Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2701 OF 2006
Infrastructure Leasing & Financial
Services Limited ... Appellant
Versus
B.P.L. Limited ... Respondent
JUDGMENT
Dipak Misra, J.
BPL Limited, the respondent herein, was incorporated
under the Companies Act, 1956 (for brevity `the Act") and on
16.4.1963, certificate of incorporation in the name of the
company as British Physical Laboratories India Pvt. Ltd. was
issued. The company became deemed public company and
the word "Private" stood deleted with effect from 24.3.1981.
Subsequently, the name of the company was changed to BPL
Limited and fresh certificate of incorporation was issued by
the Registrar of Companies on 16.3.1992. In the year 1982
the company had diversified its activities into Consumer
2
Electronics, Colour Television Receivers, Black and White TV
Receivers and Video Cassettes Recorders. The company
embarked on various diversifications, expansion programmes
and had facilities for manufacture of television, Alkaline
batteries, colour monitors, etc. It also entered into the
arena of manufacturing of refrigerators and electronic
components through associate companies and had grown
into a diversified group with multiple products and services.
Due to manifold reasons, the company faced cash flow
constraints which adversely affected its operations. It
suffered a loss of Rs.287.8 crores in the last 18 months for
the period ending on 30.09.2003 as there was decline of
sales of goods. Due to the said loss, the debt of the company
increased to 1494.57 crores as on 31.03.2003. As many a
international brand had entered into the Indian market, the
respondent company in order to keep pace with the
technological advancement in the field of business initiated a
comprehensive restructuring of its operations which
primarily involved rejuvenating its main business through a
joint venture with "Sanyo Electric Co. Ltd.", Japan and
accordingly entered into a shareholder agreement. In terms
3
of the agreement the BPL had to transfer its existing CTV
business undertaking to the joint venture constituting BPL
brand for CTV business manufacturing services, marketing
and distribution. Both the companies BPL and Sanyo had
equal partnership in the ratio 50:50 in the joint venture. The
CTV business was valued at Rs.368 crores and BPL was
required to invest approximately Rs.46 crores in the joint
venture company and to receive a net cash inflow of Rs.322
crores. Initially, BPL proposed a scheme of arrangement
which was finally modified and in the said scheme various
business institutions and banks were involved. There were
36 creditors whose names featured in the scheme.
2. After approval of the scheme the respondent filed an
application under Section 391 (1) of the Act read with Rule 9
the Companies (Court) Rules, 1959 seeking permission for
holding a meeting for consideration for approval of
compromise or arrangement proposed to be made between
companies and the creditors. The second prayer had been
made for orders governing the procedures to be complied
with. There were 15 respondents. After the application was
filed forming the subject matter of MCA No. 84 of 2004
4
notices were issued and many financial institutions filed
their counter affidavits/objections. The present appellant,
Infrastructure Leasing & Fin. Services Ltd., which was the
8th respondent, filed its counter-affidavit and in it, had
raised objections to the prayer for stay of various proceedings
before number of forums including Debt Recovery Tribunal,
etc. on the foundation that the Memorandum of Association
of the company does not authorise it to enter into any
arrangement as proposed; that the scheme concealed more
than it revealed, for when such a drastic transformation was
taking place it was imperative that there had to be
exhaustive disclosure; that the application filed under
Section 391 of the Act was totally silent as to how and on
what basis the valuation of Rs.368 crores had been arrived
at, which agency had done the valuation and at whose
instance the valuation was done; that the scheme did not
mention whether the BPL had any other option to raise the
capital when retaining CTV business; that no detailed
information had been furnished in the application or in the
proposed scheme of arrangement as to on what basis the
various percentage payments which were proposed to be
5
made to the unsecured creditors were arrived at by the
company; and that the company court had no jurisdiction to
stay the criminal prosecution under exercise of its power
under Section 391 (6) of the Act.
3. BPL filed a reply stating, inter alia, that very purpose of
Section 391(6) of the Act is that till effective consideration of
the scheme and finalization of the scheme under Section 391
of the Act there has to be a stage of abeyance from all
aspects so that the Company Court can examine the
workability of the same and grant requisite relief. As regards
the non-disclosure by BPL, it was asserted that the
disclosure had been adequately made, for what was proposed
to be transferred to the joint venture company was the colour
television business of the BPL and brand associated with it
and the residual company would retain the other business of
the group such as medical electronics, batteries,
components, etc. It was also put forth that Price Water
House Coopers (PWC) was appointed by the ICICI at the
instance of all lenders and PWC had assessed that the
residual company could sustain a debt to the extent of
Rs.480 to 520 crores and the report submitted by PWC was
6
already in possession of the lenders including 8th respondent
therein. It was alleged as the operation had been stagnated
for a period of two years the valuation made by the PWC was
absolutely fair.
4. Be it stated, some of the respondents filed affidavits
supporting the scheme and some others opposing the same,
from many an angle.
5. The learned Company Judge taking note of the factual
matrix, the submissions advanced at the Bar, the proceeding
before the DRT and the criminal cases, referred to the
maintainability of the scheme and came to hold that the
application preferred under Section 391(1) was maintainable;
that the court had the jurisdiction to consider the application
filed under Section 391(1) of the Act, even for the purpose of
convening a meeting of its creditors and its jurisdiction was
not affected solely because an application had been filed
before the Debt Recovery Tribunal; that the company Court
in exercise of power under Section 391(6) has no jurisdiction
to stay the criminal proceeding initiated under Section 138 of
the Negotiable Instrument Act or the proceeding pending
before the Debt Recovery Tribunal under Securitisation and
7
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002; that it is for the creditors at the
first instance to consider the scheme proposed and only the
approved scheme by the required majority is to be considered
by the court for grant of sanction under Section 391 (2) of
the Act; that there is a distinction between Section 391(1)
and 391(2) of the Act regard being had to the language
employed therein and if the contentions mentioned in the
proviso to sub-Section (2) of Section 391 of the Act had to be
considered at the stage of Section 391(1) that will amount to
reading the latter provision to the earlier one; and that the
distinction which has been set forth in various sub-Sections
have to be appositely understood because there are various
phases till the scheme is approved and each stage has its
own room to operate. After so stating the court referred to
the stand of the 8th respondent and came to hold as follows:-
"49. The 8th respondents among other things also
taken up the contention that at all material times
they were only an unsecured creditor of the
applicant-Company and according to them, they
are wrongly impleaded in C.A. No. 1718/2004.
Accordingly to them, the short-terms loan was
granted on terms and conditions agreed upon by
the parties and on a reading of Clause 15 of the
terms and conditions security to be created by the
Hewlett Packard (India) Ltd. through an ascrow
8
account which will separately open. According to
them, no account was opened subsequently and
no amount was channelised through the account
as contemplated by the mechanism prescribed.
Hence, no security was created in favour of the 8th
respondent. These conditions were raised in an
additional affidavit filed by the 8th respondent.
The applicant-company has also filed an
additional affidavit answering those conditions.
In the additional reply affidavit filed on
24/1/2005 the applicant-company has averred
that the contention that they are only unsecured
creditors was raised during agreement and the
affidavit was also filed during the course of
arguments. The applicant-Company took copies
of the documents creating charge in favour of the
8th respondent. They have produced Annexure-X
hypothecation deed which is executed in 2001.
Copies of Form No. 8 return dated 1.1.2001 and
Form No. 13 return dated 1.1.2001 filed with the
Registrar of Companies are produced as
Annexures-Y and Z. Annexures-AA in a copy of
the letter ILES (8th respondent) dated 4.7.2001. It
is the contention of the applicant that from the
above it is clear that there is a charge in respect
of he specified assets of the applicant-company in
favour of the 8th respondent. Annexure-X is an
unattested deed of hypothecation executed by the
Applicant in favour of the 8th respondent. The
applicant is described as "Borrower". This is a
hypothecation deed creating exclusive charge
involving all monies and right, title and interest,
to be received from and or payable by Hewlett
Packard Ltd., towards sale of colour monitors, to
the borrower as security for the said facility
arranged by the 8th respondents as security for
the payment by the borrower of the balance
outstanding. Annexure-Y is Form No.8 filed by
the applicant-Company under Section 125 of the
Companies Act. The hypothecation deed executed
by the applicant-Company in favour of the 8th
respondent is an instrumental creating a charge
9
and amount secured is contained as Rs. 150
millions. It shows that the above charge was
registered with the Registrar of Companies as per
the provisions of the Companies Act. Annexure-Z
is From No. 13 in which the amount secured is
shown as Rs. 150 million. Annexure-AA is the
letter of consent by the 8th respondent which
shows that the 8th respondents has offered for
providing short-term loan facility upto Rs. 150
million and the term loan facility is enclosed in
the Annexure. The loan facility availed by them to
the BPL Ltd. is also to be considered as part of the
above-mentioned facility. Annexure-AA attached
therein would show that the lender is 8th
respondent and the borrower is BPL Ltd. and the
purpose for which the loan advanced is to meet
working capital requirements and the security
offered is first and exclusive charge on receivables
of Hewlett Packard (India) Ltd. It is also seen that
the applicant-Company has to undertake to
complete all formalities towards creation of charge
and the escrow arrangement within 30 days from
the date of disbursement. The proposal made
even as per the Scheme of Arrangement is to
apply to all existing charge holders and 8th
respondent is one such charge holder, to whom
the Scheme is extended.
