Supreme Court of India
INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITEDversusB.P.L. LIMITED
- Citation
- 2015 INSC 19
- Decided
- 9 January 2015
- Disposal
- Dismissed
- Bench
- ANIL R DAVE
Holding
The appellant remains a secured creditor and is bound by the scheme approved by the Company Judge; the arbitration award does not extinguish the charge nor invoke res judicata or Order II Rule 2 CPC.
Summary
B.P.L. Ltd., facing severe financial distress, sought approval of a scheme of arrangement under Section 391 of the Companies Act, 1956. Infrastructure Leasing & Financial Services Ltd. (the appellant) was a secured creditor with a hypothecation charge registered against B.P.L. but later argued that a consent arbitration award extinguished its secured status, rendering it an unsecured creditor and invoking Order II Rule 2 of the CPC as a bar to the scheme. The Supreme Court held that the appellant remained a secured creditor, the arbitration award did not extinguish the charge nor create res judicata, and the scheme approved by the Company Judge was binding on all creditors of that class, including dissenters. Consequently, the appeal was dismissed.
Issues considered
- The appellant's status as a secured versus unsecured creditor after the arbitration award.
- Whether the arbitration award operates as res judicata or under Order II Rule 2 CPC to bar proceedings before the Company Court.
- Whether the scheme of arrangement approved by the Company Judge is binding on dissenting creditors.
- The effect of Sections 176 and 177 of the Contract Act on the continuation of a pledge/hypothecation.
- The jurisdiction and supervisory role of the Company Court under Sections 391, 392, and 393 of the Companies Act.
Legislation cited
- Code of Civil Procedure, 1908s. Order II Rule 2, s. Order XXXIV Rule 14, s. Order XXXIV Rule 15
- Companies Act, 1956s. 138, s. 139, s. 391, s. 392, s. 393
- Indian Contract Act, 1872s. 176, s. 177, s. 63
- Negotiable Instruments Act, 1881
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Subjects
Companies ActScheme of arrangementSecured creditorArbitration awardRes judicataOrder II Rule 2 CPCHypothecationPledgeContract ActCorporate restructuring
Judgment
(2015] 2 S.C.R. 273
INFRASTRUCTURE LEASING & FINANCIAL A
SERVICES LIMITED
v.
B.P.L. LIMITED
B
(Civil Appeal No. 2701 of 2006)
JANUARY 09, 2015
[ANIL R. DAVE AND DIPAK MISRA, JJ.]
c
Companies Act, 1956 - s.391 - Compromise between
Company and its creditors - Respondent-company
proposed a scheme involving its creditors - Application ul
s 391(1) by respondent-company seeking permission for
holding meeting for consideration of approval of the D
compromise - Objection to, by one of the creditors
(appellant) denying applicability of the scheme on it on the
ground that it was not a secured creditor as its status as
secured creditor was changed in view of subsequent events
including the arbitration award which was passed on E
consent; and that in view of Order II r 2 CPC the arbitral
award operates as res judicata and hence proceedings
before Company Court were barred - Company Judge
approved the scheme - In Company appeal, Order of
Company Judge was upheld - On appeal to this Court, F
held: The appellant-creditor would be bound by the scheme
approved by the Company Judge - The appellant-creditor
was a secured creditor and its status continued as such -
The cause of action before the Arbitral Tribunal and the
Company Court were different and hence the consent G
award passed by the arbitrator would not operate as res
judicata and Or II r2 would not apply - Even in view of
the principles engrained u/ss. 176 and 177 of the Contract
273 H
274 SUPREME COURT REPORTS [2015] 2 S.C.R.
A Act, proceedings before Company Court cannot be barred
holding that the respondent-company waived the
hypothecation by accepting the arbitral award - Code of
Civil Procedure, 1908 - Or. II r. 2 - Contract Act, 1872 -
ss. 176 and 177.
