http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 18

CASE NO.:

Appeal (civil) 3179-3181 of 2005

PETITIONER:

M/S MEGHAL HOMES PVT. LTD

RESPONDENT:

SHREE NIWAS GIRNI K.K.SAMITI & ORS

DATE OF JUDGMENT: 24/08/2007

BENCH:

G.P. MATHUR & P.K. BALASUBRAMANYAN

JUDGMENT:

J U D G M E N T

CIVIL APPEAL NOS. 3179-3181 OF 2005

WITH

[C.A. Nos. 3182-3184/2005, C.A. Nos. 3569-3571/2005, C.A. No. 4377/2006]

P.K. BALASUBRAMANYAN, J.

1. These appeals arise out of proceedings in the

Company Court in the matter of M/s Shreeniwas Cotton

Mills Limited (SCML). The Company was incorporated

on 5.2.1935. It established and ran a textile mill in a

land measuring 70,490 square meters in Lower Parel in

the then City of Bombay.

2. Just like various other textile mills located in

that city, SCML also ran into difficulties. A creditor of

the Company made an application C.P. No. 642 of 1983

under Section 433 of the Companies Act, for the winding

up of the Company. By order dated 25.7.1984, SCML

was ordered to be wound up by the Company Court. The

Official Liquidator took charge of the affairs of the

Company.

3. Nothing significant seems to have happened for

a decade. Then, on a report of the Official Liquidator,

the Company Court passed an order dated 1.9.1994

directing the Official Liquidator to issue a public notice

inviting offers for the revival of the textile mills and

absorption of the workmen and to purchase the assets of

the Company. At that stage, Rangnath Somani, a

contributory, filed Company Application No. 339 of 1994

seeking directions of the Company Court for holding a

meeting of the creditors, contributories and other

interested persons to consider a scheme proposed

allegedly for the revival of the Company. The application

was opposed. The Company Court directed the

convening of the requisite meeting to consider the

proposed scheme. Pending consideration thereof, the

Company Court also withheld the proceedings pursuant

to the public notice inviting offers. The order of the

Company Court directing the convening of a meeting for

the purpose of considering the scheme propounded was

challenged in appeal by the workers' union and three of

the parties who had submitted their offers in response to

the advertisement issued by the Official Liquidator

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 18

pursuant to the direction of the Company Court dated

1.9.1994. Notwithstanding the pendency of the appeals,

a meeting as directed by the Company Court was held

and a scheme was approved by the creditors,

contributories and workers. An application for

sanctioning the scheme was also filed. But, meanwhile,

on 4.4.1995, the Division Bench of the High Court

allowed the appeal against the order dated 1.9.1994 and

set aside the direction for convening a meeting to

consider the scheme proposed. The Company

Application filed in that behalf was thus dismissed. In

the view of the Division Bench, the scheme proposed was

not a bona fide one since it was not on the basis of any

viability report regarding the revival of the company and

there was a failure to disclose the latest financial

position of the Company. The court also found that even

on the showing of Rangnath Somani, the value of the

land belonging to SCML would be approximately Rs. 200

crores if unencumbered and that itself was a very

conservative valuation. The court was of the view that

the intention behind presentation of the Scheme

appeared to be to acquire the huge lands and other real

estate belonging to SCML at a throw away price

ostensibly in the guise of reviving the mills but with no

real intention of reviving it. After the obtaining of a

viability report, the Division Bench wanted the Company

Judge to consider certain suggestions. They were:

"(1) Whether it is possible and viable to

reopen the mills and/or any portion of

it and run it profitably and without

disposing of immovable assets of the

Company;

(2) In case the mills cannot be re-started

then whether any department or

process of the mills could be started as

viable;

(3) In case any party who comes forward

with an offer to pay off all the

creditors, take the company out of

winding up and revive and restart the

mills happens to be a shareholder of

the Company, such party should

surrender the shareholding in the

capital of the Company at the value to

be determinied by the Court;

(4) In case above courses are not workable

then whether the mills can be

restarted by disposing of part of its

assets to generate finance after

payment to all the creditors;

(5) In case even the course under clause

(4) above is not possible, then the

Official Liquidator may sell the assets

by public auction in which even the

shareholders of the Company will be at

liberty to bid."

4. Thereafter, the Division Bench emphasized

what was the main object to be kept in mind by the

Company Court. In that behalf, it was stated:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 18

"It is open for the learned Company Judge

to give any other suitable directions in the

matter keeping in mind that the whole

anxiety is to revive the Company and to

restart the mills which is in the interest not

only of the workers and creditors of the

Company but also in the general interest of

public. Needless to say that the revival of

the Company and restarting of the mills will

generate more employment and will be for

healthy economy of the country."

(emphasis supplied)

5. A Petition for Special Leave to Appeal filed in

this Court challenging the decision of the Division Bench

as Special Leave Petition (Civil) No. 13305 of 1995 was

dismissed on 10.7.1995.

6. The State Bank of India Capital Markets

Limited was assigned the task of preparing a viability

report. That Body made its recommendations after a due

study of the situation. On the first aspect posed by the

Division Bench, it answered:

"It is not possible to reopen the mills or any

portion of it without disposing of the

immovable assets of the Company. In our

opinion, it would be unviable to revive the

weaving and the processing sections of the

above mill on account of the reasons

summarized below."

For the moment, we are not concerned with those

reasons and therefore we are not adverting to them at

this stage. In answer to the second query posed, the

answer was:

"It is not possible to restart the entire mill.

Only a section of the spinning division with

21420 spindles can be restarted and

operated as viable, details of which are

given below."

