JUDGMENT Ruma Pal, J. 1. Shaw Wallace and Company Ltd. (referred to as the Company) admittedly has a large number of creditors both secured and unsecured. Its indebtedness runs into several hundreds of crores of rupees. More than a hundred creditors including Hindustan Development Corporation (hereinafter referred to as HDC) filed winding up proceedings against the company. Most of the winding up petitions were based on claims on account of inter corporate deposits (ICD) and bill discounting facilities availed of by the company. According to the company in 1997 the total dues of the company to its creditors in this account alone was about Rs. 300 crores. In a few cases the creditors made applications for appointment of provisional liquidator over the company. No provisional liquidator was appointed but interim orders of injunction were obtained by them restraining the company from disposing of any of its assets. More than 20 creditors have filed suits and some have obtained decrees against the company. Some creditors have also filed criminal proceeding against the directors of the company under section 138 of the Negotiable Instruments Act in respect of cheques issued by the company which were dishonoured on presentation. 2. In this background, the company filed an application under sections 391(1) and 393 of the Companies Act, 1956 (referred to as the Act) seeking to convene a meeting for approval of a scheme of compromise/arrangement with a defined class of creditors. The creditors were defined in clause 1.5 of the scheme as follows: "1.5 'Creditors' means persons other than subsidiaries and associate concerns of the Company, who had financial claims against the Company as on June 30, 1996 arising out of:- (i) Inter Corporate Deposits made with the Company, or (ii) bill discounting facilities availed by the Company, irrespective of whether those persons have instituted proceedings against the Company, inter alia by way of suits or petitions for winding up of the Company, for recovery of such claims, and have or have not obtained decrees or orders by consent or otherwise in their favour for payment of such claims against the company but does not include those who have been paid in full as on December 1, 1997 in respect of such claims in terms of such decrees, order or otherwise and also does not include any other persons having claims against the Company whether secured or not." 3. On 18th December, 1997 an ex parte order was passed directing meeting of the creditors "as mentioned in the scheme of the company" to be convened and held on Saturday February 28, 1998 for the purpose of considering and, if thought fit, approving with or without modification the scheme of compromise and/or arrangements of the Creditors "as mentioned in the Scheme". Mr. N.C. Roychowdhury, Sr. Advocate, was appointed as Chairman of the meeting of the creditors "as mentioned in the scheme". Notice was directed to be published at least 21 clear days before the date of the meeting by advertisement which was to state that the copy of the scheme as well as the statement required to be furnished pursuant to section 393 of the Act could be obtained free of charge at the registered office of the company. The advertisements were directed to be published once in "The Statesman" and once in the "Bartaman". In addition, notices, proxy forms as well as copies of the scheme and explanatory statement were directed to be sent to the creditors "as mentioned in the Scheme". The Order further provided that the voting of proxy to be allowed provided a person entitled to attend and vote and at the meeting were filed with applicant company at its registered office not later than 48 hours before the meeting and that the value of each creditor shall be in accordance with the books of the company and where the entries in the books were disputed, the Chairman would determine the value for purposes of the meeting. In terms of the order the Chairman was to submit a report as to the result of the meeting within 15 days of the conclusion of the meeting. 4. Pursuant to the order for convening the meeting, advertisements were issued and notices duly sent to the creditors. The meeting was fixed for 16th March, 1998. The Chairman filed an interim report dated 24th March, 1998 which records what happened at the first meeting on 16th March, 1998. One hundred and twenty creditors attended either in person by proxy. Forty three suggestions were made for modification of the scheme. The meeting was fixed for 16th March, 1998. The Chairman filed an interim report dated 24th March, 1998 which records what happened at the first meeting on 16th March, 1998. One hundred and twenty creditors attended either in person by proxy. Forty three suggestions were made for modification of the scheme. The representatives of the company agreed in principle to modify the scheme and suggested certain clauses e.g. the basis would be the outstanding as on 31st March, 1997 (instead of 1996) and rate of interest would be 15 per cent per annum as desired by the creditors subject to the company's Board's sanction. Thereafter- at the request of the creditors it was agreed that the company should send such modifications/amendments in writing so that the Board of Directors of the concerned creditors could consider the same. Accordingly, the Chairman adjourned the meeting till 7th April, 1998. 5. On 30th March, 1998 the Chairman issued notices of the meeting to be held on 7th April, 1998 to the creditors for approving the scheme of arrangement and/or compromise incorporating therein several modifications to the original scheme of arrangement. The modifications included inter alia a redefinition of the term "creditors'. Under the new definition "creditors" would include "subsidiaries and sister companies of the company having financial claims against the company on account of inter corporate deposits as reflected in the books of accounts of the company". This was a class which has been expressly excluded from the original scheme. This was not a modification suggested by the creditors. Other modifications were also incorporated in the modified scheme which were not in the original scheme. 6. HDC filed an application seeking to stay the meeting scheduled to be held on 7th April, 1998. No interim order was passed and the meeting was held on 7th April, 1998. The final report submitted by the Chairman in April, 1998 shows that at the meeting held on 7th April, 1998, 133 creditors attended. The scheme which had been directed to be considered by the Court was not put to vote. The creditors considered the modified scheme. These included votes cast by three subsidiaries of the company namely, Global Gematines Ltd., Shaw Wallace Gelatines Ltd. and Shaw Wallace Properties Ltd. The total percentage of their voters was 15.51. Seventy six creditors whose debts were of the value of 66.28% of the total value, voted for the modification. The creditors considered the modified scheme. These included votes cast by three subsidiaries of the company namely, Global Gematines Ltd., Shaw Wallace Gelatines Ltd. and Shaw Wallace Properties Ltd. The total percentage of their voters was 15.51. Seventy six creditors whose debts were of the value of 66.28% of the total value, voted for the modification. Forty-nine creditors whose claims were for 32.84% voted against. There were two invalid votes. The value of the invalid votes was 0.88%. Without the votes of the subsidiaries of the company the number of voters who approved a scheme would be reduced to 73 and the percentage of the value to 51.07%. 7. As to whether the class of creditors should extend to include the subsidiaries and associates of the company met with the following response. Forty-six voters of the value of 49.16% voted for the modification. This again included the votes of the three subsidiaries of the company totaling 15.21%. If they are excluded the number of votes in favour of the particular modification would stand at 43 of the value of 33.95%. Eighty one votes of the value of 49.96% voted against the modification. Three votes of the value of 0.88% were found by the Chairman to be invalid. The final report in effect was that the scheme had not been approved under section 391(2). The Chairman had no further role in the matter. However, on 4th May, 1998 a supplementary report was filed by the Chairman. He said that subsequent to the meeting he had received letters from several creditors who had been present at the meeting and voted against the modified scheme but who were not giving their consent to the modified scheme. The creditors mentioned were: Name of the Creditors Value Percentage 1. Casion Finance & Investment 519,96,406 2.26 India Ltd. 2. Videocon Leasing & Industrial 459,89,211 1.94 Finance Co. 3. Videocon International Ltd. (Formerly known as Videocon Narmada Electronics Ltd.) 785,00,489 3.42 4. Tapti Machines Pvt. Ltd. 340,72,330 1.48 5. Bennett, Coleman & Co. Ltd. 975,76,640 4.25 8. In May, 1998 the company filed an application under sections 391, 393 and 394 of the Act asking for approval of the modified scheme. Kirloskar Investment & Finance Limited (referred to as Kirloskar) filed an application seeking to propound a different scheme between the company and the unsecured creditors. Bennett, Coleman & Co. Ltd. 975,76,640 4.25 8. In May, 1998 the company filed an application under sections 391, 393 and 394 of the Act asking for approval of the modified scheme. Kirloskar Investment & Finance Limited (referred to as Kirloskar) filed an application seeking to propound a different scheme between the company and the unsecured creditors. Kirloskar also filed an application for rejection of the modified scheme as propounded by the company. 9. All three applications were taken up for hearing on 17th June, 1998. In the course of hearing several creditors filed letters and affidavits signifying that they had changed their minds subsequent to the meeting. Some creditors who had earlier opposed the scheme sought to support the modified scheme while others who had earlier approved the scheme sought to oppose it. 10. Hearing was concluded on 15th September, 1998, Judgment was delivered on 24th December, 1998 dismissing Kirloskar's applications and allowing the application of the Company. The Learned Judge sanctioned the scheme under section 391(2) and directed the company to appoint a Board of Trustees consisting of three advocates to administer the funds earmarked for the purpose of payment to the creditors covered by the modified scheme. He also allowed the company to make payment of its tax liabilities out of the sale proceeds received in connection with the Company's Consumer Products Division. The advocate on record of the company was directed to make payment of the first instalment to the creditors out of a fixed deposit of the company forthwith. 