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the law applicable to cases of a pledge that the creditor has two rights which are concurrent, and the right to proceed against the property pledged is not merely accessory to the right to proceed against the debtor personally. For the pledge may have a right to sue for sale of the property even in the absence of a right to sue for a personal decree. The same principles would apply to the case of hypothecation or mortgages of moveable property.”= CIVIL APPEAL NO. 2701 OF 2006 Infrastructure Leasing & Financial Services Limited … Appellant Versus B.P.L. Limited … Respondent

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2701 OF 2006
Infrastructure Leasing & Financial
Services Limited … Appellant

Versus

B.P.L. Limited … Respondent
J U D G M E N T
Dipak Misra, J.
BPL Limited, the respondent herein, was incorporated under the
Companies Act, 1956 (for brevity ‘the Act”) and on 16.4.1963, certificate
of incorporation in the name of the company as British Physical
Laboratories India Pvt. Ltd. was issued. The company became deemed public
company and the word “Private” stood deleted with effect from 24.3.1981.
Subsequently, the name of the company was changed to BPL Limited and fresh
certificate of incorporation was issued by the Registrar of Companies on
16.3.1992. In the year 1982 the company had diversified its activities
into Consumer Electronics, Colour Television Receivers, Black and White TV
Receivers and Video Cassettes Recorders. The company embarked on various
diversifications, expansion programmes and had facilities for manufacture
of television, Alkaline batteries, colour monitors, etc. It also entered
into the arena of manufacturing of refrigerators and electronic components
through associate companies and had grown into a diversified group with
multiple products and services. Due to manifold reasons, the company faced
cash flow constraints which adversely affected its operations. It suffered
a loss of Rs.287.8 crores in the last 18 months for the period ending on
30.09.2003 as there was decline of sales of goods. Due to the said loss,
the debt of the company increased to 1494.57 crores as on 31.03.2003. As
many a international brand had entered into the Indian market, the
respondent company in order to keep pace with the technological advancement
in the field of business initiated a comprehensive restructuring of its
operations which primarily involved rejuvenating its main business through
a joint venture with “Sanyo Electric Co. Ltd.”, Japan and accordingly
entered into a shareholder agreement. In terms of the agreement the BPL
had to transfer its existing CTV business undertaking to the joint venture
constituting BPL brand for CTV business manufacturing services, marketing
and distribution. Both the companies BPL and Sanyo had equal partnership
in the ratio 50:50 in the joint venture. The CTV business was valued at
Rs.368 crores and BPL was required to invest approximately Rs.46 crores in
the joint venture company and to receive a net cash inflow of Rs.322
crores. Initially, BPL proposed a scheme of arrangement which was finally
modified and in the said scheme various business institutions and banks
were involved. There were 36 creditors whose names featured in the scheme.

After approval of the scheme the respondent filed an application under
Section 391 (1) of the Act read with Rule 9 the Companies (Court) Rules,
1959 seeking permission for holding a meeting for consideration for
approval of compromise or arrangement proposed to be made between companies
and the creditors. The second prayer had been made for orders governing
the procedures to be complied with. There were 15 respondents. After the
application was filed forming the subject matter of MCA No. 84 of 2004
notices were issued and many financial institutions filed their counter
affidavits/objections. The present appellant, Infrastructure Leasing &
Fin. Services Ltd., which was the 8th respondent, filed its counter-
affidavit and in it, had raised objections to the prayer for stay of
various proceedings before number of forums including Debt Recovery
Tribunal, etc. on the foundation that the Memorandum of Association of the
company does not authorise it to enter into any arrangement as proposed;
that the scheme concealed more than it revealed, for when such a drastic
transformation was taking place it was imperative that there had to be
exhaustive disclosure; that the application filed under Section 391 of the
Act was totally silent as to how and on what basis the valuation of Rs.368
crores had been arrived at, which agency had done the valuation and at
whose instance the valuation was done; that the scheme did not mention
whether the BPL had any other option to raise the capital when retaining
CTV business; that no detailed information had been furnished in the
application or in the proposed scheme of arrangement as to on what basis
the various percentage payments which were proposed to be made to the
unsecured creditors were arrived at by the company; and that the company
court had no jurisdiction to stay the criminal prosecution under exercise
of its power under Section 391 (6) of the Act.
BPL filed a reply stating, inter alia, that very purpose of Section 391(6)
of the Act is that till effective consideration of the scheme and
finalization of the scheme under Section 391 of the Act there has to be a
stage of abeyance from all aspects so that the Company Court can examine
the workability of the same and grant requisite relief. As regards the non-
disclosure by BPL, it was asserted that the disclosure had been adequately
made, for what was proposed to be transferred to the joint venture company
was the colour television business of the BPL and brand associated with it
and the residual company would retain the other business of the group such
as medical electronics, batteries, components, etc. It was also put forth
that Price Water House Coopers (PWC) was appointed by the ICICI at the
instance of all lenders and PWC had assessed that the residual company
could sustain a debt to the extent of Rs.480 to 520 crores and the report
submitted by PWC was already in possession of the lenders including 8th
respondent therein. It was alleged as the operation had been stagnated for
a period of two years the valuation made by the PWC was absolutely fair.
Be it stated, some of the respondents filed affidavits supporting the
scheme and some others opposing the same, from many an angle.
The learned Company Judge taking note of the factual matrix, the
submissions advanced at the Bar, the proceeding before the DRT and the
criminal cases, referred to the maintainability of the scheme and came to
hold that the application preferred under Section 391(1) was maintainable;
that the court had the jurisdiction to consider the application filed under
Section 391(1) of the Act, even for the purpose of convening a meeting of
its creditors and its jurisdiction was not affected solely because an
application had been filed before the Debt Recovery Tribunal; that the
company Court in exercise of power under Section 391(6) has no jurisdiction
to stay the criminal proceeding initiated under Section 138 of the
Negotiable Instrument Act or the proceeding pending before the Debt
Recovery Tribunal under Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002; that it is for the
creditors at the first instance to consider the scheme proposed and only
the approved scheme by the required majority is to be considered by the
court for grant of sanction under Section 391 (2) of the Act; that there
is a distinction between Section 391(1) and 391(2) of the Act regard being
had to the language employed therein and if the contentions mentioned in
the proviso to sub-Section (2) of Section 391 of the Act had to be
considered at the stage of Section 391(1) that will amount to reading the
latter provision to the earlier one; and that the distinction which has
been set forth in various sub-Sections have to be appositely understood
because there are various phases till the scheme is approved and each stage
has its own room to operate. After so stating the court referred to the
stand of the 8th respondent and came to hold as follows:-
“49. The 8th respondents among other things also taken up the contention
that at all material times they were only an unsecured creditor of the
applicant-Company and according to them, they are wrongly impleaded in C.A.
No. 1718/2004. Accordingly to them, the short-terms loan was granted on
terms and conditions agreed upon by the parties and on a reading of Clause
15 of the terms and conditions security to be created by the Hewlett
Packard (India) Ltd. through an ascrow account which will separately open.
According to them, no account was opened subsequently and no amount was
channelised through the account as contemplated by the mechanism
prescribed. Hence, no security was created in favour of the 8th
respondent. These conditions were raised in an additional affidavit filed
by the 8th respondent. The applicant-company has also filed an additional
affidavit answering those conditions. In the additional reply affidavit
filed on 24/1/2005 the applicant-company has averred that the contention
that they are only unsecured creditors was raised during agreement and the
affidavit was also filed during the course of arguments. The applicant-
Company took copies of the documents creating charge in favour of the 8th
respondent. They have produced Annexure-X hypothecation deed which is
executed in 2001. Copies of Form No. 8 return dated 1.1.2001 and Form No.
13 return dated 1.1.2001 filed with the Registrar of Companies are produced
as Annexures-Y and Z. Annexures-AA in a copy of the letter ILES (8th
respondent) dated 4.7.2001. It is the contention of the applicant that
from the above it is clear that there is a charge in respect of he
specified assets of the applicant-company in favour of the 8th respondent.
Annexure-X is an unattested deed of hypothecation executed by the Applicant
in favour of the 8th respondent. The applicant is described as “Borrower”.
This is a hypothecation deed creating exclusive charge involving all
monies and right, title and interest, to be received from and or payable by
Hewlett Packard Ltd., towards sale of colour monitors, to the borrower as
security for the said facility arranged by the 8th respondents as security
for the payment by the borrower of the balance outstanding. Annexure-Y is
Form No.8 filed by the applicant-Company under Section 125 of the Companies
Act. The hypothecation deed executed by the applicant-Company in favour of
the 8th respondent is an instrumental creating a charge and amount secured
is contained as Rs. 150 millions. It shows that the above charge was
registered with the Registrar of Companies as per the provisions of the
Companies Act. Annexure-Z is From No. 13 in which the amount secured is
shown as Rs. 150 million. Annexure-AA is the letter of consent by the 8th
respondent which shows that the 8th respondents has offered for providing
short-term loan facility upto Rs. 150 million and the term loan facility is
enclosed in the Annexure. The loan facility availed by them to the BPL
Ltd. is also to be considered as part of the above-mentioned facility.
Annexure-AA attached therein would show that the lender is 8th respondent
and the borrower is BPL Ltd. and the purpose for which the loan advanced is
to meet working capital requirements and the security offered is first and
exclusive charge on receivables of Hewlett Packard (India) Ltd. It is also
seen that the applicant-Company has to undertake to complete all
formalities towards creation of charge and the escrow arrangement within 30
days from the date of disbursement. The proposal made even as per the
Scheme of Arrangement is to apply to all existing charge holders and 8th
respondent is one such charge holder, to whom the Scheme is extended.

