A.K. Misra and Another vs Wearwell Cycle Co. (India) Ltd. (In Liquidation)

S.N. Sapra, J.—By this order, I propose to dispose of an application filed by Shri A. K. Misra and Braham Arenja, under Rule 79 of the Companies (Court) Rules, 1959, hereinafter referred to as "the Rules", thereby praying that they be permitted to file a petition for sanction of the scheme of revival of the company.

In fact, the applicants have filed a petition dated September 23, 1988, being Company Petition No. 131 of 1988, u/s 391(2) of the Companies Act, 1956, hereinafter referred to as "the Act", read with Rule 9 of the Rules, for the sanction of the compromise and/or arrangement, as contained in Company Application No. 26 of 1985, and modified in the meetings of the creditors and shareholders held on July 16, 1988.

Wearwell Cycle Co. (India) Ltd., hereinafter called "the company", was a joint stock company incorporated on November 14, 1951, under the Indian Companies Act, 1913. The company was set up for the business of manufacture of cycles, at its factory, situated at plot No. 30, New Industrial Township, Faridabad.

The company was wound up, vide order dated March 9, 1978, in Company Petition No. 54 of 1977, and the official liquidator attached to this court was appointed as the liquidator of the company.

Shri H. L. Seth, who was the member/shareholder and former managing director of the company, propounded a scheme of arrangement. He filed an application, being Company Application No. 26 of 1985, u/s 391 of the Act, for summons for directions to convene separate meetings of the unsecured creditors of the company and its equity and preference shareholders, for the purposes of considering, and if thought fit, approving with or without modification, the scheme of arrangement proposed to be made between the company and its shareholders and creditors.

Vide order dated April 10, 1986, B. N. Kirpal J. issued various directions including the one for holding of separate meetings of the unsecured and secured creditors of the company and its equity and preference shareholders. Mr. Justice Prakash Narain (retired), former Chief Justice of this court, was appointed as chairman and Mr. M.S. Dewan, advocate, as the alternate chairman of the meetings.

The meetings, as directed by the aforesaid order, could not be held as there were various applications, filed subsequently, which were disposed of, vide order dated May 20, 1987, by D.P. Wadhwa J*. By that order, the court directed that the official liquidator would substitute the names of the present applicants and their nominees, as per the transfer deeds on record, in place of the members, as per annexures A and B to the agreement dated November 28, 1984, in the register of members of the company. It was further directed that Shri Misra and Arenja would be treated as the creditors of the company in place of those mentioned in annexure B to the agreement, as well as in place of the Punjab National Bank in respect of debts as appearing in the statement of affairs filed u/s 454 of the Act.

The court further directed that the meetings of the members and shareholders of the company, for considering the scheme as proposed by Mr. Seth in C. A. No. 26 of 1985 would be held on July 10, 1987, and in respect of the scheme proposed by Kelvinator of India Ltd., the meetings would be held on July 11, 1987. It was further directed that the members appearing in the list of members of the company and the creditors as given in the statement of affairs, and as amended, as per the order would be the members and creditors entitled to vote. These lists of members and creditors were directed to be submitted by the official liquidator to the chairman.

Mr. Seth filed appeal, being Company Appeal No. 16 of 1987, against the order dated May 20, 1987 ; while admitting the appeal, the Division Bench of this court directed that the chairman appointed, vide order dated April 10, 1986, would hold the meetings of the creditors and shareholders. So far as the creditors were concerned, it was observed that the list had already been prepared by the learned company judge, vide order dated May 20, 1987. With regard to the shareholders'' meeting, it was observed that directions had already been given by B. N. Kirpal J. in his order dated April 10, 1986. The Division Bench held :

"It is, however, made clear that after the respective meetings, are held, and reports thereof made available to court the learned company judge will be free to approve the scheme or to reject it without being influenced by the decision in C. A. No. 963 of 1985."