B
Dismissing the appeal, the Court
HELD: 1.1 Sub-Section (1) of Section 391
stipulates that a compromise or arrangement can be
proposed between a company or its creditor or any
C 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
D 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
E 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 3141h majority has voted
F in favour of the scheme, it is binding on those who
have dissented and had voted against the scheme or
those who remained silent. [Para 19] [294-F-H; 295-A-
B]
G Miheer H. Mafatlal v. Mafatlal Industries Ltd. 1996 (6)
Suppl. SCR 1 = (1997) 1 SCC 579 - relied on.
Employees' Union v. Hindustan Lever Ltd 1994 (4)
Suppl. SCR 723 = (1995) Supp (1) SCC 499 • referred
H to.
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 275
v. B.P.L. LTD.
Alabama, New Orleans, Texas and Pacific Junction A
Rly. Co. Re (1891) 1 Ch 213; Anglo-Continental Supply
Co. Ltd. Re (1922) 2 Ch 723 - referred to.
1.2 The purpose of the classification of creditors
has its significance. It is with this object that when a B
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 C
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. (Para 26] [304-0-E]
Sovereign Life Assurance Co. Ltd. v. Dodd 1892 (2)
Q.B. 573 CA- referred to. D
2. For Order II Rule 2 CPC to apply, the cause of
action in the cases should be similar and the bar of
constructive res judicata would not be applicable. The
consent award in an arbitral proceeding would not bar E
a suit for enforcement of the charge and it would not be
hit by Order II, Rule 2 CPC. In the present case, 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 F
decree having gone unchallenged, but the /is of framing
a Scheme under the Companies Act is of different
character. It could not have been directly or substantially
in issue before the Arbitrator. That apart, the status of
the appellant as a secured creditor has not changed. G
Therefore, the plea of resjudicata does not commend
acceptance. [Paras 35, 36 and 38] (317-E; 321-B-D]
S. Nazeer Ahmed v. State Bank of Mysore and Others
=
2007 (1) SCR 843 (2007) 11 SCC 75 - relied on.
H
276 SUPREME COURT REPORTS [2015] 2 S.C.R.
A Indian Bank v. Official Liquidator, Chemmeens Exports
(P} Ltd. and others 1998 (3) SCR 255 = (1998) 5 SCC 401
- distinguished.
Deva Ram v. lshwar Chand 1995 (4) Suppl. SCR 369
B =AIR 1996 SC 378; Ranganayakamma v. K.S. Prakash
=
2008 (9) SCR 297 (2008) 15 SC 673; Harbans Singh
and others v. Sant Hari Singh and others 2009 (1) SCR
250 = (2009) 2 SCC 526; Palaniappa Chettiar v. Alagan
Chettiar AIR 1922 PC 228; Arjun Lal Gupta v. Mriganka
C Mohan Sur AIR 1975 SC 207; State of Madhya Pradesh
v. State of Maharashtra 1977 (2) SCR 555 = AIR 1977 SC
1466; Kewal Singh v. Mt. Lajwanti 1980 (1) SCR 854 =
AIR 1980 SC 161 - referred to.
Palmer's Treatise on 'Company Law, 25 1h edition;
D Halsbury's Laws of India, 2007, Vol. 27 - referred to.
3. The provisions u/ss. 176 and 177 of Contract
Act, 1872 when read in a conjoint manner clearly
establish that a pledge does not get extinguished and,
E 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
F 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
G 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
H domain of discretion of pawnee to file a suit for
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 277
v. B.P.L. LTD.
recovery of a debt and yet retain the collateral security A
or pledged goods. It would not bar or prohibit a pawnee
from subsequently selling the pledged goods or the
collateral security. Though there is a difference between
a hypothecation and a pledge, yet it is an accepted
legal principle that hypothecation is treated as a sub- B
species of pledge and virtually has the same legal
effect. The arbitral award in the present case was
passed on consent and from the same it would be
inappropriate to deduce that the hypothecation stood
annulled. [Para 41 and 42] [323-G; 324-A, G-H; 325-A- C
F]
Firm Chunna Mal Ram Nath v. Firm Moo/ Chand Ram
Bhagat AIR 1928 PC 99; Jagad Bandu Chatterjee v. Nilima
Rani (1969) 3 SCC 445; Lal/an Prasad v. Rahmat Ali and D
another 1967 SCR 233 =AIR 1967 SC 1322; Gu/amhusain
Lalji Sajan v. Clara D'Souza AIR 1929 Born. 471; Nim
Chad Babu v. Jagabandhu Ghose [1894] 22 Ca. 21; and
Mahalinga Nadar v. Ganapathi Subbien [1902] 27 Mad.