50. In the light of the above facts, I do not find any merit in the
contention that the Scheme proposed will not cover the 8th respondent or
that they are not secured creditors, to whom the Scheme will not apply. ”

Be it stated, the court did not accept the contention that the scheme could
not be worked out on the ground that the scheme was entitled to be amended
either in the meeting or even subsequently by the Court and it was not the
stage to suggest any amendment and accordingly contentions raised by the
respondents in that regard were kept open.
On the basis of the aforesaid analysis, the Company Judge held that MCA No.
84/2004 was maintainable and other applications seeking grant of stay were
sans merit and accordingly dismissed the same. Certain applications were
kept to be considered at a later stage. The prayer of the respondents that
they were not covered by the scheme proposed by the amendment and they are
not secured creditors was rejected. Ultimately the Company Judge issued
the following directions:-
“54. M.C.A. No. 84/2004 is allowed. It is ordered that a meeting of secured
creditors (working Capital Lenders and Term Lenders) be convened and held
at the Registered office of he Applicant Company at Palghat on 16.04.2005
at 2.00 P.M. for the purpose of considering and if thought fit, approving
with or without modification of he compromise/arrangement proposed as
Annexure-G as modified by Annexure-N to be made between the Company and the
creditors abovenamed.

55. Mr. Justice T. V. Ramakrishnan, a Retired Judge of the High Court is
appointed as the Chairman for the Meeting

56. Notice convening the above meeting shall be published in all editions
of Economic Times, Indian Express and Malayala Manorama giving 21 days
clear notice.
xxx xxx xxx
58. That the value each member/creditor shall be in accordance with the
books of the Company and in case of dispute, the Chairman shall determine
the value.”

Being aggrieved by the aforesaid order, the 8th respondent filed Company
Appeal No. 5 of 2005. Before the appellate Court, it was contended that
Section 391 of the Act, although refers to the power of companies to make
arrangements with creditors and members, such compromise could have only
been possible between a company and its creditors or any class of them, and
when an application was filed before the court, where it had been possible
to find out that the arrangement was not intended to be made with a
homogeneous class, the court should have accepted the objection so raised.
It was also urged, ignoring the same, a binding order, could not have been
issued. It was contended that the meeting was proposed to be held between
the company and its secured creditors and even if it was to be presumed
that the appellant initially was a secured creditor, it had been disrobed
of the said status consequent to subsequent developments, including an
arbitration award, well before the application came to be filed in the
court.
The appellant argued that though as required by the hypothecation deed,
Form Nos. 8 and 13 thereof had been submitted before the Registrar of
Companies, yet no further action was taken by BPL Ltd. to fulfil the agreed
arrangement between the parties. It was asserted that as per the deed of
hypothecation, the borrower was obliged to open an escrow and no-lien
account with a designated bank, and was to undertake to deposit all the
receivables from Hewlett Packard India Ltd. in the said escrow account
only, however, no escrow account had been opened and the agreed arrangement
remained only on paper. The escrow mechanism was the essence of the
agreement, but it had never been put into operation and, therefore, it was
not permissible for BPL Ltd. to contend that the appellant was a secured
creditor and the original claims of the appellant could not have been
watered down.
The next contention that was advanced in the company appeal was that even
if it could have been assumed that because of the hypothecation deed, at
one point of time, the appellant could have been considered as a secured
creditor, the position had changed because of the arbitration award which
has been passed on consent. Emphasis was laid on the fact that there was an
agreement recorded in the award that the criminal proceedings would not be
pursued and more importantly it was a settlement of money claim and nothing
remained in respect of the claims on hypothecation, which originally had
been entered into by the parties. Thus, the status of a secured creditor
thereby irrevocably had been metamorphosed. Relying on the authority Deva
Ram v. Ishwar Chand[1], a submission was advanced that on principles
gatherable from Order II, Rule 2, of CPC, after the award had come into
existence, it would not have been possible for the appellant to pursue his
claims on the basis of the hypothecation deed, for the rights of the
parties got crystallised to a pure and simple money claim, and hence, the
security earlier offered and created had lost its relevance and transformed
itself to a decree debt.
Apart from the above contentions, it was also propounded that the appellant
deemed to have relinquished rights of hypothecation security and being a
party to the proceedings, BPL Ltd. could not have turned round and put
forward a technical contention that the appellant continued to be a secured
creditor. To buttress the said stand, reliance was placed upon the dictum
laid down in K.V. George v. Secretary to Government, Water and Power
Department[2].
The aforesaid contentions were resisted by the counsel for the BPL that
the order passed by the learned company Judge was absolutely flawless;
that the stand that the appellant was no more a secured creditor because of
the award passed between the parties was totally devoid of any merit; that
the scheme or arrangement was approved in the meeting of the secured
creditors held by the Chairman and the appellant company had been issued a
substantial sum but it had refused to accept the same; that the appellant
remained a secured creditor for all legal purposes and hence, it was bound
by the scheme in question.
The Division Bench adverted to the deed of hypothecation executed by the
BPL in favour of the appellant company and opined that the appellant-
company had failed to take follow up action to get an escrow account; that
the formalities relating to creation of charge had been duly followed; that
in the arbitration award there was no reference that BPL had agreed to lift
the charge created; in the absence of the agreed position that the charge
be got lifted, and the appellant continued to be a secured creditor and
passing of the arbitration award did not create any change in the status.
The Division Bench appreciating the contentions further came to hold that
the appellant was a secured creditor after the hypothecation deed was
executed; that once the charge had been created it continued to bind the
parties till steps were regressed; and that the finding recorded by the
learned company Judge was unexceptionable. That apart, the Division Bench
also took note of the fact that the persons who had to be adversely
affected were not parties to the appeal. Being of the view, it dismissed
the appeal. The said judgment and order are the subject matter of assail
in this appeal.
We have heard Mr. Shyam Divan, learned senior counsel for the appellant and
Mr. V. Giri, learned senior counsel for the respondent.
It is submitted by Mr. Divan that that once an arbitral award has been
passed on consent between the parties it extinguishes the status of the
appellant as a secured creditor and it stands on a different footing
altogether. It is further urged that the registration as a secured
creditor does not bind the appellant and, more so, when the arbitral award
has come into existence. It is his submission that after the parties
settled by way of arbitration, the conceptual requisites of a secured
creditor became non-existent. Learned senior counsel would further put
forth that the hypothecation had never become operational as is evident
from various documents on record and hence, the analysis made by the High
Court is absolutely fallible. It is contended that once the deed of
hypothecation is not fructified, mere registration as a secured creditor
with the Registrar of Companies would not confer on the appellant the
status of a secured creditor and, in any case, the said registration would
not bind it. It is canvassed by him that once the appellant has accepted
the award as passed by the arbitrator, it operates as res judicata against
the respondent company to treat the appellant company as a secured
creditor. That apart, urges the learned senior counsel, the principles
inherent in Order II, Rule 2 would be attracted and the High Court has
completely erred by totally brushing it aside. The learned senior counsel,
to support his submissions raised by him, has referred to various
provisions of the Companies Act and placed reliance on the authorities in
Firm Chunna Mal Ram Nath v. Firm Mool Chand Ram Bhagat[3], Jagad Bandu
Chatterjee v. Nilima Rani[4], Indian Bank v. Official Liquidator, Chemmeens
Exports (P) Ltd[5]., Ranganayakamma v. K.S. Prakash[6] and Jitendra Nath
Singh v. Official Liquidator and ors.[7]
Mr. Giri, learned senior counsel appearing for the respondent, resisting
the aforesaid proponements, would submit that the arbitral award, whether
passed on consent or on contest, has the status of a decree but such a
decree does not extinguish the charge and thereby does not disrobe the
status of a secured creditor. Learned senior counsel would contend that
despite the relinquishment made by the appellant, it would not take away
the legal status conferred by it in law. Emphasis has been laid on the
issue of registration before the Registrar under Sections 138 and 139 of
the Act and how the record establishes that the status and the arbitral
award will not change the registered status. It is contended by Mr. Giri
that by no stretch of imagination, the principle of resjudicata would apply
to the case at hand, for the proceedings are of different nature. He would
also urge that the lis would not be hit by the bar created under Order II,
Rule 2 of the CPC. Learned senior counsel has commended us to the decisions
in Lonankutty v. Thomman and Another[8], Harbans Singh and others v. Sant
Hari Singh and others[9], and Indian Bank v. Official Liquidator, Chemmeens
Exports (P) Ltd. and others[10].
From the narration of facts and the contentions which have been
highlighted, it is clear that two facts are beyond dispute. First, the
appellant stands registered as a secured creditor of the respondent company
on the record of the Registrar of Companies under the Act; and second, the
arbitral tribunal has passed an award on the basis of consent and it has
the status of a decree which is executable in law. Keeping in view these
two undisputed facts, we have to appreciate the rival submissions raised at
the Bar. In this context, reference to relevant portions of Sections 391
and 393 of the Act would be appropriate. They are as follows:
“391. (1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the Court may, on the application of the company or of any creditor or
member of the company, or in the case of a company which is being wound up,
of the liquidator, order a meeting of the creditors or class of creditors,
or of the members or class of members, as the case may be, to be called,
held and conducted in such manner as the Court directs.
(2) If a majority in number representing three-fourths in value of the
creditors, or class of creditors, or members, or class of members as the
case may be, present and voting either in person or, where proxies are
allowed under the rules made under Section 643, by proxy, at the meeting,
agree to any compromise or arrangement, the compromise or arrangement
shall, if sanctioned by the Court, be binding on all the creditors, all the
creditors of the class, all the members, or all the members of the class,
as the case may be, and also on the company, or, [pic]in the case of a
company which is being wound up, on the liquidator and contributories of
the company:

Provided that no order sanctioning any compromise or arrangement shall be
made by the Court unless the Court is satisfied that the company or any
other person by whom an application has been made under sub-section (1) has
disclosed to the Court, by affidavit or otherwise, all material facts
relating to the company, such as the latest financial position of the
company, the latest auditor’s report on the accounts of the company, the
pendency of any investigation proceedings in relation to the company under
Sections 235 to 251, and the like.”

xxxxx xxxxx xxxxx

“393. (1) Where a meeting of creditors or any class of creditors, or of
members or any class of members, is called under Section 391,-

(a) with every notice calling the meeting which is sent to a creditor or
member, there shall be sent also a statement setting forth the terms of the
compromise or arrangement and explaining its effect, and in particular,
stating any material interests of the directors, managing directors,
managing agents, secretaries and treasurers or manager of the company,
whether in their capacity as such or as members or creditors of the company
or otherwise, and the effect on those interests, of the compromise or
arrangement, if, and insofar as, it is different from the effect on the
like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement,
there shall be included either such a statement as aforesaid or a
notification of the place at which and the manner in which creditors or
members entitled to attend the meeting may obtain copies of such a
statement as aforesaid.”

Sub-Section (1) of Section 391 stipulates that a compromise or arrangement
can be proposed between a company or its creditor or any class of them or
between a company and its members or any class of them. It need not be
between all the creditors or all the members. Contextually, “class of
creditors” or “class of members” has a different meaning and connotation.
It gains significance when the question of approval of scheme under the Act
arises for consideration. While dealing with the approval of a scheme, the
Company Court is required to direct holding of meeting of the said class of
creditors or members concerned and only when the scheme is approved by the
majority in number representing 3/4th in value by the class of creditors,
or members present either in person or through proxy, the same becomes
binding on the said class of creditors or members. Once there is a voting
and the 3/4th majority has voted in favour of the scheme, it is binding on
those who have dissented and had voted against the scheme or those who
remained silent.
While analyzing the scope and ambit of the powers of the Company Court in
respect of Section 391 and 393 of the Act and the role of the Court a two-
Judge Bench in Miheer H. Mafatlal V. Mafatlal Industries Ltd.[11] has
observed thus:-
“Before sanctioning such a scheme even though approved by a majority of the
concerned creditors or members the [pic]Court has to be satisfied that the
company or any other person moving such an application for sanction under
sub-section (2) of Section 391 has disclosed all the relevant matters
mentioned in the proviso to sub-section (2) of that section. So far as the
meetings of the creditors or members, or their respective classes for whom
the Scheme is proposed are concerned, it is enjoined by Section 391(1)(a)
that the requisite information as contemplated by the said provision is
also required to be placed for consideration of the voters concerned so
that the parties concerned before whom the scheme is placed for voting can
take an informed and objective decision whether to vote for the scheme or
against it. On a conjoint reading of the relevant provisions of Sections
391 and 393 it becomes at once clear that the Company Court which is called
upon to sanction such a scheme has not merely to go by the ipse dixit of
the majority of the shareholders or creditors or their respective classes
who might have voted in favour of the scheme by requisite majority but the
Court has to consider the pros and cons of the scheme with a view to
finding out whether the scheme is fair, just and reasonable and is not
contrary to any provisions of law and it does not violate any public
policy. This is implicit in the very concept of compromise or arrangement
which is required to receive the imprimatur of a court of law. No court of
law would ever countenance any scheme of compromise or arrangement arrived
at between the parties and which might be supported by the requisite
majority if the Court finds that it is an unconscionable or an illegal
scheme or is otherwise unfair or unjust to the class of shareholders or
creditors for whom it is meant. Consequently it cannot be said that a
Company Court before whom an application is moved for sanctioning such a
scheme which might have got the requisite majority support of the creditors
or members or any class of them for whom the scheme is mooted by the
company concerned, has to act merely as a rubber stamp and must almost
automatically put its seal of approval on such a scheme. It is trite to say
that once the scheme gets sanctioned by the Court it would bind even the
dissenting minority shareholders or creditors. Therefore, the fairness of
the scheme qua them also has to be kept in view by the Company Court while
putting its seal of approval on the scheme concerned placed for its
sanction.”

Thereafter, the Court referred to Section 392 of the Act. The said
provision deals with the supervisory jurisdiction of the Company Court. It
is necessary to reproduce the same:
“392. (1) Where a High Court makes an order under Section 391 sanctioning a
compromise or an arrangement in respect of a company, it-
(a) shall have power to supervise the carrying out of the compromise or
arrangement; and
(b) may, at the time of making such order or at any time thereafter, give
such directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper
working of the compromise or 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.

(3) The provisions of this section shall, so far as may be, also apply to a
company in respect of which an order has been made before the commencement
of this Act under Section 153 of the Indian Companies Act, 1913 (7 of
1913), sanctioning a compromise or an arrangement.”

In the said context, the Court posed the question whether it has the
jurisdiction of an appellate authority to minutely scrutinize the scheme
and to arrive at an independent conclusion whether the scheme should be
permitted to go through or not and whether the majority creditors or
members, through their respective class, have approved the scheme as
required under sub-Section (2) of Section 391. It observed that the nature
of compromise or arrangement between the company and the creditors and the
members has to be kept in view, for it is the commercial wisdom of the
parties to the scheme who have taken an informed decision about the
usefulness and propriety of the scheme by supporting it by the requisite
majority vote. Therefore, the Court does not act as a Court of Appeal and
sit in judgment over the informed view of the parties concerned to the
compromise as the same would be in the realm of corporate and commercial
wisdom of the parties concerned and further the Court has neither the
expertise nor the jurisdiction to dig deep into the commercial wisdom
exercised by the creditors and the members of the company who have ratified
the scheme by the requisite majority. The Court eventually held that it
has the supervisory jurisdiction which is also in consonance with the
language employed under Section 392 of the Act. In that context, the Court
referred to the observations found in the oft-quoted passage in Buckley on
the Companies Act, 14th Edn. It is as follows:
“In exercising its power of sanction the court will see, first that the
provisions of the statute have been complied with, second, that the class
was fairly represented by those who attended the meeting and that the
statutory majority are acting bona fide and are not coercing the minority
in order to promote interest adverse to those of the class whom they
purport to represent, and thirdly, that the arrangement is such as an
intelligent and honest man, a member of the class concerned and acting in
respect of his interest, might reasonably approve.

