TaxTMI 
TaxTMI 
TaxTMI 
2007 (8) TMI 447
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....arma, Ms. Bina Gupta, Ms. Shweta Verma, Gaurav Singh, Pratap Venugopal, Ms. Sheela Goel, Shantanu Krishna, Ms. Mukti Chowdhary, Ramesh Kumar Singh, Ramesh Babu M.R., A.V. Rangam, Buddy A. Ranganadhan and Rajiv Nand for the Official Liquidator Ravindra Kumar for the Appearing Parties. JUDGMENT P.K. Balasubramanyan, J. - These appeals arise out of proceedings in the Company Court in the matter of M/s. Shreeniwas Cotton Mills Limited (SCML). The Company was incorporated on 5-2-1935. It established and ran a textile mill in a land measuring 70,490 square metres in Lower Parel in the then City of Bombay. 2. Just like various other textile mills located in that city, SCML also ran into difficulties. A creditor of the Company made an application C.P. No. 642 of 1983 under section 433 of the Companies Act, for the winding up of the Company. By order dated 25-7-1984, SCML was ordered to be wound up by the Company Court. The Official Liquidator took charge of the affairs of the Company. 3. Nothing significant seems to have happened for a decade. Then, on a report of the Official Liquidator, the Company Court passed an order dated 1-9-1994 directing the Official Liquidator to issue a publ....
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....her it is possible and viable to reopen the mills and/or any portion of it and run it profitably and without disposing of immovable assets of the Company; (2)In case the mills cannot be re-started then whether any department or process of the mills could be started as viable; (3)In case any party who comes forward with an offer to pay off all the creditors, take the company out of winding up and revive and restart the mills happens to be a shareholder of the Company, such party should surrender the shareholding in the capital of the Company at the value to be determined by the Court; (4)In case above courses are not workable then whether the mills can be restarted by disposing of part of its assets to generate finance after payment to all the creditors; (5)In case even the course under clause (4) above is not possible, then the Official Liquidator may sell the assets by public auction in which even the shareholders of the Company will be at liberty to bid." 4. Thereafter, the Division Bench emphasized what was the main object to be kept in mind by the Company Court. In that behalf, it was stated: "It is open for the learned Company Judge to give any other suitable directions ....
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....essing machinery and non-viable spinning machinery are sold, then, the question of sale of part of the land could be taken up. In answer to the fifth query, it was reported that since a partial revival of the mills was possible, sale by the Official Liquidator of the assets by public auction may not arise. It was also suggested that delay in implementing the revival package will escalate the liability and would lead to further deterioration in the condition of the spindleage proposed to be revived. 7. On 7-11-1998, a new Industrial Location Policy of the Government of Maharashtra became operative. That applied to all industries in the Mumbai Metropolitan Region excluding the cotton textile industries. Since cotton textile industry was excluded from its purview, it appears that there was no restriction on restarting of the manufacturing activities of SCML. 8. We may notice at this stage that the main shareholders of SCML were Bangurs, Somanis, and the Life Insurance Corporation of India and the sundry shareholders held about 20 per cent of the shares. Two of the secured creditors were the State Bank of India and the Punjab and Sind Bank. 9. The matters lingered on. On 29-6-2003, ....
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....tted to dispose of a part of the assets of SCML and the proceeds of the sale will be utilized to pay off the workers and the creditors if required. 10. On 12-12-2003, the Company Court directed the meeting to be convened to consider the amended scheme. On 21-2-2004, the amended scheme was approved at the meeting. Company Petition No. 315 of 2004 was filed on 7-4-2004 seeking sanction of the amended scheme. The Regional Director on behalf of the Central Government pointed out that the propounders of the scheme were required to file an affidavit regarding the latest financial position of the Company but that they had not filed such an affidavit. On 23-7-2004, the Company Court rejected the amended scheme and dismissed the Company Petition No. 315 of 2004. The court held that the scheme presented was not a scheme for revival but it was in substance a disposal of the Company's assets which then vested in the Official Liquidator. The court found that it was only a mode of disposal of the Company's assets and hence it would be proper for the Company Court holding the assets to dispose of the assets after inviting offers. That would fetch a better price and such a course would be in the ....
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....ion of the workers of SCML at Sholapur at a cost of Rs. 35.02 crores. It is said on behalf of the appellants, that at the last moment just before the delivery of the judgment began, affidavits filed on behalf of the LBPL were received by the court, even while refusing to receive two affidavits, Rangnath Somani wanted to file. The Division Bench allowed the appeals, set aside the judgment of the Company Court and sanctioned the scheme as modified and as further modified by two affidavits of the Directors of LBPL, by its judgment dated 21-3-2005. It is this decision of the Division Bench that is in challenge before us in these appeals. Three of the appeals are by persons, who had made offers pursuant to the direction of the court and have been described for convenience, as the interveners and one of them by Rangnath Somani. Even at this stage, we may mention that Civil Appeal Nos. 3569-3571 of 2005 filed by one of the interveners is sought to be withdrawn. We see no reason why the prayer for withdrawal of those appeals shall not be granted. So, Civil Appeal Nos. 3569-3571 of 2005 would stand dismissed as withdrawn. We are only considering the other appeals on merits. 12. Before we p....
