PETITIONER:
S. K. GUPTA & ANR.
Vs.
RESPONDENT:
K. P. JAIN & ANR.
DATE OF JUDGMENT30/01/1979
BENCH:
DESAI, D.A.
BENCH:
DESAI, D.A.
KAILASAM, P.S.
KOSHAL, A.D.
CITATION:
1979 AIR 734 1979 SCR (2)1184
1979 SCC (3) 54
CITATOR INFO :
RF 1987 SC1023 (31)
RF 1991 SC1289 (14)
ACT:
Companies Act, 1956 (1 of 1956) Ss. 391 and 392-Scope
of-Omission of the Original sponsor and substituting another
whether would change the 'basic fabric' of the scheme.
Words & Phrases-'Modify'and 'modifications'-meaning of.
HEADNOTE:
The Companies Act, 1956 by s. 391 enables a member or a
creditor of the company or a company which is being wound
up, its liquidator, to make an application to the court
proposing a compromise or arrangement between the company
and its creditors or any class of them or between the
company and its members or any class of them and seeking
directions of the court to convene a meeting of each class
of creditors and/or each class of members to whom the
compromise or arrangement is offered. On the court giving
the directions, the meeting would be convened in which the
proposed scheme of compromise and/or arrangement would be
submitted for consideration and each class will have to vote
upon it and if the scheme is accepted by a majority in
number representing three fourths in value of the creditors
or members or class of members as the case may be, present
and voting either in person or where proxy is allowed by
proxy, such approved scheme has to be placed before the
court for sanction of the court as envisaged in s. 391(2).
Under s. 392 of the Act, the High Court which has
sanctioned the scheme has the power to supervise the
carrying out of it and to give directions in regard to any
matter or to make modifications in it as it may consider
necessary for its proper working. But if the court is
satisfied that the scheme cannot work satisfactorily with or
without modifications, it can either suo motu or on an
application of any person interested in the company's
affairs order its winding up.
The holding company proposed a scheme of
compromise/arrangement between its subsidiary and the
unsecured creditors of the subsidiary company. After
obtaining the approval of the shareholders the holding
company obtained the sanction of the company court. A large
number of shares in the subsidiary company held by it and
its claim for a sum of Rs. 23 lacs recoverable from the
subsidiary company were transferred by the holding company
to the appellants. The appellants then applied to the court
to make an appropriate modification and/or grant further
direction for implementing the scheme sanctioned by the
court in respect of the subsidiary company by substituting
them (the appellants) in place of the holding company as
proponents of the scheme. The respondent in the mean while
made an application to the company court under s. 392 of the
Companies Act, 1956 to hold that the scheme sanctioned by
the court could not work satisfactorily with or without
modification and that, therefore, the court should
1185
make an order of winding up. The company judge allowed
substitution of the appellants as proponents of the scheme
and rejected the respondents' application for winding up of
the subsidiary company.
On appeal by the respondents under s. 483 of the
Companies Act a Division Bench held: (1) that since the
substitution of a new propounder in a scheme sanctioned by
the court in place of the original propounder was a change
of a basic nature which would not be comprehended within the
meaning of the expression "modification" in s. 392 and,
therefore, the company judge could not have granted
substitution of the propounder of the scheme without
referring the proposed modified scheme to the creditors who
approved the original scheme, (2) that since the transfer of
the shares in favour of the appellants had not been effected
in the company's registers, the appellants were not members
of the subsidiary, (3) that the debt owed by the subsidiary
to the holding company was not assigned according to law in
favour of the appellants and, therefore, they were not
creditors and (4) that not being either members or creditors
of the subsidiary, the appellants had no locus standi to
move an application under s. 392 for the modification of the
scheme.
On the question whether the court had power to grant an
application under s. 392 of the Act.
Allowing the appeal,
^
HELD: 1. Though a large number of provisions of the
Companies Act, 1956 are in pari materia with the provisions
of Companies Act, 1948 of the U.K. there is no provision
analogous to s. 392 in the U.K. Act. The court under the
U.K. Act has no power to modify the scheme either at the
time when it is offered for its sanction or at any time
subsequent thereto. The Parliament has in its wisdom,
conferred a power of wide amplitude on the High Court in
India to provide for its continuous supervision of the
carrying out of compromise and/or arrangement and also the
consequential power to make the supervision effective by
removing the hitches, obstacles or impediments in the
working of compromise or arrangement by conferring power to
give such directions for the proper working of the
compromise and/or arrangement. [1193 D-F]
This power of widest amplitude being conferred on the
High Court is a basic departure from the scheme of the U.K.
Act in which provision analogous to s. 392 is absent. The
sponsors of the scheme under s. 206 of the U.K. Act have
tried to get over the difficulty by taking power in the
scheme of compromise or arrangement to make alterations and
modifications as proposed by the court. [1195 C]
In the instant case the scheme is essentially a
compromise between the company and its unsecured creditors.
The scheme when sanctioned does not merely operate as an
agreement between the parties but has statutory force and is
binding not only on the company but even dissenting
creditors or members, as the cause may be. [1194 B-C]
J.K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spg. &
Wvg. Co Ltd. & Ors. etc., [1969] 2 SCR 866 at 891; referred
to.
1186
2. Section 391(1) by a specific and positive provision
prescribes who can move an application under it. Only the
creditor or member of that company or a liquidator in the
case of a company being wound up is entitled to move an
application proposing a compromise or arrangement. By
necessary implication any one other than those specified in
the section would not be entitled to move such an
application. [1194 D]
3. Sub-section (2) of s. 392 provides the legislative
exposition as to who can move the court for taking action
under s. 392. Reference to s. 391 in sub s. (2) of s. 392
merely indicates which compromise or arrangement can be
brought before the court for taking action under s. 392. The
reference to s. 391 in sub-section (2) of s. 392 does not
mean that all the limitations or restrictions on the right
of an individual to move the court while proposing a scheme
of compromise or arrangement have to be read in sub-s. (2)
merely because s. 391 is referred to therein. Unlike s. 391,
s. 392 does not specify that a member or a creditor or in
the case of a company being wound up, its liquidator, alone
can move the court under s. 392. The legislature uses the
expression 'any person, interested in the affairs of the
company' which has wider denotation than a member or
creditor or liquidator of a company. The ambit of the power
to act under s. 392(2) is demonstrated by the provision that
the court can suo-motu act to take action as contemplated by
s. 392(1) or it may act on an application of any person
interested in the affairs of the company. [1195 F-H]
Mansukhlal v. M. V. Shah, [1976] 46 Company cases 279
at 290-291; referred to.
