Companies Act Case Law M/S Meghal Homes Pvt. Ltd Vs Shree Niwas Girni K.K.Samiti & Ors

CASE NO.:
Appeal (civil) 3179-3181 of 2005

PETITIONER:
M/S MEGHAL HOMES PVT. LTD

RESPONDENT:
SHREE NIWAS GIRNI K.K.SAMITI & ORS

DATE OF JUDGMENT: 24/08/2007

BENCH:
G.P. MATHUR & P.K. BALASUBRAMANYAN

JUDGMENT:
J U D G M E N T

CIVIL APPEAL NOS. 3179-3181 OF 2005
WITH
[C.A. Nos. 3182-3184/2005, C.A. Nos. 3569-3571/2005, C.A. No. 4377/2006]

 

P.K. BALASUBRAMANYAN, J.
1. These appeals arise out of proceedings in the
Company Court in the matter of M/s Shreeniwas Cotton
Mills Limited (SCML). The Company was incorporated
on 5.2.1935. It established and ran a textile mill in a
land measuring 70,490 square meters in Lower Parel in
the then City of Bombay.

2. Just like various other textile mills located in
that city, SCML also ran into difficulties. A creditor of
the Company made an application C.P. No. 642 of 1983
under Section 433 of the Companies Act, for the winding
up of the Company. By order dated 25.7.1984, SCML
was ordered to be wound up by the Company Court. The
Official Liquidator took charge of the affairs of the
Company.

3. Nothing significant seems to have happened for
a decade. Then, on a report of the Official Liquidator,
the Company Court passed an order dated 1.9.1994
directing the Official Liquidator to issue a public notice
inviting offers for the revival of the textile mills and
absorption of the workmen and to purchase the assets of
the Company. At that stage, Rangnath Somani, a
contributory, filed Company Application No. 339 of 1994
seeking directions of the Company Court for holding a
meeting of the creditors, contributories and other
interested persons to consider a scheme proposed
allegedly for the revival of the Company. The application
was opposed. The Company Court directed the
convening of the requisite meeting to consider the
proposed scheme. Pending consideration thereof, the
Company Court also withheld the proceedings pursuant
to the public notice inviting offers. The order of the
Company Court directing the convening of a meeting for
the purpose of considering the scheme propounded was
challenged in appeal by the workers’ union and three of
the parties who had submitted their offers in response to
the advertisement issued by the Official Liquidator
pursuant to the direction of the Company Court dated
1.9.1994. Notwithstanding the pendency of the appeals,
a meeting as directed by the Company Court was held
and a scheme was approved by the creditors,
contributories and workers. An application for
sanctioning the scheme was also filed. But, meanwhile,
on 4.4.1995, the Division Bench of the High Court
allowed the appeal against the order dated 1.9.1994 and
set aside the direction for convening a meeting to
consider the scheme proposed. The Company
Application filed in that behalf was thus dismissed. In
the view of the Division Bench, the scheme proposed was
not a bona fide one since it was not on the basis of any
viability report regarding the revival of the company and
there was a failure to disclose the latest financial
position of the Company. The court also found that even
on the showing of Rangnath Somani, the value of the
land belonging to SCML would be approximately Rs. 200
crores if unencumbered and that itself was a very
conservative valuation. The court was of the view that
the intention behind presentation of the Scheme
appeared to be to acquire the huge lands and other real
estate belonging to SCML at a throw away price
ostensibly in the guise of reviving the mills but with no
real intention of reviving it. After the obtaining of a
viability report, the Division Bench wanted the Company
Judge to consider certain suggestions. They were:

“(1) Whether it is possible and viable to
reopen the mills and/or any portion of
it and run it profitably and without
disposing of immovable assets of the
Company;

(2) In case the mills cannot be re-started
then whether any department or
process of the mills could be started as
viable;

(3) In case any party who comes forward
with an offer to pay off all the
creditors, take the company out of
winding up and revive and restart the
mills happens to be a shareholder of
the Company, such party should
surrender the shareholding in the
capital of the Company at the value to
be determinied by the Court;

(4) In case above courses are not workable
then whether the mills can be
restarted by disposing of part of its
assets to generate finance after
payment to all the creditors;

(5) In case even the course under clause
(4) above is not possible, then the
Official Liquidator may sell the assets
by public auction in which even the
shareholders of the Company will be at
liberty to bid.”

4. Thereafter, the Division Bench emphasized
what was the main object to be kept in mind by the
Company Court. In that behalf, it was stated:

“It is open for the learned Company Judge
to give any other suitable directions in the
matter keeping in mind that the whole
anxiety is to revive the Company and to
restart the mills which is in the interest not
only of the workers and creditors of the
Company but also in the general interest of
public. Needless to say that the revival of
the Company and restarting of the mills will
generate more employment and will be for
healthy economy of the country.”

(emphasis supplied)
5. A Petition for Special Leave to Appeal filed in
this Court challenging the decision of the Division Bench
as Special Leave Petition (Civil) No. 13305 of 1995 was
dismissed on 10.7.1995.

6. The State Bank of India Capital Markets
Limited was assigned the task of preparing a viability
report. That Body made its recommendations after a due
study of the situation. On the first aspect posed by the
Division Bench, it answered:

“It is not possible to reopen the mills or any
portion of it without disposing of the
immovable assets of the Company. In our
opinion, it would be unviable to revive the
weaving and the processing sections of the
above mill on account of the reasons
summarized below.”

For the moment, we are not concerned with those
reasons and therefore we are not adverting to them at
this stage. In answer to the second query posed, the
answer was:

“It is not possible to restart the entire mill.
Only a section of the spinning division with
21420 spindles can be restarted and
operated as viable, details of which are
given below.”

