| SooperKanoon Citation | sooperkanoon.com/435594 |
| Subject | Company |
| Court | Andhra Pradesh High Court |
| Decided On | Apr-18-2003 |
| Case Number | CP No. 112 of 2001, C.A. Nos. 665 of 2001 and 539 of 2002 |
| Judge | S. Ananda Reddy, J. |
| Reported in | 2003(3)ALD855; [2004]122CompCas625(AP); [2003]47SCL727(AP) |
| Acts | Companies Act, 1956 - Sections 391(2) |
| Appellant | K. Sudhakar Gupta |
| Respondent | Electro thermics (Pvt) Limited |
| Appellant Advocate | C. Kodanda Ram, Adv. in CP Nos. 112 of 2001 and ;V.S. Raju, Adv. in CA Nos. 665 of 2001 and 539 of 2002 |
| Respondent Advocate | C. Kodanda Ram, Adv. for Respondent No. 1 in C.A. No. 665 of 2001 and 539 of 2002, ;M. Anil Kumar for Official Liquidator in CP No. 112 of 2001 and for Respondent No. 2 in CA Nos. 665 of 2001 and 539 |
S. Ananda Reddy, J.
1. This Company Petition is filed under Section 391, read with Section 394 of the Companies Act, 1956 (hereinafter referred to as 'the Act') seeking sanction of the scheme of arrangement/ compromise with the creditors of the Respondent Company in liquidation; whereas CA No. 665 of 2001 is filed opposing the sanction of the scheme, and CA No. 539 of 2002 is filed seeking sanction of a modified scheme of arrangement/compromise.
As the Company Petition as well as the above Company Applications are interrelated, they are heard together and disposed of by this common order.
2. The facts leading to filing of the above Company Petition and Company Applications are as under:
The Company Petition is filed by one of the shareholders, Mr. M. Sudhakar Gupta, who was the erstwhile Managing Director of the Respondent Company in liquidation, (hereinafter referred to as 'the Petitioner'). According to the Petitioner, he is holding 9041 equity shares of Rs. 100/- each. The Company in liquidation was incorporated as a Private Limited Company on 19.5.1972. The founder member of the Company is Mr. L.B. Prasada Rao, who is the applicant in the other abovementioned two Company Applications (hereinafter referred to as 'the Applicant'). The authorised share capital of the Company in liquidation was Rs. 40 lakhs divided into 40,000 equity shares of Rs. 100 each. The issued, subscribed and paid up capital of the Respondent Company is Rs. 30 lakhs divided into 30,000 equity shares of Rs. 100/- each. The share capital of the Company is held by 16 persons/ shareholders.
The Company was incorporated with the main object of manufacturing and sale of refractories of all kinds. The Company also proposed to carry on business as dealers, distributors, merchants, exporters and importers of all kinds of refractories also. In addition, it was also proposed to carry on the business of finishers, polishers, galvanisers, electro platers, anodises, enamellers, thermo plastic coalers, metalizers, metal solders, welders, painters, engravers, etc., and also to carry on the business as manufacturers, assemblers, repairers, and dealers in all kinds of Electro Thermic materials and electro thermal equipment etc. The Company in liquidation, after its incorporation, commenced its business operations of manufacturing and selling of Silicon Carbide. In the course of its business, the Company has faced severe financial constraints for the reason that the product being manufactured by the Company requires high amounts of power and in view of frequent power cuts and load shedding during the period 1987-88, affecting the performance of the Company. As a result, the Company has become indebted to various parties, including M/s. Regency Ceramics Limited, which had approached this Court under Sections 433 and 434 of the Act by filing C.P. No. 7 of 1991, seeking winding up of the Company, at whose instance winding up orders were passed on 2-12-1993. It is stated that the Petitioner, was the Managing Director from 1989 till winding up orders were passed. Further, the Petitioner has furnished personal guarantees to the secured creditors i.e., Andhra Pradesh State Financial Corporation and State Bank of Hyderabad on behalf of the Company in liquidation. The Petitioner being a shareholder of the Respondent Company, who was in charge of day-to-day affairs and has a majority stake of 1/3rd in terms of the total shareholding, is interested in reviving the Company. The same is desired to be achieved by a proper debt restructuring coupled with one time settlement of the dues, both to the secured and unsecured creditors. The Petitioner intends to achieve the same by adopting the procedure of repaying the dues to the creditors of the Company in liquidation, including the dues of the workers and other creditors, on one time settlement basis in addition to the secured creditors.
The scheme of arrangement/compromise proposed by the Petitioner is in the interest of the secured creditors, unsecured creditors and employees of the Company. Upon sanction of the arrangement/ compromise, the operations of the Company can be carried on more advantageously and efficiently vis-a-vis the interest of the members and creditors of the Company. The Petitioner proposed to adopt the following method for revival of the Company in liquidation:
(a) Infusing fresh capital of Rs. 142 lakhs by the Petitioner by himself and through his associates.
(b) Relocate the manufacturing unit/ plant presently situated at 7/4 KM Stone,
Nagarjuna Sagar Road, L.B. Nagar, Hyderabad (the same is necessitated as the area at which the present unit is located has over a period of time been converted into a residential area and manufacturing activity cannot be continued in view of the guidelines of the pollution control authorities.)
(c) To sell the land and buildings, to defray the cost of relocation of the plaint/unit and its revival.
(d) To repay the secured and unsecured creditors within a period of one year from the date of sanction of the scheme by this Hon'ble Court.
(e) To increase the equity capital of the Company and to issue secured debentures so as to maintain a debt equity ratio of 1: 1.72.
(f) Modernisation of manufacturing process so as to enhance the efficiency in terms of power consumption and optimal usage of plant and machinery.
