In Re: Maitrai Balkrishna Harivallabhdas and Others

N.V. Anjaria, J.—What is the province of inquiry by the court while considering an application u/s 391 of the Companies Act, 1956 (''the Act'') seeking to convene a meeting for proposed revival scheme of the company in liquidation, and whether it is permissible to scan through the circumstances leading to the proposal for revival, are the twin questions, which have fallen for consideration in the present appeal. The appeal is directed against order dated 20th June, 2011 of learned Company Judge in Company Application No. 313 of 2011 whereby the learned Judge has rejected the application of the appellant-original applicants for convening the meeting of shareholders for reviving Shri Amruta Mills Ltd., a company in liquidation.

The attendant facts are that Shri Amruta Mills Ltd. came to be wound up by order dated 22nd November, 1991 of this court in Company Petition No. 72 of 1991. The official liquidator attached to the High Court was appointed as liquidator under the provisions of Act. He thereafter caused a sale of movable properties and assets of the company by way of public auction, which realised approximately Rs. 4.13 crore. It is stated that what has now remained with the official liquidator are mainly the freehold and leasehold land admeasuring 1,22,742 sq. mtrs. whereon the unit of the company was situated, and also cash and bank balance with the official liquidator, as well as unrealised investments/dues of the company, if any. Because of the winding up of the company, about 3,200 employees became jobless. It is given out that most of the land of the company in liquidation is leasehold land.

One of the lessor-landlord in the meantime filed an application before this court seeking direction against the official liquidator to handover the land, which was dismissed by this court on 23rd October, 2008. Against that order, a SLP No. 29952 of 2008 before the Supreme Court is pending, wherein the hon''ble Supreme Court has passed an interim order dated 18th November, 2009 in group of petitions before it. The order of the hon''ble Supreme Court reads as under.

In the above special leave petitions, we are informed that some owners/petitioners herein are in the process of moving the company court to frame appropriate schemes u/s 391 of the Companies Act. Some of them are yet to move the company court. For those who are yet to move the company court, we are giving them two weeks'' time to do so.

Since the workers'' interest is being protected by the method, we are adjourning the entire group by a period of three months so that if some concrete arrangement is arrived at, then, we need not examine the merits of the pending special leave petitions.

The company court will decide the applications uninfluenced by the observations made in the impugned judgment. The pendency of these SLPs will not preclude the company court from framing the schemes.

It is not disputed by the learned counsels appearing for the parties in the present appeal that the aforesaid SLP is by a lessor, and no owner of the land of Shri Amrita Mills is an appellant before the Supreme Court in the said group of SLPs.

With above recap of certain facts in the background, the profile of appellants herein may be stated. Appellant No. 1 is an erstwhile director of the company in liquidation. He is also a shareholder representing more than 50 per cent equity share capital. He was part of former management of the company, and as a propounder, was instrumental in getting the company registered and incorporated. Shri Armuta Mills Ltd. - now in liquidation was situated at outside Saraspur Gate, Saraspur, Ahmedabad and engaged in manufacturing textile cloths. Appellant No. 1 claims to have the best experience in the textile business and further claims to be experienced in the working of the company. He is one of the co-sponsors of the scheme for revival. Appellant Nos. 2 to 4 are in their capacity as shareholders of the company.

Appellant No. 5, Dharnidhar Cotex (P.) Ltd. (''DPCL'') is a company engaged in the business of textile yarns and polyester, etc., claiming to be well versed in the field of textile business. It is stated that it is having sound financial background. It has projected itself to be the sponsor for the revival of Shri Amruta Mills.

Appellants'' case as set forth in the memo of appeal is that majority of creditors want to convene a meeting for revival of the Company. It is their case that they want to convene such meeting with a view to implement the directions of the hon''ble Supreme Court in true spirit. It is further their case that the proposed revival is to "protect the interest of huge labour force, generate fresh employment, apply the assets of the company to productive use", and for that purpose the present appellants - some of the erstwhile directors/shareholders of the company along with a co-sponsor, i.e., respondent No. 5-Dharnidhar Cotex have come together by way of presenting a scheme of revival of the company. According to the appellants, appellant No. 5 would infuse funds necessary for revival. It is claimed that upon revival of the company, not only the dues of the creditors of all classes would be paid but the dues of workers would be settled. In the revival Scheme, in addition to textile unit, formation of new information technology division and logistic division is also contemplated, by the appellants.

