H.K. Bose, J.
1. This is an application under Section 391 of the Indian Companies Act, 1956, for sanction of a scheme of arrangement involving re-organisation of the share capital of the company. The company was incorporated in June 1945 with an authorised capital of Rs. 50 lakhs divided into 3,75,000 ordinary shares of Rs. 10 each, 10,000, 5 per cent cumulative participating preference snares of Rs. 100/- each and 50,000 deferred shares of Rs. 5 each. The total paid up capital of the company is Rs. 29,20,300 comprising of 1,89,985 ordinary shares of Rs. 10 each, 8,452 preference shares of Rs. 100 each and 35,050 deferred shares of Rs. 5 each. The company carries on the business of manufacturers, exporters and importers of radios, radiograms, gramophones, refrigerators and various electrical goods and equipments. It has its factory at Karampura in Bihar. Although the company was started with the blessings of a very rich financial and managing agents, Karamchand Thapper and Brothers, and has secured the services of foregin technicians, its career has not been a prosperous one. Since 1948 it sustained loss in its business and in 1956 the proportion of the loss assumed such a huge magnitude that the company has been forced to seek the assistance of the court for the purpose of putting it on a stable financial basis so that it may hope to meet brighter days in the future years.
2. On 14-2-1957 the company held 3 separate meetings of the different classes of shareholders and on the same day the company also held a general meeting of all the shareholders. At these meetings resolutions were passed sanctioning a proposal for reduction of capital by decreasing the nominal value of the different classes of shares and certain other resolutions for reorganisation of the share capital consequent on the reduction of the capital were also passed. The reduction was to the effect that the nominal value of each preference share of Rs. 100 each was reduced to Rs. 30, the nominal value of each ordinary share of Rs. 10 was reduced to Rs. 2 and the nominal value of each deferred share of Rs. 5 was reduced to Re. 1.
3. The resolution sanctioning the reorganisation was to the effect that the preference and deferred shares would be extinguished and there was to be only one class of shares being ordinary shares of Rs. 10 each. New ordinary shares of the value of about Rs. 28 lakhs were to be issued for raising further capital and for reducing the claim of the managing agents who were creditors to the extent of about Rs. 75 lakhs by allotting them 12 lakhs worth of shares in the fresh issue. The managing agents also agreed to give up Rs. 13 lakhs of their claim after the scheme is sanctioned and they also agreed to pay about Rs. 5 lakhs and odd being the entire claim to the sundry creditors of the company. Some difficulty was obviously felt as to the legality of that part of the scheme which extinguished the preference shares altogether, and so at the meeting of the different classes of the sharesholders held on December 11, 1957 pursuant to the direction of this court, modification of this, part of the scheme and the consequent re-adjustment and recasting of the scheme was proposed and was carried. It is this modified scheme which has now come up before the court for sanction.
4. The functions and duties of the court in the matter of sanctioning of schemes are well-known. Any scheme which is fair and reasonable and made in good faith will be sanctioned if it could reasonably be supported by sensible people to be for the benefit of each class of the members or creditors concerned (In re Alabama New Orleans, Texas and Pacific Junction Railway Co., 1891-1 Ch. 213, 239, 243 and In re English Scottish and Australian Chartered Bank, 1893-3 Ch. 385). It is also the duty of the Court to see that the resolutions were passed by the statutory majority. (Section 391(2) of the Indian Companies Act 1956) (See In re Dorman Long and Co. 1934-1 Ch. 655). In the case before me Mr. Mitra, who opposed this scheme on behalf of the Hindusthan Commercial Bank Ltd. which is the holder of 2,000, 5 per cent preference shares of Rs. 100 each ot the company, has contended that the scheme was not passed the requisite majority. It is argued with reference to the report of the Chairman of the meeting held on 11-12-1957, that holders of preference shares of the value of Rs. 6,42,700 were present at the meeting but only holders of the preference shares of the value of Rs. 4,42,700 voted in favour of the resolution whereas to constitute the requisite majority the holders of the preference shares of the value of Rs. 4,82,000 should have voted and so the resolution was not validly passed. Now, there is some controversy raised in the affidavit of Mr. Pai, the representative of the Hindusthan Commercial Bank as to what attitude he took up at the meeting held on December 11, 1957. Mr. Pai's suggestion is that he voted against the scheme for reduction resolution which was passed at the meeting of February 14, 1957 when this resolution was placed before the meeting of December 11, 1957. It is, however, clear from the report of the Chairman that those resolutions which were passed on February 14, 1957 were not put to vote at all in the meeting of December 11, 1957. It was only the modified scheme which was put to vote but Mr. Pai expressed his intention to remain neutral in respect of this matter. He did not vote either in favour or against the modified scheme. In other words, he did not take part in the voting at all All the other preference shareholders present voted in favour of the resolution.
