judgement:
ivil Appeal Nos.
483 and 1769 of 1969.
Appeal from the Judgment and Order dated 9/10 9 1968 of the Bombay High Court in First Appeal Nos.
844 of 1961 and 245 of 1962.
M. C. Bhandare, J. section Sinha and K. J. John for the Appellants.
R. H. Dhebar, B. V. Desai and M. N. Shroff for the Respondent.
The Judgment of the Court was delivered by TULZAPURKAR J.
These appeals by certificate of fitness granted by the High Court of Judicature at Bombay are directed against that Court 's common judgment and decree dated September 9/10, 1968, passed in two cross appeals being First Appeal Nos.
245 of 1962 and 844 of 1961.
1149 A contract for the construction of an aqueduct across the Alandi River at Mile No. 2 of the Nasik Left Bank Canal of the total value of Rs. 1,07,000/ was granted to the appellant plaintiff (originally a partnership but later a proprietary firm of contractors) by the respondent defendant (the State of Maharashtra) after the former 's tender was accepted on June 17, 1955.
On July 2, 1955 the Executive Engineer issued the work order to the appellant plaintiff directing him to commence the work by July 5, 1955 intimating in clear terms that the stipulated date for starting the work would be reckoned from July 5, 1955.
The formal regular Contract in prescribed From B 2/1 of 1955 56 (exhibit 34) containing the terms and conditions as well as the Schedules, specifications etc.
was executed by the parties on July 12, 1955.
A security deposit of Rs. 4,936/ was kept by the appellant plaintiff with the respondent defendant.
The period for completion of work was fixed as 12 months from the date stipulated for commencement of the work, that is to say, it was expected to be completed on or before July 4, 1956.
It appears that on the ground that the appellant plaintiff had not completed the work as expected within the stipulated time the Executive Engineer by his letter dated August 27, 1956 (exhibit 78) rescinded the said contract with effect from August 16, 1956.
After serving a notice under section 80 of the Civil Procedure Code the appellant plaintiff filed a suit (being Special Civil Suit No. 23 of 1959) on August 28, 1959 in the Court of the Joint Civil Judge, Senior Division, Nasik making a claim for Rs. 65,000/ in the aggregate against the respondent defendant alleging wrongful and illegal recision of the contract on the part of the respondent defendant.
The appellant plaintiff 's case was that the initial fixation of July 5, 1955 as the date for commencement of the work was nominal, that the area where the work was to be done had usually heavy rainfall rendering it impossible to carry out any work from July to November and that, therefore, it was the practice of the Public Works Department to deduct the period of monsoon in case of such type of works and that the appellant plaintiff had been orally informed that this period would be deducted or not taken into account for calculating the period of 12 months under the contract and that on this assurance he had commenced the work towards the end of December 1955.
His case further was that in any event time was not of the essence of the contract, that on account of several difficulties, such as excessive rains, lack of proper road and means of approach to the site, rejection of materials on improper grounds by Government Officers, etc., over which he had no control, the completion of the work was delayed and that the extension of the time which was permissible under the contract had been wrongfully refused by the officers of the respondent defendant.
Ac 1150 cording to him none of these factors had been taken into account by the Government while refusing the extension and the contract was wrongfully rescinded and, therefore, the respondent defendant was liable in damages.
The total claim of Rs. 65,000/ comprised six items (1) Rs. 4,936/ being the amount of security deposit wrongfully forfeited by the respondent defendant, (2) Rs. 10,254/ being the amount due to him for the actual work done by him under Bill No. 1253 dated September 20, 1956 and which had not been paid for, (3) Rs. 7,375/ being the value of the material collected by him on the site for work but which had been rendered useless on account of wrongful recision, the 4th and 5th items sounded in damages, while the last item was interest from date of recision to the date of the suit.
The State of Maharashtra resisted the claim contending that time was of the essence of the contract, that the date fixed for commencement was real and not nominal and the 12 months period was fixed after all aspects of the matter had been taken into account, it was further contended that the appellant plaintiff knew the situation of the site and the so called difficulties, that there was no excuse for him for not doing the work during the months of July to November, that the appellant plaintiff failed to carry out the proportionate work during the periods fixed in the contract and that since the appellant plaintiff had rendered himself incompetent to complete the work in proper time it had to rescind the contract and the recision was proper and for adequate reasons; it was further contended that the State was entitled to forfeit the security deposit which it did on the date when the contract was rescinded.
The several items claimed by the appellant plaintiff were denied by the State.
It was denied that the material of the value of Rs. 7,375/ remained on the site or that it was responsible for its non removal from the site.
Regarding items 4 and 5 the State denied its liability to pay the same as it was the appellant plaintiff who had committed the breach of the contract.
As regards the amount due under Bill No. 1253 dated September 20, 1956 for the actual work done, it was contended that the State had to deduct the amount of penalty leviable under the contract and for the actual cement supplied to the appellant plaintiff and after making deductions in that behalf only a sum of Rs. 700/ would be due to the appellant plaintiff.
On a consideration of the documentary evidence including the terms and conditions of the contract (exhibit 34) and the oral evidence led by the parties, the learned trial Judge held that the date July 5, 1955 fixed as the date for commencement of the work was not nominal but that time was not of the essence of the contract between the 1151 parties, that the respondent defendant (State Government) had wrongfully rescinded the contract, that the appellant plaintiff was entitled to damages but that he had not established the two items claimed as damages and he was entitled to a nominal sum of Rs. 120/ as damages.
He further held that since the recision of the contract was wrongful the State was not entitled to forfeit the security deposit nor levy any penalty.
He accordingly decreed the appellant plaintiff 's claim in respect of refund of security deposits and as regards the amount of Bill No. 1253 dated September 20, 1956 for actual work done he held that a sum of Rs. 5,845/ only would be due to him after giving credit for Rs. 4,409/ due from the appellant plaintiff to the State.
He accordingly decreed the appellant plaintiff 's suit to the extent of Rs. 10,901/ with interest thereon at 6% per annum from the date of recision till date of suit and allowed proportionate costs to him.
Two appeals were preferred against the aforesaid decree of the trial court, one by the appellant plaintiff in respect of the claims that had been disallowed (First Appeal No. 245 of 1962) and the other by the State in respect of the claims allowed against it (First Appeal No. 844 of 1961).
Curiously enough the High Court did not decide the main issue that arose between the parties, namely, whether time was of the essence of the contract, as it took the view that a decision on that question was really unnecessary for disposal of the appeals.
It proceeded to decide the appeals on the assumption that time was not of the essence of the contract by considering the question whether the recision of the contract by the State could be regarded as mala fide or so unreasonable that it must in the place of the judgment of the officers concerned substitute its own judgment and hold that the recision was wrongful.
The High Court observed that even the appellant plaintiff had not alleged any mala fide on the part of any of the officers of the State but had pressed into service five or six factors the non consideration whereof by the respondent defendant rendered the recision of the contract arbitrary, unreasonable and, therefore, unjustified.
After discussing each one of those five or six factors the High Court held that some of them had not been proved by the appellant plaintiff while others did not head to the inference that the recision of the contract was arbitrary, unreasonable or unjustified.
It found that by about July 21, 1956 (vide exhibit Engineer 's letter exhibit 74) the appellant plaintiff had done only 1/3rd of the contract work and that in the circumstances the appellant plaintiff could not have completed the work even within the next three months and, therefore, the respondent 's officers had rightly rescinded the contract and, therefore, it was the appellant plaintiff and not the respondent defendant who had committed a breach of the contract.
However, the High Court took the 1152 view that for such breach on the part of the appellant plaintiff, the respondent defendant, on a reading of the cls.
2 and 3 of the Conditions of Contract, was not entitled both to levy compensation and also to forfeit the security deposit.
Accordingly, the High Court upheld the forfeiture of the security deposit made by the respondent defendant and while modifying the trial court 's decree it confirmed it only to the extent of Rs. 5,845/ , being the amount due to the appellant plaintiff for the work actually done by him under Bill No. 1253 and which had not been paid.
In the result, the appellant plaintiff 's appeal was dismissed and that of the State was partly allowed with appropriate order of proportionate costs.
In support of the present appeal counsel for the appellant plaintiff raised two or three contentions.