11. Both Kirloskar and HDC have preferred appeals form this order. In view of the provisions of section 391(3) that an order made by the Court under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar and since the certified copy of the order had not been so filed, the Appeal Court stayed the order. This judgment disposes of both these appeals as well as an appeal preferred by HDC from an order passed on 11th March, 1998 under section 391(6) staying all proceedings criminal and civil against the company and its management. 12. All the issues raised namely, was the meeting validly held? Was the application of the company for sanction of the scheme competent? Could the Court have taken cognizance of the changed views of the creditors? 12. All the issues raised namely, was the meeting validly held? Was the application of the company for sanction of the scheme competent? Could the Court have taken cognizance of the changed views of the creditors? and finally could the Court have sanctioned the modified scheme? turn on the construction of section 391. Section 391(1) of the Act in so far as it is relevant provides: "Section 391. Power to compromise or make arrangements with creditors and members.- (1) Where a compromise or arrangement is proposed - (a) between a company and its creditors or any class of them; or b) between a company and its members or any class of them; the Court may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs." 13. Under section 391(1) therefore on an application being made to it, the Court may order a meeting for ascertaining the views of the class of creditors or members. It has been held that this implies a discretion on the part of the Court not to pass any order at all, for instance the scheme propounded was ex facie "thoroughly unreasonable, absolutely unjust, basically unfair and exploitative in character" and it would be a waste of time of the Court even to prima facie examine the scheme [See Mansuklal vs. M.V. Shah, 1976 46 Com. Cases 279 also N.A.P. Alagiri Raja and Company vs. N. Guruswamy and Ors., (1989) 65 Company Cases 758 (DB) and K.R. Balasubramanyan vs. Bellary Spinning & Weaving Co. Ltd., 84 Compo Cases 830 (Kar)]. 14. But if the Court in exercise of its discretion orders that the views of the particular class of creditors or members are to be ascertained at a meeting to be called, held and conducted in a particular manner, the meeting must be called, held and conducted of the named class of creditors or members in the manner directed by Court. 15. This is exemplified in the case of In re: English, Scottish and Australian Chartered Bank, (1893) 3 Ch. 15. This is exemplified in the case of In re: English, Scottish and Australian Chartered Bank, (1893) 3 Ch. 385, cited by the company, where a company in liquidation was sought to be reconstructed under the supervision of the Joint Stock Companies Arrangement Act, 1870. Directions were given by the Learned Judge directing meetings to be held of the creditors and share holders ascertain whether they consented to the scheme. The largest number of creditors of the company resides in Australia. It was accordingly directed that meetings would be held in four major cities in Australia as well as in London at which the share holders and creditors might vote personally or by proxy or through an agent. Directions were also given as to the mode in which the Australian creditors' interest would be represented at the meeting held in London. Meetings were held as directed. It was not in dispute that if the Australian proxies were counted, the scheme was approved by the necessary majority. The Official Receiver presented a petition for sanction of the scheme. This was opposed by some of the creditors on the ground of invalidity of the proxies. Vaughan Williams, J. came to the conclusion that the Court has an inherent power to direct the mode in which meeting was to be held and the mode in which proxies shall be evidenced and to determine all such questions as to whether it was necessary that the proxies should be produced at the meeting. The objection was accordingly rejected by the Learned Judge. The matter was taken up by way of appeal by some of the creditors. The Court of Appeal held that since the proxies had been cast in the manner provided by the order convening the meeting, an order which the Court was competent to pass, the proxies were valid votes. The objection was accordingly rejected by the Learned Judge. The matter was taken up by way of appeal by some of the creditors. The Court of Appeal held that since the proxies had been cast in the manner provided by the order convening the meeting, an order which the Court was competent to pass, the proxies were valid votes. The next requirement envisaged in the process of making a compromise or arrangement binding is set out in section 391(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 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 236 to 251, and the like." 16. In other words, the scheme must be approved not only by the majority in number, but such a majority which also represents three fourths value of the class of creditors present and voting. An application can be made for approval of the scheme only if the prescribed majority approves the scheme at the meeting. Conversely if the prescribed majority does not approve the scheme, no application for approval of the scheme can be made. This interpretation follows from the scheme of section 391(2) as well as from the Rules. The relevant Rule is Rule 79 an extract of which is set out verbatim. "Rule 79. Petition for confirming compromise or arrangement. Conversely if the prescribed majority does not approve the scheme, no application for approval of the scheme can be made. This interpretation follows from the scheme of section 391(2) as well as from the Rules. The relevant Rule is Rule 79 an extract of which is set out verbatim. "Rule 79. Petition for confirming compromise or arrangement. - Where the proposed compromise or arrangement is agreed to, with or without modification, as provided by sub-section (2) of section 391, the company, (or its liquidator, as the case may be), shall, within seven days of the filing of the report by the Chairman, present a petition to the Court for confirmation of the compromise or arrangement. The petition shall be in Form No. 40. Where no petition for confirmation of the compromise or arrangement is presented, or where the compromise or arrangement has not been approved by the requisite majority under section 391(2) and consequently no petition for confirmation could be presented, the report of the Chairman as to the result of the meeting made under the preceding rule shall be placed for consideration before the Judge for such orders as may be necessary." 17. Paraphrased, this Rule in effect recognizes that the majority approval is a precondition to the presentation of an application for confirmation of the scheme. Rule 79 does not allow the Court to pass an order of sanction of the scheme except where an application is presented and the power of the Court to pass an order on the report of the Chairman on the results of the meeting when no such application is made does not include the power to confirm the scheme. That can only be done on an application (vide Rule 81 of the Rules). This is also the consistent view taken judicially. 18. In construing section 153(2) of the Indian Companies Act, 1913 (the precursor of section 391 of the 1956 Act) a Division Bench of this Court in Bengal Bank Limited vs. Suresh Chakravarty, AIR 1952 Cal 133 (DB), said that "The scheme of course is not effective unless it is confirmed by the Court. 18. In construing section 153(2) of the Indian Companies Act, 1913 (the precursor of section 391 of the 1956 Act) a Division Bench of this Court in Bengal Bank Limited vs. Suresh Chakravarty, AIR 1952 Cal 133 (DB), said that "The scheme of course is not effective unless it is confirmed by the Court. But before the Court makes an order sanctioning the scheme, it is necessary in the first place to have the scheme or arrangement approved and accepted by the requisite majority and if the scheme is sanctioned by the requisite majority then it is presented to the Court for confirmation. In other words, the Court cannot sanction a scheme until it has been approved by the majority in terms of section 153(2) of the Indian Companies Act". It was held that the: "Scheme should be approved by the requisite majority before it can be presented to Court for confirmation. If that is not done then I think the Court has no jurisdiction to approve a scheme." 19. The same view has also been taken in Nand Prasad vs. Arjun Prasad, AIR 1959 Patna 293, where the Division Bench said: "These authorities firmly establish that one of the essential conditions to give jurisdiction to the Court to accord its sanction to a scheme is that it should have been passed by a majority as required under section 153(2) of the Companies Act........ In other words, unless the Court is satisfied that the same has been approved by the statutory majority and in a manner provided by law, it is not open to the Court to give any sanction to it." 20. The decision of the Division Bench in Nand Prasad vs. Arjun Prasad (supra) was upheld by the Supreme Court (at page 1194 of the report) that if in law the requisite 3/4th majority as required was not there "no further action can be taken by the Court in the matter". In Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., [1980] 50 Com. Cases 623 (Mad), it was said: "The Court should be satisfied that the resolutions are passed by the statutory resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. Cases 623 (Mad), it was said: "The Court should be satisfied that the resolutions are passed by the statutory resolutions are passed by the statutory majority in value and in number in accordance with section 391(2) of the Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The Court should not usrup the right of the members or creditors to decide whether they approve the scheme or not. Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approve it at a meeting convened in accordance with the provisions of section 391, the Court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme." 21. As far as England is concerned, in considering section 153 of the English Companies Act, 1929 (corresponding to section 391 of the Companies Act, 1956) Maugham, J., in re: Dorman, Long & Co. said: "I will first state my view as to the function of the Court in determining whether the compromise or arrangement should be sanctioned by the Court. It is plain that the duties of the Court are two-fold. The first is to see that the resolutions are gassed by the statutory majority in value and number, in accordance with section 153, sub-section (2), at a meeting or meetings duly convened, and held. Upon that depends the jurisdiction of the Court to confirm the scheme." 