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1968 (4) TMI 79

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..... t, 1965. In consequence the working of the mills stopped as from the 6th of August, 1965. On the 16th August, 1965, an agreement was arrived at between the Singhania group and another group, which for the sake of convenience and brevity we shall call the Jalan group . The principal persons in this group are Sanwarmal Todi, Jagannath Agarwal, K. M. Goenka and Nandlal Jalan. The agreement was that the Jalan group was to buy over the controlling shares belonging to the J.K. group and thus obtain the control and management of the company. We will presently refer to the detailed terms of this agreement but for the time being it may be stated that the Singhania group had agreed to sell 25,625 ordinary (equity) shares of ₹ 100 each which they owned to the Jalan group at a price of ₹ 10 per share payable in a certain manner and on completion of the transaction the directors of the Singhania group were to resign as the directors of the company as the Jalan group would direct. By the agreement the secured and unsecured creditors of the company were divided into four categories and provision was made for the repayment of the debts of the four categories. Of these, the first categ .....

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..... e between them. A suit came to be filed in the city civil court and on the 27th February, 1967, Company Application No. 14 of 1967 was presented before this court by Messrs. J. K. Private Ltd., Bombay. That application was by way of a judge's summons praying inter alia that Nandlal Jalan, Sanwarmal Todi, Jagannath Agarwal and K. M. Goenka (the Jalan group) should be ordered to pay forthwith to the J.K. group the first instalment payable under the scheme sanctioned on the 17th February, 1966. That application was supported by an affidavit in which the J.K. group made strong allegation against the new management of the Kaiser-I-Hind Mills (the Jalan group) and alleged that they were backing out of the agreement which ought to be enforced against them and the company. That application was argued before Mr. Justice Thakkar on several days between 12th June, 1967, and 16th June, 1967. In the meanwhile the new management - (the Jalan group) - closed down the mills on the 14th June, 1967, alleging that they had no funds to run the mills and it was impossible to carry on the company. The Company Application No. 14 of 1967 contained prayers for several reliefs Nos. (a) to (u), but in th .....

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..... ication praying that the scheme should not be sanctioned and that the company, which was in a commercially insolvent condition and unable to pay its debts should be wound up. That application was obviously under section 392(2) of the Companies Act, and it is application No. 19 of 1967. 5. All these applications came up for hearing before Mr. Justice Vimadalal and by an order passed by him on the 6th November, 1967, he allowed the Company Application No. 14 of 1967, and ordered the Jalan group to comply with the conditions of the scheme and passed other ancillary orders. By a separate order he dismissed the Company Application No. 21 of 1967 for the winding-up of the company under section 392(2) of the Companies Act. 6. Against the allowance of Company Application No. 14 of 1967, two appeals have been filed in this court, one by the creditor, Lalji Thakersey and Co. being Appeal No. 96 of 1967 and the other by the company itself, being Appeal No. 97 of 1967. Against the dismissal of Company Application No. 21 of 1967, namely, the company's own application for winding it up under section 392(2) of the Companies Act, the company has filed Appeal No. 98 of 1967. We have alrea .....

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..... Mody dated 17th February, 1966, and the operative part of the order recites. THIS COURT DOTH PASS JUDGMENT AND DOTH HEREBY SANCTION the compromise or arrangement set forth in paragraph five of the petition herein with certain modifications as approved by this Hon'ble Court and which compromise or arrangement with the said modifications is set out in the schedule hereto annexed AND DOTH HEREBY DECLARE the same to be binding on the unsecured creditors of the said company and also on the said company ...... The scheme recites that there were secured and unsecured creditors of the company, the secured creditors being the Punjab National Bank Ltd., who had advanced loans against the pledge and hypothecation accounts and demand loans secured by goods or mortgage of the fixed assets and pledge account with Messrs. R. Ratilal and Co. secured by cotton and that both these accounts shall be continued by the company. The unsecured creditors have been divided into four categories, their debts aggregating to ₹ 1,01,39,900. The first category comprised the concerns of the J.K. group. The second category aggregating about ₹ 10,33,000 comprised public authorities to whom amounts .....