528 - referred to.
E
Dawson's Bank Limited v. Nippon Menkwa Kabushiki
Kaisha 62 IA 100, 108 - referred to.
4. The appellant shall remain as a secured creditor,
for it was registered as such under the Registrar of F
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 G
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. Therefore, the
appellant cannot be treated as an unsecured creditor
and it is not permissible for him to put forth a stand H
278 SUPREME COURT REPORTS (2015) 2 S.C.R.
A that it would not be bound by the Scheme that has
been approved by the Company Judge. [Para 44 and
46] [328-8-D,F]
K. V George v. Secretary to Government, Water and Power
B Department 1989 (1) Suppl. SCR 398 =AIR 1990 SC 53
- referred to.
Jitendra Nath Singh v. Official Liquidator and ors. 2012
(13) SCR 339 = (2013) 1 SCC 462; Lonankutty v. Thomman
and Another 1976 (0) Suppl. SCR 74 = (1976) 3 SCC 528
c - cited.
Case Law Reference
1989 (1) Suppl. SCR 398 referred to para 11
[) AIR 1928 PC 99 referred to para 16
(1969) 3 sec 445 referred to para 16
2008 (9) SCR 297 referred to para 16
E 2012 (13) SCR 339 cited para 16
1976 (0) Suppl. SCR 74 cited para 17
2009 (1)' SCR 250 referred to para 17
1996 (6) Suppl. SCR 1 relied on para 20
F
(1891) 1 Ch 213 referred to para 23
(1922) 2 Ch 723 referred to para 24
1994 (4) Suppl. SCR 723 referred to para 24
G
1892 (2) Q.B. 573 CA referred to para 25
1995 (4) Suppl. SCR 369 referred to para 29
AIR 1922 PC 228 referred to para 31
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 279
v. B.P.L. LTD.
AIR 1975 SC 207 referred to para 31 A
1977 (2) SCR 555 referred to para 31
1980 (1) SCR 854 referred to para 31
1998 (3) SCR 255 distinguished para 34
B
2007 (1) SCR 843 relied on para 35
5 Born. L.R. 689 referred to para 40
62 IA 100, 108 referred to para 40
c
1967 SCR 233 referred to para 42
AIR 1929 Born. 471 referred to para 43
[1894] 22 Ca. 21 referred to para 44
[1902] 27 Mad. 528 referred to D
para 44
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
2701 of 2006
From the Judgment and Order dated 17-01-2006 of E
the High Court of Kerala at Ernakulam in Company Aopeal
No. 5 of 2005
Shyam Divan, Sanjiv Sen, Mohd. Himaytullah, Gaurav
Goel, Manasi Kumar, Abhinav Malhotra, Anirudh Gupta,
Mahesh Agarwal, E.C. Agrawala for the Appellant. F
V. Giri, Roy Abraham, Anunaya Mehta, Krishna
Pradeep (For Himinder Lal) for the Respondent.
The Judgment of the Court was delivered by G
DIPAK MISRA, J. 1. 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
H
280 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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,
C 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
D 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
E 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
F 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
G 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
H approximately Rs.46 crores in the joint venture company
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 281
v. B.P.L. LTD. [DIPAK MISRA, J.]
and to receive a net cash inflow of Rs.322 crores. Initially, A
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.
B
2. 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 C
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 D
institutions filed their counter affidavits/objections. The
present appellant, Infrastructure Leasing & Fin. Services
Ltd., which was the 81h respondent, filed its counter-affidavit
and in it, had raised objections to the prayer for stay of
various proceedings before number of forums including E
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 F
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 G
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 H
282 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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.
