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1976 Supreme(Del) 101
High Court Of Delhi
K.P.JAIN - Appellant
Versus
S.K.GUPTA - Respondent
Company 16 of 1976
Decided On : 07/16/1976
A.N.KHANNA, K.K.JAIN, R.L.Roshan, S.N.CHOPRA, SATISH CHANDRA AGRAWAL
The court can modify a scheme of arrangement under section 392 of the Companies Act 1956, but it cannot radically change it.
Headnote:
COMPANIES ACT - SECTIONS 391 AND 392 - SCHEME OF ARRANGEMENT - SUBSTITUTION OF SPONSOR - MODIFICATION OF SCHEME - WINDING UP - LOCUS STANDI.
Fact of the Case:
Delhi Flour Mills Company Limited (DFM) was the holding company of Indian Hardware Industries Limited (IHI). IHI was heavily indebted. DFM proposed a scheme of arrangement to revive IHI. The scheme was approved by a majority of creditors and members. S. K. Gupta, a shareholder of IHI, opposed the scheme. The company judge sanctioned the scheme. DFM transferred its shares and debt to Mr. and Mrs. S. K. Gupta. Gupta applied to the company judge under section 392 of the Companies Act 1956 (the Act) read with Rule 9 of the Companies (Court) Rules 1959 (the Rules) for annulment of the scheme and winding up of IHI. Mr. and Mrs. Gupta moved their own petition under section 392 (1) of the Act read with Rules 9, 86 and 87 of the Rules for substitution of their names in place of DFM in the scheme.
Finding of the Court:
1. Mr. and Mrs. Gupta have no locus standi to make an application under section 392 (1) of the Act read with Rules 9, 86 and 87 of the Rules as they are neither members nor creditors of the company though they may be transferees. 2. Substitution of the name of Mr. and Mrs. S. K. Gupta in place of the original propounder, viz., DFM, is not a modification of the scheme. It is a fundamental change in the structure and substance of the scheme. 3. The court can modify the scheme but not radically change it.
Issues: 1. Whether Mr. and Mrs. Gupta have locus standi to make an application under section 392 (1) of the Act read with Rules 9, 86 and 87 of the Rules? 2. Whether substitution of the name of Mr. and Mrs. S. K. Gupta in place of the original propounder, viz., DFM, is a modification of the scheme? 3. Whether the court can radically change the scheme?
Ratio Decidendi: 1. Locus standi: Under section 391 of the Act read with Rule 87, only the company, creditors or any class of them, members or any class of them, or the official liquidator if the company is wound up, are entitled to move the court for a scheme of arrangement or compromise. 2. Modification of scheme: Modification means a small adjustment, a minor or slight change, a qualification or limitation. It does not mean a radical transformation or a drastic change of the scheme. 3. Power of the court: The court can modify the scheme but not radically change it. A basic or fundamental change in the scheme is not within the contemplation of the section.
Final Decision: Company Appeal No. 15 of 1976 is allowed and the application for substitution is dismissed. Company Appeal No. 16 of 1976 is dismissed.
( 1 ) THESE two conjoint appeals from the order of the learned company judge (D. K. Kapur J.) both dated April 26, 1976, mainly turn upon the meaning and interpretation of two sections of the Companies Act, 1956 -sections 391 and 392. The facts
( 2 ) FIRST the facts. Delhi Flour Mills Company Limited (DPM) was the holding company, It had a subsidiary. The subsidiary company is Indian Hardware Industries Limited (IHI ). Now for some years past it has stopped working.
( 3 ) IHI was incorporated in 1951 with a share capital of Rs. 8 lakhs. It floated 80,000 equity shares of Rs. 10 each. Since its formation 44,000 shares were held by the holding company, namely, DFM. They were the largest single share-holder having in their hands 55 per cent of the shares of IHI. The appellant K. P. Jain and his family hold 31,000 shares. That comes to 38. 5 per cent of the entire holdings. 5000 shares are held by an outsider.
( 4 ) IHI was engaged in the manufacture of builders hardware, lt has three sections:
1. Die-casting section. 2. Tool room section. 3. Hardware section. The appellant Jain was a director of IHI from 1955 till 1970. The company closed down in 1971 or 1972. IHI is heavily indebted. The following are its main creditors-secured and unsecured:
1. Indian Smelling and Refining Company Limited Bombay. Unsecured creditor for about 4 lakhs. 2. DFM. Unsecured credilor. lor Rs. 23 lakhs. 3. Delia Bank. Secured creditor for about Rs. 40 lakhs, including interest. 4. Workers of the company. Unsecured creditor for about Rs. 1 lakhs. 5. Other sundry unsecured creditors including Government etc. for about Rs. 75,000. 00. It will thus be seen that DFM is the largest single creditor of the company. IHI owed it a sum of Rs. 23 lakhs.
( 5 ) INDIAN Smelting and Refining Company Limited brought a petition for the winding up of IHI in 1971. The petition was made in the name of the company by the respondent S. K. Gupta styling himself as its authorised agent. While the petition was pending Dena Bank, the largest single secured creditor, became apprehensive about its securities. At its instance the Company Judge appointed a commissioner to take charge of the machinery of the three units and directed him to prepare an inventory. This was done.
( 6 ) WHILE the winding up petition was pending the DFM proposed a scheme of arrangement. The statutory meeting of creditors and members was called under the orders of the Court. The scheme was approved by a majority in number representing three-fourths in value. S. K. Gupta was one of the dissentients. He opposed the scheme. He said that the scheme was impracticable and doomed to failure. On August 1, 1975, DFM made an application to the company judge for sanctioning the scheme. On October 15, 1975, the court sanctioned the scheme despite Gupta s opposition. The scheme
( 7 ) THE scheme outlines a phased programme. Its broad features are these:
1. That the machinery of the two sections of IHI, namely, diecasting section and tool room section will be sold for payment to Dena Bank. Dena Bank had agreed not to take any action for a period of six months with regard to their debt. 2. The third section, namely, the hardware section was to be worked. DFM agreed to invest Rs. 3 lakhs to revive the company. The scheme envisaged that there will be a profit of Rs. 4 lakhs a year by working the third section and so unsecured creditors will be fully paid within a period of four years. 3. The DFM was to have priority over unsecured creditors only to the extent of their 3 lakhs rupees. For their debt of Rs. 23 lakhs they agreed that they may be paid in the end after everyone had been paid off. In other words DFM was to remain a deferred creditor till the company had discharged its all other liabilities.
( 8 ) THE court sanctioned the scheme on October 15, 1975 in C. P. No. 86 of 1975, as we have said. The scheme has not been challenged before us. Upto this stage the facts are undisputed. The dispute
( 9 ) WH
