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In Re: Bengal National Textile Mills Ltd. - Court Judgment

LegalCrystal Citation
CourtKolkata High Court
Decided On
Case NumberCompany Petition No. 581 of 1982
Reported in[1986]59CompCas956(Cal)
ActsCompanies (Court) Rules, 1959 - Rule 67; ;Companies Act, 1956 - Sections 391(6) and 518
AppellantIn Re: Bengal National Textile Mills Ltd.
Appellant AdvocateP.K. Jhunjhunwalla, Adv.
Respondent AdvocateB.K. Chatterjee, ;Ranjan Deb and ;S. Sen Gupta, Advs.
Cases Referred(f) Pioneer Dyeing House Ltd. (J.S. Davar) v. Dr. Shankar Vishnu Marathe
- dipak kumar sen, j. 1. in november and december, 1982, three petitions being company petitions nos. 544, 551 and 581 of 1982 were filed for winding-up bengal national textile mills ltd. (hereinafter referred to as ' the company '), respectively, by eastern spinning mills and industries ltd., bharat commerce and industries ltd. and rajasthan spinning and weaving mills ltd. on february 9, 1983, company petition no. 551 of 1981 was admitted and directions for advertisements were given. companypetition no. 581 of 1982 was thereafter admitted on february 16, 1983, arid directions for advertisements were again obtained.2. advertisements were published on march 11, 1983, in company petition no. 581 of 1982. on march 30, 1983, the said company petition came up for further hearing when a number of.....

Dipak Kumar Sen, J.

1. In November and December, 1982, three petitions being Company Petitions Nos. 544, 551 and 581 of 1982 were filed for winding-up Bengal National Textile Mills Ltd. (hereinafter referred to as ' the company '), respectively, by Eastern Spinning Mills and Industries Ltd., Bharat Commerce and Industries Ltd. and Rajasthan Spinning and Weaving Mills Ltd. On February 9, 1983, Company Petition No. 551 of 1981 was admitted and directions for advertisements were given. CompanyPetition No. 581 of 1982 was thereafter admitted on February 16, 1983, arid directions for advertisements were again obtained.

2. Advertisements were published on March 11, 1983, in Company Petition No. 581 of 1982. On March 30, 1983, the said company petition came up for further hearing when a number of creditors, including the petitioners in Company Petitions Nos. 544 and 551 of 1982, appeared and supported the petitioning creditor. The application was adjourned after directions were given for filing of affidavits. The said application is pending.

3. Thereafter, on April 28, 1983, M/s. Pokharmull & Sons filed another winding-up petition and applied for appointment of a provisional liquidator over the company. On the same day, the official liquidator was appointed the provisional liquidator of the company.

4. On May 12, 1983, the company filed an application under Sections 391, 392 and 393(3) of the Companies Act, 1956, proposing a scheme of compromise or arrangement with its creditors and for directions for meetings to be held for that purpose. On May 12, 1983, directions were given in the said application for calling a meeting of the unsecured creditors of the company on July 23, 1983, for consideration of the proposed scheme. Notice of the meeting was directed to be advertised.

5. On May 13, 1983, the company filed an application under Section 391(6) of the Companies Act, 1956, for an order, inter alia, that commencement and continuation of all suits and proceedings against the company be stayed. Recalling of the order of appointment of the provisional liquidator was also prayed for.

6. On May 16, 1983, the petitioner in Company Petition No. 581 of 1982 made an application praying, inter alia, that the orders passed in the applications of the company under Sections 391, 392 and 393 of the Act be recalled and set aside and that an early date for final hearing of Company Petition No. 581 of 1982 be fixed. On the same day, i.e., May 16, 1983, an order was passed directing the company that if a notice of the proposed meeting of the creditors was issued before the disposal of the application, an addendum should be included in such notice stating that an application for recalling the orders passed under Section 391 of the Act was pending in court and was likely to be disposed of before the meeting.

7. The company has since applied for amendment of its application under Section 391 of the Act and also for amendment of its proposed scheme. Directions for calling a fresh meeting for consideration of the amended scheme has also been prayed for.

