Tek Chand, J.
1. (dated 26-4-1957):-- These are two connected matters and may be disposed of by one order. C. M. No. 99 of 1956 is a petition on behalf of the Patiala Starch and Chemical Works Limited, Rajpura, made under Ss. 391 and 394 of the Companies Act, 1956. C. M. No. 141 of 1956 is an application presented on behalf of the Registrar of Companies, PEPSU and Himachal Pradesh. Patiala, under Section 439 of the Companies Act, 1956, for winding-up of the Patiala Starch and Chemical Works Limited, Rajpura, under the orders of the Court.
2. The Patiala Starch and Chemical Works Limited (hereinafter to be referred to as the Company) was incorporated as a public limited company under Patiala Companies Act. 1996, Bk on 21st January 1944, with its registered office at Rajpura. The issued, subscribed and paid up capital of the company is Rs. 11,24,630 consisting of 1,12,463 ordinary shares of Rs. 10 each. The company met with reverses from the very start.
The report of the Directors to the shareholders of the company for the period ended 31st March 1946 showed that the manufacture of starch was stopped pursuant to the freezing of the stock of maize in consequence o the decision of the Government. The factory has remained idle ever since and no starch seems to have ever been manufactured by it. In the year 1947, the company decided to instal an oil crushing mill as a subsidiary industry, as it was them believed that the oil industry offered a good scope.
The oil mill was put up in 1947 and it appears that on the one hand the starch plant remained idle and so far as the oil crushing activity was concerned the company suffered heavy losses, as is amply clear from the annual balance-sheet. According to the report of the Directors to the share-holders of the company dated 25th July 1953 the company had incurred a total loss amounting to Rs. 4,07,403 as appeared from its balance-sheet. It was stated -
'Taking into consideration the present heavy indebtedness and daily growing losses, the Directors of the Company have very reluctantly come to a decision that it is no longer possible for the Company to continue its business and that it is advisable to wind it up voluntarily.'
Share-holders of the company were required to take decision on this issue at an extraordinary general meeting of the company which was called on 31st October 1953. It was ultimately decided that the company should not go into liquidation but an attempt should be made to revive it by raising a sum of Rs. 10,00,000 by the issue of the mortgage debentures. The scheme was, that the present starch equipments --which had hardly been used -- should be modernised by replacement with machinery imported from abroad.
This was the view of the directors as expressed in their report for the year ended 31st March 1954. According to the report of the next year, it was stated that an application for a loan of Rs. 10,00,000 against the security of the fixed assets of the company was made to the Ministry of Rehabilitation, Government of India, and, the Rehabilitation Department was willing to advance money required for purchasing new machinery for modernisation, provided, that the capital assets of the company should be free from any encumbrance, which meant, that the loans which had been taken by the company from the Bank of Patiala, should be repaid.
These schemes never materialised and the indebtedness went on mounting. According to the company's balance-sheet, as on 31st March 1956 the total loss had risen to nearly Rs. 5,00,000 and the net assets of the company after depreciation etc., amounted to a little under Rs. 12,50,000. In its written statement dated 24th September 1956, in para. 5, the company stated, that the market value of its assets was hardly equal to fifty per cent, of the value as shown in the balance-sheet. Strong exception is taken by the objectors to the above statement and they contend that this is an attempt to deliberately under-estimate the assets of the company in order to coerce them into accepting the same.
3. It will be proper at this stage to give the broad features of the scheme, which the company wants me to sanction. According to the scheme of arrangement the company shall be amalgamated with the Modi Spinning and Weaving Mills Co., Ltd., and reduced. The members of the transferor company (The Patiala Starch and Chemical Works Limited, Raj-pura) shall be allotted one share of Rs. 10 in the capital of the transferee company for every ten shares of Rs. 10 fully paid up by them in the transferor company. Share-holders, holding-less than ten shares will be issued coupons of the face value of Re. 1 for one share held in the transferor company.
The transferee company shall issue one fully paid share in exchange of such ten coupons or shall pay Re. 1 in cash for every coupon at the option of the member. The whole of the undertaking, property and liabilities of the transieror company shall be transferred to the transferee company from the date the scheme is finally sanctioned. By order dated the 4th July 1956, on the company's application under S. 391 of the Companies Act, Gurnam Singh, J., gave directions that a meeting of the members-of the Company be called on the 25th August 1956, at the registered office of the company, to consider and if thought fit to pass the proposed scheme of arrangement with or without modifications.