4. If the court can suo motu act, it is immaterial as
to who drew the attention of the court to a situation which
necessitated court's intervention. Where the power is
conferred on the court to take action on its own motion, the
information emanating from whatever source which calls for
court's attention can as well be obtained from any person
without questioning his credentials, moving an application
drawing attention of the court to a situation where it must
act. The court may decline to act at the instance of a busy
body but if the action proposed to be taken is justified,
valid, legal or called for the capacity or credentials of
the person who brought the situation calling for court's
intervention is hardly relevant nor would it invalidate the
resultant action only on that ground. When sub-s. (2)
confers power on the court to act on its own motion, the
question of locus standi hardly arises. [1197 C-E]
In the instant case while examining the question of
locus standi after considering the provisions contained in
sub-s. (2) the High Court wholly over looked the important
provision therein contained, that the High Court can act on
its own motion. [1197 F]
5. Even though section 391 and 392 are complementary
they operate at different stages and have to be harmoniously
read. [1197 G-H]
6. Winding up meaning civil death of a company, must be
the ultimate resort of the court. A living workable scheme
infusing life into a sick unit is generally to be preferred
to civil death of the company. There is no warrant for
circumscribing the expression 'on the application of any
person interested in the affairs of the company as to limit
it to a member or a
1187
creditor. If the legislature used the expression 'member or
creditor' in s. 391(1) and yet used an expression of wider
denotation 'any person interested in the affairs of the
company,' in s. 392(2), the legislative intention is clearly
exposed in that any such person interested in the affairs of
the company need not be limited or restricted to refer to a
member or creditor. [1198 G-1199 A]
In the instant case, there is enough evidence on record
that as between the holding company and the appellants the
sale of shares is complete, and that the debt owed by the
subsidiary to holding company has been assigned by the
holding company to the appellants. The appellants therefore
have requisite interest both in the subsidiary company and
the scheme in respect of it, so as to enable them to
maintain an application under s. 392(2), as being persons
interested in the affairs of the company, and therefore the
application for modification by them is maintainable. [1200
B-C]
7. The High Court was in error in holding that the
appellants had no locus standi to maintain an application
under s. 392(1). The words 'modify' and 'modification' have
been defined in s. 2(29) of the Act to include the making of
additions and omissions. Section 2(1) defines 'altered' and
'alteration' to include 'making of additions and omissions',
while 'variation' is defined in s. 2(31) to include
'abrogation'. The definition of cognate words is noted to
arrive at a true meaning of the word 'modification'. The
noticeable feature is that it is an inclusive definition,
and where in a definition clause he word 'include' is used,
it is so done in order to enlarge the meaning of the words
or phrases occurring in the body of the statute and when it
is so used, these words or phrases must be construed as
comprehending not only such things which they signify
according to their natural import, but also those things
which the interpretation clause declares that they shall
include. [1200 H, 1201 D-G, H-1202 B]
Dilworth v. Commissioner of Stamps, [1899] AC 99 at
105; Jobbins v. Middlesex County Council, [1949] 1 KB 142;
Indira Nehru Gandhi v. Raj Narain (1975) Suppl. SCC 1 at 97;
Kalva Singh v. Genda Lal, [1976] 1 SCC 304 at 309; Cox v.
Hakes, [1890] 15 AC 506; referred to.
8. According to the definition 'modify' and
'modification' would include the making of additions and
omissions. In the context of s. 392 'modification' would
mean addition to the scheme of compromise and/or arrangement
or omission therefrom solely for the purpose of making it
workable. [1203 B]
9. The High Court misdirected itself when it resorted
to dictionaries for the meaning of the expression
'modification' in s. 392 when the said term was defined in
s. 2(29) of the Act itself. [1203 A]
In the instant case, the scheme is one by which a
compromise is offered to the unsecured creditors of the
company and whoever comes in as sponsor would be bound by
it. Omission of the original sponsor and substituting
another one would not therefore, change the 'basic fubric'
of the scheme. [1203 E]
10. The court on which a duty is cast by s. 392(1) to
supervise the working of compromise/arrangement must examine
the bona fides of the person applying to be substituted as
sponsor, his capacity, his ability, his interest qua the
company and other relevant considerations before
substituting one sponsor for another. In a given case an
application may be rejected if the
1188
court is of the opinion that the sponsor is not one who can
be trusted with the implementation of the scheme. [1204 A-C]
In the instant case the appellants have applied for
substituting them as sponsors of the scheme in place of the
holding company. They claim to have purchased 44,000 shares
out of 80,000 issued and subscribed equity shares of the
company. The sponsor has taken an assignment of a debt of
Rs. 23 lacs which the subsidiary company owed to the holding
company from the holding company. The only objector is
respondent holding 1,000 equity shares representing 1.25 per
cent of the issued and subscribed capital. In pursuance to
the court's order notice in the newspaper was inserted
calling for objection to the application for
substitution/modification. None including the petitioning
creditor except the respondent lodged such an objection. The
appellants agreed to implement the scheme and undertook to
provide Rs. 3 lacs as liquid finance for implementation. The
appellants therefore have a subsisting and vital interest in
the fate and future of the subsidiary company and they are
the appropriate persons who could and should be substituted
in place of the original sponsor and there is no objection
to granting their application. [1204 D-F, 1205 E, B]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1217 of
1976.
Appeal by Special Leave from the Judgment and Order
dated 16-7-1976 of the Delhi High Court in Company Appeal
No. 15/76.
Y. S. Chitale, K. R. Khaitan, B. Mohan, and Praveen
Kumar for the Appellants.
P. R. Mridul, R. L. Roshan, H. K. Puri and Vijai K.
Bahl for Respondent No. 1.
