SUDARSAN CHITS (INDIA) LTD. Vs. SUKUMARAN PILLAI

JUDGEMENT

(1.) IN these three appeals, the Sudarsan Chits (India) Limited, a company registered under the Indian Companies Act, is the appellant. The appeals arise out of a common order of winding up passed in Company Petitions No. 9/81, No. 8/81, No. 49/81, respectively. These petitions are by the creditors of the company and are petitions under Section 439 of the Companies Act, read with Sections 433 and 434 of the Act for winding up on the ground that the company was unable to pay its debts. The petitioner in Company Petition No. 9/81 claimed a sum of Rs. 41,500 in Chit No. 76 of the Salem branch of the appellant company, the petitioner in Company Petition No. 8/81 claimed a sum of Rs. 77,000 as due in Chit No. 66 of the Salem branch and the petitioner in Company Petition No. 49/81 claimed a sum of Rs. 32,500 as due in Chit No. 39 of 1981 of the Salem branch. There were a series of similar petitions from other personsSeeking the same relief before the Company Judge some of whom did not later choose to press the petitions perhaps by reason of some understanding being reached. It is not now disputed that very huge sums are outstanding from the company to its subscribers and in the normal course - the Company will not be able to meet these liabilities. The appellant company was conducting a number of chits or kuries through its 133 branches. The company has ceased to function effectively for some time past and evidently whatever amounts are to be collected by the company from its subscribers cannot easily be collected in the present situation. It is in these circumstances that a plea that the company is unable to pay its debts has been urged and winding up sought. Before a winding up order was passed, one of the shareholders, Sri T. P. Ravindran, came up with Application No. 491/81, Under Section 391 of the Companies Act, for sanctioning a scheme of compromise between the company and its creditors. According to him, if the creditors stayed their hands for some time, it would be possible to pay all the creditors in full within a period of five years in which case the winding up of the company could be avoided. It is further said that in the public interest this must be permitted as otherwise the creditors will not be able to realise any appreciable amount through the process of winding up. This application by the creditor was supported by the company, but was opposed not only by some of the other creditors but also by the Regional Director, Company Law Board, Madras, and the Registrar of Companies, Kerala, who have filed counter -affidavits. It may be stated here that from the Company Law Board as well as the Registrar of Companies, Kerala, there has been very serious objection to the sanction of any scheme mainly for the reason that in the present financial condition of the appellant company, resurrection would be impossible and any attempt at resurrection would only serve to postpone the winding -up proceedings. This, in turn, it is said, would cause further loss to the creditors and even the amounts that could be collected would become irrecoverable. Further, those who have been responsible for the present condition of the company may be able to use that opportunity to their on advantage. Having filed a petition for settling a scheme, the shareholder, Sri T.P. Ravindran, also moved Application No. 703/81, therein alleging that 16 winding up petitions under Section 439 of the Companies Act, filed by various creditors, were pending in the company court and inasmuch as the petitioners therein were likely to get amounts due to them from the company within a period of five years if the scheme proposed by the appellant was accepted, the winding up applications by the creditors will have to be stayed. Therefore, in Application No. 703/81 made in Application No. 491/81, the shareholder, Sri T. P. Ravindran, applied for stay of the winding up petitions. The Company Judge in the order impugned in these appeals directed winding up of the company holding that the circumstancesjustified such an order. Since that order is passed on the three different petitions, the three appeals have been filed by the company. The Company Judge dismissed the application filed by the creditor, Sri T. P. Ravindran, as Application No. 703/81 in Application No. 491/81, for stay of the winding up petitions pending the settlement of the scheme. Against that, an appeal has been filed by Sri T. P. Ravindran as M.F.A. No. 521/81 -We are dealing with that appeal separately. In a way the decision of the appeal will depend more or less on the decision of these appeals. Sri T. P. Ravindran has also challenged in M.F.A. No. 256/82, an order passed by the Company Judge on June 16, 1982, in Application No. 491/81. Pursuant to the scheme proposed, a meeting of the creditors of the company was directed to be held for ascertaining their consent to the scheme. Though the meeting was convened, there was pandemonium at that meeting and, consequently, the meeting could not transact the business for which it was convened. The learned judge, therefore, gave certain consequential directions for taking necessary steps for holding a proper meeting on the assumption that the meeting was not convened on March 3, 1982, in accordance with the directions earlier issued by the court. That order by the court is challenged by Sri T. P. Ravindran in M.F.A. No. 256/82, which also we will deal with independently.

