by way of modification one sponsor of a scheme cannot be substituted for another sponsor." In the case of Bhavnagar Vegetable Products Ltd., In re., (1984) 55 Comp. Cas. 107 , a creditor has filed an application for winding up of the Company, on the ground that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently is contrary to law. The Division Bench noted the question whether substitution of one party for another in a scheme is competent or not is no more a question which is res integra , as it is concluded by a decision of the Supreme Court in the case of S.K. Gupta ( supra ) and accordingly negatived the contention of the appellant. 21. If we examine the facts of the case in the light of the above decisions, though in the case of S.M. Holding Finance ( supra ) the Karnataka High Court held that compliance of three-fourths majority is not mandatory but, in fact in the said case also the facts show that three-fourths majority has approved the scheme, though not by voting at the meeting of the creditors, but, subsequently by filing memos or affidavits before the Company Court. On the other hand, the Gujarat High Court held that the compliance with the statutory provisions is a must, which implies that the scheme proposed must be approved by three-fourths of the majority present and voted. In the present case, admittedly, in the meeting of the members-shareholders, the proposed arrangement/compromise was not approved by three-fourths majority of the members present and voted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme. 22. Coming to the claim of the workmen as well as the opposite party that separate meetings of different class of creditors were not called for and therefore, the alleged approval of three-fourths of the value of the creditors present and voted, would not be taken into account so as to represent different class of all creditors. According to the learned Counsel appearing for the workmen, the workmen have to be considered as a preferential creditors and out of them only 45% present and voted and approved the scheme. Similarly, with reference to the unsecured creditors only to the extent of 52% were present and voted and have approved the scheme proposed by the Petitioner. Therefore, there is no compliance of the provisions of section 391(2) of the Act approving the scheme with the requisite majority of three-fourths. No doubt the judgments referred to earlier, as well as the provisions of Section 391(1) contemplate meeting of each class of creditors, not all classes of creditors together. In addition, it was the contention of the learned Counsel for the workmen as well as the opposite party that under the scheme proposed by the Petitioner, all the creditors were not treat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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