22. Again Palmer's Company Law (Vol. I, 23rd Edn.) summarises the law as follows in para 79.13: "The Court must see that the resolutions are passed by the statutory majority in value and number in accordance with the section at a meeting or meetings duly convened and held. Upon this depends the jurisdiction of the Court to confirm the scheme." 23. Even if an application is made on the basis that the statutory majority has approved the scheme, it is the duty of the Court to satisfy itself that it is so. The Court may hold an enquiry and determine whether in law the provisions of section 391 (2) had been fulfilled. Thus in the case of Nand Prasad Vs. Even if an application is made on the basis that the statutory majority has approved the scheme, it is the duty of the Court to satisfy itself that it is so. The Court may hold an enquiry and determine whether in law the provisions of section 391 (2) had been fulfilled. Thus in the case of Nand Prasad Vs. Arjun Prasad (supra) where the Chairman submitted a report to the effect that the compromise or arrangement had been approved by the statutory majority, the Court held an enquiry and found as a matter of law from a perusal of the report that votes had been wrongly counted. But once it is found that the statutory majority is not there, the application would be incompetent and the Court would not have the jurisdiction to approve the scheme. This would a fortiori be true in this case where the Chairman's report itself says that the prescribed majority did not approve either the original or the modified scheme at the meeting. 24. If one keeps these principles in mind and applies them to the facts, it is clear that the appeal must be allowed. First, the provisions of the statute were ignored from the outset. Although section 393(1) requires that where a meeting of creditors or a class of creditors is called under section 391, every notice calling the meeting shall also be accompanied with a statement setting forth the terms of the compromise and explaining its effect, and in the advertisement of the notice, the place at which and the manner in which the creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid, no advertisement was published of the meeting to be held on 7th April, 1998 nor of the substance of the modified scheme. Second, the meeting of 7th April, 1998 was not held in the manner directed by Court. The Court had directed the holding of the meeting of the class of creditors as mentioned in the original scheme, the definition of which expressly excluded. subsidiaries and associates of the company. No meeting was held as directed by the Court as the subsidiaries and associates were allowed to participate. Not only that, the original scheme which was directed to be considered was in fact not voted upon at all. subsidiaries and associates of the company. No meeting was held as directed by the Court as the subsidiaries and associates were allowed to participate. Not only that, the original scheme which was directed to be considered was in fact not voted upon at all. It is true that the Court by its order dated 18th December, 1997 gave the creditors the power to approve the scheme with or without modification and the word "modify" has been defined in section 2(29) of the Act as including the making of additions and omissions. But these modifications could not include a change in the class of creditors. The power to modify the scheme given by an order did not give the company a licence to change the order itself which directed a meeting of "the creditors mentioned in the scheme" as it originally stood. Third, the subsidiaries and associates could not have voted as to whether they should be included as creditors or not. In any event, when the modification which changed the definition of creditors was defeated, the subsidiaries and associates of the company should not have been allowed to participate any further in the creditors meeting. Fourth, there is no dispute that the statutory majority did not approve the scheme either with or without the subsidiaries and associates of the company. As admittedly the modified scheme had not been passed by the requisite majority as prescribed under section 391(2) at the meeting, the company could not have made any application for confirmation of the scheme at all. Fifth, the Court was not competent to entertain the application for sanction of the modified scheme not only because the meeting which was held was not in terms of its order dated 18th December, 1997 but also because the prescribed majority did not approve the modified scheme. Finally, the learned Judge should not have based his decision on the votes "cast" at the hearing by the creditors either by affidavit or by letters. The Court could not have entertained the affidavits/letters of creditors who had changed their mind subsequent to the meeting. No advertisement was issued giving notice that voting would be re-held before the Court and that the creditors were free to exercise their voting rights again. There was nothing to show that the creditors who attended before the Court were fairly representative of the class. No advertisement was issued giving notice that voting would be re-held before the Court and that the creditors were free to exercise their voting rights again. There was nothing to show that the creditors who attended before the Court were fairly representative of the class. In allowing the creditors to change their minds and re-vote, as it were, the learned Single Judge on the one hand made the meeting unnecessary but at the same time relied on the votes cast at the meeting which had not been changed subsequently. The learned Judge worked out the majority relying, according to counsel for the company, on a chart handed up to him by the company. The appellants have criticised the chart by saying it did not include those who had changed their minds from approval to disapproval of the scheme. But irrespective of the correctness or incorrectness of the Chart, the Court could not have re-opened the process of voting which had been completed in the meeting. 25. The importance of the meeting under section 391 is not only clear from the language of section 391 itself, but also from the Companies (Court) Rules, 1959 (referred to as the Rules) which relate to compromises or arrangements under section 391. All make provisions for the holding of meetings. The form of the application to convene a meeting under section 391 has been specified in Rule 67. Rule 68 provides for service on the company where the company is not the applicant. Rule 69 sets out the directions that the Court may give upon hearing the application. "Rule 69. All make provisions for the holding of meetings. The form of the application to convene a meeting under section 391 has been specified in Rule 67. Rule 68 provides for service on the company where the company is not the applicant. Rule 69 sets out the directions that the Court may give upon hearing the application. "Rule 69. Directions at hearing of summons.- Upon the hearing of the summons or any adjourned hearing thereof the Judge shall, unless he thinks fit for any reason to dismiss the summons, give such directions as he may think necessary in respect of the following matters:- (1) determining the class or class of creditors and/or of the members whose meeting or meetings have to be held for considering the proposed compromise or arrangement; (2) fixing the time and place of such meeting or meetings; (3) appointing a Chairman or Chairmen for the meeting or meetings to be held, as the case may be; (4) fixing the quorum and the procedure to be followed at the meeting or meetings, including voting by proxy; (5) determining the values of the creditors and/or members, or the creditors or members of any class, as the case may be, whose meetings have to be held; (6) notice to be given of the meeting or meetings and the advertisement of such notice; (7) the time within which the Chairman of the meeting is to report to the Court the result of the meeting; and such other matters as the Court may deem necessary." 26. Form 35 which prescribes the form of the order to be passed on summons under section 391(1) also contains directions for holding of meetings. It would appear that the Court, if it does not dismiss the application, must call a meeting for ascertainment of the views of the class affected by the scheme. 27. Rule 70 provides for voting by proxy at the meeting. Rules 73, 74 and 75 respectively give the requirements of a notice calling a meeting, advertisements of the notice of the meeting and the furnishing of the compromise or arrangements to the persons entitled thereto. Rules 76 provides that the Chairman shall file an affidavit to the effect that the service had duly been complied with and the persons to whom the service were directed to be issued by the Court. Rule 77 which is particularly relevant provides: "Rule 77. Rules 76 provides that the Chairman shall file an affidavit to the effect that the service had duly been complied with and the persons to whom the service were directed to be issued by the Court. Rule 77 which is particularly relevant provides: "Rule 77. Result of the meeting to be decided by poll.- The decisions of the meeting or meetings held in pursuance of the order made under Rule 69 on all resolutions shall be ascertained only by taking a poll." 28. The Company then said that section 391 had been substantially complied with by the Company. We are of the view that substantial compliance, even it may exist, would not do. Section 391 gives the power to the company or any creditor or member of the company to compromise or make arrangement between the company and the creditors or members of the company. It is to be distinguished from section 392 which gives power to the High Court to enforce compromises and arrangements arrived at under section 391. A scheme framed under section 391 may deprive persons covered thereby of rights which they are otherwise legally entitled to. As far as creditors are concerned, as in this case, it may reduce the contractual rate of interest and debar the immediate recovery of the debts by legal action. That is why the facility or power of making arrangements under section 391 between the company and its creditors or members binding on all the creditors or members including any dissidents must be exercised in terms of the section. The Legislature has prescribed the manner of exercise of the power. In order to bind or to deprive another of his rights irrespective of such person's opposition the power conferred is to be exercised in that manner and in no other way. There is no question of substantial compliance. As was said in Gujarat Elec. Board vs. Girdharlal, AIR 1969 SC 267 , by the Supreme Court: "These provisions confer a power on the State Electricity Board to purchase the property of the licensee but that right can be exercised only in the manner provided in the Act and not in any other way. It must be remembered that the provisions in question empower the State Electricity Board to interfere with the property rights of the licensee. Therefore, such a power will have to be strictly construed. It must be remembered that the provisions in question empower the State Electricity Board to interfere with the property rights of the licensee. Therefore, such a power will have to be strictly construed. The legislature has prescribed a mode for the exercising of that power and hence that power can be exercised only in that manner and in no other manner. See Nazir Ahmad vs. King Emperor, 63 Ind App 372: AIR 1936 PC 253, and Ballabhdas Agarwala Vs. J.C. Chakrauarty, 1960 (2) SCR 739 ." 