The cost of the rehabilitation scheme is as follows:
Amount in Lakhs.1.New land2.002.Buildings20.003.Relocation,refurbishment, addl. balancing machinery etc.,10.004.Margin Money for working capital15.005.Payment to secured,unsecured creditors61.576.Start up andpre-start up expenses3.43
Total212.00
The means of finance for the above rehabilitation schemes is as follows :
Amount in lakhs1.Share Capital35.002.Issue of secured debentures107.003.Sale of existing land andbuilding70.00
Total :212.00
In order to comply the required procedure, the Petitioner filed CA No. 261 of 2001 for a direction to convene the meeting of the shareholders and creditors of the Company in liquidation for the purpose of consideration of the scheme of arrangement/ compromise. Accordingly, one of the Advocates of the Bar was appointed as Chairman and directed to convene separate meetings of the shareholders and the creditors. Accordingly, after complying with the required publication and notices, meeting of the creditors as well as the shareholders was held on 1.6.2001 separately. As per the report of the Chairman, the shareholders approved the scheme of arrangement/ compromise by 2/3rd of the members present and voting. Insofar as the creditors are concerned, it was stated that to the extent of 84.17% present and voted, supported the scheme of arrangement/ compromise. According to the Petitioner, majority of the shareholders and creditors accepted the proposed scheme of arrangement/compromise and even some of the unsecured creditors were also paid to the extent of Rs. 1.80 lakhs, apart from the payment effected to some of the workers. It is also stated that after the winding up order, the Official Liquidator conducted the enquiry and determined the dues of the workers. In the petition, it is stated that with reference to the shareholders no arrangement is envisaged by or between the Petitioner and the other shareholders, and, according to the Petitioner, the shareholders would continue with their interest. Hence, sought for the approval of the scheme proposed.
3. The above scheme of arrangement/ compromise proposed by the Petitioner is opposed by the another shareholder, who is also incidentally the founder Director of the Company in liquidation and who filed the application in C.A. No. 665 of 2001, seeking to reject the petition, as the proposed scheme of arrangement/ compromise was not approved by the requisite majority of the shareholders and the creditors. In the application, the applicant has stated that after the initial establishment and commencement of the business the Company went into expansion in the year 1981, but thereafter, it suffered due to the non-availability of the raw material due to the agitation in Assam. Hence, the Company in liquidation became sick. When the Petitioner approached the State Bank of Hyderabad, which is one of the secured creditors for rehabilitation, it did not accept the proposal for additional loan, but advised to increase the share capital of the promoter. Therefore, the Petitioner, in order to mobilise additional resources, negotiated with the applicant, who is impleaded as 1st Respondent in the application, who became the shareholder by contribution of additional share capital to the Company. This was in the year 1987 and the Petitioner was made Additional Director and later became the Executive Director. However, according to the Petitioner in the year 1989, the Petitioner conspired to remove the applicant as Chairman and Managing Director of the Company and accordingly, the applicant was not allowed even to participate in the General Body Meeting, as according to the applicant he was kidnapped and beaten by the Petitioner and his men. Vexed with the harassment, the applicant resigned as Chairman and Managing Director of the Company on 30.6.1989, and thereafter he does not know the affairs of the Company, though he continued to be a shareholder. He came to know of the orders of liquidation only when he received a notice for convening the meeting of the shareholders for approval of the scheme of arrangement/ compromise. According to the applicant, the Company Petition was filed by M/s. Regency Ceramics Limited only at the behest of the Petitioner by creating a credit in favour of the said Company in the books of the Company in liquidation. According to the applicant, the Company was doing well from 1989 to 1993 on an average turnover of Rs. 1.5 crores. It is further stated that the Company Petitioner had fraudulently removed certain plant and machinery of the Company in liquidation viz., primary and secondary crushing plant, grain treatment plant and entire laboratory equipment of Rs. 10.85 lakhs (original cost), which may cost, as on date, at about Rs. 40,00,000/-. It is also stated that the nominee of APSFC, one of the secured creditors, was on the Board of the Company and after the winding up order the said secured creditor seized the Unit on 30.4.1994 and allowed the Petitioner to remove certain of the plant and machinery of the Company in liquidation and shifted to his own unit, namely Shilpa Abrasive Manufacturing Company, Plot No. P-10, IDA, Mallapur, Hyderabad in 1994, producing and marketing silicon carbide grains for his personal gain at the cost of the members and creditors of the Company in liquidation. The applicant also stated that there are discrepancies in the statement of affairs filed on 28.2.1994 by the erstwhile Board of Directors with the Official Liquidator, with reference to the following aspects:
(i) Cash and bank balances were shown in the statement of affairs as Rs. 3,475/-against the balance shown as Rs. 13,475/-on 30.11.1993 in the balance sheet.
(ii) The ex-management has shown intentionally in the statement of affairs the estimated realizable value of the freehold property i.e., land, buildings, plant and machinery at Rs. 35,35,366/-knowing fully well that the real value of the property on the date of winding up order was Rs. 2.50 crores.
(iii) The details of the assets not specifically pledged and valued at Rs. 37,46,332/-, which were non-performing assets in nature are not disclosed in the statement of affairs filed with the Official Liquidator.
(iv) The inventories of Rs. 51,90,000/- as on 30.11.1993 shown under the head 'current assets' in the balance sheet does not find place in the statement of affairs filed by the erstwhile Directors with the 2nd Respondent herein. This shows as to how the 1st Respondent has prepared and filed the statement of affairs with the 2nd Respondent without closing all the assets of the Company in liquidation on the date of winding up order.
(v) In the statement affairs filed, the details of inventory report dated 26.11.1993 filed by the Advocate Commissioner in O.S. No. 547 of 1993 on the file of Additional Subordinate Judge, RR. District in the suit filed by the State Bank of Hyderabad, Dilsuknagar Branch against Electro Thermics Private Limited.
(vi) The fixed deposit amounts lying with the Company in liquidation in respect of myself and my family members aggregating to Rs. 3,85,975/- together with interest of Rs. 95,405/- making a total sum of Rs. 4,81,380/- as on 15.11.1989 has not been shown in the statement of affairs under the head details of deposits in Annexure-III of List A of statement of affairs inspite of my filing applications bearing Nos. 124 to 128/58A(9)7SRB/AP/ 90 before the Company Law Board, Southern Region Bench at Madras.