The details are not relevant for the moment. In answer

to the third query regarding the surrender of

shareholding if the offer comes from a shareholder, the

report stated that the said matter rested with the court

and its discretion. Regarding query No. 4, it was

reported that since revival plan envisaged the

functioning of the spinning section alone, the machinery

in the weaving and processing sections and part of the

machinery in the spinning section had to be sold or

scrapped. A sale of such machinery was estimated to

fetch a price of approximately Rs.550.99 lakhs. It was

further reported that saleable extent of 44593 square

meters of mill land, being a part of the total holding, if

sold may fetch the required sum to settle all the past

liabilities of the Company. But, it was suggested that it

may be appropriate if the interested party brought in

Rs.12367.41 lakhs in the form of loans initially and once

the weaving and processing machinery and non-viable

spinning machinery are sold, then, the question of sale

of part of the land could be taken up. In answer to the

fifth query, it was reported that since a partial revival of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 18

the mills was possible, sale by the Official Liquidator of

the assets by public auction may not arise. It was also

suggested that delay in implementing the revival package

will escalate the liability and would lead to further

deterioration in the condition of the spindleage proposed

to be revived.

7. On 7.11.1998, a new Industrial Location Policy

of the Government of Maharashtra became operative.

That applied to all industries in the Mumbai

Metropolitan Region excluding the cotton textile

industries. Since cotton textile industry was excluded

from its purview, it appears that there was no restriction

on restarting of the manufacturing activities of SCML.

8. We may notice at this stage that the main

shareholders of SCML were Bangurs, Somanis, and the

Life Insurance Corporation of India and the sundry

shareholders held about 20% of the shares. Two of the

secured creditors were the State Bank of India and the

Punjab and Sind Bank.

9. The matters lingered on. On 29.6.2003, it is

seen that a Memorandum of Understanding was

executed between the shareholders, the Somani Group,

who meanwhile had acquired the shares of the Bangur

Group (there is controversy whether the acquisition was

by Rangnath Somani in his own right or it was an

acquisition by the Somanis Group, a controversy that we

are not called upon to decide here) and Lodha Builders

Private Limited (LBPL). Under that Memorandum, LBPL

agreed in consideration of getting the right to develop the

properties of SCML, to pay a sum of Rs. 78 crores to

SCML and 70,000 square feet of built up area or 19.50

crores in the alternative at the option of SCML. In other

words, LBPL was to pay Rs. 97.50 crores to SCML or Rs.

78 crores and 70000 square ft. of built up area. It was

also provided that if any additional funds were required

for settling the affairs of the Company, the additional

funds would have to be brought in by SCML. In other

words, on payment of Rs. 78 crores and handing over a

built up area of 70000 square feet or on paying Rs. 97.50

crores in all, LBPL was to get the right to develop and

deal with the lands of SCML. Based on this

Memorandum of Understanding, the three Somani

cousins filed Company Application No. 4 of 2004

propounding a scheme and seeking directions from the

Company Court for convening a meeting to consider the

amended scheme. The amendment to the earlier scheme

presented, included the replacement of paragraph 1.5 of

the original scheme which had indicated that sale of the

assets or properties of SCML was not envisaged and the

scheme was for revival of the textile mill unit of SCML by

a provision that the scheme envisaged development and

transfer of SCML's propertiesd by LBPL for revival of

SCML. Another amendment was to clause 5.1. This was

by deleting the salient features for scheme for revival of

the mills and providing in its place that the aim was that

after discharging the liabilities of all creditors as per the

scheme, if extra funds are available with SCML, then

SCML will start a viable industry in any part of

Maharashtra and employment would be generated. It

was further stated in the proposed amendment that

LBPL was to bring in funds of Rs. 78 crores for the

payment of liabilities of SCML. In the event of any

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 18

further finance being required than the amount agreed

to be brought in by LBPL, the Company Applicants, the

Somani cousins, would be permitted to dispose of a part

of the assets of SCML and the proceeds of the sale will be

utilized to pay off the workers and the creditors if

required.

10. On 12.12.2003, the Company Court directed

the meeting to be convened to consider the amended

scheme. On 21.2.2004, the amended scheme was

approved at the meeting. Company Petition No. 315 of

2004 was filed on 7.4.2004 seeking sanction of the

amended scheme. The Regional Director on behalf of the

Central Government pointed out that the propounders of

the scheme were required to file an affidavit regarding

the latest financial position of the Company but that

they had not filed such an affidavit. On 23.7.2004, the

Company Court rejected the amended scheme and

dismissed the Company Petition No. 315 of 2004. The

court held that the scheme presented was not a scheme

for revival but it was in substance a disposal of the

Company's assets which then vested in the Official

Liquidator. The court found that it was only a mode of

disposal of the Company's assets and hence it would be

proper for the Company Court holding the assets to

dispose of the assets after inviting offers. That would

fetch a better price and such a course would be in the

interest of the Company's minority shareholders,

workmen and secured and unsecured creditors. The

court was also of the view that the amount of Rs. 97.50

crores offered by LBPL was considerably less than the

amount of Rs. 200 crores, which the Division Bench had

noticed about ten years back, would be the minimum

price that could be fetched if the properties were to be

auctioned. The Company Court directed the issue of

advertisements inviting offers for the assets of SCML

showing a reserve price of Rs. 150 crores. The Official

Liquidator issued advertisements inviting offers.

