TaxTMI 
TaxTMI 
1993 (5) TMI 163
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....e dues of the said Lalit Trading Company despite statutory notice, that the company had not been carrying on any business for want of funds and loss of credibility, the failure of the company to comply with the provisions of the Companies Act and mismanagement of the company by the directors, etc. The company did not file any reply to the main winding up petition. On the contrary the company conceded its inability to pay and in fact supported the said creditor's petition. It was also alleged in the said petition that the company had transferred its valuable rights in its Connaught Place office, to a third party for huge underhand payment to the directors with a view to defraud the company's creditors. The company is also stated to have suffered loss of Rs. 2,38,400.53 in the year 1973-74 and in that year the accumulated losses had risen up to Rs. 27,86,687.91 as against the paid-up capital of Rs. 18,62,970. It was mentioned that the directors and their friends and relatives had also given a loan of Rs. 3.75 lakhs to the company which they were unable to get back and further that the bankers had declined to grant a further loan to the company. The factory of the company suffered dis....
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....per cent. of the said amount in full and final settlement of the dues of the said creditors. The said amounts were paid and thereafter the said Misra and Arneja stepped into the shoes of the said creditors listed in annexure "D" to the said agreement. Misra and Arneja also agreed to purchase the credit of and settle the claim of the bank. The said Misra and Arneja pending the approval of the scheme also provided the company through the official liquidator after obtaining orders dated December 3, 1984, from the company judge on their application being C.A. No. 666 of 1984, assistance to contest LPA No. 109 of 1974 filed by the Government against the single judge's order issuing the mandamus to the Government to sell the property, viz., factory land and sheds to the company. Under the said agreement, they also agreed that Mr. Seth shall have nothing to do with the result of the said LPA and that the cost of the litigation from the date of the agreement would be borne by said Misra and Arneja. Following the said agreement, Mr. Seth filed a new scheme, being C.A. No. 26 of 1985, for the revival of the company mentioning the said Misra and Arneja as financial associates and providing f....
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....f Rs. 19.81 lakhs was also provided by Misra and Arneja to Mr. H.L. Seth to conclude the suit so that apart from the claim of the bank being settled Mr. H.L. Seth and P.L. Seth could have their personal properties released. It has been held by D.P. Wadhwa J. in his order of May 20, 1987, Seth ( H.L.) v. Wearwell Cycle Co. India Ltd. [1988] 64 Comp Cas 497 (Delhi) that this settlement was the result of a tripartite agreement and that after settling with the bank, Arneja and Misra stepped into the shoes of the bank. This and other relevant extracts of the said order are as under (pages 507, 524, 529): "Under this agreement and pending approval of the Scheme in C.A. No. 26 of 1985, Misra and Arneja claimed to have paid a sum of Rs. 39,87,570, and this has not been disputed. This amount is stated to have been paid as under: (1)Rs. 51,000 paid to Seth on November 28, 1984, on the execution of the agreement on account of purchase of shares. (2)Rs. 2,69,000 paid to Seth on February 11, 1985, being the balance amount payable under the aforesaid agreement for the purchase of 13,000 equity shares and 2,000 preference shares. (3)Rs. 2,44,498.12 again paid to Seth on February 11, 1985, on ....
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.... would stand subrogated in place of the bank in respect of the property of the company for which the bank was mortgagee. This contention is quite meaningless. No particulars of the mortgage property were given. If reference is made to the bank suit it will be seen that only some items of the machinery of the company had been mortgaged to the bank. Moreover, it is quite clear that the credits held by the bank were to be assigned to Misra and Arneja. There was in fact a tripartite agreement between the bank, Seth, Misra and Arneja under which Misra and Arneja became creditors of the company in respect of the amounts due to the bank. It appears to me that the agreement was entered into bona fide and in the interest of the company." "It is not disputed that statement of affairs as required under subsection (1) of section 454 of the Act was filed giving the details of the debts and liabilities of the company. I am of the view that the creditors named in the statement of affairs be taken to be the creditors for the purpose of the meetings in question except where the credits have been lawfully transferred. In the present case, there is no dispute that the credits amounting to Rs. 4,88,9....