29. The company submitted that this rule of construction was not applicable to section 391. The company relied on Assistant Collector of Central Excise vs. National Tobacco Co. of India Ltd., 78 ELT (J) 416, in which the question before the Supreme Court was whether in respect of a class of cases in respect of which rules did not provide for completing the assessment, the assessment could in fact be completed. The High Court's view was that it could not. The High Court based this conclusion on an application of this rule of construction and held that where a mode of performing a duty is laid down by law it must be performed in that mode or not at all. The Supreme Court construed the provisions of the Central Excise & Salt Act, 1944 as well as Rules 10 and 10(a) of the Central Excise Rule and came to the conclusion that there was an implied power to carry out or complete assessments not specifically provided by the rules. It was said that the rule is subservient to the basic principle that Courts must endeavour to ascertain the legislative intent and purpose, and then adopt a rule of construction with effectuates rather than one that may defeat these. The Supreme Court held that "the rule of prohibition by necessary implication could be applied only where a specified procedure is laid down for the performance of a duty." 30. In our view the case has no application in section 391. Section 391 does not cast a duty on the applicant. It gives the applicant the power to effect minority shareholders and to deprive them of their common law rights to recover their debts on the basis of agreements or otherwise. In our view the case has no application in section 391. Section 391 does not cast a duty on the applicant. It gives the applicant the power to effect minority shareholders and to deprive them of their common law rights to recover their debts on the basis of agreements or otherwise. The object of the legislature is to protect the minority by making their views subject only to the views of the much larger percentage of persons of their own class. There was no question of such deprivation in Assistant Collector vs. National Tobacco (supra). The minority can, therefore, insist that the measures which are intended to protect them must be followed. The principle applicable to section 391 would be the one enunciated by Lindley M.R. in Allen vs. Gold Reefs of West Africa Ltd., (1900) 1 Ch 656, 671, that: ".... the power conferred by it must like all other powers, be exercised subject to these general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole and it must not be exceeded. These contentions are always implied, and seldom, if ever, expressed." 31. When there are a few creditors, the Court may not think it necessary to resort to the elaborate procedure of calling a meeting to be supervised by a Chairman etc. The Court may itself hold the 'meeting' and ascertain the views of the creditors who must be summoned to the 'meeting' to signify their approval/dissent in the manner provided in the order "convening" the "meeting". It has also been held in M/s. Mazola Theatres Pvt. Ltd. vs. M/s. New Bank of India Ltd., ILR 1975 Del 1, that the Court may pass an order for ascertainment of the views of the members of a company without calling any meeting at all. The decision was on the basis that the meeting contemplated in section 391 was analogous to an Annual General Meeting of the members of the company. The decision was on the basis that the meeting contemplated in section 391 was analogous to an Annual General Meeting of the members of the company. It was found that since section 192 of the Companies Act, 1956 enables a written resolution not passed at general meetings to be registered and that in the law the share holders can ratify a legal transaction otherwise than a meeting, the Court was not bound to call a general meeting of share holders under section 391. Thus if a written resolution is passed by all the members or if the consent of all the members is given otherwise or if all the members acquiesce in the matter by conduct and there is proof of fact that all the share holders had unanimously supported the scheme, this would be sufficient. 32. The decision of the Delhi High Court in M/s. Mazola Theatres would have no application in a case where views of a large number of creditors are to be ascertained since there is no corresponding provision such as section 192 as far as creditors are concerned. In particular, the decision would have no application in this case, because the court had expressly directed the mode of ascertainment of the views of the creditors by a meeting and this was advertised and given effect to. 33. In re: Bank of Credit & Commerce International, S.A. (No.3), 93 BCLC 1490, cited by one of the creditors supporting the company, was a case where the company was being wound up under the relevant provisions of English law. The liquidators propounded a scheme. The application was made under the Insolvency Act, 1886. Briefly speaking the scheme related to the distribution of assets amongst the creditors in the process of winding up. One of the submissions was that the application should have been made under section 425 of the English Companies Act, 1985 (which is substantially similar to section 391 of the 1956 Act). It was submitted on behalf of the liquidators that since it was practically impossible to determine who the debtors were or to identify the assets of the each, the liquidator had the discretion to enter into a compromise or arrangement in exercise of that power under section 195 of the Insolvency Act rather than by way of a scheme under section 425. Section 195 of the Insolvency Act (similar to section 557 of the Companies Act, 1956) allows the Court to determine the wishes of the creditors "in such manner as it thinks fit and proper". The Vice-Chancellor approved the proposal put forward by the liquidator. The creditors appealed. One of the grounds was that a portion of the scheme could be effected only under section 425 of the Companies Act, 1985. The Court of Appeal upheld the decision of the Vice-Chancellor by stating that it was wholly impossible to go through the procedure of a scheme under section 425 in the facts of the case. 34. The decision does not assert the company. The provisions of section 425 were not in fact resorted to. It is implicit in the decision that had section 425 been resorted to a meeting would have had to be called. The procedure which was in fact followed was one permissible under the Insolvency Act similar to section 557 of our statute which cannot apply if the company wants the scheme to be a binding one. 35. In re: Tea Corporation Limited, 1904(1) Ch. 12, cited by the Company was a decision which dealt with a scheme of arrangement under an English statute namely the Joint Stock Companies Arrangement Act, 1870. The statutory provision allowed a compromise or an arrangement to be proposed with the company which was in the course of being wound up under the Companies Act, 1862 and 1867. The company and the liquidator had formulated a scheme and presented the same to the Court. The Court directed separate meetings to be held of the debenture stock holders, the unsecured creditors, preferential share holders and the ordinary share holders for the purpose of considering the scheme. Each of the separate classes approved the scheme at the meeting with a statutory majority except the ordinary share holders. In the application for sanction the company and the liquidator said that the ordinary share holders had no interest in the matter because if the company went into liquidation, its assets would be insufficient to leave any surplus for distribution amongst the ordinary share holders and therefore they had no interest in the matter. This was found as a fact by the Trial Court and accordingly an order was passed sanctioning the scheme. The decision was upheld by the Court of Appeal. 36. This was found as a fact by the Trial Court and accordingly an order was passed sanctioning the scheme. The decision was upheld by the Court of Appeal. 36. The decision has no bearing on this case as the company is not in liquidation. There is no question of distribution of assets. The ratio would certainly have no application in a case where there is only one meeting directed to be held of a class which could not be said to have no interest in the matter. 37. The decision of the learned Single Judge of the Karnataka High Court in S.M. Holding Finance Private Limited Vs. Mysore Machinery Manufacturers Ltd. (In Liquidation), 78 Comp Cases 432, on which the learned Single Judge relied however strikes a discordant note in what appears to be the settled position in law. In that case the company had been directed to be wound up. It proposed a scheme which would allow it to revive. The Court directed the company to convince a meeting of the employees/workmen, the secured creditors, preferential statutory creditors, unsecured creditors and members of the company for the purpose of considering the scheme. At the meeting held, the workmen and the members of the company approved the scheme with the requisite majority. As far as the secured creditors were concerned the meeting was adjourned and the Chairman submitted a report to the Court. The Court directed the secured creditors to indicate their stand directly before the Court. Each of the secured creditors filed their consent to the scheme. As far as the unsecured creditors' meeting was concerned, admittedly the scheme was not passed by the requisite majority either in number or in value. Nevertheless, the company presented an application for sanction of the scheme. At the hearing several of the unsecured creditors filed affidavits indicating their consent to the scheme. The Court noted that the required number of unsecured creditors' had consented to the scheme. There was no finding as to whether the requisite value had been obtained under section 391 (2). The Court directed advertisements to be issued in connection with the hearing of the application for sanction. One of the unsecured creditors appeared and submitted that since the requisite majority had not been obtained the Court had no jurisdiction to sanction the scheme. There was no finding as to whether the requisite value had been obtained under section 391 (2). The Court directed advertisements to be issued in connection with the hearing of the application for sanction. One of the unsecured creditors appeared and submitted that since the requisite majority had not been obtained the Court had no jurisdiction to sanction the scheme. The learned Judge held that "Section 391 (2) is not cast in negative form whereas the proviso to section 391 (2) is cast in the negative form. As section 391(2) except the proviso is not prohibitory in character, it is possible to treat it as merely permissive. When section 391(2) is not prohibitory in character it definitely appears to be directory and said that the substantial compliance with the provisions of section 391(2) was therefore sufficient. In arriving at this conclusion the learned Judge relied upon the decision of the Delhi High Court in Mazola Theatres (P) Ltd. vs. New Bank, India Ltd., [1975] ILR 1975 1 (Delhi) as well as a passage in Palmer's Company Law. As a result the Court approved the scheme but excluded the objecting unsecured creditor from the purview of the scheme. It directed that the objecting creditor should be paid by the company within a period of 2 years with interest on the scheme being made. If the claim was not admitted by the company, the creditor was given leave to approach the Court for adjudication of its claim and if it were found that the company was liable it would be paid within a period of two years with interest. 