S. K. Gupta & ANR Vs. K. P. Jain
& ANR [1979] INSC 21 (30 January 1979)
DESAI, D.A.
DESAI, D.A.
KAILASAM, P.S.
KOSHAL, A.D.
CITATION: 1979 AIR 734 1979 SCR (2)1184 1979
SCC (3) 54
CITATOR INFO :
RF 1987 SC1023 (31) RF 1991 SC1289 (14)
ACT:
Companies Act, 1956 (1 of 1956) Ss. 391 and
392-Scope of-Omission of the Original sponsor and substituting another whether
would change the 'basic fabric' of the scheme.
Words & Phrases-'Modify'and
'modifications'-meaning of.
HEADNOTE:
The Companies Act, 1956 by s. 391 enables a
member or a creditor of the company or a company which is being wound up, its
liquidator, to make an application to the court proposing a compromise or
arrangement between the company and its creditors or any class of them or
between the company and its members or any class of them and seeking directions
of the court to convene a meeting of each class of creditors and/or each class
of members to whom the compromise or arrangement is offered. On the court
giving the directions, the meeting would be convened in which the proposed
scheme of compromise and/or arrangement would be submitted for consideration
and each class will have to vote upon it and if the scheme is accepted by a
majority in number representing three fourths in value of the creditors or
members or class of members as the case may be, present and voting either in
person or where proxy is allowed by proxy, such approved scheme has to be
placed before the court for sanction of the court as envisaged in s. 391(2).
Under s. 392 of the Act, the High Court which
has sanctioned the scheme has the power to supervise the carrying out of it and
to give directions in regard to any matter or to make modifications in it as it
may consider necessary for its proper working. But if the court is satisfied
that the scheme cannot work satisfactorily with or without modifications, it
can either suo motu or on an application of any person interested in the
company's affairs order its winding up.
The holding company proposed a scheme of
compromise/arrangement between its subsidiary and the unsecured creditors of
the subsidiary company. After obtaining the approval of the shareholders the
holding company obtained the sanction of the company court. A large number of
shares in the subsidiary company held by it and its claim for a sum of Rs. 23
lacs recoverable from the subsidiary company were transferred by the holding
company to the appellants. The appellants then applied to the court to make an
appropriate modification and/or grant further direction for implementing the
scheme sanctioned by the court in respect of the subsidiary company by
substituting them (the appellants) in place of the holding company as
proponents of the scheme. The respondent in the mean while made an application
to the company court under s. 392 of the Companies Act, 1956 to hold that the
scheme sanctioned by the court could not work satisfactorily with or without
modification and that, therefore, the court should 1185 make an order of
winding up. The company judge allowed substitution of the appellants as
proponents of the scheme and rejected the respondents' application for winding
up of the subsidiary company.
On appeal by the respondents under s. 483 of
the Companies Act a Division Bench held: (1) that since the substitution of a
new propounder in a scheme sanctioned by the court in place of the original
propounder was a change of a basic nature which would not be comprehended
within the meaning of the expression "modification" in s. 392 and,
therefore, the company judge could not have granted substitution of the
propounder of the scheme without referring the proposed modified scheme to the
creditors who approved the original scheme, (2) that since the transfer of the
shares in favour of the appellants had not been effected in the company's
registers, the appellants were not members of the subsidiary, (3) that the debt
owed by the subsidiary to the holding company was not assigned according to law
in favour of the appellants and, therefore, they were not creditors and (4)
that not being either members or creditors of the subsidiary, the appellants
had no locus standi to move an application under s. 392 for the modification of
the scheme.
On the question whether the court had power
to grant an application under s. 392 of the Act.
Allowing the appeal,
HELD: 1. Though a large number of provisions
of the Companies Act, 1956 are in pari materia with the provisions of Companies
Act, 1948 of the U.K. there is no provision analogous to s. 392 in the U.K.
Act. The court under the U.K. Act has no power to modify the scheme either at
the time when it is offered for its sanction or at any time subsequent thereto.
The Parliament has in its wisdom, conferred a power of wide amplitude on the
High Court in India to provide for its continuous supervision of the carrying
out of compromise and/or arrangement and also the consequential power to make
the supervision effective by removing the hitches, obstacles or impediments in
the working of compromise or arrangement by conferring power to give such
directions for the proper working of the compromise and/or arrangement. [1193
D-F] This power of widest amplitude being conferred on the High Court is a
basic departure from the scheme of the U.K. Act in which provision analogous to
s. 392 is absent. The sponsors of the scheme under s. 206 of the U.K. Act have
tried to get over the difficulty by taking power in the scheme of compromise or
arrangement to make alterations and modifications as proposed by the court.
[1195 C] In the instant case the scheme is essentially a compromise between the
company and its unsecured creditors.
The scheme when sanctioned does not merely
operate as an agreement between the parties but has statutory force and is
binding not only on the company but even dissenting creditors or members, as
the cause may be. [1194 B-C] J.K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spg.
& Wvg. Co Ltd. & Ors. etc., [1969] 2 SCR 866 at 891; referred to.
2. Section 391(1) by a specific and positive
provision prescribes who can move an application under it. Only the creditor or
member of that company or a liquidator in the case of a company being wound up
is entitled to move an application proposing a compromise or arrangement. By
necessary implication any one other than those specified in the section would
not be entitled to move such an application. [1194 D]
3. Sub-section (2) of s. 392 provides the
legislative exposition as to who can move the court for taking action under s.