8. The meeting convened for July 23, 1983, has been held.

9. The application of the petitioning-creditor in Company Petition No. 581 of 1983 for recalling of the orders passed under Section 391 of the Acthas been heard. The application of the company under Section 391(6) of the Act for stay of commencement and continuation of all suits and proceedings against it and for recalling of the appointment of the provisional liquidator has also been heard.

10. Eleven creditors appeared in support of Company Petition No. 581 of 1982. Other unsecured creditors of the company, whose claims alleged to aggregate over Rs. 1 crore, appeared in the proceedings and supported the scheme proposed by the company. It was stated on their behalf that they were prepared to defer payment of their claims for a period longer than that suggested in the scheme.

11. To appreciate the controversies raised, it is necessary to consider the basic aspects of the scheme proposed by the company. The undertaking of the company consists of a unit in the State of West Bengal, one part of which manufactures knitting yarn and the other part is run for weaving such yarn. The unit of the company at Faridabad consists of spinning and a textile department. In the latter, weaving and processing are carried on.

12. The company contends that the unit in West Bengal is viable and if properly run, will have an annual turnover of Rs. 8 crores with a profit margin of 10%.

13. Of the Faridabad unit, it is the case of the company that the spinning department is viable and, if run properly, can effect annual sales of Rs. 3.75 crores with a similar profit margin of 10%. The textile department of the Faridabad unit is admitted to be sick. Its plant is stated to be obsolete and uneconomic. The company proposes to dispose of the said unit.

14. An agreement, it is alleged, has been entered into for the sale of the said weaving and processing unit of the textile department of the company at Faridabad with its plant, machinery and assets for Rs. 52.50 lakhs. Rs. 5 lakhs have been received as advance payment of price.

15. The company contends that with the balance of the sale proceeds, i.e., Rs. 47-50 lakhs, and with the help of the Punjab National Bank, its bankers, the company can be revived.

16. The bank, it is alleged, has offered facilities to the company by way of rehabilitation-cum-renewal loan by its letter dated May 4, 1983.

17. Learned counsel for the petitioning creditors and for the supporting creditors submitted at the hearing that 3/4ths of the creditors of the class to which they belonged were not likely to support the scheme.

18. It was next submitted that the proposed scheme was impracticable, unfair, fraudulent and was incurably defective. The scheme, if implemented fully, would result in violation of law.

19. It was submitted further that it was open to the court to scrutinise the proposed scheme at any stage and even after an order was made under Section 391 of the Act for calling a meeting. The court could act either suo motu or at the instance and intervention of persons affected.

20. A meeting under Section 391(1) of the Act, it was submitted, could not be asked for as a matter of course or as of right. Before directing a meeting to be called, the court had to satisfy itself that a sufficient case had been made out for calling such a meeting. If it was established to its satisfaction that the ex parte order directing the calling of the meeting was not properly passed, the court had inherent jurisdiction to recall such order before the same was drawn up, completed and filed in the interest of justice or to prevent abuse of the process of court or to prevent commission of any illegality or fraud.

21. The infirmities and illegalities in the instant scheme and its patent impracticability, it was submitted, escaped the court's notice and the same were not brought to the notice of the court by the company which took advantage of the provisions of Rule 67 of the Companies (Court) Rules. In exercise of its inherent powers, the court, it was submitted, could permit intervention in proceedings under Section 391 at any subsequent stage.

22. It was submitted that the scheme as proposed took into consideration and included only the sundry creditors and not the unsecured loan creditors. From the accounts disclosed by the company, the total claim of the sundry creditors was Rs. 50'25 lakhs. The claim of the three sundry creditors, namely, Rajasthan Spinning and Weaving Mills Ltd., Bharat Commerce and Industries and Eastern Spinning Mills and Industries Ltd., who were opposing the scheme was in aggregate over Rs. 13 lakhs which was more than 25% of the total claim of the sundry creditors.

