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Shree Farm Chemicals Pvt. Ltd. Vs. Baba Rao Tulshiram Sande and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAndhra Pradesh High Court
Decided On
Case NumberCompany Petition Nos. 6 and 7 of 1978 and 10 and 16 (Company Application No. 142 of 1978) of 1979
Judge
Reported in[1983]53CompCas729(AP)
ActsCompanies Act, 1956 - Sections 187, 391, 391(1), 391(2), 392, 392(1), 393, 393(1) and 439
AppellantShree Farm Chemicals Pvt. Ltd.;pesticides and Breweries Ltd.;baba Rao Tulshiram Sande;central Paints
RespondentBaba Rao Tulshiram Sande and ors.;shree Farm Chemicals Pvt. Ltd.;shree Farm Chemicals Pvt. Ltd.;shre
Excerpt:
company - winding up - sections 187, 391, 391 (1), 391 (2), 392, 392 (1), 393, 393 (1) and 439 of companies act, 1956 - creditors of company filed petition for winding up of such company - scheme of compromise proposed by company in application to memorandum of association accepted majority of ordinary creditors and by secured creditor which is a bank - creditors who are opposing scheme alleged collusion of bank and debtor-company to avoid winding up - such contention not sustainable for reason that bank which is secured creditor will be most beneficial on wound up - action of bank intended to help company survive and to guarantee unsecured ordinary debtors - such intention cannot deemed to be mala fide - scheme intended to avoid civil death of company which can pay off debts on future.....ramachandra rao, j. 1. the common question that arises for consideration in these four company petitions is, whether the company, shree farm chemicals private ltd., should be ordered to be compulsorily wound up or whether sanction should be accorded for the compromise or arrangement proposed by the said company in company application no. 142/78. as common questions arise in all these four applications, they are heard together and disposed of by a common order. 2. the relevant facts are as follows : shree farm chemical private ltd. (hereinafter called 'sfc') was incorporated on january 18, 1975, under the companies act, 1956, with an authorised capital of rs. 5,00,000. the paid up capital is rs. 3,60,000 divided into 3,600 shares of rs. 100 each and the shares are fully paid up. the main.....
Judgment:

Ramachandra Rao, J.

1. The common question that arises for consideration in these four company petitions is, whether the company, Shree Farm Chemicals Private Ltd., should be ordered to be compulsorily wound up or whether sanction should be accorded for the compromise or arrangement proposed by the said company in Company Application No. 142/78. As common questions arise in all these four applications, they are heard together and disposed of by a common order.

2. The relevant facts are as follows : Shree Farm Chemical Private Ltd. (hereinafter called 'SFC') was incorporated on January 18, 1975, under the Companies Act, 1956, with an authorised capital of Rs. 5,00,000. The paid up capital is Rs. 3,60,000 divided into 3,600 shares of Rs. 100 each and the shares are fully paid up. The main object of SFC is to manufacture and sell insecticides and pesticides. SFC commenced business of manufacturing and selling of insecticides and pesticides ever since its incorporation. It has set up three units in the States of Tamil Nadu, Karnataka and Andhra Pradesh. The unit in Karnataka State which is in Mysore City is running. The unit in Guntur in the State of Andhra Pradesh which has been taken on lease, has commenced manufacturing insecticides and pesticides. The necessary plant and machinery have been acquired for the unit in the Madras City in the State of Tamil Nadu, and the Karnataka Bank Ltd. has agreed to finance the said unit on the basis of hypothecation of land, structure and machinery. Owing to natural calamities in the State of Andhra Pradesh like severe cyclones, the recoveries were very poor and the outstandings due to SFC had increased. Another unit of SFC at Warangal was closed on account of unforeseen financial difficulties. It is stated that as the State of Andhra Pradesh is predominantly dependent on agriculture SFC has immense profit potentialities. SFC has to recover debts to the tune of Rs. 42,64,321.48 as on March 31, 1978.