5. Section 391(2) of the Indian Companies Act is as follows:
'If a majority in number representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, present and voting either in person, or, where proxies are allowed, by proxy, at the meeting agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members or all the members of the class, as the case may be, and also en the company, or, in the case of a company which is being wound up, on the liquidator and the contributories of the company.'
It will be seen from the above provisionv that additional words 'and voting' between the words 'present' and 'either in person' have been introduced in Sub-section (2) of Section 391 which were absent from Section 153 (2) of the Act of 1913. There can be no doubt that these words 'and voting' have been in-troduced with a purpose and it appears to me that the intention of the framers of this section was that the majority of the three-fourth value must be of persons who were present and who took part in the voting. Mere presence would not be enough. This being the proper construction of Sub-section (2) of Section 391 it appears that all the preference shareholders present besides Mr. Pai voted in favour of the resolution. In other words, there was an unanimous passing of the resolution. Therefore there is no doubt that the requisite majority contemplated in Section 391(2) agreed to the arrangement now presented before the Court for sanction. Reference may be made to Buckley's Companies Act, latest edition, page 408, where Buckley points out that the words 'and voting' had brought about an alteration in the corresponding English Section. Mr. Mitra relied on the case reported in Bengal Bank Ltd. v. Suresh Cbakravartty, : AIR1952Cal133 , in support of his argument but that was a case under Section 153 of the Indian Companies Act of 1913 and so is not of assistance to Mr. Mitra.
6. The next argument of Mr. Mitra is that the scheme is a mala fide one which has been sponsored for the benefit of and in the interest of the managing agents with the object of restoring the managing agents to power. Reference is made to the decisions of Das T., reported in the matter of Calcutta Industrial Bank Ltd., 52 Cal WN 425, where Das J., upon the facts and circumstances established before him came to the conclusion that the scheme was not a bona fide one but had for its object the restoration to power, of the old management whose misdeeds were responsible for bringing the company to grief. In this case before Das J., clear irregularities and fraud committed by the old management had come to light and had been so conclusively established that the learned Judge was of the opinion that it would be detrimental to the interest of the company if the scheme was sanctioned and the old management was restored to power. In the case before me it has not been shown that the managing agents are guilty of any fraud or irregularity which have made them unfit to carry on the management of the company. The company has no doubt met with adversity and has failed to make profit while the managing agents were in charge of the management of the company but there is nothing to show that this is due to any inefficiency or mis-conduct on their part. The present state of the company may be due to circumstances beyond their control. It has been repeatedly held that the onus of proving unreasonableness or unfairness about the scheme or of want of good faith is on those who object to the sanction of the scheme. It is not necessary to refer to many cases on this point but reference may be made to the. decision in (1893) 3 Ch 385 at 399 (top). It seems tot me that this onus has not been discharged by Mr. Mitra's client but only certain vague and general assertions devoid of any particulars have been made in the affidavit in opposition.