Pramod Dayal and S. K. Gupta for Respondent No. 2.
R. M. Gupta and K. N. Bhat for Intervener/Dena Bank.
The Judgment of the Court was delivered by
DESAI, J-A private sector sick unit, Indian Hardware
Industries Ltd. (‘IHI’ for short), engaged in manufacture of
builders’ hardware, now in a state of suspended animation
since 1971, awaits the outcome of this appeal for infusion
of life into it simultaneously providing a ray of hope to
primarily the workmen who were rendered jobless and the
unsecured and secured creditors whose hard earned money is
locked up in it.
A few facts will put the problem raised in this appeal
in focus and proper perspective. M/s. Delhi Flour Mills Ltd.
(‘DFM’ for short) was the holding company of which IHI was
the subsidiary. Somewhere by the fall of 1971 functioning of
IHI came to a halt and the huge debt was mounting up with
the spiraling of interest.
1189
As the shares of DFM were closely held by relations of
respondent No. 1 referred to as ‘Jain group’ and as there
were fratricidal disputes in Jain family culminating into a
litigation in the High Court of Delhi, IHI languished for
want of attention. In the meantime M/s. Indian Smelting &
Refining Co. Ltd. (‘petitioning creditor’ for short) filed a
winding up petition against IHI in 1975 alleging that IHI
was heavily indebted and was unable to pay its debts as and
when they became due. After the dispute in the Jain family
was resolved somewhere in 1974, a situation emerged in which
one R. P. Jain and the members of his family acquired
controlling interest in the holding company DFM. Once R. P.
Jain came into saddle, the DFM as holding company proposed a
scheme of compromise/arrangement between IHI and its
unsecured creditors and after the scheme was approved, the
proponent of the scheme submitted Company Petition No. 86/74
to the Company Court for according sanction to the scheme
and by Order dated 15th October 1975 the scheme was
sanctioned. Sometime after the scheme was sanctioned, DFM
transferred its 44,000 shares of IHI and its claim to the
tune of Rs. 23 lacs recoverable from IHI, to the present
appellants S. K. Gupta and Mrs. Dropadi Gupta (referred to
as ‘appellants’ hereafter). Thereafter the appellants filed
Company Application No. 193/76 requesting the Court to make
appropriate modification and/or granting further direction
for effectively implementing the scheme sanctioned by the
Court in respect of IHI by substituting the appellants in
place of DFM as proponents of the scheme and imposing upon
them the liability to implement the scheme under the
supervision of the Court. A little while before this
application was moved, respondent K. P. Jain filed Company
Application No. 190/76 purporting to be under s. 392 of the
Companies Act, 1956, inviting the Court for the reasons
mentioned in the application to hold that the scheme
sanctioned by the Court cannot be worked satisfactorily with
or without modification and therefore an order winding up
the Company should be made.
The Company Judge by his two orders in the two
aforementioned applications dated 26th April 1976 granted
the application of the appellants and modified the scheme by
substituting the appellants as proponents of the scheme and
simultaneously rejected the application of the respondent K.
P. Jain for winding up the Company.
Respondent Jain preferred two appeals being Company
Appeals Nos. 15 and 15/76 under s. 483 of the Companies Act.
Both these appeals came up before a Division Bench of the
Delhi High Court, and they were disposed of by a common
judgment. The Division
1190
Bench was of the opinion that substitution of a new
propounder in a scheme already sanctioned by the Court in
place of the original propounder of the scheme was a change
of a basic nature which would not be comprehended in the
expression ‘modification’ as under s. 392 and, therefore,
the Company Judge could not have granted such a substitution
of the propounder of the scheme without referring back the
proposed modified scheme to the creditors who had approved
the original scheme. It was further of the opinion that
though the transfer of 44,000 shares of IHI held by DFM in
favour of the appellants may be complete as between the
transferor and the transferee, the same would not clothe the
appellants with the right of a member unless their names
were put on the register of members maintained by IHI and
that the same having not been done, the appellants were not
members of IHI. It was further of the opinion that the debt
owed by IHI to DFM was not assigned according to law in
favour of the appellants and, therefore, they were not
creditors, and in view of the language of s. 391 of the
Companies Act, the appellants being neither members nor
creditors of IHI, had no locus standi to move an application
under s. 392 for modification of the scheme because in the
opinion of the Court s. 391 controls s. 392 and either a
member or a creditor or in the case of a company being wound
up, a liquidator alone can file an application for
modification. In accordance with this opinion, the appeal
preferred by respondent No. 1 being Company Appeal No. 15/76
challenging the order of the Company Judge which granted
modification/substitution of appellants as proponents was
allowed and the application of the appellants for
substitution was rejected.
The Division Bench dismissed Company Appeal No. 16/76
preferred by respondent Jain against the order of the
Company Judge refusing to make an order for winding up of
the Company observing that even while dismissing the
application for substitution of the present appellants, the
Court was not in a position to come to an affirmative
finding that the scheme cannot be satisfactorily worked with
or without modification and the matter should be left to the
Company Judge as to what future course of action should be
taken in the matter.
The appellants preferred the present appeal by special
leave against the decision of the Division Bench in Company
Appeal No. 15/76 by which their application for
substitution/modification was rejected.
Mr. S. S. Ray, learned counsel for the appellants urged
that the Court committed a basic error in holding that the
application for
1191
substitution/modification was not maintainable because the
appellants were neither members nor creditors of the
Company, IHI, thereby importing a narrower concept in
respect of the locus standi of the present appellants to
move the Court under s. 392 which restrictive approach would
run counter to the power of widest amplitude conferred on
the Court, namely, even to make modification suo motu or on
the application of a person interested in the affairs of the
Company. He further urged that the appellate Court clearly
misdirected itself when it went in search of the meaning of
the expression ‘modification’ in s. 392 by ransacking
dictionaries completely overlooking the fact that in s.
