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CASE NO.: Appeal (civil)  3179-3181 of 2005

PETITIONER: M/S MEGHAL HOMES PVT. LTD

RESPONDENT: SHREE NIWAS GIRNI K.K.SAMITI & ORS

DATE OF JUDGMENT: 24/08/2007

BENCH: G.P. MATHUR & P.K. BALASUBRAMANYAN

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NOS. 3179-3181 OF 2005 WITH  [C.A. Nos. 3182-3184/2005, C.A. Nos. 3569-3571/2005, C.A. No. 4377/2006]

P.K. BALASUBRAMANYAN, J.

1.              These appeals arise out of proceedings in the  Company Court in the matter of M/s Shreeniwas Cotton  Mills Limited (SCML).  The Company was incorporated  on 5.2.1935.  It established and ran a textile mill in a  land measuring 70,490 square meters in Lower Parel in  the then City of Bombay.  

2.              Just like various other textile mills located in  that city, SCML also ran into difficulties.  A creditor of  the Company made an application C.P. No. 642 of 1983  under Section 433 of the Companies Act, for the winding  up of the Company.  By order dated 25.7.1984, SCML  was ordered to be wound up by the Company Court.  The  Official Liquidator took charge of the affairs of the  Company.

3.              Nothing significant seems to have happened for  a decade.  Then, on a report of the Official Liquidator,  the Company Court passed an order dated 1.9.1994  directing the Official Liquidator to issue a public notice  inviting offers for the revival of the textile mills and  absorption of the workmen and to purchase the assets of  the Company.  At that stage, Rangnath Somani, a  contributory, filed Company Application No. 339 of 1994  seeking directions of the Company Court for holding a  meeting of the creditors, contributories and other  interested persons to consider a scheme proposed  allegedly for the revival of the Company.  The application  was opposed.  The Company Court directed the  convening of the requisite meeting to consider the  proposed scheme.  Pending consideration thereof, the  Company Court also withheld the proceedings pursuant  to the public notice inviting offers.  The order of the  Company Court directing the convening of a meeting for  the purpose of considering the scheme propounded was  challenged in appeal by the workers’ union and three of  the parties who had submitted their offers in response to  the advertisement issued by the Official Liquidator

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pursuant to the direction of the Company Court dated  1.9.1994.  Notwithstanding the pendency of the appeals,  a meeting as directed by the Company Court was held  and a scheme was approved by the creditors,  contributories and workers.  An application for  sanctioning the scheme was also filed.  But, meanwhile,  on 4.4.1995, the Division Bench of the High Court  allowed the appeal against the order dated 1.9.1994 and  set aside the direction for convening a meeting to  consider the scheme proposed.  The Company  Application filed in that behalf was thus dismissed.  In  the view of the Division Bench, the scheme proposed was  not a bona fide one since it was not on the basis of any  viability report regarding the revival of the company and  there was a failure to disclose the latest financial  position of the Company.  The court also found that even  on the showing of Rangnath Somani, the value of the  land belonging to SCML would be approximately Rs. 200  crores if unencumbered and that itself was a very  conservative valuation.  The court was of the view that  the intention behind presentation of the Scheme  appeared to be to acquire the huge lands and other real  estate belonging to SCML at a throw away price  ostensibly in the guise of reviving the mills but with no  real intention of reviving it.  After the obtaining of a  viability report, the Division Bench wanted the Company  Judge to consider certain suggestions.  They were:

       "(1)    Whether it is possible and viable to  reopen the mills and/or any portion of  it and run it profitably and without  disposing of immovable assets of the  Company;

(2)     In case the mills cannot be re-started  then whether any department or  process of the mills could be started as  viable;

(3)     In case any party who comes forward  with an offer to pay off all the  creditors, take the company out of  winding up and revive and restart the  mills happens to be a shareholder of  the Company, such party should  surrender the shareholding in the  capital of the Company at the value to  be determinied by the Court;

(4)     In case above courses are not workable  then whether the mills can be  restarted by disposing of part of its  assets to generate finance after  payment to all the creditors;

(5)     In case even the course under clause  (4) above is not possible, then the  Official Liquidator may sell the assets  by public auction in which even the  shareholders of the Company will be at  liberty to bid."

4.              Thereafter, the Division Bench emphasized  what was the main object to be kept in mind by the  Company Court.  In that behalf, it was stated:

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"It is open for the learned Company Judge  to give any other suitable directions in the  matter keeping in mind that the whole  anxiety is to revive the Company and to  restart the mills which is in the interest not  only of the workers and creditors of the  Company but also in the general interest of  public.  Needless to say that the revival of  the Company and restarting of the mills will  generate more employment and will be for  healthy economy of the country."

(emphasis supplied) 5.              A Petition for Special Leave to Appeal filed in  this Court challenging the decision of the Division Bench  as Special Leave Petition (Civil) No. 13305 of 1995 was  dismissed on 10.7.1995.

6.              The State Bank of India Capital Markets  Limited was assigned the task of preparing a viability  report.  That Body made its recommendations after a due  study of the situation.  On the first aspect posed by the  Division Bench, it answered:

"It is not possible to reopen the mills or any  portion of it without disposing of the  immovable assets of the Company.  In our  opinion, it would be unviable to revive the  weaving and the processing sections of the  above mill on account of the reasons  summarized below."

For the moment, we are not concerned with those  reasons and therefore we are not adverting to them at  this stage.   In answer to the second query posed, the  answer was:

"It is not possible to restart the entire mill.   Only a section of the spinning division with  21420 spindles can be restarted and  operated as viable, details of which are  given below."