B
3. 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
C 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
0
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
E 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
F been stagnated for a period of two years the valuation
made by the PWC was absolutely fair.
4. Be it stated, some of the respondents filed affidavits
supporting the scheme and some others opposing the
same, from many an angle.
G
5. The learned Company Judge taking note of the
factual matrix, the submissions advanced at the Bar, the
proceeding before the ORT and the criminal cases, referred
to the maintainability of the scheme and came to hold that
H the application preferred under Section 391 (1) was
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 283
v. B.P.L. LTD. [DIPAK MISRA, J.]
maintainable; that the court had the jurisdiction to consider A
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 B
under Section 391 (6) has no jurisdiction to stay the criminal
proceeding initiated under Section 138 of the N"egotiable
Instrument Act or the proceeding pending before the Debt
Recovery Tribunal under Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest C
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 D
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; E
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 81h respondent and F
came to hold as follows:-
"49. The 81h respondents among other things also
taken up the contention that at all material times
they were only an unsecured creditor of the
G
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
H
284 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B as contemplated by the mechanism prescribed.
Hence, no security was created in favour of the Sth
respondent. These conditions were raised in an
additional affidavit filed by the 81h respondent. The
applicant-company has also filed an additional
C 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
D during the course of arguments. The applicant-
Company took copies of the documents creating
charge in favour of the gth respondent. They have
produced Annexure-X hypothecation deed which
is executed in 2001. Copies of Form No. 8 return
E 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 (8 1h respondent)
dated 4.7.2001. It is the contention of the applicant
F 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 81h respondent. Annexure-
X is an unattested deed of hypothecation executed
by the Applicant in favour of the 81h respondent.
G 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
H the borrower as security for the said facility
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 285
v. B.P.L. LTD. [DIPAK MISRA, J.]
arranged by the Sth respondents as security for A
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 B
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 c
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 D
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 E
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 ~n receivables of Hewlett Packard
(India) Ltd. It is also seen that the applicant- F
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 G
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
H
286 SUPREME COURT REPORTS [2015] 2 S.C.R.
A any merit in the contention that the Scheme
proposed will not cover the gth respondent or that
they are not secured creditors, to whom the
Scheme will not apply. "
8 6. 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
C contentions raised by the respondents in that regard were
kept open.
7. 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
D 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
E 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
F 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
G 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
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 287
v. B.P.L. LTD. [DIPAK MISRA, J.]
56. Notice convening the above meeting shall be A
published in all editions of Economic Times, Indian
Express and Malayala Manorama giving 21 days
clear notice.
xxx xxx xxx B
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."
c
1
8. Being aggrieved by the aforesaid order, the 8 h
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 D
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 E
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 F
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.
G
9. 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 ncr
further action was taken by BPL Ltd. to fulfil the agreed
arrangement between the parties. It was asserted that as H
288 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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
C the appellant could not have been watered down.
10. 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
0
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
E 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
F the authority Deva Ram v. /shwar Chand1, 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
G money claim, and hence, the security earlier offered and
created had lost its relevance and transformed itself to a
decree debt.
H 1. AIR 1996 SC 378
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 289
v. B.P.L. LTD. [DIPAK MISRA, J.]
11. Apart from the above contentions, it was also A
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 B
stand, reliance was placed upon the dictum laid down in
K. \/. George v. Secretary to Government, Water and
Power Department2.
12. The aforesaid contentions were resisted by the C
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 D.
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 E
question.
13. 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; F
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 G
creditor and passing of the arbitration award did not create
any change in the status.
2. AIR 1990 SC 53 H
290 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 14. 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
B 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
C the subject matter of assail in this appeal.
15. We have heard Mr. Shyam Divan, learned senior
counsel for the appellant and Mr. V. Giri, learned senior
counsel for the respondent.
D 16. 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
E 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.