2(29) of the Companies Act the words ‘modify’ and
‘modification’ have been defined and it is a well known
canon of construction that unless the context otherwise
requires, the definition of an expression given in a statute
shall govern the meaning of the expression wherever used in
the same statute. It was urged that the words “modify’ and
‘modification’ for the purpose of s. 392 would include the
making of additions and omissions and according to him
additions and omissions in the context of s. 392 would and
could only mean additions and omissions to the sanctioned
scheme because s. 392 operates at a stage subsequent to the
sanctioning of the scheme under s. 391(2). It was further
urged that if the words ‘modify’ and ‘modification’ would
include additions and omissions, the Court would have
plenary power to substitute one proponent for the other if
in the opinion of the Court the scheme cannot be worked
satisfactorily without the necessary modification and in all
such cases it would be imprudent to hold that the Court will
have to fall back to the cumbersome procedure of s. 391 over
again delaying for a considerable period the vital
requirement of restarting a sick unit. It was submitted that
the Court committed a fallacy in importing the concept of
Constitution while interpreting a provision of the Companies
Act.
Mr. Lal Narain Sinha on the other hand on behalf of the
respondents, while conceding that in an emergency the Court
can act on the application of any person, ordinarily the
Court would act on the application of a member or creditor
of the Company and in this blurred area some light is shed
by the provision contained in Rule 87 of the Companies
(Court) Rules, 1959. Proceeding further, it was urged that
ss. 391 and 392 constitute a code and, therefore, if there
was a qualification for proposing a scheme under s. 391, the
same qualification should be read in s. 392 and any other
approach would be self-defeating. It was submitted that
viewed from this angle, only a member or a creditor can
maintain an application under s. 392 and as the appellants
are neither members nor
1192
creditors of the Company, they have no locus standi to
maintain the petition. He further urged that putting too
wide a construction on the expression ‘modification’ in s.
392(2) would lead to such a startling result as could not
have been within the contemplation of the legislature and
that, therefore, in order to arrive at a true meaning of
word ‘modification’, the Court should bear in mind the
purpose and object behind using the expression or enacting
the provision in which the expression is found. It was also
contended that substitution of the original sponsor amounts
to repudiation of the contract which the scheme represents
between the proponent of the scheme and the Company and
another person cannot be substituted in place of the
original contracting party without the consent or affirmance
of the second party to the contract and hence such a thing
cannot be brought about by way of a modification under s.
392. The word ‘modification’ or ‘modify’, therefore, should
be given a restricted meaning looking to the context in
which it is used in s. 392 as has been done by the High
Court.
Principal contentions advanced on either side turn upon
the right to make an application and the power of the Court
to grant an application under s. 392 of the Companies Act.
Section 392 finds its place in Chapter V of the Companies
Act bearing fascicules ‘Arbitration, Compromise,
Arrangements and Reconstructions’. Section 391 enables a
member or a creditor of the Company or a Company which is
being wound up, its liquidator, to make an application to
the Court proposing a compromise or arrangement between the
company and its creditors or any class of them or between
the Company and its members or any class of them and seeking
directions of the Court to convene a meeting of each class
of creditors and/or each class of members to whom the
compromise or arrangement is offered. On the Court’s giving
the directions, the meeting would be convened in which the
proposed scheme of compromise and/or arrangement would be
submitted for consideration and each class will have to vote
upon it and if the scheme is accepted by a majority in
number representing three fourths in value of the creditors
or members or class of members as the case may be, present
and voting either in person or where proxy is allowed, by
proxy, such approved scheme has to be placed before the
Court for sanction of the Court as envisaged in s. 391(2).
Then comes s. 392 which may be reproduced in extenso:
“392. Power of High Court to enforce compromises
and arrangements-(1) Where a High Court makes an order
under section 391 sanctioning a compromise or an
arrangement in respect of a company, it-
1193
(a) shall have power to supervise the carrying
out of the compromise or arrangement; and
(b) may, at any time of making such order or at
any time thereafter, give such directions in
regard to any matter or make such
modifications in the compromise or
arrangement as it may consider necessary for
the proper working of the compromise or
arrangement.
(2) If the Court aforesaid is satisfied that a
compromise or arrangement sanctioned under section 391
cannot be worked satisfactorily with or without
modifications it may, either on its own motion or on
the application of any person interested in the affairs
of the company, make an order winding up the company,
and such an order shall be deemed to be an order made
under section 433 of this Act”.
At the outset it may be mentioned that though a large
number of provisions of the Companies Act, 1956, are in pari
materia with the provisions of Companies Act, 1948, of the
U.K. (‘U.K. Act’ for short), there is no provision analogous
to s. 392 in the U.K. Act. The Court under the U.K. Act has
no power to modify the scheme either at the time when it is
offered for its sanction or at any time subsequent thereto.
The Parliament has in its wisdom, conferred a power of wide
amplitude on the High Court in India to provide for its
continuous supervision of the carrying out of compromise
and/or arrangement and also the consequential power to make
the supervision effective by removing the hitches, obstacles
or impediments in the working of compromise or arrangement
by conferring power to give such direction in regard to any
matter or for making such modification in the compromise or
arrangement as it may consider necessary for the proper
working of the compromise and/or arrangement. Sub-s. (2)
confers power on the Court to act under s. 392 either on its
own motion or on the application of any person interested in
the affairs of the company. What falls for consideration is
the true meaning of the expression ‘on the application of
any person interested in the affairs of the company’.
The High Court was of the opinion that the appellants
have no locus standi to maintain an application for
modification/substitution of themselves as proponents of the
scheme with a liability to implement the scheme as they were
neither members nor creditors of the Company and according
to the High Court, if a scheme of compromise or arrangement
cannot be proposed by any one except a member or creditor,
ipso facto, an application for modification of such scheme
sanctioned by the Court under s. 391(2) could not be made by
any one other than a member or a creditor.
1194
Section 391 envisages a compromise or arrangement being
proposed for consideration by members and/or creditors of a
Company liable to be wound up under the Companies Act, 1956.
Compromise or arrangement has to be between creditors and/or
members of the Company and the Company, as the case may be.
It was always open to the Company to offer a compromise to
any of the creditors or enter into arrangement with each of
the members. The scheme in this case is essentially a
compromise between the company and its unsecured creditors.
