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Delhi Flour Mills Co. Ltd. and Another Vs. Indian Hardware Industries Ltd. and Others - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Applications Nos. 227, 247, 335 and 365 of 1980
Judge
Reported in[1983]53CompCas814(Delhi); ILR1980Delhi1182
AppellantDelhi Flour Mills Co. Ltd. and Another
RespondentIndian Hardware Industries Ltd. and Others
Cases ReferredS. K. Gupta v. K. P. Jain
Excerpt:
companies act (1956) (as amended)--winding up--what is 'reasonable' behavior of a bank when the interests of the bank secured creditor, propounder and unsecured creditors have to be balanced.; the instant case raises the question as to the best manner of balancing the apparently conflicting interests of the bank, a secured creditor, the propounder holding majority shares, the unsecured creditors and the minority group in the company in relation to the scheme of arrangement for the revival of a sick industrial unit. the bank sought to restrain the propounder from working the unit in the present proceedings.; 1. the propounder was not justified in working the die-casting unit or any other unit without the concurrence of the bank. the bank has the right to preserve the mortgaged assets and,.....h.l. anand, j.1. these four applications c.a. no. 247/80 by the propounder and c. as. nos. 227/80, 335/80 and 366/80 by the bank raise a difficult question as to the best manner of balancing the apparently conflicting interests of the bank, a secured creditor, the propounder, holding majority shares, the unsecured creditors and the minority group in the company, in relation to the scheme of arrangement for the revival of a sick industrial unit. 2. the facts are these. delhi flour mills company limited, for short, d.f.m., at all material times, was an industrial venture of the jain family, which consisted, at one time of r. k. jain, his brother j. p. jain and other members of the family, for short, the jain family. indian hardware industries ltd., for short, the company, was a subsidiary.....
Judgment:

H.L. Anand, J.

1. These four applications C.A. No. 247/80 by the propounder and C. As. Nos. 227/80, 335/80 and 366/80 by the bank raise a difficult question as to the best manner of balancing the apparently conflicting interests of the bank, a secured creditor, the propounder, holding majority shares, the unsecured creditors and the minority group in the company, in relation to the scheme of arrangement for the revival of a sick industrial unit.