In the first place he contended that the High Court was in error in not deciding the main issue whether the time was of the essence of the contract or not ? He urged that the said issue could not be avoided in the manner done by the High Court, for, if time was not of the essence of the contract then just before the expiry of the 12 months ' period or immediately after its expiry it was up to the respondent defendant to grant some reasonable time to the appellant plaintiff for completing the work undertaken and make the same the essence of the contract and only if the work was not completed by the appellant plaintiff within that time the contract could have been rescinded on the ground that the appellant plaintiff had committed a breach of a contract.
According to him such course of action on the part of the respondent defendant was obligatory, when the initial period of 12 months was not of the essence, especially when the request of the appellant plaintiff for extension of time was pending before the concerned officers of the Government since before the expiry of the initial period.
He contended that instead of adopting the aforesaid course the respondent defendant had without making time of the essence of the contract rescinded the same with effect from August 16, 1956 by a letter dated August 27, 1956 (exhibit 78), which recision must be regarded as wrongful and illegal.
Secondly counsel contended that the High Court further erred in considering the question whether the recision of the contract by the State was either mala fide or wholly unreasonable and, therefore, unjustified.
He pointed out it was not the appellant plaintiff 's case that the recision was mala fide and, according to him, the question was not whether the recision of the contract on the part of the respondent defendant was unreasonable, and, therefore, unjustified but whether the respondent defendant was entitled in law to rescind the contract in the manner done when time was not of the essence of the contract.
He further urged that the High Court had clearly erred in assuming that the appellant plaintiff 1153 could not have completed the work even within the next three months and, therefore, the contract was rightly rescinded by the respondent defendant.
He, however, fairly stated that even if this Court held in his favour that the recision was wrongful and, therefore, the respondent defendant had committed a breach he would merely press for the restoration of the decree passed by the trial Court and not press any other item forming the subject matter of the original claim in the suit.
On the other hand, counsel for the respondant defendant sought to support the judgment and decree of the High Court on both the grounds first that time was of the essence of the contract having regard to the express provision contained in cl.
(2) of the "Conditions of Contract" and, therefore, on appellant plaintiff 's failure to complete the same within the stipulated time the recision of the contract was legal and justified and secondly, that even if time was not of the essence of the contract, having regard to the circumstances the High Court rightly came to the conclusion that the recision of the contract by the respondent defendant could not be regarded as unreasonable or unjustified and that, therefore, the appellant plaintiff being in breach the security deposit had been rightly forfeited.
The first question that arises for our consideration, therefore, is whether time was of the essence of the contract that was executed between the parties on July 12, 1955 (exhibit 34).
It cannot be disputed that question whether or not time was of the essence of the contract would essentially be a question of the intention of the parties to be gathered from the terms of the contract.
The contract in the instant case is for the construction of an aqueduct across the Alandi River at Mile No. 2 of the Nasik Left Bank Canal and unquestionably 12 months ' period commencing from the date of the commencement of the work had been specified within which the construction had to be completed by the appellant plaintiff.
Indisputably, in the work order dated July 2, 1955 the Executive Engineer had directed the appellant plaintiff to commence the work by July 5, 1955 intimating in clear terms that the stipulated date for starting the work would be reckoned from July 5, 1955.
Both the trial court as well as the High Court have found that mentioning of July 5, 1955 as the date for starting the work was not nominal but was real date intended to be acted upon by the parties.
It is, therefore, clear that 12 months ' period mentioned for the completion of the work was to expire on July 4, 1956.
The question is whether this period of 12 months so specified in the contract was of the essence of the contract or not ? On the one hand, counsel for the appellant plaintiff contended that the contract being analogous to a building contract the period of 12 months would not 1154 ordinarily be of the essence of the contract as the subject matter there of was not such as to make completion to time essential, that an agreement to complete it within reasonable time would be implied and that reasonable time for completion would be allowed.
On the other hand counsel for the respondent defendant contended that time had been expressly made of the essence of the contract and in that behalf reliance was placed upon cl.
(2) of the "Conditions of Contract" where not only time was stated to be of the essence of the contract on the part of the contractor but even for completion of proportionate works specific periods had been specified and, therefore, the appellant plaintiff 's failure to complete the work within the stipulated period entitled the respondent defendant to rescind it.
In the latest 4th edn. of Halsbury 's Laws of England in regard to building and engineering contracts the statement of law is to be found in Vol. 4, Para 1179, which runs thus: "1179.
Where time is of the essence of the contract.
The expression time is of the essence means that a breach of the condition as to the time for performance will entitle the innocent party to consider the breach as a repudiation of the contract.
Exceptionally, the completion of the work by a specified date may be a condition precedent to the contractor 's right to claim payment.
The parties may expressly provide that time is of the essence of the contract and where there is power to determine the contract on a failure to complete by the specified date, the stipulation as to time will be fundamental.
Other provisions of the contract may, on the construction of the contract, exclude an inference that the completion of the works by a particular date is fundamental, time is not of the essence where a sum is payable for each week that the work remains incomplete after the date fixed, nor where the parties contemplate a postponement of completion.
Where time has not been made of the essence of the contract or, by reason of waiver, the time fixed has ceased to be applicable, the employer may by notice fix a reasonable time for the completion of the work and dismiss the contractor on a failure to complete by the date so fixed." (Emphasis supplied) It will be clear from the aforesaid statement of law that even where the parties have expressly provided that time is of the essence of the contract such a stipulation will have to be read along with other 1155 provisions of the contract and such other provisions may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental, for instance, if the contract were to include causes providing for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of the time provided in the contract such clauses would be construed as rendering ineffective the express provision relating to the time being of the essence of contract.
The emphasised portion of the aforesaid statement of law is based on Lamprell vs Billericay Union, Webb vs Hughes and Charles Rickards Ltd. vs Oppenheim.
It is in light of the aforesaid position in law that we will have to consider the several clauses of the contract exhibit 34 in the case.
The material clauses in this behalf are cls.
2 and 6 of the "Conditions of Contract" which run as follows: "Clause 2: The time allowed for carrying out the work as entered in the tender shall be strictly observed by the contractor and shall be reckoned from the date on which the order to commence work is given to the contractor.
The work shall throughout the stipulated period of the contract be proceeded with, with all due diligence (time being deemed to be of the essence of the contract on the part of the contractor) and the contractor shall pay as compensation an amount equal to one per cent or such smaller amount as the Superintending Engineer (whose decision in writing shall be final) may decide, of the amount of the estimated cost of the whole work as shown by the tender for every day that the work remains uncommenced, or unfinished, after the proper dates.
And further to ensure good progress during the execution of the work, the contractor shall be bound, in all cases in which the time allowed for any work exceeds one month, to complete.
1/4 of the work in 1/4 of the time 1/2 of the work in 1/2 of the time 3/4 of the work in 3/4 of the time".
"Clause 6: If the contractor shall desire an extension of the time for completion of the work on the ground of his having been unavoidably hindered in its execution or 1156 on any other ground, he shall apply in writing to the Executive Engineer before the expiry of period stipulated in the tender or before expiry of 30 days from the date on which he was hindered as aforesaid or on which the cause for asking for extension occurred, whichever is earlier and the Executive Engineer, may if in his opinion there are reasonable grounds for granting an extension, grant such extension as he thinks necessary or proper.
The decision of the Executive Engineer in this matter shall be final.
" Two aspects emerge very clearly from the aforesaid two clause.
In the first place under cl.
6 power was conferred upon the Executive Engineer to grant extension of time for completion of the work on reasonable grounds on an application being made by the contractor (appellant plaintiff) in that behalf; in other words, in certain contingencies parties had contemplated that extension of time would be available to the contractor.
Such a provision would clearly be inconsistent with parties intending to treat the stipulated period of 12 months in cl. 2 as fundamental.
Similarly, in cl. 2 itself provision was made for levying and recovering penalty/compensation from the appellant plaintiff at specified rates during the period the work shall remain unfinished after the expiry of the fixed date.
Such provision also excludes the inference that time (12 months period) was intended to be of the essence of the contract.
Further with regard to the provision that is to be found in cl.
2 whereunder a time schedule for proportionate work had been set out (namely, 1/4 of the work in 1/4 of the time, 1/2 of the work in 1/2 of the time and 3/4 of the work in 3/4 of the time), the evidence of the Superintending Engineer Pandit (D.W. 1) is very eloquent.
In para 13 of his deposition this is what he has stated: "In the agreement (exhibit 3.1) the rate of work is based on the valuation 1/4th time mentioned means 1/4th in 12 months.
The suit contract is for Rs. 1,07,000/ .
