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TMI Blog2004 (3) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed and paid-up capital of the Transferee Company is Rs. 30,00,000 divided into 30,000 equity shares of Rs. 100 each fully paid up. 3. The main objects of the Transferee Company, as reflected by its Memorandum and Articles of Association, is to establish and carry on the business of chit funds for the benefit of members and to act as foreman for any of the chit fund series for the promoters of the chits in the State of Andhra Pradesh or anywhere in India, to carry on chit fund business of all kinds permitted by law, and to raise funds from the members and other persons, firms, associations, companies etc. 4. M/s. Deepika Leasing and Finance Limited (hereinafter referred to as 'the Transferor Company') was incorporated under the provisions of the Companies Act, as a Public Limited Company on 21-8-1990. The authorized share capital of the Transferor Company is Rs. 10,00,00,000 divided into 70,00,000 equity shares of Rs. 10 each and 3,00,000 preference shares of Rs. 100 each. The issued, subscribed and paid-up capital of the Transferor Company is Rs. 8,00,35,000 divided into 50,03,500 equity shares of Rs. 10 each and 3,00,000 preference shares of Rs. 100 each. 5. The main object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71,16,675, had voted against the scheme, 35 Deposit Holders entitled to Rs. 15,00,176 had cast invalid votes. That in all the value of the votes polled in favour of the scheme was 89.18%. 8. Part II of the Scheme of Arrangement, which was approved by the Shareholders and Deposit Holders and Unprized Subscribers of the Transferee and Transferor Companies in their meetings held on 22-11-2003, inter alia provides for constitution of Collection and Disbursal Committee in Clause 2.6. Clause 2.6 of the Scheme of Arrangement, which provides for constitution of Collection and Disbursal Committee and enlists the powers and nature of duties to be performed by the said Collection and Disbursal Committee, reads thus. Collection and Disbursal Committee: 2.6 That a Collection and Disbursal Committee comprising of one Director each from the Transferor and the Transferee Company and a Commissioner to be appointed by the Hon'ble High Court be constituted. The powers and responsibilities of the Collector and Disbursal Committee shall be. (a)To take immediate charge of all the movable and immovable assets, actionable claims of the company. (b)To take immediate steps to execute the decrees that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh fixed deposits, which were either invested or financed in the course of business, could not be realized immediately. Thus, the Transferor Company which was left with no liquid money, could not pay to its Deposit Holders and the cheques issued by it were dishonoured. Due to non-payment of monies to Deposit Holders and dishonour of cheques issued to them, some of the Deposit Holders filed Criminal Cases against the Directors of the Transferor Company. Taking advantage of this misfortune, some of the prized bidders of the chits, either stopped or evaded paying the monthly premiums, and as a result thereof, the Transferor and Transferee Companies had defaulted in making payments to the Unprized Chit Subscribers. The Transferee Company also started facing problems in getting released the chit security deposits lying with various Registrars of Chits against the completed chit groups, resulting in heavy liquidity crunch. 12. The learned Counsel submits that the sudden adverse and volte face turn of events, had a cascading effect on the finances and functioning of the Transferor and Transferee Companies, and as of now, the Transferor and Transferee Companies are due and liable to pay a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stay applications filed by the Transferor and Transferee Companies. The learned Counsel appearing on behalf of the implead petitioner-bank submits that when the Transferor and Transferee Companies failed to pay the loan amounts, the bank filed applications before the Debts Recovery Tribunal, Hyderabad, in O.A. Nos. 599 and 701 of 2001 against the Transferor and Transferee Companies and O.A. Nos. 655 and 714 of 2001 against two other companies, namely M/s. Daisy Systems Limited and M/s. Blue Pencil Advertising Private Limited, floated by the Directors of the Transferor and Transferee Companies, for recovery of a sum of Rs. 38,54,650, Rs. 1,84,57, 156-30 ps., Rs. 2,70,83,763-20 ps. and Rs. 27,93,301-96 ps. along with interest thereon, and obtained decrees for the said amounts. In all, the Transferor and Transferee Companies are liable to pay an amount of more than Rs. 2.20 crores to the bank, and that because of the orders of stay dated 26-9-2003 granted by this Court in C.A. Nos. 792 and 794 of 2003, the bank is unable to execute the decrees and thus prayed that it being a necessary and proper party, should be implead, and inasmuch as the order of stay is operating against their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed Subscribers approved the Scheme of Arrangement and appointment of Collection and Disbursal Committee, a sole Unprized Chit Subscriber cannot take any exception thereto and more so when the scheme proposed is to his advantage for any amount recovered by the Collection and Disbursal Committee, would also be made available and disbursed to him. 16. By order dated 29-10-2003, this Court appointed Sri A. Venku Reddy, retired District Judge, to