IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No 34 of 1993 AND 35 OF 1993. in COMPANY PETITIONNo 90 of 1986 For Approval and Signature: Hon'ble Mr.JUSTICE N.J.PANDYA AND Hon'ble MR.JUSTICE S.D.PANDIT ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? J 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? od 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- CENTRAL BANK OF INDIA Versus AMBALAL SARABHAI ENTER. LTD. -------------------------------------------------------------- Appearance: MR RAJNI H MEHTA for Petitioners MR SM SINGHI for Respondent No. 1 MR SN SOPARKAR for Respondent No. 2 -------------------------------------------------------------- CORAM : MR.JUSTICE S.D.PANDIT Date of decision: 27/02/97 COMMON JUDGEMENT 1. The appellants are Central Bank of India and Bank of Baroda. These two appeals are preferred against the order passed on 24th December, 1987 by the Company Judge of this Court by which he has disposed of Company Petitions Nos. 90/86 and 91/86. These two appeals are preferred against one and the same order and they are also heard together with the consent of the parties and they are being disposed of by this common judgment. 2. Respondent Ambalal Sarabhai Enterprises (hereinafter referred to as " A S E ") was carrying out at all material time various business and for that purpose had organized itself into various divisions. One of the said division was called SWASTIK HOUSE HOLD AND NATURAL PRODUCTS ( hereinafter referred to as " SHIP "). SHIP was enjoying various credit facilities from appellants- Bank of Baroda and Central Bank of India. Various credit facilities in consideration of various securities including guarantee being given by Companies of ASE group. SHIP was engaged in manufacturing shops, detergents and other similar products.Said SHIP was amalgamated with ASE by order of the Bombay High Court on 11th July, 1984 and, thereafter, it had become the division of ASE. Appellants had accepted the said amalgamation on various terms including ASE giving guarantees, the credit facilities were transferred and confirmed and granted to ASE for its SHIP division, On execution of various documents and tripartie agreement of hypothecation on 29th December, 1984.On 30th June, 1984, the dues of the respondents were exceeding Rs.10,00,00,000/- ( Rupees Ten Crores ).The said SHIP after its amalgamation with ASE was named as WHITCO and WHITCO was subsequently changed to SARABHAI SURFACTANTS LTD. ( to be referred to as SSL ) was owning more than Rs.10,00,00,000/- (Rupees Ten Crores ) to the petitioners on 29th December, 1984. The Company Petitions Nos. 90/86 and 91/86 were filed by ASE by showing WHITCO LTD. which is now known as SSL as the respondent No.1 and Sarabhai Electronics Ltd. as Respondent No.2 the petitioner had come before the court with a case that there was an agreement between the petitioner and the respondent No.2 that ASE wanted to transfer its SHIP to SSL and it had also agreed to transfer its electronic undertakings to SSL. It was the contention of the petitioner-company that as it has engaged in diversion activities, restructuring of business is sought to have ideas of specialization and to keep space with the fast moving technologies and to have some collaboration with international leaders who specialize in one or other fields and who find it difficult to enter into collaboration with the petitioner because it is engaged in diverse fields. Therefore, as per the said Arrangement/amalgamation scheme, petitioner intends to transfer SHIP which was manufacturing toiletries, detergent cosmetics, industrial packing and related ancillary operations to respondent No.1 WHITCO which also manufactures and sell detergents and which is now known as SARABHAI SURFUCANTANTS LTD ( in short SSL ). It further intends to transfer technical undertakings to respondent No.2 Sarabhai Electronics Ltd. which was at the time of filing of petition functioning as financing company and the aforesaid arrangement was approved in the meetings of Board of Directors of the company and the respondent-company held separately on 31st October, 1985 and had decided to propose the scheme of arrangement to reorganize the activities of the petitioner through media of 3 co-operative entities. After approving the draft in the meeting of the Board of Directors as the petitioner-company held on 16th January, 1986, the petitions by way of Company Petition No.35/86 and 36/86 were filed and as per the order passed in those petitions on 25th March, 1986, Then the meetings were held of the equity share holders, preference share holders and thereafter, the present petitions 90/86 and 91/86 were filed. 