1/4th work means the work of about Rs. 27,000/ .
It is not possible to do the work of Rs. 27,000/ in 1/4th time as the days were rainy.
This was not reasonable.
" The witness in para 12 of his deposition has also given the following admission: "It is not specifically mentioned in the agreement (exhibit 34), that the suit work was urgent and that it was to be completed within 12 months.
In this agreement (exhibit 34) 1157 there are the clauses of imposing a penalty and extension of time." Having regard to the aforesaid material on record, particularly the clauses in the agreement pertaining to imposition of penalty and extension of time it seems to us clear that time (12 months period) was never intended by the parties to be of the essence of the contract.
Further from the correspondence on the record, particularly, the letter (exhibit 78) by which the contract was rescinded it does appear that the stipulation of 12 months ' period was waived, the contractor having been allowed to do some more work after the expiry of the period, albeit at his risk, by making the recision effective from August 16, 1956.
Once either of the aforesaid conclusions is reached it would be difficult to accept the High Court 's finding that the recision of the contract on the part of the respondent defendant was proper and justified on the basis that the same was neither shown to be mala fide nor unreasonable.
It must be observed that it was never the case of the appellant plaintiff that the recision of the contract on the part of the respondent defendant was mala fide.
Counsel for the appellant plaintiff further pointed out and, in our view, rightly that the five or six factors, namely, (1) the contract having been given at the thresh old of monsoon, the period of monsoon (4 months) ought not to have been reckoned, (2) absence of proper road and approach to the work site during the rainy season and a couple of months thereafter, (3) unreasonable rejection by the Government Officers of material brought on the site, which material was later on allowed to be used, (4) difficulty in procuring labour due to malarious climate at the site, (5) delay in issuing quarry permit and (6) extra time taken for doing extra work that was entrusted ought to have been taken into account were put forward by the appellant plaintiff merely for the purpose of showing that the refusal to extend the time by the Superintending Engineer although recommended by the S.D.O. and Executive Engineer was unreasonable and not for showing that the recision of the contract was unreasonable or unjustified.
In our view, the question would not be whether the recision of the contract was unreasonable and, therefore, unjustified but whether the recision of the contract in the circumstances of the case was wrongful and illegal.
If time was not of the essence of the contract or if the stipulation as to the time fixed for completion had, by reason of waiver, ceased to be applicable then the only course open to the respondent defendant was to fix some time making it the essence and if within the time so fixed the appellant plaintiff had failed to complete the 1158 work the respondent defendant could have rescinded the contract.
The High Court has taken the view that the contract was rightly rescinded by the respondent defendant because by about July 21, 1956 (vide letter exhibit 74) the appellant plaintiff had done work of the value of Rs. 35,000/ as against the tender value of Rs. 1,07,000/ , that is to say, only 1/3rd of the total work had been completed and, therefore, even though time was not of the essence of the contract, the appellant plaintiff, in the circumstances, could not have completed the work even within the next three months.
In our view, this approach adopted by the respondent defendant and upheld by the High Court is not correct.
Long before the expiry of the period of 12 months the appellant plaintiff had by his letter dated June 6, 1956 (exhibit 68) requested for extension of period of completion up to the end of December, 1956; this request was repeated by another letter dated June 23, 1956 (exhibit 69).
May be the reasons or grounds on which the request was made may not have appealed to the Superintending Engineer but some reasonable time making it the essence ought to have been granted.
In this behalf it may be stated that the S.D.O. by his letter (exhibit 69) had recommended extension upto December 1956 as sought while by his letter dated June 23, 1956 (exhibit 70) addressed to the Superintending Engineer, the Executive Engineer had recommended that extension of time up to October 30, 1956 may be granted to the appellant plaintiff with clear intimation that if he failed to complete the work by then, the maximum penalty allowable under cl. 2, namely, 10% of the cost of the work will be inflicted on him, but the recommendation did not receive approval of the Superintending Engineer.
It appears that the appellant plaintiff had an interview with the Superintending Engineer on August 24, 1956 when a written representation (exhibit 99) was handed over and the whole position was sought to be explained to the Superintending Engineer but within three days of the interview by the letter dated August 27, 1956 (exhibit 78) the contract was rescinded and the full security deposit was forfeited to Government.
It will thus appear clear that though time was not of the essence of the contract, the respondent defendant did not fix any further period making time the essence directing the appellant plaintiff to complete the work within such period; instead it rescinded the contract straightaway by letter dated August 27, 1956.
Such recision on the part of the respondent defendant was clearly illegal and wrongful and thereby the respondent defendant committed a breach of contract, with the result that there could be no forfeiture of the security deposit.
In our view, therefore, the trial court was right in coming to the conclusion that the appellant plaintiff was entitled to a refund of their full security deposit of Rs. 4,936/ as also 1159 to Rs. 5845/ being the balance of their Bill No. 1253 dated September 20, 1956 for work actually done by them and not paid for and nominal damages of Rs. 120/ .
The appellant plaintiff was also entitled to interest on the aforesaid sums and costs of suit as directed by the trial court.
In the result we allow the appeal, set aside the common judgment and decree in F.A. No. 844 of 1961 passed by the High Court and restore that of the trial court.
The appellant plaintiff will get costs of this appeal as also costs of F.A. No. 844 of 1961.
The High Court 's decree dismissing F.A. No. 245 of 1962 is confirmed.
P.B.R. Appeal allowed.

summary/full:
The appellant entered into a contract with the respondent for the execution of a work the essential term of which was that the contract should be completed in 12 months from the commencement of the work.
On the ground that the appellant had not completed the work within the stipulated time the respondent rescinded the contract.
In his suit for damages for illegal and wrongful recision of the contract the appellant claimed that the date for commencement of the work was merely nominal and that in any case time was not of the essence of the contract.
The appellant also alleged that on account of several difficulties such as excessive rains in the area, lack of proper road and means of approach to the site, rejection of materials on improper grounds by the Government officers, completion of the work was delayed, extension of time was wrongfully refused by the officers of the Government, and that none of these factors had been taken into account by the Government while refusing to give extension of time, and in ultimately rescinding the contract.
Holding that time was not of the essence of the contract the trial Court decreed the suit, but disallowed certain claims of the appellant.
On appeal by both sides the High Court, without deciding the question whether time was of the essence of the contract, held that the recision of the contract was not arbitrary and unreasonable or unjustified.
On further appeal to this Court it was contended on behalf of the appellant that (i) the High Court was in error in not deciding the main question whether or not time was essence of the contract; and (ii) it was not the appellant 's case that the recision was mala fide and that, therefore, the High Court erred in considering that question.
Allowing the appeal, ^ HELD: The question whether or not time was of the essence of the contract would essentially be a question of the intention of the parties to be gathered from the terms of the contract.
Even where the parties have expressly provided that time is of the essence of the contract such stipulation would have to be read alongwith other provisions of the contract and such other provisions may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental.
For instance if the contract were to include clauses providing 1148 for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of the time provided in the contract such clause would be construed as rendering ineffective the express provision relating to the time being of the essence of the contract.
[1155A B] Halsbury 's Laws of England, Vol.
4 p. 1174 referred to.
(i) In the instant case, having regard to the terms of the contract particularly the clauses pertaining to the imposition of penalty and extension of time, time was never intended by the parties to be of the essence of the contract.
The letter by which the contract was rescinded clearly waived the stipulation of 12 months ' period, the contractor having been allowed to do some more work after the expiry of the period.
[1157B] (ii) The approach adopted by the respondent and upheld by the High Court was not correct.
Long before the expiry of the period of 12 months the appellant had requested for extention of the period of completion.
Even if the grounds made out by the appellant were not agreeable to the Superintending Engineer some reasonable time making it the essence of the contract ought to have been granted.
Instead of making time of the essence at some stage or the other, the respondent rescinded the contract which was clearly illegal and wrongful.
[1158C] (iii) It was never the case of the appellant that the recision of the contract was mala fide.
The various reasons given by the appellant for delay in executing the work were put forward merely for showing that the refusal to extend time by the Superintending Engineer was unreasonable or unjustified.
The question was not whether the recision of the contract was unreasonable and, therefore, unjustified but whether the recision was wrongful and illegal.
If time was not of the essence or if the stipulation as to the time fixed for completion had, by reason of the waiver, ceased to be applicable then the only course open to the respondent was to fix some time making it the essence and if within the time so fixed the appellant had failed to complete the work, the respondent could have rescinded the contract.