50. In the light of the above facts, I do not find any
merit in the contention that the Scheme proposed
will not cover the 8th respondent or that they are
not secured creditors, to whom the Scheme will not
apply. "
6. Be it stated, the court did not accept the contention
that the scheme could not be worked out on the ground that
the scheme was entitled to be amended either in the meeting
or even subsequently by the Court and it was not the stage
10
to suggest any amendment and accordingly contentions
raised by the respondents in that regard were kept open.
7. On the basis of the aforesaid analysis, the Company
Judge held that MCA No. 84/2004 was maintainable and
other applications seeking grant of stay were sans merit and
accordingly dismissed the same. Certain applications were
kept to be considered at a later stage. The prayer of the
respondents that they were not covered by the scheme
proposed by the amendment and they are not secured
creditors was rejected. Ultimately the Company Judge
issued the following directions:-
"54. M.C.A. No. 84/2004 is allowed. It is ordered
that a meeting of secured creditors (working
Capital Lenders and Term Lenders) be convened
and held at the Registered office of he Applicant
Company at Palghat on 16.04.2005 at 2.00 P.M.
for the purpose of considering and if thought fit,
approving with or without modification of he
compromise/arrangement proposed as Annexure-
G as modified by Annexure-N to be made between
the Company and the creditors abovenamed.
55. Mr. Justice T. V. Ramakrishnan, a Retired
Judge of the High Court is appointed as the
Chairman for the Meeting
56. Notice convening the above meeting shall be
published in all editions of Economic Times,
Indian Express and Malayala Manorama giving 21
days clear notice.
xxx xxx xxx
11
58. That the value each member/creditor shall be
in accordance with the books of the Company and
in case of dispute, the Chairman shall determine
the value."
8. Being aggrieved by the aforesaid order, the 8th
respondent filed Company Appeal No. 5 of 2005. Before the
appellate Court, it was contended that Section 391 of the
Act, although refers to the power of companies to make
arrangements with creditors and members, such
compromise could have only been possible between a
company and its creditors or any class of them, and when an
application was filed before the court, where it had been
possible to find out that the arrangement was not intended
to be made with a homogeneous class, the court should have
accepted the objection so raised. It was also urged, ignoring
the same, a binding order, could not have been issued. It
was contended that the meeting was proposed to be held
between the company and its secured creditors and even if it
was to be presumed that the appellant initially was a secured
creditor, it had been disrobed of the said status consequent
to subsequent developments, including an arbitration award,
well before the application came to be filed in the court.
12
9. The appellant argued that though as required by the
hypothecation deed, Form Nos. 8 and 13 thereof had been
submitted before the Registrar of Companies, yet no further
action was taken by BPL Ltd. to fulfil the agreed arrangement
between the parties. It was asserted that as per the deed of
hypothecation, the borrower was obliged to open an escrow
and no-lien account with a designated bank, and was to
undertake to deposit all the receivables from Hewlett Packard
India Ltd. in the said escrow account only, however, no
escrow account had been opened and the agreed
arrangement remained only on paper. The escrow
mechanism was the essence of the agreement, but it had
never been put into operation and, therefore, it was not
permissible for BPL Ltd. to contend that the appellant was a
secured creditor and the original claims of the appellant
could not have been watered down.
10. The next contention that was advanced in the company
appeal was that even if it could have been assumed that
because of the hypothecation deed, at one point of time, the
appellant could have been considered as a secured creditor,
the position had changed because of the arbitration award
13
which has been passed on consent. Emphasis was laid on
the fact that there was an agreement recorded in the award
that the criminal proceedings would not be pursued and
more importantly it was a settlement of money claim and
nothing remained in respect of the claims on hypothecation,
which originally had been entered into by the parties. Thus,
the status of a secured creditor thereby irrevocably had been
metamorphosed. Relying on the authority Deva Ram
v. Ishwar Chand1, a submission was advanced that on
principles gatherable from Order II, Rule 2, of CPC, after the
award had come into existence, it would not have been
possible for the appellant to pursue his claims on the basis
of the hypothecation deed, for the rights of the parties got
crystallised to a pure and simple money claim, and hence,
the security earlier offered and created had lost its relevance
and transformed itself to a decree debt.
11. Apart from the above contentions, it was also
propounded that the appellant deemed to have relinquished
rights of hypothecation security and being a party to the
proceedings, BPL Ltd. could not have turned round and put
1
AIR 1996 SC 378
14
forward a technical contention that the appellant continued
to be a secured creditor. To buttress the said stand, reliance
was placed upon the dictum laid down in K.V. George
v. Secretary to Government, Water and Power
Department2.
12. The aforesaid contentions were resisted by the counsel
for the BPL that the order passed by the learned company
Judge was absolutely flawless; that the stand that the
appellant was no more a secured creditor because of the
award passed between the parties was totally devoid of any
merit; that the scheme or arrangement was approved in the
meeting of the secured creditors held by the Chairman and
the appellant company had been issued a substantial sum
but it had refused to accept the same; that the appellant
remained a secured creditor for all legal purposes and hence,
it was bound by the scheme in question.
13. The Division Bench adverted to the deed of
hypothecation executed by the BPL in favour of the appellant
company and opined that the appellant-company had failed
to take follow up action to get an escrow account; that the
2
AIR 1990 SC 53
15
formalities relating to creation of charge had been duly
followed; that in the arbitration award there was no reference
that BPL had agreed to lift the charge created; in the absence
of the agreed position that the charge be got lifted, and the
appellant continued to be a secured creditor and passing of
the arbitration award did not create any change in the
status.
14. The Division Bench appreciating the contentions
further came to hold that the appellant was a secured
creditor after the hypothecation deed was executed; that
once the charge had been created it continued to bind the
parties till steps were regressed; and that the finding
recorded by the learned company Judge was
unexceptionable. That apart, the Division Bench also took
note of the fact that the persons who had to be adversely
affected were not parties to the appeal. Being of the view, it
dismissed the appeal. The said judgment and order are the
subject matter of assail in this appeal.
15. We have heard Mr. Shyam Divan, learned senior
counsel for the appellant and Mr. V. Giri, learned senior
counsel for the respondent.
16
16. It is submitted by Mr. Divan that that once an arbitral
award has been passed on consent between the parties it
extinguishes the status of the appellant as a secured creditor
and it stands on a different footing altogether. It is further
urged that the registration as a secured creditor does not
bind the appellant and, more so, when the arbitral award
has come into existence. It is his submission that after the
parties settled by way of arbitration, the conceptual
requisites of a secured creditor became non-existent.
