® IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 04TH DAY OF APRIL 2013

PRESENT

THE HON'BLE MR. JUSTICE N.KUMAR

AND

THE HON'BLE MR. JUSTICE B.MANOHAR

OSA No.25 of 2012

c/w

OSA No.26 of 2012

OSA No.25/2012

BETWEEN: THE KARNATAKA INDUSTRIAL AREAS DEVELOPMENT BOARD NO14/13, 2ND FLOOR, R P BUILDING NRUPATHUNGA ROAD BANGALORE-560001 REPRESENTED BY ITS CEO&EM …APPELLANT

(By Sri. S VIJAYASHANKAR, SENIOR COUNSEL FOR Sri P V CHANDRASHEKAR, ADVOCATE)

AND: 1. HEGDE & GOLAY

LTD (IN LIQUIDATION)

2

REPRESENTED BY THE OFFICIAL LIQUIDATOR ATTACHED TO THE HON’BLE HIGH COURT OF KARNATAKA, 4TH FLOOR, D&F WING, KENDRIYA SADANA, KORAMANGALA, BANGALORE-560034, NOW AT 12TH FLOOR, RAHEJA TOWERS, M G ROAD, BANGALORE-560001, NOW HEGDE & GOLAY LTD, R/AT AREESHYLA, KANAKAPURA ROAD, BANGALORE-560062

2. MRS RASHMI HEGDE GOPI

D/O LATE B T SHANKAR HEGDE, R/AT SREESHYLA, KANAKAPURA ROAD, BANGALORE-560062. …RESPONDENTS

( By Sri. UDAYA HOLLA, SENIOR COUNSEL FOR

Sri V JAYARAM, ADVOCATE FOR OL-R1 )

This OSA is filed under Section 483 of the Companies Act, 1956 r/w Section 4 of the Karnataka High Courts Act, 1961, praying to set aside the order dated 16.9.2009 passed in Co.P No.109/2007 in CA No.324/2007 in Co.P No.8/1980. OSA No.26/2012:

BETWEEN: THE KARNATAKA INDUSTRIAL AREA DEVELOPMENT BOARD,

3

NO.14/13, II FLOOR, R.P. BUILDING, NRUPATHUNGA ROAD, BANGALORE-01 REP BY ITS CEO & EM. …APPELLANT

(By Sri S VIJAYASHANKAR, SENIOR COUNSEL FOR Sri P V CHANDRASHEKAR, ADVOCATE)

AND: 1. HEGDE & GOLAY LTD

REGD OFFICE AT SREESHYLA KANAKAPURA ROAD, BANGALORE-560 062 BY ITS DIRECTOR RASHMI HEGDE GOPI

2. THE OFFICIAL LIQUIDATOR

ATTACHED TO THE HON'BLE HIGH COURT OF KARNATAKA, 12TH FLOOR, RAHEJA TOWERS, M.G.ROAD, BANGALORE-560 001. RESPONDENTS

(By Sri UDAYA HOLLA, SENIOR COUNSEL FOR

Sri M SAJI P JOHN, ADV. Sri. V JAYARAM FOR OL -R2 )

This OSA is filed under Section 483 of the Companies

Act, 1956 r/w Section 4 of the Karnataka High Courts Act, 1961, praying to set aside the order dated 31.5.2012 passed in CA No.1425/2011 in Co.P No.109/2007.

These OSAs coming on for orders this day, N KUMAR J, delivered the following:

4

J U D G M E N T

Both these appeals are taken up together as the

parties to the proceedings are the same as well as the

subject matter. Therefore, they are disposed off by this

common order.

2. The 1st respondent – Hegde & Golay Ltd. (for

short hereinafter referred to as ‘the Company') was

incorporated on 2.7.1965 under the provisions of the

Companies Act, 1956 under the name and style of

M/s.Superweld Electrode Company Private Limited.

Subsequently the name was changed to M/s.Hegde and

Golay Private Limited w.e.f. 3.1.1969, which was converted

into a public limited company w.e.f. 14.8.1974. The

registered office of the company was situated at Shreeshyla,

Kanakapura Road, Bangalore-560 062. The company was

incorporated to carry on the business of iron founders,

mechanical engineers and manufacturers of welding

electrodes, implements and machinery, machinists, iron and

5

steel converters etc. The company, an Indo-Swiss Joint

Enterprises, was well known in the market for wrist watches,

electronic wrist watches, electronics and master clocks, etc.

The paid up share capital of the company was Rs.50 lakhs

divided into fifty thousand equity shares of Rs.100/- each

fully paid up. The promoters of the company, late B T

shankar Hegde, Smt.Shaila S Hegde, Smt.Neena R Shetty,

Smt.Rashme Hegde Gopi and Smt.Radika Thapa, were

holding 43840 equity shares of Rs.100/- each in the paid up

share capital of the company. The balance shares of 6160

were held by Shreeshyla Electronic Private Limited (1160

shares) and Tata Press Limited (5000 shares).

3. An extent of 7 acres 1 gunta of land in

Sy.Nos.81/1, 81/2-A, 81/2-B, 82/4-A and 82/2 (part) of

Doddakallasandra village, Uttarahalli Hobli, Bangalore South

Taluk (hereafter referred to as `schedule property') was

allotted by the Karnataka Industrial Areas Development

Board (for short hereinafter referred to as `the Board') to the

6

company vide letter dated 19.5.1972. The possession of the

schedule property was handed over to the company as per

possession certificate dated 23.8.1972. However, no lease-

cum-sale agreement came to be executed.

4. The State Bank of India, the secured creditor of

the company, initiated winding up proceeding against the

company during the year 1980 and filed Company Petition

No.8/1980 before this Court. By order dated 26.7.1985, the

company was wound up. The Official Liquidator was

appointed as Liquidator of the company. Against the said

order of winding up, company filed OSA No.18/1985 and the

same came to be dismissed by an order dated 19.11.1985.