Shri Dara Singh, Advocate, was to preside at the meeting. On the 31st of August 1956, Shri Dara Singh submitted his report of the meeting. It appears from his report, that the meeting was held at 9 a. m., and there were present 20 persons including shareholders & one nonmember proxy. The first two clauses of the scheme were opposed by two persons but after that, they left the meeting. The remaining clauses of the scheme have been passed unanimously. The first two clauses which were opposed by two share-holders were passed with the requisite statutory majority. Certain proxies were declared invalid as they had not been received within the time allowed.
One of these proxies was received from His. Highness the Rajpramukh. It was declared invalid on the ground that it was unstamped and had been received late. It appears, that a telegram had been received from His Highness, who held shares of the value of two lacs in this company to the effect that Shri Dalip Chand, Advocate, would act as his proxy and that the confirmation and proxy form had been posted.
The telegram was also received within 48 hours of the meeting. It was said that the other proxies were rejected by the Chairman. The total number of notices which were issued were 1,440 out of which 120 notices were received back undelivered.
4. Seventeen share-holders have filed objections in this Court against the sanctioning of the scheme- They hold shares of the value of Rs. 2.30.710. Their grievance is that the scheme is not based upon correct and complete information. They contend that the heavy losses indicated in the balance-sheets have been falsely inflated. The management is guilty of misconduct in relation to the affairs of the company and the object of the scheme is to prevent an enquiry being made into mailers that required investigation.
They further contend that there has been no proper valuation of the assets of the company by an expert. They are of the view that the share-holders will get a fair deal if the company is sent into liquidation. They think that according to the terms of the scheme, what is being offered to them is grossly inadequate. The company has filed written-statement to the objections filed by the dissenting share-holders. They have traversed the allegations made by the dissenting share-holders.
The stand taken by the company is, that the liquidation of the company will be injurious tothe interest of the creditors and the shareholders. It will result in great delay in the realisation of the assets of the company, will hardly meet the demands of the creditors of the company, as the liquidation expenses will be very high. It is contended that if the scheme is sanctioned, the creditors will be paid in full immediately by the transferee company and the share-holders will receive a part of their capital either in the form of shares in a bigger and prosperous company, or in cash.
It is denied that the management has been guilty of any act of misfeasance, no facts have been suppressed and the share-holders have been kept in touch with the state of the com- party's affairs from time to time. The management contends that in order to resuscitate the company, a very large outlay is required, and the plant of the starch factory needs modernisation.
5. Lengthy arguments have been addressed to me by the learned counsel, appearing on behalf of the company, the dissenting shareholders, and by the Deputy Advocate-General, who supported the Registrar's application for winding-up of the company. The arguments of Mr. Tuli appearing on behalf of the company, in brief are that the share-holders at no stage asked for the winding up of the company and Registrar alone has made such an application.
The wishes of the majority should be respected and liquidation ought not to be ordered when it is opposed by majority. He says that only two-shareholders attended the meeting to oppose the scheme. The other share-holders who have now appeared to oppose the application under Sections 391 and 394 of the Indian Companies Act, 1956, are doing so out of spite and not in the best interest of the creditors and the shareholders.
6. Mr. Dalip Chand, counsel for objectors, maintains that the scheme is not bona fide and its object is to benefit the Directors. Under the scheme, share-holders are not getting a fair price and in substance the scheme has not been backed by the requisite majority. Mr. Dalip Chand says, that the scheme originated with nine Directors of Company, five out of whom are common to the transferor and the transferee companies.
The other four Directors of this Company, who are big persons, the learned counsel says, really do not stand to lose anything by the scheme as the overall benefit of this transaction will be beneficial to them. The persons who voted for the scheme according to the learned counsel for the objectors have got bigger inte- ' rests in the transferee company.
Mr. Dalip Chand vehemently contends that according to the latest balance-sheet of 1956 the net assets of this company are shown to be of the value of nearly 12,50,000 rupees. These assets have been deliberately shown to be of much lesser value and their true market value cannot now be deemed to have been reduced by fifty per cent, as contended on behalf of the company. This has been done with a view to deprive the share-holders of fair value of their capital.
7. Mr. Lachhman Das, Deputy Advocate-General, supporting the Registrar's application for the winding up of the company argues that the business has remained suspended for five years and the balance-sheets of the last ten years have been disclosing a sorry state of affairs. No business has been done in starch and' the factory hardly functioned. It is wanton act on the part of the company now to contend that the machinery which hardly ever worked is now valueless and needs scrapping. The company has had enough time to resuscitate itself if it could.
The scheme is unfair, because the total of net assets of nearly 12,50,000 rupees, was arrived at after allowing for depreciation on machinery and building. Its market value cannot ^ be very much below the face value, if those in charge of the management of the company were maintaining correct accounts and submitting true reports. The valuation in the balance-sheet was arrived at by the Directors of the Company, and if they reduced their own figure by fifty per cent, they cannot escape the conclusion that the price which is now being offered to the share-holders under the scheme is grossly unfair.
