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Mansukhlal Vs. M.V. Shah, Official Liquidator, Liquidator of Hathising Mfg. Co. Ltd. (In Liquidation) and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Application No. 21 of 1975 in Company Petition No. 12 of 1974, connected with Company Applic
Judge
Reported in[1976]46CompCas279(Guj); (1976)GLR592
ActsCompanies Act, 1956 - Sections 391, 391(1), 391(2), 392, 392(1), 392(1), 392(1), 393 and 393(1)
AppellantMansukhlal
RespondentM.V. Shah, Official Liquidator, Liquidator of Hathising Mfg. Co. Ltd. (In Liquidation) and ors.
Appellant Advocate B.R. Shah, Adv.
Respondent Advocate V.B. Patel, Adv.
Cases ReferredJ.K. (Bombay) Private Ltd. v. New Kaiser
Excerpt:
company - modification - section 392 (1) (b) of companies act, 1956 - matter pertaining to power of court under section 392 (1) (b) to make modifications in compromise - basic modification cannot be made by court without ascertaining opinion of those bound by scheme of compromise - court to be satisfied on three points - statutory provisions are complied with - class or classes affected by scheme are fairly represented - arrangement is such as man of reason would reasonably approve - court would seek reasonableness on compromise offered and economic and financial feasibility of scheme with view to ascertain its smooth implementation - court would seek whether those who have come forth with scheme are persons who would inspire confidence of court and they would carry out obligations -.....d.a. desai, j.1. this summons is a sequel to a very unfortunate tragedy of an unprecedented character that occurred in the process of reviving, rejuvenating and resuscitating a sick production unit in this city. hathising . ( in liquidation), hereinafter referred to as 'the company', was ordered to be wound up way back by an order made in 16th august, 1965, in company petition no. 9 of 1965. since then, the spinning unit of the company remained idle and in the process got deteriorated over a period of a decade. number of litigations by persons having rival interests in the company flooded the court. it was somewhere in 1972 that there appeared on the scene late shri chhotalal devchand shah who came forth with a scheme of compromise and arrangement through shri rajendrakumar maneklal field.....
Judgment:

D.A. Desai, J.

1. This summons is a sequel to a very unfortunate tragedy of an unprecedented character that occurred in the process of reviving, rejuvenating and resuscitating a sick production unit in this city. Hathising . ( in liquidation), hereinafter referred to as 'the company', was ordered to be wound up way back by an order made in 16th August, 1965, in Company Petition No. 9 of 1965. Since then, the spinning unit of the company remained idle and in the process got deteriorated over a period of a decade. Number of litigations by persons having rival interests in the company flooded the court. It was somewhere in 1972 that there appeared on the scene late Shri Chhotalal Devchand Shah who came forth with a scheme of compromise and arrangement through Shri Rajendrakumar Maneklal field Company Application No. 43 of 1972, under section 391(1) of the Companies Act, 1956, praying for directions for convening the meetings of the equity shareholders and different kinds of creditors and others having a claim against the company for examining and, if thought fit, for approving with or without modification a scheme of compromise and arrangement proposed on behalf of Shri Chhotalal Devchand Shah. That was not a scheme with any laudable object of restarting or infusing fresh life into an otherwise dead unit. In fact, the scheme originally conceived was a further attempt at dividing the booty of a company which had fallen on evil days. It was somewhere in August, 1973, that the matter came up before me when the sponsor of the scheme had taken out judge's summons in Company Application No. 44 of 1973, praying for certain directions that I had a chance to examine the scheme in its various ramification. The scheme as it was then propounded was thoroughly unconscionable, absolutely unjust, basically unfair and exploitative in character and I was of the opinion that it would be a waste of the valuable time of the court even to prima facie examine the scheme and, therefore, I rejected the scheme by my judgment and order dated 14th August, 1973. Things moved quickly thereafter. The sponsor modified the scheme to remove some thoroughly unjust features of the scheme and clothed it in a presentable form making it attractive for examination. At any rate, a crude attempt at exploiting the most unfortunate class working in a company, viz., the employees was wholly given up. The next step of convening the meeting was taken and ultimately Company Petition No. 12 of 1974, Hathising . (in liquidation), In re, was fixed under section 391(2) requesting the court to sanction the scheme. There were some intermediate hurdles, one especially regarding restoration of the registration-cum-licence certificate of the company which was revoked or canceled on 24th November, 1967. In Company Application No. 12 of 1974, the Central Government appeared and stated that the order revoking the registration/licence of the company is cancelled and that the old registration certificate is revived. The court proceeded to examine the scheme in various details and ultimately by its decision dated 9th/10th December, 1974, sanctioned the scheme with certain modifications which were necessary for the proper and effective working of the scheme of compromise and arrangement. At the request of the then sponsor, Chhotalal Devchand Shah, the court directed that the possession of the property of the company including the mill premises be handed over to the sponsor, Chhotalal Devchand Shah, on 16th December, 1974. All the parties interested in the scheme and, no less the court, fondly hoped that all the troubles, tragedies, tribulations and misfortunes befallen on this company have now come to an end and the company would restart its fresh lease of life under auspicious circumstances. The fond hope that those ill-starved workmen of the company, workers of the company who are without employment for over almost a decade, would have the much valued employment and their days of starvation would soon come to an end because, while sanctioning the scheme, the court had directed a phased out programme or restarting the various departments of the spinning unit of the company simultaneously cancelling the winding-up order. No one foresaw what was in store. A ghastly calamity of unprecedented character occurred on 16th December, 1974. The court was informed that when the liquidator went to the mill premises and formally handed over possession of the immovable properties of the company to the sponsor, Chhotalal Devchand Shah, and immediately thereafter when a celebration was arranged in which workmen were participating, Chhotalal suffered thrombosis (cerebral haemorrhage) and he was removed to the hospital, he lost his consciousness and he never revived his consciousness and unfortunately passed away on 26th December, 1974. The wheels unfortunately again came to a standstill. No one could even visualise in his calmer moments what again would be the position of the company. The workmen bemoaned their lot, the shareholders and the creditors watched the situation with dismay, everybody was a silent spectator to an otherwise helpless situation.

