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TMI Blog2005 (3) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the learned Company Judge in Company Petition No. 315 of 2004 decided on 23-7-2004. The learned Company Judge by the impugned judgment rejected a scheme of revival of Shree Niwas Cotton Mills Ltd. (now in liquidation), hereinafter referred to as the "Company". The scheme has been approved by the overwhelming majority by the shareholders and creditors, both secured and unsecured and the Union representing about 4500 workmen. Not a single creditor including any workman or shareholder or any person connected with the company or affected by the scheme opposed it either before the learned Company Judge or before us. The State Bank of India withdrew its consent only temporarily and that too only after the present Appeals were fully heard by another Division Bench. Before us finally even the SBI, after certain modifications, has consented to the scheme. The learned Company Judge has, however, held that the scheme submitted for sanction is not for revival of the Company, but for disposal of its assets and if the scheme is for disposal of assets by undertaking its development then it is better that the Official Liquidator disposes of the property. The shareholders, sponsors of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India was holding 20% share capital of the Company and the remaining 20% shares were held by the sundry shareholders. The members of the Somani family were managing the affairs of the Company till July 1984 when it was ordered to be wound up. 6. It appears that the Official Liquidator received certain offers to take over the said mills from one S.S. Bhandari and Kantikumar Kanoria and on the report of the Official Liquidator the learned Company Judge vide his orders dated 11-8-1994 and 18-8-1994 directed that anyone including said Bhandari would make offer to take over with a view to restart the mills so as to provide employment to the workers of the Company and not for the purpose of development or sale of the land or property belonging to the Company and the Official Liquidator would consider only those offers which were received within the prescribed time accompanied by pay order or demand draft of Rs. 1 crore. By order dated 1-9-1994 the learned Company Judge directed that the proposals be invited by advertisement in sealed covers in two categories, first category for the submission of the scheme for revival of the industry and absorption of dislodged workmen and another ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nwala, J. The Bench noted that the scheme as proposed by Somanis is not based on any viable report. The Somanis, though required under the provisions of section 391 of the Act, have not disclosed to the Court all material facts relating to the latest financial position of the Company. It was also noted that the estimate of the market value of the mill land of Rs. 200 crores given by the learned counsel appearing for Somanis was on a lower side more particularly when the prices in real estate in the metropolis continue to escalate unlimitedly. The estimate of liability of over 18 crores given by the learned counsel was on the basis of statement of affairs filed in September 1989. With lapse of over 5 years the liabilities of the Company had multiplied, the workmen's liability itself was in the proximity of Rs. 60 crores. The deposit of Rs. 18 crores and bank guarantee of Rs. 12 crores therefore cannot be considered as adequate and sufficient resource to revive the Company. It was therefore held that the intention behind the prosecution of the scheme was to acquire huge land and other real estate belonging to the Company at a meagre throw away price ostensibly under the guise of revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Needless to say that the revival of the Company and restarting of the mills will generate more employment and will be for healthy economy of the Contrary." [Emphasis supplied] 10. By further order dated 15-12-1995 the Division Bench appointed SBI Capital Markets Ltd. as the agency to make a viability report considering five options suggested in the order dated 4-4-1995 as well as the scheme of the Somanis. The SBI Capital Markets Ltd. submitted a report dated 13-6-1996 stating, inter alia, that option Nos. 1 and 2 were not viable. Option No. 3 was left to the discretion of the Court. Option No. 4 was found to be the only viable option, i.e., revival of the industry through part sale of the assets of the Company. Option No. 5, i.e., sale of the assets of the Company through Liquidator was considered not relevant since option No. 4 was viable. It appears that thereafter the Official Liquidator submitted his report dated 26-12-1996 in which after referring to the report of the SBI Capital Markets Ltd., he stated that out of 5 options suggested in the order of the Division Bench dated 4-4-1995, only 4th option was viable, i.e., part of the assets of the Company be sold off in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dule under which secured creditors SBI and PSB are to be paid off fully within a period of 21 months from the date of sanction of the scheme. Under clause 4.7 of the scheme, the workers are to be paid an amount of Rs. 45 crores in time bound programme. The entire payments of all the workers will be made within one year from the date of sanction. We may mention at this stage that upon liquidation, the workers would get much less than the amount payable under the scheme and according to Kamgar Kruti Samiti, the workers would be entitled to get only about Rs. 7 crores in liquidation. Under Annexure 3 to the scheme, it is mentioned that in addition to the money brought in by the sponsor, i.e., Lodha Builders Pvt. Ltd. (LBPL) to pay off the liability of the Company a revenue sharing arrangement between LBPL and the Company is envisaged. It is provided that the developable area of the property exceeding 7.5 lakhs sq. ft. will be shared between the LBPL and the Company in the ratio of 55 : 45 and that the construction cost will be borne only by