In Re: Hindustan Dorr-Oliver Ltd. vs Unknown on 21 October, 2002

JUDGMENT

S.J. Vazifdar, J.

1. The Petition seeks the Court’s sanction to the scheme of arrangement between the Petitioner and its equity shareholders as modified. The Petitioners have also sought permission to amend certain provisions of the scheme.

2. The Petitioner was incorporated on 26th July, 1974. As on 31st March, 2001, the authorized share capital of the Petitioners was Rs. 10,00,00,000 (Rupees ten crores) divided into 1,00,00,000 equity shares of Rs. 10 each. The issue, subscribed and paid-up shares capital is Rs. 4,75,20,000 divided into 47,52,000 equity shares of Rs. 10 each.

The shareholding pattern is as follows:

No. of Equity Shares held

No. of Share holders    

96 of Share holders    

No. of Shares held    

% of Share holding    

1 to 50

3491

35.26

1,25,832

2.65

51 to 100

2852

28.81

2,61,007

5.49

101 to
200

2739

27.66

4,81,687

10.14

201 to
500

598

6.04

2,08,104

4.38

501 to
1000

155

1.56

1,07,788

2.27

1001
to 5000

57

0.57

94,187

1.98

5001& above

9

0.09

34,73,355

73.09

Total

9901

100.00

47,52,000

100.00

3. The Petitioner’s Board of Directors propounded the scheme and approved the same in a meeting held on 27th November, 2001.

The scheme is presented under Sections 391 to 394 read with Section 100 of the Companies Act, 1956 for cancellation of equity shares held in small lots and to issue in lieu thereof 11% secured redeemable non-convertible debenture (NCD’s) of Rs. 20 each of the company in the manner and to the extent provided therein.

4. (a) Clauses 3 and 4 of the Scheme are as follows :–

“3. Objective of the scheme.–The Company has a high number of Shareholders who hold Equity Shares in small-lots. The cancellation of Equity Share Capital of the Company and issue of Debentures proposed to be effected through this Scheme is expected to eliminate the high number of small-lot shareholding in the Company and reduce the cost of distribution of dividend, cost of printing and posting of annual reports and dividend warrants and avoid dividend remaining unpaid due to difficulties in encashment of warrants.

The shares of the Company are thinly traded in view of the low liquidity and shareholders find it difficult to dispose their holdings easily. During the past one year, the volume of shares traded on the BSE was less than 1.2%. Moreover, since the shares of the Company are traded compulsorily in dematerialized form, shareholders of small-lot Equity Shares in physical form will also find it difficult and expensive to dematerialise and dispose of the small number of their shareholding in the Company. The proposed issue of Debentures will facilitate accumulation of interest and encashment thereof on maturity together with the principal amount of the Debentures and early encashment by buyback of the Debentures by the Company immediately after issue and allotment. The proposed scheme is thus expected to provide an exit option to the shareholders holding small-lots as also to shareholders holding odd-lots.”

“4. Scheme of arrangement.–The Company shall issue and allot 1 (one) Debenture of Rs. 20 (Rupees twenty) or as may be approved by the Court for every Equity Share cancelled as follows :

(a) In case of shareholding being up to 200 (two hundred) Equity Shares held in physical form on the Record Date, automatic cancellation of the entire shareholding without surrender of the share certificate relating to the Equity Shares, unless the Company receives a written intimation in Form A from such Shareholder on or before the Record Date desiring to continue holding the Equity Shares.

(b) In case of shareholding being more than 200 (two hundred) Equity Shares in physical form on the Record Date, cancellation of upto 200 (two hundred) Equity Shares upon the Company receiving a written intimation in Form B from such Shareholder on or before the Record date and surrender of the share certificate relating to the Equity Shares desired to be cancelled upon which the Company would issue a new share certificate for the balance shares (if any), not cancelled.

(c) In case of dematerialised Shareholding, cancellation of upto 200 (two hundred) Equity Shares upon the Company receiving a written intimation on or before the Record Date in Form C and photocopy of debit instruction slip duly acknowledged by the Depository Participants.

For receiving dematerialised shares, the Company shall appoint Trustees who shall hold the shares in trust till such time the shares are cancelled and debentures are allotted in accordance with the Scheme.”

4(b) Clause 8 of the Scheme provides that the issued, subscribed and paid-up equity share capital of the company shall stand cancelled and be reduced to the extent of equity shares surrendered and/or otherwise cancelled pursuant to Clause 4 of the scheme. Clause 10 is important. It provides that in consideration of the equity shares surrendered for cancellation or otherwise cancelled by the petitioner pursuant to the scheme, the company is required to issue one 11% N.C.D. of Rs. 20 for every equity share of Rs. 10 each cancelled pursuant to the scheme. The debentures are proposed to be secured by creation of an equitable mortgage by way of first and/or second charge in respect of specific fixed assets of the Company in consultation with the Trustees.

