Case: New Kaiser-I-Hind Spinning and Weaving Company Limited (In Liquidation) Vs. State of Maharastra

take over the company by offering to sell them their controlling share holding at the low price of Rs. 10 per share. Perhaps that attracted the Jalan group which for a time felt that they were making an easy bargain and would be able to set the company on its feet again by procuring finances and running it to their profit in which case the value of the shares would have also risen, but after the controlling shares were transferred and the Jalan group took over the company the expectations of the Jalan group were not realised and they found that the company was in a worse commercial position than they had thought it was in, before they entered into the agreement with the J. K. group. What is more, it does appear that a period of severe depression in the textile industry and want of cotton worsened the position. In that predicament the attitude of the authorities who had controlled the purchases of cotton and fixed its price was most unhelpful and contributed to further losses of the company, with the result that the Jalan group found it impossible to implement the scheme and decided to give a go-by to their agreement with the J. K. group. We think that the only proper thing they could do in the circumstances was to apply for liquidation of the company. They also had sought their own advantage but their calculations failed. Neither of these two groups can be credited with seeking the advantage of the company or its workers or the interests of the other unsecured creditors of the company. ( 91 ) IN the several proceedings which commenced no doubt each of the two groups started violently to blame the others making all kinds of allegations against each other, the J. K. group charging the Jalan with deliberate breach of their agreement and fraudulent conduct and an attempt to make money for themselves by mismanaging the company. The Jalan group retorted that the position of the company was brought on by the fraudulent conduct of the J. K. group in the past and by their obstructionist attitude in the implementation of the scheme. These charges and counter charges are all at the stage of allegations and counter allegations and there is no proof of them as such. We have come to our conclusions only on the face of the affidavits filed. If a case is made out for the winding-up of a company, as we have held has been made out in the present case, upon such material as has been placed before us, we do not think that these allegations and counter-allegations can affect the issue; nor can the motives of either of the two groups, the one in presenting the application for winding up of the company and the other in seeking to enforce the scheme, can be taken into consideration. In Bachharaj Factories Ltd. v. Hirjee Mills Ltd. ([1955] 25 Comp. Cas. 227 251; 57 Bom. L. R. 378), there were also similar allegations made against the directors of the company and Chief Justice Chagla disposed of the allegations at page 392 as follows : but as we read the judgment of the learned judge, the main reason which has weighed with him is that the petitioners have not come to this court with clean hands, and Mr. Mathalone wanted to satisfy us that the motive of the petitioners in closing down the mills was selfish, that they were largely responsible for bringing about an impasse in the affairs of the mills, and the court will not make an order at the instance of a party which is guilty of mala fides. We have not permitted Mr. Mathalone to go into the merits of these allegations about the mala fides of the petitioners because in our opinion these allegations are entirely irrelevant. If the petitioners have made out a case of for the winding-up of the company, if they have placed materials before the court which satisfy the court that the company is insolvent, if they have placed materials before the court which satisfy the court that the substratum of the company is gone, it is difficult to understand what the motive of the petitioners has got to do with the question whether an order of winding-up should be made or not. If the petitioners were to stand to benefit by the order, undoubtedly the court would say that a party cannot derive benefit by its own wrong. But when an order of winding-up is made and the liquidator is appointed, the court passes that order in the interest of the company, in the interest of the shareholders, and in the interest of the creditors, and except for the rather doubtful benefit that ordinarily the petitioners solicitors are in conduct of the proceedings no benefit whatever accrues to the petitioners. Therefore, in our opinion, what the learned judge should have considered was whether on the materials placed before him by the petitioners - and the materials in this case are overwhelming and they are indisputable - a case had been made out or not for the winding-up of the company. The learned judge should not have taken into consideration how wicked the petitioners were or how evil their actions had been. ( 92 ) IN a later passage the Chief Justice observed (page 393) ([1955] 25 Comp. Cas. 227, 252; 57 bom. L. R. 378) : there is not the slightest possibility of the working ever being resumed under the present dispensation. We take it that the learned judge was thinking of the allegations of the company that the mills suddenly came to a standstill because of the machinations of the petitioners. But the stark truth remains, for which there is no answer or no explanation, that the mills have no money whatsoever which would enable them to be run. ( 93 ) THAT, in our opinion, exactly sums up the position in the present case also.