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....d decision in this Court. It is also submitted that the framing of a Scheme for revival of a Company under liquidation had overtones of public interest and commercial morality and in the context of what had transpired in this case and the involvement of the interveners at every stage, it was not open to the respondent now to raise a contention that the appellants have no locus standi. In fact, the Division Bench of the High Court was totally in error in excluding their objections on the ground that they had no locus standi and as persons aggrieved by that finding, it is open to them to file these appeals. It is also submitted that LBPL was also in the same boat as the appellant in Civil Appeal Nos. 3179-3181 of 2005 and if it had locus standi to appeal to the Division Bench of the High Court against the order of the Company Court, the appellant has the locus standi to appeal to this Court. 13. In the light of what had transpired in this case and the orders of the Division Bench dated 4-4-1995 and 15-12-2004, it is not possible to accept the argument on behalf of the respondents that the appellants in the two sets of appeals have no locus standi to maintain their appeals in this Co....
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....ion and approval. On this part of the objection, we find substance in the stand adopted on behalf of Rangnath Somani and on that basis we cannot say that he is not entitled to file an appeal against the decision of the Division Bench. 15. But more seriously it is contended that Rangnath Somani had accepted the decision of the Division Bench of the High Court and had even received possession of the assets of SCML from the Official Liquidator pursuant to his discharge on the basis of the decision of the Division Bench and having done so, he is estopped from questioning the order of the Division Bench in an appeal which he has filed subsequently. This argument is sought to be met on behalf of Rangnath Somani by pointing out that the receiving of possession pursuant to the order of the Division Bench from the Official Liquidator cannot estop him from filing an appeal before this Court and from pointing out that the decision suffers from a vital defect of being one in excess of the authority of the Division Bench of the High Court and not in consonance with the terms of the Companies Act. It is seen that some objection was sought to be raised by Rangnath Somani regarding the proposals ....
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....tration of a Company and Chapter V thereof deals with Arbitrations, Compromises, Arrangements and Reconstructions. In that Chapter occurs sections 390 to 396A of the Act with which we are concerned. While defining a Company for the purpose of sections 391 and 393, section 390 clarifies that Company means any Company liable to be wound up under the Companies Act. SCML was a company that was ordered to be wound up on 25-7-1984. Therefore, when the Scheme was originally presented on 3-10-1994, it was at a time when the winding up order was already in existence. The argument that section 391 would not apply to a Company, which has already been ordered to be wound up cannot be accepted in view of the language of section 391(1) of the Act, which speaks of a Company which is being wound up. If we substitute the definition in section 390(a) of the Act, this would mean a Company liable to be wound up and which is being wound up. It also does not appear to be necessary to restrict the scope of that provision considering the purpose for which it is enacted, namely, the revival of a company including a Company that is liable to be wound up or is being wound up and normally, the attempt must be....
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....ould be proper that the assets are disposed of by the Official Liquidator by inviting offers from the public in that behalf and maintaining transparency. But, the Division Bench accepted the contention that it was not mandatory in law that a compromise or arrangement has to be for revival of the very activity in which the company was engaged in at the time of winding up and the anxiety of the court while sanctioning the scheme which is approved by all classes should be to see that the company is permitted to continue its corporate existence. The Division Bench also took the view that the judgment of the earlier Division Bench dated 4-4-1995 did not stand in the way of accepting the present scheme, and that since the Company Court had no jurisdiction to sit in appeal over the decision of the creditors, members and contributories of the company, the proposal put forward was liable to be accepted especially in the context of its finding that the interveners have no locus standi to oppose the proceedings. 18. Learned counsel argued before us whether in the case of a company which had been ordered to be wound up, a compromise or arrangement made under section 391 of the Act could be ac....
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....nvisage sale of any of the assets or properties of Shreeniwas Cotton Mills Limited (now in liquidation) and is for the revival of the textile Mill unit of Sree Niwas Cotton Mills Ltd. (now in liquidation)." It provided for payment and discharge of liabilities and it contained what were described as salient features of the Scheme for revival of the Mills. The amendments proposed to that Scheme by the Somanis were the deletion of paragraph 1.5. quoted above and replacement of it with the following: "The Scheme envisages development and transfer of SCML's said property by LBPL for revival of SGML (now in liquidation)." After dealing with the modified proposal for settlement of liabilities to creditors and others, it was provided in clause 5 that on the sanctioning of the Scheme, a development agreement will be entered into between SCML and LBPL for developing SCML's property, liquidity will be generated and all creditors paid off and the company will come out of liquidation. Then it was stated: "Secondly, after discharging all creditors as per the scheme, if extra funds are available with SNCML, then SNCML will start a viable industry in any part of Maharashtra and employment will....
