# J. K. (BOMBAY) (P) LTD v. NEW KAISER-I-HIND SPG. & WVG. CO. LTD. & ORS. ETC

- **Citation:** [1969] 2 S.C.R. 866
- **Court:** Supreme Court of India
- **Decided:** 1968-11-22
- **Case number:** Civil Appeals Nos. 1399 to 1402 of 1968
- **Bench:** J. M. Shelat, V. Bhargava, C. A. Vaidialingam
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/j-k-bombay-p-ltd-v-new-kaiser-i-hind-spg-wvg-co-ltd-ors-etc-4599
- **Pages:** 30

## Headnote

Companies Act I of 1956 Ss. 391, 392 & 433-Scheme under s. 391Scope and nature of-Effect on right of creditors and other parties-On
scheme becoming unenforcetible if parties bound to operate it or Company
to be wound up-Obligations undertaken by management
to 'provide'
finance for working company-If· unlimited obligation or only one in coin·
1nercial sense, i.e., with prospect of making profits.
Mortgage-Agreed to be executed under scheme in favour
of unsecured creditors-Not executed at date of winding up-If amounted to
charge in presenti in favour of the creditors.
On a winding-up petition being filed in respect of the tespondent company in June, 1965, a provisional liquidator was
appointed,
who took
charge of the Cotton Textile Mills of the Company after they had stopped
working.
Thereafter an agreement was
entered into in August,
1965
between the S group who owned the majority of equity shares in the
company and the J group which agreed to buy the shares and to
take
over the management.
'The agreement provided, inter alia, that
after
the J group took over, the Oimpany would execute a second legal mortgage of its fixed and other assets in favour of the S group and certain
-Other unsecured creditors mentioned in Schedule B to the agreement in
consideration of which those creditors agreed to receive interest at 'a
nominal rate and receive repayment of their debts over a long period.
The agreement also contained provision which contemplated the Company obtaining loans fro1n certain finarlcial institutions, the Central and
State Governments and other persons
and securing
them by a prior
charge over its fixed assets as well as liquid assets.
After this agreement with the unsecured creditors and/ another with
the workers union, the· Company submitted a scheme for the sanction
of the High Court. By an order in February, 1966, a single Judge
-0f the High Court approved the scheme which provided, inter tilia, for
payments to various cat~gories of creditors within specified periods and
for the execution of a second mortgage in favour of the Schedule B
creditors; or alternatively for the execution of a debenture trust deed
and the issue of debentures in their favour if sanction of the Controller
of Capital Jssues could be obtained.
It was also provided in clause ( 4)
of the scheme that the J group "will provide the necessary :finance required for running the mi11s".
The winding-up petition was then \Vithdrawn. the provisional liquidator discharged and the J group took over
the Comuany's management.
The mills were restarted in April,
1966
and payments to various categories of creditors other than the Schedule
B creditors were du1y made.
However in view of certain disputes between the tw6 groups, the company did not execute the mortgage or
the proposed debenture trust deed in favour of the Schedule B creditors.
The mills· contin'ued to work until June, 1967, but the management
experienced various difficulties in raising adequate working finances, in
·securing sufficient supplies of cotton. due to price rise following devaluation. of the Rupee in 1966 and for various other reasons.
In view of
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J. K. LTD. v. KAISER SPG. CO.
8 67
these the mills were eventually closed down in June, 1967, and thereafter the Company and others filed a petition for its winding-up. However, the Company Judge in fhe High Court took the view that under
clause ( 4) di the scheme the J group were bound not only to procure
but to personally bring in the finance sufficient to work the mills. Holding that the scheme was workable he directed the J group to provide
the necessary finance.
He also directed the company to execute the debenture trust deed in favour of the un.secured cre.dilors in Schedule B.
He therefore dismissed the winding-up petitions. In appeal, a Division
Bench of the High Court held that the Company Jud!e was in error
in giving the said directions and in dismissin,g the petirions for

## Text

_Characters 0–39,974 of 88,895. This is a partial read: ask again with offset=39974 for what follows._

866
J. K. (BOMBAY) (P) LTD.
v.
NEW KAISER-I-HIND SPG. & WVG. CO. LTD. & ORS. ETC.
November 22, 1968
[J. M. SHELAT, V. BHARGAVA AND C. A. VAIDIALINGAM, JJ.]
Companies Act I of 1956 Ss. 391, 392 & 433-Scheme under s. 391Scope and nature of-Effect on right of creditors and other parties-On
scheme becoming unenforcetible if parties bound to operate it or Company
to be wound up-Obligations undertaken by management
to 'provide'
finance for working company-If· unlimited obligation or only one in coin·
1nercial sense, i.e., with prospect of making profits.
Mortgage-Agreed to be executed under scheme in favour
of unsecured creditors-Not executed at date of winding up-If amounted to
charge in presenti in favour of the creditors.
