TaxTMI 
TaxTMI 
1999 (9) TMI 771
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....21-1-1999, when it came up for admission, this Court passed an order appointing a chairman for the conduct of the said meeting to be held on 7-3-1999. In the said application it is admitted by the company that it had been declared as 'Nidhi' company as per notification dated 17-12-1988 by the Central Government. Nidhi company is referred to in section 620A of the said Act to mean it as a mutual benefit society. It is averred in the application that the main objects of the company are as follows. "1.To encourage the habit of thrift and savings among the members of the company. 2.To lend or advance monies only to the members of the company with or without security and to provide for the repayment of the same. 3.To receive deposits, savings, fixed and recurring, exclusively from the members of the company. The company, however, shall not do the business of banking within the meaning of the provision of the Banking Regulation Act, 1949 and also chit fund business". It is also admitted that the first three promoters of the company whose names are included in Annexure C had caused to incorporate another company called St. Mary's Properties Ltd. The first three persons men-tio....
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....hus, this one and odd crore surplus is taking into account the said Rs. 7.67 crores advanced to St. Mary's Property Ltd., as asset. It is further stated in paragraph 11 that- "the overall recession prevalent today has created a situation by which the company has to face a liquidity crisis which resulted in its inability to meet its commitments and obligations on demand". [Emphasis supplied] This is an admitted financial bankruptcy that it is unable to meet its commitments and obligations. It is further averred that "as is usual in such situations the debtors of the company also stopped their payments and a large number of the company's creditors began withdrawing deposits". As per the main objects, the only purpose for which the company is constituted is to lend advance and to receive deposits. In such circum-stances, there will be withdrawal and remittances on everyday as it is its business. It is because of the inability to meet its commitments and obligations on demand, the company is proposing a scheme to pay off its liability of Rs. 17,24,95,837, towards its depositors in instalments, 10 per cent by 31-12-2000, 20 per cent each by 31-12-2001,31-12-2002 and 31-12-20....
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....self, the two directors including Sri Boby Varghese and his wife had interests in St. Mary's Properties Ltd. to which a large amount of Rs. 7.6 crores, as admitted in M.C.A. No. 6 of 1999 itself, had been sanctioned. Therefore, the directors of the company as members of the company were really interested in the compromise. Therefore, such statement in the notice is incorrect and creditors were put in dark of the real situation. It is the right of every member and creditor to know about the interest of the directors, if any, and that right had been denied to the creditors. Therefore, the meeting itself is convened in an illegal manner. 4. In C.A. No. 81 of 1999 the applicant prayed for an order rejecting the M.C.A. There also it is averred that he is a depositor and attempt of the company is to delay and defeat the creditors. It is submitted that the major chunk of the deposits received by the company had been given by way of unsecured loan to St. Mary's Properties Ltd. which is managed by the same managing director and two other directors of the company. In the counter affidavit, the company had admitted that 'the company transact business only with its members as envisaged in t....
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....ne the meeting to be held on 7-3-1999 was not conceded at that stage. Their right to object was preserved for being considered, when this Court takes up the question of approving the arrangement, as was done in Bengal National Textile Mills Ltd., In re [1986] 59 Comp. Cas. 956 (Cal.). Accordingly orders were passed as follows: "Thus reserving the right in the creditors and the applicants herein to put forward all their objections at the stage of considering whether the scheme or arrangement ought or ought not to be accepted or should be accepted with or without modification, the prayer to recall the ex parte order made by this Court on 21-1-1999 and/or to stay the holding of the meeting of the creditors stated to be held on 7-3-1999 is rejected." In the light of this order I am bound to consider their contentions again, taking into consideration the petition filed under rule 79, of the Company (Court) Rules, a petition to confirm the compromise. Such a petition is now filed with necessary corrections and incorporations as C.A. No. 126 of 1999. 8. At the same time C.P. No. 18 of 1999 is also filed on 6-4-1999 seeking an order of winding up of the company or such other order....