The details are not relevant for the moment.  In answer  to the third query regarding the surrender of  shareholding if the offer comes from a shareholder, the  report stated that the said matter rested with the court  and its discretion.  Regarding query No. 4, it was  reported that since revival plan envisaged the  functioning of the spinning section alone, the machinery  in the weaving and processing sections and part of the  machinery in the spinning section had to be sold or  scrapped.  A sale of such machinery was estimated to  fetch a price of approximately Rs.550.99 lakhs.  It was  further reported that saleable extent of 44593 square  meters of mill land, being a part of the total holding, if  sold may fetch the required sum to settle all the past  liabilities of the Company.  But, it was suggested that it  may be appropriate if the interested party brought in  Rs.12367.41 lakhs in the form of loans initially and once  the weaving and processing machinery and non-viable  spinning machinery are sold, then, the question of sale  of part of the land could be taken up.  In answer to the  fifth query, it was reported that since a partial revival of

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the mills was possible, sale by the Official Liquidator of  the assets by public auction may not arise.  It was also  suggested that delay in implementing the revival package  will escalate the liability and would lead to further  deterioration in the condition of the spindleage proposed  to be revived.   

7.              On 7.11.1998, a new Industrial Location Policy  of the Government of Maharashtra became operative.   That applied to all industries in the Mumbai  Metropolitan Region excluding the cotton textile  industries.  Since cotton textile industry was excluded  from its purview, it appears that there was no restriction  on restarting of the manufacturing activities of SCML.   

8.              We may notice at this stage that the main  shareholders of SCML were Bangurs, Somanis, and the  Life Insurance Corporation of India and the sundry  shareholders held about 20% of the shares.  Two of the  secured creditors were the State Bank of India and the  Punjab and Sind Bank.  

9.              The matters lingered on.  On 29.6.2003, it is  seen that a Memorandum of Understanding was  executed between the shareholders, the Somani Group,  who meanwhile had acquired the shares of the Bangur  Group (there is controversy whether the acquisition was  by Rangnath Somani in his own right or it was an  acquisition by the Somanis Group, a controversy that we  are not called upon to decide here) and Lodha Builders  Private Limited (LBPL).  Under that Memorandum, LBPL  agreed in consideration of getting the right to develop the  properties of SCML, to pay a sum of Rs. 78 crores to  SCML and 70,000 square feet of built up area or 19.50  crores in the alternative at the option of SCML.  In other  words, LBPL was to pay Rs. 97.50 crores to SCML or Rs.  78 crores and 70000 square ft. of built up area.  It was  also provided that if any additional funds were required  for settling the affairs of the Company, the additional  funds would have to be brought in by SCML.  In other  words, on payment of Rs. 78 crores and handing over a  built up area of 70000 square feet or on paying Rs. 97.50  crores in all, LBPL was to get the right to develop and  deal with the lands of SCML.  Based on this  Memorandum of Understanding, the three Somani  cousins filed Company Application No. 4 of 2004  propounding a scheme and seeking directions from the  Company Court for convening a meeting to consider the  amended scheme.  The amendment to the earlier scheme  presented, included the replacement of paragraph 1.5 of  the original scheme which had indicated that sale of the  assets or properties of SCML was not envisaged and the  scheme was for revival of the textile mill unit of SCML by  a provision that the scheme envisaged development and  transfer of SCML’s propertiesd by LBPL for revival of  SCML.  Another amendment was to clause 5.1.  This was  by deleting the salient features for scheme for revival of  the mills and providing in its place that the aim was that  after discharging the liabilities of all creditors as per the  scheme, if extra funds are available with SCML, then  SCML will start a viable industry in any part of  Maharashtra and employment would be generated.  It  was further stated in the proposed amendment that  LBPL was to bring in funds of Rs. 78 crores for the  payment of liabilities of SCML.  In the event of any

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further finance being required than the amount agreed  to be brought in by LBPL, the Company Applicants, the  Somani cousins, would be permitted to dispose of a part  of the assets of SCML and the proceeds of the sale will be  utilized to pay off the workers and the creditors if  required.  

10.             On 12.12.2003, the Company Court directed  the meeting to be convened to consider the amended  scheme.  On 21.2.2004, the amended scheme was  approved at the meeting.   Company Petition No. 315 of  2004 was filed on 7.4.2004 seeking sanction of the  amended scheme.  The Regional Director on behalf of the  Central Government pointed out that the propounders of  the scheme were required to file an affidavit regarding  the latest financial position of the Company but that  they had not filed such an affidavit.  On 23.7.2004, the  Company Court rejected the amended scheme and  dismissed the Company Petition No. 315 of 2004.  The  court held that the scheme presented was not a scheme  for revival but it was in substance a disposal of the  Company’s assets which then vested in the Official  Liquidator.  The court found that it was only a mode of  disposal of the Company’s assets and hence it would be  proper for the Company Court holding the assets to  dispose of the assets after inviting offers.  That would  fetch a better price and such a course would be in the  interest of the Company’s minority shareholders,  workmen and secured and unsecured creditors. The  court was also of the view that the amount of Rs. 97.50  crores offered by LBPL was considerably less than the  amount of Rs. 200 crores, which the Division Bench had  noticed about ten years back, would be the minimum  price that could be fetched if the properties were to be  auctioned.  The Company Court directed the issue of  advertisements inviting offers for the assets of SCML  showing a reserve price of Rs. 150 crores.  The Official  Liquidator issued advertisements inviting offers.  