392. Reference to s. 391 in sub s. (2) of s. 392 merely indicates which
compromise or arrangement can be brought before the court for taking action
under s. 392. The reference to s. 391 in sub-section (2) of s. 392 does not
mean that all the limitations or restrictions on the right of an individual to
move the court while proposing a scheme of compromise or arrangement have to be
read in sub-s. (2) merely because s. 391 is referred to therein. Unlike s. 391,
s. 392 does not specify that a member or a creditor or in the case of a company
being wound up, its liquidator, alone can move the court under s. 392. The
legislature uses the expression 'any person, interested in the affairs of the
company' which has wider denotation than a member or creditor or liquidator of
a company. The ambit of the power to act under s. 392(2) is demonstrated by the
provision that the court can suo-motu act to take action as contemplated by s.
392(1) or it may act on an application of any person interested in the affairs
of the company. [1195 F-H] Mansukhlal v. M. V. Shah, [1976] 46 Company cases
279 at 290-291; referred to.
4. If the court can suo motu act, it is
immaterial as to who drew the attention of the court to a situation which
necessitated court's intervention. Where the power is conferred on the court to
take action on its own motion, the information emanating from whatever source
which calls for court's attention can as well be obtained from any person
without questioning his credentials, moving an application drawing attention of
the court to a situation where it must act. The court may decline to act at the
instance of a busy body but if the action proposed to be taken is justified,
valid, legal or called for the capacity or credentials of the person who
brought the situation calling for court's intervention is hardly relevant nor
would it invalidate the resultant action only on that ground. When sub-s. (2)
confers power on the court to act on its own motion, the question of locus
standi hardly arises. [1197 C-E] In the instant case while examining the
question of locus standi after considering the provisions contained in sub-s.
(2) the High Court wholly over looked the important provision therein
contained, that the High Court can act on its own motion. [1197 F]
5. Even though section 391 and 392 are
complementary they operate at different stages and have to be harmoniously
read. [1197 G-H]
6. Winding up meaning civil death of a
company, must be the ultimate resort of the court. A living workable scheme
infusing life into a sick unit is generally to be preferred to civil death of
the company. There is no warrant for circumscribing the expression 'on the
application of any person interested in the affairs of the company as to limit
it to a member or a 1187 creditor. If the legislature used the expression
'member or creditor' in s. 391(1) and yet used an expression of wider
denotation 'any person interested in the affairs of the company,' in s. 392(2),
the legislative intention is clearly exposed in that any such person interested
in the affairs of the company need not be limited or restricted to refer to a
member or creditor. [1198 G-1199 A] In the instant case, there is enough
evidence on record that as between the holding company and the appellants the
sale of shares is complete, and that the debt owed by the subsidiary to holding
company has been assigned by the holding company to the appellants. The
appellants therefore have requisite interest both in the subsidiary company and
the scheme in respect of it, so as to enable them to maintain an application
under s. 392(2), as being persons interested in the affairs of the company, and
therefore the application for modification by them is maintainable. [1200 B-C]
7. The High Court was in error in holding
that the appellants had no locus standi to maintain an application under s.
392(1). The words 'modify' and 'modification' have been defined in s. 2(29) of
the Act to include the making of additions and omissions. Section 2(1) defines
'altered' and 'alteration' to include 'making of additions and omissions',
while 'variation' is defined in s. 2(31) to include 'abrogation'. The
definition of cognate words is noted to arrive at a true meaning of the word
'modification'. The noticeable feature is that it is an inclusive definition,
and where in a definition clause he word 'include' is used, it is so done in
order to enlarge the meaning of the words or phrases occurring in the body of
the statute and when it is so used, these words or phrases must be construed as
comprehending not only such things which they signify according to their
natural import, but also those things which the interpretation clause declares
that they shall include. [1200 H, 1201 D-G, H-1202 B] Dilworth v. Commissioner
of Stamps, [1899] AC 99 at 105; Jobbins v. Middlesex County Council, [1949] 1
KB 142;
Indira Nehru Gandhi v. Raj Narain (1975)
Suppl. SCC 1 at 97;
Kalva Singh v. Genda Lal, [1976] 1 SCC 304 at
309; Cox v. Hakes, [1890] 15 AC 506; referred to.
8. According to the definition 'modify' and
'modification' would include the making of additions and omissions. In the
context of s. 392 'modification' would mean addition to the scheme of
compromise and/or arrangement or omission therefrom solely for the purpose of
making it workable. [1203 B]
9. The High Court misdirected itself when it
resorted to dictionaries for the meaning of the expression 'modification' in s.
392 when the said term was defined in s. 2(29) of the Act itself. [1203 A] In
the instant case, the scheme is one by which a compromise is offered to the
unsecured creditors of the company and whoever comes in as sponsor would be
bound by it. Omission of the original sponsor and substituting another one
would not therefore, change the 'basic fubric' of the scheme. [1203 E]
10. The court on which a duty is cast by s.
392(1) to supervise the working of compromise/arrangement must examine the bona
fides of the person applying to be substituted as sponsor, his capacity, his
ability, his interest qua the company and other relevant considerations before
substituting one sponsor for another. In a given case an application may be
rejected if the 1188 court is of the opinion that the sponsor is not one who
can be trusted with the implementation of the scheme. [1204 A-C] In the instant
case the appellants have applied for substituting them as sponsors of the
scheme in place of the holding company. They claim to have purchased 44,000
shares out of 80,000 issued and subscribed equity shares of the company. The
sponsor has taken an assignment of a debt of Rs. 23 lacs which the subsidiary
company owed to the holding company from the holding company. The only objector
is respondent holding 1,000 equity shares representing 1.25 per cent of the
issued and subscribed capital. In pursuance to the court's order notice in the
newspaper was inserted calling for objection to the application for
substitution/modification. None including the petitioning creditor except the
respondent lodged such an objection. The appellants agreed to implement the
scheme and undertook to provide Rs. 3 lacs as liquid finance for implementation.
