# MIS MEGHAL HOMES PVT. LTD v. SHREE NIW AS GIRNI K.K. SAMITI AND ORS

- **Citation:** [2007] 9 S.C.R. 330
- **Court:** Supreme Court of India
- **Decided:** 2007-08-24
- **Bench:** G.P.Mathurandp.K.Balasubramanyan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mis-meghal-homes-pvt-ltd-v-shree-niw-as-girni-k-k-samiti-and-ors-23251
- **Pages:** 31

## Headnote

Companies Act, 1956-Sections 39/-394A and 466-Power to make
compromise or arrangements with creditors and members-Winding up of
C Company-Framing of scheme for revival of company under liquidationScheme approved by general meeting but not accepted by Division Bench of
High Court-Compromise or arrangement between promoters of Company
and sponsor of arrangement-Amended Scheme approved-Non-acceptance
by company court on the ground that Scheme not for revival-Official
Liquidator inviting offers for disposal of assets of co,mpany-lnterested persons
D including sponsors placed proposals-Scheme modified on basis of affidavits
of sponsors-Division Bench set aside order of company court and sanctioned
Scheme as modified-Challenge to, by promoters and others, who presented
their proposals-On appeal, Held: Modified scheme was not for revival of
Company in liquidation-Scheme was neither modified by general meeting
E of members of Company in terms with s. 391 nor requisite majority was
obtained and was also objected by shareholders-Also sponsors were nonmember of the Company-Promoters and others, who presented their scheme
had sufficient locus standi to challenge the d~cision of Division Bench--
Thus, order of Division Bench as also Company Court set aside-Proceedings
remitted back to Company Court.
F
SCML-textile mill ran into difficulties. The Bangurs, Somanis, and LIC
were its main shareholders and 20% were the sundry shareholders. State
Bank of India and Punjab and Sind Bank were the secured creditors. On
25.7.1984, Company Court ordered win~ing up of SCML. The Official
liquidator took charge of the affairs of SCML. On 1.9.1994, the Company
G Court directed the Official Liquidator to issue public notice inviting offers
for the revival of the mills, absorption of workmen and to purchase the assets
of the Company. Advertisement was issued. In pursuance thereof, three parties
submitted their offers. Ranganath Somani-contributory, filed Company
Application seeking directions of the Company Court for convening meeting
H
330
MEGHAL HOMES PVT.LTD. v. SHREE NIW AS GIRNI K.K. SAMm
3 3 l
of the creditors, contributories and other interested persons to consider a A
scheme proposed for the revival of the Company. The directions were given.
However, the Workers' Union and the three parties challenged the order of
Company Court. During pendency, meeting was held and the creditors,
contributories and workers approved the scheme. On 4.4.1995, the Division
Bench of the High Court set aside the direction for convening a meeting to B
consider the scheme proposed holding that the scheme proposed was not based
on any of the viability report regarding the revival of the company; that there
was a failure to disclose the latest financial position of the Company; that as
per Ranganath Somani the value of the land belonging to SCML was Rs. 200
crores; and that the intention was to acquire the huge lands and other real
estate belonging to SCML at a throw away price. The Division Bench directed C
the Company Judge to obtain viability report. Special Leave Petition was filed
challenging the decision of Division Bench and SLP was dismissed. State
Bank of India Capital Markets Limited prepared a viability report that only 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 D
ofa portion of the immovable property of the company.
On 29.6.2003, Somani Group and LBPL executed a Memorandum of
Understanding. Under MOU, LBPL was to get the right to develop and deal
with the lands of SCML on payment of Rs. 78 crores and 70,000 square ft. of
built up area or on paying Rs. 97.50 crores to SCML. Thereafter, on E
application filed by Somanis, Company Court directed the meeting to be
convened to consider the amended scheme. At the meeting, the amended
scheme was approved. Thereafter, Company Petition was filed seeking sanction
of the amended scheme. On 23. 7.2004, the Company

## Text

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A
B
MIS MEGHAL HOMES PVT. LTD.
v.
SHREE NIW AS GIRNI K.K. SAMITI AND ORS.
AUGUST 24, 2007
[G.P.MATHURANDP.K.BALASUBRAMANYAN,JJ.)
