1. This is an application under Section 391 of the Indian Companies Act, 1956, for sanction of a scheme of arrangement involving re-organisation of the share capital of the company. The company was incorporated in June 1945 with an authorised capital of Rs. 50 lakhs divided into 3,75,000 ordinary shares of Rs. 10 each, 10,000, 5 per cent cumulative participating preference snares of Rs. 100/- each and 50,000 deferred shares of Rs. 5 each. The total paid up capital of the company is Rs. 29,20,300 comprising of 1,89,985 ordinary shares of Rs. 10 each, 8,452 preference shares of Rs. 100 each and 35,050 deferred shares of Rs. 5 each. The company carries on the business of manufacturers, exporters and importers of radios, radiograms, gramophones, refrigerators and various electrical goods and equipments. It has its factory at Karampura in Bihar. Although the company was started with the blessings of a very rich financial and managing agents, Karamchand Thapper and Brothers, and has secured the services of foregin technicians, its career has not been a prosperous one. Since 1948 it sustained loss in its business and in 1956 the proportion of the loss assumed such a huge magnitude that the company has been forced to seek the assistance of the court for the purpose of putting it on a stable financial basis so that it may hope to meet brighter days in the future years.
2. On 14-2-1957 the company held 3 separate meetings of the different classes of shareholders and on the same day the company also held a general meeting of all the shareholders. At these meetings resolutions were passed sanctioning a proposal for reduction of capital by decreasing the nominal value of the different classes of shares and certain other resolutions for reorganisation of the share capital consequent on the reduction of the capital were also passed. The reduction was to the effect that the nominal value of each preference share of Rs. 100 each was reduced to Rs. 30, the nominal value of each ordinary share of Rs. 10 was reduced to Rs. 2 and the nominal value of each deferred share of Rs. 5 was reduced to Re. 1.
3. The resolution sanctioning the reorganisation was to the effect that the preference and deferred shares would be extinguished and there was to be only one class of shares being ordinary shares of Rs. 10 each. New ordinary shares of the value of about Rs. 28 lakhs were to be issued for raising further capital and for reducing the claim of the managing agents who were creditors to the extent of about Rs. 75 lakhs by allotting them 12 lakhs worth of shares in the fresh issue. The managing agents also agreed to give up Rs. 13 lakhs of their claim after the scheme is sanctioned and they also agreed to pay about Rs. 5 lakhs and odd being the entire claim to the sundry creditors of the company. Some difficulty was obviously felt as to the legality of that part of the scheme which extinguished the preference shares altogether, and so at the meeting of the different classes of the sharesholders held on December 11, 1957 pursuant to the direction of this court, modification of this, part of the scheme and the consequent re-adjustment and recasting of the scheme was proposed and was carried. It is this modified scheme which has now come up before the court for sanction.
4. The functions and duties of the court in the matter of sanctioning of schemes are well-known. Any scheme which is fair and reasonable and made in good faith will be sanctioned if it could reasonably be supported by sensible people to be for the benefit of each class of the members or creditors concerned (In re Alabama New Orleans, Texas and Pacific Junction Railway Co., 1891-1 Ch. 213, 239, 243 and In re English Scottish and Australian Chartered Bank, 1893-3 Ch. 385). It is also the duty of the Court to see that the resolutions were passed by the statutory majority. (Section 391(2) of the Indian Companies Act 1956) (See In re Dorman Long and Co. 1934-1 Ch. 655). In the case before me Mr. Mitra, who opposed this scheme on behalf of the Hindusthan Commercial Bank Ltd. which is the holder of 2,000, 5 per cent preference shares of Rs. 100 each ot the company, has contended that the scheme was not passed the requisite majority. It is argued with reference to the report of the Chairman of the meeting held on 11-12-1957, that holders of preference shares of the value of Rs. 6,42,700 were present at the meeting but only holders of the preference shares of the value of Rs. 4,42,700 voted in favour of the resolution whereas to constitute the requisite majority the holders of the preference shares of the value of Rs. 4,82,000 should have voted and so the resolution was not validly passed. Now, there is some controversy raised in the affidavit of Mr. Pai, the representative of the Hindusthan Commercial Bank as to what attitude he took up at the meeting held on December 11, 1957. Mr. Pai's suggestion is that he voted against the scheme for reduction resolution which was passed at the meeting of February 14, 1957 when this resolution was placed before the meeting of December 11, 1957. It is, however, clear from the report of the Chairman that those resolutions which were passed on February 14, 1957 were not put to vote at all in the meeting of December 11, 1957. It was only the modified scheme which was put to vote but Mr. Pai expressed his intention to remain neutral in respect of this matter. He did not vote either in favour or against the modified scheme. In other words, he did not take part in the voting at all All the other preference shareholders present voted in favour of the resolution.
5. Section 391(2) of the Indian Companies Act is as follows:
8. The validity of the Scheme was also attacked by Mr. Mitra on the ground that it contravenes the provisions of Section 81(1)(a) of the Indian Companies Act, 1956. It was argued that the provision in the scheme under Clause (9), Sub-clauses (a) and (c) which authorise the allotment of 12 lakhs worth of the newly issued shares without offering such shares to the equity share-holders of the company in the first instance and the provision which enables the Directors to allot 96,000 and odd shares to such persons as they think fit, without offering them to the existing equity share-holders, voilate the provisions of Section 81(1)(a). Mr. Mitra has drawn the attention of the court to the report of the company's Law Committee as an aid to the proper construction of section 81(1)(a). It appears to me, however, that in construing the provision of a statute the language employed should be the primary guide to its interpretation. As I have already indicated in the application for confirmation of reduction of capital, the plain meaning of the section is that if the company at a general meeting resolves that the newly issued shares should be allotted to persons other than the equity share-holders, such decision will prevail and will not be open to any question. But in the absence of any specific direction or decision to the contrary the terms of the section have to be followed. As I have pointed out already, the words "contrary to" in Sub-section (1) of Section 81 mean contrary to what is laid down in the section. This disposes of all the objections raised to the scheme. In my view this scheme passed in the meeting of the 11th December 1957 should be sanctioned. I have already given my reasons in the application for confirmation of reduction of capital as to why the company should be permitted to function under the scheme.
9. I accordingly sanction the scheme set out in Aunexure-'A' to the report of the Chairman at the meeting held on 11-12-1957 as modified in the manner indicated in Annexure 'B' to the said report that subject to these conditions that the managing agents will pay off within 3 months from date the claims of the sundry creditors whose claims have not been paid till this day. The managing agents will also duly acknowledge in writing that they forego Rs. 13 lakhs of their claim against the company within a month from date. The fact of payment of the claim of the sundry creditors and the amount paid in satisfaction of their claims should be disclosed in the balance sheet of the company. The fact that the claim of the managing agents has been satisfied or foregone to the extent of Rs. 13 lakhs should also be disclosed in the balance sheet. There will be this further condition to the sanction of the scheme that if the company does not or is unable to pay any dividend to the share-holders by 31-12-1961, this fact should be brought to the notice of the court and the court will then be at liberty to give direction for changing the management of the company if it thinks fit to do so, or to take such other steps as, in the circumstances then existing, appears to the court to be proper.
10. The fact of payment to the sundry creditors and about the relinquishment of the claim to the extent of Rs. 13 lakhs to be communicated to the auditors as soon as such payment or relinquishment is made.