11. The order of the Company Court dated

23.7.2004 was challenged in appeal by LBPL, by the

Somanis and by the workers' union. Though various

offers had been received pursuant to the advertisement

issued at the direction of the Company Court, they were

not considered since in appeal, the auction process was

stayed. The Division Bench, on 15.12.2004, passed an

order directing the Somanis, LBPL and the various

interveners who had made offers, to place their proposals

for rehabilitation on record. It was also directed that

those interested in purchase of the property should file

affidavits placing on record whether they were prepared

to make a down payment of a specified sum for release to

the workers. The court also directed the Somanis

holding the major shares (again we are not concered with

their inter se dispute here) to state whether they would

be willing to accept any such better scheme. Some

affidavits were filed and in its affidavit, LBPL stated that

in addition to the payment of Rs. 45 crores to the

workers, LBPL would set up a spinning unit and a

garment unit at the cost of Rs. 40 crores on the 7,50,000

square feet coming to them under the Scheme, and

would construct and transfer to a Workers Trust a

30,000 square feet unit, housing a school and other

accommodation at a cost of Rs. 15-20 crores. Rangnath

Somani, the eldest of the cousins filed an affidavit

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 18

showing that the Somanis would be willing to consider

and evaluate any better scheme in the interests of SCML.

But, on the same day, Ramesh Somani, who was one of

the co-propounders of the scheme, filed an affidavit

stating that he fully supported the scheme of LBPL and

did not want any change in the sponsors. He also filed

another affidavit stating that the propounders of the

scheme would set up a textile unit for rehabilitation of

the workers of SCML at Sholapur at a cost of Rs. 35.02

crores. It is said on behalf of the appellants, that at the

last moment just before the delivery of the judgment

began, affidavits filed on behalf of the LBPL were received

by the court, even while refusing to receive two affidavits,

Rangnath Somani wanted to file. The Division Bench

allowed the appeals, set aside the judgment of the

Company Court and sanctioned the scheme as modified

and as further modified by two affidavits of the Directors

of LBPL, by its judgment dated 21.3.2005. It is this

decision of the Division Bench that is in challenge before

us in these appeals. Three of the appeals are by

persons, who had made offers pursuant to the direction

of the court and have been described for convenience, as

the interveners and one of them by Rangnath Somani.

Even at this stage, we may mention that Civil Appeal

Nos. 3569-3571 of 2005 filed by one of the interveners is

sought to be withdrawn. We see no reason why the

prayer for withdrawal of those appeals shall not be

granted. So, Civil Appeal Nos. 3569-3571 of 2005 would

stand dismissed as withdrawn. We are only considering

the other appeals on merits.

12. Before we proceed to consider the merits of the

appeals, an objection taken to the maintainability of the

appeals requires to be considered. According to the

respondents, the appellants in Civil Appeal Nos. 3179-

3181 of 2005 and Civil Appeal Nos. 3182-3184 of 2005

have no locus standi either to object in the Company

Court or to challenge the decision of the Division Bench

of the High Court in appeal before this Court. It is

submitted that neither of those appellants are creditors,

contributories or debenture holders and are total

strangers to SCML and they have nothing to do with the

proposal and acceptance of the Scheme under Section 391 of

the Companies Act read with Sections 392 and 393 of that

Act. This contention is sought to be met by the appellants in

these appeals by pointing out that the appellant in Civil

Appeal Nos. 3171-3181 was associated with the original

Scheme for which approval was sought from the Company

Court and that the appellant therein had in fact deposited a

sum of Rs. 18 crores as per the direction of the court and

had also furnished a bank guarantee for Rs.10 crores and

had allegedly discharged certain creditors of the Company

and what was sought in the present case was a modification

of the earlier Scheme in which the appellant was involved

and in this situation the locus standi of the appellant could

not be denied. It was also pointed out that there was a

specific direction by the Division Bench to the appellant and

others to present their Schemes/Proposals before the court

and they had filed affidavits in that behalf. The Company

Court was bound to consider their proposals in the light of

the directions of the Division Bench. The Division Bench in

the present round also could not go back on what had been

ordered by earlier Division Bench. This gave the appellants

sufficient locus standi. The appellants in both these sets of

appeals had also submitted proposals pursuant to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 18

directions of the court and had also responded to the tenders

issued as per the directions of the Company Court. If the

proceedings had continued in the Company Court, one of

those persons could have benefited. The benefit that was

thus to accrue to one of the interveners was deprived of by

the Division Bench by its present order and in that situation,

the appellants are persons who are aggrieved by the decision

of the Division Bench and entitled to challenge the said

decision in this Court. It is also submitted that the framing

of a Scheme for revival of a Company under liquidation had

overtones of public interest and commercial morality and in

the context of what had transpired in this case and the

involvement of the interveners at every stage, it was not open

to the respondent now to raise a contention that the

appellants have no locus standi. In fact, the Division Bench

of the High Court was totally in error in excluding their

objections on the ground that they had no locus standi and

as persons aggrieved by that finding, it is open to them to file

these appeals. It is also submitted that LBPL was also in

the same boat as the appellant in Civil Appeal Nos. 3179-

3181 of 2005 and if it had locus standi to appeal to the

Division Bench of the High Court against the order of the

Company Court, the appellant has the locus standi to appeal

to this Court.

13. In the light of what had transpired in this case

and the orders of the Division Bench dated 4.4.1995 and

15.12.2004, it is not possible to accept the argument on

behalf of the respondents that the appellants in the two

sets of appeals have no locus standi to maintain their

appeals in this Court. They have been allowed to

intervene by the Division Bench of the High Court on

earlier occasions and it is too late in the day now to raise

a contention that they have no role to play in the

approval of a Scheme under Section 391 of the Act and

their appeals should be rejected on that ground. The

case of the appellant in Civil Appeal Nos. 3171-3181 of

2005 involves a further fact that it was sought to be

involved in the Scheme originally presented by the

Somanis which ultimately was rejected by the court, but

during the course of the proceedings the appellant

therein was directed to deposit certain amounts and

furnish security for certain other amounts and this could

only be on the basis that as a participant in the original

Scheme proposed, the appellant had some locus standi.