23. It was next submitted that the scheme was impractical as it provided for payment only to the sundry creditors. The unsecured loans were to be kept pending for an indefinite time. Funds were neither available nor allocated to pay the unsecured loans. There was no provision in the original scheme even for postponement of payment of the unsecured loans.

24. The proposal to amend the scheme and provide for postponement of payment of the unsecured loans, it was submitted, was illegal even with the unanimous consent of the creditors. Under the Companies (Acceptance of Deposits) Rules, 1975, read with Section 58A of the Companies Act, unsecured loans had to be treated as deposits. A company was not entitled to accept unsecured loans exceeding 20% of its paid up capital plus its reserves and surplus reduced by accumulated loss. The share capital and the reserves and surplus of the company in the aggregate was Rs. 60,67,060, whereas the accumulated loss as on December 31, 1981, was Rs. 2,28,70,575.The unsecured loans thus exceeded the statutory limit and were illegal. The same were repayable forthwith unless time for repayment was extended by the Central Government.

25. It was next submitted that the sundry creditors and the unsecured loan creditors constituted two different classes. Proposed repayment of these two classes of creditors were also on different bases. It was submitted that the approval of three-fourths majority of both the classes of creditors was required for approval of the scheme. So far as the sundry creditors were concerned, it was clear even at this stage that the majority of them will not support the scheme. Even if the unsecured loan creditors approved of the scheme, as amended, the court will still have to consider whether the implementation of the scheme would oppress or override the wishes of the sundry creditors.

26. It was next submitted that the scheme was otherwise not feasible being based on a number of assumptions which were not likely to materialise.

27. The company fell into difficulties, admittedly, on account of (a) recession in the textile industry, (b) shortage in supply of electricity, (c) loss incurred in the textile department of the company in Faridabad.

28. No materials were brought before the court that there was likelihood of improvement either in the textile industry or in the supply of electricity. In fact, in 1980-81, the turnover of the company diminished sharply. There was also no evidence to show that even after the disposal of this sick unit in Faridabad, the other units of the company will generate sufficient funds to enable it to pay off even a part of its debts. There was no technical report as to the feasibility of the scheme, which was recommended only by a firm of chartered accountants.

29. A main assumption of the scheme was a rise in the turnover of the West Bengal unit of the company to about Rs. 8 crores per annum. This, it was contended, was not a valid assumption as the unit in West Bengal could not function optimally in view of the prevailing circumstances.

30. The proposed scheme, it was submitted, was a subterfuge to stall the genuine creditors and meant to benefit others by further dissipation of the assets of the company. The claims of the unsecured creditors had been shown at sharply deflated figures ignoring the past admissions of the company.

31. It was submitted that the approval of the scheme by the Punjab National Bank was tentative and in the event the company was ultimately wound up, the sale of its Faridabad unit would be void in law.

(a) Calicut Bank Ltd. v. Devani Ammal [1940] 10 Comp Cas 78 (Mad); AIR 1940 Mad 621. Here, the directors of a banking company filed a petition under Section 153 of the Indian Companies Act, 1913, for sanction of a scheme after the bank closed its business. A petition for winding up of the bank was filed thereafter. The scheme was approved by a large majority of shareholders and creditors. The court rejected the scheme and directed winding-up of the company. On appeal from this order, it was found that (a) the scheme, if adopted, might give the depositors a part of their dues but it was misrepresented in the scheme that the bank would be ultimately revived ; (b) wrongful withdrawals from the bank of large amounts by the directors and their associates were not brought to the notice of the creditors and the shareholders ; (c) that the bank was hopelessly insolvent; and (d) the creditors who were not depositors had not been considered in the scheme. The rejection of the scheme was upheld. The appeal court observed as follows (p. 81 of 10 Comp Cas):

' The fact that shareholders and creditors of a company have approved of a scheme of compromise or arrangement as contemplated by Section 153 of the Indian 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.' (b) Light of Asia Insurance Co. Ltd., In re AIR 1942 Cal 578, was cited for the following observations (headnote):

' In sanctioning a scheme under Section 153, the court does not simply register a resolution passed by the majority of the creditors or the shareholders. It must look at the scheme and see whether the Act has been complied with and whether the scheme is reasonable or whether there is such an objection to it that any reasonable man might say that he could not approve of it. If the creditors act on sufficient information and act honestly, they are much better judges of what is to their commercial advantage than the court can be, but that is not conclusive because there might be some defect in the scheme which they did not notice.