On a winding-up petition being filed in respect of the tespondent company in June, 1965, a provisional liquidator was
appointed,
who took
charge of the Cotton Textile Mills of the Company after they had stopped
working.
Thereafter an agreement was
entered into in August,
1965
between the S group who owned the majority of equity shares in the
company and the J group which agreed to buy the shares and to
take
over the management.
'The agreement provided, inter alia, that
after
the J group took over, the Oimpany would execute a second legal mortgage of its fixed and other assets in favour of the S group and certain
-Other unsecured creditors mentioned in Schedule B to the agreement in
consideration of which those creditors agreed to receive interest at 'a
nominal rate and receive repayment of their debts over a long period.
The agreement also contained provision which contemplated the Company obtaining loans fro1n certain finarlcial institutions, the Central and
State Governments and other persons
and securing
them by a prior
charge over its fixed assets as well as liquid assets.
After this agreement with the unsecured creditors and/ another with
the workers union, the· Company submitted a scheme for the sanction
of the High Court. By an order in February, 1966, a single Judge
-0f the High Court approved the scheme which provided, inter tilia, for
payments to various cat~gories of creditors within specified periods and
for the execution of a second mortgage in favour of the Schedule B
creditors; or alternatively for the execution of a debenture trust deed
and the issue of debentures in their favour if sanction of the Controller
of Capital Jssues could be obtained.
It was also provided in clause ( 4)
of the scheme that the J group "will provide the necessary :finance required for running the mi11s".
The winding-up petition was then \Vithdrawn. the provisional liquidator discharged and the J group took over
the Comuany's management.
The mills were restarted in April,
1966
and payments to various categories of creditors other than the Schedule
B creditors were du1y made.
However in view of certain disputes between the tw6 groups, the company did not execute the mortgage or
the proposed debenture trust deed in favour of the Schedule B creditors.
The mills· contin'ued to work until June, 1967, but the management
experienced various difficulties in raising adequate working finances, in
·securing sufficient supplies of cotton. due to price rise following devaluation. of the Rupee in 1966 and for various other reasons.
In view of
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J. K. LTD. v. KAISER SPG. CO.
8 67
these the mills were eventually closed down in June, 1967, and thereafter the Company and others filed a petition for its winding-up. However, the Company Judge in fhe High Court took the view that under
clause ( 4) di the scheme the J group were bound not only to procure
but to personally bring in the finance sufficient to work the mills. Holding that the scheme was workable he directed the J group to provide
the necessary finance.
He also directed the company to execute the debenture trust deed in favour of the un.secured cre.dilors in Schedule B.
He therefore dismissed the winding-up petitions. In appeal, a Division
Bench of the High Court held that the Company Jud!e was in error
in giving the said directions and in dismissin,g the petirions for windingup.
Accordingly, it allowed the appeals and ordered winding-up of the
company.
In appeal to this Court it was contended inter alia that the Appeal
Court
was in erro'r in
setting
aside
the directions
given
by the
Company Judge and in ordering winding-up instead; the Company had
reached its unsatisfactory position in view of (i) the failure of the J
group to provide finance in accordance with clause ( 4) of the scheme;
and (ii) giving away the processing unit of the mills which was the
most profit yielding part of the mills for a nominal value to a nominee
of the J group. It was also contended that once the scheme was sanctioned by the court, it became a statutory bargain and part of the company's constitution~ and therefore, all further arrangements of the company's affairs had to be on the basis of the rights and obligations thereunder; if the company were to be wound up, such winding-up could
only be ordered after compelling it to carry out those obligations
and
it would be opposed to equity and public policy to allow the company
to
escape its obligations by ordering it to be wound up; even if the
scheme could be ignored by directing winding-up, it could only be done
by putting the parties in the position they were prior to the scheme; and
that the winding-up of the company being, at the in.stance. of the J group
who had failed to carry out their obligation_ to find the finance, acceding
to their prayer for winding up was
tantamount to. acceding to
their
default. It was further contended on behalf of the Schedule B creditors
that the J group had deliberately failed to secure permission
of the
Controller of Capital Issues for execution of the. debenture trust deed
and that they were entitled to a charge on the company's assets
not
merely on the secpnd mortgage being executed, _ but irrespective of it
and in presenti; as the agreement of August, 1965. specified the property
out of which a debt was to be payable. and this was coupled with an
intention to subject such proparty to a charge, the property became
subject to a charge in pres.enti even though a regular mortgage was to
be executed at some future date.
HELD : Dismissing the appeal :
. ( 1) The direction of the Company Judge that the J group must pro~
v1~e the. required finance was nebulous and vague and impossible of
being enforced.