The details are not relevant for the moment. In answer
to the third query regarding the surrender of
shareholding if the offer comes from a shareholder, the
report stated that the said matter rested with the court
and its discretion. Regarding query No. 4, it was
reported that since revival plan envisaged the
functioning of the spinning section alone, the machinery
in the weaving and processing sections and part of the
machinery in the spinning section had to be sold or
scrapped. A sale of such machinery was estimated to
fetch a price of approximately Rs.550.99 lakhs. It was
further reported that saleable extent of 44593 square
meters of mill land, being a part of the total holding, if
sold may fetch the required sum to settle all the past
liabilities of the Company. But, it was suggested that it
may be appropriate if the interested party brought in
Rs.12367.41 lakhs in the form of loans initially and once
the weaving and processing machinery and non-viable
spinning machinery are sold, then, the question of sale
of part of the land could be taken up. In answer to the
fifth query, it was reported that since a partial revival of
the mills was possible, sale by the Official Liquidator of
the assets by public auction may not arise. It was also
suggested that delay in implementing the revival package
will escalate the liability and would lead to further
deterioration in the condition of the spindleage proposed
to be revived.

7. On 7.11.1998, a new Industrial Location Policy
of the Government of Maharashtra became operative.
That applied to all industries in the Mumbai
Metropolitan Region excluding the cotton textile
industries. Since cotton textile industry was excluded
from its purview, it appears that there was no restriction
on restarting of the manufacturing activities of SCML.

8. We may notice at this stage that the main
shareholders of SCML were Bangurs, Somanis, and the
Life Insurance Corporation of India and the sundry
shareholders held about 20% of the shares. Two of the
secured creditors were the State Bank of India and the
Punjab and Sind Bank.

9. The matters lingered on. On 29.6.2003, it is
seen that a Memorandum of Understanding was
executed between the shareholders, the Somani Group,
who meanwhile had acquired the shares of the Bangur
Group (there is controversy whether the acquisition was
by Rangnath Somani in his own right or it was an
acquisition by the Somanis Group, a controversy that we
are not called upon to decide here) and Lodha Builders
Private Limited (LBPL). Under that Memorandum, LBPL
agreed in consideration of getting the right to develop the
properties of SCML, to pay a sum of Rs. 78 crores to
SCML and 70,000 square feet of built up area or 19.50
crores in the alternative at the option of SCML. In other
words, LBPL was to pay Rs. 97.50 crores to SCML or Rs.
78 crores and 70000 square ft. of built up area. It was
also provided that if any additional funds were required
for settling the affairs of the Company, the additional
funds would have to be brought in by SCML. In other
words, on payment of Rs. 78 crores and handing over a
built up area of 70000 square feet or on paying Rs. 97.50
crores in all, LBPL was to get the right to develop and
deal with the lands of SCML. Based on this
Memorandum of Understanding, the three Somani
cousins filed Company Application No. 4 of 2004
propounding a scheme and seeking directions from the
Company Court for convening a meeting to consider the
amended scheme. The amendment to the earlier scheme
presented, included the replacement of paragraph 1.5 of
the original scheme which had indicated that sale of the
assets or properties of SCML was not envisaged and the
scheme was for revival of the textile mill unit of SCML by
a provision that the scheme envisaged development and
transfer of SCML’s propertiesd by LBPL for revival of
SCML. Another amendment was to clause 5.1. This was
by deleting the salient features for scheme for revival of
the mills and providing in its place that the aim was that
after discharging the liabilities of all creditors as per the
scheme, if extra funds are available with SCML, then
SCML will start a viable industry in any part of
Maharashtra and employment would be generated. It
was further stated in the proposed amendment that
LBPL was to bring in funds of Rs. 78 crores for the
payment of liabilities of SCML. In the event of any
further finance being required than the amount agreed
to be brought in by LBPL, the Company Applicants, the
Somani cousins, would be permitted to dispose of a part
of the assets of SCML and the proceeds of the sale will be
utilized to pay off the workers and the creditors if
required.

10. On 12.12.2003, the Company Court directed
the meeting to be convened to consider the amended
scheme. On 21.2.2004, the amended scheme was
approved at the meeting. Company Petition No. 315 of
2004 was filed on 7.4.2004 seeking sanction of the
amended scheme. The Regional Director on behalf of the
Central Government pointed out that the propounders of
the scheme were required to file an affidavit regarding
the latest financial position of the Company but that
they had not filed such an affidavit. On 23.7.2004, the
Company Court rejected the amended scheme and
dismissed the Company Petition No. 315 of 2004. The
court held that the scheme presented was not a scheme
for revival but it was in substance a disposal of the
Company’s assets which then vested in the Official
Liquidator. The court found that it was only a mode of
disposal of the Company’s assets and hence it would be
proper for the Company Court holding the assets to
dispose of the assets after inviting offers. That would
fetch a better price and such a course would be in the
interest of the Company’s minority shareholders,
workmen and secured and unsecured creditors. The
court was also of the view that the amount of Rs. 97.50
crores offered by LBPL was considerably less than the
amount of Rs. 200 crores, which the Division Bench had
noticed about ten years back, would be the minimum
price that could be fetched if the properties were to be
auctioned. The Company Court directed the issue of
advertisements inviting offers for the assets of SCML
showing a reserve price of Rs. 150 crores. The Official
Liquidator issued advertisements inviting offers.