11.             The order of the Company Court dated  23.7.2004 was challenged in appeal by LBPL, by the  Somanis and by the workers’ union.  Though various  offers had been received pursuant to the advertisement  issued at the direction of the Company Court, they were  not considered since in appeal, the auction process was  stayed.  The Division Bench, on 15.12.2004, passed an  order directing the Somanis, LBPL and the various  interveners who had made offers, to place their proposals  for rehabilitation on record.  It was also directed that  those interested in purchase of the property should file  affidavits placing on record whether they were prepared  to make a down payment of a specified sum for release to  the workers.  The court also directed the Somanis  holding the major shares (again we are not concered with  their inter se dispute here) to state whether they would  be willing to accept any such better scheme.   Some  affidavits were filed and in its affidavit, LBPL stated that  in addition to the payment of Rs. 45 crores to the  workers, LBPL would set up a spinning unit and a  garment unit at the cost of Rs. 40 crores on the 7,50,000  square feet coming to them under the Scheme, and  would construct and transfer to a Workers Trust a  30,000 square feet unit, housing a school and other  accommodation at a cost of Rs. 15-20 crores.  Rangnath  Somani, the eldest of the cousins filed an affidavit

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showing that the Somanis would be willing to consider  and evaluate any better scheme in the interests of SCML.   But, on the same day, Ramesh Somani, who was one of  the co-propounders of the scheme, filed an affidavit  stating that he fully supported the scheme of LBPL and  did not want any change in the sponsors.  He also filed  another affidavit stating that the propounders of the  scheme would set up a textile unit for rehabilitation of  the workers of SCML at Sholapur at a cost of Rs. 35.02  crores. It is said on behalf of the appellants, that at the  last moment just before the delivery of the judgment  began, affidavits filed on behalf of the LBPL were received  by the court, even while refusing to receive two affidavits,  Rangnath Somani wanted to file.  The Division Bench  allowed the appeals, set aside the judgment of the  Company Court and sanctioned the scheme as modified  and as further modified by two affidavits of the Directors  of LBPL, by its judgment dated 21.3.2005.  It is this  decision of the Division Bench that is in challenge before  us in these appeals.  Three of the appeals are by  persons, who had made offers pursuant to the direction  of the court and have been described for convenience, as  the interveners and one of them by Rangnath Somani.   Even at this stage, we may mention that Civil Appeal  Nos. 3569-3571 of 2005 filed by one of the interveners is  sought to be withdrawn.  We see no reason why the  prayer for withdrawal of those appeals shall not be  granted.  So, Civil Appeal Nos. 3569-3571 of 2005 would  stand dismissed as withdrawn.  We are only considering  the other appeals on merits.  

12.             Before we proceed to consider the merits of the  appeals, an objection taken to the maintainability of the  appeals requires to be considered.  According to the  respondents, the appellants in Civil Appeal Nos. 3179- 3181 of 2005 and Civil Appeal Nos. 3182-3184 of 2005  have no locus standi either to object in the Company  Court or to challenge the decision of the Division Bench  of the High Court in appeal before this Court.  It is  submitted that neither of those appellants are creditors,  contributories or debenture holders and are total  strangers to SCML and they have nothing to do with the  proposal and acceptance of the Scheme under Section 391 of  the Companies Act read with Sections 392 and 393 of that  Act.  This contention is sought to be met by the appellants in  these appeals by pointing out that the appellant in Civil  Appeal Nos. 3171-3181 was associated with the original  Scheme for which approval was sought from the Company  Court and that the appellant therein had in fact deposited a  sum of Rs. 18 crores as per the direction of the court and  had also furnished a bank guarantee for Rs.10 crores and  had allegedly discharged certain creditors of the Company  and what was sought in the present case was a modification  of the earlier Scheme in which the appellant was involved  and in this situation the locus standi of the appellant could  not be denied.  It was also pointed out that there was a  specific direction by the Division Bench to the appellant and  others to present their Schemes/Proposals before the court  and they had filed affidavits in that behalf.  The Company  Court was bound to consider their proposals in the light of  the directions of the Division Bench.  The Division Bench in  the present round also could not go back on what had been  ordered by earlier Division Bench.  This gave the appellants  sufficient locus standi.  The appellants in both these sets of  appeals had also submitted proposals pursuant to the

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directions of the court and had also responded to the tenders  issued as per the directions of the Company Court.  If the  proceedings had continued in the Company Court, one of  those persons could have benefited.  The benefit that was  thus to accrue to one of the interveners was deprived of by  the Division Bench by its present order and in that situation,  the appellants are persons who are aggrieved by the decision  of the Division Bench and entitled to challenge the said  decision in this Court.  It is also submitted that the framing  of a Scheme for revival of a Company under liquidation had  overtones of public interest and commercial morality and in  the context of what had transpired in this case and the  involvement of the interveners at every stage, it was not open  to the respondent now to raise a contention that the  appellants have no locus standi.  In fact, the Division Bench  of the High Court was totally in error in excluding their  objections on the ground that they had no locus standi and  as persons aggrieved by that finding, it is open to them to file  these appeals.   It is also submitted that LBPL was also in  the same boat as the appellant in Civil Appeal Nos. 3179- 3181 of 2005 and if it had locus standi to appeal to the  Division Bench of the High Court against the order of the  Company Court, the appellant has the locus standi to appeal  to this Court.

13.             In the light of what had transpired in this case  and the orders of the Division Bench dated 4.4.1995 and  15.12.2004, it is not possible to accept the argument on  behalf of the respondents that the appellants in the two  sets of appeals have no locus standi to maintain their  appeals in this Court.  They have been allowed to  intervene by the Division Bench of the High Court on  earlier occasions and it is too late in the day now to raise  a contention that they have no role to play in the  approval of a Scheme under Section 391 of the Act and  their appeals should be rejected on that ground.  The  case of the appellant in Civil Appeal Nos. 3171-3181 of  2005 involves a further fact that it was sought to be  involved in the Scheme originally presented by the  Somanis which ultimately was rejected by the court, but  during the course of the proceedings the appellant  therein was directed to deposit certain amounts and  furnish security for certain other amounts and this could  only be on the basis that as a participant in the original  Scheme proposed, the appellant had some locus standi.   In a sense, LBPL, which is now sought to be associated  in the modified Scheme also stands on the same footing  as the appellant in Civil Appeal Nos. 3179-3181 of 2005  and we are not invited to hold that LBPL has no locus  standi in this proceeding as no such argument was  raised before us.  Considering the aspects involved, in  the context of the order for liquidation of the company  and the attempt to sponsor a scheme for acceptance by  the Company Court, we are of the view that the two sets of  appeals could not be dismissed as appeals by persons who  have no locus standi to maintaini them.  Surely, to the  extent the Division Bench has held that their objections are  irrelevant, they can certainly appeal to this Court in an  attempt to show that their objections are indeed relevant.   Whether their claim is meritorious, is another matter.