F Learned serior 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
G 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
H the appellant has accepted the award as passed by
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 291
v. B.P.L. LTD. [DIPAK MISRA, J.]
the arbitrator, it operates as res judicata against the A
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 B
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
Moo/ Chand Ram Bhagat3, Jagad Bandu Chatterjee C
v. Nilima Rani4 , Indian Bank v. Official Liquidator,
Chemmeens Exports (P) Ltd5 ., Ranganayakamma
v. K.S. Prakash 6 and Jitendra Nath Singh v. Official
Liquidator and ors. 7
D
17. 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 E
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 F
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
G
3. AIR 1928 PC 99
4. (1969) 3 sec 445
5. (1998) 5 sec 401
6. (2008) 15 SC 673
7. (2013) 1 sec 462 H
292 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B counsel has commended us to the decisions in
Lonankutty v. Thomman and Another, Harbans
Singh and others v. Sant Hari Singh and others 9,
and Indian Bank v. Official Liquidator, Chemmeens
Exports (P) Ltd. and others 10 .
c
18. 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;
0
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
E 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-
F
(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;
G
8. (1976) 3 sec 528
9. (2009) 2 sec 526
H 10. (1998) 5 sec 401
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 293
v. B.P.L. LTD. [DIPAK MISRA, J.]
the Court may, on the application of the company A
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, 8
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
c
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,
D
the compromise or arrangement shall, if sanctioned
by the Court, be binding on all the creditors, all
the creditors of the class, all the members, or all
the members of the class, as the case may be,
and also on the company, or, .in the case of a
E
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 F
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 G
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 H
294 SUPREME COURT REPORTS [2015] 2 S.C.R.
A "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
8 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
c
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
D
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
E 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."
F 19. 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.
G 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
H direct holding of meeting of the said class of creditors or
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 295
v. B.P.L. LTD. [DIPAK MISRA, J.]
members concerned and only when the scheme is A
approved by the majority in number representing 3/4 1h 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 3/4 1h majority has voted in favour of the B
scheme, it is binding on those who have dissented and
had voted against the scheme or those who remained
silent.
20. While analyzing the scope and ambit of the powers C
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. Mafatla/ \/. Mafatlal Industries Ltd. 11 has
observed thus:-
"Before sanctioning such a scheme even though D
approved by a majority of the concerned
creditors or members the 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 E
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 F
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 G
take an informed and objective decision whether
to vote for the scheme or against it. On a
conjoint reading of the relevant provisions of
11. (1997) 1 sec 579 H
296 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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
C 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
o 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
E 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
F 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
G 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
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 297
v. B.P.L. LTD. [DIPAK MISRA, J.]
approval on the scheme concerned placed for its A
sanction."
21. 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 8
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-
c
(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 D
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 E
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 F
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 G
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." H
298 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 22. 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
B 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
C 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
D 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
E 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
F 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, 14 1h Edn. It is as follows:
"In exercising its power of sanction the court
will see, first that the provisions of the statute
G
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
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 299
v. B.P.L. LTD. [DIPAK MISRA, J.]
those of the class whom they purport to A
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. B
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
c
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."
D
23. The Court also referred to the decision in Alabama,
New Orleans, Texas and Pacific Junction Rly. Co. Re12
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 E
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 F
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 not being overridden by a majority
having interests of its own clashing with those of G
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
12. (1891) 1 Ch 213 H
300 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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,
B 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
C 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."
24. The observations of Fry, L.J. were also reproduced.
A reference was made to the decision in Anglo-Continental
0
Supply Co. Ltd. Re 13 and the judgment by a three-Judge
Bench in Employees' Union \I. Hindustan Lever Ltd. 14
and eventually, the following principles were culled out:
"In view of the aforesaid settled legal position,
E 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:
F 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
G held.
2. That the scheme put up for sanction of the
13. (1922) 2 Ch 723
H 14. (1995) Supp (1) sec 499
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 301
v. B.P.L. LTD. [DIPAK MISRA, J.]
Court is backed up by the requisite majority A
vote as required by Section 391 sub-section
(2).