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....er of 1033 creditors. 11. I have to examine whether notice was given to all the creditors, company does not dispute that all the creditors of the company as on the date of the meeting are entitled to notice. The order of this Court does not limit issuance of notice to the creditors with reference to any cut off date including 31-12-1998 or the date of order. Necessarily as per the spirit of the order, all the creditors as on the date of the said order at least have to be informed. Few of the applicants before me or those who have deposited money in the company have not been invited to the meeting. It is complained by the applicant in C.A. No. 81 of 1999 that though he is a depositor and admitted to be a member in the counter affidavit of the company, he has not been served with notice. It is submitted that the first applicant did not receive any notice, but that is not averred in the petition. In C.A. No. 95 of 1999 it is submitted that though the applicant has received intimation, the other members of the family, who have also deposits in the company did not receive any notice. The applicant has also filed an objection to the chairman's report enclosing therewith the deposit re....
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....ficers of the company available in the court, submits that the amount mentioned in the state- ment is the amount due from St. Mary's Properties Ltd. It is only because of this diversion of the fund to the tune of Rs. 7,67 crores during 4-7-1998 to 20-1-1999 that the company placed itself into the present predicament. If such diversion had not taken place, necessarily the company would not have faced this situation. This diversion of the fund as averred in para- graph 8 of the M.C.A., itself, is 'as the immediate source of finance available for St. Mary's Properties Ltd. was from St. Mary's Finance Ltd.' The arrangement now proposed in the M.C.A. to pay off the depositors of their deposits in instalments as 10 per cent by 31-3-2000, 20 per cent each by 31-3-2001, 31-3-2002 and 31-3-2003 and the rest by 31-3-2004 is because of the company's inability to obtain the amounts advanced to the sister concern of which the directors are also interested. This arrangement is necessary to keep the company breathing if not functioning, to pay off them, with the interest that they can collect from the amounts advanced to others, which they have categorised as loans and advances considered good, t....
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....annexed to the notice convening meeting there is a statement drawn up in conformity with requirement of section 393 (1)(a), (vide Sidhpur Mills Co. Ltd., In re AIR 1962 Guj. 305)". (p. 308) Thus when a scheme of compromise is presented, and notice of meeting for consideration of such scheme is sent to the creditors of the company, there shall be full and fair disclosure of the interest of the directors as members of the company, is a prerequisite and a statutory essentiality in terms of section 393(1)(a). In this case, the interest of Mr. Boby Varghese and another director, in St. Mary's Properties Ltd., the largest debtor of the company is not disclosed. Because of the compromise, the real beneficia- ry is St. Mary's Properties Ltd. to whom the company had heavily advanced. I cannot find fault with the chairman who had convened the meeting and sent notices, because he was never informed by the company of the interest of the directors. Therefore, the company not only withheld that valid information from the creditors alone; but also from the chair- man as well. So the meeting, whatever be the majority in support of the scheme the company managed to obtain through compelled proxi....
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....whisper regarding interest. 14. In this background, it has to be noted that Nidhi company cannot lend any amount in excess of 7.5 lakhs as contained in the statutory notification No. GSR 603(E), dated 20-10-1997 of the Government of India. Clause a( ii) thereof provides that 'no company declared as Nidhi shall give to any borrower loans or advances exceeding Rs. 7.5 lakhs or 1 per cent of the total deposits of the company whichever is less'. Here the company had given a loan to another corporate body to the tune of Rs. 7.67 crores. That is also a violation of the statutory restrictions imposed on the company. Such statutory restrictions are imposed to protect the interest of the depositors as the company-men shall not put all the eggs into one basket to spoil it in one moment. The applications submitted by several deposi- tors and also the letters written by several to this Court disclose that they have made demand and they have gone to the company's office on several occasions demanding their deposit, but the company did not pay even interest. 15. Added to this, this is flagrant violation of the order of this Court during the pendency of M.C.A. No. 6 of 1999. After they move....