4(c) Clause 10.4 of the scheme provides that the debentures shall be redeemed at the end of one year from the appointed date by paying the principal amount of debentures and annual interest thereof. The Petitioners have in prayer (c) sought permission to modify Clause 10.4 by making the debentures redeemable at the end of one year from the date of issuance of the debentures by paying the principal amount and interest to each debenture holder. There was no objection taken by any of the parties to this modification.

5. (a) The Company took out Company Application No. 573 of 2001 seeking directions to convene a meeting of the equity shareholders to consider the proposed scheme.

(b) By an order dated 5th December, 2001. D.G. Karnik, J., ordered a meeting of the equity shareholders of the petitioner on 5th January, 2002 for the purpose of considering and if thought fit to approve with or without modification the scheme. The usual directions regarding advertisements forwarding notices, convening the meeting, appointing a Chairman and fixing the quorum were also passed. Clause 11 of the order reads as under :–

“11. Ordered that the convening and holding of the meeting of the Secured and Unsecured Creditors of the Applicant Company to consider and approve with or without modification the proposed Scheme of Arrangement between Hindustan Dorr-Oliver Limited and its Members is dispensed with in view of the undertaking mentioned in Paragraph 23 of the Affidavit in support of the Summons for Directions. Applicant undertake to issue notice of date of hearing of Petition to secured and unsecured Creditors as directed by this Hon’ble Court.”

(c) Paragraph 23 of Company Application No. 573 of 2001 referred to in Clause 11 above, read as under :–

“23. It is further submitted that the secured and unsecured creditors of the Applicant Company are not affected by the Scheme as the scheme is principally between the Applicant Company and its Members. Moreover no sacrifice or waiver is at all called for from them nor are their rights sought to be modified in any manner In any event the Company undertakes to give notice of hearing of the Petition to all the secured and unsecured creditors of such value if and as may be directed by this Hon’ble Court. In the circumstances, the meeting of creditors of the Applicant Company be dispensed with. This would not cause any prejudice and would avoid unnecessary proliferation of notices and enormously cumbersome procedure. In any event general notice of hearing of Petitioner in the newspapers will be given if and as may be directed by this Hon’ble Court.”

6. (a) The meeting of the equity shareholders of the Petitioner was accordingly held on 5th January, 2002. Mr. A.P. Kothari, Company Registrar of this Court appointed Chairman of the meeting by the order dated 5th December, 2001, submitted his report.

(b) One of the shareholder viz,, Dandvati Investments and Trading Company Private Limited proposed an amendment to the scheme by incorporating paragraphs 15A and 15B thereto, to provide for a longer validity period of the scheme. The amendment was approved by an overwhelming majority of the equity shareholders present at the meeting, only two persons having voted against the same.

(c) Thirty-seven equity shareholders attended the meeting, three of whom refrained from voting. Thirty-four equity shareholders holding equity shares of an aggregate value of Rs. 3,42,41,700 voted in favour of the scheme as amended. Only seven equity shareholders holding equity shares of an aggregate value of Rs. 24,920 voted against the scheme.

Three votes were declared invalid. An overwhelming majority of the equity shareholders thus voted in favour of the scheme.

7. On 5th April, 2002, the present petition was filed. On 8th March, 2002 the petition was called for directions. D.K. Deshmukh, J., recorded and accepted the statement of the learned counsel appearing on behalf of the petitioner to the effect that the proposed reduction of the share capital does not involve either the diminution of liability in respect of the equity share capital or payment to any shareholders of any paid-up share capital. In view of this statement, his Lordship directed :–

” Therefore, compliance with the provisions of Sub-section (2) of Section 101 is dispensed with.”

The petition was admitted and the minutes of the order separately signed excluding the bracketed portion were taken on record. Incidently Minutes of the order do not contain any bracketed portion. Nothing however turns on this.

8. The Company Secretary of the petitioner filed an affidavit dated 18th March, 2002 in which he stated that the above statement to the effect that “the proposed reduction of the share capital does not involve payment to any shareholder of any paid-up capital” was not correct, as under the scheme, payment was to be made to the shareholders of the paid-up share capital in respect of share capital proposed to be reduced. The petitioner therefore applied that the order dated 8th March, 2002 be modified or set-aside and a fresh order be passed. The affiant further stated that the petitioner on realising this error, mentioned the matter before his Lordship at 4.45 p.m. on 8th March, 2002 itself.