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....the lists of shareholders and creditors as per interim report dated July 12, 1986, of the chairman. (8)A copy of these directions shall be forwarded to the chairman/alternate chairman by the Registry." The meetings which were originally directed to be held on October 16 and 17, 1987, could not be so held on account of certain clarifications which were required by the chairman regarding the list of the creditors and shareholders. It appears that having got his property released and persuading Misra and Arneja in sinking considerable funds towards the achievement of the revival of the company Mr. Seth was no longer interested in going along with the said financiers or honouring his commitments under the said agreement and started looking for excuses to frustrate the revival of the company with the help of the financiers, viz., Misra and Arneja, despite having committed to the contrary under the aforesaid agreement. Mr. Seth also instituted a suit, being Suit No. 2621 of 1987, along with I.A. No. 9438 of 1987, praying for interim injunction/cancellation of the holding of the meetings of the creditors and the shareholders. Interim orders were passed and injunction was granted with ....
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...., 1992 (H.L. Seth v. Wearwell Cycle Co. India Ltd. [1992] 2 Comp LJ 15), upholding the transfer of shares. Some of the important observations in the said judgment of the Division Bench are as under (pages 25, 26 and 27): "So, we hold that the court has the jurisdiction under section 536(2) to validate the transfer of shares which had taken place in the present case after the winding up order as the winding-up process is still continuing and the company has not yet been dissolved." "It may be that if the transaction of transfer of shares is not complete, the company judge may in his discretion refuse to entertain any claim for transfer of shares. But, in the present case, the parties had completed the transaction of transfer of shares when the share certificates and the transfer forms were duly handed over to the respondent by the appellant and his associates and full consideration which was agreed upon had been obtained by the transferors from the transferees. So, the transaction of transfer of shares was complete in the present case." "If the court in its wisdom comes to the conclusion that transfer of shares has been made between the parties validly and the said transfer of sh....
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....es not mean change in the status of the creditors as it existed on the date of winding-up order. There is no provision in the Companies Act by virtue of which the transfer of credits is declared as void. So, the transaction of transfer of credits entered into between the parties is not hit by any provisions of law and could be duly given effect to by the company judge. The interim orders earlier made in the case by which the respondent was not to have any voting rights in the meetings of the creditors and the appellant and the respondent have later been asked to exercise parallel voting rights in the meetings of the members were obviously subject to the final disposal of the present petition. It was so made clear even in the order of B.N. Kirpal J. dated April 10, 1986." "Hence, we find no merit in these appeals, we make it clear that the company judge would consider the schemes pending before him keeping in view the public interest of reviving the company so that job opportunities become available. The company judge may also keep in view as to which propounder is having sufficient finances to revive the company and put it on sound footing, without selling or encumbering the prec....
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....,527 preference shares of Rs. 100 each and 14,802 equity shares of Rs. 100 each. The call money in arrears is Rs. 2,575. As per the statement of affairs, the position of the company with regard to its assets and liabilities was as follows: (Amount in Rs.) 1. Gross assets 3,19,082.26 2. Secured loan (Punjab National Bank) 24,87,547.95 3. Unsecured loan 5,93,210.19 4. Preferential creditors 2,32,745.58 5. Trade and other bills 2,68,489.76 The official liquidator also claims to have incurred expenses after the company went into liquidation and submitted that an amount of about Rs. 2 lakhs is due to him on this account. Misra and Arneja have already invested, among other things, a sum of Rs. 16,36,707.78 as price of factory land and sheds apart from incurring expenses on stamp duty of Rs. 68,365 for the execution of the sale deed plus certain other expenses in this connection. It is also hot disputed that Misra and Arneja after securing settlement with the Punjab National Bank had stepped into the shoes of the bank. The said bank was due a sum of Rs. 24,87,537 as detailed in annexure "H" to the petition. At the time of hearing, Mr. Lonial pointed out that certain ot....