The scheme when sanctioned does not merely operate as an
agreement between the parties but has statutory force and is
binding not only on the company but even dissenting
creditors or members, as the case may be. The effect of the
sanctioned scheme is “to supply by recourse to the procedure
thereby prescribed the absence of that individual agreement
by every member of the class to be bound by the scheme which
would otherwise be necessary to give it validity” (see J. K.
(Bombay) Pvt. Ltd., v. New Kaiser-I-Hind Spg. & Wvg. Co.
Ltd. & Ors. etc.(1). Further section 391(1) itself by a
specific and positive provision prescribes who can move an
application under it. Only the creditor or member of that
company or a liquidator in the case of a company being wound
up is entitled to move an application proposing a compromise
or arrangement. By necessary implication any one other than
those specified in the section would not be entitled to move
such an application.
When a scheme is being considered by the Court, in all
its ramifications, for according its sanction, it would not
be possible to com prehend all situations, eventualities and
exigencies that may arise while implementing the scheme.
When a detailed compromise and/or arrangement is worked out,
hitches and impediments may arise and if there was no
provision like the one in s. 392, the only obvious
alternative would be to follow the cumbersome procedure as
provided in s. 391(1), viz., again by approaching the class
of creditors or members to whom the compromise and/or
arrangement was offered to accord their sanction to the
steps to be taken for removing such hitches and impediments.
This would be unduly cumbersome and time consuming and,
therefore, the legislature in its wisdom conferred power of
widest amplitude on the High Court under s. 392 not only to
give directions but to make such modification in the
compromise and/or arrangement as the Court may consider
necessary, the only limit on the power of the Court being
that such directions can be given and modifications can be
made for the proper working of the compromise and/or
arrangement. The purpose underlying s. 392 is to provide for
effective working of the compromise and/or arrangement once
sanctioned and
1195
over which the Court must exercise continuous
supervision[see s. 392(1)], and if over a period there may
arise obstacles, difficulties or impediments, to remove
them, again, not for any other purpose but for the proper
working of the compromise and/or arrangement. This power
either to give directions to overcome the difficulties or if
the provisions of the scheme themselves create an
impediment, to modify the provision to the extent necessary,
can only be exercised so as to provide for smooth working of
the compromise and/or arrangement. To effectuate this
purpose the power of widest amplitude has been conferred on
the High Court and this is a basic departure from the scheme
of the U.K. Act in which provision analogous to s. 392 is
absent. The sponsors of the scheme under s. 206 of the U.K.
Act have tried to get over the difficulty by taking power in
the scheme of compromise or arrangement to make alterations
and modifications as proposed by the Court. But the
Legislature foreseeing that a complex or complicated scheme
of compromise or arrangement spread over a long period may
face unforeseen and unanticipated obstacles, has conferred
power of widest amplitude on the Court to give directions
and if necessary, to modify the scheme for the proper
working of the compromise or arrangement. The only
limitation on the power of the Court, as already mentioned,
is that all such directions that the Court may consider
appropriate to give or make such modifications in the
scheme, must be for the proper working of the compromise
and/or arrangement.
Sub-section (2) provides the legislative exposition as
to who can move the Court for taking action under s. 392.
Reference to s. 391 in sub-s. (2) of s. 392 merely indicates
which compromise or arrangement can be brought before the
Court for taking action under s. 392. The reference to s.
391 does not mean that all the limitations or restrictions
on the right of an individual to move the Court while
proposing a scheme of compromise or arrangement have to be
read in sub-s. (2) merely because s. 391 is referred to
therein. Unlike section 391, s. 392 does not specify that a
member or creditor or in the case of a company being wound
up, its liquidator, can move the Court under s. 392. On the
other hand, the legislature uses the expression ‘any person
interested in the affairs of the company’ which has wider
denotation than a member or creditor or liquidator of a
company. In fact, the ambit of the power to act under s.
392(2) can be gauged from the fact that the Court can suo
motu act to take action as contemplated by s. 392(1) or it
may act on an application of any person interested in the
affairs of the Company.
1196
In this context the observations of the Gujarat High
Court, extracted hereunder, in Mansukhlal v. M. V. Shah,(1)
can be referred to with advantage as it precisely lays bare
the ambit and width of Court’s power under section 392:
“The framers of the company law in India have
conferred statutory powers on the High Court to make
such modifications in the compromise or arrangement as
the Court may consider necessary for the proper working
of the compromise and arrangement. The power of the
widest amplitude has been conferred on the court under
section 392(1) (b) and the width and the magnitude of
the power can be gauged from the language employed in
section 392 (1) (a) which confers a sort of a
supervisory role on the court during the period the
scheme of compromise or arrangement is being
implemented. Reading clauses (a) and (b) of sub-section
(1) of section 392, it appears that Parliament did not
want the court to be functus officio as soon as the
scheme of compromise and arrangement is sanctioned by
it. The Court has a continuing supervision over the
implementation of compromise and arrangement.
Unenvisaged, unanticipated, unforeseen or even
unimaginable hitches, obstruction and impediments may
arise in the course of implementation of a scheme of
compromise and arrangement and if on every such
occasion, sponsors have to go back to the parties
concerned for seeking their approval for a modification
and then seek the approval of the court, it would be a
long-drawn out, protracted, time-consuming process with
no guarantee of result and the whole scheme of
compromise and arrangement may be mutilated in the
process. Parliament has, therefore thought it fit to
trust the wisdom of the court rather than go back to
the interested parties. If the parties have several
times to decide the modification with the democratic
process, the good part of an election machinery apart,
the dirt may step in, the conflicting interests may be
bought and sold, and, in the process, the whole scheme
of compromise and arrangement may be jettisoned. In
order, therefore, to guard against this eventuality and
situation, which is clearly envisageable, Parliament
has conferred power on the court, not only to make
modifications even at the time of sanctioning the
scheme, but at any time thereafter during the period
the scheme is being implemented. Conceding that, before
the Court sanctions the scheme, it partakes the
character of an emerging contract between the
1197
company and the creditors and members; once the court
approves it, it becomes a statutorily enforceable
contract even on dissidents, with power in the court to
modify, amend or correct or revise the contract the
outer periphery or the limit on the power being that,
after testing it on this anvil of probabilities,
surrounding circumstances and the prevalent state of
affairs, it can be done for the proper working of the
compromise and arrangement, and subject to this limit
on the Court’s power, the power seems to be absolute
and of the widest amplitude and it would be unwise to
curtail it by process of interpretation”.