After the winding up order was passed and the Liquidator

took charge of the assets of the company, the Board filed

Co.A No.56/2005 in Co.P No.8/1980 for a direction to the

company to release the schedule property out of the list of

assets of the company and not to take possession of the

same and for other reliefs. However, the said application

came to be withdrawn on 13th April, 2005. Subsequently,

7

one more application was filed in Co.A No.335/2005 for the

same purpose, which was dismissed for non-prosecution.

Subsequently, on a report submitted by the Official

Liquidator in OLR No.865/2006, he made a request to the

Company Court to permit him to sell the schedule property.

By order dated 9.1.2007, the report of the Official Liquidator

was accepted and he was permitted to sell the schedule

property by inviting tenders and thereafter to conduct

inter se bidding among the tenderers without fixing the

reserve price, but fixing the EMD amount of Rs.10 crores. It

was at that stage, Co.A.No.324/2007 was filed by one

Smt.Rashmi Hegde Gopi, shareholder of the company in

liquidation, requesting the Company Court to convene a

meeting of equity shareholders, secured and unsecured

creditors of the company for approving a scheme of

arrangement. In support of the said application, it was

contended that the promoters have now come up to revive

the company and have formulated a scheme of arrangement

and have advised to take all necessary steps to move the

8

Company Court for approval of the scheme. Accepting the

said case, the application was allowed. One Sri Shankar was

appointed as Chairman, who was directed to convene a

meeting of the secured creditors at 10.00 a.m., unsecured

creditors at 11.00 a.m. and equity shareholders at 12.00

noon on 30th July, 2007 at Hotel Capitol, Raj Bhavan Road,

Bangalore-560 001. The Chairman was also directed to issue

individual notices to equity shareholders, secured creditors

and unsecured creditors mentioning the time, date and place

of the meeting. He was further directed to take out notice of

the meeting by way of paper publication. Accordingly, the

meeting was convened. The Chairman submitted his report.

Out of six shareholders, who attended the meeting, all the

six persons exercised their votes, the total number of ballot

polled was six. The total number of votes cast in favour of

the resolution was forty five thousand being forty five

thousand equity shares of Rs.100/- each held by them.

Therefore, the resolution was passed unanimously.

9

5. Thereafter Co.P No.109/2007 was filed by the

said promoters/shareholders seeking sanction of the scheme

of arrangement. The promoters contended that they would

bring in the required amount for revival of the company and

implementation of the scheme. They have approached the

State Bank of India (SBI), the major secured creditor of the

company for one time settlement of Rs.10 crores of the

amount due to secured creditors and have deposited in all

Rs.5 crores in a No Lien Account. The Karnataka State

Financial Corporation has agreed for one time settlement

amount of Rs.19,42,830.75. It has been paid by the

promoters and duly acknowledged by the Corporation. In

terms of the order passed by the Court, notice of the said

petition was published in the newspaper. It was also served

on the Regional Director and the Official Liquidator. The

Board filed its statement of objections to the petition for

sanction of the scheme of arrangement contending that the

schedule property belongs to them. Neither the lease-cum-

sale agreement nor sale deed was executed in favour of the

10

company in liquidation. Under the Regulations Governing

the Disposal of Lands by Karnataka Industrial Areas

Development Board, 1969, the lands are allotted by the

Board on lease-cum-sale agreement basis and sale deeds are

issued only after implementation of the project and

satisfactory completion of all the terms and conditions of

allotment. Compliance with the terms and conditions of

allotment is essential keeping in view the object and purpose

of the Karnataka Industrial Areas Development Act, 1966. As

the company in liquidation does not have any sale deed as of

day it is the Board which is the owner of the lands. They

have no objection for revival of the company in liquidation

subject to terms and conditions of allotment of the Board.

They wanted the Court to note the no objection of the Board

for revival of company in liquidation subject to the terms and

conditions of allotment.

6. In fact, in Co.P No.109/2007, the Board was

arrayed as the 2nd respondent. The Company Court taking

note of the fact that the secured creditor, State Bank of

11

India, has been paid a sum of Rs.5 crores and assured a

payment of the balance amount of Rs.5 crore and they have

no objection to the scheme, proceeded to pass the order on

16th September, 2009 sanctioning the scheme of

arrangement. It further held that the said sanctioned scheme

is binding on the petitioner/respondent company its share

holders, secured creditors and unsecured creditors. It was

made clear that the said sanctioning of the scheme is subject

to the settlement of the income-tax dues as well as other

statutory dues that may arise and the Official Liquidator was

directed to invite claims and the petitioner was directed to

settle all those claims.

7. The relevant clause in the said scheme of

arrangement with which we are concerned in this

proceedings is clause 11, which reads as under:

“Upon the scheme becoming effective, the

Company/Promoters shall pay the dues of the

KIADB and the KIADB shall execute sale deed in

favour of the Company in respect of the land

allotted to the company.”

12

8. In spite of the letters written by the company to

the Board calling upon them to execute the sale deed in

terms of the aforesaid clause in the scheme, the sale deed

was not executed by the Board. Then the company filed Co.P

No.1425/2011 for a direction to the Board to execute the

sale deed in respect of the schedule properties in favour of

the company. In the affidavit filed in support of the said

application, it was contended that the company is in the

process of implementing the revival scheme sanctioned by

the High Court. In terms of clause 11 of the scheme

sanctioned by the High Court, the board is required to

execute the absolute sale deed in favour of the company. The

company has approached the Board to execute the sale deed.