9. What followed in the affidavit and the order based thereon is important to decide Dr. V.V. Tulzapurkar’s submission. The affiant stated that the financial position of the petitioner was strong and that therefore the procedure under Section 101(2) be dispensed with. It is important to note that the affiant did not submit that the provisions of Section 101(2) should be dispensed with. The petitioner thereafter had the matter circulated for modifying the order dated 8th March, 2002. On 4th April, 2002, D.K. Deshmukh, J., passed a fresh order as under :–

“P.C. : Minutes of order taken on record and marked “X”. Order in terms of minutes of order.”

Clauses 5 and 6 of the Minutes of the order read as under :–

“5. At least 21 days prior to the date of the hearing of the petition individual notice to be served upon the Secured Creditor of the Petitioner Company viz. The United Western Bank Limited and also upon the Unsecured Creditors whose claim exceeds Rs. 1 lac and individual notice to Unsecured Creditors whose claim is Rs. 1 lac and less is dispensed with,

6. In view of Clause 5 hereinabove, the procedure under Section 101(2) of the Companies Act, 1956 is dispensed with.”

Clause 5 was pursuant to the undertaking of the company contained in paragraph 20 of Company Application No. 573 of 2001 and in view of which the meeting of the creditors was dispensed with as recorded in Clause 11 of the order of D.G. Karnik, J., dated 5th December, 2001.

Once again it is important to note that the order dated 4th April, 2002 did not dispense with the provisions of Section 101(2). Even the minutes of the order did not dispense with the provisions of Section 101(2) but only the procedure thereunder.

10. Thereafter notices were issued by the petitioner to the unsecured creditors informing them that the petition had been admitted and had been fixed for hearing on 6th June, 2002. One such notice dated 24th April, 2002 was issued to Thermax Ltd. an unsecured creditor of the petitioner who has opposed the confirmation of the scheme.

11. Dr. Tulzapurkar, the learned counsel appearing on behalf of the petitioner submitted that the entire procedure under Section 101 and the requirement of the petitioner to secure the creditors claims has been dispensed with by this court by its order dated 4th April, 2002. According to him, the said order directing notices to be given to the individual creditors merely permitted them to object to the scheme in general.

I am unable to agree with this submission for more than one reason. Section 101 of the Companies Act, 1956 reads as under :–

“101. Application to Court for confirming order, objections by creditors, and settlement of list of objecting creditors:–

(1) Where a company has passed a resolution for reducing share capital, it may apply, by petition, to the Court for an order confirming the reduction.

(2) Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, and in any other case if the Court so directs, the following provisions shall have effect, subject to the provisions of Sub-section (3) :–

(a) every creditor of the company who at the date fixed by the Court is entitled to any debt or claim which, if that date were the commencement of the winding-up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction;

(b) the Court shall settle a list of creditors so entitled to object, and for that purpose shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction;

(c) where a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the Court may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of his debt or claim by appropriating, as the Court, may direct, the following amount :–

(i) if the company admits the full amount of the debt of claim or, though not admitting it, is willing to provide for it, then, the full amount of the debt or claim;

(ii) if the company does not admit and is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the Court after the like inquiry and adjudication as if the company were being wound-up by the Court.

(3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, the Court may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct that the provisions of Sub-section (2) shall not apply as regards any class or any classes of creditors.”

12. The right given to and the protection provided for creditors under Section 101(2) are important and valuable. In a given case it is possible that the entire assets of a company can be erode by providing payment to the shareholders of the paid-up share capital of the company. The court may of course, in a given case if, having regard to any special circumstances of the case, thinks it proper to do so in exercise of its powers under Section 101(3), direct that the provisions of Section 101(2) shall not apply as regards any class or classes of creditors. The extinguishment of either this right or the protection of the creditors dues however cannot easily be inferred. Do the earlier orders warrant such an inference ? This is the question I must deal with first.

13. It is pertinent to note that D.K. Deshmukh, J by his order dated 8th March, 2002 dispensed with the provisions of Section 101(2). This, however, the learned Judge did in view of the statement made on behalf of the petitioner that the proposed reduction of the share capital does not involve payments to any shareholders of any paid-up share capital. The petitioners, fairly and responsibly corrected this statement as the position was actually to the contrary, The moment it was pointed out that the scheme involved payment to the shareholders of paid-up share capital, which it did, the learned Judge in the subsequent order dated 4th April, 2002 did not dispense with the provisions of Section 101(2). He confined his order to dispensing with the procedure and not the provisions of Section 101(2).

14. The difference between dispensing with the procedure under Section 101(2) and dispensing with the provisions of Section 101(2) is material and
significant.