2. The facts are these. Delhi Flour Mills Company Limited, for short, D.F.M., at all material times, was an industrial venture of the Jain Family, which consisted, at one time of R. K. Jain, his brother J. P. Jain and other members of the family, for short, the Jain Family. Indian Hardware Industries Ltd., for short, the company, was a subsidiary of D.F.M. It was incorporated in 1951 with an authorised capital of Rs. 15 lakhs. The issued capital, which was fully paid, was of the order of Rs. 18 lakhs divided into 80,000 shares of Rs. 10 each. 44,000 shares, representing the majority, were held by the D.F.M., of the remaining 36,000 shares, J. P. Jain and other members of his branch, for short, Jain Group, between them held 31,000 shares. The company, which was, inter alia, engaged in the business of manufacture of builders' hardware, has its factory at Faridabad. The industrial activity of the company had been lying in a state of suspended animation since 1971, following disputed in the Jain Family, which had controlling interest in D.F.M. In 1971, Indian Smelting and Refining Company Limited, for short, the petitioning creditor, filed a petition, being C.P. No. 50/71 (See [1981] 51 Comp Case 51 , for the winding-up of the company on the ground that it was unable to pay its debts. The petitioning creditor had claim of Rs. 3 lakhs. D.F.M. itself was the largest unsecured creditor of the company with a claim of Rs. 23 lakhs. Dena Bank, a secured creditor, had a claim of about Rs. 25 lakhs secured by the mortgage and pledge of all the movable and immovable assets of the company. This has since swelled to over 60 lakhs on account of interest, etc., during the pendency of proceedings in this court. In 1974, disputed in the Jain Family were apparently resolved as consequence of which one of the branches of the Jain Family, headed by R. P. Jain, R. K. Jain having died meanwhile, required the controlling interest in D.F.M. Soon, thereafter, D.F.M. proposed a scheme of compromise/arrangement between the company and its unsecured creditors. The scheme was adopted by the members as well as its unsecured creditors, and was eventually sanctioned by this court by in order of October 15, 1975 in C.P. No. 86/75 (Sec [1981] 51 Comp Cas 51. Soon, thereafter, by an agreement of January 19, 1976, D.F.M. transferred its entire holding in the company and assigned its claim of Rs. 23 lakhs against the company to one S. K. Gupta and his nominees, for short, the Gupta Group, for a consideration of Rs. 12 lakhs and the amount was paid on different dates between January 20, 1976, and February 27, 1976. By C.A. No. 193/76, the Gupta Group sought their substitution in place of D.F.M. as proponents of the scheme. K. P. Jain, a member of the Jain Group, who had apparently not reconciled to these changes, opposed it and sought the winding-up of the company. By two separate orders of April 26, 1976, this court accepted the application of the Gupta Group thereby substituting the Gupta Group for D.F.M. as proponents and rejected the application of K. P. Jain for the winding-up of the company. By an order of April 28, 1976, made in C.P. No. 86/75 (See [1981] 51 Comp Cas 51, this court also directed that an extraordinary general meeting of the company be held for the purpose of eliciting a board of directors of the company in view of the transfer of controlling interest in favor of the Gupta Group. K. P. Jain appealed against all the three orders. The appeal against the order directing holding of the extra ordinary general meeting (C.A. No. 17/76) is still pending and since the meeting had already been held and the board of directors had been elected, the Division Bench, admitting the appeal, granted a stay of the implementation of the decision of the meeting. By an order made on July 16, 1976, the Division Bench accepted the appeal against the order granting substitution and set aside the order on the ground that the substitution of a propounder was beyond the scope of modification of the scheme under s. 392 of the Act and the Gupta Group, in any event, had no locus stand to seek substitution as they were neither the members nor creditors of the company. It was held that although the transfer of the shares of the D.F.M. in favor of the Gupta Group was complete as between the transferors and the transferees, the transferees had not become members of the company in the absence of registration of the transfer. It was further held that the assignment of the debt in favor of the Gupta Group was not according to law and the Gupta Group, thereforee, were not even the creditors of the company. The Division Bench, however, dismissed the other appeal against the order rejecting the application of K. P. Jain for the winding-up of the company leaving the future course of action to be decided by this court. Meanwhile, J. P. Jain filed a suit, being Suit No. 281/76, in his name and in that of company on the original side of this court for a declaration that the Gupta Group were not the members of the company and had no right to the management and control of the company and were not entitled to exercise any authority as directors of the company. An application was also made for interim directions in terms of the main relief and by an order made by Chadha J., on October 25, 1976, in I.A. No. 849/76, the interim order, restraining the Gupta Group from acting as directors of the company till the registration of the transfer of the shares in their favor, issued earlier, was made absolute till the decision in the suit, inter alia, on the ground that the plaintiffs had a prima facie case for the relief and the balance of convenience was in their favor. In the course of the order, the learned judge relied on the decision of the Division Bench referred to above in support of the plea that prima face the transfer had not been registered. The order of the Division Bench rejecting the Gupta Group's application for substitution was taken by the Gupta Group to the Supreme Court and by an order made on January 30, 1979, in C.A. No. 1217/76, reported as S. K. Gupta v. K. P. Jain : [1979]2SCR1184 , the Supreme Court set aside the order of the Division Bench and allowed the substitution of the Gupta Group for D.F.M. as proponents. The Supreme Court held that even on the assumption that Gupta Group were neither the members nor the creditors of the company they had the locus stand to seek substitution, as, in view of the transfer of the share holding and of the assignment of the debt claimed by them, they were nevertheless persons interested and, in the circumstances, proper persons to be substituted for D.F.M. In the way the Supreme Court looked at the question of locus standi, the further question as to the validity of the transfer of shares, its registration and assignment of debt were not decided.