38. With respect we are unable to accept the reasoning of or the procedure followed by the learned Judge. First, it is contrary to the language of section 391 itself which envisages the views of the concerned class to be ascertained at a meeting to be held in such manner as the Court may direct. The Karnataka Court had directed the views to be ascertained at a meeting. The views had been so ascertained. This precluded the court from ascertaining the views of the concerned class in any other fashion. As this aspect has been fully discussed earlier we do not respect ourselves. The Karnataka Court had directed the views to be ascertained at a meeting. The views had been so ascertained. This precluded the court from ascertaining the views of the concerned class in any other fashion. As this aspect has been fully discussed earlier we do not respect ourselves. Second, the Delhi decision in Mazola Theatres related to the consent or share holders under section 391 being ascertained otherwise than at the meeting, by virtue of section 192 of the Companies Act. As already noted, there is no such corresponding provision as far as creditors are concerned. Thirdly, the passage in Palmer's Company Law Volume 1 (23rd Ed.) paras 79-13 was, in our view, misconstrued in the Karnataka decision. The passage says that the Court would not upset a scheme "for minor irregularities, as where consent of a class has been subsequently obtained and where the necessary majority of one class was absent when the petition was presented. The Court allowed a fresh petition to be presented subsequently when the necessary majority was later obtained without requiring the other class meetings to be held again. 39. The passage cannot be relied upon to dispense with the statutory requirement of having the scheme approved by the prescribed majority prior to the application for confirmation as far as this country is concerned particularly having regard to the judicial authority to the contrary. The passage quoted must be read in the context of the decisions referred to in support. 40. Of the two decisions cited in support of the passage, one was In re: Dynevor, Dyffryn, and Neath Abbey Collieries Co., [1879] 11 Ch.605. The company had resolved to be would up voluntarily. An order was passed by Court directing meetings of the creditors to consider an arrangement proposed between the company and its debenture holders. At the meeting a majority of more than 3/5th of the creditors approved the arrangement. The trustee liquidators took out a summons to obtain the sanction of the Court. The Court sanctioned the scheme and directed that the scheme was binding on the creditors, debenture holders and contributories of the company. Subsequently a general meeting of the company was held at which the arrangement was approved by an extraordinary resolution. Some debenture holders appeared. The trustee liquidators took out a summons to obtain the sanction of the Court. The Court sanctioned the scheme and directed that the scheme was binding on the creditors, debenture holders and contributories of the company. Subsequently a general meeting of the company was held at which the arrangement was approved by an extraordinary resolution. Some debenture holders appeared. One of the objections taken was that the meeting of the contributories or ordinary shareholders was held and the scheme approved unanimously after the order affirming the scheme. The particular statute which was being construed was section 2 of the Joint Stock Companies Arrangement Act, 1870 which according to the Court of Appeal only required that the arrangement should be sanctioned by the Company by an extraordinary resolution. It was in these circumstances, the Court said: "All that is required, as it appears to me, by the Act of Parliament is that the arrangement shall be sanctioned by the company by an extraordinary resolution. That extraordinary resolution has been obtained, the company were in fact themselves applying to the Court for it, and the debenture holders, who are the person who are complaining, sanctioned it by a resolution carried by more than a sufficient majority. The Court having had its attention called to all the terms of it has sanctioned it, and then if there was any difficulty from the want of a meeting of the shareholders to ratify what the company had done, that meeting has been held, and that ratification has been obtained. Therefore the whole thing seems to me to be quite right. Then it is said that the Vice-Chancellor ought not to have made his order until after that meeting. If necessary the order might have been postdated, but I do not think that was necessary. Every assent that is required has been given to the management, and in what particular order or form those assents have been given seems to me to be wholly immaterial". 41. There was nothing in the English Statute which fixed the order or time in which the meetings were to be held. As already seen, the provisions of section 391 clearly lay down that the meetings must precede the order of sanction. 41. There was nothing in the English Statute which fixed the order or time in which the meetings were to be held. As already seen, the provisions of section 391 clearly lay down that the meetings must precede the order of sanction. Under section 391 the Court cannot confirm a scheme which has not been sanctioned by the majority as required by section 391 and the sanction of the majority is the pre-requisite for confirmation of the Scheme by the Court. It is noteworthy however that the necessity of the meeting to ascertain the views of the concerned class was not disputed. 42. The second decision referred to by Palmer was in Re. United Provident Assurance Company Ltd., [1910] 2 Ch. 277, where a question arose as to the distribution of the assets of a company in liquidation; There were four groups of shareholders namely, fully paid up shareholders (Group A), ordinary partly paid a further in advance (Group C) and finally holders of fully paid deferred shares (Group D). Separate meetings were called in respect of each of the four groups. One of the groups (Group C) approved an arrangement by a show off hands. A poll was demanded of this group. This was refused by the liquidator. The meeting was consequently aborted. Combined meetings were thereafter directed to be held. At these meetings the scheme was approved but Group "C" was completely swamped by the other groups. An application was made for sanction of the scheme. It was contended that Group 'C' was in the same position as one of the other groups. This was negatived by the learned single Judge who held that Group "C" clearly constituted a separate class and as they had had no separate meeting other than the aborted meeting, it was held to be fatal and the scheme was rejected. Subsequent to the order a meeting was called of Group "C" and the necessary approval of that class was obtained. A fresh petition was made for sanction of the Scheme. It was then held, in Re. United Provident Assurance Company Ltd., 1911 WN 40, that the Court may sanction a scheme under the fresh petition without requiring fresh meetings of the other classes who had already approved the scheme. 43. Far from supporting the view taken by the learned Single Judge in S.M. Holding Finance Private Ltd. Vs. It was then held, in Re. United Provident Assurance Company Ltd., 1911 WN 40, that the Court may sanction a scheme under the fresh petition without requiring fresh meetings of the other classes who had already approved the scheme. 43. Far from supporting the view taken by the learned Single Judge in S.M. Holding Finance Private Ltd. Vs. Mysore Machinery Manufacturers (supra) the decision is a clear authority for the proposition that without a properly constituted meeting being held at which the prescribed majority of the particular Reliance on the passage of Palmer in the Karnataka decision to justify the acceptance of affidavits of creditors changing their views subsequent to the meeting, was in the circumstances, inapposite. 44. Finally, the Karnataka decision is contrary to the scheme of section 391(2). Under section 391(2) the scheme must be approved by a majority in number representing 3/4th in value of the class of creditors or members present and voting. This language would appear to indicate that the process of voting must be completed at once and not in stages. If this were not so there would be no finality in the matter. Views may be changed and re-changed. The jurisdiction of the Court cannot be founded on such a nebulous and shifting basis. Absurd and undesirable results would ensue if the members could signify their approval or disapproval subsequently. This is well illustrated by the facts of this case. For example, it is the allegation of the appellants that Bennett Coleman and Company Ltd. and Praj Industries Ltd. (who filed letters supporting the scheme after opposing it at the meeting) changed their mind having derived an unfair benefit from the company for doing so. The company has disputed this. It is not necessary to determine this allegation. But the possibility of "horse trading" or "under the counter trading" which might take place subsequent to the meeting cannot be denied. 