Case Law Companies Act S K Gupta And Anr Vs K P Jain And Anr

Case Law Companies Act

S K Gupta And Anr Vs  K P Jain And Anr

 

DATE OF JUDGMENT  30/01/1979

 

BENCH: DESAI, D.A.

BENCH: DESAI, D.A. KAILASAM, P.S. KOSHAL, A.D.

 

CITATION: 1979 AIR  734   1979 SCR  (2)1184 1979 SCC  (3)   54

CITATOR INFO : RF          1987 SC1023  (31) RF          1991 SC1289  (14)

 

ACT: Companies Act,  1956 (1  of 1956) Ss. 391 and 392-Scope of-Omission of the Original sponsor and substituting another whether would change the ‘basic fabric’ of the scheme. Words & Phrases-‘Modify’and ‘modifications’-meaning of.

HEADNOTE: The Companies Act, 1956 by s. 391 enables a member or a creditor of  the company  or a  company which is being wound up, its  liquidator, to  make an  application to  the  court proposing a  compromise or  arrangement between  the company and its  creditors or  any class  of  them  or  between  the company and  its members  or any  class of  them and seeking directions of  the court  to convene a meeting of each class of creditors  and/or each  class  of  members  to  whom  the compromise or  arrangement is  offered. On  the court giving the directions,  the meeting  would be convened in which the proposed scheme  of compromise  and/or arrangement  would be submitted for consideration and each class will have to vote upon it  and if  the scheme  is accepted  by a  majority  in number representing  three fourths in value of the creditors or members  or class  of members as the case may be, present and voting  either in  person or  where proxy  is allowed by proxy, such  approved scheme  has to  be placed  before  the court for sanction of the court as envisaged in s. 391(2).

Under s.  392 of  the Act, the High  Court  which  has sanctioned  the  scheme  has  the  power  to  supervise  the carrying out  of it  and to give directions in regard to any matter or  to make  modifications in  it as  it may consider necessary for  its proper  working.  But  if  the  court  is satisfied that the scheme cannot work satisfactorily with or without modifications,  it can  either suo  motu  or  on  an application  of  any  person  interested  in  the  company’s affairs order its winding up.

The holding company proposed  a scheme of compromise/arrangement  between   its  subsidiary  and  the unsecured  creditors   of  the   subsidiary  company.  After obtaining the  approval  of  the  shareholders  the  holding company obtained  the sanction of the company court. A large number of  shares in  the subsidiary  company held by it and its claim  for a  sum of  Rs. 23  lacs recoverable  from the subsidiary company  were transferred  by the holding company to the  appellants. The appellants then applied to the court to make  an appropriate  modification and/or  grant  further direction for  implementing the  scheme  sanctioned  by  the court in  respect of  the subsidiary company by substituting them (the  appellants) in  place of  the holding  company as proponents of  the scheme.  The respondent in the mean while made an application to the company court under s. 392 of the Companies Act,  1956 to  hold that  the scheme sanctioned by the court  could not  work satisfactorily  with  or  without modification and that, therefore, the court should 1185 make an  order of  winding up.

The  company  judge  allowed substitution of  the appellants  as proponents of the scheme and rejected  the respondents’ application for winding up of the subsidiary company. On appeal       by the  respondents  under  s.  483  of  the Companies Act  a Division  Bench held:  (1) that  since  the substitution of  a new  propounder in a scheme sanctioned by the court  in place  of the original propounder was a change of a basic nature which would not be comprehended within the meaning of  the expression  “modification” in  s.  392  and, therefore,  the   company  judge   could  not  have  granted substitution  of   the  propounder  of  the  scheme  without referring the  proposed modified scheme to the creditors who approved the original scheme, (2) that since the transfer of the shares in favour of the appellants had not been effected in the  company’s registers, the appellants were not members of the  subsidiary, (3) that the debt owed by the subsidiary to the  holding company was not assigned according to law in favour of  the appellants  and,  therefore,  they  were  not creditors and (4) that not being either members or creditors of the  subsidiary, the  appellants had  no locus  standi to move an application under s. 392 for the modification of the scheme. On the question whether the court had power to grant an application under s. 392 of the Act. Allowing the appeal,

HELD: 1. Though a large number  of provisions  of the Companies Act,  1956 are in pari materia with the provisions of Companies  Act, 1948  of the  U.K. there  is no provision analogous to  s. 392  in the  U.K. Act.  The court under the U.K. Act  has no  power to  modify the  scheme either at the time when  it is  offered for  its sanction  or at  any time subsequent  thereto.  The  Parliament  has  in  its  wisdom, conferred a  power of  wide amplitude  on the  High Court in India to  provide for  its  continuous  supervision  of  the carrying out  of compromise  and/or arrangement and also the consequential power  to make  the supervision  effective  by removing  the  hitches,  obstacles  or  impediments  in  the working of  compromise or arrangement by conferring power to give  such   directions  for   the  proper  working  of  the compromise and/or arrangement. [1193 D-F] This power  of widest  amplitude being conferred on the High Court  is a basic departure from the scheme of the U.K. Act in  which provision  analogous to  s. 392 is absent. The sponsors of  the scheme  under s.  206 of  the U.K. Act have tried to  get over  the difficulty  by taking  power in  the scheme of  compromise or arrangement to make alterations and modifications as proposed by the court. [1195 C] In       the  instant  case  the  scheme  is  essentially  a compromise between  the company and its unsecured creditors.

The scheme  when sanctioned  does not  merely operate  as an agreement between the parties but has statutory force and is binding  not   only  on  the  company  but  even  dissenting creditors or members, as the cause may be. [1194 B-C] J.K. (Bombay)  Pvt. Ltd.  v. New  Kaiser-I-Hind Spg.  & Wvg. Co  Ltd. & Ors. etc., [1969] 2 SCR 866 at 891; referred to. 1186 2. Section       391(1) by a specific and positive provision prescribes who  can move  an application  under it. Only the creditor or  member of  that company  or a liquidator in the case of  a company  being wound  up is  entitled to  move an application  proposing   a  compromise  or  arrangement.  By necessary implication  any one other than those specified in the  section   would  not   be  entitled  to  move  such  an application. [1194 D] 3. Sub-section  (2) of  s. 392 provides the legislative exposition as  to who  can move  the court for taking action under s.  392. Reference  to s.  391 in sub s. (2) of s. 392 merely indicates  which compromise  or  arrangement  can  be brought before the court for taking action under s. 392. The reference to  s. 391  in sub-section  (2) of s. 392 does not mean that  all the  limitations or restrictions on the right of an  individual to move the court while proposing a scheme of compromise  or arrangement  have to be read in sub-s. (2) merely because s. 391 is referred to therein. Unlike s. 391, s. 392  does not  specify that  a member or a creditor or in the case  of a company being wound up, its liquidator, alone can move  the court  under s.  392. The legislature uses the expression ‘any  person, interested  in the  affairs of  the company’  which  has  wider  denotation  than  a  member  or creditor or  liquidator of a company.

