1. The present Company Application No. 7 of 1982 arises out of summons for directions dated 14th January, 1982, for the following orders :
'(a) The non-compliance of the order of this Hon'ble court dated 26th June, 1981, passed in Company Application No. 173 of 1981, be condoned.
(b) That the order of this Hon'ble court dated 26th June, 1981, passed Company Application No. 173 of 1981 be vacated.
(c) In the alternative to (b) above, the operation of the order dated 26th June, 1981, passed in Company Application No. 173 of 1981 be stayed until further orders of this Hon'ble court.
(d) In the alternative to prayers (b) and (c) above, liberty be granted to the applicants to propound a fresh scheme of reconstruction under section 391 of the Companies Act, 1956, within three months or within such time as this Hon'ble court deems fit, of the finalisation of the proposal for reconstruction assistance made by the Industrial Reconstruction Corporation of India Ltd.'
2. In support of this summons, the company relies upon the affidavit of Narayan Prasad Jalan, a principal officer of the company, affirmed on 29th September, 1981. In order to appreciate the above prayers, it is necessary to revert to the background of the order dated 26th June, 1981, which is sought to be vacated by prayer (b) or stayed by prayer (c) and for considering prayer (d) to propound a fresh scheme on the edifice of the letter of 'Industrial Reconstruction Corporation of India Ltd.'
3. In Company Application No. 173 of 1981, the company took out summons for directions to convene a meeting under s. 391 of the Companies Act, 1956, supported by an affidavit of the said Narayan Prasad Jalan affirmed on 22nd June, 1981. The learned company judge, Parekh J., by his order dated 26th June, 1981, ordered convening of a meeting of the secured creditors on 26th September, 1981, at 11 a.m. for the purpose of considering, and if thought it, of approving with or without modifications, the scheme of compromise or arrangement proposed to be made between the company and its secured creditors, and a meeting of the unsecured creditors of the company to be convened and held on 26th September, 1981, at 12.30 p.m. for the same purpose. It is not necessary to refer to the rest of the directions which are of usual nature. Thereafter, the company's advocates, under their letter dated 26th June, 1981, forwarded to the Company Registrar drafts of the notices, form of proxy and draft of advertisement and draft of the statement. In order to curtail the argument, I will proceed on the footing that the said draft was considered at a meeting between the company's advocates and the Company Registrar, though it is not clear when such a meeting took place. Beyond submitting the said drafts, the company did not pursue the matter.
4. The matter seems to have rested until the said Narayan Prasad Jalan made an affidavit dated 29th September, 1981, in support of the present Company Application No. 7 of 1982. In this affidavit, it is stated that shortly after the said drafts were submitted by the company to the Company Registrar, the Industrial Reconstruction Corporation of India Ltd. (hereinafter referred to as 'IRCI'), a government company, issued to the company a letter of intent dated 27th July, 1981, inter alia, stating that IRCI was agreeable in principle to grant to the company a reconstruction loan of Rs. 89.50 lakhs on the terms and conditions mentioned therein. IRCI, by another letter dated 31st July, 1981, forwarded to the company the standard forms of loan agreement, deed of hypothecation, etc., to be executed between the parties on the basis whereof IRCI would provide reconstruction assistance and release funds to the company. Mention is also made in the said affidavit about the letter addressed by IRCI to the Secretary, Industries Department, Government of Maharashtra, Bombay, inter alia, recommending that company should be declared a relief undertaking by the Government of Maharashtra for the period of reconstruction and to a meeting, of the board of directors of the company held on 21st August, 1981, and passing of resolution approving and accepting the terms and conditions of the reconstruction assistance from IRCI. Reference is also made about the meeting held between the company and some of the secured creditors, namely, certain banks, for revitalising the company in the light of the proposal of IRCI. It is then submitted in paragraph 5 of the said affidavit that by virtue of the aforesaid events all of which had occurred after the passing of the order dated 26th June, 1981, the very basis of the scheme of compromise or arrangement propounded by the company under s. 391 of the Companies Act has been altered. Moreover, by reason of funds to the extent of Rs. 160 lakhs that are likely to be made available to the company by various financial institutions, nationalised bank and the State Government, the reconstruction and the revival of the company will be much quicker. Furthermore, on finalisation of the proposal for reconstruction by IRCI, the company will have to modify the scheme or will have to propound a fresh scheme in accordance with the terms and conditions stipulated by the Government. It was under these circumstances that the company did not proceed with convening the meeting of the creditors in pursuance of the aforesaid directions of this court given on 26th June, 1981.
5. However, after arguing the matter fully, Shri Vajifdar, learned counsel appearing for the company, reconstructed his arguments and that of his predecessor, Shri Subramaniam, before the judgment and stated that the only prayers that he is now seeking are prayers (a) and (d). He modified prayer (d) and wanted me to grant 8 weeks' time to enable the company to propound a new scheme. In the alternative, the company will amend the old proposed scheme as the company is likely to get assistance from IRCI as per discussions held on Saturday, the 20th Of February, 1982, between Shri Tiwari, Chairman of IRCI, and Shri Tapuriah, Chairman of the company, and that the company is likely to receive a letter from IRCI within a period of about 10 days, to the effect that IRCI is agreeable to sanction a loan of Rs. 89.50 lakhs in terms of its letter dated 27th July, 1981.
