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TMI Blog2015 (2) TMI 689X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. It has also expressed the view that in the absence of any proceeding, the status of the company as a secured creditor continues. After registration of the deed of hypothecation, if a condition subsequent is not satisfied, that would be in a different realm altogether. In any case, the finding has been recorded that the respondent was not at fault and, in any case, that would not change the status of the appellant as a secured creditor. In view of the aforesaid analysis, we are of the considered opinion that the appellant cannot be treated as an unsecured creditor and it is not permissible for him to put forth a stand that it would not be bound by the Scheme that has been approved by the learned Company Judge. Decided against appellant. - CIVIL APPEAL NO. 2701 OF 2006 - - - Dated:- 9-1-2015 - ANIL R. DAVE AND DIPAK MISRA, JJ. JUDGMENT Dipak Misra, J. BPL Limited, the respondent herein, was incorporated under the Companies Act, 1956 (for brevity 'the Act ) and on 16.4.1963, certificate of incorporation in the name of the company as British Physical Laboratories India Pvt. Ltd. was issued. The company became deemed public company and the word Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or approval of compromise or arrangement proposed to be made between companies and the creditors. The second prayer had been made for orders governing the procedures to be complied with. There were 15 respondents. After the application was filed forming the subject matter of MCA No. 84 of 2004 notices were issued and many financial institutions filed their counter affidavits/objections. The present appellant, Infrastructure Leasing Fin. Services Ltd., which was the 8th respondent, filed its counter-affidavit and in it, had raised objections to the prayer for stay of various proceedings before number of forums including Debt Recovery Tribunal, etc. on the foundation that the Memorandum of Association of the company does not authorise it to enter into any arrangement as proposed; that the scheme concealed more than it revealed, for when such a drastic transformation was taking place it was imperative that there had to be exhaustive disclosure; that the application filed under Section 391 of the Act was totally silent as to how and on what basis the valuation of ₹ 368 crores had been arrived at, which agency had done the valuation and at whose instance the valuation was done; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal; that the company Court in exercise of power under Section 391(6) has no jurisdiction to stay the criminal proceeding initiated under Section 138 of the Negotiable Instrument Act or the proceeding pending before the Debt Recovery Tribunal under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; that it is for the creditors at the first instance to consider the scheme proposed and only the approved scheme by the required majority is to be considered by the court for grant of sanction under Section 391 (2) of the Act; that there is a distinction between Section 391(1) and 391(2) of the Act regard being had to the language employed therein and if the contentions mentioned in the proviso to sub-Section (2) of Section 391 of the Act had to be considered at the stage of Section 391(1) that will amount to reading the latter provision to the earlier one; and that the distinction which has been set forth in various sub-Sections have to be appositely understood because there are various phases till the scheme is approved and each stage has its own room to operate. After so stating the court referred to the stand of the 8th respondent an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licant-Company in favour of the 8th respondent is an instrumental creating a charge and amount secured is contained as ₹ 150 millions. It shows that the above charge was registered with the Registrar of Companies as per the provisions of the Companies Act. Annexure-Z is From No. 13 in which the amount secured is shown as ₹ 150 million. Annexure-AA is the letter of consent by the 8th respondent which shows that the 8th respondents has offered for providing short-term loan facility upto ₹ 150 million and the term loan facility is enclosed in the Annexure. The loan facility availed by them to the BPL Ltd. is also to be considered as part of the above-mentioned facility. Annexure-AA attached therein would show that the lender is 8th respondent and the borrower is BPL Ltd. and the purpose for which the loan advanced is to meet working capital requirements and the security offered is first and exclusive charge on receivables of Hewlett Packard (India) Ltd. It is also seen that the applicant-Company has to undertake to complete all formalities towards creation of charge and the escrow arrangement within 30 days from the date of disbursement. The proposal made even as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have only been possible between a company and its creditors or any class of them, and when an application was filed before the court, where it had been possible to find out that the arrangement was not intended to be made with a homogeneous class, the court should have accepted the objection so raised. It was also urged, ignoring the same, a binding order, could not have been issued. It was contended that the meeting was proposed to be held between the company and its secured creditors and even if it was to be presumed that the appellant initially was a secured creditor, it had been disrobed of the said status consequent to subsequent developments, including an arbitration award, well before the application came to be filed in the court. 9. The appellant argued that though as required by the hypothecation deed, Form Nos. 8 and 13 thereof had been submitted before the Registrar of Companies, yet no further action was taken by BPL Ltd. to fulfil the agreed arrangement between the parties. It was asserted that as per the deed of hypothecation, the borrower was obliged to open an escrow and no-lien account with a designated bank, and was to undertake to deposit all the receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally devoid of any merit; that the scheme or arrangement was approved in the meeting of the secured creditors held by the Chairman and the appellant company had been issued a substantial sum but it had refused to accept the same; that the appellant remained a secured creditor for all legal purposes and hence, it was bound by the scheme in question. 