3. When the petitions came up for admission, the court had directed issuing of necessary advertisement in the newspapers and notice was also issued to the Central Government. In pursuance of the said advertisement, the State Bank of India- one of the creditors of WHITCO which is at present known as SSL had filed an affidavit in reply opposing the said petition. It was also opposed by Ceiba Geigy Ltd. and Polyolefins Ltd. But it seems that after they had filed their affidavit in reply opposing the petition, the original petitioner-respondent No.1 ASE had working out with them and consequently they had filed statement saying that they are withdrawing their objections. But the advocate for the Central Government had raised objections for approving the said amalgamation and arrangement scheme. The learned Single Judge had negatived all the contentions raised on behalf of the Central Government and he also came to the conclusion on the strength of the affidavit filed by the petitioner-company that the secured creditors of the petitioner-company have agreed to the proposals for the scheme of arrangement though no specific statement of the secured creditors mentioning therein that they had agreed to the proposals of scheme of arrangement was produced before him. He therefore, came to the conclusion that there was proper compliance of the statutory requirements by the petitioners and he therefore, was pleased to accord sanction to the said arrangement and amalgamation scheme by his order dated 24th December, 1987. 4. The present appellants who are the secured creditors of the WHITCO Company Ltd. and now known as SWASTIK SURFACTANTS LTD. have preferred the present appeals. Their main contention is that though there was sufficient material before the learned Single Judge to hold that there was no satisfaction of the statutory requirement for according the sanction, the learned Single Judge has erred in holding that there was compliance with the statutory requirements by the petitioners. It is also the contention of the appellants that respondent No.1 ASE had filed a false affidavit saying that an arrangement had been arrived at between the appellants and the petitioners and that the appellants had no objection for according sanction to the said arrangement and amalgamation scheme. The respondent ASE never intended to work out any arrangement to satisfy the dues of the appellants and after getting the approval and sanction to the said arrangement and amalgamation scheme, the respondent No.1 ASE has backed out from the statements made by him before the Company Judge on affidavit stating therein that an arrangement has been worked out with the appellants. It is the contention of the appellants that the respondent No.1 had played a fraud on the Single Judge in getting the approval and sanction for the said arrangement and amalgamation scheme. They therefore seek setting aside of the order passed by the learned Single Judge on 24th December, 1987 by which the approval and sanction has been granted to the arrangement and approval scheme. 5. The respondents have contended before us that the subsequent events after the passing the order of approval and sanction of the arrangement scheme on 24th December, 1987 could not be taken into consideration by this court. If the appellants wants to contend that the order in question has been obtained by fraud, then they could have to go for a separate civil suit and they cannot raise this contention in the appeal. It is also contended that the learned Single Judge has not committed any error of either of law or fact so as to interfere with the order passed by him. 6. Therefore, on the submissions made before him the points which arise for consideration and findings thereon for the reasons hereinafter stated are as under: POINTS FINDINGS 1. Whether the learned Single Judge was right in holding that the petitioner has fulfilled all the statutory requirements for getting the order of approval and NO. sanction to the said arrangement and amalgamation scheme ? 2. Whether in view of the material which was on record of the learned Single Judge ought not to have approved and sanctioned the scheme in question ? YES 3. Whether is it open for the appell- ants to raise a contention in appeal that the order passed by the learned Single Judge was obtained by the respondents by playing fraud ? YES 4. Whether the present appeals will have to be allowed ? YES 7. Before proceeding to consider various contentions raised by the appellants as well as the respondents, it would be just & proper to consider provisions of Section 391 under which the original applications were filed and allowed.The said Section 391 is running as under : Power to compromise or make arrangements with creditors and members (1) Where a compromise or arrangement is proposed (a) between a company and its creditors or any class of them ; or (b) between a company and its members or any class of them ; the Court may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. (2) If a majority in number representing three-fourth in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed ( under the rules made under section 643 ), by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contibutories of the company : (Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like.) (3) An order made by the Court under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar. (4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company. (5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to ten rupees for each copy in respect of which default is made. (6) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of. (7) An appeal shall lie from any order made by a Court exercising original jurisdiction under this section to the Court empowered to hear appeals from the decisions of that Court, or if more than one Court is so empowered, to the Court of inferior jurisdiction. The provisions of sub-section (3) to (6) shall apply in relation to the appellate order and the appeal as they apply in relation to the original order and the application. If the above provisions of Section 391 are considered, then it