6. Coming to the prayer for condonation for not complying with the order dated 26th June, 1981, of Parekh J. it is contended that there was no delay on the part of the company in pursing the matter, but since the letter of IRCI dated 27th July, 1981, was received, therefore, there was no purpose of complying with the directions of the court. The company was required to comply with the various requisitions contained in the letter of IRCI and it has in fact complied with some of the requisitions by the passing of a resolution of the board of directors and by writing to the secured creditors. The company's advocates had lodged the drafts for approval on 26th June, 1981. The advertisement of the meeting could have been published on 5th September, 1981, as the meeting was to be convened on 26th June, 1981. The advertisement of the meeting could have been published on 5th September, 1981, as the meeting was to be convened on 26th September, 1981, but all this became unnecessary and the company got the affidavit of Narayan Prasad Jalan on 29th September, 1981, made for the purpose of applying for condonation of delay. I think that these explanations are not sufficient. The order was made ex parte and it affects a large body of creditors. It may be noted that as many as 22 winding-up petitions are pending against the company. The earliest petition is Company Petition No. 643 of 1981, which is based on a statutory notice dated 18th June, 1981, and the petition was filed on 17th July, 1981, and made returnable on 9th September, 1981. The remaining petitions are field after this petition. Though there is nothing in the minutes of the order passed in Company Petition. Though there is nothing in the minutes of the orders passed in Company Petition No. 643 of 1981, that these petitions were adjourned on account of the scheme proposed by the company, yet Shri Dadlani, learned advocate appearing for the petitioners in that petition, stated that his petition and some of the other petitions in which he appeared, were adjourned on the ground of the scheme proposed by the company for compromise with its unsecured creditors.
7. I feel that the reliance on IRCI's letter dated 27th July, 1981, seems to be after-thought because the company's letter dated 20th March, 1981, addressed to IRCI is a simple application for seeking financial assistance. Secondly, there is no mention in the affidavit in support of the proposed scheme that the company was seeking financial assistance from IRCI. It appears that the letter of IRCI has become handy and it is being made use of in keeping the winding-up petitions at bay and for gaining time. The company's stand that by virtue of the IRCI's letter, the very basis of the proposal for compromise is altered or the proposal requires to be modified or a fresh proposal is required to be initiated in accordance with the terms and conditions stipulated by IRCI, was no justification in not carrying out the directions of the court, especially when the winding-up petitions were being got adjourned on the ground that the company had taken directions for convening a meeting. The rights and interests of a large body of unsecured creditors get involved once the machinery under s. 391 of the Companies Act is set in motion. Normally, the court is liberal in condoning delay, but no my mind, the court should be very slow in condoning delay in matters of this type. In a matter of this type, I am no inclined to condone the non-implementation of the directions of the court. To my mind, the conduct of the company lacks bona fides. The letter of IRCI is being used as an excuse. Interest of a large body of creditors is involved. Several petitions for winding-up are pending. The company has abused the process of the court. Hence, prayer (a) is refused.
8. Coming to the modified prayer (d), the first part relates to granting of 8 days' time to enable the company to make a new proposal to its creditors. Now, it was not seriously argued that the company requires permission of the court to make a fresh proposal to the creditors. If the company genuinely had any fresh proposal, unrelated to or unconnected with IRCI'S loan of Rs. 89.50 lakhs, it could have very well come out with it. The company has all the time since July 27, 1981, when the company allegedly realised that the proposal already made in Company Application No. 173 of 1981 cannot be worked out or had become impracticable. To me, the request for 8 days' time for a fresh proposal appeared to be mala fide. The modification of the prayer was done after the matter was fully argued. This approach cannot be encouraged in a case when the company has already abused the process of the court by not implementing the court's order. Hence, I refuse this part of the modified prayer (d).
