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PETITIONER: J.K. (BOMBAY) (P) LTD.

       Vs.

RESPONDENT: NEW KAISER-I-HIND SPG. & WVG. CO. LTD. & ORS. ETC.

DATE OF JUDGMENT: 22/11/1968

BENCH: SHELAT, J.M. BENCH: SHELAT, J.M. BHARGAVA, VISHISHTHA VAIDYIALINGAM, C.A.

CITATION:  1970 AIR 1041            1970 SCR  (3) 866  CITATOR INFO :  R          1979 SC 734  (12,16)

ACT: Companies  Act 1 of 1956 Ss. 391, 392 & 433-Scheme under  s. 391-Scope  and  nature of-Effect on right of  creditors  and other  parties-On scheme becoming unenforceable  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  commercial 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.

HEADNOTE: On  a  winding-up  petition being filed in  respect  of  the respondent  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 Company  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  m 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 from  certain financial 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      of  the  High  Court approved the scheme which provided, inter alia, for payments to various categories of creditors within specified  periods and for the execution of a second mortgage in favour of  the

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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 Issues 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 mills".  The  winding-up  petition was  then withdrawn, the provisional  liquidator  discharged and  ’the  J group Wok over the Company’s  management.   The mills  were  restarted  in  April,   1966  and  payments  to various  categories of creditors other than the  Schedule  B creditors  were  duly  made.  However  in  view  of  certain disputes between the two groups, the company did not execute the mortgage or the proposed debenture trust deed in  favour of the Schedule B creditors.     The  mills continued 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 867 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  the  High Court took the view that under clause (4) of 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 unsecured  creditors in Schedule B. He  therefore  dismissed the  winding-up petitions.  In appeal, a Division  Bench  of the  High Court held 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 of the company.     In  appeal  to this Court it was contended   inter  alia that the Appeal Court  was in error 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  pan  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 instance 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 second  mortgage  being

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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 property to a charge, the property became subject to a charge in presenti 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 provide 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  monies  without  even specifying how much ’and for how long he should provide.  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 in the  circumstances then prevailing the scheme could  not  be satisfactorily  worked  and, therefore, a  winding-up  order under s. 392(2) had become inevitable.  [887 H---888 B] 868   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 responsibility  to  provide finance required for running the; mills so that from out  of their  profits the obligation to pay the creditors could  be met in the manner laid down in the scheme.  Therefore, the J group were to "provide" finance either on the credit of  the company or on the security of its ’assets, or if  necessary, their  own  monies 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 them in reasonable profit.   Such a  constitution  would  be contrary to  the  fact  that  the creditors  knew there was hardly any chance of  their  being paid  and  wore anxious that instead of taking  the  company into  liquidation  the mills should 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 therefore 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  procedure  thereby  prescribed  the absence of that individual ’agreement by every member of the clause. to be bound by the scheme which  would otherwise  be necessary  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 creditors 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  its creditors is that so long as it is carried  out  by the  company  by regular 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 and to  the extent provided in the scheme.  It

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cannot  be said that a  winding-up order can Only be  passed after  compelling the company to complete the  rights  which are still incomplete under the scheme. [891 F] Once a scheme is cancelled under s. 39’2(2)  on the   ground that  it  cannot be satisfactorily worked and  a  winding-up order  passed, such order is deemed to be for  all  purposes one  made under s. 433.  It is not as if because the  scheme has  been  sanctioned under s. 391 that a  winding-up  order under s. 39’2(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 would mean that where a company makes 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  order  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  I 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. 869     (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  a charge in presenti 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 contention  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 Choudhuri, 55 I.A. 107; 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  not  be satisfactorily  worked  with or without  modifications,  the only  alternative for that Court was to pass the  winding-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 appellants   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  had, 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  been executed, the appellants 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 C]     Bank of Scotland v. Macleod [1914] A.C. 311 at 317, 318; Tulsidas  Jasrai  Parekh v. The Industrial Bank  of  Western India  32 Bombay Law Reporter 953 at 967; Re  Anglo-Oriental Carpet   Manufacturing  Company [1903] 1 Ch.  914,  referred to.     The principle that no act of a court should be permitted

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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 mortgage in their favour. [892 D]     Premila  Devi  v. Peaples Bank of Northern  India  Ltd., [1938]  4 All E.R. 337; Re Garner Motors Ltd., [1937] 1  All E.R.  671; Jang  Singh v. Brijlal, [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.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos. 1399  1402 of 1968.     Appeals  from  the judgment and decree dated  April  26, 1968 of the Bombay High Court in Appeals Nos. 96, 97, 98 and 86 of 1967. 870     A.K.  Sen,  Krishna Sen, Rameshwar Nath   and   Mahinder Narain, for the appellant (in all the appeals).     S.J.  Sorabjee,  1.  M.  Chagla,  K.D.  Mehta,  Ravinder Narain, J.B. Dadachanji and O.C. Mathur, for respondent  No. 1 (in the appeals.).     F.S.  Nariman and 1. N. Shroff, for respondents  Nos.  2 and 3 (in C.A. No. 1399 of 1968).     B.  Divan,  Rameshwar Nath  and   Mahinder  Narain,  for Creditors Nos. 1 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. 1399 of 1968). The Judgment of the Court was delivered by     Shelat,J.  These appeals, rounded on a certificate,  are directed  against  the  order of the High  Court  of  Bombay ordering the winding-up of Respondent No. 1  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 agreement was made  between the   J.K.   group  and  Nandial  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 1/4% and not to demand  repayment  of

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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 provid- 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   u13 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 company, 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  secured,  the company took out on October 19,  1965  a summons  submiting  a scheme for the sanction  of  the  High Court.  It would seem that though the other creditors of the company  were  willing to accord their consent to  the  said scheme,  the Bank was not, unless two cash  credit  accounts under which the company owed to it Rs. 19 lacs were paid off and a term loan of Rs.  26.75  lacs 872 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 February 14,  1966 an agreement between the company,  (still under the old management), the  Jalans  and

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Sushil  Investment (P) Ltd., a company under the control  of the Jalans, was made whereunder Sushil 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  Sushil Company.  Sushil 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 Jalans 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 S‘h. ’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 k: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 873 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.  C1. (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