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....contributory nor a creditor and the Central Government in response to a notice under section 394(a) of the Companies Act, has also raised certain objections including the one that Kelvinator Co. is neither a creditor nor a shareholder of the company in liquidation and is not competent to make application under section 391 of the Act. The Central Government has further alleged that the scheme appears to have been devised for expansion of Kelvinator's own activities of manufacture of refrigerators and mopeds parts. The said scheme has also been objected to by the official liquidator. The official liquidator when called upon to file comments on the report of the chairman has stated that Kelvinator could not muster the majority of the creditors as required under the law. This scheme could not be passed even at the time of the meeting of the shareholders. For these reasons, the schemes covered by C.A. No. 414 of 1985 and 94 of 1987, cannot be accepted and are hereby rejected. Kelvinator had also filed an application, being C.A. No. 133 of 1985, under rule 79 of the Companies (Court) Rules, which also stands dismissed in the light of the above. Coming to the scheme propounded by Mr. H.L....
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....ers without their names being brought on the register of members in view of the statutory provisions of the Act. (vi)Whether Rajdhani Films Pvt. Ltd. and Arneja Enterprises Pvt. Ltd. are not the creditors of the company and as such their words could not be taken into consideration. (vii)The scheme is not viable and is not in public interest. (viii)Mr. Misra and Mr. Arneja could not join as propounders without forming a registered partnership or a company and what would be the effect if one of the two is a non-resident Indian. Certain other objections were also raised relating to the chairman's report being not enclosed and the scheme being not supported by the project report. Before dealing with the above let me notice a few submissions made at the Bar on behalf of Misra and Arneja. It was submitted that under the scheme all Government dues in respect of liabilities to various authorities such as sales tax, income-tax and local authorities which may be found to be finally due and payable by the company would be paid in full; and the remaining shareholders of the company holding the balance 2,371 shares would be free to retain their shares and in case they wish to sell, Misra a....
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....thin the ambit of its objects clause, as set out in its memorandum of association, particularly, in the field of manufacturing of motor cycles, mopeds, etc., or spare parts for cars, scooters, etc., and other ancillary units for transport industry. Under the scheme the management committee is to prepare or get prepared a project report for the above-mentioned objects, including diversification and modernisation of plant and machinery, respectively. The Central Government filed their report and have recommended an earlier sanction of the scheme covered by resolution No. 1. The official liquidator has also recommended sanction of the scheme as modified by resolution No. 1. Mr. H.L. Seth, Subhash Chander, K.K. Mehndiratta and S.L. Gupta (Excise and Taxation Officer on behalf of the Sales Tax Department) and Kelvinator have filed their respective objections against the sanction of the scheme. As already observed, Mr. H.L. Seth had earlier also propounded a scheme which was covered by C.A. No. 527 of 1983. Earlier the court did not feel satisfied about viability of the said scheme as it did not show as to how the resources are to be mobilised. I find the same problem arising in the mod....
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....re to enable him to devote his time to this work. Mr. Seth further pointed out that the majority of the creditors who had opted against resolution No. 1 would accept whatever Mr. Seth suggests to them. Somehow all these negotiations, to settle a pending suit and other matters could not bear fruit and finally at the hearing on September 21, 1992, the parties indicated a break-down in the negotiations for an amicable solution. I was further informed by Mr. Seth that he had filed a petition in the Supreme Court of India. I wanted to be informed about the outcome of the said petition. Neither party informed me about what had happened to the said petition in the Supreme Court or whether that petition was at all taken up for hearing by the Supreme Court. It was only on May 12, 1993, from C.A. No. 669 of 1993, that I came to know of the dismissal of the said special leave petition by the Supreme Court. Mr. J.C. Seth points out that he has filed another SLP which is still pending. He, however, conceded that no stay of the present proceedings was granted in that special leave petition. In the circumstances, I do not think it appropriate to wait any longer for the outcome of the said petitio....