In a sense, LBPL, which is now sought to be associated

in the modified Scheme also stands on the same footing

as the appellant in Civil Appeal Nos. 3179-3181 of 2005

and we are not invited to hold that LBPL has no locus

standi in this proceeding as no such argument was

raised before us. Considering the aspects involved, in

the context of the order for liquidation of the company

and the attempt to sponsor a scheme for acceptance by

the Company Court, we are of the view that the two sets of

appeals could not be dismissed as appeals by persons who

have no locus standi to maintaini them. Surely, to the

extent the Division Bench has held that their objections are

irrelevant, they can certainly appeal to this Court in an

attempt to show that their objections are indeed relevant.

Whether their claim is meritorious, is another matter.

14. The right of Rangnath Somani to maintain his

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 18

appeal being Civil Appeal No. 4377 of 2006, is challenged

on the ground that he was a co-sponsor of the Scheme

which has been accepted and approved by the Division

Bench and therefore he cannot claim to be a person

aggrieved by the decision of the Division Bench entitled

to challenge the decision of the Division Bench. The

argument on behalf of Rangnath Somani is that the

Scheme as approved by the general meeting of the

concerned, has not been accepted by the Division Bench

and certain modifications were brought in on the basis of

affidavits filed on behalf of LBPL and he has always a

right to object to such modifications or to contend that

such modifications must go back to the general meeting

for consideration and approval. On this part of the

objection, we find substance in the stand adopted on

behalf of Rangnath Somani and on that basis we cannot

say that he is not entitled to file an appeal against the

decision of the Division Bench.

15. But more seriously it is contended that

Rangnath Somani had accepted the decision of the

Division Bench of the High Court and had even received

possession of the assets of SCML from the Official

Liquidator pursuant to his discharge on the basis of the

decision of the Division Bench and having done so, he is

estopped from questioning the order of the Division

Bench in an appeal which he has filed subsequently.

This argument is sought to be met on behalf of Rangnath

Somani by pointing out that the receiving of possession

pursuant to the order of the Division Bench from the

Official Liquidator cannot estop him from filing an appeal

before this Court and from pointing out that the decision

suffers from a vital defect of being one in excess of the

authority of the Division Bench of the High Court and

not in consonance with the terms of the Companies Act.

It is seen that some objection was sought to be raised by

Rangnath Somani regarding the proposals contained in the

affidavits filed on behalf of LBPL, which proposals were

accepted and made part of the Scheme of the Division Bench

and the objection of Rangnath Somani was not dealt with as

such. Moreover, from the fact that, subsequent to the

decision of the Division Bench, Rangnath Somani received

possession of the assets of SCML along with his cousins, the

other two Somanis, it cannot be said that thereby he has lost

his right to appeal to this Court questioning the

modifications in the Scheme sought to be propounded by

him and approved at the General Meeting. We are not

inclined to go into the charges and counter charges as to

which of the Somanis has been got at and by whom, since we

consider those allegations to be irrelevant for our purpose.

Suffice it to say that, we are not inclined to accept the

argument on behalf of the respondents that Rangnath

Somani is estopped from filing an appeal against the decision

of the Division Bench. Anyway, since we have held that the

appeals by the other two appellants are maintainable, the

question that arises will have to be examined by this Court

and in that context, we find it not proper to turn away

Rangnath Somani from the portals of this Court on the

ground of estoppel. Thus, we overrule the objections to the

maintainability of these appeals.

