Case: Echjay Industries Private Limited Vs. Echjay Forgings Private Limited

2. To state in brief, one Harilal Doshi had five sons Mansukhlal, Maganlal, Vinodchandra, Manharlal and Hasmukhlal. Echjay Industries Private Limited was commenced and controlled by this Doshi family. This company had its factory at Kanjurmarg, which may be referred to as Kanjur Division. The said company also had another division known as Overseas Trade Division. They had also factory at Rajkot, which may be referred to as Rajkot division. Several other business units were opened and controlled by the Doshi family. Harilal Doshi died on 22nd November, 1980 leaving behind his five sons. It appears that after the death of Harilal, there were disputes in the family essentially about control and management of the business. Therefore, a family arrangement was formulated and it was decided to spin off Kanjur Division from the Echjay Industries and to give control of Kanjur Division to Mansukhlal, who was eldest among the brothers. A new company known as Echjay Forgings Private Limited came into existence as a result of this arrangement. This newly formed company may be referred to as Forgings and the original company may be referred to as the Industries for the sake of convenience. A scheme was prepared to spin off Kanjur Division and the Company Petition No.271 of 1985 and the Company Petition No.272 of 1985 were filed for sanction of the scheme. The scheme was sanctioned by this Court by the order datedThe shares, rights and liabilities of the parties were described in the said scheme and as a result, Forgings came into existence as a new company, which was totally controlled by Mansukhlal and after his death by his sons.3. In 1973 services of 356 workmen of Kanjur Division were terminated and the workmen filed cases No.125 of 1974 and No.272 of 1974 before the Industrial Tribunal seeking reinstatement and backwages. In December, 1980, the company was advised that these two cases were likely to be decided against the company and, therefore, it should make provision to meet such liability. The Board of Directors of the Company by resolution dated 3rd July, 1981 resolved to create General Reserve No.II of Rs.2.2 crores. By another resolution dated 20th July, 1982, additional reserve of Rs.37 lakhs was created. By resolution datedthe Board of Directors further transferred an amount of Rs.68,54,732/to General Reserve No.II, thus, making a total reserve in theof the company at Rs.The Forgings filed Company Application No.332 of 1988 in the Company Petition No.271 of 1985, apparently for implementation of the scheme in the said application. Forgings claimed back General Reserve No.II to the tune of Rs.3,25,54,732/alleging that this reserve was specifically created for meeting liability towards the workmen, who were terminated from the Kanjur Division and that this fact was specifically stated in the meetings of the Board of Directors. It was contended that when the Kanjur Division was spun off from the Industries, this reserves should have been transferred to the Forgings but the Industries had failed to transfer the General Reserve No.II to the Forgings. It was contended that the Forgings had from its funds paid an amount of Rs.23,47,000/towards the claim of workmen and, therefore, Industries had no right to retain the General Reserve No.II. It was also contended by the Forgings that certainand machines, which were transferred from Kanjur Division to Rajkot Division but they were never returned to Kanjur Division. Therefore, the Forgings claimed, by the said application, a direction to the Industries to transfer the amount of General Reserve No.II to the Forgings as well as to hand overand machinery, which were transferred to Rajkot Division.4. The Industries contested this claim denying that anyor machinery were taken away from the Kanjur Division to Rajkot Division. It is contended that when the scheme was formulated for spinning off the Kanjur Division from the Industry, valuation of fixed assets, machinery as well as the current assets was made. As per the valuation, Mansukhlal had taken over complete 69% shares, which were previously controlled by Doshi family and he also took over some other properties and business units. He surrendered his rights and shares in the Industries and other units of the Industries, which were taken over by the remaining four brothers. It is contended that General Reserve No.II were never assets or liabilities of the Forgings. It was general reserve in the Balance Sheet of the main company and it was appropriated from the profits of that company. The whole of that company was never transferred to Mansukhlal and, therefore, transfer of General Reserve No.II was not provided as per the scheme. Forgings had no right over the same. It was contended that even though the amount of Rs.23,47,000/was paid to the workers from the Kanjur Division account, that amount was adjusted while evaluating the differential to be paid by Mansukhlal to his brothers. Amount of Rs.8.68 lakhs which is net of tax was adjusted in