In Re: Auto Steering India P. Ltd.

D.K. Kapur, J.—This is a petition u/s 391(2) of the Companies Act, 1956, moved on behalf of M/s. Auto Steering India (P.) Ltd., claiming that a certain scheme of arrangement with creditors had been passed by a majority of the unsecured creditors amounting to over 3/4ths of those, present and voting. It is claimed in the application that 84 per cent. in value of the unsecured creditors present had voted in favor of the scheme. This claim is based on the working out of the record of the meeting as maintained by the chairman of the meeting. On the other hand, an analysis of the statement given by the chairman appointed by the court, would show that about 69 per cent. in value of those present had voted in favor of the scheme. This result is based on the statement annexed to the report filed in C.A. No. 7 of 1974. The chairman was required to give a report stating the values of the various persons who voted and the way they had voted. On adding the figures for the persons who voted for the scheme and those who voted against it turns out that the creditors voting for the scheme were of a value of about Rs. 7,95,000 and those voting against the scheme were of a value of about Rs. 2,95,000. However, the petitioner claims that some of the proxies of the persons voting at the meeting were defective and, Therefore, the court should re-determine the voting result by first determining the validity of the proxies. There are many difficulties in this case, preventing such a procedure being adopted and it is also unnecessary, as there are manifest objections to the adoption of the scheme by the court. And, many creditors have filed objections to the sanction of the scheme. This matter can be dealt with very shortly, without going into the objections in any detail. Firstly, the application u/s 391(1) of the Act which resulted in the holding of creditors'' meeting, shows a large number of defects which are, in my view, entirely due to the faults of the propounder of the scheme. Instead of giving the actual creditors and giving them notices, different lists of creditors of the company were filed at different times. When the application C.A. No. 7 of 1974 was filed it was accompanied by annexures "E", "F", "G" and "H", which showed the various unsecured and secured creditors of the company. The value shown in annexure "E" showed that the trading debts were Rs. 1,51,302.48. In annexure "F" were shown the deposits of funds amounting to Rs. 70,984.54, and the deposits from other parties amounting to Rs. 1,09,774.34. The secured creditors were shown in annexure "G" to be Rs. 4,77,305.01. The tax dues were shown to be Rs. 1,74,968.86 in annexure "H". Later on, during the proceedings it turned out that all these lists were wrong. Therefore, another list of creditors was filed which was annexure "A" showing the allegedly correct amounts due to the various creditors These amounts also did not include interest up to 7th January, 1974. The amended list showed the secured creditors to be Rs. 4,93,779.71, the trade debts to be Rs. 3,61,411.18 and the deposits as Rs. 1,24,774.34. The list does not show that any amounts were dae to any Government departments on account of tax liability or on account of other liabilities, and is clearly wrong. It was ordered by the court on 8th February, 1974, that this list would be taken to be the correct list of the creditors, and notices were ordered to be given to every one of the unsecured creditors in the list under " certificate of posting " by the chairman appointed by the court. Similarly, notices were to be given to the secured creditors. Later on, when the matter came before the chairman there was great difficulty in working out both the proxies as well as the quantum of the creditors. As it happened, a number of creditors who were not mentioned in the list, appeared to take part in voting and the court was compelled to give further directions to remove the defects as far as possible. Firstly, by an order dated 3rd April, 1974, the proxy form was altered by the court, then, secondly, certain creditors who had approached the chairman to say that notices had been sent to the wrong addresses by the company were dealt with and the chairman was permitted to serve those creditors at the correct addresses. Thirdly, certain directions were given regarding disputed creditors and it was then mentioned to the court that the disputed creditors had not been mentioned in the list, annexure "A", The chairman was told to get the names of such persons from the company. Further, the following observations were made:

" It is obviously in the interest of the company as it may prevent any later disputes about the validity of the meetings. In its own interest, the company should try to get disputed creditors also served with the notice."

Unfortunately, the company adopted the attitude that it should not take steps to serve the allegedly disputed creditors and if excluded the entire set of Government creditors, and accordingly the entire set of creditors were not served with notices. Thus, the meetings were held by the chairman of the company, Mr. Jindra Lal, senior advocate, with the greatest difficulty. At the meeting, the secured creditors who met separately, rejected the scheme by an overwhelming majority. However, the unsecured creditors who were present voted in the manner set out earlier. It is very apparent that it is difficult to determine what is the correct value of the persons who supported the scheme and what is the correct value of the persons who have opposed the scheme. It is sufficient to say here that there is a serious contest on this question. The difficulty could have been resolved by an analysis of the proxies and the values of the creditors if it was at all necessary, but I find it is unnecessary in this case The reason for saying so is that the meetings seem to have been vitiated from the very beginning by a failure to give a complete list of creditors. This is one short reason for saying that the scheme cannot be taken to have been passed by the unsecured creditors.