14.             The right of Rangnath Somani to maintain his

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appeal being Civil Appeal No. 4377 of 2006, is challenged  on the ground that he was a co-sponsor of the Scheme  which has been accepted and approved by the Division  Bench and therefore he cannot claim to be a person  aggrieved by the decision of the Division Bench entitled  to challenge the decision of the Division Bench.  The  argument on behalf of Rangnath Somani is that the  Scheme as approved by the general meeting of the  concerned, has not been accepted by the Division Bench  and certain modifications were brought in on the basis of  affidavits filed on behalf of LBPL and he has always a  right to object to such modifications or to contend that  such modifications must go back to the general meeting  for consideration and approval.  On this part of the  objection, we find substance in the stand adopted on  behalf of Rangnath Somani and on that basis we cannot  say that he is not entitled to file an appeal against the  decision of the Division Bench.

15.             But more seriously it is contended that  Rangnath Somani had accepted the decision of the  Division Bench of the High Court and had even received  possession of the assets of SCML from the Official  Liquidator pursuant to his discharge on the basis of the  decision of the Division Bench and having done so, he is  estopped from questioning the order of the Division  Bench in an appeal which he has filed subsequently.   This argument is sought to be met on behalf of Rangnath  Somani by pointing out that the receiving of possession  pursuant to the order of the Division Bench from the  Official Liquidator cannot estop him from filing an appeal  before this Court and from pointing out that the decision  suffers from a vital defect of being one in excess of the  authority of the Division Bench of the High Court and  not in consonance with the terms of the Companies Act.   It is seen that some objection was sought to be raised by  Rangnath Somani regarding the proposals contained in the  affidavits filed on behalf of LBPL, which proposals were  accepted and made part of the Scheme of the Division Bench  and the objection of Rangnath Somani was not dealt with as  such.  Moreover, from the fact that, subsequent to the  decision of the Division Bench, Rangnath Somani received  possession of the assets of SCML along with his cousins, the  other two Somanis, it cannot be said that thereby he has lost  his right to appeal to this Court questioning the  modifications in the Scheme sought to be propounded by  him and approved at the General Meeting.  We are not  inclined to go into the charges and counter charges as to  which of the Somanis has been got at and by whom, since we  consider those allegations to be irrelevant for our purpose.   Suffice it to say that, we are not inclined to accept the  argument on behalf of the respondents that Rangnath  Somani is estopped from filing an appeal against the decision  of the Division Bench.  Anyway, since we have held that the  appeals by the other two appellants are maintainable, the  question that arises will have to be examined by this Court  and in that context, we find it not proper to turn away  Rangnath Somani from the portals of this Court on the  ground of estoppel.  Thus, we overrule the objections to the  maintainability of these appeals.

16.             Now to recapitulate, the Company was ordered  to be wound up on 25.7.1984 and the Official Liquidator  was directed to take possession of the assets of the  Company.  Once an order of liquidation had been passed

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on an application under Section 433 of the Companies  Act, the winding up has to be either stayed altogether or for a  limited time, on such terms and conditions as the court  thinks fit in terms of Section 466 of the Act.  If no such stay  is granted, the proceedings have to go on and the court has  to finally pass an order under Section 481 of the Act  dissolving the Company.  In other words, when the affairs of  the Company had been completely wound up or the court  finds that the Official Liquidator cannot proceed with the  winding up of the Company for want of funds or for any  other reason, the court can make an order dissolving the  Company from the date of that order.  This puts an end to  the winding up process.  Winding up is dealt with in Part VII  of the Companies Act and Sections 433 to 483 occur in  Chapter II of that Part.  Part VI deals with management and  administration of a Company and Chapter V thereof deals  with Arbitrations, Compromises, Arrangements and  Reconstructions.  In that Chapter occurs Sections 390 to  396A of the Act with which we are concerned.  While defining  a Company for the purpose of Sections 391 and 393, Section  390 clarifies that Company means any Company liable to be  wound up under the Companies Act.  SCML was a company  that was ordered to be wound up on 25.7.1984.  Therefore,  when the Scheme was originally presented on 3.10.1994, it  was at a time when the winding up order was already in  existence.  The argument that Section 391 would not apply  to a Company, which has already been ordered to be wound  up cannot be accepted in view of the language of Section  391(1) of the Act, which speaks of a Company which  is being  wound up.  If we substitute the definition in Section 390(a) of  the Act, this would mean a Company liable to be wound up  and which is being wound up.  It also does not appear to be  necessary to restrict the scope of that provision considering  the purpose for which it is enacted, namely, the revival of a  company including a Company that is liable to be wound up  or is being wound up and normally, the attempt must be to  ensure that rather than dissolving a company it is allowed to  revive.  Moreover, Section 391(1)(b) gives a right to the  liquidator in the case of a company which is being wound  up, to propose a compromise or arrangement with creditors  and members indicating that the provision would apply even  in a case where an order of winding up has been made and a  liquidator had been appointed.  Equally, it does not appear  to be necessary to go elaborately into the question whether in  the case of a company in liquidation, only the Official  Liquidator could propose a compromise or arrangement with  the creditors and members as contemplated by Section 391  of the Act or any of the contributories or creditors also can  come forward with such an application.  By and large, the  High Courts are seen to have taken the view that the right of  the Official Liquidator to make an application under Section  391 of the Act was in addition to the right inhering in the  creditors, the contributories or members and the power need  not be restricted to a motion only by the liquidator.   For the  purpose of this case, we do not think that it is necessary to  examine this question also in depth.  We are inclined to  proceed on the basis that the Somanis, as contributories or  the members of the Company, are entitled to make an  application to the Company Court in terms of Section 391 of  the Act for the purpose of acceptance of a compromise or  arrangement with the creditors and members.   