(vii) Further, I submit that in the statement of affairs the 1st Respondent herein has shown Rs. 32,20,152/- towards power charges payable to S.A.O. (Operation) APSEB, Mint Compound, Hyderabad. However, the APSEB dues amounting to Rs. 1,33,42,818/- were shown under the head contingent liabilities (APSEB dues in dispute). Whereas in the notes annexed to the balance sheet and profit and loss account for the year ended 31.3.1993 of the Electro Thermics Private Limited (Company under liquidation) under the Item-9:
'The Hon'ble High Court of A.P has dismissed the appeal in regard to HT-III Category to H.T.-I Category in the month of February, 1993. The Hon'ble High Court has also dismissed the appeal of minimum charges during the disconnected period 1987. Thus APSEB has raised a demand of Rs. 76,29,353/- and also an amount of Rs. 11,01,713/- towards minimum charges during the disconnected period. The APSEB has also charged Rs. 8,60,661/- towards interest on instalments due and the same was pending before the Hon'ble High Court of Andhra Pradesh. The APSEB has charged rate applicable to 1800 K.VA and whereas the Company has taken rate only for 1490 KVA. The same was disputed in the Court. Thus the Company has not provided Rs. 31,06,666/- for the year 1989-90 and Rs. 16,34,785/- for the year 1990-91. Thus the Company has neither provided nor paid for Rs. 1,43,33,178/-towards power charges for the years 1986-87 to 1990-91 as per the demand raised by the Andhra Pradesh State Electricity Board since the same is disputed in the High Court of Andhra Pradesh. There is no dispute on the power charges during the year 1991-92 and 1992-93.'
Whereas in the Directors Report for the year ended 31st March, 1993 of Eletrothermics Pvt. Limited (Company under liquidation) under the head Status of the Company is as follows: -
'The Hon'ble High Court of Andhra Pradesh has dismissed the appeal in regard to cases pending against demand of APSEB since 1985 on account of categorisation and minimum charges during the disconnected periods. APSEB has raised a demand of Rs. 76,29,353/-and ordered the Company to pay the dues on or before 20.5.1993. Your Company left with no alternative than to file a Writ Petition before the Hon'ble High Court saying that the Company's financial position is bad and is not in a position to pay the dues. Then the Court ordered 1/3rd of dues should be paid in two instalments within 4 weeks from the date of order i.e., 19.5.1993. Due to difficult financial position, the Company is not able to pay the two instalments in time. APSEB has disconnected the power supply on 29.6.1993 brining the Company's operation to a standstill. The Company approached the APSEB again for sanction of instalments to pay the old dues. Negotiations with APSEB are in progress.'
This information was suppressed in the statement of affairs filed with the Official Liquidator by erstwhile Board of Directors. I reserve my right to take appropriate action either civil or criminal against the persons who have submitted the false statement of affairs of the Company in liquidation with the 2nd Respondent herein.
(viii) Further, in the Creditors List (Annexure-III) of Statement of Affairs it has been shown that the Company owes Rs. 17,000/ - to Sri B. Radhakrishna and Rs. 77,606/-to Smt. Rajeswari, whereas notices were not received by them for attending creditors meeting convened on 1.6.2001 at 2.00 p.m.
(ix) In the Statement of Affairs submitted to the Respondent No. 2, correct addresses of creditors were not furnished and at no time confirmation of balances were obtained from the creditors by the Company in liquidation.'
4. It is stated that the scheme has been framed in such a way that it will suit the convenience of the Petitioner and his relatives and family members and the scheme will be detrimental to the interest of the shareholders, creditors and others. The relocation of the plant and machinery has not been specified in the scheme. The amount to be incurred by the promoters about the rehabilitated scheme has not been disclosed properly. The definition of the promoters is wrongly mentioned. The constitution of the Board, as envisaged in the Scheme, is not in accordance with the provisions of the Act. The constitution of the Board is to be done by the shareholders at the general body meeting. In the profitability projections, the viability of the scheme is not properly explained. The scheme contemplates the relocation of the plant and machinery at Yanam. The 1st Respondent wants the authorisation from the newly constituted Board of his relatives to sell part or whole of the undertaking i.e., assets of the Company on such terms and conditions as the Board deems fit. The projected profitability statement is not realistic. Further, according to the applicant, the objective of framing the scheme is to grab the prime landed property of two acres of the Company in liquidation situated in Karmanghat, Hyderabad, abutting Nagarjuna Sagar Road, very close to the ring road. Since, the scheme is unfair, unreasonable and detrimental to the interests of the shareholders of the Company in liquidation, the same is liable to be rejected. The applicant has also stated that the Petitioner had committed fraud in forging and presenting false letters to the Chairperson of the meeting to support his claim. The details are stated at Page-12 of the application.
5. Even with reference to the creditors, it was stated by the applicant that the Company owes Rs. 1,51,31,513/-. To that effect, a letter was submitted to the Chairperson by the Superintending Engineer (Operation) R.R.Circle, Mint Compound, Hyderabad, but the Chairperson did not take note of the contents of the said letter and treated that the amount due to the Electricity Board is Rs. 17,46,858-03 paise. According to the applicant, if the dues of the Electricity Board are taken into account, the persons voted in favour of the scheme comes to only 45.37%, while voted against the scheme comes to 54.63%. Thus, the required majority of three-fourths as contemplated under the provisions of the Act, is not available to the Petitioner. Hence, sought for rejection of the Scheme presented by the Petitioner.
6. The other application - CA No. 539 of 2002 is filed by the same applicant in CA No. 665 of 2001, Sri L.B. Prasada Rao, who is the founder member of the Company in liquidation, seeking sanction of the modified scheme/compromise, which in effect submitted with the modification of the scheme presented by the Petitioner in CP No. 112 of 2001. According to the applicant, as the scheme proposed by the Petitioner is detriment to the interest of the shareholders, he has come up with the present modified scheme, as it is beneficial to all the shareholders, creditors and workers. Therefore, such scheme has to be approved instead of the scheme proposed by the Petitioner. The details of the modified scheme of compromise are as under:
'The cost of compromise/modified scheme is as follows:
Particulars As per CorpromiselModified scheme, (Rupees in Lakhs)
1.New Land1.002.Buildings20.003.Relocation,Refurbishment, replacement of removed/missing plant and machinery.108.384.Margin Money forworking capital15.005.Payment to securedand unsecured creditors181.636.Start up arepre-start up Expenses IPreoperative)4.887.Payment toshareholders to purchase the shares of petitioner/R1 herein and his Familymembers.39.11 Total370.00Means of Finance: 1.Addl.Share capital(Including Rs.23.50 lakhs paid to SBH on 29.6.2002)51.622.Sale of existing landand buildings.250.003.Return/recovery ofremoved/Missing plant and machinery.68.38 Total370.00
Note: 1. This includes payment of additional Rs. 15.25 lakhs as decided by O.L. to workmen and Rs. 4.82 lakhs to the Petitioner herein and his family towards return of deposits/unsecured loans.