2. Some time after when the court believed that the shock to the members of the family of Chhotalal must have lost some of its sting, the court directed that the matter be placed on board to decide what should be done. Time was taken by Mansukhlal Shah, the son of Chhotalal Shah, to brood over the position as to what should be done with regard to the scheme. Ultimately, on 7th April, 1975, Mansukhlal Shah, the son of late Chhotalal Devchand Shah, took out judge's summons in Company Application No. 21 of 1975, for the following reliefs :

'(a) for direction regarding substitution of the name of M/s. Mansukhlal, Vinubhai & Associates as sponsors of the scheme and for other consequential changes in the scheme; and

(b) for directions regarding constitution of the Board of Directors.'

3. Eight persons were impleaded as respondents to the summons. In support of the summons, Mansukhlal Shah had filed his affidavit in which he pointed out that late Chhotalal died leaving eight heirs whose names have been set out in paragraph 4 of his affidavit. He has also stated that they are major heirs and there are no other heirs of late Chhotalal. He has also stated that all the heirs of Chhotalal have executed a general power of attorney in favour of himself and his brother, Yeshwant C. Shah. A copy of the power of attorney is to be found at page 41 of the record. This being a general power of attorney, it authorises Mansukhlal and Yeshwant, jointly and severally, to do as many things as set out therein and it generally authorises them to act on behalf of all heirs of Chhotalal in court proceedings and to deal with the property. However, as I find nothing, no reference to the scheme, in the said power, I called upon Mr. B. R. Shah, learned advocate who appeared for the applicant in this summons, to file a letter setting out therein the consent of all the heirs of Chhotalal accepting and ratifying all steps taken by Mansukhlal in these proceedings as binding on them. In the affidavit, it is also stated that unfortunately as Chhotalal has now died and that he alone and all heirs of Chhotalal would not be in a position to implement the scheme, he entered into negotiations with one Vinubhai Jagannath Bhatt and Sanwarmal B. Todi and that these negotiations have been fruitful and have been finalized, as a result of which the scheme would now be implemented by M/s. Mansukhlal, Vinubhai and Associates and that their names be substituted as sponsors of the scheme. He set out in his affidavit the proposed names for being appointed on the board of directors which may be constituted under the scheme. They include over and above the applicant Mansukhlal, Vinubhai Jagannath Bhatt, Sanwarmal Bhagwandas Todi, Motilal Ramdutt Todi and Babulal Bhagwandas Todi. In that affidavit, it is further stated that in view of the unfortunate tragedy, the time schedule as envisaged in the scheme would become otiose and, therefore, consequential modifications will have to be made in order to bring the scheme uptodate for its effective implementation. The proposed modifications are set out in paragraphs 12(a) to 12(g). Annexed to the affidavit are the bio-data of Vinubhai J. Bhatt and Sanwarmal Bhagwandas Todi. When the application came up for admission before the court, the situation appeared to be slightly puzzling; the court toying with the idea whether the modification sought as far as substitution of sponsor is concerned is of such a basic nature that before any action can be taken on the application, the party should be referred back to the creditors and members of the company for their approval of the proposed modification. Before that problem could be disposed of, the court had to deal with the request of Mr. I. M. Nanavati who was till then appearing for Mansukhlal C. Shah to permit him to retire in view of what was stated by Sanwarmal Bhagwandas Todi in his