The ambit of the power to act under s. 392(2) is demonstrated by the provision that the court can suo-motu act to take action as contemplated by s. 392(1)  or it  may act  on an  application of  any person interested in the affairs of the company. [1195 F-H] Mansukhlal v.  M. V.  Shah, [1976] 46 Company cases 279 at 290-291; referred to. 4. If  the court  can suo motu act, it is immaterial as to who  drew the attention of the court to a situation which necessitated  court’s   intervention.  Where  the  power  is conferred on the court to take action on its own motion, the information emanating  from whatever  source which calls for court’s attention  can as  well be  obtained from any person without questioning  his credentials,  moving an application drawing attention  of the court to a situation where it must act. The  court may decline to act at the instance of a busy body but  if the  action proposed  to be taken is justified, valid, legal  or called  for the  capacity or credentials of the person  who brought  the situation  calling for  court’s intervention is  hardly relevant nor would it invalidate the resultant action  only  on  that  ground.  When  sub-s.  (2) confers power  on the  court to  act on  its own motion, the question of locus standi hardly arises. [1197 C-E] In the  instant case  while examining  the question  of locus standi  after considering  the provisions contained in sub-s. (2)  the High  Court wholly over looked the important provision therein  contained, that the High Court can act on its own motion. [1197 F] 5. Even  though section  391 and  392 are complementary they operate at different stages and have to be harmoniously read. [1197 G-H]

6. Winding up meaning civil death of a company, must be the ultimate  resort of  the court. A living workable scheme infusing life  into a sick unit is generally to be preferred to civil  death of  the company.  There is  no  warrant  for circumscribing the  expression ‘on  the application  of  any person interested  in the affairs of the company as to limit it to a member or a 1187 creditor. If  the legislature used the expression ‘member or creditor’ in  s. 391(1)  and yet used an expression of wider denotation ‘any  person interested  in the  affairs  of  the company,’ in s. 392(2), the legislative intention is clearly exposed in that any such person interested in the affairs of the company  need not be limited or restricted to refer to a member or creditor. [1198 G-1199 A] In the instant case, there is enough evidence on record that as  between the  holding company and the appellants the sale of  shares is  complete, and  that the debt owed by the subsidiary to  holding company  has  been  assigned  by  the holding company  to the appellants. The appellants therefore have requisite  interest both  in the subsidiary company and the scheme  in respect  of it,  so  as  to  enable  them  to maintain an  application under  s. 392(2),  as being persons interested in  the affairs of the company, and therefore the application for  modification by them is maintainable. [1200 B-C] 7.

 

The  High Court       was in  error in  holding that  the appellants had  no locus  standi to  maintain an application under s.  392(1). The words ‘modify’ and ‘modification’ have been defined in s. 2(29) of the Act to include the making of additions and  omissions. Section 2(1) defines ‘altered’ and ‘alteration’ to include ‘making of additions and omissions’, while  ‘variation’   is  defined  in  s.  2(31)  to  include ‘abrogation’. The  definition of  cognate words  is noted to arrive at  a true  meaning of  the word  ‘modification’. The noticeable feature  is that  it is  an inclusive definition, and where  in a definition clause he word ‘include’ is used, it is  so done  in order to enlarge the meaning of the words or phrases  occurring in the body of the statute and when it is so  used, these  words or  phrases must  be construed  as comprehending  not  only  such  things  which  they  signify according to  their natural  import, but  also those  things which the  interpretation clause  declares that  they  shall include. [1200 H, 1201 D-G, H-1202 B] Dilworth v.  Commissioner of  Stamps, [1899]  AC 99  at 105; Jobbins  v. Middlesex  County Council, [1949] 1 KB 142; Indira Nehru Gandhi v. Raj Narain (1975) Suppl. SCC 1 at 97; Kalva Singh  v. Genda  Lal, [1976]  1 SCC 304 at 309; Cox v. Hakes, [1890] 15 AC 506; referred to.

8. According to the  definition ‘modify’ and ‘modification’ would  include the  making of  additions  and omissions. In  the context  of s.  392 ‘modification’  would mean addition to the scheme of compromise and/or arrangement or omission  therefrom solely  for the  purpose of making it workable. [1203 B] 9. The  High Court  misdirected itself when it resorted to  dictionaries   for  the   meaning  of   the   expression ‘modification’ in  s. 392  when the said term was defined in s. 2(29) of the Act itself. [1203 A] In the  instant case,  the scheme is one  by  which  a compromise is  offered to  the unsecured  creditors  of  the company and  whoever comes  in as  sponsor would be bound by it.  Omission  of  the  original  sponsor  and  substituting another one  would not  therefore, change the ‘basic fubric’ of the scheme. [1203 E] 10. The  court on which a duty is cast by s. 392(1) to supervise the working of compromise/arrangement must examine the bona  fides of  the person applying to be substituted as sponsor, his  capacity, his  ability, his  interest qua  the company   and    other   relevant    considerations   before substituting one  sponsor for  another. In  a given  case an application may be rejected if the 1188 court is  of the opinion that the sponsor is not one who can be trusted with the implementation of the scheme. [1204 A-C] In the  instant case  the appellants  have applied  for substituting them  as sponsors of the scheme in place of the holding company.  They claim to have purchased 44,000 shares out of  80,000 issued  and subscribed  equity shares  of the company. The  sponsor has  taken an  assignment of a debt of Rs. 23 lacs which the subsidiary company owed to the holding company from  the holding  company.