17.             The question in this case really is whether the  compromise put forward under Section 391 of the  Companies Act could be accepted by the court without

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reference to the fact that it is a company in liquidation  and without considering whether the compromise  proposed as intending to take the company out of  liquidation, contemplates the revival of the company and  whether it puts forward a proposal for revival and  whether such a proposal also satisfies the element of  public interest and commercial morality, the elements  required to be satisfied for the court to stop the winding  up proceeding in terms of Section 466 of the Act.  In the  present case, the Company Court was of the view that the  compromise or arrangement that is put forward by the  Somanis in conjunction with LBPL was not a scheme or  proposal for revival of the company or the Mills, but it is  one for disposal of the assets of the company and in that  situation, it would be proper that the assets are disposed  of by the Official Liquidator by inviting offers from the  public in that behalf and maintaining transparency.   But, the Division Bench accepted the contention that it  was not mandatory in law that a compromise or  arrangement has to be for revival of the very activity in  which the company was engaged in at the time of  winding up and the anxiety of the court while  sanctioning the scheme which is approved by all classes  should be to see that the company is permitted to  continue its corporate existence.  The Division Bench  also took the view that the judgment of the earlier  Division Bench dated 4.4.1995 did not stand in the way  of accepting the present scheme, and that since the  Company Court had no jurisdiction to sit in appeal over  the decision of the creditors, members and  contributories of the company, the proposal put forward  was liable to be accepted especially in the context of its  finding that the interveners have no locus standi to  oppose the proceedings.   

18.             Learned counsel argued before us whether in  the case of a company which had been ordered to be  wound up, a compromise or arrangement made under  Section 391 of the Act could be accepted on the basis  that the said arrangement has been approved by the  relevant meeting of the creditors, members and so on  and whether the court was concerned with anything  more than such a decision taken by the concerned  members and creditors of the company.  In the case of a  company ordered to be wound up, a compromise or  arrangement that could normally be accepted by the  Company Court could be either paying off all dues by  liquidation of assets or an arrangement for revival of the  company and its business.  That is the rationale of the  order dated 4.4.1995 by which the Division Bench  directed consideration of the various aspects pointed out  therein.  The Division Bench had emphasized that what  the court was concerned with while sanctioning a  Scheme under Section 391 of the Act in the case of a  company that is ordered to be wound up, is the revival of  the company.  Strictly speaking, in the light of that order  of a Division Bench, which was binding on the  subsequent Division Bench, no question arises in this  case especially when we notice that the decision of the  earlier Division Bench dated 4.4.1995 was sought to be  challenged in this Court by way of a Petition for Special  Leave to Appeal and that challenge was repulsed and the  Petition was dismissed.  Therefore, as far as this case is  concerned, the contours of the enquiry to be made by the  Company Court was drawn by the decision of the Division

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Bench dated 4.4.1995.  Hence, what is relevant for the  court to consider was whether the proposal or the  modified compromise or arrangement put forward was  for revival of the company.   

19.             In that context, it is clear that the State Bank  of India Capital Markets Limited had pointed out that it  was not possible to revive the entire business of the  SCML and that a part of the spinning industry could be  retained and revived by disposing of the machinery  related to the other activities carried on by SCML and by  sale of a portion of the immovable property of the  company.  Therefore, the main aim of any scheme or  modified compromise or arrangement in terms of Section  391 of the Act, would be a revival only of the spinning  section of the company at the premises of the Mill and  the facilitating of that revival by the sale of parts of the  assets of the company.  The Scheme as it was, originally  proposed, contained the following clause in the  preamble:

"1.5. The Scheme does not envisage sale of  any of the assets or properties of Shreeniwas  Cotton Mills Limited (now in liquidation) and  is for the revival of the textile Mill unit of Sree  Niwas Cotton Mills Ltd. (now in liquidation)"

It provided for payment and discharge of liabilities and it  contained what were described as salient features of the  Scheme for revival of the Mills.  The amendments  proposed to that Scheme by the Somanis were the  deletion of paragraph 1.5. quoted above and replacement  of it with the following:

"The Scheme envisages development and  transfer of SCML’s said property by LBPL for  revival of SCML (now in liquidation)."

After dealing with the modified proposal for settlement of  liabilities to creditors and others, it was provided in  clause 5 that on the sanctioning of the Scheme, a  development agreement will be entered into between  SCML and LBPL for developing SCML’s property, liquidity  will be generated and all creditors paid off and the company  will come out of liquidation.  Then it was stated:

"Secondly, after discharging all creditors as per  the scheme, if extra funds are available with  SNCML, then SNCML will start a viable industry  in any part of Maharashtra and employment will  be generated."

It also explained that the entire dues of the workers will be  paid and all the creditors will be satisfied.  The following  clause was also to be inserted:

"If the Scheme is allowed, SCML will enter into an  agreement with the LBPL for development and  transfer of SCML’s said property.  LBPL shall  bring in and provide for funds to discharge the  creditors of SCML.  LBPL will bring in funds of  Rs. 78.00 crores for payment of liabilities of  SCML.  Finance for the purpose of the Scheme is  being provided by LBPL and all the creditors and  workers will be paid.  In the event, if any further

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finance is required than the amount agreed to be  brought in by LBPL, the Applicants be permitted  to dispose off the part of the assets of SNCML and  proceeds from the sale will be utilized to pay off  the workers and the creditors if required."

It was stated that:

"In the event, if after paying all creditors of  SNCML funds are available with SNCML, then  SNCML will start such viable industry in any  part of Maharashtra."