Learned senior counsel would further put forth that the
hypothecation had never become operational as is evident
from various documents on record and hence, the analysis
made by the High Court is absolutely fallible. It is
contended that once the deed of hypothecation is not
fructified, mere registration as a secured creditor with the
Registrar of Companies would not confer on the appellant
the status of a secured creditor and, in any case, the said
registration would not bind it. It is canvassed by him that
once the appellant has accepted the award as passed by the
arbitrator, it operates as res judicata against the respondent
company to treat the appellant company as a secured
17
creditor. That apart, urges the learned senior counsel, the
principles inherent in Order II, Rule 2 would be attracted
and the High Court has completely erred by totally brushing
it aside. The learned senior counsel, to support his
submissions raised by him, has referred to various
provisions of the Companies Act and placed reliance on the
authorities in Firm Chunna Mal Ram Nath v. Firm Mool
Chand Ram Bhagat3, Jagad Bandu Chatterjee v. Nilima
Rani4, Indian Bank v. Official Liquidator, Chemmeens
Exports (P) Ltd5., Ranganayakamma v. K.S. Prakash6
and Jitendra Nath Singh v. Official Liquidator and ors.7
17. Mr. Giri, learned senior counsel appearing for the
respondent, resisting the aforesaid proponements, would
submit that the arbitral award, whether passed on consent
or on contest, has the status of a decree but such a decree
does not extinguish the charge and thereby does not disrobe
the status of a secured creditor. Learned senior counsel
would contend that despite the relinquishment made by the
appellant, it would not take away the legal status conferred
3
AIR 1928 PC 99
4
(1969) 3 SCC 445
5
(1998) 5 SCC 401
6
(2008) 15 SC 673
7
(2013) 1 SCC 462
18
by it in law. Emphasis has been laid on the issue of
registration before the Registrar under Sections 138 and 139
of the Act and how the record establishes that the status and
the arbitral award will not change the registered status. It is
contended by Mr. Giri that by no stretch of imagination, the
principle of resjudicata would apply to the case at hand, for
the proceedings are of different nature. He would also urge
that the lis would not be hit by the bar created under Order
II, Rule 2 of the CPC. Learned senior counsel has
commended us to the decisions in Lonankutty v. Thomman
and Another8, Harbans Singh and others v. Sant Hari
Singh and others9, and Indian Bank v. Official
Liquidator, Chemmeens Exports (P) Ltd. and others10.
18. From the narration of facts and the contentions which
have been highlighted, it is clear that two facts are beyond
dispute. First, the appellant stands registered as a secured
creditor of the respondent company on the record of the
Registrar of Companies under the Act; and second, the
arbitral tribunal has passed an award on the basis of
consent and it has the status of a decree which is executable
8
(1976) 3 SCC 528
9
(2009) 2 SCC 526
10
(1998) 5 SCC 401
19
in law. Keeping in view these two undisputed facts, we have
to appreciate the rival submissions raised at the Bar. In this
context, reference to relevant portions of Sections 391 and
393 of the Act would be appropriate. They are as follows:
"391. (1) Where a compromise or arrangement is
proposed--
(a) between a company and its creditors or
any class of them; or
(b) between a company and its members or
any class of them;
the Court may, on the application of the company
or of any creditor or member of the company, or
in the case of a company which is being wound
up, of the liquidator, order a meeting of the
creditors or class of creditors, or of the members
or class of members, as the case may be, to be
called, held and conducted in such manner as the
Court directs.
(2) If a majority in number representing three-
fourths in value of the creditors, or class of
creditors, or members, or class of members as the
case may be, present and voting either in person
or, where proxies are allowed under the rules
made under Section 643, by proxy, at the
meeting, agree to any compromise or
arrangement, the compromise or arrangement
shall, if sanctioned by the Court, be binding on all
the creditors, all the creditors of the class, all the
members, or all the members of the class, as the
case may be, and also on the company, or, in the
case of a company which is being wound up, on
the liquidator and contributories of the company:
Provided that no order sanctioning any
compromise or arrangement shall be made by the
Court unless the Court is satisfied that the
20
company or any other person by whom an
application has been made under sub-section (1)
has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the
company, such as the latest financial position of
the company, the latest auditor's report on the
accounts of the company, the pendency of any
investigation proceedings in relation to the
company under Sections 235 to 251, and the
like."
xxxxx xxxxx xxxxx
"393. (1) Where a meeting of creditors or any class
of creditors, or of members or any class of
members, is called under Section 391,--
(a) with every notice calling the meeting which is
sent to a creditor or member, there shall be sent
also a statement setting forth the terms of the
compromise or arrangement and explaining its
effect, and in particular, stating any material
interests of the directors, managing directors,
managing agents, secretaries and treasurers or
manager of the company, whether in their
capacity as such or as members or creditors of
the company or otherwise, and the effect on those
interests, of the compromise or arrangement, if,
and insofar as, it is different from the effect on the
like interests of other persons; and
(b) in every notice calling the meeting which is
given by advertisement, there shall be included
either such a statement as aforesaid or a
notification of the place at which and the manner
in which creditors or members entitled to attend
the meeting may obtain copies of such a
statement as aforesaid."
21
19. Sub-Section (1) of Section 391 stipulates that a
compromise or arrangement can be proposed between a
company or its creditor or any class of them or between a
company and its members or any class of them. It need not
be between all the creditors or all the members.
Contextually, "class of creditors" or "class of members" has a
different meaning and connotation. It gains significance
when the question of approval of scheme under the Act
arises for consideration. While dealing with the approval of a
scheme, the Company Court is required to direct holding of
meeting of the said class of creditors or members concerned
and only when the scheme is approved by the majority in
number representing 3/4th in value by the class of creditors,
or members present either in person or through proxy, the
same becomes binding on the said class of creditors or
members. Once there is a voting and the 3/4th majority has
voted in favour of the scheme, it is binding on those who
have dissented and had voted against the scheme or those
who remained silent.
20. While analyzing the scope and ambit of the powers of
the Company Court in respect of Section 391 and 393 of the
22
Act and the role of the Court a two-Judge Bench in Miheer
H. Mafatlal V. Mafatlal Industries Ltd.11 has observed
thus:-
"Before sanctioning such a scheme even though
approved by a majority of the concerned creditors
or members the Court has to be satisfied that the
company or any other person moving such an
application for sanction under sub-section (2) of
Section 391 has disclosed all the relevant matters
mentioned in the proviso to sub-section (2) of that
section. So far as the meetings of the creditors or
members, or their respective classes for whom the
Scheme is proposed are concerned, it is enjoined
by Section 391(1)(a) that the requisite information
as contemplated by the said provision is also
required to be placed for consideration of the
voters concerned so that the parties concerned
before whom the scheme is placed for voting can
take an informed and objective decision whether
to vote for the scheme or against it. On a conjoint
reading of the relevant provisions of Sections 391
and 393 it becomes at once clear that the
Company Court which is called upon to sanction
such a scheme has not merely to go by the ipse
dixit of the majority of the shareholders or
creditors or their respective classes who might
have voted in favour of the scheme by requisite
majority but the Court has to consider the pros
and cons of the scheme with a view to finding out
whether the scheme is fair, just and reasonable
and is not contrary to any provisions of law and it
does not violate any public policy. This is implicit
in the very concept of compromise or arrangement
which is required to receive the imprimatur of a
court of law. No court of law would ever
countenance any scheme of compromise or
arrangement arrived at between the parties and
11
(1997) 1 SCC 579
23
which might be supported by the requisite
majority if the Court finds that it is an
unconscionable or an illegal scheme or is
otherwise unfair or unjust to the class of
shareholders or creditors for whom it is meant.
Consequently it cannot be said that a Company
Court before whom an application is moved for
sanctioning such a scheme which might have got
the requisite majority support of the creditors or
members or any class of them for whom the
scheme is mooted by the company concerned, has
to act merely as a rubber stamp and must almost
automatically put its seal of approval on such a
scheme. It is trite to say that once the scheme
gets sanctioned by the Court it would bind even
the dissenting minority shareholders or creditors.
Therefore, the fairness of the scheme qua them
also has to be kept in view by the Company Court
while putting its seal of approval on the scheme
concerned placed for its sanction."
21. Thereafter, the Court referred to Section 392 of the Act.
The said provision deals with the supervisory jurisdiction of
the Company Court. It is necessary to reproduce the same:
"392. (1) Where a High Court makes an order
under Section 391 sanctioning a compromise or
an arrangement in respect of a company, it--
(a) shall have power to supervise the carrying
out of the compromise or arrangement; and
(b) may, at the 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.
24
(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.
(3) The provisions of this section shall, so far as
may be, also apply to a company in respect of
which an order has been made before the
commencement of this Act under Section 153 of
the Indian Companies Act, 1913 (7 of 1913),
sanctioning a compromise or an arrangement."
22. In the said context, the Court posed the question
whether it has the jurisdiction of an appellate authority to
minutely scrutinize the scheme and to arrive at an
independent conclusion whether the scheme should be
permitted to go through or not and whether the majority
creditors or members, through their respective class, have
approved the scheme as required under sub-Section (2) of
Section 391. It observed that the nature of compromise or
arrangement between the company and the creditors and the
members has to be kept in view, for it is the commercial
wisdom of the parties to the scheme who have taken an
informed decision about the usefulness and propriety of the
25
scheme by supporting it by the requisite majority vote.