11. The order of the Company Court dated
23.7.2004 was challenged in appeal by LBPL, by the
Somanis and by the workers’ union. Though various
offers had been received pursuant to the advertisement
issued at the direction of the Company Court, they were
not considered since in appeal, the auction process was
stayed. The Division Bench, on 15.12.2004, passed an
order directing the Somanis, LBPL and the various
interveners who had made offers, to place their proposals
for rehabilitation on record. It was also directed that
those interested in purchase of the property should file
affidavits placing on record whether they were prepared
to make a down payment of a specified sum for release to
the workers. The court also directed the Somanis
holding the major shares (again we are not concered with
their inter se dispute here) to state whether they would
be willing to accept any such better scheme. Some
affidavits were filed and in its affidavit, LBPL stated that
in addition to the payment of Rs. 45 crores to the
workers, LBPL would set up a spinning unit and a
garment unit at the cost of Rs. 40 crores on the 7,50,000
square feet coming to them under the Scheme, and
would construct and transfer to a Workers Trust a
30,000 square feet unit, housing a school and other
accommodation at a cost of Rs. 15-20 crores. Rangnath
Somani, the eldest of the cousins filed an affidavit
showing that the Somanis would be willing to consider
and evaluate any better scheme in the interests of SCML.
But, on the same day, Ramesh Somani, who was one of
the co-propounders of the scheme, filed an affidavit
stating that he fully supported the scheme of LBPL and
did not want any change in the sponsors. He also filed
another affidavit stating that the propounders of the
scheme would set up a textile unit for rehabilitation of
the workers of SCML at Sholapur at a cost of Rs. 35.02
crores. It is said on behalf of the appellants, that at the
last moment just before the delivery of the judgment
began, affidavits filed on behalf of the LBPL were received
by the court, even while refusing to receive two affidavits,
Rangnath Somani wanted to file. The Division Bench
allowed the appeals, set aside the judgment of the
Company Court and sanctioned the scheme as modified
and as further modified by two affidavits of the Directors
of LBPL, by its judgment dated 21.3.2005. It is this
decision of the Division Bench that is in challenge before
us in these appeals. Three of the appeals are by
persons, who had made offers pursuant to the direction
of the court and have been described for convenience, as
the interveners and one of them by Rangnath Somani.
Even at this stage, we may mention that Civil Appeal
Nos. 3569-3571 of 2005 filed by one of the interveners is
sought to be withdrawn. We see no reason why the
prayer for withdrawal of those appeals shall not be
granted. So, Civil Appeal Nos. 3569-3571 of 2005 would
stand dismissed as withdrawn. We are only considering
the other appeals on merits.

12. Before we proceed to consider the merits of the
appeals, an objection taken to the maintainability of the
appeals requires to be considered. According to the
respondents, the appellants in Civil Appeal Nos. 3179-
3181 of 2005 and Civil Appeal Nos. 3182-3184 of 2005
have no locus standi either to object in the Company
Court or to challenge the decision of the Division Bench
of the High Court in appeal before this Court. It is
submitted that neither of those appellants are creditors,
contributories or debenture holders and are total
strangers to SCML and they have nothing to do with the
proposal and acceptance of the Scheme under Section 391 of
the Companies Act read with Sections 392 and 393 of that
Act. This contention is sought to be met by the appellants in
these appeals by pointing out that the appellant in Civil
Appeal Nos. 3171-3181 was associated with the original
Scheme for which approval was sought from the Company
Court and that the appellant therein had in fact deposited a
sum of Rs. 18 crores as per the direction of the court and
had also furnished a bank guarantee for Rs.10 crores and
had allegedly discharged certain creditors of the Company
and what was sought in the present case was a modification
of the earlier Scheme in which the appellant was involved
and in this situation the locus standi of the appellant could
not be denied. It was also pointed out that there was a
specific direction by the Division Bench to the appellant and
others to present their Schemes/Proposals before the court
and they had filed affidavits in that behalf. The Company
Court was bound to consider their proposals in the light of
the directions of the Division Bench. The Division Bench in
the present round also could not go back on what had been
ordered by earlier Division Bench. This gave the appellants
sufficient locus standi. The appellants in both these sets of
appeals had also submitted proposals pursuant to the
directions of the court and had also responded to the tenders
issued as per the directions of the Company Court. If the
proceedings had continued in the Company Court, one of
those persons could have benefited. The benefit that was
thus to accrue to one of the interveners was deprived of by
the Division Bench by its present order and in that situation,
the appellants are persons who are aggrieved by the decision
of the Division Bench and entitled to challenge the said
decision in this Court. It is also submitted that the framing
of a Scheme for revival of a Company under liquidation had
overtones of public interest and commercial morality and in
the context of what had transpired in this case and the
involvement of the interveners at every stage, it was not open
to the respondent now to raise a contention that the
appellants have no locus standi. In fact, the Division Bench
of the High Court was totally in error in excluding their
objections on the ground that they had no locus standi and
as persons aggrieved by that finding, it is open to them to file
these appeals. It is also submitted that LBPL was also in
the same boat as the appellant in Civil Appeal Nos. 3179-
3181 of 2005 and if it had locus standi to appeal to the
Division Bench of the High Court against the order of the
Company Court, the appellant has the locus standi to appeal
to this Court.

13. In the light of what had transpired in this case
and the orders of the Division Bench dated 4.4.1995 and
15.12.2004, it is not possible to accept the argument on
behalf of the respondents that the appellants in the two
sets of appeals have no locus standi to maintain their
appeals in this Court. They have been allowed to
intervene by the Division Bench of the High Court on
earlier occasions and it is too late in the day now to raise
a contention that they have no role to play in the
approval of a Scheme under Section 391 of the Act and
their appeals should be rejected on that ground. The
case of the appellant in Civil Appeal Nos. 3171-3181 of
2005 involves a further fact that it was sought to be
involved in the Scheme originally presented by the
Somanis which ultimately was rejected by the court, but
during the course of the proceedings the appellant
therein was directed to deposit certain amounts and
furnish security for certain other amounts and this could
only be on the basis that as a participant in the original
Scheme proposed, the appellant had some locus standi.
In a sense, LBPL, which is now sought to be associated
in the modified Scheme also stands on the same footing
as the appellant in Civil Appeal Nos. 3179-3181 of 2005
and we are not invited to hold that LBPL has no locus
standi in this proceeding as no such argument was
raised before us. Considering the aspects involved, in
the context of the order for liquidation of the company
and the attempt to sponsor a scheme for acceptance by
the Company Court, we are of the view that the two sets of
appeals could not be dismissed as appeals by persons who
have no locus standi to maintaini them. Surely, to the
extent the Division Bench has held that their objections are
irrelevant, they can certainly appeal to this Court in an
attempt to show that their objections are indeed relevant.
Whether their claim is meritorious, is another matter.