Companies Act, 1956-Sections 39/-394A and 466-Power to make
compromise or arrangements with creditors and members-Winding up of
C Company-Framing of scheme for revival of company under liquidationScheme approved by general meeting but not accepted by Division Bench of
High Court-Compromise or arrangement between promoters of Company
and sponsor of arrangement-Amended Scheme approved-Non-acceptance
by company court on the ground that Scheme not for revival-Official
Liquidator inviting offers for disposal of assets of co,mpany-lnterested persons
D including sponsors placed proposals-Scheme modified on basis of affidavits
of sponsors-Division Bench set aside order of company court and sanctioned
Scheme as modified-Challenge to, by promoters and others, who presented
their proposals-On appeal, Held: Modified scheme was not for revival of
Company in liquidation-Scheme was neither modified by general meeting
E of members of Company in terms with s. 391 nor requisite majority was
obtained and was also objected by shareholders-Also sponsors were nonmember of the Company-Promoters and others, who presented their scheme
had sufficient locus standi to challenge the d~cision of Division Bench--
Thus, order of Division Bench as also Company Court set aside-Proceedings
remitted back to Company Court.
F
SCML-textile mill ran into difficulties. The Bangurs, Somanis, and LIC
were its main shareholders and 20% were the sundry shareholders. State
Bank of India and Punjab and Sind Bank were the secured creditors. On
25.7.1984, Company Court ordered win~ing up of SCML. The Official
liquidator took charge of the affairs of SCML. On 1.9.1994, the Company
G Court directed the Official Liquidator to issue public notice inviting offers
for the revival of the mills, absorption of workmen and to purchase the assets
of the Company. Advertisement was issued. In pursuance thereof, three parties
submitted their offers. Ranganath Somani-contributory, filed Company
Application seeking directions of the Company Court for convening meeting
H
330
MEGHAL HOMES PVT.LTD. v. SHREE NIW AS GIRNI K.K. SAMm
3 3 l
of the creditors, contributories and other interested persons to consider a A
scheme proposed for the revival of the Company. The directions were given.
However, the Workers' Union and the three parties challenged the order of
Company Court. During pendency, meeting was held and the creditors,
contributories and workers approved the scheme. On 4.4.1995, the Division
Bench of the High Court set aside the direction for convening a meeting to B
consider the scheme proposed holding that the scheme proposed was not based
on any of the viability report regarding the revival of the company; that there
was a failure to disclose the latest financial position of the Company; that as
per Ranganath Somani the value of the land belonging to SCML was Rs. 200
crores; and that the intention was to acquire the huge lands and other real
estate belonging to SCML at a throw away price. The Division Bench directed C
the Company Judge to obtain viability report. Special Leave Petition was filed
challenging the decision of Division Bench and SLP was dismissed. State
Bank of India Capital Markets Limited prepared a viability report that only 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 D
ofa portion of the immovable property of the company.
On 29.6.2003, Somani Group and LBPL executed a Memorandum of
Understanding. Under MOU, LBPL was to get the right to develop and deal
with the lands of SCML on payment of Rs. 78 crores and 70,000 square ft. of
built up area or on paying Rs. 97.50 crores to SCML. Thereafter, on E
application filed by Somanis, Company Court directed the meeting to be
convened to consider the amended scheme. At the meeting, the amended
scheme was approved. Thereafter, Company Petition was filed seeking sanction
of the amended scheme. On 23. 7.2004, the Company Court rejected the
amended scheme holding that the scheme presented was not a scheme for
revival but for disposal of the Company's assets which then vested in the F
Official Liquidator; that it was only a mode of disposal of the Company's assets;
and that the amount of Rs. 97.50 crores offered by LBPL was very less than
the amount of Rs. 200 crores. The Company Court directed the issue of
advertisements inviting offers for the assets of SCML. Official Liquidator
issued advertisements inviting offers.
G
LBPL, Somanis and Workers' Union challenged the order dated
23. 7.2004. The Division Bench of High Court passed an order directing the
Somanis, LBPL and the various interveners who had made offers~ to place
their proposals for rehabilitation on record; to file affidavits for down payment
for release to the workers; and Somanis to state whether they would be willing H
332
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A to accept any such better scheme. Some affidavits were filed. LBPL stated in
its affidavit that in addition to the payment of Rs. 45 crores to the workers, it
would set up a spinning unit at the cost of Rs. 40 crores on the 7,50,000 sq
ft coming to them under the Scheme; it would construct 30,000 square ft unit,
housing a sch.ool and other accommodation at a cost of Rs. 15-20 crores.