Therefore, the Court does not act as a Court of Appeal and
sit in judgment over the informed view of the parties
concerned to the compromise as the same would be in the
realm of corporate and commercial wisdom of the parties
concerned and further the Court has neither the expertise
nor the jurisdiction to dig deep into the commercial wisdom
exercised by the creditors and the members of the company
who have ratified the scheme by the requisite majority. The
Court eventually held that it has the supervisory jurisdiction
which is also in consonance with the language employed
under Section 392 of the Act. In that context, the Court
referred to the observations found in the oft-quoted passage
in Buckley on the Companies Act, 14th Edn. It is as follows:
"In exercising its power of sanction the court
will see, first that the provisions of the statute
have been complied with, second, that the class
was fairly represented by those who attended the
meeting and that the statutory majority are acting
bona fide and are not coercing the minority in
order to promote interest adverse to those of the
class whom they purport to represent, and thirdly,
that the arrangement is such as an intelligent and
honest man, a member of the class concerned and
acting in respect of his interest, might reasonably
approve.
26
The court does not sit merely to see that the
majority are acting bona fide and thereupon to
register the decision of the meeting, but at the
same time, the court will be slow to differ from the
meeting, unless either the class has not been
properly consulted, or the meeting has not
considered the matter with a view to the interest of
the class which it is empowered to bind, or some
blot is found in the scheme."
23. The Court also referred to the decision in Alabama,
New Orleans, Texas and Pacific Junction Rly. Co. Re12
to cull out the principle relating to the power and jurisdiction
of the Company Court which is called upon to sanction the
scheme of arrangements or compromise between the
company and its creditors or shareholders. The observations
of Lindley, L.J. as quoted in the said authority read as
under:
"What the court has to do is to see, first of all,
that the provisions of that statute have been
complied with; and, secondly, that the minority
has been acting bona fide. The court also has to
see that the minority is not being overridden by a
majority having interests of its own clashing with
those of the minority whom they seek to coerce.
Further than that, the court has to look at the
scheme and see whether it is one as to which
persons acting honestly, and viewing the scheme
laid before them in the interests of those whom
they represent, take a view which can reasonably
be taken by businessmen. The court must look at
the scheme, and see whether the Act has been
12
(1891) 1 Ch 213
27
complied with, whether the majority are acting
bona fide, and whether they are coercing the
minority in order to promote interests adverse to
those of the class whom they purport to
represent; and then see whether the scheme is a
reasonable one or whether there is any reasonable
objection to it, or such an objection to it as that
any reasonable man might say that he could not
approve it."
24. The observations of Fry, L.J. were also reproduced. A
reference was made to the decision in Anglo-Continental
Supply Co. Ltd. Re13 and the judgment by a three-Judge
Bench in Employees' Union V. Hindustan Lever Ltd.14 and
eventually, the following principles were culled out:
"In view of the aforesaid settled legal position,
therefore, the scope and ambit of the jurisdiction
of the Company Court has clearly got earmarked.
The following broad contours of such jurisdiction
have emerged:
1. The sanctioning court has to see to it that
all the requisite statutory procedure for
supporting such a scheme has been complied
with and that the requisite meetings as
contemplated by Section 391(1)(a) have been
held.
2. That the scheme put up for sanction of the
Court is backed up by the requisite majority
vote as required by Section 391 sub-section
(2).
13
(1922) 2 Ch 723
14
(1995) Supp (1) SCC 499
28
3. That the meetings concerned of the
creditors or members or any class of them
had the relevant material to enable the voters
to arrive at an informed decision for
approving the scheme in question. That the
majority decision of the concerned class of
voters is just and fair to the class as a whole
so as to legitimately bind even the dissenting
members of that class.
4. That all necessary material indicated by
Section 393(1)(a) is placed before the voters
at the meetings concerned as contemplated
by Section 391 sub-section (1).
5. That all the requisite material
contemplated by the proviso of sub-section
(2) of Section 391 of the Act is placed before
the Court by the applicant concerned seeking
sanction for such a scheme and the Court
gets satisfied about the same.
6. That the proposed scheme of compromise
and arrangement is not found to be violative
of any provision of law and is not contrary to
public policy. For ascertaining the real
purpose underlying the scheme with a view
to be satisfied on this aspect, the Court, if
necessary, can pierce the veil of apparent
corporate purpose underlying the scheme
and can judiciously X-ray the same.
7. That the Company Court has also to
satisfy itself that members or class of
members or creditors or class of creditors, as
the case may be, were acting bona fide and in
good faith and were not coercing the minority
in order to promote any interest adverse to
that of the latter comprising the same class
whom they purported to represent.
29
8. That the scheme as a whole is also found
to be just, fair and reasonable from the point
of view of prudent men of business taking a
commercial decision beneficial to the class
represented by them for whom the scheme is
meant.
9. Once the aforesaid broad parameters
about the requirements of a scheme for
getting sanction of the Court are found to
have been met, the Court will have no further
jurisdiction to sit in appeal over the
commercial wisdom of the majority of the
class of persons who with their open eyes
have given their approval to the scheme even
if in the view of the Court there would be a
better scheme for the company and its
members or creditors for whom the scheme is
framed. The Court cannot refuse to sanction
such a scheme on that ground as it would
otherwise amount to the Court exercising
appellate jurisdiction over the scheme rather
than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit
of the jurisdiction of the Company Court which is
called upon to sanction a scheme of compromise
and arrangement are not exhaustive but only
broadly illustrative of the contours of the Court's
jurisdiction."
25. In this context, we may usefully refer to Palmer's
Treatise on `Company Law, 25th edition, wherein delineating
with the concept of class, it has been stated thus:-
"What constitutes a class:
The court does not itself consider at this point
what classes of creditors or members should be
made parties to the scheme. This is for the
30
company to decide, in accordance with what the
scheme purports to achieve. The application for
an order for meetings is a preliminary step, the
applicant taking the risk that the classes which
are fixed by the judge, usually on the applicant's
request, are sufficient for the ultimate purpose of
the section, the risk being that if in the result, and
we emphasize the words 'in the result', they reveal
inadequacies, the scheme will not be approved'. If,
e.g., rights of ordinary shareholders are to be
altered, but those of preference shares are not
touched, a meeting of ordinary shareholders will
be necessary but not of preference shareholders. If
there are different groups within a class the
interests of which are different from the rest of the
class, or which are to be treated differently under
the scheme, such groups must be treated as
separate class for the purpose of the scheme.
Moreover, when the company has decided what
classes are necessary parties to the scheme, it
may happen that one class will consist of a small
number of persons who will all be willing to be
bound by the scheme. In that case it is not the
practice to hold a meeting of that class, but to
make the class a party to the scheme and to
obtain the consent of all its members to be bound.
It is, however, necessary for at least one class
meeting to be held in order to give the court
jurisdiction under the section."
In this regard, reference to a passage from Sovereign
Life Assurance Co. Ltd. v. Dodd15, as stated by Bowen,
L.J., would be apt. It reads as follows:
"it seems plain that we must give such a meaning
to "Class" as will prevent the section being so
worked as to result in confiscation and injustice,
15
1892 (2) Q.B. 573 CA
31
and that it must be confined to those persons
whose rights are not so dissimilar as to make it
impossible for them to consult together with a
view to their common interest."
26. The purpose of the classification of creditors has its
significance. It is with this object that when a class has to
be restricted, the principle has to be founded on homogeneity
and commonality of interest. It is to be seen that dissimilar
classes with conflicting interest are not put in one
compartment to avoid any kind of injustice. For example, an
unsecured creditor who has filed a suit and obtained a
decree would not become a secured creditor. He has to be
put in the same class as other unsecured creditors (See
Halsbury's Laws of India, 2007, Vol. 27).