The appellants therefore have a subsisting and vital interest in the fate and
future of the subsidiary company and they are the appropriate persons who could
and should be substituted in place of the original sponsor and there is no
objection to granting their application. [1204 D-F, 1205 E, B]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1217 of 1976.
Appeal by Special Leave from the Judgment and
Order dated 16-7-1976 of the Delhi High Court in Company Appeal No. 15/76.
Y. S. Chitale, K. R. Khaitan, B. Mohan, and
Praveen Kumar for the Appellants.
P. R. Mridul, R. L. Roshan, H. K. Puri and
Vijai K. Bahl for Respondent No. 1.
Pramod Dayal and S. K. Gupta for Respondent
No. 2.
R. M. Gupta and K. N. Bhat for
Intervener/Dena Bank.
The Judgment of the Court was delivered by
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.
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 spiraling of interest.
1189 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 & Refining Co. Ltd. ('petitioning creditor' for short)
filed a winding up petition against IHI in 1975 alleging that IHI was heavily
indebted 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 s. 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 worked satisfactorily with or without
modification and therefore an order winding up the Company should be made.
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.
Respondent Jain preferred two appeals being
Company Appeals Nos. 15 and 15/76 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 1190 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 under 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 of IHI held by DFM in favour of the
appellants may be complete as between the transferor and the transferee, the
same would not clothe the appellants with the right of a member unless their
names were put on the register of members maintained by IHI and that the same
having not been done, the appellants were not members of IHI. It was further of
the opinion that the debt owed by IHI to DFM was not assigned according to law
in favour of the appellants and, therefore, they were not creditors, and in
view of the language of s. 391 of the Companies Act, the appellants being
neither members nor creditors of IHI, had no locus standi to move an
application under s. 392 for modification of the scheme because in the opinion
of the Court s. 391 controls s. 392 and either a member or a creditor or in the
case of a company being wound up, a liquidator alone can file an application
for modification. In accordance with this opinion, the appeal preferred by
respondent No. 1 being Company Appeal No. 15/76 challenging the order of the
Company Judge which granted modification/substitution of appellants as
proponents was allowed and the application of the appellants for substitution
was rejected.
The Division Bench dismissed Company Appeal
No. 16/76 preferred by respondent Jain against the order of the Company Judge
refusing to make an order for winding up of the Company observing that even
while dismissing the application for substitution of the present appellants,
the Court was not in a position to come to an affirmative finding that the
scheme cannot be satisfactorily worked with or without modification and the
matter should be left to the Company Judge as to what future course of action
should be taken in the matter.
The appellants preferred the present appeal
by special leave against the decision of the Division Bench in Company Appeal
No. 15/76 by which their application for substitution/modification was
rejected.
Mr. S. S. Ray, learned counsel for the
appellants urged that the Court committed a basic error in holding that the
application for 1191 substitution/modification was not maintainable because the
appellants were neither members nor creditors of the Company, IHI, thereby
importing a narrower concept in respect of the locus standi of the present
appellants to move the Court under s. 392 which restrictive approach would run
counter to the power of widest amplitude conferred on the Court, namely, even
to make modification suo motu or on the application of a person interested in
the affairs of the Company. He further urged that the appellate Court clearly
misdirected itself when it went in search of the meaning of the expression 'modification'
in s. 392 by ransacking dictionaries completely overlooking the fact that in s.
2(29) of the Companies Act the words 'modify'
and 'modification' have been defined and it is a well known canon of
construction that unless the context otherwise requires, the definition of an
expression given in a statute shall govern the meaning of the expression
wherever used in the same statute. It was urged that the words "modify' and
'modification' for the purpose of s. 392 would include the making of additions
and omissions and according to him additions and omissions in the context of s.
392 would and could only mean additions and omissions to the sanctioned scheme
because s. 392 operates at a stage subsequent to the sanctioning of the scheme
under s. 391(2). It was further urged that if the words 'modify' and
'modification' would include additions and omissions, the Court would have
plenary power to substitute one proponent for the other if in the opinion of
the Court the scheme cannot be worked satisfactorily without the necessary
modification and in all such cases it would be imprudent to hold that the Court
will have to fall back to the cumbersome procedure of s. 391 over again delaying
for a considerable period the vital requirement of restarting a sick unit. It
was submitted that the Court committed a fallacy in importing the concept of
Constitution while interpreting a provision of the Companies Act.
Mr. Lal Narain Sinha on the other hand on
behalf of the respondents, while conceding that in an emergency the Court can
act on the application of any person, ordinarily the Court would act on the
application of a member or creditor of the Company and in this blurred area
some light is shed by the provision contained in Rule 87 of the Companies
(Court) Rules, 1959. Proceeding further, it was urged that ss. 391 and 392
constitute a code and, therefore, if there was a qualification for proposing a
scheme under s. 391, the same qualification should be read in s. 392 and any
other approach would be self-defeating. It was submitted that viewed from this
angle, only a member or a creditor can maintain an application under s. 392 and
as the appellants are neither members nor 1192 creditors of the Company, they
have no locus standi to maintain the petition. He further urged that putting
too wide a construction on the expression 'modification' in s.