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....r the head 'Settlement of Creditors'. Thus, the company had paid off the creditors of its choice. The reason stated is that several of them were needy, handicapped persons, widows and senior citizens. This payment was made during the period from 15-5-1999 to 15-8-1999. In this regard I have to refer to C.A. Nos. 298 and 299 of 1999 filed in M.C.A. by two of the creditors of the company. They seek payment of 50 per cent of the accumulated interest. That will be very small and meagre compared to the payments already made by the company. This C.As. are hotly contested by the company filing counter with the averment that "The company before sanctioning the scheme of arrangement, cannot pay any amount to its creditors by way of interim payments as prayed for. The company can make the payment only after this Hon'ble Court sanctions this scheme and the payment is done in terms of the resolution already passed at the meeting of the creditors". [Emphasis supplied] This counter affidavit was filed on 18-8-1999 whereas unauthorised payment to the tune of Rs. 2.9 crores as mentioned above had been made during the period from 15-5-1999 to 15-8-1999. This shows that the company had flagran....
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....ors are always interested in their money rather than the whims and fancies of the persons in management. Therefore the vote by Mr. Boby Varghese for and on behalf of 1033 persons who had given proxies can only be considered as due to undue influence. 16. Added to this, there is an important fact reported by the chairman in paragraph 8 of the report. It is reported as follows: "On a general scrutiny of the votes polled by Sri Boby Varghese, in his capacity as proxy for the depositors, I find that certain votes polled by him in his capacity as proxy have to be treated as invalid votes as those persons who had given proxies themselves had come in person for the meeting and had voted in the meeting. Therefore the votes polled by Sri Boby Varghese for and on behalf of those persons who had actually participated in the meeting and voted cannot be counted." The details and number of such persons are not given. Thus, there was a chance of dual voting in persons and proxies by some of the persons or there is chance of invalidating the proxy's votes because who had given the proxies were present and voted. Therefore, the votes casted by proxy holder, viz, the director of the company....
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.... member of the company, had made an application dated 21-3-1994 'for loan of Rs. 5 crores'. But the company in M.C.A. No. 6 of 1999 stated that 'an application dated 21-3-1994 for loan of Rs. 5 crores was received from a member of the applicant company, viz., Vinod P. Jacob, which was sanctioned by the company by board resolution dated 4-4-1994'. I have examined the minutes book produced by the company upon my direction. The minutes for the meeting dated 4-4-1994 against item No. 3 states as follows: "The Board noted that Mr. Vinod P. Jacob residing at Purakkattil House, Arakkaunnam has placed an application for a loan of Rs. 5 crores. The Board had a thorough discussion on the proposal. After studying all aspects of the creditworthiness, financial soundness, security aspects and legal implications of the proposal and period of loan and interest rates, it was decided to grant loans upto a limit of Rs. 5 crores to the applicant subject to provisions of adequate security." "The Board also authorised the managing director to enter into a memorandum of understanding with the loanee. It was also decided to grant the loan in a spread of 2-4 years as and when the requirement aris....
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....mstances, how can the amount be one said to be outstanding with St. Mary's Properties, the said firm, as averred in paragraph 8 of the said counter affidavit, is not disclosed to this Court. This shows that there is utter confusion regarding accounting and amount of loan paid by the company to Mr. Vinod P. Jacob, to St. Mary's Properties, a partnership firm and also to St. Mary's Properties Ltd., a corporate body, in each of which as admitted before me, Mr. Boby Varghese is a partner and a director. The statement of accounts furnished as directed by this Court on 28-9-1999, shows that an amount of Rs. 7,90,77,618 is outstand-ing in respect of transactions of Mr. M.C. Jacob as on 31-3-1999. This statement was filed when the counsel was asked to submit the details regarding the payments made to St. Mary's Properties Ltd. It is also admitted before me that the amount made mention of this statement are the dues from St. Mary's Properties Ltd. as mentioned in the affidavit in support of the Company Application. 18. It is further stated in memo dated 17-7-1999 that "Mr. M.C. Jacob; another member of the applicant company approached it with a loan application dated 15-9-1995 for a loan....