affidavit dated 21st April, 1975. Sanwarmal Todi in his affidavit had proposed certain modifications even in respect of the modifications proposed by Mansukhlal Shah in his affidavit and disclosed his desire to take over the responsibility to implement the scheme on the court accepting the modifications proposed by him. Again, the modification was of a basic character, viz., substitution of the name of sponsor from 'M/s. Mansukhlal Vinubhai & Associates' to 'Todi Group & Associates'. He also proposed the constitution of the board of directors suggesting that it should consist of nine persons with Sanwarmal B. Todi as Chairman and others being Babulal Todi, Motilal Todi, Mansukhlal Shah. Vinubhai Bhatt, all those whose names were proposed by Mansukhlal Shah in his affidavit, the other new additions being Murari Todi, son of Sanwarmal Todi, and a director to be nominated by the court and two more to be nominated by the chairman from amongst well-known professionals and industrialists of repute. Other part of the affidavit is not relevant at this stage.

4. The court made an order on 22nd April, 1975, on the application permitting Mr. I. M. Nanavati to retire because be felt embarrassed in continuing to appear for Mansukhlal, the court being not interested in the cause of embarrassment. The court simultaneously directed that a public advertisement be issued in Indian Express and Gujarat Samachar stating therein the substance of the summons concerning the modification in the sponsorship and inviting everyone to appear at the hearing of the summons, the hearing being fixed on 5th May, 1975.

5. This is the unfortunate chequered history of this company since it was brought to the door-steps of the court by winding-up petition. It is lying idle, idle, idle over a decade. The machinery has been the victim of corrosion over a decade, unattended, unused and unserviced. Persons having different interests in the company have been tired of this procedure and have almost lost all interest. Only the workmen of the company again in the distant hope of getting back employment have been coming to the court day in and day out. They are attending in large numbers, unfortunately not knowing what is going on in the court because it is beyond the purview of their comprehension.

6. When the summons was taken up for hearing, Mr. B. R. Shah first referred to the affidavit of Mansukhlal Shah, dated 1st May, 1975, to which were annexed copies of the advertisements as they appeared in the Indian Express and Gujarat Samachar. Mr. B. R. Shah also referred to his own affidavit in which he has stated that pursuant to the said advertisement, he has not received any notice or intimation from any person expressing his intention to support or oppose the summons. Mr. B. R. Shah also relied upon the affidavit dated 7th May, 1975, of Sanwarmal Bhagwandas Todi in which he has given in unmistakable and categorical terms an undertaking taking over all the rights and liabilities under the scheme and almost substituting himself in place of Chhotalal Devchand Shah, further stating that he would be responsible while implementing the scheme to the same extent as Chhotalal Devchand Shah, had he been alive, would have been responsible. He has also stated that the fidelity deposit made by late Chhotalal Devchand Shah with the Registrar of the court in the amount of Rs. 50,000 as guarantee for proper and effective implementation of the scheme and the consequence of his failure, viz., that the deposit to be forfeited to the State, be transferred to his name because he has already paid over the amount to Mansukhlal C. Shah and Mansukhlal C. Shah in his affidavit dated 7th May, 1975, in terms accepts that he has realised the sum of Rs. 50,000 and that the present deposit which is in the name of Chhotalal Devchand Shah be transferred to the name of Sanwarmal Bhagwandas Todi.