The  only  objector  is respondent holding 1,000 equity shares representing 1.25 per cent of  the issued  and subscribed capital. In pursuance to the court’s  order notice  in  the  newspaper  was  inserted calling   for    objection   to    the    application    for substitution/modification. None  including  the  petitioning creditor except the respondent lodged such an objection. The appellants agreed  to implement  the scheme and undertook to provide Rs. 3 lacs as liquid finance for implementation. The appellants therefore have a subsisting and vital interest in the fate  and future  of the subsidiary company and they are the appropriate  persons who could and should be substituted in place  of the  original sponsor and there is no objection to granting their application. [1204 D-F, 1205 E,

JUDGMENT: CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1217 of 1976. Appeal by Special Leave  from the  Judgment and  Order dated 16-7-1976  of the  Delhi High  Court in Company Appeal No. 15/76. Y. S.  Chitale, K.  R. Khaitan,  B. Mohan,  and Praveen Kumar for the Appellants. P. R.  Mridul, R.       L. Roshan,  H. K.  Puri and Vijai K. Bahl for Respondent No. 1. Pramod Dayal and S. K. Gupta for Respondent No. 2. R. M. Gupta and K. N. Bhat for Intervener/Dena Bank. The Judgment of the Court was delivered by DESAI, J-A  private sector  sick unit,  Indian Hardware Industries Ltd. (‘IHI’ for short), engaged in manufacture of builders’ hardware,  now in  a state  of suspended animation since 1971,  awaits the  outcome of this appeal for infusion of life  into it  simultaneously providing  a ray of hope to primarily the  workmen who  were rendered  jobless  and  the unsecured and  secured creditors  whose hard earned money is locked up in it. A few  facts will put the problem raised in this appeal in focus and proper perspective. M/s. Delhi Flour Mills Ltd. (‘DFM’ for  short) was  the holding company of which IHI was the subsidiary. Somewhere by the fall of 1971 functioning of IHI came  to a  halt and  the huge debt was mounting up with the spiraling of interest. 1189 As the  shares of  DFM were  closely held  by  relations  of respondent No.  1 referred  to as  ‘Jain group’ and as there were fratricidal  disputes in Jain family culminating into a litigation in  the High  Court of  Delhi, IHI languished for want of  attention. In  the meantime  M/s. Indian Smelting & Refining Co. Ltd.

(‘petitioning creditor’ for short) filed a winding up  petition against  IHI in  1975 alleging that IHI was heavily  indebted and was unable to pay its debts as and when they  became due.  After the dispute in the Jain family was resolved somewhere in 1974, a situation emerged in which one R.  P. Jain  and the  members  of  his  family  acquired controlling interest  in the holding company DFM. Once R. P. Jain came into saddle, the DFM as holding company proposed a scheme  of   compromise/arrangement  between   IHI  and  its unsecured creditors  and after  the scheme was approved, the proponent of the scheme submitted Company Petition No. 86/74 to the  Company Court  for according  sanction to the scheme and  by  Order  dated  15th  October  1975  the  scheme  was sanctioned. Sometime  after the  scheme was  sanctioned, DFM transferred its  44,000 shares  of IHI  and its claim to the tune of  Rs. 23  lacs recoverable  from IHI,  to the present appellants S.  K. Gupta  and Mrs. Dropadi Gupta (referred to as ‘appellants’  hereafter). Thereafter the appellants filed Company Application  No. 193/76 requesting the Court to make appropriate modification  and/or granting  further direction for effectively  implementing the  scheme sanctioned  by the Court in  respect of  IHI by  substituting the appellants in place of  DFM as  proponents of the scheme and imposing upon them  the  liability  to  implement  the  scheme  under  the supervision  of  the  Court.

A  little  while  before  this application was  moved, respondent  K. P. Jain filed Company Application No.  190/76 purporting to be under s. 392 of the Companies Act,  1956, inviting  the Court  for  the  reasons mentioned  in  the  application  to  hold  that  the  scheme sanctioned by the Court cannot be worked satisfactorily with or without  modification and  therefore an  order winding up the Company should be made. The  Company  Judge  by  his  two       orders  in  the  two aforementioned applications  dated 26th  April 1976  granted the application of the appellants and modified the scheme by substituting the  appellants as proponents of the scheme and simultaneously rejected the application of the respondent K. P. Jain for winding up the Company. Respondent Jain  preferred two  appeals  being  Company Appeals Nos. 15 and 15/76 under s. 483 of the Companies Act. Both these  appeals came  up before  a Division Bench of the Delhi High  Court, and  they were  disposed of  by a  common judgment. The Division 1190 Bench  was  of  the  opinion  that  substitution  of  a  new propounder in  a scheme  already sanctioned  by the Court in place of  the original propounder of the scheme was a change of a  basic nature  which would  not be  comprehended in the expression ‘modification’  as under  s. 392  and, therefore, the Company Judge could not have granted such a substitution of the  propounder of  the scheme without referring back the proposed modified  scheme to  the creditors who had approved the original  scheme. It  was further  of the  opinion  that though the  transfer of  44,000 shares of IHI held by DFM in favour of  the appellants  may be  complete as  between  the transferor and the transferee, the same would not clothe the appellants with  the right  of a  member unless  their names were put  on the  register of  members maintained by IHI and that the  same having not been done, the appellants were not members of  IHI. It was further of the opinion that the debt owed by  IHI to  DFM was  not assigned  according to  law in favour of  the appellants  and,  therefore,  they  were  not creditors, and  in view  of the  language of  s. 391  of the Companies Act,  the appellants  being  neither  members  nor creditors of IHI, had no locus standi to move an application under s.  392 for  modification of the scheme because in the opinion of  the Court  s. 391  controls s.  392 and either a member or a creditor or in the case of a company being wound up,

a liquidator  alone   can  file  an  application  for modification. In  accordance with  this opinion,  the appeal preferred by respondent No. 1 being Company Appeal No. 15/76 challenging the  order of  the Company  Judge which  granted modification/substitution of  appellants as  proponents  was allowed  and   the  application   of  the   appellants   for substitution was rejected. The Division  Bench dismissed  Company Appeal No. 16/76 preferred by  respondent  Jain  against  the  order  of  the Company Judge  refusing to  make an  order for winding up of the  Company   observing  that  even  while  dismissing  the application for  substitution of the present appellants, the Court was  not in  a position  to  come  to  an  affirmative finding that the scheme cannot be satisfactorily worked with or without modification and the matter should be left to the Company Judge  as to  what future course of action should be taken in the matter. The appellants  preferred the present appeal by special leave against  the decision of the Division Bench in Company Appeal  No.   15/76   by   which   their   application   for substitution/modification was rejected. Mr. S. S. Ray, learned counsel for the appellants urged that the  Court committed  a basic error in holding that the application for 1191 substitution/modification was  not maintainable  because the appellants  were   neither  members  nor  creditors  of  the Company,  IHI,  thereby  importing  a  narrower  concept  in respect of  the locus  standi of  the present  appellants to move the Court under s. 392 which restrictive approach would run counter  to the  power of  widest amplitude conferred on the Court,  namely, even to make modification suo motu or on the application of a person interested in the affairs of the Company. He  further urged  that the appellate Court clearly misdirected itself  when it went in search of the meaning of the  expression  ‘modification’  in  s.  392  by  ransacking dictionaries completely  overlooking the  fact  that  in  s.