D.K. Deshmukh, J., himself made a distinction between the two. In the order dated 8th March, 2002. D.K. Deshmukh, J. directed that the provisions of Section 101(2) were dispensed with. The minutes dated 8th March, 2002 provided in Clause 7 that the procedure under Section 101(2) of the Companies Act shall not apply. If there was no distinction between dispensing with the procedure under Section 101(2) and dispensing with the provisions of Section 101(2), it would not have been necessary to mention in the order again that the provisions of Section 101(2) are dispensed with.

15. In a given case it is possible that the order may use the terms “procedure” to mean “provision” and vice versa. The context of the order would indicate this. However in this case it is not so.

16. The company itself proceeded on the basis that there was a distinction between dispensing with the procedure under Section 101 on the one hand and dispensing with the provisions of Section 101(2) on the other. This is evident from the fact that after pointing out the inaccuracy in the statement made on its behalf before D.K. Deshmukh. J., on 8th March, 2002, the company in its affidavit dated 18th March, 2002, did not even submit that the provisions of Section 101(2) ought to be dispensed with. The company only submitted that the procedure under Section 101(2) be dispensed with.

17. The fallacy in Dr. Tulzapurkar’s submission is apparent for another reason. In paragraph 23 of Company Application No. 573 of 2001 the company requested that meeting of the creditors be dispensed with on two grounds. One of the grounds was that the company undertook to give notice of the hearing of the petition to the creditors of such value if and as may be directed by this court. It was on the basis of this paragraph that D.G. Karnik, J., in his order dated 5th December, 2001 dispensed with the convening and holding of the meeting of the creditors of the company. There is nothing in the order to suggest that the learned Judge while dispensing with the creditors meeting did not take into consideration the undertaking given by the company to give notice of the hearing of the petition to all the creditors.

The order dated 5-12-2001 did not affect the rights of the creditors under Section 101(2). Nor did it created any rights in favour of the creditors. In other words it was not an order under Section 101(3). By dispensing with the holding of the meeting of the creditors in view of the undertaking of the company to give notice to the creditors of the hearing of the petition, the court preserved the right of the creditors to object to the scheme at the hearing of the petition. The creditors could have opposed the scheme at the meeting on the ground that their interests were not secured. No doubt the Court could even in that event have passed an order under subSection (3). But the court did not do so. It preserved the consideration of this right of the creditors at the hearing of the petition. Pursuant to and in view of the said undertaking, D.K. Deshmukh, J., by the order dated 4th

April, 2002 directed the company to serve individual notices upon the secured creditors and unsecured creditors whose claims exceeded Rs. 1,00,000.

18. The substantive right of a creditor under Section 101(2) is to have his claim either paid or secured. The court in exercise of powers under subSection (8) of Section 101 is entitled to direct that the provisions of subSection (2) shall not apply as regards any class or classes of creditors. The procedure to enable the court and the creditors to protect the interests of the creditors is provided in Section 101(2)(b). The order dated 4th April, 2002 dispensed with neither the substantive nor the procedural rights of the creditors. The procedural rights were only modified by ensuring that the company would give notice of the hearing of the petition to the individual creditors, whose claim exceeded Rs. 1,00,000. Under Section 101(2)(a) every creditor of the company is entitled to object to the reduction in share capital. Section 101(2)(b) provides the procedure for settling the list of creditors so entitled to object. By Clause 6 of the order, the court dispensed with the specific procedure under Section 101(2) relating to the settlement of the list of the creditors. The court altered the procedure under Section 101(2)(b). Thus the court exercised its power under Section 101(3) to the limited extent of dispensing with the specific procedure and not with all the provisions of Section 101(2).Instead of going through the rather elaborate procedure provided by 101(2)(b), the court in exercise of its jurisdiction directed the company to give notice of the hearing of the petition to unsecured creditors whose claims were in excess of Rs. 1,00,000.

19. This in turn implied that the Court would consider only the case of those creditors who appeared at the hearing of the petition as to whether or not their debts ought to be secured by the company. In respect of such creditors the court did not dispense with the provisions of Section 101(2).

20. Nor do I see anything in the said order which restricts the right of the creditors to appear before this court only for the limited purpose of opposing the scheme generally and not for the purpose of enforcing their rights under Section 101(2)(a) and (c).

21. When the court settles a list of creditors it does so after following the procedure mentioned in Section 101(2)(b). The court applies its mind as to the rights of the creditors – the nature and amount of their debts or claims. The court would enter on the list only those creditors who at the date fixed by the court are entitled to any debt or claim which, if that debt, at the commencement of the winding-up of the company would be admissible in proof against the company. The dispensation of the procedure and the requirement of settling the list predicates that the court has not applied its mind to the entitlement of any creditor either to object to the scheme or to have his debt secured. Thus, a creditor in such circumstances, who appears at the hearing of the petition is entitled to object to the scheme in general as well as apply to have his claim secured.