7. The court should be primarily concerned with the most important modification about the change in sponsorship. That immediately raises the question of the power of the court under section 391(1)(b) of the Companies Act to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. At one end of the spectrum, the argument was that once a scheme of compromise or arrangement is sanctioned, any modification that is required to be made in the compromise or arrangement can be made by the court, the limit of the power being that proposed modification must be for the proper working of the compromise or arrangement. In other words, even though a scheme of compromise or arrangement is one between the company and its creditors or one between the company and its members and after they have approved the proposed scheme of compromise and arrangement, the same is offered for sanction of the court; once the court has accorded sanction, the power is in the court alone to modify the same for its effective implementation and that it is not necessary for the court to refer the proposed modification or amendment to those who had initially approved the scheme in a different form. At the other end of the spectrum, the argument was that the matter had to be examined at two different stages, viz., if the scheme is not already sanctioned by the court, it is in the realm of contract between one who proposes the scheme and those who accept it, and, if there is any modification of a basic nature suggested in the scheme when the court is called upon to sanction the same, if the court is of the view that the content of the modification is such as would affect the judgment of those who were called upon to approve it, such a basic modification cannot be made by the court without ascertaining the opinion of those who are bound by the scheme of compromise and arrangement. In fact, at the final hearing of this summons, when the court ascertained as to who are the persons interested in the scheme of compromise and arrangement and whether any of them who has the substantial interest is not before the court, the analysis only disclosed that all those who are vitally interested are very much before the court and their wishes can be ascertained here. Viewed from this angle, the wider question of the width and amplitude of the court's power under section 392 of the Companies Act need not be examined in this case. However, I would like to examine the content of the power of the court under section 392.

8. It is undoubtedly true that the scheme proposed under section 391 is a scheme of compromise and arrangement between a company and its creditors or between a company and its members. There can be a scheme which may be between the company and its creditors alone. There can as well be a scheme which can be between the company and its members alone. One can envisage a comprehensive scheme, affecting the rights, duties and obligations of the creditors and members of a company. Section 391(1) postulates that where a scheme of compromise or arrangement is proposed between the company and its creditors or between the company and its members, an ex parte summons may be moved before the company judge, but the application has to be made either by a creditor or a member of the company or in the case of a company which is being wound up, by the liquidator. In this summons, the prayer is to convene a meeting of the creditors or members to whom a compromise or arrangement is offered. In convening the meeting, the court has to be careful and keep a watchful eye to see that those who are asked to attend a given metting have a like interest. In other words, there cannot be a composite meeting of persons having conflicting interests. While convening a meeting of the creditors, it is to be classwise : such as secured creditors, unsecured creditors, creditors having a specified claim or a specified class of creditors or members would deliberate upon the scheme offered for its consideration and by a process of democratic voting express an opinion whether they approve or do not approve. Till that stage, the court has no say in the matter. In fact, as soon as the court directs meeting to be convened, its function under section 391(1) comes to an end. After the meetings are convened and the results are analysed, the chairman appointed by the court to preside over the meetings has to submit a report stating accurately the number of creditors, or class of creditors, or number of members, or class of members, as the case may be, who were present and who voted at the meeting either in person or by proxy, their individual values, vide rule 78 of the Companies (Court) Rules, 1959. If the scheme has been approved by those to whom it is offered by the majority as prescribed in section 391(2), the company has to file an application within seven days of the filing of the report by the Chairman for confirmation of the compromise or arrangement. It is at this stage that the court applies its mind, first to the details of the scheme, the way in which it has been voted upon by different classes of creditors and members and ascertain whether it is approved by a statutory majority or not in each such meeting. But that itself is not sufficient for the court to accord sanction to the scheme. The court would then like to be satisfied on three points : viz., (i) whether the statutory provisions have been complied with; (ii) whether the class or classes affected by the scheme have been fairly represented; and (iii) whether the arrangement is such as a man of reason would reasonably approve. At this stage, the court would seek the reasonableness or the fairness on the compromise offered, the feasibility or viability, both economic and financial of the scheme, with a view to ascertain its smooth implementation and whether those who have come forth with the scheme are persons who would inspire confidence of the court, whether they would carry out the obligations or not. Undoubtedly, the scheme is always between the company and its creditors and/or members. A compromise or arrangement has to be between two parties between whom there are rights and obligations; but it is equally true that when a sponsor of the scheme takes over the implementation of the scheme, he does it in the name of the company. Mr. B. R. Shah, therefore, urged that the personality of the sponsor is hardly a relevant consideration. The court should be concerned with the scheme on its merits and the duty to implement it is on the sponsor himself. He, therefore, urged, and with some emphasis, that the sponsor of the scheme does not hold a position of prestige or importance whose change or substitution would require re-examination of the scheme by those to whom compromise or arrangement was offered. In making this submission, Mr. B. R. Shah tried to draw some support from the language of section 393 which makes it obligatory to furnish certain information as to compromise or arrangement with creditors and members. After referring to section 393(1)(a), Mr. B. R. Shah urged that every information which is required to be furnished to the creditors and members before they are called upon to examine the scheme of compromise or arrangement on merits as would be of such vital nature which would influence their decision has been set out in sub-clause (a) and it does not refer to the sponsor at all. Approaching the matter from this angle, Mr. B. R. Shah urged that the sponsor seems to have been relegated to a back position and that his personality is not of such vital consideration while sanctioning the scheme of compromise and/or arrangement that a change in the sponsorship can be said to be of such a basic nature as to be referred back to those to whom the compromise is offered. Well, it is not possible to denigrate the sponsor to such a low level. It is always true that the company is the pivot and the compromise is between the company and the creditors and members. It is undeniable that the company having a corporate personality is independent of its members, creditors, employees, directors and every other agent or limb of the company. But, having said this, what exactly is a company when it functions can best be answered by referring to the observation of Viscount Haldane L.C., in Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. which has become a classic. It may be reproduced :