Learned senior counsel Mr. K.S. Nanavati, assisted by learned advocate Mr. Nandish Chudgar for Nanavati Associates, appeared for the appellant. Learned advocate Ms. Amee Yagnik appeared on behalf of the official liquidator, whereas learned advocate Mr. D.S. Vasavada was for the Textile Labour Association. The court heard the respective counsels at length.

Assailing the impugned order, learned senior counsel, submitted that learned company Judge has failed to appreciate that the prayer at this stage is only to convene a meeting of the members and shareholders to deliberate the proposed revival scheme. It was submitted that permission to convene a meeting and approval of the scheme of revival of the company are two distinct stages. He submitted that the majority of the shareholders having requested for convening a meeting u/s 391 of the Act, the permission deserves to be accorded as is normally accorded. According to learned senior counsel, it is overlooked by learned Judge that at this stage all classes of creditors should be allowed to deliberate and discuss the scheme of revival and that revival of a company in liquidation is a preferential object. It was submitted that if the company is ultimately revived, it would work to the benefit of not only creditors class in particular but also the workers/labourers and the textile industry in general. It was submitted that in the alternative of revival, sale of land and payment to workers of their dues would remain a dream. He submitted that the learned Company Judge exceeded the ambit of consideration and observed on the merits of the Scheme. That was neither the stage, nor the issue before learned Company Judge, it was submitted.

The learned senior counsel for the appellants in support of his submissions placed reliance on decision of the Apex Court in Rainbow Denim Ltd. Vs. Rama Petrochemicals Ltd., , and submitted that in that case the appellant had approached a learned company Judge of the High Court seeking permission to dispense with calling of meeting of shareholders and creditors for the purpose of approving a scheme of arrangement. The approach of the Company Judge who declined to make such order, but made observations affecting the viability of the proposed scheme was disapproved by the Supreme Court.

Learned senior counsel for the appellants next invited the court''s attention to Chembra Orchard Produce Ltd. and Others Vs. Regional Director of Company Affairs and Another, for the proposition that an application seeking direction to convene a meeting to consider a scheme of amalgamation (in that case) is required to be heard and decided ex parte and that there is a clear dichotomy between the threshold stage of issuance of directions to convene a meeting which is different from the subsequent stage. Decision of learned Company Judge of this court in Kotak Mahindra Bank Ltd. Vs. Balaram Cements Ltd., and in Essar Oil Ltd. v. State of Gujarat [2005] (0) GLHEL-HC 214313 were relied for reiterating the submission that at the stage of meeting, the objections in respect of proposed scheme are not required to be considered and the court would not go into the merits of the Scheme. A decision by learned Company Judge of this court in Gujarat Kamdar Sahakari Mandal and Others Vs. Ramkrishna Mills Ltd., was next relied on to submit that section 391 of the Act gives widest discretion to the court to approve any sort of arrangement and/or scheme and that ordinarily and practicably the court would lean towards reviving the industry rather than closing it down.

Learned senior counsel for the appellants then invited attention of the court to the various clauses of the proposed scheme of revival and submitted that in the scheme, the interest of all classes of creditors is taken care of, wherein the secured and statutory creditors would be paid their dues in 6 equal monthly installments. It was submitted that in the scheme of revival, a provision is made to offer an option for fresh employment to all permanent workman without any continuity of service, and further invited attention to the clauses in the scheme regarding manner of payment of workers'' dues as ascertained by liquidator of the company u/s 529A of the Act.