B Rangnath Somani tiled affidavit that the Somanis would be willing to consider
any better scheme in the interests of SCML. However, Ramesh Somani-copropounders of the scheme filed affidavit that he fully supported the scheme
of LBPL. The court received the affidavits filed on behalf of the LBPL but
c
refused to receive the two affidavits, Rangnath Somani wanted to file. By order
dated 21.3.2005, the Division Bench of High Court allowed the appeals and
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.
Hence, the present appeals by Rangnath Somani and interveners-persons who
made offers pursuant to the direction of the court.
D
Appellants contended that 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 hy 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
E cannot accept a scheme proposed under Section 391 of the Act; that the
appellant in Civii Appeal Nos. 3171-3181 was associated with the original
Scheme for which approval was sought from the Company Court; that the
appellant had in fact deposited a certain sum as per the direction of the court;
that in the instant case ~odification of the earlier Scheme was sought in which
F the appellant was involved; and that there was a specific direction by the
Division Bench to the appellant and others to p_resent their Schemes/Proposals
before the court and they had filed affidavits in that behalf thus the appellants
had sufficient locus standi.
Respondents contended that it was clear that a Company Court could
G approve, independently of section 466 of the Act, a scheme ~nd could take the
company out_ofliquidation and even pass an order of stay in terms of Section
391 read with Section 392 of the Act; and that the appellants in Civil Appeal
Nos. 3179-3181 of2005 aod Civil Appeal Nos. 3182-3184 of20Q5 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 since
H neither of them were creditors, contributories or debenture holders and were
..
...
MEGHAL HOMES PVT.LTD. 1•. SHREE NIW AS GIRNI K.K. SAMITI
3 3 3
total strangers to SCML, having nothing to do with the proposal and acceptance A
of Scheme under section 391 of the Act.
Allowing Civil Appeal Nos. 3179-3181of2005,3182-3184 of2005 and
4377 of 2006, and dismissing Civil Appeal Nos. 3569-3571 as withdrawn, the
Court
HELD: 1.1. Once an order of liquidation had been passed on an
application under Section 433 of tht> Companies Act, 1956 the winding up
B
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 C
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. [Para I 6) (348-A-C)
D
1.2. SCML was ordered to be wound up on 25.7.1984. When the Scheme
was originally presented on 3.10.1994, at a time the winding up order was
already in existence. It cannot be said that section 391 would not apply to a
Company, which has already been ordered to be wound up in view of the
language of section 391(1) of the Act, which speaks ofa Company· which is E
being wound up. If the definition in section 390(a) of the Act is substituted,
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 39J(l)(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. (Para 16] (348-D-G)
1.3. 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 ofa 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
F
G
H
334
SUPREME COURT REPORTS
[2007] 9 S.C.R.
ultimately resulting in the death of the company by an order under Section
A 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 orproposal 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
B 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. The Court
has to see to the bonajides 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. 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
C 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 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
D 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.
(Paras 22 and.231 (355-C-H; 356-A)
1.4: Sections 391 to 394A are not·to be-read in isolation but with
reference to the other relevant provisions <>fthe Act. The need is to satisfy
E the requirements of both sections 391 to 394A and section 466 of the Act
'
while dealing with a Company which has been ordered to be wound up. In other
words, there is 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 arrangementput forward in terms of
F Section 391 of the should be accepted or not. There is no conflict in applying
both the provisions and in harmoniously construing them and in finding that
while the court would not sit in appeal over the commercial wisdom of the
shareholders of a company, it would certainly consider whether there is a
genuine attempt to revive the company that has gone into liquidation and
G whether such revival is in public interest and conforms to commercial
morality. Therefore, 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
H by a private arrangement. If it comes to the latter conclusion, then it is the
MEGHAL HOMES PVT.LTD. v. SHREE NIW AS GIRNI K.K. SAMm
3 3 5
duty of the court in which the properties are vested on liquidation, to dispose A
of the properties, realize the assets and distribute the same in accordance
with law. !Para 251 [356-G; 357-A-D)
Miheer H. Mafatlal v. Mafatlal Industries Ltd, 11997) 1 S.C.C. 579,
referred to.
Principles of Statutory Interpretation by Justice G.P. Singh, referred
to.