[1157D G]


judgement:
Civil Appeal No. 1217 of 1976.
Appeal by Special Leave from the Judgment and Order dated 16 7 1976 of the Delhi High Court in Company Appeal No. 15/76.
Y. section Chitale, K. R. Khaitan, B. Mohan, and Praveen Kumar for the Appellants.
P. R. Mridul, R. L. Roshan, H. K. Puri and Vijai K. Bahl for Respondent No. 1.
Pramod Dayal and section K. Gupta for Respondent No. 2.
R. M. Gupta and K. N. Bhat for Intervener/Dena Bank.
A few facts will put the problem raised in this appeal in focus and proper perspective.
M/s. Delhi Flour Mills Ltd. ( 'DFM ' for short) was the holding company of which IHI was the subsidiary.
Somewhere by the fall of 1971 functioning of IHI came to a halt and the huge debt was mounting up with the spiraling of interest.
1189 As the shares of DFM were closely held by relations of respondent No. 1 referred to as 'Jain group ' and as there were fratricidal disputes in Jain family culminating into a litigation in the High Court of Delhi, IHI languished for want of attention.
In the meantime M/s. Indian Smelting & Refining Co. Ltd. ( 'petitioning creditor ' for short) filed a winding up petition against IHI in 1975 alleging that IHI was heavily indebted and was unable to pay its debts as and when they became due.
After the dispute in the Jain family was resolved somewhere in 1974, a situation emerged in which one R. P. Jain and the members of his family acquired controlling interest in the holding company DFM.
Once R. P. Jain came into saddle, the DFM as holding company proposed a scheme of compromise/arrangement between IHI and its unsecured creditors and after the scheme was approved, the proponent of the scheme submitted Company Petition No. 86/74 to the Company Court for according sanction to the scheme and by Order dated 15th October 1975 the scheme was sanctioned.
Sometime after the scheme was sanctioned, DFM transferred its 44,000 shares of IHI and its claim to the tune of Rs. 23 lacs recoverable from IHI, to the present appellants section K. Gupta and Mrs. Dropadi Gupta (referred to as 'appellants ' hereafter).
Thereafter the appellants filed Company Application No. 193/76 requesting the Court to make appropriate modification and/or granting further direction for effectively implementing the scheme sanctioned by the Court in respect of IHI by substituting the appellants in place of DFM as proponents of the scheme and imposing upon them the liability to implement the scheme under the supervision of the Court.
A little while before this application was moved, respondent K. P. Jain filed Company Application No. 190/76 purporting to be under section 392 of the , inviting the Court for the reasons mentioned in the application to hold that the scheme sanctioned by the Court cannot be worked satisfactorily with or without modification and therefore an order winding up the Company should be made.
The Company Judge by his two orders in the two aforementioned applications dated 26th April 1976 granted the application of the appellants and modified the scheme by substituting the appellants as proponents of the scheme and simultaneously rejected the application of the respondent K. P. Jain for winding up the Company.
Respondent Jain preferred two appeals being Company Appeals Nos. 15 and 15/76 under section 483 of the .
Both these appeals came up before a Division Bench of the Delhi High Court, and they were disposed of by a common judgment.
The Division 1190 Bench was of the opinion that substitution of a new propounder in a scheme already sanctioned by the Court in place of the original propounder of the scheme was a change of a basic nature which would not be comprehended in the expression 'modification ' as under section 392 and, therefore, the Company Judge could not have granted such a substitution of the propounder of the scheme without referring back the proposed modified scheme to the creditors who had approved the original scheme.
It was further of the opinion that though the transfer of 44,000 shares of IHI held by DFM in favour of the appellants may be complete as between the transferor and the transferee, the same would not clothe the appellants with the right of a member unless their names were put on the register of members maintained by IHI and that the same having not been done, the appellants were not members of IHI.
It was further of the opinion that the debt owed by IHI to DFM was not assigned according to law in favour of the appellants and, therefore, they were not creditors, and in view of the language of section 391 of the , the appellants being neither members nor creditors of IHI, had no locus standi to move an application under section 392 for modification of the scheme because in the opinion of the Court section 391 controls section 392 and either a member or a creditor or in the case of a company being wound up, a liquidator alone can file an application for modification.
In accordance with this opinion, the appeal preferred by respondent No. 1 being Company Appeal No. 15/76 challenging the order of the Company Judge which granted modification/substitution of appellants as proponents was allowed and the application of the appellants for substitution was rejected.
The Division Bench dismissed Company Appeal No. 16/76 preferred by respondent Jain against the order of the Company Judge refusing to make an order for winding up of the Company observing that even while dismissing the application for substitution of the present appellants, the Court was not in a position to come to an affirmative finding that the scheme cannot be satisfactorily worked with or without modification and the matter should be left to the Company Judge as to what future course of action should be taken in the matter.
The appellants preferred the present appeal by special leave against the decision of the Division Bench in Company Appeal No. 15/76 by which their application for substitution/modification was rejected.
Mr. section section Ray, learned counsel for the appellants urged that the Court committed a basic error in holding that the application for 1191 substitution/modification was not maintainable because the appellants were neither members nor creditors of the Company, IHI, thereby importing a narrower concept in respect of the locus standi of the present appellants to move the Court under section 392 which restrictive approach would run counter to the power of widest amplitude conferred on the Court, namely, even to make modification suo motu or on the application of a person interested in the affairs of the Company.
He further urged that the appellate Court clearly misdirected itself when it went in search of the meaning of the expression 'modification ' in section 392 by ransacking dictionaries completely overlooking the fact that in section 2(29) of the the words 'modify ' and 'modification ' have been defined and it is a well known canon of construction that unless the context otherwise requires, the definition of an expression given in a statute shall govern the meaning of the expression wherever used in the same statute.
It was urged that the words "modify ' and 'modification ' for the purpose of section 392 would include the making of additions and omissions and according to him additions and omissions in the context of section 392 would and could only mean additions and omissions to the sanctioned scheme because section 392 operates at a stage subsequent to the sanctioning of the scheme under section 391(2).
It was further urged that if the words 'modify ' and 'modification ' would include additions and omissions, the Court would have plenary power to substitute one proponent for the other if in the opinion of the Court the scheme cannot be worked satisfactorily without the necessary modification and in all such cases it would be imprudent to hold that the Court will have to fall back to the cumbersome procedure of section 391 over again delaying for a considerable period the vital requirement of restarting a sick unit.
It was submitted that the Court committed a fallacy in importing the concept of Constitution while interpreting a provision of the .
Mr. Lal Narain Sinha on the other hand on behalf of the respondents, while conceding that in an emergency the Court can act on the application of any person, ordinarily the Court would act on the application of a member or creditor of the Company and in this blurred area some light is shed by the provision contained in Rule 87 of the Companies (Court) Rules, 1959.
Proceeding further, it was urged that sections 391 and 392 constitute a code and, therefore, if there was a qualification for proposing a scheme under section 391, the same qualification should be read in section 392 and any other approach would be self defeating.
It was submitted that viewed from this angle, only a member or a creditor can maintain an application under section 392 and as the appellants are neither members nor 1192 creditors of the Company, they have no locus standi to maintain the petition.
He further urged that putting too wide a construction on the expression 'modification ' in section 392(2) would lead to such a startling result as could not have been within the contemplation of the legislature and that, therefore, in order to arrive at a true meaning of word 'modification ', the Court should bear in mind the purpose and object behind using the expression or enacting the provision in which the expression is found.
It was also contended that substitution of the original sponsor amounts to repudiation of the contract which the scheme represents between the proponent of the scheme and the Company and another person cannot be substituted in place of the original contracting party without the consent or affirmance of the second party to the contract and hence such a thing cannot be brought about by way of a modification under section 392.
The word 'modification ' or 'modify ', therefore, should be given a restricted meaning looking to the context in which it is used in section 392 as has been done by the High Court.
Principal contentions advanced on either side turn upon the right to make an application and the power of the Court to grant an application under section 392 of the .
Section 392 finds its place in Chapter V of the bearing fascicules 'Arbitration, Compromise, Arrangements and Reconstructions '.
Section 391 enables a member or a creditor of the Company or a Company which is being wound up, its liquidator, to make an application to the Court proposing a compromise or arrangement between the company and its creditors or any class of them or between the Company and its members or any class of them and seeking directions of the Court to convene a meeting of each class of creditors and/or each class of members to whom the compromise or arrangement is offered.