The reason for dividing the creditors into different classes is that they have different interests. If different state of facts exists among different creditors which may differently affect their minds and their judgment, they must be divided into different classes. The word ' class ' in Clause (1) has not been defined in the Act. It must be given such a meaning as will prevent the section being so worked as to result in confiscation and injustice and it must be confined to those persons whose rights are not sodissimilar as to make it impossible for them to consult together with a view to their common interest.'

Holder of policies in an insurance company whose policies ripened and those whose policies were continuing were treated as belonging to different classes.

(c) Indian Crescent Bank Ltd., In re [1949] 53 CWN 183. Here, the constituents of a banking company who were mainly Muslims started to withdraw their accounts on the eve of the partition of India. This resulted in depletion of cash and liquid assets of the bank. The bank also suffered loss in the course of transmission of funds.

The bank applied under Section 153 of the Indian Companies Act, 1913, for a meeting of its creditors and shareholders to consider a scheme of arrangement.

S.R. Das J., as his Lordship then was, before directing the calling of any meeting examined the scheme and found the same to be neither reasonable nor practical as a large number of creditors who were foreigners would not be bound by the scheme and that the paid up capital of the bank being about Rs. 12,000 was too meagre to enable it to carry on its business. The application was rejected.(d) A.M. Muhammed Abdulla Tharagnar v. Official Liquidator, Cape Comorin Generals Traffic Co. Ltd. [1953] 23 Comp Cas 161 ; AIR 1952 TC 243. Here, in an application under Section 153 of the Indian Companies Act, 1913, for propounding a scheme for reconstruction of a company, which was in liquidation, and praying for an order directing a meeting of the shareholders as a matter of course, a Division Bench of the Travancore Cochin High Court rejected the application on the ground that an identical application, made earlier, had been rejected.

(e) Bengal Bank Ltd. v. Suresh Chakravarthy : AIR1952Cal133 . In this case, a scheme of arrangement was propounded by a bank and was approved by the required majority of the shareholders. The scheme was thereafter modified by the Reserve Bank. The court refused to sanction the same. A Division Bench of this court dismissed the appeal preferred from the order refusing sanction, observing as follows (p. 317 of 21 Comp Cas):

' The court does not sanction a scheme merely because it has been approved by the requisite majority. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting.....Section 153(2) allows the decision of themajority to bind the minority and, therefore, it is incumbent on the court to see that the decision does not act oppressively on the minority.....Insanctioning a scheme, the court must see that it is a reasonable scheme and it is a practicable scheme.' (f) Pioneer Dyeing House Ltd. (J.S. Davar) v. Dr. Shankar Vishnu Marathe : AIR1967Bom456 . Here, more than 10 years after a winding-up order had been passed against a company, a scheme propounded by some creditors and ex-directors of the company for reconstruction of the company was approved by 75% of the creditors including depositors and all the shareholders and was sanctioned by the court. An appeal by the official liquidator against the said order was allowed by a Division Bench of the Bombay High Court and the order sanctioning the scheme was set aside on the grounds, inter alia, that (a) the scheme did not provide sufficiently for payment of its creditors; (b) the object of the scheme was to caver up past wrongful acts of its directors ; (c) the scheme provided for taking over of the personal debts of the managing directors by the company ; (d) the scheme was approved by the creditors without appreciating its real implication, and (e) the scheme was such that no businessman could reasonably approve of the same. The Division Bench observed as follows (AIR headnote):

' The consent of the majority of creditors or shareholders to a scheme does not conclude the issue whether the scheme should be sanctioned by the court under Section 153(2). The view of the majority is but one element in the case, though a very important one, which must be taken into account in sanctioning the scheme.