This is especially so because no attempt has been made to get the assets of the company valued, preferably by an expert, who may bring ' his disinterested and independent judgment to bear on the point. Mr. Tuli desires me to give effect to the wishes of the statutory majority of the members present, representing three fourths in value and voting at the meeting in person or by proxy.
It is true that Court ought not to substitute its discretion for that of the share-holders, who should normally be permitted to manage their own affairs themselves, but it is also to be remembered, that in sanctioning a scheme, the Court does not simply register the wishes of the share-holders or the creditors, as the case may --be, as expressed in their resolution passing the scheme. It is the duty of the Court to examine the scheme and to see whether there has been compliance with the provisions of law.
The scheme must conform to the standard of reasonableness, having regard to all the information that may be available. The commercial advantage, and the parties who stand to benefit thereby, are matters, which cannot be left to the exclusive decision of the persons attending the meeting. The fact that the shareholders and creditors have approved of a scheme should normally carry great weight, but there may be equally weighty considerations on the other side.
Where the share-holders have not independently guarded their interests, the Court cannot abdicate responsibility of examining the proposal in the scheme and decide whether it conforms to the standards of fairness and reasonableness: see Calicut Bank Ltd, v. Devani Ammal, AIR 1940 Mad 621 (A). It Is a notorious fact, that share-holders or as a matter of that creditors, are a class who are generally indifferent to their own affairs not only in India but also in England as is clear from the following observations of Vaughan Williams, J., In re, English Scottish and Australian Chartered Bank, (1893) 3 Ch 385 at p. 396 (B) -
'I confess that I have very little belief in creditors of a company being able to look after their own interests. It is a matter of history that -- never mind what safeguards may be suggested, never mind what statutory precautions may be given -- the creditors of an individual bankrupt have never been roused to look after their own interests.........but experience shows that creditors, whether of a company or of an individual man, never can be Crusted to take care of themselves. The disjected forces of individual creditors are a mere nothing as against the consolidated forces of those who are often deeply interested in bringing about an adoption of the scheme which is presented to the creditors........ am not at all disposed to think that creditors are able to take care of themselves, or ready to suppose that when the Legislature threw upon a Judge the duty of sanctioning the scheme agreed to by the creditors, he, in the absence of fraud, or in the absence of voting obviously for oblique reasons, was practically bound to sanction the scheme adopted by the creditors.'
When it comes to schemes the indifference of the creditors can be matched with that of the share-holders of the company. Sometimes they have to be protected against their lethargy or inertia- An instance in point is furnished by this case when the members of the company who have vehemently opposed the sanctioning of the scheme in this Court did not even care to attend the meeting either personally, or through proxy, despite the fact, that some of them held very large stakes.
The scheme has to be examined by the Court with a view to see, whether, it is such as an independent and honest member of the company, while wisely acting in respect of his own Interest, can reasonably approve. In Albama, New Orleans, Texas and Pacific Junction Railway Co., In re, (1891) 1 Ch 213 (C), Lord Justice Pry posed the question which always arises in such cases and answered it thus at p. 247:--
'Under what circumstances is the Court to sanction a resolution which has been passed approving of a compromise or arrangement? I shall not attempt to define what elements may enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposal was made in good faith; and. further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast.'
Again at pp. 238 and 239, Lindley, L. J., observed:--
'..........what the Court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the majority has been acting bona fide. The Court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by business man.
The Court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it.'
The above passages were cited with approval by Lindley, L. J., in (1893) 3 Ch 385 at p. 409 (B). While adhering to what he had said in the Albama case (C), he further observed -
'While, therefore, I protest that we are not to register their decisions, but to see that they have been properly convened and have been properly consulted, and have considered the matter from a proper point of view, that is, with a view to the interests of the class to which they belong and are empowered to bind, the Court ought to be slow to differ from them. It should do so without hesitation if there is anything wrong; but it ought not to do so, in my judgment, unless something is brought to the attention of the Court to show that there has been some material oversight or miscarriage.'
The above dicta were cited with approval by Maugham, J., In re, Dorman, Long and Co. Ltd., (1934) 1 Ch 635 at pp. 655, 656 (D). Later, the House of Lords endorsed the above view In John Kennedy Carruth v. Imperial Chemical Industries Ltd., 1937 AC 707 at p. 709 (E). The Courts in India have followed the principle enunciated in the above cited English authorities, and have subjected the schemes of arrangement to careful scrutiny in accordance with the standards indicated justifying judicial interference.