On the Court 's giving the directions, the meeting would be convened in which the proposed scheme of compromise and/or arrangement would be submitted for consideration and each class will have to vote upon it and if the scheme is accepted by a majority in number representing three fourths in value of the creditors or members or class of members as the case may be, present and voting either in person or where proxy is allowed, by proxy, such approved scheme has to be placed before the Court for sanction of the Court as envisaged in section 391(2).
Then comes section 392 which may be reproduced in extenso: "392.
Power of High Court to enforce compromises and arrangements (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it 1193 (a) shall have power to supervise the carrying out of the compromise or arrangement; and (b) may, at any 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.
(2) If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act".
At the outset it may be mentioned that though a large number of provisions of the , are in pari materia with the provisions of Companies Act, 1948, of the U.K. ( 'U.K. Act ' for short), there is no provision analogous to section 392 in the U.K. Act.
The Court under the U.K. Act has no power to modify the scheme either at the time when it is offered for its sanction or at any time subsequent thereto.
The Parliament has in its wisdom, conferred a power of wide amplitude on the High Court in India to provide for its continuous supervision of the carrying out of compromise and/or arrangement and also the consequential power to make the supervision effective by removing the hitches, obstacles or impediments in the working of compromise or arrangement by conferring power to give such direction in regard to any matter or for making such modification in the compromise or arrangement as it may consider necessary for the proper working of the compromise and/or arrangement.
Sub section
(2) confers power on the Court to act under section 392 either on its own motion or on the application of any person interested in the affairs of the company.
What falls for consideration is the true meaning of the expression 'on the application of any person interested in the affairs of the company '.
The High Court was of the opinion that the appellants have no locus standi to maintain an application for modification/substitution of themselves as proponents of the scheme with a liability to implement the scheme as they were neither members nor creditors of the Company and according to the High Court, if a scheme of compromise or arrangement cannot be proposed by any one except a member or creditor, ipso facto, an application for modification of such scheme sanctioned by the Court under section 391(2) could not be made by any one other than a member or a creditor.
1194 Section 391 envisages a compromise or arrangement being proposed for consideration by members and/or creditors of a Company liable to be wound up under the .
Compromise or arrangement has to be between creditors and/or members of the Company and the Company, as the case may be.
It was always open to the Company to offer a compromise to any of the creditors or enter into arrangement with each of the members.
The scheme in this case is essentially a compromise between the company and its unsecured creditors.
The scheme when sanctioned does not merely operate as an agreement between the parties but has statutory force and is binding not only on the company but even dissenting creditors or members, as the case may be.
The effect of the sanctioned scheme is "to supply by recourse to the procedure thereby prescribed the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity" (see J. K. (Bombay) Pvt.
Ltd., vs New Kaiser I Hind Spg.
& Wvg.
Co. Ltd. & Ors.
etc.(1).
Further section 391(1) itself by a specific and positive provision prescribes who can move an application under it.
Only the creditor or member of that company or a liquidator in the case of a company being wound up is entitled to move an application proposing a compromise or arrangement.
By necessary implication any one other than those specified in the section would not be entitled to move such an application.
When a scheme is being considered by the Court, in all its ramifications, for according its sanction, it would not be possible to com prehend all situations, eventualities and exigencies that may arise while implementing the scheme.
When a detailed compromise and/or arrangement is worked out, hitches and impediments may arise and if there was no provision like the one in section 392, the only obvious alternative would be to follow the cumbersome procedure as provided in section 391(1), viz., again by approaching the class of creditors or members to whom the compromise and/or arrangement was offered to accord their sanction to the steps to be taken for removing such hitches and impediments.
This would be unduly cumbersome and time consuming and, therefore, the legislature in its wisdom conferred power of widest amplitude on the High Court under section 392 not only to give directions but to make such modification in the compromise and/or arrangement as the Court may consider necessary, the only limit on the power of the Court being that such directions can be given and modifications can be made for the proper working of the compromise and/or arrangement.
The purpose underlying section 392 is to provide for effective working of the compromise and/or arrangement once sanctioned and 1195 over which the Court must exercise continuous supervision[see section 392(1)], and if over a period there may arise obstacles, difficulties or impediments, to remove them, again, not for any other purpose but for the proper working of the compromise and/or arrangement.
This power either to give directions to overcome the difficulties or if the provisions of the scheme themselves create an impediment, to modify the provision to the extent necessary, can only be exercised so as to provide for smooth working of the compromise and/or arrangement.
To effectuate this purpose the power of widest amplitude has been conferred on the High Court and this is a basic departure from the scheme of the U.K. Act in which provision analogous to section 392 is absent.
The sponsors of the scheme under section 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme of compromise or arrangement to make alterations and modifications as proposed by the Court.
But the Legislature foreseeing that a complex or complicated scheme of compromise or arrangement spread over a long period may face unforeseen and unanticipated obstacles, has conferred power of widest amplitude on the Court to give directions and if necessary, to modify the scheme for the proper working of the compromise or arrangement.
The only limitation on the power of the Court, as already mentioned, is that all such directions that the Court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement.
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 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.
1196 In this context the observations of the Gujarat High Court, extracted hereunder, in Mansukhlal vs M. V. Shah,(1) can be referred to with advantage as it precisely lays bare the ambit and width of Court 's power under section 392: "The framers of the company law in India have conferred statutory powers on the High Court to make such modifications in the compromise or arrangement as the Court may consider necessary for the proper working of the compromise and arrangement.
The power of the widest amplitude has been conferred on the court under section 392(1) (b) and the width and the magnitude of the power can be gauged from the language employed in section 392 (1) (a) which confers a sort of a supervisory role on the court during the period the scheme of compromise or arrangement is being implemented.
Reading clauses (a) and (b) of sub section (1) of section 392, it appears that Parliament did not want the court to be functus officio as soon as the scheme of compromise and arrangement is sanctioned by it.
The Court has a continuing supervision over the implementation of compromise and arrangement.
Unenvisaged, unanticipated, unforeseen or even unimaginable hitches, obstruction and impediments may arise in the course of implementation of a scheme of compromise and arrangement and if on every such occasion, sponsors have to go back to the parties concerned for seeking their approval for a modification and then seek the approval of the court, it would be a long drawn out, protracted, time consuming process with no guarantee of result and the whole scheme of compromise and arrangement may be mutilated in the process.
Parliament has, therefore thought it fit to trust the wisdom of the court rather than go back to the interested parties.
If the parties have several times to decide the modification with the democratic process, the good part of an election machinery apart, the dirt may step in, the conflicting interests may be bought and sold, and, in the process, the whole scheme of compromise and arrangement may be jettisoned.
In order, therefore, to guard against this eventuality and situation, which is clearly envisageable, Parliament has conferred power on the court, not only to make modifications even at the time of sanctioning the scheme, but at any time thereafter during the period the scheme is being implemented.
Conceding that, before the Court sanctions the scheme, it partakes the character of an emerging contract between the 1197 company and the creditors and members; once the court approves it, it becomes a statutorily enforceable contract even on dissidents, with power in the court to modify, amend or correct or revise the contract the outer periphery or the limit on the power being that, after testing it on this anvil of probabilities, surrounding circumstances and the prevalent state of affairs, it can be done for the proper working of the compromise and arrangement, and subject to this limit on the Court 's power, the power seems to be absolute and of the widest amplitude and it would be unwise to curtail it by process of interpretation".
If the Court can suo motu act, it is immaterial as to who drew the attention of the Court to a situation which necessitated Court 's intervention.
Where the power is conferred on the Court to take action on its own motion the information emanating from whatever source which calls for Court 's attention can as well be obtained from any person without questioning his credentials, moving an application drawing attention of the Court to a situation where it must act.
Undoubtedly, the Court may decline to act at the instance of a busy body but if the action proposed to be taken is justified, valid, legal or called for, the capacity or credentials of the person who brought the situation calling for Court 's intervention is hardly relevant nor would it invalidate the resultant action only on that ground.
Therefore, when sub section
(2) confers power on the Court to act on its own motion, the question of locus standi hardly arises.
The High Court while examining the question of locus standi, after combing the provision contained in sub section
(2), wholly overlooked the important provision therein contained that the High Court can act on its own motion.
It was, however, said in passing that sub section
(2) enables the Court to wind up the Company and, therefore, the Court may act on its own motion or on the application of any person interested in the affairs of the company not for modifying the scheme or for any directions but for winding up the company.