3. By C.A. No. 75 of 1979, the Gupta Group sought the implementation of the order of substitution, since upheld by the Supreme Court, inter alias by a direction to the Commissioner, appointed earlier by this court, to hand over the possession of the premises, factory and works and of the machinery, stores and assets of the company to them to enable them to implement the scheme. This was vehemently opposed on behalf of the Jain Group not only in their capacity as members but also as purporting represent the company, inter alia, on the grounds that even though the Gupta Group may be entitled to be substituted in vies of the decision of the supreme Court, they were not entitled to dominion and control over the assets of the company in view of a serious dispute with regard to the validity of the transfer of shares and of the assignment of the debt claimed by them. The Jain Group sought support from the decision of the learned single judge in the suit filed by J. P. Jain, by which the Gupta Group had been restrained from acting as directors of the company till the transfer of shares had been registered in their favor. In support of their claim, the Jain group also pressed into service the various contentions urged by them in the supreme court with regard to the validity of the transfer and of the assignment which had been left open. Pending further consideration of the various contentions raised on behalf of the Jain Group, this court made an interim order on May 25, 1979, directing the Commissioner to hand over possession of the assets of the company to the Gupta Group to enable them to take appropriate steps in furtherance of the scheme as proponents. In view, however, of the serious disputes between the two groups, as indeed, the various question with regard to the validity of the transfer and the assignment, it was directed that the scheme would be implemented by the Gupta Group under the supervision of a Committee of Management composed of representative of the Gupta Group a representative of the Jain Group, who may be acceptable to the Gupta Group, and Shri S. D. Verma, former Chairman, Allahabad Bank, as Chairman of the Committee. During the pendency of this application, three further applications, C.A. No. 104/79, C.A. No. 261/79 and C.A. No. 529/79, were filed by the parties. By C.A. No. 104/79, J. P. Jain, a member of the Jain group, in his own name and as purporting to represent the company, sought a direction that the position of the assets be handed over to them and the Gupta Group be restrained from in any manner 'asserting and/or claiming to be entitled to benefits of the terms of the scheme in their alleged capacity' as members or directors of the company. Certain other reliefs are also claimed. C.A. No. 261 of 1979 was another application by the Jain Group purporting to be in the name of the company for the annulment of the orders of sanction of the scheme, and of the substitution of the Gupta Group and for a declaration that the said orders were not binding on the company and, in the alternative, for a modification of the scheme so as to permit the company to pay all its creditors and for certain other directions. C.A. No. 529 of 1979 was made by the Gupta Group seeking modification of the scheme and certain consequential directions in view of the delay in its implementation. The Gupta Group also filed a suit on the original side of this court, being No. 360 of 1979, for a declaration that the shares in dispute were duly transferred in their favor and the transfer having been duly registered, they had been and continued to be the shareholders and members of the company. In the alternative, leave of the court was sought to sue D.F.M. and R. P. Jain for damages.

4. By an order made by this court on January 24, 1980 (see [1981] 51 Comp Cas 51), this court, inter alia, held that in the peculiar circumstances of these cases, none of the groups would be entitled to hold themselves out as the company or its board of directors until the disputes had been finally adjudicated and the scheme be implemented by the Gupta Group under the supervision of the committee of management referred to above. The committee of management was given the liberty to obtain direction through its chairman from time to time so as to facilitate the task of implementation of the scheme. In the result, the Gupta Group was formally substituted as proponent to enable them to take appropriate steps to implement the scheme under the supervision of the committee of management, and the interim order of delivery of possession of the premises, factory, works, machinery, stores and assets of the company was confirmed.