In the. absence of any enquiry as to whether the mills
could be worked at a profit no court would compel a party to furnish
mon~es without even speci~ying how much and for how long he should
p~ov1de. If such a direction was not possible, no direction could be
given under s. 392(1) to work the scheme as its implementation depended on the mills working at profit. The only course left to the
Court was to pronounce. that i!1 the circumstances then prevailing the
scheme could not be sat1sfactonly worked and, therefore, a winding-up
order under s. 392(2) had become inevitable. [887 H-888 BJ
S68
SUPREME COURT REPORTS
[1969] 2 $.C.R.
Although the scheme' had statutory force, it had to be construed as
a commercial document, that is, in the manner in which businessmen
would read it.
There can be no doubt that the J group took the res·
ponsibility to provide finance required for running the mills so that from
out of tueir profits the obligation to pay the creditors could be met in
the manner laid down in the scheme.
Ther~fore_, the J group were to
"provide" finance either on the credit of the company or on the secnrity of its assets, or if necessary, their ov.rn IQ.Onies for running the mills
in the commercial sense, i.e. with a reasonable prospect of making profits
and not in all events and in all circumstances. even if there was no
prospect of running \(hem lat reasonable profit. Such a fcOnstruction
would be contrary to the fact that the creditors knew there was hardly
2.ny chance of their being paid and were anxious that instead of taking
the company into liquidation the mills .~hould be. restarted and their
dues paid bit by bit.
By virtue of the provisions of s. 391 of the Act, a scheme is statutorily binding even on creditors and share-holders who dissented from
or were opposed to its being sanctioned. It has statutory force in that
sense and
ther~fore cannot be altered except with the sanction of the
Court even if the share.holders and the creditors acquiesce in such alteration. The effect of the scheme is "to supply by recourse to the pro·
cedure thereby prescribed the absence of thaj individual agreement by
every member of the clause to be bound by the scheme which
would
otherwise be Qecessary to give it validity". Sub-sec. (2) of s. 391 of
the Act allows the decision of the majority prescribed therein to bind
the minority of cr~itors and shareholders and it is for that reason that
a scheme is said to have statutory operation and cannot be varied by
the shareholders or the creditors unless such variation is sanctioned by
the court.
The effect, therefore,, of a scheme between a company and
it_s creditors is that so long as it is carri~d out by the company by regu~
lar payment in terms of the scheme, a creditor who is bound by it
cannot maintain a' winding-up petition.
But if the company commits a
default, there is a debt presently due by the company and a petition
for winding-up can· be sustained at the
instance of a creditor.
The
scheme,
however,
does not have the effect of creating a new debt; it
simply makes the original debt payable and in the manner ancl to
the
extent provided in the scheme. It cannot be said that a
winding-up
order can only be passed after compelling the company to complete the
rights whieh are still incomplete under the scheme. [891 Fl
Once a scheme is cancelled under s. 392(2)
on the ground that it
cannot be satisfactorily worked and a winding-up order passed, such
an order is deemed to be for all purposes one made nnder s. 433. It is
not as if because the scheme has been sanctioned under s. 391 that a
winding-up order under s. 392(2) cannot be made. If the contention.
that a winding-up order can only be made subject to the· rights and
obligations of the parties under the scheme were to be right, it vt0uld
mean that where a company m·akes default in paying an instalment on
the date prescribed by the scheme and a creditor files a winding.up
petition, even though a winding-up orde,r is made on the basis that the
debt has become presently payable, still the creditor is bound by the
scheme and his debt is to be payable by instalments as provided by
the scheme. [893 C-E]
(2) The Appeal Court was right in holding that no proof had been
offered in support of the allegation that the J group had let out the processing unit of the mills which was the most profit yielding part to one
of their nominees to the prejudice of the company,
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J. K. LTD. V. KAISER SPG. CO.
8 69
(3) An examination of the scheme and the agreement of August 1965
did not show that there was any intention to subject the company assets
to a charge in present[ in favour of the Schedule B creditors.
The provisions of these two documents amounted only to an agreement to mortgage which could give rise to an obligation to specifically perform it
but did not constitute either a mortgage under s. 58 or a charge under
s. 100 of the Transfer of Property Act. There was, therefore, no force
in the contentfon that the Schedule B creditors, irrespective ·of the proposed mortgage, were entitled to be treated as secured creditors. [889 G]
Jewan Lal Daga v. Nilmani Chaudhuri, 55 I.A. 1()7; Khajeh Solehman
Quadir v. Salimullah, 49
I.A. 153; Hukamchand v. Radha
Kishan,
A.I.R. 130 P.C. 76; referred to.
( 4) On the findings by the Appeal Court that the company was
commercially insolvent and the scheme could ~ot be satis_factorily worked with or w\thout modifications, the only alternative for that Court
was to pass the windi_11g-up order under s. 392(2). The Court could
not have completed, as contended by the appellants, their rights which
were still incomplete or order the company to execute a debenture trust
deed or the second mortgage, and thus set up the appeJlants
and the
other Schedule B creditors as secured creditors against the rest of the
unsecured creditors.