The court does not sit merely to see that the majority are acting bona fide
and thereupon to register the decision of the meeting, but at the same
time, the court will be slow to differ from the meeting, unless either the
class has not been properly consulted, or the meeting has not considered
the matter with a view to the interest of the class which it is empowered
to bind, or some blot is found in the scheme.”

The Court also referred to the decision in Alabama, New Orleans, Texas and
Pacific Junction Rly. Co. Re[12] to cull out the principle relating to the
power and jurisdiction of the Company Court which is called upon to
sanction the scheme of arrangements or compromise between the company and
its creditors or shareholders. The observations of Lindley, L.J. as quoted
in the said authority read as under:
“What the court has to do is to see, first of all, that the provisions of
that statute have been complied with; and, secondly, that the minority has
been acting bona fide. The court also has to see that the minority is
[pic]not being overridden by a majority having interests of its own
clashing with those of the minority whom they seek to coerce. Further than
that, the court has to look at the scheme and see whether it is one as to
which persons acting honestly, and viewing the scheme laid before them in
the interests of those whom they represent, take a view which can
reasonably be taken by businessmen. The court must look at the scheme, and
see whether the Act has been complied with, whether the majority are acting
bona fide, and whether they are coercing the minority in order to promote
interests adverse to those of the class whom they purport to represent; and
then see whether the scheme is a reasonable one or whether there is any
reasonable objection to it, or such an objection to it as that any
reasonable man might say that he could not approve it.”

The observations of Fry, L.J. were also reproduced. A reference was made
to the decision in Anglo-Continental Supply Co. Ltd. Re[13] and the
judgment by a three-Judge Bench in Employees’ Union V. Hindustan Lever
Ltd.[14] and eventually, the following principles were culled out:
“In view of the aforesaid settled legal position, therefore, the scope and
ambit of the jurisdiction of the Company Court has clearly got earmarked.
The following broad contours of such jurisdiction have emerged:

1. The sanctioning court has to see to it that all the requisite
statutory procedure for supporting such a scheme has been complied with and
that the requisite meetings as contemplated by Section 391(1)(a) have been
held.

2. That the scheme put up for sanction of the Court is backed up by the
requisite majority vote as required by Section 391 sub-section (2).

3. That the meetings concerned of the creditors or members or any class
of them had the relevant material to enable the voters to arrive at [pic]an
informed decision for approving the scheme in question. That the majority
decision of the concerned class of voters is just and fair to the class as
a whole so as to legitimately bind even the dissenting members of that
class.

4. That all necessary material indicated by Section 393(1)(a) is placed
before the voters at the meetings concerned as contemplated by Section 391
sub-section (1).

5. That all the requisite material contemplated by the proviso of sub-
section (2) of Section 391 of the Act is placed before the Court by the
applicant concerned seeking sanction for such a scheme and the Court gets
satisfied about the same.

6. That the proposed scheme of compromise and arrangement is not found
to be violative of any provision of law and is not contrary to public
policy. For ascertaining the real purpose underlying the scheme with a view
to be satisfied on this aspect, the Court, if necessary, can pierce the
veil of apparent corporate purpose underlying the scheme and can
judiciously X-ray the same.

7. That the Company Court has also to satisfy itself that members or
class of members or creditors or class of creditors, as the case may be,
were acting bona fide and in good faith and were not coercing the minority
in order to promote any interest adverse to that of the latter comprising
the same class whom they purported to represent.

8. That the scheme as a whole is also found to be just, fair and
reasonable from the point of view of prudent men of business taking a
commercial decision beneficial to the class represented by them for whom
the scheme is meant.

9. Once the aforesaid broad parameters about the requirements of a
scheme for getting sanction of the Court are found to have been met, the
Court will have no further jurisdiction to sit in appeal over the
commercial wisdom of the majority of the class of persons who with their
open eyes have given their approval to the scheme even if in the view of
the Court there would be a better scheme for the company and its members or
creditors for whom the scheme is framed. The Court cannot refuse to
sanction such a scheme on that ground as it would otherwise amount to the
Court exercising appellate jurisdiction over the scheme rather than its
supervisory jurisdiction.

The aforesaid parameters of the scope and ambit of the jurisdiction of the
Company Court which is called upon to sanction a scheme of compromise and
arrangement are not exhaustive but only broadly illustrative of the
contours of the Court’s jurisdiction.”

In this context, we may usefully refer to Palmer’s Treatise on `Company
Law, 25th edition, wherein delineating with the concept of class, it has
been stated thus:-
“What constitutes a class:

The court does not itself consider at this point what classes of creditors
or members should be made parties to the scheme. This is for the company to
decide, in accordance with what the scheme purports to achieve. The
application for an order for meetings is a preliminary step, the applicant
taking the risk that the classes which are fixed by the judge, usually on
the applicant’s request, are sufficient for the ultimate purpose of the
section, the risk being that if in the result, and we emphasize the words
‘in the result’, they reveal inadequacies, the scheme will not be
approved’. If, e.g., rights of ordinary shareholders are to be altered, but
those of preference shares are not touched, a meeting of ordinary
shareholders will be necessary but not of preference shareholders. If there
are different groups within a class the interests of which are different
from the rest of the class, or which are to be treated differently under
the scheme, such groups must be treated as separate class for the purpose
of the scheme. Moreover, when the company has decided what classes are
necessary parties to the scheme, it may happen that one class will consist
of a small number of persons who will all be willing to be bound by the
scheme. In that case it is not the practice to hold a meeting of that
class, but to make the class a party to the scheme and to obtain the
consent of all its members to be bound. It is, however, necessary for at
least one class meeting to be held in order to give the court jurisdiction
under the section.”

In this regard, reference to a passage from Sovereign Life Assurance
Co. Ltd. v. Dodd[15], as stated by Bowen, L.J., would be apt. It reads as
follows:
“it seems plain that we must give such a meaning to “Class” as will prevent
the section being so worked as to result in confiscation and injustice, and
that it must be confined to those persons whose rights are not so
dissimilar as to make it impossible for them to consult together with a
view to their common interest.”