16. Now to recapitulate, the Company was ordered

to be wound up on 25.7.1984 and the Official Liquidator

was directed to take possession of the assets of the

Company. Once an order of liquidation had been passed

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 18

on an application under Section 433 of the Companies

Act, the winding up has to be either stayed altogether or for a

limited time, on such terms and conditions as the court

thinks fit in terms of Section 466 of the Act. If no such stay

is granted, the proceedings have to go on and the court has

to finally pass an order under Section 481 of the Act

dissolving the Company. In other words, when the affairs of

the Company had been completely wound up or the court

finds that the Official Liquidator cannot proceed with the

winding up of the Company for want of funds or for any

other reason, the court can make an order dissolving the

Company from the date of that order. This puts an end to

the winding up process. Winding up is dealt with in Part VII

of the Companies Act and Sections 433 to 483 occur in

Chapter II of that Part. Part VI deals with management and

administration of a Company and Chapter V thereof deals

with Arbitrations, Compromises, Arrangements and

Reconstructions. In that Chapter occurs Sections 390 to

396A of the Act with which we are concerned. While defining

a Company for the purpose of Sections 391 and 393, Section

390 clarifies that Company means any Company liable to be

wound up under the Companies Act. SCML was a company

that was ordered to be wound up on 25.7.1984. Therefore,

when the Scheme was originally presented on 3.10.1994, it

was at a time when the winding up order was already in

existence. The argument that Section 391 would not apply

to a Company, which has already been ordered to be wound

up cannot be accepted in view of the language of Section

391(1) of the Act, which speaks of a Company which is being

wound up. If we substitute the definition in Section 390(a) of

the Act, this would mean a Company liable to be wound up

and which is being wound up. It also does not appear to be

necessary to restrict the scope of that provision considering

the purpose for which it is enacted, namely, the revival of a

company including a Company that is liable to be wound up

or is being wound up and normally, the attempt must be to

ensure that rather than dissolving a company it is allowed to

revive. Moreover, Section 391(1)(b) gives a right to the

liquidator in the case of a company which is being wound

up, to propose a compromise or arrangement with creditors

and members indicating that the provision would apply even

in a case where an order of winding up has been made and a

liquidator had been appointed. Equally, it does not appear

to be necessary to go elaborately into the question whether in

the case of a company in liquidation, only the Official

Liquidator could propose a compromise or arrangement with

the creditors and members as contemplated by Section 391

of the Act or any of the contributories or creditors also can

come forward with such an application. By and large, the

High Courts are seen to have taken the view that the right of

the Official Liquidator to make an application under Section

391 of the Act was in addition to the right inhering in the

creditors, the contributories or members and the power need

not be restricted to a motion only by the liquidator. For the

purpose of this case, we do not think that it is necessary to

examine this question also in depth. We are inclined to

proceed on the basis that the Somanis, as contributories or

the members of the Company, are entitled to make an

application to the Company Court in terms of Section 391 of

the Act for the purpose of acceptance of a compromise or

arrangement with the creditors and members.

17. The question in this case really is whether the

compromise put forward under Section 391 of the

Companies Act could be accepted by the court without

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 18

reference to the fact that it is a company in liquidation

and without considering whether the compromise

proposed as intending to take the company out of

liquidation, contemplates the revival of the company and

whether it puts forward a proposal for revival and

whether such a proposal also satisfies the element of

public interest and commercial morality, the elements

required to be satisfied for the court to stop the winding

up proceeding in terms of Section 466 of the Act. In the

present case, the Company Court was of the view that the

compromise or arrangement that is put forward by the

Somanis in conjunction with LBPL was not a scheme or

proposal for revival of the company or the Mills, but it is

one for disposal of the assets of the company and in that

situation, it would be proper that the assets are disposed

of by the Official Liquidator by inviting offers from the

public in that behalf and maintaining transparency.

But, the Division Bench accepted the contention that it

was not mandatory in law that a compromise or

arrangement has to be for revival of the very activity in

which the company was engaged in at the time of

winding up and the anxiety of the court while

sanctioning the scheme which is approved by all classes

should be to see that the company is permitted to

continue its corporate existence. The Division Bench

also took the view that the judgment of the earlier

Division Bench dated 4.4.1995 did not stand in the way

of accepting the present scheme, and that since the

Company Court had no jurisdiction to sit in appeal over

the decision of the creditors, members and

contributories of the company, the proposal put forward

was liable to be accepted especially in the context of its

finding that the interveners have no locus standi to

oppose the proceedings.

18. Learned counsel argued before us whether in

the case of a company which had been ordered to be

wound up, a compromise or arrangement made under

Section 391 of the Act could be accepted on the basis

that the said arrangement has been approved by the

relevant meeting of the creditors, members and so on

and whether the court was concerned with anything

more than such a decision taken by the concerned

members and creditors of the company. In the case of a

company ordered to be wound up, a compromise or

arrangement that could normally be accepted by the

Company Court could be either paying off all dues by

liquidation of assets or an arrangement for revival of the

company and its business. That is the rationale of the

order dated 4.4.1995 by which the Division Bench

directed consideration of the various aspects pointed out

therein. The Division Bench had emphasized that what

the court was concerned with while sanctioning a

Scheme under Section 391 of the Act in the case of a

company that is ordered to be wound up, is the revival of

the company. Strictly speaking, in the light of that order

of a Division Bench, which was binding on the

subsequent Division Bench, no question arises in this

case especially when we notice that the decision of the

earlier Division Bench dated 4.4.1995 was sought to be

challenged in this Court by way of a Petition for Special

Leave to Appeal and that challenge was repulsed and the

Petition was dismissed. Therefore, as far as this case is

concerned, the contours of the enquiry to be made by the

Company Court was drawn by the decision of the Division

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 18

Bench dated 4.4.1995. Hence, what is relevant for the

court to consider was whether the proposal or the

modified compromise or arrangement put forward was

for revival of the company.

19. In that context, it is clear that the State Bank

of India Capital Markets Limited had pointed out that it

was not possible to revive the entire business of the

SCML and that a part of the spinning industry could be

retained and revived by disposing of the machinery

related to the other activities carried on by SCML and by

sale of a portion of the immovable property of the

company. Therefore, the main aim of any scheme or

modified compromise or arrangement in terms of Section

391 of the Act, would be a revival only of the spinning

section of the company at the premises of the Mill and

the facilitating of that revival by the sale of parts of the

assets of the company. The Scheme as it was, originally

proposed, contained the following clause in the

preamble:

"1.5. The Scheme does not envisage sale of

any of the assets or properties of Shreeniwas

Cotton Mills Limited (now in liquidation) and

is for the revival of the textile Mill unit of Sree

Niwas Cotton Mills Ltd. (now in liquidation)"

It provided for payment and discharge of liabilities and it

contained what were described as salient features of the

Scheme for revival of the Mills. The amendments

proposed to that Scheme by the Somanis were the

deletion of paragraph 1.5. quoted above and replacement

of it with the following:

"The Scheme envisages development and

transfer of SCML's said property by LBPL for

revival of SCML (now in liquidation)."

After dealing with the modified proposal for settlement of

liabilities to creditors and others, it was provided in

clause 5 that on the sanctioning of the Scheme, a

development agreement will be entered into between

SCML and LBPL for developing SCML's property, liquidity

will be generated and all creditors paid off and the company

will come out of liquidation. Then it was stated:

"Secondly, after discharging all creditors as per

the scheme, if extra funds are available with

SNCML, then SNCML will start a viable industry

in any part of Maharashtra and employment will

be generated."