Mr. Seth approached the Supreme Court of India, by way of special leave petition, against the order of the Division Bench. The Supreme Court passed the following order on October 9, 1987 :

"Heard learned counsel for the parties. We do not propose to interfere in the matter except to indicate that as had been directed earlier by the learned company judge in his order dated April 10, 1986, votes cast in the meeting of the shareholders in regard to the transferee shareholders shall be separately recorded. The Division Bench of the High Court will do well to hear the appeal expeditiously. SLP is disposed of accordingly."

Vide order dated November 9, 1987, Mahinder Narain J. issued further directions with regard to the holding of the meetings.

The meetings of the creditors and shareholders of the company were held on July 16, 1988, at Hotel Imperial, New Delhi. The meetings with regard to the scheme of arrangement propounded by Kelvinator of India Ltd., were held on January 24, 1988.

The chairman of the meetings has filed his report.

It is alleged by the applicants in their petition, being Company Petition No. 131 of 1988, filed u/s 391(2) of the Act, that at the meetings of the creditors, two resolutions were moved, thereby modifying the scheme. One resolution was moved by the applicant, namely, Shri Braham Arenja and the other by Shri Vipin Ghadok, partner of Matchless Industries of India. The scheme of arrangement/compromise, as contained in Company Application No. 26 of 1985, and, modified by resolution No. 1, was carried over and passed in the meeting of the creditors by an overwhelming and clear majority of 93.93 per cent. According to the applicants, resolution No. 2, adopted and supported by Shri H. L Seth, was defeated in the meeting of creditors, by an overwhelming and clear majority of 93.98 per cent.

Mr. Ved Vyas, learned counsel for Mr. Seth, has urged that the applicants are not competent to file the present application. In other words, Shri Misra and Arenja have no locus standi to file the present application. As both the official liquidator and the profounder have found that the scheme was not approved by the requisite majority, they did not move any application for its sanction by the court under Rule 79 of the Rules. The contention of Mr. Ved Vyas is that the names of the creditors as given in the list filed by the official liquidator on November 9, 1987, on which the applicants rely, does not specifically contain the names of the applicants as creditors. Moreover, these applicants did not exercise any votes as such. The names of these applicants have not been entered in the register of members of the company So far. As such, the applicants are neither the creditors nor the members of the company ; hence they have no locus standi to move the application under Rule 79(3) of the Rules.

On the other hand, Mr. Vohra, learned counsel for the applicants, has urged that the applicants are major creditors, i.e., for Rs. 29,76,593.54 out of Rs. 33,86,321, and also shareholders, i.e., 15,000 shares, out of 18,329 shares of the company, as per the fist of creditors and shareholders certified by the official liquidator and filed in the court.

Rule 79 of the Rules reads as under :

"Petition for confirming compromise or arrangement.--Where the proposed compromise or arrangement is agreed to, with or without modification, as provided by Sub-section (2) of Section 391, the company, (or its liquidator, as the case may be) shall, within seven days of the filing of the report by the chairman, present a petition to the court for confirmation of the compromise or arrangement. The petition shall be in Form No. 40.

Where a compromise or arrangement is proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions u/s 394.

Where the company fails to present the petition for confirmation of the compromise or arrangement as aforesaid, it shall be open to any creditor or contributory as the case may be, with the leave of the court, to present the petition and the company shall be liable for the cost thereof.

Where no petition for confirmation of the compromise or arrangement is presented, or where the compromise or arrangement has not been approved by the requisite majority u/s 391(2) and consequently no petition for confirmation could be presented, the report of the chairman as to the result of the meeting made under the preceding rule shall be placed for consideration before the judge for such orders as may be necessary."

Thus, under the aforesaid rule, in case the company fails to present the petition for confirmation of compromise or arrangement, then it is open to any of the creditors or contributories, as the case may be, to file a petition with the leave of the court for that purpose.

Vide order dated May 20, 1987, this court directed the official liquidator to substitute the names of S/Shri Misra and Arenja and their nominees, as per the transfer deeds, in the register of members of the company, subject however, that Misra would produce the requisite permission from the Reserve Bank of India for his being brought on record as a member of the company.

