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Infrastructure Leasing & Financial Services Limited Vs. B.P.L. Limited
February, 09th 2015



             CIVIL APPEAL NO. 2701 OF 2006

Infrastructure Leasing & Financial
Services Limited                         ... Appellant


B.P.L. Limited                           ... Respondent


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

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

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

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

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

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

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

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

     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

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

     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.

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

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

    AIR 1996 SC 378

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


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

    AIR 1990 SC 53

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


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.   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

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

  AIR 1928 PC 99
  (1969) 3 SCC 445
  (1998) 5 SCC 401
  (2008) 15 SC 673
  (2013) 1 SCC 462

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

  (1976) 3 SCC 528
   (2009) 2 SCC 526
   (1998) 5 SCC 401

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

         (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

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

            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."

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

Act and the role of the Court a two-Judge Bench in Miheer

H. Mafatlal V. Mafatlal Industries Ltd.11 has observed


          "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

     (1997) 1 SCC 579

      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

      (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

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

                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


          "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

     (1891) 1 Ch 213

           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

              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

     (1922) 2 Ch 723
      (1995) Supp (1) SCC 499

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.

        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

        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

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

          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,

     1892 (2) Q.B. 573 CA

      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

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

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.

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

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

      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

      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

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

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

          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

     AIR 1922 PC 228
     AIR 1975 SC 207
     AIR 1977 SC 1466
     AIR 1980 SC 161

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,

     (1985) 58 Comp Cas 121 (Bom)

      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

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

      i.    Rs.17,500,000/- on     or   before   30th
             Septemebr, 2004
      ii.   Rs.6,287,000/- on or before 15th April,

 iii. Rs.6,287,000/- on or before 15th April,
 iv. Rs.6,287,000/- on or before 15th April,
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

       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


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.

          (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

     (2007) 11 SCC 75

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

was held, was not applicable. Analysing the facts, the Court


         "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

            (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)

   (1913-14) 41 IA 142
   (1947-48) 75 IA 121
   (1867) 11 MIA 551
   (1888) 22 QBD 128

              (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
     (1884) 14 QBD 141
     (1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)

            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

   (1970) 1 SCC 186
   (1995) 6 SCC 733
   (1996) 1 SCC 735

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

      the subsequent suit in which such issue has been

      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

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

          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

                  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

          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

     5 Bom. L.R. 689
     62 IA 100, 108

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:

     (1959) Supp 2 SCR 217, 226

      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

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

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

     AIR 1967 SC 1322

          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.

     AIR 1929 Bom. 471

          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

          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.

     [1894] 22 Ca. 21
     [1902] 27 Mad. 528

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.

                                         [Anil R. Dave]

                                           [Dipak Misra ]
New Delhi;
January 09, 2015
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