The purpose of the classification of creditors has its significance. It is
with this object that when a class has to be restricted, the principle has
to be founded on homogeneity and commonality of interest. It is to be seen
that dissimilar classes with conflicting interest are not put in one
compartment to avoid any kind of injustice. For example, an unsecured
creditor who has filed a suit and obtained a decree would not become a
secured creditor. He has to be put in the same class as other unsecured
creditors (See Halsbury’s Laws of India, 2007, Vol. 27).
The aforesaid being the position relating to the status of a class, at this
juncture, it is necessary to appreciate the basic facts which are
determinative in the case at hand. As the exposition of facts would
uncurtain, the appellant company had extended a short-term loan facility of
Rs.150 million to the respondent company on 4.7.2001; that the respondent
company had executed a deed of hypothecation in favour of the appellant
hypothecating by way of an exclusive charge of the monies and right, title
and interest relating to amounts, both present and future to be received or
payable by M/s. Hewlett Packard Ltd.; that the respondent had filed Forms 8
and 13 and the charge by way of hypothecation was duly registered with the
Registrar of Companies; that the appellant had initiated an arbitration
proceeding which eventually resulted in the consent award dated 1.7.2004
whereby the arbitral tribunal directed a sum of Rs.48,683,710/- as due on
30.06.2004 along with interest @ 20% p.a. on the principal amount of
Rs.36,360,000/- from 01.07.2004 till realization; that the award stipulated
due discharge of the liability on payment of Rs.36,360,000/- in four
instalments for the purpose of which post-dated cheques were issued; that
there was a postulate that in case of default of payment of any instalment,
the entire amount may become due and payable and the appellant would be
entitled in law to execute the award for recovery of the entire due without
prejudice to and in addition to entitlement to institute criminal
proceedings under the Negotiable Instruments Act; that the respondent
failed to pay the first instalment of Rs.17,500,000/- on or before
30.09.2004; that on 30.09.2004 the respondent filed a petition under
Sections 391-394 of the Act for sanction of the scheme; that the appellant
initially filed objections to the scheme in the form of a counter affidavit
on 25.11.2004 on merits and thereafter at a subsequent stage on 20.1.2005
filed an additional affidavit stating, inter alia, that it was an unsecured
creditor; that an affidavit was filed in oppugnation asserting that the
appellant was a secured creditor, regard being had to the hypothecation
deed and the registration having been effected with the Registrar of
Companies; that meeting of the secured creditors and guarantors was held on
6.4.2005 and a Chairperson was appointed; that the said order was
challenged by IndusInd Bank Ltd., WTI Bank Ltd. and Bank of Rajasthan Ltd.
in appeals but the same were dismissed by the Division Bench on 17.06.2005;
that the appellant preferred an appeal which was dismissed by the judgment
on 17.1.2006, which is impugned herein; that the scheme which has been
amended was put to vote and was duly approved by the three-fourth of the
secured creditors present and voting in value terms; and that the Court has
approved and accepted the modified Scheme.
We have, hereinabove, referred to the fact that the Scheme was amended and
approved in the meetings held by the secured creditors. For the sake of
completeness, we think it appropriate to reproduce how the learned Company
Judge had approved the Scheme.
“(i) The scheme of arrangement as amended by amendments approved at the
meeting of the secured creditors on April 16, 2005, being Annexure D1 to
the Company Petition No. 13/2004 is sanctioned so as to be binding with
effect from 31.03.2003, on the petitioner company and all of its secured
creditors and preference shareholders, including any secured creditor and
preference shareholders that may have obtained any decree, order or
direction from any court tribunal or any other authority, without any
further act or deed by the petitioner company, in respect of the
outstanding debt of the petitioner company as of March 31, 2003 to all its
secured creditors and preference shareholders, which amount shall be as has
been determined on the basis of the figures agreed and accepted between the
petitioner company and each of the secured creditors at the meeting of the
secured creditors convened and held on April 16, 2005, and hence the figure
as was specified in the application filed by the petitioner Company under
section 391 (1) of the Companies Act stands/ modified accordingly.

(ii) The petitioner Company shall within 30 days after the date of sealing
of this order cause a certified copy thereof to be delivered to the
Registrar of Companies, Kerala of registration.

(iii) On the coming into effect by the Scheme of Arrangement being filed by
the petitioner Company with the Registrar of Companies, Kerala and with
effect from 31.03.2003, the outstanding debt of the petitioner company owed
to all secured creditors and Preference Shareholders as of 31.03.2003 shall
be restructured on the terms and conditions and in the manner provided for
in the Scheme of Arrangement as annexed in Annexure D1 to the petition.

(iv) The total outstanding debt of the petitioner company to all is
Secured Creditors and Preference Shareholders as of 31.03.2003 of the
petitioner Company shall be restructured under the scheme of arrangement
and all rights and liabilities relating to such outstanding debt to secured
Creditors and Preference Shareholders as of 31.03.2003 shall stand created
under the Scheme of Arrangement. In addition, the petitioner company and
the Secured Creditors and Preference Shareholders shall enter into any
documentation that may be required, only to give formal effect to the
restricting and for the modification of the security contemplated by the
Scheme of Arrangement, and to govern the prospective/ongoing relationship
between the petitioner Company and its Secured Creditors and Preference
Shareholders (including covenants of the petitioner company, supervision of
the management of the petitioner Company, Event of Default etc). However,
upon the Scheme of Arrangement coming into effect, in the absence of the
formal documentation referred to above, the rights obligations and
privileges of the petitioner Company and the Secured Creditors and
Preference Shareholders shall be governed by the provisions of the Scheme
of Arrangement as detailed in Annexure D1 to the petition.

(v) Any legal or other proceedings pending against the petitioner
Company, in India or abroad, relating to any of the outstanding debt, of
the petitioner company to Secured Creditors and Preference Shareholders
shall, on the effectiveness of the Scheme of Arrangement, be terminated and
the rights, obligations and liabilities of the parties shall be governed by
the terms of the Scheme of Arrangement.

That the parties to the compromise of arrangement or other persons
interested shall be at liberty to apply to this court for any directions
that may be necessary in regard to the working of the Compromise or
arrangement and that the said company do file with the Registrar of
Companies a certified copy of this order within 14 days from the date.

Keeping in view the factual backdrop, we have to appreciate the principal
contentions. The seminal contention of the appellant is that it does not
fall into the class of secured creditors, for it had initiated the
arbitration proceeding and an award has been passed on consent which is a
simple money decree and, therefore, the deed of hypothecation, even if
assumed to be executed at one point of time, has become irrelevant. To
elaborate, the status of the appellant had changed from a secured creditor
to that of an unsecured creditor. On this foundation, a stance has been
taken that the principles of Order II, Rule 2, C.P.C. would be applicable
as the appellant would be debarred to issue on the basis of the charge of
hypothecation. Emphasis has been laid on the factum that there having been
a change of status, the appellant company cannot be clubbed with the
secured creditors as a class and even if it is kept in homogenous category
of secured creditors, it should still fall under a separate class, regard
being had to the fact it has obtained an award from the arbitral tribunal.
In this context, it is to be seen that whether the arbitration award has
the effect of obliterating or nullifying the status of the appellant and
making him an unsecured creditor as a consequence of which it would not be
able to sue on the basis of a charge created in its favour.
What is contended by Mr. Divan, learned senior counsel for the appellant is
that any further lis would be hit by principles enshrined under Order II,
Rule 2 as well as by resjudicata. It is urged by him that the claim of the
appellant company having been heard and decided in a formal proceeding,
i.e. the arbitration, it is binding and, therefore, the principle under
Order II, Rule 2 would come into play. For the said proposition, he has
drawn inspiration from Deva Ram (supra). The Court, after analyzing the
Order II, Rule 2 CPC, observed thus:
“A bare perusal of the above provisions would indicate that if a plaintiff
is entitled to several reliefs against the defendant in respect of the same
cause of action, he cannot split up the claim so as to omit one part of the
claim and sue for the other. If the cause of action is the same, the
plaintiff has to place all his claims before the court in one suit as Order
II Rule 2 is based on the cardinal principle that the defendant should not
be vexed twice for the same cause.”

In that context, reference was made to Palaniappa Chettiar v. Alagan
Chettiar[16]. The Court also observed that the Rule requires the unity of
all claims based on the same cause of action in one suit but it does not
contemplate unity of separate causes of action. If, therefore, the
subsequent suit is based on a different cause of action, the rule will not
operate as a bar. For the said purpose, reliance was placed on Arjun Lal
Gupta V. Mriganka Mohan Sur[17], State of Madhya Pradesh V. State of
Maharashtra[18], and Kewal Singh V. Mt. Lajwanti[19].
In this regard, immense emphasis has been placed by Mr. Divan, learned
senior counsel, on the authority in Official Liquidator, Chemmeens Exports
(P) Ltd. (supra), especially paragraphs 13, 15 and 18. Paras 15 and 18
which have been pressed into service with immense inspiration read as
follows:
“The aforementioned preliminary decree was passed by the Court even though
the Official Liquidator raised the plea in the written statement that the
charge created on the Company’s property was void under Section 125 of the
Act. But it may be that the plea was not argued at the hearing. However,
what is clear from the material on record is that no appeal was [pic]filed
against the said preliminary decree by the Official Liquidator and the
preliminary decree has attained finality.

xxxx xxxx xxxx

In Suryakant Natvarlal Surati v. Kamani Bros. Ltd.[20] the Company created
a charge under a mortgage in favour of the trustees of the Employees’
Gratuity Fund. The creditors, by a preliminary decree of 3-12-1977 were
entitled to receive the amount secured on the property of the [pic]Company;
the Court fixed 8-12-1988 as the date for redemption and ordered that in
default of payment of the sum due by that date, the property was to be sold
by public auction. On an application made on 16-2-1978, the Company was
ordered to be wound up by an order dated 3-8-1979. As default in payment of
the decreed amount was committed, the mortgagees applied for leave of the
Court under Section 446 to execute the decree against the Official
Liquidator by application dated 10-7-1981. Three contributories sought
injunction against taking any further action on the ground that the charge
created by the Company was not registered under Section 125 of the
Companies Act, therefore, the mortgagees should be treated only as
unsecured creditors. Their application was dismissed by a learned Single
Judge. On appeal, speaking for the Division Bench of the Bombay High Court
Justice Bharucha (as he then was) laid down, inter alia, the principle that
the question of applicability of Section 125 had to be decided on the terms
of the decree – whether the unregistered charge created by the mortgagor
was kept alive or extinguished or replaced by an order of sale created by
the decree; if upon a construction of the decree, the Court found that the
unregistered charge was kept alive, the provisions of Section 125 would
apply and if, on the other hand, the decree extinguished the unregistered
charge, the section would not apply. We are in respectful agreement with
that principle. We hold that a judgment-creditor will be entitled to relief
from the Company Court accordingly.”

