NAVJIVAN MILLS CO. LTD Vs. KOHINOOR MILLS CO. LTD., BOMBAY

JUDGEMENT

(1.) By an order made by the company judge on 30th April, 1970, a scheme of compromise and arrangement proposed between the Navjivan Mills Ltd., Kalol, and its creditors and members in Company Application No. 136 of 1969 was sanctioned with a reservation that the Central Government should file its representation by 31st May, 1970, and the court will consider the objections, if any, raised therein and pursuant thereto, if any directions became necessary, they would be given after hearing Mr. I. M. Nanavati, learned advocate for the petitioner. It was further made clear in the order that detailed reasons which weighed with the court to accord its sanction to the scheme of compromise and arrangement will be given after taking into consideration the representation that the Central Government may choose to make under section 394A of the Companies Act. Subsequently, the Central Government submitted its first representation dated 28th May, 1970 (at page 159 of the record) and the second representation dated 31st Aug., 1970 (at page 313 of the record). After these representations were filed on behalf of the Central Government, the present petition was set down for hearing. After hearing Mr. L. T. Shah for the Central Government, I now proceed to consider the various objections raised by the Central Government to my according sanction to the scheme of compromise and arrangement and also detailed reasons why the court has accorded its sanction to the said scheme of compromise and arrangement.

(2.) Navjivan Mills Company Ltd. (hereinafter referred to as "Navjivan") was incorporated as a private limited company under the Companies Act, 1913, having its registered office at Kalol, District Mehsana, in this State. It was a composite textile undertaking having spinning machinery, weaving machinery and full fledged processing house. When Navjivan commenced business its paid up capital was Rs. 7 lakhs, which was subsequently increased to Rs. 52 lakhs. The issued, subscribed and paid up capital was Rs. 52 lakhs made up of 45,000 ordinary shares each of Rs. 100 fully paid and 7,000 41/2 per cent. redeemable preference shares each of Rs. 100 fully paid. Navjivan was converted into a public limited company in the year 1967. Navjivan was in embarrassed financial circumstances since the year 1965 and its carried forward loss as on 31st Dec., 1967, was Rs. 86.75 lakhs. M. J. & Company were the managing Agents of Navjivan but the managing agency agreement expired by efflux of time on 31st Dec., 1966, and was not renewed. Since then Subodh Mangaldas and Gunvant Mangaldas were managing directors of Navjivan and they along with other friends and relations had deposits worth Rs. 22.68 lakhs with the Navjivan. As the loss mounted up by working the mill the management was forced to close the mills with effect from 30th Aug., 1968. At the relevant time 1,700 workers were working in the mills. Navjivan proposed a scheme of compromise and arrangement with its creditors in Company Petition No. 27 of 1969 which was presented on July 17, 1969. In the meantime three petitions being Company Petitions Nos. 37 of 1968, 40 of 1968 and 41 of 1968 were filed by difference creditors of the Navjivan praying for winding up the company. Subsequently, Company Petition No. 27 of 1969 proposing a scheme of compromise and arrangement between Navjivan and its members was withdrawn on 6th Oct., 1968. Petitions for winding up Navjivan were pending in this court but the order for winding up Navjivan was not made till Kohinoor Mills Company Ltd. (hereinafter referred to as "Kohinoor") - a public limited company incorporated under the Companies Act filed Company Application No. 136 of 1969 on 24th Oct., 1969, under section 391(1) of the Companies Act praying for directions that the meetings of the creditors and members of Navjivan be convened to consider a scheme of compromise and arrangement proposed by Kohinoor between the creditors and members of Navjivan and Navjivan. The court gave directions for convening different meeting and appointed Mr. M. A. Syed, Deputy Registrar of this High Court, to preside over the meetings. After the meetings were held, the Deputy Registrar in his capacity as chairman of the meetings filed his report on 24th Dec., 1969, which disclosed that the proposed scheme with certain modifications was approved by different classes of creditors and members of the Navjivan by more than the statutory majority. Kohinoor thereafter obtained leave of the court in Company Application No. 38 of 1970 on April 8, 1970, under rule 79 of the Companies (Court) Rules, enabling it to file a substantive petition under section 391(2) for obtaining sanction to the scheme of compromise and arrangement as approved by the members and creditors of Navjivan. As the scheme envisaged issue of equity shares of the Kohinoor to the members and creditors of Navjivan, it was necessary that issue of fresh shares to persons other than the equity shareholders of Kohinoor should be approved by the shareholders of Kohinoor by a special resolution as envisaged by section 81(1A) of the Companies Act. Accordingly, Kohinoor convened an extraordinary general meeting of its members on 20th April, 1970, for passing a special resolution. The scheme of compromise and arrangement as proposed by Kohinoor between Navjivan on the one hand and its creditors and members on the other and the allotment of shares of Kohinoor to the shareholders of Navjivan in exchange for their shares of Navjivan in a certain ratio as approved in this meeting by adopting a special resolution to that effect. Kohinoor filed a substantive petition being Company Petition No. 12 of 1970, under section 391(2) of the Companies Act on 16th April, 1970. This petition was advertised in various newspapers and the date of hearing was fixed on 30th April, 1970. A direction was given that a notice of the petition be served upon the Central Government as provided in section 394A of the companies Act. When the petition was taken up for hearing on 30th April, 1970, it transpired that no creditor or member