22. In support of his submission, Dr. Tulzapurkar submitted that if the creditors before me are permitted to apply for security under Section 101(2)(c)(ii) it would give them an unfair advantage over other creditors of the same class as they would succeed in obtaining security in precedence over other creditors whose claims may be admitted but not secured because of the dispensation order. But the fallacy in this submission lies in proceeding on the basis that the order dated 4th April, 2002 dispensed with the requirement of the company securing the debts under Section 101(2). Considering the view I have taken this argument does not survive.

23. There is another reason why the submission cannot be accepted. Even where a list of creditors is settled under Section 101(2)(b), it is not necessary that the court must pass an order under Section 101(2)(c) in favour of each of the creditors whose name is entered in the list. The court under Section 101(2)(c) is required to pass an order for payment or security only in respect of those creditors who do not consent to the reduction. Thus, Section 101 contemplates a situation where only some creditors may be paid or the claims of only some of the creditors may be secured. In that view of the matter also Dr. Tulzapurkar’s submission in this regard is rejected.

24. Dr. Tulzapurkar relied upon the following passage in Pennington’s Company Law (Eighth Edition page 214) in support of their submissions :

“The Court may dispense with these provisions for the protection of creditors, but it will only do so in special circumstances, and on being satisfied that the company has deposited in court a sum of money sufficient to satisfy all claims which are likely to be made against it, or that a bank or other responsible person or company (e.g., an insurance company) has guaranteed the payment of such claims, valuing them in the same way as if the company were being wound-up, and that the guarantor has sufficient assets to meet all its liabilities. The effect of such a dispensation is not only to obviate the procedural requirements with regard to creditors, but also to deprive them of their right to object to the reduction on the hearing of the company’s petition.”

25. Dr. Tulzapurkar relied upon the last three lines of the above extract in support of his submission that the order dated 4th April, 2002 deprived the creditors of their right even to object to the scheme at the hearing of the Company Petition. But, the last three lines must be read with the first sentence in that paragraph. The words “such a dispensation” referred to in the last three lines relate to the words “the Court may dispense with these provisions for the protection of creditors”. Thus the last sentence would support Dr. Tulzapurkar’s submission only in a case where the Court has dispensed with the provisions for the protection of creditors. I have already held that the order dated 4th April, 2002 did not dispense with the provisions of Section 101(2) and only modified the procedure to a limited extent. The passage is Pennington therefore can be of no assistance to Dr. Tulzapurkar.

26. Lastly, as submitted Mr. Doijode, the learned counsel appearing on behalf of Term ax Limited, the Petitioner was directed to give notice of the hearing of the petition to the individual creditors who had a claim in excess of Rs. 1,00,000. The question is to what intent and purpose was this direction given ? If, according to Dr. Tulzapurkar it was not the intent or the order to give the creditors a right thereby, to apply for security under Section 101(2), on what basis could it be said that it permitted the creditors to object to the scheme generally? There is nothing in the order to indicate the same. Thus, if it is held that the notice of the hearing of the Petition given to the creditors did not permit them to make an application in respect of their rights under Section 101(2)(c), it must equally be held that the notice did not give them a right to oppose the scheme at all. Such an interpretation would render the direction and the notice issued pursuant thereto otious.

In my view, therefore, the creditors who have appeared before me are not only entitled to oppose the scheme generally but are also entitled to apply that their debts be secured.

27. This view, therefore, also disposes of the contention of Mr. Doijode, that the Court in a petition for sanction to a scheme for reduction of share capital involving the payment to any shareholder of any paid-up share capital is bound to either order payment of or secure the claim of all the creditor’s irrespective of anything. In other words according to him a creditor whole name is entered on the list is ipso facto entitled to have his claim either paid over or secured. I am unable to agree with Mr. Doijode’s submission either. In fact the provisions of Section 101, itself make it clear that not every person who claims to be a creditor of the company is entitled to an order in his favour under Section 101(2)(c). Even a creditor whose name has been entered on the list is not entitled to an order under 101(2)(c) securing the entire amount, ipso facto. Where the company does not admit and is not willing to provide security for the full amount of the debt, the court is required in respect of a creditor entered on the list, to fix the amount after the like enquiry and adjudication as if the company were being wound-up by the court. The Court may even dispense with the provisions of Section 101(2) in exercise of its powers under Section 101(3). If it were not so Section 101(2)(c)(ii) would have provided in express terms that the Court is bound to secure every creditor entered on the list to the extent of the amounts of their debts or claims determined under Section 101(2)(b).

