Page 1 Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2701 OF 2006

Infrastructure Leasing & Financial

Services Limited ... Appellant

Versus

B.P.L. Limited ... Respondent

J U D G M E N T

Dipak Misra, J.

BPL Limited, the respondent herein, was incorporated

under the Companies Act, 1956 (for brevity ‘the Act”) and

on 16.4.1963, certificate of incorporation in the name of

the company as British Physical Laboratories India Pvt. Ltd.

was issued. The company became deemed public

company and the word “Private” stood deleted with effect

from 24.3.1981. Subsequently, the name of the company

was changed to BPL Limited and fresh certificate of

incorporation was issued by the Registrar of Companies on

Page 2 16.3.1992. In the year 1982 the company had diversified

its activities into Consumer Electronics, Colour Television

Receivers, Black and White TV Receivers and Video

Cassettes Recorders. The company embarked on various

diversifications, expansion programmes and had facilities

for manufacture of television, Alkaline batteries, colour

monitors, etc. It also entered into the arena of

manufacturing of refrigerators and electronic components

through associate companies and had grown into a

diversified group with multiple products and services. Due

to manifold reasons, the company faced cash flow

constraints which adversely affected its operations. It

suffered a loss of Rs.287.8 crores in the last 18 months for

the period ending on 30.09.2003 as there was decline of

sales of goods. Due to the said loss, the debt of the

company increased to 1494.57 crores as on 31.03.2003.

As many a international brand had entered into the Indian

market, the respondent company in order to keep pace

with the technological advancement in the field of business

initiated a comprehensive restructuring of its operations

which primarily involved rejuvenating its main business

2

Page 3 through a joint venture with “Sanyo Electric Co. Ltd.”,

Japan and accordingly entered into a shareholder

agreement. In terms of the agreement the BPL had to

transfer its existing CTV business undertaking to the joint

venture constituting BPL brand for CTV business

manufacturing services, marketing and distribution. Both

the companies BPL and Sanyo had equal partnership in the

ratio 50:50 in the joint venture. The CTV business was

valued at Rs.368 crores and BPL was required to invest

approximately Rs.46 crores in the joint venture company

and to receive a net cash inflow of Rs.322 crores. Initially,

BPL proposed a scheme of arrangement which was finally

modified and in the said scheme various business

institutions and banks were involved. There were 36

creditors whose names featured in the scheme.

2. After approval of the scheme the respondent filed

an application under Section 391 (1) of the Act read with

Rule 9 the Companies (Court) Rules, 1959 seeking

permission for holding a meeting for consideration for

approval of compromise or arrangement proposed to be

made between companies and the creditors. The second

3

Page 4 prayer had been made for orders governing the procedures

to be complied with. There were 15 respondents. After the

application was filed forming the subject matter of MCA No.

84 of 2004 notices were issued and many financial

institutions filed their counter affidavits/objections. The

present appellant, Infrastructure Leasing & Fin. Services

Ltd., which was the 8

th

respondent, filed its counter-

affidavit and in it, had raised objections to the prayer for

stay of various proceedings before number of forums

including Debt Recovery Tribunal, etc. on the foundation

that the Memorandum of Association of the company does

not authorise it to enter into any arrangement as proposed;

that the scheme concealed more than it revealed, for when

such a drastic transformation was taking place it was

imperative that there had to be exhaustive disclosure; that

the application filed under Section 391 of the Act was

totally silent as to how and on what basis the valuation of

Rs.368 crores had been arrived at, which agency had done

the valuation and at whose instance the valuation was

done; that the scheme did not mention whether the BPL

had any other option to raise the capital when retaining

4

Page 5 CTV business; that no detailed information had been

furnished in the application or in the proposed scheme of

arrangement as to on what basis the various percentage

payments which were proposed to be made to the

unsecured creditors were arrived at by the company; and

that the company court had no jurisdiction to stay the

criminal prosecution under exercise of its power under

Section 391 (6) of the Act.

3. BPL filed a reply stating, inter alia, that very

purpose of Section 391(6) of the Act is that till effective

consideration of the scheme and finalization of the scheme

under Section 391 of the Act there has to be a stage of

abeyance from all aspects so that the Company Court can

examine the workability of the same and grant requisite

relief. As regards the non-disclosure by BPL, it was

asserted that the disclosure had been adequately made,

for what was proposed to be transferred to the joint

venture company was the colour television business of the

BPL and brand associated with it and the residual company

would retain the other business of the group such as

medical electronics, batteries, components, etc. It was

5

Page 6 also put forth that Price Water House Coopers (PWC) was

appointed by the ICICI at the instance of all lenders and

PWC had assessed that the residual company could sustain

a debt to the extent of Rs.480 to 520 crores and the report

submitted by PWC was already in possession of the lenders

including 8

th

respondent therein. It was alleged as the

operation had been stagnated for a period of two years the

valuation made by the PWC was absolutely fair.

4. Be it stated, some of the respondents filed

affidavits supporting the scheme and some others

opposing the same, from many an angle.

5. The learned Company Judge taking note of the

factual matrix, the submissions advanced at the Bar, the

proceeding before the DRT and the criminal cases, referred

to the maintainability of the scheme and came to hold that

the application preferred under Section 391(1) was

maintainable; that the court had the jurisdiction to consider

the application filed under Section 391(1) of the Act, even

for the purpose of convening a meeting of its creditors and

its jurisdiction was not affected solely because an

application had been filed before the Debt Recovery

6

Page 7 Tribunal; that the company Court in exercise of power

under Section 391(6) has no jurisdiction to stay the

criminal proceeding initiated under Section 138 of the

Negotiable Instrument Act or the proceeding pending

before the Debt Recovery Tribunal under Securitisation and

Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002; that it is for the creditors at

the first instance to consider the scheme proposed and

only the approved scheme by the required majority is to be

considered by the court for grant of sanction under Section

391 (2) of the Act; that there is a distinction between

Section 391(1) and 391(2) of the Act regard being had to

the language employed therein and if the contentions

mentioned in the proviso to sub-Section (2) of Section 391

of the Act had to be considered at the stage of Section

391(1) that will amount to reading the latter provision to

the earlier one; and that the distinction which has been set

forth in various sub-Sections have to be appositely

understood because there are various phases till the

scheme is approved and each stage has its own room to

7

Page 8 operate. After so stating the court referred to the stand of

the 8

th

respondent and came to hold as follows:-

“49. The 8

th

respondents among other things

also taken up the contention that at all material

times they were only an unsecured creditor of

the applicant-Company and according to them,

they are wrongly impleaded in C.A. No.

1718/2004. Accordingly to them, the short-

terms loan was granted on terms and conditions

agreed upon by the parties and on a reading of

Clause 15 of the terms and conditions security

to be created by the Hewlett Packard (India) Ltd.

through an ascrow account which will separately

open. According to them, no account was

opened subsequently and no amount was

channelised through the account as

contemplated by the mechanism prescribed.

Hence, no security was created in favour of the

8

th

respondent. These conditions were raised in

an additional affidavit filed by the 8

th

respondent. The applicant-company has also

filed an additional affidavit answering those

conditions. In the additional reply affidavit filed

on 24/1/2005 the applicant-company has

averred that the contention that they are only

unsecured creditors was raised during

agreement and the affidavit was also filed

during the course of arguments. The applicant-

Company took copies of the documents creating

charge in favour of the 8

th

respondent. They

have produced Annexure-X hypothecation deed

which is executed in 2001. Copies of Form No. 8

return dated 1.1.2001 and Form No. 13 return

dated 1.1.2001 filed with the Registrar of

Companies are produced as Annexures-Y and Z.

Annexures-AA in a copy of the letter ILES (8

th

respondent) dated 4.7.2001. It is the contention

of the applicant that from the above it is clear

that there is a charge in respect of he specified

assets of the applicant-company in favour of the

8

Page 9 8

th

respondent. Annexure-X is an unattested

deed of hypothecation executed by the

Applicant in favour of the 8

th

respondent. The

applicant is described as “Borrower”. This is a

hypothecation deed creating exclusive charge

involving all monies and right, title and interest,

to be received from and or payable by Hewlett

Packard Ltd., towards sale of colour monitors, to

the borrower as security for the said facility

arranged by the 8

th

respondents as security for

the payment by the borrower of the balance

outstanding. Annexure-Y is Form No.8 filed by

the applicant-Company under Section 125 of the

Companies Act. The hypothecation deed

executed by the applicant-Company in favour of

the 8

th

respondent is an instrumental creating a

charge and amount secured is contained as Rs.