But when the Court is required to act under section 392(1), the limitations and restrictions imposed upon the Court under section 391(1) must be read in section 392(1) because the sections are complimentary to each other.
This submission overlooks the two different stages at which sections 391 and 392 operate though they may be complimentary to each other.
Two sub sections of section 392 have to be harmoniously read and sub section
(2) clearly indicates the power of Court to take action suo motu while taking action under sub section
Again this approach is inconsistent with the language employed in section 392(2) in that the Court can wind up the company 1198 under section 392(2) if and only it is satisfied that the compromise and/or arrangement sanctioned by it cannot be satisfactorily worked with or without modifications.
The Court has to reach an affirmative conclusion before acting under section 392(2) that the compromise and/or arrangement cannot be worked satisfactorily with or without modification (see J. K. Bombay P. Ltd.) (supra).
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.
Mr. Sinha referred to Rule 87 of Companies (Court) Rules and urged that it throws some light on the question as to at whose instance the Court can act under section 392.
The rule is procedural in character and at any rate the rule cannot circumscribe the power conferred by the section.
Hence rule 87 is of no assistance.
Assuming that the Court would not act on its own, the next question is: could it act under section 392(1) on the application of any person interested in the affairs of the Company ? Now, if the Court under section 392(2) can order winding up of the company on the application of any person interested in the affairs of the company who need not be a member or a creditor, we fail to see how the Court cannot act on the application of such a person interested in the affairs of the Company either to give directions or to make modifications so as to make the compromise or arrangement workable.
Winding up meaning civil death of a company, must be the ultimate resort of the Court.
A living workable scheme infusing life into a sick unit is generally to be preferred to civil death of the company.
There is, therefore, no warrant for circumscribing the expression 'on the application of any person interested in the affairs of the company ' as to limit it to member or creditor.
If the legislature used the expression 'member or creditor ' in section 391(1) and yet used an expression of wider denotation 'any person interested in the affairs of the company ', the legislative intention is clearly exposed in that any such person interested in the affairs of the company need not be limited or restricted to refer to a 1199 member or creditor.
It would, therefore, be necessary to ascertain whether the appellants would be comprehended in the expression 'any person interested in the affairs of the company '.
At one stage there was a threatened long argument to ascertain whether the appellants have become the members of the company or are the creditors of the company.
The appellants contended that they and their friends have purchased 44,000 equity shares of IHI from its former holder DFM and they have also taken an assignment of the debt in the amount of Rs. 23 lacs owned by IHI to DFM from DFM.
Respondent Jain contended that the assignment is not valid as it fails to comply with section 130 of the Transfer of Property Act and as the names of the appellants are not put on the register of IHI, they have not acquired the status of member of IHI and, therefore, they being neither creditors nor members of IHI, they have no locus standi, to maintain the application under section 392.
The stand taken by respondent Jain in this behalf is wholly ambivalent.
Sometime after the scheme was sanctioned on 15th October 1975, the appellants assert that they purchased the 44,000 equity shares of IHI from DFM and they simultaneously took assignment of the debt.
Thereafter respondent Jain filed Company Application No. 190/76 in which he sought a direction under section 392(2) for winding up the Company.
In inviting the Court to grant his prayer for winding up the Company, the averment made is that since the sanction of the scheme by the Court, DFM has sold its interest to Shri section K. Gupta and others who wanted to operate the scheme as if they were the substitutes for DFM.
Another averment is that DFM was not entitled to sell its shares because it was the propounder of the scheme.
Therefore, the raison d 'etre for moving the application under section 392(2) was the sale of shares of IHI held by DFM to the appellants.
When the appellants filed Company Application No. 193/76 under section 392(1), in order to show their newly acquired or subsisting interest in the scheme so as to enable them to move the application under section 392, it was averred that the appellants have purchased 41,800 shares of IHI from DFM and the balance of holding of DFM to the tune of 2200 equity shares have been purchased by the nominee of the appellants.
It is further averred that the amount standing in the name of DFM in the books of IHI also been taken over by the appellants.
While replying to these averments in the application, respondent K. P. Jain in para 16 of his counter affidavit dated 29th March 1976 has stated that 'there is some understanding or agreement between the Delhi Flour Mills Co. Ltd. and Shri section K. Gupta for the sale of the shares held by Delhi Flour Mills Co. Ltd., in the IHI and I have referred to 1200 it in my application CA.
190/76 '.
If the very alleged sale of the shares by DFM to the appellants gave cause of action to respondent Jain to maintain an application under section 392(2) praying for an order for winding up of the company, what greater ambivalence could it disclose when it was contended on his behalf that the sale has not taken place ? There is enough evidence on record as is evident from the affidavit filed by DFM that as between DFM and the appellants the sale is complete.
Similarly, there is evidence in the affidavit that the debt owned by IHI to DFM has been assigned by DFM to the appellants.
In the face of this express position adopted by Jain, would it not clothe the appellants with necessary interest both in the company IHI and the scheme in respect of it, so as to enable them to maintain an application under section 392(2) ? Appellants are certainly persons interested in the affairs of the company.
For this additional reason the application for modification by them is certainly maintainable.
In the aforementioned circumstances we are not inclined to examine a very serious contention raised by Mr. Mridul who appeared at a later stage of hearing for the respondent Jain that unless names of the appellants are put on the register of IHI they do not become members and as the assignment on which the appellants rely does not comply with the requirements of section 130 of the Transfer of Property Act, the assignee 's title to the debt assigned has not become complete, and, therefore, the appellants are not creditors of IHI.
We may in passing say that the factum of assignment or the sale of shares was never seriously questioned but we are prepared to proceed on the assumption that even if it be so, in the circumstances herein discussed and the ambivalence of respondent Jain the appellants could certainly be said to be persons sufficiently interested both in the company IHI and the scheme in respect of it so as to be able to maintain an application under section 392(1).
Lastly in this connection it must be remembered that if DFM whose scheme was sanctioned and not challenged by respondent Jain, started implementing the scheme and after getting into the saddle by constituting the Board of Directors as desired by it, it could have transferred its shares to appellants and appellants could have as well taken over management and implemented the scheme and no one, at any rate, Respondent Jain holding only 1000 equity shares, i.e. 1.25% of the issued capital, could have objected to it.
The objection at this stage is equally futile.
Therefore, with respect, the High Court was in error in holding that the appellants had no locus standi to maintain an application under section 392(1).
The next important contention is that the sponsor or propounder of a scheme is such an integral part of the whole scheme or an impor 1201 tant element of the 'basic structure ' of the scheme that its substitution changes, alters or amends the scheme in almost its entirety and such a thing cannot be done by way of modification under section 392.
The word 'modification ' must be given, according to the respondent and according to the High Court, a restricted and narrow meaning.
The High Court, after reaching the conclusion that propounder of a scheme is 'the very life blood and soul of the scheme and on his going out the scheme itself becomes lifeless and inert ', proceeded to examine the connotation of the word 'modification ' as used in section 392 and after referring to various dictionary meanings, reached a conclusion that the context and setting in which the word is used, it would only means a "small adjustment a minor or slight change, a qualification or limitation, alteration of a subordinate character", and substitution of a sponsor of a scheme is of such a vital nature altering, in the opinion of the High Court, the 'basic structure ' of the scheme that such a three dimensional change would not be comprehended in the word 'modification ' as used in section 392.
In reaching this conclusion the High Court referred to the meaning assigned to the word 'modify ' in various dictionaries such as Webster, Black 's Law Dictionary, et el.
Unfortunately the High Court completely overlooked the obvious that the words 'modify ' and 'modification ' have been defined in section 2(29) of the as under: "2.
Definitions In this Act, unless the context otherwise requires (29) "Modify" and "modification" shall include the making of additions and omissions".
It may also be mentioned that section 2(1) defines 'altered ' and 'alteration ' to include making of additions and omissions, while 'variation ' is defined in section 2(31) to include 'abrogation '.
The definition of cognate words is noted by us to arrive at a true meaning of the word 'modification '.
The High Court nowhere refers in its judgment to the definition of 'modify ' and 'modification ' given in the very statute and proceeded to examine the content and meaning of the word used in a provision in the same statute which, unless the context otherwise requires, must bear the same meaning as set out in the definition section.
