Section 391, read with sections 392, 433 and 464, of the Companies Act, 1956 - Compromise and arrangement

HELD In the light of what had transpired in the instant case and the orders of the Division bench dated 4-4-1995 and 15-12-2004, it was not possible to accept the argument of the respondents that the appellants had no locus standi to maintain their appeals in the Supreme Court. They had been allowed to intervene by the Division Bench of the High Court on earlier occasions and it was too late in the day to raise a contention that they had no role to play in the approval of a scheme under section 391 and their appeals should be rejected on that ground. The case of the appellant involved a further fact that it was sought to be involved in the scheme originally presented by the ‘S’ group which ultimately was rejected by the Court, but during the course of the proceedings, the appellant was directed to deposit certain amounts and furnish security for certain other amounts and that could only be on the basis that as a participant in the original scheme proposed, the appellant had some locus standi. 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, appeals could not be dismissed as appeals by persons who had no locus standi to maintain them. (PARA 13) Thus, the objections to the maintainability of the instant appeals were to be overruled. (PARA 15) 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, 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. If no such stay is granted, the proceedings have to go on and the Court has to finally pass an order under section 481 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. 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 Act. ‘S’ 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 had already been ordered to be wound up could not be accepted in view of the language of section 391(1) which speaks of a company which is being wound up. If one substitutes the definition in section 390(a), 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 can propose a compromise or arrangement with the creditors and members as contemplated by section 391 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 is an 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. In the instant case, the ‘S’ group, as contributories or the members of the company, were entitled to make an application to the Company Court in terms of section 391 for the purpose of acceptance of a compromise or arrangement with the creditors and members. (PARA 16) 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 being passed. But, nothing stands in the way of the Company Court, before the ultimate step is taken or before assets of the company in liquidation 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 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. (PARA 22) In fact, it was on that 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 were 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 had 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. (PARA 23) 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. The Supreme 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. When that principle is accepted, what one has to do is to read sections 391 to 394A not in isolation as canvassed by the respondents, but with reference to the other relevant provisions of the Act. There is no difficulty in reconciling the need to satisfy the requirements of both sections 391 to 394A and section 466 while dealing with a company which has been ordered to be wound up. In other words, there is 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 should be accepted or not. There is no conflict in applying both the provisions and in harmoniously construing them 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 such revival is in public interest and conforms to commercial morality. Therefore, the Company Court is bound to consider whether the liquidation is 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 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 come 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. (PARA 25) But before that, another step had to be taken in the instant case. What had been accepted by the Division bench, was not the scheme as modified by the general meeting as contemplated by section 391. At least, two of the modifications having ramifications were based on undertakings or statements made by ‘L’ and there appeared to be difference of opinion on that modification even among the ‘S’ group. There was also the question whether the proposals of a person, who was not one of those recognized by section 391 could be accepted by the Company Court while approving a scheme. The scheme with the modifications as proposed or accepted, had to go back to the general meeting of the members of the company, called in accordance with section 391 and the requisite majority obtained. (PARA 26) section 392 only gives power to the Court to make such modifications in compromise or arrangement as it may consider necessary for proper working of the compromise or arrangement. That 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. 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 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 for approval of the compromise or arrangement as modified or proposed to be modified. In Miheer H. Mafatlal v. Mafatlal Industries Ltd. (supra), the Supreme 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, the argument of the respondents that the scheme as modified by the decision of the Division bench need not go back to the general meting of the members in terms of section 391 could not be accepted. One must also remember that at least before the Supreme Court there was serious objection to the modifications by one of the ‘S’ group members who were the promoters of the company in liquidation and the sponsors of the arrangement and that objection could not be brushed aside. (PARA 27) The modifications proposed altered the position of the shareholders vis-à-vis the company. Instead of the company reviving the spinning unit as recommended by the expert body, as adopted in the general meeting, the company would have nothing to do with the mill lands, and the whole of the mill lands would pass on to ‘L’ on ‘L’ paying a value of Rs.97.50 crores to ‘S’ and ‘L’ would start an industry of its own in that property. That could not be considered to be a modification in the scheme necessary for the proper working of the compromise or arrangement. That was a modification of the scheme itself. Same was the position regarding the provision of replacing the resolution passed that if any surplus amounts were available, ‘S’ would start a viable industry in any part of the State of Maharashtra, by a commitment that ‘S’ would establish an industry in any part of the State of Maharashtra on an investment of Rs.20 crores. That again was an obligation cast on the members of the company and that could also be taken to be a modification which the Court could bring about on its own under section 391 on the pretext that it was a modification necessary for the proper working of the compromise or arrangement. 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 to consider the modifications and ensured that the approval thereof by the requisite majority existed. (PARA 28) Therefore, it was a fit case where the decision of the Division bench as also of the Company Court should be set aside and the proceedings was to be remanded to the Company Court. (PARA 29) Thus, instant appeals were to be allowed. The judgment of the Division Bench and that of the Company Court were to be set aside, and the matter was to be remitted back to the Company Court for a fresh consideration in accordance with law and in the light of the directions contained in the judgment. (PARA 31)