28. Dr. Tulzapurkar submitted, in the alternative, that a creditor who appears pursuant to the notice is not entitled to security as of right, as if he is on the list of creditors settled by the court. Such a creditor is bound, according to him, to satisfy the Court that in the facts of his case he is entitled to have his claim either paid or secured. The submission is well founded. The Court dispensed with the procedure of settling the lists of creditors. The Court therefore, had no occasion to consider the tenability of the creditors claim. I have held that the consideration thereof was postponed to the hearing of the Petition. Dr. Tulzapurkar’s submission is therefore axiomatic.

29. This then gives rise to the question as to the nature and scope of enquiry, and adjudication contemplated in Section 101(2)(c)(ii).

30. When a company is wound-up, a creditor is entitled either to prove his claim in winding-up before the Official Liquidator or apply for and obtain leave under Section 446 of the Companies Act to commence or proceed with against the company the suit or other legal proceeding. When an application is made under Section 446, the Company Court may permit the credited to commence or to initiate a suit against the company. It is not mandatory that the Company Court must entertain or dispose of such a suit or proceeding itself.

Thermax Limited has already filed a suit in this Court being suit No. 39 of 2000 seeking an injunction restraining the petitioner from invoking the bank guarantee. Having failed to obtain the injunction, the bank paid under the guarantee. It is stated that Thermax Pvt. Limited has now amended the suit to claim refund of the amounts alleged to have been wrongly recovered by the company under the bank guarantee.

The very nature of the proceeding under Section 101 indicates that it does not necessarily contemplate a full-fledged trial of the creditors’ claim. Firstly and especially in a case such as that of Thermax where a suit or other proceedings has already been initiated, there is no question of the Company Court relegating the suit to itself. That is a power specifically conferred upon the Company Court in respect of a company being wound-up. The final determination of such a creditor’s claim can be only by the Court or Tribunal before which the proceedings for recovery are pending. The same will apply even in respect of a creditor who has not adopted proceedings for recovery. For while exercising powers under Section 101, the Court is not entitled to pay over the amount to the creditors but only to secure their claim.

31. Section 101(2)(c)(ii) only provides for the procedure for fixing the amount of security. It does not contemplate a final, determinative and precise adjudication of the creditors claim. This coupled with the fact that the final adjudication of the creditors dues will depend upon the substantive proceedings adopted in a Court of law indicates that a similar procedure is not contemplated under Section 101(2). I do not suggest that a Court has no power to direct the parties to lead evidence in proceedings under Section 101. But that would be only for the purpose of determining the extent of the security. The Court is entitled to determine the extent of the security on the basis of affidavits filed before it in a proceeding under Section 101. The manner and extent of proof must be decided by the Court depending on the fact of each case.

32. Under Section 101(2)(c)(ii), the Court is required to fix the amount “after the like inquiry and adjudication as if the Company were being wound-up by the Court”.

Rules 147 to 163 of the Companies (Court) Rules, 1959 (hereinafter referred to as the Rules) deal with the debts and claims against the company and prescribe the procedure for determination thereof. The Rules and especially Rules 150, 151, 159, 160 and 163 establish that it is permissible for the Liquidator to determine the claims on the basis of the affidavits, which are to be filed in Form No. 66. The Liquidator is entitled to call for the production of vouchers or further evidence in support of the debt. He is also entitled to call upon the creditor to attend the investigation in person. Rule 163 requires the Liquidator to admit or reject the proof in whole or in part “after such investigation as he may think necessary”.

The Rules establish therefore that a summary procedure is contemplated in proceedings under Section 101(2)(c).

33. This leaves then for consideration the applications of the various creditors on facts.

The Petitioner and Watco Technical Private Limited have arrived at a settlement whereby the Petitioner shall pay to Watco Technical Private Limited a sum of Rs. 3,00,000 in full and final settlement of Watco’s claims on or before 10th January, 2003. In the event of the Petitioner’s failing to make payment of the said amount. Liberty to Watco Technical Private Limited to apply.

34. Alstom Limited has withdrawn its objection.

35. The Petitioner and Paharpur Cooling Towers Limited have arrived at a settlement whereby the Petitioner shall pay Paharpur Cooling Towers Limited a sum of Rs. 16,00,000 in full and final settlement of the latter’s claims on or before 1st March, 2003. In the event of the Petitioner failing to make payment, liberty to Paharpur Cooling Towers Limited to apply.

36. The only claim that is contested is that of Thermax Limited.

Thermax Limited has raised its claims in two affidavits filed on its behalf dated 29th May, 2002 and 4th June, 2002. At the outset it is necessary to state that the Thermax claims are neither admitted nor liquidated. I do not propose therefore to deal with a situation where the claim of a creditor is admitted in any manner.