2(29) of the Companies Act  the   words  ‘modify’ and ‘modification’ have  been defined  and it is a well known canon of construction that  unless  the  context  otherwise requires, the definition of an expression given in a statute shall govern  the meaning of the expression wherever used in the same  statute. It  was urged that the words “modify’ and ‘modification’ for  the purpose  of s. 392 would include the making of  additions and  omissions  and  according  to  him additions and  omissions in  the context of s. 392 would and could only  mean additions  and omissions  to the sanctioned scheme because  s. 392 operates at a stage subsequent to the sanctioning of  the scheme  under s.  391(2). It was further urged that  if the  words ‘modify’  and ‘modification’ would include  additions  and  omissions,  the  Court  would  have plenary power  to substitute  one proponent for the other if in the  opinion of  the Court  the scheme  cannot be  worked satisfactorily without the necessary modification and in all such cases it would be imprudent to hold that the Court will have to fall back to the cumbersome procedure of s. 391 over again  delaying   for  a   considerable  period   the  vital requirement of restarting a sick unit. It was submitted that the Court  committed a  fallacy in  importing the concept of Constitution while interpreting a provision of the Companies Act.

Mr. Lal Narain Sinha on the other hand on behalf of the respondents, while  conceding that in an emergency the Court can act  on the  application of  any person,  ordinarily the Court would  act on  the application of a member or creditor of the  Company and  in this blurred area some light is shed by the  provision contained  in Rule  87  of  the  Companies (Court) Rules,  1959. Proceeding  further, it was urged that ss. 391  and 392  constitute a code and, therefore, if there was a qualification for proposing a scheme under s. 391, the same qualification  should be  read in  s. 392 and any other approach would  be self-defeating.  It  was  submitted  that viewed from  this angle,  only a  member or  a creditor  can maintain an  application under  s. 392 and as the appellants are neither members nor 1192 creditors of  the Company,  they have  no  locus  standi  to maintain the  petition. He  further urged  that putting  too wide a  construction on  the expression ‘modification’ in s. 392(2) would  lead to  such a  startling result as could not have been  within the  contemplation of  the legislature and that, therefore,  in order  to arrive  at a  true meaning of word ‘modification’

The Court  should  bear  in  mind  the purpose and  object behind  using the expression or enacting the provision  in which the expression is found. It was also contended that  substitution of the original sponsor amounts to repudiation  of the  contract which the scheme represents between the  proponent of  the scheme  and the  Company  and another  person  cannot  be  substituted  in  place  of  the original contracting party without the consent or affirmance of the  second party  to the contract and hence such a thing cannot be  brought about  by way  of a modification under s. 392. The  word ‘modification’ or ‘modify’, therefore, should be given  a restricted  meaning looking  to the  context  in which it  is used  in s.  392 as  has been  done by the High Court. Principal contentions advanced on either side turn upon the right  to make an application and the power of the Court to grant  an application  under s. 392 of the Companies Act. Section 392  finds its  place in  Chapter V of the Companies Act    bearing    fascicules    ‘Arbitration,    Compromise, Arrangements and  Reconstructions’. Section  391  enables  a member or  a creditor  of the  Company or a Company which is being wound  up, its  liquidator, to  make an application to the Court  proposing a compromise or arrangement between the company and  its creditors  or any  class of them or between the Company and its members or any class of them and seeking directions of  the Court  to convene a meeting of each class of creditors  and/or each  class  of  members  to  whom  the compromise or  arrangement is offered. On the Court’s giving the directions,  the meeting  would be convened in which the proposed scheme  of compromise  and/or arrangement  would be submitted for consideration and each class will have to vote upon it  and if  the scheme  is accepted  by a  majority  in number representing  three fourths in value of the creditors or members  or class  of members as the case may be, present and voting  either in  person or  where proxy is allowed, by proxy, such  approved scheme  has to  be placed  before  the Court for  sanction of  the Court as envisaged in s.

391(2). Then comes s. 392 which may be reproduced in extenso: “392. Power  of High Court to enforce compromises and arrangements-(1)  Where a High Court makes an order under  section  391  sanctioning  a  compromise  or  an arrangement in respect of a company, it- 1193 (a)  shall have  power to  supervise the  carrying out of the compromise or arrangement; and (b)  may, at    any 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”. At the  outset it  may be mentioned that though a large number of provisions of the Companies Act, 1956, are in pari materia with  the provisions  of Companies Act, 1948, of the U.K. (‘U.K. Act’ for short), there is no provision analogous to s.  392 in the U.K. Act. The Court under the U.K. Act has no power  to modify the scheme either at the time when it is offered for  its sanction or at any time subsequent thereto. The Parliament  has in its wisdom, conferred a power of wide amplitude on  the High  Court in  India to  provide for  its continuous supervision  of the  carrying out  of  compromise and/or arrangement  and also the consequential power to make the supervision effective by removing the hitches, obstacles or impediments  in the  working of compromise or arrangement by conferring  power to give such direction in regard to any matter or  for making such modification in the compromise or arrangement as  it may  consider necessary  for  the  proper working of  the compromise  and/or arrangement.  Sub-s.  (2) confers power on the Court to act under s. 392 either on its own motion or on the application of any person interested in the affairs  of the company. What falls for consideration is the true  meaning of  the expression

‘on the application of any person interested in the affairs of the company’. The High  Court was  of the opinion that the appellants have  no   locus  standi  to  maintain  an  application  for modification/substitution of themselves as proponents of the scheme with a liability to implement the scheme as they were neither members  nor creditors  of the Company and according to the  High Court, if a scheme of compromise or arrangement cannot be  proposed by  any one except a member or creditor, ipso facto,  an application  for modification of such scheme sanctioned by the Court under s. 391(2) could not be made by any one other than a member or a creditor. 1194 Section 391 envisages a compromise or arrangement being proposed for  consideration by members and/or creditors of a Company liable to be wound up under the Companies Act, 1956. Compromise or arrangement has to be between creditors and/or members of  the Company and the Company, as the case may be. It was  always open  to the Company to offer a compromise to any of  the creditors or enter into arrangement with each of the members.  The scheme  in  this  case  is  essentially  a compromise between  the company and its unsecured creditors. The scheme  when sanctioned  does not  merely operate  as an agreement between the parties but has statutory force and is binding  not   only  on  the  company  but  even  dissenting creditors or  members, as the case may be. The effect of the sanctioned scheme is “to supply by recourse to the procedure thereby prescribed  the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity” (see J. K. (Bombay) Pvt.  Ltd., v.