13. The Division Bench adverted to the deed of hypothecation executed by the BPL in favour of the appellant company and opined that the appellant-company had failed to take follow up action to get an escrow account; that the formalities relating to creation of charge had been duly followed; that in the arbitration award there was no reference that BPL had agreed to lift the charge created; in the absence of the agreed position that the charge be got lifted, and the appellant continued to be a secured creditor and passing of the arbitration award did not create any change in the status. 14. The Division Bench appreciating the contentions further came to hold that the appellant was a secured creditor after the hypothecation deed was executed; that once the charge had been created it continued to bind the parties till steps were regre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Giri, learned senior counsel appearing for the respondent, resisting the aforesaid proponements, would submit that the arbitral award, whether passed on consent or on contest, has the status of a decree but such a decree does not extinguish the charge and thereby does not disrobe the status of a secured creditor. Learned senior counsel would contend that despite the relinquishment made by the appellant, it would not take away the legal status conferred by it in law. Emphasis has been laid on the issue of registration before the Registrar under Sections 138 and 139 of the Act and how the record establishes that the status and the arbitral award will not change the registered status. It is contended by Mr. Giri that by no stretch of imagination, the principle of resjudicata would apply to the case at hand, for the proceedings are of different nature. He would also urge that the lis would not be hit by the bar created under Order II, Rule 2 of the CPC. Learned senior counsel has commended us to the decisions in Lonankutty v. Thomman and Another (1976) 3 SCC 528, Harbans Singh and others v. Sant Hari Singh and others (2009) 2 SCC 526, and Indian Bank v. Official Liquidator, Chemmeens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company under Sections 235 to 251, and the like. ** ** ** 393. (1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under Section 391, - (a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular, stating any material interests of the directors, managing directors, managing agents, secretaries and treasurers or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and insofar as, it is different from the effect on the like interests of other persons; and (b) in every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. 19. Sub-Section (1) of Section 391 stipulates that a compromise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the company concerned, has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned and further the Court has neither the expertise nor the jurisdiction to dig deep into the commercial wisdom exercised by the creditors and the members of the company who have ratified the scheme by the requisite majority. The Court eventually held that it has the supervisory jurisdiction which is also in consonance with the language employed under Section 392 of the Act. In that context, the Court referred to the observations found in the oft-quoted passage in Buckley on the Companies Act, 14th Edn. It is as follows: In exercising its power of sanction the court will see, first that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following broad contours of such jurisdiction have emerged: 1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 sub-section (2). 3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the meetings concerned as contemplated by Section 391 sub-section (1). 5. That all the requisite material contemplated by the proviso of sub-section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant taking the risk that the classes which are fixed by the judge, usually on the applicant's request, are sufficient for the ultimate purpose of the section, the risk being that if in the result, and we emphasize the words 'in the result', they reveal inadequacies, the scheme will not be approved'. If, e.g., rights of ordinary shareholders are to be altered, but those of preference shares are not touched, a meeting of ordinary shareholders will be necessary but not of preference shareholders. If there are different groups within a class the interests of which are different from the rest of the class, or which are to be treated differently under the scheme, such groups must be treated as separate class for the purpose of the scheme. Moreover, when the company has decided what classes are necessary parties to the scheme, it may happen that one class will consist of a small number of persons who will all be willing to be bound by the scheme. In that case it is not the practice to hold a meeting of that class, but to make the class a party to the scheme and to obtain the consent of all its members to be bound. It is, however, necessary for at least one class meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued; that there was a postulate that in case of default of payment of any instalment, the entire amount may become due and payable and the appellant would be entitled in law to execute the award for recovery of the entire due without prejudice to and in addition to entitlement to institute criminal proceedings under the Negotiable Instruments Act; that the respondent failed to pay the first instalment of ₹ 17,500,000/- on or before 30.09.2004; that on 30.09.2004 the respondent filed a petition under Sections 391-394 of the Act for sanction of the scheme; that the appellant initially filed objections to the scheme in the form of a counter affidavit on 25.11.2004 on merits and thereafter at a subsequent stage on 20.1.2005 filed an additional affidavit stating, inter alia, that it was an unsecured creditor; that an affidavit was filed in oppugnation asserting that the appellant was a secured creditor, regard being had to the