Such an order could not be passed as it would
be contrary to and in breach of the right of distribution pari passu of
the joint body of unsecured creditors. The Appeal Court bad, therefore correctly followed the principle that the status of creditors which
could be recognised was that which existed at the date of the windingup order, that the second mortgage or the debenture trust deed not having so far be.en executed, the appellaf!ts and the other Schedule B creditors were still unsecured creditors and therefore could not claim any
priority over the rest of the unsecured creditors. [894 H-895 CJ
Bank of Scotland v. Macleod [1914] A.C. 311 at 317, 318; Tulsidas
Jasraj Parekh v. The Industrial Bank of Western India 32 Bombay Law
Reporter 953 at 967; Re Anglo-Oriental Carpet
Manufacturing Company [1903] I Cb. 9'14, referred to.
The principle that no act of a court should be permitted to harm
a litigant who has acted on the faith of such an act cannot be invoked
for the purpose of completion of rights where such. rights
are incomplete at the date when a winding-up order is made. There was
no
question of the appellants having done something on the faith of an act
of the court, the appellants and the other Schedule B creditors having
agreed to a postponement of repayment to them in consideration of an
agreement between them and the. company providing for a second mor~
gage in their favour. [892 DJ
Premila Devi v. Peoples Bank of Northern India Ltd., [1938] 4 AU
E.~. 337; Re Garner Motors Ltd., [1937] 1 All E.R. 671; Jang Singh v.
Br11lal, [1964] 2 S.C.R. 145; Jai Behram v. Kedar Nath Marwari 49
I.A. 351 at 356; Re Downing (T.H.) & Co. [1940] All E.R. 333; 'also
Buckley on the Companies Acts (13th Ed.) 411 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1399
to 1402 of 1968.
Appeals from the judgmeint and decree dated April 26 1968
of the Bombay High Court in Appeals Nos. 96, 97, 98 ~nd 86
Otf 1967.
870
SUPREME COURT REPORTS
[1969] 2 s.c.R.
A. K. Sen, Krishna Sen, Rameshwar Nath
and Mahinder
Narain, for the appellant (in all the appeals).
S. J. Sorabjee, I. M. Chagla, K. D. Mehta, Ravinder Narain,
J. B. Dadachanji and 0. C.' Mathur, for respondent No. 1 (in all
the appeals).
F. S. Nariman and/. N. Shroff, for respondents Nos. 2 and 3
(in C.A. No. 1399 of 1968).
A. B. Divan, Rameshwar Nath
and Mahinder Narain, for
Creditors Nos. I to 8 (in C.A. No. 1399 of 1968).
C. K. Daphtary, Attorney-General, Rameshwar Nath and
Mahinder Narain, for Creditors Nos. 9 and 10 (in C.A. No.
A
1399 of 1968 ).
C
The Judgment of the Court was delivered by
Shelat, J.
These appeals, founded on a certificate, are directed against the order of the High Court of Bombay ordering
the winding-up of Respondent No. I-Company.
Prior to August 1965, the company was managed by Singhanias, (referred to hereinafter as the J.K. group), who held 25,625
out of 45,000 equity shares of the company. By 1965 the company was in a bad way, its liabilities having exceeded its assets
and was not in a position to pay its unsecured creditors.
On
June 21, 1965 one of its creditors, M/s. Indulal & Co,, filed a
petition for winding-up. On August 2, 1965 the Court appointed a provisional liquidator. On August 6, 1965 the cotton textile mills of the company stopped working and the provisional
liquidator took charge thereof.
On August 16, 1965 an agree•
ment was made between the J.K. group and Nandlal Jalan and
two others, (hereinafter referred to as the Jalans), under which
the latter agreed to take over the company's management on terms
and conditions therein set out. The agreement provided that the
J.K. group should sell to the Jalans at Rs. 10/- per share the said
block of shares held by the former, that the J.K. group thereafter
should resign as directors and accept as directors the nominees of
the Jalans, that the company should execute a second legal mortgage of its fixed and other assets in favour of the J.K. group and
certain other unsecured creditors named in Sch. 'B' to the agreement in consideration of which those creditors agreed not to claim
interest at more than 1I4 % and not to demand repayment of
their debts except in the manner set out in the agreement and Sch.
'C' thereto, and that the transactions therein contained should
be completed within one month from the date when the said
petition would be withdrawn.
The agreement recorded that the
debts due to Sch. 'B' creditors amounted to Rs. 48.28 lacs. Sch.
'C' to the agreement contained the terms to be included in the
second mortgage to be executed by the company. Term 3 providD
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J. K. LTD. v. KAISER SPG. co. (She/at, J.)