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..... e whole of this arrangement was subject to the Controller of Capital Issues granting section to the second mortgage being created by the company in favour of the J.K. group. 12. This provision of the scheme has to be read along with the agreement which is referred to in clause (ii) of category I. That agreement is exhibit A and is entered into between Gopalkrishna Singhania called the vendor (J.K. group) and the three members of the Jalan group, Nandlal Jalan, Sanwarmal Todi and Jagannath Agarwal called the purchasers. The agreement provides that the Jalans were to purchase the 25,625 ordinary shares owned by the J.K. group in the New Kaiser-I-Hind Spg. Wvg. Co. Ltd. and that the purchase price of the shares will be ₹ 10 per share. It also provides that the vendor, namely, the J.K. group, shall procure and accept the appointment of such persons as directors of the said company as the purchasers shall direct and that the J.K. group will also procure the consent and confirmation of the various creditors whose names are set out in schedule B. If the company secures the amount due to the vendors by a second legal mortgage, the vendors, J.K. group, agreed that they will not .....

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..... e filing of the Application No. 14 of 1967, but at the hearing various other affidavits and documents were read. At the outset Mr. Bhatt on behalf of the J.K. Group wanted that each appeal should be heard separately and that the parties should not be allowed to refer to any pleading or affidavit or document in any other appeal. At any rate, he urged that Appeals Nos. 96 and 97 which arise out of the Application No. 14 of 1967, should be heard separately and Appeal No. 98 should be heard separately because it arose out of the Application No. 21 of 1967. At the hearing, however, we had over-ruled this objection of Mr. Bhatt and had informed counsel that we would give our reasons later. We are unable to accept this contention of Mr. Bhatt for the simple reason that the conduct of all these matters was not kept separate before the learned single judge and in his own orders also the learned single judge has referred to his findings in the other orders. In his order on Company Application No. 14 of 1967, paragraph 1, the learned judge observed as follows : Before I do so, it may, however, be mentioned that the parties have freely referred to affidavits filed in the different applica .....

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..... Thus the scheme has been partially implemented and now the company and the new management are dishonestly backing out. They have made allegations of deliberate mismanagement and maneuvering against the Jalan group and of having gone back upon their representations to the court made at the time when the scheme was sanctioned. They have pointed out that at the time when the scheme was to be sanctioned the Jalan group had painted a very rosy picture before the company court and made it appear that the company could be worked and the scheme satisfactorily implemented, but having got into the management and control, they have turned round, taken the assets of the company; converted them into cash and have diverted them to their own friends or partisans; deliberately brought the company into the state in which it is to-day. The most paying part of the company's business, viz., the processing plant has been leased out to Badri Prasad Jhunjhunwala and others on very liberal terms, thus causing great loss to the company. Having deliberately brought about such a position they should not be allowed to back out of the scheme, because of the position they have themselves induced. Particula .....

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..... he held that the allegation which the new management had made against the old management of fraud had not been made out and that in any case the frauds alleged by the new management were merely committed by certain individuals and the company could not possibly be affected by any acts of fraud which some individuals, who were at one time in the management of the mill-company, are alleged to have committed on that company. At any rate, the pleading as to fraud on the part of the Jalan group was wanting in particulars and was too vague and general to be considered. He observed that, it was not a proper pleading of fraud at all and does not show that the new management has acquired any definite personal knowledge of the acts of fraud alleged by it against the old management. He also accepted the contention of counsel that the company is incapable of perpetrating a fraud . He Further held that assuming that the old management had committed the frauds alleged against it, the proper remedy of the new management is not to scuttle the scheme on that ground, but to take proceedings under the appropriate provisions of the Companies Act against the individuals who committed those frauds .....

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..... which the new management had given. 21. In his order passed in Company Application No. 21 of 1967, the learned judge dealt with the question of the unworkability of the scheme and negatived the contention of the Jalan group that the company was commercially insolvent and that it was impossible to implement the Scheme. He came to the conclusion that it is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme and that the mere fact that, in view certain difficulties, it may not be possible to work the mill for sometime, would not justify a winding-up order under section 392(2) . He reiterated that it was the Jalan group which had deliberately tried to create a situation in which they could come forward and say that the scheme was unworkable, so that they may not be required to bring in any further finances for ruining the mills. Finally he ordered that on considering the facts discussed by me above, I have come to the conclusion that, if the new management brings in the necessary funds, which it has undertaken to do under the provisions of clause (4) .....

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..... to do so. The orders which the learned Judge passed are clearly unsustainable and impossible to be implemented in practice, because unless finance is forthcoming the mills cannot run. He also urged that the company was in a hopelessly insolvent condition and was so even on the date on which the scheme was sanctioned by Mr. Justice Mody, a fact which the learned judge himself recognised in the order which he passed. At that time all the parties expected that the company may turn the corner but that expectation has failed. He took us through the pleadings of the parties and through a considerable volume of correspondence which had been filed by the company to show what steps it took to revive the company and what its condition is, to show commercial insolvency. He contended that the scheme is unworkable and is impossible to be implemented and at any rate the application No. 14 of 1967 is an application praying that the scheme should be implemented partially in favour of the J.K. group and that ought not to be permitted having regard to the circumstances here. He also raised the issue, decided against him, that the agreement to transfer the management shares is illegal having regard .....