The Courts will not shirk their responsibility in the matter, should not relax their vigil and must not content themselves by just registering the resolution passed by the requisite majority. (See Peoples Bank of Northern India Ltd., Lahore, In the matter of, AIR 1933 Lah 51 (F); In the matter of Calcutta Industrial Bank, Ltd., 52 Cal WN 425 (G); In the matter of, Light of Asia Insurance Co. Ltd., AIR 1942 Cal 578 (H); In re, Tata Iron and Steel Co. Ltd., AIR 1928 Bom 80 (I); Serajgunj Loan Office Ltd. v. Nil Kanta Lahiri, AIR 1935 Cal 777 (J); Lawrence Dawson v. J. Hormasji, ILR 10 Rang 438: ,(AIR 1932 Rang 154) (K) ).
8. After giving my anxious consideration to the arguments addressed on behalf of the respective contestants, I will prefer a just, equitable and reasonable scheme of arrangement, whereby the Company may be able to exist, and in 'time, to flourish, than to a compulsory liquidation terminating its existence with very slim chances of payment in full and with reasonable expedition.
The scheme as is placed before me suffers from certain material defects. The net assets of the company which according to the balance-sheet of 1956 were of the value of nearly 12,50,000 rupees cannot, all of a sudden, be deemed to be fifty per cent, of their book value, as alleged by the Managing Director of the Company in the written-statement dated the 24th September 1956.
9. This estimate loses its persuasive faculty when it is realised that there has been no proper or expert valuation. I am not satisfied that the members of the company were fairly represented at the meeting that was held. In view of the interests of the Directors of this Company in the transferee company, I will be straining my credulity to the utmost if I were to imagine that those who voted for the scheme acted bona fide in the interests of all the shareholders.
It is unfortunate that one big share-holder who had shares of the value of two lac rupees, could not exercise his vote through his proxy because of the defects indicated above. I cannot, however, close my eyes to the fact that if his proxy had been in time and regular or the shareholder was himself present, the proposed scheme could not have been passed by statutory majority at the meeting.
It will be wrong on my part to sanction the scheme simply because three-fourths majority -- though its interest in the entire capital is fractional -- who had their special personal reasons for supporting it, has passed it. In the circumstances of this case, I desire to steer clear of the two conflicting proposals. Neither I think, that the Company should go into liquidation, nor can I approve of the scheme, in the absence of fuller information, and more adequate representation of the members.
I do not feel satisfied in my mind that the proposed arrangement judged from the standard of a man of business, is fair and reasonable. Under these circumstances, I think, that the only proper course for me to adopt, is to direct that there shall be another meeting convened to ascertain whether the real block of the shareholders is in favour of this scheme, alter the members have had an opportunity of acquainting themselves more thoroughly with the affairs of the Company, and in particular, after the assets of the Company, as indicated in the balance-sheet of 1956, have been valued by an expert.
10. In view of what I have stated above I pass the following order. A meeting of the members of the Patiala Starch and Chemical Works Ltd., Rajpura, shall be called for consideration of the scheme of arrangement (Annexure D) to be held at the registered office of the Company at 9 a. m. on 13th July, 1957, to consider and if thought fit to pass the proposed scheme of arrangement with or without modifications that may be proposed at the meeting.
11. Shri D. N. Awasthy Advocate shall preside at the meeting and in case he is not willing to act or is not available, then Shri Gomti Parshad Advocate shall preside at the meeting.
12. Notices of the meeting will be sent to the members, by the Chairman, under postal certificates at their registered addresses to be supplied by the Company. The notices shall be despatched at least 21 days before the date of the meeting.
13. Notices of the meeting shall also be advertised in 'The Tribune' Ambala and in the official Gazette by one insertion at least 21 days before the date of the meeting,
14. The members who are not able toattend the meeting in person may send in theirproxies which should reach the chairman atleast 48 hours before the time of the meeting.The proxy may be member or a non-member,but if he is not a member, he shall have onlya right to vote but not to participate in thediscussion or speak at the meeting. Quorumof the meeting shall be twenty present in person or by proxy.
15. The chairman shall have the power to adjourn the meeting to some other date or time if this is considered necessary.
16. The chairman shall submit his report to this Court on or before 20th July, 1957,
17. Objections, if any, should be filed in this Court on or before 3rd August, 1957. The Company is directed to get its assets valued by an expert within four weeks of this order and to send a copy of the valuation report to the shareholders and the Registrar of Companies. Case to come up on 9th August, 1957.
18. The remuneration of the chairman and of the alternate chairman shall be Rs. 300/- and Rs. 150/- respectively.
19. A copy of this order be sent to the respective chairman.