The official liquidator has admitted that the transfer with regard to 15,000 shares has already been effected. In the order, D. P. Wadhwa }. also directed that Shri Misra and Arenja would be treated as the creditors of the company in place of those as mentioned in annexure ''D'' to the agreement as well as in place of the Punjab National Bank in respect of debts as appearing in the statement of affairs filed u/s 454 of the Act.

Thus, in my view, the contention of learned counsel for Mr. Seth is without any basis. The applicants are competent to file the present application under Rule 79 of the Rules as, admittedly, the official liquidator has failed to file an application under this rule for confirmation of the scheme of arrangement/compromise.

Mr. Vohra has argued that at this stage of deciding an application under Rule 79 of the Rules, the merits of the scheme of arrangement are not to be considered. The question whether the scheme was approved by the requisite majority in the meetings of the creditors and shareholders of the company held on July 10, 1987, is to be determined at the time of confirmation of the scheme as contained in Company Petition No. 131 of 1988. He has further contended that the chairman had no jurisdiction to allow the statutory creditors to vote as creditors to the tune of their claims as lodged with the chairman. This was against the order dated May 20, 1987. where the court specifically observed that the members whose names appear in the list of members of the company and the creditors, as given in the statement of affairs, and as amended, would be the members and creditors entitled to vote. These lists of members and creditors were submitted by the official liquidator to the chairman. He has also invited the attention of this court to the order dated August 4, 1987, passed by the Division Bench of this court and the order dated October 9, 1987, passed by the Supreme Court of India in SLP No. 10600 of 1987 and the order dated November 9, 1987, passed by Mahinder NarainJ. Mr. Vohra has submitted that Mr. Seth had made a specific plea to enhance the credit amount of the statutory creditors to the extent of Rs. 23 lakhs. But, the Division Bench did not agree to this prayer of Mr. Seth.

According to Mr, Vohra, the compilation of votes, as submitted by Mr. Seth, is not correct. If the excess voting, as allowed by the chairman, is excluded, then certainly the scheme was passed by an overwhelming majority.

According to Mr. Vohra, the statutory creditors were not entitled to vote for higher credits as per their claims and the chairman was not within his powers to allow them to vote for higher credits than the amounts shown in the list of creditors as prepared by the official liquidator under the orders passed by the court. Moreover, admittedly, the official liquidator has not admitted the liability of the statutory creditors except for what is shown in the list of creditors prepared by him. The list of creditors could not be amended by the chairman for the purpose of voting. The list prepared by the official liquidator could be amended only by the court.

With regard to the objection raised by Mr. Seth that it was incumbent upon the court to examine the latest financial position, Mr. Vohra has urged that this aspect is to be considered at the time of deciding the petition u/s 391(2) of the Act. Mr. Vohra, however, has invited the attention of this court to paras 1 to 6, 17, 32 and 33 of the petition, being Company Petition No. 131 of 1988, under which the entire financial position of the company in liquidation has been disclosed.

Mr. Vohra has placed reliance upon the judgments in Nand Prasad and Others Vs. Arjun Prasad and Another, ; In Re: Hathising Manufacturing Company Ltd. (In Liquidation), ; Sales Tax Officer, Petlad Vs. Rajratna Naranbhai Mills Co. Ltd. and Another, ; Auto Steering India P. Ltd., In Re: Auto Steering India P. Ltd., ; S.K. Gupta and Another Vs. K.P. Jain and Another, ; Centron Industrial Alliance Ltd. Vs. Pravin Kantilal Vakil and another, ; Income Tax Officer Vs. Official Liquidator, ; M.M. Sehgal Vs. Sehgal Papers Ltd. (In Liquidation), and Smt. Gian Devi and Another Vs. Bachan Motor Financiers (Pvt.) Ltd., .

Mr. Ved Vyas has contended that u/s 391(2) of the Act read with Rule 79 of the Rules, the applicants must satisfy the following conditions as prerequisite before any application for approval of the scheme of compromise is presented :

(i) there must be a majority of the creditors and members present and voting in meetings approving the proposed scheme of compromise;

(ii) three-fourths majority in value of the votes cast in the meeting must approve the scheme of compromises

(iii) latest financial position of the company must be given by means of an affidavit by the propounder ; and

(iv) the application, if other than the official liquidator, or the company, must be by a creditor or contributory of the company.

