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TMI Blog1966 (8) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the 10th of November 1952, a petition for winding up of the company was filed by two creditors of the company, Harihar Ramkrishna Karandikar and Anandibai Karandikar. On the 2nd of February 1954, D. B. Phatak presented a scheme for reconstruction of the company, but the attempt to revive the company was given up as the scheme could not be worked out. On the 13th of August 1954, the learned District Judge, Poona, ordered the company to be wound up. 3. The company had constructed a building called 'Pioneer House' on the Laxmi Road, Poona. D. B. Phatak, the Managing Director of the Company, made a claim that the building was of his private ownership and therefore, on the 6th of June 1955, the Official Liquidators filed Civil Suit No. 835 of 1955 against him and another person for a declaration that the building as well as the land under it were the ownership of the company. The trial Court held by is judgment, dated the 24th of July 1956, that the building belonged to the Company but the land under the building belonged to D. B. Phatak. The Official Liquidators did not challenge that part of the decree which was against the company but D. B. Phatak filed Appeal No. 537 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Managing Director who treated the property as his own. The Insurance Company did not want the enforce its rights under the agreement of sale and it was willing to pay to the Official Liquidators the sum of ₹ 19,000 and old which was in its hands after the appropriation of Rs, 47,000 paid by its as earnest under the agreement of sale. The Official Liquidators had also in their hands a sum of about ₹ 24,000 from out of the rent of the Pioneer House . Thus the amount available for distribution amongst the creditors of the company was about ₹ 43,000 in addition to the sale proceeds of the vacant plot, amounting to ₹ 1,85,000.) (d) That the Company will issue debentures of the value of ₹ 2,02,500 to the depositors and other creditors of the company in partial satisfaction of the amount due to them. The debentures would be repayable at the end to ten years and the interest at 7 1/2 per cent per annum could, at the option of the Company, be capitalised during the first three years. (e) That the creditors should forgo twenty-nine paise in a rupee in consideration of the interest paid by the company on the debentures. (f) That D. B. Phat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The meetings of the shareholders and the creditors of the Pioneer Dying House Limited were held on the afternoon of the 13th of December 1964. The report exhibits 398, dated the 19th of January 1965, submitted by the Chairman, V. R. Phadke, to the District Court shows that all the nine shareholders of the Pioneer Dying House Limited consented to the scheme. The meeting of the depositors and the creditors, which was held separately from the meeting of the shareholders, was attended by 124 persons representing claims of the value of ₹ 4,38,004. 36 creditors appeared personally and 88 appeared through proxies 7 creditors representing claims of the value of ₹ 43, 345 opposed the scheme whereas others holding a total claim of Rs, 3,31,399 consented to the scheme. On the material date, the company held deposits of the value of ₹ 5,00,000 and the other debts amounted to ₹ 2,50,000. 10. The meetings of the shareholders and the creditors of the Maharashtra Textiles Limited which was the largest single creditor of the Pioneer Dying House Limited, were held separately on the 19th of January 1965. The report of the Chairman at exhibit 248 shows that all the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2), advisedly, does not say that if a certain proportion of the creditors or members agrees to a compromise or arrangement, the Court shall sanction the same and thereupon the compromise or arrangement shall bind all concerned. Therefore, though the opinion of the creditors or members of the company must be given due weight, such an opinion does not conclude the question whether the scheme must be accepted. The opinion of the majority is only one of the elements in the case, to be considered by the Court which is called upon to sanction the scheme. 13. Mr. Mistry, who appears on behalf of the respondents who propound the scheme did not initially dispute the proposition that the Court may refuse to sanction a scheme even if the requisite majority had agreed to adopt it. During the closing stages of his argument however he contended that though the Court may have jurisdiction to go beyond the verdict of the majority, the Court would not be justified in refusing to sanction the scheme unless it appeared that the consent of the majority was obtained by misrepresentation or by suppression of material facts. In view of this submission, it becomes necessary to examine the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Two debenture-holders of the company filed an appeal from the decision of the trial Court and that appeal was heard by Lindley, L. J., Bowen L. J. And Fry L. J. Section 2 of the Joint Stock Companies Arrangement Act, 1870, which is reproduced in the judgment of Lindley L. J. at page 236 is in material respects similar to sub-section (2) of section 153 of the Indian Companies Act, 1913, and sub-section (2) of section 206 of the English Companies Act, 1948, In a passage at page 238 Lindley L. J. observes as follows: . . . . .what the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the majority has been acting bona fide. The Court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interest of those whom they represent, take a view which can be reasonably taken by businessmen. The Court must look at the scheme and whether the Act has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s still to consider the circumstances. Fry L. J. expressed the same view in the following words: Then the next inquiry is Under what circumstances is the Court to sanction a resolution which has been passed approving of a compromise or arrangement? I shall not attempt to define what elements may enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of its, What other circumstances the Court may take into consideration I will not attempt to forecast. 17. In re English, Scottish and Australian Chartered Bank (1893) 3 Ch. 385, during the winding up proceedings of the chartered banking company a scheme of reconstruction was proposed under which a new bank was to be established which would defray some of the liabilities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plated is a reasonable arrangement, such as that which a man of business would reasonably approve, With regard to the word 'reasonably,' it must always be borne in mind the word 'reasonably' is a relative term; it means reasonably with regard to the particular circumstances of the case. What is reasonable in one case might be unreasonable in another. The reasonableness must be always regarded with reference to other alternatives. 