9. The second part of the modified prayer (d) is to allow the company to amend the old proposal as the company is likely to get assistance from IRCI and a letter within about 10 days agreeing to sanction a loan of Rs. 89.50 lakhs in terms of IRCI's letter dated July 27, 1981, and also IRCI's letter dated July 31, 1981. The terms and conditions of these two letters were examined with the assistance of the learned counsel. I was informed that the banks have indicated their support and some other conditions within the power of the company, like passing of necessary resolutions are compiled with. But I find that many of the conditions are in the nature of conditions precedent. The Government of Maharashtra is required to declare the company a relief undertaking. On ordinary principles of financing a company in bankruptcy (the present company is liable to be wound up as the company has approached the court under s. 391 of the Companies Act). IRCI is not going to release Rs. 89.50 lakhs from its kitty unless the company fulfills the stiff conditions indicated in the letter dated July 27, 1981, and executes the documents, specified in the letter dated 31st July, 1981, or such other conditions which IRCI might like to impose to safeguard its money. The learned counsel could not satisfy how the company was going to repay the moneys of the unsecured creditors, in other words, about the work ability of the proposal. No attempt was made to show what amendments or alterations are intended to be made in the old proposal. The whole burden of the song was that I should grant time to amend the old proposal as the company was going to receive Rs. 89.50 lakhs from IRCI for reconstruction. We may have a look at the old proposal of compromise. The preamble to the old proposal for compromise reads thus :
'IPCO Paper Mills Ltd. (hereinafter referred to as 'the company') had prior to 24th March, 1979, incurred substantial liabilities. On 24th March, 1979, the management of the company changed hands and the board of directors of the company was reconstituted. The new management, with a view to reconstruct the company and avoid its winding up has made concerted efforts including raising substantial finances from banks and institutions such as the United Bank of India and Dena Bank which have extended additional facilities to the company of aggregate sum of about Rs. 50 lakhs by way of cash credit and bill discounting facilities. The chairman of the reconstituted board, Mr. K. Tapuriah, along with his friends and associates, has also made available to the company finances by way of short-term loans and deposits in excess of Rs. 50 lakhs. The new management has also re-started the plant of the company since March, 1980, and has arranged for smooth availability of raw materials and supplies to the company. However, the company has incurred very substantial liabilities prior to 24th March, 1979, which have severely eroded the viability of the company. The interest on such liabilities places a heavy burden on the company's resources and it is not possible for the company to meet at the same time the mounting burden of interest and to clear the liabilities incurred. The efforts of the new management to revitalise the company, which include plants for modernisation and expansion at a presently estimated cost of about Rs. 75 to 80 lakhs, will be thwarted unless the burden of interest is mitigated and breathing time is given to the company to build up its resources which will not only enable the company to wipe off its past liabilities, but make the company also precludes the banks, financial institutions and others from injecting further funds which are needed for modernisation and expansion as aforesaid. Accordingly, the present scheme is proposed with a view to prevent the winding up of the company, which would not at all be in the interest of its members or creditors, and to reconstruct and revitalise the company.
Subject as hereinafter to the contrary specifically so provided, the scheme will not cover and will not be applicable to liabilities incurred by the company to creditors, secured and unsecured, on and after the March 24, 1979, except in so far as such liabilities relate to interest on principal amounts due and payable as on March 24, 1979.'
10. The secured creditors are (a) the United Bank of India : Rs. 67,97,805 + Rs. 33,29,350 = Rs. 1,01,27,155 inclusive of the guarantee for deferred payment credits from machinery suppliers; (b) Dena Bank : Rs. 54,78,721 + Rs. 14,42,211 = Rs. 69,20,932 inclusive of guarantee of SICOM including interest up to March 31, 1981; (c) Bank of Baroda : Rs. 24,50,933 including interest up to March 31, 1979; and (d) Maharashtra State Financial Corporation : Rs. 12,96,631.
11. The abovementioned amounts (excluding the amounts guaranteed) will be repaid to the secured creditors in the following manner :
'(i) No interest will be paid for a period of three years commencing from 1-4-1981 and ending 31-3-1984;
(ii) On and after 1-4-1984 interest will be paid at the rate of 9% per annum on the reducing balance payable every six months, the first such payment to be made on or before 31-6-1984;
(iii) The principal amount shall be repaid in 20 equal half yearly installments, the first of which shall be paid on or before September 30, 1984.'
12. As on March 31, 1981, a sum of Rs. 3,06,67,677 was due and payable, inter alia, to sundry creditors, fixed depositors and distributors by way of deposits. Out of the said amount, the principal amount due as on March 24, 1979, was Rs. 1,98,92,958 which was sought to be offered to be paid in any one of the following three alternative modes :
'Alternative No. 1 : The principal amount due as on March 24, 1979, to the respective creditors will be repaid without any interest in five equal annual installments, the first of such instalments to be paid within a period of 6 months from the effective date.
Alternative No. 2 : (a) the principal amount due as on March 24, 1979, to the respective creditors will not bear any interest up to the effective date;
(b) On and after the effective date, interest will accrue at 6% per annum on the principal amount due as on March 24, 1979;
(c) The principal amount due as on March 24, 1979, together with the interest as specified in sub-clause (b) will be paid in 9 equal annual instalments, the first instalment to be paid within twelve months of the effective date.
Alternative No. 3 : (a) The principal amount due as on March 24, 1979, to the respective creditors will not bear any interest up to the effective date;
(b) On and after the effective date interest will accrue at 9% per annum on the principal amount due as on March 24, 1979;
(c) The principal amount due as on March 24, 1979, together with the interest as specified in sub-clause (b) will be paid in 12 equal annual instalments, the first instalment to be paid within twelve months of the effective date.'