examine the financial soundness of the Transferor and Transferee Companies and ascertain their assets and liabilities. Sri A. Venku Reddy having ascertained the assets and liabilities of the Transferor and Transferee Companies with reference to the records made available to him, filed detailed report stating that the estimated realizable assets and liabilities of the Transferee Company as at 22-8-2003 stand at Rs. 1,725.00 lakhs and Rs. 1,650.69 lakhs, and likewise, the estimated realizable assets and liabilities of the Transferor Company as at 22-8-2003 stand at Rs. 12,83,73,138 and Rs. 12,43,97,702, which is almost equal, and inasmuch as the loans due by the Transferor and Transferee Companies to banks are fully secured by mortgage of immov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious allegations of mismanagement and siphoning and diversion of public funds by the Directors of the Transferor and Transferee Companies, to the companies promoted by them, this Court with a view to remove the misgivings and to satisfy itself of the financial soundness of the Transferor and Transferee Companies and to have a clear and transparent picture of the affairs of the Companies, upon hearing the learned Counsel appearing on behalf of the respective parties, by order dated 5-2-2004 appointed a Committee of Commissioners comprising Sri A. Venku Reddy, retired District Judge and Sri M.V. Durga Prasad, a practising Advocate in this Court, to examine the feasibility and viability of the scheme with reference to the accounts, documents and other records maintained by the Transferor and Transferee Companies, and for the purpose of sale of properties owned by the Transferor and Transferee Companies, recovery and distribution of monies to the Deposit Holders and Unprized Chit Subscribers of the Transferor and Transferee Companies. The Committee of Commissioners upon having lengthy and day long deliberations and discussions for two days with the Directors of the Transferor and Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Transferee Companies, and pending according its approval to the Scheme of Arrangement, under section 391 or 394 of the Companies Act, 1956 can appoint a Committee of Commissioners to run the affairs of the Transferor and Transferee Companies having regard to the fact that the operations of the Transferor and Transferee Companies have come to a standstill for various reasons stated above ? 20. To consider this question, a reference be made to sub-section (2) of section 391 of the Companies Act, which reads thus : "(2) If 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 voting either in person or, where proxies are allowed under the rule made under section 643, by proxy, at the meeting, agree to any compromise, or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contractors of the company : Provided that no o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act, being mandatory in nature, it is incumbent upon this High Court to satisfy itself about the financial soundness of the Transferor and Transferee Companies before it puts its seal of imprimatur on the Scheme of Arrangement. 22. In State of West Bengal v. Pronab Kr. Sur AIR 2003 SC 2313, the factual matrix of the matter before the Apex Court, ran thus: A winding up petition was filed by a creditor of the company before the High Court of Calcutta on the ground of its inability to discharge the debts and pending application, the company came forward with a scheme purportedly under section 391(1) and 391(6) of the Companies Act, 1956. The said scheme inter alia envisaged making payment to the creditor by sale of a portion of company's land and the said application was rejected by the learned Single Judge of the Calcutta High Court on the ground that the property was mortgaged to the Bank and hence it was not leasable. On appeal, the Division Bench of the Calcutta High Court allowed the application, and in terms of the said order, the property was sold, and on application of the purchaser, the High Court directed the State Government to grant exemption and passed anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt should, before sanctioning the scheme must necessarily conduct an enquiry, which would take some time. 25. In the case on hand, the report of the Committee of Commissioner discloses that no audit was conducted since 1999 and the administration of the Transferor and Transferee Companies has been seriously affected after October, 2000. A number of suits and E.Ps. were already dismissed for default or for non-prosecution, and pending suits and proceedings require to be attended to immediately and immediate steps are required to be taken to realize the monies due to the Transferor and Transferee Companies. Unless the audit is conducted, the information so far fur- nished by the Transferor and Transferee Companies remains unauthen-ticated. The prerequisite of section 391 or 394 of the Companies Act, as observed by the Apex Court in Pronab Kr. Sur (supra) is not an empty formality and cannot be thrown to the winds, for no order sanctioning the scheme can be passed unless the last Audit Report and the Report of the Official Liquidator etc., are made available to the Court. Therefore, it cannot be said that the Court is devoid of power to pass an orders of interlocutory nature to pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealt with or dealt with adequately on the petition for sanction of the compromise or scheme, an application shall be made to the Court under section 