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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  37% 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  121/2% payable within 90  days  from  the sanctioning of the scheme.     C1.  (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  company  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.     The  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 pany.  On February 22, 1966 the nominees of the Jalans  were appointed  directors and two days later the  directors  from the  J.K. group, except Gopal Krishna  Singhania,  resigned. 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 H, 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 in 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 (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,  which, 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  creditors  and for  payment of the first instalment to categories  III  and

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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. ’B’ 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  agree- 875 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  stand  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, could 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

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individuals. 876     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 therefore.   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  Jalans, as aforesaid, entered into an arrangement  with Sushil  Co.,  to which the J.K. Group  were  parties,  under which Sushil 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  therefore.   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 fixed 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  not prepared, as the State Government did, to give its guarantee until  the documents 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 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 only 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  prior  charge  to  the Bank  and  not  to  the  two Governments.  But the objection was technical and was raised for  creating an obstacle in the way of the company  getting the  said  advance  from  the  Bank.   It  really  made   no difference to the creditors whether the 877 prior  charge  was given in favour of the Bank  or  the  two Governments.   The  result was that the  Central  Government declined  to give its guarantee and the further  advance  of Rs.  25  lacs  became  unavailable.   Even  the  provisional guarantee  given by the State Government for a year  in  the first instance expired in July 1967.     The  position  which  ultimately emerged  was  that  the company got advances of Rs. 43 lacs from Sushil Co. of which Rs.  23 lacs were paid to the Bank.  Rs. 20  lacs,  however, remained with. the company presumably for meeting  immediate payments  under the scheme, the expenses needed  to  restart

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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  Sushil  Co. against the loans 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 Sushil 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 Sushil Co. in  respect  of Rs. 43 lacs or (2) to procure from the Bank a loan of Rs. 50 lacs  on  the  guarantee  of  the  two  Governments.    They obviously  could not do both, continue the loan from  Sushil Co.  and  to  obtain the advances from  the  Bank  as  well, because  the 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 Sushil Co. unless they were released from that  company and pledged with the two Governments, no guarantee would  be forthcoming  from  them.  Sushil 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 difficult  to  say  that the  new  management  did  anything palpably wrong in paying off Sushil Company particularly  as there  was every likelihood of the company obtaining Rs.  50 lacs  from  the  Bank  on the  guarantee  of  the  said  two Governments.   There  is at the same time no doubt  that  no further  finance was provided by the Jalans over  and  above these transactions.     The  learned Company Judge took the view that under  el. (4) of the scheme the jalans were bound not only to  procure but to 878 personally  bring  in  the finance sufficient  to  work  the mills,  that by’ paying off Sushil 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 Jalans 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 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 could 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

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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’ creditors had  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 Jalans  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 879 Judge  and  in ordering instead winding-up of  the  company. These were (1) the failure of the Jalans to provide  finance which would include their bringing in their own monies,  and (2)  giving away the processing unit of the mills which  was the  most  profit yielding part of the mills for  a  nominal value to Jhunjhunwalas, the nominees of the Jalans.  Mr. Sen commended the following propositions for our acceptance: (1) that  the  scheme  when sanctioned by  the  court  became  a statutory  bargain and part of the  company’s  constitution, and  therefore,  all  further  arrangements  of  the  pany’s affairs had to be on the basis of the rights and obligations thereunder;  (2)  that if the company were to be  wound  up, such  winding-up can 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, (3 ) that 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 (4) that the winding-up of the company  being at the instance of the Jalans 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.  He firstly argued that no winding-up  order should at all have been passed and the scheme ought to  have been ordered to be implemented as the Company Judge did, and secondly, in the alternative, that even if the company  were to  be  wound  up,  it should be  so  done  subject  to  the implementation of the rights and obligations of the parties. The  learned Attorney General adopted these contentions  and in addition urged that Sch. ’B’ creditors were entitled to a charge  on  the company’s as. sets not merely  on  the  said second  mortgage being executed, but irrespective of it  and in  presenti  under  the scheme and the  said  agreement  of August 16,  1965.     As  regards  financing the company, the  contention  was that  under cl. (4) of the scheme the Jalans were  bound  to

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bring in their own monies required for working the mills and that  they  could not contend that because  they  could  not procure. finance on the credit of or on the security of  the assets  of  the company,. their obligation  was  over.’  The Company  Judge agreed with this view, but the Appeal  Court, as aforesaid, took a different views held that under cl. (4) it  was not as if the Jalans were bound’ to provide  finance in  all  circumstances or were bound to bring in  their  own monies.   In our view both the Company Judge and the  Appeal Court took, extreme views of cl. (4).  It is clear from  the sanctioning  order  of Mody, J., that the  company  at  that stage  was, and that fact was well-known to  all  concerned, commercially  insolvent.  A winding-up petition was at  that stage pending before the High Court.  There were, therefore, two  alternatives  before  creditors,  either  to  take  the company in liquidation, Sup CI/69-5 880 in  which  event  the  creditors  knew,  as  Mody,  J.,  has observed,  that  they could not be paid their  dues,  or  to restart the company under an arrangement whereunder it would work  the mills and pay the debts gradually from out of  the profits  such   debts  in the meantime being  secured  by  a second  mortgage.  The basis of the scheme,  therefore,  was that a new management would replace the old, the mills would be  restarted  and  the unsecured creditors  would  be  paid gradually from the profits.  Every one including the  Jalans must have realised that the mills could not be restarted and profits  made unless necessary finance for working them  was furnished.  The scheme which was framed and sanctioned  with their  concurrence  threw  the  responsibility  of  bringing finance on the Jalans.     It  is true, as argued by Mr. Nariman, that  the  scheme was essentially an arrangement between the company. and  its creditors  and  that the Jalans did not  give  any  personal undertaking to the Court. Nevertheless, it was sanctioned by the  court  after the Jalans had concurred and  given  their assent through cl. (4) that they would provide the necessary finance.   The word ’provide’ in cl. (4) is of  wide  import which  would mean that they would arrange for  the  finance, either  on the credit of and security of the assets  of  the company   or  if  necessary,  by  bringing  in  the   monies themselves.   In view of the language of cl. (4)  we  cannot agree  with Mr. Nariman that the clause meant  only  finance secured on the assets of the company.  At the same time even though the scheme is not a mere agreement but has  statutory force it has 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 Jalans took the responsibility  to provide finance required for running the mills so that  from out  of  their profits the obligation to pay  the  creditors under  cl.  2(ii) of the scheme could be met in  the  manner therein  laid down.  Therefore, the Jalans were  to  provide finance  either  on  the credit of the  company  or  on  the security  its assets, or if necessary, their own monies  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 as the Company Judge  appears  to have thought, even if there was no prospect of running  them at reasonable profit.  Such a construction would be contrary to  the fact that the creditors. including the  workers  and those who had supplied stores and other materials knew  that there  was  hardly  any  chance of  their  being  paid,  and therefore,   with few exceptions, were anxious that  instead of  taking the company into liquidation the mills should  be