13. The Bank of Baroda has filed in the Bombay High Court, Suit No. 1481 of 1979 against the company. Two winding up petitions, No. 129 of 1981 and 145 of 1981, were then pending. The company, therefore, sought the 'permanent' stay of the suit and the petitions and stay of all further proceedings.
14. Now, in order to know more about the unsecured creditors, one has to look into the audited balance-sheet for 1979-80 for the year ending 31st March, 1980, with comparative position of the previous year ending 31st March, 1979, and the year ending 31st March, 1981, as per the audited balance-sheet for 1980-81 filed during the course of the hearing by affidavit dated 6th February, 1982. The position is as follows :
----------------------------------------------------------------------Previous For the For theyear ending Liabilities year ending year ending31-3-1979 31-3-1980 31-3-81Rs. Rs. Rs.-----------------------------------------------------------------------Unsecured loans(includinginterest)69,68,934 Fixed deposits 76,24,629 80,57,8631,05,691 From banks against 47,008 54,059bills receivablediscounted4,24,928 Distributors' 10,44,569 7,58,564deposits From 26,24,658 47,82,209others Currentliabilities &provisions;(A) Currentliabilities1,21,69,378 Sundry creditors 1,02,31,342 1,41,05,958Advances from 12,50,000 19,07,521customersOthers 6,99,956-----------------------------------------------------------------------
15. The above comparative table shows a rise in the dues of the fixed depositors, 'others', sundry creditors, except the fortunate distributors who received about Rs. 3,00,000 in 1980-81.
16. Now, under the old proposal, only the principal amount of Rs. 1,98,92,958 as due on March 24, 1979, is offered to the unsecured creditors over a period of years depending upon the option they exercised. They were also asked to forgo about Rs. 1,08,00,000 by way of interest. The affidavit dated June 22, 1981, in support of the judge's summons for convening a meeting in respect of the old proposal shows that the company's paper mill could start only in 1977 and for several reasons the viability of the company was severely eroded resulting in its closure within three months of trial production. The company's management changed on March 24, 1979. The new management obtained feasibility reports to take concrete steps for revitalisation of the company. Rs. 14 lakhs were spent on such revitalisation. In March, 1980, the plant became fully operational producing about 3,400 tonnes of paper and paper board during the year ending March 31, 1981. After setting out that paper and paper board is an industry of national importance and that the company offers employment to over 200 workers in an industrially backward area at Tarapur, it is stated in para. 13 as follows :
'The new management has negotiated with banks and financial institutions which have made available substantial credit facilities to the company and the United Bank of India and Dena Bank have extended additional facilities to the company aggregating to about Rs. 50,00,000. Mr. K. Tapuriah, the chairman, along with his friends and associates has also made available to the company finances by way of short-term loan and deposits in excess of Rs. 50,00,000. However, in view of the past liabilities built up, it is essential, for effectuating the revitalising of the company, and avoiding its winding-up, which will be a loss not only to the shareholders but also to all the creditors of the company, to propound a scheme of reconstruction. A copy of the proposed scheme is hereto annexed and marked exhibit 'B'.'
17. It appears that United Bank of India and Dena bank had extended additional facilities aggregating to Rs. 50,00,000. This seems to be so because if we see the balance-sheet for 1979-80 in the list of liabilities at p. 10, there is an item of Rs. 29,08,151 against 'from banks' and in the balance-sheet for 1980-81 at p. 8, the figure is Rs. 74,36,057 against the same head 'from banks'. Thus, Rs. 45,27,906 appear to have been injected in revitalisation of the company. It is not unlikely that the claim of the company that Rs. 50,00,000 have been provided by the chairman and his friends and associates by way of short-term loan and deposits is true. It is possible that under the head 'from others' on the above pages of the balance-sheets, the figure of Rs. 47,82,209 is represented as loans and deposits but not otherwise. During the course of the hearing, I was informed that the company is a trading company. Thus, the above-mentioned amount of Rs. 95,00,000 has been sucked in without the company having been revitalised and at present its manufacturing activities are at a standstill.
18. At this stage, it is important to note what was the version of the company in its affidavit dated September 29, 1981, in support of the present application. In para. 3, the hope expressed by the company was this :
'... It is anticipated that within a period of about 2 months, the proposal for reconstruction assistance to be rendered to the applicant will be finalised and funds to the tune of about Rs. 160 lakhs will be made available to the applicant.'
19. In para. 5 of the said affidavit, it is stated :
'... Moreover, by reason of funds to the extent of Rs. 160 lakhs that are likely to be made-available to the applicant as well as by various other forms of reconstruction assistance likely to be provided by IRCI, the financial institutions and nationalised banks and the State Government, the reconstruction and revival of the applicant will be much quicker ...'