3. That the meetings concerned of the
creditors or members or any class of them B
had the relevant material to enable the voters
to arrive at .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
c
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 D
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 E
the applicant concerned seeking sanction for
such a scheme and the Court gets satisfied
about the same.
6. That the proposed scheme of compromise
F
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,
G
can pierce the veil of apparent corporate
purpose underlying the scheme and can
judiciously X-ray th~ same.
7. That the Company Court has also to satisfy
H
302 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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
c
commercial decision beneficial to the class
represented by them for whom the scheme is
meant.
9. Once the aforesaid broad parameters about
D 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
E 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
F 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.
G 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
H contours of the Court's jurisdiction."
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 303
v. B.P.L. LTD. [DIPAK MISRA, J.]
25. In this context, we may usefully refer to Palmer's A
Treatise on 'Company Law, 251h edition, wherein delineating
with the concept of class, it has been stated thus:-
"What constitutes a class:
B
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
c
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
D
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. E
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. F
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 G
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
H
304 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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. Dodc/1 5 , as stated by Bowen,
B 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
c whose rights are not so dissimilar as to make it
impossible for them to consult together with a view
to their common interest."
26. The purpose of the classification of creditors has
D 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
E 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 Ha/sbury's Laws of India, 2007, Vol. 27}.
F 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
G 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
H 15. 1892 (2) Q.B. 573 CA
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 305
v. B.P.L. LTD. [DIPAK MISRA, J.]
and right, title and interest relating to amounts, both present A
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 B
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 C
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 D
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 E
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 F
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 G
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 lnduslnd Bank Ltd., WTI Bank Ltd. and
Bank of Rajasthan Ltd. in appeals but the same were H
306 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B creditors present and voting in value terms; and that the
Court has approved and accepted the modified Scheme.
28. We have, hereinabove, referred to the fact that
the Scheme was amended and approved in the meetings
c 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
D
secured creditors on April 16, 2005, being
Annexure 01 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
E 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
F
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
G 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
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 307
v. B.P.L. LTD. [DIPAK MISRA, J.]
Companies Act stands/ modified accordingly. A
(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. B
(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 c
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. D
(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 'E
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 F
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 G
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 H
308 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B Company and the Secured Creditors and
Preference Shareholders shall be governed by the
provisions of the Scheme of Arrangement as
detailed in Annexure 01 to the petition.
c (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
D
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
E 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
F a certified copy of this order within 14 days from
the date.
29. Keeping in view the factual backdrop, we have to
appreciate the principal contentions. The seminal contention
G 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
H point of time, has become irrelevant. To elaborate, the
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 309
v. B.P.L. LTD. [DIPAK MISRA, J.]
status of the appellant had changed from a secured creditor A
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 B
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 homogenouJ category of
secured creditors, it should still fall under a separate class,
regard being had to the fact it has obtained an award from C
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 D
favour.
30. 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 E
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 F
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 G
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 H
310 SUPREME COURT REPORTS [2015] 2 S.C.R.
A that the defendant should not be vexed twice for
the same cause."
31. In that context, reference was made to Palaniappa
Chettiar v. Alagan Chettiar16 . The Court also observed
B 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,
C reliance was placed on Arjun Lal Gupta \I. Mriganka
Mohan Sur17 , State of Madhya Pradesh \I. State of
Maharashtra 18 , and Kewal Singh \I. Mt. Lajwanti19 .
32. In this regard, immense emphasis has been placed
by Mr. Divan, learned senior counsel, on the authority in
D 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:
E "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
F be that the plea was not argued at the hearing.
However, what is clear from the material on record
is that no appeal was filed against the said
preliminary decree by the Official Liquidator and
the preliminary decree has attained finality.
G
xx xx xx xx xxxx
16. AIR 1922 PC 228
17. AIR 1975 SC 207
18. AIR 1977 SC 1466
H 19. AIR 1980 SC 161
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 311
v. B.P.L. LTD. [DIPAK MISRA, J.]