'My Lords, a corporation is an abstraction. It has no mind of its own any more that it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.'

9. A company with a juristic personality is merely a concept. It is the human machinery which runs it. The human machinery is the alter ego but because of the fiction of law the company is independent of the persons constituting it. But, when a situation arises where the court is called upon to decide who is running the show, who is responsible for certain acts and omissions of the company, who is the very ego and centre of the company, the veil of corporate personality has to be lifted to find out the person. Viewed from this angle, the position of a sponsor of the scheme of compromise and arrangement is of such a vital nature that if there is a complete substitution of the sponsor, the modification sought for substitution is of a basic nature and before sanctioning such a modification, the matter will have to be examined with care and attention. What is the basic modification which the court may in a given case not grant on its own but refer back to the person interested in the company and vitally affected by the scheme of compromise and arrangement must be judged from this test : Is it such a change or is it such a fact which would have influenced the decision of those attending the meeting called for approving the scheme before deciding whether be they would approve or not approve Viewed from this angle, could it ever be said that the personality of the sponsor would not affect or influence the decision of those voting at the meeting I think, the answer is unquestionably in the affirmative. I need stress the point which I want to develop. A person receiving a notice for attending the meeting, apart from anything else, is likely to have a passing thought in his mind that one who sponsors the scheme is a man of repute, a man whose bona fides area beyond dispute, who has the technical skill to run a textile unit, and he may refuse to attend the meeting, believing that, in his hands, the interests of the persons concerned are secure. If that sponsor quietly walks out, land those who had a right to decide whether the scheme should be approved or not are not given an opportunity to find out whether the new one who steps in the shoes is a man of straw, the personality of the sponsor is bound to be a vital factor influencing the decision of these attending the meeting. This cannot be gainsaid.