394, supported by affidavit, and the Court may make such order or give such directions as it may think fit as to the proceedings to be taken for the purpose of reconstruction or amalgamation, as the case may be, including, where necessary, an inquiry as to the creditors of the transferor company and for securing of the debts and claims of any of the dissenting creditors in such manner as the Court may seem just. This apart, there is no provision either in the Companies Act, 1956 or the Companies (Court) Rules, 1959 which limits the power of the Court, to issue directions under Rule 83. Admittedly, this is a case of reconstruction, and no mean have any doubt as to the power of the Company Court to pass interlocutory directions pending consideration of a petition under section 391 or 394 of the Companies Act. 28. Secondly, sections 390 to 394 of the Companies Act, appearing in Chapter V of the Companies Act, deal with arbitration, compromise, arrangement with and reconstruction. It is significant to note that the provisions of this Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, even where an application for winding up is filed under section 433 of the Companies Act and when there is no arrangement with the creditors or a scheme for amalgamation or reconstruction, the Court need not order winding up. It is now well settled law that the Court can order beneficial winding up by appointing a provisional liquidator with or without the support of the administrators under section 450 of the Companies Act. Reference in this context be made to judgments of High Courts of Madras, Gujarat, Punjab and Haryana and Kerala in Chamundi Theatre v. S. Chandrashekar Rao, [1975] 45 Comp. Cas. 60 (Mad), Panchmahaals Steels Ltd. v. Universal Steel Traders, [1976] 46 Comp. Cas. 706 (Guj.), In re Brunton & Co. Engineers Ltd. [1988] 63 Comp. Cas. 299 (Ker.), Bharti Telecom Ltd. v. Altos India Ltd. (No 2), [1998] 94 Comp. Cas. (Punj. & Har.) and St. Mary's Finance Ltd. v. R.G. Jayaprakash [2000] 99 Comp. Cas. 359 (Ker.) When the Court can issue an order for winding up and initiate proceedings under Part VI of the Companies Act in a petition filed under section 391 of the Companies Act and then, appoint provisional liquidator under section 450 of the Companies Act, it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very same judgment, quoted with approval, the following observations of the Gujarat High Court in Mansukhlal v. M.V. Shah [1976] 46 Comp. Cas. 279 : "The framers of the Company Law in India have conferred statutory powers on the High Court to make such modifications in the compromise or arrangement as the Court may consider necessary for the proper working of the compromise and arrangement. The power of the widest amplitude has been conferred on the Court under section 392(1)(b) and the width and the magnitude of the power can be gauged from the language employed in section 392(1)(a) which confers a sort of a supervisory role on the Court during the period the scheme of compromise or arrangement is being implemented. Reading clauses (a) and (b) of sub-section (1) of section 392, it appears that Parliament did not want the Court to be functus officio as soon as the scheme of compromise and arrangement is sanctioned by it. The Court has a continuing supervision over the implementation of compromise and arrangement. Unenvisaged, unanticipated, unforeseen or even unimaginable hitches, obstruction and impediments may arise in the course of implementation of a scheme of compromise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thaal Lal Chand v. Bharat Jute Mills Ltd. [1983] 53 Comp. Cas. 392, a learned Single Judge of Calcutta High Court placing reliance on the observations made by the Apex Court in S.K. Gupta held that interim order cannot be passed under section 392 of the Companies Act. On the other hand, the Gujarat High Court in Tungabadhra Industries Ltd. v. National Dairy Board, See the judgment 1989 Tax LR 2527, took the view that the powers conferred by section 39 of the Companies Act on the Court may be exercised before or after the approval of the scheme, deriving the meaning from the words 'at the time of'. 36. A close examination of sections 391 and 392 of the Companies Act would reveal that sections 391 and 392 operate in different stages and they do not control each other. As noticed, section 392 was inserted in the present Act, but for which the Court would have been rendered "functus officio" once the scheme is approved, as in the case of U.K., section 392 comes into operation after the enquiry under section 391 is over. In fact the Apex Court in S.K. Gupta pointed out this distinction (in para 14 @ p. 740 and in para 16 @ p. 741). In that view of the matter, this Court has no doubt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jaferbhai Mohammed Bhai [1989] 65 Comp. Cas. 163 (Guj.), it was held by the High Court of Gujarat that the proceedings under section 391(6) of the Companies Act include criminal proceedings also. 39. In Allambag Tea & Trading Co. Ltd. v. Union Bank of India [1953] Comp. Cas. 107 (Assam), the High Court of Assam, held that the stay order continues to be in force till final order sanctioning the scheme was passed, and it stands vacated, if scheme is rejected, and if the scheme is sanctioned, it becomes part of the scheme. 