The company has written letters dated 21.10.2009,

10.3.2010, 18.9.2010, 20.12.2010, 9.3.2010 and 25.7.2011,

none of which are replied. Therefore, it was contended that

without the execution of the sale deed by the Board, the

company cannot implement the scheme of arrangement

sanctioned by the Court. The company is revived with an

13

objective of settling the legitimate liabilities of the company

and to utilize the existing built up infrastructure to promote

state artisans and assist them in their manufacture of

handicrafts products (cottage industry). The cottage

industries will be supported by the technical expertise and

management skills of the NGO Shankara Foundation

recognized as a vocational training and design centre by the

State and Central Governments.

9. The Board entered appearance and filed a

detailed statement of objections to Co.A No.1425/2011. It

was contended that valuable scarce industrial land allotted

at subsidized prices acquired from farmers is utilized for the

industrial purpose so that the object of the KIAD Act is

accomplished. The land is not meant for the purpose of

enabling speculators to benefit from the unearned increase

in the price. Except allowing the valuable industrial plot to

lie vacant for almost four decades the company has done

precious little. The purpose for which the plot is allotted was

for the manufacture of special types of plated through holes,

14

printed circuits, ordinary circuits, electronic components,

electronic wrist watches etc. is not implemented in the plot

in question. No plan sanction is obtained. Not even a lease

deed is secured. As per the Regulations Governing the

Disposal of Lands by KIADB, 1969, sale deed will be issued

only after the project is implemented. If the request of the

company is considered, then it amounts to placing premium

on default. The company would become owner of industrial

plot and thereafter sell the property in the real estate market

and thus earn the benefit of the unearned increase in the

price. The company does not merit such a bonanza. If the

request is considered it would set a bad precedent and dilute

the role of the Board in monitoring and supervising the

implementation of the projects in industrial areas.

10. It was further contended by the Board that the

company has put up construction without the sanction of

plan from the Board, which is mandatory under the

Regulations. The company is using the industrial land as a

cultural centre, which is not the purpose for which the

15

industrial land could be allotted. The plot is being let out on

hire for private functions and celebrations. These are

impermissible under the terms and conditions governing the

allotment of industrial plot. However, further it was

contended that schedule property was allotted by letter

dated 19.5.1972. No lease-cum-sale agreement was executed

in favour of the company. Unless the terms of allotment are

complied with, demand for execution of sale deed is tenable.

The Board is the owner of the land and the grant of land

being subject to standard terms and conditions made

applicable to all the allottees of the KIADB, no case is made

out for defaulting company to get sale deed executed without

implementing the industrial project.

11. For the said objections, the company filed its

rejoinder. In the rejoinder, it was stated that the company

had submitted necessary plans and sanctions to the

respondent. On account of the fact that they did not reject

the same within the time stipulated, there is a deemed

approval and consequently the construction was carried out.

16

Copy of one of the applications dated 18.9.2010 submitted

by the company was produced at Annexure-J. They denied

that the industrial land is used for cultural centre that they

let it out on hire for private functions and celebrations. They

denied all other allegations.

12. The learned Company Judge passed the

impugned order dated 31st May, 2012 directing the Board to

receive a sum of Rs.3,07,651/- from the company and

register the sale deed in favour of the company in respect of

the schedule property. In the course of the impugned order,

the learned Company Judge observed that the order dated

16.9.2009 passed by the Company Court in Co.P

No.109/2007, wherein the scheme of arrangement was

considered for approval does not, in anyway alter Clause

No.11 of the scheme. The scheme, as proposed, has been

approved by this Court. In the said petition, the Board was

impleaded as second respondent. If the Board had any

objection to the scheme of arrangement, they should have

raised such contention at that juncture so that the same

17

would have enabled the Court to consider that aspect of the

matter in the light of that contention, which has been put

forth with regard to approval or otherwise of the scheme. In

the absence of such objection, when the court has

considered and approved the scheme in the form in which it

had been brought before the Court and that too in the

presence of KIADB, at this juncture all that is necessary is to

see that the scheme is implemented as approved by this

Court. Aggrieved by the said order, the Board has

preferred OS No.26/2012 challenging the order dated 31st

May, 2012 .

13. It is stated, in the order dated 16.9.2009 in Co.P

No.109/2007, the learned Company Judge approved the

scheme and held that it is binding on the company, its

shareholders, secured and unsecured creditors. Therefore, it

is not stated that the scheme is binding on the Board.

Therefore, the Board was under the impression that the

objection filed by them to the scheme is accepted and revival

of the company was made subject to the terms and

18

conditions of the allotment. Therefore, the said scheme as

approved was not binding on the Board. Therefore, they did

choose to challenge the said order. Since, in the order dated

31.5.2012 passed in Co.A.No.1425/2011, the learned

Company Judge has negated their contentions that the

earlier order is not binding on them, they chose to file one

more appeal in OSA No.25/2012 challenging the earlier

order. That is how, both these appeals are filed together and

placed before us for consideration.

14. Sri S Vijayashankar, learned Senior Counsel

assailing the impugned order, contended that the Board is

not a party to the scheme of arrangement. When a public

notice was given and as they were made parties to the

proceedings, the Board filed its statement of objections

insofar as clause No.11 of the scheme is concerned and

stated that they have no objection in respect of the

remaining portion of the scheme. Though in the order dated

16.9.2009 there is no reference to their objection, but while

passing the order, the Company Court made it expressly

19

clear that the sanctioned scheme is binding only on the

company, its shareholders, secured and unsecured creditors.

It did not say that the said scheme is binding on the Board.

Therefore, the scheme is not binding on the Board. The said

order was not challenged by the Board. But when an

application is filed purporting to implement the sanctioned

scheme and to give effect to Clause No.11 of the scheme, the

Board did object to the said application. However, the

learned Company Judge over-ruling the said objection has

issued the impugned direction, which is contrary to law and

materials on record and therefore it requires to be set aside.