According to the contesting respondents, the Scheme as  sought to be modified is a Scheme that takes care of all  the liabilities of SCML and also contemplates the setting  up of some viable industry in any part of Maharashtra by  the company.  This was enough to recognize a scheme  under Section 391 of the Companies Act. It was not  feasible to revive the mills as a whole as was clear from the  materials and in that context what was possible was to save  the godown and the office building of SCML, discharge all  liabilities and if any excess fund is left, to start an industry  in any part of Maharashtra and there was nothing wrong  with the acceptance of such a scheme.  It was during the  course of the hearing before the Division Bench that two  alternatives were proposed in an affidavit filed on behalf of  the LBPL, not a member or creditor of the Company, but  which was associated with the proposal put forward by way  of a compromise or arrangement, that LBPL will, in addition  to the liability of Rs. 97.50 crores undertaken, would put up  a school / industrial unit of 30000 square feet for the benefit  of the workers or pay a sum of Rs. 15 lakhs in lieu thereof to  the workers; that LBPL will set up a spinning/garment unit  in an area of 1,00,000 square feet in the Mill premises at a  cost of Rs. 40 crores and SCML would set up a unit in rural  Maharashtra at a total outlay of Rs. 20 crores.  Yet another  affidavit was filed on behalf of LBPL in which willingness was  expressed by it to pay the higher amounts claimed by the  two secured creditors, the State Bank of India and the  Punjab and Sind Bank subject to LBPL being entitled to  create a charge on the mill property even before discharging  the liability to the two banks and on condition of delivery of  the original documents relating to SCML to LBPL and not to  SCML, on full payment of the amounts agreed to be paid to  the two creditor banks.  It was to these modifications  proposed by a non member of the company, but which was  associated with the working of the compromise or  arrangement, that Rangnath Somani tried to raise some  objections one of which was that SCML was not agreeable to  set up an industrial unit anywhere in Maharashtra at a cost  of Rs. 20 crores.  Ramesh Somani supported LBPL.  The  Division Bench of the High Court accepted the affidavits filed  on behalf of LBPL and sanctioned the scheme as amended  and as further modified by the two affidavits of Abhishek  Lodha, Director of the Company dated 21.3.2005.   Obviously, the Division Bench must have been conscious  that Abhishek Lodha was only a Director of LBPL and that he  was not a Director of the Company in liquidation, though  there is some ambiguity in the concerned sentence in the  judgment.  He was also not a propounder of the Scheme, but  he was only a participant in the proposed arrangement come  to between the company and its creditors, shareholders,  debenture holders, workers, etc.  

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20.             How far the scheme could be modified on the  suggestion of LBPL which is not one of the entities  contemplated by Section 391 of the Act, is a moot question.  Even otherwise, the deletion of clause 1.5 indicated in the  original proposal and the replaced clause 1.5 in the modified  scheme, indicated that the object was not the revival of  SCML.  The vague stipulation that SCML would put up some  viable industry in some part of the State of Maharashtra, if  funds are available, was sought to be replaced by a  commitment to start an industry in rural Maharashtra that  also at the cost of Rs. 20 crores.  Though, one of the Somani  cousins agreed to these proposals, another cousin attempted  to object to that proposal and is objecting to it before us.   Similarly, the amendment by way of an affidavit on behalf of  the LBPL contemplated the starting of an industry in the Mill  land by LBPL and not by the company in liquidation.  Thus,  the company in liquidation, did not intend taking up any  revival activity in the properties belonging to SCML other  than retaining the office building it had and the godown it  had away from the mill lands.  It is difficult to conceive of  this as a revival of SCML, a company in liquidation.  This is  more in the realm of disposal of the assets of the company in  liquidation, no doubt, with a view to pay off all the creditors,  debenture holders and workers from the funds generated out  of the sale of the lands in favour of LBPL.  Going by the test  laid down by the Division Bench in its order dated 4.4.1995,  which has become final inter parties and the object of  Section 391 of the Act, it is difficult to say that it is a scheme  for revival of the company, the clear statutory intention  behind entertaining a proposal under Section 391 of the Act.  

21.             Considerable arguments were raised on the  role of the Court when a Scheme under Section 391 of  the Act was propounded for its consideration.  The  decision in Miheer H. Mafatlal Vs. Mafatlal Industries  Ltd. [(1997) 1 S.C.C. 579] was relied on.   That was a  case of merger or amalgamation of two companies.   Neither of the companies was in liquidation.  This Court  held that compromise or arrangement included  amalgamation of one company with another.  This Court  also defined the broad contours of the jurisdiction of the  Company Court in granting sanction to a scheme in terms  of Section 391 and Section 393 of the Act.   This Court  laid down the following parameters: "1.     The sanctioning court has to see to it  that all the requisite statutory procedure for  supporting such a scheme has been  complied with and that the requisite  meetings as contemplated by Section  391(1)(a) have been held. 2.      That the scheme put up for sanction of  the Court is backed up by the requisite  majority vote as required by Section 391  Sub-Section (2). 3.      That the concerned meetings of the  creditors or members or any class of them  had the relevant material to enable the  voters to arrive at an informed decision for  approving the scheme in question. That the  majority decision of the concerned class of  voters is just and fair to the class as a  whole so as to legitimately bind even the  dissenting members of that class. 4.      That all necessary material indicated  by Section 393(1)(a) is placed before the

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voters at the concerned meetings as  contemplated by Section 391 Sub-section  (1). 5.      That all the requisite material  contemplated by the proviso of Sub-section  (2) of Section 391 of the Act is placed before  the Court by the concerned applicant  seeking sanction for such a scheme and the  Court gets satisfied about the same.  6.      That the proposed scheme of  compromise and arrangement is not found  to be violative of any provision of law and is  not contrary to public policy. For  ascertaining the real purpose underlying  the Scheme with a view to be satisfied on  this aspect, the Court, if necessary, can  pierce the veil of apparent corporate  purpose underlying the scheme and can  judiciously X-ray the same. 7.      That the Company Court has also to  satisfy itself that members or class of  members or creditors or class of creditors,  as the case may be, were acting bona fide  and in good faith and were not coercing the  minority in order to promote any interest  adverse to that of the latter comprising of  the same class whom they purported to  represent. 8.      That the scheme as a whole is also  found to be just, fair and reasonable from  the point of view of prudent men of  business taking a commercial decision  beneficial to the class represented by them  for whom the scheme is meant. 9.      Once the aforesaid broad parameters  about the requirements of a scheme for  getting sanction of the Court are found to  have been met, the Court will have no  further jurisdiction to sit in appeal over the  commercial wisdom of the majority of the  class of persons who with their open eyes  have given their approval to the scheme  even if in the view of the Court there would  be a better scheme for the company and its  members or creditors for whom the scheme  is framed. The Court cannot refuse to  sanction such a scheme on that ground as  it would otherwise amount to the Court  exercising appellate jurisdiction over the  scheme rather than its supervisory  jurisdiction."