27. The aforesaid being the position relating to the status of
a class, at this juncture, it is necessary to appreciate the
basic facts which are determinative in the case at hand. As
the exposition of facts would uncurtain, the appellant
company had extended a short-term loan facility of Rs.150
million to the respondent company on 4.7.2001; that the
respondent company had executed a deed of hypothecation
in favour of the appellant hypothecating by way of an
exclusive charge of the monies and right, title and interest
32
relating to amounts, both present and future to be received
or payable by M/s. Hewlett Packard Ltd.; that the
respondent had filed Forms 8 and 13 and the charge by way
of hypothecation was duly registered with the Registrar of
Companies; that the appellant had initiated an arbitration
proceeding which eventually resulted in the consent award
dated 1.7.2004 whereby the arbitral tribunal directed a sum
of Rs.48,683,710/- as due on 30.06.2004 along with interest
@ 20% p.a. on the principal amount of Rs.36,360,000/- from
01.07.2004 till realization; that the award stipulated due
discharge of the liability on payment of Rs.36,360,000/- in
four instalments for the purpose of which post-dated
cheques were issued; that there was a postulate that in case
of default of payment of any instalment, the entire amount
may become due and payable and the appellant would be
entitled in law to execute the award for recovery of the entire
due without prejudice to and in addition to entitlement to
institute criminal proceedings under the Negotiable
Instruments Act; that the respondent failed to pay the first
instalment of Rs.17,500,000/- on or before 30.09.2004; that
on 30.09.2004 the respondent filed a petition under Sections
33
391-394 of the Act for sanction of the scheme; that the
appellant initially filed objections to the scheme in the form
of a counter affidavit on 25.11.2004 on merits and thereafter
at a subsequent stage on 20.1.2005 filed an additional
affidavit stating, inter alia, that it was an unsecured creditor;
that an affidavit was filed in oppugnation asserting that the
appellant was a secured creditor, regard being had to the
hypothecation deed and the registration having been effected
with the Registrar of Companies; that meeting of the secured
creditors and guarantors was held on 6.4.2005 and a
Chairperson was appointed; that the said order was
challenged by IndusInd Bank Ltd., WTI Bank Ltd. and Bank
of Rajasthan Ltd. in appeals but the same were dismissed by
the Division Bench on 17.06.2005; that the appellant
preferred an appeal which was dismissed by the judgment on
17.1.2006, which is impugned herein; that the scheme which
has been amended was put to vote and was duly approved by
the three-fourth of the secured creditors present and voting
in value terms; and that the Court has approved and
accepted the modified Scheme.
34
28. We have, hereinabove, referred to the fact that the
Scheme was amended and approved in the meetings held by
the secured creditors. For the sake of completeness, we
think it appropriate to reproduce how the learned Company
Judge had approved the Scheme.
"(i) The scheme of arrangement as amended by
amendments approved at the meeting of the
secured creditors on April 16, 2005, being
Annexure D1 to the Company Petition No.
13/2004 is sanctioned so as to be binding with
effect from 31.03.2003, on the petitioner company
and all of its secured creditors and preference
shareholders, including any secured creditor and
preference shareholders that may have obtained
any decree, order or direction from any court
tribunal or any other authority, without any
further act or deed by the petitioner company, in
respect of the outstanding debt of the petitioner
company as of March 31, 2003 to all its secured
creditors and preference shareholders, which
amount shall be as has been determined on the
basis of the figures agreed and accepted between
the petitioner company and each of the secured
creditors at the meeting of the secured creditors
convened and held on April 16, 2005, and hence
the figure as was specified in the application filed
by the petitioner Company under section 391 (1) of
the Companies Act stands/ modified accordingly.
(ii) The petitioner Company shall within 30 days
after the date of sealing of this order cause a
certified copy thereof to be delivered to the
Registrar of Companies, Kerala of registration.
(iii) On the coming into effect by the Scheme of
Arrangement being filed by the petitioner
Company with the Registrar of Companies, Kerala
35
and with effect from 31.03.2003, the outstanding
debt of the petitioner company owed to all secured
creditors and Preference Shareholders as of
31.03.2003 shall be restructured on the terms and
conditions and in the manner provided for in the
Scheme of Arrangement as annexed in Annexure
D1 to the petition.
(iv) The total outstanding debt of the petitioner
company to all is Secured Creditors and
Preference Shareholders as of 31.03.2003 of the
petitioner Company shall be restructured under
the scheme of arrangement and all rights and
liabilities relating to such outstanding debt to
secured Creditors and Preference Shareholders as
of 31.03.2003 shall stand created under the
Scheme of Arrangement. In addition, the
petitioner company and the Secured Creditors and
Preference Shareholders shall enter into any
documentation that may be required, only to give
formal effect to the restricting and for the
modification of the security contemplated by the
Scheme of Arrangement, and to govern the
prospective/ongoing relationship between the
petitioner Company and its Secured Creditors and
Preference Shareholders (including covenants of
the petitioner company, supervision of the
management of the petitioner Company, Event of
Default etc). However, upon the Scheme of
Arrangement coming into effect, in the absence of
the formal documentation referred to above, the
rights obligations and privileges of the petitioner
Company and the Secured Creditors and
Preference Shareholders shall be governed by the
provisions of the Scheme of Arrangement as
detailed in Annexure D1 to the petition.
(v) Any legal or other proceedings pending
against the petitioner Company, in India or
abroad, relating to any of the outstanding debt, of
the petitioner company to Secured Creditors and
Preference Shareholders shall, on the effectiveness
36
of the Scheme of Arrangement, be terminated and
the rights, obligations and liabilities of the parties
shall be governed by the terms of the Scheme of
Arrangement.
That the parties to the compromise of
arrangement or other persons interested shall be
at liberty to apply to this court for any directions
that may be necessary in regard to the working of
the Compromise or arrangement and that the said
company do file with the Registrar of Companies a
certified copy of this order within 14 days from the
date.
29. Keeping in view the factual backdrop, we have to
appreciate the principal contentions. The seminal contention
of the appellant is that it does not fall into the class of
secured creditors, for it had initiated the arbitration
proceeding and an award has been passed on consent which
is a simple money decree and, therefore, the deed of
hypothecation, even if assumed to be executed at one point
of time, has become irrelevant. To elaborate, the status of
the appellant had changed from a secured creditor to that of
an unsecured creditor. On this foundation, a stance has
been taken that the principles of Order II, Rule 2, C.P.C.
would be applicable as the appellant would be debarred to
issue on the basis of the charge of hypothecation. Emphasis
has been laid on the factum that there having been a change
37
of status, the appellant company cannot be clubbed with the
secured creditors as a class and even if it is kept in
homogenous category of secured creditors, it should still fall
under a separate class, regard being had to the fact it has
obtained an award from the arbitral tribunal. In this
context, it is to be seen that whether the arbitration award
has the effect of obliterating or nullifying the status of the
appellant and making him an unsecured creditor as a
consequence of which it would not be able to sue on the
basis of a charge created in its favour.
30. What is contended by Mr. Divan, learned senior counsel
for the appellant is that any further lis would be hit by
principles enshrined under Order II, Rule 2 as well as by
resjudicata. It is urged by him that the claim of the
appellant company having been heard and decided in a
formal proceeding, i.e. the arbitration, it is binding and,
therefore, the principle under Order II, Rule 2 would come
into play. For the said proposition, he has drawn inspiration
from Deva Ram (supra). The Court, after analyzing the
Order II, Rule 2 CPC, observed thus:
"A bare perusal of the above provisions would
indicate that if a plaintiff is entitled to several
38
reliefs against the defendant in respect of the
same cause of action, he cannot split up the claim
so as to omit one part of the claim and sue for the
other. If the cause of action is the same, the
plaintiff has to place all his claims before the
court in one suit as Order II Rule 2 is based on
the cardinal principle that the defendant should
not be vexed twice for the same cause."
31. In that context, reference was made to Palaniappa
Chettiar v. Alagan Chettiar16. The Court also observed
that the Rule requires the unity of all claims based on the
same cause of action in one suit but it does not contemplate
unity of separate causes of action. If, therefore, the
subsequent suit is based on a different cause of action, the
rule will not operate as a bar. For the said purpose, reliance
was placed on Arjun Lal Gupta V. Mriganka Mohan Sur17,
State of Madhya Pradesh V. State of Maharashtra18, and
Kewal Singh V. Mt. Lajwanti19.
32. In this regard, immense emphasis has been placed by
Mr. Divan, learned senior counsel, on the authority in
Official Liquidator, Chemmeens Exports (P) Ltd. (supra),
especially paragraphs 13, 15 and 18. Paras 15 and 18 which
16
AIR 1922 PC 228
17
AIR 1975 SC 207
18
AIR 1977 SC 1466
19
AIR 1980 SC 161
39
have been pressed into service with immense inspiration
read as follows:
"The aforementioned preliminary decree was
passed by the Court even though the Official
Liquidator raised the plea in the written statement
that the charge created on the Company's
property was void under Section 125 of the Act.
But it may be that the plea was not argued at the
hearing. However, what is clear from the material
on record is that no appeal was filed against the
said preliminary decree by the Official Liquidator
and the preliminary decree has attained finality.
xxxx xxxx xxxx
In Suryakant Natvarlal Surati v. Kamani Bros.
