1. This is an application for sanction of a scheme of arrangement under Section 153, Companies Act. The Company was incorporated in the year 1921 with an authorised capital of Rs. 20,00,000 divided into 80,000 shares of Rs. 25 each. The authorised capital is now divided into 4,00,000 shares of Rs. 5 each. The issued capital is RS. 20,00,000 and the amount of capital paid up or credited as paid up is Rs. 19,86,898. The Registered Office of the Company is at 18, Netaji Subhas Road, Calcutta. The object of the Company is, inter alia, to deal in cotton and to carry on the business of ginning cotton, spinning yarn and manufacture of linen cloth and other goods.
2. The Managing Agents of the Company are M/s Hemendra Nath Dutta & Sons Limited, a private limited company. They were so appointed on 10th March 1943 for a period of 20 years. Two of the Directors of the Managing Agency Company, viz., Hemendra Nath Dutta and Rabindra Nath Dutta are also Directors of the Company. The business of the Company is at present being carried on by a Board of Directors consisting of persons other than the said Hemendra Nath Dutta and Rabindra Nath Dutta. The present Board of Directors has suspended the said Managing Agents.
3. On 29th November 1948, an application was presented to me for sanction of a scheme which was annexed to the petition. I admitted the petition and gave directions for holding a meeting and fixed the date of hearing for 26th January 1949. Pursuant to the directions, on 9th January 1949, the meeting was held but it is said that certain creditors whose debts were disputed created disturbances, by reason whereof the creditors could not consider and vote upon the scheme.
4. The matter came before me on 25th January 1949. I, thereupon, gave fresh directions for holding meetings of the creditors and shareholders. I directed that creditors whose claims were disputed by the company would be entitled to attend the meeting and their votes would be separately recorded. I further directed that notice of the meeting together with a proper form of proxy and a copy of the scheme should be sent to each creditor and shareholder to his respective address as recorded in the books of the company. I also directed that any person whose claim was disputed by the company and who applied to the special officer in writing at least 10 days before the date appointed for the meeting would be entitled to be supplied with a proxy form. I fixed the hearing of the application for 28th March 1949.
5. I have forgotten to mention that on 29th November 1948 I appointed Mr. A.B. Gupta a Chartered Accountant, to investigate the work-ability of the scheme and the said auditor was to submit his report on 31st December 1948. The report of the auditor was to be available for inspection by the creditors at least a week before the meeting. I also appointed Mr. S.N. Bose as a Special Officer and ordered him to make an inventory of the books and assets of the applicant. Pursuant to the directions Mr. A.B. Gupta investigated the accounts and made a report. He reported that there was huge loss of liquid assets amounting to about Rs. 29,00,000. According to him the liabilities of the company were Rs. 44,00,000 and the available resources for meeting the liabilities was Rs. 27,00,000 and the scheme was likely to founder for want of finance.
6. On 13th March 1949, meetings of creditors and shareholders were held. Mr. S. Banerji, a member of the Bar, acted as Chairman of the Meeting. The auditors' report as well as the opinion of M/s K.C. Roy Chowdhury & Co., Auditors, commenting on the report of Mr. Gupta were placed before the creditors and explained to them. Mr. Keshab Chandra Bose and Mr. B.M. Bagaria, Solicitors attended the meeting as holders of proxies from numerous creditors of the company. At first the entire scheme was presented to the creditors for their acceptance or rejection and it was rejected by an overwhelming majority of creditors. Votes, of the creditors were not, however, recorded. Thereafter the clauses of the scheme were considered. Mr. Bagaria proposed certain amendments. The Chairman, although he was of the opinion that Mr. Bagaria was not entitled to move any amendment permitted him to do so. The amendments were seconded by Mr. Keshab Chandra Bose who was also not a creditor. The motion of Mr. Bagaria was supported by admitted creditors of the value of Rs. 10,965-9-3 and by disputed creditors whose claims amount to Rs. 11,96,495-7-9. The value of the creditors who opposed the motion was Rs. 4,00,755-7-10. Thereafter, one Mr. Tallaty, moved certain amendments. The motion was supported by admitted creditors of the value of Rs. 4,00.112-9-6 and disputed creditors of the value of Rs. 39,717-10-9. The motion was opposed by admitted creditors of the value of Rs. 10,715-15-3 and disputed creditors of the value Rs. 11,41,981-13-6.
7. The Chairman reported that the scheme as amended on the motion of Mr. Tallaty was passed by the requisite majority of creditors in number as well as in value whose claims were not disputed by the company. The scheme as amended is annexed to the report of the Chairman, and marked 'G'. At the meeting of the shareholders, the scheme as amended was accepted by the shareholders of the value of Rs. 4,84,080 and opposed by shareholders of the value of Rs. 27,830.
8. It is submitted that the scheme as amended should be sanctioned by me because it has been passed by the requisite majority of creditors and shareholders.