15. The learned Senior Counsel further contended

that the learned Company Judge also proceeds on the

assumption that the petition filed by the promoters of the

company can maintain petition under Section 391 of the

Companies Act. The petition is not maintainable and

therefore the order passed in such a petition is void ab initio.

He further contended that the scheme is described as

scheme of arrangement, it is not a scheme of arrangement,

20

but it is a scheme of compromise. A compromise binds only

the parties to the compromise. It is not binding on the third

parties who are not parties to the compromise. On that score

also the said scheme of compromise and the sanctioning of

the said scheme do not in any way bind the Board. He also

pointed out that the Regulation 15 of the Karnataka

Industrial Area Development Regulations stipulates that an

allottee of a industrial plot is considered as mere licensee,

who has authority to enter upon the land allotted to him and

starts construction of building. The licensee is also defined

as person, who has authority only to enter upon the land

allotted for the purpose of executing work thereon. Therefore,

admittedly, when there is no lease-cum-sale agreement

entered into between the Board and the Company and no

sale deed is yet executed, the company being only an

allottee, the licensee has no right in the schedule property.

Section 14 of the Karnataka Industrial Area Development

Act, 1960, empowers the board to resume possession of

premises or part thereof including residential tenants in the

21

industrial area in the manner provided in Sections 34B.

Section 34B of the Act empowers the Board to resume the

possession of the premises on breach of terms and

conditions of lease. Even after 40 years, the company has

not complied with the terms and conditions of allotment.

Therefore, they violated the terms and the said land is liable

to be resumed. For the aforesaid reasons, the learned Senior

Counsel submits that the impugned orders are liable to be

sustained.

16. Per contra, Sri Udaya Holla, learned Senior

Counsel appearing for the company contended that though

the Board is not a party to the scheme, the Board was

arrayed as second respondent in the company petition. The

sanctioned scheme was approved in the presence of the

Board. Assuming that their objection was not considered or

over-ruled, as it is clear from Clause No.11 of the scheme, it

hurt their interest and therefore they ought to have

challenged the scheme insofar as Clause No.11 is concerned.

For 30 long years, they kept quiet and therefore it is not

22

open to them to challenge the order at this juncture.

Further, he contended that once the scheme is approved by

the Court, it has statutory force. Therefore, clause No.11 in

the scheme is fully binding on the Board and they are bound

to obey the same. Further, he contended that because the

scheme was sanctioned, the shareholders/ promoters raised

funds and paid Rs.5 crores to the State Bank of India and

they have paid the amount to all the secured creditors, on

the assumption that by virtue of the order of sanctioning the

scheme, they would be able to revive and rehabilitate the

company. In fact, after sanctioning of the scheme, the

company has written six letters calling upon the Board to

execute the sale deed. It is only thereafter the Board before

the Company Court contended that the company has not

complied with the terms and conditions of the allotment. No

construction is put upon the land allotted is also incorrect.

In fact, Annexure-J to the rejoinder shows that a request

was made to the Board for sanctioning of the plan and it is

deemed to have been sanctioned. Therefore, the company

23

has put up construction. Hence, it is too late in the day to

contend that there is violation of terms and conditions of

allotment. For the last 40 years, the company is in

possession of the schedule property. In fact, two applications

filed for resumption of land were dismissed. It is that stage,

the scheme was approved and therefore now the Board

cannot say that they are the owner of the schedule property

and the company has no right in the schedule property.

Therefore there is no substance in the said contention.

17. In the light of the aforesaid facts and rival

contentions, the points that arise for our consideration are

as under:

1) Whether the scheme sanctioned by this

Court binds the Board and the third party?

2) Whether the Company Court was justified

in issuing a direction to the Board to

execute the sale deed in respect of

schedule properties in favour of the

company in the facts of this case?

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18. Point No.1: The salient features of the Scheme

which is sanctioned by the Company Court discloses that

the Company / Promoters shall pay each of the General

Creditors the amounts which are due to them as mentioned

in the Scheme within 180 days from the effective date. The

General Creditors includes the Secured Creditors as well as

the unsecured creditors. The money brought by the

Promoters for the revival of the Company shall be

appropriated towards discharge of the aforesaid debts. On

payment of such amounts, General Creditors shall not

proceed against the Company. Upon the Scheme becoming

effective and payment of One Time Settlement (OTS) of its

dues, the Secured Creditors shall relieve and release charge

over the assets of the Company.

19. Clause 11 of the Scheme provides that upon the

Scheme becoming effective, the Company / Promoters shall

pay the dues of the KIADB and the KIADB shall execute the

sale deed in favour of the Company in respect of the land

allotted to the Company. Upon the Scheme being approved

25

by the Court, the winding up order dated 26.07.1985 shall

stand recalled or set aside. Consequently, the Management

of the Company shall stand vested with the Promoters. In

pursuance of the notice issued in the petition filed for

sanctioning of the Scheme, the KIADB filed its objection

which is as under:

“1. Except paragraphs 8 and 14(11) there are no

other averments made which is in reference to

this Respondent. Further, in the Scheme at

Annexure – A to the petition, except paragraph 4

of the preliminary and paragraph 11 of the

Scheme, there is no reference to this Respondent.

As such this Respondent does not intend to

traverse the averments made in the petition.

2. The Company in liquidation was allotted an

extent of 07 acres 01 gunta of land in

Sy.Nos.81/1, 81/2A, 812B, 82/4A and 82/2

part of Doddakallasandra Village, Uttarahalli

Hobli, Bangalore South Taluk, as per Allotment

letter dated 19.05.1972. A copy of the allotment

letter is herewith produced and marked as

Annexure – A. Neither the Lease-cum-Sale

Agreement not sale deed was executed in favour

26

of the Company in liquidation. However,

possession was handed-over to the Company as

per Possession Certificate dated 23.08.1972. A

copy of the Possession Certificate is herewith

produced and marked as Annexure – B.