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....o vote in favour of the scheme must be first a majority in number of those members of the class (whether of creditors or shareholders) who are present and voting; and, secondly, it must be three-fourths in value of the holding of such persons. Thus, if there are 100 members voting of whom (to take an extreme example) one member holds 901 shares and the remainder hold one each, the 99 shareholders holding one share each cannot force a scheme against the vote of the holder of the 901 shares, because they do not muster three-fourths in value. Conversely, that shareholder and 49 of the others could not force a scheme against the votes of the remaining 50 because there would not be a majority in number. The same principle applies to creditors. It will be seen that the majorities are of those who vote, not of those entitled to vote nor of those who are present. Thus, shareholders who are not present in person or by proxy, or who, although present, do not vote, may be ignored." It may further be noticed that the above illustration is not based on any judgment of any court or any authentic judicial pronouncement in interpreting this expression. In this case, it may be pointed out that ....
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.... he has stepped. Once a poll is demanded in the case of shareholders, the value should be determined as provided in section 87 while in the case of creditors the number be determined by the number of creditors represented by the persons voting including the number of creditors into whose shoes he has stepped. I have already observed above that Misra and Arneja had under the agreement dated November 28, 1984, paid off the 24 creditors mentioned in annexure "D" thereto. A perusal of annexure "D" shows that there were 24 creditors who were satisfied which among others included H.L. Seth, P.N. Seth and J.C. Seth. Mr. J.C. Seth in this case is now appearing as counsel for Mr. H.L. Seth. In addition to these 24, Misra and Arneja had also stepped into the shoes of the Punjab National Bank who was a secured creditor as has been held by D.P. Wadhwa J. Thus, they had stepped into the shoes of, in all 25 creditors. Subsequent to the meeting, of course, the sales tax authorities on remand had reassessed the sales tax dues which came to a substantially reduced amount. Misra and Arneja have also offered to pay the said reduced claim of the sales tax department as mentioned above. Coming to the....
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....liquidation the taxation officer shall be required to prove his claim under section 528. In the course of arguments as also in the scheme modified by the resolution moved by Misra and Arneja, 100 per cent. payment in respect of tax liability of the company is provided for, once the dues are finally determined and crystallised. Mr. Lonial has drawn my attention to the case of Hathisingh Manufacturing Co. Ltd., In re [1976] 46 Comp Cas 59 (Guj). Mr. Lonial has contended, that in case the order dated November 9, 1987, passed by Mahinder Narain J. vested authority in the chairman to determine the correct value of the higher credits other than the amounts in the list settled by the court, then the chairman could not have rejected the claims of Misra and Arneja presented before him and rejected by him. I think this submission is not without merit. As already observed above, I consider that what was intended by the order dated November 9, 1987, was that in case any creditor who has not been served with personal notice comes before the chairman and presents his claim to substantiate that he is one of the creditors in the records of the company on the date of winding up, then he could be p....
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.... and Sons for value of Rs. 574.64 4.Lalit Trading Co. for value of Rs. 5,151.92 5.Maharaja Exports (P.) Ltd. for value of Rs. 1,05,847 6.Indra Paints for value of Rs. 1,140.10 which makes the total of 31 cast in favour of resolution No. 1 as against 30 votes against it. Mr. Lonial has contended that even out of these 30 votes the chairman could not have considered two votes, those of T.I.&M. Sales Ltd., and Ralson India Ltd., because no proper authorisation as required under section 187 of the Companies Act was lodged by these companies in favour of their representatives. As such the votes of these two creditors represented by person not duly authorised could not have been considered. I find that the votes of the creditors represented and the voting against the resolution were less than those who were represented and voted in favour thereof. Coming to the value of the votes, I find that while the value of the debts represented by the votes cast in favour of resolution No. 1 of Misra and Arneja came to Rs. 30,89,535.36 without taking into account amounts which Misra and Arneja had paid to the company to enable it to acquire valuable property and the value of the votes cast agai....