7. Mr. Mitra has made a further point to the effect that although the case made in the petition is that further finance of Rs. 15 lakhs is necessary for carrying on the business of the company, no attempt was made to increase the capital although the authorised capital was Rs. 50 lakhs and the paid up capital was Rs. 29 lakhs and odd, but instead, the circuitous process of reducing the capital and then issuing fresh shares has been resorted to, with certain improper and ulterior object, and to avoid any investigation into the conduct of the managing agents. It is also pointed out by Mr. Mitra that in view of Section 293(d) of the Indian Companies Act, 1956 which puts a restriction on the Directors' power of borrowing it is not possible for the company to raise any further loan. It is argued that by reduction of capital, the paid up-capital is reduced to Rs. 6,68,000 and as the admitted indebtedness of the company is about Rs. 66 lakhs (Rs. 10,68,000 to Industrial Finance Corporation, about Rs. 50 lakhs to the Managing Agents after their loan is reduced according to the scheme, and about Rs. 6 lakhs to sundry creditors), the Directors cannot borrow any further sum. But it may be pointed out that the opening words of Section 293(1) of the Indian Companies Act make it clear that with the sanction of the company given at a general meeting the Directors can borrow notwithstanding the provision of Clause (d) of Section 293(1) of the Act. Moreover, what the company really wants to do under the scheme is to raise finance by sale of the newly issued shares of the value of about Rs. 28 lakhs and not by borrowing, because nobody may lend money to the company now, owing to its already heavy indebtedness. Under the scheme Rs. 12 lakhs worth of shares will go to the managing agents in reduction of their debt due from the company and the balance of Rs. 16 lakhs worth of shares will be sold and further finance of Rs. 15 lakhs will be raised in this manner. If the company had issued Rs. 20 lakhs worth of shares in the first instance as suggested by Mr. Mitra without reducing its capital, the insolvent condition of the company would have remained as before and the company might have become involved in further difficulties. Furthermore, if the managing agents had to be allotted Rs. 12 lakhs worth of shares out of the fresh issue there would remain only Rs. 8 lakhs worth of shares out of 20 lakhs which would be insufficient to raise liquid finance of Rs. 15 lakhs as was required by the company. So far writing off the loss and attaining solvency and also for raising further finance of Rs. 15 lakhs the resort to the scheme of reduction and reorganisation was a necessity.
8. The validity of the Scheme was also attacked by Mr. Mitra on the ground that it contravenes the provisions of Section 81(1)(a) of the Indian Companies Act, 1956. It was argued that the provision in the scheme under Clause (9), Sub-clauses (a) and (c) which authorise the allotment of 12 lakhs worth of the newly issued shares without offering such shares to the equity share-holders of the company in the first instance and the provision which enables the Directors to allot 96,000 and odd shares to such persons as they think fit, without offering them to the existing equity share-holders, voilate the provisions of Section 81(1)(a). Mr. Mitra has drawn the attention of the court to the report of the company's Law Committee as an aid to the proper construction of Section 81(1)(a). It appears to me, however, that in construing the provision of a statute the language employed should be the primary guide to its interpretation. As I have already indicated in the application for confirmation of reduction of capital, the plain meaning of the section is that if the company at a general meeting resolves that the newly issued shares should be allotted to persons other than the equity share-holders, such decision will prevail and will not be open to any question. But in the absence of any specific direction or decision to the contrary the terms of the section have to be followed. As I have pointed out already, the words 'contrary to' in Sub-section (1) of Section 81 mean contrary to what is laid down in the section. This disposes of all the objections raised to the scheme. In my view this scheme passed in the meeting of the 11th December 1957 should be sanctioned. I have already given my reasons in the application for confirmation of reduction of capital as to why the company should be permitted to function under the scheme.
9. I accordingly sanction the scheme set out in Aunexure-'A' to the report of the Chairman at the meeting held on 11-12-1957 as modified in the manner indicated in Annexure 'B' to the said report that subject to these conditions that the managing agents will pay off within 3 months from date the claims of the sundry creditors whose claims have not been paid till this day. The managing agents will also duly acknowledge in writing that they forego Rs. 13 lakhs of their claim against the company within a month from date. The fact of payment of the claim of the sundry creditors and the amount paid in satisfaction of their claims should be disclosed in the balance sheet of the company. The fact that the claim of the managing agents has been satisfied or foregone to the extent of Rs. 13 lakhs should also be disclosed in the balance sheet. There will be this further condition to the sanction of the scheme that if the company does not or is unable to pay any dividend to the share-holders by 31-12-1961, this fact should be brought to the notice of the court and the court will then be at liberty to give direction for changing the management of the company if it thinks fit to do so, or to take such other steps as, in the circumstances then existing, appears to the court to be proper.
10. The fact of payment to the sundry creditors and about the relinquishment of the claim to the extent of Rs. 13 lakhs to be communicated to the auditors as soon as such payment or relinquishment is made.
11. Operation of the order is stayed for 3 weeks. Costs of the petitioner as well as of the respondent to come out of the assets of the Company. Certified for counsel.