TaxTMI 
TaxTMI 
2015 (2) TMI 689
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.... television, Alkaline batteries, colour monitors, etc. It also entered into the arena of manufacturing of refrigerators and electronic components through associate companies and had grown into a diversified group with multiple products and services. Due to manifold reasons, the company faced cash flow constraints which adversely affected its operations. It suffered a loss of Rs. 287.8 crores in the last 18 months for the period ending on 30.09.2003 as there was decline of sales of goods. Due to the said loss, the debt of the company increased to 1494.57 crores as on 31.03.2003. As many a international brand had entered into the Indian market, the respondent company in order to keep pace with the technological advancement in the field of business initiated a comprehensive restructuring of its operations which primarily involved rejuvenating its main business through a joint venture with "Sanyo Electric Co. Ltd.", Japan and accordingly entered into a shareholder agreement. In terms of the agreement the BPL had to transfer its existing CTV business undertaking to the joint venture constituting BPL brand for CTV business manufacturing services, marketing and distribution. Both the comp....
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....ct. 3. BPL filed a reply stating, inter alia, that very purpose of Section 391(6) of the Act is that till effective consideration of the scheme and finalization of the scheme under Section 391 of the Act there has to be a stage of abeyance from all aspects so that the Company Court can examine the workability of the same and grant requisite relief. As regards the non-disclosure by BPL, it was asserted that the disclosure had been adequately made, for what was proposed to be transferred to the joint venture company was the colour television business of the BPL and brand associated with it and the residual company would retain the other business of the group such as medical electronics, batteries, components, etc. It was also put forth that Price Water House Coopers (PWC) was appointed by the ICICI at the instance of all lenders and PWC had assessed that the residual company could sustain a debt to the extent of Rs. 480 to 520 crores and the report submitted by PWC was already in possession of the lenders including 8th respondent therein. It was alleged as the operation had been stagnated for a period of two years the valuation made by the PWC was absolutely fair. 4. Be it stat....
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....nt which will separately open. According to them, no account was opened subsequently and no amount was channelised through the account as contemplated by the mechanism prescribed. Hence, no security was created in favour of the 8th respondent. These conditions were raised in an additional affidavit filed by the 8th respondent. The applicant-company has also filed an additional affidavit answering those conditions. In the additional reply affidavit filed on 24/1/2005 the applicant-company has averred that the contention that they are only unsecured creditors was raised during agreement and the affidavit was also filed during the course of arguments. The applicant-Company took copies of the documents creating charge in favour of the 8th respondent. They have produced Annexure-X hypothecation deed which is executed in 2001. Copies of Form No. 8 return dated 1.1.2001 and Form No. 13 return dated 1.1.2001 filed with the Registrar of Companies are produced as Annexures-Y and Z. Annexures-AA in a copy of the letter ILES (8th respondent) dated 4.7.2001. It is the contention of the applicant that from the above it is clear that there is a charge in respect of he specified assets of the appl....
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....either in the meeting or even subsequently by the Court and it was not the stage to suggest any amendment and accordingly contentions raised by the respondents in that regard were kept open. 7. On the basis of the aforesaid analysis, the Company Judge held that MCA No. 84/2004 was maintainable and other applications seeking grant of stay were sans merit and accordingly dismissed the same. Certain applications were kept to be considered at a later stage. The prayer of the respondents that they were not covered by the scheme proposed by the amendment and they are not secured creditors was rejected. Ultimately the Company Judge issued the following directions:- "54. M.C.A. No. 84/2004 is allowed. It is ordered that a meeting of secured creditors (working Capital Lenders and Term Lenders) be convened and held at the Registered office of he Applicant Company at Palghat on 16.04.2005 at 2.00 P.M. for the purpose of considering and if thought fit, approving with or without modification of he compromise/arrangement proposed as Annexure-G as modified by Annexure-N to be made between the Company and the creditors abovenamed. 55. Mr. Justice T. V. Ramakrishnan, a Retired Judge of the....