3.. Under the Regulations Governing the

Disposal of Lands by Karnataka Industrial Areas

Development Board, 1969 the lands are allotted

by this Respondent on Lease-cum-Sale Agreement

basis and Sale Deeds are issued only after

implementation of the project and satisfactory

completion of all the terms and conditions of

allotment. Compliance with the terms and

conditions of allotment is essential keeping in

view the object and purpose of Karnataka

Industrial Areas Development Act, 1966. As the

Company in liquidation does not have any sale

deed as of day it is this respondent which is the

owner of the lands.

4. Under the circumstances, this Respondent has

no objection for revival of the Company in

liquidation subject to the terms and conditions of

allotment of the respondent”.

27

20. From the aforesaid objection, it is clear the

Board had no objection for sanction of the Scheme subject to

the terms and conditions of allotment of the schedule land

by the Board to the Company. In other words, they objected

to Clause – 11, where it is stated that upon the Scheme

becoming effective, the Company / Promoters shall pay the

dues of the KIADB and KIADB shall execute the sale deed in

favour of the Company in respect of the land allotted to the

Company. In other words, execution of the sale deed is

subject to the terms and conditions of allotment and not in

terms of Clause – 11. The Board was the second respondent

in the Company Petition No.109/2007. In the order which is

passed according to sanction of the Scheme on 16th

September 2009, there is no reference to this objection at all.

Probably, the Company Court did not rightly go into the said

question as that cannot be the subject matter of the

proceedings under Section 391 of the Companies Act.

Therefore, while passing the order, it made it clear that the

Scheme of Arrangement sanctioned by the Court is binding

28

on the Respondent Company, the Share-Holders, Secured

Creditors and Un-secured Creditors. Therefore, consciously,

the Company Court did not hold that the Scheme of

Arrangement is binding on the Board. In other words, to that

extent, the said Scheme which was produced before the

Court stood amended. As there was no order holding that

the Scheme is binding on the Board, the Board cannot be

said to be the aggrieved party. Therefore, they did not choose

to challenge the said order. It is in this context, it is

necessary to look into the statutory provisions of Section 391

to deal with the power to compromise or make arrangements

with the creditors and members:

“391. Power to compromise or make

arrangements with the creditors and members:-

(1) Where a compromise or arrangement is

proposed -

(a) between a company and its creditors or any

class of them,

or

29

(b) between a company and its members or any

class of them, the [Tribunal] 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 [Tribunal]

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 sections 643], by proxy, at the

meeting, agree to any compromise or

arrangement, the compromise or arrangement

shall, if sanctioned by the [Tribunal], 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 contributions of the

company:

30

[Provided that an order sanctioning any

compromise or arrangement shall be made by the

[Tribunal] is satisfied that the company or any

other person by whom an application has been

made under sub-section (1) has disclosed to the

[Tribunal], 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 section 235 to 351,

and the like].

(3) An order made by the [Tribunal] under sub-

section (2) shall have no effect until a certified

copy of the order has been filed with the

Registrar.

(4) A copy of every such order shall be annexed to

every copy of the memorandum of the company

issued after the certified copy of the order has

been filed as aforesaid, or in the case of a

complicity any not having a memorandum, to

every copy so issued of the instrument

31

constituting of defining the constitution of the

company.

(5) If default is made in complying with sub-

section (4), the company, and every officer of the

company who is in default, shall be punishable

with fine which may extend to [one hundred

rupees] for each copy in respect of which default

is made.

(6) The [Tribunal] may, at any time after an

application has been made to it under this section

stay the commencement or continuation of any

suit or proceeding against the company on such

terms as the [Tribunal] thinks fit, until the

application is finally disposed of”.

21. The aforesaid provision provides for a

compromise or arrangement between a Company and its

Creditors or any class of them or between a Company and its

members or any class of them. Therefore, a compromise or

arrangement under Section 391 of the Companies Act can

only among the aforesaid persons. No outsider / third party

32

can be a party to such compromise or arrangement in a

petition filed under Section 391 of the Companies Act.

22. Section 392 of the Companies Act deals with the

power of the Court to enforce compromise and arrangement,

which reads as under:

“392. Power of Tribunal to enforce compromise

and arrangement :-

(1) Where the Tribunal 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 an arrangement; and

(b) may, at the time of making such order or at

any time thereafter, give such directions in regard

to any matter or make such modifications in the

compromise or arrangement as it may consider

necessary for the proper working of the

compromise or arrangement.

33

(2) If the Tribunal aforesaid is satisfied that a

compromise or an 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 the Companies (Amendment)

Act, 2001 sanctioning a compromise or an

arrangement.

23. A reading of the aforesaid provision makes it

very clear after a compromise or an arrangement is

sanctioned by the Court, the Court shall have power to

supervise the carrying out of the compromise or

arrangement. Further, it may either at the time of making

such order or at any time thereafter, give such directions in

34

regard to any matter or make such modifications in the

compromise or arrangement as it may consider necessary for

the proper working of the compromise or arrangement.

24. A harmonious reading of these two provisions

makes it clear the power is vested in the Court to sanction a

compromise or arrangement and at the time of according

such sanction or subsequent thereto, may issue directions

for implementing the Scheme which is approved including

the power to make such modifications in the Scheme, if it

considers it necessary for the proper working of the

compromise or arrangement. If the Court is issuing any

directions for the implementation of the terms of the

Scheme, it can issue directions only to persons who are

bound by the terms of the scheme. In other words, those

who are parties to the scheme and in respect of the matters

which are the subject matters of a compromise or an

arrangement and any dispute arising between the parties

which is resolved by such compromise or arrangement. That

power cannot be extended to issue directions to persons who

35

are not parties to the Scheme or who are not bound by the

order of the Court sanctioning the Scheme and which are

extraneous to the said compromise or arrangement.