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..... it to be a very profitable and paying unit before Mr. Justice Mody but now they say that it was a burden to the company and therefore it was leased out to Jhunjhunwalla, much to the detriment of the interests of the company. He controverted the contention that the scheme was unworkable in itself or in any way illegal. On the other hand, he alleged that the new management was estopped from urging that the scheme was illegal or unworkable, by the order of Mr. Justice Mody sanctioning it and that the creditor, Lalji Thakersey and Co. who have obtained advantage for themselves cannot now be allowed to go back and challenge the scheme. He also urged that the J.K. group under the agreement itself had become secured creditors or at least charge-holders and that therefore they could not be defeated simply because the Company was being wound up. Alternatively, he urged that the J.K. group were already secured creditors and in any event he prayed that the charge of the J.K. group should be recognised even though the company be wound up. He also urged that the company cannot apply for winding up without a proper resolution passed by its shareholders. 27. Now, both the Applications Nos. 14 .....

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..... court is given the power to supervise the carrying out of the compromise or arrangement and (2) if the scheme cannot be worked as it is, then, the court has the power (a) to give such directions as it may consider necessary for the proper working of the compromise or arrangement or (b) make such modifications in the compromise or arrangement as it may consider necessary also for the proper working of the compromise or arrangement. These are the powers conferred by sub-section (1) which contemplates only the working of the scheme or working it with directions and modifications. 30. But there may be a case where despite a scheme, the scheme cannot at all be worked satisfactorily with or without modifications. That case is contemplated in sub-section (2) and in such a case the court is given the power to make an order winding up the company and if it passes such an order that order is deemed to be an order made under section 433 of the Act. The power moreover can be exercised by the court either on its own motion or on the application of any person interested in the affairs of the company. In that view, much of the argument directed to attack of the application made by Lalji Tha .....

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..... z., the provisions of the agreement between the J.K. group and the Jalan group, exhibit A to the scheme and particularly schedule C thereto which lays down the principal terms of the second mortgage. In clause 4(d) of schedule C to the scheme, it is provided that in the event of the company obtaining a loan from certain Corporations or the Central or the State Governments or a State Corporation or any scheduled bank the company shall be entitled to create a first or prior charge over the fixed assets of the company upon such terms and conditions as may be agreed to between the company and the said financial institutions ......... It is also provided that in that event the security of the second mortgagees over the fixed assets shall be subject to the first or prior charge or mortgage in favour of the said financial institution and that subject only to the said first or prior charge no other terms or conditions of second mortgage shall be affected. It is clear from this provision that it was within the contemplation of the parties that the Jalans in order to provide the necessary finance were entitled to negotiate with the said financial institutions for loans. The provisions of .....

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..... fact that the new management has, in breach of the obligation undertaken by it under clause 4 of the scheme failed to invest any longer a single rupee by way of finance for the purpose of running the mills, I am not satisfied that the mills cannot be run for want of finance. 36. The words we have underlined clearly show that the learned judge thought that the new management was under an obligation to invest, that is to say, to provide the finance themselves and they had failed to do so. Therefore, the learned judge stated in the penultimate paragraph of his judgment It is true that, as things stand, the mills cannot be run, but that is a situation of the new management's own doings, and not one which arises out of the unworkability of the scheme , and he passed the final order : On considering the facts discussed by me above, I have come to the conclusion that, if the new management brings in the necessary funds, which it has undertaken to do under the provisions of clause 4 of the scheme ............. it will still be possible to run the mills and to carry out the provisions of the scheme. It will thus be seen that thought the learned judge noticed the remark of Mr. J .....

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..... the contemplation of the parties was that the new management should make provision for finance or arrange finance and that they could do it either by getting the finance from other parties or if they so chose by providing it by themselves. In that view we think that the learned judge erred in his construction of clause 4 and in the order which he passed. 39. The order, moreover, in our opinion, is incapable of being carried out and is incapable of supervision and enforcement. The new management, we shall, presently show, have stated that they made efforts to procure finance, were able to procure it to some extent, but not to the extent that the large indebtedness of the company required. They have also alleged that in this respect the J.K. group were responsible for foiling their efforts to procure the finance, and that the position of the company is such that no reasonable financier would advance moneys to such a company. We shall presently show that having regard to all the circumstances and the conduct of the parties this contention is borne out. 40. Bearing in mind the crucial fact that the new management had not themselves given a binding undertaking to provide finance t .....