If the Court can suo motu act, it is immaterial as to
who drew the attention of the Court to a situation which
necessitated Court’s intervention. Where the power is
conferred on the Court to take action on its own motion the
information emanating from whatever source which calls for
Court’s attention can as well be obtained from any person
without questioning his credentials, moving an application
drawing attention of the Court to a situation where it must
act. Undoubtedly, the Court may decline to act at the
instance of a busy body but if the action proposed to be
taken is justified, valid, legal or called for, the capacity
or credentials of the person who brought the situation
calling for Court’s intervention is hardly relevant nor
would it invalidate the resultant action only on that
ground. Therefore, when sub-s. (2) confers power on the
Court to act on its own motion, the question of locus standi
hardly arises. The High Court while examining the question
of locus standi, after combing the provision contained in
sub-s. (2), wholly overlooked the important provision
therein contained that the High Court can act on its own
motion. It was, however, said in passing that sub-s. (2)
enables the Court to wind up the Company and, therefore, the
Court may act on its own motion or on the application of any
person interested in the affairs of the company not for
modifying the scheme or for any directions but for winding
up the company. But when the Court is required to act under
s. 392(1), the limitations and restrictions imposed upon the
Court under s. 391(1) must be read in section 392(1) because
the sections are complimentary to each other. This
submission overlooks the two different stages at which
sections 391 and 392 operate though they may be
complimentary to each other. Two sub-sections of s. 392 have
to be harmoniously read and sub-s. (2) clearly indicates the
power of Court to take action suo motu while taking action
under sub-s. (1). Again this approach is inconsistent with
the language employed in s. 392(2) in that the Court can
wind up the company
1198
under s. 392(2) if and only it is satisfied that the
compromise and/or arrangement sanctioned by it cannot be
satisfactorily worked with or without modifications. The
Court has to reach an affirmative conclusion before acting
under s. 392(2) that the compromise and/or arrangement
cannot be worked satisfactorily with or without modification
(see J. K. Bombay P. Ltd.) (supra). It follows as a
corollary that if the compromise or arrangement can be
worked as it is or by making modifications, the Court will
have no power to wind up the Company under s. 392(2). Now,
if the arrangement or compromise can be worked with or
without modification, the Court must undertake the exercise
to find out what modifications are necessary to make the
compromise or arrangement workable and that it can do so on
its own motion or on the application of any person
interested in the affairs of the Company. If such be the
power conferred on the Court, it is difficult to entertain
the submission that an application for directions or
modification cannot be entertained except when made by a
member or creditor. It would whittle down the power of the
Court in that it cannot do so on its own motion.
Mr. Sinha referred to Rule 87 of Companies (Court)
Rules and urged that it throws some light on the question as
to at whose instance the Court can act under s. 392. The
rule is procedural in character and at any rate the rule
cannot circumscribe the power conferred by the section.
Hence rule 87 is of no assistance.
Assuming that the Court would not act on its own, the
next question is: could it act under s. 392(1) on the
application of any person interested in the affairs of the
Company ? Now, if the Court under s. 392(2) can order
winding up of the company on the application of any person
interested in the affairs of the company who need not be a
member or a creditor, we fail to see how the Court cannot
act on the application of such a person interested in the
affairs of the Company either to give directions or to make
modifications so as to make the compromise or arrangement
workable. Winding up meaning civil death of a company, must
be the ultimate resort of the Court. A living workable
scheme infusing life into a sick unit is generally to be
preferred to civil death of the company. There is,
therefore, no warrant for circumscribing the expression ‘on
the application of any person interested in the affairs of
the company’ as to limit it to member or creditor. If the
legislature used the expression ‘member or creditor’ in s.
391(1) and yet used an expression of wider denotation ‘any
person interested in the affairs of the company’, the
legislative intention is clearly exposed in that any such
person interested in the affairs of the company need not be
limited or restricted to refer to a
1199
member or creditor. It would, therefore, be necessary to
ascertain whether the appellants would be comprehended in
the expression ‘any person interested in the affairs of the
company’.
At one stage there was a threatened long argument to
ascertain whether the appellants have become the members of
the company or are the creditors of the company. The
appellants contended that they and their friends have
purchased 44,000 equity shares of IHI from its former holder
DFM and they have also taken an assignment of the debt in
the amount of Rs. 23 lacs owned by IHI to DFM from DFM.
Respondent Jain contended that the assignment is not valid
as it fails to comply with s. 130 of the Transfer of
Property Act and as the names of the appellants are not put
on the register of IHI, they have not acquired the status of
member of IHI and, therefore, they being neither creditors
nor members of IHI, they have no locus standi, to maintain
the application under s. 392.
The stand taken by respondent Jain in this behalf is
wholly ambivalent. Sometime after the scheme was sanctioned
on 15th October 1975, the appellants assert that they
purchased the 44,000 equity shares of IHI from DFM and they
simultaneously took assignment of the debt. Thereafter
respondent Jain filed Company Application No. 190/76 in
which he sought a direction under s. 392(2) for winding up
the Company. In inviting the Court to grant his prayer for
winding up the Company, the averment made is that since the
sanction of the scheme by the Court, DFM has sold its
interest to Shri S. K. Gupta and others who wanted to
operate the scheme as if they were the substitutes for DFM.
Another averment is that DFM was not entitled to sell its
shares because it was the propounder of the scheme.
Therefore, the raison d’etre for moving the application
under s. 392(2) was the sale of shares of IHI held by DFM to
the appellants. When the appellants filed Company
Application No. 193/76 under s. 392(1), in order to show
their newly acquired or subsisting interest in the scheme so
as to enable them to move the application under s. 392, it
was averred that the appellants have purchased 41,800 shares
of IHI from DFM and the balance of holding of DFM to the
tune of 2200 equity shares have been purchased by the
nominee of the appellants. It is further averred that the
amount standing in the name of DFM in the books of IHI also
been taken over by the appellants. While replying to these
averments in the application, respondent K. P. Jain in para
16 of his counter affidavit dated 29th March 1976 has stated
that ‘there is some understanding or agreement between the
Delhi Flour Mills Co. Ltd. and Shri S. K. Gupta for the sale
of the shares held by Delhi Flour Mills Co. Ltd., in the IHI
and I have referred to
1200
it in my application CA. 190/76′. If the very alleged sale
of the shares by DFM to the appellants gave cause of action
to respondent Jain to maintain an application under s.