25. The Supreme Court in the case of Punjab

National Bank Limited –vs- Sri Bikram Cotton Mills

Limited and another reported in AIR 1970 SC 1973 dealing

with the binding nature of a composition under Section 391

of the Companies Act held as under:

“13. A binding obligation created under a

composition under Section 391 of the Companies

Act, 1956, between the company and its creditors

does not affect the liability of the surety unless

the contract of suretyship otherwise provides. As

observed in Halsbury’s Laws of England, Volume

6, 3rd Edition, Article 1555 at page 771:

“A scheme need not expressly reserve the rights

of any creditors against sureties for debts of the

company, as such rights are unaffected by a

scheme”.

36

It was in Re.Garner’s Motors Limited 1937

Chancery 549 that the scheme when sanctioned

by the Court has a statutory operation and the

scheme does not release other persons not parties

to the scheme from their obligations.

26. Reliance was also placed on the judgment of the

Apex Court in the case of Ashok Paper Mills Kamgar Union –

vs- Union of India and others reported in (1997) 3 Company

Law Journal page 55 (SC) where it has been held that:

“The financial institution when it is called upon to

build up India as an industrial country among

world nations, it is under a duty to ensure

industrial growth of the country. When scheme

framed was approved by this Court, it is but its

duty to see that the same is implemented. It is

unfortunate that such an attempt has not been

made by the IDBI. It instead of doing it, it has

been a self help to the persons managing, etc.

Therefore, they directed all the persons and

institutions concerned should participate in the

implementation of the scheme and Finance

Secretary, Ministry of Finance, Government of

37

India, is directed to ensure that the legal

conditions are fulfilled and the mill is

rehabilitated and both, phase I and phase II of

the scheme, are given effect to”.

27. That was the case where IDBI who participated

in the meeting called for framing a scheme for rehabilitation.

After the scheme had been approved by the Apex Court, they

wanted to back out of the contract and refused to pay a sum

of Rs.10 Crores. It is in that context, the Apex Court held

that IDBI is a party to the Rehabilitation Scheme and the

Scheme having been approved by the Apex Court, it has a

duty to lend money to the Company in liquidation for

rehabilitation and thereby they were trying to enforce the

terms of the scheme under Section 392 of the Companies Act

against a person who was a party to the scheme.

28. The Apex Court while dealing with the power

under Section 392 in the case of S.K.Gupta and another –

38

vs K.P.Jain and another reported in (1979) 3 SCC 54 held

at para 14 as under:

“14. Sub-section (2) provides the legislative

exposition as to who can move the Court for

taking action under Section 392. Reference to

Section 391 in sub-section (2) of Section 392

merely indicates which compromise or

arrangement can be brought before the Court for

taking action under Section 392. The reference to

Section 391 does not mean that all the limitations

or restrictions on the right of an individual to

move the Court while proposing a scheme of

compromise or arrangement have to be read in

sub-section (2) merely because Section 391 is

referred to therein. Unlike Section 391, Section

392 does not specify that a member or creditor or

in the case of a company being wound up, its

liquidator, can move the Court under Section 392.

On the other hand, the legislature uses the

expression ‘any person interested in the affairs of

the company’ which has wider denotation than a

member or creditor or liquidator of a company. In

fact, the ambit of the power to act under Section

392 (2) can be gauged from the fact that the Court

39

can suo motu act to take action as contemplated

by Section 392 (1) or it may act on an application

of any person interested in the affairs of the

company”.

Again, at Paragraph No.16, it is held as under:

“It follows as a corollary that if the compromise or

arrangement can be worked as it is or by making

modifications, the Court will have no power to

wind up the company under Section 392(2). Now,

if the arrangement or compromise can be worked

with or without modification, the Court must

undertake the exercise to find out what

modifications are necessary to make the

compromise or arrangement workable and that it

can do so on its own motion or on the application

of any person interested in the affairs of the

company. If such be the power conferred on the

Court, it is difficult to entertain the submission

that an application for directions or modification

cannot be entertained except when made by a

member or creditor. It would whittle down the

power of the Court in that it cannot do so on its

own motion”.

40

29. Reliance is also placed on the judgment of Divya

Vasundhara Financiers Limited –vs- K.N.Samant and others

reported in 1990 (69) Company Cases page 646 where it has

been held as under:

“It is true that a scheme of compromise or

arrangement sanctioned by the Court under

section 391 of the Companies Act, 1956, is

between a company and its creditors or any class

of them and between the company and its

members or any class of them and they can be

said to be parties to the scheme and the scheme

is binding on them. But so far as Section 392 of

the Companies Act, 1956, is concerned, the

powers of the High Court for enforcing the

compromise or arrangement extend to general

supervision for carrying out the compromise or

arrangement and the Court can, at the time of

making an order under Section 391 or even

subsequently, give directions in regard to matters

which are necessary for the proper working of the

compromise or arrangement. Section 392(1)(b) of

the Companies Act nowhere provides that

directions can be given by the company court only

against parties to the scheme and against no one

41

else. The only requirement of a direction under

section 392(1)(b) is that such direction must be

necessary for the proper working of the

compromise of arrangement.

Section 6 of the Specific Relief Act, 1963, is not a

bar to powers of the company court under section

392(1)(b) of the Companies Act. A scheme of

compromise or arrangement has to be supervised

by the court with a view to seeing that the

scheme is fully implemented, without impediment.

In that process, if there are any obstructions by

persons who have prima facie no right, title or

interest in the company’s property, such

obstructions can be eradicated by issuing

suitable directions. So far as that power is

concerned, it is an independent power available

to the Court in connection with the scheme of

compromise and arrangement and such power

cannot be fettered by the provisions of general

law such as those contained in Section 6 of the

Specific Relief Act”.