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..... n. It is commercially insolvent and its substratum is completely gone. 43. The fact that it was insolvent on the date of the sanctioning of the scheme is virtually conceded even on behalf of the Singhania group as can be seen from the affidavit to Gopalkrishna Singhania dated 8th August, 1967, filed in answer to the Company's Petition No. 82 of 1967 under section 433 of the Companies Act (in Appeal No. 100 of 1967). In paragraph 9 this is what a person who was at that time a director and the chairman of the company says : I say that at the date of the said order dated 17th February, 1966, the petitioner-company was commercially insolvent and but for the obligation undertaken by the newly appointed directors to run the mills and to provide the necessary finance, this Hon'ble Court would never have sanctioned the scheme. The said scheme cannot be implemented and worked unless the said newly appointed directors provide the necessary finance. I say that the attitude now taken up by the newly appointed directors and at their instance by the petitioner-company constitutes a breach on their part of the said obligation ........... 44. It seems to us that in view of thi .....

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..... everal points and due to the dearness allowance being linked up with the cost of living index. (5) The devaluation of the Indian rupee had by then taken place and the prices of various items of stores particularly dyes and chemicals went up considerably. (6) Under these circumstances the company's machinery which was repaired and reconditioned could not be put to active use and all these factors affected the running of the unit which became uneconomic and the mills could only be run at a heavy loss of about ₹ 2,50,000 per month. (7) In the financial year ending 31st March, 1967, the company suffered an estimated loss of ₹ 28.44 lakhs according to the provisional balance-sheet. 47. These allegations have been denied on behalf of the J.K. group. They have denied that the company was unable to pay its debts and alleged that primarily the unsound financial position of the company was due to the failure of the new management to provide the necessary finance for running the mills. They have alleged that the newly appointed directors have so conducted the affairs of the company that they gradually withdrew all the available moneys from the company and diverted them to t .....

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..... Jhunjhunwalla and others and the whole agreement was made after the new management had negotiated with the Textile Commissioner as well as the excise authorities for separating the processing unit from the composite mill and after obtaining the sanction from the excise authorities. The compensation of ₹ 50,000 per month charged was not only adequate but was more than reasonable and the licensees were under the agreement with the company under an obligation in the first instance to process the entire production of the mill at costs. It is only for surplus capacity that may be available to the licensees for processing outside cloth that the licensees were paying a handsome amount of ₹ 50,000 per month to the company as monthly compensation for the use of the building and machinery of the process house. All the expenses such as water power, steam, wages, maintenance etc., were charge to the licensees separately. The working of the processing unit, according to the licensees, for eleven months showed a loss and not profit. 50. The director of the new management further alleged generally that As regards details of estimate of working of the petitioner-company given .....

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..... m 14th June, 1967, till to-day these overhead and capital charges must run into several lakhs of rupees. The company does not appear to have any reserve or other funds from which its indebtedness can be paid. Its machinery, which has been lying idle, will cost several lakhs of rupees to be put in order again. When the new management re-started the mills on 1st April, 1966, it cost the new management ₹ 5 lakhs to put 60% of the machinery, in order. We cannot imagine that any reasonable or prudent businessman would decide to sink money into or run such a mill. It is clear that the company is insolvent, its entire capital wiped out and its substratum gone. 52. Such correspondence as has been placed before the court shows how this position was reached. There is no doubt that from about September, 1966, there arose a crisis in the textile industry for want of Indian cotton and on 14th September, 1966, the Indian Cotton Mills Federation of Bombay passed several resolutions of which notice was given to all the mills (vide exhibit D). In their circular the Federation have stated : The committee of the Federation at their meeting held on 14th September, 1966, gave careful cons .....

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..... ained to stop working of III shift of the spinning department of the mills . 54. On the 23rd November, 1966, the Indian Cotton Mills' Federation pointed out several facts and in a press note stated that the total supply or cotton will be no more than 60 lakhs bales against the requirement of 66 lakhs and that this gap clearly brings out the necessity for reduction of spindle working by 10 per cent. at least . They also pointed out that the prices of cotton were ruling very high upto 50 per cent. over the ceiling and that sporadic closure of mills was taking place in various parts of the country for want of cotton. They announced that in order to meet the abnormal situation all mills in India should be closed for a period of 15 days from 19th December, 1966, to 2nd January, 1967, and as from 3rd January, 1967, there should be a reduced working of spindles in all the mills. They also blamed the cotton control for the situation that had arisen and urged that if the cotton control were lifted thereof would be prospects of a larger production of cotton. In a further circular issued on the 25th November 1966, the Federation withdraw its offer to compensate mills as closure due to .....