I have already held that the applicants are competent to file the present application.

According to Mr. Ved Vyas, the applicants have not been able to satisfy any of the conditions, so leave cannot be granted to them for presenting a petition u/s 391(2) of the Act. Mr. Ved Vyas has further urged that the court should decide the questions whether resolution No. 1 with regard to the proposed scheme of arrangement/compromise, was approved by a majority of creditors and members, present and voting, in the meetings; and whether 3/4ths majority in value of votes, cast in the meetings, approved the scheme. Further, the latest financial position of the company must be given by means of an affidavit by the propounder.

Mr. Ved Vyas has urged that the statutory creditors were entitled to vote for higher credits as per their claims and the chairman was within his power to allow them to vote for higher credits, rather than the amount shown in the list of creditors as prepared by the official liquidator.

Mr. Seth has filed the compilation showing the actual position of voting on resolution No. 1 as moved by the applicants. Thus, relying on the compilation, Mr. Ved Vyas has urged that the scheme failed for want of simple majority in the number of persons present and voting both in the meetings of creditors and members. Further, the scheme could not be approved with the requisite 3/4ths majority in value of the members and creditors. According to Mr. Ved Vyas, the list of creditors was never approved by the Division Bench or the Supreme Court of India.

Reliance has been placed by Mr. Ved Vyas on the judgments in Navjivan Mills Co. Ltd., In re : Kohinoor Mills Co. Ltd., In Re: Navjivan Mills Co. Ltd., Kalol, ; Nand Prasad v. Arjun Prasad [1959] 29 Comp Cas 552 (Pat) ; Auto Steering India P. Ltd., In Re: Auto Steering India P. Ltd., ; Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., In re [1980] 50 Comp Cas 623 (Mad) ; Union of India (UOI) and Another Vs. The Wearwell Cycle Co. (India) Ltd. and Another, and M.M. Sehgal Vs. Sehgal Papers Ltd. (In Liquidation), .

In Nand Prasad''s case [1959] 29 Comp Cas 552, the Division Bench of the Patna High Court, while considering the provisions as contained in Section 153(2) of the Indian Companies Act, 1913, which is identical with Section 391(2) of the Act, held (at page 562) :

"Therefore, these authorities firmly establish that one of the essential conditions to give jurisdiction to the court to accord its sanction to a scheme is that it should have been passed by a majority as required u/s 153(2) of the Companies Act, 1913, and that the proxies filed at the meeting were valid in law. In other words, unless the court is satisfied that the same has been approved by the statutory majority and in a manner provided by law, it is not open to the court to give any sanction to it.

That being so, in cases where, as here, a question is raised as to whether a scheme of reconstruction under consideration has been approved by the statutory majority or not, the court cannot refuse to consider the same if on facts already on the record it is clear that it has not been so done though the position may vary, and that for good reasons where such an objection is not available on the very face of the report without some further investigation into facts.

In those cases no doubt the question like that of prejudice, laches and unnecessary protraction of the proceedings may arise for consideration before an objection to the validity of the report is allowed to be raised for the first time in the course of the final hearing of the matter. If that is so then here the objection as to the absence of signature on the copy of the resolutions, which respondent No. 1 had produced in proof of his authority before the chairman of the meeting held on 9-11-1953, has to be held as rather belated ; for it is not denied that no such objection had ever been raised before Mr. G. C. Banerji nor was it ever mooted in any manner by the appellants before the learned company judge until the hearing of the report had already been taken up.

Therefore, on that technical ground alone this part of the argument has to fail, I further think that the right of a person to vote as the representative of a company under such circumstances depends essentially on the question whether he has been validly appointed or not and not upon evidence produced by him in support of that authority. And so far as the evidence is concerned, it is meant only to satisfy the chairman that he is the person duly authorised so that he may be in a position to admit the vote cast by such a representative, which is generally done by the simple production of the copy of the authorised resolution : Kelantan Coconut Estates Ltd., In re [1920] WN 274 ; 64 SJ 700.