The jurisdiction of the court transcends the mere consideration that a majority of those affected by the scheme is willing to submit to the scheme. The creditors of a company may agree to accept a fraction of the amount due to them from the company and yet, on considerations of more lasting importance, like public or commercial morality, the court may refuse to accept the verdict of the majority. It may also refuse to accept the scheme on the ground that it is not reasonable or that it is not feasible or that there is no chance that it will yield to a smooth and satisfactory execution.'

(g) Krishnakumar Mills Co. Ltd., In re [1975] 45 Comp Cas 248 (Guj). In this case, a company was in the process of liquidation and the official liquidator under directions of the court had advertised sale of the assets of the company inviting tenders. At this stage, a creditor moved an application under Section 391 of the Companies Act for convening a meeting of the shareholders and creditors of the company to consider a scheme of compromise and arrangement. The secured creditors appeared and opposed the application, before directions for holding the meeting were issued,alleging that the proposed scheme was neither reasonable nor practicable and that a similar scheme had been rejected in the past. The court after considering the objections rejected the application.

(h) Hellenic and General Trust Ltd., In re [1976] 1 WLR 123 (Ch D). This decision of the Chancery Division of the English High Court was cited for the proposition that the interests of a wholly owned subsidiary of an intended purchaser of shares under a scheme of arrangement were different from those of the ordinary shareholders who formed a different class and the latter's views had to be determined separately before the court finally decided to approve or reject the scheme.

32. Learned counsel for the company contended on the other hand that neither the Companies Act, 1956, nor the rules framed thereunder provided for an application for recalling an order convening a meeting of the creditors of a company for consideration of a scheme or compromise. Rule 67 expressly provided that an application for convening a meeting of the members or the creditors of a company should be moved ex parte.

33. This had been done in the instant case and an order had been obtained on May 12, 1983. Assuming the court had power to recall an ex parte order passed under Rule 67, the same would be done only if the court came to the conclusion that the scheme as propounded was illegal or fraudulent or was opposed by an overwhelming majority of creditors, which would render the holding of such a meeting an idle formality. None of the above grounds has been established and this was not the appropriate stage when the court should go into the merits of the scheme.

34. Learned counsel submitted that in the cases cited in support of the petitioning creditor, the earlier statute, viz., the Indian Companies Act, 1913, was applicable. The rules framed thereunder provided for hearing only at one stage. Under the rules framed under the Act of 1956, an application for propounding a scheme was required to be moved ex parte. Notice was not required to be given even to the Central Government. It was for the creditors and shareholders to consider the scheme, reject or approve the same with or without modification at the meetings. Only after that stage, the court was called upon to consider the scheme further when it came up for final sanction.

35. It was next submitted that the scheme was meant to record an arrangement between the company and its unsecured creditors, viz., decree-holders, loan creditors and sundry creditors. There was no scope for making a further division of unsecured creditors into different classes and categories. Unsecured loan creditors whose claim exceeded Rs. 1 crore in aggregate had categorically expressed their intention to support the scheme and agreed to defer repayment of their dues.

36. There was no illegality involved in deferring payment to the loan creditors. All loans were not deposits and loans from directors as also inter-corporate loans did not come under the mischief of the Companies (Acceptance of Deposits) Rules. Under Section 58A of the Act, a company was permitted to apply to the Central Government for extension of time for repayment of deposits and exemption from the penal consequences laid down in the said section. The form prescribed for such an application required the company to state, inter alia, whether there was any scheme for repayment of deposits approved by a High Court. It was possible to propound a scheme for repayment of deposits and such a scheme would not be ex facie illegal.

37. If there was any lacuna in the scheme, the same could always be amended either by the court or at a meeting of the creditors where objections could be raised and considered.

38. Learned counsel submitted last that the intention and the desire of a large number of creditors of a company could not be ignored in decidingwhether the company should be wound up or not. Unless shown that themajority of the crditors have coerced the minority or intended to furthertheir special interest at the cost of others, the desire of the majority shouldbe favourably considered. Taking into account the current socio-economic condition, industrial unrest and labour and employment problems, thecourt should give the company a chance to revive in the larger public interest even if such a chance was slender.