392(2) would lead to such a startling result
as could not have been within the contemplation of the legislature and that,
therefore, in order to arrive at a true meaning of word 'modification', the
Court should bear in mind the purpose and object behind using the expression or
enacting the provision in which the expression is found. It was also contended
that substitution of the original sponsor amounts to repudiation of the
contract which the scheme represents between the proponent of the scheme and
the Company and another person cannot be substituted in place of the original
contracting party without the consent or affirmance of the second party to the
contract and hence such a thing cannot be brought about by way of a modification
under s. 392. The word 'modification' or 'modify', therefore, should be given a
restricted meaning looking to the context in which it is used in s. 392 as has
been done by the High Court.
Principal contentions advanced on either side
turn upon the right to make an application and the power of the Court to grant
an application under s. 392 of the Companies Act.
Section 392 finds its place in Chapter V of
the Companies Act
bearing fascicules 'Arbitration, Compromise, Arrangements and Reconstructions'.
Section 391 enables a member or a creditor of the Company or a Company which is
being wound up, its liquidator, to make an application to the Court proposing a
compromise or arrangement between the company and its creditors or any class of
them or between the Company and its members or any class of them and seeking
directions of the Court to convene a meeting of each class of creditors and/or
each class of members to whom the compromise or arrangement is offered. On the
Court's giving the directions, the meeting would be convened in which the proposed
scheme of compromise and/or arrangement would be submitted for consideration
and each class will have to vote upon it and if the scheme is accepted by a
majority in number representing three fourths in value of the creditors or
members or class of members as the case may be, present and voting either in
person or where proxy is allowed, by proxy, such approved scheme has to be
placed before the Court for sanction of the Court as envisaged in s. 391(2).
Then comes s. 392 which may be reproduced in
extenso:
"392. Power of High Court to enforce
compromises and arrangements-(1) Where a High Court makes an order under
section 391 sanctioning a compromise or an arrangement in respect of a company,
it- 1193 (a) shall have power to supervise the carrying out of the compromise
or arrangement; and (b) may, at any time of making such order or at any time
thereafter, give such directions in regard to any matter or make such
modifications in the compromise or arrangement as it may consider necessary for
the proper working of the compromise or arrangement.
(2) If the Court aforesaid is satisfied that
a compromise or arrangement sanctioned under section 391 cannot be worked
satisfactorily with or without modifications it may, either on its own motion
or on the application of any person interested in the affairs of the company,
make an order winding up the company, and such an order shall be deemed to be
an order made under section 433 of this Act".
At the outset it may be mentioned that though
a large number of provisions of the Companies Act, 1956, are in pari materia
with the provisions of Companies Act, 1948, of the U.K. ('U.K. Act' for short),
there is no provision analogous to s. 392 in the U.K. Act. The Court under the
U.K. Act has no power to modify the scheme either at the time when it is
offered for its sanction or at any time subsequent thereto.
The Parliament has in its wisdom, conferred a
power of wide amplitude on the High Court in India to provide for its
continuous supervision of the carrying out of compromise and/or arrangement and
also the consequential power to make the supervision effective by removing the
hitches, obstacles or impediments in the working of compromise or arrangement
by conferring power to give such direction in regard to any matter or for
making such modification in the compromise or arrangement as it may consider
necessary for the proper working of the compromise and/or arrangement. Sub-s.
(2) confers power on the Court to act under s. 392 either on its own motion or
on the application of any person interested in the affairs of the company. What
falls for consideration is the true meaning of the expression 'on the
application of any person interested in the affairs of the company'.
The High Court was of the opinion that the
appellants have no locus standi to maintain an application for
modification/substitution of themselves as proponents of the scheme with a
liability to implement the scheme as they were neither members nor creditors of
the Company and according to the High Court, if a scheme of compromise or
arrangement cannot be proposed by any one except a member or creditor, ipso
facto, an application for modification of such scheme sanctioned by the Court
under s. 391(2) could not be made by anyone other than a member or a creditor.
1194 Section 391 envisages a compromise or
arrangement being proposed for consideration by members and/or creditors of a
Company liable to be wound up under the Companies Act, 1956.
Compromise or arrangement has to be between
creditors and/or members of the Company and the Company, as the case may be.
It was always open to the Company to offer a
compromise to any of the creditors or enter into arrangement with each of the
members. The scheme in this case is essentially a compromise between the
company and its unsecured creditors.
The scheme when sanctioned does not merely
operate as an agreement between the parties but has statutory force and is
binding not only on the company but even dissenting creditors or members, as
the case may be. The effect of the sanctioned scheme is "to supply by
recourse to the procedure thereby prescribed the absence of that individual agreement
by every member of the class to be bound by the scheme which would otherwise be
necessary to give it validity" (see J. K. (Bombay) Pvt. Ltd., v. New
Kaiser-I-Hind Spg. & Wvg. Co. Ltd. & Ors. etc.(1). Further section
391(1) itself by a specific and positive provision prescribes who can move an
application under it. Only the creditor or member of that company or a
liquidator in the case of a company being wound up is entitled to move an
application proposing a compromise or arrangement. By necessary implication anyone
other than those specified in the section would not be entitled to move such an
application.
When a scheme is being considered by the
Court, in all its ramifications, for according its sanction, it would not be
possible to com prehend all situations, eventualities and exigencies that may
arise while implementing the scheme.