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

Explanation:
1[ds]In his order on Company Application No. 21 of 1967, also the learned judge made a similar remark : it may be mentioned that, in the course of the hearing of this judges summons, the parties have freely used the affidavits filed in the different applications relating to the, as the same have been referred to and incorporated in the affidavits filed in the said applications.in view of this conduct of the cases before the learned single judge we do not think that at the appellate stage counsel for one of the parties can claim that the other party shall now be confined exclusively to the pleadings contained in the affidavits filed in that petition alone and not refer to the affidavits filed in the other applications. Moreover, even the paper books which have been prepared are so prepared that it would be impossible to argue a particular appeal upon the pleadings and documents in that appeal. In fact, Mr. Bhatt himself was compelled to refer to several affidavits in the connected appeals in arguing a particular appeal. We are unable to accept this submission of counselThe clause in our opinion lays down nothing more than the normal duty of a managing agent or other person in charge of management of a company to make financial provision to run the companyThe provisions of clause 4 (e) of schedule C also contemplate the borrowing of loans from any other firm, company or person because by that clause safeguards are laid own for the security of the second mortgagees. These clauses therefore show that though the provision was that the Jalans should provide the necessary finance the parties contemplated that they would try to raise the finances like any ordinary business house from financial institutions and other persons, firms or companies and that they were under no legal obligation to pay themselves to provide finance in any event, even if negotiations failedIn that view we think that the learned judge erred in his construction of clause 4 and in the order which he passed( 39 ) THE order, moreover, in our opinion, is incapable of being carried out and is incapable of supervision and enforcement. The new management, we shall, presently show, have stated that they made efforts to procure finance, were able to procure it to some extent, but not to the extent that the large indebtedness of the company required. They have also alleged that in this respect the J. K. group were responsible for foiling their efforts to procure the finance, and that the position of the company is such that no reasonable financier would advance moneys to such a company. We shall presently show that having regard to all the circumstances and the conduct of the parties this contention is borne out( 45 ) BUT we do not propose to rest our decision on only that admission, but to examine the position of the company as it appears on the recordThese affidavits deal mostly with the charges ands flung at each other by the two rival groups, the facts and figures pertaining to the company being only incidentally givenThe workers, we are told, have in satisfaction of their claims taken possession of the factory premises and are squatting on it and preventing any director from going in. From 14th june, 1967, tillthese overhead and capital charges must run into several lakhs of rupees. The company does not appear to have any reserve or other funds from which its indebtedness can be paid. Its machinery, which has been lying idle, will cost several lakhs of rupees to be put in order again. When the new managementrestarted the mills on 1st April, 1966,it cost the new management Rs. 5 lakhs to put 60% of the machinery, in order. We cannot imagine that any reasonable or prudent businessman would decide to sink money into or run such a mill. It is clear that the company is insolvent, its entire capital wiped out and its substratum goneWe do not think, therefore, that it was a reasonable inference to draw from the letter of the 25th April 1967, that the new management had failed to purchase the cotton requisitioned for them. Their objection to quality appears to be reasonable and if so, they had a right to reject inferior cotton and to ask that the proper quality be supplied to them. It is not suggested. . . . . . . . . . . . anywhere that they deliberately or dishonestly declined the offer. At any rate, this letter in isolation, picked out from a bunch of about 25 letters, cannot furnish a true picture as to the conduct of the new management, even assuming that that conduct was material, which in our opinion it was not, as we shall presently showWe are unable to accept the charge that the company failed to lift the cotton deliberately and cannot be heard to say that the mills could not make profits for want of cotton. The letter dated 25th April, 1967, moreover does not establish that till then the management could be blamed, which is a charge levelled against the new management by the J. K. group. The position of the company must have further deteriorated since the closure in April, 1967, for we are informed that further amounts of compensation to labour have accumulated and other liabilities in the shape of recurring charges have arisen. How such a company could possibly continue to work at a profit it is difficult to see. It is only it runs at a profit that the scheme can be implementedThe new management after restarting the mills rationalised the spinning and weaving departments and also effected substantial economies. In spite of economies and for reasons and factors beyond the control of the new management the mill is runing at a monthly loss of Rs. 1 to 1 1/2 lakhs. The agreement entered into by the company with Badriprasad Jhunjhunwala and others is a leave and licence agreement and not a lease. They have denied the allegations of fraud, invalidity, illegality and mala fides. They also made an offer that they were ready and willing to offer the working of the processing unit to Gopalkrishna Singhania on a leave and licence agreement similar in terms and conditions to that given to Badriprasad Jhunjhunwalla and others. They have denied that the latter are their nominees or that the son of Nandlal Jalan is managing the processing