It also explained that the entire dues of the workers will be

paid and all the creditors will be satisfied. The following

clause was also to be inserted:

"If the Scheme is allowed, SCML will enter into an

agreement with the LBPL for development and

transfer of SCML's said property. LBPL shall

bring in and provide for funds to discharge the

creditors of SCML. LBPL will bring in funds of

Rs. 78.00 crores for payment of liabilities of

SCML. Finance for the purpose of the Scheme is

being provided by LBPL and all the creditors and

workers will be paid. In the event, if any further

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 18

finance is required than the amount agreed to be

brought in by LBPL, the Applicants be permitted

to dispose off the part of the assets of SNCML and

proceeds from the sale will be utilized to pay off

the workers and the creditors if required."

It was stated that:

"In the event, if after paying all creditors of

SNCML funds are available with SNCML, then

SNCML will start such viable industry in any

part of Maharashtra."

According to the contesting respondents, the Scheme as

sought to be modified is a Scheme that takes care of all

the liabilities of SCML and also contemplates the setting

up of some viable industry in any part of Maharashtra by

the company. This was enough to recognize a scheme

under Section 391 of the Companies Act. It was not

feasible to revive the mills as a whole as was clear from the

materials and in that context what was possible was to save

the godown and the office building of SCML, discharge all

liabilities and if any excess fund is left, to start an industry

in any part of Maharashtra and there was nothing wrong

with the acceptance of such a scheme. It was during the

course of the hearing before the Division Bench that two

alternatives were proposed in an affidavit filed on behalf of

the LBPL, not a member or creditor of the Company, but

which was associated with the proposal put forward by way

of a compromise or arrangement, that LBPL will, in addition

to the liability of Rs. 97.50 crores undertaken, would put up

a school / industrial unit of 30000 square feet for the benefit

of the workers or pay a sum of Rs. 15 lakhs in lieu thereof to

the workers; that LBPL will set up a spinning/garment unit

in an area of 1,00,000 square feet in the Mill premises at a

cost of Rs. 40 crores and SCML would set up a unit in rural

Maharashtra at a total outlay of Rs. 20 crores. Yet another

affidavit was filed on behalf of LBPL in which willingness was

expressed by it to pay the higher amounts claimed by the

two secured creditors, the State Bank of India and the

Punjab and Sind Bank subject to LBPL being entitled to

create a charge on the mill property even before discharging

the liability to the two banks and on condition of delivery of

the original documents relating to SCML to LBPL and not to

SCML, on full payment of the amounts agreed to be paid to

the two creditor banks. It was to these modifications

proposed by a non member of the company, but which was

associated with the working of the compromise or

arrangement, that Rangnath Somani tried to raise some

objections one of which was that SCML was not agreeable to

set up an industrial unit anywhere in Maharashtra at a cost

of Rs. 20 crores. Ramesh Somani supported LBPL. The

Division Bench of the High Court accepted the affidavits filed

on behalf of LBPL and sanctioned the scheme as amended

and as further modified by the two affidavits of Abhishek

Lodha, Director of the Company dated 21.3.2005.

Obviously, the Division Bench must have been conscious

that Abhishek Lodha was only a Director of LBPL and that he

was not a Director of the Company in liquidation, though

there is some ambiguity in the concerned sentence in the

judgment. He was also not a propounder of the Scheme, but

he was only a participant in the proposed arrangement come

to between the company and its creditors, shareholders,

debenture holders, workers, etc.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 18

20. How far the scheme could be modified on the

suggestion of LBPL which is not one of the entities

contemplated by Section 391 of the Act, is a moot question.

Even otherwise, the deletion of clause 1.5 indicated in the

original proposal and the replaced clause 1.5 in the modified

scheme, indicated that the object was not the revival of

SCML. The vague stipulation that SCML would put up some

viable industry in some part of the State of Maharashtra, if

funds are available, was sought to be replaced by a

commitment to start an industry in rural Maharashtra that

also at the cost of Rs. 20 crores. Though, one of the Somani

cousins agreed to these proposals, another cousin attempted

to object to that proposal and is objecting to it before us.

Similarly, the amendment by way of an affidavit on behalf of

the LBPL contemplated the starting of an industry in the Mill

land by LBPL and not by the company in liquidation. Thus,

the company in liquidation, did not intend taking up any

revival activity in the properties belonging to SCML other

than retaining the office building it had and the godown it

had away from the mill lands. It is difficult to conceive of

this as a revival of SCML, a company in liquidation. This is

more in the realm of disposal of the assets of the company in

liquidation, no doubt, with a view to pay off all the creditors,

debenture holders and workers from the funds generated out

of the sale of the lands in favour of LBPL. Going by the test

laid down by the Division Bench in its order dated 4.4.1995,

which has become final inter parties and the object of

Section 391 of the Act, it is difficult to say that it is a scheme

for revival of the company, the clear statutory intention

behind entertaining a proposal under Section 391 of the Act.

21. Considerable arguments were raised on the

role of the Court when a Scheme under Section 391 of

the Act was propounded for its consideration. The

decision in Miheer H. Mafatlal Vs. Mafatlal Industries

Ltd. [(1997) 1 S.C.C. 579] was relied on. That was a

case of merger or amalgamation of two companies.

Neither of the companies was in liquidation. This Court

held that compromise or arrangement included

amalgamation of one company with another. This Court

also defined the broad contours of the jurisdiction of the

Company Court in granting sanction to a scheme in terms

of Section 391 and Section 393 of the Act. This Court

laid down the following parameters:

"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 concerned meetings 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 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 18

voters at the concerned meetings 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 concerned applicant

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 of

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 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."