the differential because the Forgings had taken tax benefit of remaining amount asrebate and, therefore, nothing more is required to be paid by the Industries to the Forgings. The claim of the Forgings towards theand the machinery was also denied.5. The matter was referred to Mr.S.E.Dastur, Senior Advocate by an order dated 11th September, 1992. He was required to record the evidence and hear the parties and to submit a report. Accordingly, he submitted a report on 2nd March, 1994 wherein, he opined that Forgings had failed to prove both of its claims. After hearing the parties, the learned Single Judge rejected the claim of Forgings in respect of General Reserve No.II to the tune of Rs.3,25,54,732/and also the claim towards theand machinery . However, the learned Single Judge came to the conclusion that the liability to pay compensation to the workmen, who were terminated in 1973, was of the Forgings and that amount was paid from the account of Kanjur Division after the scheme was formulated to spin off Kanjur Division from the Industries. The learned Single Judge found that as no provision was made for payment of this amount to the Forgings, the Industries were liable to pay that amount to the Forgings. The learned Single Judge also came to conclusion that the Industries had failed to prove that the said amount was actually adjusted by paying amount of Rs.8.68 lakhs net of tax as Forgings had taken tax rebate to the extent of remaining amount. In the result, the learned Single Judge directed the Industries to pay the said amount of Rs.23,47,000/to Forgings while rejecting remaining claims of the Forgings. Being not satisfied with the rejection of the claim to the General Reserve No.II and theand machinery, the Forgings preferred Appeal No.662 of 2001. The Industries also preferred Appeal No.532 of 2001 challenging the direction to pay an amount of Rs.23.47 lakhs to the Forgings.

Reasoning:
Thus, total value of Kanjur Division, including fixed and current assets excluding liabilities, was found to be Rs.151 lakhs. H.P.Kumbhani report suggests that for every 10 shares held in the Industries, the shareholder would get 8 shares of Rs.100/each in the Kanjur Division. Admittedly, total share capital of Industries was 1,92,00,000/comprising of 1,92,000 shares of Rs.100/each. In view of the proposal to allot 8 shares in Forgings for every 10 shares in the Industries, the total 1,53,600/shares of Rs.100/each would be required to be issued in Forgings. Total value of such shares would beThus, allotment of 8 shares per 10 shares in the Industries was the nearest possible figure, taking into consideration the value of assets of Kanjur Division being Rs.The report of H.P.Kumbhani and Co. shows that General Reserve No.II of Industries were not taken into consideration for the purpose of making valuation of the assets of Kanjur Division. It is also material to note that theprepared for Kanjur Division for the years ending 1983 and even in 1984 do not make any reference to General Reserve No.II amounting to Rs.3,25,00,000. On the contrary, theof the Kanjur Division for the year ending with 31st December, 1983 shows reserve transferred from Profit and Loss Account of Rs.8,14,725/et as on 31st December, 1984 shows that Reserves and Surplus column contains opening balance of Rs.8,14,725/and additional appropriation was made during the year to the extent of Rs.Thus, as on 31st December, 1984 the total reserves in theof Kanjur Division were Rs.There is nothing on record to show that General Reserve No.II amounting to Rs.3,25,00,000/was ever shown in the11. It is the contention of Forgings that General Reserve No.II was specifically created to meet the liabilities of workers in view of two cases pending before the Industrial Court and as the said liability was met from the account of Forgings, the General Reserve No.II is liable to be transferred to the Forgings.It is material to note that while General Reserve No.II for an amount of Rs.2,20,00,000/was created by resolution passed by the Board of Directors on 3rd July, 1981, additional amount of Rs.37,00,000/was put in the said reserve on 20th July, 1982. Third addition of Rs.68,54,732/was made in the said reserve by a resolution datedtaking the total of General Reserve No.II to the tune of Rs.Admittedly, on 10th January, 1983, the settlement had taken place with the said workers and as per that settlement, total amount to be paid to the workers was Rs.23,47,000/and the payment of the said amount was actually made from 14th January, 1983 to August, 1983. If the total liability towards the workers was finally settled at Rs.23,47,000/, there could be no reason or justification to make additional reserve of Rs.68,54,732/3 particularly when a huge amount of Rs.2,57,00,000/was already in General Reserve No.II. This clearly reveals that the General Reserve No.II was not created to meet liability towards the workmen.The learned Single Judge referred to several other circumstances to come to conclusion that the claim of the Forgings on General Reserve is not well founded. He noted