plantBut we do not think that these allegations and counter allegations are of much relevance since in our view there was no binding obligation or dutyJalans to pay anything to the company or to compulsorily provide financeWe have no doubt that it would not affect the powers vested in the High Court under the Companies Act, nor especially would it affect the transactions already sanctioned and in force before the notification under section 13 was issuedWe do not propose to enter into that discussion, for in our opinion where the powers under section 391 or section 392 are being invoked we do not think that any provision of the Securities Contracts (Regulation) Act affects any of those powers of the court. If the provisions of that Act of not apply, the question whether a scheme is a contact or not, to which these provisions would be attracted, would not arise. With respect we uphold the decision of the learned single judges on this questionUpon the finding we have reached there is no question of giving direction as to a part of the scheme. We do not propose to implement the scheme at all for the simple reason that the company is not a company which can possibly work. It is insolvent and its substratum is gone, quite apart from the fact that in its present condition to allow a second mortgage to be given to the J. K. group would mean completely depriving the remaining unsecured creditors of any share or dividend in the liquidation( 76 ) WE are unable to accept this construction of section of 392. Section 392 appears in an independent chapter dealing with arbitration, compromises, arrangements and reconstructions and was obviously intended to make comprehensive provisions on that subject. So far as compromise and arrangements are concerned, the provisions which govern are sections 391, 392 and 393. These sections have to be read together, because section 392 refers back to a compromise or arrangement sanctioned under section 391 and makes provision for its enforcement. We cannot also readn (1) of section 392 divorced fromn (2)as was urged. The two provisions are complementaryBoth the above powers are for the proper working of the compromise or arrangement. It will thus be seen thatn (1) deals with the cases where a compromise or arrangement sanctioned under section 391 can be worked fully or partially by modifications or giving of directions.n (2) however contemplates a case where the scheme cannot be worked satisfactorily with or without modifications, that is to say, where the scheme (sic) despite any endeavour to modity it or any endeavour to implement by proper supervision or giving suitable directions, in such a case the court is given the power to make an order winding up the company. This power is a discretionary power, because of the use of the word may inn (2), and having regard to the context in which it is used. It is not essential that the company should be wound up even if the scheme does not work satisfactorily, but it is clear that the court must consider the question whether the company ought to be wound up in such a contingency. This power of course can be exercised suo motu by the court or on the application of a person interested in the affairs of the companyThe effect of these provisions is that where a compromise or arrangement is sanctioned under section 391 and the court comes to the conclusion that the scheme cannot be worked satisfactorily with or without modifications, the court has a discretion to wind up the company. In doing so it will have regard to the normal principles governing, particularly those laid down in section 433 and 434. We cannot, therefore, accept the contention of Mr. Bhatt that his clients application for implementation of the scheme must be looked at on its own and in isolation and the position of the company and its capacity to fulfil that scheme ought not to enter into computationWe also hold that the court would not exceed its powers if in a case like this where an application is made for winding up the company in answer to an application to enforce the scheme, to consider the circumstances of the company and order its winding upIn our opinion, since the company is financially not in position to implement the scheme at all, it is not necessary to consider whether implementing a part of it would be legal or illegalThe contention, therefore, must failIt does not follow that the parties cannot, relying upon the subsequent developments and the changed situation, say that the scheme should not be implemented. Were we to accept any such contention, the provision of section 392 would be rendered largely ineffective. It was urged that Lalji Thakersey, the creditor, had actually taken advantage under the scheme in so far as he had got one instalment of the amount paid to him out of the amount due to him. Nevertheless we do not think that in the face of the positive provisions of section 392 we can bar him from pleading that on the date on which Company Application no. 14 of 1967 was filed, the company ought to be wound up and the scheme not implemented. In view of this it is unnecessary to go into the question whether the scheme as passed by Mr. Justice Mody was illegal and void in the inception or it was merely contrary to law. We have however already shown that in our opinion there is no illegalityWe do not think, therefore, that the Rangoon case can support the argument that in the present case the J. K. group have already become secured creditors. They had merely an agreement that a second mortgage would be executed in their favour and nothing moreRelying on this clause Mr. Bhatt urged that if the company is to be wound up, the J. K. group must to be held to be secured creditors as upon a second mortgage and therefore in the event of an order being passed for winding up, in thep proceedings the J. K. group must be classed as secured creditors in terms of the scheme. The argument begs the entire question. The question first of all is, is the scheme enforceable  and that necessarily implies that the scheme including the schedule C has not yet come into force. The question is whether it should be brought into force and yet it is sought to be argued that one of its terms must be forthwith enforced, as if it had been brought