2. While so, M/s. Pesticides and Breweries Ltd., Bombay, filed Company Petition, C.P. No. 6/78, stating that SFC was indebted to M/s. Pesticides & Breweries Ltd., in a sum of Rs. 64,387.84 with interest thereon at 15% per annum from June 27, 1976, and that SFC was unable to pay its debts and it was, therefore, just and equitable that SFC should be wound up. Another petition C.P. No. 7/78 was filed by Sri Baburao Tulsiram Sande carrying on business as sole proprietor under the name and style of Indo Advertising at Bombay stating that SFC became indebted to him in a sum of Rs. 65,945.80 and that SFC was liable to be wound up for non-compliance with the statutory notice of demand under s. 439 of the Companies Act.

3. Notice was ordered on these two petitions to SFC. Both SFC and the Karnataka Bank filed counter-affidavits opposing the petitions for winding-up of SFC. At that stage, SFC filed company application, C.A. No. 142/78, under s. 391(1) of the Companies Act, 1956, for the purpose of considering the approving with or without modification a scheme of compromise or arrangement proposed to be made between SFC and its creditors, and that directions should be issued for convening, holding and conducting meetings of the different classes of creditors.

4. According to the scheme or arrangement annexed to the application, the anticipated cash flow and funds available for payment of debts is mentioned as follows :

1979-80 1980-81 1981-82(figures in lakhs of rupees)Net Profit 3.82 5.22 6.64Depreciation 0.45 0.42 0.38------ ------ ------4.27 5.64 7.02Less : Machinery instalment 0.60 0.60 0.60------ ------ ------3.67 5.04 6.42------ ------ ------

5. SFC filed the memorandum of association, the list of outstandings due to the company and list of creditors. To this application, Baburao Tulsiram Sande, sole proprietor, Indo Advertising, Bombay, Pesticides and Breweries Ltd., Bombay and Karnataka Bank Ltd., Hyderabad, have been impleaded as respondents Nos. 1 to 3.

6. The respondents Nos. 1 and 2 filed counter-affidavits opposing the application, whereas the 3rd respondent, bank, has supported the application. An objection was taker by respondents Nos. 1 and 2 that the scheme annexed to the application did not set out several particulars with regard to discharge of the debts, whereupon I gave directions on December 17, 1978, that the respondents should serve a notice on the SFC calling upon it to furnish particulars which they allege were not mentioned in the scheme and that SFC should furnish the information within two weeks after service of such notice and also file an additional affidavit furnishing the said particulars and serve the copies of the same on the respondents. Accordingly, notice was served on SFC for furnishing the details, and the SFC furnished the details as mentioned in the annexures. SFC also filed an affidavit on December 16, 1978, stating that as per the directions of the court, a statement giving full details of liabilities, projected profits and a list of creditors and a schedule of repayment have been furnished. Copies of the same have been filed as annexures to the said affidavit. Thereafter, when the company application, C.A. No. 142/78, came up for hearing, the same was opposed by respondents Nos. 1 and 2 but supported by the 3rd respondent, bank.

7. Sri V. K. Damle, the learned counsel for the 1st respondent, raised three objections : (i) that the application did not comply with the requirements of s. 391 and the rules as it was not accompanied by documents mentioned in Appendix II, item 6; (ii) that the application did not disclose material facts and did not satisfy the requirements of the proviso to s. 391(2); and (iii) that the scheme of compromise proposed was such that no reasonable businessman would approve of the same, and that the scheme was also not bona fide. By order dated July 27, 1979, I held that it was not necessary or proper to go into the merits of the scheme or arrangement proposed at that stage, and that the several objections raised by the respondents could be considered only when the court is called upon to sanction the scheme or arrangement under s. 391(2), and that a prima facie case was made out for summoning and holding the meetings of the different classes of creditors. Accordingly, I allowed the said application, C.A. No. 142/78, and appointed Sri K. Somakonda Reddy, advocate, as chairman, to conduct the meetings of the different classes of creditors and submit his report.