 
14. The right of Rangnath Somani to maintain his
appeal being Civil Appeal No. 4377 of 2006, is challenged
on the ground that he was a co-sponsor of the Scheme
which has been accepted and approved by the Division
Bench and therefore he cannot claim to be a person
aggrieved by the decision of the Division Bench entitled
to challenge the decision of the Division Bench. The
argument on behalf of Rangnath Somani is that the
Scheme as approved by the general meeting of the
concerned, has not been accepted by the Division Bench
and certain modifications were brought in on the basis of
affidavits filed on behalf of LBPL and he has always a
right to object to such modifications or to contend that
such modifications must go back to the general meeting
for consideration and approval. On this part of the
objection, we find substance in the stand adopted on
behalf of Rangnath Somani and on that basis we cannot
say that he is not entitled to file an appeal against the
decision of the Division Bench.

15. But more seriously it is contended that
Rangnath Somani had accepted the decision of the
Division Bench of the High Court and had even received
possession of the assets of SCML from the Official
Liquidator pursuant to his discharge on the basis of the
decision of the Division Bench and having done so, he is
estopped from questioning the order of the Division
Bench in an appeal which he has filed subsequently.
This argument is sought to be met on behalf of Rangnath
Somani by pointing out that the receiving of possession
pursuant to the order of the Division Bench from the
Official Liquidator cannot estop him from filing an appeal
before this Court and from pointing out that the decision
suffers from a vital defect of being one in excess of the
authority of the Division Bench of the High Court and
not in consonance with the terms of the Companies Act.
It is seen that some objection was sought to be raised by
Rangnath Somani regarding the proposals contained in the
affidavits filed on behalf of LBPL, which proposals were
accepted and made part of the Scheme of the Division Bench
and the objection of Rangnath Somani was not dealt with as
such. Moreover, from the fact that, subsequent to the
decision of the Division Bench, Rangnath Somani received
possession of the assets of SCML along with his cousins, the
other two Somanis, it cannot be said that thereby he has lost
his right to appeal to this Court questioning the
modifications in the Scheme sought to be propounded by
him and approved at the General Meeting. We are not
inclined to go into the charges and counter charges as to
which of the Somanis has been got at and by whom, since we
consider those allegations to be irrelevant for our purpose.
Suffice it to say that, we are not inclined to accept the
argument on behalf of the respondents that Rangnath
Somani is estopped from filing an appeal against the decision
of the Division Bench. Anyway, since we have held that the
appeals by the other two appellants are maintainable, the
question that arises will have to be examined by this Court
and in that context, we find it not proper to turn away
Rangnath Somani from the portals of this Court on the
ground of estoppel. Thus, we overrule the objections to the
maintainability of these appeals.

16. Now to recapitulate, the Company was ordered
to be wound up on 25.7.1984 and the Official Liquidator
was directed to take possession of the assets of the
Company. Once an order of liquidation had been passed
on an application under Section 433 of the Companies
Act, the winding up has to be either stayed altogether or for a
limited time, on such terms and conditions as the court
thinks fit in terms of Section 466 of the Act. If no such stay
is granted, the proceedings have to go on and the court has
to finally pass an order under Section 481 of the Act
dissolving the Company. In other words, when the affairs of
the Company had been completely wound up or the court
finds that the Official Liquidator cannot proceed with the
winding up of the Company for want of funds or for any
other reason, the court can make an order dissolving the
Company from the date of that order. This puts an end to
the winding up process. Winding up is dealt with in Part VII
of the Companies Act and Sections 433 to 483 occur in
Chapter II of that Part. Part VI deals with management and
administration of a Company and Chapter V thereof deals
with Arbitrations, Compromises, Arrangements and
Reconstructions. In that Chapter occurs Sections 390 to
396A of the Act with which we are concerned. While defining
a Company for the purpose of Sections 391 and 393, Section
390 clarifies that Company means any Company liable to be
wound up under the Companies Act. SCML was a company
that was ordered to be wound up on 25.7.1984. Therefore,
when the Scheme was originally presented on 3.10.1994, it
was at a time when the winding up order was already in
existence. The argument that Section 391 would not apply
to a Company, which has already been ordered to be wound
up cannot be accepted in view of the language of Section
391(1) of the Act, which speaks of a Company which is being
wound up. If we substitute the definition in Section 390(a) of
the Act, this would mean a Company liable to be wound up
and which is being wound up. It also does not appear to be
necessary to restrict the scope of that provision considering
the purpose for which it is enacted, namely, the revival of a
company including a Company that is liable to be wound up
or is being wound up and normally, the attempt must be to
ensure that rather than dissolving a company it is allowed to
revive. Moreover, Section 391(1)(b) gives a right to the
liquidator in the case of a company which is being wound
up, to propose a compromise or arrangement with creditors
and members indicating that the provision would apply even
in a case where an order of winding up has been made and a
liquidator had been appointed. Equally, it does not appear
to be necessary to go elaborately into the question whether in
the case of a company in liquidation, only the Official
Liquidator could propose a compromise or arrangement with
the creditors and members as contemplated by Section 391
of the Act or any of the contributories or creditors also can
come forward with such an application. By and large, the
High Courts are seen to have taken the view that the right of
the Official Liquidator to make an application under Section
391 of the Act was in addition to the right inhering in the
creditors, the contributories or members and the power need
not be restricted to a motion only by the liquidator. For the
purpose of this case, we do not think that it is necessary to
examine this question also in depth. We are inclined to
proceed on the basis that the Somanis, as contributories or
the members of the Company, are entitled to make an
application to the Company Court in terms of Section 391 of
the Act for the purpose of acceptance of a compromise or
arrangement with the creditors and members.