2. Plant will be shifted to Jagdalpur in Chattisgarh State where cost of electricity is Rs. 2.50 per unit as against Rs. 4.50 per unit in A.P.
3. All the workers who are willing to work at new place will be employed.
4. The amount of Rs. 90,87,366/- said to have been paid by R1 will be reimbursed on proof of payment within six months with 12% interest from the date of payment and on returning the assets of Rs. 60.25 lakhs retained by R-1.
5. The entire scheme shall be implemented in 12 months from the date of approval of the compromise/modified scheme.
Accordingly, the applicant prayed for sanction of the compromise/modified scheme, as submitted by him, by staying up the winding up order altogether.
7. The learned Counsel for the Petitioner contended that the scheme proposed by the Petitioner was considered by the shareholders as well as the creditors and approved by majority, though not by three-fourths of the majority, but still, according to the learned Counsel the Court has got the power to consider the circumstances and the proposal whether such a scheme is beneficial to the shareholders, creditors as well as the workers. According to the learned Counsel, as on date, the Company is closed and the possibility of realising the entire amounts due to the creditors as well as to the workers is remote. The interest of the shareholders also is only a negative value as on date. If the scheme is approved and the Petitioner is allowed to rehabilitate the Company in liquidation, the Petitioner is prepared to discharge the debts due to the creditors as per the settlement including the dues to the workers and in the process even the shareholders value would also increase. According to the learned Counsel, the negative value may become positive, may be by few rupees, which would be beneficial to them also. Therefore, the learned Counsel sought for approval of the scheme of arrangement/compromise.
8. The learned Counsel also contended with reference to the modified scheme proposed by the applicant that as the scheme was not referred, as required under the provisions of the Act, for consideration and approval of the shareholders and creditors, the said modified scheme couldn't be considered as a scheme for approval. Hence, sought for rejection of the application filed by the applicant. Even with reference to the other application filed by the applicant for rejection of the scheme proposed by the Petitioner, the learned Counsel contended that there are absolutely no merits in the contentions raised by the applicant and as the revival and rehabilitation would help even the applicant, it would be proper to allow the petition, accepting the proposed scheme of arrangement/compromise of the Petitioner.
9. The learned Counsel for the Petitioner relied upon the following decisions in support of his contentions:
S.M. Holding Finance v. Mysore Machinery Mfrs., (1993) 78 CC 432, In re Maneckchowk and Ahmedabad Mfg. Co. Ltd., (1970) 40 CC 819, Navjivan Mills Co.Ltd., Kalol In re, (1972) 40 CC 265, Mansukhlal v. M.V. Shah, Official Liquidator, (1976) 46 CC 279; and PMP Auto Industries Ltd., In re,(1994) 80 CC 289.
10. On the other hand, the learned Counsel appearing for the applicant, who is opposing the claim proposed by the Petitioner, contended that the scheme as proposed is unreasonable and is intended only to benefit the Petitioner and his family members holding the shares not only at the cost of other shareholders but also at the cost of the creditors and workers. According to the learned Counsel, as already stated in the pleadings, that major part of the plant and machinery were removed by the Petitioner and shifted to his own factory, which is also working in the same lines of manufacturing refractory products. The learned Counsel also contended that, in fact, the Petitioner did not propose to pay any amount to the other shareholders, whereas the applicant proposed to pay a sum of Rs. 39.11 lakhs towards the shares held by the Petitioner and his family, which according to the learned Counsel works out at Rs. 200/- per share as against the face value of Rs. 100/- per share and the negative value as stated by the Petitioner. Even with reference to the value of the existing assets, the applicant has valued the land and buildings at Rs. 250 lakhs, whereas the Petitioner had valued the same at about Rs. 70 lakhs. The learned Counsel also contended that the applicant has proposed to pay the dues to the workmen to the extent of 100%, while the Petitioner proposed to pay only a part i.e., Rs. 16.27 lakhs as against Rs. 24.73 lakhs. With reference to the re-employment of the workers, the applicant proposed to engage any of the workers willing to work at the place of relocation of the Unit, whereas the Petitioner did not make any such proposal. The learned Counsel also contended that though the modified scheme was not referred for consideration of the creditors, according to the learned Counsel, as the original scheme proposed by the Petitioner was referred for consideration and therefore, the modified scheme need not be referred for further consideration, as admittedly, the modified scheme proposed by the applicant is beneficial to all, as the applicant is prepared to pay of the workers in full, apart from the payment as proposed by the Petitioner to others. Further other shareholders are also offered payment. Therefore, the learned Counsel sought for approval of the modified scheme.
11. On behalf of the workers, a separate application has been filed, opposing the scheme proposed by the Petitioner. According to the learned Counsel for the workers, separate meeting for approval of the scheme was not called for, as contemplated under the provisions of the Act According to the learned Counsel, the workers, who could be constituted as preferential creditors, form a separate class of creditors and such separate creditors could not be called for a meeting along with the other creditors, such as unsecured creditors etc. Further the proposal of payment to different creditors is also different. Therefore, the meeting of the creditors, including the workers as one class, is not in accordance with the provisions of the Act, and therefore, the scheme basing on such approval, could not be considered as a proper approval. The learned Counsel also contended that some of the workers have not even served with the notices as to the meeting of the creditors called for. Similarly, even with reference to the consent letters filed, representing some of the workers, they are not genuine, as according to the workers, they were all forged letters, obtained for the purpose of approval of the scheme at the meeting. Therefore, the learned Counsel contended that the scheme, as proposed by the Petitioner, should not be considered for approval.