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.... could have been assumed that because of the hypothecation deed, at one point of time, the appellant could have been considered as a secured creditor, the position had changed because of the arbitration award which has been passed on consent. Emphasis was laid on the fact that there was an agreement recorded in the award that the criminal proceedings would not be pursued and more importantly it was a settlement of money claim and nothing remained in respect of the claims on hypothecation, which originally had been entered into by the parties. Thus, the status of a secured creditor thereby irrevocably had been metamorphosed. Relying on the authority Deva Ram v. Ishwar Chand AIR 1996 SC 378, a submission was advanced that on principles gatherable from Order II, Rule 2, of CPC, after the award had come into existence, it would not have been possible for the appellant to pursue his claims on the basis of the hypothecation deed, for the rights of the parties got crystallised to a pure and simple money claim, and hence, the security earlier offered and created had lost its relevance and transformed itself to a decree debt. 11. Apart from the above contentions, it was also propounded t....
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....hat that once an arbitral award has been passed on consent between the parties it extinguishes the status of the appellant as a secured creditor and it stands on a different footing altogether. It is further urged that the registration as a secured creditor does not bind the appellant and, more so, when the arbitral award has come into existence. It is his submission that after the parties settled by way of arbitration, the conceptual requisites of a secured creditor became non-existent. Learned senior counsel would further put forth that the hypothecation had never become operational as is evident from various documents on record and hence, the analysis made by the High Court is absolutely fallible. It is contended that once the deed of hypothecation is not fructified, mere registration as a secured creditor with the Registrar of Companies would not confer on the appellant the status of a secured creditor and, in any case, the said registration would not bind it. It is canvassed by him that once the appellant has accepted the award as passed by the arbitrator, it operates as res judicata against the respondent company to treat the appellant company as a secured creditor. That apar....
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....ciate the rival submissions raised at the Bar. In this context, reference to relevant portions of Sections 391 and 393 of the Act would be appropriate. They are as follows: "391. (1) Where a compromise or arrangement is proposed - (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them; the Court may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. (2) If a majority in number representing threefourths 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 under the rules made under Section 643, 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 ....
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....class of creditors or members concerned and only when the scheme is approved by the majority in number representing 3/4th in value by the class of creditors, or members present either in person or through proxy, the same becomes binding on the said class of creditors or members. Once there is a voting and the 3/4th majority has voted in favour of the scheme, it is binding on those who have dissented and had voted against the scheme or those who remained silent. 20. While analyzing the scope and ambit of the powers of the Company Court in respect of Section 391 and 393 of the Act and the role of the Court a two-Judge Bench in Miheer H. Mafatlal V. Mafatlal Industries Ltd. (1997) 1 SCC 579 has observed thus:- "Before sanctioning such a scheme even though approved by a majority of the concerned creditors or members the Court has to be satisfied that the company or any other person moving such an application for sanction under sub-section (2) of Section 391 has disclosed all the relevant matters mentioned in the proviso to sub-section (2) of that section. So far as the meetings of the creditors or members, or their respective classes for whom the Scheme is proposed are concerned,....
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.... - (a) shall have power to supervise the carrying out of the compromise or arrangement; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. (2) If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under Section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under Section 433 of this Act. (3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Act under Section 153 of the Indian Companies Act, 1913 (7 of 1913), sanctioning a compromise or an arrangement." 22. In the said context, the Court posed the question whether it has the jurisdiction of an appellate authority to minutely scrutinize the scheme and to arrive a....
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....tion Rly. Co. Re12 (1891) 1 Ch 21 to cull out the principle relating to the power and jurisdiction of the Company Court which is called upon to sanction the scheme of arrangements or compromise between the company and its creditors or shareholders. The observations of Lindley, L.J. as quoted in the said authority read as under: "What the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the minority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can reasonably be taken by businessmen. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent;....
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....as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. The aforesaid parameters of the scope and ambit of the jurisdiction of the C....
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....together with a view to their common interest." 26. The purpose of the classification of creditors has its significance. It is with this object that when a class has to be restricted, the principle has to be founded on homogeneity and commonality of interest. It is to be seen that dissimilar classes with conflicting interest are not put in one compartment to avoid any kind of injustice. For example, an unsecured creditor who has filed a suit and obtained a decree would not become a secured creditor. He has to be put in the same class as other unsecured creditors (See Halsbury's Laws of India, 2007, Vol. 27). 27. The aforesaid being the position relating to the status of a class, at this juncture, it is necessary to appreciate the basic facts which are determinative in the case at hand. As the exposition of facts would uncurtain, the appellant company had extended a short-term loan facility of Rs. 150 million to the respondent company on 4.7.2001; that the respondent company had executed a deed of hypothecation in favour of the appellant hypothecating by way of an exclusive charge of the monies and right, title and interest relating to amounts, both present and future to b....