17. The question in this case really is whether the
compromise put forward under Section 391 of the
Companies Act could be accepted by the court without
reference to the fact that it is a company in liquidation
and without considering whether the compromise
proposed as intending to take the company out of
liquidation, contemplates the revival of the company and
whether it puts forward a proposal for revival and
whether such a proposal also satisfies the element of
public interest and commercial morality, the elements
required to be satisfied for the court to stop the winding
up proceeding in terms of Section 466 of the Act. In the
present case, the Company Court was of the view that the
compromise or arrangement that is put forward by the
Somanis in conjunction with LBPL was not a scheme or
proposal for revival of the company or the Mills, but it is
one for disposal of the assets of the company and in that
situation, it would be proper that the assets are disposed
of by the Official Liquidator by inviting offers from the
public in that behalf and maintaining transparency.
But, the Division Bench accepted the contention that it
was not mandatory in law that a compromise or
arrangement has to be for revival of the very activity in
which the company was engaged in at the time of
winding up and the anxiety of the court while
sanctioning the scheme which is approved by all classes
should be to see that the company is permitted to
continue its corporate existence. The Division Bench
also took the view that the judgment of the earlier
Division Bench dated 4.4.1995 did not stand in the way
of accepting the present scheme, and that since the
Company Court had no jurisdiction to sit in appeal over
the decision of the creditors, members and
contributories of the company, the proposal put forward
was liable to be accepted especially in the context of its
finding that the interveners have no locus standi to
oppose the proceedings.

18. Learned counsel argued before us whether in
the case of a company which had been ordered to be
wound up, a compromise or arrangement made under
Section 391 of the Act could be accepted on the basis
that the said arrangement has been approved by the
relevant meeting of the creditors, members and so on
and whether the court was concerned with anything
more than such a decision taken by the concerned
members and creditors of the company. In the case of a
company ordered to be wound up, a compromise or
arrangement that could normally be accepted by the
Company Court could be either paying off all dues by
liquidation of assets or an arrangement for revival of the
company and its business. That is the rationale of the
order dated 4.4.1995 by which the Division Bench
directed consideration of the various aspects pointed out
therein. The Division Bench had emphasized that what
the court was concerned with while sanctioning a
Scheme under Section 391 of the Act in the case of a
company that is ordered to be wound up, is the revival of
the company. Strictly speaking, in the light of that order
of a Division Bench, which was binding on the
subsequent Division Bench, no question arises in this
case especially when we notice that the decision of the
earlier Division Bench dated 4.4.1995 was sought to be
challenged in this Court by way of a Petition for Special
Leave to Appeal and that challenge was repulsed and the
Petition was dismissed. Therefore, as far as this case is
concerned, the contours of the enquiry to be made by the
Company Court was drawn by the decision of the Division
Bench dated 4.4.1995. Hence, what is relevant for the
court to consider was whether the proposal or the
modified compromise or arrangement put forward was
for revival of the company.

19. In that context, it is clear that the State Bank
of India Capital Markets Limited had pointed out that it
was not possible to revive the entire business of the
SCML and that a part of the spinning industry could be
retained and revived by disposing of the machinery
related to the other activities carried on by SCML and by
sale of a portion of the immovable property of the
company. Therefore, the main aim of any scheme or
modified compromise or arrangement in terms of Section
391 of the Act, would be a revival only of the spinning
section of the company at the premises of the Mill and
the facilitating of that revival by the sale of parts of the
assets of the company. The Scheme as it was, originally
proposed, contained the following clause in the
preamble:

“1.5. The Scheme does not envisage sale of
any of the assets or properties of Shreeniwas
Cotton Mills Limited (now in liquidation) and
is for the revival of the textile Mill unit of Sree
Niwas Cotton Mills Ltd. (now in liquidation)”

It provided for payment and discharge of liabilities and it
contained what were described as salient features of the
Scheme for revival of the Mills. The amendments
proposed to that Scheme by the Somanis were the
deletion of paragraph 1.5. quoted above and replacement
of it with the following:

“The Scheme envisages development and
transfer of SCML’s said property by LBPL for
revival of SCML (now in liquidation).”

After dealing with the modified proposal for settlement of
liabilities to creditors and others, it was provided in
clause 5 that on the sanctioning of the Scheme, a
development agreement will be entered into between
SCML and LBPL for developing SCML’s property, liquidity
will be generated and all creditors paid off and the company
will come out of liquidation. Then it was stated:

“Secondly, after discharging all creditors as per
the scheme, if extra funds are available with
SNCML, then SNCML will start a viable industry
in any part of Maharashtra and employment will
be generated.”

It also explained that the entire dues of the workers will be
paid and all the creditors will be satisfied. The following
clause was also to be inserted:

“If the Scheme is allowed, SCML will enter into an
agreement with the LBPL for development and
transfer of SCML’s said property. LBPL shall
bring in and provide for funds to discharge the
creditors of SCML. LBPL will bring in funds of
Rs. 78.00 crores for payment of liabilities of
SCML. Finance for the purpose of the Scheme is
being provided by LBPL and all the creditors and
workers will be paid. In the event, if any further
finance is required than the amount agreed to be
brought in by LBPL, the Applicants be permitted
to dispose off the part of the assets of SNCML and
proceeds from the sale will be utilized to pay off
the workers and the creditors if required.”

It was stated that:

“In the event, if after paying all creditors of
SNCML funds are available with SNCML, then
SNCML will start such viable industry in any
part of Maharashtra.”