would be quite clear that the provisions of sub-section 2 of section 391 is very crucial and the compliance of the said sub-section 2 of Section 391 is essence of determination of petition filed under Section 391. Provisions of Section 391 (2) caste a duty on the court to see that all the material facts relating to the company such as latest financial position of the company, latest auditor's report and the accounts of the company are disclosed by the company who had filed theapplication Proviso to Section 391 (2) being in negative form is mandatory and making all the disclosure as required by the proviso being condition precedent to court exercising the jurisdiction for sanction of the scheme unless that condition is fully established, the court will have no jurisdiction to sanction the scheme. Where applications under section 391 (1) does not disclose the material such as latest audited balance sheet and other details of the working of the company, the scheme of the arrangement with the creditors not being given, the application cannot be sanctioned. 8. It is an admitted fact that in the main petition, the petitioner had not disclosed the names of the present appellants as the secured creditors of the petitioners. They were not made specifically parties to the proceeding. No doubt, a public notice was issued and inspite of the same, the present appellants had not appear. But that conduct of the appellants will not absolve the original petitioners- respondents in these appeals from fulfilling their statutory obligation created by proviso of sub-section 2 of section 391. It is an admitted fact that the State Bank of India, Ceiba Geigy Ltd. and Polyolefins Industries Ltd. had filed affidavit in reply opposing the original petitions. No doubt, the said three creditors of the respondent on their dues being satisfied had subsequently given up their opposition. But merely because of satisfaction of their dues, they happen to give up their opposition, the facts stated by them on affidavit while opposing the petition could not be defaced or ignored. Their affidavit in reply was a material in the proceeding and the same material ought to have been considered by the learned Company Judge. The conduct of those three creditors on subsequently withdrawing their opposition on account of satisfaction of their dues would at the most create an estoppel or bar against them from sticking to original opposition, but that would not erase and devalue the affidavit in reply filed by them. In any case the contents therein which are pertaining to the fullfilment of the statutory obligation and duty of the petitioner ought to have been considered by the Company court. 9. In Company Petition No.91 of 1986 at Annexure 32 there is affidavit of D.R. Sampathkrishnan, Manager, Commercial & Industrial Division, State Bank of India, Baroda. In this affidavit in reply in para No. 10 he has stated as under : The Petitioner Company's annual report for the year 1984-85 is enclosed to the petition and I say that in the year ending 30th April, 1985, the Petitioner Company showed a net loss together with deficit carried forward to the tune of Rs.145.97 lacs. I say that perusal of the Auditor's Report of the Petitioner Company would clearly show that the Petitioner Company has under-stated the loss for the year ended 30-4-1985 and over-stated the value of fixed assets as of the said date. I say that the Petitioner company has not provided for the future liability for gratuities, which is estimated by the Auditor of the Petitioner Company at Rs.2,37,824/- as of 30th April, 1985. I say that in view of the losses incurred by the Petitioner Company, the Petitioner Company has not created any reserve for investment for investment allowances, which amounts to Rs.1,86,753/-. I say that with regard to the depreciation on assets, which is being mentioned by me hereinabove, the Petitioner Company has not considered shifted allowances and if such a considered shift allowances and if such a consideration would have been made, the depreciation for the year ended 30th April, 1985 would have been more by Rs.5,52,703/-. I say that as far as the increase in rates of depreciation on buildings, plant and machinery with effect from 2-4-1983, the specified period which is recommended by the Department of Company Affairs and the Institute of Chartered Accountants of India, the Petitioner Company has not revealed the correct information with regard to depreciation and thus the Petitioner Company has not adhered to the recommendations made by the Department of Company Affairs and the Institute of Chartered Accountants of India. I say that if the depreciation be provided as per this recommendation, the charge for the depreciation would have been more by Rs.59,85,796/-. I say that thus the Petitioner Company, as I already stated hereinabove, under-stated the losses for the year by more than Rs. 60 lacs and over-stated the value of fixed assets by not providing for the depreciation as stated hereinabove. Then he has further stated in para : 15 as under : I say that if the present scheme is approved by this Hon'ble Court, it would amount to a creditor taking over the liabilities of his debtor and in the process would adversely affect the security of the bank. I further say that the State Bank of India held a hypothecation charge over the book debts/receivable of the Petitioner Company. I further