Relying on the said passages, it is urged that when the award has been
passed on consent and has the status of a decree that makes him an
unsecured creditor, for it has attained finalilty. To appreciate the said
submission, the quoted passages are to be appositely appreciated. As is
evident, this Court has concurred with the view expressed by the Bombay
High Court in Suryakant Natvarlal Surati (supra). The Division Bench of
the Bombay High Court had opined that the question of applicability of
Section 125 of the Act has to be decided on the terms of the decree –
whether the unregistered charge created by the mortgagor was kept alive or
extinguished or replaced by an order of sale created by the decree; if upon
a construction of the decree, the Court found that the unregistered charge
was kept alive, the provisions of Section 125 would apply and if, on the
other hand, the decree extinguished the unregistered charge, the Section
would not apply. To elucidate, it would depend upon the terms of the
decree. In the case at hand, the learned Arbitrator has passed an award on
consent. It is trite that it has the status of a decree but there is
nothing expressed in the award that the decree has extinguished the charge.
It was not extinguished because the award does not say so. To have a
complete picture, we think it necessary to reproduce the relevant portion
of the operative part of the award:
“I. Award on admission in the sum of Rs.48,683,710/- (due as on June 30,
2004) in favour of the Claimants against the Respondents together with
further interest @ 20% p.a. on the principal sum of Rs.36,360,000/- from
1st July, 2004 till payment and/or realization.

II. The aforesaid Award against the Respondents shall be marked as fully
satisfied in the even of the Respondents making payment to the Claimants of
the sum of Rs.36,360,000/- in the following installments:-

Rs.17,500,000/- on or before 30th Septemebr, 2004

Rs.6,287,000/- on or before 15th April, 2017

Rs.6,287,000/- on or before 15th April, 2018

Rs.6,287,000/- on or before 15th April, 2019

III. Simultaneously with the signing of these Consent Terms, the
Respondents have handed over to the Claimants one post dated cheque in
favour of the Claimants for Rs.17,500,000/- and 3 post dated cheques in
favour of the Claimants for Rs.6,287,000/- each falling due on the date of
the respective instalments.

IV. The Respondents hereby agree and undertake that the Respondents shall
make payment of the said sum of Rs.36,360,000/- to the Claimants as per the
Schedule set out in Clause 2 above and shall honour the post dated cheques
on their respective due dates. This undertaking is given by the
Respondents after satisfying themselves that they have the financial
ability to make the said payment on the respective due dates.

V. In the event of the Respondents committing default in payment of any
of the installments including the last installment on the due date for any
reason whatsoever, the entire dues together with interest as provided on
Clause I hereinabove and outstanding due and payable by the Respondents to
the Claimants as on that date shall become forthwith due and payable by the
Respondents to the Claimants and the Claimants shall be entitled to
forthwith execute the Award against the Respondents and recover the entire
dues. In that even, any installments/s paid under Clause 2 will be first
appropriated towards the interest payable under Clause I without prejudice
and in addition thereto, the Claimants shall also be entitled to institute
criminal legal proceedings against the Respondents including for dishonor
of cheque/s under the provisions of the Negotiable Instruments Act, 1881.”
In view of the aforesaid conclusions, in the award, we have no scintilla of
doubt that the decision in Official Liquidator, Chemmeens Exports (P) Ltd.
(supra) is distinguishable.
In this backdrop, we are to analyse whether the deed of hypothecation would
continue in spite of the arbitration award. Mr. Divan submitted that it
would not survive because of the provisions contained in Order II, Rule 2
of the CPC. We have already referred to the decree and distinguished the
decision in Official Liquidator, Chemmeens Exports (P) Ltd (supra). In
this context, reference to Order XXXIV Rule 14 and 15 of the CPC would be
apposite. They read as follows:
14. Suit for sale necessary for bringing mortgaged property to sale – (1)
Where a mortgagee has obtained a decree for the payment of money in
satisfaction of a claim arising under the mortgage, he shall not be
entitled to bring the mortgaged property to sale otherwise than by
instituting a suit for sale in enforcement of the mortgage, and he may
institute such suit notwithstanding anything contained in Order II, rule 2.

(2) Nothing in sub-rule (1) shall apply to any territories to which the
Transfer of Property Act, 1882(4 of 1882), has not been extended.

15. Mortgages by the deposit of title-deeds and charges – (1) All the
provisions contained in this Order which apply to a simple mortgage shall,
so far as may be, apply to a mortgage by deposit of title-deeds within the
meaning of section 58, and to a charge within the meaning of section 100 of
the Transfer of Property Act, 1882 (4 of 1882).

(2) Where a decree orders payment of money and charges it on immovable
property on default of payment, the amount may be realized by sale of that
property in execution of that decree.

The said provisions came to be interpreted in S. Nazeer Ahmed V. State Bank
of Mysore and Others[21]. Referring to the said provisions, the Court held
the suit for enforcement of mortgage could be filed even when in the
earlier civil proceedings, the plaintiff had omitted to sue on the basis of
equitable mortgage and in such cases, principle of constructive resjudicata
or Order II, Rule 2 would not apply. The two-Judge Bench has opined that
in such cases a suit for enforcement of the mortgage would lie under Order
XXXIV notwithstanding that in the earlier suit the plaintiff had not asked
for enforcement of the mortgage. As the factual matrix in the said case
would unfurl, the Bank had advanced a loan by hypothecating a bus and
further by equitable mortgaging two items of immovable properties. It had
at first filed a suit for recovery of money and sought to proceed against
the hypothecated bus which could not be traced and recovered. In the said
suit, the Bank had not prayed for a decree under Order XXXIV on the basis
of mortgage. There was an attempt to enforce the mortgaged property in the
execution proceeding but the same was rejected as no decree of mortgage has
been passed. Thereafter, the Bank, the respondent therein, instituted
another suit for enforcement of equitable mortgage. The second suit was
held to be maintainable, regard being had to the language employed in Rules
14 and 15 of Order XXXIV, holding, inter alia, that said Rules had been
enacted to protect the mortgagor, etc. and, therefore, the plea of
constructive resjudicata relying upon Order II, Rule 2 of the Code was
erroneous. The two-Judge Bench held that for Order II, Rule 2 to apply,
the cause of action in the two suits should be similar and the bar of
constructive resjudicata, as was held, was not applicable. Analysing the
facts, the Court held:
“That apart, the cause of action for recovery of money based on a medium-
term loan transaction simpliciter or in enforcement of the hypothecation of
the bus available in the present case, is a cause of action different from
the cause of action arising out of an equitable mortgage, though the
ultimate relief that the plaintiff Bank is entitled to is the recovery of
the term loan that was granted to the appellant. On the scope of Order II
Rule 2, the Privy Council in Payana Reena Saminathan v. Pana Lana
Palaniappa[22] has held that Order II Rule 2 is directed to securing an
exhaustion of the relief in respect of a cause of action and not to the
inclusion in one and the same action of different causes of action, even
though they [pic]may arise from the same transactions. In Mohd. Khalil Khan
v. Mahbub Ali Mian[23], the Privy Council has summarised the principle
thus: (IA pp. 143-44)

“The principles laid down in the cases thus far discussed may be thus
summarised:

(1) The correct test in cases falling under Order II Rule 2, is ‘whether
the claim in the new suit is, in fact, founded on a cause of action
distinct from that which was the foundation for the former suit’. (Moonshee
Buzloor Ruheem v. Shumsoonnissa Begum[24])

(2) The cause of action means every fact which will be necessary for the
plaintiff to prove, if traversed, in order to support his right to the
judgment. (Read v. Brown[25])

(3) If the evidence to support the two claims is different, then the causes
of action are also different. (Brunsden v. Humphrey[26])

(4) The causes of action in the two suits may be considered to be the same
if in substance they are identical. (Brunsden v. Humphrey)
(5) The cause of action has no relation whatever to the defence that may be
set up by the defendant, nor does it depend on the character of the relief
prayed for by the plaintiff. It refers ‘to the media upon which the
plaintiff asks the Court to arrive at a conclusion in his favour’. (Chand
Kour v. Partab Singh[27]) This observation was made by Lord Watson in a
case under Section 43 of the Act of 1882 (corresponding to Order II Rule
2), where plaintiff made various claims in the same suit.”