When a detailed compromise and/or arrangement
is worked out, hitches and impediments may arise and if there was no provision
like the one in s. 392, the only obvious alternative would be to follow the
cumbersome procedure as provided in s. 391(1), viz., again by approaching the
class of creditors or members to whom the compromise and/or arrangement was
offered to accord their sanction to the steps to be taken for removing such
hitches and impediments.
This would be unduly cumbersome and time
consuming and, therefore, the legislature in its wisdom conferred power of
widest amplitude on the High Court under s. 392 not only to give directions but
to make such modification in the compromise and/or arrangement as the Court may
consider necessary, the only limit on the power of the Court being that such
directions can be given and modifications can be made for the proper working of
the compromise and/or arrangement. The purpose underlying s. 392 is to provide
for effective working of the compromise and/or arrangement once sanctioned and
1195 over which the Court must exercise continuous supervision[see s. 392(1)],
and if over a period there may arise obstacles, difficulties or impediments, to
remove them, again, not for any other purpose but for the proper working of the
compromise and/or arrangement. This power either to give directions to overcome
the difficulties or if the provisions of the scheme themselves create an impediment,
to modify the provision to the extent necessary, can only be exercised so as to
provide for smooth working of the compromise and/or arrangement. To effectuate
this purpose the power of widest amplitude has been conferred on the High Court
and this is a basic departure from the scheme of the U.K. Act in which
provision analogous to s. 392 is absent. The sponsors of the scheme under s.
206 of the U.K. Act have tried to get over the difficulty by taking power in
the scheme of compromise or arrangement to make alterations and modifications
as proposed by the Court. But the Legislature foreseeing that a complex or
complicated scheme of compromise or arrangement spread over a long period may
face unforeseen and unanticipated obstacles, has conferred power of widest
amplitude on the Court to give directions and if necessary, to modify the
scheme for the proper working of the compromise or arrangement. The only
limitation on the power of the Court, as already mentioned, is that all such
directions that the Court may consider appropriate to give or make such
modifications in the scheme, must be for the proper working of the compromise
and/or arrangement.
Sub-section (2) provides the legislative
exposition as to who can move the Court for taking action under s. 392.
Reference to s. 391 in sub-s. (2) of s. 392
merely indicates which compromise or arrangement can be brought before the
Court for taking action under s. 392. The reference to s.
391 does not mean that all the limitations or
restrictions on the right of an individual to move the Court while proposing a
scheme of compromise or arrangement have to be read in sub-s. (2) merely
because s. 391 is referred to therein. Unlike section 391, s. 392 does not
specify that a member or creditor or in the case of a company being wound up,
its liquidator, can move the Court under s. 392. On the other hand, the
legislature uses the expression 'any person interested in the affairs of the
company' which has wider denotation than a member or creditor or liquidator of a
company. In fact, the ambit of the power to act under s. 392(2) can be gauged
from the fact that the Court can suo motu act to take action as contemplated by
s. 392(1) or it may act on an application of any person interested in the
affairs of the Company.
1196 In this context the observations of the
Gujarat High Court, extracted hereunder, in Mansukhlal v. M. V. Shah,(1) can be
referred to with advantage as it precisely lays bare the ambit and width of
Court's power under section 392:
"The framers of the company law in India
have conferred statutory powers on the High Court to make such modifications in
the compromise or arrangement as the Court may consider necessary for the
proper working of the compromise and arrangement. The power of the widest amplitude
has been conferred on the court under section 392(1) (b) and the width and the
magnitude of the power can be gauged from the language employed in section 392
(1) (a) which confers a sort of a supervisory role on the court during the
period the scheme of compromise or arrangement is being implemented. Reading
clauses (a) and (b) of sub-section (1) of section 392, it appears that
Parliament did not want the court to be functus officio as soon as the scheme
of compromise and arrangement is sanctioned by it. The Court has a continuing
supervision over the implementation of compromise and arrangement.
Unenvisaged, unanticipated, unforeseen or
even unimaginable hitches, obstruction and impediments may arise in the course
of implementation of a scheme of compromise and arrangement and if on every
such occasion, sponsors have to go back to the parties concerned for seeking
their approval for a modification and then seek the approval of the court, it
would be a long-drawn out, protracted, time-consuming process with no guarantee
of result and the whole scheme of compromise and arrangement may be mutilated
in the process. Parliament has, therefore thought it fit to trust the wisdom of
the court rather than go back to the interested parties. If the parties have several
times to decide the modification with the democratic process, the good part of
an election machinery apart, the dirt may step in, the conflicting interests
may be bought and sold, and, in the process, the whole scheme of compromise and
arrangement may be jettisoned. In order, therefore, to guard against this
eventuality and situation, which is clearly envisageable, Parliament has
conferred power on the court, not only to make modifications even at the time
of sanctioning the scheme, but at any time thereafter during the period the
scheme is being implemented. Conceding that, before the Court sanctions the
scheme, it partakes the character of an emerging contract between the 1197
company and the creditors and members; once the court approves it, it becomes a
statutorily enforceable contract even on dissidents, with power in the court to
modify, amend or correct or revise the contract the outer periphery or the
limit on the power being that, after testing it on this anvil of probabilities,
surrounding circumstances and the prevalent state of affairs, it can be done
for the proper working of the compromise and arrangement, and subject to this
limit on the Court's power, the power seems to be absolute and of the widest
amplitude and it would be unwise to curtail it by process of
interpretation".