20. Which of the nationalised banks or financial institutions or when the State Government has offered to provide loans is kept vague. The difference between Rs. 160 lakhs and Rs. 90 lakhs suggested by IRCI is nearly Rs. 70 lakhs. The Bank of Baroda has already filed a suit in 1979 to realise its dues of Rs. 23,50,933 and further interest from April 1, 1979 has mounted on the principal sum due to that bank. The Bank of Baroda does not seem to be in the picture as its name does not find place in the above affidavit. The company has large debts of over two crores to the banks, though against security. Its indebtedness to its unsecured creditors is far greater. The amount of Rs. 95 lakhs provided by the banks and the new management has been exhausted without the company regaining manufacturing activity. Nothing could be shown how the company can pay off its unsecured creditors while it continues to incur more and more liabilities during its battle for survival. In the above circumstances, I do not think that the company can implement its old proposal even in the light of the expected financial assistance of Rs. 89.50 lakhs from IRCI.
21. It was strenuously argued that the court has no power to examine the proposal at the stage of giving ex parte directions under s. 391 for convening a meeting and, therefore, I cannot examine the proposal. In other words, at the stage of giving directions, the court has no right to satisfy itself about the feasibility or workability or practicability or validity of the proposal for which the court gives directions. Merely because the directions are obtainable ex parte, which too is not an absolute rule in my opinion, it does not mean that the court has to mechanically give directions and shut its mind and eyes. It is another thing that as a matter of practice and convenience and to save time, the court does not spend any time on examining a proposal, but that does not mean that it lacks jurisdiction or is prohibited to do so. In a fit case the court can satisfy itself about the proposal before passing it over to the creditors to use their commercial judgment and express their wishes. Looking to the scheme of the provisions of the Companies Act relating to schemes of compromise or arrangement, I think that the court's role is vital, participation the court's jurisdiction is invoked from the stage of ex parte directions and continues if the scheme is sanctioned, until the creditors are paid in accordance with the sanctioned scheme; otherwise, the court found unworkable. The Legislature has thus given a role of real supervision and real participation. It is the duty of the court to see that the scheme it sanctions does not remain on paper but the same is sincerely implemented. To my mind, the duty case on the court and the underlying object of the Legislature can be best attained if the court at the time of sanctioning the scheme also gives direction that the matter be placed before it from time to time, to enable the court to satisfy about the working of the scheme.
22. Reverting to the question of the power of the court, the court has the power to satisfy itself about the feasibility of a proposal of a scheme of compromise which has been put before the creditors, considered and approved by them. It has the power to make modifications, if necessary. It has also the power even the refuse to sanction the same, though approved by the creditors. The exercise of these powers depends on the facts of each case. I think that when the court gives directions ex parte, its responsibility is not in any manner less. Such responsibility becomes heavier in the working out of s. 391, which involves the interest of a large number creditors who are not before the court. In my opinion, the court has the power, at the stage of giving directions, to examine the proposal and its role at this stage is not to act as a mere rubber stamp.
23. This takes us to the question of the validity of the proposal in so far as it relates to deposits to which the provisions of s. 58A of the Companies Act, 1956, and the rules made thereunder, are applicable. I had raised this point. During the course of hearing, Shri Dadlani, learned counsel appearing for some of the creditors, submitted that proposal of compromise cannot cover the fixed depositors. The company by launching a proposal of compromise with its creditors cannot reduce the amount of the deposits or write off the accrued interest or confiscate the future interest. Shri Dadlani referred to s. 58A, of the Companies (Acceptance of Deposits) Rules, 1975, and the Reserve Bank of India Act, 1934, to substantiate his submission. On behalf of the company, it was argued that there is no adequate material on record to decide this question and the point does not arise at this stage of the application.
24. Now, let us see whether on general considerations the fixed depositors can be treated on class similar to trade creditors or sundry creditors. In classifying the creditors in the same class, one has to consider that their rights are similar so that they can consult each other with a view to safeguard their common interest. If their rights are dissimilar, it would be impossible for them to consult together. It would be practical to consult together if their rights, interests and objects are common, otherwise, injustice can be caused to that section whose rights are dissimilar. This might also result in confiscation of the money of one class of creditors by being placed with another class of creditors. In our case, as on March 31, 1981, (see the table above), the rights and interests of 'fixed depositors' of the value of Rs. 80,57,863 cannot be similar to those of 'banks' of the value of Rs. 54,059, 'Distributors' deposits' the value of Rs. 7,58,564, 'Others' of the value of Rs. 47,82,209 and 'Sundry creditors' of the value of Rs. 1,41,05,958. The banks are financial institutions and their case is entirely different. The other creditors are trade, sundry, promoters, their relatives, friends and associates. The trade or sundry creditor's approach and thinking is different because they have traded and dealt with the company. They might have made profits and earned from the company in the past. They might entertain a hope of future gain or profit. They have a kind of business relationship or business thoughtfulness for mutual advantage which is totally absent in the case of fixed depositors. Many of them might think of giving up the past or future interest or even a part of the principal to oblige the company while the hearts of fixed depositors might sink. The trade creditors can possibly get relief in income-tax on the basis of capital loss if a scheme is sanctioned. The case of promoters, their relatives, friends and associates is, on the face of it, for different considerations, which would be difficult to fathom. The management would ultimately safeguard their interest in the best possible manner. Their presence personally or by proxies in a meeting of creditors is expected to be in favour of the proposal, regardless of the merits of the proposal. But in the case of fixed depositors, apart from their relationship with the company being one of a borrower and lender, the fixed depositors act on certain representations of the company made by the media of advertisement or otherwise for attracting deposits. They are governed by special provisions since 1974. The Central Government has come forward to provide certain safeguards to the fixed depositors, which are not meant for any other class of unsecured creditors. The provisions make fixed depositors a class by themselves as discussed further. Fixed depositors cannot be made to deliberate upon the proposal of compromise along with trade and sundry creditors or other classes of unsecured creditors. What might be a normal matter to business, trade and sundry creditors and friends, relatives and associates of the promoters might be prejudicial or harmful to the interest of fixed depositors. In this connection, we may read cl. 5(d) of IRCI's letter dated July 27, 1981, which is in these terms :
'5. (d) The promoters will make adequate arrangement to liquidate the dues of fixed deposit holders as per the projected cash flow and in case of any shortfall of projected surplus, this would be made good by the promoters .....'
