[2008] 81 SCL 334 (BOM.)

HIGH COURT OF BOMBAY

Brij Mohan Grover

v.

O.L., High Court of Bombay

R.S. MOHITE, J.

COMPANY PETITION NO. 472 OF 2006 IN COMPANY APPLICATION NO. 527 OF 2006 IN COMPANY PETITION NO. 404 OF 1986

DECEMBER 22, 2006 AND JANUARY 15, 2007

Section 391, read with sections 392 to 394, of the Companies Act, 1956 - Compromise and arrangement - Whether wide powers have been given to Company Court to modify scheme of a compromise or arrangement as it may consider necessary for proper working of compromise or arrangement and Court can exercise these powers even suo motu without calling meeting of all members or creditors at time of sanctioning scheme - Held, yes - Whether workers of company, who were not paid their dues, were creditors of company and, therefore, persons entitled to propose a scheme under section 391 - Held, yes - Petitioner, who was shareholder and ex-managing director of company in liquidation, filed petition seeking sanction of scheme of arrangement between company and its shareholders, creditors and workers - Scheme was approved by shareholders and creditors, but workers did not approve scheme and suggested modifications therein - Whether since no objection had been raised to scheme as modified by workers and said scheme was more advantageous to all concerned, scheme as modified by workers should be sanctioned and scheme proposed by petitioner was liable to be rejected - Held, yes

Facts

A company was ordered to be wound up and the Official Liquidator was appointed as liquidator of the company. The petitioner, who was shareholder and ex-managing director of the company in liquidation, filed a petition under section 391 seeking for sanction of a scheme of compromise/arrangement between the company and its equity shareholders, secured creditors, unsecured creditors, statutory creditors and workers. The scheme was approved by shareholders and all the creditors in their respective meetings. However, at the meeting, the workers, who were creditors of the company since they had not been paid, did not grant approval to the scheme of the petitioner. Thereafter, one of the two workers’ union ‘Sabha’ filed an affidavit in the Court contending that the intention behind the scheme was to appropriate the assets of the company by denying the workers’ re-employment. They suggested modifications under section 392 which, according to them were more beneficial to the displaced workers and contained a proposal aimed at getting eligible workers re-employed and re-habilitated. A prayer was made that since the proposed modification to the scheme only improved upon the scheme as propounded by the petitioner, the scheme should be sanctioned along with the modifications as proposed by the ‘Sabha’. The petitioner contended that the modifications, as proposed by the ‘Sabha’, ought not be granted as the Company Court has no 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 could be a better scheme for the company and its members or creditors for whom the scheme is framed; that the matter should be sent again for reconsideration in a fresh meeting of the workers; that the modifications suggested by the ‘Sabha’ were effectively a scheme by the sponsor who was not a person eligible to propose a compromise or arrangement under section 391(1); and that the sponsor of the scheme was not financially solvent.

Held

The scheme, as modified by the ‘Sabha’, was clearly equal to, in two respects and more advantageous to all parties in several other respects, than the scheme as proposed by the petitioner. The scheme was also more advantageous to the secured creditor, particularly as it contemplated down payment of the entire value of the property as calculated by the petitioner of the land and structures, which was the subject-matter of the scheme. It was more advantageous to the shareholders, as it reduced their burden of taking further loans. [Para 34]

Insofar as the scheme of the petitioner was concerned, it did not find approval from the workmen and that was evident from the report of the chairman of the meeting of workmen, which was on record. The scheme, as propounded by the petitioner, in the absence of approval by the workmen and thereafter also disapproved by the secured creditor, was clearly rendered unworkable and could not be sanctioned. [Para 36]

However, after the petition was admitted, all concerned parties had, by a notice, been given a further opportunity to appear at the stage of the final hearing of the petition. All the workers supported the scheme as modified by the ‘Sabha’. No worker had appeared in any individual capacity to express his disapproval to the scheme as modified. The unsecured creditors had granted their approval to the scheme and in spite of the notice, no unsecured creditor had appeared at the stage of the hearing of the petition to oppose the modifications as suggested by the ‘Sabha’. As far as the statutory creditors were concerned, since 3/4th of the statutory creditors in value approved of the original scheme, all of them were deemed to have granted their approval. The modifications of the ‘Sabha’ made no change in the amounts payable to them as proposed in the petitioner’s scheme. After notice, no statutory creditor had appeared before the Court to indicate that they were withdrawing their approval or that there was any change in their stance. The modifications, as suggested by the ‘Sabha’, took adequate care of the interest of the secured creditor insofar as it not only offered to deposit the entire market value of the land and structure as calculated by the petitioner and left uncontroverted by the secured creditor, but also further offered to pay the entire decretal amount if and when the suit of the secured creditor would be decreed. [Para 37]

As regards the contention of the petitioner that it would be desirable to again send the matter for reconsideration in a fresh meeting of the workers, on a plain reading of section 392(1)(b), read with section 392(2), it appears that wide powers have been given to the Company Court to modify the scheme of a compromise or arrangement, as it may consider necessary, for the proper working of the compromise or arrangement. In the instant case, the scheme of the petitioner was rendered completely unworkable due to opposition by the two unions representing the workers and even the secured creditor. In view of such a situation, to ensure the working of the scheme, the more beneficial modifications suggested by the ‘Sabha’ could be sanctioned. The powers of the Court can be exercised even suo motu without calling the meeting of all the members or creditors at the time of sanctioning the scheme. [Paras 38 and 39]

It was next contended that the modifications suggested by the ‘Sabha’ was effectively a scheme by the sponsor who was not a person eligible to propose a compromise or arrangement under section 391(1), insofar as the sponsor was not the company, its creditor or member. That submission must be rejected as the modification to the scheme was not put by the sponsor, but, in fact, it was put up by the union which represented the workers. It was conceded that the workers, who were yet to be paid, were creditors of the company and in fact, the Act, by virtue of section 529A, put them at pari passu with secured creditors. The scheme as such had not been put up by the sponsor who was merely to bring in the finance and start a textile unit, but had been put up by the workers, who were creditors and, therefore, persons entitled to propose a scheme under section 391 and were also persons interested within the meaning of section 392. [Para 42]

The figures shown by the petitioner might not reflect the borrowing capacity or the real capacity of the sponsor to raise the amount through other sources, but the ‘Sabha’ and the sponsor had both filed affidavits promising to bring in amounts under the scheme within a short period of time. The proof of the pudding is in its eating. If they failed to do so, they were not outside the jurisdiction of the Company Court and the Court had the power, jurisdiction and ability to pass further orders if thought necessary. What was important from the point of view of the workers, was that the textile unit was established and run. The scheme, as modified by the ‘Sabha’, offered a bank guarantee to secure the performance of that promise. The scheme envisaged the opening of a textile unit within a maximum period of 18 months from the date of possession including construction of factory building and installation of plant and machinery. The sponsor and the ‘Sabha’ had undertaken to re-employ all the eligible workers, who would opt for re-employment and commence operations within 18 months from the date of the final sanction of the scheme. The bank guarantee could be enforced by the Official Liquidator in case of default. They had agreed to furnish the bank guarantee to the Official Liquidator within 90 days by the sanction of the scheme by the High Court and the giving of such a guarantee secured the performance of the promise to revive a textile unit. [Para 43]

In view of above, the scheme proposed by the petitioner was to be rejected, and the scheme with modifications as proposed by ‘Sabha’ was to be sanctioned with certain clarifications.