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..... oner, the company pointed out that they were carrying on with cotton of lesser count then they needed after they had put up a closure notice because of instructions of their Federation, and that they could only continue to work till the 10th of that month (December, 1966). The company by this letter informed the Textile Commissioner : Our mill is facing closure positively from 10th of this month when no stocks either in process or in godown will be left out except few bales of 60s count. This enforced working in last 20 days has been at the cost of process stock. We fail to understand as to how we shall keep the mills working since we have not received a single bale till to-day the 7th December, 1966, nor any requisition order. Your circular clearly indicates that no mill will be allowed to stop without prior permission in writing from your office. Hence we request you to accord your permission for closure from 10th until we receive the cotton of various counts as reported. In paragraph 6 of this letter the new management prayed that they should be permitted to work six days in a week instead of five days since we are not in a position to do so in view of our proposed reduced wo .....

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..... eiling and the difference was between ₹ 100 to ₹ 500 per candy depending upon the variety. They stated that they were given a definite assurance that cotton from the requisitioned stock would be allotted to them by Government, but till date not a single bale allotments has come. On enquiry, we have been told that officers are still busy in carrying out requisition at various centres and we shall soon get the news about the allotment . They confirmed also a telegram sent by them to the Commerce Minister at Delhi. The company also made it clear that this mill cannot sustain any further burden of loss beyond what we are already incurring. Still there seems to be no positive interest or response from any circle. This additional loss, if added, would make the total quantum very high and within the next one to two months we will have no working capital . They have even prayed that the labour union should be directed to forego lay-off compensation and let the labour also contribute to this calamity . On the 20th December, 1966, they again reiterated all these facts and prayed to the Commerce Minister that they should be exempted from the extra one day closure but on the 21s .....

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..... ia when the facts were clearly placed before your goodself and the position was explained that there is absolutely no stock of cotton in the mill and if permission is not granted, the mill will close down. Instead of any help, you intimated that in case we cannot manage to run the mill we may close down . The Additional Textile Commissioner must have known that this oral permission given by him could not be availed of in view of the Ordinance which had been passed earlier. The remaining correspondence (exhibit D) shows their efforts to continue to carry on. On the 16th April, 1967, there came into force the Essential Commodities (Amendment) Act, 1967, which replaced the Ordinance No. 13 of 1966 and virtually re-enacted its provisions with certain amendments (sic) closed down the mill but by that time Company Application No. 14 of 1967 had been filed. The mill was closed down while arguments in that application were going on. 61. All these letters were written in the ordinary course of business and do not appear to be inspired or motivated. Many of them have been replied to by the authorities concerned. The whole correspondence viewed in the light of the Ordinance and the orders .....

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..... h is making loss is made to suffer further. We demand proper justice failing which closure of this mill will be solely due to non-availability of raw material and any legitimate assistance from authorities which please note - New Kaiser-I-Hind Mills. 63. Thereafter it appears that a committee of the Federation met the Textile Commissioner and some sort of an assurance was given by the Textile Commissioner which the Federation communicated to all its members by its letter dated 3rd April, 1967, when 50 bales seem to have been allotted to this company, but even that was not of the quality which the company wanted. This is clear from another telegram dated 22nd April, 1967, to the Textile Commissioner and others : Having failed to obtain transport permit of 50 bales to-day and to get required types of cotton duly requisitioned in spite of several approaches to yours Mr. Viswanathan, Mr. Mathur and Mr. A. I. Fernandes we have to-day put up notice stopping third shift in spinning from Monday 24th until further orders , and in a letter written confirming that telegram the company made it clear that they were being allotted cotton of a quality which they did not require. Their lette .....

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..... not establish that till then the management could be blamed, which is a charge levelled against the new management by the J.K. group. The position of the company must have further deteriorated since the closure in April, 1967, for we are informed that further amounts of compensation to labour have accumulated and other liabilities in the shape of recurring charges have arisen. How such a company could possibly continue to work at a profit it is difficult to see. It is only it runs at a profit that the scheme can be implemented. 65. Next we turn to the charges levelled against the new management regarding the processing unit. This was made a major point in the arguments against the Jalan group and protracted arguments were addressed to us on it. It appears that soon after taking over the company, the new management represented to the Textile Commissioner an the excise authorities that they would like to separate the processing unit from the mill which till then was being run as a composite unit. The authorities considered the proposal favourably and permitted them to do so. Thereafter the new management entered into what they called a leave and licence agreement and what the J.K .....