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.... "It would immediately appear that the valid votes cast in favour of the scheme were majority in number representing 3/4th in value of the total shares represented at the meeting by the members attending the meeting by person or proxy." (emphasis supplied) Therefore, it would be clear that even when a person attends by proxy or if one person is attending on behalf of more than one it is the number of persons represented by him who will be treated as numbers present and voting. In this fashion the members present and voting in favour of the resolution No. 1 did exceed the number who voted against the resolution, another case which is apposite to illustrate the point would be the case of Bhavnagar Vegetable Products Ltd., In re [1984] 55 Comp Cas 107 (Guj) (at page 140 and 141). In that case as regards the preference shareholders out of 12,492 fully subscribed shares, LIC alone held shares of the value of Rs. 10 lakhs and at the NDDB meeting, four shareholders holding 10,017 shares voted in favour of NDDB as against eight shareholders holding only 158 shares who opposed, which shows that NDDB is acceptable to the former who hold the majority of shares. The court had upheld the schem....
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.... and Arneja that they are in a position to attract even NRI investment and can raise additional capital. My attention has also been drawn to para. 8 of Mr. Seth's affidavit filed in C.A. No. 26 of 1985, wherein Mr. Seth has testified to the resources and creditworthiness of Misra and Arneja. As already observed, the revival of a company or a sick industrial unit is in public interest, industry and trade as it will generate employment avenues for a number of persons and also help the growth of commerce which in turn will result in payment of taxes to the State. In the light of the above discussion, I hold that objections (i ) and (ii) have no merit and are rejected. (iii) Mr. Seth next contended very vehemently that full disclosure of facts had not been made about the affairs of the company to the shareholders and the creditors at the time of the meeting. Mr. Seth did not give any detail of the material facts which were not disclosed and which would be necessary to enable the court in coming to the conclusion whether the scheme has been approved by the statutory majority or not. The notices were in fact prepared by the official liquidator in terms of the order of the court. Notic....
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.... made in this behalf to the observations of the Hon'ble Supreme Court in the case of Raza Buland Sugar Co. Ltd. v. Municipal Board, AIR 1965 SC 895. In the present case, the statement of affairs has been filed by Mr. Seth, who was at the material time at the helm of affairs of the company. The scheme covered by C.A. No. 26 of 1985 was also propounded by Mr. Seth. That very scheme was adopted by Misra and Arneja which is pending consideration before this court. For the above reasons, I do not find any merit in this objection of Mr. Seth and reject the same. (iv) Mr. Seth next contended that Mr. H.L. Seth could not have been substituted by Misra and Arneja as the propounder of the scheme and he would not have been removed from the position of chairman of the management committee by moving resolution in the meetings of the creditors and shareholders held on July 16, 1988. Mr. Lonial in reply has submitted that in its order dated April 10, 1986, the court had specifically made it clear that at the meeting the scheme may be passed with or without modifications. It was also clarified that it would be open to anyone who would be entitled to move for amendment of any of the terms of arran....
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....Seth at the meeting of the shareholders but could not be passed at the meetings. It was also revealed in the course of the hearing that Mr. K.K. Mehendiratta is a member of the Seth group who had admittedly sold his shares in favour of the Misra and Arneja group. As such as of date he is no more a member of the company and is not left with any locus standi in this matter. In the light of the above discussion, I hold that there is no substance in this objection of Mr. Seth and it is also rejected. (v) The fifth objection raised by Mr. Seth was that the names of Misra and Arneja had not been mentioned in the register of members of the company and accordingly votes cast by them for the purpose of ascertaining the number and value thereof cannot be taken into account. Regarding the register of members my attention was drawn to the order dated November 11, 1987, wherein Mahinder Narain J. had made specific inquiry from Mr. Seth regarding any evidence of delivery of members' register of the company, but Mr. Seth failed to produce any such document. The liquidator has contended that the members' register was never handed over to him by Mr. Seth. However, in his report on the scheme and ....