30. In the aforesaid case, it was found that certain

persons had encroached upon some of the properties which

42

had vested in the Court Committee. An officer of the Court

was appointed to take an inventory of the immovable

properties of the company and to ascertain whether any

encroachment on the immovable properties had been

effected by any persons or parties. The Court officer found in

his report that as far as the immovable properties in

question were concerned, some encroachers were found

squatting on the land and had put up huts thereon. The

Court Committee filed an application before the Company

Court under Section 392 of the Companies Act seeking

suitable directions for removal of the alleged encroachment

on the company’s properties by the respondents concerned.

The respondents questioned the jurisdiction of the Court in

the matter and, inter alia, put up the plea of adverse

possession. In that context, it was held as under:

“That the basis of the scheme sanctioned by the

Court under Section 391(2) of the Companies Act,

and to ensure the proper working of which the

Court committee was appointed, was to ensure

payment to all the creditors within a reasonable

43

time, to complete and / or dispose of the

outstanding incomplete projects, to sell the

properties and liquidate the investments and to

disburse the amounts recovered to the creditors.

Thus, the Court Committee was charged with the

duty to realize the value of the properties and to

disburse the amount realized amongst the

creditors. For this purpose, the Court Committee

had obtained the approval of the Court to accept

the offer of one ‘U’ to purchase the properties in

dispute on an “as is where is” basis, hand over

vacant and peaceful possession thereof to ‘U’,

and complete their little on receipt of the balance

purchase price. This could not be done unless the

squatters were cleared off. This impediment,

sought to be removed by the application, fell

within the supervisory jurisdiction of the Court

under Section 392 of the Companies Act, through

its Court Committee, and called for a direction for

the proper working of the scheme of compromise

or arrangement.”

31. Section 391 is a complete code by itself. It deals

with right of the Companies to enter into compromise or

44

arrangement to itself and its creditors or in class of them

and between itself and its members or in class of them. It

covers restructuring, merger, demerger and hiring of a unit

by the company. Once scheme of compromise and

arrangement falls squarely within the four corners of the

Section, it can be sanctioned. The words of the Section are

very wide. A scheme is binding on the members and

creditors of a Company. Once the scheme or compromise

and arrangement under this Section is approved by statutory

majority, it binds the dissenting minority, the Company and

also the liquidator, if the Company is in winding up. Under

Section 391 of the Act, the persons who are bound by the

scheme and the order of the Court sanctioned in the scheme

or the arrangement are its creditors and its members. Person

who do not fall under any of these categories are third

parties. Their presence is not necessary for the Court to

accord sanction to the scheme.

45

32. Section 392 is concerned, it is supervisory in

nature. The said power is exercised to give effect to the order

according sanction to the compromise or arrangement.

Under Section 392, the Court has powers to give directions

even to the third parties to the compromise or arrangement.

The only requirement for direction is that such direction

must be necessary for the proper working of the compromise

or arrangement. Even if there are any claims of the

properties by persons who have no manner of right, title or

interest over the property, whose conduct is effecting the

interest of the company then either suomoto or by an

application made by any person interested in the affairs of

the company, the Company Court has power to issue such

directions so as to protect the interest of the company and to

give effect to the sanctioned scheme. The Court can order for

eviction of persons who have prima facie no right, title or

interest in the Company properties by issuing suitable

directions. Where the revival scheme of the Company in

liquidation could not be implemented without getting vacant

46

possession of the Company premises from tenants, the Court

had the widest powers under the Section even to order

eviction of tenants. However, the rights of a third party

claiming independent title or interest of his own in any

property cannot be effected by seeking mere directions under

Section 392(1)(b). Third party rights cannot be resolved in a

compromise among the aforesaid persons. Therefore, when

the Court passes an order approving the scheme, the said

order of the Court as well as the scheme binds only among

such persons. But that power cannot be intended to resolve

dispute between the third parties and the company or to

enforce rights between the company, its creditors, its

members and third parties. The said power cannot be

exercised by issuing directions to persons who have

independent propriety rights over the properties, so as to

affect such rights. The proper course against such a third

party would be to file a substantive suit.

47

33. Therefore, in the instant case, it is clear that the

Company was allotted a site by the Board 40 years back.

Therefore, we have to find out what is the nature of right the

company acquired under such allotment. Regulation 15 of

the Karnataka Industrial Areas Development Board

Regulations, 1969 deals with the rights of allottee as a

licensee, which reads as under:

“15. Allottee as a Licensee:

Till the agreement for lease, sale or lease-cum-

sale is executed, the allottee will be considered as

a mere licensee who shall have licence and

authority only to enter upon the land allotted to

him and to start construction of buildings or

works and will have no power to legally alienate

his interest except to the extent allowed by the

Board for raising loans. No sub-division of the plot

will be allowed without the permission of the

Board given in writing.”

34. A reading of the aforesaid provision makes it

very clear, till the agreement for lease or lease-cum-sale is

48

executed, the position of the allottee would be as a mere

licensee who shall have licence and authority only to enter

upon the land allotted to him and to start construction of

buildings or and will have no power to legally alienate his

interest except to the extent allowed by the Board for raising

loans. Therefore, by an allotment, the allottee do not acquire

any interest in the immovable properties. When an allotment

is made under the provisions of the Karnataka Industrial

Areas Development Act, 1966, the Board has the power to

resume possession of the premises or part thereof or the

residential tenement as in the manner provided under

Section 34B. Section 34B reads as under:

“34B : Resumption of the possession of premises

including the residential tenements on breach of

terms and conditions of lease or holding without

authority:

(1) Where the Board is of the opinion that an

allottee of any premises or part thereof or

residential tenement in an industrial area or

industrial estate has violated any of the terms or

49

conditions of allotment or holds it without any

authority it may, without prejudice to Section 25

give notice to such allottee and Banks or

Financial Institutions, in whose favour the Board

has permitted the mortgage or leasehold rights of

the premises, or residential tenement specifying

the breaches of the terms and conditions of the

allotment calling upon the allottee to remedy such

breaches within a time stipulated in the notice.