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....proved in the meetings held by the secured creditors. For the sake of completeness, we think it appropriate to reproduce how the learned Company Judge had approved the Scheme. "(i) The scheme of arrangement as amended by amendments approved at the meeting of the secured creditors on April 16, 2005, being Annexure D1 to the Company Petition No. 13/2004 is sanctioned so as to be binding with effect from 31.03.2003, on the petitioner company and all of its secured creditors and preference shareholders, including any secured creditor and preference shareholders that may have obtained any decree, order or direction from any court tribunal or any other authority, without any further act or deed by the petitioner company, in respect of the outstanding debt of the petitioner company as of March 31, 2003 to all its secured creditors and preference shareholders, which amount shall be as has been determined on the basis of the figures agreed and accepted between the petitioner company and each of the secured creditors at the meeting of the secured creditors convened and held on April 16, 2005, and hence the figure as was specified in the application filed by the petitioner Company under se....
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....t. That the parties to the compromise of arrangement or other persons interested shall be at liberty to apply to this court for any directions that may be necessary in regard to the working of the Compromise or arrangement and that the said company do file with the Registrar of Companies a certified copy of this order within 14 days from the date. 29. Keeping in view the factual backdrop, we have to appreciate the principal contentions. The seminal contention of the appellant is that it does not fall into the class of secured creditors, for it had initiated the arbitration proceeding and an award has been passed on consent which is a simple money decree and, therefore, the deed of hypothecation, even if assumed to be executed at one point of time, has become irrelevant. To elaborate, the status of the appellant had changed from a secured creditor to that of an unsecured creditor. On this foundation, a stance has been taken that the principles of Order II, Rule 2, C.P.C. would be applicable as the appellant would be debarred to issue on the basis of the charge of hypothecation. Emphasis has been laid on the factum that there having been a change of status, the appellant compan....
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.... and 18. Paras 15 and 18 which have been pressed into service with immense inspiration read as follows: "The aforementioned preliminary decree was passed by the Court even though the Official Liquidator raised the plea in the written statement that the charge created on the Company's property was void under Section 125 of the Act. But it may be that the plea was not argued at the hearing. However, what is clear from the material on record is that no appeal was filed against the said preliminary decree by the Official Liquidator and the preliminary decree has attained finality. xxx xxx xxx In Suryakant Natvarlal Surati v. Kamani Bros. Ltd.20 the Company created a charge under a mortgage in favour of the trustees of the Employees' Gratuity Fund. The creditors, by a preliminary decree of 3-12-1977 were entitled to receive the amount secured on the property of the Company; the Court fixed 8-12-1988 as the date for redemption and ordered that in default of payment of the sum due by that date, the property was to be sold by public auction. On an application made on 16-2-1978, the Company was ordered to be wound up by an order dated 3-8-1979. As default in payment of the ....
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....status of a decree but there is nothing expressed in the award that the decree has extinguished the charge. It was not extinguished because the award does not say so. To have a complete picture, we think it necessary to reproduce the relevant portion of the operative part of the award: "I. Award on admission in the sum of Rs. 48,683,710/- (due as on June 30, 2004) in favour of the Claimants against the Respondents together with further interest @ 20% p.a. on the principal sum of Rs. 36,360,000/- from 1st July, 2004 till payment and/or realization. II. The aforesaid Award against the Respondents shall be marked as fully satisfied in the even of the Respondents making payment to the Claimants of the sum of Rs. 36,360,000/- in the following installments:- i. Rs. 17,500,000/- on or before 30th Septemebr, 2004 ii. Rs. 6,287,000/- on or before 15th April, 2017 iii. Rs. 6,287,000/- on or before 15th April, 2018 iv. Rs. 6,287,000/- on or before 15th April, 2019 III. Simultaneously with the signing of these Consent Terms, the Respondents have handed over to the Claimants one post dated cheque in favour of the Claimants for Rs. 17,500,000/- and 3 post dated cheques in fa....
