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SUPREME COURT OF INDIA
P.S. KAILASAM, D.A. DESAI AND A.D. KOSHAL, JJ.
S.K. Gupta and another, Appellants
Versus
K. P. Jain and another, Respondents.
Civil Appeal No. 1217 of 1976, D/-30-1-1979.
Advocates appeared
Mr. Y. S. Chitale, Sr. Advocate (M/s. K. R. Khaitan, B. Mohan and Praveen Kumar, Advocates with him), for Appellants; Mr. P. R. Mridul, Sr. Advocate (M/s. R. L. Roshan, H. K. Puri and Vijai K. Bahl. Advocates with him), (for No. 1) and Mr. Pramod Dayal and 736 S. K. Gupta, Advocates, (for No. 2), for Respondents; M/s. R. M. Gupta and K. N. Bhat, Advocates, for Interverner, Dena Bank.
Transfer of Property Act – Section 130 – Companies Act, 1956 – Sections 392, 483, 391, 2 – Companies (Court) Rules, 1959 – Rule 87 – Suspension – Scheme of Arrangement – Private sector sick unit, Indian Hardware Industries Ltd 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 – Held, 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 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 bonafides 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 – 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 – Court see no objection to granting the application of the appellants for substitution/modification as sponsors of the scheme – Judgment of the Division Bench in Company Appeal is set aside and the order of the Company Judge in Company Application is restored with costs throughout – Appeal Allowed
Key Points: - The Court held that Section 392 confers wide, ongoing supervisory and modifying power to ensure proper working of a sanctioned scheme, including substitution of sponsors when fit (!) (!) (!) . - The appellants were found to have locus standi under Section 392(1) as "any person interested in the affairs of the company," not limited to members or creditors (!) (!) . - The definition in Section 2(29) (modify/modification include additions and omissions) governs the interpretation of Section 392, allowing additions/omissions to the scheme to make it workable (!) (!) . - The High Court’s view restricting modification to a minor change was rejected; substitution of a sponsor is within the meaning of "modification" for proper working of the scheme (!) (!) (!) . - The Division Bench’s rejection of substitution was overruled; substitution/modification in favor of appellants was allowed, restoring the Company Judge’s order (!) . - The Court affirmed the principle that the sponsor’s substitution is permissible where the sponsor is fit, competent, and capable of implementing the scheme, with the Court’s supervision (!) (!) . - The process may involve publishing notices and assessing bona fides, but lack of objections does not preclude substitution if warranted (!) . - Section 392(2) enables winding up if the sanctioned scheme cannot be satisfactorily worked with or without modifications, but the Court emphasized preserving life of the sick unit where possible (!) (!) . - The decision contrasts with UK practice, highlighting India’s broad court powers under Section 392 to ensure successful implementation (!) . - The judgment ultimately sets aside the Division Bench decision and restores the Company Judge’s order granting substitution/modification, with costs (!) .
Judgment
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.
2. 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 spiralling of interest. 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 and Refining Co. Ltd. (petitioning creditor for short) filed a winding up petition against IHI in 1975 alleging that IHI was heavily indebeted 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 Section 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 work satisfactorily with or without modification and therefore an order winding up the Company should be made.
3. 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.
4. Respondent Jain preferred two appeals being Company Appeals Nos. 15 and 16/76 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 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 used in 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
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