8. Before the meetings were held, another creditor, Central Paints Ltd., Bombay, filed a petition, C.P. No. 10/79, for winding-up SFC under s. 439 of the Companies Act alleging that SFC was indebted to the said company in a sum of Rs. 2,12,057.09, together with interest at 15% per annum, and that SFC had failed and neglected to pay the debt and it was unable to pay its debts, and that it was also just and equitable to pass an order winding up SFC. Notice was ordered on this application to SFC, and this petition is opposed by SFC and the 3rd respondent, the sole secured creditor.

9. The chairman, Sri K. Somakonda Reddy, held meetings of different classes of creditors, viz., secured creditors, preferential creditors and ordinary creditors and reported that the secured creditor, the Karnataka Bank, and the preferential creditors voted in favour of the proposed scheme or compromise. With regard to the ordinary creditors, he reported that 13, ordinary creditors, the value of whose debts came to Rs. 14,08,128.74 voted in favour of the proposed scheme of compromise. One creditor, Pesticides & Breweries Ltd., the petitioner in C.P. No. 6/78, whose value of debt is shown as Rs. 64,367.84, voted for the proposed scheme or compromise subject to the condition that the Karnataka Bank Ltd. should repay the ordinary creditors according to a reasonable schedule and if the said condition was not fulfilled, they were opposed to the scheme or compromise. There was a dispute with regard to the value of the debt of the Central Insecticides and Fertilisers, the petitioner in C.P. No. 10/79, and the chairman decided that the value of the debt of Central Insecticides and Fertilisers, Bombay, was determined as Rs. 98,722.26 for the purpose of the meeting of the ordinary creditors. The chairman reported that the Central Insecticides and Fertilisers, the petitioner in C.P. No. 10/79, and Indo Advertising, the petitioner in C.P. No. 7/78, voted against the proposed scheme of compromise and the values of their debts are mentioned as Rs. 98,722.26 and Rs. 65,784.44 respectively aggregating to Rs. 1,64,506.70. Four other creditor, (1) Doris (India) Engineers Pvt. Ltd., Madras, (2) Samanto Laminates Pvt. Ltd., Hyderabad, (3) Kanoria Chemicals Industries Ltd., Calcutta, and (4) The Central Scientific Supplies Co. Ltd., Hyderabad, did not file authorisations as required under s. 187 of the Companies Act and r. 70(2) of the Companies (Court) Rules, 1959, and their ballot papers were rejected and the value of the debts was not taken into account. However, it was mentioned that the first two creditors, Doris (India) Engineers Pvt. Ltd. and Samanto Laminates, voted in favour of the scheme of compromise, whereas the other two creditors voted for the scheme of compromise subject to the condition that the Karnataka Bank Ltd. should repay the ordinary creditors according to reasonable schedule and if that condition was not fulfilled, they were against the scheme.

10. Thereafter, SFC filed company petition, C.P. No. 15/79, under s. 391(2) of the Companies Act praying that the scheme of compromise or arrangement proposed by the company should be sanctioned by the court. The respondents, Nos. 1 and 2, and another creditor, M/s. Central Paints Ltd., filed counters opposing the petition.

11. Sri. K. G. Kannabiran, the learned counsel for the petitioner, contended that the majority of the ordinary creditors had approved the scheme proposed by the SFC, and that the secured creditor, the Karnataka Bank, wholly accepted the scheme, and that the scheme is fair and reasonable and is beneficial to the creditors as well as the shareholders of the company, and that a winding-up of the company will not benefit the ordinary creditors, and that the company is a commercially viable unit, and that the company has to realise nearly Rs. 42 lakhs odd debts due by farmers and if the company is allowed to function, it will be able to realise considerable profits and discharge all its debts in accordance with the proposals made in the scheme.