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.... the mortgage, and he may institute such suit notwithstanding anything contained in Order II, rule 2. (2) Nothing in sub-rule (1) shall apply to any territories to which the Transfer of Property Act, 1882(4 of 1882), has not been extended. 15. Mortgages by the deposit of title- deeds and charges - (1) All the provisions contained in this Order which apply to a simple mortgage shall, so far as may be, apply to a mortgage by deposit of title-deeds within the meaning of section 58, and to a charge within the meaning of section 100 of the Transfer of Property Act, 1882 (4 of 1882). (2) Where a decree orders payment of money and charges it on immovable property on default of payment, the amount may be realized by sale of that property in execution of that decree. 35. The said provisions came to be interpreted in S. Nazeer Ahmed v. State Bank of Mysore and Others(2007) 11 SCC 75. Referring to the said provisions, the Court held the suit for enforcement of mortgage could be filed even when in the earlier civil proceedings, the plaintiff had omitted to sue on the basis of equitable mortgage and in such cases, principle of constructive resjudicata or Order II, Rule 2 would not a....
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....the cases thus far discussed may be thus summarised: (1) The correct test in cases falling under Order II Rule 2, is 'whether the claim in the new suit is, in fact, founded on a cause of action distinct from that which was the foundation for the former suit'. (Moonshee Buzloor Ruheem v. Shumsoonnissa Begum (1867) 11 MIA 551) (2) The cause of action means every fact which will be necessary for the plaintiff to prove, if traversed, in order to support his right to the judgment. (Read v. Brown(1888) 22 QBD 128) (3) If the evidence to support the two claims is different, then the causes of action are also different. (Brunsden v. Humphrey(1884) 14 QBD 141 (4) The causes of action in the two suits may be considered to be the same if in substance they are identical. (Brunsden v. Humphrey) (5) The cause of action has no relation whatever to the defence that may be set up by the defendant, nor does it depend on the character of the relief prayed for by the plaintiff. It refers 'to the media upon which the plaintiff asks the Court to arrive at a conclusion in his favour'. (Chand Kour v. Partab Singh(1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)) This observation was ....
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....ed with certitude that there is no shadow of doubt that the consent award in an arbitral proceeding would not bar a suit for enforcement of the charge for the same reasons and it would not be hit by Order II, Rule 2 CPC. We are absolutely conscious that the present case does not relate to a charge as engrafted under Section 100 of the Transfer of Property Act, or simply for equitable mortgage. In the present case, the charge is by hypothecation and relates to movable property. Needless to say, provisions of Rules 14 and 15 of Order XXXIV would not be directly applicable but the principle inherent under the said Rules, as enunciated would be applicable. In fact, the ratio laid down in S.Nazeer Ahmed (supra), as we understand, makes it equally applicable to different causes of action. The said principle would apply, if we accept that the cause of action is distinct. 37. The next aspect we shall advert to is the applicability of doctrine of resjudicata. In Deva Ram (supra), the Court while dealing with the said doctrine has opined thus: "Section 11 contains the rule of conclusiveness of the judgment which is based partly on the maxim of Roman Jurisprudence "Interest reipublicae ....
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....e was an agreement to dispense or a contract, supported by consideration to do so, and that in any case it could only operate, when the party dispensing had performed his part of the contract and only something remained to be performed on the other side, unless dispensed with Abaji Sitaram Modok v. Trimbak Municipality 28 B. 66; 5 Bom. L.R. 689. They further said that, if they had been wrong in refusing in advance to accept bales, this repudiation had not been accepted by the respondents, and, therefore, the contract remained alive and ought to have been performed. It is evident that the alleged dispensation under Section 63 is by itself a complete answer, unless the absence of contract or consideration is fatal, for the appellants again and again dispensed with the performance by the respondents of their promise to deliver the goods contracted for and they cannot recover damages for the breach of a promise touching the performance of a thing they wholly dispense with. In Abaji Sitaram Modok v. Trimbak Municipality 5 Bom. L.R. 689, Chief Justice Jenkins deals with Section 63, and holds that the promise mentioned in Section 63, can, only do the acts he is by that section empowere....
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....said provisions read as under: 176. Pawnee's right where pawnor makes default. - If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. 177.Defaulting pawnor's right to redeem - If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default." 42. The aforesaid two provisions ....
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.... and (2) to sell the goods after reasonable notice of the intended sale to the pawner. Once the pawnee by virtue of his right under section 176 sells the goods the right of the pawner to redeem them is of course extinguished. But as aforesaid the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long, however, as the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. It follows therefore that where a pawnee files a suit for recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt. The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and therefore if he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree. If it were otherwise, the result would be that he would recover the debt and also retain the goods pledged and the pawner in such a case would be placed in a position where he incurs a greater liability than he bargained for under the contract of pledge. The pawnee therefore can sue on the debt retaining the pledged ....