25. It seems that IRCI was mindful of the position of the fixed deposit holders and desired to treat them differently from other unsecured creditors, otherwise it would not have required the promoters to make adequate arrangements to liquidate the dues of fixed deposit holders as per the projected cash flow and in case of any shortfall, the promoters would not have been required to make good the same.
26. We now go over to the relevant provisions of s. 58A and s. 58B of the Companies Act, 1956. They are as follows :
'58A. Deposits not to be invited without issuing an advertisement. -
(1) The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which, deposits may be invited or accepted by a company either from the public or from its members.
(2) No company shall invite, or allow any other person to invite or cause to be invited on its behalf, any deposit unless -
(a) such deposit is invited or is caused to be invited in accordance with the rules made under sub-section (1), and
(b) an advertisement, including therein a statement showing the financial position of the company, has been issued by the company, in such form and in such manner as may be prescribed.
(3) (a) Every deposit accepted by a company at any time before the commencement of the Companies (Amendment) Act, 1974, in accordance with the directions made by the Reserve Bank of India under Chapter III-B of the Reserve bank of India Act, 1934, shall, unless renewed in accordance with clause (b), be repaid in accordance with the terms of such deposit.
(b) No deposit referred to in clause (a) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under sub-section (1) were in force at the time when the deposit was initially accepted by the company.
(c) Where, before the commencement of the Companies (Amendment) Act, 1974, any deposit was received by a company in contravention of any direction made under Chapter III-B of the Reserve Bank of India Act, 1934, repayment of such deposit shall be made in full on or before 1st day of April, 1975, and such repayment shall be without prejudice to any action that may be taken under the Reserve Bank of India Act, 1934, for the acceptance of such deposit in contravention of such direction.
(4) Where any deposit is accepted by a company after the commencement of the Companies (Amendment) Act, 1974, in contravention of the rules made under sub-section (1), repayment of such deposit shall be made by the company within thirty days from the date of acceptance of such deposit or within such further time, not exceeding thirty days, as the Central Government may, on sufficient cause being shown by the company allow.
(5) Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause (c) of sub-section (3), or in the case of a deposit referred to in sub-section (4), within the time specified in that sub-section, -
(a) the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realised, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the court, trying the offence, to the person to whom repayment of the deposit was to be made, and on such payment, the liability of the company to make repayment of the deposit shall, to the extent of the amount paid by the court, stand discharged;
(b) Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine.
(6) Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in excess of the limits prescribed under sub-section (1) or in contravention of the manner or condition prescribed under that sub-section or in contravention of the provisions of sub-section (2), as the case may be, -
(a) the company shall be punishable, -
(i) where such contravention relates to the acceptances of any deposit, with fine which shall not be less than an amount equal to the amount of the deposit so accepted;
(ii) where such contravention relates to the invitation of any deposit, with fine which may extend to one lakh rupees but shall not be less than five thousand rupees;
(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine .....
Explanation. - For the purposes of this section 'deposit' means any deposit of money with, and includes any amount borrowed by, a company but shall not includes such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
58B. Provisions relating to prospectus to apply to advertisement. -
The provisions of this Act relating to a prospectus shall, so far as may be, apply to an advertisement referred to in section 58A.'
27. Before we consider the scheme of these provisions, it is necessary to bear in mind the rules, relevant for our purpose, made by the Central Government under s. 58A in consultation with the Reserve Bank of India, called 'Companies (Acceptance of Deposits) Rules, 1975'. These rules came into force from February 3, 1975. The term 'deposit' is defined by rule 2(b). 'Deposit' means any deposit of money with, and includes any amount borrowed by, a company. Various kinds of borrowings mentioned in clauses (i) to (x) of this sub-rule (b) are excluded and these are not relevant in this case.
