TaxTMI 
TaxTMI 
1991 (1) TMI 377
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...., with a nominal capital of Rs. 100,00,000 divided into 10,00,000 equity shares of Rs. 10 each, of which 5,00,000 equity shares were issued and Rs. 10 was paid-up on each share issued. The objects for which the company was formed are set out in the company's memorandum of association. In brief they are: (i)to carry on the business of iron founders, mechanical engineers and manufacturers of agricultural implements and textile machinery, etc., (ii)to carry on the business of structural engineering, general jobbing, casting and machining works, the manufacture of malleable castings for vaccum brakes, and other fittings for the railways and other commercial purposes. The company commenced business in 1946-47. All through, it had poor performance. As per the printed annual report of the company made for the year ending December 31, 1982, the accumulated loss of the company was about Rs. 61.52 lakhs, as against the paid-up capital and free reserves of Rs. 9.10 lakhs. There was no provision made in the balance-sheet towards certain statutory claims and liabilities for the earlier period. The industrial relations were also disturbing with several industrial disputes pending in ....
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....lt systems were still in the process of being commissioned. The management also took steps to export its products to countries such as Bangladesh and Mauritius. Despite all these rehabilitory schemes, diversification, rejuvenating measures adopted by the company, the working results were not sufficient to match the additional investment made by way of increase of capital and bank advances. The company was not able to sustain its efforts for viability despite fresh investments because of several hurdles which thwarted its efforts. They include steep increase in the cost of raw materials, non-availability of raw materials at the appropriate time from agencies such as the Steel Authority of India Limited, Coal India Limited, etc., low productivity and continuance of power cut. In addition to the above, the Central Government of India made several drastic changes in the textile policy which affected adversely the powerloom sector. As a result of change in textile policy, several varieties of textiles numbering about 22, including most common varieties, like dhoties and sarees even with small borders, doria cloth and shirting, which were hitherto mainly manufactured by the decentralised....
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....epaid by the company filed a Company Petition No. 44 of 1986, under section 433(e) of the Companies Act before this court. The company pleaded for time to make payment of the admitted liability but since nothing could be arranged, this court made a winding up order on June 18, 1987. It is stated that it is not possible to revive the company for continuing the manufacturing activities. Any new plan of revival of manufacturing activities would call for further investment of one crore rupees by way of working capital in addition to necessary funds for settlement of labour claims, statutory liabilities, overdue secured and unsecured advances all amounting to Rs.3.25 crores (approximately). But in the textile engineering industry in general and weaving in particular and the peculiar problems and inherent weakness in the company's structure, there was no reasonable basis that further efforts would be fruitful. In fact, such a huge investment attended with high incidence of risk would not be forthcoming at all from any quarter. This is more so because the factors as explained above which contributed to the sickness and unviability of the industry are beyond the control of any management. ....
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.... able to receive their total dues within a period of six months from the date of approval of the scheme. This beneficial situation may not be ordinarily possible, if the present proceedings are continued. As such the scheme is drawn up keeping in view the interest of the large number of workmen who otherwise would have to wait for a long period to get their wages. The scheme of the compromise and/or arrangement was given in detail in annexure B to the petition. As per the scheme, it envisages the following modus operandi for the clearance of the liabilities: (a)On approval of the scheme, all the assets of the company other than land shall be jointly realised by the company in liquidation, SM Property Developers/bankers within a period of six months from the date of approval. The estimated value of such realisation is about Rs. 95 lakhs. (b)SM Property Developers shall, within a period of six months from the date of approval of the scheme, arrange for obtaining the necessary clearance for the proposed group housing project from the required Government and other authorities. (c)On approval of the group housing project and securing all necessary clearances or within a peri....