9. Mr. S.C. Bose, appearing on behalf of some creditors, whose claims are disputed by the company, submits that the scheme has not been passed by the requisite statutory majority. The disputed creditors may be classed into two categories. There are creditors whose names appear in the books of the company as creditors, and to whom proxy forms were sent by the special officer pursuant to the directions given by the Court. On the date when directions were given their debts were not denied or disputed. There is another class of creditors whose names do not appear in the books of the company. The proxy forms were sent to them on their application to the special officer. The Chairman considered the creditors of both the classes I have mentioned as disputed creditors and in coming to the conclusion whether the scheme was passed by the requisite majority did not take into account both the said classes of creditors. He has only considered creditors whose debts were admitted by the company and on such consideration has reported that the scheme has been passed by the requisite majority.
10. Another point which has been raised is whether the votes cast by Mr. Bagaria and Mr. K.C. Basu holding proxies from creditors should be taken into account. The Chairman was of the opinion that they were not entitled to be present or vote, though he allowed them to be present and recorded their votes. If the votes cast by Mr. Bagaria and Mr. Basu are taken into consideration it is clear that the scheme has not been passed by the requisite majority.
11. I am of opinion that for the purpose of this application, the creditors whose names appear in the book a of the company should be considered as creditors and their votes would taken into account. The creditors whose names do not appear in the books of the company should not be considered as creditors unless they can show prima facie on this application to the satisfaction of the Court that they are creditors.
12. I am, however, of opinion that Mr. Bagaria and Mr. Basu were not entitled to be present in the meeting as holders of proxy from creditors. It has been held in England that for the purposes of a meeting of any particular class, proxies can be given only to the members of that class. In other words, at a meeting of creditors, only creditors were entitled to be present. Persons who hold proxies from creditors but who were not themselves creditors could not attend the meeting.
13. Sir George Jessel held that it was a well established rule that at a meeting held of a class of persons, holders of proxies who do not belong to the class are not entitled to be present or to vote. Mr. S.C. Bose contended that that rule was based on the General Order and Rules of the High Court of Chancery 1863, Rule 46 and should not be followed in India. Ha has also referred to adverse criticisms of the rule in Palmer on Company Precedents and Buckley on Companies Act. He also referred to a case reported in Re General Mortgage Society (Great Britain) Ltd. (1942) 1 ALL E. Rule 414: (1942 Ch. 274).
14. It appears, however, that the rule is one of general application. In Section 79, Companies Act, it is provided that a meeting of shareholders cannot be attended by a proxy holder who himself is not a shareholder. A similar rule appears in Article 65 of Table A, Companies Act. In Section 115 which is the section in the Companies Act of 1929 in England corresponding to Section 79 of the Indian Act, there is no provision similar to the provision in Section 79, Companies Act. The intention of the legislature in the case of meeting of shareholders was that it must be attended by persons of the same class and not by outsiders as holders of proxies from shareholders. It is difficult to see why a different rule should apply in the case of meetings of creditors. There seems to be sound reason why meetings of creditors should be attended only by creditors and not by any outsiders. The rule was said to be well established in the time of Sir George Jesell. That rule has been followed in England except where there is any statutory provision empowering outsiders to be present at meetings of a class of persons. The case reported in Re. General Mortgage Society (Great Britain) Ltd, (1942) 1 ALL E. Rule 414: (1942 ch. 274) is a case of that class. There, Rule 160 of the winding up rules clearly provided that the Official Receiver could be present at a meeting of the creditors. There would have been no necessity for such a rule unless it was well established that the meeting could not be attended by any person outside the class of persons who were holding the meeting. For these reasons, I think I should follow the decision of Sir George Jessell in preference to the criticism of the text book writers.
15. I am, however, of the opinion that there might have been justifiable misapprehension in the minds of creditors as to whether an outsider can be appointed as a proxy or not. It appears that there is a large number of creditors who wanted to oppose this scheme but whose votes have to be disregarded because of the fact that they appointed as proxy somebody who was not a creditor. I think I should give these creditors a further opportunity to express their wishes in regard to the scheme by appointing persons as proxies who are creditors.
16. There has been considerable discussion as to how the scheme should be altered in order to meet the wishes of the creditors. It is more or less agreed that the scheme should be altered in order that it may be workable and fair. I have been asked to make alterations in the scheme pursuant to a clause therein which empowers me to do so. I am however, unwilling to introduce extensive alterations into the scheme without their being considered by the creditors. I will, however, indicate the alterations which I consider to be desirable and leave it to the creditors to consider the scheme as altered by me and accept it with or without alterations. I have annexed the scheme as altered by me in my judgment.
17. I decline to sanction the scheme as passed at the meeting. I direct a meeting of creditors and shareholders to be held on 26th June 1949. Mr. Sankar Banerjee will be the Chairman at the meeting. He will separately record, (a) the votes of creditors whose claims are admitted, (b) votes of creditors whose claims may be disputed but whose names appear in the books of the company, (c) votes of creditors whose names do not appear in the books of the company.
18. The disputed creditors whose names do not appear in the books of the company and whose debts are disputed by the company will file before the Special Officer, a statement of their claims with particulars on or before 15th June 1949 and I will decide at the time of the hearing of this application whether they are to be treated as creditors or not for the purposes of this application.
19. I also direct the Special Officer to make a report as to the financial position of the company and as to the workability of the scheme, the report to be filed on or before 2nd July 1949. [The rest of the portion of the judgment which is the scheme mentioned in para. 16 is not material for reporting].