871
ed that the said Rs. 48.28 lacs were to be repaid two years after
the date of the said mortgage by annual instalments of an amount
equal to 50 per cent of the profit made by the company or Rs. 6.50
lacs whichever was lower, provided, however, that in any event
the whole debt should be paid off by June 30, 1980. Term 4(a)
provided that in the event of the assets secured under the second
mortgage being damaged or impaired or the first mortgagees enforcing their security or the company being wound up, the entire
debt due under the second mortgage would immediately become
due. Term 4(d) contemplated the company obtaining loans from
certain financial institutions including the Central and the State
Governments and securing them by a prior charge over its fixed
assets and therefore provided that in such an event "security of the
second mortgagees for the fixed assets shall be subject to" such
first or prior charge. Term 4(e) likewise permitted the company
to obtain loans from any person, firm or company on a first or
prior charge over its liquid assets so that the security of the second
mortgagees over the liquid assets "shall be subject to the first or
prior charge in favour of such lender". There was already a first
mortgage in favour of the Punjab National Bank Ltd. (hereinafter referred to as the 'Bank') for securing advances made by it
to the company.
The effect of the said agreement was two fold : (1) that the
Jalans by purchasing the said shares could take over the company's management, and (2) on the second mortgage being executed Sch. 'B' creditors, who, in respect of the debts due to
them, were unsecured creditors, would take precedence over the
other unsecured creditors by becoming secured creditors. No
doubt, they agreed to accept 1/ 4 % interest and to postpone the
date of payment of their debts, nonetheless, in the event of the
company being wound up the entire debt due to them would
become immediately payable and they would have priority over
the rest of the unsecured creditors.
On October 18, 1965 an agreement was made between the
com~any, the Jalans and the workers' union, which inter alia
provided that the new management would employ 2700 out of
the total 4200 workers and pay to the rest retrenchment compensation .
Agreements with the largest group of unsecured creditors on
the one hand and the workers on the other having been thus
secur~d; the company took out on October 19, 1965 a summons
subm1ttmg a scheme for the sanction of the High Court. It would
H
seem that tho~gh the other creditors of the company were willing
to accord their consent to the said scheme, the Bank was not,
~less two cash credit accounts under which the company owed to
it Rs. 19 lacs were paid off and a term loan of Rs.
26. 7 5 lacs
872
SUPREME COURT REPORTS
[1969) 2 S.C.R.
secured· by a first mortgage of the company's fixed assets was reduced by Rs. 5 lacs., To remove the Bank's objection the Jalans
had therefore to make an immediate financial arrangement. On
Feb~uary 14, '1966 an agreement between the company, (still
under the old management), the Jalans and Sushi! Investment (P)
Ltd., a company under the control of the Jalans, was made whereunder Sushi! Company agreed to pay off the said cash credits
accounts and also to pay Rs. 5 lacs against the said term loan,
in all Rs. 23 lacs. On so doing the Bank was to release the assets
hypothecated with it and the company was to hypothecate such
assets in favour of Sushi! Company. Sushi! Company also agreed
to finance the company to the extent of Rs. 40 lacs including the
said Rs. 23 lacs on the company hypothecating cotton cloth, yarn
and other movable assets in its favour, and the Jalans giving their
personal . guarantee.
This agreement under which the company
agreed to hypothecate all its movable assets together with Term
4(d) and (e) of Sch. 'C' to the agreement of August 16, 1965
shows that it was understood between the parties that the J alans
were entitled to procure finance on the security of the company's
assets, both fixed and movable, and that such security would take
priority over the second mortgage to be executed in favour of the
J.K. group and other Sch. 'B' creditors.
By his order dated February 17, 1966, Mody J., gave his
sanction to the said scheme making therein two significant observations: (1) that all the concerned parties realised that the company at that stage was commercially insolvent, and (2) that though
he appreciated the objection of some of the opposing creditors
that the Jalans under the scheme gave no personal guarantee for
payments provided thereunder to the unsecured creditors or for
providing adequate finance for the working of the mills, he was
giving his sanction as the majority of the unsecured creditors were
anxious that the company should be allowed to work under the
scheme.
The preamble of the scheme expressly recites that it was "for
the payment of the secured and unsecured creditors". Clause (1)
sets out that the secured creditors were the Bank and M/ s. R.
Ratilal & Co., whose advances to the company were secured by
hypothecation and mortgage in favour of the Bank and by a
pledge of cotton in favour of R. Ratilal & Co. Clause (2) states
that the unsecured debts of the company amounting to Rs. 101.39
lacs were due to four categories of creditors :
Category 1 : consisted of-
( a) J.K. (Bombay) (P) Ltd. for Rs. 3.46 lacs, being the amount
advanced by it to the company for purchase of 2000 shares of
Bengal and Assam Investors. The company agreed to get these
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J. K, LTD. v. KAISER SPG. co. (Shelat, J.)
8 73
shares released from the Bank with which they were pledged and
hand them over to this creditor within 90 days from the date of
the order sanctioning the scheme.