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restarted  and  their  dues  paid bit  by  bit.   Thus,  the assumption on which the scheme was made was that there was a possibility  of running the mills successfully and that  the creditors  would be paid gradually out of the profits  which the mills would make. 881     In the events that have happened it is impossible to say that  the Jalans had no genuine desire to work the mills  or that  they did not; in the initial stages at any rate,  make arrangements for financing the mills.  This can be seen from the  arrangement  made with Sushil Co., their  bringing  the mills  machinery  in  working  order  after  the  mills  had remained  closed for nearly 8 months and  their  arrangement with  the Bank and the two Governments for a loan of Rs.  50 lacs.  It is true, as pointed out by Mr. Sen that out of Rs. 45 lacs received from the Bank Rs. 43 lacs were utilised for paying  off Sushil Co. leaving only Rs. 2 lacs therefrom  as working  capital.  But, as already stated, they had to  have the  assets pledged with Sushil & Co. released in  order  to procure the guarantee of the two Governments on which  alone the  Bank  was prepared to advance the new loan  of  Rs.  50 lacs.  The  two Governments on their part were  prepared  to stand  a  guarantee only if the company gave them  a  second charge  on its fixed assets pledged and a  hypothecation  of all  its movable assets. That could only be done  by  paying off  Sushil  & Co. and having the assets with  it  released. Whether  what they did in these circumstances was  right  or wrong, the fact remains that had the deal with the Bank  and the  two Governments gone through, there would have  been  a further  sum of Rs. 25 lacs over and above Rs. 20 lacs  left from the loan by Sushil & Co. available as working  capital. Besides  restarting  the mills, it is  undisputed  that  the company,  as  provided  by the scheme  paid  off  the  small creditors  and  also  paid  the  first  instalment  due   to creditors  of  categories  Iii and IV(a) and  (b).   It  is, therefore,  impossible to say that the Jalans did  not  make efforts to work the mills or to implement the scheme.  There is  evidence  on  record, though the figures  given  by  the Jalans  are not admitted by the appellants, that though  the working  of  the mills was at a loss it was  continued  upto June 1967.     But  the  contention was that the mills  did  not  yield profits  because  of  the  Jalans  having  parted  with  the processing  unit to Jhunjhunwalas.  The allegation was  that the company should have worked this unit as it was the  most profit-yielding  department,  that  Jhunjhunwalas  were  the nominees  of Jalans, and that the rent or  compensation,  as the  case  may  be, was a nominal one.   The  Company  Judge directed termination of the agreement as he thought that  if that   unit   had  not  been  parted  with  at   a   nominal consideration it was possible to run the mills at profit and to implement the scheme.  The Appeal Court rightly disagreed with  the premises on which the said conclusion was  arrived at.  There  could  be  no valid  objection  to  the  company entering into a lease or a licence agreement, for  Singhania himself  had  in September 1965 asked  permission  from  the Textile  Commissioner  to separate this unit and  either  to sell or lease it and the Textile Commissioner had 882 assured  him  to  consider  the  proposal  favourably.   The argument,  nonetheless, was that in 1964-65 the company  had earned  Rs.  17.12 lacs from processing  work  of  outsiders after processing its own goods, that after entering into the said  agreement  the company had in 1966-67 paid  Rs.  21.77 lacs  for  processing its own goods and in the  bargain  got

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only Rs. 50,000 a month. On these figures it was urged  that whereas the company earned a profit of Rs. 17 lacs in  1964- 65,  it  incurred  a loss of a like amount in  196667  as  a result of the aforesaid bargain.  On these figures only  the Company  Judge  directed the company to terminate  the  said agreement.   The figures were, however,  misleading  because Rs.  17.12 lacs were the gross receipts and not net  profit. Before  arriving  at  net profits, cost  of  raw  materials, labour, depreciation etc. had to be worked out and then only a  true  picture of the working of the  unit  would  emerge. Besides,  the,figure  of  Rs. 17 lacs  does  not  take  into account  the  cost  of processing the  company’s  goods  and whether that had resulted in profit.  This is important when it is remembered that the company paid Rs. 21 lacs in  1966- 67  for processing its goods though Jhunjhunwalas  were   to charge  only cost price for processing the company’s  goods. It was, therefore, unsafe from a few figures to jump to  the conclusion that had the unit not been parted with the  mills would  have made profit. It was said that the Jalans  should have produced the company’s accounts if they wanted to  show that the terms on which they had parted with the said  ,unit were  profitable  to the company.  The Jalans  gave  several reasons why the account could not be produced.  Whether they were  true  or not, even if the accounts had  been  produced they could not have thrown any light as no separate accounts were  kept  of the income and  expenditure of  the  unit  in 1964-65.  But then if the unit was the most  profit-yielding unit and had made large profit in 1964-65 one  wonders   why Singhanla  should  have applied for permission  to  sell  or lease  it. It is also difficult to believe that the  Jalians would  let  out the unit at a nominal consideration  only  a month after they had restarted the mills as in the beginning at  any rate they were genuinely interested in  working  the mills  and  implementing  the scheme unless  of  course  the allegation that Jhunjhunwalas were their nominees was  true. But,  as  the Appeal Court has rightly said,  no  proof  was offered in support of that allegation.     The  next question is whether the closure of  the  mills was due to the Jalans having starved them of finance. Having perused the record and after hearing counsel we do not think such  a conclusion possible. The correspondence between  the Textile  Commissioner, the Mills Federation and the  company shows  that  from the middle of 1966 and onwards  there  was great  difficulty in obtaining adequate quantity  of  cotton and particularly of the type required by 883 the mills, that the supply position was worsening day by day and  though  the Government had fixed ceiling prices  and  a little  later  on enhanced them, dealers in  cotton  charged prices  in  excess of the ceiling prices. Even  the  Textile Commissioner had to acquiesce in the mills purchasing cotton at  prices  nearly 20% more than even the  enhanced  ceiling prices.    Realising   the   difficulties   in   which   its member/mills were placed, the Federation at first evolved  a policy of voluntary restraint and advised its members not to purchase  cotton in excess of their requirements  for  three months, to purchase only at ceiling prices and to close down the mills or reduce their spindleage if it was not  possible for  them to get cotton at ceiling prices.   The  Federation even  agreed to reimburse the mills of lay off  compensation if they were forced to close down for a while.  Not only the prices of cotton but all other stores had spiraled up partly due  to devaluation of the rupee on June 6, 1966 and  partly due  to the stock of cotton being less than the  demand  and Government’s insistence to avoid unemployment that the mills