12. Sri P. R. Ramachandra Rao, the learned counsel appearing for the 2nd respondent, contended that the Karnataka Bank, the secured creditor, represents 84% of the value of the total debts, and that the endorsement of the scheme by the bank is only to cover up its improper and improvident advance made to SFC, that the advances made by the bank to the SFC to the tune of Rs. 67 lakhs odd were not warranted, as the assets of the SFC did not measure up to 3 lakhs of rupees, and that the bank is supporting the scheme out of selfish interest with a view to recover its advances together with interest thereon as a secured creditor, and that there is collusion between the bank and the SFC, and that the readiness on the part of the bank to advance loan to SFC disregards the interests of the ordinary creditors and that the company should not be allowed to run for the benefit of the bank at the cost of ordinary creditors.

13. Sri Venkata Rao Sawarikar, the learned counsel for the Karnataka Bank, contended that the bank sent a letter approving the scheme and agreed to take on a pro rata basis along with unsecured creditors even in respect of its secured debt, and the bank agreed to further finance the company as the bank wants to see that the company survives, and that the petitions for winding-up have been filed only with a view to pressurise and coerce the bank to pay the debts due by the SFC to the creditors who filed the petitions for a winding-up.

14. Sri. V. K. Damle, the learned counsel for the 1st respondent raised the following objections :

(1) that the company petition, C.P. No. 15/79 filed by SFC does not comply with the requirements of ss. 391 and 393 of the Companies Act.

(2) the unsecured class of creditors were not fairly and properly represented at the meetings of the ordinary creditors.

(3) Majority of creditors represented by the bank were not acting bona fide.

(4) The scheme proposed by SFC is such that a man of business acting in his own interest will not approve of the same.

15. Before adverting to the contention of Sri P. R. Ramachandra Rao that there is a collusion between the bank and SFC, it is appropriate to consider the objections raised by Sri V. K. Damle.

16. The first contention of Sri Damle is that the majority of creditors representing 3/4ths in value did not approve of the scheme, and that there is no compliance of s. 391(2) of the Act. Under s. 391(2), each class of creditors should approve the scheme by 3/4ths majority and then only the sanction of the court binds all the creditors. The proviso to s. 391(2) requires that all the material facts such as latest financial position, latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company and the like should be disclosed to the court. The contention of Sri Damle is that the Karnataka Bank was shown as secured creditor in the scheme for Rs. 67,56,377.86 whereas in the report of the chairman, the bank was shown as secured creditor for Rs. 57,54,234.25 and as an ordinary creditor for Rs. 10,02,143.61 and by adding this value of debt due to the bank as an ordinary creditor, the value of the debts owed to ordinary creditors was inflated to Rs. 14,08,128.74; and if the value of the debt of Rs. 10 lakhs odd owed to the Karnataka Bank is excluded and the Karnataka Bank is not treated as an ordinary creditor, then, the requisite majority in number representing 3/4ths in value of the ordinary creditors will be wanting and if so, there is no compliance with the provisions of s. 391(2), and the court cannot sanction the scheme. But, I find it difficult to accept this submission. In the chairman's report, the value of 13 ordinary creditors including the Karnataka Bank was shown as Rs. 14,08,128.74. One ordinary creditor of the value of Rs. 64,367.84 conditionally accepted the scheme, whereas two creditors of the value of Rs. 1,64,506.70 voted against the scheme.

17. It is the contention of Sri Damle that the value of Rs. 10,02,143.61 shown as the debt due to the Karnataka Bank as an ordinary creditor should be excluded inasmuch as the Karnataka Bank was always shown as a secured creditor for the amount of Rs. 67,56,377.86 and that there was no justification for splitting up the same and showing the Karnataka Bank as a secured creditor for Rs. 57,54,234.25 and as an unsecured creditor for Rs. 10,02,143.61. But I am unable to accept his submission. Sri Damle contended that both in the scheme and in the balance-sheets, the Karnataka Bank was shown as secured creditor for Rs. 67 lakhs odd, and that the bank never raised any objection to the same. Therefore, it cannot be treated as a secured creditor for Rs. 57 lakhs odd, and as an ordinary creditor for Rs. 10 lakhs odd.