10. The next question, however, is whether every such change in sponsorship should be referred back to the members and creditors. No hard and fast rule can be laid down on this point. In England, a court practice has been developed to circumvent the situation. In England, the sponsors of the scheme also take the power in the scheme itself to accept the modifications if proposed or suggested or indicated by the court while sanctioning the scheme and they could accept the modification, armed with this power. That would avoid going back to the creditors and members on every occasion when some modification becomes necessary or some modification is suggested by the court before the court is prepared to put its stamp of approval on the scheme. The framers of the company law in India have conferred statutory powers on the High Court to make such modifications in the compromise or arrangement as the court may consider necessary for the proper working of the compromise and arrangement. The power of the widest amplitude has been conferred on the court under section 392(1)(b) and the width and the magnitude of the power can be ganged from the language employed in section 392(1)(a) which confers a sort of a supervisory role on the court during the period the scheme of compromise or arrangement is being implemented. Reading clauses (a) and (b) of sub-section (1) of section 392, it appears that Parliament did not want the court to be function office as soon as the scheme of compromise and arrangement is sanctioned by it. The court has a continuing supervision over the implementation of compromise and arrangement. Unenvisaged, unanticipated, unforeseen or even unimaginable hitches, obstruction and impediments may arise in the course of implementation of a scheme of compromise and arrangement and if on every such occasion, sponsors have to go back to the parties concerned for seeking their approval for a modification and then seek the approval of the court, it would be a long-drawn out protracted, time-consuming process with no guarantee of result and the whole scheme of compromise and arrangement may be mutilated in the process. Parliament has, therefore, thought it fit to trust the wisdom of the court rather than go back to the interested parties. If the parties have several times to decide the modification with the democratic process, the good part of an election machinery apart, the dirt may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise and arrangement may be so twisted and torn out of context as to be thoroughly useless and may be jettisoned. In order, therefore, to guard against this eventuality and situation, which is clearly envisageable, Parliament has conferred power on the court, not only to make modifications even at the time of sanctioning the scheme, but at any time there after during the period the scheme is being implemented. Conceding that, before the court sanctions the scheme, it partakes as the character of an emerging contract between the company and the creditors and members; once the court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the court to modify, amend or correct or revise the contract the outer periphery or its limit on the power being that, after testing it on the anvil of probabilities, surrounding circumstances and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and, subject to this limit on the court's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation. Mr. S. B. Majumdar in this connection drew my attention J.K. (Bombay) Private Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd., wherein it is observed as under :

'Under section 392 of the Act the High Court which has sanctioned the scheme has the power to supervise the carrying out of it and to give directions in regard to any matter or to make modifications in it as it may consider necessary for its proper working. But if the court is satisfied that the scheme cannot be worked satisfactorily with or without modification, it can either suo motu or on an application by any person interested in the company's affairs order its winding-up.'

11. It would thus appear that till the court believes that some modifications in the effective implementation of the scheme, there is no fetter no its power in making the modifications. It is true that the court may not be inclined to undertake responsibility of making modifications which would vitally affect different interests affected by the modifications and may have recourse to ascertain their views or may permit then to express their opinion either at a meeting or by any other suitable method, but that is more an act of wisdom rather than a fetter on the power of the court. The court's power, subject to the limitation placed by the section, appears to be absolute.

12. Assuming that my understanding of the court's power is not correct and assuming that every basic change in a scheme of compromise or arrangement must have the concurrence of those affected or interested in the scheme of compromise and arrangement, let me see whether, on the facts of this case, the petitioner has been able to satisfy me that every such interested person has accorded his approval to the proposed modification.

13. The Government of Gujarat is a secured creditor and Mr. M.I. Hava of M/s. Bhaishanker Kanga & Girdharlal appeared for the State of Gujarat and accorded its consent to the proposed modifications. Rajendrakumar Maneklal and his relations claim to be secured creditors and Mr. C. C. Gandhi and Mr. A. C. Gandhi, the learned advocates appearing for them, accord their consent to the proposed amendment. Mr. D. K. Trivedi appeared on behalf of Mr. G. N. Desai who appeared for the Ahmedabad Municipal Corporation and straightway consented to the proposed modification. Mr. R. A. Mehta appeared for Mr. K. G. Vakharia for the Employees' State Insurance Corporation and consented to the modification. The textile Labour Association, the representative of minor employees, appeared through advocates, Mr. S. B. Majumdar and Mr. R. M. Shukla, and accorded their consent to the proposed modification. Mr. V. B. Patel, learned advocate appearing for the official liquidator, also appeared in person and he had no objection if the court were to sanction the proposed modification. Mr. M. B. Shah, learned Assistant Government Pleader, appeared for the Sales Tax Commissioner and gave consent to the proposed modification.

14. The consent of the two remaining parties remain to be ascertained. Each forms a class. They are : (i) unsecured creditors; and (ii) shareholders of the company. Taking the first class first, viz., the unsecured creditors, it may be pointed out that in the statement of affairs submitted by the outgoing management after the order winding up the company was made, it has been stated that M/s. Maneklal Mansukhlal Ltd. is the unsecured creditor of the company to the tune of Rs. 19,69,764.75 and there are sundry creditors to the tune of Rs. 2,40,073 inclusive of unpaid bonus. Now, Mr. C. C. Gandhi and Mr. A. C. Gandhi, who represent Rajendrakumar Maneklal, also consent to the proposed modification on behalf of Maneklal Mansukhlal Ltd., the unsecured creditor having a claim of over 90% of the total claim of unsecured creditors.