150 millions. It shows that the above charge

was registered with the Registrar of Companies

as per the provisions of the Companies Act.

Annexure-Z is From No. 13 in which the amount

secured is shown as Rs. 150 million. Annexure-

AA is the letter of consent by the 8

th

respondent

which shows that the 8

th

respondents has

offered for providing short-term loan facility upto

Rs. 150 million and the term loan facility is

enclosed in the Annexure. The loan facility

availed by them to the BPL Ltd. is also to be

considered as part of the above-mentioned

facility. Annexure-AA attached therein would

show that the lender is 8

th

respondent and the

borrower is BPL Ltd. and the purpose for which

the loan advanced is to meet working capital

requirements and the security offered is first

and exclusive charge on receivables of Hewlett

Packard (India) Ltd. It is also seen that the

applicant-Company has to undertake to

complete all formalities towards creation of

charge and the escrow arrangement within 30

days from the date of disbursement. The

proposal made even as per the Scheme of

Arrangement is to apply to all existing charge

9

Page 10 holders and 8

th

respondent is one such charge

holder, to whom the Scheme is extended.

50. In the light of the above facts, I do not find

any merit in the contention that the Scheme

proposed will not cover the 8

th

respondent or that

they are not secured creditors, to whom the

Scheme will not apply. ”

6. Be it stated, the court did not accept the contention

that the scheme could not be worked out on the ground

that the scheme was entitled to be amended either in the

meeting or even subsequently by the Court and it was not

the stage to suggest any amendment and accordingly

contentions raised by the respondents in that regard were

kept open.

7. On the basis of the aforesaid analysis, the Company

Judge held that MCA No. 84/2004 was maintainable and

other applications seeking grant of stay were sans merit

and accordingly dismissed the same. Certain applications

were kept to be considered at a later stage. The prayer of

the respondents that they were not covered by the scheme

proposed by the amendment and they are not secured

creditors was rejected. Ultimately the Company Judge

issued the following directions:-

1

Page 11 “54. M.C.A. No. 84/2004 is allowed. It is ordered

that a meeting of secured creditors (working

Capital Lenders and Term Lenders) be convened

and held at the Registered office of he Applicant

Company at Palghat on 16.04.2005 at 2.00 P.M.

for the purpose of considering and if thought fit,

approving with or without modification of he

compromise/arrangement proposed as Annexure-

G as modified by Annexure-N to be made

between the Company and the creditors

abovenamed.

55. Mr. Justice T. V. Ramakrishnan, a Retired

Judge of the High Court is appointed as the

Chairman for the Meeting

56. Notice convening the above meeting shall be

published in all editions of Economic Times,

Indian Express and Malayala Manorama giving 21

days clear notice.

xxx xxx xxx

58. That the value each member/creditor shall be

in accordance with the books of the Company

and in case of dispute, the Chairman shall

determine the value.”

8. Being aggrieved by the aforesaid order, the 8

th

respondent filed Company Appeal No. 5 of 2005. Before

the appellate Court, it was contended that Section 391 of

the Act, although refers to the power of companies to make

arrangements with creditors and members, such

compromise could have only been possible between a

company and its creditors or any class of them, and when

an application was filed before the court, where it had been

1

Page 12 possible to find out that the arrangement was not intended

to be made with a homogeneous class, the court should

have accepted the objection so raised. It was also urged,

ignoring the same, a binding order, could not have been

issued. It was contended that the meeting was proposed

to be held between the company and its secured creditors

and even if it was to be presumed that the appellant

initially was a secured creditor, it had been disrobed of the

said status consequent to subsequent developments,

including an arbitration award, well before the application

came to be filed in the court.

9. The appellant argued that though as required by

the hypothecation deed, Form Nos. 8 and 13 thereof had

been submitted before the Registrar of Companies, yet no

further action was taken by BPL Ltd. to fulfil the agreed

arrangement between the parties. It was asserted that as

per the deed of hypothecation, the borrower was obliged to

open an escrow and no-lien account with a designated

bank, and was to undertake to deposit all the receivables

from Hewlett Packard India Ltd. in the said escrow account

only, however, no escrow account had been opened and

1

Page 13 the agreed arrangement remained only on paper. The

escrow mechanism was the essence of the agreement, but

it had never been put into operation and, therefore, it was

not permissible for BPL Ltd. to contend that the appellant

was a secured creditor and the original claims of the

appellant could not have been watered down.

10. The next contention that was advanced in the

company appeal was that even if it could have been

assumed that because of the hypothecation deed, at one

point of time, the appellant could have been considered as

a secured creditor, the position had changed because of

the arbitration award which has been passed on consent.

Emphasis was laid on the fact that there was an agreement

recorded in the award that the criminal proceedings would

not be pursued and more importantly it was a settlement

of money claim and nothing remained in respect of the

claims on hypothecation, which originally had been entered

into by the parties. Thus, the status of a secured creditor

thereby irrevocably had been metamorphosed. Relying on

the authority Deva Ram v. Ishwar Chand

1

, a submission

was advanced that on principles gatherable from Order II,

1

AIR 1996 SC 378

1

Page 14 Rule 2, of CPC, after the award had come into existence, it

would not have been possible for the appellant to pursue

his claims on the basis of the hypothecation deed, for the

rights of the parties got crystallised to a pure and simple

money claim, and hence, the security earlier offered and

created had lost its relevance and transformed itself to a

decree debt.

11. Apart from the above contentions, it was also

propounded that the appellant deemed to have

relinquished rights of hypothecation security and being a

party to the proceedings, BPL Ltd. could not have turned

round and put forward a technical contention that the

appellant continued to be a secured creditor. To buttress

the said stand, reliance was placed upon the dictum laid

down in K.V. George v. Secretary to Government,

Water and Power Department

2

.

12. The aforesaid contentions were resisted by the

counsel for the BPL that the order passed by the learned

company Judge was absolutely flawless; that the stand that

the appellant was no more a secured creditor because of

the award passed between the parties was totally devoid of

2

AIR 1990 SC 53

1

Page 15 any merit; that the scheme or arrangement was approved

in the meeting of the secured creditors held by the

Chairman and the appellant company had been issued a

substantial sum but it had refused to accept the same; that

the appellant remained a secured creditor for all legal

purposes and hence, it was bound by the scheme in

question.

13. The Division Bench adverted to the deed of

hypothecation executed by the BPL in favour of the

appellant company and opined that the appellant-

company had failed to take follow up action to get an

escrow account; that the formalities relating to creation of

charge had been duly followed; that in the arbitration

award there was no reference that BPL had agreed to lift

the charge created; in the absence of the agreed position

that the charge be got lifted, and the appellant continued

to be a secured creditor and passing of the arbitration

award did not create any change in the status.

14. The Division Bench appreciating the contentions

further came to hold that the appellant was a secured

creditor after the hypothecation deed was executed; that

1

Page 16 once the charge had been created it continued to bind the

parties till steps were regressed; and that the finding

recorded by the learned company Judge was

unexceptionable. That apart, the Division Bench also took

note of the fact that the persons who had to be adversely

affected were not parties to the appeal. Being of the view,

it dismissed the appeal. The said judgment and order are

the subject matter of assail in this appeal.

15. We have heard Mr. Shyam Divan, learned senior

counsel for the appellant and Mr. V. Giri, learned senior

counsel for the respondent.

16. It is submitted by Mr. Divan that that once an

arbitral award has been passed on consent between the

parties it extinguishes the status of the appellant as a

secured creditor and it stands on a different footing

altogether. It is further urged that the registration as a

secured creditor does not bind the appellant and, more so,

when the arbitral award has come into existence. It is his

submission that after the parties settled by way of

arbitration, the conceptual requisites of a secured creditor

became non-existent. Learned senior counsel would

1

Page 17 further put forth that the hypothecation had never become

operational as is evident from various documents on record

and hence, the analysis made by the High Court is

absolutely fallible. It is contended that once the deed of

hypothecation is not fructified, mere registration as a

secured creditor with the Registrar of Companies would not

confer on the appellant the status of a secured creditor

and, in any case, the said registration would not bind it. It

is canvassed by him that once the appellant has accepted

the award as passed by the arbitrator, it operates as res

judicata against the respondent company to treat the

appellant company as a secured creditor. That apart,

urges the learned senior counsel, the principles inherent in

Order II, Rule 2 would be attracted and the High Court has

completely erred by totally brushing it aside. The learned

senior counsel, to support his submissions raised by him,

has referred to various provisions of the Companies Act

and placed reliance on the authorities in Firm Chunna

Mal Ram Nath v. Firm Mool Chand Ram Bhagat

3

,

Jagad Bandu Chatterjee v. Nilima Rani

4

, Indian Bank

3

AIR 1928 PC 99

4

(1969) 3 SCC 445

1

Page 18 v. Official Liquidator, Chemmeens Exports (P) Ltd

5

.,

Ranganayakamma v. K.S. Prakash

6

and Jitendra Nath

Singh v. Official Liquidator and ors.

