2007 Supreme(SC) 1103

2007(6) Supreme 387
Supreme Court of india
(From Bombay High Court)
G.P. Mathur & P.K. Balasubramanyan, JJ.
M/s Meghal Homes Pvt. Ltd. — Petitioner
versus
Shree Niwas Girni K.K. Samiti & Ors. — Respondents
Appeal (civil) 3179-3181 of 2005
WITH
[C.A. Nos. 3182-3184/2005, C.A. Nos. 3569-3571/2005, C.A. No. 4377/2006]
Decided on : 24-08-2007

important points
Scope of section 391(1) of Companies Act should not be restricted considering the purpose for which it is enacted.
It is open to the Company Court, before the ultimate step of passing order under section 481 is taken, or before the assets are disposed of, to accept a scheme or proposal for revival of the Company.
Power of the Court under section 392 of the Companies Act 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.

Headnote:(a)Code of Civil Procedure, 1908 – Section 100 – The appellants were allowed to intervene by the Division Bench of the High Court on earlier occasions – It was also sought to involve them in the Scheme originally presented by the Somanis which ultimately was rejected by the court – During the course of the proceedings, however, the appellant was directed to deposit certain amounts and furnish security for certain other amounts – This could only be done on the basis that as a participant in the original Scheme proposed, the appellant had some locus standi – Preliminary objection of maintainability rejected. (Para 13)

       (b)Estoppel – Respondents contending that after receiving of possession pursuant to order of Division Bench from the Official Liquidator, Rangnath Somani was estopped from filing an appeal against that order – In view of fact that objection was sought to be raised by Rangnath Somani regarding proposals contained in affidavits filed on behalf of LBPL, which proposals were accepted and made part of Scheme of Division Bench and his objection was not dealt with as such, and fact that subsequent to decision of Division Bench, he received possession of assets of SCML not alone but along with his cousins; he could not be estopped from filing an appeal against decision of Division Bench. (Para 15)

       (c)Companies Act, 1956 – Sections 391(1), 391(1)(b) and 390(a) – A company would mean a Company liable to be wound up and which is being wound up – Scope of section 391(1) should not be restricted considering the purpose for which it is enacted – 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. (Para 16)

       (d)Companies Act, 1956 – Section 391 r/w 481 – When a Company is ordered to be wound up, its assets are put in possession of the Official Liquidator and become custodia legis – In the absence of a revival of the Company, the Official Liquidator has to realize the assets of the company and distribute 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 – However, it is open to 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. (Para 22)

       (e)Code of Civil Procedure, 1908 – Section 11 – Res Judicata – The order passed by the Division Bench on the earlier occasion was binding on the parties as also on the Division Bench of coequal jurisdiction when the proposal for amendment of the earlier scheme came up – More so when it was not a fresh scheme, but a proposal for an amendment of the scheme already considered by the Division Bench – It was the plain duty of the Division Bench on the latter occasion to keep in focus the suggestions earlier made. (Para 23)

       (f)Interpretation of Statutes – Well settled that provisions in an enactment must be read as a whole before ascertaining the scope of any particular provision and the intention of the legislature must be found by reading the statute as a whole. (Para 24)

       (g)Companies Act, 1956 – Section 391 to 395A r/w 466 – There will be 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 – The provisions are not in conflict and should be construed harmoniously – 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. (Para 25)

       (1997) 1 S.C.C. 579 – Relied upon.

       (h)Companies Act, 1956 – Section 391 – When the scheme modified by the general meeting as contemplated u/s 391 is again modified on the basis of a person not recognised by section 391, such modifications have to go back to the general meeting. (Para 26)

       (i)Companies Act, 1956 – Section 392 – Section 392 of the Act, 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 – 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 – High Court’s order not sustainable. (Para 27)

       Facts of the case :

       M/s Shreeniwas Cotton Mills Limited (SCML) 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.

       Just like various other textile mills located in that city, SCML also ran into difficulties. A creditor of the Company made an application 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.

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

       Findings of the Court:

       Rangnath Somani received possession of the assets of SCML not alone but along with his cousins; so he cannot be estopped from filing an appeal against the decision of the Division Bench.

       It was the plain duty of the Division Bench on the latter occasion to keep in focus the suggestions earlier made.

       High Court’s orders not sustainable.

       Result : Appeals allowed, matter remitted back to Company Court.