5. Dena Bank has been a secured creditor of the company since 1969 and the total outstanding of the bank, which are secured by the mortgage, etc., of its assets, and the counter-guarantees of certain members of the Jain Group, was of the order of a little over Rs. 20 lakhs when the scheme was initially propounded. The outstandings have since swelled to a figure of over Rs. 60 lakhs on account of recurring debt-servicing liability. For a variety of reasons, the bank has, by and large, adopted an attitude of co-operation and sympathetic forbearance in the matter of enforcing the securities during the period the company has been passing through one crisis or the other. The bank has throughout been participating in the proceedings in this court, as indeed, in the Supreme Court, without prejudice to its status as a secured creditor. The scheme envisages that the pressure die-casting section of the undertaking of the company would be sold to pay off the bank and in case the entire debt of the bank was not liquidated by the proceeds a part or the whole of the machines in the tool room section would be disposed of to pay off the bank. It has, at all material times, been explicit that if the bank chose to enforce the securities, it would frustrate the scheme altogether and for close any possibility of revival of the industrial activity of the company and the propounder, the bank and this court have throughout been painfully aware of the crucial role of the bank in the implementation, as indeed, the very existence of the scheme. The forbearance of bank, as indeed, of the various steps in aid of an implementation of the scheme have, thereforee, been on the assumption and in the hope that the bank would not be compelled to take precipitate steps and it would be possible for the propounder and the company to enter into satisfactory financial arrangements with the bank which would ensure a substantial payment to bank, appropriate safeguards and guarantees for the payment of the balance and the continued availability of the assets to enable the propounder to implement the scheme. It was also hoped that in view of the continued sickness of the industrial unit, it would be possible for the bank to scale down its outstandings and to agree to a rescheduling of the repayments. Such an arrangement also appeared to be in the interest of the bank because with the increase in the outstandings, it became clear that the disposal of the assets may not result in the realization by the bank of all its outstandings. When this court appointed a committee of management to supervise the implementation of the scheme so as not to leave the assets exclusively in the hands of the Gupta Group and to give necessary protection to the Jain Group, this court appointed a former chairman of the Allahabad Bank as the chairman of the committee of management in the hope that with his expertise and background, it may be possible for the committee to successfully negotiate a reasonable settlement with the bank, if possible, with the co-operation of both the groups. While the Jain Group did not co-operate, for its own reasons, in any negotiations between the Gupta Group or the committee of management and the bank, the Gupta Group and the committee of management made attempts to negotiate a settlement. At one stage, the Gupta Group offered to pay Rs. 28 lakhs by installments against the outstandings that then stood at Rs. 55 lakhs, thereby involving a write-off of a substantial amount of Rs. 25 lakhs. This offer was naturally not acceptable to the bank. Subsequently, the chairman negotiated a proposal for a settlement of the outstandings at Rs. 46 lakhs inclusive of interest up to December, 1979. In his report of February 11, 1980, the chairman pointed out that the bank had, at his intervention, informally accepted the proposal and that it only required the formal approval of the bank's board. Subsequently, in his report of May 17, 1980, the chairman, however, pointed out that the proposal had been turned down by the bank because 'the bank had received some offers from the representatives of the Jain Group and certain other parties which were higher'. It now appears from a copy of the resolution of the board of the bank, which was filed in this court, that the proposal of the Gupta Group had been turned down because the Jain Group had mean while put up a company in its control known as Ruchika Engineering Pvt. Ltd. as a possible buyer of all the assets for Rs. 55 lakhs against the highest offer of the Gupta Group of Rs. 46 lakhs. The offer of Ruchika involved a write-off of the balance of Rs. 14 lakhs based on the outstanding as in December, 1979. The offer of Ruchika envisages the payment of Rs. 15 lakhs on the acceptance of the offer and the balance of Rs. 40 lakhs in 5 years by quarterly installments with the proviso that the reducing balance would carry interest at 12 percent. per annum, and the further proviso that the balance would remain covered by a bank guarantee. While there is no doubt that the offer of the Jain Group would involve the disposal of the assets by the bank, probably through the mechanics of a suit to be filed for the enforcement of its securities, and would, in the long run, be prejudicial to the interest of the company and its creditors and would adversely affect the interest of the propounder, who has a large stake in the company, and may have been made with the object of frustrating the scheme, to which the Jain Group had throughout been hostile, and sending the company into liquidation, the bank's inclination to accept the offer is understandable as representing the highest amount so far offered.