39. It was not disputed on behalf of the creditors of the company that under Rule 67 of the Companies (Court) Rules, the court is empowered to direct the holding of a meeting of the creditors to consider a scheme of arrangement ex parte. The question which arises is that, after such a meeting has been called, can or ought the court make an interim scrutiny of the scheme, before the meeting considers the same and on the basis thereof call off the meeting.

40. It appears to me that it is open to the creditors when they come to know of the proposed meeting and they do so, when an application under Section 391(6) is usually made after a meeting is directed to be called, to move the court for rejection of the scheme in its embryo stage.

41. The court can entertain such an application under its inherent powers.Even otherwise, Section 518 of the Companies Act permits a creditor toapply to the court to determine any question arising in the winding up ofa company. It is a matter of record that, in the instant case, proceedings for winding up of the company had reached a concluding stage as advertisements have been issued and a provisional liquidator has been appointedfor the company.

42. But to succeed in such an application, a creditor will have to make out a strong case and establish, inter alia, that the scheme is being opposed by the majority of the existing creditors or at least more than one-fourth of them, or that the scheme is patently fraudulent or illegal, or that, ex-facie, the scheme is so unreasonable or impractical that it has to be seen to be rejected.

43. In view of the above, the merits, or more appropriately, the demerits, of the scheme may now be considered.

44. One of the main objections to the scheme as proposed is that no provision has been made in it for payment of the loan creditors. This objection has been sought to be countered by the application of the company to amend the scheme. A number of such creditors whose aggregate claim exceeds the claims of the creditor have appeared and have offered suo motu to defer payment of their claims. I hold that this lacuna in the scheme is curable.

45. The next objection, also important, is that under the Deposit Rules of 1975, payment of the loans which are in fact deposits will be deemed to be deposits, cannot be deferred. The said prohibition in the rules, in my view, is not absolute as Section 58A of the Companies Act provides for extension of the time for repayment of deposits with the sanction of the Central Government. With the consent of the majority of the loan creditors, there is no reason why sanction by the Central Government, if applied for, will be withheld. On this aspect, the scheme may need further amendment. In the event such sanction is not ultimately granted, the scheme will become void. I do not find the scheme to be patently illegal.

46. A contention has been raised that the creditors of the company should be divided into two classes, viz., sundry creditors and loan creditors, and that the scheme should be considered by the two classes separately. Prima facie, I do not find any particular reason for such a classification. It is nobody's case that the loan creditors are not genuine creditors or that they have any special interest to override or oppress the sundry creditors. In any event, I am not expressing my final opinion in the matter and the same may be agitated if and when the scheme is approved in the meeting and comes for the final sanction of the court.

47. A number of objections have been raised as to the feasibility and the practicability of the scheme. The scheme like any other business scheme or project is based on certain expectations which may or may not materia-lise. With financial assistance from the bank and the co-operation of the creditors, there is a possibility that the scheme might be implemented. At this stage, it is not necessary for the court to examine the scheme further or to venture into the realm of business management and the matter shouldbe left to the commercial wisdom of the creditors to be exercised at the meeting.

48. The objection of the sundry creditors that there is a likelihood of dissipation of the assets of the company pending the finalisation of the scheme deserves some consideration. It would be in the interest of all concerned that the present status quo of the assets of the company should be maintained till a final decision is reached whether the scheme should be implemented or not.

49. The pendency of the winding-up proceedings, in my view, is no bar to the scheme being considered by the creditors in the usual course.

50. In the facts and circumstances and for the reasons stated hereinabove, I dispose of the application filed by the petitioning creditor, inter alia, for recalling of the order passed on May 12, 1983, by the following order.

51. The meeting of the creditors as directed would be held without prejudice to the rights and contentions of the petitioning creditor and other supporting creditors. The winding-up proceedings will not be stayed but the provisional liquidator will not take any further steps in respect of the properties, assets and records of the company. All other proceedings pending in respect of winding-up of the company will stand adjourned till the meeting is held and the report of the chairman is filed.

52. There will be no order as to costs.

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