1. These appeals arise out of an order passed by Gentle J. rejecting a scheme put forward by the directors of the Calicut Bank Limited under Section 153, Companies Act, and directing the compulsory winding up of the company. It has been conceded here, as it was conceded below, that if the scheme is not one which the Court can sanction, a compulsory winding up order must necessarily follow. The appellants are the directors and they are supported by a number of creditors. The company was registered in 1908. Its head office was at Calicut and it had thirteen branches in British India, one at Cranganore in the State of Cochin and another at Colombo. Its issued capital was Rupees 2,77,280 divided into 27,728 fully paid up shares of Rs. 10 each. As the result of a run on the bank it was compelled to close its doors on 16th August last year. The day before the closing of the doors the directors filed a petition in this Court asking for the sanction of the scheme with which Appeal Ho. 75 is concerned. On 19th August a petition for the compulsory winding up was filed by the respondents and on the 30th of that month Gentle J. appointed provisional liquidators, who on 31st October presented a report which shows that the company's liabilities amount to Rs. 15,58,830 and its realizable assets to Rs. 10,52,955 leaving a deficit of Rupees 5,05,874. It is common ground that this report accurately states the position of the Bank.
2. The report also shows that certain directors, their friends and relations had obtained advances from the bank to the extent of Rs. 5,19,372 of which Rs. 4,54,611 is considered to be irrecoverable. The figures in the provisional liquidators' report do not take into account the position in Cranganore nor in Colombo. The reason for this is that the officials of the bank failed to present statements showing the state of affairs at these two branches and we are informed by the learned advocate who appears for the official liquidators who were appointed on the passing of the winding up order that the information has not even yet been received. It is alleged that after the date of the appointment of the provisional liquidator a sum of Rs. 17,000 was withdrawn by the manager of the bank from the funds at Cranganore and Colombo and this matter is being investigated by the Master.
3. The scheme which the directors desire the Court to sanction is not a scheme of reconstruction but is really a scheme for the voluntary liquidation of the bank spread over a number of years, and if adopted it would only give the depositors part of what is due to them. Broadly speaking the proposals so far as the depositors are concerned are these : (1) The depositors to be paid two annas in the rupee with interest at the contract rate up to 15th August 1938 as and when their deposits fall due; after that date interest on fixed deposits to be three per cent., on savings bank deposits two per cent, and on sums on current accounts one per cent; (2) the depositors to be paid eight annas in the rupee spread over a period of four years (two annas each year) with interest at the rate of three per cent, per annum; (3) the depositors to convert two annas in the rupee into fully paid up shares of the company; (4) four annas in the rupee to be written off 'provisionally,' but the only hope of restoration being the collection of debts considered to be bad or doubtful. The scheme also provides that the share-holders are to give up twelve annas in the rupee of their paid up capital 'to be set apart as part of the provision for bad and doubtful debts.' Considering that the loss on the business amounts to nearly twice the capital this is a remarkable provision. The scheme further provides that the share-holders are to forgo their rights in the reserve fund. According to the books the reserve fund amounts to Rs. 1,29,500 but the report of the provisional liquidators shows - and here again it is accepted as disclosing the true position - that no fund exists. The entry is merely a book entry without any cash to support it.
4. The learned Judge directed that the scheme should be submitted to meetings of shareholders and creditors. A shareholders' meeting was held on 18th October 1938 when 35 of them were present in person, representing 1894 shares, and 252 share, holders, holding 16,029 shares, were present by proxy. The scheme was approved by 253 shareholders, representing 14,949 shares. Nine shareholders, representing 717 shares, disapproved. There was a large majority in favour of the scheme. The creditors' meeting was held on 25th October. There were present at this meeting 56 creditors, representing Rs. 4,15,554 and 1666 depositors representing Rs. 7,49,348, sent proxies. The scheme was approved by 1669 creditors representing Rs. 9,38,770, and was disapproved by five creditors, representing Rs. 30,692. The application for the approval of the scheme and the application for the compulsory winding up of the company came before Gentle J. on 10th and 11th November. The learned Judge after a careful examination of the scheme and of the position of the company came to the conclusion that the proper course was to reject the scheme and direct the compulsory winding up of the company. We consider that the decision which he arrived at is the proper one.