28. Rule 3 deals with 'Acceptance of deposits by companies'. Rule 3 A was added with the effect from 1st April, 1978, and reads as follows :
'3A. Maintenance of liquid assets. - (1) Every company shall, before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than ten per cent. of the amount of its deposits maturing during the year ending on the 31st day of March next following in any one or more of the following methods, namely :-
(a) in a current or other deposit account with any scheduled bank, free from charge of lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses (a) to (b) and (ee) of section 20 of the Indian Trusts Act, 1882 (2 of 1882) :
Provided that with relation to the deposits maturing during the year ending on the 31st day of March, 1979, the sum required to be deposited or invested under this sub-rule shall be deposited or invested before the 30th day of September, 1978.
Explanation. - For the purpose of this sub-rule, the securities referred to in clause (b) or clause (c) shall be reckoned at their market value.
(2) The amount deposited or invested, as the case may be, under sub-rule (1), shall not be utilised for any purpose other than for the repayment of deposits maturing during the year referred to in that sub-rule, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below ten per cent. of the amount of deposits maturing until the 31st day of March of that year.'
29. Rule 4 is connected with form and particulars of advertisements for inviting deposits. Rule 4A is about statement in lieu of advertisement. Rules 5 speaks of form of application for deposits. Rule 6 takes care of furnishing of receipts to depositors. Rule 7 requires a company to keep Registers of Deposits. Such a register has to take note, inter alia, the date on which each deposit is repayable and date or dates on which payment of interest is to be made. Rule 8 makes general provisions regarding repayment of deposits, but this rule shall not apply to repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of conversion, with the consent of the depositors, of deposits into secured debentures in accordance with the guidelines issued by the Government of India from time to time regarding the issue of 'rights' debentures. Rule 13 is again important and requires filing of Return of Deposits with the Registrar. It reads as follows :
'13. (1) Every company to which these rules apply, shall, on or before 30th day of June, of every year, file with the Registrar, a return in the form annexed to these rules and furnishing the information contained therein as on the 31st day of March of that year, duly certified by the auditor of the company.
(2) A copy of the return shall also be simultaneously furnished to the Reserve Bank of India.'
30. Rule 11 provides for penalty for contravention of the above rules with fine.
31. These provisions are simple and clear and do not present difficulty in understanding the object and scope of the same. Sub-ss. (1) and (2) of s. 58 A empower the Central Government to prescribe limits up to which a company may invite or accept deposits from the public or from its members. It makes it obligatory for a company to invite deposits by issue of an advertisement in a prescribed form. The company is prohibited from directly or indirectly inviting deposits either by itself or through any other agency unless the 1975 Rules are compiled with.
32. Sub-s. (3) of s. 58A deals with deposits accepted before the enactment of s. 58A. It is incumbent on a company to repay every deposit in accordance with the terms of such deposit. Every such deposit is not permitted to be renewed by the company unless such deposits are brought in conformity with the requirements of the 1975 Rules and are within the limits up to which deposits can be accepted; otherwise the company is prohibited from renewing the old deposits on old terms. Deposits which were received by a company in contravention of the directions given under Chapter III-B of the Reserve Bank of India Act, 1934, were required to be repaid in full on or before 1st April, 1975. While affording this opportunity, the company is not relieved of the legal consequences of contravening the directions of the Reserve Bank of India in accepting such deposits.
33. Deposits accepted after the enactment of s. 58A in excess of the limits up to which deposits can be accepted as prescribed by the Central Government and the 1975 Rules are required to be repaid within the time fixed under sub-s. (4). Deposits which were and are accepted on contravention of the above 1975 Rules are to be repaid in full within the time fixed under sub-s. 3(c) and sub-s. (4); otherwise the company must face the severe penalties fixed under sub-s. (5). These provisions show that an obligation is case on the company to repay the deposits in accordance with and within the time fixed under sub-s. 3(c) and sub-s. (4) without a demand being made by the depositor. The words used are 'where a company 'omits' or 'fails' to make repayment of a deposit'. The company has to be careful and vigilant in repaying the amounts within the specified time. The use of the expression 'omits' to make repayment or 'fails' to make repayment, indicates that the law-makers were aware that a company could take up various pleas about not making repayment of a deposit and, therefore, care has been taken to put the entire burden of making repayment on the shoulders of a company to make repayment within the specified time. The fine that a court is required to impose is quantified so far as the minimum is concerned and that is not less than twice the amount of the unpaid deposit. If the fine is realised, the court trying the case is required to pay the amount of the deposit to the person to whom the repayment was to be made. On such payment being made by the court, the liability of the company to its depositor is discharged to the extent the amount is paid by the court. Every officer of the company who is in default is also liable to be punished with imprisonment for a term extending to five years and also liable to fine. The provisions for repayment being made within the time-limits fixed by law, the repayments being sought to be secured out of heavy fines on the company and every officer of the company being exposed to jail sentence up to five years and fine, are indicative of the intention of the Legislature to safeguard the deposits from the public and the members of the company.