We may straightaway notice that this Court did not have  occasion to consider whether any additional tests have to  be satisfied when the Company concerned is in  liquidation and a compromise or arrangement in respect  of it is proposed.  Therefore, it cannot be said that this  would be the final word on any Scheme put forward  under Section 391 of the Act, whatever be the position of  the concerned company.  Even then, this decision lays  down the need to conform to the statutory formalities,  the power of the Court to ascertain the real purpose  underlying the Scheme, the bona fides of the Scheme,  the good faith in propounding it and that as a whole, it is  just, fair and reasonable, at the same time emphasizing

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that it is not for the Court to examine the Scheme as if it  were an appellate authority over the commercial wisdom  of the majority.  

22.             When a Company is ordered to be wound up,  the assets of it, are put in possession of the Official  Liquidator.  The assets become custodia legis.  The follow up,  in the absence of a revival of the Company, is the realization  of the assets of the company by the Official Liquidator and  distribution of the proceeds to the creditors, workers, and  contributories of the company ultimately resulting in the  death of the company by an order under Section 481 of the  Act, being passed.  But, nothing stands in the way of the  Company Court, before the ultimate step is taken or before  the assets are disposed of, to accept a scheme or proposal for  revival of the Company.  In that context, the Court has  necessarily to see whether the Scheme contemplates revival  of the business of the company, makes provisions for paying  off creditors or for satisfying their claims as agreed to by  them and for meeting the liability of the workers in terms of  Section 529 and Section 529A of the Act.  Of course, the  Court has to see to the bona fides of the scheme and to  ensure that what is put forward is not a ruse to dispose of  the assets of the Company in liquidation.  

23.             In fact, it was on this basis that the Division  Bench of the High Court proceeded when it passed the  order dated 4.4.1995.  Apart from the fact that the  correct principle was adopted, the directions therein are  binding on the Company Court and the Division Bench of  the High Court of coequal jurisdiction when the proposal  for amendment of the earlier scheme came up.  It has to  be noted that it was not a fresh scheme that was being  mooted, but it was a proposal for an amendment of the  scheme already considered by the Division Bench when  it passed the order dated 4.4.1995.  It was the plain duty  of the Division Bench on the latter occasion to keep in  focus the suggestions earlier made.

24.             It was argued before us on behalf of the  appellant that Sections 391 to 394A were procedural  provisions and when once a company was under  liquidation, the Chapter dealing with winding up applied  and the only provision or substantive provision  conferring power of stopping the winding up was  conferred on the court by Section 466 of the Act, and  unless the court is satisfied that the Company is being  taken out of liquidation by way of revival and that it will  sub-serve public interest and will conform to commercial  morality, the court cannot accept a scheme proposed  under Section 391 of the Act.  The argument on the side  of the respondents is that Section 391 is a self-contained  code and read with Section 392 of the Act, which was  peculiar to our Act, it was clear that a Company Court  could approve, independently of Section 466 of the Act, a  scheme and could take the company out of liquidation  and even pass an order of stay in terms of Section 391  read with Section 392 of the Act.   Section 466 of the Act  was not attracted when a scheme approved by the  shareholders, creditors, members of the Company and so  on was put forward before the Company Court.   

25.             It is a well settled rule of interpretation that  provisions in an enactment must be read as a whole  before ascertaining the scope of any particular provision.  

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This Court has held that it is a rule now firmly  established that the intention of the legislature must be  found by reading the statute as a whole.  In Principles of  Statutory Interpretation by Justice G.P. Singh, it is  stated:

"The rule is referred to as an "elementary rule"  by VISCOUNT SIMONDS; a "compelling rule"  by LORD SOMERVELL OF HARROW; and a  "settled rule" by B.K. MUKHERJEE, J."                          (See pages 31 and 32 of the Tenth Edition)

When we accept this principle, what we have to do is to  read Sections 391 to 394A not in isolation as canvassed  for by learned counsel for the respondents, but with  reference to the other relevant provisions of the Act.  We  see no difficulty in reconciling the need to satisfy the  requirements of both Sections 391 to 394A and Section  466 of the Companies Act while dealing with a Company  which has been ordered to be wound up.  In other words,  we find no incongruity in looking into aspects of public  interest, commercial morality and the bona fide intention  to revive a company while considering whether a  compromise or arrangement put forward in terms of  Section 391 of the Companies Act should be accepted or  not.  We see no conflict in applying both the provisions and  in harmoniously construing them and in finding that while  the court will not sit in appeal over the commercial wisdom  of the shareholders of a company, it will certainly consider  whether there is a genuine attempt to revive the company  that has gone into liquidation and whether such revival is in  public interest and conforms to commercial morality.  We  cannot understand the decision in Miheer H. Mafatlal Vs.  Mafatlal Industries Ltd. (supra) as standing in the way of  understanding the scope of the provisions of the Act in the  above manner.  We are therefore satisfied that the Company  Court was bound to consider whether the liquidation was  liable to be stayed for a period or permanently while  adverting to the question whether the scheme is one for  revival of the company or that part of the business of the  company which it is permissible to revive under the relevant  laws or whether it is a ruse to dispose of the assets of the  company by a private arrangement.  If it comes to the latter  conclusion, then it is the duty of the court in which the  properties are vested on liquidation, to dispose of the  properties, realize the assets and distribute the same in  accordance with law.  

