K.R. Balasubramanyan vs Bellary Spinning and Weaving Co. Ltd. and another

Kedambady Jagannatha Shetty, J.—This company application is filed by one of the shareholders of the respondent-company, u/s 391 of the Companies Act, 1956, which was directed to be liquidated by the order of this court dated October 19, 1987/November 6, 1987, in Company Petition No. 34 of 1986.

The brief facts are :

The respondent company was wound up under the provisions of section 433(e) and (f) of the Companies Act, 1956 (hereinafter referred to as "the Act"), since the company was unable to pay the debts to the creditors. This court has observed that the respondent-company has failed to discharge the liability which exceeds Rs. 2.5 crores, exclusive of interest and is unable to pay the debts within the meaning of section 433(e) of the Act. The respondent-company has preferred an appeal against the said order in O.S.A. No. 12 of 1987 (see Assistant Executive Engineer (Electrical), Karnataka Electricity Board Vs. Reyhan Minerals and Chemicals (Pvt.) Ltd., which came to be dismissed.

During the pendency of the appeal, this company application was filed by a shareholder and also the managing director of the said company. The prayer in the application is that the scheme of arrangement/compromise u/s 391 of the Act, which is sponsored by the applicant is highly beneficial to the interest of creditors at large and that the scheme be put to vote to all class of creditors and necessary summons for direction to be given as to the issue and publication of notices and convening of meetings of both classes of creditors, viz., secured and unsecured. The prayer in the application reads as follows :

"(1) Direct Meetings to be called of the unsecured creditors, equity shareholders of the company, the Bellary Spinning and Weaving Company Limited, for the purpose of considering and, if thought fit, approving, with or without modification, a scheme of arrangement proposed to be made between the company and the said creditors and members of the said company;

(2) Pass an order giving directions as to the method of convening, holding and conducting the said meetings and as to the notices and advertisements to be issued;

(3) Pass an order appointing chairman of the said meetings who shall report the result thereof to the court;

(4) Pass such other orders as the hon''ble court deems fit in the circumstances of the case."

The only secured creditor is the Syndicate Bank, which has filed the objection opposing the prayer made in the application referred to above.

In the affidavit filed by the applicant in support of the direction to call for the meeting of shareholders and unsecured creditors, it was stated that the propounder approached the financial institution, viz., the Indian Bank, Bellary, and submitted a letter dated May 7, 1990, to the said bank. The Indian Bank has stated that the revival scheme has been forwarded to the Regional Officer at Hubli, for their comments. Further, he has averred that one letter dated April 4, 1991, was sent to the chairman and the managing director and the Indian Bank is likely to accept the proposal for rehabilitation. The only objection raised by the bank is the pendency of the appeal and that the Indian Bank wants an order at the hands of the court for revival. It is further averred that as per the scheme, the Syndicate Bank would be paid Rs. 1.50 crores in full and final settlement of its dues within three months from the date of approval of the scheme. Further, it was stated that all other statutory dues would be cleared in terms of the norms as applicable to units under the Board for Industrial and Financial Reconstruction. So far as the labour and staff are concerned, it is mentioned in detail, the proposals as per Schedule C. The outstandings to the K.E.B. would also be settled in terms of Schedule D, and the sundry creditors'' dues would be paid in terms of Schedule E. That apart, the compensation payable to the shareholders is also mentioned as per Schedule F. Further, it has been stated, that since the official liquidator has expressed his inability in terms of the endorsement, dated April 3, 1990, as such, they are not able to produce the financial structure as required u/s 391 of the Act along with the application. Therefore, the applicant has sought a direction from the court.