(b) J.K. concerns and others to whom Rs. 48.39 lacs were
due and who were mentioned in Sch. 'B' to the agreement dated
August 16, 1965. Cl. (2) provided that this amount was to be
secured by a second mortgage of the company's assets in consideration whereof the creditors would accept payment in the manner provided by the agreement dated August 16, 1965, annexed
as Ex. A to the scheme. Sub-clause (3) of cl. (2) provided that
if the Controller of Capital Issues gave his sanction the second
mortgage should be in the form of a debenture trust deed and the
company should issue debentures of the said amount of Rs. 48.13
lacs of Rs. 100 each to these creditors ranking pari passu.
Category 2: Creditors were the Bombay Municipal Corporation, the Collector of Sales Tax, the Commissioner of Income
Tax, the Bombay Port Trust, the Collector of Bombay, the Life
Insurance Corporation, the Employees State Insurance Corporation, the workers, their cooperative society, and lastly the Tata
Power Company Ltd. These were to be paid off within the time
specified against their names.
Category 3: Creditors were 15 in number and were the suppliers of cotton and to whom Rs. 6.84 lacs were due. These were
to be paid off in certain instalments, the first instalment being
3 7 % of the debt, payable within 90 days from the date of
sanctioning of the scheme.
Category 4: Creditors whose claims were Rs. 1000/- or less
were to be paid off within 90 days after the sanction of the scheme.
Creditors whose claims were above Rs. 1000/-, the total of whose
debts amounted to Rs. 33.70 lacs, were to be paid off by 8 equal
annual instalments, the first instalment being 12!% payable within 90 days from the sanctioning of the scheme.
CL (3) of the scheme referred to the said agreement dated
October 18, 1965. Lastly, clause (4) provided that the Jalans
"will provide the necessary finance required for running the mills".
Except for cl. (4), the scheme thus represented an arrangement
between the co~pany and the creditors for repayment of debts
due to the creditors. The Jalans were not parties to the scheme
for at the date when it was sanctioned they were not either the
shareholders or the directors though they appeared before Mody
J., and gave their concurrence.
Th_e scheme having been sanctioned, the winding-up petition
was withdrawn, the provisional liquidator was discharged and all
the assets taken charge of by him were handed over to the com-
874
SUPREME COURT REPORTS
[1969] 2 s.c.R.
pany. On February 22, 1966 the nomine~s of the Jalans were
appointed directors and two days later the dire?tors from the J .K.
group, except Gopal Krishna Singhania,
res1g~ed. From and
after that date the Jalans, according to the said agreement of
August 16, 1965 took over the management of the company.
The scheme envisaged the restarting of the mills which had
been closed from August 6, 1965, the repayment to categories
II, III and IV of the unsecured creditors, in some cases in full
and in the rest by instalments, the execution of the second mortgage by the company i£1 favour of category 1 (b) creditors or
issuing of debentures in their favour to secure repayment of Rs.
48 .13 lacs from out of the profits which may be made by the
company by working the said mills and the handing over of the
said investment shares to J.K. (Bombay) (P) Ltd.
There can
be no dispute that the scheme assumed that the mills would be
worked and that from the profits which ·may accrue the J.K. concerns and other creditors of category 1 (b) would be paid off by
1980 and in the meantime the debts due to them would be secured
by a debenture trust deed or a second mortgage. This naturally
meant that finance to work the mills had to be procured and that
was why cl. (4) provided that the Jalans would provide the requisite finance.
There is reason to believe, and it so appears from the record
also, that in the early stages at any rate, there was a genuine
desire on the part of the Jalans to implement the scheme.
In
March 1966, the company's solicitors were instructed to prepare
a draft debenture trust deed, whi'ch, after it was ready, was sent
to the Singhanias for approval. Likewise, the mills were restarted
on April 1, 1966, after spending, it was said, Rs. 5 lacs for
setting the machinery into working order. May 17, 1966 was
under the scheme the due date for payment in full to category
II cr~ditors and for payment of the first instalment to categories
III and IV(a) and (b) creditors. It is undisputed that the company made these payments,,
What remained, therefore, to be
implemented were the following : (i) the execution of second mortgage or the debenture trust deed, (ii) the transfer of the said investment shares and (iii) providing finance for working the
mills.
Regarding the second mortgage, it appears that after the draft
was sent for Singhanias' approval a dispute arose between the
parties regarding interest payable on Rs. 48 .13 lacs due to the
Sch. 'II' creditors, the Singhanias claiming the original interest
chargeable on advances made by them until the execution of the
second mortgage and the Jalans replying that interest at 1/ 4 %
only was payable from August 16, 1965, the date of the agreeA
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J. K. LTD. \I. KAISER SPG. co. (Shelat, J.)