12. From the above rival contentions, the issues to be considered are--
(i) Whether the Company Petition filed by the erstwhile Managing Director, viz., Mr. M. Sudhakar Gupta, seeking approval of the scheme proposed by him is proper and just and could be ordered, or, whether it is liable to be rejected, as claimed by the Applicant i.e., Mr. L.B. Prasada Rao, the founder Director of the Company in liquidation? and
(ii) Whether the modified scheme proposed by the applicant Mr. L.B. Prasada Rao, could be considered for approval in terms of the provisions of the Act
13. Major facts of the case, as already stated above, are not in dispute. The Petitioner Mr. Sudahakar Gupta and his relatives are holding major share in the Company in liquidation i.e., to the extent of 2/3rd share, holding, while the opposing party Mr. Prasada Rao and his family members are holding 1/3rd shareholding. The Company closed its operations in the year 1993 and is continuing as such and subsequently an order of winding up was also passed on 2.12,1993 at the instance of one of the creditors. Though it is disputed about the genuineness of the said credit, but we need not go into that aspect, at this juncture. Though the Company was ordered to be wound up and the Official Liquidator was appointed as Liquidator of the Company, but the assets of the Company were seized by one of the secured creditor, namely Andhra Pradesh State Financial Corporation. Though the said secured creditor tried to dispose of the assets of the Company by issuing publications for the sale of the assets of the Company, but could not dispose of the assets. At this stage the Petitioner has come up with a scheme of rehabilitation, which is opposed by the opposite party, who has also come up with an alterative proposal of modified scheme.
14. Insofar as the scheme proposed by the Petitioner, he did not consider it appropriate to pay off the other shareholders, though he had proposed to pay the creditors partially, including the workers' dues. Admittedly, the valuable asset of the Company is the land, where the Unit is established. Though the buildings are also referred, they may not be of much value. The land is about 2 acres. The realisable value of the said land along with buildings as stated by the Petitioner in his proposed rehabilitation scheme is at about Rs. 70 lakhs; whereas the opposite party had shown the value of the same at about Rs. 250 lakhs. In fact, even the opposite party proposed to pay off the workers' dues in full, as determined by the Official Liquidator, apart from paying the secured creditors, as was proposed by the Petitioner. Apart from all the above, the opposite party has even proposed to pay off the other shareholders i.e., the Petitioner and his family by paying an amount of Rs. 39.11 lakhs which works out at about Rs. 200/- per share each (original value per share is Rs. 100/-). In fact, during the course of hearing when the opposite party has referred to this, the learned Counsel appearing for the Petitioner had agreed to receive that amount from the opposite party to give up the shareholding of the Petitioner and his relatives. But in the course of the said proposals, the petitioner demanded to withdraw certain of the applications filed by the opposite party, which were filed for recovery of certain amounts on the allegations that the Petitioner had removed certain of the items of plant and machinery of the Company in liquidation. Though to some extent the opposite party had even conceded to such demand, and, in fact, as per the directions of this Court deposited about Rs. 25 lakhs with State Bank of Hyderabad, which the Petitioner had stated to have been payable on or before 30th June, 2002, but finally the Petitioner did not co-operate and accept the proposals and therefore, the matter was finally heard.
15. Admittedly, the scheme proposed by the Petitioner was not approved by three-fourths of the Members present and voted at the meeting called for, for the approval of the scheme as contemplated under Section 391(2) of the Act. There was only one meeting for alt the creditors, though all the creditors' interest was not the same. Further, the Petitioner also proposed to treat or pay the creditors differently. Coming to the merits of the scheme, the Petitioner valued the valuable asset i.e., the land and building at Rs. 70 lakhs as means of finance, whereas the applicant valued the same at Rs. 250 lakhs (more than three times the value offered by the Petitioner). The Petitioner and the applicant are not sailing together with in view of the bad blood flowing between them. The Petitioner is not prepared to acquire the shareholding of the opposite party by offering any consideration; whereas the opposite party has offered to pay Rs. 39.11 lakhs, which works out twice the face value. The Petitioner is not offering any employment to the existing workers and proposed to nominate Directors of his choice to be continued for life by bringing additional share capital by them. This will result in shutting the voice of the opposite party forever, who are bound by the decisions of the Board of Directors, who are in majority. The above factors clearly show that the proposed scheme is beneficial to the Petitioner and his associates by the sale of the valuable assets of the Company and to make profits to themselves or to bring back the surplus proceeds to the Company as their share capital. The scheme is not intended to benefit the workmen, as usual in the revival of a Company in a scheme of compromise or arrangement. The Petitioner proposed to pay only a part of the amount due to the workmen, while the opposite party offered to pay the full amount of dues to the workers. Therefore, on the face of it, the scheme of arrangement/compromise proposed by the Petitioner, in comparison with the alternative scheme proposed by the applicant is biased, unreasonable and inequitable and intended to benefit only the profounders of the scheme.
16. Coming to the legal aspects, the contention of the Petitioner is that as the majority of the shareholders and creditors have approved the scheme (though not three-fourths of them present and voted), it is for the Court to consider the scheme on merits. It is also the contention of the petitioner that the requirements of approval of a scheme by three -fourths majority present and voted, as contemplated under Section 391(2) is not mandatory, but is only directory and it is for the Court to consider the scheme on merits for approval.
17. In order to appreciate the contention of the learned Counsel for the Petitioner, it would be convenient to refer to the relevant provision of Section 391 of the Act, which is as under:
'Section 391. Power to compromise or make arrangements with creditors and members:--
(1) Where a compromise or arrangement is proposed--
(a) between a Company and its creditors or any class of them; or
(b) between a Company and its members or any class of them;
the Court may, on the application of the Company or of any creditor or member of the Company, or in the case of a Company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.
(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed under the rules made under Section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the Class, all the members, or all the members of the class, as the case may be, and also on the Company, or, in the case of a Company which is being wound up, on the liquidator and contributories of the Company.
Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the Company or any other person by whom an application has been made under Sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the Company, such as the latest financial position of the Company, the latest auditor's report on the accounts of the Company, the pendency of any investigation proceedings in relation to the Company under Sections 235 - 251, and the like.
18. A perusal of the above provision shows that when a scheme of arrangement/ compromise is proposed between a Company and its creditors or any class of them or its members or any class of them, on an application of the Company or any of the creditor or member of the Company, by an order of the Court, a meeting of the creditors, class of creditors, or members or class of members, would be called for their consideration of the proposed scheme for approval or otherwise. It is only after the decision at such meeting, Sub-section (2) would come into play. If at such meeting, a majority in number, representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voted either in person or through proxies, and agreed any compromise or arrangement, if sanctioned by the Court, be binding on all the creditors, class of creditors, or members or class of members, as well as the Liquidator, if the Company is ordered to be wound up. Here, it is not in dispute that the proposed scheme offered by the Petitioner was referred by calling a meeting of the shareholders as well as the creditors. Admittedly, in the shareholders meeting the proposed scheme was not approved by three-fourths majority as referred to in Sub-section (2) of Section 391. Though in the creditors meeting, it was reported by the Chairman appointed by this Court for conducting the meeting, that the scheme was approved at the creditors meeting, but there are objections from the workmen as well as the opposite party that such meeting, which was called for to all the creditors, is not in accordance with law, but this objection may be considered at a later stage. For the time being it can be inferred insofar as creditors meeting is concerned, the scheme proposed by the Petitioner was approved by three-fourths of the majority. Here, the contention of the Petitioner is that even with reference to the shareholders, majority of the shareholders i.e., to the extent of two-thirds have approved the scheme, though one-third of the shareholders opposed the same. As majority has been approved, the Court need not detain itself from considering on merits.
19. In support of his contention, the learned Counsel relied upon various decisions:
In the case of S.M. Holding Finance v. Mysore Machinery Mfrs. (supra) a scheme of compromise or arrangement was proposed by the Petitioner Company for revival of the Respondent Company. When the said scheme was referred to for consideration both by the creditors as well as by the workmen, the said scheme was approved by the workmen and the employees present and voted in favour of the scheme. In the meeting of the unsecured creditors, there was no three-fourths of the majority in passing the resolution and a number of dissenting unsecured creditors filed their affidavits consenting for the scheme. Similarly, the secured creditors also filed memos before the Court consenting to the scheme. Under the above circumstances, the learned Single Judge of the Karnataka High Court held, that the provisions of Section 391(2) of the Act was not mandatory but merely directory and there had been substantial compliance inasmuch three-fourths of the unsecured creditors agreed to and approved the scheme. There the contention raised that there was no compliance of the provisions of Section 391(2) was negatived.
In the case of In re Maneckchowk and Ahmedabad Mfg. Co. Ltd., (supra) a learned Single Judge of the Gujarat High Court had an occasion to consider the issue. In this case, the Gujarat High Court held that before the Court accords its sanction to any scheme of compromise or arrangement it would normally expect to be satisfied about three important matters, namely, (a) whether the statutory provisions have been complied with or not; (b) whether the class or classes have been fairly represented; and (c) whether the arrangement is such as a man of business would reasonably approve. It was also held that Sections 391(1) and 391(2) of the Companies Act, 1956 refer to two distinct stages. Whenever a compromise or arrangement is proposed between a Company and its creditors or any class of them or between a Company and its members or any class of them, the Court on the application of the Company or any creditor or member of the Company or in the case of a Company which is being wound up, of the liquidator, has to order a meeting of the creditors or members or any class of them, as the case may be, to be held. After the approval of the scheme or arrangement at the meeting referred to above, then only the second stage would start and the matter would come before the Court for consideration. It was held that when it comes to choosing between a scheme for reconstruction and an order for winding up, after keeping of the circumstances of the case and also the question of morality in view, and, if the scheme appears to be feasible and workable, it should be preferred to compulsory liquidation.
To the same effect is the decision of the Gujarat High Court in the case of Navjivan Mills Co. Ltd, Kalol, In re (supra).
In the case of Mansukhlal v. M.V. Shah, Official Liquidator (supra) a learned Single Judge of the Gujarat High Court, while considering the powers of the Court in modifying an approved scheme by substituting a new set of sponsorers in the place of original sponsorers reiterated the stand, apart from holding that once the scheme is approved by the Company Court, it has got all the powers to make necessary modifications of the scheme so as to make it workable.
In the case of PMP Auto Industries Ltd, In re (supra) the Bombay High Court while considering the scheme of amalgamation held that Section 391 of the Companies Act, 1956, invests the Court with powers to approve or sanction a scheme of amalgamation/arrangement, which is for the benefit of the Company. In doing so, if there are any other things which, for effectuation, require a special procedure to be followed-except reduction of capital-then the Court has power to sanction them while sanctioning the scheme itself. It would not be necessary for the Company to resort to other provisions of the Companies Act or to follow other procedures prescribed for bringing about the changes requisite for effectively implementing the scheme, which is sanctioned by the Court. Not only is Section 391 a complete code, but it is intended to be in the nature of a 'single window clearance' system to ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making repeated applications to the Court for various other alterations or changes which might be needed effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged by the Court under Section 394 of the Act.
20. The learned Counsel for the opposite party, on the hand, relied upon the following decisions:
In the case of In re Hathising Mfg. Co. Ltd., (1976) 46 CC 59, the High Court of Gujarat was dealing with an application filed under Section 391 for sanctioning the scheme of arrangement or compromise. In that case at the meeting of the equity shareholders, the scheme was unanimously approved and as regards the secured creditors the State of Gujarat with certain modifications accepted the scheme, as it is being finally sanctioned. The other secured creditor, the Petitioner and his companion creditors, unreservedly accepted the scheme as sanctioned. The Ahmedabad Municipal Corporation as well as the Sales Tax Department, who claimed certain amounts due, have also accepted the terms for their payment, as determined after discussion in Court and thus they also accepted the scheme. The Employees' State Insurance Corporation also accepted as the sponsor was agreeable to pay the amount in full immediately. On an objection raised that the sponsor has not satisfied the Court about his financial ability, it was held that if the sponsor comes with a detailed scheme and is tied down to an undertaking to the Court, it is his responsibility to know wherefrom finances would be brought and today finance comes from such diverse sources that it would be inadvisable to expect the sponsor to disclose them in his own interest. Therefore, the Court sanctioned the scheme, as there was nothing in the way of sanctioning it. But, it was sanctioned not as originally proposed but as amended and modified and has accepted by the concerned authorities. The order of winding up of the Company, therefore, was cancelled.