(2) If the allottee fails to remedy the breaches

within the time so stipulated, the Board shall

serve a notice upon the allottee under intimation

to such Bank or Financial Institutions to show

cause within thirty days from the date of service

of notice, why the possession of the premises or

part thereof or residential tenement should not be

resumed.

(3) After considering the cause, if any, shown by

the allottee and after giving him an opportunity of

being heard, the Board may pass such orders, as

it deems fit.

(4) Where the Board passes an order under sub-

section (3), for resuming possession of the

50

premises or part thereof or residential tenement in

the industrial area it may, by notice in writing,

order any allottee to surrender and deliver

possession thereof to the Board or any person

dully authorized in this behalf within the date

specified in the notice.

(5) If any allottee refuses to surrender or deliver

the possession of the premises or part thereof or

residential tenement within the time specified in

the notice, the Board or any officer authorized by

it in this behalf may resume the possession of the

premises or part thereof or residential tenement

free from all encumbrances and for that purpose

may use force as may be necessary”.

35. The aforesaid provision makes it clear when the

allottee violates any of the terms or conditions of the

allotment and fails to remedy the breaches within the time

so stipulated, the Board may resume the allotted land. In the

instant case, the company is the allottee. Admittedly, no

lease-cum-sale agreement has been executed between the

parties. The secured creditors filed a company petition for

51

winding up of the company and the company was ordered to

be wound up. The Official Liquidator took possession of the

assets of the company including the schedule land. An

attempt was made by him by filing two applications for

seeking permission for resumption of the land. One

application was withdrawn, second application was

dismissed for non-prosecution. Subsequently, on the report

submitted by the official liquidator, the schedule property

was brought to sale. Therefore, it is clear the Board is

contending that the Company has violated the terms of

allotment. They intended to resume the land. When the

scheme was propounded including the schedule land, as the

subject matter of the scheme provided for payment of

balance amount and execution of the sale agreement by the

Board to the company, they filed written objections. When

the Court accorded sanction, because of the said objections,

the Court made it clear that the order according sanction is

not binding on the Board. As the Board was not bound by

the said order, the interest of the Board was not effected.

52

Therefore, they did not challenge the order as they had no

objection for the scheme being approved subject to the rights

as stipulated under the terms of law. Finally, when an

application was filed for direction to the Board to execute the

sale deed, they objected to the said application. The learned

Company Judge proceeded on the assumption that the

Board did not object to the Clause before the scheme was

approved is a factual error. Even otherwise, the learned

Company Judge did not carefully look into the order granting

sanction where it was expressly provided that the order of

sanction binds the company, the petitioner, the shareholders

and the creditors only. Nowhere, it is mentioned that it binds

the Board. The learned single Judge failed to notice though

the allotment was made 40 years back, no lease-cum-sale

agreement was executed. On the contrary, an attempt was

made by the Board to resume the land on the ground that

there is violation of the terms of allotment which clearly

shows that there existed a dispute between the Board and

the Company regarding the schedule property. That dispute

53

cannot be resolved by the term of the scheme without the

Board being a party to the scheme. Admittedly, the Board is

the owner of the schedule property. The position of the

Company is only that of a licensee. It had not acquired any

interest in the schedule property. Admittedly, there is

violation of the terms of the allotment. The Company had a

right to resume the schedule property. Twice an attempt was

made to enforce the said right. These aspects are not

considered by the learned Company Judge while passing the

impugned order directing the Board to execute the sale deed.

The order granting approval to the scheme did not make the

scheme binding on the Board. In that view of the matter, the

scheme sanctioned by the Board as it does not bind the

Board, which is a third party to the scheme, the impugned

order passed by the learned Company Judge directing the

Board to execute the sale deed in favour of the Company

cannot be sustained. Accordingly, the impugned order

passed by the learned Company Judge on 31st May 2012 is

54

hereby set aside and the Company Application

No.1425/2011 is dismissed.

36. As we are holding that the order passed by the

Company Court in Company Petition No.109/2007 is not

binding on the Board, the Board cannot be said to be

aggrieved person and therefore, at the instance of the Board,

the said ordered dated 16th September 2009 cannot be set

aside. The interest of the Board is protected by the

declaration granted by us that the said order and the

scheme which is approved by that order do not bind the

Board to any extent whatsoever.

37. In the light of what we have stated above, it is

wholly un-necessary for us to go into the question whether a

promoter can maintain a petition under Section 391 of the

Companies Act or not?

38. Firstly, in the statement of objections filed by the

Board, they said no objection for the scheme being approved

55

subject to their rights in respect of the schedule property

being kept in tact. Therefore, it is not open to them now to

contend that the application itself is not maintainable. Even

otherwise, as we have held that the said order does not bind

the Board to any extent whatsoever, they have no right to

challenge the maintainability of the petition as they are not

aggrieved parties. However, we make it clear now that the

winding up order has been recalled, the company has been

rehabilitated and the Management of the company is now

vested with the shareholders, they have right to proceed

against the KIADB to get the sale deed executed in their

name. They have to work out their remedy in accordance

with law and not by way of filing application in these

company proceedings. Therefore, the order passed by us in

these appeals will not in any way affect the rights of the

company. If and when they try to enforce such rights, the

Authorities or the Courts shall adjudicate such rights

independently and in accordance with law on merits without

in any way being influenced by the orders of this Court.

56

39. Accordingly OSA No.25 of 2012 dismissed.

OSA No.26 of 2012 allowed.

Sd/-

JUDGE

Sd/-

JUDGE

bkm/dh*