On the other hand, there is little doubt that the scheme was rejected by an overwhelming majority of the secured creditors. There was only one scheme put forward before the court. That scheme covered both the secured and the unsecured creditors. It was directed to be put before both secured and unsecured creditors by the order of the court but at separate meetings. As the scheme was rejected by the secured creditors, obviously, the scheme ceases to have any effect at all. However, it is contended by the learned counsel for the propounder of the scheme that the scheme has become binding on the unsecured creditors although it was rejected by the secured creditors. He submits that this proposition is supported by a judgment of the Gujarat High Court reported as In re Maneckchowk and Ahmedabad Manufacturing Co. Ltd, [1970] 40 Comp Case 819 (Guj). In that case, there was a scheme of a composite and complicated nature which covered shareholders as well as creditors. The scheme was passed at separate meetings of the creditors and the shareholders. There was a provision in the scheme for a change in the rights of certain shareholders ; but it is unnecessary to set out any details. It was urged at the time of the arguments in opposition to the sanctioning of the scheme, that the scheme had not been passed by every class of creditor, the argument being that there were classes within the class of creditors who should have voted separately. The court held that it was not possible to hold separate meetings of the unsecured creditors consisting of various classes of unsecured creditors and then hold a composite meeting of all the unsecured creditors. As the scheme had been passed at each meeting the scheme was upheld by the court and sanctioned. This case does not seem to have any bearing on the present matter. We are dealing with the case in which there was only one scheme before the court and that scheme was to apply to secured creditors as well as unsecured creditors. If the secured creditors have rejected the scheme, it obviously cannot bind them. I do not see how the scheme can bind the unsecured creditors, even if they are assumed to have voted for it. The scheme is one scheme covering all classes of creditors and obviously it has to be passed by all classes of creditors if it is to be binding. If the scheme was relating only to unsecured creditors then its rejection by the secured creditors would not make any difference. It would still be binding on the unsecured creditors. The provisions of Section 391(2) are quite clear. A scheme must either be binding on all the creditors or it may be binding on some of the creditors. The provision is very harsh to the extent that if a majority of creditors passes a scheme consisting of 3/4ths majority, it also binds the minority. When separate meetings were called for one composite scheme covering both the secured and unsecured creditors it became absolutely necessary that both meetings should pass the scheme by a 3/4ths majority. To refer again to Maneckchowk''s case [1970] 40 Comp Case 819 (Guj) , referred to by the learned counsel for the propounder of the scheme, if that scheme had been rejected either by the shareholders or by the creditors it would certainly have been rejected by the court and could not have been sanctioned. A composite scheme of the type mentioned in In Re: Maneckchowk and Ahmedabad Manufacturing Co. Ltd., had necessarily to be passed by both the creditors as well as the shareholders. Similarly, the present scheme had to be passed by both the secured as well as the unsecured creditors. Although provisions like Section 391 have existed in the Indian Companies Act and the English Companies Act for many years I have not come across any single case in which a composite scheme has been passed by one set of persons affected by it and rejected by the other set and yet been sanctioned by the court. I am, Therefore, of the view that without the scheme being passed by the secured creditors the scheme cannot even be considered for sanctioning by the court.

Furthermore, in the present case, after the scheme had been rejected by the secured creditors, the company propounded another scheme of a different sort for the secured creditors which is the subject-matter of another petition before the court. The scheme differs very substantially from the present scheme. That scheme was passed subsequently by the secured creditors and is the subject-matter of another petition. In ray view, the scheme which was put before the secured creditors at a later date substantially altered the foundations on which the present scheme was based. The reason for that is that the later scheme envisages the sale of half the factory and half the building and half the land belonging to the company and also a disposal of many other assets. These sales are supposed to be for the purpose of paying off the equitable mortgage, and the claims of the other secured creditors of the company. The present scheme does not visualise any such sales and is, Therefore, inconsistent with the later scheme. Clearly, the later scheme should also have been presented to the unsecured creditors.