that in the Company Petitions filed by both the parties, scheme was sanctioned by the Court on 3rd September, 1986. After that on 22nd October, 1986, Forgings forwarded a debit note dated 15th October, 1986 with a covering letter to the Industries claiming amount of Rs.38,04,580.82 paise being the amount paid by the Forgings to the workers with interest at the rate of 15% per annum. This debit note included amount of Rs.23,47,000/which was paid to the workers of the Kanjur Division from the accounts of the Kanjur Division. Balance amount of Rs.14.57 lakhs was interest thereon at the rate of 15% per annum. In that letter or debit note, there is no reference to the claim on the entire amount of General Reserve being Rs.3.25 crores.14. Appeal No.784 of 1987 in Notice of Motion No.713 of 1987 in Suit No.767 of 1987 was filed by Maganlal Doshi and others against Echjay Electronics Private Limited, a company which was allotted to Mansukhlal Group under the family arrangement. In that appeal, a consent order was passed on 14th October, 1987 by the Division Bench of this Court whereby the directors of the Forgings agreed to pay an amount of Rs.45.58 lakhs under Clause 2 of Part I of the scheme to the Industries. This consent order was significant because if the Forgings were really entitled to claim amount of 3.25 crores under the General Reserve No.II, they would not have agreed to pay amount of Rs.45.58 lakhs to the Industries.15. The learned Single Judge noted that a letter dated 1st September, 1987 was addressed by M/s. Bachubhai MunimCo. about computation of differential, which was payable by the Mansukhlal group. M/s. Bachubhai MunimCo. were acting as advocates for Echjay Electronics Pvt. Ltd. in appeal no.784 of 1987 referred above. As per that computation, total net worth of Doshi family together with business interest of the family was stated to be 607.63 lakhs. The share of Mansukhlal group at 20% of the aforesaid amount was assessed to be Rs.121.53 lakhs. However, Mansukhlal group had received Kanjur Division having fixed assets of Rs.86.01 lakhs. As he had received 69.25% share of Doshi family, he had actually received interest of the family worth Rs.59.56 lakhs in the form of fixed assets of the Kanjur Division. He also received net current assets of Rs.45 lakhs being the share of Doshi family in the company. He had also received certain other business concerns like Echjay Electronics Kanjurmarg, Kanjur Bleaching, Hema Suru Corporation, Investment Companies and personal wealth. The total valuation of assets received or retained by Mansukhlal Group worked out to Rs.183.92 lakhs. In view of the fact that Mansukhlal Group was entitled to assets worth Rs.121.53 lakhs, he was required to pay amount of Rs.62.39 lakhs as differential to the remaining group. This calculation made by M/s. Bachubhai fully tallies with the calculation made by H.P.KumbhaniCo. Chartered Accountants. The learned Single Judge noted that this statement of M/s. Bachubhai MunimCo. was accepted as per the admitted Minutes of Meeting dated 29th August, 1984. Here also there was no reference to the claim over the amount of Rs.3.25 crores being General Reserve No.II of the Industries.16. Mr.Dastur as well as the learned Single Judge also noted that as per the verticalto be prepared as per Schedule VI under the Companies Act, the reserves are required to be shown along with the capital. The reserves are to tally with the equivalent assets to be shown in the assets column in theThe assets of Kanjur Division were found to be worth Rs.1.51 crores without any mention of the reserves. If General Reserve of Rs.3.25 crores would be transferred to theof Kanjur Division, the result would be that liability side of thewould increase by Rs.3.25 crores without any corresponding increase in the assets and in the result, net worth of Kanjur Division would be minus Rs.1.74 crores instead of it being Rs.1.51 crores. If that be so Mansukhalal Group would be entitled not only to retain that Kanjur Division but also to receive substantial amount and that too without surrendering their share in other properties of Doshi family. However, as pointed out earlier after making all the calculations, it was found that Mansukhlal was found liable to pay differential of 62.39 lakhs to other group.17. The learned Single Judge has considered all these aspects and several other aspects minutely before coming to conclusion that the Forgings have no right or claim over the General Reserve No.II of Rs.3.25 crores shown in theof Industries. We find no valid reason to disagree with these findings.18.Next important question is about liability to pay amount of Rs.23.47 lakhs in respect of payments made to the workers, whose services were terminated in 1973.The learned Single Judge noted that both the parties have taken shifting stand in this respect. In paragraph 14.1, the learned Single Judge noted that Mr.Thakkar the learned Senior Counsel for the Forgings had submitted that liability to pay workmen was that of Forgings and not of the Industries and Mr.Dada, the learned counsel