In Suryakant Natvarlal Surati v. Kamani Bros. Ltd. 20 A
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 Company; the Court B
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 C
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. D
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 . E
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 F
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 G
construction of the decree, the Court found that
the unregistered charge was kept alive, the
provisions of Section 125 would apply and if, on
20. (1985) 58 Comp Cas 121 (Born) H
312 SUPREME COURT REPORTS [2015] 2 S.C.R.
A the other hand, the decree oxtinguished 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."
B
33. 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,
c 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 Natvar/al Surati
(supra). The Division Bench of the Bombay High Court
had opined that the question of applicability of Section 125
0 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
E 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
F 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
G 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
H
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 313
v. B.P.L. LTD. [DIPAK MISRA, J.]
principal sum of Rs.36,360,000/- from 1st July, 2004 A
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 8
of the sum of Rs.36,360,000/- in the following
installments:-
i. Rs.17,500,000/- on or before 30 1h Septemebr,
2004
c
ii. Rs.6,287,000/- on or before 15th April, 2017
iii. Rs.6,287,000/- on or before 15th April, 2018
iv. Rs.6,287,000/- on or before 15th April, 2019
D
Ill. 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 E
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 F
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 G
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
H
314 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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
C 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
o 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
E Liquidator, Chemmeens Exports (P) Ltd. (supra) is
distinguishable.
34. 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
F 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
G 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
H of money in satisfaction of a claim arising under
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 315
v. B.P.L. LTD. [DIPAK MISRA, J.]
the mortgage, he shall not be entitled to bring the A
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 11, rule
2. B
(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
c
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
D
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 E
of that property in execution of that decree.
35. The said provisions came to be interpreted in S.
Nazeer Ahmed \I. State Bank of Mysore and Others21 .
Referring to the said provisions, the Court held the suit for F
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 G
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.
21. (2007) 11 sec 75 H
316 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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
B 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
C 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
D 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
E 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
F
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
G
appellant. On the scope of Order II Rule 2, the
Privy Courn~il in Payana Reena Saminathan v.
Pana Lana Palaniappa 22 has held that Order II
H 22. (1913-14) 41 IA 142
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 317
v. B.P.L. LTD. [DIPAK MISRA, J.]
Rule 2 is directed to securing an exhaustion of A
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 may
arise from the same transactions. In Mohd. Khalil
Khan v. Mahbub Ali Mian 23 , the Privy Council has B
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 c
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 ) D
(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 ) E
.(3) If the evidence to support the two claims is
different, then the causes of action are also
different. (Brunsden v. Humphrey26 )
(4) The causes of action in the two suits may be F
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 G
23. (1947-48) 75 IA 121
24. (1867) 11 MIA 551
25. (1888) 22 QBD 128
26. (1884) 14 QBD 141 H
318 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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 Kaur
v. Partab Singh 27 ) This observation was made by
B 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
c
the scope of the plea based on Order II Rule 2 of
the Code in Gurbux Singh v. Bhooralat1. It will be
useful to quote from the headnote of that decision:
(SCR Headnote pp. 831-32)
D "Held: (1) 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
E 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
F 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
G of deduction what those facts might be with
reference to the reliefs which were then claimed.
On the facts of this case it has to be held that the
H 27. (1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 319
v. B.P.L. LTD. [DIPAK MISRA, J.]
plea of a bar under Order II Rule 2 of the Code A
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.
B
(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 (1)
that the second suit was in respect of the same
cause of action as that on which the previous suit c
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
D
the second suit had been filed."
It is not necessary to multiply authorities except to
notice that the decisions in Sidramappa v.
Rajashetty28 , Deva Ram v. lshwar Chand29 and
State of Maharashtra v. National Construction Co. 30 E
have reiterated and re-emphasised this principle."
36. 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 F
bar a suit for enforcement of the charge for the same
reasons and it would not be hit by Order 11, 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 G
mortgage. In the present case, the charge is by
28. (1970) 1 sec 186
29. (1995) 6 sec 733
30. (1996) 1 sec 735 H
320 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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),
B 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.