7

17. Mr. Giri, learned senior counsel appearing for the

respondent, resisting the aforesaid proponements, would

submit that the arbitral award, whether passed on consent

or on contest, has the status of a decree but such a decree

does not extinguish the charge and thereby does not

disrobe the status of a secured creditor. Learned senior

counsel would contend that despite the relinquishment

made by the appellant, it would not take away the legal

status conferred by it in law. Emphasis has been laid on

the issue of registration before the Registrar under

Sections 138 and 139 of the Act and how the record

establishes that the status and the arbitral award will not

change the registered status. It is contended by Mr. Giri

that by no stretch of imagination, the principle of

resjudicata would apply to the case at hand, for the

proceedings are of different nature. He would also urge

that the lis would not be hit by the bar created under Order

5

(1998) 5 SCC 401

6

(2008) 15 SC 673

7

(2013) 1 SCC 462

1

Page 19 II, Rule 2 of the CPC. Learned senior counsel has

commended us to the decisions in Lonankutty v.

Thomman and Another

8

, Harbans Singh and others

v. Sant Hari Singh and others

9

, and Indian Bank v.

Official Liquidator, Chemmeens Exports (P) Ltd. and

others

10

.

18. From the narration of facts and the contentions

which have been highlighted, it is clear that two facts are

beyond dispute. First, the appellant stands registered as a

secured creditor of the respondent company on the record

of the Registrar of Companies under the Act; and second,

the arbitral tribunal has passed an award on the basis of

consent and it has the status of a decree which is

executable in law. Keeping in view these two undisputed

facts, we have to appreciate the rival submissions raised at

the Bar. In this context, reference to relevant portions of

Sections 391 and 393 of the Act would be appropriate.

They are as follows:

“391. (1) Where a compromise or arrangement

is proposed—

8

(1976) 3 SCC 528

9

(2009) 2 SCC 526

10

(1998) 5 SCC 401

1

Page 20 (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-

fourths 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 contributories 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.”

2

Page 21 xxxxx xxxxx xxxxx

“393. (1) Where a meeting of creditors or any

class of creditors, or of members or any class of

members, is called under Section 391,—

(a) with every notice calling the meeting which

is sent to a creditor or member, there shall be

sent also a statement setting forth the terms of

the compromise or arrangement and explaining

its effect, and in particular, stating any material

interests of the directors, managing directors,

managing agents, secretaries and treasurers or

manager of the company, whether in their

capacity as such or as members or creditors of

the company or otherwise, and the effect on

those interests, of the compromise or

arrangement, if, and insofar as, it is different

from the effect on the like interests of other

persons; and

(b) in every notice calling the meeting which is

given by advertisement, there shall be included

either such a statement as aforesaid or a

notification of the place at which and the

manner in which creditors or members entitled

to attend the meeting may obtain copies of such

a statement as aforesaid.”

19. Sub-Section (1) of Section 391 stipulates that a

compromise or arrangement can be proposed between a

company or its creditor or any class of them or between a

company and its members or any class of them. It need

not be between all the creditors or all the members.

Contextually, “class of creditors” or “class of members”

2

Page 22 has a different meaning and connotation. It gains

significance when the question of approval of scheme

under the Act arises for consideration. While dealing with

the approval of a scheme, the Company Court is required

to direct holding of meeting of the said class of creditors or

members concerned and only when the scheme is

approved by the majority in number representing 3/4

th

in

value by the class of creditors, or members present either

in person or through proxy, the same becomes binding on

the said class of creditors or members. Once there is a

voting and the 3/4

th

majority has voted in favour of the

scheme, it is binding on those who have dissented and had

voted against the scheme or those who remained silent.

20. While analyzing the scope and ambit of the powers

of the Company Court in respect of Section 391 and 393 of

the Act and the role of the Court a two-Judge Bench in

Miheer H. Mafatlal V. Mafatlal Industries Ltd.

11

has

observed thus:-

“Before sanctioning such a scheme even though

approved by a majority of the concerned

creditors or members the Court has to be

satisfied that the company or any other person

moving such an application for sanction under

11

(1997) 1 SCC 579

2

Page 23 sub-section (2) of Section 391 has disclosed all

the relevant matters mentioned in the proviso to

sub-section (2) of that section. So far as the

meetings of the creditors or members, or their

respective classes for whom the Scheme is

proposed are concerned, it is enjoined by

Section 391(1)(a) that the requisite information

as contemplated by the said provision is also

required to be placed for consideration of the

voters concerned so that the parties concerned

before whom the scheme is placed for voting

can take an informed and objective decision

whether to vote for the scheme or against it. On

a conjoint reading of the relevant provisions of

Sections 391 and 393 it becomes at once clear

that the Company Court which is called upon to

sanction such a scheme has not merely to go by

the ipse dixit of the majority of the shareholders

or creditors or their respective classes who

might have voted in favour of the scheme by

requisite majority but the Court has to consider

the pros and cons of the scheme with a view to

finding out whether the scheme is fair, just and

reasonable and is not contrary to any provisions

of law and it does not violate any public policy.

This is implicit in the very concept of

compromise or arrangement which is required to

receive the imprimatur of a court of law. No

court of law would ever countenance any

scheme of compromise or arrangement arrived

at between the parties and which might be

supported by the requisite majority if the Court

finds that it is an unconscionable or an illegal

scheme or is otherwise unfair or unjust to the

class of shareholders or creditors for whom it is

meant. Consequently it cannot be said that a

Company Court before whom an application is

moved for sanctioning such a scheme which

might have got the requisite majority support of

the creditors or members or any class of them

for whom the scheme is mooted by the company

concerned, has to act merely as a rubber stamp

2

Page 24 and must almost automatically put its seal of

approval on such a scheme. It is trite to say that

once the scheme gets sanctioned by the Court it

would bind even the dissenting minority

shareholders or creditors. Therefore, the fairness

of the scheme qua them also has to be kept in

view by the Company Court while putting its seal

of approval on the scheme concerned placed for

its sanction.”

21. Thereafter, the Court referred to Section 392 of the

Act. The said provision deals with the supervisory

jurisdiction of the Company Court. It is necessary to

reproduce the same:

“392. (1) Where a High Court makes an order

under Section 391 sanctioning a compromise or

an arrangement in respect of a company, it—

(a) shall have power to supervise the carrying

out of the compromise or arrangement; and

(b) may, at the time of making such order or

at any time thereafter, give such directions

in regard to any matter or make such

modifications in the compromise or

arrangement as it may consider necessary

for the proper working of the compromise or

arrangement.

(2) If the Court aforesaid is satisfied that a

compromise or arrangement sanctioned under

Section 391 cannot be worked satisfactorily with

or without modifications, it may, either on its

own motion or on the application of any person

interested in the affairs of the company, make an

order winding up the company, and such an

order shall be deemed to be an order made

under Section 433 of this Act.

2

Page 25 (3) The provisions of this section shall, so far as

may be, also apply to a company in respect of

which an order has been made before the

commencement of this Act under Section 153 of

the Indian Companies Act, 1913 (7 of 1913),

sanctioning a compromise or an arrangement.”

22. In the said context, the Court posed the question

whether it has the jurisdiction of an appellate authority to

minutely scrutinize the scheme and to arrive at an

independent conclusion whether the scheme should be

permitted to go through or not and whether the majority

creditors or members, through their respective class, have

approved the scheme as required under sub-Section (2) of

Section 391. It observed that the nature of compromise or

arrangement between the company and the creditors and

the members has to be kept in view, for it is the

commercial wisdom of the parties to the scheme who have

taken an informed decision about the usefulness and

propriety of the scheme by supporting it by the requisite

majority vote. Therefore, the Court does not act as a Court

of Appeal and sit in judgment over the informed view of the

parties concerned to the compromise as the same would

be in the realm of corporate and commercial wisdom of the

2

Page 26 parties concerned and further the Court has neither the

expertise nor the jurisdiction to dig deep into the

commercial wisdom exercised by the creditors and the

members of the company who have ratified the scheme by

the requisite majority. The Court eventually held that it

has the supervisory jurisdiction which is also in consonance

with the language employed under Section 392 of the Act.