the LBPL. The Official Liquidator by his report dated 6-6-2004 accorded his consent to the scheme submitted by Somanis to pay all the creditors an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e schemes a little later but at this stage we may only state that it is revealed during the course of hearing that the said M/s. Suditi Industries Ltd. is declared as a sick industry under the SICA Act. It is also required to be stated that Mr. Aspi Chinoy, learned counsel appearing for M/s. Anand Agarwal candidly admitted that alternate schemes submitted by the interveners cannot be considered by the Court and even if a better scheme is submitted, that would not be a ground for refusing the sanction to the scheme, but he contended that the scheme of revival of a mere corporate existence of a Company is not envisaged by section 391 read with section 393 and the Court has no option to save and except to reject the scheme and the liquidation proceedings should be proceeded to its logical conclusion leading to the sale of the assets of the Company, whatever be the consequence on any of the creditors or workers. 15. In view of the direction dated 15-12-2004, the scheme submitted by Somanis has been also modified to the benefit of all the concerned persons and especially the workers. Under the modified scheme, the State Bank of India and Punjab and Sind Bank are being paid Rs. 45 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nions to exercise the option as they being adequately represented would be the best judges of their interest. Accordingly, the Kruti Samiti and recognized union of the workers have accepted option "B" indicated above. 16. Mr. Chagla, Dr. Tulzapurkar, and Mr. Ravi Kadam, learned counsels appearing for the appellants, submitted that reasoning of the learned Company Judge that the scheme is not for revival of the Company is factually not correct. All the assets of the Company are not being disposed of. Shareholders have decided to continue to run the Company and carry on such other business as is permissible in law. Therefore, the second reason given by the learned Judge that the scheme is for disposal of the assets is also factually not correct. The learned counsel submitted that in view of the Industrial Location Policy of the State Government the only alternative to the Company was to carry out some other business which was permissible under the Memorandum of Association of the Company. The scheme was not opposed by any person interested in the scheme. The interveners have no locus to appear in the present proceedings for sanction of the scheme. The petition under section 391 read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith section 391 of the Companies Act, the Company Court is required to exercise winding up jurisdiction and powers under sections 443 and/or 466 of the Companies Act. Therefore it was submitted that the considerations that would weigh with the Company Court whilst deciding whether to recall/set aside its order of winding up and to sanction a scheme for revival of the Company would not necessarily be those under section 391. The interest of the public, the workmen and general welfare and common good of the community constitute vital considerations in matters relating to winding up. It was submitted that under section 392 of the Companies Act, a Company Court has the power to substitute the sponsor of the scheme and to make modification in a scheme which has already been sanctioned by the shareholders and creditors and that "any person interested in the affairs of the Company" would be entitled to be heard and considered as a sponsor of the scheme under section 392. According to the learned counsel, the sponsor need not be a shareholder or a creditor of the Company and schemes of interveners being clearly superior and more beneficial to the workers and public interest, the Court shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contributories of the company : Provided that no order sanctioning any compromise or arrangement shall, be made by the Court unless the Court is satisfied that the company or any other person by whom an application 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. 392. Power of High Court to enforce compromise and arrangements.-- (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it-- (a )shall have power to supervise the carrying out of the compromise or arrangement; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of individual agreement, gets bound by the scheme, which would otherwise be necessary to give it validity, the two provisos have been introduced casting a duty on the Court to satisfy itself that the affairs of the company were/are not being conducted in a manner prejudicial to the interest of its members or to the public interest. The basic principle underlying these provisos is none other than the broad and general principle inherent in any compromise or settlement entered into between the parties, the same being that it should not be unfair, contrary to the public policy, unconscionable or against the law. While exercising its power in sanctioning a scheme of agreement, the Court has to examine as to whether the provisions of the statute have been comp- lied with. Once the Court finds that the parameters set out in section 394 of the Companies Act have been met then the Court would have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their eyes open give their approval, even if, in the view of the Court a better scheme could have been adopted. 21. In Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the company and the creditors and members has to be kept in view. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote that has to be kept in view by the Court. The Court certainly would not act as a court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the concerned parties. The Court has neither the expertise nor the jurisdiction to delve into the commercial wisdom exercised by the creditors and members of the company who have ratified the Scheme by the requisite majority. Consequently the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that how best the game is to be played is left to the players and not to the umpire. . . ." [Emphasis supplied] (p. 812) With regard to the power of the Court to modify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The role of the Court is that of an umpire in a game to see that the teams play their role as per rules and not overstep the limits. Subject to that how best the game is to be played is left to the players and not to the umpire." [Emphasis supplied] (p. 333) 26. The main question that falls for our consideration is whether the learned Company Judge was right in holding that the scheme is liable to be rejected as it is not for revival of the Company but for disposal of its assets and, therefore, it would be desirable that the Official Liquidator himself disposes of the Company's property. Under section 391(1) only a creditor or a member of that company or liquidator in the case of a company being wound up, is entitled to move an application proposing compromise or arrangement. The scheme proposed in this case is for revival of the Company and for sale of the part of the assets of the Company. The scheme contemplates payment of the creditors including workers. The Company has entered into agreement with sponsors for development and transfer of the property. All the assets of the Company are not sold or disposed of. The scheme provides that after paying off the creditors, if funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of manufacturing activities. The Official Liquidator objected to the scheme on the ground that under the scheme the Company proposed to carry on business which was not contemplated under the existing object clauses of the Memorandum of Association of the Company. The amended clause 7(a) of the scheme of compromise provided that the Company will continue to carry out the business which it was doing prior to winding up, namely, dealing in immovable properties, and that, in the event of the Company desiring to carry on any other business, it would act in accordance with the provisions of the Companies Act, and if necessary, would take steps to amend the Memorandum of Association in accordance with law. Overruling the objection raised by the Official Liquidator, the learned Judge held as under : "This clause, therefore, cannot be said to contemplate something which is ultra vires either the memorandum of association of the company or the provisions of the Companies Act. Once the company is reconstituted, it will be open to the company to carry on such business as its memorandum of association warrants, and it would be open to the company - as it is open to any other company - to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31. We find absolutely no merit in the submission of Mr. Chinoy. In the first place the submission of the learned counsel that the judgment of the Division Bench dated 4-4-1995 has stipulated only two permissible options is totally misconceived. The Division Bench has merely indicated in para 14 that the Company Judge may consider the suggestions of the learned Government Pleader and should call for viability report before considering the suggestion Nos. 1 to 5 mentioned therein. In the same para it was also clarified that it would be open for the learned Company Judge to give any other suitable directions in the matter, keeping in mind that the whole anxiety is to revive the company and to restart it which is in the interest of all concerned. As per the decision of the Division Bench the SBI Capital Markets Ltd. has submitted a viability report on 5 options suggested in the order dated 4-4-1995. The option 4 was found to be the only viable option that is revival of the industry through part sale of the assets of the Company. In view of the commencement of new industrial policy it is not possible to revive the textile mill and consequently a modified scheme was submitted for reviva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Each case depends upon its own facts and close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect (See Ashwin Kumar Singh v. U.P. Public Service Commission AIR 2003 SC 2661. 33. In Smt. Saroj G. Poddar's case (supra) the Division Bench came to the conclusion that the scheme for revival of the mill was only a camouflage to grab the assets and property of the Company defeating the claims of the creditors and workers whereas in this case the modified scheme contem- plates sale of land of the Company and out of the sale proceeds all the statutory creditors, secured creditors, unsecured creditors and other creditors and workmen are being paid their dues to the fullest extent. In our opinion the judgment of the learned Company Judge proceeds on entirely wrong premise that the scheme is not for revival of the Company. In our opinion the scheme having been sanctioned by more than the requisite majority of different classes consisting of members and creditors, function of the Court was limited to examine the validity thereof as enumerated in Miheer H. Mafatlal's case (supra). 34. Mr. Chinoy also placed reliance on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vement Trust. The application filed under section 20 of the ULC Act was rejected by the State Government. The Division Bench by the impugned judgment set aside the order of the State Government rejecting the exemption and directed the Special Officer, appointed by the Court to transfer and hand over the vacant possession of the land declared surplus under the ULC Act to Chatterjee Management Service (P.) Ltd. on receipt of Rs. 3.90 crores and laid down the modality of utilization of the said amount for revival of the Company. In appeal filed by the State of West Bengal the question before the Supreme Court was whether the directions given by the Calcutta High Court were supportable in law and the Court observed in para 13 as follows : "13. The aforesaid question calls for a discussion on the jurisdiction of the Court to pass an order approving the proposed sale as well as the propriety of such order. Coming to the first aspect, it is difficult to comprehend, under what jurisdiction the