6. Meanwhile, soon after it was put in possession of the factory, the committee of management carried out extensive cleaning of the area, oiling and greasing of the machinery and commissioned the die-casting and hinges section with a view to put it in working condition to facilitate the course of revival of the industrial activity of the company as also to ensure an appropriate price for the unit, if it was to be sold in terms of the scheme. It appears that even though the response to the bank's advertisement for sale has been poor, the unit has been working since November, 1979, and the turnover for the month of December, 1979, was Rs. 80,000 which was raised to Rs. 1,80,000 in the month of March, 1980. The bank raised an objection to the continued working of the unit on the ground that there was no provision for the working of the unit by the propounder or the committee of management. The bank, thereforee, sought to restrain the propounder from working the unit by C.A. No. 227/80 and C.A. No. 365/80. After hearing the parties, I made an interim order on May 22, 1980, permitting the working of the unit as an interim measure pending disposal of the unit and/or finalisation of any arrangement with the bank but subject to the condition that the propounder would submit a monthly account to the bank in respect of the proceeds from the working and would pay to the bank on or before the 10th of every month, a sum of Rs. 35,000 or 75% of the net income from the working, whichever was higher. It was further directed that the bank would be entitled to participate in all the meetings of the committee of management. Certain other directions were also made giving liberty to the bank to dispose of the unit or the pledged goods after notice to both the groups.

7. I have heard learned counsel for the parties at length in the bank's applications, being C.A. No. 227/80 and C.A. No. 365/80, objecting to the working of the unit by the propounder and C.A. No. 335/80 seeking appropriate directions with a view to enable the bank to dispose of the entire securities, on the basis of the offer received from Ruchika, and in C.A. No. 247/80 of the propounder, seeking modification of the scheme, inter alia, envisaging the payment, by the propounder to the bank, of Rs. 24 lakhs in full settlement of its claim.