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should  work at their full quota. As the  position  worsened after  September 1966, ’the Federation revoked  its  earlier policy  and  permitted its members to buy cotton  at  prices above the ceiling prices as it was realised that on the  one hand  the mills were not getting cotton at prices  fixed  by the  Government and on the other they were not permitted  to restrict  their spindleage. Prices of cotton of  almost  all varieties had by this time gone up by 50% above the  ceiling prices.  Realising the difficulty supply position Government on December 3, 1966 directed the mills to observe one  extra holiday  per week and to pay lay-off compensation  for  such extra holiday.  On December 7, 1966 the company wrote to the Textile  Commissioner  that  as  it  was  not  getting   the requisite type of cotton it had reduced its count from 30 to 20,  that  till  that  day it  had  not  received  a  single requisitioned bale, that though the dealers were directed to sell cotton at Rs. 1430 a bale they were charging Rs. 1600 a bale  and  that lay-off compensation for the  extra  holiday imposed  by  Government meant an additional  burden  of  Rs. 80,000 a month.  On December 12,- 1966 the company  demanded of  the Textile Commissioner to requisition cotton  required by it.  No cotton was delivered to the company although  the Textile   Commissioner  promised  to  requisition  it.    On December 23, 1966 the Essential Commodities Ordinance, 13 of 1966 was promulgated empowering the Government to direct  an employer   not  to  close  his  establishment  without   the authorised   officer’s   permission,   not   to   work   the establishment  for more than the prescribed days  and  hours and to pay lay-off compensation where the employer  obtained permission  for closure.  The next day Government issued  an order  directing  that no employer should  close  wholly  or partially  his  undertaking without the  permission  of  the Textile  Commissioner  and directed  all  establishments  to observe an extra 884    holiday per week and to pay lay-off compensation for  it. On  December 25,  1966 Government informed the company  that no permission would be given to any mill for not giving  the extra  holiday.   In view of there being no  possibility  of getting  proper  cotton   the company asked for a  quota  of terylene  fibre as a substitute.     That also could not  be procured.   Meanwhile, the company had   deposited with  the Federation  Rs.  12,500 as advance towards  the    price  of cotton  which  may  be requisitioned for  it.   In  February 1967, some cotton was requisitioned for the company but  the sellers  could not deliver it as the authorities had  sealed their   godowns       and  prohibited  removal   of   cotton therefrom.   On February 15,     1967 the company put  up  a notice  of  closure owing to want of   cotton.  A  few  days later   it   requested   the   Textile   Commissioner    for requisitioning  2000 bales stating that the company was  not in  a   position to buy cotton at excess prices.  The  reply was  that  150  bales were requisitioned for  it,  that  the question  of  requisitioning     350 bales  more  was  under consideration but that the company should appreciate that it cannot go on  requisitioned cotton only.    The  implication was  that the company must manage to buy cotton     even  at exorbitant  prices.   So  far out of  2000  bales   demanded only  200  bales had been allotted to the company.  Even  in respect   of these bales the sellers would not permit  their sample survey   to ascertain their quality.  In March  1967, the spinning department was partially closed causing  labour unrest.  The cotton position in April 1967, as explained  by the  company  in  its  letter of   April  25,  1967  was  as follows: 1282 bales were allotted to the     company between

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February  15, 1967 and April 20, 1967 out of      which  the company  took delivery of 200 bales.  No survey by    sample was  allowed  in respect of 732 bales.  Survey made  by  the suppliers  of  350 bales was challenged by the  company.  In respect   of the balance of 250 bales the  company  disputed the right of the  suppliers to demand clearance charges  and that dispute was referred to the Textile Commissioner.  From this letter alone and  without reading it in the context  of the  previous correspondence,   the Company Judge  concluded that though cotton was requisitioned for it the company  had declined  to  lift it. The conclusion was neither  fair  nor just.   It  stands to reason that no  purchaser  would  take delivery  of goods unless he is satisfied from their  survey that   they were of the quality for which he had  paid.   If the suppliers    declined to permit survey the company could not be accused of    refusing delivery.  Mr. Sen argued that the company could not  depend upon getting cotton at ceiling prices or on cotton requisitioned for it and that it  should have purchased it even at excess prices just as other  mills were  doing.   If that contention was right   there  was  no point  in Government fixing the ceiling prices. It  may   be that  other  mills  might have purchased  cotton  at  excess prices,  but if the finances of the company did  not  permit that luxury it is 885 difficult  to  hold  that  the company  was  guilty  of  any dereliction.  Even apart from having to pay high prices  for cotton,  the mills had to pay Rs. 80,000 a month because  of the compulsory extra holiday.     In the meantime several other difficulties were mounting up.  The  affidavit  of Goenka shows  that  the  mills  were working  at  a loss of Rs. 1.5 lacs a month  and  the  total losses by June 1967 had risen to Rs. 28 lacs. These  figures were  not admitted by the appellants as the company did  not produce books of accounts.  The’ precision of the loss could be  disputed but not the fact. On May 9, 1967 the  guarantee given  by  the State Government for one year expired  and  a fresh  arrangement  with  the  Bank  became  necessary.  The Government  would not renew its guarantee as Singhanias  had objected to a second charge being made in its favour. On May 17,  1967 the second instalment payable under the scheme  to categories  III and IV(b) creditors amounting to over Rs.  5 lacs  became  due.  The mills were for  the  reasons  stated above  closed on June 4, 1967 with the consequence that  the company  became liable to pay to 2700  workers  retrenchment compensation.   By  the time the winding-up  petitions  were heard  the company had already become liable to pay a  large amount by way of retrenchment compensation.  The closure  of the  mills  was followed by workers’ unrest  culminating  in hunger strikes and prevention of the directors from entering the  mills and disposal by them of cotton, cloth  and  other articles.   If the scheme were to be worked as  directed  by the  Company  Judge  it meant  paying  of  the  retrenchment compensation,  putting the machinery once again  in  working order etc., requiting large amounts to meet these claims and expenses.     The argument, however, was that the Jalans were to thank themselves  for this calamity.  But, surely, they could  not be  blamed, however badly they might have behaved  in  other respects,  for  the closure of the mills which  was  due  to reasons  beyond their control, viz., the price rise  due  to devaluation  which  overtook them only two months after they restarted the mills, the impossibility of getting cotton  at reasonable  prices, and the imposition of the extra  holiday which  meant both loss of production and the burden of  lay-