18. Sri Venkata Rao Sawarikar submits that there was no admission on the part of the bank that it is a secured creditor for Rs. 67 lakhs. In the counter in C.P. No. 6/78, it is mentioned in paras. 3 and 4 that the SFC was liable to the bank under various heads of account as on December 14, 1978, to the extent of Rs. 64,92,746.06 and that the SFC had hypothecated and pledged all its movable and immovable asses with the bank, and as such, the bank is the only secured creditor of the company. In the counter-affidavit, the only allegation is that the SFC owes to the bank to the extent of Rs. 64 lakhs odd, but there is no admission that it was a secured creditor to the extent of Rs. 67 lakhs odd.

19. In the statement relating to the projected profits and pro rata repayment schedule, under the head 'Liabilities' Rs. 67,56,377.86 was shown as due to the Karnataka Bank and within brackets it was mentioned 'secured'. In this statement filed by the SFC, there is no mention that the bank is a secured creditor to the extent of the said amount. In the note appended to the said statement, it is mentioned as follows :

'Excepting Karnataka Bank all the others are unsecured creditors. All machinery and properties of the company are hypothecated to M/s. Karnataka Bank Ltd.'

20. In this note, there is no mention of the value of the secured debt. The aforesaid statement merely shown that the total liability of the SFC to the Karnataka Bank was Rs. 67 lakhs odd. In the balance-sheet of SFC as at March 31, 1978, the secured loans shown as Rs. 14,28,487.21 and unsecured loans as Rs. 53,27,890.65. In schedule F appended to the balance-sheet, the value of the sundry debtors (unsecured) was shown as Rs. 43,25,747.04. Admittedly, the bank has a floating charge on the sundry debts, and treating the aforesaid sum of Rs. 43,25,747.04 as a secured debt and adding the same to Rs. 14,28,487.21 shown as secured debt in the balance-sheet, the total amount due to the bank as secured creditor comes to Rs. 57,54,234.25. Thus, the bank is a secured creditor only to the extent of Rs. 57,54,234.25. The unsecured loans were shown in the balance-sheet as at March 31, 1978, as Rs. 53,27,890.65. From this, if a sum of Rs. 43,25,747.04 shown as sundry debts, on which the bank claimed a floating charge, is deducted, the unsecured debt comes to Rs. 10,02,143.61. In view of the aforesaid position, the bank was treated as secured creditor for the amount of Rs. 57,54,234.25 and as unsecured creditor for Rs. 10,02,143.61 and, accordingly, the votes of the bank were valued at the meetings held by the chairman of secured creditors and unsecured creditors.

21. Further, when the meeting of the ordinary creditors was held, 16 ordinary creditors including the Karnataka Bank were present. No objection was raised by the contesting respondents or any other ordinary creditor that the bank should not have been allowed to take part in the meeting, and that its vote as an ordinary creditor should not be counted. In view of the aforesaid facts and circumstances, I do not find any merit in the contention of Sri V. K. Damle that the bank should not be treated as an ordinary creditor to the extent of Rs. 10,02,143.61 and that the value of the debt of the bank as an ordinary creditor for the sum of Rs. 10,02,143.61 should be ignored.

22. It is next contended by Sri Damle that the bank is a separate class of creditor, whether secured or unsecured, and that the bankers' rights are not similar to (those of) unsecured creditors as the bank has assumed full control over the affairs of the company and, therefore, the bank should not have been allowed to take part in the meeting of the ordinary creditors. But, I find no merit in this submission. As already held by me, the bank is both a secured and an unsecured creditor to the extent of the amounts mentioned in the chairman's report, and, therefore, the bank was rightly allowed to take part at the meeting of the ordinary creditors.

23. It was next contended by Sri Damle that the preferential creditors did not approve of the scheme by the requisite majority, as the value of their debts was shown as nil. There is no merit in this submission. Though the value of the debts of the preferential creditors was shown as nil, all of them voted in favour of the scheme. Therefore, there is no substance in the contention of Sri Damle that the preferential creditors did not approve of the scheme by 3/4ths majority.

24. Sri Damle next Contended that all material facts as required by the proviso to s. 391(2) were not disclosed. His contention is that the following three factors should have been disclosed.