B
1.5. Section 392 of the Act 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 It cannot C
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 D
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 Act for approval of the compromise or arrangement as
now modified or proposed to be modified. It cannot be said that the scheme E
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. Also
there is serious objection to the modifications by one of the Soman is who are
the promoters of the Company in liquidation and the sponsors of the
arrangement and that objection cannot be brushed aside.
tpara 27) (357-H; 358-A-F)
1.6. What has now been accepted by the Division Bench, is not the
scheme as modified by the general meeting as contemplated by Section 391
F
of the Act At least two of the modifications having ramifications are based on
undertakings or statements made on behalf of LBPL which is not one of the G
entities contemplated by section 391 and there appears to be difference of
opinion on that modification even among the Somanis. There is also the
question whether the proposals ofa 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. The scheme with the modifications as now proposed or
accepted, has to go back to the General Meeting of the members of the H
336
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A Company, called in accordance with Section 391 of the Act and the requisite
majority obtained. [Para 26) [357-E-F)
1. 7. 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. Similarly, the amendment by way of an affidavit on
B 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
C 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, it is difficult to say that it is
D a scheme for revival of the company, the clear statutory intention behind
entertaining a proposal under section 391 of the Act.
[Para 20) .(352-H; 353-A-D)
1.8. The modifications proposed altered the position of the shareholders
vis-a-vis the Company. Instead of the company retaining and reviving the part
E of the spinning unit as recommended by the State Bank of India C&pital
Markets Limited, 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, as adopted in the General Meeting, now the Company would have
nothing to do with the mill lands and the whole of the mill lands would pass
F on to LBPL on LBPL paying a value of Rs. 97.50 crores to SCML and LBPL
would 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 modmcation 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
G 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 members of SCML
and cannot 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
H necessary for the proper working of the compromise or arrangement In any
,J
MEGHAL HOMES PVT.LID. v. SHREE NIW AS GIRNI K.K. SAMITI
3 3 7
event, the Division Bench of the High Court ought to have directed a 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. Thus, the decision of the Division
Bench as also of the Company Court is set aside and the proceedings are
remanded back to the Company Court.
(Paras 19, 28 and 291 (358-F; 350-F; 358-F-H; 359-A-Dl B
1.9. Workers' Union submitted 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 and also highlighted the additional benefits C
that would accrue to the workers under the present scheme. Though, this
aspect of the matter cannot be appreciated 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, interfering D
with the deci'iion of the Division Bench on the ground put forward by Workers'
Union of benefit to the workers cannot be avoided. (Para 30) (359-E-F)
2.1. In the ligh.t of the facts of the case and the orders of the Division
Bench dated 4.4.1995 and 15.12.2004, it cannot be said 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 to raise a contention that they
have no role to play in the approval of a Scheme under Section 391 of the
Companies Act and their appeals should be rejected on that ground. The case
E
of the appellant in Civil Appeal Nos. 3171-3181 of2005 involves a further F
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 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. LBPL, which is now sought to be associated in the modified G
Scheme also stands on the same footing as the appellant in Civil Appeal Nos.
3179-3181 of2005. 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, the two sets of appeals could not be
H
338
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A dismissed as appeals by persons who have no locus standi to maintain them.
(Para 13) (346-8-E]
2.2. With regard to the locus standi of Rangnath Somani to maintain_
the appeal, it was submitted that Rangnath Somani was a co-sponsor of the
Scheme which was accepted and approved by Division Bench and Rangnath
B Somani 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 as such is estopped from questioning the order of the
Division Bench in an appeal. Rangnath Somani submitted that the Scheme as
approved by the general meeting of the concerned, was not accepted by the
C Division Bench and certain modifications were brought in on the basis of
11ffidavits filed on behalf of LBPL and made part of Scheme of the Division
Bench and objection of Rangnath Somani was not dealt with and he always
had a right to object to such modifications or to contend that such
modifications must go back to the general meeting for consideration and
approval. There is substance in the submission of Rangnath Somani and it
D cannot be said that Rangnath Somani is estopped from filing an appeal against
the decision of the Division Bench ..
E
!Paras 14 and '15) (346-G-H; 347.:.A, 8-C]
CIVIL APPELLATE JURISDCTION: Civil Appeal Nos. 3179-3181 of
2005.'
From the final Judgment and Order dated 21.3.2005 of the High Court
of Judicature at Bombay in Appeal Nos. 512, 527& 534 of2004.
WITH
F
C.A. Nos. 3182-3184 and 3569-3571 of2005 and 4377of2006.
R. Mohan, ASG., C.A. Sundaram, C.S. Vaidyanathan, Shyam Diwan,
Aspi Chinoy, Iqbal Chagla, Dr. Abhishek M. Singhvi, Anil B. Diwan, R.F.