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off  compensation.  It is, therefore, not fair to  say  that the  Jalans  were responsible for the closure of  the  mills either  on  the ground of failure to lift the cotton  or  by their having given away the processing unit as alleged.     As  regards cl. (4) of the scheme, we do not agree  with the learned Attorney General that the jalans had to  finance the  mills from their own monies only nor with  Mr.  Nariman that their obligation was confined only to arranging finance on  security of the company’s assets.  Both of them took  up extreme positions with which it is not possible to agree. On the one hand sub-cls. (d) and 886 (e) of Term (4) of the said Sch. ’C’ clearly contemplate the right,  of the Jalans to arrange finance on the security  of the company’s’ assets.  On the other hand it must have  been clear  to  them that as the company’s  assets  were  already mortgaged  and  pledged, further finance would  have  to  be brought in either by them or on their own credit.  In  cases such  as the one before us, the scheme has to be read  as  a commercial  document,  that  is,  in  the  sense  in   which businessmen   conducting   such   an   establishment   would understand.   If so read, cl. 4 cannot mean that the  Jalans had  taken  upon themselves the liability to put  in  monies even  if the mills could not be run at  reasonable  profits. No industrial establishment is ordinarily run except in  the hope  of doing so at profit. Considering  the  circumstances which  existed in 1966-67 we cannot say that the  conclusion of the Appeal Court that there was no reasonable prospect to run the mills at profit was incorrect.     The  company was commercially insolvent when the  scheme was  sanctioned.   It  was concurred in  by  the  Jalans  in expectation  that the company could be resuscitated and  the mills  worked at reasonable profit.  By June 1967, when  the mills  were  closed  and the company  filed  the  winding-up petition,  it was commercially insolvent in the  sense  that its assets and its existing liabilities were such as to make it reasonably certain that the existing and probable  assets of   the   company  would  be  insufficient  to   meet   its liabilities. Besides, the very object for which the  company was  formed,  namely,  to run the  mills  commercially,  had failed.   By  November  6,  1967  when  the  Company   Judge delivered his judgment, apart from the company’s debts being in excess of its assets, the company’s total losses and  its liability  to pay retrenchment compensation to  its  workers had  run into considerable figures.  Although the figure  of Rs.  28  lacs  for such losses and Rs. 5 lacs  a  month  for compensation were not admitted by the appellants, there  can be  no doubt that the company had been running the mills  at loss  and  its liability for retrenchment had swelled  to  a large figure.     Under  sec.  392  of the Act the High  Court  which  has sanctioned  the  scheme  has  the  power  to  supervise  the carrying  out of it and to give directions in regard to  any matter  or  to make modifications in it as it  may  consider necessary   for  its  proper working.  But if the  Court  is satisfied  that the scheme cannot be  worked  satisfactorily with or without modifications, it can either suo moto or  on an  application  by any person interested in  the  company’s affairs order its winding-up.  Both Mr. Sen and the  learned Attorney General contended that the Company Judge was  right in  holding that the scheme could have been worked  but  for the defaults of Jalans, that the Company Judge was right  in giving  directions under sec. 392(1) compelling  the  Jalans and  the company to implement their obligations and that  no winding-up

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887 order  in  exercise of power under sec. 392(2)  should  have been  passed.  We have examined the circumstances  in  which and  the reasons why the company closed the mills  and  held that theft closure was for reasons beyond the control of the company.   As Mody, J., had, while sanctioning  the  scheme, observed,  he  sanctioned  it  only  because  most  of   the creditors,  except a few, were anxious that instead  of  the company  being wound up, it should be given  an  opportunity under  a  new  management to work so that, it  may  pay  off gradually  the debts due to them by working its millS.   The assumption,  therefore, on which the scheme was  framed  was that the company could work the mills profitably and pay off its  creditors from out of the profits.  Therefore,  it  was not  as if the mills had to be worked even if their  working resulted  in loss.  Assuming that the Jalans were  under  an obligation  to bring in finance including their own  monies, they could not be said to be under an obligation to bring in finance  even  if  the  working  of  the  mills  showed   no reasonable  prospect of profit.  If the mills could  not  be worked  except  at loss the company would  be  justified  in ceasing to work them.  The very object of the company  being to  manufacture  cloth, if the mills had to be  closed  that would  mean  that  the very object  for  which  the  company existed  and  which  also was the assumption  on  which  the scheme was flamed ceased to exist.     The  direction  of  the Company Judge  that  the  Jalans should  bring in the necessary finance could only be on  the basis  that  the mills could be successfully’  worked.   But before giving such a direction he did not, and indeed  could not,   on   affidavits  only,  ascertain  whether   in   the circumstances   then  existing  there  was  any   reasonable prospect of profits.  If there was not, it stands to  reason that the court could not compel the Jalans to work the mills at  loss and equally could not compel them to pour in  their monies  in such an undertaking.  Besides, the direction  did not,  and in the very nature of things, could  not,  specify how much finance the Jalans were to bring in.  If the Jalans were  to bring in the finance, assuming there was a  binding obligation  on  them  to  do so, they would  do  so  in  the expectation that they would be repaid. The words  "necessary finance  required  for running the  mills" in cl. 4  of  the scheme  must necessarily mean the amount which a  reasonable and prudent financier would think necessary for working  the mills  at  profit and not an unlimited amount in  a  concern which cannot be expected to work at reasonable profit.   The direction  did  not also specify on what  terms  the  Jalans should  bring in their monies nor the terms upon which  they would be repaid.  It was, therefore, nebulous and vague  and impossible of being enforced.  In the absence of any enquiry as  to whether the mills could be worked at profit no  court would  compel  a  party  to  furnish  monies  without   even specifying how much and for how 888 long  he  should  provide.   If such  a  direction  was  not possible, no direction could also be given under sec. 392(1) to   work  the scheme as its implementation depended on  the mills working at profit.  The only course left to the  Court was,  as   the  Appeal Court did, to pronounce that  in  the circumstances  then  prevailing  the  scheme  could  not  be satisfactorily worked and therefore a winding-up order under sec.  392(2) had become inevitable. By the time  the  Appeal Court  passed its order, the mills having been closed  since June 1967, a huge amount had become payable as  retrenchment compensation.