8. Whether the propounder was justified in working the die-casting unit or any other unit without the concurrence of the bank, is the first question that calls for an answer. The answer is in the negative and it was not seriously disputed. The entire assets of the company form the subject-matter of the mortgage, pledge and/or hypothecation favor of the bank, for the realisation of its heavy outstandings. The bank has the right, as indeed the duty, to preserve the mortgaged assets and, if necessary and possible to dispose of them in accordance with law on the best possible terms to realise its outstandings. Whatever be the overriding claims of public interest, the interest of the company or that of the other creditors of the company, the bank's own interest is still paramount from its point of view. While there is no doubt that since the amount was called up by the bank, even before the scheme was proposed, the bank did not enforce its security and has been forbearing from disposing of the assets either because it was sympathetically inclined to the efforts to rehabilitate the company or because of its anxiety not to frustrate a scheme of arrangement, which had been blessed by the court, or because it was unable to dispose of the assets on terms which could generate enough funds to meet the outstandings, which have had a snowballing effect because of the increasing burden of interest, there can be little doubt that as a secured creditor, the bank was outside any winding-up and beyond the scope or constraints of the scheme of arrangement and in no way stopped from enforcing its security. The fact that it had not so far filed a suit to enforce the security is also beside the point. True, a nationalised banking institution or any other financial institution would not ordinarily conduct its affairs in such a manner so as to prejudice public interest or deal with its security or the assets of an industrial undertaking in such a way as to cause any injury to the interest of unsecured creditors or employees of such an undertaking or which may interfere in the pursuit of a legitimate effort at the revival of a closed industrial undertaking. But, there is nothing in these constraints or any other policy directions which would constitute a legal bar to the bank or these institutions acting to protect their legitimate interests, particularly, where a balancing of the conflicting interest of the bank and of the other interests is not reasonably possible in an unfortunate situation that may obtain in relation to an industry. The scheme of arrangement categorically reinforces the right of the bank to be paid off out of the proceeds of one or the other of the units and the bank's right to enforce the security is in no way affect by or dependent on the scheme. It is the other way round. The scheme depends on the attitude of the bank towards the security as also the amount that the disposal of one unit may generate. If by the disposal of one unit the entire liability is discharged, the scheme operates with reference to the remaining assets. If, however, the disposal of the unit leaves an undischarged liability, the other assets follow the fate of that unit and that seals the fate of the scheme, of which naturally nothing survives after the disposal of all the assets. The scheme does not say so in terms but it is major inarticulate postulate of it that the company and/or the propounder would have the goodwill of the bank and its concurrence, on its own terms, to the preservation of the assets and the working of the scheme. The propounder apparently made efforts to enlist the support of the bank but failed to come to terms with it. Whenever I had entrusted the task of implementation of the scheme to a committee of management, I was fully conscious of how dangerously perched was the scheme, blessed by the highest court in the country, on any move that the bank may decide to make with reference to the assets. It was primarily for this reason that I inducted into the committee of management as a Chairman, an eminent banker, who happened to be a former chairman of the Allahabad Bank. It was in the hope that the committee of management may succeed in getting proper terms from the bank, both in the scaling down of the liability as also in the rescheduling of the repayment, a difficult task in which the propounder had either failed or did not appear to have much hope. If the bank, thereforee, had the unrestricted right to dispose of the securities, it follows that the propounder would not have any right to go into production on the basis of any of these assets without an appropriate arrangement in that behalf with the bank. The circumstances in which the commercial production was started would also show that there was no right to it without the concurrence of the bank. The idea of working the units was apparently born of the desire, as indeed, the need to commission the unit which was sought to be sold in terms of the scheme for payment to the bank. It appears that at some stage, the committee of management felt and rightly that to commission the unit would facilitate the course of disposal because any intending buyer would like the unit to be shown to be in working condition. Such a course must have also been considered necessary to attract better price. It also had the additional merit of the cleaning, oiling, greasing, repairing and the commissioning of the machinery which would be conducive to all interests in any event, whether the assets were to be sold or preserved for the benefit of the company or its creditors. The purpose for which the units were commissioned, however, was not satisfied because no worthwhile offer came. It appears that once the unit was commissioned, its working was continued probably in the hope that the efforts being made in the meanwhile to finalise a reasonable financial arrangement with the bank would eventually succeed. When the matter with regard to the working of the unit was raised by the bank, I was inclined to take the new that even though outside the scheme and without the concurrence of the bank, there was, perhaps, good reason to continue the working until managements for its disposal were finalised or the bank had finally turned down the proposal for any financial arrangement provided the interest of the bank was safeguarded and substantial proceeds of the working went in to the coffers of the bank towards the reduction of the outstandings, between though to a very small measure. It was in these circumstances that on a consideration of a variety of factors including the claim of revenues, employment, etc., that I allowed the working of the unit by my order of May 22, 1980, subject to the conditions that the propounder would furnish a monthly account of the working to the bank and pay to the bank or before the 10th of every month a sum of Rs. 35,000 or 75% of the income from the working, whichever was higher, and the bank would entitled to participate in all the meetings of the committee of management. I also made certain other directions with regard to the disposal of the assets. It is thus clear that as secured creditor, the back was entitled to deal with the securities in accordance with law and even in terms of the scheme, the assets had to be disposed of to satisfy the outstandings of the bank before any of the units could be put to use and there was, thereforee, no right in the Propounder to work any of the units without the concurrence of the bank.

