Case: Forbes &amp; Company Limited &amp; Another Vs. The Official Liquidator of The Hon'Ble Bombay High Court &amp; Another

to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation, and so leave a surplus for the members of the company, there are plainly three categories to consider. First, there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the pound. .......................Third, there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good causeThe decision of Megarry, J. in Re Calgary is a clear authority for a proposition that in normal circumstances, no stay should be granted of winding up unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it, (3) or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. The expression in normal circumstances in this formulation also recognises that in an appropriate case and for a good cause, the court may still order a stay of winding up even if none of the three criteria are met. But that still requires a sufficient cause to be made out to the satisfaction of the court to make an exception to the normal rule. At the very minimum, this would indicate that non-existence of any of these conditions is an important criterion that would contribute to the exercise of the discretion by the court on an application for stay of winding up.26 The formulation of Megarry, J. in Re Calgary (supra) was accepted in a judgment of this Court delivered by Mrs.Justice Sujata Manohar (as the learned Judge then was) in VasantInvestment Corporation Ltd. vs. Official Liquidator, Colaba Land and Mill Co.Ltd. (1981) Volume 51 Company Cases 20). However, in VasantInvestment Corporation Ltd., the learned Single Judge held that in the case of a scheme or arrangement which is proposed under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent.27 That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court were to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. In such a case, the members of the company have an opportunity to consider and vote on a proposal and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible.28 Before we conclude, we may note that RMSS a registered union of the objecting workers has sought to allege that RMMS as a representative union is alone entitled to represent the textile mill workers. We make it clear that for the purposes of these proceedings, the legality and the validity of the MOU which was entered into by RMSS with the Appellants has not been an issue which falls for consideration. Insofar as the locus of the workmen represented by Mr.Singhvi is concerned, we have no doubt in coming to the conclusion that they have a substantial standing in these proceedings. When the court has to consider whether a permanent stay should be granted in regard to the order of winding up, every creditor, and workmen in this case being preferential creditors, is entitled to be heard.29 For these reasons, we have come to the conclusion that the learned Single Judge was not in error in refusing to stay the winding up of Svadeshi Mills. There is no merit in the Appeal.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]The judgment of the court also considered the rights of members upon liquidation and their effect while considering an application for stay of winding up. The observations in that regard were as follows:That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation, and so leave a surplus for the members of the company, there are plainly three categories to consider. First, there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the pound.there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good causeThe decision of Megarry, J. in Re Calgary is a clear authority for a proposition that in normal circumstances, no stay should be granted of winding up unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it, (3) or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. The expression in normal circumstances in this formulation also recognises that in an appropriate case and for a good cause, the court may still order a stay of winding up even if none of the three criteria are met. But that still requires a sufficient cause to be made out to the satisfaction of the court to make an exception to the normal rule. At the very minimum, this would indicate thatof any of these conditions is an important criterion that would contribute to the exercise of the discretion by the court on an application for stay of winding up.26 The formulation of Megarry, J. in Re Calgary (supra) was accepted in a judgment of this Court delivered by Mrs.Justice Sujata Manohar (as the learned Judge then was) in VasantInvestment Corporation Ltd. vs. Official Liquidator, Colaba Land and Mill Co.Ltd. (1981) Volume 51 Company Cases 20). However, in VasantInvestment Corporation Ltd., the learned Single Judge held that in the case of a scheme or arrangement which is proposed under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent.27 That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court were to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. In such a case, the members of the company have an opportunity to consider and vote on a proposal and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible.28 Before we conclude, we may note that RMSS a registered union of the objecting workers has sought to allege that RMMS as a representative union is alone entitled to represent the textile mill workers. We make it clear that for the purposes of these proceedings, the legality and the validity of the MOU which was entered into by RMSS with the Appellants has not been an issue which falls for consideration. Insofar as the locus of the workmen represented by Mr.Singhvi is concerned, we have no doubt in coming to the conclusion that they have a substantial standing in these proceedings. When the court has to consider whether a permanent stay should be granted in regard to the order of winding up, every creditor, and workmen in this case being preferential creditors, is entitled to be heard.29 For these reasons, we have come to the conclusion that the learned Single Judge was not in error in refusing to stay the winding up of Svadeshi Mills. There is no merit in theApplying the test which has been enunciated by the Supreme Court in Meghal Homes (supra), we are of the view that the exercise of the discretion by the learned Single Judge was correct and proper. The object and purpose of the Company application is not to revive the business of the Company. The whole purpose is to dispose of the assets by embarking upon real estate construction and development. The company application before the learned Single Judge has proceeded on the basis that what the Appellants would do is to diversify the business of the company into real estate by amending the objects clause of the Memorandum of Association of the company. Admittedly, the company had not carried on any real estate business in the past. Though a faint attempt was made during the course of the hearing, relying upon Clauses 4, 12, 16 and 26 of the Memorandum of Association to show that the objects clause permitted carrying on of real estate business, it is evident from the averments in the company application that the Appellants themselves proceeded on the basis that an amendment of the objects would be required in order to enable the company to enter upon real estate construction. Whether such an amendment would or would not be granted is something which may depend upon the decision of the competent authority in future but it is evident that presently, the carrying on of real estate construction would bethe objects of the company. Besides, under Section 17 of the Companies Act, 1956, an amendment of the objects requires a special resolution which in view of the provision of Section 189 requires 3/4th majority of members present and voting. No circumstances have been placed before the Court to indicate as to whether the Appellants have the support of the requisite majority for a special resolution under Section 189.