A Constitution Bench of this Court has explained the scope of the plea
based on Order II Rule 2 of the Code in Gurbux Singh v. Bhooralal1. It will
be useful to quote from the headnote of that decision: (SCR Headnote pp.
831-32)

“Held: (i) A plea under Order II Rule 2 of the Code based on the existence
of a former pleading cannot be entertained when the pleading on which it
rests has not been produced. It is for this reason that a plea of a bar
under Order II Rule 2 of the Code can be established only if the defendant
files in evidence the pleadings in the previous suit and thereby proves to
the court the identity of the cause of action in the two suits. In other
words a plea under Order II Rule 2 of the Code cannot be made out except on
proof of the plaint in the previous suit the filing of which is said to
create the bar. Without placing before the court the plaint in which those
facts were alleged, the defendant cannot invite the court to speculate or
infer by a process of deduction what those facts might be with reference to
the reliefs which were then claimed. On the facts of this [pic]case it has
to be held that the plea of a bar under Order II Rule 2 of the Code should
not have been entertained at all by the trial court because the pleadings
in Civil Suit No. 28 of 1950 were not filed by the appellant in support of
this plea.

(ii) In order that a plea of a bar under Order II Rule 2(3) of the Code
should succeed the defendant who raises the plea must make out (i) that the
second suit was in respect of the same cause of action as that on which the
previous suit was based; (ii) that in respect of that cause of action the
plaintiff was entitled to more than one relief; (iii) that being thus
entitled to more than one relief the plaintiff, without leave obtained from
the Court omitted to sue for the relief for which the second suit had been
filed.”

It is not necessary to multiply authorities except to notice that the
decisions in Sidramappa v. Rajashetty[28], Deva Ram v. Ishwar Chand[29] and
State of Maharashtra v. National Construction Co.[30] have reiterated and
re-emphasised this principle.”

Applying the said test to the present case, it can be stated with certitude
that there is no shadow of doubt that the consent award in an arbitral
proceeding would not bar a suit for enforcement of the charge for the same
reasons and it would not be hit by Order II, Rule 2 CPC. We are absolutely
conscious that the present case does not relate to a charge as engrafted
under Section 100 of the Transfer of Property Act, or simply for equitable
mortgage. In the present case, the charge is by hypothecation and relates
to movable property. Needless to say, provisions of Rules 14 and 15 of
Order XXXIV would not be directly applicable but the principle inherent
under the said Rules, as enunciated would be applicable. In fact, the
ratio laid down in S. Nazeer Ahmed (supra), as we understand, makes it
equally applicable to different causes of action. The said principle would
apply, if we accept that the cause of action is distinct.
The next aspect we shall advert to is the applicability of doctrine of
resjudicata. In Deva Ram (supra), the Court while dealing with the said
doctrine has opined thus:
“Section 11 contains the rule of conclusiveness of the judgment which is
based partly on the maxim of Roman Jurisprudence “Interest reipublicae
[pic]ut sit finis litium” (it concerns the State that there be an end to
law suits) and partly on the maxim “Nemo debet bis vexari pro una at eadem
causa” (no man should be vexed twice over for the same cause). The section
does not affect the jurisdiction of the court but operates as a bar to the
trial of the suit or issue, if the matter in the suit was directly and
substantially in issue (and finally decided) in the previous suit between
the same parties litigating under the same title in a court, competent to
try the subsequent suit in which such issue has been raised.”

Mr. Divan, learned senior counsel has also drawn our attention to Harbans
Singh (supra) wherein it has been held that when no appeal was preferred by
the Union of India, while accepting the award in favour of the first
respondent therein, it had attained finality and thus the principle of
resjudicata was applicable. Reliance has also been placed on
Ranganayakamma (supra).
The said plea has been advanced on the foundation that the controversy
between the parties having been finally put to rest by the arbitral award,
the respondent would not have dragged the appellant to the said proceeding
as that would vex him twice. The issue before the Company Court was quite
different than that was before the Arbitral Tribunal. True it is, it has
the status of a decree which is executable, as a decree having gone
unchallenged, but the lis of framing a Scheme under the Act is of different
character. It could not have been directly or substantially in issue
before the learned Arbitrator. That apart, we have already held the status
of the appellant as a secured creditor has not changed. Therefore, in our
considered opinion, the plea of resjudicata which has been canvassed by the
learned senior counsel for the appellant does not commend acceptance and we
so hold.
Mr. Divan, learned senior counsel has drawn our attention to Section 63 of
the Contract Act. To buttress the applicability of the said provision, he
has commended us to the decision in Firm Chunna Mal Ram Nath (supra). The
relevant portion reads as under:
“The contentions raised on these sections were as follows. The
respondents, relying on Sections 39 and 63, said that the appellants had
put and end to the agreement and had expressly dispensed them from delivery
at all. The appellants contended that Section 63 applied only where there
was an agreement to dispense or a contract, supported by consideration to
do so, and that in any case it could only operate, when the party
dispensing had performed his part of the contract and only something
remained to be performed on the other side, unless dispensed with Abaji
Sitaram Modok v. Trimbak Municipality 28 B. 66; 5 Bom. L.R. 689. They
further said that, if they had been wrong in refusing in advance to accept
bales, this repudiation had not been accepted by the respondents, and,
therefore, the contract remained alive and ought to have been performed.
It is evident that the alleged dispensation under Section 63 is by itself a
complete answer, unless the absence of contract or consideration is fatal,
for the appellants again and again dispensed with the performance by the
respondents of their promise to deliver the goods contracted for and they
cannot recover damages for the breach of a promise touching the performance
of a thing they wholly dispense with.

In Abaji Sitaram Modok v. Trimbak Municipality[31], Chief Justice Jenkins
deals with Section 63, and holds that the promise mentioned in Section 63,
can, only do the acts he is by that section empowered to do, if there be an
agreement (as defined by 2(e)) amongst the parties to that effect. At page
72 of the report of this case the learned Judge is reported to have
expressed himself thus:-

Therefore we hold that assuming there was a legal resolution and that it
was communicated as alleged, still inasmuch as a dispensation or remission
under Section 63 requires an agreement or contract, the resolution was of
no legal effect since the provisions of s.30 of Bombay Act II of 1884 have
not been observed.

With this their Lordships are unable to agree The language of the section
does not refer to any such agreement and ought not to be enlarged by any
implication of English doctrines. On this they agree with the learned
Judges of the High Court.”

He has also drawn inspiration from Jagad Bandu Chatterjee (supra), wherein
after referring to the observations of Lord Russell of Killowen in Dawson’s
Bank Limited V. Nippon Menkwa Kabushiki Kaisha[32] and the well known work
of Sir William P. Anson “Principles of the English Law of Contract”, 22nd
Edn., the Court opined thus:
“In India the general principle with regard to waiver of contractual
obligation is to be found in Section 63 of the Indian Contract Act. Under
that section it is open to a promisee to dispense with or remit, wholly or
in part, the performance of the promise made to him or he can accept
instead of it any satisfaction which he thinks fit. Under the Indian law
neither consideration nor an agreement would be necessary to constitute
waiver. This Court has already laid down in Waman Shriniwas Kini v. Ratilal
Bhagwandas & Co.[33] that waiver is the abandonment of a right which
normally everybody is at liberty to waive. “A waiver is nothing unless it
amounts to a release. It signifies nothing more than an intention not to
insist upon [pic]the right”…..