9. In the face of this rather difficult position, the only contention that counsel for the propounder could urge to prevent the bank from proceeding to dispose of the entire assets was that the disposal of the assets would frustrate the scheme and irresistibly lead to the liquidation of the company. It was urged that it would tantamount to the winding-up of a company on a motion of the secured creditor even though it would neither be in the interest of the company, its members, its creditors, employees or a public interest and that on the trial of any such motion, the company court would clearly refuse to wind up the company. Now, it is not disputed that the court would be reluctant to wind up a company if a winding-up order was neither in the interest of the creditors nor its members nor in public interest and any attempt by a secured creditor to wind up a company purely for his own interest would ordinarily be frustrated by the court. Even so, the bank could not be prevented from enforcing its security. In the first instance, the scheme itself visualises the disposal of one or all the units and the implementation of the scheme is itself impliedly deferred until the bank's claim has been satisfied. Secondly, the scheme impliedly visualises a successful working arrangement between the propounder and the bank, which has so far not come through. Thirdly, the existence of the scheme is clearly dependent on the attitude of the bank and it is not possible to control the action of the bank merely to salvage the scheme. Lastly, with all the overriding interests, the bank could not be said to be acting unreasonably in enforcing the security, after having waited for almost a decade, during which its outstandings of Rs. 20 lakhs odd has multiplied more than three times.

10. A faint suggestion was made that in dealing with the various proposals the bank gave an impression that it allowed itself to be influenced by the Jain Group and acted unfairly in the matter of scaling down of its outstandings and even in the manner in which it approached this court to facilitate disposal of the assets. In the first instance, it was pointed out that the policy guidelines of the Reserve Bank enabled the bank to scale down the outstanding on account of interest in view of the long-standing sickness of the unit for which the bank has shown a marked reluctance. Secondly, it was urged that in considering the proposal made through the intervention of the chairman and in its eventual rejection, the bank allowed itself to be influenced by the offer made on behalf of the Jain Group, even though such an offer had an oblique motivation to frustrate the scheme and put the company into winding-up and to settle scores with the propounder. Thirdly, it was urged that even though the bank was, at all material times, fully aware that Ruchika was a Jain Group enterprise, the frame of the bank's application, being C.A. No. 335/80, sought to create an impression as if Ruchika was an independent buyer. I am, however, unable to that on account of any of these reasons the bank could be said to have acted unreasonably, even though the disposal of the assets would frustrate the scheme and cause prejudice to the interests of the company, its members and the creditors. The proposal initially made by the PROPOUNDER involved a write-off of almost Rs. 25 lakhs, which would constitute almost 50 per cent. of the total outstandings. The bank certainly had to exercise its own discretion in working out the policy guidelines of the Reserve Bank and it would not be possible for this court to substitute its decision for that of the bank. It is true that the second proposal of the Propounder, through the intervention of the chairman, represented an improvement upon the earlier one and involved a write-off of a lesser amount and had, according to the chairman, informally agreed to the bank. But, it is difficult to ignore that the offer of Ruchika represented a further improvement. Ruchika or the Jain Group may have had their own motivation for a higher offer but the bank could not have rejected it out of had for that reason. The fact that the propounder is now willing to pay the bank in terms of the Ruchika offer, which is acceptable to the bank, would itself show that the bank was not acting unreasonably. It is true that the bank's application, being CA No. 335/80, dose give the impression that the prospective buyer was an independent party not connected with the Jain Group. It is also true that while the resolution of the board of the bank placed on record the fact that Ruchika was part of the Jain Group and the original draft of the application makes was that disclosure to the court because a copy of the application that was delivered to the propounder is based on the resolution of the board. It is, thereforee, obvious that the impression that intending buyer was an independent buyer, not connected with the Jain Group, was a subsequent development but it is not possible to attribute any motivation to the bank because the resolution of the Board takes note of the affiliation of Ruchika and the chairman of the committee of management had also been given the impression that the better offer had been made by the Jain Group itself. While it is unfortunate buyer the revised draft of the application could not necessarily be linked with the object to create an impression that the Jain Group had nothing to do with the intending buyer.