If the Court can suo motu act, it is
immaterial as to who drew the attention of the Court to a situation which
necessitated Court's intervention. Where the power is conferred on the Court to
take action on its own motion the information emanating from whatever source
which calls for Court's attention can as well be obtained from any person
without questioning his credentials, moving an application drawing attention of
the Court to a situation where it must act. Undoubtedly, the Court may decline
to act at the instance of a busy body but if the action proposed to be taken is
justified, valid, legal or called for, the capacity or credentials of the
person who brought the situation calling for Court's intervention is hardly
relevant nor would it invalidate the resultant action only on that ground.
Therefore, when sub-s. (2) confers power on the Court to act on its own motion,
the question of locus standi hardly arises. The High Court while examining the
question of locus standi, after combing the provision contained in sub-s. (2),
wholly overlooked the important provision therein contained that the High Court
can act on its own motion. It was, however, said in passing that sub-s. (2)
enables the Court to wind up the Company and, therefore, the Court may act on
its own motion or on the application of any person interested in the affairs of
the company not for modifying the scheme or for any directions but for winding
up the company. But when the Court is required to act under s. 392(1), the
limitations and restrictions imposed upon the Court under s. 391(1) must be
read in section 392(1) because the sections are complimentary to each other.
This submission overlooks the two different stages at which sections 391 and
392 operate though they may be complimentary to each other. Two sub-sections of
s. 392 have to be harmoniously read and sub-s. (2) clearly indicates the power
of Court to take action suo motu while taking action under sub-s. (1). Again
this approach is inconsistent with the language employed in s. 392(2) in that
the Court can wind up the company 1198 under s. 392(2) if and only it is
satisfied that the compromise and/or arrangement sanctioned by it cannot be
satisfactorily worked with or without modifications. The Court has to reach an
affirmative conclusion before acting under s. 392(2) that the compromise and/or
arrangement cannot be worked satisfactorily with or without modification (see
J. K. Bombay P. Ltd.) (supra). It follows as a corollary that if the compromise
or arrangement can be worked as it is or by making modifications, the Court
will have no power to wind up the Company under s. 392(2). Now, if the
arrangement or compromise can be worked with or without modification, the Court
must undertake the exercise to find out what modifications are necessary to
make the compromise or arrangement workable and that it can do so on its own
motion or on the application of any person interested in the affairs of the
Company. If such be the power conferred on the Court, it is difficult to
entertain the submission that an application for directions or modification
cannot be entertained except when made by a member or creditor. It would
whittle down the power of the Court in that it cannot do so on its own motion.
Mr. Sinha referred to Rule 87 of Companies
(Court) Rules and urged that it throws some light on the question as to at
whose instance the Court can act under s. 392. The rule is procedural in
character and at any rate the rule cannot circumscribe the power conferred by
the section.
Hence rule 87 is of no assistance.
Assuming that the Court would not act on its
own, the next question is: could it act under s. 392(1) on the application of
any person interested in the affairs of the Company ? Now, if the Court under s.
392(2) can order winding up of the company on the application of any person
interested in the affairs of the company who need not be a member or a
creditor, we fail to see how the Court cannot act on the application of such a
person interested in the affairs of the Company either to give directions or to
make modifications so as to make the compromise or arrangement workable.
Winding up meaning civil death of a company, must be the ultimate resort of the
Court. A living workable scheme infusing life into a sick unit is generally to
be preferred to civil death of the company. There is, therefore, no warrant for
circumscribing the expression 'on the application of any person interested in
the affairs of the company' as to limit it to member or creditor. If the
legislature used the expression 'member or creditor' in s. 391(1) and yet used
an expression of wider denotation 'any person interested in the affairs of the
company', the legislative intention is clearly exposed in that any such person
interested in the affairs of the company need not be limited or restricted to
refer to a 1199 member or creditor. It would, therefore, be necessary to
ascertain whether the appellants would be comprehended in the expression 'any
person interested in the affairs of the company'.
At one stage there was a threatened long
argument to ascertain whether the appellants have become the members of the
company or are the creditors of the company. The appellants contended that they
and their friends have purchased 44,000 equity shares of IHI from its former
holder DFM and they have also taken an assignment of the debt in the amount of
Rs. 23 lacs owned by IHI to DFM from DFM.
Respondent Jain contended that the assignment
is not valid as it fails to comply with s. 130 of the Transfer of Property Act
and as the names of the appellants are not put on the register of IHI, they
have not acquired the status of member of IHI and, therefore, they being
neither creditors nor members of IHI, they have no locus standi, to maintain
the application under s. 392.
The stand taken by respondent Jain in this
behalf is wholly ambivalent. Sometime after the scheme was sanctioned on 15th
October 1975, the appellants assert that they purchased the 44,000 equity
shares of IHI from DFM and they simultaneously took assignment of the debt.
Thereafter respondent Jain filed Company Application No. 190/76 in which he
sought a direction under s. 392(2) for winding up the Company. In inviting the
Court to grant his prayer for winding up the Company, the averment made is that
since the sanction of the scheme by the Court, DFM has sold its interest to
Shri S. K. Gupta and others who wanted to operate the scheme as if they were
the substitutes for DFM.
Another averment is that DFM was not entitled
to sell its shares because it was the propounder of the scheme.
Therefore, the raison d'etre for moving the
application under s. 392(2) was the sale of shares of IHI held by DFM to the
appellants. When the appellants filed Company Application No. 193/76 under s.