We may straightaway notice that this Court did not have

occasion to consider whether any additional tests have to

be satisfied when the Company concerned is in

liquidation and a compromise or arrangement in respect

of it is proposed. Therefore, it cannot be said that this

would be the final word on any Scheme put forward

under Section 391 of the Act, whatever be the position of

the concerned company. Even then, this decision lays

down the need to conform to the statutory formalities,

the power of the Court to ascertain the real purpose

underlying the Scheme, the bona fides of the Scheme,

the good faith in propounding it and that as a whole, it is

just, fair and reasonable, at the same time emphasizing

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 18

that it is not for the Court to examine the Scheme as if it

were an appellate authority over the commercial wisdom

of the majority.

22. When a Company is ordered to be wound up,

the assets of it, are put in possession of the Official

Liquidator. The assets become custodia legis. The follow up,

in the absence of a revival of the Company, is the realization

of the assets of the company by the Official Liquidator and

distribution of the proceeds to the creditors, workers, and

contributories of the company ultimately resulting in the

death of the company by an order under Section 481 of the

Act, being passed. But, nothing stands in the way of the

Company Court, before the ultimate step is taken or before

the assets are disposed of, to accept a scheme or proposal for

revival of the Company. In that context, the Court has

necessarily to see whether the Scheme contemplates revival

of the business of the company, makes provisions for paying

off creditors or for satisfying their claims as agreed to by

them and for meeting the liability of the workers in terms of

Section 529 and Section 529A of the Act. Of course, the

Court has to see to the bona fides of the scheme and to

ensure that what is put forward is not a ruse to dispose of

the assets of the Company in liquidation.

23. In fact, it was on this basis that the Division

Bench of the High Court proceeded when it passed the

order dated 4.4.1995. Apart from the fact that the

correct principle was adopted, the directions therein are

binding on the Company Court and the Division Bench of

the High Court of coequal jurisdiction when the proposal

for amendment of the earlier scheme came up. It has to

be noted that it was not a fresh scheme that was being

mooted, but it was a proposal for an amendment of the

scheme already considered by the Division Bench when

it passed the order dated 4.4.1995. It was the plain duty

of the Division Bench on the latter occasion to keep in

focus the suggestions earlier made.

24. It was argued before us on behalf of the

appellant that Sections 391 to 394A were procedural

provisions and when once a company was under

liquidation, the Chapter dealing with winding up applied

and the only provision or substantive provision

conferring power of stopping the winding up was

conferred on the court by Section 466 of the Act, and

unless the court is satisfied that the Company is being

taken out of liquidation by way of revival and that it will

sub-serve public interest and will conform to commercial

morality, the court cannot accept a scheme proposed

under Section 391 of the Act. The argument on the side

of the respondents is that Section 391 is a self-contained

code and read with Section 392 of the Act, which was

peculiar to our Act, it was clear that a Company Court

could approve, independently of Section 466 of the Act, a

scheme and could take the company out of liquidation

and even pass an order of stay in terms of Section 391

read with Section 392 of the Act. Section 466 of the Act

was not attracted when a scheme approved by the

shareholders, creditors, members of the Company and so

on was put forward before the Company Court.

25. It is a well settled rule of interpretation that

provisions in an enactment must be read as a whole

before ascertaining the scope of any particular provision.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 18

This Court has held that it is a rule now firmly

established that the intention of the legislature must be

found by reading the statute as a whole. In Principles of

Statutory Interpretation by Justice G.P. Singh, it is

stated:

"The rule is referred to as an "elementary rule"

by VISCOUNT SIMONDS; a "compelling rule"

by LORD SOMERVELL OF HARROW; and a

"settled rule" by B.K. MUKHERJEE, J."

(See pages 31 and 32 of the Tenth Edition)

When we accept this principle, what we have to do is to

read Sections 391 to 394A not in isolation as canvassed

for by learned counsel for the respondents, but with

reference to the other relevant provisions of the Act. We

see no difficulty in reconciling the need to satisfy the

requirements of both Sections 391 to 394A and Section

466 of the Companies Act while dealing with a Company

which has been ordered to be wound up. In other words,

we find no incongruity in looking into aspects of public

interest, commercial morality and the bona fide intention

to revive a company while considering whether a

compromise or arrangement put forward in terms of

Section 391 of the Companies Act should be accepted or

not. We see no conflict in applying both the provisions and

in harmoniously construing them and in finding that while

the court will not sit in appeal over the commercial wisdom

of the shareholders of a company, it will certainly consider

whether there is a genuine attempt to revive the company

that has gone into liquidation and whether such revival is in

public interest and conforms to commercial morality. We

cannot understand the decision in Miheer H. Mafatlal Vs.

Mafatlal Industries Ltd. (supra) as standing in the way of

understanding the scope of the provisions of the Act in the

above manner. We are therefore satisfied that the Company

Court was bound to consider whether the liquidation was

liable to be stayed for a period or permanently while

adverting to the question whether the scheme is one for

revival of the company or that part of the business of the

company which it is permissible to revive under the relevant

laws or whether it is a ruse to dispose of the assets of the

company by a private arrangement. If it comes to the latter

conclusion, then it is the duty of the court in which the

properties are vested on liquidation, to dispose of the

properties, realize the assets and distribute the same in

accordance with law.