11. Be that as it may, there is still a silver lining, albeit a thin one, in the otherwise dark horizon that surrounds this unfortunate industrial unit. It may perhaps be possible to strike a reasonable balance between the well merited interest of the bank, the interest of the company, that of its creditors and members, including the propounder and the Jain Group, both of whom have large stakes in the company. The bank is inclined to accept the offer of Ruchika. The acceptance of this offer would involve a write off of about Rs. 15 lakhs on the acceptance of the offer and payment of the balance in 5 years by quarterly installments with a suitable bank guarantee for the balance. The acceptance of this offer by the bank would, however, involve disposal of the assets by the bank which would natural deprive the company of its entire assets and put an end to the scheme as also the hopes of the creditors, including the Revenues as well as the propounder, who has made a substantial investment. The disposal of these assets by the bank to Ruchika would perhaps involve further court action unless the bank has reserved the right to dispose of the immovable property by the instrument of mortgage without court intervention. Any court action would involve the company as well as the bank in further expenses. The disputes with regard to the holding in the company would also create further difficulties in the defense of any such action by the company. If the bank is to be compelled to substitute the Gupta Group for Ruchika in the offer and to transfer the assets to the Gupta Group, it would have the same impact on the company, its creditors as also the scheme and involve the same difficulty as in the case of transfer to Ruchika. The sale of the assets to either of the group would not benefit the company, its a members or its creditors or help in the implementation of the scheme of arrangement. If, on the other hand, the assets of the company could be retained by the company, and the bank is paid the amount that is envisaged by the offer of Ruchika and in the same manner in which Ruchika is entitled to pay, such a course would be conducive to all interests, including the company, its members, its creditors, the Gupta Group and even the Jain Group in that the assets would continue to in the company and the liabilities of the members of the Jain Group, who had given personal guarantees, would be extinguished by the payment and the write-off of the balance. The initial payment envisaged in the offer could be made by the company with the funds that may be made available by the propounder, by himself or in any reasonable collaboration with the Jain Group, should the Group be willing to co-operate with the Gupta Group. If the Jain Group do not wish to join in this arrangement, the Gupta Group could be left to arrange the initial payment and the necessary bank guarantees in respect of the balance, which could be paid by quarterly installments out of the income of the working of the various units that the company would be left intact to utilise. In such an arrangement, the minority interest of the Jain group could continue to be protected by the device of the committee of management or any other arrangement that may be acceptable to the parties unless the two groups are able to work out the scheme in collaboration with each other. The interest of the creditors would not be affected by an arrangement between the company and the bank and it would not involve any modification of the scheme. If the Gupta Group are unable to provide funds to the company for the payment of the initial amount, option could be given to the Jain Group to provide the funds. In either case, suitable directions could be made to protect the interest of the group, which provides the funds, inter alia, by the mortgage and/or pledge or hypothecation of the assets in favor of one or the other of the groups on the assets being released from the existing mortgage, pledge, etc. Parties could also obtain appropriate directions in the working of the unit as also the implementation of the scheme in the context of these changes.

12. In the result, I would make the following directions :

(i) The Bank would be free to dispose of the assets of the company in terms of the instruments of mortgage, pledge and/or hypothecation, as the case may be, in accordance with law provided the company acting through the committee of management fails to make, within two weeks, an offer in terms of the Ruchika offer to retain the assets and having made such an offer fails within four weeks of its acceptance to make initial payment of Rs. 15 lakhs in terms of the offer, or fails within one week of such payment in providing a bank guarantee for the balance to the satisfaction of the bank.

(ii) Appropriate arrangements for funds to make the initial payment of Rs. 15 lakhs and for the bank guarantee for the balance would be made by the Gupta Group in the first instance and in the even of their failure the Jain Group would be at liberty to make the appropriate arrangements.

(iii) The Group that makes the arrangement for initial payment and the bank guarantee would entitle to obtain appropriate directions from this court so as to protect its interest and to seek modification of the scheme that such provision may necessitate.

(iv) The balance amount payable in terms of the offer would be patted by the company from the working of the various units and should there be any shortfall in the payment of any installments, it would be for the Group which provided the initial payment and the bank garnet to make up the deficiency.

(v) In case the company fails to make the offer, further working of the units will be suspended unless concurred in by the bank and the committee of management would hold possession of the assets until they are taken possession by the bank in accordance with law.

13. C. As. Nos. 227/80, 247/80, 335/80 and 365/80 are disposed of in these terms. In the peculiar circumstances, there would be no costs.


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