34. Under rule 3A of the 1975 Rules, a company is required, before the 30th day of April of each year, to deposit or invest in various account and securities a sum not less than 10 per cent. of the amount of its deposits maturing during the year ending on 31st day of March next following. To this extent the repayment of the deposits is being secured. Under cl. (c) of rule 8, consent of the depositor is required for conversion into secured debentures of the amount of the amount of the deposit required to be repaid before the before the expiry of the period for which it was accepted. Rule 10 requires filing of return with the Registrar of Companies.
35. The above provisions show that the deposits accepted from the public and members of the company are of a class of creditors distinct and separate from others. Their rights are different from those of other class of creditors, secured or unsecured. If they are sought to be covered by a proposal of compromise, their rights and recoveries would be shattered. If the depositors are included in the scheme, they might not get the amount of their deposits out of the fines and they might not be able to follow the liquid assets required to be maintained by a company under rule 3A. A company by launching a scheme of compromise and arrangement covering the deposits from the public and its members might use it as a shield against prosecution under sub-ss. (5) and (6) of s. 58A and contravention of 1975 Rules. In the present case, the company has contravened the provisions of s. 58A and the 1975 Rules and this is an admitted position and beyond controversy. In the balance-sheet for the year 1978-79, cl. (ix) of the auditors' report says :
'(ix) In our opinion, and according to the information and explanations given to us, the company has not complied with the directives issued by the Reserve Bank of India and/or the provisions of section 58A of the Companies Act, 1956, and the rules framed thereunder.'
36. The directors' report for the year 1978-79 was signed by Shri K. Tapuriah, B. K. Choudhury, V. R. Desai, Subir Biswas, H. Nanjundiah and N. K. Kejriwal, and clauses 5(b) thereof is in these words :
'5. (b) Clauses (ix) of the above report. - The company could not repay the fixed deposits accepted by it on maturity. The interests on theses deposits also remained in arrears. This default has occurred mainly on account of the bad financial position of the company. Further, the company had received and accepted fixed deposits in excess of the permissible limits specified under section 58A of the Companies Act, 1956, long before the present directors were appointed. All possible steps are being taken to regularises the same, but it may take quite some time before much can be done in this regard.'
37. In the balance-sheets for the years 1979-80 and 1980-81, the auditors' report repeats that in each of these two years the company has not complied with the directives issues by the Reserve Bank of India and/or the Provisions of s. 58A and the rules framed thereunder. For both these years, the board of directors continued to be the same as per the year 1978-79 except that Shri S. J. Parekh joined the board of directors in the year 1979-80, and all of them remained silent the above remarks of the auditors in the directors' report.
38. Though the provisions of s. 621 of the Companies Act, 1956, are there for taking cognizance of the above breaches for the last three years, yet their is inaction. The rights of the depositors are thus maimed and crippled. It is patent in the case before me that what is given by the lawmakers is taken away by the enforcement machinery. It may be advisable to give the right to take enforcement machinery. It may be advisable to give the right to take action to the aggrieved depositors, so that before a company financially becomes incapable to pay the fines, the depositors can pursue their remedy; otherwise the laudable object of securing the repayment of the deposit out of the fines will be annihilated.
39. I am not impressed by the company's technical objection to My deciding these questions on the ground that there is no material before the court or the question does not arise in the present application. The material about the contravention of the above provisions is patent on the face of the balance-sheets for the years 1978-79, 1979-80 and 1980-81. No attempt was made during the hearing into consideration. All the time the emphasis was that I should not consider these questions and allow the proposal to be considered by the creditors. If I were to accept these technical objection, I would be overlooking the contravention of the provision of the Companies Act.
40. To sum up on this point, the depositors who are governed by the provisions of s. 58A and the Rules made thereunder Stand outside a proposal for a scheme of compromise or a scheme for compromise. The rights and remedies enacted in respect of deposits invited or received from the public by a company would be nullified if a company is allowed to launch a proposal for compromise in respect of such public deposits. In the present case, the depositors are of the value of Rs. 80,57,863 as on 31st March, 1981, or of the value of Rs. 69,68,934 as on 24th March, 1979, under the old proposal. The company and every officer of the company concerned is also prima facie in breach of s. 58A and the 1975 Rules made thereunder. In the light of the above discussion, the applicant-company cannot be permitted either to initiate a fresh proposal or to modify the old proposal is so far as it involved the claims of the creditors who are governed by s. 58A and the Rules made thereunder.
41. The prothonotary and senior master to forward a copy of the judgment to the Ministry of Law, Justice and Company Affairs, New Delhi, and the Reserve Bank of India to enable them to consider whether the provisions of s. 621 or any other relevant provision of the Companies Act, 1956, require to be amended in the light of the above observations.
42. In the result, Company Application No. 7 of 1982 is dismissed. No order as to costs.