15. That leaves for consideration the shareholders. The capital structure of the company shows that in all 890 equity shares of Rs. 250 each fully paid were issued, subscribed and paid up. Rajendrakumar Maneklal and his relations hold 460 out of 890 shares and Mr. C. C. Gandhi and Mr. A. C. Gandhi appearing on behalf of Rajendrakumar consent to the modification and agree to sell the shares at the price agreed in the scheme. Thus, more than 50% of the holders of the shares accept the modification whose consent remains to be obtained. They are creditors claiming only 7% of the total claim of unsecured creditors and about 44% of the shareholders. Even in order to give them an opportunity to come and express their views on the proposed modification, a public advertisement was issued in Indian Express an Gujarat Samachar having wide circulation in the State. None of them has come forth to appear and either oppose or support the summons.

16. In the light of these irrefutable facts, would any useful purpose be served by paying a lip sympathy to the form of the matter rather than substance I think not. There is not only a substantial compliance but an overwhelming compliance even if the other view of the matter is to be taken.

17. Would the court accept the modification on its own merits because even if the parties accept, the discretion is still with the court to accept or reject the same. The court may look upon with respect the views expressed; but, in the ultimate analysis, it is the unfettered discretion of the court to make modifications in the scheme of compromise and arrangement and the court would be guided by the sole consideration whether it is necessary for the proper and satisfactory working of the compromise and arrangement.

18. Whilst sanctioning the scheme of compromise and arrangement, the guiding consideration with the court was two-fold. In the days of mounting unemployment, if under a scheme of compromise and arrangement, employment is offered to those who richly deserve it and those who had spent a part of their useful life in running this company and who for a decade have the misfortune of being unemployed, should they have a respite in the process of starvation by getting back the employment and in the economic malaise of this country, should a productive unit be allowed to be crucified at the altar of the shareholders and the creditors It is true it was once the belief that when a company is sought to be wound up, the court is vitally concerned with the rights of the creditors and the shareholders as if none else was interested in the company. The view that a creditor of a commercially insolvent company is entitled to an order for winding up ex debito justitiae was firmly entrenched. That of course was the view till the recent past when laissez faire economy was the prevailing economic doctrine. Is it true today We know how a public limited company is formed and obtains its finances for production-oriented activity. The nationalised bank, the deposits from the public, the loans from the shareholders, the loans from public finance corporations, the subsidies from State Government - are all vital sources for procuring finance. The concept of managerial ownership is getting decayed. Some one does manage a company, but he does it with the finance, the intellect and muscle power procured from the society. Shareholders have put in initial share capital. In this company, it was Rs. 2,25,000 only. It would be a challenge destined to fail if one can profitably run a unit of 14,000 spindles on a capital which is completely wiped out, viz., Rs. 2,25,000. It would make businessmen laugh and workmen weep. That is not possible. The moneys are no doubt brought by the sponsor; but even Sanwarmal Todi who proposes to take over the company reveals no secret when he states that he has a good standing credit with the banks indicating the source from which he would procure finance. It is the middle class people who save by postponing their present enjoyment for a rainy day which forms capital, which the bank gets and again those moneys come back to oil the wheels of industry. The public finance houses get the money by loan and State contributions which came from taxes or people's savings. The L.I.C., the Unit Trust and several other bodies have finance coming from the middle class people of this country and it is the money of these people which is used in running the industry. I have no grievance; I am only stating a fact. If this he an unchallengeable fact, can there be any one bold enough to maintain that in dealing with a company the court would be agitated about the interest of creditors and shareholders only Further, when an industrial establishment manufactures something in these days of short supply of every commodity except the human being, at a time when the prices go on soaring impelled by the harsh law of supply and demand, a productive unit which would produce something tangible, something useful - and in this case yarn - which would help augmenting the commodity market in this article, would be to some extent, adding to the economic growth of this country. The scheme would provide employment and one has only to meet an unemployed man to know what employment means to him. It is an attempt at wiping some tears from some eyes. All these factors go to make the industry and if the priorities of various interest in the company are to be re-devised, an attempt may be made with the greatest respect to the time-honoured view to reverse the priorities. The priorities as at present in vogue with reference to interest in a company are creditors and shareholders. Employees and consumers of the product find no place in this table. I may in this connection refer to an observation by Prof. Gower in his principles of Modern Company Law, third edition, page 62, which reads as under :

'The vexed question of the relationship between the employees and the company which employs them is, in fact, a dominant theme in the current debate which flows over from company to labour law. It is generally accepted that it is unreal for company law to ignore, as at present our law largely does, that the workers are as much, if not more, a part of the company as the members of it.'