According to the contesting respondents, the Scheme as
sought to be modified is a Scheme that takes care of all
the liabilities of SCML and also contemplates the setting
up of some viable industry in any part of Maharashtra by
the company. This was enough to recognize a scheme
under Section 391 of the Companies Act. It was not
feasible to revive the mills as a whole as was clear from the
materials and in that context what was possible was to save
the godown and the office building of SCML, discharge all
liabilities and if any excess fund is left, to start an industry
in any part of Maharashtra and there was nothing wrong
with the acceptance of such a scheme. It was during the
course of the hearing before the Division Bench that two
alternatives were proposed in an affidavit filed on behalf of
the LBPL, not a member or creditor of the Company, but
which was associated with the proposal put forward by way
of a compromise or arrangement, that LBPL will, in addition
to the liability of Rs. 97.50 crores undertaken, would put up
a school / industrial unit of 30000 square feet for the benefit
of the workers or pay a sum of Rs. 15 lakhs in lieu thereof to
the workers; that LBPL will set up a spinning/garment unit
in an area of 1,00,000 square feet in the Mill premises at a
cost of Rs. 40 crores and SCML would set up a unit in rural
Maharashtra at a total outlay of Rs. 20 crores. Yet another
affidavit was filed on behalf of LBPL in which willingness was
expressed by it to pay the higher amounts claimed by the
two secured creditors, the State Bank of India and the
Punjab and Sind Bank subject to LBPL being entitled to
create a charge on the mill property even before discharging
the liability to the two banks and on condition of delivery of
the original documents relating to SCML to LBPL and not to
SCML, on full payment of the amounts agreed to be paid to
the two creditor banks. It was to these modifications
proposed by a non member of the company, but which was
associated with the working of the compromise or
arrangement, that Rangnath Somani tried to raise some
objections one of which was that SCML was not agreeable to
set up an industrial unit anywhere in Maharashtra at a cost
of Rs. 20 crores. Ramesh Somani supported LBPL. The
Division Bench of the High Court accepted the affidavits filed
on behalf of LBPL and sanctioned the scheme as amended
and as further modified by the two affidavits of Abhishek
Lodha, Director of the Company dated 21.3.2005.
Obviously, the Division Bench must have been conscious
that Abhishek Lodha was only a Director of LBPL and that he
was not a Director of the Company in liquidation, though
there is some ambiguity in the concerned sentence in the
judgment. He was also not a propounder of the Scheme, but
he was only a participant in the proposed arrangement come
to between the company and its creditors, shareholders,
debenture holders, workers, etc.

20. How far the scheme could be modified on the
suggestion of LBPL which is not one of the entities
contemplated by Section 391 of the Act, is a moot question.
Even otherwise, the deletion of clause 1.5 indicated in the
original proposal and the replaced clause 1.5 in the modified
scheme, indicated that the object was not the revival of
SCML. The vague stipulation that SCML would put up some
viable industry in some part of the State of Maharashtra, if
funds are available, was sought to be replaced by a
commitment to start an industry in rural Maharashtra that
also at the cost of Rs. 20 crores. Though, one of the Somani
cousins agreed to these proposals, another cousin attempted
to object to that proposal and is objecting to it before us.
Similarly, the amendment by way of an affidavit on behalf of
the LBPL contemplated the starting of an industry in the Mill
land by LBPL and not by the company in liquidation. Thus,
the company in liquidation, did not intend taking up any
revival activity in the properties belonging to SCML other
than retaining the office building it had and the godown it
had away from the mill lands. It is difficult to conceive of
this as a revival of SCML, a company in liquidation. This is
more in the realm of disposal of the assets of the company in
liquidation, no doubt, with a view to pay off all the creditors,
debenture holders and workers from the funds generated out
of the sale of the lands in favour of LBPL. Going by the test
laid down by the Division Bench in its order dated 4.4.1995,
which has become final inter parties and the object of
Section 391 of the Act, it is difficult to say that it is a scheme
for revival of the company, the clear statutory intention
behind entertaining a proposal under Section 391 of the Act.

21. Considerable arguments were raised on the
role of the Court when a Scheme under Section 391 of
the Act was propounded for its consideration. The
decision in Miheer H. Mafatlal Vs. Mafatlal Industries
Ltd. [(1997) 1 S.C.C. 579] was relied on. That was a
case of merger or amalgamation of two companies.
Neither of the companies was in liquidation. This Court
held that compromise or arrangement included
amalgamation of one company with another. This Court
also defined the broad contours of the jurisdiction of the
Company Court in granting sanction to a scheme in terms
of Section 391 and Section 393 of the Act. This Court
laid down the following parameters:
“1. The sanctioning court has to see to it
that all the requisite statutory procedure for
supporting such a scheme has been
complied with and that the requisite
meetings as contemplated by Section
391(1)(a) have been held.
2. That the scheme put up for sanction of
the Court is backed up by the requisite
majority vote as required by Section 391
Sub-Section (2).
3. That the concerned meetings of the
creditors or members or any class of them
had the relevant material to enable the
voters to arrive at an informed decision for
approving the scheme in question. That the
majority decision of the concerned class of
voters is just and fair to the class as a
whole so as to legitimately bind even the
dissenting members of that class.
4. That all necessary material indicated
by Section 393(1)(a) is placed before the
voters at the concerned meetings as
contemplated by Section 391 Sub-section
(1).
5. That all the requisite material
contemplated by the proviso of Sub-section
(2) of Section 391 of the Act is placed before
the Court by the concerned applicant
seeking sanction for such a scheme and the
Court gets satisfied about the same.
6. That the proposed scheme of
compromise and arrangement is not found
to be violative of any provision of law and is
not contrary to public policy. For
ascertaining the real purpose underlying
the Scheme with a view to be satisfied on
this aspect, the Court, if necessary, can
pierce the veil of apparent corporate
purpose underlying the scheme and can
judiciously X-ray the same.
7. That the Company Court has also to
satisfy itself that members or class of
members or creditors or class of creditors,
as the case may be, were acting bona fide
and in good faith and were not coercing the
minority in order to promote any interest
adverse to that of the latter comprising of
the same class whom they purported to
represent.
8. That the scheme as a whole is also
found to be just, fair and reasonable from
the point of view of prudent men of
business taking a commercial decision
beneficial to the class represented by them
for whom the scheme is meant.
9. Once the aforesaid broad parameters
about the requirements of a scheme for
getting sanction of the Court are found to
have been met, the Court will have no
further jurisdiction to sit in appeal over the
commercial wisdom of the majority of the
class of persons who with their open eyes
have given their approval to the scheme
even if in the view of the Court there would
be a better scheme for the company and its
members or creditors for whom the scheme
is framed. The Court cannot refuse to
sanction such a scheme on that ground as
it would otherwise amount to the Court
exercising appellate jurisdiction over the
scheme rather than its supervisory
jurisdiction.”