18. In re Dorman, Long and Co. Ltd, and in re South Durham Steel and Iron Co. Ltd. (1934) 1 Ch. 635, two petitions were filed under section 153 of the English Companies Act, 1929, which, in all material respects corresponds to section 153 of the Indian Companies Act, 1913. Maugham J. who dealt with the petitions says at the outset of his judgment that it was plain that the duties of the Court under section 153 are twofold: The first is to see that the resolutions are passed by the statutory majority in value and number, in accordance with section 153, sub-section (2), at a meeting or meetings duly convened and held. Upon that depends the jurisdiction of the Court to confirm the scheme. The other duty is in the nature of the discre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be more important considerations. It was held in that case that the position of the company was misrepresented in the meeting of the shareholders and creditors of the company and, therefore, the view of the majority could not be accepted. It was further held that even if the resolution passed by the shareholders and creditors had been passed after a disclosure of the true position, the scheme could not be accepted, because, amongst other things, the company was hopelessly insolvent. 20. In the matter of Bharati Central bank, Ltd. ILR (1949) 1 Cal 127 is the decision of a single Judge who held that in sanctioning a scheme of arrangement under section 153, the Court is not bound to follow the decision of the creditors and shareholders approving the scheme. It must be satisfied that the provisions of the Act have been complied with, that the scheme is a reasonable and workable one, that the creditors and shareholders had sufficient information with regard to the affairs of the company before approving the scheme, that the creditors and shareholders acted in good faith in approving the scheme and that there are no considerations of public interest which would override the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feasible or that there is no chance that it will yield to a smooth and satisfactory execution. By 'reasonable' is generally meant that the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of the class which they represent. The Court will also not sanction the scheme if the facts which would have influenced decision of the majority were not known or disclosed to the majority, or if the sponsors of the scheme have misrepresented the true position of the company. Finally, if the acceptance of the scheme would lead to the stifling of an inquiry into the conduct of the delinquent directors, the Court would be slow to give its sanction to the scheme. Considerations such as those mentioned above must be taken into account by a Court before a scheme is sanctioned but in the very nature of things, it is not possible to enumerate exhaustively the circumstances which a Court is entitled to take into consideration. 23. In our opinion, therefore there is no substance in the submission of Mr. Mistry that he decision of the majority must necessarily lead to the inference that the scheme is for the benefit of that class which was represented i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that his income was less than the minimum taxable. 25. The total debts of the company can be taken roughly at ₹ 7,44,000. if the personal debts of the Managing Director amounting to ₹ 1,57,000 which under the scheme are passed on to the company are added to it, the total liability of the company would come to ₹ 9,01,000. About Rs, 1,20,000 were paid by the Liquidators as interim dividend and, therefore, a sum of ₹ 7,81,000 is still due from the company by way of debts. 26. As against these debts, the assets of the company consist of a vacant plot of three acres which under the scheme is to be sold for ₹ 1,85,000, another plot of three acres which yields a monthly rent of ₹ 2,100, a building on the Laxmi Road which yields an income of ₹ 1,300 per month and about ₹ 43,000 which are lying to the credit of the company as rent of the building on the Laxmi Road. 27. Under clause (f) of the scheme, ₹ 1,87,000 would have to be paid to the creditors in partial satisfaction of their dues at 25 paise in rupee. The sale-proceeds, therefore of the three acres of land at Yerandavana shall have been used for the purpose of paying debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh capital. The possibility, therefore, that the company may be able to raise capital for its business must be excluded. Therefore, if the scheme is accepted, all that can happen is that the evil day will be postponed. We see no justification for prolonging the agonies of the creditors any more. It seems to us certain that even if the scheme is accepted, the company will have to face a fresh challenge to its solvency within a short time. 30. The second reason why the scheme cannot be sanctioned is that its object appears to us to be to cover the deeds of delinquent directors. In Civil Suit. No. 835 of 1955 which was filed by the Official Liquidators against the Managing Director and another person for a declaration that the building called 'Pioneer House' on the Laxmi Road, Poona, is of the ownership of the company, the trial Court held that the Managing Director had made a false claim to the building, that he had manipulated accounts to suit his convenience and that he had not acted in the best interests of the company. The decree of the trial Court was confirmed in appeal by the Extra-Assistant Judge, Poona, who also held that the Managing Director was guilty of fraud. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of clause (i) (a) of the scheme, the Managing Director agrees to transfer the land under the building 'Pioneer House', to the Company for a consideration of ₹ 47,000. It is difficult to appreciate that men of business knowing their interest would agree to such a provision. The Managing Director had made a false claim to the building which belongs to the company. He agreed to sell the building to Yeshwant Mutual Insurance Co. Ltd., and took an earnest of ₹ 47,000 from them. He put the Insurance Company in possession and during the course of the last few years that Company has recovered by way of rent an amount larger than the one which it had paid by way of earnest. The Insurance Company has been taken over by the Life Insurance Corporation of India which has very properly taken the view that it will not enforce the agreement of sale. It is content that the amount paid by way of earnest has already been recovered in the shape of rent. It would be clear from these facts that the Managing Director has wrongly appropriated to himself the sum of ₹ 47,000. It, therefore, seems to us strange that he should be said to have transferred the land to the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visualise where and with what equipment the company will do its business. 36. We will only cite one more reason why the scheme should not be sanctioned. That reason is by no means the least important After the trial Court decided Suit No. 835 of 1955 in respect of the building at Laxmi Road, the Official Liquidators filed a misfeasance summons on the 2nd November 1957 against the Managing Director and three other directors of the company. The misfeasance summons was stayed during the pendency of the second appeal filed by the Managing Director in this Court. The fact that the misfeasance proceedings were taken against the directors of the company is not shown to have been disclosed to the shareholders and creditors of the company. While considering the scheme, its was highly relevant whether the conduct of the Managing Director and the other directors was such that the fate of the company could be put in their hands. If the creditors were told that a Court of law had held that the Managing Director was guilty of fraud as against the company and if they were further told that misfeasance proceedings were taken against the Directors, their decision on the approval of the scheme c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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