5. The fact that shareholders and creditors of a company have approved of a scheme of compromise or arrangement as contemplated by Section 153, Companies Act, does not; mean that the Court is bound to accept the scheme. It is the Court's duty to examine the proposals and decide whether they are fair and reasonable, taking everything into consideration. That the shareholders and creditors have approved of a scheme will of course carry weight, but there may be more important considerations. In this case justice demands that the resolutions passed at the respective meetings should be disregarded. In the first place, it is obvious that as the result of a letter signed by certain creditors of which a director of the company was one, the position of the company was misrepresented. This letter was circulated to all the shareholders and creditors before the meetings took place. It held out hopes that if the scheme was approved the position of the company would be restored and it would be able to continue its business. This is shown by the following passage:
Thus, it will be seen that we have to provide for about Rs. 6,50,000 to meet the bad and doubtful debts. If the shareholders will forgo eight annas in the rupee of their shares and the entire reserve fund, we would get Rs. 2,68,140 and if the depositors allow four annas in the rupee to be written off we get Rs. 3,82,545. Thus, in all, we can set apart a sum of Rs. 6,50,685 as reserve for bad and doubtful debts, which is sufficient to put the Bank again on its legs.
6. Now when this letter was issued, there was no intention of reconstructing the company. The company had no money with which to carry on business. All that the directors had in mind was a voluntary liquidation which would take years to complete. The learned advocate who appears for the appellant frankly told us that the intention was not to re-open the bank, and that no reconstruction was contemplated was also made clear by the learned Advocate-General who appeared for the directors when the case was before Gentle J. The misleading character of this letter does not end with the passage just quoted. No reference was made in the letter to the expenses of continuing the business and no reference was made to the fact that certain directors, their friends and relations had withdrawn from the company over Rs. 5,00,000 of which Rs. 4,50,000 was considered to be completely lost. If the true position had been placed before the creditors, it is inconceivable that they would have accepted the scheme.
7. But even if the resolutions passed by the shareholders and creditors had been passed after a disclosure of the true position the scheme could not be accepted. The company is hopelessly insolvent, and the scheme confess no apparent benefit on any one, in fact it ignores creditors who are not depositors. There is at least one creditor who is not a depositor, namely the P. & O. Banking Corporation to which is due Rs. 15,000. According to the judgment under appeal this amount at the date of the presentation of the petition was Rs. 49,000. It does not appear how it came to be reduced to Rs. 15,000. The immediate payment of two annas in the rupee which the scheme contemplates requires a sum of Rs. 1,92,500, but on 10th October the total amount of cash available was only Rs. 1,11,000. The scheme therefore is in itself not a feasible one. But there are other grounds for its rejection and the insistence on a compulsory winding up. The bank's officials have refused to disclose the position at Cranganore and Colombo and an allegation of unlawful withdrawal of funds after the appointment of provisional liquidators has been made. Then there is the fact that the directors and their friends have received large advances from the company and most of these advances are considered to be irrecoverable. Taking these factors into consideration and remembering the misleading statement which was issued by certain of the creditors before the meetings were held there is, in our opinion, an overwhelming case for the rejection of the scheme and the enforcement of the order for the compulsory winding up of this company. It is necessary that the assets that do exist should be realized for the benefit of the creditors, and their realization can best be carried out by the official liquidators. A compulsory winding up will also result in a close inquiry into the conduct of the directors, past and present. For these reasons the appeals will be dismissed with the costs' of Appeal No. 74 of 1938 against the appellant and the supporting creditors in favour of the creditors who oppose the appeal (one set). There will be no order for costs in Appeal No. 75 of 1938 as the two appeals, have been heard together.