In that context, the Court referred to the observations

found in the oft-quoted passage in Buckley on the

Companies Act, 14

th

Edn. It is as follows:

“In exercising its power of sanction the

court will see, first that the provisions of the

statute have been complied with, second, that

the class was fairly represented by those who

attended the meeting and that the statutory

majority are acting bona fide and are not

coercing the minority in order to promote

interest adverse to those of the class whom they

purport to represent, and thirdly, that the

arrangement is such as an intelligent and honest

man, a member of the class concerned and

acting in respect of his interest, might

reasonably approve.

The court does not sit merely to see that

the majority are acting bona fide and thereupon

to register the decision of the meeting, but at the

same time, the court will be slow to differ from

the meeting, unless either the class has not been

properly consulted, or the meeting has not

considered the matter with a view to the interest

2

Page 27 of the class which it is empowered to bind, or

some blot is found in the scheme.”

23. The Court also referred to the decision in

Alabama, New Orleans, Texas and Pacific Junction

Rly. Co. Re

12

to cull out the principle relating to the power

and jurisdiction of the Company Court which is called upon

to sanction the scheme of arrangements or compromise

between the company and its creditors or shareholders.

The observations of Lindley, L.J. as quoted in the said

authority read as under:

“What the court has to do is to see, first of all,

that the provisions of that statute have been

complied with; and, secondly, that the minority

has been acting bona fide. The court also has to

see that the minority is not being overridden by

a majority having interests of its own clashing

with those of the minority whom they seek to

coerce. Further than that, the court has to look

at the scheme and see whether it is one as to

which persons acting honestly, and viewing the

scheme laid before them in the interests of

those whom they represent, take a view which

can reasonably be taken by businessmen. The

court must look at the scheme, and see whether

the Act has been complied with, whether the

majority are acting bona fide, and whether they

are coercing the minority in order to promote

interests adverse to those of the class whom

they purport to represent; and then see whether

the scheme is a reasonable one or whether

there is any reasonable objection to it, or such

12

(1891) 1 Ch 213

2

Page 28 an objection to it as that any reasonable man

might say that he could not approve it.”

24. The observations of Fry, L.J. were also reproduced.

A reference was made to the decision in Anglo-

Continental Supply Co. Ltd. Re

13

and the judgment by a

three-Judge Bench in Employees’ Union V. Hindustan

Lever Ltd.

14

and eventually, the following principles were

culled out:

“In view of the aforesaid settled legal position,

therefore, the scope and ambit of the jurisdiction

of the Company Court has clearly got earmarked.

The following broad contours of such jurisdiction

have emerged:

1.The sanctioning court has to see to it that

all the requisite statutory procedure for

supporting such a scheme has been

complied with and that the requisite

meetings as contemplated by Section

391(1)(a) have been held.

2.That the scheme put up for sanction of

the Court is backed up by the requisite

majority vote as required by Section 391

sub-section (2).

3.That the meetings concerned of the

creditors or members or any class of them

had the relevant material to enable the

voters to arrive at an informed decision for

approving the scheme in question. That the

majority decision of the concerned class of

voters is just and fair to the class as a whole

13

(1922) 2 Ch 723

14

(1995) Supp (1) SCC 499

2

Page 29 so as to legitimately bind even the

dissenting members of that class.

4.That all necessary material indicated by

Section 393(1)(a) is placed before the

voters at the meetings concerned as

contemplated by Section 391 sub-section

(1).

5.That all the requisite material

contemplated by the proviso of sub-section

(2) of Section 391 of the Act is placed

before the Court by the applicant concerned

seeking sanction for such a scheme and the

Court gets satisfied about the same.

6.That the proposed scheme of

compromise and arrangement is not found

to be violative of any provision of law and is

not contrary to public policy. For

ascertaining the real purpose underlying

the scheme with a view to be satisfied on

this aspect, the Court, if necessary, can

pierce the veil of apparent corporate

purpose underlying the scheme and can

judiciously X-ray the same.

7.That the Company Court has also to

satisfy itself that members or class of

members or creditors or class of creditors,

as the case may be, were acting bona fide

and in good faith and were not coercing the

minority in order to promote any interest

adverse to that of the latter comprising the

same class whom they purported to

represent.

8.That the scheme as a whole is also found

to be just, fair and reasonable from the

point of view of prudent men of business

taking a commercial decision beneficial to

2

Page 30 the class represented by them for whom the

scheme is meant.

9.Once the aforesaid broad parameters

about the requirements of a scheme for

getting sanction of the Court are found to

have been met, the Court will have no

further jurisdiction to sit in appeal over the

commercial wisdom of the majority of the

class of persons who with their open eyes

have given their approval to the scheme

even if in the view of the Court there would

be a better scheme for the company and its

members or creditors for whom the scheme

is framed. The Court cannot refuse to

sanction such a scheme on that ground as it

would otherwise amount to the Court

exercising appellate jurisdiction over the

scheme rather than its supervisory

jurisdiction.

The aforesaid parameters of the scope and

ambit of the jurisdiction of the Company Court

which is called upon to sanction a scheme of

compromise and arrangement are not

exhaustive but only broadly illustrative of the

contours of the Court’s jurisdiction.”

25. In this context, we may usefully refer to Palmer’s

Treatise on `Company Law, 25

th

edition, wherein

delineating with the concept of class, it has been stated

thus:-

“What constitutes a class:

The court does not itself consider at this point

what classes of creditors or members should be

made parties to the scheme. This is for the

company to decide, in accordance with what the

scheme purports to achieve. The application for

3

Page 31 an order for meetings is a preliminary step, the

applicant taking the risk that the classes which

are fixed by the judge, usually on the applicant's

request, are sufficient for the ultimate purpose

of the section, the risk being that if in the result,

and we emphasize the words 'in the result', they

reveal inadequacies, the scheme will not be

approved'. If, e.g., rights of ordinary

shareholders are to be altered, but those of

preference shares are not touched, a meeting of

ordinary shareholders will be necessary but not

of preference shareholders. If there are different

groups within a class the interests of which are

different from the rest of the class, or which are

to be treated differently under the scheme, such

groups must be treated as separate class for the

purpose of the scheme. Moreover, when the

company has decided what classes are

necessary parties to the scheme, it may happen

that one class will consist of a small number of

persons who will all be willing to be bound by the

scheme. In that case it is not the practice to hold

a meeting of that class, but to make the class a

party to the scheme and to obtain the consent of

all its members to be bound. It is, however,

necessary for at least one class meeting to be

held in order to give the court jurisdiction under

the section.”

In this regard, reference to a passage from

Sovereign Life Assurance Co. Ltd. v. Dodd

15

, as stated

by Bowen, L.J., would be apt. It reads as follows:

“it seems plain that we must give such a

meaning to “Class” as will prevent the section

being so worked as to result in confiscation and

injustice, and that it must be confined to those

persons whose rights are not so dissimilar as to

15

1892 (2) Q.B. 573 CA

3

Page 32 make it impossible for them to consult together

with a view to their common interest.”

26. The purpose of the classification of creditors has its

significance. It is with this object that when a class has to

be restricted, the principle has to be founded on

homogeneity and commonality of interest. It is to be seen

that dissimilar classes with conflicting interest are not put

in one compartment to avoid any kind of injustice. For

example, an unsecured creditor who has filed a suit and

obtained a decree would not become a secured creditor.

He has to be put in the same class as other unsecured

creditors (See Halsbury’s Laws of India, 2007, Vol. 27).

27. The aforesaid being the position relating to the

status of a class, at this juncture, it is necessary to

appreciate the basic facts which are determinative in the

case at hand. As the exposition of facts would uncurtain,

the appellant company had extended a short-term loan

facility of Rs.150 million to the respondent company on

4.7.2001; that the respondent company had executed a

deed of hypothecation in favour of the appellant

hypothecating by way of an exclusive charge of the monies

and right, title and interest relating to amounts, both

3

Page 33 present and future to be received or payable by M/s.