37. The next aspect we shall advert to is the
C 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
D of Roman Jurisprudence "Interest reipublicae ut
sit finis /ilium" (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
E 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
F 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
G 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
H been placed on Ranganayakamma (supra).
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 321
v. B.P.L. LTD. [DIPAK MISRA, J.]
38. The said plea has been advanced on the foundation A
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. B
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 C
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. D
39. 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 E
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 F
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 G
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
H
322 SUPREME COURT REPORTS [2015] 2 S.C.R.
A Modok v. Trimbak Municipality 28 B. 66; 5 Born.
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
B 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
c 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
D thing they wholly dispense with.
In Abaji Sitaram Modok v. Trimbak
Municipality , Chief Justice Jenkins deals with
31
Section 63, and holds that the promise
mentioned in Section 63, can, only do the acts
E 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:-
F
T'lerefore we hold that assuming there was a
leg31 resolution and that it was communicated
as alleged, still inasmuch as a dispensation or
i . mission under Section 63 requires an
G 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
H 31. 5 Born. L.R. 689
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 323
v. B.P.L. LTD. [DIPAK MISRA, J.]
language of the section does not refer to any such A
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."
40. He has also drawn inspiration from Jagad Bandu
8
Chatterjee (supra), wherein after referring to the
observations of Lord Russell of Killowen in Dawson's Bank
Limited \I. 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: C
"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 D
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. E
Ra ti/al 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 the right"..... F
1
41 . 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 G
award was passed on consent and from the same it would
be inappropriate to deduce that the hypothecation stood
32. 62 IA 100, 108
33. (1959) Supp 2 SCR 217, 226 H
324 SUPREME COURT REPORTS [2015] 2 S.C.R.
A 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:
B 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
c 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
D 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.
E
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
F of the debt or performance of the promise at the
stiµulated 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."
G
42. 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
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 325
v. B.P.L. LTD. [DIPAK MISRA, J.]
176, when the pawner makes default in making the A
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 B
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 C
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 D
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 pawner. Though such a distinction exists, yet it is an E
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 Lal/an
Prasad \I. Rahmat Ali and another34 , would be seemly.
F
"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
G
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
34. AIR 1967 SC 1322 H
326 SUPREME COURT REPORTS
r
[2015] 2 S.C.R.
A 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
B 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
C 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
D 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
E 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
F 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
G 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
H debt denying the pledge, and it is found that he
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 327
v. B.P.L. LTD. [DIPAK MISRA, J.]
A
was given possession of the goo.ds pledged and
had retained the same, the pawner has the right
to redeem the goods so pledged by payment Jf
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. \'Vhere B
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 c
goods and would be entitled then to recover only
the balance".
43. More than eight decades back, the Bombay High
Court in Gu/amhusain Lalji Sajan \I. Clara D'Souza 35 , D
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 pledger upon the debt E
or promise, and retain the goods pledged as a
collateral security; or he may sell the thing pledged
in giving the pledger 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 F
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 G
a personal decree.
The same principles would apply to the case of
35. AIR 1929 Born. 471 H
328 SUPREME COURT REPORTS (2015] 2 S.C.R.
A hypothecation or mortgages of moveable property."
Be it noted, in the said case reliance was placed
on Nim Chad Babu v. Jagabandhu Ghose36 and
Mahalinga Nadar v. Ganapathi Subbien 37 .
B 44. 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
C 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
D continues.
45. 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
E 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.
46. In view of the aforesaid analysis, we are of the
F 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.
4 7. The aforesaid conclusion of ours leads to the
G inevitable dismissal of the appeal, which we direct. However,
36. (1894] 22 Ca. 21
H 37. [1902] 27 Mad. 528
INFRASTRUCTURE LEASING & FIN. SERVICES LTD. 329
v. B.P.L. LTD. [DIPAK MISRA, J.]
A
in the factum and circumstances of the case, there shall
be no order as to costs.
Kalpana K. Tripathy Appeal dismissed.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "Companies Act"Sign in to search