37. I will deal with the claim in the second affidavit dated 4th June, 2002 first. Thermax stated that certain claims remained to be raised in its affidavit dated 29th May, 2002. Its case is that on 27th June, 1995 the Petitioner placed an order on it to set up a filtration plant which it did and in respect thereof a sum of Rs. 26,55,016 remains due and payable to it by the Petitioner. It is further stated that an amount of Rs. 12,60,321.12 ps. is due and payable by the Petitioner to Thermax in connection with transportation and freight charges on account of dishonour of cheques issued by the Petitioner in favour of Thermax in connection with the payments in respect of the aforesaid two orders. Thermax has tabulated its claims in Exhibit ‘A’ to its affidavit. The claims are ex facie barred by limitation. Mr. Doijode was unable to dispute the same.

38. In the affidavit in reply, the petitioner has further stated that Thermax had abandoned the sight of the two contracts. Further, the petitioner disputed the various claims of Thermax by various letters, two of which are annexed to the Petitioner’s affidavit in reply. The Petitioner has alleged that it was Thermax which was responsible for various breaches of the said contract and that it has suffered losses as a result thereof.

The above facts are not rebutted by Thermax. In the circumstances, and specially in view of the fact that the claim appears to be barred by limitation, I am not inclined to secure the same.

39. In the first affidavit dated 29th May, 2002 Thermax alleges to have a claim against the Petitioners in respect of a purchase order dated 25th June, 1997. The purchase order was for a sum of Rs. 75,00,000. The Petitioner had procured a contract for setting up a Water Treatment Plant for Telco at Pune. The Petitioner was to set up a Primary Treatment Plant and the effluents from the plant set up by the Petitioner were to be set up by the Secondary Treatment Plant which was sub-contracted to Thermax by the purchase order. 10% of the payment was to be paid against submission of a corporate guarantee and the balance 9096 of the sum was to be paid to Thermax on a pro rata basis within 15 days from the date of Thermax’s invoice along with, lorry receipt, packing slip, and test certificates. Thermax was to provide a performance guarantee in the form of a bank guarantee for 10% of the value of the contract. The Secondary Treatment Plant was guaranteed by Thermax against faulty workmanship for a period of eighteen months from the date of delivery or twelve months from the date of commissioning, whichever is earlier.

Thermax furnished a corporate guarantee on 5th June, 1997 to secure advance bill. Thermax also submitted a performance guarantee dated 15th December, 1997 executed by Deutsche bank AG in the sum of Rs. 7,50,000. The main case of Thermax is that the Primary Treatment Plant was to be installed by the Petitioner and only the job of installing the Secondary Treatment Plant was given to it that although the technical completion of the Secondary Treatment Plant was achieved by Thermax in October, 1998, the same could not be commissioned as the Primary Treatment Plant was not ready as a result whereof Thermax could not commission its plant and had to wait beyond the period provided in the purchase order, that the delay in commissioning the Secondary Treatment Plant was wholly attributable to the Petitioner, that Thermax had carried out certain alterations due to defaults of the Petitioner, that the Petitioner delayed the civil foundation work for both the plans which in turn delayed the work and that the same resulted in Thermax suffering damages. In addition to the claim for damages, according to Thermax, the Petitioner has also not paid an aggregate amount of Rs. 6,47,438.52.

40. The Petitioner invoked the performance guarantee. Thermax filed Suit No. 39 of 2000 inter alia seeking an injunction restraining the Petitioner from invoking the said guarantee. Thermax took out Notice of Motion No. 72 of 2000 for interim reliefs which was dismissed by an order dated 18th January, 2000.

41. Thus, in respect of the aforesaid contract, Thermax claims to be entitled to a sum of Rs. 6,47,438.52 ps. under various invoices issued by it pursuant to the purchase order Rs. 12,37,000 by way of damages, Rs. 5,56,639.98 ps. towards interest and Rs. 10,50,000 towards recovery of the amount recovered by the Petitioner by invoking the guarantee, including interest thereon.

42. Dr. Tulzapurkar submitted that in view of the order dated 18th January, 2000 dismissing the application for injuncting payment under the bank guarantee, the Respondent is not entitled to have any part of its claim secured. I am unable to agree. The injunction was refused not pursuant to an adjudication of the claim of Thermax on merits but in view of the law relating to the grant of injunctions in respect of unconditional bank guarantees. This is clear from the order. However, refusal of the injunction does indicate that the invocation of the guarantee by the Petitioners was not fraudulent and that there were no special equities in favour of Thermax, entitling it to the injunction. The refusal of an injunction restraining the bank guarantee would not by itself disentitle a creditor from seeking security under Section 101.

43. The Petitioner has disputed the claim of Thermax. The Petitioner’s case is that Thermax committed several breaches of the agreement and failed to rectify the same despite requests, as a result whereof, the plant could not be commissioned. In this regard, the Petitioner has craved leave to refer to and rely upon the correspondence. The Petitioner has further alleged that consequent thereto, it could not recover all its dues from Telco which they were entitled to under the principal contract with Telco. The Petitioner claims to be the creditor of Thermax.