Learned advocate Ms. Yagnik for the official liquidator, while opposing the prayer, relied on the decision of the Apex Court in Meghal Homes Pvt. Ltd. Vs. Shree Niwas Girni K.K. Samiti and Others, , and another decision of Rajasthan High Court in Jaipur Spinning & Weaving Mills (in liquidation) [2010] 158 Comp Cas 550 (Raj.). She highlighted a factual aspect that in group of special leave petitions before the Supreme Court, SLP (C) No. 29952 of 2008 was in respect of the company in question Shri Amruta Mills and the said SLP was by the lessor only.

Learned advocate Mr. D.S. Vasavda, appearing for the Textile Labour Association, objected to the appellants'' case and the prayer. He submitted that it is not "the interest of workers'', but the appellants" own interests which is being promoted in the proposal of revival. He submitted that since the prices of land have shoot up in the recent past, the appellants have approached the court in the name of revival of the company. He submitted giving the figures that, at the time when the company was wound up, there were more than 3,200 workers, but today after passage of 23 years, more than 700 of those workers have expired and amongst the survivors, almost all have crossed 62 years which is the age of retirement in the textile industry. He submitted that hardly about 100 workers may have been left now, if at all and they too are above 50-55 years of age.

At this stage, it may be noted that during the course of hearing, the court called for the details of management and incorporation of appellant No. 5, namely, Dharnidhar Cotex (P.) Ltd. In the list of the directors produced by the appellants, one of the directors is appellant No. 1, and as per learned senior counsel for the appellant, the date of incorporation of appellant No. 5 - company was not available, he fairly submitted that its existence is only recently.

The order dated 4th August, 2011 passed by this court in the present proceedings, which is extracted herein, deserves attention:

Mr. Choksi for Nanavati Associates, learned counsel for the appellants, states that the appellants are unable to deposit the amount of Rs. 60 crore with this court so as to show the genuineness of the offer made for financial viability to pay up all the debts, which is stated to be approximately the debts of the company, including the workers'' claim and he further states that time is required to address on merits of the matter. Hence, so to 9th August, 2011.

Another relevant factual aspect requiring mention is that the land which is subject-matter of present appeal and in respect of which official liquidator submitted its report before learned company Judge, does not include the leasehold land and the present subject-matter is separate also from the subject-matter of SLP No. 29952 of 2008 pending before the Supreme Court, which is by the legal heirs of original lessor No. 1, Dilipbhai Dashrathbhai Patel. Accordingly, the proceedings pending before the Supreme Court has no bearing on the present proceedings.

From the scheme of revival produced on record, it could be gathered that the dues of secured creditors include Rs. 1,06,61,264 due to IFCI Ltd., Rs. 2,10,42,026 is the amount due to IDBI Bank Ltd., Rs. 1,01,88,418 is the debt due to Standard Chartered bank, Rs. 73,27,774 is the amount due to Industrial Investment Bank of India Ltd., whereas Rs. 6,99,07,946 is due to Punjab National Bank Ltd. In addition total dues payable to the statutory creditors are Rs. 30,30,61,749.19ps. The dues of the workers are yet to be quantified. As against all these appellant No. 5, DPCL proposes to bring Rs. 36 crore/60 crore for revival. These facts are set out not as a part of process of evaluation of revival scheme but as a necessary detail, which cannot be lost sight of while considering the question of "convening the meeting" as an initial step.

Over and above order dated 4th August, 2011 reproduced in paragraph No. 5.1 above, it is further pertinent to note that by order dated 5th September, 2011 this court desired a feasibility report giving the details as to how the appellants proposes to revive and restart the company in liquidation. A feasibility report on the revival got prepared by the appellants has been placed with further affidavit dated 29th September, 2011, which hardly shows anything material.

On an enquiry being made by the court as to whether there is any other instance where after a gap of so many years, the revival proposal and for that matter holding of meeting has been approved by the court, learned senior advocate for the appellants relied on the case in Company Petition No. 44 of 2011. In that case, the subject-matter for consideration of the court was about granting sanction to the modified scheme of arrangement and compromise of the company which was wound up in 1983. It was submitted that the sanction for the scheme of arrangement and compromise was sought after 22 years of liquidation of the company and the same is pending for approval. From the facts of that case placed before this court by learned senior counsel for the appellants, it is noticed and which is not disputed that in that case the amount payable towards the dues of workers has been specifically earmarked and the association of workers, namely, the Textile Labour Association filed affidavit guaranteed the scheme for arrangement and compromise. Having taken notice of the facts of that matter it is found that they do not conform to the facts involved in this case.