8 75
ment between them and the J.K. group. Despite the controversy,
the company applied on September 27, 1966 to the Controller
of Capital Issues for sanctioning the debentures trust deed. It
appears that along with the application the company had to send
a treasury chalan for Rs. 50/-, that though a chalan was despatched it was under a wrong head, and, therefore, the Controller
asked the company to replace it by a proper chalan. This the
company did not do and the application remained unattended to.
In the meantime, the Singhanias wrote to the company inquiring
about the outcome of the company's application and requiring the
company to send a copy of the application and the order made
thereon. On coming to know that the sanction of the Controller
could not be issued because of the technical defect in the chalan
they sent Rs. 50/- to the Controller's office asking him to issue
the sanction. That, of course, could not be done as the Singhanias had no locus standi in the matter of the said application since
the application had to be made by the person desiring to issue
debentures and sanction could be given to such applicant only.
While this correspondence was going on, the Controller enquired
of the company when the requisite chalan could be expected. The
company thereupon requested him to keep the matter of sanction
in abeyance. Mr. Sen contended that the Controller had already
given his consent and that the only thing which remained to be
done was to issue it to the company which could not be done by
reason of the said defect in the chalan and that that being so, the
company could have executed the debenture trust deed and issued the debentures. The correspondence on this subject, however, does not factually support the contention. The Controller
did not proceed with the application as the company itself had
written to keep the matter in abeyance. There is, however, no
doubt that the company, if it had so desired, conld have obtained
the sanction and proceeded with the execution of the debenture
trust deed.
But it asked the Controller to keep the matter in
abeyance as the Jalans, rightly or wrongly, alleged that though
Rs. 48.13 lacs were stated in the scheme to be due to the J.K.
group, they were not entitled to that amount by reason of their
having committed several fraudulent acts during the period of
their management. We may mention that in the order made by
the Company Judge in the summons for directions taken out later
on by the Appellants he held that the affidavit of Goenka in which
these allegations were made was not in conformity with Order
XIX, rule 3 of the Code of Civil Procedure, and that therefore,
they could not be taken notice of, that assuming that these allegations were true, the said alleged acts were of certain individuals,
that the company's obligation was not affected thereby and that
the proper remedy was to take proceedings against those individuals.
876
SUPREME COURT REPORTS
[1969] 2 S.C.R.
As regards the said investment shares, the company got those
shares released and handed them over to J .K. (Bombay) (P) Ltd.
but failed to hand over the transfer deeds therefor. There can,
therefore, be no doubt that the company failed to implement this
part of its obligation.
As regards the implementation of cl. ( 4) of the scheme, the
J alans, as aforesaid, entered into an arrangement with Sushi!
Co., to which the J.K. Group were parties, under which Sushi!
Co. gave loans totalling Rs. 43 lacs including Rs. 23 lacs paid
to the Bank.
This arrangement was evidently made as moneys
were immediately required to pay to the Bank, without which
'the Bank's objection to the scheme could not be removed and
also because it would not presumably have been possible to have
further dealings with the Bank. After the initial difficulties with
the Bank were thus got over, fresh negotiations were started with
the Bank and an arrangement was made whereunder the Bank
agreed to advance Rs. 50 lacs provided the Central and the State
Governments gave their guarantees therefor.
Both the Governments were prepared to furnish their guarantees on a 50-50 basis
for an advance of Rs. 50 lacs by the Bank against a pledge of
stocks, stores etc. and a second charge on the company's fo:ed
assets which charge under Term 4(b) of Sch. 'C' of the agreement
of August 16, 1965 would have priority over the second mortgage in favour of Sch. 'B' creditors. The State Government even
agreed to issue a provisional letter of intent pending completion
of guarantee documents guaranteeing thereby 90 per cent of its
share of Rs. 25 lacs, whereupon the Bank advanced Rs. 25 lacs,
part of the intended loan of Rs. 50 lacs.
With regard to the
remaining Rs. 25 lacs, the Central Government was nqt prepared,
as the State Government did, to give its guarantee until the docu-
'ments were completed. On November 17, 1966 the Bank gave
its consent to the company creating a second charge in favour
of the two Governments on its 1 fixed assets which were subject
to a first mortgage in its favour.
Though the Bank was agreeable to facilitate the said transaction, the J.K. group were not.
By his letter dated July 7, 1966 Singhania contended that such a
charge in favour of the two Governments which would have
priority over the proposed second mortgage could onlv be in
favour of financial institutions mentioned in the said Term 4( d)
advancing the said loan and not the two Governments who were
giving only their guarantee, and therefore, the company could
grant to the said Governments only a third and not a second
charge.
Strictly speaking the company could give such a orior
charge to the Bank and not to the two Governments.
But the
objection was technical and was raised for creatin<> an obstacle
in the way of the company getting the said adva~ce from the
Bank. It really made no difference to the creditors whether the
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J, K. LTD. v. KAISER SPG. co. (She/at, !.)
8 77
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prior charge was given in favour of the Bank or the two Gov.ernments.