In the case of S.K. Gupta v. K.P. Jain, (1979) CC 342, the Apex Court had an occasion to consider the scope of substitution of propounder of scheme with reference to a scheme of compromise or arrangement. In that case, Indian Hardware Industries Limited (for short 'IHI Ltd.'), which is a subsidiary of M/s. Delhi Flour Mills Ltd., (for short 'DFM Ltd.') fell sick. Therefore, M/s. Indian Smelting and Refining Co. Ltd., filed a winding up petition against the IHI Ltd., in 1975. When the said petition was pending one Mr. R.P. Jain, who was having controlling interest in the holding Company, proposed a scheme of arrangement/ compromise between the IHI Ltd., and its secured creditors and after the approval of the scheme, he filed a Company Petition seeking sanction of the said scheme, which was ordered on 15.10.1975. Subsequently, the holding Company transferred its 44,000 shares in IHI Ltd., as well as its claim to the extent of Rs. 23 lakhs recoverable from the IHI Ltd., to the present appellants. Thereafter, the appellants filed Company Application requesting the Court to make appropriate modifications did or granting further directions for effectually implementing the scheme sanctioned by the Court in respect of the IHI Ltd. At that stage the Respondent, K.P. Jain, filed another application purporting to be under Section 392 of the Companies Act, 1956 inviting the Court for the reasons mentioned in the application to hold that the scheme sanctioned by the Court cannot be worked satisfactorily with or without modification and therefore, the order of winding up of the Company should be made. The Court by two orders in the above two applications approved the scheme of arrangement or compromise, as modified, while the application of the Respondent was rejected upon which the Respondent-Jain preferred appeals to the Division Bench. The Division Bench was of the opinion that substitution of a new propounder in a scheme already sanctioned by the Court in place of original propounder of the scheme was a change of a basic nature which would not be comprehended in the expression 'modification' as used in Section 392 and, therefore, the Company Judge could not have granted such a substitution of the propounder of the scheme without referring back the proposed modified scheme to the creditors, who had approved the original scheme. When the said orders of the Division Bench are assailed before the Apex Court in the appeal, the Apex Court while considering the above issue, observed as under:
'When a scheme is being considered by the Court, in all its ramifications, for according its sanction, it would not be possible to comprehend all situations, eventualities and exigencies that may arise while implementing the scheme. When a detailed compromise and/or arrangement is worked out, hitches and impediments may arise and if there was no provision like the one in Section 392, the only obvious alternative would be to follow the cumbersome procedure as provided in Section 391(1), viz., again by approaching the class of creditors or members to whom the compromise and/or arrangement was offered to accord their sanction to the steps to be taken for removing such hitches and impediments. This would be unduly cumbersome and time consuming and, therefore, the Legislature in its wisdom conferred power of widest amplitude on the High Court under Section 392 not only to give directions but to make such modification in the compromise and/or arrangement as the Court may consider necessary, the only limit on the power of the Court being that such directions can be given and modifications can be made for the proper working of the compromise and/or arrangement. The purpose underlying Section 392 is to provide for effective working of the compromise and/or arrangement once sanctioned and over which the Court must exercise continuous supervision and if over a period there may arise obstacles, difficulties or impediments, to remove them, again, not for any other purpose but for the proper working of the compromise and/or arrangement. ... ...
If the parties have several times to decide the modification with the democratic process, the good part of an election machinery apart, the dirt may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise and arrangement may be so twisted and torn out of context as to be thoroughly useless and may be jettisoned. In order, therefore, to guard against this eventuality and situation, which is clearly envisageable, Parliament has conferred power on the Court, not only to make modifications even at the time of sanctioning the scheme, but at any time thereafter during the period the scheme is being implemented. Conceding that, before the Court sanctions the scheme, it partakes the character of an emerging contract between the Company and the creditors and members; once the Court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the Court to modify, amend or correct or revise the contract the outer periphery or its limit on the power being that, after testing it on the anvil of probabilities, surrounding circumstances, and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and, subject to this limit on the Court's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation. ... ...
Strictly speaking, omission of the original sponsor and substituting another one would not change the 'basic fabric' of the scheme. The scheme in this case is one by which a compromise is offered to the unsecured creditors of the Company and whoever comes in as sponsor would be bound by it. Undoubtedly, a sponsor of the scheme enjoys an important place in the scheme of compromise and/or arrangement but basically the scheme is between the Company and its creditors or any class of them, or the Company and its members or any class of them, and not between the sponsor of the scheme and the creditor or member. The scheme represents a contract sanctified by Court's approval between the Company and the creditors and/or members of the Company. The Company may as well be in charge of directors and the implementation of the scheme may come through the agency of the directors but that would to lead to the conclusion that during the working of the scheme the directors cannot be changed. If the scheme has to be ultimately implemented by the Company as part of its contract and yet its directors can be changed according to its articles of association, we see no difference in the situation where a sponsor is required to be changed in the facts and circumstances of a case. Therefore, it is not possible to accept the submission that as and by way of modification one sponsor of a scheme cannot be substituted for another sponsor.'