The stress on the aforesaid decisions by the learned senior counsel is to
highlight that the respondent have waived the hypothecation by accepting
the arbitration award. The said submission has its own fallacy. The
arbitral award was passed on consent and from the same it would be
inappropriate to deduce that the hypothecation stood annulled. In this
context, we may fruitfully refer to Sections 176 and 177 of the Contract
Act, 1872, which pertain to the rights of pawnee on default made by the
pawnor. The said provisions read as under:
176. Pawnee’s right where pawnor makes default. – If the pawnor makes
default in payment of the debt, or performance; at the stipulated time or
the promise, in respect of which the goods were pledged, the pawnee may
bring a suit against the pawnor upon the debt or promise, and retain the
goods pledged as a collateral security; or he may sell the thing pledged,
on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the
debt or promise, the pawnor is still liable to pay the balance. If the
proceeds of the sale are greater than the amount so due, the pawnee shall
pay over the surplus to the pawnor.

177. Defaulting pawnor’s right to redeem – If a time is stipulated for the
payment of the debt, or performance of the promise, for which the pledge is
made, and the pawnor makes default in payment of the debt or performance of
the promise at the stipulated time, he may redeem the goods pledged at any
subsequent time before the actual sale of them, but he must, in that case,
pay, in addition, any expenses which have arisen from his default.”

The aforesaid two provisions when read in a conjoint manner clearly
establish that a pledge does not get extinguished and, in fact, continues
even when the pawnee has sued and recovered a part of the debt without
enforcement of the pledge or the security. As per Section 176, when the
pawnor makes default in making the payment, the pawnee may bring a suit
upon the debt or promise and retain the good(s) pledged as a collateral
security. A pawnee has both collateral and concurrent rights and can
institute a suit for the purpose of realization of the said debt or promise
while retaining the goods as a collateral security. Section 176 also makes
it clear that it is the discretion of the pawnee and it gives an option to
him and merely because pawnee has filed a suit for recovery, that would not
affect or destroy the charge or the right of the pawnee in respect of a
pledged goods or the collateral security. Thus, it is within the domain of
discretion of pawnee to file a suit for recovery of a debt and yet retain
the collateral security or pledged goods. It would not bar or prohibit a
pawnee from subsequently selling the pledged goods or the collateral
security. It is pertinent to mention here that there is a difference
between a hypothecation and a pledge. In the case of a pledge, the
security is in possession of the pledge, but in the case of hypothecation,
the possession remains with the owner i.e. the pawnor. Though such a
distinction exists, yet it is an accepted legal principle that
hypothecation is treated as a sub-species of pledge and virtually has the
same legal effect. In this context, reference to a passage from Lallan
Prasad V. Rahmat Ali and another[34], would be seemly.
“17. There is no difference between the common law of England and the law
with regard to pledge as codified in sections 172 to 176 of the Contract
Act. Under section 172 a pledge is a bailment of the goods as security for
payment of a debt or performance of a promise. Section 173 entitles a
pawnee to retain the goods pledged as security for payment of a debt and
under section 175 he is entitled to receive from the pawner any
extraordinary expenses he incurs for the preservation of the goods pledged
with him. Section 176 deals with the rights of a pawnee and provides that
in case of default by the pawner the pawnee has (1) the right to sue upon
the debt and to retain the goods as collateral security and (2) to sell the
goods after reasonable notice of the intended sale to the pawner. Once the
pawnee by virtue of his right under section 176 sells the goods the right
of the pawner to redeem them is of course extinguished. But as aforesaid
the pawnee is bound to apply the sale proceeds towards satisfaction of the
debt and pay the surplus, if any, to the pawner. So long, however, as the
sale does not take place the pawner is entitled to redeem the goods on
payment of the debt. It follows therefore that where a pawnee files a suit
for recovery of debt, though he is entitled to retain the goods he is bound
to return them on payment of the debt. The right to sue on the debt assumes
that he is in a position to redeliver the goods on payment of the debt and
therefore if he has put himself in a position where he is not able to
redeliver the goods he cannot obtain a decree. If it were otherwise, the
result would be that he would recover the debt and also retain the goods
pledged and the pawner in such a case would be placed in a position where
he incurs a greater liability than he bargained for under the contract of
pledge. The pawnee therefore can sue on the debt retaining the pledged
goods as collateral security. If the debt is ordered to be paid he has to
return the goods or if the goods are sold with or without the assistance of
the court appropriate the sale proceeds towards the debt. But if he sues on
the debt denying the pledge, and it is found that he was given possession
of the goods pledged and had retained the same, the pawner has the right to
redeem the goods so pledged by payment of the debt. If the pawnee is not in
a position to redeliver the goods he cannot have both the payment of the
debt and also the goods. Where the value of the pledged property is less
than the debt and in a suit for recovery of debt by the pledgee, the pledge
denies the pledge or is otherwise not in a position to return the pledged
goods he has to give credit for the value of the goods and would be
entitled then to recover only the balance”.

More than eight decades back, the Bombay High Court in Gulamhusain Lalji
Sajan V. Clara D’Souza[35], while dealing with the applicability of Section
176 of the Contract Act to a case of hypothecation, had opined thus:
“Under S.176, Contract Act, the pledge has a right to bring a suit against
the pledgor upon the debt or promise, and retain the goods pledged as a
collateral security; or he may sell the thing pledged in giving the pledgor
reasonable notice of the sale.

It is clear under the law applicable to cases of a pledge that the creditor
has two rights which are concurrent, and the right to proceed against the
property pledged is not merely accessory to the right to proceed against
the debtor personally. For the pledge may have a right to sue for sale of
the property even in the absence of a right to sue for a personal decree.

The same principles would apply to the case of hypothecation or mortgages
of moveable property.”

Be it noted, in the said case reliance was placed on Nim Chad Babu v.
Jagabandhu Ghose[36] and Mahalinga Nadar v. Ganapathi Subbien[37].
We will be failing in our duty if we do not advert to the issue that the
appellant shall remain as a secured creditor, for it was registered as such
under the Registrar of Companies. The formalities for creating the charge
having duly followed, the Division Bench has referred to the Form No. 8 and
13 and also adverted to the power of Registrar to make entries of
satisfaction and release, as provided under Sections 138 and 139 of the
Act. It has also expressed the view that in the absence of any proceeding,
the status of the company as a secured creditor continues.
After registration of the deed of hypothecation, if a condition subsequent
is not satisfied, that would be in a different realm altogether. In any
case, the finding has been recorded that the respondent was not at fault
and, in any case, that would not change the status of the appellant as a
secured creditor.
In view of the aforesaid analysis, we are of the considered opinion that
the appellant cannot be treated as an unsecured creditor and it is not
permissible for him to put forth a stand that it would not be bound by the
Scheme that has been approved by the learned Company Judge.
The aforesaid conclusion of ours leads to the inevitable dismissal of the
appeal, which we direct. However, in the factum and circumstances of the
case, there shall be no order as to costs.

………………………..J.
[Anil R. Dave]
………………………J.
[Dipak Misra ]
New Delhi;
January 09, 2015

———————–
[1] AIR 1996 SC 378
[2] AIR 1990 SC 53
[3] AIR 1928 PC 99
[4] (1969) 3 SCC 445
[5] (1998) 5 SCC 401
[6] (2008) 15 SC 673
[7] (2013) 1 SCC 462
[8] (1976) 3 SCC 528
[9] (2009) 2 SCC 526
[10] (1998) 5 SCC 401
[11] (1997) 1 SCC 579
[12] (1891) 1 Ch 213
[13] (1922) 2 Ch 723
[14] (1995) Supp (1) SCC 499
[15] 1892 (2) Q.B. 573 CA
[16] AIR 1922 PC 228
[17] AIR 1975 SC 207
[18] AIR 1977 SC 1466
[19] AIR 1980 SC 161
[20] (1985) 58 Comp Cas 121 (Bom)
[21] (2007) 11 SCC 75
[22] (1913-14) 41 IA 142
[23] (1947-48) 75 IA 121
[24] (1867) 11 MIA 551
[25] (1888) 22 QBD 128
[26] (1884) 14 QBD 141
[27] (1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)
[28] (1970) 1 SCC 186
[29] (1995) 6 SCC 733
[30] (1996) 1 SCC 735
[31] 5 Bom. L.R. 689
[32] 62 IA 100, 108
[33] (1959) Supp 2 SCR 217, 226
[34] AIR 1967 SC 1322
[35] AIR 1929 Bom. 471
[36] [1894] 22 Ca. 21
[37] [1902] 27 Mad. 528

———————–
59

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