The result was that the Central Government declined
to give its guarantee and the f~~ther advance of R;s. 25 lacs became
unavailable.
Even the prov1s1onal guarantee given by the State
Government for a year in the first instance expired in July 1967.
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The position which ultimately emerged was that the company
got advances of Rs. 43 lacs from Sushi! Co. of which R.s. 23 !~cs
were paid to the Bank. Rs. 20 lacs, however, remamed with
the company presumably for meeting immediate payments under
the scheme, the expenses needed to restart the mills and for other
urgent purposes.
The company obtained from the Bank an advance of Rs. 25 lacs on the provisional guarantee of the State
Government and subsequently a further advance of Rs. 20 lacs
on a further charge over its fixed assets.
It was contended that
though the company obtained Rs. 45 lacs from the Bank, none
of it except Rs. 2 lacs remained with it for working the Mills as
out of Rs. 45 lacs Rs. 43 lacs were paid to Sushi! Co. against
the Joans given by that company. That, no doubt, is true, but
as a result of these transactions Rs. 20 lacs out of Rs. 43 lacs
advanced by Sushi! Co. still remained with the company, Rs. 23
lacs only having been used to pay off the said cash credit accounts
and in reducing the said term loan by Rs. 5 lacs.
It appears
from the record that at this stage the new directors had before
them two alternatives : (1) to continue its liability to Sushi! <,.::o.
in respect of Rs. 43 lacs or (2) to procure from the Bank a loan
of Rs. 50 lacs on fue guarantee of the two Governments. They
obviously could not do both, continue the loan from Sushi! Co,
and to obtain fue advances from the Bank as well, because fue
two Governments were prepared to furnish their guarantee only
on the company hypothecating all its movable assets in their favour
and giving a second charge on its fixed assets. Since the movable
assets were already pledged with Sushi! Co. unless they were
released from that company and pledged wifu the two Governments, no guarantee would be forthcoming from tl1em.
Sushi!
Co., therefore, had to be paid off and the assets pledged with it
released, unless of course that company was prepared to let go
its right under the said agreement to have movable assets of the
company hypothecated in its favour. In these circumstances it
is diffic1;1lt to s_ay that the n.ew management did anyfuing palpably
wrong m paymg off Sushil Company particularly as there was
every likelihood of the company obtainiug Rs. 50 lacs from the
Bank on tl!e guarantee of tl!e said two Governments.
There is
at the same time no doubt that no furtl!er finance was provided
by the Jalans over and above these transactions.
The learned Company Judge took the view that under cl. ( 4)
of tl!e scheme the Jalans were bound not only to procure but to·
:s 7 8
SUPREME COURT REPORTS
[1969] 2 S.C.R.
personally bring in the finance sufficient to work the mills, that
by paying off Sushi! Co. and not bringing in further finance they
starved the mills of finance and therefore. could not be heard to
say that the scheme had become unworkable.
Holding that the
scheme was workable he directed the J alans to provide the necessary finance which meant that they must bring in their own finance
in addition to any finance which they may or may not procure
from elsewhere.
He also directed the company to obtain sanction from the Controller of Capital Issues and to execute the
debenture trust deed within three weeks. In accordance with this
view he dismissed the winding up petitions filed by the company
and others. In the appeals against these orders the Appeal Court
held that as Singhania himself had admitted in his affidavit that
the company was commercially insolvent at the date when the
scheme was approved and that the scheme conld not be worked
unless the Jalans provided the necessary finance there was nothing
more to decide except as to whether the Jalans had undertaken an
obligation to provide finance.
The Appeal Court answered that
question holding that "there was no binding obligation or duty
undertaken by the Jalans to pay anything to the company or to
compulsorily provide finance", that the company had become commercially insolvent, that no reasonable or prudent person would
invest any of his moneys in the company, that its capital and
reserves had been wiped out, that its substratum had disappeared inasmuch as its business of manufacturing cotton cloth could
no longer be carried on with profit, and lastly, that therefore
the scheme which was on the assumption that the mills could work
and the company's debts would be paid from out of the profits ·
could not be implemented. . The Appeal Court was also of the
view that the Company Judge was in error in giving the said directions and in dismissing the petitions for winding-up. Accordingly,
it allowed the appeals and ordered winding-up. In doing so it
rejected the contention that Sch. 'B' cneditors hoo under the
scheme already become secured creditors and had priority over
the other unsecured creditors, or that in the alternative, the court
should order winding-up only after directing the company to execute a second mortgage in their favour and thus implement the
scheme which the company and the Jalans were bound to do.
It also held that even assuming that the Jal ans had brought about
an impasse due to which the mills could not be run with any prospect of profits, their mala fides were not relevant once the court
·came to the conclusion that the company had become commercially
insolvent.
Mr. Sen, as also the learned Attorney General, principally
relied on two facts in support of their stand that the Appeal Court
was in error in setting aside the directions given by the Company
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