We may straightaway notice that this Court did not have
occasion to consider whether any additional tests have to
be satisfied when the Company concerned is in
liquidation and a compromise or arrangement in respect
of it is proposed. Therefore, it cannot be said that this
would be the final word on any Scheme put forward
under Section 391 of the Act, whatever be the position of
the concerned company. Even then, this decision lays
down the need to conform to the statutory formalities,
the power of the Court to ascertain the real purpose
underlying the Scheme, the bona fides of the Scheme,
the good faith in propounding it and that as a whole, it is
just, fair and reasonable, at the same time emphasizing
that it is not for the Court to examine the Scheme as if it
were an appellate authority over the commercial wisdom
of the majority.

22. When a Company is ordered to be wound up,
the assets of it, are put in possession of the Official
Liquidator. The assets become custodia legis. The follow up,
in the absence of a revival of the Company, is the realization
of the assets of the company by the Official Liquidator and
distribution of the proceeds to the creditors, workers, and
contributories of the company ultimately resulting in the
death of the company by an order under Section 481 of the
Act, being passed. But, nothing stands in the way of the
Company Court, before the ultimate step is taken or before
the assets are disposed of, to accept a scheme or proposal for
revival of the Company. In that context, the Court has
necessarily to see whether the Scheme contemplates revival
of the business of the company, makes provisions for paying
off creditors or for satisfying their claims as agreed to by
them and for meeting the liability of the workers in terms of
Section 529 and Section 529A of the Act. Of course, the
Court has to see to the bona fides of the scheme and to
ensure that what is put forward is not a ruse to dispose of
the assets of the Company in liquidation.

23. In fact, it was on this basis that the Division
Bench of the High Court proceeded when it passed the
order dated 4.4.1995. Apart from the fact that the
correct principle was adopted, the directions therein are
binding on the Company Court and the Division Bench of
the High Court of coequal jurisdiction when the proposal
for amendment of the earlier scheme came up. It has to
be noted that it was not a fresh scheme that was being
mooted, but it was a proposal for an amendment of the
scheme already considered by the Division Bench when
it passed the order dated 4.4.1995. It was the plain duty
of the Division Bench on the latter occasion to keep in
focus the suggestions earlier made.

24. It was argued before us on behalf of the
appellant that Sections 391 to 394A were procedural
provisions and when once a company was under
liquidation, the Chapter dealing with winding up applied
and the only provision or substantive provision
conferring power of stopping the winding up was
conferred on the court by Section 466 of the Act, and
unless the court is satisfied that the Company is being
taken out of liquidation by way of revival and that it will
sub-serve public interest and will conform to commercial
morality, the court cannot accept a scheme proposed
under Section 391 of the Act. The argument on the side
of the respondents is that Section 391 is a self-contained
code and read with Section 392 of the Act, which was
peculiar to our Act, it was clear that a Company Court
could approve, independently of Section 466 of the Act, a
scheme and could take the company out of liquidation
and even pass an order of stay in terms of Section 391
read with Section 392 of the Act. Section 466 of the Act
was not attracted when a scheme approved by the
shareholders, creditors, members of the Company and so
on was put forward before the Company Court.

25. It is a well settled rule of interpretation that
provisions in an enactment must be read as a whole
before ascertaining the scope of any particular provision.
This Court has held that it is a rule now firmly
established that the intention of the legislature must be
found by reading the statute as a whole. In Principles of
Statutory Interpretation by Justice G.P. Singh, it is
stated:

“The rule is referred to as an “elementary rule”
by VISCOUNT SIMONDS; a “compelling rule”
by LORD SOMERVELL OF HARROW; and a
“settled rule” by B.K. MUKHERJEE, J.”
(See pages 31 and 32 of the Tenth Edition)
When we accept this principle, what we have to do is to
read Sections 391 to 394A not in isolation as canvassed
for by learned counsel for the respondents, but with
reference to the other relevant provisions of the Act. We
see 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. In other words,
we find no incongruity in looking into 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. We see 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. We
cannot understand the decision in Miheer H. Mafatlal Vs.
Mafatlal Industries Ltd. (supra) as standing in the way of
understanding the scope of the provisions of the Act in the
above manner. We are therefore satisfied that the Company
Court was bound to consider whether the liquidation was
liable to be stayed for a period or permanently while
adverting to the question whether the scheme is one for
revival of the company or that part of the business of the
company which it is permissible to revive under the relevant
laws or whether it is a ruse to dispose of the assets of the
company by a private arrangement. If it comes to the latter
conclusion, then it is the duty of the court in which the
properties are vested on liquidation, to dispose of the
properties, realize the assets and distribute the same in
accordance with law.

