Case: S. K. Gupta &amp; Anr Vs. K. P. Jain &amp; Anr

The scheme in this case is one by which a compromise is offered to the unse-cured 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. 28. 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 Section 392 (1) to exercise continuous supervision over the working of the compro-mise and/or arrangement must, in order to effective 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 below 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 a saying that the Court has no power to make such a substitution as and by way of modification of a compromise or arrangement. 29. 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 trans-feree of the shares, the transfer of the shares is complete and not even seriously objected to by the respondent as pointed out herein before. The sponsor has taken an assignment of a debt of Rs. 23 lacs which IHI owed to DFM from the creditor DFM. Again, as between the transferor and transferee the assignment is complete. The only objector is respondent holding l,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 substitu-tion/modification made by the appellants inviting every one interested in the company or in the scheme of compromise and/or arrangement or 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 (2) 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 Section 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 Section 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 is being done here also that no one has come forward to object to the substi-tution 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 acts 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. 30. 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 become discernible from the fact that they tooth and nail oppo-sed 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. 31. Lastly it may be mentioned that the appellants agree to imple-ment 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.

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

Explanation:
1[ds]11. The High Court was of the opinion that the appellants have no locus standi to maintain an application for modification/substitution of them-selves 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 appli-cation for modification of such scheme sanctioned by the Court under Section 391 (2) could not be made by any one other than a member or a creditor20. The stand taken by respondent Jain in this behalf is wholly ambi-valent21. 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 appel-lants are put on the register of IHI they do not become members and as the assignments on which the appellants rely does not comply with the require-ments of Section 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 appelition under Section 392 (1)22. 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 so 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 Section (392) (1)29. 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 thecompany.As stated earlier, between the transferor and trans-feree of the shares, the transfer of the shares is complete and not even seriously objected to by the respondent as pointed out herein before. The sponsor has taken an assignment of a debt of Rs. 23 lacs which IHI owed to DFM from the creditor DFM. Again, as between the transferor and transferee the assignment is complete. The only objector is respondent holding l,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 substitu-tion/modification made by the appellants inviting every one interested in the company or in the scheme of compromise and/or arrangement or 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 (2) 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 Section 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, the scope and ambit of the power of the Court under Section 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 is being done here also that no one has come forward to object to the substi-tution 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 acts 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 sponsor30. 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 become discernible from the fact that they tooth and nail oppo-sed 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 thecompany.This could hardly be treated as a disqualification of the appellants31. Lastly it may be mentioned that the appellants agree to imple-ment 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.