392(1), in order to show their newly acquired or subsisting interest in the
scheme so as to enable them to move the application under s. 392, it was
averred that the appellants have purchased 41,800 shares of IHI from DFM and
the balance of holding of DFM to the tune of 2200 equity shares have been
purchased by the nominee of the appellants. It is further averred that the
amount standing in the name of DFM in the books of IHI also been taken over by
the appellants. While replying to these averments in the application,
respondent K. P. Jain in para 16 of his counter affidavit dated 29th March 1976
has stated that 'there is some understanding or agreement between the Delhi
Flour Mills Co. Ltd. and Shri S. K. Gupta for the sale of the shares held by
Delhi Flour Mills Co. Ltd., in the IHI and I have referred to 1200 it in my
application CA. 190/76'. If the very alleged sale of the shares by DFM to the
appellants gave cause of action to respondent Jain to maintain an application
under s. 392(2) praying for an order for winding up of the company, what
greater ambivalence could it disclose when it was contended on his behalf that
the sale has not taken place ? There is enough evidence on record as is evident
from the affidavit filed by DFM that as between DFM and the appellants the sale
is complete. Similarly, there is evidence in the affidavit that the debt owned
by IHI to DFM has been assigned by DFM to the appellants. In the face of this
express position adopted by Jain, would it not clothe the appellants with
necessary interest both in the company IHI and the scheme in respect of it, so
as to enable them to maintain an application under s. 392(2) ? Appellants are
certainly persons interested in the affairs of the company.
For this additional reason the application
for modification by them is certainly maintainable.
In the aforementioned circumstances we are
not inclined to examine a very serious contention raised by Mr. Mridul who
appeared at a later stage of hearing for the respondent Jain that unless names
of the appellants are put on the register of IHI they do not become members and
as the assignment on which the appellants rely does not comply with the
requirements of s. 130 of the Transfer of Property Act, the assignee's title to
the debt assigned has not become complete, and, therefore, the appellants are
not creditors of IHI. We may in passing say that the factum of assignment or
the sale of shares was never seriously questioned but we are prepared to
proceed on the assumption that even if it be so, in the circumstances herein
discussed and the ambivalence of respondent Jain the appellants could certainly
be said to be persons sufficiently interested both in the company IHI and the
scheme in respect of it so as to be able to maintain an application under s.
392(1).
Lastly in this connection it must be
remembered that if DFM whose scheme was sanctioned and not challenged by
respondent Jain, started implementing the scheme and after getting into the
saddle by constituting the Board of Directors as desired by it, it could have
transferred its shares to appellants and appellants could have as well taken
over management and implemented the scheme and no one, at any rate, Respondent
Jain holding only 1000 equity shares, i.e. 1.25% of the issued capital, could
have objected to it.
The objection at this stage is equally
futile. Therefore, with respect, the High Court was in error in holding that
the appellants had no locus standi to maintain an application under s. 392(1).
The next important contention is that the
sponsor or propounder of a scheme is such an integral part of the whole scheme
or an important element of the 'basic structure' of the scheme that its
substitution changes, alters or amends the scheme in almost its entirety and
such a thing cannot be done by way of modification under s. 392. The word
'modification' must be given, according to the respondent and according to the
High Court, a restricted and narrow meaning. The High Court, after reaching the
conclusion that propounded of a scheme is 'the very life blood and soul of the
scheme and on his going out the scheme itself becomes lifeless and inert',
proceeded to examine the connotation of the word 'modification' as used in s.
392 and after referring to various dictionary meanings, reached a conclusion that
the context and setting in which the word is used, it would only means a
"small adjustment a minor or slight change, a qualification or limitation,
alteration of a subordinate character", and substitution of a sponsor of a
scheme is of such a vital nature altering, in the opinion of the High Court,
the 'basic structure' of the scheme that such a three dimensional change would
not be comprehended in the word 'modification' as used in s. 392. In reaching
this conclusion the High Court referred to the meaning assigned to the word
'modify' in various dictionaries such as Webster, Black's Law Dictionary, et
el. Unfortunately the High Court completely overlooked the obvious that the
words 'modify' and 'modification' have been defined in s. 2(29) of the Companies
Act as under:
"2. Definitions-In this Act, unless the
context otherwise requires- (29) "Modify" and
"modification" shall include the making of additions and
omissions".
It may also be mentioned that s. 2(1) defines
'altered' and 'alteration' to include making of additions and omissions, while
'variation' is defined in s. 2(31) to include 'abrogation'. The definition of
cognate words is noted by us to arrive at a true meaning of the word
'modification'. The High Court nowhere refers in its judgment to the definition
of 'modify' and 'modification' given in the very statute and proceeded to
examine the content and meaning of the word used in a provision in the same
statute which, unless the context otherwise requires, must bear the same
meaning as set out in the definition section.
The noticeable feature of this definition is
that it is inclusive definition and where in a definition clause the word
'include' is used it is 1202 so done in order to enlarge the meaning of the
words or phrases occurring in the body of the statute and when it is so used,
these words or phrases must be construed as comprehending not only such things
which they signify according to their natural import, but also those things
which the interpretation clause declares that they shall include (see Dilworth
v. Commissioner of Stamps). Where in a definition section of a statute a word
is defined to mean a certain thing, wherever that word is used in that statute,
it shall mean what is stated in the definition unless the context otherwise
requires. But where the definition is an inclusive definition, the word not
only bears its ordinary, popular and natural sense whenever that would be
applicable but it also bears its extended statutory meaning. At any rate, such
expansive definition should be so construed as not cutting down the enacting
provisions of an Act unless the phrase is absolutely clear in having opposite
effect (see Jobbins v. Middlesex County Council). where the definition of an
expression in a definition clause is preceded by the words 'unless the context
otherwise requires', normally the definition given in the section should be
applied and given effect to but this normal rule may, however, be departed from
if there be something in the context to show that the definition should not be
applied (see Khanna, J. in Indira Nehru Gandhi v. Raj Narain). It would thus
appear that ordinarily one has to adhere to the definition and if it is an
expansive definition the same should be adhered to. The frame of any definition
more often than not is capable of being made flexible but the precision and
certainty in law requires that it should not be made loose and kept tight as
far as possible (see Kalva Singh v. Genda Lal).