New Kaiser-I-Hind  Spg. &  Wvg. Co. Ltd. &  Ors. etc.(1).  Further section  391(1) itself  by  a specific and  positive provision  prescribes who can move an application under  it. Only  the creditor  or member of that company or a liquidator in the case of a company being wound up is entitled to move an application proposing a compromise or arrangement.  By necessary implication any one other than those specified in the section would not be entitled to move such an application. When a  scheme is being considered by the Court, in all its ramifications,  for according its sanction, it would not be possible to com prehend all situations, eventualities and exigencies that  may arise  while implementing  the  scheme. When a detailed compromise and/or arrangement is worked out, hitches and  impediments may  arise  and  if  there  was  no provision  like   the  one  in  s.  392,  the  only  obvious alternative would  be to  follow the cumbersome procedure as provided in  s. 391(1), viz., again by approaching the class of creditors  or  members  to  whom  the  compromise  and/or arrangement was  offered to  accord their  sanction  to  the steps to be taken for removing such hitches and impediments. This would  be unduly  cumbersome and  time  consuming  and, therefore, the  legislature in its wisdom conferred power of widest amplitude  on the High Court under s. 392 not only to give  directions  but  to  make  such  modification  in  the compromise and/or  arrangement as  the  Court  may  consider necessary, the  only limit  on the  power of the Court being that such  directions can  be given and modifications can be made  for  the  proper  working  of  the  compromise  and/or arrangement. The purpose underlying s. 392 is to provide for effective working  of the compromise and/or arrangement once sanctioned and 1195 over   which    the   Court    must   exercise    continuous supervision[see s.392(1)], and  if over a period there may arise obstacles,  difficulties  or  impediments,  to  remove them, again,  not for  any other  purpose but for the proper working of  the compromise  and/or arrangement.  This  power either to give directions to overcome the difficulties or if the  provisions   of  the   scheme  themselves   create   an impediment, to modify the provision to the extent necessary, can only be exercised so as to provide for smooth working of the  compromise   and/or  arrangement.  To  effectuate  this purpose the  power of widest amplitude has been conferred on the High Court and this is a basic departure from the scheme of the  U.K. Act  in which  provision analogous to s. 392 is absent.

The sponsors of the scheme under s. 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme  of compromise or arrangement to make alterations and  modifications   as  proposed  by  the  Court.  But  the Legislature foreseeing  that a complex or complicated scheme of compromise  or arrangement  spread over a long period may face unforeseen  and unanticipated  obstacles, has conferred power of  widest amplitude  on the  Court to give directions and if  necessary, to  modify  the  scheme  for  the  proper working  of   the  compromise   or  arrangement.   The  only limitation on  the power of the Court, as already mentioned, is that  all such  directions that  the Court  may  consider appropriate to  give  or  make  such  modifications  in  the scheme, must  be for  the proper  working of  the compromise and/or arrangement. Sub-section (2)  provides the legislative exposition as to who  can move  the Court  for taking action under s. 392. Reference to s. 391 in sub-s. (2) of s. 392 merely indicates which compromise  or arrangement  can be  brought before the Court for  taking action  under s.  392. The reference to s. 391 does  not mean  that all the limitations or restrictions on the  right of  an individual  to  move  the  Court  while proposing a  scheme of  compromise or arrangement have to be read in  sub-s. (2)  merely because  s. 391  is referred  to therein. Unlike  section 391, s. 392 does not specify that a member or  creditor or  in the case of a company being wound up, its  liquidator, can move the Court under s. 392. On the other hand,  the legislature uses the expression ‘any person interested in  the affairs  of the  company’ which has wider denotation than  a member  or creditor  or liquidator  of  a company. In  fact, the  ambit of  the power  to act under s. 392(2) can  be gauged  from the  fact that the Court can suo motu act  to take  action as contemplated by s. 392(1) or it may act  on an  application of  any person interested in the affairs of the Company. 1196 In this  context the  observations of  the Gujarat High Court, extracted  hereunder, in Mansukhlal v. M. V. Shah,(1) can be  referred to with advantage as it precisely lays bare the ambit and width of Court’s power under section 392: “The framers    of the  company law  in  India  have conferred statutory  powers on  the High  Court to make such modifications       in the compromise or arrangement as the Court may consider necessary for the proper working of the  compromise and  arrangement. The  power of       the widest amplitude  has been conferred on the court under section 392(1)  (b) and  the width and the magnitude of the power       can be  gauged from the language employed in section  392

(1) (a)  which  confers  a  sort  of  a supervisory role  on the  court during  the period the scheme  of compromise   or  arrangement   is   being implemented. Reading clauses (a) and (b) of sub-section (1) of  section 392, it appears that Parliament did not want the  court to  be functus  officio as  soon as the scheme of compromise and  arrangement is sanctioned by it. The  Court has a continuing  supervision over  the implementation   of    compromise        and    arrangement. Unenvisaged,   unanticipated, unforeseen   or   even unimaginable hitches,  obstruction and  impediments may arise in  the course  of implementation  of a scheme of compromise  and   arrangement  and  if  on  every  such occasion, sponsors  have to  go  back  to  the  parties concerned for seeking their approval for a modification and then  seek the approval of the court, it would be a long-drawn out, protracted, time-consuming process with no  guarantee   of  result  and  the  whole  scheme  of compromise and  arrangement may  be  mutilated  in   the process. Parliament  has, therefore  thought it  fit to trust the wisdom of  the court  rather than go back to the interested  parties. If  the parties  have  several times to  decide the  modification with  the democratic process, the  good part of an election machinery apart, the dirt  may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise  and arrangement  may be  jettisoned.  In order, therefore, to guard against this eventuality and situation, which  is clearly  envisageable,  Parliament has conferred  power on  the court,  not only  to  make modifications even  at  the  time  of  sanctioning  the scheme, but  at any  time thereafter  during the period the scheme is being implemented. Conceding that, before the  Court  sanctions  the  scheme,  it  partakes  the character of an emerging contract between the 1197 company and  the creditors and members; once the court approves  it,

it becomes  a  statutorily  enforceable contract even on dissidents, with power in the court to modify, amend  or correct  or revise  the contract  the outer periphery  or the  limit on the power being that, after  testing  it on  this  anvil  of  probabilities, surrounding circumstances  and the  prevalent state  of affairs, it  can be  done for the proper working of the compromise and  arrangement, and  subject to this limit on the  Court’s power,  the power       seems to be absolute and of  the widest  amplitude and it would be unwise to curtail it by process of interpretation”. If the  Court can  suo motu act, it is immaterial as to who drew  the attention  of the  Court to  a situation which necessitated  Court’s   intervention.  Where  the  power  is conferred on  the Court to take action on its own motion the information emanating  from whatever  source which calls for Court’s attention  can as  well be  obtained from any person without questioning  his credentials,  moving an application drawing attention  of the Court to a situation where it must act. Undoubtedly,  the Court  may  decline  to  act  at  the instance of  a busy  body but  if the  action proposed to be taken is justified, valid, legal or called for, the capacity or credentials  of the  person  who  brought  the  situation calling for  Court’s intervention  is  hardly  relevant  nor would it  invalidate  the  resultant  action  only  on  that ground. Therefore,  when sub-s.  (2) confers  power  on  the Court to act on its own motion, the question of locus standi hardly arises.  The High  Court while examining the question of locus  standi, after  combing the  provision contained in sub-s.