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..... the period April 1, 1965 to March 31, 1967 the company is shown to have received by way of lease money a sum of ₹ 4,80,000 and the petitioner-company is shown to have paid to the processing unit, processing charges amounting to ₹ 21,77,000. Therefore it was urged that the net result was that the petitioner-company in the previous year earned a net income of ₹ 17,12,000 our of the processing unit but for the subsequent period April 1, 1966 to March 31, 1967 the company is alleged to have incurred a liability or debt of ₹ 17 lakhs in respect of the losses of the processing house. It was alleged that the business of the processing unit is being attended to by the son of Nandlal Jalan (the principal director of the new management) and the transfer is mala fide, fraudulent, illegal and invalid besides being in flagrant breach of the provisions of the sanctioned scheme. It was suggested that Badriprasad Jhunjhunwala and others were merely nominees of the directors of the new management. 67. These allegations have been denied with vehemence and in equally strong language by the new management, vide paragraph 22 of the affidavit dated 11th April, 1967, of Krishn .....

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..... , of Jagannath Agarwal, that the unit was a paying proposition the new management alleged that what they had stated there was an estimate and not an assurance or representation an alleged. They pointed out that the textile industry as a whole had been passing through very severe crisis due to the shortage of raw material, high cost of raw material and stores, higher wages and dearness allowance, depression in the sale of cloth rates, less export due to devaluation and several other factors. The new management after restarting the mills rationalised the spinning and weaving departments and also effected substantial economies. In spite of economies and for reasons and factors beyond the control of the new management the mill is runing at a monthly loss of ₹ 1 to 1 1/2 lakhs. The agreement entered into by the company with Badriprasad Jhunjhunwala and others is a leave and licence agreement and not a lease. They have denied the allegations of fraud, invalidity, illegality and mala fides. They also made an offer that they were ready and willing to offer the working of the processing unit to Gopalkrishna Singhania on a leave and licence agreement similar in terms and conditions to .....

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..... spend on colours, chemicals, dyes, labour, electricity, water, licence, compensation and other overheads, with regard to the processing unit. The learned judge treated this as a bare denial amounting to no denial at all and therefore held that the affidavit of Gopalkrishna Singhania dated 8th August, 1967, remained unrefuted. Another reason which prevailed with the learned judge in coming to this conclusion was that the affidavit of Goenka is : Scrupulously silent on the question as to what was the amount which the company had to spend during that year for running the processing unit. As to that it has been explained before us that after the company was closed down the premises of the company had been taken procession of by the workers who are squatting on the premises and will not allow anyone from the management to enter or remove any thing from the premises. The workers are doing this pursuant to their claim to arrears of wages, retrenchment compensation and other claims which they have been trying to enforce by violence and threats of violence. On several occasions prior to the closing down of the mills the directors of the new management were confined for several hours .....

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..... n all towards the reduction of the loan or for the clearing up of the balance of the cash credit account. The amount was deposited by Sushil Investments (Pvt.) Ltd. Though a subsequent affidavit was filed by Gopalkrishna Singhania by way of rejoinder on the 24th April, 1967, paragraph 11 of Goenka's affidavit was not specifically replied to see paragraph 18) and we accept the statements in Goenka's affidavit. But we do not think that these allegations and counter allegations are of much relevance since in our view there was no binding obligation or duty under-taken by the Jalans to pay anything to the company or to compulsorily provide finance. 71. Then we turn to some of the legal objections to the implementation of the scheme. It was urged on behalf of the creditor Lalji Thackersey and Co. and by the company itself in Appeal No. 97 of 1967, that the agreement to transfer the management shares in favour of the J.K. group was itself illegal having regard to the provisions of the Securities Contracts (Regulation) Act (Act No. 42 of 1956) and, therefore, the scheme as a whole must fail because an integral part of it, which cannot be separated from the rest of it, is render .....

