DELHI FLOUR MILLS INDUSTRIES LIMITED Vs. INDIAN HARDWARE

JUDGEMENT

(1.) These four applications CA 247/80 by the propounder and C. As. 227180, 335180 and 365180 by the Bank raise a difficult question as to the best manner of balancing the appaarenly conflicting interests of the Bank, a secured creditor, the propounder, holding majority shares, the unsecured creditors and the minority group in the Company, in relation to the scheme of arrangement for the revival of a sick industrial unit.

(2.) The facts are these. Delhi Flour Mills Company Limited, for short, D.F.M., at all material times, was an industrial venture of Jain family, which consisted, at one time of R. K. Jain, his brother J. P. Jair and other members of the family, for short, the Jain Faimily. Indian Hardware Industries Limited, for short, the Company, was a subsidiary of D.F.M. It was incorporated in 1951 with an authorised capital of Rs. 15 lakhs. The issued capital, which was fully paid, was of the order of Rs. 18 lakhs divided into 80,0-00 shares of Rs. 10 each. 44,000 shares, representing the majority, were held by the D.F.M. Of the remaining 36,000 shares, J. P. Jain and other members of his branch, for short, Jain Group, between them held 31,000 shares. The Company, which was, inter alia, engaged in ths business of manufacture of builders Hardware, has its factory at Faridabad. The Industrial activity of the Company has been lying in a state of suspended animation since 1971, following disputes in the Jain Family, which had controlling interest in D.F.M. In 1971, Indian Smelting and Refining Company Limited, for short, the petitioning credi tor, filed a petition, being C. P. 50/71, for the winding up of the Company on the ground that it was unable to pay its debts. The petitioning creditor had a claim of Rs. 3 lakhs. D.F.M. itself was the largest unsecured creditor of the Company with a claim cf Rs. 23 lakhs. Dena Bank, a secured creditor, had a claim of about Rs, 25 lakhs secured by the mortgage and pledge of all the moveable and immoveable assets of the Company. This has since swelled to over 60 lakhs on account of interest etc. during {he pendency of proceedings in this Court. In 1974 disputes in the Jain Family were apparently resolved as a consequence of which one of the branches of the Jain Family, headed by R. P. Jain, R. K. Jain having died meanwhile, acquired the controlling interest in D.F.M. Soon thereafter D.F.M. proposed a scheme of compromise/arrangement between the Company and its unsecured creditors. The scheme was adopted by the members as well as its unsecured creditors, and was eventually sanctioned by this Court by an order cf October 15, 1975 in C. 86175. Soon thereafter by an agreement of January 19. 1976 D.F.M. transferred its entire holding in the Company and assigned its claim of Rs. 23 lakhs against die Company to one S. K. Gupta and his nominees, for short, the Gupta Group, for a consideration of Rs. 12 lakhs and the amount was paid on different dates between January 20, 1976 and February 27, 1976. By CA 193176, the Gupta Group sought their substitution in place of D.F.M. as proponents of the scheme. K. P. Jain, a member of the Jain Group, who had apparently not reconciled to these changes, opposed it and sought the winding up of the Company. By two separate orders of April 26, this Court accepted the application of Gupta Group thereby substituting the Gupta Group for D.F.M. as proponents and rejected the application of K. P. Jain for the winding up of the Company. By an order of April 28, 1976, made in CP 86/75, this Court also directed that an Extra-ordinary General Meeting of the Company be held for the purpose of electing a board of Directors of the Company in view of the transfer of controlling interest in favour of Gupta Group. K. P. Jain appealed against all the three orders. The appeal against the order directing holding of the Extra-ordinary General Meeting (C.A. 17176) is still pending and since the Meeting had already been held and the Board of Directors had been elected, the Division Bench, admitting the appeal, granted a stay of the implementation of the decision of the meeting. By an order made on July 16, 1976, the Division Bench accepted the appeal against the order granting substitution and set aside the order on the ground that the substitution of a propounder was beyond the scope of modification of the scheme under Section 392 of the Act and Gupta Group in any event, had no locus standi to seek substitution as they were neither the members nor creditors of the Company. It was held that although the transfer of the shares of the D.F.M. in favour of Gupta Group was complete as between the transferors and the transferees, the transferees had not become members of the Company in the absence of registration of the transfer. It was tether held that the assignment of the debt in. favour of Gupta Group was not according to law and Gupta Group, therefore, were not even the creditors of the Company. The Division Bench, however, dismissed the other appeal against the order rejecting the application of K. P. Jain for the winding up of the Company leaving the future course of action to be decided by this Court. Meanwhile, J. P. Jain filed a suit, being suit No. 281/76, in his name and in that of the Company on the original side of this Court for a declaration that Gupta Group were not the members of the Company and had no right to the management and control of the Company and were not entitled to exercise any authority as Directors of the Company. An application was also made for interim directions in terms of the main relief and by an order made by Chadha J. on October 25, 1976 in I.A. 849/76, the interim order restraining the Gupta Group from acting as Directors of the Company till the registration of the transfer of the shares in their favour issued earlier was made absolute till the decision of the suit, inter alia, on the ground that the plaintiffs had a prima facie case for the relief and the balance of convenience was in their favour. In the course of the order, the Learned Judge relied on the decision of the Division Bench referred to above in support of the plea that prima facie the transfer had not been registered. The order of the Division Bench rejecting Gupta Group's application for substitution was taken by Gupta Group to the Supreme Court and by an order made on January 30, 1979, in CA 1217176. the Supreme Court set aside the order of the Division Bench and allowed the substitution of Gupta Group for D.F.M. as proponents. The Supreme Court held that even on the assumption that Gupta Group were neither the members nor the creditors of the Company they had the locus standi to seek substitution as in view of the transfer of share holding and of assignment of debt claimed by them, they were nevertheless persons interested and, in the circumstances proper persons to be substituted for D.F.M. In the way the Supreme Court looked at the question of locus standi, the further questions as to the validity of the transfer of shares, its registration and assignment of debt were not decided.