(2.) WE may also have to refer in this context to another appeal, M.F.A. No. 258/82, which also we are taking up and disposing of independently. That again is by one of the creditors of the company who is the first applicant in Application No. 68/82, praying for issue of an order of injunction restraining the directors and all officers of M/s. Sudarsan Trading Company Ltd. of which the appellant company here is a wholly owned subsidiary from alienating any of the properties Owned or held by M/s. Sudarsan Trading Company Ltd. till final orders are passed by this court in the winding up matter. The appellant in M.F.A. No. 258/82 is said to be a creditor to whom a sum of Rs. 1,51,000 is due from Sudarsan Chits (India) Ltd. and it is the case of the applicant therein that the holding company which was holding out promises of repayment of the amount of Rs. 10.5 crores due from it to the appellant company was disposing of its assets and that would defeat the rights of the creditors of the appellant Company. For that reason, an injunction restraining the holding company from alienating its assets was sought for. That prayer was not allowed by the learned judge and, hence, the appeal M.F.A. No. 258/82. -We will dispose of that appeal too independently after we dispose of these appeals.

(3.) WE may now refer to the proceedings in Application No. 491/81. As indicated earlier, this application was very seriously opposed by the Company Law Board and it is suggested in the counter -affidavit that the application is one filed in collusion with the company and is really intended to put off the liquidation of the company which must, in the circumstances, be found to be inevitable, regard being had to the financial position of the company. In support of this it is averred in the counter -affidavit filed onbehalf of the Central Government as follows: The applicant in Application No. 491 of 1981 has no locus standi to file the application. He holds only one share of M/s. Sudarsan Chits (India) Ltd. (hereinafter referred to as ' the S.C'.I.'). He is only a nominee shareholder of M/s. Sudarsan Trading Company (hereinafter referred to as ' the S.T.C.'), and as such he has' actually no financial interest or stake in the affairs of the company. Sri T. P. Ravindran is the chief executive of the S.T.C. The S.C.I., though described as a board managed company, is, in fact, managed by Sri M. Velayudhan duly assisted by the applicant, Sri. T. P. Ravindran, and one V. P. Balaram. The financial position of the company as disclosed by its accounts for the financial year ending April 30, 1979, that being the latest year for which balance -sheet and profit and loss account are available, discloses an alarming situation. While the amount due to the company from prized chit subscribers, fully secured, is only Rs. 4,07,74,449 and secured by personal liabilities is only Rs. 19,00,85,566, thus totalling Rs. 23,08,60,015, the liability to chit subscribers far exceed this amount, that being a sum of Rs. 31,65,40,616. The S.C.T. is a fully owned subsidiary company of the S.T.C. which is having ten subsidiary companies including the S.C.I. The net worth of the S.T.C. for the period ending July 31, 1979, is said to be Rs. 39,04,896. Regarding the S.C.I., it is stated that the paid up capital is only Rs. 30,00,000. While so, the holding company S.C.I. has taken a sum of Rs. 10.44 crores from the S.T.C. The share capital of Rs. 30,00,000 in the S.C.I, is so structured that virtually Sri M. Velayudhan has control of the S.C.I. The origin of the S.C.I, which is now the company sought to be wound up is related to the suggestion made by the Reserve Bank of India to segregate the chits business of the Sudarsan Trading Company from its other activities. Thereupon the S.C.I, entered into an agreement with the S.T.C. on April 23, 1973, and the latter started the business of conducting chits and also took other chits that were being conducted by the S.T.C. Under the agreement, the S.C.I, undertook to maintain a current account between it and the S.T.C. and agreed to advance monies to the S.T.C. as and when required by it subject to a maximum of Rs. 15 crores. The amount so advanced was to be repaid interest free within a period of 15 years from the date of the advance and interest was to be charged at the rate of 6% per annum on, the amount outstanding at the end of the 15th year, in case the amount was not repaid within the period of 15 years. Further, it was agreed that a sum of Rs. 24 lakhs per annum was to be paid by the S.C.L to the parent company, S.T.C. There is also an obligation on the S.C.I, to pay either a sum of Rs. 2.5 lakhs or 75% of the total salary and allowances, etc., of Sri Velayudhan and four other executives of the S.T.C., whichever was lower, annually. The S.C.I. is found to have diverted a substantial part of the funds amounting toRs. 10,43,77,000 as per the balance -sheet as on April 30, 1979, to the S.T.C., the holding company, and this diversion by the company whose share capital was only Rs. 30 lakhs was possible only by diverting funds collected from the chit subscribers. This affected substantially numerous chit creditors of the company and the main beneficiary of this arrangement is the parent company, S.T.C. There are many other matters mentioned in the counter to which we are not making specific reference as we are not proposing ,to discuss each of these since that may not be necessary in view of the manner of disposal of this appeal we are adopting. It may be necessary to point out that elaborate reference is made to diversion, of funds by way of payments made to various persons in whom the holding company of Mr. Velayudhan was interested. As illustration, mention may be made of an advance of a sum of Rs. 2,06,809 to Sri M. Velayudhan, to his wife K. M. Sarada, and her sister. A similar diversion of a sum of Rs. 3,93,812 to K. R. Vijaya, said to be a close associate of Sri. Velayudhan, is referred to. It is attempted to be pointed out in the counter - affidavit that by reason of the diversion of huge amounts to parties in whom the director, Sri Velayudhan, was interested and in paying the amounts without proper security, the solvency of the company was so seriously affected and the financial position of the company is such that even if the entire outstandings are realised, it will not be possible to meet the liabilities.