The noticeable feature of this definition is that it is inclusive definition and where in a definition clause the word 'include ' is used it is 1202 so done in order to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be construed as comprehending not only such things which they signify according to their natural import, but also those things which the interpretation clause declares that they shall include (see Dilworth vs Commissioner of Stamps).
Where in a definition section of a statute a word is defined to mean a certain thing, wherever that word is used in that statute, it shall mean what is stated in the definition unless the context otherwise requires.
But where the definition is an inclusive definition, the word not only bears its ordinary, popular and natural sense whenever that would be applicable but it also bears its extended statutory meaning.
At any rate, such expansive definition should be so construed as not cutting down the enacting provisions of an Act unless the phrase is absolutely clear in having opposite effect (see Jobbins vs Middlesex County Council).
where the definition of an expression in a definition clause is preceded by the words 'unless the context otherwise requires ', normally the definition given in the section should be applied and given effect to but this normal rule may, however, be departed from if there be something in the context to show that the definition should not be applied (see Khanna, J. in Indira Nehru Gandhi vs Raj Narain).
It would thus appear that ordinarily one has to adhere to the definition and if it is an expansive definition the same should be adhered to.
The frame of any definition more often than not is capable of being made flexible but the precision and certainty in law requires that it should not be made loose and kept tight as far as possible (see Kalva Singh vs Genda Lal).
Is there anything in the context and setting in which the word 'modification ' is used in section 392 to indicate that the legislature has not used the expression assigning the meaning to the word as set out in the definition clause? At least nothing was pointed out to us.
Undoubtedly, as pointed out by Lord Hershell in Cox vs Hakes, that for the purpose of construing any enactment it is right to look, not only at the provision immediately under construction, but at any others found in connection with it which may throw light upon it, and afford an indication that general words employed in it were not intended to 1203 be applied without some limitation.
Even with this caution we find nothing in section 392 or reading s.392 with section 391, to cut down and restrict the meaning as has been attempted by the High Court completely ignoring the definition section.
According to the definition 'modify ' and 'modification ' would include the making of additions and omissions.
In the context of section 392 'modification ' would mean addition to the scheme of compromise and/or arrangement or omission therefrom solely for the purpose of making it workable.
Reading section 392 by substituting the definition of the word 'modification ' in its place, if something can be omitted or something can be added to a scheme of compromise by the Court on its own motion or on the application of a person interested in the affairs of the company for the proper working of the compromise and/or arrangement, we see no justification for cutting down its meaning by a process of interpretation and thereby whittle down the power of the Court to deal with the scheme of a compromise and/or arrangement for the purpose of making it workable in course of its continued supervision as ordained by section 392 (1).
Strictly speaking, omission of the original sponsor and substituting another one would not change the 'basic fabric ' of the scheme.
The scheme in this case is one by which a compromise is offered to the unsecured creditors of the company and whoever comes in as sponsor would be bound by it.
Undoubtedly a sponsor of the scheme enjoys an important place in the scheme of compromise and/or arrangement but basically the scheme is between the company and its creditors or any class of them, or the company and its members or any class of them, and not between the sponsor of the scheme and the creditor or member.
The scheme represents a contract sanctified by Court 's approval between the company and the creditors and/or members of the company.
The company may as well be in charge of directors and the implementation of the scheme may come through the agency of directors but that would not lead to the conclusion that during the working of the scheme the directors cannot be changed.
If the scheme has to be ultimately implemented by the company as part of its contract and yet its directors can be changed according to its Articles of Association, we see no difference in the situation where a sponsor is required to be changed in the facts and circumstances of a case.
Therefore, it is not possible to accept the submission that as and by way of modification one sponsor of a scheme cannot be substituted for another sponsor.
1204 We may not be understood to say for a moment that the Court can appoint any one as sponsor.
The Court on which a duty is cast by section 392(1) to exercise continuous supervision over the working of the compromise and/or arrangement must, in order to effectively discharge its duty, examine the bona fides of the person applying to be substituted as sponsor, his capacity, his ability, his interest qua the company and other relevant considerations before substituting one sponsor for another.
In a given case an application may be rejected as the Court is of the opinion that the sponsor is not one who can be trusted with the implementation of the scheme but that is entirely a different thing from saying that the Court has no power to make such a substitution as and by way of modification of a compromise or arrangement.
Now to the facts of the case.
The appellants have applied for substituting them as sponsors of the scheme in place of DFM.
They claim to have purchased 44,000 shares out of 80,000 issued and subscribed equity shares of the company.
As stated earlier, between the transferor and transferee of the shares, the transfer of the shares is complete and not even seriously objected to by the respondent as pointed out hereinbefore.
The sponsor has taken an assignment of a debt of Rs. 23 lacs which IHI owed to DFM from the creditor DFM.
A gain, as between the transferor and transferee the assignment is complete.
The only objector is respondent holding 1,000 equity shares representing 1.25 per cent of the issued and subscribed capital.
An advertisement was directed to be inserted by the order of the Court in newspapers in respect of the application for substitution modification made by the appellants inviting every one interested in the company or in the scheme of compromise and/or arrangement to come and lodge objection, if it was so desired, against substitution/modification prayed by the appellants.
None including the petitioning creditor except the respondent Jain has lodged such an objection.
This procedure was also followed by the Gujarat High Court in Mansukhlal 's (supra) case and by referring to that part of the judgment, the High Court held that judgment itself is an authority for the proposition that substitution of the sponsor is a vital change of a basic nature and cannot be ordered by the Court acting under section 392 and must be referred to a meeting of the creditors or members.
With respect, this is not a fair reading of the judgment.
At pages 290 291, the scope and ambit of the power of the Court under section 392 has been precisely set out and it is concluded that the power to modify would comprehend the power to substitute one sponsor for the other if he is found otherwise fit and competent.
As an additional string to the bow, it was observed, as it 1205 is being done here also, that no one has come forward to object to the substitution and that would further strengthen the hands of the Court.
Such observation cannot be construed to mean that the Court lacks the power to make such a modification without reference back to the creditors and/or members, as the case may be.
In the background of these unimpeachable facts the conclusion is inescapable that the appellants have a subsisting and vital interest in the fate and future of IHI and they are the appropriate persons who could and should be substituted in place of the original sponsor.
In passing it was said that the fate of the company should not be placed in the hands of the appellants and the lack of bona fides of the appellants becomes discernible from the fact that they tooth and nail opposed the very scheme which they now seek to implement.
This is hardly a relevant consideration.
A creditor may come and oppose a scheme being implemented by some person and yet may be interested in taking over the affairs of the company.
This could hardly be treated as a disqualification of the appellants.
Lastly it may be mentioned that the appellants agree to implement the scheme.
They undertake to bring Rs. 3 lacs as liquid finance for implementing the scheme.
The question of the know how was examined by the company Judge who has accepted their fitness to run the business and nothing was pointed out to us to depart from the same.
Therefore, viewed from any angle, we see no objection to granting the application of the appellants for substitution/modification as sponsors of the scheme.
Accordingly, the judgment of the Division Bench dated 16th July 1976 in Company Appeal No. 15/76 is set aside and the order of the Company Judge dated 26th April 1976 in Company Application No. 193/76 is restored with costs throghout.
N.V.K. Appeal allowed.

dataset_name: IN-Abs

summary/full:
The by section 391 enables a member or a creditor of the company or a company which is being wound up, its liquidator, to make an application to the court proposing a compromise or arrangement between the company and its creditors or any class of them or between the company and its members or any class of them and seeking directions of the court to convene a meeting of each class of creditors and/or each class of members to whom the compromise or arrangement is offered.
On the court giving the directions, the meeting would be convened in which the proposed scheme of compromise and/or arrangement would be submitted for consideration and each class will have to vote upon it and if the scheme is accepted by a majority in number representing three fourths in value of the creditors or members or class of members as the case may be, present and voting either in person or where proxy is allowed by proxy, such approved scheme has to be placed before the court for sanction of the court as envisaged in section 391(2).
Under section 392 of the Act, the High Court which has sanctioned the scheme has the power to supervise the carrying out of it and to give directions in regard to any matter or to make modifications in it as it may consider necessary for its proper working.
But if the court is satisfied that the scheme cannot work satisfactorily with or without modifications, it can either suo motu or on an application of any person interested in the company 's affairs order its winding up.
The holding company proposed a scheme of compromise/arrangement between its subsidiary and the unsecured creditors of the subsidiary company.
After obtaining the approval of the shareholders the holding company obtained the sanction of the company court.