Respondent No. 2, Syndicate Bank, has, in its objection statement, inter alia, contended that the scheme has been propounded merely to delay the winding-up proceedings. A sum of Rs. 3,09,53,456.30 was due from the company in liquidation as on June 19, 1986, and the present liability of the company to the respondent-bank is more than Rs. 5 crores. The respondent-company is required to pay substantial amounts to private creditors towards certain statutory dues like KST, CST, provident fund, employees'' State insurance, Income Tax, etc. The dues of labour and staff also comes to a substantial amount. It is also due to KEB and other persons in huge amounts. The assets of the company in liquidation are not sufficient to meet its liabilities and the company is commercially insolvent. It is further averred that by order dated October 19, 1987/November 6, 1987, the company judge passed an order directing compulsory winding up of the company in liquidation against which an appeal in O.S.A. No. 12 of 1987 was preferred by the company represented by its managing director, the propounder of the present scheme. In the said appeal, this court afforded several opportunities to the management to run the industry with a further direction to deposit a certain amounts. However, the management, represented by the presented by the present propounder, miserably failed to keep up its promise and also failed to deposit the amount in spite of several extensions granted by this court. It is further stated, that during the period when the management of the company in liquidation was in possession of the mill, it attempted to remove the machinery and dispose of it. The appeal ultimately came to be dismissed on March 1, 1991. It is stated further that the proposed scheme is neither bona fide nor reasonable and is liable to be rejected without any further consideration. The present scheme is nothing but a continuation of the earlier attempt by the propounder, who has no regard for the promises he makes. The respondent-bank is the biggest creditor of the company in liquidation. The dues of the company to this respondent far exceed Rs. 5 crores. Under the present scheme, a payment of Rs. 1.5 crores in full and final settlement is proposed by the propounder. This figure works out to less than one-third of the dues and the respondent-bank is not agreeable to the said scheme. In addition to this, the scheme dictates terms to the statutory authorities and to the labour and staff as also to KEB, etc., to forgo interest, penalty, etc., and requires the authorities to grant instalments, which, on the face of it, will be rejected by the said authorities. Virtually, the propounder intends to make a one-man show. The company became sick and could not be revived in spite of sufficient opportunities, by the propounder of the scheme and his team. It is further averred that the respondent has already spent huge amounts towards liquidation expenses, litigation and security charges, to preserve the assets. The very purpose of the scheme appears to be to drag on the proceedings without any result and ultimately saddle this respondent with further liability to pay security charges. This intention is very clear from the application filed u/s 391 of the Act. While requesting for meetings of the unsecured creditors and equity shareholders, the propounder of the scheme has not requested this court for a meeting of the secured creditors. The respondent-bank is a secured creditor and also a major creditor, and the respondent-bank is not agreeable to the present scheme which is highly unreasonable. As such, the scheme is liable to be rejected without calling for any meeting of the unsecured creditors or the members. Calling for the meeting will be nothing but a waste and will unnecessarily consume time and drag on the liquidation proceedings. If a meeting is called pursuant to the request of the propounder, the same will further delay the proceedings and this respondent and other creditors will suffer. The respondent-bank has stated that the scheme is liable to be rejected even without calling for the meetings.

During the course of hearing, counsel Mr. Radhesh Prabhu for the respondent-bank informed the court that appeal O.S.A. No. 12 of 1987 preferred by the respondent-company was dismissed on March 1, 1991.

The question is whether the request for convening a meeting to consider a scheme for the reconstruction of company should be allowed or is the court bound to convene the meeting contemplated u/s 391, and objections, if any, can and should be considered at the meeting and later at the time of sanctioning of the scheme by the court.

Rule 67 of the Companies (Court) Rules, 1959, no doubt, says that an application u/s 391 for directions is to be made ex parte. But hearing of a motion ex parte does not mean that the court has not applied its mind or was not prima facie satisfied about the merits of the application. On a proper analysis of the provision of section 391(1), it is absolutely clear about the discretion resting with the court in granting application. It is a well-laid principle of law that the court will not and shall not pass an order unless it is satisfied that it is a fit case to do so. Equally, rule 69 further makes it clear and points out that directions are to be given "unless he (the judge) thinks fit for any reason to dismiss the summons (for directions)". Therefore, on the basis of the Act and Rules made thereunder, it is not compulsory for the court to give directions to convene a meeting contemplated u/s 391(1) of the Act.

In the decision of the Madras High Court in N. A. P. Alagiri Raja and Co. v. N. Guruswamy [1989] 65 Comp Cas 758 it is opined as follows (at page 768) :

"The court is not intended to act as a post office with no discretion or power to refuse to call for a meeting. In our opinion, even when considering an application u/s 391(1), the court will have to be satisfied as to the prima facie case that the compromise or arrangement is genuine, bona fide and would be in the interest of the creditors and the company."

The contention of Mr. Ashwatha Reddy, counsel for the applicant, that the court is bound to issue a direction to convene the meeting when an application is made u/s 391(1), and the objection, if any, either by the creditor or any other person interested will have to be considered in convening the meeting or later of sanction the scheme by the court, is plainly unsustainable and is devoid of merit, and as such, it is rejected.

Let me consider the rival contentions of the parties.

Before issuing a direction to convene a meeting as requested by the applicant propounder, the court will have to examine and see whether the scheme is bona fide, genuine, or feasible and in the interest of the creditors of the company.

The respondent-bank says that the proposed scheme is neither bona fide nor reasonable as well as not feasible and is liable to be rejected. It further says, that it is filed with a view to prolong and stall the liquidation proceedings. With regard to the scheme, the respondent-bank has pleaded that though more than Rs. 3.5 crores was due as on June 19, 1986, and the present liability of the company is more than Rs. 5 crores, the scheme has taken into account only Rs. 1.5 crores as full and final settlement of all dues. Further, it is pleaded, that the scheme does not give any details about the manner in which the funds are sought to be mobilised, but merely mentions the schedule of payment. The respondent further reiterates and states that it has considered the scheme of arrangement and is of the view that the scheme is not beneficial to the bank. The respondent-bank, the major secured creditor says the scheme is not agreeable to them. If the meeting is called, the respondent-bank, being the major secured creditor and when the scheme is not accepted by them, then calling of any meeting either of the unsecured or secured creditors will be nothing but a waste and unnecessarily consume time and drag on the liquidation proceedings. Thus, it is submitted by the respondent-bank that it would be an exercise in futility to direct the convening of the meeting.