(i) Value of the creditors should be correctly ascertained.

(ii) All available avenues of finance and sources should be disclosed.

(iii) Manner and method or mode of application of funds towards execution of the scheme and repayment of debts should also be disclosed.

25. With regard to joint (i), it is submitted that in the list of debtors, M/s. Central Insecticides and Fertilisers was shown as a debtor to the extent of Rs. 1,63,059.67 and this firm is a creditor of the SFC and filed company petition, C.P. No. 10/79, for the winding-up of the company, where it is claiming a sum of Rs. 2,12,057.09 as due to it. But, in the said Company Petition No. 10/79, this amount is being disputed. Therefore, it cannot be said that there is any non-disclosure of any material facts.

26. It is submitted by Sri Damle that Doris (India) Engineers (Private) Ltd. shown as an ordinary creditor for a sum of Rs. 64,193.75 was not mentioned in the list of creditors. But, this creditor attended the meeting of the ordinary creditors after the chairman published notice in the dailies. Therefore, all the ordinary creditors were aware that Doris (India) Engineers (Private) Ltd. is also an ordinary creditor. Further, in the chairman's report, it is stated that Doris (India) Engineers (Private) Ltd., Madras, did not file the authorisation as required under s. 187 of the Companies Act and r. 70(2) of the Companies (Court) Rules, 1959, and its ballot paper was rejected and the value of its debt was not taken into account. Therefore, no prejudice was caused to the ordinary creditors in not showing M/s. Doris (India) Engineers (Private) Ltd. in the list of creditors.

27. It is next contended by Sri Damle that the scheme does not disclose the source of funds. But, so far as the current assets are concerned, schedule F has set out the same and, hence, it could not be said that there was any non-disclosure of the current assets. Sri Damle submitted that he could not raise any objection that the current assets were not properly disclosed. With regard to working capital, Sri Damle submitted that the source of funds was properly disclosed, as it was mentioned in annexure VI that the Karnataka Bank was willing to advance funds.

28. It is contended by Sri Damle that the value of the debtors was not correctly disclosed. His submission is that in the list of debtors, some debts were disclosed, and that in the list of debtors, it is not mentioned how many debts are bad or doubtful or disputed or what legal action has been taken in respect of the said debtors. But in the petition, the total number of debtors was mentioned and the total value of the debts due to the company was shown as Rs. 43,25,747.04. The company, thus, disclosed the total number of the debtors and also the value of their debts, and it cannot be said that there was a non-disclosure of any material fact relating to the aforesaid debts.

29. It is next submitted by Sri Damle that no details or data were furnished with regard to the estimation or calculation of the profits. He submitted that the figures relating to the profits for the years 1979-80, 1980-81 and 1981-82 vary and that one of the units, namely, the Madras unit, has not yet started functioning, and that the profits mentioned are speculative and imaginary and unrealistic, and that the profits earned by SFC during the years 1975-76 to 1978-79 show considerable variation, and that the terms of the Mysore unit taken on lease basis, were not disclosed, and that no provision was made for payment of income-tax while estimating the profits, and no provision for payment of dividends is made, and the scheme provided for payment of 50% of the liabilities up to the year 1983-84, but it does not disclose as to how the balance of the liabilities would be paid. But, I am unable to accept any of these submissions. SFC had shown sales of Rs. 48.1 lakhs for the year ending March 31, 1976, Rs. 75.35 lakhs for the year ending March 31, 1977, Rs. 5.43 lakhs for the year ending March 31, 1978, and Rs. 3.11 lakhs for the year ending March 31, 1979. It is alleged in the petition that due to recent cyclones and other unfavourable circumstances, the loans could not be repaid by the farmers, and, hence, the company ran into difficulties. The details of production and the profit possibilities have been given in the annexure to the scheme and an estimate of profits can only be made on a reasonable basis considering the company's past performance. It is stated that due to the two cyclones, farmers were badly affected and could not repay the debts, and that it the company is allowed to function, it will realise considerable profits. In the circumstances, I think the company had disclosed all the relevant material facts and has complied with the provisions of s. 391(2) and, therefore, there is no substance in the contention that there was a non-disclosure of any material facts.