into force. We cannot accept this argumentThere is no question, therefore, of supervising the carrying out of the compromise or arrangement or of carrying out the same with any modifications. The compromise or arrangement sanctioned and contained in the scheme cannot be worked satisfactorily at all with or without modifications and the only proper order to pass in the present case is to wind up the company known as the Newd Spinning and Weaving Co. Ltd( 90 ) THE result may be unfortunate to one or the others party, but that cannot be helped, though we may say that in our opinion there is little to choose between the two contending groups who were fighting for control of the company. Each group was seeking its own benefit and was hardly interested in the benefit of the company qua the company. The J. K. group having managed the company for a long time had seen its inter workings and realised that it was impossible bring up the company to a healthier position and work it for profit. They, therefore, decided to clear out of the company so long as they could recover their debts from the company in preference to other creditors. It was a substantial sum of Rs. 48,38,899 and they managed to persuade the Jalan group to take over the company stipulating for themselves to get a security for themselves at the cost of the unsecured creditors of more than twice the value. They also persuaded the Jalan group to take over the company by offering to sell them their controlling share holding at the low price of Rs. 10 per share. Perhaps that attracted the Jalan group which for a time felt that they were making an easy bargain and would be able to set the company on its feet again by procuring finances and running it to their profit in which case the value of the shares would have also risen, but after the controlling shares were transferred and the Jalan group took over the company the expectations of the Jalan group were not realised and they found that the company was in a worse commercial position than they had thought it was in, before they entered into the agreement with the J. K. group. What is more, it does appear that a period of severe depression in the textile industry and want of cotton worsened the position. In that predicament the attitude of the authorities who had controlled the purchases of cotton and fixed its price was most unhelpful and contributed to further losses of the company, with the result that the Jalan group found it impossible to implement the scheme and decided to give ay to their agreement with the J. K. group. We think that the only proper thing they could do in the circumstances was to apply for liquidation of the company. They also had sought their own advantage but their calculations failed. Neither of these two groups can be credited with seeking the advantage of the company or its workers or the interests of the other unsecured creditors of the companyWe have come to our conclusions only on the face of the affidavits filed. If a case is made out for thep of a company, as we have held has been made out in the present case, upon such material as has been placed before us, we do not think that these allegations ands can affect the issue; nor can the motives of either of the two groups, the one in presenting the application for winding up of the company and the other in seeking to enforce the scheme, can be taken into consideration. In Bachharaj Factories Ltd. v. Hirjee Mills Ltd. ([1955] 25 Comp. Cas. 227 251; 57 Bom. L. R. 378), there were also similar allegations made against the directors of the company and Chief Justice Chagla disposed of the allegations at page 392 as follows :but as we read the judgment of the learned judge, the main reason which has weighed with him is that the petitioners have not come to this court with clean hands, and Mr. Mathalone wanted to satisfy us that the motive of the petitioners in closing down the mills was selfish, that they were largely responsible for bringing about an impasse in the affairs of the mills, and the court will not make an order at the instance of a party which is guilty of mala fides. We have not permitted Mr. Mathalone to go into the merits of these allegations about the mala fides of the petitioners because in our opinion these allegations are entirely irrelevant. If the petitioners have made out a case of for thep of the company, if they have placed materials before the court which satisfy the court that the company is insolvent, if they have placed materials before the court which satisfy the court that the substratum of the company is gone, it is difficult to understand what the motive of the petitioners has got to do with the question whether an order ofp should be made or not. If the petitioners were to stand to benefit by the order, undoubtedly the court would say that a party cannot derive benefit by its own wrong. But when an order ofp is made and the liquidator is appointed, the court passes that order in the interest of the company, in the interest of the shareholders, and in the interest of the creditors, and except for the rather doubtful benefit that ordinarily the petitioners solicitors are in conduct of the proceedings no benefit whatever accrues to the petitioners. Therefore, in our opinion, what the learned judge should have considered was whether on the materials placed before him by the petitionersand the materials in this case are overwhelming and they are indisputablea case had been made out or not for thep of the company. The learned judge should not have taken into consideration how wicked the petitioners were or how evil their actions had been.( 92 ) IN a later passage the Chief Justice observed (page 393) ([1955] 25 Comp. Cas. 227, 252; 57 bom. L. R. 378) :there is not the slightest possibility of the working ever being resumed under the present dispensation. We take it that the learned judge was thinking of the allegations of the company that the mills suddenly came to a standstill because of the machinations of the petitioners. But the stark truth remains, for which there is no answer or no explanation, that the mills have no money whatsoever which would enable them to be run.( 93 ) THAT, in our opinion, exactly sums up the position in the present case also.