(3.) By C. A. 75 of 1979, Gupta Group sought the implementation of the order of substitution, since upheld by the Supreme Court, inter-alia, by a direction to the Commissioner, appointed earlier by this Court, to hand over the possession of the premises, factory and works and of the machinery stores and assets of the Company to them to enable them to implement the scheme. This was vehemently opposed on behalf of Jain Group not only in their capacity as members but also as purporting to represent the Company, inter alia, on the grounds that even though Gupta Group may be entitled to be substituted in view of the decision of the Supreme Court, they were not entitled to dominion and control over the assets of the Company in view of a serious dispute with regard to the validity of the transfer of shares and of the assignment of debt claimed by them. Jain Group sought support from the decision of the learned Single Judge in the suit filed by J. P. Jain, by which Gupta Group had been restrained from acting as Directors of the Company till the transfer of shares had been registered in their favour. In support of their claim, Jain Group also pressed into service the various contentions urged by them in the Supreme Court with regard to the validity of the transfer and of the assignment which had been left open. Pending further consideration of the various contentions raised on behalf of the Jain Group, this Court made an interim order on May 25, 1979 directing the Commissioner to hand over possession of the assets of the Company to Gupta Group to enable them to take appropriate steps in furtherance of the scheme as proponents. In view, however, of the serious disputes between the two groups, as indeed, the various questions with regard to the validity of the transfer and the assignment, it was directed that the scheme would be implemented by the Gupta Group under the supervision of a Committee of Management, composed of a representative of the Gupta Group, a representative of the Jain Group, who may be acceptable to the Gupta Group, and Shri S. D. Verma, former Chairman, Allahabad Bank, as Chairman of the Committee. During the pendency of this application, three further applications C. A. 104179, C. A. 261179 and C.A. 52979 were filed by the parties. By CA 104/79 J. P. Jain, a member of the Jain Group, in his own name and as purporting to represent the Company, sought a direction that the possession of the assets be handed over to them and the Gupta Group be restrained from in any manner "asserting and/or claiming to be entitled to benefits of the terms of the scheme in their alleged capacity" as members or directors of the Company. Certain other reliefs are also claimed. CA 261 of 1979 was another application by Jain Group purporting to be in the name of the Company for the annulment of the orders of sanction of the scheme, and of the substitution of Gupta Group and for a declaration that the said orders were not binding on the Company and in the alternative, for a modification of the scheme so as to permit the Company to pay all its creditors and for certain other directions. CA 529 of 1979 was made by the Gupta Group seeking modification of the scheme and certain consequential directions in view of the delay in its implementation. Gupta Group also filed a suit on the original side of this Court, being No. 360 of 1979, for a declaration that the shares, in dispute were duly transferred in their favour and the transfer having been duly registered, they had been and continued to be the shareholders and members of the Company. In the alternative, leave of the Court was sought to sue D.F.M. and R. P. Jain for damages.