On the merits, I am unable to accept that the applicant-propounder has made out a case for calling a meeting as required u/s 391(1) of the Act. In the scheme, it is stated that the respondent-bank is the only highest secured creditor and they proposed to pay in one lump sum payment of Rs. 1.5 crores as full and final settlement. The statutory dues would be about Rs. 25 lakhs and they would be paid within four years including one-year holiday for repayment. The labour and staff dues are about Rs. 10 lakhs and those would be paid over the period of four years from March 31, 1992, to March 31, 1996. The KEB dues are about Rs. 5 lakhs after forgoing penal interest and those would be paid over a period of two years. The other sundry creditors whose dues are about Rs. 10 lakhs would be paid in full by March 31, 1993. The compensation to shareholders is about Rs. 64.5 lakhs which the propounder proposes to offer Rs. 10 to each of the preference and equity shares of Rs. 100 at Rs. 50 as compensation. Finally, it is stated in the scheme that the propounder proposed to discharge all the liabilities stated in the scheme. According to the statement made in the scheme, the total amount due to various creditors and other claimants roughly comes to Rs. 2.5 crores.

It may be seen from the clauses A, B, C, D in the scheme proposed that all the creditors will be paid their amounts in full. However, it is not stated, how the amount could be paid to all the creditors. In the affidavit filed in support of the application, he has stated that he had submitted a letter dated May 7, 1990, to the Indian Bank, Bellary, for providing financial assistance for the revival of the company and he at the request of the Indian Bank forwarded the scheme and he is hopeful that the Indian Bank is likely to accept the proposal, but the only objection of the Indian Bank is that it wants an order at the hands of the court. It is relevant to refer here that the application for revival of the company was filed on February 27, 1991. The matter came up for hearing of the application for several times. The court asked the applicant whether he was able to mobilise the funds, or able to get any financial assistance from the Indian Bank or any other bank for the payment of the amount due to the various creditors. The applicant has expressed that so far he could not get financial assistance either from the Indian Bank or from any other financial institutions.

I may mention here that after the winding up order was passed by this court, the respondent-company represented by the applicant propounder preferred an appeal in O.S.A. No. 12 of 1987 and obtained an order of stay. The respondent-bank filed an application for vacating the order of stay, but it was allowed to continue up to January 9, 1989, subject to the appellant therein running the mill for three months initially and the appellant paying the amount of Rs. 10 lakhs to the respondent-bank before January 6, 1989. Since the said amount was not paid and the appellant (applicant-propounder) did not run the mill, the appellate court vacated the order of stay. The appellate court has observed, while rejecting I.A. III for extension of stay, that "the conduct of the appellant has left an impression in our mind that it has no intention to make any payment. We have granted sufficient indulgence to the appellant to make some payment to the bank, but the appellant has failed to do so". I may also mention here that the appeal also came to be dismissed by the appellate court on March 1, 1991. In the said order it is observed that "we have pointed out earlier that no scheme has been presented even though the petition was pending for a long time, nor is any such scheme presented before us though the appeal is pending for more than four years."

It is relevant to refer to the provisions of section 391(2) of the Act. The company court has no jurisdiction to sanction a scheme if it is not approved by three-fourths majority of the creditors or class of creditors. Considering the question of sanctioning the scheme by the court would arise only if the scheme has been approved by the statutory majority provided for u/s 391(2) of the Act. It is apparent in the present case that 100 per cent. of the secured creditors (respondent-bank) are opposing the scheme. It would, therefore, be an idle formality to direct the convening of the meeting of the unsecured members to consider the scheme. In view of the above stated legal position, the application filed by the propounder of the scheme is liable to be rejected and the direction as sought by the applicant for convening the meeting cannot be issued.

I am also of the view, that even on the merits, the application of the propounder is liable to be rejected. From the foregoing discussions it is clear that the scheme is put forth with a view to delay the winding up proceedings. Though the hearing of the application is adjourned several times, the applicant propounder was not able to say how he would make available of funds for running the mill, and make payments to the various creditors. That apart, the applicant has not refuted the allegations made by the respondent-bank in its objection statement, by filing any reply. The scheme, even otherwise, does not appear to be feasible and viable.

I am also of the opinion that the scheme is not genuine, bona fide and it would not be in the interest of the creditors and the company. The scheme is put forward by the applicant propounder mainly for the purpose of prolonging the winding up proceedings. That apart, the scheme is extremely vague.

In view of the above discussions. Company Application No. 873 of 1991 is dismissed with costs. The cost is quantified at Rs. 3,000.