392(2) praying for an order for winding up of the company,
what greater ambivalence could it disclose when it was
contended on his behalf that the sale has not taken place ?
There is enough evidence on record as is evident from the
affidavit filed by DFM that as between DFM and the
appellants the sale is complete. Similarly, there is
evidence in the affidavit that the debt owned by IHI to DFM
has been assigned by DFM to the appellants. In the face of
this express position adopted by Jain, would it not clothe
the appellants with necessary interest both in the company
IHI and the scheme in respect of it, so as to enable them to
maintain an application under s. 392(2) ? Appellants are
certainly persons interested in the affairs of the company.
For this additional reason the application for modification
by them is certainly maintainable.
In the aforementioned circumstances we are not inclined
to examine a very serious contention raised by Mr. Mridul
who appeared at a later stage of hearing for the respondent
Jain that unless names of the appellants are put on the
register of IHI they do not become members and as the
assignment on which the appellants rely does not comply with
the requirements of s. 130 of the Transfer of Property Act,
the assignee’s title to the debt assigned has not become
complete, and, therefore, the appellants are not creditors
of IHI. We may in passing say that the factum of assignment
or the sale of shares was never seriously questioned but we
are prepared to proceed on the assumption that even if it be
so, in the circumstances herein discussed and the
ambivalence of respondent Jain the appellants could
certainly be said to be persons sufficiently interested both
in the company IHI and the scheme in respect of it so as to
be able to maintain an application under s. 392(1).
Lastly in this connection it must be remembered that if
DFM whose scheme was sanctioned and not challenged by
respondent Jain, started implementing the scheme and after
getting into the saddle by constituting the Board of
Directors as desired by it, it could have transferred its
shares to appellants and appellants could have as well taken
over management and implemented the scheme and no one, at
any rate, Respondent Jain holding only 1000 equity shares,
i.e. 1.25% of the issued capital, could have objected to it.
The objection at this stage is equally futile. Therefore,
with respect, the High Court was in error in holding that
the appellants had no locus standi to maintain an
application under s. 392(1).
The next important contention is that the sponsor or
propounder of a scheme is such an integral part of the whole
scheme or an impor-
1201
tant element of the ‘basic structure’ of the scheme that its
substitution changes, alters or amends the scheme in almost
its entirety and such a thing cannot be done by way of
modification under s. 392. The word ‘modification’ must be
given, according to the respondent and according to the High
Court, a restricted and narrow meaning. The High Court,
after reaching the conclusion that propounder of a scheme is
‘the very life blood and soul of the scheme and on his going
out the scheme itself becomes lifeless and inert’, proceeded
to examine the connotation of the word ‘modification’ as
used in s. 392 and after referring to various dictionary
meanings, reached a conclusion that the context and setting
in which the word is used, it would only means a “small
adjustment a minor or slight change, a qualification or
limitation, alteration of a subordinate character”, and
substitution of a sponsor of a scheme is of such a vital
nature altering, in the opinion of the High Court, the
‘basic structure’ of the scheme that such a three
dimensional change would not be comprehended in the word
‘modification’ as used in s. 392. In reaching this
conclusion the High Court referred to the meaning assigned
to the word ‘modify’ in various dictionaries such as
Webster, Black’s Law Dictionary, et el. Unfortunately the
High Court completely overlooked the obvious that the words
‘modify’ and ‘modification’ have been defined in s. 2(29) of
the Companies Act as under:
“2. Definitions-In this Act, unless the context
otherwise requires-
(29) “Modify” and “modification” shall include the
making of additions and omissions”.
It may also be mentioned that s. 2(1) defines ‘altered’
and ‘alteration’ to include making of additions and
omissions, while ‘variation’ is defined in s. 2(31) to
include ‘abrogation’. The definition of cognate words is
noted by us to arrive at a true meaning of the word
‘modification’. The High Court nowhere refers in its
judgment to the definition of ‘modify’ and ‘modification’
given in the very statute and proceeded to examine the
content and meaning of the word used in a provision in the
same statute which, unless the context otherwise requires,
must bear the same meaning as set out in the definition
section.
The noticeable feature of this definition is that it is
inclusive definition and where in a definition clause the
word ‘include’ is used it is
1202
so done in order to enlarge the meaning of the words or
phrases occurring in the body of the statute and when it is
so used, these words or phrases must be construed as
comprehending not only such things which they signify
according to their natural import, but also those things
which the interpretation clause declares that they shall
include (see Dilworth v. Commissioner of Stamps). Where in a
definition section of a statute a word is defined to mean a
certain thing, wherever that word is used in that statute,
it shall mean what is stated in the definition unless the
context otherwise requires. But where the definition is an
inclusive definition, the word not only bears its ordinary,
popular and natural sense whenever that would be applicable
but it also bears its extended statutory meaning. At any
rate, such expansive definition should be so construed as
not cutting down the enacting provisions of an Act unless
the phrase is absolutely clear in having opposite effect
(see Jobbins v. Middlesex County Council). where the
definition of an expression in a definition clause is
preceded by the words ‘unless the context otherwise
requires’, normally the definition given in the section
should be applied and given effect to but this normal rule
may, however, be departed from if there be something in the
context to show that the definition should not be applied
(see Khanna, J. in Indira Nehru Gandhi v. Raj Narain). It
would thus appear that ordinarily one has to adhere to the
definition and if it is an expansive definition the same
should be adhered to. The frame of any definition more often
than not is capable of being made flexible but the precision
and certainty in law requires that it should not be made
loose and kept tight as far as possible (see Kalva Singh v.
Genda Lal).