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....s. 20 crores. Yet another affidavit was filed on behalf of LBPL in which willingness was expressed by it to pay the higher amounts claimed by the two secured creditors, the State Bank of India and the Punjab and Sind Bank subject to LBPL being entitled to create a charge on the mill property even before discharging the liability to the two banks and on condition of delivery of the original documents relating to SCML to LBPL and not to SCML, on full payment of the amounts agreed to be paid to the two creditor banks. It was to these modifications proposed by a non-member of the company, but which was associated with the working of the compromise or arrangement, that Rangnath Somani tried to raise some objections one of which was that SCML was not agreeable to set up an industrial unit anywhere in Maharashtra at a cost of Rs. 20 crores. Ramesh Somani supported LBPL. The Division Bench of the High Court accepted the affidavits filed on behalf of LBPL and sanctioned the scheme as amended and as further modified by the two affidavits of Abhishek Lodha, Director of the Company dated 21-3-2005. Obviously, the Division Bench must have been conscious that Abhishek Lodha was only a Director o....
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.... of two companies. Neither of the companies was in liquidation. This Court held that compromise or arrangement included amalgamation of one company with another. This Court also defined the broad contours of the jurisdiction of the Company Court in granting sanction to a scheme in terms of section 391 and section 393 of the Act. This Court laid down the following parameters: "1.The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held. 2.That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by section 391(2). 3.That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4.That all necessary material indicated by section 393(1)(a) is placed before the voters at the conce....
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....lities, the power of the Court to ascertain the real purpose underlying the Scheme, the bona fides of the Scheme, the good faith in propounding it and that as a whole, it is just, fair and reasonable, at the same time emphasizing that it is not for the Court to examine the Scheme as if it were an appellate authority over the commercial wisdom of the majority. 22. When a Company is ordered to be wound up, the assets of it, are put in possession of the Official Liquidator. The assets become custodia legis. The follow up, in the absence of a revival of the Company, is the realization of the assets of the company by the Official Liquidator and distribution of the proceeds to the creditors, workers, and contributories of the company ultimately resulting in the death of the company by an order under section 481 of the Act, being passed. But, nothing stands in the way of the Company Court, before the ultimate step is taken or before the assets are disposed of, to accept a scheme or proposal for revival of the Company. In that context, the Court has necessarily to see whether the Scheme contemplates revival of the business of the company, makes provisions for paying off creditors or for s....
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....ed that the intention of the Legislature must be found by reading the statute as a whole. In Principles of Statutory Interpretation by Justice G.P. Singh, it is stated: 'The rule is referred to as an "elementary rule" by VISCOUNT SIMONDS; a "compelling rule" by LORD SOMERVELL OF HARROW; and a "settled rule" by B.K. MUKHERJEE, J.' (See pages 31 and 32 of the Tenth Edition) When we accept this principle, what we have to do is to read sections 391 to 394A not in isolation as canvassed for by learned counsel for the respondents, but with reference to the other relevant provisions of the Act. We see no difficulty in reconciling the need to satisfy the requirements of both sections 391 to 394A and section 466 of the Companies Act while dealing with a Company which has been ordered to be wound up. In other words, we find no incongruity in looking into aspects of public interest, commercial morality and the bona fide intention to revive a company while considering whether a compromise or arrangement put forward in terms of section 391 of the Companies Act should be accepted or not. We see no conflict in applying both the provisions and in harmoniously construing them and in finding that....
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....and in the godown, being given to it for development and sale. As we read section 392 of the Act, it only gives power to the Court to make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. This is only a power that enables the court to provide for proper working of compromise or arrangement, it cannot be understood as a power to make substantial modifications in the scheme approved by the members in a meeting called in terms of section 391 of the Act. A modification in the arrangement that may be considered necessary for the proper working of the compromise or arrangement cannot be taken as the same as a modification in the compromise or arrangement itself and any such modification in the scheme or arrangement or an essential term thereof must go back to the general meeting in terms of section 391 of the Act and a fresh approval obtained therefor. The fact that no member or creditor opposed it in court cannot be considered as a substitute for following the requirements of section 391 of the Companies Act for approval of the compromise or arrangement as now modified or proposed to be modified. In....
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.... is a fit case where we should set aside the decision of the Division Bench as also of the Company Court and remand the proceedings to the Company Court. The Company Court first will direct the sponsors of the scheme to call a meeting of the concerned in terms of section 391 of the Act and seek an approval for the modifications now suggested by the Division Bench or that may be put forward at the meeting. If the requisite majority approves the modifications and the matter comes back to the Company Court, the Company Court will consider whether the compromise or arrangement put forward is one that deserves to be accepted in respect of a company which has been ordered to be wound up in the light of what we have indicated above and what the Division Bench had earlier indicated in its order dated 4-4-1995. 30. In addition to expanding and supporting the submission that in terms of sections 391 to 393 of the Act, the Court had the power to accept the compromise or arrangement even in respect of a company ordered to be wound up, independent of section 466 of the Act and in that process the power to stay a winding up, learned Senior Counsel appearing for the Workers' Union argued on beha....