say that the State Bank of India will be adversely affected not only with respect to the said security but also with respect to the said security but also with respect to the bills dishonoured by the Swastik Undertaking of ASE. I say that, in nut-shell, ASE as a Guarantor is liable for the payment of the amount due and payable by the Petitioner Company in respect of the banking facilities accorded to the Petitioner Company. I say that Swastik division of ASE is also liable to make payments for the bills accepted by them and on the basis of such acceptance the bank has discounted the said bills in favour of WHITCO Ltd. I say that even looking to the internal transactions between WHITCO Ltd. on the one hand, and Swastik division of ASE, it is abundantly clear that taking over of Swastik division of ASE by WHITCO Limited as well as the State Bank of India. I say that there is no information given at all as to the real financial position of Swastik division of ASE. I say that unless the said financial position is made clear before this Hon'ble Court, it will not be possible for this Hon'ble Court to grant any sanction to any such scheme, by which, the Swastik division of ASE is to be taken over by WHITCO Ltd. I further say that even the so-called consideration which is agreed to be paid under the scheme by WHITCO Ltd. to ASE, can also not be justified unless all the facts and the financial picture of WHITCO Ltd. as well as Swastik division of ASE and ASE are clearly placed before this Hon'ble Court. I say that by taking over the Swastik division of ASE by WHITCO Ltd. even the amount due and payable to WHITCO Ltd. by Swastik division of ASE would be wiped out and the bank, as a secured creditor would be seriously handicapped and affected. I say that the bookdebts are also a part of the security in respect of the financial assistance given by the Bank by way of cash credit to the Petitioner Company. I say that in absence of all the important financial information, the State Bank of India is unable to evaluate the scheme and even before this Hon'ble High Court, the Petitioner Company should have disclosed all the relevant financial information which it has not done. In absence of all the relevant financial information, the true effect of the scheme cannot be assessed. ( Emphasis are supplied by us ) In para No.19 and 20 of his affidavit he has deposed as under : 19. With reference to paragraph 2(a) of the said scheme, I say that no particulars about the debts, liabilities, dues and obligations of the Swastik Undertaking of ASE as on the relevant date have been given in this petition. I say that in absence of this important and relevant information, it will not be possible to judge the true effect of the said scheme. I crave leave to file a detailed affidavit as and when necessary information is disclosed before this Hon'ble Court. 20. I say that as far as the Petitioner Company is concerned, the information disclosed in this petition is only upto 30-4-1985. There is no information as of 1-7-1985 with respect to the Petitioner Company, whereas with respect to the Swastik Undertaking division of Respondent No.1 Company, no information whatsoever has been furnished in this petition. I say that except the bare information of all types of liabilities, dues and obligations, there is no real information, which is pertinent to the scrutiny of the said scheme. The State Bank of India, is therefore, unable to take a view in the matter. It is not clear as to what will be the situation with regard to the outstanding debts of the State Bank of India and what will happen to it after the implementation of the said scheme. I say that according to the terms and conditions,under which the Petitioner Company has obtained from the bank, the various facilities, it is expressly agreed that the Petitioner Company as well as the 1st respondent Company shall not, without prior reference to the bank, effect any change in the said Company's capital structure and/or formulate any scheme of amalgamation or reconstruction. I say that it was on the basis of these terms and conditions, the banking facilities were accorded to the Petitioner Company. I say that, therefore, the Petitioner Company and/or Respondent No.1 Company cannot violate the terms of the said agreement and cannot propose before this Hon'ble Court any scheme of amalgamation or reconstruction. I say that the Baroda Branch of the State Bank of India by various letters had advised the Petitioner Company as well as Respondent No.1 Company that the proposed scheme of reorganization should not be put through till such time as Bank's approval is obtained. I say that the branch had asked the Petitioner Company vide its letter dated 8th July, 1956 to furnish us the information and date requiring the Swastik Undertaking Division. I say that no information has been furnished to the State Bank of India by the Petitioner Company. I say that the Petitioner Company has been selling their products to Swastik Undertaking of Respondent No.1 Company and the bill drawn by the Petitioner Company on Swastik Undertaking of Respondent No.1 Company are accepted by that undertaking, but, the bank has been having difficulties in realising these bills on due dates. I say that as already stated hereinabove, the bills aggregating about Rs.50 lacs were due from February 1986 onwards and they have been dishonoured by non-payment.