Court had passed the order and issued the directions referred to supra. The High Court did not refer to any provision of the Companies Act under which the order in question was passed nor did the 2n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection given in the order was to pay the amount of one crore or so to the 2nd Respondent-Company ostensibly for the purpose of restarting the industry. How to ensure proper utilization of that money - nothing is mentioned in the order. No provision for monitoring the revival has been made. At the same time all the pending proceedings were terminated. There can be no doubt that the Division Bench out-stepped the limits of its jurisdiction and passed orders of the extraordinary nature." [Emphasis supplied] 35. We fail to appreciate as to how the above decision supports the submission of Mr. Chinoy. In fact in a way the underlying observations of the Supreme Court support the case of the appellants that there can be a scheme for revival of a Company by sale of the part of its assets. On this aspect the Court has clearly observed that a scheme for sale of the part of the assets of the Company could be passed only under sections 391, 392 read with section 394 of the Companies Act in which a definite procedure prescribed for sanctioning the scheme or arrangement is mandatory and that procedure was not followed in the above case. The Court has nowhere stated that the assets of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme in respect of sick company which was sanctioned by the Court, after the same was approved by the unsecured creditors with which arrangement/compromise was sought. The appellants, i.e., Guptas, had opposed the scheme being sanctioned. After the sanction, the Guptas acquired controlling interest in the holding company (i.e., original sponsor) and, therefore, the Guptas moved an application before the Court for being substituted for the holding company as sponsor. This was opposed by the Jain group who did not have the controlling interest in the holding company although they supported the scheme when the scheme was sanctioned and they prayed that the sick company should be wound up. The Court held that Guptas had a subsisting and vital interest in the fate and future of the sick company and they were the appropriate persons who could be substituted in place of the holding company. The Court did this as it was found necessary for proper working of the scheme earlier sanctioned. This is clear from the following observations of the Court: "When a scheme is being considered by the Court, in all its ramifications, for according its sanction, it would not be possible to comprehe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary, to modify the scheme for the proper working of the compromise or arrangement. The only limitation on the power of the Court, as already mentioned, is that all such directions that the Court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement." [Emphasis supplied] (p. 351) 38. The decision of the Gujarat High Court in National Dairy Development Board's case (supra) is also clearly distinguishable on facts. There the Company, viz., Bhavnagar Vegetables Pvt. Ltd. had incurred huge loss and one of the creditors instituted a petition under section 434, read with section 439 of the Companies Act, for winding up of the said Company and the petition was admitted. In the course of proceedings, a scheme for compromise/arrangement was submitted by the appellant Tungabhadra Industries Ltd. (TIL). Before the said scheme could be sanctioned under section 391 of the Act, National Dairy Development Board (NDDB) proposed a scheme of its own and thus there were in the field two Schemes. The scheme submitted by TIL was accepted by requisite majority and a petition was instituted for sanctioning the sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is nothing in S.K. Gupta's case (supra) which would go to suggest that sanctioning of a scheme of the original sponsor is a condition precedent for exercising power of substitution under section 392 of the Act and that such substitution can only fall on the heels of sanction accorded to the scheme proposed by the original sponsor in which original sponsor figures as party to the compromise. The power of modification by substituting one sponsor by another could be exercised by court at any point of time when the question of sanction of a scheme arises. It is thus seen the Court allowed substitution as the original sponsor withdrew from the scheme and without substitution the scheme would have failed leading to closure of the Unit. 39. In the instant case, the scheme was not opposed by any person interested in the scheme even before this Court and all concerned parties have supported the scheme. Once the court is satisfied that the requisite statutory procedure has been followed and the scheme is backed by requisite majority and majority decision is just and fair and the scheme is not found in violation of any provisions of law, it is not permissible for the Court to perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be necessary for the company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme which is sanctioned by the Court. Not only is section 391 a complete code as held by the Courts, but, in my view, it is intended to be in the nature of a 'single window clearance' system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the Court for various other alterations or changes which might be needed effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged by the Court under section 394 of the Act." (p. 299) 41. In our opinion the interveners have no locus standi in the present proceedings under section 391 read with section 393 of the Companies Act. The interveners are neither the shareholders nor the creditors of the Company and there is nothing to show that they are interested in the affairs of the Company. In a scheme under sections 391 and 393 of the Act, the person who is not a creditor or a shareholder of the Company, has no right to appear ..... 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