of Navjivan appeared to oppose the scheme. On that day Mr. J.G. Gatha, Registrar of Companies, appeared and requested the court to adjourn the hearing of the petition on the ground that the Central Government to whom notice had been served under section 394A desires to make a representation but it had not had sufficient time to apply its mind to the proposed scheme of compromise and arrangement and was, therefore, not able to make its representation. This motion for adjournment was opposed by Mr. I. M. Nanavati, learned advocate who appeared for the petitioner, specifically on the ground that the scheme of compromise and arrangement has been approved by the members of the Kohinoor as well as by the members and creditors of Navjivan and that no one from amongst the members or creditors of Navjivan has appeared to oppose the scheme and that, therefore, the court should not adjourn the hearing of the petition because the court was closing for summer vacation on the next day. Mr. Nanavati specifically urged that the petitioner was keen to re-start the mill as soon as the scheme is sanctioned and that it is in the interest of all including the workmen that Navjivan should re-start as early as possible because the interest liability was mounting from day to day. A little curious situation arose where the adjournment could not have been for less than six weeks. The Central Government under section 394A was certainly entitled to a notice and any representation that the Central Government may desire to make in view of the power conferred upon it under section 394A, the court will have certainly to take into consideration before sanctioning or refusing to sanction the scheme. In fact very often these scheme petitions are usually ex-parte in nature and therefore any assistance coming from an independent source in examining merits and demerits of the scheme would always be welcome. But, on the other hand, the court had to weigh the mounting liability of the sponsors of the scheme and the more important fact that the adjournment would necessitate more than six weeks of delay. Faced with this situation, the court, after examining the case minutely and in its various aspects, proceeded to sanction the scheme on that day giving liberty to the Central Government to make its representation and making a reservation in the order that if any further directions are necessary after considering the representation of the Central Government that it might desire to make, the court would give further directions, undoubtedly for the proper working and implementation of the scheme. It was least expected and there was not even the slightest apprehension that the Central Government would come out with a contentious attitude. Whatever that may be, the nature and effect of the order made by this court is itself in serious dispute and I would not dilate upon this aspect at this stage. Suffice it to say that on 30th April, 1970, this scheme was sanctioned with a reservation in favour of the Central Government giving liberty to it to submit its representation latest by 31st May, 1970. In fact notice of sufficient duration was already served upon the Central Government and the adjournment sought for could have been legitimately refused. A representation was submitted on behalf of the Central Government within the time granted to it and hardly any serious question was raised in that representation. Before the Central Government could be heard in support of its first representation, another representation was submitted on its behalf on 31st Aug., 1970, raising a number of contentions. It was strenuously contended on behalf of the petitioner that the Central Government was given time to make its representation up to 31st May, 1970, which opportunity was availed of, and, therefore, any further affidavit filed on their behalf, therefore, should not be taken into consideration. There is substance in this submission. But actuated by a keen desire to have an independent non-partisan body assisting the court in examining the merits and demerits of the scheme and in order to do full justice to the matter I overruled the objection of the petitioner and would examine the contentions raised in both the affidavits filed on behalf of the Central Government, though, strictly speaking, the second one would not be admissible.

(3.) Next thing that I should notice is the broad outlines of the scheme as also the various stages through which it has moved and the final scheme which is submitted to the court for its sanction. The scheme proposed by Kohinoor is contained in a brochure, annexure "A", at page 40 of the record. The postulates or assumptions on the basis of which the scheme is proposed are set out in the first three paragraphs and I need not refer to them because it was in terms conceded that all of them have been carried out and the sponsors cannot retrace from the scheme on the ground that the postulates or assumptions on which the scheme is founded are incorrect. The scheme is undoubtedly a scheme of compromise and arrangement though whether it is in fact a scheme of compromise alone or scheme of arrangement alone or it is a composite scheme, falls to be determined in view of the contentions of the Central Government. For the present, I should like to refer to it as the scheme of compromise and arrangement and the scheme is between all classes of creditors and all classes of members of the Navjivan on one the hand and Navjivan on the other sponsored by Kohinoor. Initially, the compromise offered to the holders of 41/2 per cent redeemable cumulative preference shares of Navjivan was that in exchange of 12 preference shares of Navjivan, the Kohinoor will allot one equity share of the Kohinoor and arrangement for working out fractional shares was also drawn up. A provision was also made for the transfer of shares by appointing constituted attorneys to work on behalf of Kohinoor. Subsequently, this proposal was modified at the meeting of preference shareholders to the effect that instead of 12 preference shares being exchanged for one equity share of Kohinoor the ratio would be 10 : 1. In other words, the