Is there anything in the context and setting
in which the word 'modification' is used in s. 392 to indicate that the
legislature has not used the expression assigning the meaning to the word as
set out in the definition clause? At least nothing was pointed out to us.
Undoubtedly, as pointed out by Lord Hershell in Cox v. Hakes, that for the
purpose of construing any enactment it is right to look, not only at the
provision immediately under construction, but at any others found in connection
with it which may throw light upon it, and afford an indication that general
words employed in it were not intended to 1203 be applied without some
limitation. Even with this caution we find nothing in s. 392 or reading s.392
with s. 391, to cut down and restrict the meaning as has been attempted by the
High Court completely ignoring the definition section.
According to the definition 'modify' and
'modification' would include the making of additions and omissions. In the
context of s. 392 'modification' would mean addition to the scheme of
compromise and/or arrangement or omission therefrom solely for the purpose of
making it workable.
Reading s. 392 by substituting the definition
of the word 'modification' in its place, if something can be omitted or
something can be added to a scheme of compromise by the Court on its own motion
or on the application of a person interested in the affairs of the company for
the proper working of the compromise and/or arrangement, we see no
justification for cutting down its meaning by a process of interpretation and
thereby whittle down the power of the Court to deal with the scheme of a
compromise and/or arrangement for the purpose of making it workable in course
of its continued supervision as ordained by s. 392 (1).
Strictly speaking, omission of the original
sponsor and substituting another one would not change the 'basic fabric' of the
scheme. The scheme in this case is one by which a compromise is offered to the
unsecured creditors of the company and whoever comes in as sponsor would be
bound by it. Undoubtedly a sponsor of the scheme enjoys an important place in
the scheme of compromise and/or arrangement but basically the scheme is between
the company and its creditors or any class of them, or the company and its
members or any class of them, and not between the sponsor of the scheme and the
creditor or member. The scheme represents a contract sanctified by Court's
approval between the company and the creditors and/or members of the company.
The company may as well be in charge of directors and the implementation of the
scheme may come through the agency of directors but that would not lead to the
conclusion that during the working of the scheme the directors cannot be
changed. If the scheme has to be ultimately implemented by the company as part
of its contract and yet its directors can be changed according to its Articles
of Association, we see no difference in the situation where a sponsor is
required to be changed in the facts and circumstances of a case. Therefore, it
is not possible to accept the submission that as and by way of modification one
sponsor of a scheme cannot be substituted for another sponsor.
1204 We may not be understood to say for a
moment that the Court can appoint any one as sponsor. The Court on which a duty
is cast by s. 392(1) to exercise continuous supervision over the working of the
compromise and/or arrangement must, in order to effectively discharge its duty,
examine the bona fides of the person applying to be substituted as sponsor, his
capacity, his ability, his interest qua the company and other relevant
considerations before substituting one sponsor for another. In a given case an
application may be rejected as the Court is of the opinion that the sponsor is
not one who can be trusted with the implementation of the scheme but that is
entirely a different thing from saying that the Court has no power to make such
a substitution as and by way of modification of a compromise or arrangement.
Now to the facts of the case. The appellants
have applied for substituting them as sponsors of the scheme in place of DFM.
They claim to have purchased 44,000 shares out of 80,000 issued and subscribed
equity shares of the company. As stated earlier, between the transferor and
transferee of the shares, the transfer of the shares is complete and not even
seriously objected to by the respondent as pointed out hereinbefore. The
sponsor has taken an assignment of a debt of Rs. 23 lacs which IHI owed to DFM
from the creditor DFM. A gain, as between the transferor and transferee the
assignment is complete. The only objector is respondent holding 1,000 equity
shares representing 1.25 per cent of the issued and subscribed capital. An
advertisement was directed to be inserted by the order of the Court in
newspapers in respect of the application for substitution-modification made by
the appellants inviting every one interested in the company or in the scheme of
compromise and/or arrangement to come and lodge objection, if it was so
desired, against substitution/modification prayed by the appellants. None
including the petitioning creditor except the respondent Jain has lodged such
an objection. This procedure was also followed by the Gujarat High Court in
Mansukhlal's (supra) case and by referring to that part of the judgment, the High
Court held that judgment itself is an authority for the proposition that
substitution of the sponsor is a vital change of a basic nature and cannot be
ordered by the Court acting under s. 392 and must be referred to a meeting of
the creditors or members. With respect, this is not a fair reading of the
judgment. At pages 290-291, the 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 1205 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
bona fides 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. The 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. Therefore, viewed from
any angle, we see no objection to granting the application of the appellants
for substitution/modification as sponsors of the scheme.
Accordingly, the judgment of the Division
Bench dated 16th July 1976 in Company Appeal No. 15/76 is set aside and the
order of the Company Judge dated 26th April 1976 in Company Application No.
193/76 is restored with costs throughout.
N.V.K. Appeal allowed.
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