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....95.00 However, realisation, if any, in excess of the estimated values shall be exclusively paid to the secured creditors against their dues. (h)The first instalment of Rs. 50 lakhs from SM Property Developers shall be utilised as under: (Rs. in lakhs) Payment of statutory dues 22.00 10% of the secured creditors 23.00 10% of the unsecured creditors 3.83 Balance cash/provision to be kept in reserve with any of the consortium of bankers 1.17 50.00 (i)The balance amount due to the secured and unsecured creditors shall be paid in half-yearly instalment each of 10% for the next 4'/2 years out of the amount to be paid by SM Property Developers against the balance consideration due detailed as under: Each instalment of Rs. 30 lakhs shall be paid by SM Property Developers as under: (Rs. in lakhs) 10% of secured creditors 23.00 10% of unsecured creditors 3.83 Balance cash/provision to be kept in reserve with any of the consortium of bankers 3.17 30.00 (j)On total payment to all the creditors, the surplus of generation estimated at Rs. 30 lakhs shall be pa....
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....th a copy of the compromise/arrangement and the statement required under section 393 and a form of proxy. The notice of the meeting was also advertised as directed by the said order in the newspaper Deccan Herald on February 16, 1989. It is also on record to show that on March 13, 1989, a meeting of the workers and employees, secured creditors, preferential statutory creditors, unsecured creditors and members of the company in liquidation, duly convened in accordance with the said order was held at Sree Ramesh-wara Kalyana Mandira, 3rd Main Road, Chamarajpet, Bangalore-18, and the said Sri Kora Chandy, advocate, acted as the chairman of the meeting. The chairman appointed by this court has reported the result of the meeting in his Report No. 1, dated March 16, 1989, and Report No. 2, dated April 12, 1989, which is annexed as annexure C to the petition. The said meeting was attended by secured creditors, workers and employees, preferential statutory creditors, unsecured creditors and members, either personally or by proxy and the quorum fixed by the court for all the meetings was present. The total value of their debts/ shares is detailed as follows: No. Value ....
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....Wire and Allied Industries Pvt. Ltd., 179, D. Rajappa St., Bangalore-2. 8,802.57 3-7-90 5. Esbee Industrial Corporation, 179, D. Rajappa Street, Bangalore-2. 81,638.88 -do- 6. Kamal Steel and Metal Corporation, 1/8, N.R. Road Cross, Bangalore-2. 60,918.55 -do- 7. Ess Ess Steels, 258, 14th Main, 24th Cross, BSK-II Stage, Bangalore-70. 1,88,560.00 -do- 8. Noble Hardware Mart, 2/1, MRR Road, Bangalore-2. 53,285.16 10-7-90 9. Bipsi Blades and Turners Pvt. Ltd., 84, II Stage, Yeshwanthpur, Bangalore-72. 1,16,072.69 18-7-90 9,17,773.85 This court has taken on record the affidavits of the unsecured creditors. Consequently, the required number of unsecured creditors who have consented to the scheme/arrangement comes to 76.2 per cent. In so far as the members are concerned, the result of voting is as follows: Total number of equity shares held by all the members whose votes were held valid.....
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....for approval of the scheme which could make 3/4ths of the unsecured creditors, is not a valid one for 3/4ths should vote in the meeting convened on March 13, 1989. As there was no 3/4ths of the unsecured creditors voting in the meeting convened and held, there is no valid approval of the scheme by the unsecured creditors as required under section 391(2) of the Companies Act. This court should not accede to the request of the petitioner and grant the prayer sought for in the petition. Further, learned counsel has urged that in any event the alleged approval by the unsecured creditors by agreeing to the approval of the scheme by a mode other than what is contemplated by the provision of the Act is not binding on the objecting creditors. Learned counsel has further submitted that if a class whose interests are affected by a scheme does not assent to the scheme to approve it at a meeting convened in accordance with the provision of section 391(2), the court will have no jurisdiction to confirm the scheme, even if the unsecured creditors have otherwise approved the scheme, other than in the meeting convened and held for the said purpose. In support of the submissions, learned counsel ci....
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....uidation) and the secured creditors/unsecured creditors. The liabilities and assets given as on the date of liquidation indicate that the company may not be able to pay even 60% of the secured creditors and in those circumstance, statutory creditors as well as the unsecured creditors may have to forgo their entire claim. As per the scheme the petitioner would generate the requisite fund to meet all the liabilities of the company by a quick competitive disposal of all the assets of the company excepting the land with the active participation of the bankers who hold a charge on the assets. In so far as the land given by the company is concerned, it would be entrusted to the property developers mentioned in the scheme who are a public limited company to develop the plot into a suitable group housing project after the receipt of the necessary governmental clearance. The main object of the scheme is to generate the requisite finance for payment of labour, secured/unsecured creditors and statutory liabilities and as well as to the members. It is seen from the arrangement in the scheme that the entire class of labourers who ceased to be employees ever since the closure of the company w....