26. But before that, we think that another step has to
be taken in this case. What has now been accepted by the
Division Bench, is not the scheme as modified by the general
meeting as contemplated by Section 391 of the Act. At least
two of the modifications having ramifications are based on
undertakings or statements made on behalf of LBPL and
there appears to be difference of opinion on that modification
even among the Somanis. There is also the question whether
the proposals of a person who is not one of those recognized
by Section 391 of the Act, could be accepted by the Company
Court while approving a scheme. We are of the view that the
scheme with the modifications as now proposed or accepted,
has to go back to the General Meeting of the members of the
Company, called in accordance with Section 391 of the Act
and the requisite majority obtained.

27. It was argued on behalf of the respondents that
under Section 392 of the Act, the Court has the power to
make modifications in the compromise or arrangement
as it may consider necessary and this power would
include the power to approve what has been put forward
by LBPL who has come forward to discharge the
liabilities of the Company on the rights in the properties
of the Company other than in the office building and in
the godown, being given to it for development and sale.
As we read Section 392 of the Act, it only gives power to
the Court to make such modifications in the compromise
or arrangement as it may consider necessary for the
proper working of the compromise or arrangement. This
is only a power that enables the court to provide for
proper working of compromise or arrangement, it cannot
be understood as a power to make substantial
modifications in the scheme approved by the members in
a meeting called in terms of Section 391 of the Act. A
modification in the arrangement that may be considered
necessary for the proper working of the compromise or
arrangement cannot be taken as the same as a
modification in the compromise or arrangement itself
and any such modification in the scheme or arrangement
or an essential term thereof must go back to the general
meeting in terms of Section 391 of the Act and a fresh
approval obtained therefor. The fact that no member or
creditor opposed it in court cannot be considered as a
substitute for following the requirements of Section 391
of the Companies Act for approval of the compromise or
arrangement as now modified or proposed to be
modified. In Miheer H. Mafatlal Vs. Mafatlal
Industries Ltd. (supra), this Court had insisted that the
procedural requirements of Section 391 must be satisfied
before the court can consider the acceptability of a
scheme even in respect of a Company not in liquidation.
Therefore, we are not in a position to accept the
argument on behalf of the respondents that the scheme
now as modified by the decision of the Division Bench
need not go back to the general meeting of the members
in terms of Section 391 of the Act. We must also
remember that at least before us there is serious
objection to the modifications by one of the Somanis who
are the promoters of the Company in liquidation and the
sponsors of the arrangement and that objection cannot
be brushed aside.

28. We find that the modifications proposed alters
the position of the shareholders vis-`-vis the Company.
Instead of the company reviving the spinning unit as
recommended by the State Bank of India Capital
Markets Limited, as adopted in the General Meeting, now
the Company will have nothing to do with the mill lands
and the whole of the mill lands will pass on to LBPL on
LBPL paying a value of Rs. 97.50 crores to SCML and
LBPL will start an industry of its own in that property.
This cannot be considered to be a modification in the
scheme necessary for the proper working of the
compromise or arrangement. This is a modification of
the scheme itself. Same is the position regarding the
provision of replacing the resolution passed that if any
surplus amounts are available, SCML would start a
viable industry in any part of the State of Maharashtra,
by a commitment that SCML would establish an industry
in any part of the State of Maharashtra on an investment
of Rs. 20 crores. This again is an obligation cast on the
members of SCML and we are of the view that this
cannot also be taken to be a modification which the
Court can bring about on its own under Section 392 of
the Act on the pretext that it is a modification necessary
for the proper working of the compromise or
arrangement. We have no hesitation in holding that in
any event, the Division Bench of the High Court ought to
have directed a reconvening of the meeting of the
members of the Company in terms of Section 391 of the
Act to consider the modifications and ensured that the
approval thereof by the requisite majority existed.

29. In the view we have thus taken, we are
satisfied that it is a fit case where we should set aside
the decision of the Division Bench as also of the
Company Court and remand the proceedings to the
Company Court. The Company Court first will direct the
sponsors of the scheme to call a meeting of the concerned in
terms of Section 391 of the Act and seek an approval for the
modifications now suggested by the Division Bench or that
may be put forward at the meeting. If the requisite majority
approves the modifications and the matter comes back to the
Company Court, the Company Court will consider whether
the compromise or arrangement put forward is one that
deserves to be accepted in respect of a company which has
been ordered to be wound up in the light of what we have
indicated above and what the Division Bench had earlier
indicated in its order dated 4.4.1995.

30. In addition to expanding and supporting the
submission that in terms of Sections 391 to 393 of the Act,
the court had the power to accept the compromise or
arrangement even in respect of a company ordered to be
wound up, independent of Section 466 of the Act and in that
process the power to stay a winding up, learned Senior
Counsel appearing for the Workers’ Union argued on behalf
of the workmen that interference by this Court would further
delay the benefits that would accrue to the workers under
the arrangement now approved by the Division Bench and
considering the long lapse of time, that would be unjust.
Learned counsel highlighted the additional benefits that
would accrue to the workers under the present scheme.
Though, we do appreciate this aspect of the matter, having
taken the view that the arrangement has to go back to the
meeting of members, creditors, etc. of the company in terms
of Section 391 of the Act and once it is adopted or adopted
with modifications with the requisite majority at the meeting,
the arrangement would require a fresh scrutiny by the
Company Court thereafter, we cannot avoid interfering with
the decision of the Division Bench on the ground put forward
by learned Senior Counsel of benefit to the workers.

31. We thus allow Civil Appeal Nos. 3179-3181 of
2005, Civil Appeal Nos. 3182-3184 of 2005 and Civil
Appeal No. 4377 of 2006, set aside the judgment of the
Division Bench and that of the Company Court, and remit
the matter to the Company Court for a fresh consideration
in accordance with law and in the light of the directions
contained in the judgment. Civil Appeal Nos. 3569-3571
of 2005 is dismissed as withdrawn. The parties are
directed to suffer their respective costs. The parties will
appear before the Company Court for further directions
on 12.11.2007.

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