for the Industries had submitted that the liability in respect of compensation paid to the workmen as the part of the industrial settlement had to be borne by the Industries and not by the Forgings. The learned Single Judge noted that admittedly payment was actually made from the accounts of the Forgings and Industries had failed to prove that the Forgings were compensated for this amount. The learned Single Judge noted that in view of the specific provisions in respect of pending legal proceedings and the liability in respect thereof in the sanctioned scheme, the liability to make payment of compensation to erstwhile workmen was assumed by Forgings and not by the Industries. However, as in the settlement, no provision was made for that amount and as the claim of Forgings over the General Reserve No.II is not acceptable, the Industries are liable to compensate Forgings in that respect. It may be noted that in his report, Mr.Dastur Senior Advocate had come to conclusion that as per the terms of the scheme as sanctioned by the Court, the Forgings had taken over the responsibility only in respect of workmen, who were in service immediately before 31st December, 1982 and also the workers, who were in service after that day and in view of the fact that workmen, about whom two cases were pending before the Industrial Court, were not in service on or immediately before 31st December, 1982, the Forgings had not taken responsibility of the same. Mr.Dastur came to conclusion that it was the responsibility of Industries to pay compensation to the workmen but as the payment was made from the account of the Kanjur Division, the Industries was liable to compensate Kanjur Division. Thus, in spite of divergent opinions about the liability to pay compensation to the workmen, Mr.Dastur as well as the learned Single Judge opined that as the amount was paid from the account of Kanjur Division, Industries are liable to compensate the Forgings. After dealing with the evidence at length, Mr.Dastur opined that the remaining Doshi group family had adjusted that amount in the differential, which was required to be paid by Mansukhlal group to them and thus, Mansukhlal group was compensated. However, the learned Single Judge came to conclusion that evidence in respect of this adjustment in the differential is not reliable and, therefore, the Industries are liable to pay amount of Rs.23.47 lakhs to the Forgings.19. To decide as to whether the Industries is liable to compensate the Forgings for the amount of 23.47 lakhs, in fact it is not necessary to find out under the settlement and under the sanction scheme, who is to meet that liability because Mr.Dastur as well as the learned Single Judge though for different reasons, found that the Industries was to compensate the Forgings. However, in view of difference of opinion, we find it appropriate to scrutinize the record as to what was the settlement in this respect. Mr.Dastur as well as the learned Single Judge rightly observed that the parties have not taken consistent stand about taking over the responsibility of liability to pay compensation to the erstwhile workers of the Kanjurinto consideration the second part ofb(i), there remains no doubt that this responsibility was only in respect of employees, who were in actual service because there could not be any protection of uninterrupted service and the guarantee against any terms of service less favourable than those which were applicable prior to the effective date in respect of the workers, who were not in the employment on the effective date. Such guarantee could be given only to the employees, who were in actual employment on that day. It is nobodys case that 356 employees, whose claims were pending in the industrial disputes, were in the employment on the effective day or immediately preceding the effective day. The learned Single Judge observed that the provisions of the scheme are sufficiently drawn and comprehensive to deal with the question of liability in respect of those workmen of Kanjur Division, who had been terminated prior to the effective day and who had approached the Industrial Tribunal for legal redressal. It is material to note that even though the effective date was 31st December, 1982, the scheme was sanctioned by the Court onThe dispute with those workmen was already settled on 10th January, 1983 and the payment of their claims amounting to Rs.23.47 lakhs was already paid by August, 1983. Therefore, when the scheme was sanctioned, there was no reason to cover those employees. If those employees would have been covered under the scheme, the valuation of Kanjur Division would have certainly taken note of that liability but admittedly there is no reference of that liability in the valuation made by H.P.KumbhaniCo., Chartered Accountants in 1984. Taking into consideration the terms of the scheme, we have no doubt that the Forgings had not taken the responsibility of paying any compensation to the workmen, whose services were terminated in the year 1973 though they were the workers at Kanjur Division. Therefore, we