In the conspectus of above facts and considering the submissions by the respective parties, what emerges, is that it is after a span of 20 years that the appellants have proposed a revival scheme. Shri Amruta Mills went in liquidation in November 1991. Thereupon, its movable assets were sold. At that time nobody including the present appellant Nos. 1 to 4, raised any objection. It further appears that the sale of immovable properties was finalised after negotiations amongst the representatives of the lead secured creditor IFCI Bank, the official liquidator and other members and valuation report was called for. The move on part of the appellants to call the meeting projecting a revival scheme is being smacked by the opposing parties to be the attempt to thwart the process of sale of land.

As is rightly emphasised by learned company Judge that there is a yawning gap of more than two decades after which the revival proposal is mooted. It is further observed that the revival move is by very those persons who were responsible for plunging the company into the poor state of affairs. The court is afraid, under the garb of revival proposal, the appellants are trying to sub-serve their own interests tempted by the times when in the recent past the real estate prices have boomed and skyrocketed. Learned company Judge is eminently justified in observing as under.

6.1....[T]he scheme of revival appears to be an attempt on part of ex-directors and shareholders, who are responsible for sorry state of affairs of the company in liquidation, with a sole eye on growing realty market in the city of Ahmedabad has come forward by invoking of provisions of section 391 of the Companies Act, 1956 and this court is of the view that no purpose will serve by permitting the applicants to convene the meeting at this stage belated stage and on the contrary it would result in thwarting the process of selling the assets of the company which has reached to the penultimate stage.

The claim that the revival proposal would bring welfare to the worker and that their dues would be paid-up, looks like a mirage. From the figures given by learned advocate Mr. Vasavda, it is clear that the majority of the workers have crossed the age of retirement and are now senior citizens. There is no question of re-employment to them. Only about of 100 workers who too are in the age group of 50-55 years are supposed to have been left out, out of those 3,200 rendered jobless at the time of winding up who might be opting for employment again. All the workers have unbearably waited for payment of their dues.

In paragraph No. 6 of the impugned judgment, learned company Judge has noted with reference to the valuer''s report dated 19th September, 2010 and 24th December, 2010 placed on record by the official liquidator which reveal that the value of the land is approx. Rs. 92 crore. He has, therefore, observed that the upset price of Rs. 100 crore would be appropriate on the basis of which the public advertisement can be issued for sale of land which would substantially help in discharging the liabilities and in paying up the dues of the workers waiting for the last two decades. In other words the very reason of upcoming real estate prices is a consideration why the sale of land should be effected so as to fetch maximum price and thereby to unburden the liabilities of the company in liquidation.

Having regard to the above circumstances, the bona fides in moving a revival proposal are too far to seek. Without going into the merits of the revival scheme, on primary considerations it fails to inspire confidence and desirability of it. Even at the stage of considering application u/s 391 for convening of meeting the court is not prevented from taking a prima facie overview of the worthiness of the scheme and accordingly, answer the question regarding acceptability of a request to convene a meeting. Given the context of such rationale, learned company Judge appropriately observed that it is to be borne in mind that parameters laid down in the case of Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., and reiterated by the Apex Court in Sesa Industries Ltd. Vs. Krishna H. Bajaj and Others, prima facie need to be kept in view even while considering the application for convening a meeting of shareholders and other stakeholders for revival of the company in liquidation after 20 years.

Though the court would not go deep into the merits of revival scheme, at the same time, it cannot keep itself away from assessing the bona fides and credentials of the sponsors and their scheme on the basis of, and by gathering primary facts. There would be a broad consideration without commenting upon the merits of the scheme. The decision in Rainbow (supra) relied on by learned senior counsel has laid down a correct principle that the appropriate time for a company Judge to consider the scheme is subsequent to approval thereof by the shareholders and creditors of the company. This court cannot and has not gone into the merits and viability of the scheme proposed by the appellants herein as such. Nor learned company Judge has delved into the merits of the scheme in the impugned order, but has taken into account overall genuineness, fairness and reasonableness of the scheme, which was a permissible exercise.