A large number of shares in the subsidiary company held by it and its claim for a sum of Rs. 23 lacs recoverable from the subsidiary company were transferred by the holding company to the appellants.
The appellants then applied to the court to make an appropriate modification and/or grant further direction for implementing the scheme sanctioned by the court in respect of the subsidiary company by substituting them (the appellants) in place of the holding company as proponents of the scheme.
The respondent in the mean while made an application to the company court under section 392 of the to hold that the scheme sanctioned by the court could not work satisfactorily with or without modification and that, therefore, the court should 1185 make an order of winding up.
The company judge allowed substitution of the appellants as proponents of the scheme and rejected the respondents ' application for winding up of the subsidiary company.
On appeal by the respondents under section 483 of the a Division Bench held: (1) that since the substitution of a new propounder in a scheme sanctioned by the court in place of the original propounder was a change of a basic nature which would not be comprehended within the meaning of the expression "modification" in section 392 and, therefore, the company judge could not have granted substitution of the propounder of the scheme without referring the proposed modified scheme to the creditors who approved the original scheme, (2) that since the transfer of the shares in favour of the appellants had not been effected in the company 's registers, the appellants were not members of the subsidiary, (3) that the debt owed by the subsidiary to the holding company was not assigned according to law in favour of the appellants and, therefore, they were not creditors and (4) that not being either members or creditors of the subsidiary, the appellants had no locus standi to move an application under section 392 for the modification of the scheme.
On the question whether the court had power to grant an application under section 392 of the Act.
Allowing the appeal, ^ HELD: 1.
Though a large number of provisions of the are in pari materia with the provisions of Companies Act, 1948 of the U.K. there is no provision analogous to section 392 in the U.K. Act.
The court under the U.K. Act has no power to modify the scheme either at the time when it is offered for its sanction or at any time subsequent thereto.
The Parliament has in its wisdom, conferred a power of wide amplitude on the High Court in India to provide for its continuous supervision of the carrying out of compromise and/or arrangement and also the consequential power to make the supervision effective by removing the hitches, obstacles or impediments in the working of compromise or arrangement by conferring power to give such directions for the proper working of the compromise and/or arrangement.
[1193 D F] This power of widest amplitude being conferred on the High Court is a basic departure from the scheme of the U.K. Act in which provision analogous to section 392 is absent.
The sponsors of the scheme under section 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme of compromise or arrangement to make alterations and modifications as proposed by the court.
[1195 C] In the instant case the scheme is essentially a compromise between the company and its unsecured creditors.
The scheme when sanctioned does not merely operate as an agreement between the parties but has statutory force and is binding not only on the company but even dissenting creditors or members, as the cause may be.
[1194 B C] J.K. (Bombay) Pvt. Ltd. vs New Kaiser I Hind Spg.
& Wvg.
Co Ltd. & Ors.
, at 891; referred to.
1186 2.
Section 391(1) by a specific and positive provision prescribes who can move an application under it.
Only the creditor or member of that company or a liquidator in the case of a company being wound up is entitled to move an application proposing a compromise or arrangement.
By necessary implication any one other than those specified in the section would not be entitled to move such an application.
[1194 D] 3.
Sub section (2) of section 392 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 in sub section (2) of section 392 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 a creditor or in the case of a company being wound up, its liquidator, alone can move the court under section 392.
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.
The ambit of the power to act under section 392(2) is demonstrated by the provision that the court 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.
[1195 F H] Mansukhlal vs M. V. Shah, [1976] 46 Company cases 279 at 290 291; referred to.
If the court can suo motu act, it is immaterial as to who drew the attention of the court to a situation which necessitated court 's intervention.
Where the power is conferred on the court to take action on its own motion, the information emanating from whatever source which calls for court 's attention can as well be obtained from any person without questioning his credentials, moving an application drawing attention of the court to a situation where it must act.
The court may decline to act at the instance of a busy body but if the action proposed to be taken is justified, valid, legal or called for the capacity or credentials of the person who brought the situation calling for court 's intervention is hardly relevant nor would it invalidate the resultant action only on that ground.
When sub section
(2) confers power on the court to act on its own motion, the question of locus standi hardly arises.
[1197 C E] In the instant case while examining the question of locus standi after considering the provisions contained in sub section
(2) the High Court wholly over looked the important provision therein contained, that the High Court can act on its own motion.
[1197 F] 5.
Even though section 391 and 392 are complementary they operate at different stages and have to be harmoniously read.
[1197 G H] 6.
Winding up meaning civil death of a company, must be the ultimate resort of the court.
A living workable scheme infusing life into a sick unit is generally to be preferred to civil death of the company.
There is no warrant for circumscribing the expression 'on the application of any person interested in the affairs of the company as to limit it to a member or a 1187 creditor.
If the legislature used the expression 'member or creditor ' in section 391(1) and yet used an expression of wider denotation 'any person interested in the affairs of the company, ' in section 392(2), the legislative intention is clearly exposed in that any such person interested in the affairs of the company need not be limited or restricted to refer to a member or creditor.
[1198 G 1199 A] In the instant case, there is enough evidence on record that as between the holding company and the appellants the sale of shares is complete, and that the debt owed by the subsidiary to holding company has been assigned by the holding company to the appellants.
The appellants therefore have requisite interest both in the subsidiary company and the scheme in respect of it, so as to enable them to maintain an application under section 392(2), as being persons interested in the affairs of the company, and therefore the application for modification by them is maintainable.
[1200 B C] 7.
The High Court was in error in holding that the appellants had no locus standi to maintain an application under section 392(1).
The words 'modify ' and 'modification ' have been defined in section 2(29) of the Act to include the making of additions and omissions.
Section 2(1) defines 'altered ' and 'alteration ' to include 'making of additions and omissions ', while 'variation ' is defined in section 2(31) to include 'abrogation '.
The definition of cognate words is noted to arrive at a true meaning of the word 'modification '.
The noticeable feature is that it is an inclusive definition, and where in a definition clause he word 'include ' is used, it is so done in order to enlarge the meaning of the words or phrases occurring in the body of the statute and when it is so used, these words or phrases must be construed as comprehending not only such things which they signify according to their natural import, but also those things which the interpretation clause declares that they shall include.
[1200 H, 1201 D G, H 1202 B] Dilworth vs Commissioner of Stamps, [1899] AC 99 at 105; Jobbins vs Middlesex County Council, ; Indira Nehru Gandhi vs Raj Narain at 97; Kalva Singh vs Genda Lal, ; at 309; Cox vs Hakes, ; referred to.
According to the definition 'modify ' and 'modification ' would include the making of additions and omissions.
In the context of section 392 'modification ' would mean addition to the scheme of compromise and/or arrangement or omission therefrom solely for the purpose of making it workable.
[1203 B] 9.
The High Court misdirected itself when it resorted to dictionaries for the meaning of the expression 'modification ' in section 392 when the said term was defined in section 2(29) of the Act itself.
[1203 A] In the instant case, the scheme is one by which a compromise is offered to the unsecured creditors of the company and whoever comes in as sponsor would be bound by it.
Omission of the original sponsor and substituting another one would not therefore, change the 'basic fubric ' of the scheme.
[1203 E] 10.
The court on which a duty is cast by section 392(1) to supervise the working of compromise/arrangement must examine the bona fides of the person applying to be substituted as sponsor, his capacity, his ability, his interest qua the company and other relevant considerations before substituting one sponsor for another.
In a given case an application may be rejected if the 1188 court is of the opinion that the sponsor is not one who can be trusted with the implementation of the scheme.
[1204 A C] In the instant case the appellants have applied for substituting them as sponsors of the scheme in place of the holding company.
They claim to have purchased 44,000 shares out of 80,000 issued and subscribed equity shares of the company.
The sponsor has taken an assignment of a debt of Rs. 23 lacs which the subsidiary company owed to the holding company from the holding company.
The only objector is respondent holding 1,000 equity shares representing 1.25 per cent of the issued and subscribed capital.
In pursuance to the court 's order notice in the newspaper was inserted calling for objection to the application for substitution/modification.
None including the petitioning creditor except the respondent lodged such an objection.
The appellants agreed to implement the scheme and undertook to provide Rs. 3 lacs as liquid finance for implementation.
The appellants therefore have a subsisting and vital interest in the fate and future of the subsidiary company and they are the appropriate persons who could and should be substituted in place of the original sponsor and there is no objection to granting their application.
[1204 D F, 1205 E, B]