2),  wholly  overlooked  the  important  provision therein contained  that the  High Court  can act  on its own motion. It  was, however,  said in  passing that  sub-s. (2) enables the Court to wind up the Company and, therefore, the Court may act on its own motion or on the application of any person interested  in the  affairs of  the company  not  for modifying the  scheme or  for any directions but for winding up the  company. But when the Court is required to act under s. 392(1), the limitations and restrictions imposed upon the Court under s. 391(1) must be read in section 392(1) because the  sections   are  complimentary   to  each   other.  This submission overlooks  the  two  different  stages  at  which sections  391   and  392   operate  though   they   may   be complimentary to each other. Two sub-sections of s. 392 have to be harmoniously read and sub-s. (2) clearly indicates the power of  Court to  take action suo motu while taking action under sub-s.  (1). Again  this approach is inconsistent with the language  employed in  s. 392(2)  in that  the Court can wind up the company 1198 under s.  392(2) if  and  only  it  is  satisfied  that  the compromise and/or  arrangement sanctioned  by it  cannot  be satisfactorily worked  with or  without  modifications.  The Court has  to reach  an affirmative conclusion before acting under s.  392(2)  that  the  compromise  and/or  arrangement cannot be worked satisfactorily with or without modification (see J.  K.  Bombay  P.  Ltd.)  (supra).  It  follows  as  a corollary that  if the  compromise  or  arrangement  can  be worked as  it is  or by making modifications, the Court will have no  power to  wind up the Company under s. 392(2). Now, if the  arrangement or  compromise can  be  worked  with  or without modification,  the Court must undertake the exercise to find  out what  modifications are  necessary to  make the compromise or  arrangement workable and that it can do so on its  own   motion  or  on  the  application  of  any  person interested in  the affairs  of the  Company. If  such be the power conferred  on the  Court, it is difficult to entertain the  submission   that  an  application  for  directions  or modification cannot  be entertained  except when  made by  a member or  creditor. It  would whittle down the power of the Court in that it cannot do so on its own motion.

 

Mr. Sinha referred to  Rule 87  of  Companies  (Court) Rules and urged that it throws some light on the question as to at  whose instance  the Court  can act  under s. 392. The rule is  procedural in  character and  at any  rate the rule cannot circumscribe  the power  conferred  by  the  section. Hence rule 87 is of no assistance. Assuming that  the Court  would not act on its own, the next question  is: could  it act  under  s.  392(1)  on  the application of  any person  interested in the affairs of the Company ?  Now, if  the Court  under  s.  392(2)  can  order winding up  of the  company on the application of any person interested in  the affairs  of the company who need not be a member or  a creditor,  we fail  to see how the Court cannot act on  the application  of such  a person interested in the affairs of  the Company either to give directions or to make modifications so  as to  make the  compromise or arrangement workable. Winding  up meaning civil death of a company, must be the  ultimate resort  of the  Court.  A  living  workable scheme infusing  life into  a sick  unit is  generally to be preferred  to   civil  death   of  the  company.  There  is, therefore, no  warrant for circumscribing the expression ‘on the application  of any  person interested in the affairs of the company’  as to  limit it  to member or creditor. If the legislature used  the expression  ‘member or creditor’ in s. 391(1) and  yet used  an expression of wider denotation ‘any person interested  in  the  affairs  of  the  company’,  the legislative intention  is clearly  exposed in  that any such person interested  in the affairs of the company need not be limited or restricted to refer to a 1199 member or  creditor.

It  would, therefore,  be necessary  to ascertain whether  the appellants  would be  comprehended in the expression  ‘any person interested in the affairs of the company’. At one  stage there  was a  threatened long argument to ascertain whether  the appellants have become the members of the company  or  are  the  creditors  of  the  company.  The appellants  contended  that  they  and  their  friends  have purchased 44,000 equity shares of IHI from its former holder DFM and  they have  also taken  an assignment of the debt in the amount  of Rs.  23 lacs  owned by  IHI to  DFM from DFM. Respondent Jain  contended that  the assignment is not valid as it  fails to  comply with  s.  130  of  the  Transfer  of Property Act  and as the names of the appellants are not put on the register of IHI, they have not acquired the status of member of  IHI and,  therefore, they being neither creditors nor members  of IHI,  they have no locus standi, to maintain the application under s. 392. The stand       taken by  respondent Jain  in this behalf is wholly ambivalent.  Sometime after the scheme was sanctioned on 15th  October  1975,  the  appellants  assert  that  they purchased the  44,000 equity shares of IHI from DFM and they simultaneously  took  assignment  of  the  debt.  Thereafter respondent Jain  filed Company  Application  No.  190/76  in which he  sought a  direction under s. 392(2) for winding up the Company.  In inviting  the Court to grant his prayer for winding up  the Company, the averment made is that since the sanction of  the scheme  by the  Court,  DFM  has  sold  its interest to  Shri S.  K. Gupta  and  others  who  wanted  to operate the  scheme as if they were the substitutes for DFM. Another averment  is that  DFM was  not entitled to sell its shares  because   it  was  the  propounder  of  the  scheme. Therefore, the  raison d’etre  for  moving  the  application under s. 392(2) was the sale of shares of IHI held by DFM to the  appellants.   When   the   appellants   filed   Company Application No.  193/76 under  s. 392(1),  in order  to show their newly acquired or subsisting interest in the scheme so as to  enable them  to move the application under s. 392,