hypothecation deed and the registration having been effected with the Registrar of Companies; that meeting of the secured creditors and guarantors was held on 6.4.2005 and a Chairperson was appointed; that the said order was challenged by IndusInd Bank Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement as annexed in Annexure D1 to the petition. (iv) The total outstanding debt of the petitioner company to all is Secured Creditors and Preference Shareholders as of 31.03.2003 of the petitioner Company shall be restructured under the scheme of arrangement and all rights and liabilities relating to such outstanding debt to secured Creditors and Preference Shareholders as of 31.03.2003 shall stand created under the Scheme of Arrangement. In addition, the petitioner company and the Secured Creditors and Preference Shareholders shall enter into any documentation that may be required, only to give formal effect to the restricting and for the modification of the security contemplated by the Scheme of Arrangement, and to govern the prospective/ongoing relationship between the petitioner Company and its Secured Creditors and Preference Shareholders (including covenants of the petitioner company, supervision of the management of the petitioner Company, Event of Default etc). However, upon the Scheme of Arrangement coming into effect, in the absence of the formal documentation referred to above, the rights obligations and privileges of the petitioner Company and the Secured Credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples enshrined under Order II, Rule 2 as well as by resjudicata. It is urged by him that the claim of the appellant company having been heard and decided in a formal proceeding, i.e. the arbitration, it is binding and, therefore, the principle under Order II, Rule 2 would come into play. For the said proposition, he has drawn inspiration from Deva Ram (supra). The Court, after analyzing the Order II, Rule 2 CPC, observed thus: A bare perusal of the above provisions would indicate that if a plaintiff is entitled to several reliefs against the defendant in respect of the same cause of action, he cannot split up the claim so as to omit one part of the claim and sue for the other. If the cause of action is the same, the plaintiff has to place all his claims before the court in one suit as Order II Rule 2 is based on the cardinal principle that the defendant should not be vexed twice for the same cause. 31. In that context, reference was made to Palaniappa Chettiar v. Alagan Chettiar AIR 1922 PC 228. The Court also observed that the Rule requires the unity of all claims based on the same cause of action in one suit but it does not contemplate unity of separate causes of actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicability of Section 125 had to be decided on the terms of the decree - whether the unregistered charge created by the mortgagor was kept alive or extinguished or replaced by an order of sale created by the decree; if upon a construction of the decree, the Court found that the unregistered charge was kept alive, the provisions of Section 125 would apply and if, on the other hand, the decree extinguished the unregistered charge, the section would not apply. We are in respectful agreement with that principle. We hold that a judgment-creditor will be entitled to relief from the Company Court accordingly. 33. Relying on the said passages, it is urged that when the award has been passed on consent and has the status of a decree that makes him an unsecured creditor, for it has attained finalilty. To appreciate the said submission, the quoted passages are to be appositely appreciated. As is evident, this Court has concurred with the view expressed by the Bombay High Court in Suryakant Natvarlal Surati (supra). The Division Bench of the Bombay High Court had opined that the question of applicability of Section 125 of the Act has to be decided on the terms of the decree - whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts including the last installment on the due date for any reason whatsoever, the entire dues together with interest as provided on Clause I hereinabove and outstanding due and payable by the Respondents to the Claimants as on that date shall become forthwith due and payable by the Respondents to the Claimants and the Claimants shall be entitled to forthwith execute the Award against the Respondents and recover the entire dues. In that even, any installments/s paid under Clause 2 will be first appropriated towards the interest payable under Clause I without prejudice and in addition thereto, the Claimants shall also be entitled to institute criminal legal proceedings against the Respondents including for dishonor of cheque/s under the provisions of the Negotiable Instruments Act, 1881. In view of the aforesaid conclusions, in the award, we have no scintilla of doubt that the decision in Official Liquidator, Chemmeens Exports (P) Ltd. (supra) is distinguishable. 34. In this backdrop, we are to analyse whether the deed of hypothecation would continue in spite of the arbitration award. Mr. Divan submitted that it would not survive because of the provisions contained in Order II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of mortgage. There was an attempt to enforce the mortgaged property in the execution proceeding but the same was rejected as no decree of mortgage has been passed. Thereafter, the Bank, the respondent therein, instituted another suit for enforcement of equitable mortgage. The second suit was held to be maintainable, regard being had to the language employed in Rules 14 and 15 of Order XXXIV, holding, inter alia, that said Rules had been enacted to protect the mortgagor, etc. and, therefore, the plea of constructive resjudicata relying upon Order II, Rule 2 of the Code was erroneous. The two-Judge Bench held that for Order II, Rule 2 to apply, the cause of action in the two suits should be similar and the bar of constructive resjudicata, as was held, was not applicable. Analysing the facts, the Court held: That apart, the cause of action for recovery of money based on a medium-term loan transaction simpliciter or in enforcement of the hypothecation of the bus available in the present case, is a cause of action different from the cause of action arising out of