26. But before that, we think that another step has to

be taken in this case. What has now been accepted by the

Division Bench, is not the scheme as modified by the general

meeting as contemplated by Section 391 of the Act. At least

two of the modifications having ramifications are based on

undertakings or statements made on behalf of LBPL and

there appears to be difference of opinion on that modification

even among the Somanis. There is also the question whether

the proposals of a person who is not one of those recognized

by Section 391 of the Act, could be accepted by the Company

Court while approving a scheme. We are of the view that the

scheme with the modifications as now proposed or accepted,

has to go back to the General Meeting of the members of the

Company, called in accordance with Section 391 of the Act

and the requisite majority obtained.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 18

27. It was argued on behalf of the respondents that

under Section 392 of the Act, the Court has the power to

make modifications in the compromise or arrangement

as it may consider necessary and this power would

include the power to approve what has been put forward

by LBPL who has come forward to discharge the

liabilities of the Company on the rights in the properties

of the Company other than in the office building and in

the godown, being given to it for development and sale.

As we read Section 392 of the Act, it only gives power to

the Court to make such modifications in the compromise

or arrangement as it may consider necessary for the

proper working of the compromise or arrangement. This

is only a power that enables the court to provide for

proper working of compromise or arrangement, it cannot

be understood as a power to make substantial

modifications in the scheme approved by the members in

a meeting called in terms of Section 391 of the Act. A

modification in the arrangement that may be considered

necessary for the proper working of the compromise or

arrangement cannot be taken as the same as a

modification in the compromise or arrangement itself

and any such modification in the scheme or arrangement

or an essential term thereof must go back to the general

meeting in terms of Section 391 of the Act and a fresh

approval obtained therefor. The fact that no member or

creditor opposed it in court cannot be considered as a

substitute for following the requirements of Section 391

of the Companies Act for approval of the compromise or

arrangement as now modified or proposed to be

modified. In Miheer H. Mafatlal Vs. Mafatlal

Industries Ltd. (supra), this Court had insisted that the

procedural requirements of Section 391 must be satisfied

before the court can consider the acceptability of a

scheme even in respect of a Company not in liquidation.

Therefore, we are not in a position to accept the

argument on behalf of the respondents that the scheme

now as modified by the decision of the Division Bench

need not go back to the general meeting of the members

in terms of Section 391 of the Act. We must also

remember that at least before us there is serious

objection to the modifications by one of the Somanis who

are the promoters of the Company in liquidation and the

sponsors of the arrangement and that objection cannot

be brushed aside.

28. We find that the modifications proposed alters

the position of the shareholders vis-`-vis the Company.

Instead of the company reviving the spinning unit as

recommended by the State Bank of India Capital

Markets Limited, as adopted in the General Meeting, now

the Company will have nothing to do with the mill lands

and the whole of the mill lands will pass on to LBPL on

LBPL paying a value of Rs. 97.50 crores to SCML and

LBPL will start an industry of its own in that property.

This cannot be considered to be a modification in the

scheme necessary for the proper working of the

compromise or arrangement. This is a modification of

the scheme itself. Same is the position regarding the

provision of replacing the resolution passed that if any

surplus amounts are available, SCML would start a

viable industry in any part of the State of Maharashtra,

by a commitment that SCML would establish an industry

in any part of the State of Maharashtra on an investment

of Rs. 20 crores. This again is an obligation cast on the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 18

members of SCML and we are of the view that this

cannot also be taken to be a modification which the

Court can bring about on its own under Section 392 of

the Act on the pretext that it is a modification necessary

for the proper working of the compromise or

arrangement. We have no hesitation in holding that in

any event, the Division Bench of the High Court ought to

have directed a reconvening of the meeting of the

members of the Company in terms of Section 391 of the

Act to consider the modifications and ensured that the

approval thereof by the requisite majority existed.

29. In the view we have thus taken, we are

satisfied that it is a fit case where we should set aside

the decision of the Division Bench as also of the

Company Court and remand the proceedings to the

Company Court. The Company Court first will direct the

sponsors of the scheme to call a meeting of the concerned in

terms of Section 391 of the Act and seek an approval for the

modifications now suggested by the Division Bench or that

may be put forward at the meeting. If the requisite majority

approves the modifications and the matter comes back to the

Company Court, the Company Court will consider whether

the compromise or arrangement put forward is one that

deserves to be accepted in respect of a company which has

been ordered to be wound up in the light of what we have

indicated above and what the Division Bench had earlier

indicated in its order dated 4.4.1995.

30. In addition to expanding and supporting the

submission that in terms of Sections 391 to 393 of the Act,

the court had the power to accept the compromise or

arrangement even in respect of a company ordered to be

wound up, independent of Section 466 of the Act and in that

process the power to stay a winding up, learned Senior

Counsel appearing for the Workers' Union argued on behalf

of the workmen that interference by this Court would further

delay the benefits that would accrue to the workers under

the arrangement now approved by the Division Bench and

considering the long lapse of time, that would be unjust.

Learned counsel highlighted the additional benefits that

would accrue to the workers under the present scheme.

Though, we do appreciate this aspect of the matter, having

taken the view that the arrangement has to go back to the

meeting of members, creditors, etc. of the company in terms

of Section 391 of the Act and once it is adopted or adopted

with modifications with the requisite majority at the meeting,

the arrangement would require a fresh scrutiny by the

Company Court thereafter, we cannot avoid interfering with

the decision of the Division Bench on the ground put forward

by learned Senior Counsel of benefit to the workers.

31. We thus allow Civil Appeal Nos. 3179-3181 of

2005, Civil Appeal Nos. 3182-3184 of 2005 and Civil

Appeal No. 4377 of 2006, set aside the judgment of the

Division Bench and that of the Company Court, and remit

the matter to the Company Court for a fresh consideration

in accordance with law and in the light of the directions

contained in the judgment. Civil Appeal Nos. 3569-3571

of 2005 is dismissed as withdrawn. The parties are

directed to suffer their respective costs. The parties will

appear before the Company Court for further directions

on 12.11.2007.