40. Fifthly, it must be remembered that the true purpose of sections 391 to 394 of the Companies Act is revival or reconstruction of the company. The present case is one of revival and reconstruction of the companies but by means of compromise with creditors an amalgamation and is not merely a case of amalgamation of two companies. Both the transferor and the Transferee Companies which were under common management secured financial debility on account of certain unanticipated and unforeseen events, as stated in the earlier part of this order. 41. The summary of the case law, as is appearing from the above referred cases, in relation to the power of this Court und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Transferee Companies and the report filed by the Committee of Commissioners on 25-2-2004 before this Court, discloses that detailed reports and information are required to be called for from the Board of Directors of the Transferor and Transferee Companies in terms of the proviso to section 391(2) of the Companies Act, and the deliberation and discussions undertaken by them, indicate that a consensus was arrived at between them as to the mode and manner of approach for making the scheme viable. It is required to be placed on record that none of the parties to the scheme have raised any objections to the report of the Committee of Commissioners report dated 25-2-2004, though an argument was raised by sole objection-petitioner that no interim directions can be given pending sanction of the scheme. 44. In the above view of the matter, and having regard to the report of the Committee of Commissioners, which discloses that the Transfer and Transferee Companies are having more assets than their liabilities, in the form of money decrees and monies recoverable from pending suits, from their defaulters, and that unless and until the decrees are executed and the pending suits brought to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be passed by this Court from time to time. (4)No amount shall be received by any person or official of the Transferor and Transferee Companies other than the two Directors, namely Sri. A. Balaji and Sri. A.S. Prasad, jointly on behalf of the Transferor or the Transferee Company, except by way of Demand Drafts or crossed cheques payable to the accounts to be opened to the credit of the above proceedings in the names of the Transferor and Transferee Companies, as per clause 3 against the receipts superscribed with the cause title of the above proceedings signed by both of them, disclosing clearly the particulars such as payer, account number, branch, amount paid, date, outstanding amount, suit particulars in the case of suit filed account, etc. The record book should be in quadruplicate, on which the first copy shall be issued to the payer, second copy shall be submitted to the Committee of Commissioners along with weekly reports and third copy shall be submitted to the auditor and the fourth copy shall be retained by the respective companies. (5)The Board of Directors shall submit Weekly Reports with respect to the following matters, to the Committee of Commissioners: (a)The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transferor and Transferee Companies shall follow scrupulously the plan of action devised by concensus during the meetings held on 22-2-2004, minutes of which are filed along with the Committee of Commissioners. (10)Except the persons authorized by this order, neither the Board of Directors nor any other person representing the Transferor and Transferee Companies, shall operate any other bank account except the bank account to be opened to the credit of the above proceedings in the names of the Transferor and Transferee Companies as per clause (3) above. (11)The Board of Director of the Transferor and Transferee Companies are permitted to: (a)To appoint M/s. Nandam and Company, Secunderabad, as Auditors, subject to their giving an undertaking to complete the audit up to date within one month and to assist the Committee of Commissioners as per this order. Their remuneration shall be fixed in advance with the approval of the Committee of Commissioners. (b)To continue the existing Advocates subject to the satisfaction of the Committee of Commissioners about their performance and on their giving an undertaking to send weekly reports above all the suits or other proceedings along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement is arrived at within one month, M/s. Karnataka Bank Limited shall be at liberty to proceed against the properties mortgaged to them in respect of the loans advanced by them to the Transferor and Transferee Companies. At any rate they shall not sell the properties mortgaged to them without the prior permission of this Court and the sale also shall not be confirmed without prior permission of the Court. The stay shall continue to operate against M/s. Karnataka Bank Limited and other in all other respects. 45. In the result, C.A. No. 795 of 2002 is allowed subject to the aforementioned directions. C.A. No. 2848 and 2857 of 2003, filed by M/s. Karnataka Bank Limited and one Mr. Khaza Masood Ali, seeking their impleadment are allowed. The application C.A. No. 2849 of 2003, filed by M/s. Karnataka Bank Limited seeking their impleadment is ordered, and while the application C.A. No. 2858 of 2003, filed by Mr. Khaza Masood Ali, seeking to dismiss the application C.A. No. 793 of 2003, whereby meeting of the shareholders of the transferee Company was called for was dispensed with, is dismissed. 46. The matter shall be listed every month for the reports of the Committee of Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X
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