It was averred that the appellants have purchased 41,800 shares of IHI  from DFM  and the  balance of  holding of DFM to the tune of  2200 equity  shares  have  been  purchased  by  the nominee of  the appellants.  It is  further averred that the amount standing  in the name of DFM in the books of IHI also been taken  over by  the appellants. While replying to these averments in  the application, respondent K. P. Jain in para 16 of his counter affidavit dated 29th March 1976 has stated that ‘there  is some  understanding or agreement between the Delhi Flour Mills Co. Ltd. and Shri S. K. Gupta for the sale of the shares held by Delhi Flour Mills Co. Ltd., in the IHI and I have referred to 1200 it in  my application  CA. 190/76’. If the very alleged sale of the  shares by DFM to the appellants gave cause of action to respondent  Jain to  maintain  an  application  under  s. 392(2) praying  for an  order for winding up of the company, what greater  ambivalence could  it  disclose  when  it  was contended on  his behalf that the sale has not taken place ? There is  enough evidence  on record  as is evident from the affidavit  filed   by  DFM  that  as  between  DFM  and  the appellants  the   sale  is  complete.  Similarly,  there  is evidence in  the affidavit that the debt owned by IHI to DFM has been  assigned by  DFM to the appellants. In the face of this express  position adopted  by Jain, would it not clothe the appellants  with necessary  interest both in the company IHI and the scheme in respect of it, so as to enable them to maintain an  application under  s. 392(2)  ? Appellants  are certainly persons  interested in the affairs of the company. For this  additional reason the application for modification by them is certainly maintainable. In the aforementioned circumstances we are not inclined to examine  a very  serious contention  raised by Mr. Mridul who appeared  at a later stage of hearing for the respondent Jain that  unless names  of the  appellants are  put on  the register of  IHI they  do not  become  members  and  as  the assignment on which the appellants rely does not comply with the requirements  of s. 130 of the Transfer of Property Act, the assignee’s  title to  the debt  assigned has  not become complete, and,  therefore, the  appellants are not creditors of IHI.  We may in passing say that the factum of assignment or the  sale of shares was never seriously questioned but we are prepared to proceed on the assumption that even if it be so,  in   the  circumstances   herein  discussed   and   the ambivalence  of   respondent  Jain   the  appellants   could certainly be said to be persons sufficiently interested both in the  company IHI and the scheme in respect of it so as to be able to maintain an application under s. 392(1).

Lastly in this connection it must be remembered that if DFM whose  scheme  was  sanctioned  and  not  challenged  by respondent Jain,  started implementing  the scheme and after getting  into  the  saddle  by  constituting  the  Board  of Directors as  desired by  it, it  could have transferred its shares to appellants and appellants could have as well taken over management  and implemented  the scheme  and no one, at any rate,  Respondent Jain  holding only 1000 equity shares, i.e. 1.25% of the issued capital, could have objected to it. The objection  at this  stage is  equally futile. Therefore, with respect,  the High  Court was  in error in holding that the  appellants   had  no   locus  standi   to  maintain  an application under s. 392(1). The next  important contention  is that  the sponsor or propounder of a scheme is such an integral part of the whole scheme or an impor- 1201 tant element of the ‘basic structure’ of the scheme that its substitution changes,  alters or amends the scheme in almost its entirety  and such  a thing  cannot be  done by  way  of modification under  s. 392.  The word ‘modification’ must be given, according to the respondent and according to the High Court, a  restricted and  narrow meaning.  The  High  Court, after reaching the conclusion that propounder of a scheme is ‘the very life blood and soul of the scheme and on his going out the scheme itself becomes lifeless and inert’, proceeded to examine  the connotation  of the  word ‘modification’  as used in  s. 392  and after  referring to  various dictionary meanings, reached  a conclusion that the context and setting in which  the word  is used,  it would  only means  a “small adjustment a  minor or  slight change,  a  qualification  or limitation, alteration  of  a  subordinate  character”,  and substitution of  a sponsor  of a  scheme is  of such a vital nature altering,  in the  opinion of  the  High  Court,  the ‘basic  structure’   of  the   scheme  that   such  a  three dimensional change  would not  be comprehended  in the  word ‘modification’  as   used  in   s.  392.

In  reaching  this conclusion the  High Court  referred to the meaning assigned to  the  word  ‘modify’  in  various  dictionaries  such  as Webster, Black’s  Law Dictionary,  et el.  Unfortunately the High Court  completely overlooked the obvious that the words ‘modify’ and ‘modification’ have been defined in s. 2(29) of the Companies Act as under: “2. Definitions-In  this Act,    unless the  context otherwise requires- (29) “Modify” and “modification” shall include the making of additions and omissions”. It may also be mentioned that s. 2(1) defines ‘altered’ and  ‘alteration’   to  include   making  of  additions  and omissions, while  ‘variation’ is  defined  in  s.  2(31)  to include ‘abrogation’.  The definition  of cognate  words  is noted by  us to  arrive  at  a  true  meaning  of  the  word ‘modification’.  The   High  Court  nowhere  refers  in  its judgment to  the definition  of ‘modify’  and ‘modification’ given in  the very  statute and  proceeded  to  examine  the content and  meaning of  the word used in a provision in the same statute  which, unless  the context otherwise requires, must bear  the same  meaning as  set out  in the  definition section. The noticeable feature of this definition is that it is inclusive definition  and where  in a  definition clause the word ‘include’ is used it is 1202 so done  in order  to enlarge  the meaning  of the  words or phrases occurring  in the body of the statute and when it is so used,  these  words  or  phrases  must  be  construed  as comprehending  not  only  such  things  which  they  signify according to  their natural  import, but  also those  things which the  interpretation clause  declares that  they  shall include (see Dilworth v. Commissioner of Stamps). Where in a definition section  of a statute a word is defined to mean a certain thing,  wherever that  word is used in that statute, it shall  mean what  is stated  in the definition unless the context otherwise  requires. But  where the definition is an inclusive definition,  the word not only bears its ordinary, popular and  natural sense whenever that would be applicable but it  also bears  its extended  statutory meaning.  At any rate, such  expansive definition  should be  so construed as not cutting  down the  enacting provisions  of an Act unless the phrase  is absolutely  clear in  having opposite  effect (see  Jobbins   v.  Middlesex  County  Council).

Where  the definition of  an  expression  in  a  definition  clause  is preceded  by   the  words   ‘unless  the  context  otherwise requires’, normally  the definition  given  in  the  section should be  applied and  given effect to but this normal rule may, however,  be departed from if there be something in the context to  show that  the definition  should not be applied (see Khanna,  J. in  Indira Nehru  Gandhi v. Raj Narain). It would thus  appear that  ordinarily one has to adhere to the definition and  if it  is an  expansive definition  the same should be adhered to. The frame of any definition more often than not is capable of being made flexible but the precision and certainty  in law  requires that  it should  not be made loose and  kept tight as far as possible (see Kalva Singh v. Genda Lal). Is there  anything in  the context and setting in which the word  ‘modification’ is  used in s. 392 to indicate that the legislature  has not  used the  expression assigning the meaning to  the word as set out in the definition clause? At least nothing was pointed out to us. Undoubtedly, as pointed out by  Lord Hershell  in Cox v. Hakes, that for the purpose of construing any enactment it is right to look, not only at the provision  immediately under  construction, but  at  any others found  in connection  with it  which may  throw light upon  it,  and  afford  an  indication  that  general  words employed in it were not intended to 1203 be applied  without some  limitation.