19. Now, suppose that the present modification is not accepted, what is the outcome Unfortunately, Chhotalal who spent two very useful years of his life, running from pillar to post and striving to put life into this unit, died before something concrete could be done. That is unfortunate. His sons and relations have their pre-occupations and are not in a position to devote their full time after this unit. Mr. Sanwarmal Todi has his won terms to offer in order to be a sponsor. They may not be very attractive. Even if I am not satisfied, what options have I got Suppose I reject the modification, things do not move farther at all. It is out of a compelling necessity that I will have to accept the modification. But, I must frankly say that I find nothing wrong or objectionable in the proposed modification.

20. Let me now refer to the important modification which has called for all this discussion. Initially Chhotalal Devchand Shah sponsored the scheme and under took the responsibility to implement the scheme. Chhotalal Shah died and his son, Mansukhlal, in the company of Vinubhai J. Bhatt formed a group designated as 'M/s. Mansukhlal Vinubhai & Associates' and sought substitution as sponsors of the scheme in place of 'Chhotalal Devchand Shah'. However, when Sanwarmal Bhagwandas Todi was sought to be associated, he sought a further modification in his affidavit that the sponsor should be 'Todi Group & Associates' and Mansukhlal has accepted the change as proposed by Sanwarmal Bhagwandas Todi. In fact, in the final analysis, Sanwarmal Todi, his brother and relations would be having a preponderant voice and the largest share in the management. Now, Sanwarmal Todi has given his bio-data as set out at page 11 of the record. It appears that he, his brother and his relations have a number of business and industrial activities. Apart from anything else, they are also interested in the manufacture of yarn and Sanwarmal Todi appears to the quite conversant with the technical side of production. His standing with public finance houses is fairly high. Mansukhlal Shah is being nominated on the board of directors, so also Vinubhai Bhatt. Vinubhai Bhatt is at present associated with a unit manufacturing yarn and having an installed capacity of 2000 spindles. Todi Group and Associates is neither a firm nor company.

21. It is an association of persons. But it appears that this group has both the financial wherewithal and the technical know-how and they would be able to implement the scheme. An unconditional undertaking has been filed by Sanwarmal Todi to implement the scheme in all its manifestations. He is acceptable to the various interests that appeared at the hearing of this summons. Therefore, the modification deserves to be accepted. Sanwarmal Todi will be personally responsible for reporting the progress of the implementation of the scheme in the first year every mouth and subsequently every three months for the entire period the scheme is being implemented. The court would give a direction for appointing a director on the board of directors to be constituted as herein indicated. Subject to this future direction, the board of directors as proposed in the affidavit of Sanwarmal Todi is hereby affirmed, with this further observation that in future appointment shall be made after obtaining the prior approval of the court.

22. With all the best hopes and aspirations, let us close with a hopeful note today that all the evil omens enveloping this company disappear into the limbo of oblivion. We start not only on a clean slate but a purer slate and hope that the wheels move fast smoothly and satisfactorily. With this, I confirm the modification as sought in the affidavit of Sanwarmal Todi. In terms, it is hereby directed that Todi Group & Associates shall be the sponsors of the scheme in place of any in substitution of Chhotalal Devchand Shah. Other modifications in the summons of Mansukhlal area of consequential nature. Some have become necessary because some obvious points were missed, such as time for payments was not specified. Therefore, modifications as sought in paragraphs 12(a) to 12(g) in the summons of Mansukhlal C. Shah are hereby granted and they should be incorporated in the final scheme. The sponsor in consultation with Mr. R. M. Shukla should work out a phased-out programme within a week and submit it to the court.

23. Accordingly, the summons herein is hereby granted. The scheme finally thus approved must be annexed to the judgment dated 9th and 10th December, 1974. There shall be no order of costs except in favour of the official liquidator and the Textile Labour Association.


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