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..... ection (2) of section 392 subject to conditions therein stated that the compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications , or the court may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company. When such an order to wind up a company is passed it is deemed to be made under section 433 of the Companies Act. There is nothing in the Securities Contracts (Regulation) Act (Act No. 42 of 1956) to suggest that it affects the powers of the High Court to pass orders under these sections nor is there anything in the provisions of the Act to suggest that a scheme sanctioned by the court under which shares are to be transferred would also be rendered nugatory by the operation of this regulating Act. The Act as its preamble states was brought into force to meet a specific evil, i.e., to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matters connected therewith . We have no doubt that it would not affect the powers vested in the High C .....

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..... vidend in the liquidation. 75. The scheme was sanctioned by Mr. Justice Mody under the powers conferred by section 391. Its enforcement or implementation is governed by the provisions of sub-sections (1) and (2) of section 392, which we have quoted above. These provisions are comparatively new being incorporated for the first time by Act I of 1956 and there is very little authority to indicate their construction. Mr. Bhatt has argued that the words in sub-section (2) cannot be worked satisfactorily are not to be found in the provisions of sub-section (1). Therefore, he urged a two-fold argument (1) that in considering an application under sub-section (1) such as the J.K. group had made, which was and application to enforce the scheme, the court cannot set aside the entire scheme and hold that it cannot be worked satisfactorily. He urged that the Appellation No. 14 of 1957 should be considered independently and apart from the other applications for winding up, etc., and (2) that the question whether the company is solvent or not, cannot legally be considered in deciding that application. 76. We are unable to accept this construction of section of 392. Section 392 appears in .....

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..... the company should be wound up even if the scheme does not work satisfactorily, but it is clear that the court must consider the question whether the company ought to be wound up in such a contingency. This power of course can be exercised suo motu by the court or on the application of a person interested in the affairs of the company. 78. Any order passed for the winding up of a company under section 392 of the Act is deemed to be an order made under section 433 of this Act . In other words, if an order for winding up a company is passed under section 392 it is for all purposes an order under section 433. There was considerable argument advanced on the basis of these words in sub-section (2) as to whether the court in passing a winding-up order must have regard to the conditions laid down in section 433 and 434 for the winding up of a company by the court. By the use of the words shall be deemed to be an order made under section 433 of this Act in sub-section (2) of section 392, it seems to us that the court when it considers whether the company should be wound up or not, may have regard to the requirements of sections 433 and 434 to the extent it is possible to do so thoug .....

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..... k Ltd. v. D. P. Narayana Rao Provisional Liquidator, Godavari Sugar and Refineries Ltd. and one passage from Buckley on the Companies Acts, 13th edition, at page 493. In our opinion, since the company is financially not in position to implement the scheme at all, it is not necessary to consider whether implementing a part of it would be legal or illegal. 81. Next, on behalf of the J.K. group, it was urged that the company cannot apply for its winding-up as it has done in Company Petition No. 82 of 1967 and in Company Application No. 21 of 1967 without a valid resolution passed by the members of the company. Since, as we have said, section 392(2) gives in express terms the power to the court to wind up the company suo motu by the use of the words either on its own motion or on the application of any person interested ........ , the objection can at the most arise in respect of the application under section 433 of the Companies Act made by the company to wind it up, i.e., Company Petition No. 82 of 1967, which is the subject-matter of Appeal No. 100 of 1967. In so far as we propose to exercise the power given to the court under section 392(2), we do not think that this contention .....

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..... 103), which was under section 2 of the British Companies Amalgamation Act which counsel said was in terms similar to section 391(2). An alternative to this part of the argument was that the creditor Lalji Thakersey who had been a party to the proceedings when the scheme was sanctioned and had obtained an advantage for himself is doubly estopped and cannot now, having taken advantage of the scheme, turn round and say that it should not be sanctioned. On behalf of the J.K. group reference was made in this respect to a decision of this court in Govind Waman Shanbhag v. Murlidhar Shrinivas Shanbhag , and to a decision in Chhaganlal Kishoredas v. Bai Harkha ([1909] I.L.R. 33 Bom. 479). Reference was also made to the decision in Seth Badri Prasad v. Seth Nagar Mal. ([1959] 29 Comp. Cas. 229; [1959] Supp. 1 S.C.R. 769). 83. Now we have already held that we are unable to find any illegality in the scheme, but nevertheless, we do not think that any principle of estopped can be attracted in the present case, for the simple reason that the conditions and circumstances which have arisen since the passing of the decree have to be taken into account in exercising our powers under section 392 .....