Even with this caution we find  nothing in  s. 392 or reading s.392 with s. 391, to cut down  and restrict  the meaning as has been attempted by the High Court completely ignoring the definition section. According to the definition ‘modify’ and ‘modification’ would include  the making of additions and omissions. In the context of  s. 392 ‘modification’ would mean addition to the scheme  of   compromise  and/or   arrangement  or   omission therefrom solely  for the  purpose of  making  it  workable. Reading s.  392 by  substituting the  definition of the word ‘modification’ in  its place, if something can be omitted or something can  be added  to a  scheme of  compromise by  the Court on  its own  motion or  on the application of a person interested in  the affairs  of the  company for  the  proper working of  the compromise  and/or arrangement,  we  see  no justification for  cutting down  its meaning by a process of interpretation and  thereby whittle  down the  power of  the Court to  deal  with  the  scheme  of  a  compromise  and/or arrangement for  the purpose of making it workable in course of its continued supervision as ordained by s. 392 (1). Strictly speaking, omission of the original sponsor and substituting another one would not change the ‘basic fabric’ of the  scheme. The  scheme in  this case  is one by which a compromise is  offered to  the unsecured  creditors  of  the company and  whoever comes  in as  sponsor would be bound by it. Undoubtedly  a sponsor of the scheme enjoys an important place in  the scheme  of compromise  and/or arrangement  but basically  the   scheme  is  between  the  company  and  its creditors or  any class  of them,  or the  company  and  its members or any class of them, and not between the sponsor of the scheme and the creditor or member. The scheme represents a  contract  sanctified  by  Court’s  approval  between  the company and the creditors and/or members of the company. The company may  as well  be in  charge  of  directors  and  the implementation of  the scheme may come through the agency of directors but  that would  not lead  to the  conclusion that during the  working of  the scheme  the directors  cannot be changed. If  the scheme  has to be ultimately implemented by the company  as part  of its  contract and yet its directors can be  changed according to its Articles of Association, we see no  difference in  the  situation  where  a  sponsor  is required to  be changed  in the facts and circumstances of a case. Therefore, it is not possible to accept the submission that as  and by  way of modification one sponsor of a scheme cannot be substituted for another sponsor.

1204 We may  not be  understood to say for a moment that the Court can  appoint any  one as sponsor. The Court on which a duty is cast by s. 392(1) to exercise continuous supervision over the  working of the compromise and/or arrangement must, in order to effectively discharge its duty, examine the bona fides of  the person  applying to be substituted as sponsor, his capacity,  his ability, his interest qua the company and other  relevant   considerations  before   substituting  one sponsor for  another. In  a given case an application may be rejected as  the Court is of the opinion that the sponsor is not one  who can  be trusted  with the implementation of the scheme but  that is  entirely a  different thing from saying that the  Court has  no power to make such a substitution as and by way of modification of a compromise or arrangement. Now to  the facts       of the  case.  The  appellants  have applied for  substituting them  as sponsors of the scheme in place of DFM. They claim to have purchased 44,000 shares out of  80,000  issued  and  subscribed  equity  shares  of  the company. As  stated  earlier,  between  the  transferor  and transferee of  the shares,  the transfer  of the  shares  is complete  and   not  even   seriously  objected  to  by  the respondent as  pointed out  hereinbefore.  The  sponsor  has taken an  assignment of a debt of Rs. 23 lacs which IHI owed to DFM  from the  creditor  DFM.  A  gain,  as  between  the transferor and  transferee the  assignment is  complete. The only objector  is respondent  holding  1,000  equity  shares representing 1.25  per cent  of the  issued  and  subscribed capital. An advertisement was directed to be inserted by the order  of   the  Court  in  newspapers  in  respect  of  the application  for   substitution-modification  made   by  the appellants inviting  every one  interested in the company or in the  scheme of  compromise and/or arrangement to come and lodge   objection,

if   it   was   so   desired,   against substitution/modification prayed  by  the  appellants.  None including the  petitioning creditor  except  the  respondent Jain has  lodged such  an objection. This procedure was also followed by  the Gujarat  High Court in Mansukhlal’s (supra) case and by referring to that part of the judgment, the High Court held  that judgment  itself is  an authority  for  the proposition that  substitution of  the sponsor  is  a  vital change of  a basic nature and cannot be ordered by the Court acting under s. 392 and must be referred to a meeting of the creditors or  members. With  respect, this  is  not  a  fair reading of  the judgment.  At pages  290-291, the  scope and ambit of  the power  of the  Court under  s.  392  has  been precisely set  out and  it is  concluded that  the power  to modify would  comprehend the power to substitute one sponsor for the other if he is found otherwise fit and competent. As an additional string to the bow, it was observed, as it 1205 is being  done here  also, that  no one  has come forward to object to the substitution and that would further strengthen the hands of the Court. Such observation cannot be construed to mean  that the  Court lacks  the power  to  make  such  a modification without  reference back to the creditors and/or members, as  the case  may be.  In the  background of  these unimpeachable facts  the conclusion  is inescapable that the appellants have  a subsisting and vital interest in the fate and future  of IHI  and they are the appropriate persons who could and  should be  substituted in  place of  the original sponsor. In passing       it was  said that  the fate  of the company should not  be placed in the hands of the appellants and the lack of  bona fides  of the  appellants becomes  discernible from the  fact that  they tooth  and nail  opposed the  very scheme which  they now  seek to  implement. This is hardly a relevant consideration.  A creditor  may come  and oppose  a scheme being  implemented by  some person  and  yet  may  be interested in  taking over  the affairs of the company. This could  hardly  be  treated  as  a  disqualification  of  the appellants. Lastly it may be mentioned that the appellants agree to implement the  scheme. They undertake to bring Rs. 3 lacs as liquid finance  for implementing the scheme. The question of the know-how  was examined  by the  company  Judge  who  has accepted their  fitness to  run the business and nothing was pointed out to us to depart from the same. Therefore, viewed from  any  angle,  we  see  no  objection  to  granting  the application of  the appellants for substitution/modification as sponsors of the scheme. Accordingly, the  judgment of  the Division Bench dated 16th July  1976 in Company Appeal No. 15/76 is set aside and the order  of the  Company Judge  dated 26th  April 1976  in Company  Application  No.  193/76  is  restored  with  costs throghout. N.V.K.

Appeal allowed. 1

 

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