45. Again, Casion's letter dated 28th April, 1998 to the Chairman signifying Casion's consent to the scheme was purported to be signed by its director Onkarnath Rampal. Onkarnath Rampal affirmed an affidavit on 29th June, 1998 stating that the letter was a forgery. Onkarnath Rampal was sent for by this Court on 5th April, 1999 and asked to sign on a blank piece of paper. Onkarnath Rampal affirmed an affidavit on 29th June, 1998 stating that the letter was a forgery. Onkarnath Rampal was sent for by this Court on 5th April, 1999 and asked to sign on a blank piece of paper. The signatures obtained by the Court, on a visual assessment appear to be the same as the signature on the affidavit and differ markedly from the signature on the letter alleged to have been written by Casion. The company at first asserted that Casion was under liquidation and therefore Onkarnath Rampal was incompetent to file any affidavit as Director. The submission is unacceptable since Onkarnath Rampal could always file an affidavit in his personal capacity denying his signature. Ultimately, the company submitted that it did not rely on the letter of Casion. The submission does not detract from the pitfalls which would have to be faced by Court if it does not follow the protective measures legislatively provided for correctly ascertaining the views of the creditors. 46. Take again the case of Marine Containers. It attended the meeting and voted in favour of the scheme. Then it filed an affidavit before the learned Single Judge opposing the scheme. Before us it was stated by Counsel appearing on behalf of Marine Containers that written instructions had been given to him to support the scheme. When and where would this end? Even after the disposal of the matter by the learned Single Judge the parties are vacillating. 47. An unreported judgment of a learned Single Judge of the Karnataka High Court in M/s. Bangalore Plastic Fibre Pvt. Ltd. (In Liquidation) was cited by the company to submit that a meeting need not be held and the views of the creditors can be ascertained by affidavits. In that case no order for holding a meeting was passed. The Court dispensed with the holding of meetings altogether on the application under section 39(1) because of the special circumstances of that case. In the case before us, the Court had directed the holding of a meeting at which the voting weas to take place. The order was given effect and fully worked out. The Court could not then, at the confirmation stage of the proceedings, reopen the voting. The decision in Centron Industrial Alliance Ltd. vs. Prauin Kantilal Vakil and Anr., 55 Com Cases 731, cited by the company also does not support it. The order was given effect and fully worked out. The Court could not then, at the confirmation stage of the proceedings, reopen the voting. The decision in Centron Industrial Alliance Ltd. vs. Prauin Kantilal Vakil and Anr., 55 Com Cases 731, cited by the company also does not support it. There the scheme had been approved but it was said, albeit as a prima facie view, that those who approved the scheme can appear at the final hearing to oppose the application for confirmation of the scheme. While a creditor may be heard on the question of feasibility of a scheme, it cannot subsequently change the statutory pre-conditional proceedings which must exit when the application for sanction is made. Significantly, in the last mentioned case, it was held that once having approved the scheme, the creditor could not ask for its withdrawal. 48. We do not go into the further point raised by Kirloskar that as the votes had been in fact validly cast, a change of mind would amount to a retrospective invalidation of the valid vote which was impermissible in law. 49. We progress this change of opinion or view before the Court, which we finally Court should have, there can be no doubt that the scheme was not approved by the statutory majority as required under section 391(2) and the application of the company should have accordingly been dismissed. 50. The company then claimed that despite the lack of the required majority under section 391(2) the application can be allowed under section 557 of the Act, which provides: "557.(1) In all matters relating to the winding up of a company, the Court may, (a) have agreed to the wishes of the creditors or contributories of the company, as proved to it by any sufficient evidence; (b) if it thinks fit for the purpose of ascertaining those wishes, direct meeting of the creditors or contributories to be called, held and conducted in such manner as the Court directs; and (c) appoint a person to act as Chairman of any such meeting and to report result thereof to the Court. (2) When ascertaining the wishes of creditors, regard shall be had to the value of each creditor's debt. (3) When ascertaining the wishes of the contributories, regard shall be had to the number of votes which may be cast by each contributory". 51. (2) When ascertaining the wishes of creditors, regard shall be had to the value of each creditor's debt. (3) When ascertaining the wishes of the contributories, regard shall be had to the number of votes which may be cast by each contributory". 51. Section 557 is contained in Chapter V of the Act and is applicable when the court is considering whether the company should be wound up or not [See : M. Gordhandas & Co. vs. M.W. Industries, AIR 1971 SC 2600 , 2605]. That is not the issue before the Court now. Besides, section 557 does not provide for a scheme binding on all the creditors or contributories of the company regardless of the wishes of a dissenting minority as provided by section 391(2). 52. The next submission of the company was that the Court could itself modify the scheme without any fresh meeting. This would be true if there were a duly approved scheme before the Court in the first place. This was the view expressed in the case of Bhawnagar Vegetable Products Ltd., (1984) 55 Comp Cases 107(DB). This would also depend upon the nature of the modification. If the modification does not alter the basic structure, such as a change in the class of creditors, the Court will not itself modify the scheme but direct the classes of shareholders to consider the modification. So in Hindustan General Electric Corporation, AIR 1959 Cal 679 , the Company's different classes of shareholders approved a proposal for reduction of its capital at several meetings. A modification of the scheme was necessary because of an obvious illegality in the approved scheme. The Court directed the modification to be considered at the meeting of the different classes of shareholders. The modification was duly approved by the shareholders after which the approved scheme was sanctioned by the Court. 53. Needless to say after sanction of the scheme, the Court has the power under section 392 to modify a sanctioned scheme. In Mansukhlal vs. M.V. Shah, Official Liquidator, (1976) 46 Comp. Cases 279, D.A. Desai-J said that as far as section 392(1) (a) is concerned if the court believes that some modifications are necessary for the effective implementation of the scheme, there is no fetter on its power in making the modifications. In Mansukhlal vs. M.V. Shah, Official Liquidator, (1976) 46 Comp. Cases 279, D.A. Desai-J said that as far as section 392(1) (a) is concerned if the court believes that some modifications are necessary for the effective implementation of the scheme, there is no fetter on its power in making the modifications. "It is true that the court may not be inclined to undertake responsibility of making modifications which would vitally affect different interests affected by the modifications and may have recourse to ascertain their views or may permit them to express their opinion either at a meeting or by any other suitable method, but that is more an act of wisdom rather than a fetter on the power of the Court. The Court's power, subject to the limitation placed by the section, appears to the absolute" (See also S.K. Gupta vs. K.P. Jainl, AIR 1979 SC 734 ). The cases are not authorities for the proposition that the Court can modify a scheme which has not been approved by the requisite majority of the concerned class. 54. The company lastly submitted that the Court should grant the alternative prayer which had been made to the Court by the company viz. "(b) If necessary, the Chairman of the said meeting appointed by this Hon'ble Court be directed to convene and adjourned meeting for the purpose of ascertaining the views of the creditors covered by the said scheme afresh and the Chairman of the said meeting be directed to make a further report to this Hon'ble Court on the result of such voting". 55. This submission of the company is also unacceptable. The meeting has already been held pursuant to the orders passed under section 391(1). There is no scope for, in effect, passing another order for holding an adjourned meeting in this proceeding for re-considering the scheme. The statute does not allow for this. What the company is in effect asking for is a fresh order under section 391(1) on the application presented by it on 18th December, 1997. A meeting cannot now be directed on the financial picture obtaining in 1996-97. The position of the company and the creditors may have changed in the last two years. Several creditors' claims would have increased with the accumulation of interest. A meeting cannot now be directed on the financial picture obtaining in 1996-97. The position of the company and the creditors may have changed in the last two years. Several creditors' claims would have increased with the accumulation of interest. The company has produced its audited balance sheet before us from which it is clear that there have been significant changes in its financial set up. In any event, the exercise would be a futile one unless the Court considers the scheme to be a viable one. 56. The company contended that if one took into consideration the several letters and affidavits filed, it was clear that the majority of the creditors approved the modified scheme and this must be given due weight by the Court in assessing the viability of a scheme. It relied on the observation of Vaisey, J In re: Sussex Brick Co. Ltd., (1961) I Ch 289. "Prima facie the court ought to regard the scheme as a fair one inasmuch as it seems to me impossible to suppose that the court, in the absence of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned". 57. Reliance on the decision is inapposite. The Court cannot in this case assume with any certainty on the basis of letters and affidavits filed in Court that the creditors supporting the scheme would in fact reach the majority required under section 391(2) without giving all creditors due notice and the opportunity to express their approval/disapproval of the scheme before the Court. Furthermore, in the Sussex Brick Company's case the Court was construing section 209 of the English Companies Act, 1948 where the only ground available to a dissentient shareholder to get out of a scheme was to show that it was unfair. The power of the Court under section 391(2) is not limited. The judicial consensus on the power of Court is that the scheme must not only be fair, it must be reasonable and practicable. 