44. Firstly, there is no rejoinder disputing the Petitioner’s case against Thermax. Secondly, as far as the individual claims are concerned. Mr, Doijode conceded that while considering the amount of security furnished by a company under Section 101, the Court may not consider an unliquidated claim for damages, I express no view on this point. Suffice it to say that in the present case, I am not inclined to secure the same.

45. I would at the highest have considered securing the claim of Thermax to the limited extent of Rs. 6,47,438.52 ps. i.e., in respect of the amounts claimed under the invoices. There is however a serious dispute between the Petitioner and Thermax as to which of them has committed a breach of the contract and as to which of them is the creditor of the other. These are questions which can conveniently be decided only in the suit. In these circumstances, it is not really necessary to insist on the company securing the dues of Thermax. In the facts of this case, I am not inclined to secure the claim for refund of the amounts recovered by the Petitioner invoking the bank guarantee.

46. Moreover the financial condition of a Company is a relevant factor while deciding whether an order under Section 101(3) is warranted. I am not in agreement with Mr. Doijode’s contention to the contrary. On the contrary, I see no such fetter on the power of the Court in exercising in its discrection under Section 101(3). For instances, if a dissenting creditors claim or even if the claim of all the creditors is extremely small, and/or the consequence of the reduction is not significant and the assets of the company are such that if the scheme is sanctioned, it would pose no threat to the rights of the creditors there is no reason why the Court cannot take the financial position of the company into consideration while passing an order under Section 101(3). I hasten to reiterate that this judgment does not purport to deal with an admitted claim or a claim regarding the sustainability of which the Court has little or no doubt.

47. The Petitioner has at several places contended that its financial position is sound. For instance, in its affidavit in reply, the Petitioner has stated that it is a profit-making and financially sound company. This is evident from the balance sheet and accounts annexed to the petition. The Petitioner will therefore be able to meet any liability, if the suit is decided against it. This position has not been controverted by any of the creditors who have appeared before me, including Thermax.

48. I am also satisfied that this assertion is well founded. The latest audited accounts of the company for the year ended 31st March, 2001 are annexed to Company Application No. 573 of 2001. The net wealth (share capital and reserves excluding revaluation reserves) for the year ending 31st March, 2001 was Rs. 18,50,66,000. The Net Current Assets for the Financial Year 31st March, 2000 and 31st March, 2001 was Rs. 26,37,11,000. Moreover, the company has been paying dividend throughout from 1997 except during the year ended 31st March, 2000. The audited financial results for the year ended 31st March, 2002 also indicate that the company is in a sound financial position. It is important to note that none of these facts are in dispute. It is also important to note that the company’s assertion in Company Application No. 573 of 2001 to the effect that it has been paying all its dues on time and has not defaulted any of its financial obligations is not controverted.

49. Before parting with the judgment, it is necessary to observe that none of the parties before me contended that the scheme is fraudulent or is mala fide, with a view to benefiting the shareholders. Indeed, such a contention would be unsustainable. I have tabulated earlier the shareholding pattern of the company. Only nine shareholders hold about 73% of the issued, subscribed and paid-up capital of the company. Even assuming that they exercise their option to the entire extent, the benefit that they are likely to derive is negligible viz., 1800 shares. The reason furnished by the Petitioner in Clause 3 of the scheme is therefore genuine and I have no reason to doubt the same.

Absence of mala fide is not a ground in itself to deny a creditor an order under Section 101(2). It is however one of the factors a Court must take into consideration while exercising powers under Section 101 while the absence of mala fides would not by itself entitle a Company to an order under Section 101(3) or deny a creditor an order under Section 101(3)(c) the presence of it may well be an important factor to deny a Company an order.

50. The Petitioners have sought leave to amend. Clauses No. 15(a)(i) and 10.4 of the scheme. In paragraph No. 15(a)(i), the Petitioner has, through inadvertence, in line No. 9 mentioned the word ‘later’ instead of the word “earlier”. There can be no objection to the same.

It would also be necessary to amend Clause 10.4 of the scheme in view of the modification of the scheme. There can be no objection to the same in real.

51. In the circumstances, the petition is made absolute in terms of prayer Clauses (a) to (d). There shall be no order as to costs.

52. Mr. Doijode, the learned counsel appearing on behalf of Thermax applies for stay of this order. The order is stayed upto 26th November, 2002. An application is also made today on behalf of a creditor, seeking security under Section 101(2) of the Companies Act. However, the application was made after the arguments were over. It is therefore, rejected.

Parties to act on an ordinary copy of this order duly authenticated by the Company Registrar of this Court.