scheme finally approved by the holders of the preference shares of Navjivan was that in exchange for 10 preference shares of Navjivan, the holder would be entitled to one equity share of Kohinoor and the system of working out fraction was retained. Initially the compromise offered to the holders of ordinary shares of Navjivan was that in exchange for 20 ordinary shares of Navjivan, the holder would be entitled to one equity share of Kohinoor and system for working of fraction was provided for as also arrangement for the transfer by constituted attorneys of Kohinoor was also provided therein. This provision in the scheme had a chequered history. When it was moved in a meeting of ordinary shareholders of Navjivan the shareholders proposed that instead of the ratio of 30 : 1, it should be reduced to 26 : 1. In other words, it was proposed and finally adopted that in exchange of 26 ordinary shares of Navjivan the holder would be entitled to one equity share of the Kohinoor. Now, allotment of the shares was to be made by Kohinoor and, therefore, this arrangement worked out by shareholders of Navjivan will have to be passed or adopted by the Shareholders of Kohinoor. It appears that the Life Insurance Corporation of India and the Unit Trust of India - two wholly Central Government controlled bodies - have large holdings of equity shares of Kohinoor and vigilant as they were for their own interest and having a dominant voice in the management of Kohinoor they almost asserted a right of veto by changing the proportion radically from 26 : 1 to 40 : 1, the shareholders of Navjivan being beggars were no choosers and, forced as they were under the circumstances, meekly and timidly submitted. This aspect need examination because in the first affidavit of the Central Government a poser was made that in the scheme the interest of shareholders of Kohinoor was not taken care of or looked after. I will examine that aspect on merits as to who had exploited whom in this case and the result is not going to be very flattering to the shareholders of Kohinoor. Be that as it may, ultimately as the shareholders of Kohinoor radically altered the ratio to the utter disadvantage of the shareholders of Navjivan this court was forced to direct a fresh meeting of the shareholders of Navjivan. I accordingly gave a direction on 9th July, 1970, that a fresh meeting of ordinary shareholders of Navjivan be convened to be presided over by the same chairman at which the shareholders of Navjivan should consider whether they would approve the scheme with the radically altered ratio of 40 : 1. As stated earlier, they were at the sweet mercy of the Kohinoor and, therefore, again to my mind very meekly and timidly submitted to the altered ratio with the result that the veto of Kohinoor has prevailed unchallenged. The final scheme in this behalf now submitted to the court for sanction is that in exchange for 40 ordinary shares of Navjivan, the holder would be entitled to one equity share of the Kohinoor. Initially the compromise offered to the unsecured creditors who were depositors and holders of loan accounts was that the claim of the depositors and the holders of loan account shall stand reduced to 31% of the amount standing to their credit together with the interest accrued thereon up to 23rd Aug., 1968, and the reduced claim shall stand assigned to the Kohinoor and that Kohinoor in consideration thereof shall allot to the said depositors and holders of loan accounts the equity shares of Kohinoor, each of Rs. 100 fully paid at a premium of Rs. 200. When this proposal was moved at the meeting of the unsecured creditors who were depositors and holders of loan accounts, an amendment was moved that the premium, instead of being Rs. 200 shall be Rs. 160, and this was approved and was also accepted by the petitioner. However, some marginal adjustments had to be made again to persuade the Life Insurance Corporation and Unit Trust of India and other equity shareholders of Kohinoor to which a reference will be made when I would point out that two managing directors, viz., Subodh Mangaldas and Gunvant Mangaldas had to forgo 234 shares to which they would have been otherwise entitled if the proportion herein mentioned was retained in respect of their deposits. The compromise finally offered for sanction of the court in respect of the unsecured creditors who are depositors and holders of loan accounts was the same as it was approved at the meeting of unsecured creditors. Initially the compromise offered to the unsecured creditors who were suppliers of cotton, stores, colours, chemicals, etc., was that their claim would stand reduced to 31 per cent. of the face value of the goods supplied by them and they would not be entitled to interest on the value of the goods supplied by them and the reduced claim shall stand assigned to Kohinoor and in consideration thereof Kohinoor shall allot to these unsecured creditors equity shares of Kohinoor of the face value of Rs. 100 fully paid at the premium of Rs. 200. This initial compromise was modified so as to reduce the premium from Rs. 200 to Rs. 160 and that has been finally approved and the court is requested to accord sanction to it. Arrangements were made that while doing so if there is a balance left over which is less than Rs. 300 it shall be paid in cash by Kohinoor. Separate agreement was worked with the labour and workmen employed by the company and it is to be found at annexure F/2 (page 109 of the record). It has not undergone any change and the court is requested to accord sanction. In respect of three specified creditors such as Central Board of Trustees of the Provident Fund, Employees State Insurance Corporation and Employee's Credit Co-operative Society, a separate agreement was worked out with each of them and the court is requested to afford sanction to the same. The agreement with the Central Board of Trustees of the Provident Fund, Employees State Insurance Corporation and Employees' Credit Co-operative Society are the same as have been set out in the order made by me on 30th April, 1970. I have been informed that the parties adhere to the same.