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   But  it was urged that assuming that a winding-up  order in these circumstances could be passed it had to be  subject to   the  rights  and  obligations  of  the  parties.    The contention  was  that irrespective of  the  second  mortgage which  the  company had to execute, Sch. ’B’  creditors  had already become entitled to a charge on the company’s assets. It was argued that where an agreement specifies ’a  property out of which a debt is to be payable and is coupled with  an intention to subject such property to a charge, the property becomes  subject  to  a charge in  presenti  even  though  a regular  mortgage  is to be executed at  some  future  date. Such an intention, the learned Attorney General argued,  was demonstrated by the agreement that (1) the debts were to  be paid  out of profits and (2)’the engagement by  the  company not  to  deal with its assets.  The  distinction  between  a charge  and  a mortgage is clear.  While in the  case  of  a charge  there  is no transfer of’ property or  any  interest therein, but only the creation of a right of payment out  of the  specified property, a mortgage effectuates transfer  of property or an interest therein. No particular form of words is necessary to create a charge and all that is necessary is that  there  must be a clear intention to  make  a  property security  for  payment of money in presenti. In  Jewan   Lal Daga v.  Nilmani Choudhuri,(1) a case relied on by him,  the question  was  one  relating to an  agreement  to  mortgage. Following  on the agreement,_ a draft mortgage was  prepared which  was.  approved by the  respondent’s  solicitors,  the mortgage  deed was engrossed and even the stamp for  it  was paid  by the respondent.  The question was whether  specific performance  of the agreement completing the  respondent  to execute  the  mortgage  could  be  granted  before  accounts between  the  parties  were  made  up  and  the  amount  due thereunder  was ascertained.  The Privy Council  disagreeing with  the  High  Court  held that that  could  be  done  and observed  that  "there was a valid  agreement  charging  the property with whatever sum was actually due  ....  and  that a  proper  mortgage  ought be executed to  carry  out  these terms."  In Khajeh Solehman, (1) 55 I.A. 107. 889 Quadir  v.  Salimullah  ( 1 ) certain  deeds  were  executed purporting to make wakfs of certain properties in favour  of the  members of a Mahomedan family and then  for  charitable purposes.   Later on, agreements were executed, under one of which  the  members. of the family  agreed  that  allowances fixed  under the wakfs should be paid out of the  income  to named  persons of the family and upon their death  to  theft heirs,  and under the other agreement the  mutawalli  agreed that  he  and  the  future mutawallis  would  pay  the  said allowances.   The  wakfs  were held invalid  as  creating  a perpetual  succession of estates.  The question was  whether the  agreements  to  pay allowances also  fell   along  with them.  The’ Privy Council held that they did not, that  they Were  valid  and enforceable and that the direction  in  the agreements  to pay the allowances out of the income  of  the settled  properties showed an intention to create a  charge. In  both  these decisions the Board came to  the  conclusion that there was a clear intention on the part of the  parties to create a charge in presenti.  The argument of the learned Attorney  General  was  that if  an  agreement  indicated  a property out of which a debt is to be paid and an  intention to  subject it to a charge in presenti, the court must  find the  charge.  Certain other decisions were also  brought  to our  notice but it is not necessary to burden this  judgment with them because in each case the question which the  court

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would  have  to decide would be whether’  the  agreement  in question creates a charge in presenti.     C1. 2(ii) of the scheme first sets out Rs. 48.13 lacs as being  due to Sch. ’B’ creditors and then provides that  the said  amount  would be repaid by annual  instalments  of  an amount  equal to 50% of the profits which the company  would make,  such instalments commencing after two years from  the date of the execution of the second mortgage.  C1. 3 of  the agreement  of August 16, 1965 provides for the execution  of the  second mortgage in consideration of the said  creditors agreeing to accept repayment in accordance with the terms in Sch. ’C’ thereto.  Term 3 in Sch. ’C’ provides the said mode of  repayment and term 4 provides that in the  events  there set  out  the debt or the balance thereof  remaining  unpaid would  become immediately payable. In our view, neither  the scheme nor the said agreement shows any intention to subject to  the company’s assets to a charge in presenti.  All  that they provide is a promise to create a second mortgage  which was.  to contain the terms set out in the said Sch.  ’C’  in consideration  for which the creditors ’agreed  to  postpone repayment  in the manner therein provided.  Thus the  scheme merely  contains  an agreement to mortgage and the  mode  of repayment  and the said agreement provides for (a) the  sale of  shares  and  (b)  a promise  to  postpone  repayment  in consideration of a second mortgage to (1) 49 I.A. 153. 890 be  executed  by  the company. Even if term 4  in  the  said agreement can be construed to mean an engagement not to deal with  the  assets  of the company, that by  itself,  in  the absence  of  an  intention  to create  a  charge  under  the agreement,  would  not be enough to hold that it  creates  a charge.  [cf.  Mulla’s Transfer of Property Act,  (5th  Ed.) 616.] In our view the said provisions of the scheme and  the agreement amount only to an agreement to mortgage which  can give  rise  to an obligation to specifically perform  it,  a personal obligation, but do not constitute either a mortgage under  sec.  58  or a charge under s. 100  of  the  Transfer Property  Act.  (cf. Hukumchand v.  Radha  Kishan)(1).   The claim urged on behalf of Sch. ’B’ creditors that they had  a charge  irrespective  of  the  proposed  mortgage  and  were entitled to be treated as secured creditors cannot therefore be upheld.     The contention next was that a scheme sanctioned by  the court being binding on the company, its shareholders and the creditors, anything done contrary to its provisions is ultra vires the company.  Therefore, if the company is wound up it could be so done subject to the rights and obligations under such a scheme. The order of the Appeal Court was, therefore, wrong  inasmuch  as it could pass a  winding-up  order  only after  the company had been made to perform its  obligations under the scheme, that is, after it had been made to execute the  debenture trust deed or the second mortgage.   Reliance in  this connection was placed upon the decision in  Premila Devi  v.  Peoples Bank of Northern India Ltd.(2)  where  the respondent bank had issued A & B shares of which Rs. 50/- on each such share out of the face value of Rs. 100 were called up.   The  bank being in difficulty, a scheme  was  prepared which was sanctioned by the court.  Later on the scheme  was mended  and  that  also was sanctioned by  the  court.  ’The scheme  so  amended  provided that further calls on  A  &  B ,shares  should  not exceed 25% which included  20%  already called by the directors between the passing of the  original and the amended scheme and provided further that the balance of  5% call should be payable in 5 instalments payable  each