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....Jacob. But no security furnished by Mr. M.C. Jacob is produced before me. Pursuant to the said order what is disclosed to this Court is that "Since St. Mary's Finance Ltd. felt that the securities already furnished were inadequate for the loans so far availed of both by the firm and St. Mary's Properties Ltd. through the above said members, it required St. Mary's Properties Ltd. to furnish further securities. Accordingly St. Mary's Properties Ltd. offered 250 cents of land in Kakkanad Village in Sy. No. 352/2 and 326/1 and 153 cents of land in Kumbalam Village in St. No. 58/7, 58/8 and 58/9, in substitution of the existing security". I do not know what the company had meant by this. In the opening portion of the sentence. It is stated that the company felt that the security already furnished was inadequate and therefore asked for further security and the further security given as above was according to the company itself, in substitution of the existing security. That means the original security is taken away. Thus, the company's affairs are in utter confused state. When additional security is furnished necessarily it can be only an addition of the existing security. In the l....
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....ny were not disclosed to the creditors as enjoined under section 393(1)(a). I have already found that the directors had deep interest in the scheme as the net result of the scheme is postponement of the payment of amount by St. Mary's Properties Ltd. in which the directors are interested. So that reason itself is sufficient to discard the scheme. Added to this, there are irregularities in the voting as I have already found. On that reason also the scheme shall be rejected. In spite of these there is a bounden duty attached to this Court, while considering a petition under section 391 to protect the interest of the depositors, members, public and of the company. It is contended by the counsel for the company, relying on the decision in Sundarsan Chits (India) Ltd. v. Sukumaran Pillai [1985] 57 Comp. Cas. 85 (Ker.); Maneckchowk & Ahmedabad Mfg. Co. Ltd., In re [1970] 40 Comp. Cas. 819 (Guj.); Premier Motors (P.) Ltd. v. Ashok Tandon [1971] 41 Comp. Cas. 656 (All.) and Registrar of Companies v. Navjivan Trading Finance (P.) Ltd. [1978] 48 Comp. Cas. 402 (Guj.), that the company court shall always favour the working of a scheme rather than winding up of the company. But it is held by t....
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.... stated that: "St. Mary's Properties Ltd. had sent a reply expressing their difficulty to repay the loan amount at that time because of the prevalent recession in real estate market". The company has no case before me that recession is over. It is submitted in M.C.A. No. 6 of 1999 itself that there was an unexpected crash in the share market and by reason of that the St. Mary's Properties could not come into public and had to abandon the scheme for public issue of its shares. It was further averred in paragraph 11 of the affidavit that 'the overall recession prevalent today has created a situation by which the company has to face liquidity crisis'. Therefore if the scheme is allowed to be worked out, the company itself cannot work in terms of its objects as anybody will not be depositing any amount in the company and the company is unable to pay its depositors, in terms of the contract with the depositors and company. If it was a manufacturing concern the produc- tion would have been envisaged. The only function of the company is receiving and lending money. When that comes to standstill as they cannot borrow because of the present situation and as they cannot repay the depos....
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....ted in the Court. At the same time the Provisional Liquidator will have the powers of the Liquidator, with the permission of this Court under the provisions contained in section 450(3). This will enable him to take steps for speedy recovery of the dues to the company. It is also possible in terms of the provisions contained in section 457(1)(b), to allow the Provisional Liquidator to carry out the business of the company to the extent as mentioned above, viz., at least with respect to the collection of the amount due to the company and to pay off its creditors. In that regard if necessary with the permission of this court, as provided for in clause (v) of section 457, he can employ a competent agent to look after its affairs. It is, therefore, necessary to think of such a situation so that the interest of the larger number of the depositors who alone need care of this Court as far as the company is concerned shall be protected. 21. Before passing an order in this regard, it is necessary to consider the contention raised with respect to C.P. No. 18 of 1999 wherein the winding up of the company is sought for As already mentioned, copy had been served on the company and the company....