Ltd.20 the Company created a charge under a
mortgage in favour of the trustees of the
Employees' Gratuity Fund. The creditors, by a
preliminary decree of 3-12-1977 were entitled to
receive the amount secured on the property of the
Company; the Court fixed 8-12-1988 as the date
for redemption and ordered that in default of
payment of the sum due by that date, the property
was to be sold by public auction. On an application
made on 16-2-1978, the Company was ordered to
be wound up by an order dated 3-8-1979. As
default in payment of the decreed amount was
committed, the mortgagees applied for leave of the
Court under Section 446 to execute the decree
against the Official Liquidator by application dated
10-7-1981. Three contributories sought injunction
against taking any further action on the ground
that the charge created by the Company was not
registered under Section 125 of the Companies Act,
therefore, the mortgagees should be treated only as
unsecured creditors. Their application was
dismissed by a learned Single Judge. On appeal,
20
(1985) 58 Comp Cas 121 (Bom)
40
speaking for the Division Bench of the Bombay
High Court Justice Bharucha (as he then was) laid
down, inter alia, the principle that the question of
applicability of Section 125 had to be decided on
the terms of the decree -- whether the unregistered
charge created by the mortgagor was kept alive or
extinguished or replaced by an order of sale
created by the decree; if upon a construction of the
decree, the Court found that the unregistered
charge was kept alive, the provisions of Section
125 would apply and if, on the other hand, the
decree extinguished the unregistered charge, the
section would not apply. We are in respectful
agreement with that principle. We hold that a
judgment-creditor will be entitled to relief from the
Company Court accordingly."
33. Relying on the said passages, it is urged that when the
award has been passed on consent and has the status of a
decree that makes him an unsecured creditor, for it has
attained finalilty. To appreciate the said submission, the
quoted passages are to be appositely appreciated. As is
evident, this Court has concurred with the view expressed by
the Bombay High Court in Suryakant Natvarlal Surati
(supra). The Division Bench of the Bombay High Court had
opined that the question of applicability of Section 125 of the
Act has to be decided on the terms of the decree whether
the unregistered charge created by the mortgagor was kept
alive or extinguished or replaced by an order of sale created
41
by the decree; if upon a construction of the decree, the Court
found that the unregistered charge was kept alive, the
provisions of Section 125 would apply and if, on the other
hand, the decree extinguished the unregistered charge, the
Section would not apply. To elucidate, it would depend upon
the terms of the decree. In the case at hand, the learned
Arbitrator has passed an award on consent. It is trite that it
has the status of a decree but there is nothing expressed in
the award that the decree has extinguished the charge. It
was not extinguished because the award does not say so. To
have a complete picture, we think it necessary to reproduce
the relevant portion of the operative part of the award:
"I. Award on admission in the sum of
Rs.48,683,710/- (due as on June 30, 2004) in
favour of the Claimants against the Respondents
together with further interest @ 20% p.a. on the
principal sum of Rs.36,360,000/- from 1st July,
2004 till payment and/or realization.
II. The aforesaid Award against the Respondents
shall be marked as fully satisfied in the even of the
Respondents making payment to the Claimants of
the sum of Rs.36,360,000/- in the following
installments:-
i. Rs.17,500,000/- on or before 30th
Septemebr, 2004
ii. Rs.6,287,000/- on or before 15th April,
2017
42
iii. Rs.6,287,000/- on or before 15th April,
2018
iv. Rs.6,287,000/- on or before 15th April,
2019
III. Simultaneously with the signing of these
Consent Terms, the Respondents have handed
over to the Claimants one post dated cheque in
favour of the Claimants for Rs.17,500,000/- and
3 post dated cheques in favour of the Claimants
for Rs.6,287,000/- each falling due on the date of
the respective instalments.
IV. The Respondents hereby agree and
undertake that the Respondents shall make
payment of the said sum of Rs.36,360,000/- to
the Claimants as per the Schedule set out in
Clause 2 above and shall honour the post dated
cheques on their respective due dates. This
undertaking is given by the Respondents after
satisfying themselves that they have the financial
ability to make the said payment on the respective
due dates.
V. In the event of the Respondents committing
default in payment of any of the installments
including the last installment on the due date for
any reason whatsoever, the entire dues together
with interest as provided on Clause I hereinabove
and outstanding due and payable by the
Respondents to the Claimants as on that date
shall become forthwith due and payable by the
Respondents to the Claimants and the Claimants
shall be entitled to forthwith execute the Award
against the Respondents and recover the entire
dues. In that even, any installments/s paid
under Clause 2 will be first appropriated towards
the interest payable under Clause I without
prejudice and in addition thereto, the Claimants
shall also be entitled to institute criminal legal
proceedings against the Respondents including
43
for dishonor of cheque/s under the provisions of
the Negotiable Instruments Act, 1881."
In view of the aforesaid conclusions, in the award, we
have no scintilla of doubt that the decision in Official
Liquidator, Chemmeens Exports (P) Ltd. (supra) is
distinguishable.
34. In this backdrop, we are to analyse whether the deed of
hypothecation would continue in spite of the arbitration
award. Mr. Divan submitted that it would not survive
because of the provisions contained in Order II, Rule 2 of the
CPC. We have already referred to the decree and
distinguished the decision in Official Liquidator,
Chemmeens Exports (P) Ltd (supra). In this context,
reference to Order XXXIV Rule 14 and 15 of the CPC would
be apposite. They read as follows:
14. Suit for sale necessary for bringing
mortgaged property to sale (1) Where a
mortgagee has obtained a decree for the payment
of money in satisfaction of a claim arising under
the mortgage, he shall not be entitled to bring the
mortgaged property to sale otherwise than by
instituting a suit for sale in enforcement of the
mortgage, and he may institute such suit
notwithstanding anything contained in Order II,
rule 2.
44
(2) Nothing in sub-rule (1) shall apply to any
territories to which the Transfer of Property Act,
1882(4 of 1882), has not been extended.
15. Mortgages by the deposit of title-deeds
and charges (1) All the provisions contained in
this Order which apply to a simple mortgage
shall, so far as may be, apply to a mortgage by
deposit of title-deeds within the meaning of
section 58, and to a charge within the meaning of
section 100 of the Transfer of Property Act, 1882
(4 of 1882).
(2) Where a decree orders payment of money
and charges it on immovable property on default
of payment, the amount may be realized by sale of
that property in execution of that decree.
35. The said provisions came to be interpreted in S. Nazeer
Ahmed V. State Bank of Mysore and Others21. Referring
to the said provisions, the Court held the suit for
enforcement of mortgage could be filed even when in the
earlier civil proceedings, the plaintiff had omitted to sue on
the basis of equitable mortgage and in such cases, principle
of constructive resjudicata or Order II, Rule 2 would not
apply. The two-Judge Bench has opined that in such cases
a suit for enforcement of the mortgage would lie under Order
XXXIV notwithstanding that in the earlier suit the plaintiff
had not asked for enforcement of the mortgage. As the
21
(2007) 11 SCC 75
45
factual matrix in the said case would unfurl, the Bank had
advanced a loan by hypothecating a bus and further by
equitable mortgaging two items of immovable properties. It
had at first filed a suit for recovery of money and sought to
proceed against the hypothecated bus which could not be
traced and recovered. In the said suit, the Bank had not
prayed for a decree under Order XXXIV on the basis of
mortgage. There was an attempt to enforce the mortgaged
property in the execution proceeding but the same was
rejected as no decree of mortgage has been passed.
Thereafter, the Bank, the respondent therein, instituted
another suit for enforcement of equitable mortgage. The
second suit was held to be maintainable, regard being had to
the language employed in Rules 14 and 15 of Order XXXIV,
holding, inter alia, that said Rules had been enacted to
protect the mortgagor, etc. and, therefore, the plea of
constructive resjudicata relying upon Order II, Rule 2 of the
Code was erroneous. The two-Judge Bench held that for
Order II, Rule 2 to apply, the cause of action in the two suits
should be similar and the bar of constructive resjudicata, as
46
was held, was not applicable. Analysing the facts, the Court
held:
"That apart, the cause of action for recovery of
money based on a medium-term loan transaction
simpliciter or in enforcement of the hypothecation
of the bus available in the present case, is a cause
of action different from the cause of action arising
out of an equitable mortgage, though the ultimate
relief that the plaintiff Bank is entitled to is the
recovery of the term loan that was granted to the
appellant. On the scope of Order II Rule 2, the
Privy Council in Payana Reena Saminathan v.