an equitable mortgage, though the ultimate relief that the plaintiff Bank is entitled to is the recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order II Rule 2 of the Code can be established only if the defendant files in evidence the pleadings in the previous suit and thereby proves to the court the identity of the cause of action in the two suits. In other words a plea under Order II Rule 2 of the Code cannot be made out except on proof of the plaint in the previous suit the filing of which is said to create the bar. Without placing before the court the plaint in which those facts were alleged, the defendant cannot invite the court to speculate or infer by a process of deduction what those facts might be with reference to the reliefs which were then claimed. On the facts of this case it has to be held that the plea of a bar under Order II Rule 2 of the Code should not have been entertained at all by the trial court because the pleadings in Civil Suit No. 28 of 1950 were not filed by the appellant in support of this plea. (ii) In order that a plea of a bar under Order II Rule 2(3) of the Code should succeed the defendant who raises the plea must make out (i) that the second suit was in respect of the same cause of action as that on which the previous suit was based; (ii) that in respect of that cause of action the plai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so drawn our attention to Harbans Singh (supra) wherein it has been held that when no appeal was preferred by the Union of India, while accepting the award in favour of the first respondent therein, it had attained finality and thus the principle of resjudicata was applicable. Reliance has also been placed on Ranganayakamma (supra). 38. The said plea has been advanced on the foundation that the controversy between the parties having been finally put to rest by the arbitral award, the respondent would not have dragged the appellant to the said proceeding as that would vex him twice. The issue before the Company Court was quite different than that was before the Arbitral Tribunal. True it is, it has the status of a decree which is executable, as a decree having gone unchallenged, but the lis of framing a Scheme under the Act is of different character. It could not have been directly or substantially in issue before the learned Arbitrator. That apart, we have already held the status of the appellant as a secured creditor has not changed. Therefore, in our considered opinion, the plea of resjudicata which has been canvassed by the learned senior counsel for the appellant does not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and ought not to be enlarged by any implication of English doctrines. On this they agree with the learned Judges of the High Court. 40. He has also drawn inspiration from Jagad BanduChatterjee (supra), wherein after referring to the observations of Lord Russell of Killowen in Dawson'sBank Limited V. Nippon Menkwa Kabushiki Kaisha 62 IA 100, 108 and the well known work of Sir William P. Anson Principles of the English Law of Contract , 22nd Edn., the Court opined thus: In India the general principle with regard to waiver of contractual obligation is to be found in Section 63 of the Indian Contract Act. Under that section it is open to a promisee to dispense with or remit, wholly or in part, the performance of the promise made to him or he can accept instead of it any satisfaction which he thinks fit. Under the Indian law neither consideration nor an agreement would be necessary to constitute waiver. This Court has already laid down in Waman Shriniwas Kini v. Ratilal Bhagwandas Co. (1959) Supp 2 SCR 217, 226 that waiver is the abandonment of a right which normally everybody is at liberty to waive. A waiver is nothing unless it amounts to a release. It signifies no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it clear that it is the discretion of the pawnee and it gives an option to him and merely because pawnee has filed a suit for recovery, that would not affect or destroy the charge or the right of the pawnee in respect of a pledged goods or the collateral security. Thus, it is within the domain of discretion of pawnee to file a suit for recovery of a debt and yet retain the collateral security or pledged goods. It would not bar or prohibit a pawnee from subsequently selling the pledged goods or the collateral security. It is pertinent to mention here that there is a difference between a hypothecation and a pledge. In the case of a pledge, the security is in possession of the pledge, but in the case of hypothecation, the possession remains with the owner i.e. the pawnor. Though such a distinction exists, yet it is an accepted legal principle that hypothecation is treated as a sub-species of pledge and virtually has the same legal effect. In this context, reference to a passage from Lallan Prasad v. Rahmat Ali and another AIR 1967 SC 1322, would be seemly. 17. There is no difference between the common law of England and the law with regard to pledge as codified in sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in a suit for recovery of debt by the pledgee, the pledge denies the pledge or is otherwise not in a position to return the pledged goods he has to give credit for the value of the goods and would be entitled then to recover only the balance . 43. More than eight decades back, the Bombay High Court in Gulamhusain Lalji Sajan V. Clara D'Souza AIR 1929 Bom. 471, while dealing with the applicability of Section 176 of the Contract Act to a case of hypothecation, had opined thus: Under S.176, Contract Act, the pledge has a right to bring a suit against the pledgor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged in giving the pledgor reasonable notice of the sale. It is clear under the law applicable to cases of a pledge that the creditor has two rights which are concurrent, and the right to proceed against the property pledged is not merely accessory to the right to proceed against the debtor personally. For the pledge may have a right to sue for sale of the property even in the absence of a right to sue for a personal decree. The same principles would apply to the case of hypothecation or mortgages of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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