Hewlett Packard Ltd.; that the respondent had filed Forms

8 and 13 and the charge by way of hypothecation was duly

registered with the Registrar of Companies; that the

appellant had initiated an arbitration proceeding which

eventually resulted in the consent award dated 1.7.2004

whereby the arbitral tribunal directed a sum of

Rs.48,683,710/- as due on 30.06.2004 along with interest

@ 20% p.a. on the principal amount of Rs.36,360,000/-

from 01.07.2004 till realization; that the award stipulated

due discharge of the liability on payment of

Rs.36,360,000/- in four instalments for the purpose of

which post-dated cheques were issued; that there was a

postulate that in case of default of payment of any

instalment, the entire amount may become due and

payable and the appellant would be entitled in law to

execute the award for recovery of the entire due without

prejudice to and in addition to entitlement to institute

criminal proceedings under the Negotiable Instruments Act;

that the respondent failed to pay the first instalment of

Rs.17,500,000/- on or before 30.09.2004; that on

3

Page 34 30.09.2004 the respondent filed a petition under Sections

391-394 of the Act for sanction of the scheme; that the

appellant initially filed objections to the scheme in the form

of a counter affidavit on 25.11.2004 on merits and

thereafter at a subsequent stage on 20.1.2005 filed an

additional affidavit stating, inter alia, that it was an

unsecured creditor; that an affidavit was filed in

oppugnation asserting that the appellant was a secured

creditor, regard being had to the hypothecation deed and

the registration having been effected with the Registrar of

Companies; that meeting of the secured creditors and

guarantors was held on 6.4.2005 and a Chairperson was

appointed; that the said order was challenged by IndusInd

Bank Ltd., WTI Bank Ltd. and Bank of Rajasthan Ltd. in

appeals but the same were dismissed by the Division

Bench on 17.06.2005; that the appellant preferred an

appeal which was dismissed by the judgment on

17.1.2006, which is impugned herein; that the scheme

which has been amended was put to vote and was duly

approved by the three-fourth of the secured creditors

3

Page 35 present and voting in value terms; and that the Court has

approved and accepted the modified Scheme.

28. We have, hereinabove, referred to the fact that the

Scheme was amended and approved in the meetings held

by the secured creditors. For the sake of completeness, we

think it appropriate to reproduce how the learned Company

Judge had approved the Scheme.

“(i)The scheme of arrangement as amended by

amendments approved at the meeting of the

secured creditors on April 16, 2005, being

Annexure D1 to the Company Petition No.

13/2004 is sanctioned so as to be binding with

effect from 31.03.2003, on the petitioner

company and all of its secured creditors and

preference shareholders, including any secured

creditor and preference shareholders that may

have obtained any decree, order or direction

from any court tribunal or any other authority,

without any further act or deed by the petitioner

company, in respect of the outstanding debt of

the petitioner company as of March 31, 2003 to

all its secured creditors and preference

shareholders, which amount shall be as has been

determined on the basis of the figures agreed

and accepted between the petitioner company

and each of the secured creditors at the meeting

of the secured creditors convened and held on

April 16, 2005, and hence the figure as was

specified in the application filed by the petitioner

Company under section 391 (1) of the

Companies Act stands/ modified accordingly.

(ii)The petitioner Company shall within 30

days after the date of sealing of this order cause

3

Page 36 a certified copy thereof to be delivered to the

Registrar of Companies, Kerala of registration.

(iii)On the coming into effect by the Scheme of

Arrangement being filed by the petitioner

Company with the Registrar of Companies,

Kerala and with effect from 31.03.2003, the

outstanding debt of the petitioner company owed

to all secured creditors and Preference

Shareholders as of 31.03.2003 shall be

restructured on the terms and conditions and in

the manner provided for in the Scheme of

Arrangement as annexed in Annexure D1 to the

petition.

(iv)The total outstanding debt of the petitioner

company to all is Secured Creditors and

Preference Shareholders as of 31.03.2003 of the

petitioner Company shall be restructured under

the scheme of arrangement and all rights and

liabilities relating to such outstanding debt to

secured Creditors and Preference Shareholders

as of 31.03.2003 shall stand created under the

Scheme of Arrangement. In addition, the

petitioner company and the Secured Creditors

and Preference Shareholders shall enter into any

documentation that may be required, only to

give formal effect to the restricting and for the

modification of the security contemplated by the

Scheme of Arrangement, and to govern the

prospective/ongoing relationship between the

petitioner Company and its Secured Creditors

and Preference Shareholders (including

covenants of the petitioner company, supervision

of the management of the petitioner Company,

Event of Default etc). However, upon the Scheme

of Arrangement coming into effect, in the

absence of the formal documentation referred to

above, the rights obligations and privileges of

the petitioner Company and the Secured

Creditors and Preference Shareholders shall be

governed by the provisions of the Scheme of

3

Page 37 Arrangement as detailed in Annexure D1 to the

petition.

(v)Any legal or other proceedings pending

against the petitioner Company, in India or

abroad, relating to any of the outstanding debt,

of the petitioner company to Secured Creditors

and Preference Shareholders shall, on the

effectiveness of the Scheme of Arrangement, be

terminated and the rights, obligations and

liabilities of the parties shall be governed by the

terms of the Scheme of Arrangement.

That the parties to the compromise of

arrangement or other persons interested shall be

at liberty to apply to this court for any directions

that may be necessary in regard to the working

of the Compromise or arrangement and that the

said company do file with the Registrar of

Companies a certified copy of this order within

14 days from the date.

29. Keeping in view the factual backdrop, we have to

appreciate the principal contentions. The seminal

contention of the appellant is that it does not fall into the

class of secured creditors, for it had initiated the arbitration

proceeding and an award has been passed on consent

which is a simple money decree and, therefore, the deed of

hypothecation, even if assumed to be executed at one

point of time, has become irrelevant. To elaborate, the

status of the appellant had changed from a secured

creditor to that of an unsecured creditor. On this

3

Page 38 foundation, a stance has been taken that the principles of

Order II, Rule 2, C.P.C. would be applicable as the appellant

would be debarred to issue on the basis of the charge of

hypothecation. Emphasis has been laid on the factum that

there having been a change of status, the appellant

company cannot be clubbed with the secured creditors as a

class and even if it is kept in homogenous category of

secured creditors, it should still fall under a separate class,

regard being had to the fact it has obtained an award from

the arbitral tribunal. In this context, it is to be seen that

whether the arbitration award has the effect of obliterating

or nullifying the status of the appellant and making him an

unsecured creditor as a consequence of which it would not

be able to sue on the basis of a charge created in its

favour.

30. What is contended by Mr. Divan, learned senior

counsel for the appellant is that any further lis would be hit

by principles enshrined under Order II, Rule 2 as well as by

resjudicata. It is urged by him that the claim of the

appellant company having been heard and decided in a

formal proceeding, i.e. the arbitration, it is binding and,

3

Page 39 therefore, the principle under Order II, Rule 2 would come

into play. For the said proposition, he has drawn

inspiration from Deva Ram (supra). The Court, after

analyzing the Order II, Rule 2 CPC, observed thus:

“A bare perusal of the above provisions would

indicate that if a plaintiff is entitled to several

reliefs against the defendant in respect of the

same cause of action, he cannot split up the

claim so as to omit one part of the claim and sue

for the other. If the cause of action is the same,

the plaintiff has to place all his claims before the

court in one suit as Order II Rule 2 is based on

the cardinal principle that the defendant should

not be vexed twice for the same cause.”

31. In that context, reference was made to

Palaniappa Chettiar v. Alagan Chettiar

16

. The Court

also observed that the Rule requires the unity of all claims

based on the same cause of action in one suit but it does

not contemplate unity of separate causes of action. If,

therefore, the subsequent suit is based on a different cause

of action, the rule will not operate as a bar. For the said

purpose, reliance was placed on Arjun Lal Gupta V.

Mriganka Mohan Sur

17

, State of Madhya Pradesh V.

16

AIR 1922 PC 228

17

AIR 1975 SC 207

3

Page 40 State of Maharashtra

18

, and Kewal Singh V. Mt.

Lajwanti

19

.

32. In this regard, immense emphasis has been placed

by Mr. Divan, learned senior counsel, on the authority in

Official Liquidator, Chemmeens Exports (P) Ltd.

(supra), especially paragraphs 13, 15 and 18. Paras 15 and

18 which have been pressed into service with immense

inspiration read as follows:

“The aforementioned preliminary decree was

passed by the Court even though the Official

Liquidator raised the plea in the written

statement that the charge created on the

Company’s property was void under Section 125

of the Act. But it may be that the plea was not

argued at the hearing. However, what is clear

from the material on record is that no appeal

was filed against the said preliminary decree by

the Official Liquidator and the preliminary decree

has attained finality.

xxxx xxxx xxxx

In Suryakant Natvarlal Surati v. Kamani Bros.

Ltd.