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half year. The directors, however, resolved that the said 5% should  be  paid on February 26, 1933 ignoring  the  amended scheme  and later passed another resolution  forfeiting  the shares  of  those who failed to pay by the  aforesaid  date. The bank thereafter went into liquidation and the liquidator contended  that  the forfeitures were ultra vires  the  bank being  contrary  to the scheme and that the names  of  those shareholders   should   be   included   in   the   fist   of contributories.  The Privy Council held (1) that the amended scheme  once sanctioned by the court became binding  on  the company,  the creditors and the shareholders and  its  terms could be (1) A.I.R. 1930 P.C. 76.              (2) [1938] 4 All  E.R. 337. 891 varied  only by an order of the court after  such  variation was   approved  at  meetings  of  the  creditors   and   the shareholders;  (2) that, therefore, it was not possible  for the  bank or the directors or the shareholders,  whether  by resolution or ratification or otherwise, to alter the  dates of payments of the call monies fixed by the scheme; (3) that the  resolution calling the call money on a  date  different from  those  dates  was  ultra vires  the  company  and  the forfeitures  in  pursuance of the said resolution,  even  if ratified by the shareholders, were equally ultra vires,  and that  the liquidator therefore was entitled to  include  the names  of those shareholders in the list of  contributories. It  is  difficult to say how this decision  can  assist  the appellants  for neither the company nor the  directors  have passed  any  resolution over-riding the  provisions  of  the scheme while it was in operation.  The problem is whether in relation  to  the incomplete rights of  the  appellants  the Appeal  Court  was bound first to call upon the  company  to complete those rights and then pass a winding-up order.  The decision  in Premila Devi’s case(1) had nothing to  do  with the winding-up of the company or the correctness of an order of  windingup  and  is,   therefore,  not  relevant  to  the question  before us. The case of Re Garner. Motors  Ltd.,(a) relied  on by Mr. Sen lays down that though a  joint  debtor would   ordinarily  under  the  principle  of   accord   and satisfaction  be released from his liability if the debt  is paid up by the other joint debtor, a release of one of  them under  a scheme of arrangement is a release by operation  of law  and  not under accord and  satisfaction  and  therefore would not relieve the other joint debtor.  The principle  is that a scheme sanctioned by the court does not operate as  a mere  agreement between the parties: it becomes  binding  on the  company,  the creditors and the  shareholders  and  has statutory  force, and therefore, the joint-debtor could  not invoke the principle of accord and satisfaction.  By  virtue of  the  provisions  of sec. 391 of the  Act,  a  scheme  is statutorily binding even on creditors ,and shareholders  who dissented from or opposed to its being  sanctioned.  It  has statutory  force  in  that sense  and  therefore  cannot  be altered  except with the sanction of the Court even  if  the shareholders   and   the  creditors   acquiesce   in    such alteration   of Premila Devi v. Peoples Bank(1).  The effect of  the  scheme is "to supply by recourse to  the  procedure thereby prescribed the absence of that individual  agreement by  every   member of  the class to be bound by  the  scheme which  would  otherwise be necessary to give  it  validity". (Palmer’s Company Law,  20th  Ed. 664) Sub-sec. (2) of  sec. 391  of  the  Act  allows  the  decision  of  the   majority prescribed  therein  to bind the minority of  creditors  and shareholders and it is for that reason that a scheme is said

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to  have  statutory operation and cannot be  varied  by  the share- (1)  [1938] 4 All E.R. 337.               (2) [1937]  1  A11 E.R. 671. 892 holders or the creditors unless such variation is sanctioned by the ,court.  The effect, therefore, of a scheme   between a   company  and  its creditors is that so  long  as  it  is carried  out by the company by regular 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  in  the manner and to the extent  provided  in  the scheme. The proposition that a winding-up order can only  be passed  after compelling the company to complete the  rights which  are   still  incomplete  is  not  borne  out  by  the decisions relied on by Mr. Sen.     Reliance was also placed on the principle that no act of a  court,  (in  the present case’  the  sanctioning  of  the scheme) should be permitted to harm a litigant who has acted on the faith of such an act and that such a person should be restored to the position he would have occupied but for that act.  (cf. Jang Singh v. Brijlal(1) and Jai Behram v.  Kedar Nath  Marwari(2).  We do not see how this principle  can  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 is no question of the appellants  having  done something  on  the  faith  of  an  act  of  the  court,  the appellants  and the other Sch. ’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 mortgage in their favour.     Next, it was said. that by reason of sub-section 3 and 4 of  sec.  391 a scheme once sanctioned becomes part  of  the company’s  constitution.  Therefore, the company  cannot  be ordered to be wound-up except in conformity with the  rights and  obligations  of the parties under such a  scheme.   But sub-sec. 3 only provides that an order sanctioning a  scheme begins  to operate only when a certified copy of such  order is  filed with the Registrar.  Thus, the sub-section  merely lays down a condition precedent to the coming in force of  a scheme  and  does not deal with rights  and  obligations  of parties  under such a scheme. Sub-sec. 4 requires a copy  of such order to be annexed to every copy of the memorandum  of the company issued after the certified copy of the order has been  filed  with the Registrar, and sub-sec.  (5)  provides penalty for default of this requirement.  These sub-sections were  presumably  introduced to ensure notice of  the  order sanctioning  the scheme to persons dealing with the  company so  that they may deal with the company henceforth with  the knowledge of the (1)  [1964] 2 S.C.R. 145.                (2) 49 I.A. 351  at 356. 893 scheme.   But the sub-sections do not mean that  the  scheme becomes  part of the constitution of the  company.  Sub-sec. (4)  clearly  lays down that a copy of the order  is  to  be annexed  to  a  copy  of the  memorandum  issued  after  its certified  copy has been filed with the Registrar, that  is, after  the  operation  of the scheme  commences.  A  scheme, therefore,  is  not  to  be  considered  for  instance,   as modifying existing special rights attached to shares  unless