30. It is submitted that there is non-compliance with s. 393(1)(a) inasmuch as the interest of one of the directors was not disclosed in the notice calling for the meetings. The contention is that Mr. Bele was a proprietor of M/s. Aswini Plastics and Chemicals and he is also a director of SFC; and this fact was not disclosed. No doubt, this was not mentioned in the notice, but I do not think this omission by itself is fatal to the maintainability of the petition under s. 391(2) of the Act.

31. It is next contended by Sri Damle that unsecured creditors were not fairly represented, because the bank should be treated as a separate class of creditor. I do not find any merit in this submission. The mere fact that a creditor happens to be a bank would not in any manner alter its character as an ordinary creditor and, therefore, the bank was properly classified as an unsecured creditor along with the other unsecured creditors.

32. The submission of Sri P. R. Ramachandra Rao and Sri Damle is that the majority of creditors did not act bona fide. This contention is based on the basis that the bank being the major creditor, did not act bona fide, and that it was supporting the scheme of compromise only with a view to delay the winding-up and to benefit the bank, and that the profits earned by the bank or the debts realised by the debtors will go into the hands of the bank, and, therefore, there are no bona fides on the part of the bank. As already held by me, the bank has got sufficient interest in SFC and it has approved the scheme, and the bank is interested in seeing that the company is kept alive and does not suffer a civil death. When a financial institution like the bank has approved the scheme after assessing the potentialities of the SFC, the court can take into consideration the aforesaid fact in sanctioning the scheme.

33. Sri Venkata Rao Sawarikar contended that these petitions for winding-up were filed only with a view to pressurise the bank to pay the debts of the said petitioners. Even otherwise, I find that the winding-up of the company will adversely and prejudicially affect the interests of the ordinary creditors, whereas if the company is kept alive, there is some reasonable chance of the company making profits and realising the debts due to it and discharging its liabilities.

34. Sri Damle contended that the scheme is such that no ordinary business man will approve of the same, and that the scheme's success is problematic and it may run into rough weather, and the company's chances of making profits are remote, and the fact that the unsecured creditors are not likely to get any amount if SFC is wound up, should not be taken into consideration and force the ordinary creditors to accept the scheme. As already held by me, the scheme proposed appears to be reasonable and it is beneficial to all the creditors, and a reasonable chance should be given to SFC to allow it to run instead of allowing it to suffer a civil death by winding-up the same.

35. It is contended by Sri P. R. Ramachandra Rao that the bank is supporting the scheme on account of collusion. But, the facts and circumstances do not warrant any such inference. On the other hand, the bank, which has considerable stakes, is interested in seeing that the company is alive and the bank has further proposed to advance funds to the company to enable it to function and make profits and discharge its debts. If the company is wound up, the bank, as a secured creditor, would stand to benefit most, as the entire assets of SFC are hypothecated to the bank and the ordinary creditors will not have any chance of recovering any amount. In the circumstances, there is no merit in the contention of the contesting respondents that there is any collusion between the SFC and the bank. In this context, it is useful to remember the observations made by his Lordship, Desai J. in In re Maneckchowk and Ahmedabad . [1970] 40 Comp Cas 819 as follows (headnote at p. 821) :

'The court in exercising its discretion in sanctioning a scheme of compromise with members and creditors under section 391(2) of the Companies Act, 1956, must treat it as cardinal that its function does not extend to usurping the views of the members or creditors. It must look at the scheme to see that it is a reasonable one and, while so doing, the court will be strongly influenced by a big majority vote and the reasons which actuated the contesting creditors in opposing the scheme. None the less it is essential that the scheme must be a fair and equitable one, though it is one of the business of the court to judge upon the commercial merits which in fact is the function of the creditors and members.'