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.... scheme by 3/4ths majority, but later by filing individual affidavits consented to the scheme which was by 3/4ths majority. It is seen that when the statute confers discretionary power on the court, such power has to be exercised judicially as and when an occasion arises and that, therefore, ordinarily discretion must be brought to bear on every case as and when it comes up before this court. As already noticed in this case, the company had stopped its business, a large number of employees and workmen remained jobless, the losses have mounted up, the plant and machinery are deteriorating. Therefore, it would be in the interest of the company itself to allow the scheme sponsored by it. The scheme of compromise/arrangement has devised a living workable one, which provided early relief to all concerned and infused life into a sick company. I am of the view that the scheme of compromise/arrangement is not only fair and reasonable, but also beneficial to both sides. Nevertheless the point raised by learned counsel, M. Kolekar, for the objecting unsecured creditor, that there was no approval of the scheme by three-fourths majority of the value in the meeting held on March 13, 1989,....
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....iance with a directory provision, it has been held in many cases as not affecting the validity of the act done in breach thereof (See State of U. P. v. Manbodhan Lai Srivastava, AIR 1957 SC 912). Now, I consider the decision cited by Mr. Kolekar, learned counsel for the objector unsecured creditor. In the decision in N. A. P. Alagiri Raja and Co. v. JV. Guruswamy [1989] 65 Comp Cas 758 (Mad), the question for consideration was whether in the case of a company which is being wound up only the official liquidator can file application under section 397, or even in such a case the creditor or any class of creditors or members can file an application. In that context, it has been observed as follows (at pages 767, 769): "An order under section 391(1) has to be made only after the court considers the feasibility or otherwise of the proposed scheme or settlement and the bona fides of the applicant and the application. It cannot be said that at the stage of filing an application under section 391(1), the court is not called upon to consider the feasibility or otherwise of the proposed scheme or settlement and that will have to be decided first in the meeting of the creditors or share....
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....s follows: "Section 391 of the Act is an important provision made in the Act in regard to repatriation, compromise and reconstruction and amalgamation of schemes so that the interest of several members of the company or companies and creditors-secured and unsecured are safeguarded in any scheme of reconstruction, amalgamation or compromise which is going to be approved by the court under section 394 of the Act. Ordinarily, the convening of meetings of members and creditors is a must. Discretion to waive must be under exceptional circumstances". In the decision in Mazola Theatres ( P.) Ltd. v. New Bank of India Ltd. [1975] ILR 1975 1 (Delhi), the court has observed as follows: "The meeting contemplated in section 391 is analogous to an extraordinary general meeting of the company, in as much as a three-fourths majority is required to pass the required resolution. The normal rule is that the consent of the shareholders whether it is unanimous or by a three-fourths majority, must be obtained in a meeting summoned on the orders of the court under section 391. This is in accordance with the general principle that members must act in a general meeting. Inroads have, however, bee....
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....to be held again". As already noticed all the acts have been done in conformity with the provisions of the Companies Act, and the Central Government to whom notice was issued, appeared through counsel and stated that they have nothing to say with regard to the approval of the scheme by this court. The applicant in Company Application No. 1 of 1989 is the Regional Provident Fund Commissioner, Karnataka Bhavishya Nidhi Bhavan, Bangalore. In their objection statement they have stated that the petitioner has filed a memo which was recorded by this court wherein they have given an undertaking to clear all outstanding dues in respect of its preferential statutory creditor and as such the applicant shall have no objection to compromise the scheme. On behalf of the workmen Mr. M. C. Narasimhan, appeared and submitted that the scheme may be sanctioned, so that the employees and workmen would be paid their dues as provided in the scheme. The dissenting unsecured creditor, Karamchand Thapar and Brothers (Coal Sales) Ltd., Bangalore, has opposed the sanctioning of the scheme. According to them, a large sum of money is due by the company. They are not agreeable to the arrangement as....