20

the Company created a charge under a

mortgage in favour of the trustees of the

Employees’ Gratuity Fund. The creditors, by a

preliminary decree of 3-12-1977 were entitled to

receive the amount secured on the property of

the Company; the Court fixed 8-12-1988 as the

date for redemption and ordered that in default

of payment of the sum due by that date, the

property was to be sold by public auction. On an

18

AIR 1977 SC 1466

19

AIR 1980 SC 161

20

(1985) 58 Comp Cas 121 (Bom)

4

Page 41 application made on 16-2-1978, the Company

was ordered to be wound up by an order dated 3-

8-1979. As default in payment of the decreed

amount was committed, the mortgagees applied

for leave of the Court under Section 446 to

execute the decree against the Official Liquidator

by application dated 10-7-1981. Three

contributories sought injunction against taking

any further action on the ground that the charge

created by the Company was not registered

under Section 125 of the Companies Act,

therefore, the mortgagees should be treated only

as unsecured creditors. Their application was

dismissed by a learned Single Judge. On appeal,

speaking for the Division Bench of the Bombay

High Court Justice Bharucha (as he then was) laid

down, inter alia, the principle that the question of

applicability of Section 125 had to be decided on

the terms of the decree — whether the

unregistered charge created by the mortgagor

was kept alive or extinguished or replaced by an

order of sale created by the decree; if upon a

construction of the decree, the Court found that

the unregistered charge was kept alive, the

provisions of Section 125 would apply and if, on

the other hand, the decree extinguished the

unregistered charge, the section would not apply.

We are in respectful agreement with that

principle. We hold that a judgment-creditor will

be entitled to relief from the Company Court

accordingly.”

33. Relying on the said passages, it is urged that when

the award has been passed on consent and has the status

of a decree that makes him an unsecured creditor, for it

has attained finalilty. To appreciate the said submission,

the quoted passages are to be appositely appreciated. As

4

Page 42 is evident, this Court has concurred with the view

expressed by the Bombay High Court in Suryakant

Natvarlal Surati (supra). The Division Bench of the

Bombay High Court had opined that the question of

applicability of Section 125 of the Act has to be decided on

the terms of the decree – whether the unregistered charge

created by the mortgagor was kept alive or extinguished or

replaced by an order of sale created by the decree; if upon

a construction of the decree, the Court found that the

unregistered charge was kept alive, the provisions of

Section 125 would apply and if, on the other hand, the

decree extinguished the unregistered charge, the Section

would not apply. To elucidate, it would depend upon the

terms of the decree. In the case at hand, the learned

Arbitrator has passed an award on consent. It is trite that

it has the status of a decree but there is nothing expressed

in the award that the decree has extinguished the charge.

It was not extinguished because the award does not say so.

To have a complete picture, we think it necessary to

reproduce the relevant portion of the operative part of the

award:

4

Page 43 “I.Award on admission in the sum of

Rs.48,683,710/- (due as on June 30, 2004) in

favour of the Claimants against the Respondents

together with further interest @ 20% p.a. on the

principal sum of Rs.36,360,000/- from 1

st

July,

2004 till payment and/or realization.

II.The aforesaid Award against the

Respondents shall be marked as fully satisfied in

the even of the Respondents making payment to

the Claimants of the sum of Rs.36,360,000/- in

the following installments:-

i.Rs.17,500,000/- on or before 30

th

Septemebr, 2004

ii.Rs.6,287,000/- on or before 15

th

April,

2017

iii.Rs.6,287,000/- on or before 15

th

April,

2018

iv.Rs.6,287,000/- on or before 15

th

April,

2019

III.Simultaneously with the signing of these

Consent Terms, the Respondents have handed

over to the Claimants one post dated cheque in

favour of the Claimants for Rs.17,500,000/- and

3 post dated cheques in favour of the Claimants

for Rs.6,287,000/- each falling due on the date

of the respective instalments.

IV.The Respondents hereby agree and

undertake that the Respondents shall make

payment of the said sum of Rs.36,360,000/- to

the Claimants as per the Schedule set out in

Clause 2 above and shall honour the post dated

cheques on their respective due dates. This

undertaking is given by the Respondents after

satisfying themselves that they have the

financial ability to make the said payment on the

respective due dates.

4

Page 44 V.In the event of the Respondents committing

default in payment of any of the installments

including the last installment on the due date for

any reason whatsoever, the entire dues together

with interest as provided on Clause I

hereinabove and outstanding due and payable

by the Respondents to the Claimants as on that

date shall become forthwith due and payable by

the Respondents to the Claimants and the

Claimants shall be entitled to forthwith execute

the Award against the Respondents and recover

the entire dues. In that even, any installments/s

paid under Clause 2 will be first appropriated

towards the interest payable under Clause I

without prejudice and in addition thereto, the

Claimants shall also be entitled to institute

criminal legal proceedings against the

Respondents including for dishonor of cheque/s

under the provisions of the Negotiable

Instruments Act, 1881.”

In view of the aforesaid conclusions, in the award, we

have no scintilla of doubt that the decision in Official

Liquidator, Chemmeens Exports (P) Ltd. (supra) is

distinguishable.

34. In this backdrop, we are to analyse whether the

deed of hypothecation would continue in spite of the

arbitration award. Mr. Divan submitted that it would not

survive because of the provisions contained in Order II,

Rule 2 of the CPC. We have already referred to the decree

and distinguished the decision in Official Liquidator,

Chemmeens Exports (P) Ltd (supra). In this context,

4

Page 45 reference to Order XXXIV Rule 14 and 15 of the CPC would

be apposite. They read as follows:

14.Suit for sale necessary for bringing

mortgaged property to sale – (1) Where a

mortgagee has obtained a decree for the

payment of money in satisfaction of a claim

arising under the mortgage, he shall not be

entitled to bring the mortgaged property to sale

otherwise than by instituting a suit for sale in

enforcement of the mortgage, and he may

institute such suit notwithstanding anything

contained in Order II, rule 2.

(2)Nothing in sub-rule (1) shall apply to any

territories to which the Transfer of Property Act,

1882(4 of 1882), has not been extended.

15.Mortgages by the deposit of title-

deeds and charges – (1) All the provisions

contained in this Order which apply to a simple

mortgage shall, so far as may be, apply to a

mortgage by deposit of title-deeds within the

meaning of section 58, and to a charge within

the meaning of section 100 of the Transfer of

Property Act, 1882 (4 of 1882).

(2)Where a decree orders payment of money

and charges it on immovable property on default

of payment, the amount may be realized by sale

of that property in execution of that decree.

35. The said provisions came to be interpreted in S.

Nazeer Ahmed V. State Bank of Mysore and Others

21

.

Referring to the said provisions, the Court held the suit for

enforcement of mortgage could be filed even when in the

21

(2007) 11 SCC 75

4

Page 46 earlier civil proceedings, the plaintiff had omitted to sue on

the basis of equitable mortgage and in such cases,

principle of constructive resjudicata or Order II, Rule 2

would not apply. The two-Judge Bench has opined that in

such cases a suit for enforcement of the mortgage would

lie under Order XXXIV notwithstanding that in the earlier

suit the plaintiff had not asked for enforcement of the

mortgage. As the factual matrix in the said case would

unfurl, the Bank had advanced a loan by hypothecating a

bus and further by equitable mortgaging two items of

immovable properties. It had at first filed a suit for

recovery of money and sought to proceed against the

hypothecated bus which could not be traced and

recovered. In the said suit, the Bank had not prayed for a

decree under Order XXXIV on the basis of mortgage. There

was an attempt to enforce the mortgaged property in the

execution proceeding but the same was rejected as no

decree of mortgage has been passed. Thereafter, the

Bank, the respondent therein, instituted another suit for

enforcement of equitable mortgage. The second suit was

held to be maintainable, regard being had to the language

4

Page 47 employed in Rules 14 and 15 of Order XXXIV, holding, inter

alia, that said Rules had been enacted to protect the

mortgagor, etc. and, therefore, the plea of constructive

resjudicata relying upon Order II, Rule 2 of the Code was

erroneous. The two-Judge Bench held that for Order II,

Rule 2 to apply, the cause of action in the two suits should

be similar and the bar of constructive resjudicata, as was

held, was not applicable. Analysing the facts, the Court

held:

“That apart, the cause of action for recovery of

money based on a medium-term loan transaction

simpliciter or in enforcement of the

hypothecation of the bus available in the present

case, is a cause of action different from the

cause of action arising out of an equitable

mortgage, though the ultimate relief that the

plaintiff Bank is entitled to is the recovery of the

term loan that was granted to the appellant. On

the scope of Order II Rule 2, the Privy Council in

Payana Reena Saminathan v. Pana Lana

Palaniappa

22

has held that Order II Rule 2 is

directed to securing an exhaustion of the relief in

respect of a cause of action and not to the

inclusion in one and the same action of different

causes of action, even though they may arise

from the same transactions. In Mohd. Khalil Khan

v. Mahbub Ali Mian

23

, the Privy Council has

summarised the principle thus: (IA pp. 143-44)

“The principles laid down in the cases thus far

discussed may be thus summarised:

22

(1913-14) 41 IA 142

23

(1947-48) 75 IA 121

4

Page 48 (1) The correct test in cases falling under

Order II Rule 2, is ‘whether the claim in the new

suit is, in fact, founded on a cause of action

distinct from that which was the foundation for

the former suit’. (Moonshee Buzloor Ruheem v.