In the case of Bhavnagar Vegetable Products Ltd, In re., (1984) 55 CC 107, a creditor has filed an application for winding up of the Company, on the ground that it has become indebted heavily and was unable to pay the creditors. During the pendency of the said petition one of the creditors filed a Company Application under Section 391(1) of the Act sponsoring a scheme on behalf of M/s. Tungabhadra Industries Limited (for short 'TIL'). On receipt of the report of the Chairman of the meeting, the petitioning creditors filed a substantive petition under Section 391(2) for approval of the scheme. When the said petition was pending, two others filed similar petitions offering better terms than the scheme sponsored on behalf of the TIL and the applications filed under Section 391(1) were ordered for consideration of the said scheme by the members of the creditors as well as the shareholders. Thereafter, another sponsor, viz., National Dairy Development Board (for short 'NDDB') filed its application under Section 391(1) proposing its own scheme, and thereafter the Court passed orders for convening the meeting as required under law. Pursuant to the directions of the Court, meetings of the creditors were held to consider the schemes propounded by three different parties. But, subsequent to the filing of the report by the Chairman of the meeting, only NDDB presented its substantive application whereas the other two applicants did not file. At that stage, there were two competing schemes in the field, one of TIL and the other of NDDB. During the course of the pendency of the above two applications, TIL filed an application intimating the Company Court that its scheme is not being supported by the creditor banks. In the course of hearing of the Company Petition filed by NDDB, it was alternatively suggested that if the Court finds any legal flaw in sanctioning the NDDB's scheme, the Court may examine the possibility of selling the assets of the Company to NDDB. The another application was also made by NDDB for substitution of its name in the place of M/s. Veljee Shamjee and Company, the sponsor of TIL scheme and for modification of the said scheme to bring it in line with the NDDB scheme. The Court, after considering the comparative merits of the schemes, approved the scheme sponsored by the NDDB. However, the aggrieved parties carried the matter in appeal before a Division Bench. The Division Bench observed that the submission of the appellant that the order of substitution of sponsor in the original scheme as modified subsequently is contrary to law. The Division Bench noted the question whether substitution of one party for another in a scheme is competent or not is no more a question which is res Integra, as it is concluded by a decision of the Supreme Court in the case of S.K. Gupta v. K.P. Jain (supra) and accordingly negatived the contention of the appellant.
21. If we examine the facts of the case in the light of the above decisions, though in the case of S.M. Holding Finance v. Mysore Machinery Mfrs, (supra) the Karnataka High Court held that compliance of three-fourths majority is not mandatory, but, in fact in the said case also the facts shows that three-fourths majority has approved the scheme, though not by voting at the meeting of the creditors, but, subsequently by filing memos or affidavits before the Company Court. On the other hand, the Gujarat High Court held that the compliance with the statutory provisions is a must, which implies that the scheme proposed must be approved by three-fourths of the majority present and voted. In the present case, admittedly, in the meeting of the members-shareholders, the proposed arrangement compromise was not approved by three-fourths majority of the members present and voted. Though it was claimed by the Petitioner that in the creditors meeting, the requisite three-fourths majority had approved, but the same is disputed by both the workmen as well as by the opposite party, claiming that different classes of creditors were called for in a single meeting and, in fact, if the creditors are separately classified and if their voting pattern is taken into account, though the secured creditors have approved with the requisite majority of three-fourths present and voting, but with reference to the preferential creditors as well as the unsecured creditors, it falls short of the requisite three-fourths majority. In addition, if the scheme as such is considered, whether it is equitable, reasonable, and any reasonable prudent person would approve the same, the answer must be in the negative. In fact, under the scheme of compromise or arrangement, the Petitioner, who is a member of the Company in liquidation and erstwhile Managing Director of the same, seeking approval to dispose of all the assets of the Company for a meager value of Rs. 70 lakhs, which he did not propose even to alter, when the opposite party had valued the same assets of land and buildings at Rs. 250 lakhs and stick to the value of Rs. 70 lakhs offered by him. Under the proposed scheme, the Petitioner is not reviving the Unit, but only seeking permission to dispose of the assets of the Company and proposing to establish the Unit elsewhere. The Petitioner also did not show the existence or availability of any valuable machinery for the proposed relocation of the Unit. The Petitioner proposed to pay only 36.27 lakhs to the workmen as against the dues of 24.72 lakhs and is not even offering any employment to the workers in the new Unit. Therefore, the proposed scheme, on any aspect, could not be considered as a beneficial or equitable with reference to the concerned with the Company in liquidation, except to benefit the sponsorers themselves. In fact, when the Petitioner's scheme is compared with the modification scheme offered by the opposite party, the terms of the opposite party are better for acceptance. But, however, such scheme requires approval of the majority of the members as well as the creditors, as contemplated under Section 391(2) and as there is no such approval with reference to the alternative scheme, this Court is not considering the acceptability of the said scheme.
22. Coming to the claim of the workmen as well as the opposite party that separate meetings of different class of creditors were not called for and therefore, the alleged approval of three-fourths of the value of the creditors present and voted, would not be taken into account, so as to represent different class of all creditors. According to the learned Counsel appearing for the workmen, the workmen have to be considered as a preferential creditors and out of them only 45% present and voted and approved the scheme. Similarly, with reference to the unsecured creditors only to the extent of 52% were present and voted and have approved the scheme proposed by the Petitioner. Therefore, there is no compliance of the provisions of Section 391(2) of the Act approving the scheme with the requisite majority of three-fourths. No doubt the judgments referred to earlier, as well as the provisions of Section 391(1) contemplate meeting of each class of creditors, not all classes of creditors together. In addition, it was the contention of the learned Counsel for the workmen as well as the opposite party that under the scheme proposed by the Petitioner, all the creditors are not treated equally, as different creditors are to be paid differently. Therefore, even on that ground also the meeting of the creditors called for as a single class is not in accordance with the provisions of the Act.
23. In addition to the above, the opposite party filed complaints alleging that the Petitioner misappropriated certain of the assets of the Company and also committed forgery and fraud in obtaining the approval of the scheme in the creditors meeting, for which, in fact, separate complaints were filed, which are to be enquired into.
24. Under the above circumstances, this Court is of the opinion that the scheme proposed by the Petitioner is not in compliance with the requirements of the provisions of Section 391(2), and the said scheme is neither equitable nor beneficial to all the members as well as the creditors.
25. Hence, the Company Petition andthe CA No. 539 of 2002 are dismissed, whilethe CA No. 665 of 2001 is allowed. Nocosts.