Pana Lana Palaniappa22 has held that Order II
Rule 2 is directed to securing an exhaustion of the
relief in respect of a cause of action and not to the
inclusion in one and the same action of different
causes of action, even though they may arise from
the same transactions. In Mohd. Khalil Khan v.
Mahbub Ali Mian23, the Privy Council has
summarised the principle thus: (IA pp. 143-44)
"The principles laid down in the cases thus far
discussed may be thus summarised:
(1) The correct test in cases falling under Order
II Rule 2, is `whether the claim in the new suit is,
in fact, founded on a cause of action distinct from
that which was the foundation for the former suit'.
(Moonshee Buzloor Ruheem v. Shumsoonnissa
Begum24)
(2) The cause of action means every fact which
will be necessary for the plaintiff to prove, if
traversed, in order to support his right to the
judgment. (Read v. Brown25)
22
(1913-14) 41 IA 142
23
(1947-48) 75 IA 121
24
(1867) 11 MIA 551
25
(1888) 22 QBD 128
47
(3) If the evidence to support the two claims is
different, then the causes of action are also
different. (Brunsden v. Humphrey26)
(4) The causes of action in the two suits may be
considered to be the same if in substance they are
identical. (Brunsden v. Humphrey)
(5) The cause of action has no relation whatever
to the defence that may be set up by the
defendant, nor does it depend on the character of
the relief prayed for by the plaintiff. It refers `to the
media upon which the plaintiff asks the Court to
arrive at a conclusion in his favour'. (Chand Kour
v. Partab Singh27) This observation was made by
Lord Watson in a case under Section 43 of the Act
of 1882 (corresponding to Order II Rule 2), where
plaintiff made various claims in the same suit."
A Constitution Bench of this Court has
explained the scope of the plea based on Order II
Rule 2 of the Code in Gurbux Singh v. Bhooralal1.
It will be useful to quote from the headnote of that
decision: (SCR Headnote pp. 831-32)
"Held: (i) A plea under Order II Rule 2 of the
Code based on the existence of a former
pleading cannot be entertained when the
pleading on which it rests has not been
produced. It is for this reason that a plea of a
bar under Order II Rule 2 of the Code can be
established only if the defendant files in
evidence the pleadings in the previous suit and
thereby proves to the court the identity of the
cause of action in the two suits. In other words
a plea under Order II Rule 2 of the Code cannot
be made out except on proof of the plaint in the
previous suit the filing of which is said to create
the bar. Without placing before the court the
26
(1884) 14 QBD 141
27
(1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)
48
plaint in which those facts were alleged, the
defendant cannot invite the court to speculate or
infer by a process of deduction what those facts
might be with reference to the reliefs which were
then claimed. On the facts of this case it has to
be held that the plea of a bar under Order II
Rule 2 of the Code should not have been
entertained at all by the trial court because the
pleadings in Civil Suit No. 28 of 1950 were not
filed by the appellant in support of this plea.
(ii) In order that a plea of a bar under Order II
Rule 2(3) of the Code should succeed the
defendant who raises the plea must make out (i)
that the second suit was in respect of the same
cause of action as that on which the previous
suit was based; (ii) that in respect of that cause
of action the plaintiff was entitled to more than
one relief; (iii) that being thus entitled to more
than one relief the plaintiff, without leave
obtained from the Court omitted to sue for the
relief for which the second suit had been filed."
It is not necessary to multiply authorities except to
notice that the decisions in Sidramappa v.
Rajashetty28, Deva Ram v. Ishwar Chand29 and
State of Maharashtra v. National Construction Co.30
have reiterated and re-emphasised this principle."
36. Applying the said test to the present case, it can be
stated with certitude that there is no shadow of doubt that
the consent award in an arbitral proceeding would not bar a
suit for enforcement of the charge for the same reasons and
it would not be hit by Order II, Rule 2 CPC. We are
28
(1970) 1 SCC 186
29
(1995) 6 SCC 733
30
(1996) 1 SCC 735
49
absolutely conscious that the present case does not relate to
a charge as engrafted under Section 100 of the Transfer of
Property Act, or simply for equitable mortgage. In the
present case, the charge is by hypothecation and relates to
movable property. Needless to say, provisions of Rules 14
and 15 of Order XXXIV would not be directly applicable but
the principle inherent under the said Rules, as enunciated
would be applicable. In fact, the ratio laid down in S.
Nazeer Ahmed (supra), as we understand, makes it equally
applicable to different causes of action. The said principle
would apply, if we accept that the cause of action is distinct.
37. The next aspect we shall advert to is the applicability of
doctrine of resjudicata. In Deva Ram (supra), the Court
while dealing with the said doctrine has opined thus:
"Section 11 contains the rule of conclusiveness of
the judgment which is based partly on the maxim
of Roman Jurisprudence "Interest reipublicae ut sit
finis litium" (it concerns the State that there be an
end to law suits) and partly on the maxim "Nemo
debet bis vexari pro una at eadem causa" (no man
should be vexed twice over for the same cause).
The section does not affect the jurisdiction of the
court but operates as a bar to the trial of the suit
or issue, if the matter in the suit was directly and
substantially in issue (and finally decided) in the
previous suit between the same parties litigating
under the same title in a court, competent to try
50
the subsequent suit in which such issue has been
raised."
Mr. Divan, learned senior counsel has also drawn our
attention to Harbans Singh (supra) wherein it has been held
that when no appeal was preferred by the Union of India,
while accepting the award in favour of the first respondent
therein, it had attained finality and thus the principle of
resjudicata was applicable. Reliance has also been placed on
Ranganayakamma (supra).
38. The said plea has been advanced on the foundation
that the controversy between the parties having been finally
put to rest by the arbitral award, the respondent would not
have dragged the appellant to the said proceeding as that
would vex him twice. The issue before the Company Court
was quite different than that was before the Arbitral
Tribunal. True it is, it has the status of a decree which is
executable, as a decree having gone unchallenged, but the lis
of framing a Scheme under the Act is of different character.
It could not have been directly or substantially in issue
before the learned Arbitrator. That apart, we have already
held the status of the appellant as a secured creditor has not
changed. Therefore, in our considered opinion, the plea of
51
resjudicata which has been canvassed by the learned senior
counsel for the appellant does not commend acceptance and
we so hold.
39. Mr. Divan, learned senior counsel has drawn our
attention to Section 63 of the Contract Act. To buttress the
applicability of the said provision, he has commended us to
the decision in Firm Chunna Mal Ram Nath (supra). The
relevant portion reads as under:
"The contentions raised on these sections were as
follows. The respondents, relying on Sections 39
and 63, said that the appellants had put and end
to the agreement and had expressly dispensed
them from delivery at all. The appellants
contended that Section 63 applied only where
there was an agreement to dispense or a contract,
supported by consideration to do so, and that in
any case it could only operate, when the party
dispensing had performed his part of the contract
and only something remained to be performed on
the other side, unless dispensed with Abaji
Sitaram Modok v. Trimbak Municipality 28 B. 66;
5 Bom. L.R. 689. They further said that, if they
had been wrong in refusing in advance to accept
bales, this repudiation had not been accepted by
the respondents, and, therefore, the contract
remained alive and ought to have been performed.
It is evident that the alleged dispensation under
Section 63 is by itself a complete answer, unless
the absence of contract or consideration is fatal,
for the appellants again and again dispensed with
the performance by the respondents of their
promise to deliver the goods contracted for and
they cannot recover damages for the breach of a
52
promise touching the performance of a thing they
wholly dispense with.
In Abaji Sitaram Modok v. Trimbak Municipality31,
Chief Justice Jenkins deals with Section 63, and
holds that the promise mentioned in Section 63,
can, only do the acts he is by that section
empowered to do, if there be an agreement (as
defined by 2(e)) amongst the parties to that effect.
At page 72 of the report of this case the learned
Judge is reported to have expressed himself
thus:-
Therefore we hold that assuming there
was a legal resolution and that it was
communicated as alleged, still inasmuch
as a dispensation or remission under
Section 63 requires an agreement or
contract, the resolution was of no legal
effect since the provisions of s.30 of
Bombay Act II of 1884 have not been
observed.
With this their Lordships are unable to agree The
language of the section does not refer to any such
agreement and ought not to be enlarged by any
implication of English doctrines. On this they
agree with the learned Judges of the High Court."