Shumsoonnissa Begum

24

)

(2) The cause of action means every fact

which will be necessary for the plaintiff to prove,

if traversed, in order to support his right to the

judgment. (Read v. Brown

25

)

(3) If the evidence to support the two claims is

different, then the causes of action are also

different. (Brunsden v. Humphrey

26

)

(4) The causes of action in the two suits may

be considered to be the same if in substance

they are identical. (Brunsden v. Humphrey)

(5) The cause of action has no relation

whatever to the defence that may be set up by

the defendant, nor does it depend on the

character of the relief prayed for by the plaintiff.

It refers ‘to the media upon which the plaintiff

asks the Court to arrive at a conclusion in his

favour’. (Chand Kour v. Partab Singh

27

) This

observation was made by Lord Watson in a case

under Section 43 of the Act of 1882

(corresponding to Order II Rule 2), where plaintiff

made various claims in the same suit.”

A Constitution Bench of this Court has

explained the scope of the plea based on Order II

Rule 2 of the Code in Gurbux Singh v. Bhooralal1.

It will be useful to quote from the headnote of

that decision: (SCR Headnote pp. 831-32)

24

(1867) 11 MIA 551

25

(1888) 22 QBD 128

26

(1884) 14 QBD 141

27

(1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)

4

Page 49 “Held: (i) A plea under Order II Rule 2 of the

Code based on the existence of a former

pleading cannot be entertained when the

pleading on which it rests has not been

produced. It is for this reason that a plea of a

bar under Order II Rule 2 of the Code can be

established only if the defendant files in

evidence the pleadings in the previous suit and

thereby proves to the court the identity of the

cause of action in the two suits. In other words

a plea under Order II Rule 2 of the Code cannot

be made out except on proof of the plaint in

the previous suit the filing of which is said to

create the bar. Without placing before the

court the plaint in which those facts were

alleged, the defendant cannot invite the court

to speculate or infer by a process of deduction

what those facts might be with reference to

the reliefs which were then claimed. On the

facts of this case it has to be held that the plea

of a bar under Order II Rule 2 of the Code

should not have been entertained at all by the

trial court because the pleadings in Civil Suit

No. 28 of 1950 were not filed by the appellant

in support of this plea.

(ii) In order that a plea of a bar under Order II

Rule 2(3) of the Code should succeed the

defendant who raises the plea must make out

(i) that the second suit was in respect of the

same cause of action as that on which the

previous suit was based; (ii) that in respect of

that cause of action the plaintiff was entitled to

more than one relief; (iii) that being thus

entitled to more than one relief the plaintiff,

without leave obtained from the Court omitted

to sue for the relief for which the second suit

had been filed.”

It is not necessary to multiply authorities except

to notice that the decisions in Sidramappa v.

4

Page 50 Rajashetty

28

, Deva Ram v. Ishwar Chand

29

and

State of Maharashtra v. National Construction

Co.

30

have reiterated and re-emphasised this

principle.”

36. Applying the said test to the present case, it can be

stated with certitude that there is no shadow of doubt that

the consent award in an arbitral proceeding would not bar

a suit for enforcement of the charge for the same reasons

and it would not be hit by Order II, Rule 2 CPC. We are

absolutely conscious that the present case does not relate

to a charge as engrafted under Section 100 of the Transfer

of Property Act, or simply for equitable mortgage. In the

present case, the charge is by hypothecation and relates to

movable property. Needless to say, provisions of Rules 14

and 15 of Order XXXIV would not be directly applicable but

the principle inherent under the said Rules, as enunciated

would be applicable. In fact, the ratio laid down in S.

Nazeer Ahmed (supra), as we understand, makes it

equally applicable to different causes of action. The said

principle would apply, if we accept that the cause of action

is distinct.

28

(1970) 1 SCC 186

29

(1995) 6 SCC 733

30

(1996) 1 SCC 735

5

Page 51 37. The next aspect we shall advert to is the

applicability of doctrine of resjudicata. In Deva Ram

(supra), the Court while dealing with the said doctrine has

opined thus:

“Section 11 contains the rule of conclusiveness

of the judgment which is based partly on the

maxim of Roman Jurisprudence “ Interest

reipublicae ut sit finis litium” (it concerns the

State that there be an end to law suits) and

partly on the maxim “Nemo debet bis vexari pro

una at eadem causa” (no man should be vexed

twice over for the same cause). The section does

not affect the jurisdiction of the court but

operates as a bar to the trial of the suit or issue,

if the matter in the suit was directly and

substantially in issue (and finally decided) in the

previous suit between the same parties litigating

under the same title in a court, competent to try

the subsequent suit in which such issue has

been raised.”

Mr. Divan, learned senior counsel has also drawn our

attention to Harbans Singh (supra) wherein it has been

held that when no appeal was preferred by the Union of

India, while accepting the award in favour of the first

respondent therein, it had attained finality and thus the

principle of resjudicata was applicable. Reliance has also

been placed on Ranganayakamma (supra).

38. The said plea has been advanced on the foundation

that the controversy between the parties having been

5

Page 52 finally put to rest by the arbitral award, the respondent

would not have dragged the appellant to the said

proceeding as that would vex him twice. The issue before

the Company Court was quite different than that was

before the Arbitral Tribunal. True it is, it has the status of a

decree which is executable, as a decree having gone

unchallenged, but the lis of framing a Scheme under the

Act is of different character. It could not have been directly

or substantially in issue before the learned Arbitrator. That

apart, we have already held the status of the appellant as a

secured creditor has not changed. Therefore, in our

considered opinion, the plea of resjudicata which has been

canvassed by the learned senior counsel for the appellant

does not commend acceptance and we so hold.

39. Mr. Divan, learned senior counsel has drawn our

attention to Section 63 of the Contract Act. To buttress

the applicability of the said provision, he has commended

us to the decision in Firm Chunna Mal Ram Nath

(supra). The relevant portion reads as under:

“The contentions raised on these sections were

as follows. The respondents, relying on Sections

39 and 63, said that the appellants had put and

end to the agreement and had expressly

5

Page 53 dispensed them from delivery at all. The

appellants contended that Section 63 applied

only where there was an agreement to dispense

or a contract, supported by consideration to do

so, and that in any case it could only operate,

when the party dispensing had performed his

part of the contract and only something

remained to be performed on the other side,

unless dispensed with Abaji Sitaram Modok v.

Trimbak Municipality 28 B. 66; 5 Bom. L.R. 689.

They further said that, if they had been wrong in

refusing in advance to accept bales, this

repudiation had not been accepted by the

respondents, and, therefore, the contract

remained alive and ought to have been

performed. It is evident that the alleged

dispensation under Section 63 is by itself a

complete answer, unless the absence of contract

or consideration is fatal, for the appellants again

and again dispensed with the performance by

the respondents of their promise to deliver the

goods contracted for and they cannot recover

damages for the breach of a promise touching

the performance of a thing they wholly dispense

with.

In Abaji Sitaram Modok v. Trimbak Municipality

31

,

Chief Justice Jenkins deals with Section 63, and

holds that the promise mentioned in Section 63,

can, only do the acts he is by that section

empowered to do, if there be an agreement (as

defined by 2(e)) amongst the parties to that

effect. At page 72 of the report of this case the

learned Judge is reported to have expressed

himself thus:-

Therefore we hold that assuming there

was a legal resolution and that it was

communicated as alleged, still inasmuch

as a dispensation or remission under

Section 63 requires an agreement or

31

5 Bom. L.R. 689

5

Page 54 contract, the resolution was of no legal

effect since the provisions of s.30 of

Bombay Act II of 1884 have not been

observed.

With this their Lordships are unable to agree The

language of the section does not refer to any

such agreement and ought not to be enlarged

by any implication of English doctrines. On this

they agree with the learned Judges of the High

Court.”