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.... deciding Company Appeals Nos. 16 and 17 of 1987, has also held that there is no provision in the Companies Act by virtue whereof the transfer of credits is declared void. It is not disputed that the official liquidator has given the credit to the said two companies at the written request of Misra and Arneja. It is, therefore, not possible for me to accept the contention of Mr. Seth. Accordingly, I reject the said objection also. (vii) The next ground of attack by Mr. J.C. Seth was that the scheme is not commercially viable and is also not in public interest. While raising this argument Mr. J.C. Seth primarily stressed that the scheme is in fact unfair and discriminatory towards his client. Apart from this allegation, Mr. Seth was unable to point out any other argument or bring to my notice any fact wherefrom such contention of Mr. Seth received any support. All these arguments have already been dealt with in the earlier decisions and I need not go over the same again and I find no merit in contentions of Mr. Seth. In fact, I find this argument rather surprising because the scheme was originally propounded by Mr. Seth himself, vide C.A. No. 26 of 1985, and in that, it has been cat....
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....e the company and that the scheme has been propounded with a view to sell the valuable lands, factory building of the company for their personal benefits. Mr. Lonial while opposing this argument has argued that there is absolutely no merit in the said contention and it has been raised with ulterior motive and the sole object is to pressurise his client in an effort to extort further payments. In fact, Mr. Seth through his own people had proposed the other resolution modifying his scheme which had the intention of selling the company's assets to raise working capital. He strongly defended the scheme and submitted that the same had been propounded with the principal object of reviving the sick industrial unit. In the course of arguments, he went to the extent of suggesting that Misra and Arneja had also offered not to charge interest on a large part of their credits and investments and to reduce the burden of repayment of their credits and investments, they would convert a part thereof into fully paid capital of the company. He repeated his assertion that the scheme was originally propounded by Mr. H.L. Seth himself. Even at the time of propounding the scheme by Mr. Seth there was no....
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....4, 1988, had directed Mr. Seth to notify persons of his group to attend the meeting to be held on July 16, 1988. Besides this, notices of the meetings were published as per the orders of the court in Times of India and Nav Bharat Times. This objection is also without any merit. In the light of the above discussions, I would accord sanction to the scheme contained in C.A. No. 26 of 1985, as modified by resolution No. 1 and approved in the meetings of the creditors and shareholders subject to further directions contained hereunder. The scheme as modified by resolution No. 1 and by the directions contained hereunder shall form part of this judgment and will be binding on all the creditors and members of the company: 1.Misra and Arneja shall deposit Rs. 1,83,654.50 with the official liquidator within 15 days from the date hereof to liquidate the liability of the company towards the remaining creditors other than revenue authorities, of the company. The official liquidator is directed to pay the said creditors after verifying the debts due to them. 2.The amount of Rs. 91,259 paid by Misra and Arneja to the official liquidator which is already lying with the official liquidator shall ....
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....rogress report after every three months. The management committee will pay the electricity dues and get restoration of the electric connections and take immediate steps for the preparation of the project report. All efforts should be made to get the project report, prepared within three months from the date hereof. Once the electricity is restored and project report obtained and submitted steps be initiated to reconstitute the board of directors of the company after calling an extraordinary annual general meeting of the members of the company. The said board will also continue to be responsible to ensure the progress made in the implementation of the scheme. 6(b)Mr. H.L. Seth shall be associated with it by the management committee/board of directors. His services should be availed of in getting the sales tax assessment/reassessment carried out. Mr. Seth shall be paid a monthly remuneration of Rs. 10,000 per month plus expenses incurred by him in discharging his duty initially for a period of one year commencing after 60 days from today. Thereafter, the board of directors/ management committee may consider the need for his services to be continued or not. I am providing for this as....