58. Most of the authorities cited have dealt with the duty of the Court to determine the viability of the scheme even after it may have been duly approved by the concerned class and would not, strictly speaking, be applicable. 58. Most of the authorities cited have dealt with the duty of the Court to determine the viability of the scheme even after it may have been duly approved by the concerned class and would not, strictly speaking, be applicable. However, accepting the principles enunciated it is clear that because a scheme might deprive minority creditors of their rights, the Court has a duty to satisfy itself that the scheme is a reasonable one. Lindley L.J. In re: Alabama, New Orleans, Texas and Pacific Junction Ry. Co., (1891) 1 Ch. 213, said: "The Court must look at the scheme, and see whether the Act has been 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 of it". Or as said by Bowen, L.J. in somewhat more picturesque fashion: "Now, I have no doubt at all that it would be improper for the Court to be on any class of creditors. If the arrangement cannot reasonably be supported by sensible business people to be for the benefit of that class as such, otherwise the sanction of the Court would be a sanction to what would be a scheme of confiscation. The objective of this section is not confiscation. It is not that one person should be a victim, and that the rest of the body should feast upon his rights. Its object is to enable compromises to be made which are for the common benefit of the creditors as creditors, or for the common benefit of some class of creditors as such". 59. Judged from this point of view, we are of the opinion that the modified schemes does not meet this criterion. Firstly, the class of creditors intended to be covered by the scheme is not only uncertain but inappropriate. The submission of the company that the Court should not consider this aspect of the matter because the ground had not been taken in the Memorandum of Appeal filed by the appellants is untenable. Firstly, the class of creditors intended to be covered by the scheme is not only uncertain but inappropriate. The submission of the company that the Court should not consider this aspect of the matter because the ground had not been taken in the Memorandum of Appeal filed by the appellants is untenable. Even if this were the case, when the Court is in effect determining whether or not to direct the meeting to consider the modified scheme, the issues are as such reopened. Not only will the Court have to be satisfied that the compromise is reasonable, genuine and mala fide, it was also have to consider whether it would be proper to club together the votes of persons with conflicting interests. 60. La Mansukhlal vs. M. V. Shah, Official Liquidator, 46 Company Cases 279 at pages 287-288, it was said: "In convening the meeting, the court has to be careful and keep a watchful eye to see that those who are asked to attend a given meeting have a like interest. In other words, there cannot be a composite meeting of persons having conflicting interests. While convening a meeting of the creditors, it is to be classwise: such as secured creditors, unsecured creditors, creditors having a specified claim or a specified class of creditors or members would deliberate upon the scheme offered for its consideration and by a process of democratic voting express an opinion whether they approve or do not approve." 61. The learned Judge who passed the order under section 391(1) appears to have done so on the basis that the class of creditors concerned were unsecured creditors. This is clear from the order passed by the learned Judge on 11th March, 1998 on the application filed by the company under section 391(6). In allowing the application of the company to stay all proceedings including criminal proceedings against the company, the learned Judge said: "This application has been made in aid •of the application which has been made by the applicant under section 391(1) of the Companies Act, 1956 for convening a meeting a certain section of its unsecured creditors for considering its proposed scheme for payment of their dues...... The section of the unsecured creditors of the applicant proposed to be involved in the said scheme are the inter-corporate depositors as well as the other unsecured creditors and the decree-holders mentioned in the 'Definition' clause of the scheme." It however appears from HDC's notes of argument that according to it the order under section 391 covered secured and unsecured creditors. 62. In fact several of the creditors who are sought to be covered by the scheme are secured creditors in the sense that the inter corporate deposits made by them were secured by shares either in the company or in the company's subsidiaries. Even according to the company at least six of the creditors who are covered by the scheme had made advances to the company against pledge of shares namely: 1. Colgate Palmolive (I) Ltd. 2. Maharastra Apex Corporation 3. Deccan Tobacco Processors 4. Benett Coleman & Co. Ltd; 5. Andhra Pradesh Paper Mills Ltd. 6. Nippon Dendro Ispat Ltd. 63. In our view, the secured creditors should not have been clubbed together with the unsecured creditors. Their interest would not be the same. This is another reason why the scheme could not be sanctioned. "If the creditors and members are not properly classified and if the meeting of the proper class of creditors and members are not separately held, the scheme approved at such meeting cannot be sanctioned, vide Court Practice Note in (1934) Weekly Notes 142. The responsibility for determining what creditors are to be summoned to any meeting constituting a class is of the applicant company and if meetings are incorrectly convened or constituted or an objection is taken to the presence of any particular creditors as having interests competing with the others such objection if successfully taken at the hearing of the petition for sanctioning the scheme the company has take the risk of having it dismissed" (Per Desai J. In re: Mansukhlal and Ahmedabad Mfg. Co. Ltd., 40 Company Cases 819, 873). In fact, as observed in the last mentioned judgment "Generally speaking the creditors of the company should be divided into three different classes, viz., secured creditors, preferential creditors and unsecured creditors" [See also: Mansukhlal vs. M.V. Shah (supra)] 64. Furthermore, the basis for the company's distinction between Inter Corporate Depositors and Term Loan from Corporations is debitable. In fact, as observed in the last mentioned judgment "Generally speaking the creditors of the company should be divided into three different classes, viz., secured creditors, preferential creditors and unsecured creditors" [See also: Mansukhlal vs. M.V. Shah (supra)] 64. Furthermore, the basis for the company's distinction between Inter Corporate Depositors and Term Loan from Corporations is debitable. The dubiousness of the distinction is clear from the case of Peerless General Finance & Investment Co. Ltd. (referred to as Peerless). In the affidavit affirmed on behalf of the company of Aditya Basu Mallick on 9th January, 1998 the company said that Peerless was an inter corporate depositor and that the principal amount of Peerless' ICD was Rs. 16,92,16,704.00. In fact Peerless winding up application was sought to be deferred by the company on the ground that Peerless was covered by the scheme. Yet Peerless was never given any notice of the creditor's meeting and before use the company justified the exclusion by saying that Peerless' had granted a term loan and was therefore excluded. According to the company the only distinction between a term loan by a corporation and an ICD is that the first has a fixed time for repayment. This is, in our opinion, a distinction without a difference. Admittedly the companies who had given term loans have not been included in the scheme. Again the singling out of Inter Corporate Depositors from amongst other unsecured creditors for deferred payment and reduction in the rates of interest appears to be discriminatory. 65. Besides, the subsidiaries of the company also cannot be fairly included along other unsecured creditors. Their interest in supporting a scheme proposed by the company would not be same as the interest of the other unsecured creditors. The primary interest of "a subsidiary/associate would be to support any measure which the company might choose to take without insisting on their rights qua creditors because "before and after the arrangement the directors of the parent company and the subsidiary could have been the same persons with the same outlook and the same judgment" [In re: Hellenic & General Trust Ltd., (1975) 3 All E.R. 382]. Section 370 of the Companies Act, 1956 which deals with loans etc. to companies under the same management recognises this community of interest between the parent and subsidiary companies. Section 370 of the Companies Act, 1956 which deals with loans etc. to companies under the same management recognises this community of interest between the parent and subsidiary companies. Indeed, the modified scheme provides that the subsidiary creditors would not be paid until that other creditors were repaid. The other creditors would be more concerned in protecting their debts and recovering them. In view of this class of interest it would not be reasonable to include the subsidiaries of the company in the same class of other unsecured creditors. 66. Finally, the submission of Kirloskar and HDC that the scheme is speculative is of substance. According to the company the inter corporate deposits and bill discounting outstanding as on 12th December, 1997 with interest reckoned upto 31st March, 1997 was Rs. 2,63,78,93,987/-. Some of the unsecured creditors have disputed the amounts stated by the camp any as due to them. The Chairman in his report has said. "Several disputes were raised regarding the quantum of debts as shown by the company I had tried to resolve the dispute as regards the quantum of debt due to the creditors by directing that far the purpose of the meeting, the value of debts as per the books of accounts of the company would be the basis, except in those cases where a decree or order of the Court is there, in which case, that will be the basis, provided copies thereof are produced." 67. Far the purpose of this judgment we proceed on the basis of the debts admitted by the Company. With the accumulation of interest, now the amount would be about Rs. 400 cares. 