36. Again his Lordship observed that (headnote ibid) :

'The scheme has not got to be scrutinised by the court with that much care with which an expert will scrutinise it, nor will it approach it in a carping spirit with a view to pick holes in it. If the majority is acting in a bona fide and honest manner, and in the interests of the class that if purports to represent, then, if the scheme is such as a fair-minded person, reasonably acquainted with the facts of the case as prevailing at the time when the scheme was sponsored and approved, can regard it as beneficial for those whom the majority seeks to represent, then, unless there are some strong and cogent grounds to show that the scheme was conceived, designed or calculated to cause injury to others, the court will ordinarily sanction it, rather than reject it. While examining the scheme, the court should, keeping in view all the aspects of the matter, prefer a living scheme to compulsory liquidation bringing about an end to a company.'

37. In the instant case, the only secured creditor and the majority of the other class of creditors have accorded their approval for the scheme and, therefore, I do not find any valid objections for refusing to accord sanction for the scheme proposed.

38. In the schedule of projected profits and pro rata repayment, an abstract of disbursement of profits among creditors on pro rata basis during the first five year from 1979-80 to 1983-84 has been given. In view of the pendency of these petitions, and until the sanction of the court is accorded, the scheme could not be given effect to and the disbursement of profits among the creditors on pro rata basis as mentioned in the above abstract could not be given effect to for the year 1979-80. Therefore, the scheme can only be sanctioned subject to modification with regard to the disbursement of the profits to the creditors. Under s. 392(1) :

'Where a High Court makes an order under s. 391 sanctioning a compromise or an arrangement in respect of a company, it -

(a) shall have power to supervise the carrying out of the compromise or arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.'

39. Sub-section (1)(b) of s. 392 expressly confers power on the court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.

40. Dealing with the scope of s. 392, the Gujarat High Court held in Mansukhlal v. M. V. Shah [1976] 46 Comp Cas 279 at p. 291, that :

'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.'

41. This has been approved by their Lordships of the Supreme Court in S. K. Gupta v. K. P. Jain [1979] 49 Comp Cas 342 (SC), where their Lordships observed at p. 351 as follows :

'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 s. 392, the only obvious alternative would be to follow the cumbersome procedure as provided in s. 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 the widest amplitude on the High Court under s. 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 s. 392 is to provide for effective working of the compromise and/or arrangement once sanctioned and over which the court must exercise continuous supervision [see s. 392(1)]. 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. This power either to give directions to overcome the difficulties or if the provisions of the scheme themselves creat an impediment, to modify the provisions to the extent necessary, can only be exercised so as to provide for smooth working of the compromise and/or arrangement. To effectuate this purpose the power of the widest amplitude has been conferred on the High Court and this is a basic departure from the scheme of the U.K. Act in which provision analogous to s. 392 is absent. The sponsors of the scheme under s. 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme of compromise of arrangement to make alterations and modifications as proposed by the court. But the Legislature foreseeing that a complex or complicated scheme of compromise or arrangement spread over a long period may face unforeseen and unanticipated obstacles, has conferred power of the widest amplitude on the court to give directions and, if necessary, to modify the scheme for the proper working of the compromise or arrangement. The only limitation on the power of the court, as already mentioned, is that all such directions that the court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement.'

42. In the instant case, for the proper working of the scheme of compromise of arrangement, it is necessary to modify the scheme and the schedule of repayment of debts, and the schedule of repayment of debts to the creditors on pro rata basis as mentioned in the schedule to the scheme has to be modified and the repayment of debts for the first five years, 1979-80 to 1983-84 should be altered as 1980-81 to 1984-85.

43. Company Petition, C.P. No. 15/79, is ordered and the scheme is sanctioned subject to the aforesaid modification of the schedule with regard to repayment of the debts. In the circumstances of the case, there will be no order as to costs. In view of the sanctioning of the scheme of compromise or arrangement, the winding-up petitions, C.P. No. 6/78, C.P. No. 7/78, and C.P. No. 10/79, are liable to be dismissed, and are accordingly dismissed, but in the circumstances, without costs.


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