In Jaipur Spinning & Weaving Mills Ltd. (supra) applicant had proposed to repay the dues after 25 years of winding up, but not under scheme of revival. , It was observed by the court after considering the facts,

The applicant had not shown its resourcefulness to make such payment. The present application filed 25 years after the company was ordered to be wound up was only with an intention to block the sale of the land of the company in liquidation. The sale of the land was necessary to satisfy the claims of workers and others along with interest, which was yet to be paid. The applicant had not satisfied the requirement for stay the winding up proceedings.

The Apex Court in Meghal Homes (P.) Ltd. (supra) considered the provisions of sections 390, 391 and 433 of the Act and observed that they were required to be read as a whole. It then held,

Sections 391 to 394A of the Companies Act, 1956, must be read not in isolation but with reference to the other relevant provisions of the Act. There is 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. There is no incongruity in looking into the 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. There is no conflict in applying both the provisions and in harmoniously construing them and in finding that while the court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality.

In Gujarat Kamdhar Sahakari Mandali (supra), relied on by learned counsel for the appellants, the criteria applied was the interest of workers and the court was inclined to consider the revival proposal which was at the instance of workers themselves. It was observed by the court that the company in that case would be revived and thereby the workers participation in the management would be ensured.

The observations in Gujarat Kamdar Sahkari Mandali (supra) that "In fact balancing of views and adverse interests is the function which the court shall have to perform". Is the real test to be applied. It may be true that while considering the application u/s 391 of the Act for permission to convene a meeting, the court would normally be inclined to grant the prayer in ordinary and normal circumstances. However, the exercise for granting such permission is not mechanical. The wide discretion which the court possesses has to be exercised by taking into account the equally wide spectrum of relevant facts. Amongst the relevant factors, the workers'' interest is paramount and the creditors'' interests rank high.

The task of the court is to judge whether the request u/s 391 of the Act is attended by bona fide circumstances and legitimate considerations and there is a real commitment visible in it to revive the company. It is true as observed in Gujarat Kamdhar Sahakari Mandali (supra) that the scheme is not be examined in the way of harping critic, hair splitting expert, a meticulous accountant and a fastidious counsel would do. Those were the observations in the context of giving approval to the scheme u/s 391 of the Act. At the same time, when the court considers an application u/s 391 of the Act for holding a meeting for revival scheme, its function has to be that of an objective assessor, an independent observer, a wise counsel and a judicious judge.

In that process, it is required to be considered whether the request for calling meeting is attended by bona fide reasons and legitimate considerations, and that a genuine commitment to revive the company is visible therein. The aspects of commercial morality and an honesty of purpose in reviving the company are not foreign considerations. It is not the interest of one class but all classes of creditors, workers and other interested segments which would have to be weighed. The court has to sift the factors which by their very nature have bearing on the genuineness of the request for calling a meeting on the ground of proposing revival of the company.

Summarising the conclusions, firstly the revival proposal is after a gap of 20 years, intervened by sale of the movable properties and assets of the company in liquidation without anybody objecting to it. The valuation of the immovable properties was undertaken and the valuer''s report came to be produced on record by the official liquidator. In the next, the mooting of proposal to revive now unmistakably suggests that it is prompted by high prices of real estate market. Thirdly, the accrual of benefit of the proposed revival to the class of workers and their welfare is only a mirage. On the contrary, the payment of dues to the workers in waiting is a course required to be imminently pursued. Fourthly, the creditworthiness of appellant No. 5 sponsor is not established and the source of raising of fund is not coming out. Fifthly, a bird''s eye view of the scheme even without going in-depth into it, is not convincing about reasonableness and fairness of it. For the foregoing reasons and discussion, the impugned order of learned company Judge warrants no interference. Accordingly, this appeal is dismissed.