Nariman, Indu Malhotra and Rakesh Dwivedi, Mukul Taly, Rohini Musa; Jatin
G Zaveri, Haripriya Padmanabham, Senthil Jagadeesan, E.C. Agrawala, Mahesh
Agrawal, Rishi Agrawala, Gaurav Goel, Amit Sharma, Neha Aggrawal, Purnima
Bhat, P.H. Parekh, Pallav Shishodia, Sameer Parekh, Sumit Goel, Nitin Thukral,
Kush Chaturvedi, Yash Kapadia, Ravi Gandhi, Dhoyal Vussonji (for P.H.
Parekh & Co.) Amit Bhandari, Nandini Gore, Debmalya Banerjee, Sonia Nigam,
Manik Karnajawala, S.M. Dharap, Aniruddha Joshi, Vinay Navare, Naresh
H Kumar, C. Mukund, Pankaj Jain, Ashok Kr. Jain, Shashank Sharma, Amit
MEGHALHOMESPVT.LID. •. SHREENIWASGIRNIK.K.SAMITI[BALASUBRAMANYAN,J.) 339
Kasera, Bijoy Kumar Jain, Indra Sawhney, Indu Sharma, Bina Gupta, Shweta A
Verma, Gaurav Singh, Pratap Venugopal (for K.J. John & Co.), Sheela Goel.
Shantanu Krishna, Mukti Chowdhary, Ramesh Kumar Singh, Ramesh Babu
M.R., A.V. Rangam, Buddy A. Ranganadhana and Rajiv Nanda (for Official
Liquidator Ravindra Kumar) for the appearing parties.
The Judgment of the Court was delivered by
B
P.K. BALASUBRAMANY AN, J. 1. These appeals arise out of
proceedings in the Company Court in the matter of Mis 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 C
Lower Pare! 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 D
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
l. 9.1994 directing the Official Liquidator to issue a public notice inviting offers E
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 F
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' G
union and three of the parties who had submitted their offers in response to
the advertisement issued by the Official Liquidator 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
H
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[2007] 9 S.C.R.
A 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
l.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
B 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
C 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:
D
"(l) Whether it is possible and viable to reopen the mills and/or any
E
F
G
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 deterrninied 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 s_hareholders 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:
H
"It is open for the learned Company Judge to give any other suitable
""
...
MEGHALHOMESPVT.LID. ''· SHREEN!WASGIRNIK.K.SAMITI[BALASUBRAMANYAN,J.] 34 J
directions in the matter keeping in mind that the whole anxiety is to A
revive the Company and to restart the mills which is in the interest
not only of the workers and creditors ef 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:
B
c
"It is not possible to reopen the mills or any portion of it without D
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 E
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 ifthe offer comes from a shareholder,
F
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 G
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 Iakhs. 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 H
342
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A party brought in Rs. I 2367.4 I 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 the
mills was possible, sale by the Official Liquidator of the assets by pu~lk
auction may not arise. It was also suggested that delay in implementing the
B revival package will escalate the liability and would lead to further_~~~ei:ioration
in the condition of the spindleage proposed to be revived.
7. On 7. I 1.1998, a new Industrial Location Policy of the Government of
Maharashtra became operative. That applied to all industries in the Mumbai
C 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, Soman is, and the Life Insurance Corporation of India and the sundry
D shareholders held about 10% 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
E 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
(LRPL ). 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
F 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. lt·was also
provided that if any additional funds were required for settling the affairs of
the Company, the additional funds would h!lve to be brought in by SCML.
In other words, on payment of Rs. 78.crores and handing over a built up area
G of70000 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
H
MEGHAL HOMES PVT.LID. v. SHREE NIWASGIRNI K.K. SAMITI [BALASUBRAMANY AN,J.) 343
paragraph 1.5 of the original scheme which had indicated that sale of the A
a~sets or properties of SCML was not envisag~d 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 B
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 further finance being required than the amount agre¢d to be C
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.
IO. 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 D
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, E
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 F
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 G
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 H
344
SUPREME COURT REPORTS
[2007] 9 S.C.R.
A 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
B 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 con,cered with their inter se dispute here)
to state whether they would be willing to accept any such better scheme.
C 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
D the cousins filed an affidavit 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
E stating that the propounders of the scheme would set up a textile unit for
rehabilitation of the workers of SCML at Sholapurat 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
F 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
G 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 of2005
filed by one of the interveners is sought to be withdrawn.