There is also another reason why the present scheme cannot stand if it is rejected by the secured creditors. The reason for this is that the fundamental basis on which the present scheme is to operate is that a plastic Injection Moulding Machine, belonging to the National Small Scale Industries, will be made available for making automobile steering wheels.

The National Small Scale Industries is the owner of that machine and it was given to the company under a hire purchase agreement. Unfortunately, the company could not pay the hire purchase Installments and, hence, the hire purchase agreement was terminated. The assumption on which the present scheme is based is that the National Small Scale Industries would be willing to let the petitioner-company use this machine for the purpose of the scheme. If the secured creditors have not approved the scheme, it clearly means that the machine is not available, and, Therefore, the whole basis and foundation of the scheme falls to the ground. Obviously, such a scheme cannot be upheld by the court.

In the circumstances detailed above, it would not be necessary to go into many details regarding the present scheme, nor into the question whether the court finds it reasonable or convenient or in the interest of the creditors, or even whether it finds the scheme feasible. Those considerations could only arise if the scheme had been adopted by the creditors, and, particularly, the National Small Scale Industries. As I find that the scheme had not been adopted I do not express my view on the feasibility or reasonableness of the scheme. I would have observed that even if the scheme had been carried, I would certainly be inclined to put several restrictions and safeguards as to the manner in which the scheme was to be carried out, for the protection of the rights of the creditors. Every effort has been made in this case to try to save the company and to make the scheme something which might lead to the working of the compay. Unfortunately, the management does not seem to have faced the matter in the same perspective ; and the scheme seems merely to have been moved to delay the winding-up proceedings.

Turning now to the main reason why the scheme had got to be rejected, it is necessary to refer to the proviso to Section 391(2). It is stated there as follows:

" Provided that no order sanctioning any compromise or arrangement shall be made by the court unless the court is satisfied that the company or any other person by whom an application has been made under Sub-section (1) has disclosed to the court, by affidavit or otherwise, all material facts relating to the company such as the latest financial position of the company, the latest auditor''s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like. "

The fundamental requirement is that all the necessary facts should be before the court. Those facts include the latest financial position of the company. The court has made several directions during these proceedings for the purpose of trying to get the fulfillment of this requirement. The last order passed in this behalf was on 6th May, 1975, when the audited balance-sheet of the company was asked for. Unfortunately, the audited balance-sheet has been filed up to the year ending June, 1970. This is not sufficient. The section shows that the court cannot give sanction unless the latest financial position of the company and all other material facts have been disclosed to the court. This is all the more necessary in the case of a company of this type, where there are a vast number of creditors, whose outstandings are not revealed in the accounts. In order to enable the court to determine, firstly, whether a majority of the creditors has passed the scheme in the manner provided by Section 391(2), it is necessary to find out who are the creditors and also the amounts due to them. It is only after the various formalities have been completed and all the creditors have been given notices of the meeting, can it be determined whether 3/4ths of them have supported the scheme and, thereafter, the court can consider whether the scheme should be sanctioned. It must be kept in view that the effect of the sanction is to enable the company to avoid its immediate liability, by propounding a scheme for making payments to the creditors, which has to meet the approval of the creditors. The. purpose of such scheme is to enable the creditors to make up their minds whether it is better to wind up the company, or to get their payments by way of the proposed scheme or arrangement. If the company does not disclose full and complete details of the creditors and chooses not to give notices to the creditors, then the creditors cannot exercise the right to vote which is safeguarded to them by Sub-section (2) of Section 391, and, consequently, the court is unable to find out whether a 3/4ths majority has passed the scheme. It is regrettable that this situation was not appreciated at an earlier stage, though it was indicated in the order and directions of the court concerning the scheme that every conceivable creditor should be given notice. Furthermore, without the financial particulars the court cannot judge the reasonableness or feasibility of the scheme, and has no material to sanction it. In the circumstances stated above, I hold that (a) the scheme had not been passed by a 3/4ths majority of the value of the creditors present and it is in fact not possible to hold that it was so passed because a large percentage of the creditors have not been given any notice of the meeting, (b) in any case, the scheme had been rejected by the secured creditors and, Therefore, has to be deemed to be rejected by the creditors generally, (c) on account of the failure to comply with the proviso to Sub-section (2) of Section 391, the scheme cannot be sanctioned because the material particulars have not been filed, nor have other necessary details of the working of the company been disclosed to the court. The petition is accordingly rejected. The stay orders passed in these proceedings are all discharged.