40. He has also drawn inspiration from Jagad Bandu
Chatterjee (supra), wherein after referring to the
observations of Lord Russell of Killowen in Dawson's Bank
Limited V. Nippon Menkwa Kabushiki Kaisha32 and the
31
5 Bom. L.R. 689
32
62 IA 100, 108
53
well known work of Sir William P. Anson "Principles of the
English Law of Contract", 22nd Edn., the Court opined thus:
"In India the general principle with regard to
waiver of contractual obligation is to be found in
Section 63 of the Indian Contract Act. Under that
section it is open to a promisee to dispense with or
remit, wholly or in part, the performance of the
promise made to him or he can accept instead of
it any satisfaction which he thinks fit. Under the
Indian law neither consideration nor an
agreement would be necessary to constitute
waiver. This Court has already laid down in
Waman Shriniwas Kini v. Ratilal Bhagwandas &
Co.33 that waiver is the abandonment of a right
which normally everybody is at liberty to waive. "A
waiver is nothing unless it amounts to a release. It
signifies nothing more than an intention not to
insist upon the right".....
41. The stress on the aforesaid decisions by the learned
senior counsel is to highlight that the respondent have
waived the hypothecation by accepting the arbitration award.
The said submission has its own fallacy. The arbitral award
was passed on consent and from the same it would be
inappropriate to deduce that the hypothecation stood
annulled. In this context, we may fruitfully refer to Sections
176 and 177 of the Contract Act, 1872, which pertain to the
rights of pawnee on default made by the pawnor. The said
provisions read as under:
33
(1959) Supp 2 SCR 217, 226
54
176. Pawnee's right where pawnor makes
default. - If the pawnor makes default in payment
of the debt, or performance; at the stipulated time
or the promise, in respect of which the goods were
pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the
goods pledged as a collateral security; or he may
sell the thing pledged, on giving the pawnor
reasonable notice of the sale.
If the proceeds of such sale are less than the
amount due in respect of the debt or promise, the
pawnor is still liable to pay the balance. If the
proceeds of the sale are greater than the amount
so due, the pawnee shall pay over the surplus to
the pawnor.
177. Defaulting pawnor's right to redeem If a
time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge
is made, and the pawnor makes default in
payment of the debt or performance of the
promise at the stipulated time, he may redeem the
goods pledged at any subsequent time before the
actual sale of them, but he must, in that case,
pay, in addition, any expenses which have arisen
from his default."
42. The aforesaid two provisions when read in a conjoint
manner clearly establish that a pledge does not get
extinguished and, in fact, continues even when the pawnee
has sued and recovered a part of the debt without
enforcement of the pledge or the security. As per Section
176, when the pawnor makes default in making the
55
payment, the pawnee may bring a suit upon the debt or
promise and retain the good(s) pledged as a collateral
security. A pawnee has both collateral and concurrent rights
and can institute a suit for the purpose of realization of the
said debt or promise while retaining the goods as a collateral
security. Section 176 also makes it clear that it is the
discretion of the pawnee and it gives an option to him and
merely because pawnee has filed a suit for recovery, that
would not affect or destroy the charge or the right of the
pawnee in respect of a pledged goods or the collateral
security. Thus, it is within the domain of discretion of
pawnee to file a suit for recovery of a debt and yet retain the
collateral security or pledged goods. It would not bar or
prohibit a pawnee from subsequently selling the pledged
goods or the collateral security. It is pertinent to mention
here that there is a difference between a hypothecation and a
pledge. In the case of a pledge, the security is in possession
of the pledge, but in the case of hypothecation, the
possession remains with the owner i.e. the pawnor. Though
such a distinction exists, yet it is an accepted legal principle
that hypothecation is treated as a sub-species of pledge and
56
virtually has the same legal effect. In this context, reference
to a passage from Lallan Prasad V. Rahmat Ali and
another34, would be seemly.
"17. There is no difference between the common
law of England and the law with regard to pledge
as codified in sections 172 to 176 of the Contract
Act. Under section 172 a pledge is a bailment of
the goods as security for payment of a debt or
performance of a promise. Section 173 entitles a
pawnee to retain the goods pledged as security for
payment of a debt and under section 175 he is
entitled to receive from the pawner any
extraordinary expenses he incurs for the
preservation of the goods pledged with him.
Section 176 deals with the rights of a pawnee and
provides that in case of default by the pawner the
pawnee has (1) the right to sue upon the debt and
to retain the goods as collateral security and (2) to
sell the goods after reasonable notice of the
intended sale to the pawner. Once the pawnee by
virtue of his right under section 176 sells the
goods the right of the pawner to redeem them is of
course extinguished. But as aforesaid the pawnee
is bound to apply the sale proceeds towards
satisfaction of the debt and pay the surplus, if any,
to the pawner. So long, however, as the sale does
not take place the pawner is entitled to redeem the
goods on payment of the debt. It follows therefore
that where a pawnee files a suit for recovery of
debt, though he is entitled to retain the goods he is
bound to return them on payment of the debt. The
right to sue on the debt assumes that he is in a
position to redeliver the goods on payment of the
debt and therefore if he has put himself in a
position where he is not able to redeliver the goods
he cannot obtain a decree. If it were otherwise, the
result would be that he would recover the debt and
34
AIR 1967 SC 1322
57
also retain the goods pledged and the pawner in
such a case would be placed in a position where
he incurs a greater liability than he bargained for
under the contract of pledge. The pawnee therefore
can sue on the debt retaining the pledged goods as
collateral security. If the debt is ordered to be paid
he has to return the goods or if the goods are sold
with or without the assistance of the court
appropriate the sale proceeds towards the debt.
But if he sues on the debt denying the pledge, and
it is found that he was given possession of the
goods pledged and had retained the same, the
pawner has the right to redeem the goods so
pledged by payment of the debt. If the pawnee is
not in a position to redeliver the goods he cannot
have both the payment of the debt and also the
goods. Where the value of the pledged property is
less than the debt and in a suit for recovery of debt
by the pledgee, the pledge denies the pledge or is
otherwise not in a position to return the pledged
goods he has to give credit for the value of the
goods and would be entitled then to recover only
the balance".
43. More than eight decades back, the Bombay High Court
in Gulamhusain Lalji Sajan V. Clara D'Souza35, while
dealing with the applicability of Section 176 of the Contract
Act to a case of hypothecation, had opined thus:
"Under S.176, Contract Act, the pledge has a right
to bring a suit against the pledgor upon the debt
or promise, and retain the goods pledged as a
collateral security; or he may sell the thing
pledged in giving the pledgor reasonable notice of
the sale.
35
AIR 1929 Bom. 471
58
It is clear under the law applicable to cases of a
pledge that the creditor has two rights which are
concurrent, and the right to proceed against the
property pledged is not merely accessory to the
right to proceed against the debtor personally.
For the pledge may have a right to sue for sale of
the property even in the absence of a right to sue
for a personal decree.
The same principles would apply to the case of
hypothecation or mortgages of moveable
property."
Be it noted, in the said case reliance was placed on Nim
Chad Babu v. Jagabandhu Ghose36 and Mahalinga Nadar
v. Ganapathi Subbien37.
44. We will be failing in our duty if we do not advert to the
issue that the appellant shall remain as a secured creditor,
for it was registered as such under the Registrar of
Companies. The formalities for creating the charge having
duly followed, the Division Bench has referred to the Form
No. 8 and 13 and also adverted to the power of Registrar to
make entries of satisfaction and release, as provided under
Sections 138 and 139 of the Act. It has also expressed the
view that in the absence of any proceeding, the status of the
company as a secured creditor continues.
36
[1894] 22 Ca. 21
37
[1902] 27 Mad. 528
59
45. After registration of the deed of hypothecation, if a
condition subsequent is not satisfied, that would be in a
different realm altogether. In any case, the finding has been
recorded that the respondent was not at fault and, in any
case, that would not change the status of the appellant as a
secured creditor.
46. In view of the aforesaid analysis, we are of the
considered opinion that the appellant cannot be treated as
an unsecured creditor and it is not permissible for him to
put forth a stand that it would not be bound by the Scheme
that has been approved by the learned Company Judge.
47. The aforesaid conclusion of ours leads to the inevitable
dismissal of the appeal, which we direct. However, in the
factum and circumstances of the case, there shall be no
order as to costs.
.............................J.
[Anil R. Dave]
...........................J.
[Dipak Misra ]
New Delhi;
January 09, 2015
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