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such  modification  is provided for in the scheme.  [cf.  Re Downing  (T.H.) & Co.(1)].  The contention, therefore,  that the scheme becomes part of the company’s constitution or  of its memorandum, and therefore, a winding-up order cannot  be passed except in conformity with the altered constitution of the  company, is not tenable.  So long as the scheme  is  in operation  and is binding on the company and its  creditors, the  rights and obligations of those on whom it  is  binding are  undoubtedly governed by its provisions.  But  once  the scheme is cancelled under sec. 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 to be one made under sec. 433.  It is not as if because the scheme has  been sanctioned under sec. 391 that a  windingup  order under  sec.  392(2)  cannot be  made.   If  the  appellants’ 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 would mean that where a  company makes default in paying an instalment on the date prescribed by  the scheme and a creditor files a  winding-up  petition, even though a windingup order 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.     The  effect  of a winding-up order is  that  except  for certain  preferential  payments  provided  in  the  Act  the property of the company is to be applied in satisfaction  of its liabilities pari passu. Pari passu distribution is to be made in satisfaction of the liabilities as they exist at the commencement of the winding-up. (of. secs. 528 & 529 of  the Act;  Ghosh  on Indian Companies Law, 11th Ed.  Vol.  2,  p. 1073),  The effect of a winding-up order on  rights  already completed   as  against  rights  yet  to  be  completed   is succinctly stated by Lord Halsbury in the Bank of   Scotland v. Macleod(2) as follows:                    "Rights  in  security  which  have   been               effectually  completed before the  liquidation               must  still receive the effect. which the  law               gives  to  them.   But  the  company  and  its               liquidators are just as completely disabled by               the winding-up from granting new or completing               imperfect (1) [1940] All E.R. 333; also Buckley on the Companies  Acts (13th Ed.) 411. (2) [1914] A.C. 311 at 317, 318. 894               rights in security as the individual  bankrupt               is  by his bankruptcy.  This, indeed,  is  the               necessary effect of the express provisions  of               the  Companies  Act that the estate is  to  be               distributed among  the  creditors  pari passu.               Every  creditor  is to have  an  equal  share,               unless’  any  one has already a  part  of  the               estate in his hands, by virtue of an effectual               legal right." [cf.  Tulsidas  Jasraj  Parekh v.  The  Industrial  Bank  of Western  India(1)]. Similarly, in Re  Anglo-Oriental  Carpet Manufacturing  Company(2)  it  was held that  even  where  a company  had  executed a trust deed  and  issued  debentures creating a charge on its assets but the charge had not  been registered as required by the Companies Act by the time  the company had passed an extraordinary resolution for voluntary winding-up  the debenture holders were not, as  against  the joint body of creditors, secured creditors.     It is thus well established that once a winding-up order is passed the undertaking and the assets of the company pass

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under the control of the liquidator whose statutory duty  is to realise them and to pay from out of the sale-proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed  among them  pari passu.  No new rights can thereafter  be  created and  no  uncompleted rights can be completed, for  doing  so would  be  contrary  to the creditors’  right  to  have  the proceeds  of the assets distributed among them  pari  passu. But Mr. Sen’s argument was that the appellants had  acquired under  the scheme a vested right to have a  second  mortgage which  ’could  not  be nullified by the  court  passing  the windingup  order.  We cannot accede to this  contention  for the  scheme vested no such right.  What it did  provide  was that  in consideration of the company agreeing to execute  a second  mortgage  the  appellants and  the  other  Sch.  ’B’ creditors  agreed to receive repayment of debts due to  them in  the manner provided in the scheme and the  agreement  of August 16,  1965.  On failure of the company to execute  the mortgage  the  consideration for postponement  of  repayment failed  and  the  monies  due  to  those  creditors   became immediately payable.  It is also not correct to say that the scheme  gave  any  priority  to  those  creditors.   Such  a priority could result only on the execution of the  mortgage which would make them secured creditors.     On the findings by the Appeal Court that the company was commercially  insolvent  and  that  the  scheme  could   not satisfactorily be worked with or without modifications,  the only alter- (1) 32 Bombay Law Reporter 953 at 967.           (2)  [1903] 1 Ch. 914.   895 native for that Court was to pass the winding-up order under sec.  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  appellants and  the  other  Sch. ’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, therefore, correctly followed  the principle that the status of  creditors  which could  be recognised was that which existed at the  date  of the  winding-up  order,  that the  second  mortgage  or  the debenture  trust deed not having so far been  executed,  the appellants  and  the  other Sch. ’B’  creditors  were  still unsecured  creditors  and  therefore  could  not  claim  any priority over the rest of the unsecured creditors.     In the result, we are of the view that the Appeal  Court was  right  in  ordering winding-up of the  company  and  we uphold  that,  order. Appeals are dismissed with  costs.  As there has been one common argument, we think it proper  that there should be one set of costs for all the respondents  in these appeals.  The creditors for whom the learned  Attorney General  and  Mr. A.B. Divan appeared will  bear  their  own costs. R.K.P.S.                                 Appeals dismissed. Sup. C.I./69-6