68. According to the modified scheme all creditors would be repaid be fare the expiry of 18 months from the effective date - the effective date being the date on which the certified copy of the order of High Court sanctioning the scheme would be filed with the Registrar of Companies, West Bengal. The Court will have to see whether on the figures given there is a reasonable possibility of this happening. 69. The sources far funds to make such arrangement have been stated in clause 8 of the modified scheme. They are :- 1. All monthly profits generated by the camp any subject to a maximum of Rs. 205 cares from the appointed date. 69. The sources far funds to make such arrangement have been stated in clause 8 of the modified scheme. They are :- 1. All monthly profits generated by the camp any subject to a maximum of Rs. 205 cares from the appointed date. The appointed date had been defined in the scheme as 12th December, 1997. 2. All sums received by the company on account of any issue of shares whether by way .of rights or public issue. 3. All sums received by the company through external commercial borrowings; 4. A sum of Rs. 34 crores out of the proceeds to be received by the company on account of sale, if any, of its Consumer Products Division. 5. All money received by the company arising out of sale, if any, of shares held by the company in Shaw Wallace Gelatines Limited subject to a maximum of Rs. 27 crores after release of pledge, if any, in respect thereof. 6. All money received by the company arising out of sale, if any, of its shares in Shaw Wallace Hedges Limited subject to a maximum of Rs.25 crores; 7. All moneys received by the company arising out of sale, if any, of the Agrichem Division of the company subject to a maximum of Rs.25 crores (save and except assets acquired by the company as ------) if and when received. 70. According to the appellants even if .one were to accept the sources as genuine the total amount available would be Rs.156 cares, an amount available is much less. 71. As far as source (1) is concerned, according to the appellants the company's balance sheets did not show that the company would be able to put aside Rs. 25 cores every month out of its profits. The Company sought to counter this criticism by saying that Kirloskar in its scheme had relied on the source. The learned Single Judge rejected this objection by saying: "It is on record that as on date the sum of Rs. 27,83,05,392.26 inclusive of accrued interest in lying in the said account and the same is available for payment to the creditors covered by the said modified scheme. The money lying in the said account is adequate for payment of at least the first instalment as envisaged by the said modified scheme". 72. It is not clear as to the account on which this amount has been accumulated. The money lying in the said account is adequate for payment of at least the first instalment as envisaged by the said modified scheme". 72. It is not clear as to the account on which this amount has been accumulated. There does not appear to be any reference in the Balance Sheet of the company to this. Be that as it may, the amount has now reached to Rs. 36 crores. The Fixed Deposit Receipt was produced before us, and we proceed on the basis that the amount is available for distribution to the creditors covered by the scheme. 73. As far as source (3) was concerned the learned Single Judge did not accept the company's claim because, "It is doubtful whether funds would be available under this head at present having regard to the poor economic condition in the country and the turbulence in the financial market in the region." This finding has not been objected to by the company. 74. As far as source (4) is concerned, despite litigation, the sale of the Consumer Products Division has according to the company effectively been com pelted and the company has received the purchase price from the purchaser and has set aside a sum of Rs. 34 cores, for the purposes of the scheme. The appellants have contended that the money is not available for distribution as the sale was the subject matter of pending litigation. However, for the purposes of this judgment we will accept the claim of the company that the amount of Rs. 34 cores is available for the purposes of the scheme. 75. As far as sources (2), (5), (6) and (7) are concerned, the learned Judge did not come to any specific finding on these except to say: "With the improvement in the market conditions there is not reason why further funds should not be available by issue of rights and new shares and from borrowings from abroad and further by disinvestment of its shares by Shaw Wallace". 76. We regret that in the absence of any material on support of this observation, we are unable to share the optimism of the learned Single Judge. The language used by the company itself such as "if any" or "any" is speculative. There is no time frame fixed for the rights or public issues. 76. We regret that in the absence of any material on support of this observation, we are unable to share the optimism of the learned Single Judge. The language used by the company itself such as "if any" or "any" is speculative. There is no time frame fixed for the rights or public issues. It is not the company's case that effective steps have been taken in this regard. As far as the sales of the company's share holding in its subsidiaries is concerned, in some cases the sale is subject to the release pf pledge. It does not appear that the pledges have agreed to release their pledge. It was submitted by the company before the learned Single Judge that "the disinvestment would be made after the effective date and when the conditions were right in the share market so as to maximise the return." This is an unpredictable and therefore an uncertain eventuality. Besides there are several subsisting orders of injunction restraining the company from dealing with these assets. The Court cannot be asked to prejudge the likely fate of the applications on which the orders were passed. Incidentally the company had made an application earlier (Shaw Wallace Co. Ltd. vs. M/s. Drap Leasing & Finance Pvt. Ltd., C.P. No. 297 of 1996) praying for inter alia a moratorium on the payment of its dues on the basis of a "proposed cash flow plan." The application was rejected on 16th September, 1997. The learned Judge said: "Even if I was to assume, that there were sufficient non-core properties in the disposal of the company, the sale proceeds of which would liquidate a major, portion of its debts, the 'ifs and buts' which could include the restraint on the sale of properties imposed by court, could surely not be interfered within this application, the company, therefore, admittedly did not as on date enjoy the liberty to dispose of its property, even non-core property merely at its will. In the event, therefore, the company was not able to sell its assets as it would have liked to, which possibility in the circumstances was quite real than the spirit of the proposed plan for cash flow would evaporate." 77. This leaves the Court with two out of the seven proposed sources. Compared to the overall admitted indebtedness to the unsecured creditors (excluding the subsidiaries) of about Rs. This leaves the Court with two out of the seven proposed sources. Compared to the overall admitted indebtedness to the unsecured creditors (excluding the subsidiaries) of about Rs. 400 cores which is required to be cleared, the amount of Rs. 70 cores is pitifully small. It would be unreasonable and impractical to allow a scheme based on such figures to survive. 78. Having come to the conclusion that even the modified scheme is not feasible and must fail, it is not necessary for us to consider the bona fides of the company in propounding the scheme nor its conduct. The learned Single Judge had in fact noted the findings of the Company Law Board on an application filed by the Central Government against the company (C.P. No. 46 of 1996) to the following effect: "What is clear from the said judgment is that the Company Law Board found the Board of Directors of Shaw Wallace to be inefficient and inept. There is also a suggestion of dishonesty on the part of the Directors of Shaw Wallace in the said judgment." He went on to say: "It is common knowledge that the Shaw Wallace had not only been beset by internal dissensions amongst it directors but that it had fallen a pray to corporate raiders. Apart from the adverse trading conditions the parlous state in which the Shaw Wallace now finds itself was due to its poor and inefficient management." 79. The company has preferred a cross appeal challenging these observations. We may have had to go into the question had we otherwise found the scheme feasible. But as we do not find the scheme at all workable it is unnecessary to deal with these findings for the purpose of this judgment. The company's cross appeal is accordingly disposed of without any order. 80. This brings us to the appeal from the order passed under section 391(6). On the same day that the order under section 391(1) had been passed i.e. 18th December, 1997 the company moved an application under section 391(6) for stay of all proceedings including criminal proceedings pending the consideration of the scheme, an interim order was passed as prayed for. The interim order was confirmed on 11th March, 1998. This order is the subject matter of HDC's appeal APO No. 212 of 1999. The interim order was confirmed on 11th March, 1998. This order is the subject matter of HDC's appeal APO No. 212 of 1999. At the time of the admission of the appeal on 6.4.98 the Appellate Court modified the order to the extent that criminal proceedings would not be stayed. Section 391(6) provides: "(6) The Court may, at any time after an application has been made to it under this section, stay toe commencement or continuation of any suit or proceeding against 1he company on such terms as the Court thinks fit, until the application is finally disposed of." With the dismissal of the application the order under section 391(6) does not survive. We are therefore not called upon to decide the merits of the order. 81. For the reasons stated both the Appeals of HDC are allowed with costs. The appeal of Kirloskar is also allowed with costs. As the only ground for dismissing Kirloskar's application under section 391 was the sanction of the company's scheme, the application of Kirloskar for sanction of its Scheme be placed before the learned Judge taking Company matter for further directions. Malay Kumar Basu, J.: I agree. 82. Stay prayed for is allowed till 19th July, 1999 in view of the summer vacation of the Supreme Court. 83. After hearing the submission of the parties and the objection of the appellants to the grant of stay, stay is granted till 19th July, 1999. 84. Let a xerox copy of this Judgment duly signed by the Assistant Registrar of this Court be made available to the parties upon their undertaking to apply for and obtain certified copy thereof on payment of usual charges. Ruma Pal, J. Malay Kumar Basu, J. All the appeals are allowed.