find that it was responsibility of the Industries.20. The question whether the responsibility of the liability towards those workmen was taken over by the Industries or by the Forgings, in fact becomes immaterial because admittedly the payment of that liability was made from the account of the Forgings during the year 1983 and admittedly, no provision was made for that payment in the scheme nor it was provided for in the evaluation report of the Kanjur Division. Therefore, in either case after having made a payment of said Rs.23.47 lakhs, the Forgings would be entitled to be compensated for that amount by the Industries.After careful scrutiny of the record, which is discussed at length in the report of Mr.Dastur as well as in the impugned judgment of the learned Single Judge, we find it difficult to uphold the view taken by the learned Single Judge. Admittedly, there was deduction of 13.07 lakhs from the differential of Rs.62.39 lakhs which was required to be paid by Mansukhlal Group to the remaining brothers. Maganlal Doshi explained what this deduction was but there is no acceptable or plausible explanation from Mansukhlal group about this deduction. Report of Mr.Dastur reveals that Mansukhlal group tried to contend that this differential was towards the depreciation of machinery. This could not be accepted for the reason that valuation of the fixed assets, machinery, etc. was already made by H.P.KumbhaniCompany, Chartered Accountants and after that valuation, differential of Rs.62.39 lakhs was found payable by Mansukhlal group. At the cost of repetition, it may be again pointed out that there was no mention or provision about the liability of payment of Rs.23.47 lakhs in the scheme sanctioned by the Court onShortly after the scheme was sanctioned, Forgings sent a debit note of Rs.38,04,580.82 on Industries. However, admittedly in connection with the dispute pertaining to Echjay Electronics Private Limited in Appeal No.784 of 1987 in Notice of Motion No.713 of 1987 in Suit No.757 of 1987, the Forgings was required to pay amount of Rs.45,58,661/lakhs as per the order dated 14th October, 1987. If any amount was still due for payment from Industries to Forgings, the Forgings would have certainly raised that question and they could not be directed to pay an amount of Rs.45,58,661/lakhs to the Industries. In the same matter M/s. Bachubhai MunimCompany attorneys for Mansukhlal group also found the differential payable by Mansukhlal group to the remaining brothers. If this amount of Rs.23.47 lakhs had been already satisfied M/s. Bachubhai MunimCompany would have certainly taken note of that while finding out the differential to be paid by Mansukhlal group. However, Bachubhai Munim did not make any mention of Rs.23.47 lakhs while calculating the differential payable by Mansukhlal group. This aspect also goes against the Forgings. Taking into consideration these aspects, we find that payment of Rs.23.47 lakhs towards the liability of erstwhile workers was in fact adjusted by deduction of Rs.8.68 lakhs net of tax from the differentials and the remaining amount was settled as the Forgings got rebate in thefor the payment of Rs.23.47 lakhs towards the workers liability. Taking into consideration overall view of the facts and circumstances, we find ourselves unable to agree with the learned Single Judge on this count. In our opinion, they already satisfied this claim of the Forgings in the differential payable to the Industries as per the minutes of the meeting dated 29th August 1984. Therefore, we find that the decree passed by the learned Single Judge in favour of the Forgings in that respect cannot be sustained.24. Lastly, there is dispute aboutand machinery allegedly transferred from Kanjur Division to Rajkot Division. Mr.Dastur as well as the learned Single Judge found that there was no substance in this claim. The learned Judge also noted that this dispute was not seriously pressed on behalf of the Forgings. In the appeal also though this question has been raised, the learned counsel for the Forgings did not give much emphasis on this question. After going through the report of Mr.Dastur and the judgment of the learned Single Judge on this count, we find no reason to take a different view.25. In view of the evidence discussed above, we find that the Forgings had failed to prove its claim over the General Reserve No.II of Rs.3.25 crores. It also failed to prove its claim about theand machinery allegedly transferred from Kanjur Division to Rajkot Division. Taking into consideration the evidence, we find that the Industries have satisfactorily proved that even though the payment of Rs.23.47 lakhs was made by the Forgings towards the liability of erstwhile workmen, the Forgings have been in fact compensated by the Industries by deduction of Rs.8.68 lakhs net of tax from the differential and, therefore, Forgings are not entitled to receive anything more. Therefore, Appeal No.662 of 2001 filed by the Forgings is liable to be dismissed while the Appeal No.532 of 2001 filed by the Industries deserves to be allowed.