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..... , as provided in the said agreement being exhibit A hereto and the said amount with interest as aforesaid will be secured by a second mortgage of the company's assets. In exhibit A which is annexed to the scheme, the relevant stipulation is to be found in clause 3(c) : That the vendor will procure the consent or confirmation from the various creditors whose names are set out in schedule B hereunder written to the effect that in consideration of the said company securing the amounts respectively due to them by a second legal mortgage of the fixed and other assets of the said company as hereinafter more particularly stated the said creditors will not claim interest on the amounts respectively due to them by the said company as on the date of the said second mortgage at a rate higher than 1/4% per annum from the date of execution of the said second mortgage and will not demand immediate payment of the said amount .... Under clause 6(b) it is recited : The purchasers shall cause the said company to execute in favour of the various creditors of the said company whose names are set out in schedule B hereunder written a second legal mortgage over. Thus the parties expressly conte .....

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..... f mortgage of the assets of the company. The case in Allan Brothers Co. v. Shaik Jooman and Sons Co. (A.I.R. 1925 Rang. 189) is distinguishable upon the facts. In that case there was an order passed on 6th February, 1924, that the decree shall be payable by instalments of ₹ 10,000 per mensem and that the respondent should give as security a second mortgage on 23A, Phayre Street and the court held that this order of 6th February, 1924, had not been set aside and if the appellant acquired the position of a second creditor by virtue of that order, he has not lost it since . The decree in that case was thus construed to imply that the appellant was granted the position of a secured creditor by its very terms and it was assumed and not challenged that thereby the appellant had acquired the position of a secured creditor. This is clear from the remark of the learned Chief Justice .... and if the appellant acquired the position of a secured creditor by virtue of that order, he has to lost it since. We do not think, therefore, that the Rangoon case can support the argument that in the present case the J.K. group have already become secured creditors. They had merely an agree .....

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..... has only the outward form of a company and there is no semblance of a business left. It is impossible to carry out the objects for which the company was established. There is no question, therefore, of supervising the carrying out of the compromise or arrangement or of carrying out the same with any modifications. The compromise or arrangement sanctioned and contained in the scheme cannot be worked satisfactorily at all with or without modifications and the only proper order to pass in the present case is to wind up the company known as the New Kaiser-I-Hind Spinning Weaving Co. Ltd. 90. The result may be unfortunate to one or the others party, but that cannot be helped, though we may say that in our opinion there is little to choose between the two contending groups who were fighting for control of the company. Each group was seeking its own benefit and was hardly interested in the benefit of the company qua the company. The J.K. group having managed the company for a long time had seen its inter workings and realised that it was impossible bring up the company to a healthier position and work it for profit. They, therefore, decided to clear out of the company so long as they .....

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..... ation of the scheme. These charges and counter charges are all at the stage of allegations and counter allegations and there is no proof of them as such. We have come to our conclusions only on the face of the affidavits filed. If a case is made out for the winding-up of a company, as we have held has been made out in the present case, upon such material as has been placed before us, we do not think that these allegations and counter-allegations can affect the issue; nor can the motives of either of the two groups, the one in presenting the application for winding up of the company and the other in seeking to enforce the scheme, can be taken into consideration. In Bachharaj Factories Ltd. v. Hirjee Mills Ltd. ([1955] 25 Comp. Cas. 227 251; 57 Bom. L.R. 378), there were also similar allegations made against the directors of the company and Chief Justice Chagla disposed of the allegations at page 392 as follows : But as we read the judgment of the learned judge, the main reason which has weighed with him is that the petitioners have not come to this court with clean hands, and Mr. Mathalone wanted to satisfy us that the motive of the petitioners in closing down the mills was sel .....

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..... 94. In the result, we pass the following orders : Appeal No. 96 of 1967 : We allow this appeal and dismiss the Application No. 14 of 1967 made on behalf of the J.K. Group to implement the scheme. On the other hand we allow the Company Application No. 21 of 1967 for winding up of the company under section 392(2). Appeals Nos. 97 of 1967 and 98 of 1967 : Appeal No. 97 of 1967 is the company's appeal against the order in Application No. 14 of 1967 and Appeal No. 98 of 1967 arises out of Company Application No. 21 of 1967. Both these appeals are allowed. The Company Application No. 21 of 1967 is allowed. Appeal No. 100 of 1967 : This appeal is directed against the order passed on Company Petition No. 82 of 1967. This was the company's own application for winding it up under section 433 of the Companies Act. Consequent upon the orders passed on Company Application No. 14 and Company Application No. 21 of 1967, the learned judge merely ordered that this company petition should stand over until four weeks after the order on Applications Nos. 14 and 21 of 1967. The company has appealed against this order of the learned single judge standing over its application for win .....

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