Then on merits also I think there is no substance in this objection. It is quite understandable that in the meetings wherein those resolutions were passed, the chairman must have put the signature on the minutes not after each resolution but only once at the end of it, as is the common practice in matters like these. Perhaps it is for that reason that Section 83(2) of the Indian Companies Act, 1913, speaks of signature only in a case where the entire minute is involved and not in relation to a case where only a part of it is to be produced."

In M. M. Sehgal''s case [1986] 60 Comp Cas 510, S. P. Goyal J. of the . Punjab and Haryana High Court held (headnote) :

"A bare perusal of Section 391(2) of the Companies Act makes it clear that the approval of the proposed arrangement or compromise is a condition precedent before any application for its sanction can be moved. The position has been further made clear by Clause (4) of Rule 79 of the Companies (Court) Rules, 1959 . . . and, consequently, no petition could be presented . . . Further, even if it is found that the consent (to the scheme) has been withheld mala fide or arbitrarily, it would be wholly beyond the jurisdiction of the company judge either to sanction the scheme in spite of disapproval by the secured creditors or to issue a mandate to them to reconsider the scheme and accord their sanction."

In Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd.''s case [1980] 50 Comp Cas 623 (Mad), it has been held that the court should be satisfied that the resolutions are passed by the statutory majority in value and in number, in accordance with Section 391(2) of the Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The court should not usurp the right of the members or creditors to decide whether they approve the scheme or not. Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approve it at a meeting convened in accordance with the provisions of Section 391, the court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme. It was further held that the court should satisfy itself that those who take part in the meeting are fairly representative of the class and that the statutory majority does not coerce the minority in order to promote the adverse interests of those of the class whom they purport to represent.

It may be noticed that the scheme of arrangement, as propounded by Kelvinator of India Ltd., is also under consideration. This is also to be considered at the appropriate stage.

In his comments on the report of the chairman, the official liquidator has stated that, if the excess voting as allowed by the chairman is excluded and the voting is restricted to the amounts as shown in the list of creditors, the scheme was passed by an overwhelming majority of 93.93 per cent. At this stage, I am not considering the merits of the scheme of arrangement, u/s 391(2) of the Act, as contained in Company Petition No. 131 of 1988. But, it is, however, appropriate to mention that under the proposed scheme of arrangement, the applicants have agreed to pay 100 per cent, to the creditors along with interest. No doubt, the court, vide its order dated May 20, 1987, directed that the members, appearing in the list of members of the company and the creditors as given in the statement of affairs and as amended as per the orders would be the members and creditors entitled to vote. It was further directed that the lists of members and creditors be submitted by the official liquidator to the chairman. This was done by the official liquidator. The meetings were convened and held properly and in accordance with law.

Now, there is a good deal of controversy as to whether resolution No. 1 moved by the applicants to the scheme of arrangement as propounded by Mr. Seth was passed by the requisite majority of creditors and shareholders in accordance with law. Further, it is also to be decided whether the chairman was within his jurisdiction to allow the statutory creditors to vote for higher credits as per their claims submitted before the chairman.

In my view, these points require detailed study and these questions should be decided at the time of considering the confirmation of the scheme of arrangement in Company Petition No. 131 of 1988. The objection, as raised by Mr. Seth, with regard to non-disclosure of the financial position by the applicants, in my view, should be dealt with at the time of deciding the petition u/s 391(2) of the Act. The report of the chairman and the other objections shall also be considered at that time. It may be noticed that in Company Petition No. 131 of 1988, notice was directed to be issued to the Central Government and the official liquidator.

Under the facts and circumstances of the case, I allow the application, being Company Application No. 2439 of 1988. I direct that the notice be published in the same newspapers, namely, "The Hindustan Times" and "Navbharat Times" (Hindi), for July 18, 1990, to the effect that the scheme of arrangement in Company Petition No. 131 of 1988 shall be considered for confirmation.

C. A. No. 2439 of 1988 stands disposed of.