26.             But before that, we think that another step has to  be taken in this case.  What has now been accepted by the  Division Bench, is not the scheme as modified by the general  meeting as contemplated by Section 391 of the Act.  At least  two of the modifications having ramifications are based on  undertakings or statements made on behalf of LBPL and  there appears to be difference of opinion on that modification  even among the Somanis.  There is also the question whether  the proposals of a person who is not one of those recognized  by Section 391 of the Act, could be accepted by the Company  Court while approving a scheme.  We are of the view that the  scheme with the modifications as now proposed or accepted,  has to go back to the General Meeting of the members of the  Company, called in accordance with Section 391 of the Act  and the requisite majority obtained.

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27.             It was argued on behalf of the respondents that  under Section 392 of the Act, the Court has the power to  make modifications in the compromise or arrangement  as it may consider necessary and this power would  include the power to approve what has been put forward  by LBPL who has come forward to discharge the  liabilities of the Company on the rights in the properties  of the Company other than in the office building and in  the godown, being given to it for development and sale.   As we read Section 392 of the Act, it only gives power to  the Court to make such modifications in the compromise  or arrangement as it may consider necessary for the  proper working of the compromise or arrangement.  This  is only a power that enables the court to provide for  proper working of compromise or arrangement, it cannot  be understood as a power to make substantial  modifications in the scheme approved by the members in  a meeting called in terms of Section 391 of the Act.  A  modification in the arrangement that may be considered  necessary for the proper working of the compromise or  arrangement cannot be taken as the same as a  modification in the compromise or arrangement itself  and any such modification in the scheme or arrangement  or an essential term thereof must go back to the general  meeting in terms of Section 391 of the Act and a fresh  approval obtained therefor.   The fact that no member or  creditor opposed it in court cannot be considered as a  substitute for following the requirements of Section 391  of the Companies Act for approval of the compromise or  arrangement as now modified or proposed to be  modified.  In Miheer H. Mafatlal Vs. Mafatlal  Industries Ltd. (supra), this Court had insisted that the  procedural requirements of Section 391 must be satisfied  before the court can consider the acceptability of a  scheme even in respect of a Company not in liquidation.   Therefore, we are not in a position to accept the  argument on behalf of the respondents that the scheme  now as modified by the decision of the Division Bench  need not go back to the general meeting of the members  in terms of Section 391 of the Act. We must also  remember that at least before us there is serious  objection to the modifications by one of the Somanis who  are the promoters of the Company in liquidation and the  sponsors of the arrangement and that objection cannot  be brushed aside.

28.             We find that the modifications proposed alters  the position of the shareholders vis-‘-vis the Company.   Instead of the company reviving the spinning unit as  recommended by the State Bank of India Capital  Markets Limited, as adopted in the General Meeting, now  the Company will have nothing to do with the mill lands  and the whole of the mill lands will pass on to LBPL on  LBPL paying a value of Rs. 97.50 crores to SCML and  LBPL will start an industry of its own in that property.   This cannot be considered to be a modification in the  scheme necessary for the proper working of the  compromise or arrangement.  This is a modification of  the scheme itself.  Same is the position regarding the  provision of replacing the resolution passed that if any  surplus amounts are available, SCML would start a  viable industry in any part of the State of Maharashtra,  by a commitment that SCML would establish an industry  in any part of the State of Maharashtra on an investment  of Rs. 20 crores.  This again is an obligation cast on the

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members of SCML and we are of the view that this  cannot also be taken to be a modification which the  Court can bring about on its own under Section 392 of  the Act on the pretext that it is a modification necessary  for the proper working of the compromise or  arrangement.  We have no hesitation in holding that in  any event, the Division Bench of the High Court ought to  have directed a reconvening of the meeting of the  members of the Company in terms of Section 391 of the  Act to consider the modifications and ensured that the  approval thereof by the requisite majority existed.

29.             In the view we have thus taken, we are  satisfied that it is a fit case where we should set aside  the decision of the Division Bench as also of the  Company Court and remand the proceedings to the  Company Court.  The Company Court first will direct the  sponsors of the scheme to call a meeting of the concerned in  terms of Section 391 of the Act and seek an approval for the  modifications now suggested by the Division Bench or that  may be put forward at the meeting.  If the requisite majority  approves the modifications and the matter comes back to the  Company Court, the Company Court will consider whether  the compromise or arrangement put forward is one that  deserves to be accepted in respect of a company which has  been ordered to be wound up in the light of what we have  indicated above and what the Division Bench had earlier  indicated in its order dated 4.4.1995.  

30.             In addition to expanding and supporting the  submission that in terms of Sections 391 to 393 of the Act,  the court had the power to accept the compromise or  arrangement even in respect of a company ordered to be  wound up, independent of Section 466 of the Act and in that  process the power to stay a winding up, learned Senior  Counsel appearing for the Workers’ Union argued on behalf  of the workmen that interference by this Court would further  delay the benefits that would accrue to the workers under  the arrangement now approved by the Division Bench and  considering the long lapse of time, that would be unjust.   Learned counsel highlighted the additional benefits that  would accrue to the workers under the present scheme.   Though, we do appreciate this aspect of the matter, having  taken the view that the arrangement has to go back to the  meeting of members, creditors, etc. of the company in terms  of Section 391 of the Act and once it is adopted or adopted  with modifications with the requisite majority at the meeting,  the arrangement would require a fresh scrutiny by the  Company Court thereafter, we cannot avoid interfering with  the decision of the Division Bench on the ground put forward  by learned Senior Counsel of benefit to the workers.   

31.             We thus allow Civil Appeal Nos. 3179-3181 of  2005, Civil Appeal Nos. 3182-3184 of 2005 and Civil  Appeal No. 4377 of 2006, set aside the judgment of the  Division Bench and that of the Company Court, and remit  the matter to the Company Court for a fresh consideration  in accordance with law and in the light of the directions  contained in the judgment.  Civil Appeal Nos. 3569-3571  of 2005 is dismissed as withdrawn.  The parties are  directed to suffer their respective costs.  The parties will  appear before the Company Court for further directions  on 12.11.2007.