40. He has also drawn inspiration from Jagad Bandu

Chatterjee (supra), wherein after referring to the

observations of Lord Russell of Killowen in Dawson’s

Bank Limited V. Nippon Menkwa Kabushiki Kaisha

32

and the well known work of Sir William P. Anson “Principles

of the English Law of Contract”, 22

nd

Edn., the Court opined

thus:

“In India the general principle with regard to

waiver of contractual obligation is to be found in

Section 63 of the Indian Contract Act. Under that

section it is open to a promisee to dispense with

or remit, wholly or in part, the performance of

the promise made to him or he can accept

instead of it any satisfaction which he thinks fit.

Under the Indian law neither consideration nor

an agreement would be necessary to constitute

waiver. This Court has already laid down in

Waman Shriniwas Kini v. Ratilal Bhagwandas &

Co.

33

that waiver is the abandonment of a right

which normally everybody is at liberty to waive.

“A waiver is nothing unless it amounts to a

32

62 IA 100, 108

33

(1959) Supp 2 SCR 217, 226

5

Page 55 release. It signifies nothing more than an

intention not to insist upon the right”.....

41. The stress on the aforesaid decisions by the

learned senior counsel is to highlight that the respondent

have waived the hypothecation by accepting the

arbitration award. The said submission has its own fallacy.

The arbitral award was passed on consent and from the

same it would be inappropriate to deduce that the

hypothecation stood annulled. In this context, we may

fruitfully refer to Sections 176 and 177 of the Contract Act,

1872, which pertain to the rights of pawnee on default

made by the pawnor. The said provisions read as under:

176. Pawnee’s right where pawnor makes

default. - If the pawnor makes default in

payment of the debt, or performance; at the

stipulated time or the promise, in respect of

which the goods were pledged, the pawnee may

bring a suit against the pawnor upon the debt or

promise, and retain the goods pledged as a

collateral security; or he may sell the thing

pledged, on giving the pawnor reasonable notice

of the sale.

If the proceeds of such sale are less than the

amount due in respect of the debt or promise,

the pawnor is still liable to pay the balance. If

the proceeds of the sale are greater than the

amount so due, the pawnee shall pay over the

surplus to the pawnor.

5

Page 56 177.Defaulting pawnor’s right to redeem –

If a time is stipulated for the payment of the

debt, or performance of the promise, for which

the pledge is made, and the pawnor makes

default in payment of the debt or performance of

the promise at the stipulated time, he may

redeem the goods pledged at any subsequent

time before the actual sale of them, but he must,

in that case, pay, in addition, any expenses

which have arisen from his default.”

42. The aforesaid two provisions when read in a

conjoint manner clearly establish that a pledge does not

get extinguished and, in fact, continues even when the

pawnee has sued and recovered a part of the debt without

enforcement of the pledge or the security. As per Section

176, when the pawnor makes default in making the

payment, the pawnee may bring a suit upon the debt or

promise and retain the good(s) pledged as a collateral

security. A pawnee has both collateral and concurrent

rights and can institute a suit for the purpose of realization

of the said debt or promise while retaining the goods as a

collateral security. Section 176 also makes it clear that it is

the discretion of the pawnee and it gives an option to him

and merely because pawnee has filed a suit for recovery,

that would not affect or destroy the charge or the right of

5

Page 57 the pawnee in respect of a pledged goods or the collateral

security. Thus, it is within the domain of discretion of

pawnee to file a suit for recovery of a debt and yet retain

the collateral security or pledged goods. It would not bar

or prohibit a pawnee from subsequently selling the pledged

goods or the collateral security. It is pertinent to mention

here that there is a difference between a hypothecation

and a pledge. In the case of a pledge, the security is in

possession of the pledge, but in the case of hypothecation,

the possession remains with the owner i.e. the pawnor.

Though such a distinction exists, yet it is an accepted legal

principle that hypothecation is treated as a sub-species of

pledge and virtually has the same legal effect. In this

context, reference to a passage from Lallan Prasad V.

Rahmat Ali and another

34

, would be seemly.

“17. There is no difference between the common

law of England and the law with regard to pledge

as codified in sections 172 to 176 of the Contract

Act. Under section 172 a pledge is a bailment of

the goods as security for payment of a debt or

performance of a promise. Section 173 entitles a

pawnee to retain the goods pledged as security

for payment of a debt and under section 175 he

is entitled to receive from the pawner any

extraordinary expenses he incurs for the

preservation of the goods pledged with him.

34

AIR 1967 SC 1322

5

Page 58 Section 176 deals with the rights of a pawnee

and provides that in case of default by the

pawner the pawnee has (1) the right to sue upon

the debt and to retain the goods as collateral

security and (2) to sell the goods after

reasonable notice of the intended sale to the

pawner. Once the pawnee by virtue of his right

under section 176 sells the goods the right of the

pawner to redeem them is of course

extinguished. But as aforesaid the pawnee is

bound to apply the sale proceeds towards

satisfaction of the debt and pay the surplus, if

any, to the pawner. So long, however, as the sale

does not take place the pawner is entitled to

redeem the goods on payment of the debt. It

follows therefore that where a pawnee files a suit

for recovery of debt, though he is entitled to

retain the goods he is bound to return them on

payment of the debt. The right to sue on the debt

assumes that he is in a position to redeliver the

goods on payment of the debt and therefore if he

has put himself in a position where he is not able

to redeliver the goods he cannot obtain a decree.

If it were otherwise, the result would be that he

would recover the debt and also retain the goods

pledged and the pawner in such a case would be

placed in a position where he incurs a greater

liability than he bargained for under the contract

of pledge. The pawnee therefore can sue on the

debt retaining the pledged goods as collateral

security. If the debt is ordered to be paid he has

to return the goods or if the goods are sold with

or without the assistance of the court appropriate

the sale proceeds towards the debt. But if he

sues on the debt denying the pledge, and it is

found that he was given possession of the goods

pledged and had retained the same, the pawner

has the right to redeem the goods so pledged by

payment of the debt. If the pawnee is not in a

position to redeliver the goods he cannot have

both the payment of the debt and also the goods.

Where the value of the pledged property is less

5

Page 59 than the debt and in a suit for recovery of debt

by the pledgee, the pledge denies the pledge or

is otherwise not in a position to return the

pledged goods he has to give credit for the value

of the goods and would be entitled then to

recover only the balance”.

43. More than eight decades back, the Bombay High

Court in Gulamhusain Lalji Sajan V. Clara D’Souza

35

,

while dealing with the applicability of Section 176 of the

Contract Act to a case of hypothecation, had opined thus:

“Under S.176, Contract Act, the pledge has a

right to bring a suit against the pledgor upon the

debt or promise, and retain the goods pledged

as a collateral security; or he may sell the thing

pledged in giving the pledgor reasonable notice

of the sale.

It is clear under the law applicable to cases of a

pledge that the creditor has two rights which are

concurrent, and the right to proceed against the

property pledged is not merely accessory to the

right to proceed against the debtor personally.

For the pledge may have a right to sue for sale

of the property even in the absence of a right to

sue for a personal decree.

The same principles would apply to the case of

hypothecation or mortgages of moveable

property.”

35

AIR 1929 Bom. 471

5

Page 60 Be it noted, in the said case reliance was placed on

Nim Chad Babu v. Jagabandhu Ghose

36

and Mahalinga

Nadar v. Ganapathi Subbien

37

.

44. We will be failing in our duty if we do not advert to

the issue that the appellant shall remain as a secured

creditor, for it was registered as such under the Registrar

of Companies. The formalities for creating the charge

having duly followed, the Division Bench has referred to

the Form No. 8 and 13 and also adverted to the power of

Registrar to make entries of satisfaction and release, as

provided under Sections 138 and 139 of the Act. It has

also expressed the view that in the absence of any

proceeding, the status of the company as a secured

creditor continues.

45. After registration of the deed of hypothecation, if a

condition subsequent is not satisfied, that would be in a

different realm altogether. In any case, the finding has

been recorded that the respondent was not at fault and, in

any case, that would not change the status of the appellant

as a secured creditor.

36

[1894] 22 Ca. 21

37

[1902] 27 Mad. 528

6

Page 61 46. In view of the aforesaid analysis, we are of the

considered opinion that the appellant cannot be treated as

an unsecured creditor and it is not permissible for him to

put forth a stand that it would not be bound by the Scheme

that has been approved by the learned Company Judge.

47. The aforesaid conclusion of ours leads to the

inevitable dismissal of the appeal, which we direct.

However, in the factum and circumstances of the case,

there shall be no order as to costs.

.............................J.

[Anil R. Dave]

...........................J.

[Dipak Misra ]

New Delhi;

January 09, 2015

6