Is there anything in the context and setting in which
the word ‘modification’ is used in s. 392 to indicate that
the legislature has not used the expression assigning the
meaning to the word as set out in the definition clause? At
least nothing was pointed out to us. Undoubtedly, as pointed
out by Lord Hershell in Cox v. Hakes, that for the purpose
of construing any enactment it is right to look, not only at
the provision immediately under construction, but at any
others found in connection with it which may throw light
upon it, and afford an indication that general words
employed in it were not intended to
1203
be applied without some limitation. Even with this caution
we find nothing in s. 392 or reading s.392 with s. 391, to
cut down and restrict the meaning as has been attempted by
the High Court completely ignoring the definition section.
According to the definition ‘modify’ and ‘modification’
would include the making of additions and omissions. In the
context of s. 392 ‘modification’ would mean addition to the
scheme of compromise and/or arrangement or omission
therefrom solely for the purpose of making it workable.
Reading s. 392 by substituting the definition of the word
‘modification’ in its place, if something can be omitted or
something can be added to a scheme of compromise by the
Court on its own motion or on the application of a person
interested in the affairs of the company for the proper
working of the compromise and/or arrangement, we see no
justification for cutting down its meaning by a process of
interpretation and thereby whittle down the power of the
Court to deal with the scheme of a compromise and/or
arrangement for the purpose of making it workable in course
of its continued supervision as ordained by s. 392 (1).
Strictly speaking, omission of the original sponsor and
substituting another one would not change the ‘basic fabric’
of the scheme. The scheme in this case is one by which a
compromise is offered to the unsecured creditors of the
company and whoever comes in as sponsor would be bound by
it. Undoubtedly a sponsor of the scheme enjoys an important
place in the scheme of compromise and/or arrangement but
basically the scheme is between the company and its
creditors or any class of them, or the company and its
members or any class of them, and not between the sponsor of
the scheme and the creditor or member. The scheme represents
a contract sanctified by Court’s approval between the
company and the creditors and/or members of the company. The
company may as well be in charge of directors and the
implementation of the scheme may come through the agency of
directors but that would not lead to the conclusion that
during the working of the scheme the directors cannot be
changed. If the scheme has to be ultimately implemented by
the company as part of its contract and yet its directors
can be changed according to its Articles of Association, we
see no difference in the situation where a sponsor is
required to be changed in the facts and circumstances of a
case. Therefore, it is not possible to accept the submission
that as and by way of modification one sponsor of a scheme
cannot be substituted for another sponsor.
1204
We may not be understood to say for a moment that the
Court can appoint any one as sponsor. The Court on which a
duty is cast by s. 392(1) to exercise continuous supervision
over the working of the compromise and/or arrangement must,
in order to effectively discharge its duty, examine the bona
fides of the person applying to be substituted as sponsor,
his capacity, his ability, his interest qua the company and
other relevant considerations before substituting one
sponsor for another. In a given case an application may be
rejected as the Court is of the opinion that the sponsor is
not one who can be trusted with the implementation of the
scheme but that is entirely a different thing from saying
that the Court has no power to make such a substitution as
and by way of modification of a compromise or arrangement.
Now to the facts of the case. The appellants have
applied for substituting them as sponsors of the scheme in
place of DFM. They claim to have purchased 44,000 shares out
of 80,000 issued and subscribed equity shares of the
company. As stated earlier, between the transferor and
transferee of the shares, the transfer of the shares is
complete and not even seriously objected to by the
respondent as pointed out hereinbefore. The sponsor has
taken an assignment of a debt of Rs. 23 lacs which IHI owed
to DFM from the creditor DFM. A gain, as between the
transferor and transferee the assignment is complete. The
only objector is respondent holding 1,000 equity shares
representing 1.25 per cent of the issued and subscribed
capital. An advertisement was directed to be inserted by the
order of the Court in newspapers in respect of the
application for substitution-modification made by the
appellants inviting every one interested in the company or
in the scheme of compromise and/or arrangement to come and
lodge objection, if it was so desired, against
substitution/modification prayed by the appellants. None
including the petitioning creditor except the respondent
Jain has lodged such an objection. This procedure was also
followed by the Gujarat High Court in Mansukhlal’s (supra)
case and by referring to that part of the judgment, the High
Court held that judgment itself is an authority for the
proposition that substitution of the sponsor is a vital
change of a basic nature and cannot be ordered by the Court
acting under s. 392 and must be referred to a meeting of the
creditors or members. With respect, this is not a fair
reading of the judgment. At pages 290-291, the scope and
ambit of the power of the Court under s. 392 has been
precisely set out and it is concluded that the power to
modify would comprehend the power to substitute one sponsor
for the other if he is found otherwise fit and competent. As
an additional string to the bow, it was observed, as it
1205
is being done here also, that no one has come forward to
object to the substitution and that would further strengthen
the hands of the Court. Such observation cannot be construed
to mean that the Court lacks the power to make such a
modification without reference back to the creditors and/or
members, as the case may be. In the background of these
unimpeachable facts the conclusion is inescapable that the
appellants have a subsisting and vital interest in the fate
and future of IHI and they are the appropriate persons who
could and should be substituted in place of the original
sponsor.
In passing it was said that the fate of the company
should not be placed in the hands of the appellants and the
lack of bona fides of the appellants becomes discernible
from the fact that they tooth and nail opposed the very
scheme which they now seek to implement. This is hardly a
relevant consideration. A creditor may come and oppose a
scheme being implemented by some person and yet may be
interested in taking over the affairs of the company. This
could hardly be treated as a disqualification of the
appellants.
Lastly it may be mentioned that the appellants agree to
implement the scheme. They undertake to bring Rs. 3 lacs as
liquid finance for implementing the scheme. The question of
the know-how was examined by the company Judge who has
accepted their fitness to run the business and nothing was
pointed out to us to depart from the same. Therefore, viewed
from any angle, we see no objection to granting the
application of the appellants for substitution/modification
as sponsors of the scheme.
Accordingly, the judgment of the Division Bench dated
16th July 1976 in Company Appeal No. 15/76 is set aside and
the order of the Company Judge dated 26th April 1976 in
Company Application No. 193/76 is restored with costs
throghout.
N.V.K. Appeal allowed.
1