INFRASTRUCTURE LEASING &FIN.SERVICES LTD Vs. B.P.L. LIMITED

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 2701 of 2006, Judgment Date: Jan 09, 2015

                         IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 2701 OF 2006


Infrastructure Leasing & Financial
Services  Limited                                              ... Appellant

                                   Versus

B.P.L. Limited                                                ... Respondent




                               J U D G M E N T


Dipak Misra, J.


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

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

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

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

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

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

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

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

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

                              xxxxx xxxxx xxxxx

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

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

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

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

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

(2) If the Court aforesaid is satisfied that  a  compromise  or  arrangement
sanctioned under  Section  391  cannot  be  worked  satisfactorily  with  or
without  modifications,  it  may,  either  on  its  own  motion  or  on  the
application of any person interested in the affairs of the company, make  an
order winding up the company, and such an order shall be  deemed  to  be  an
order made under Section 433 of this Act.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                         xxxx        xxxx       xxxx

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

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

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

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

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

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

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

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

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

V.    In the event of the Respondents committing default in payment  of  any
of the installments including the last installment on the due date  for  any
reason whatsoever, the entire dues together with  interest  as  provided  on
Clause I hereinabove and outstanding due and payable by the  Respondents  to
the Claimants as on that date shall become forthwith due and payable by  the
Respondents to  the  Claimants  and  the  Claimants  shall  be  entitled  to
forthwith execute the Award against the Respondents and recover  the  entire
dues.  In that even, any installments/s paid under Clause 2  will  be  first
appropriated towards the interest payable under Clause I  without  prejudice
and in addition thereto, the Claimants shall also be entitled  to  institute
criminal legal proceedings against the Respondents  including  for  dishonor
of cheque/s under the provisions of the Negotiable Instruments  Act,  1881."


In view of the aforesaid conclusions, in the award, we have no scintilla  of
doubt that the decision in Official Liquidator, Chemmeens Exports  (P)  Ltd.
(supra) is distinguishable.
In this backdrop, we are to analyse whether the deed of hypothecation  would
continue in spite of the arbitration award.  Mr.  Divan  submitted  that  it
would not survive because of the provisions contained in Order  II,  Rule  2
of the CPC.  We have already referred to the decree  and  distinguished  the
decision in Official Liquidator, Chemmeens  Exports  (P)  Ltd  (supra).   In
this context, reference to Order XXXIV Rule 14 and 15 of the  CPC  would  be
apposite.  They read as follows:
14.   Suit for sale necessary for bringing mortgaged property to sale -  (1)
Where a mortgagee has  obtained  a  decree  for  the  payment  of  money  in
satisfaction of a  claim  arising  under  the  mortgage,  he  shall  not  be
entitled  to  bring  the  mortgaged  property  to  sale  otherwise  than  by
instituting a suit for sale in enforcement  of  the  mortgage,  and  he  may
institute such suit notwithstanding anything contained in Order II, rule 2.

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

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

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

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

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

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

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

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

                         IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 2701 OF 2006


Infrastructure Leasing & Financial
Services  Limited                                              ... Appellant

                                   Versus

B.P.L. Limited                                                ... Respondent




                               J U D G M E N T


Dipak Misra, J.


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

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

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

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

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

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

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

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

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

                              xxxxx xxxxx xxxxx

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

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

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

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

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

(2) If the Court aforesaid is satisfied that  a  compromise  or  arrangement
sanctioned under  Section  391  cannot  be  worked  satisfactorily  with  or
without  modifications,  it  may,  either  on  its  own  motion  or  on  the
application of any person interested in the affairs of the company, make  an
order winding up the company, and such an order shall be  deemed  to  be  an
order made under Section 433 of this Act.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                         xxxx        xxxx       xxxx

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

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

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

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

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

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

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

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

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

V.    In the event of the Respondents committing default in payment  of  any
of the installments including the last installment on the due date  for  any
reason whatsoever, the entire dues together with  interest  as  provided  on
Clause I hereinabove and outstanding due and payable by the  Respondents  to
the Claimants as on that date shall become forthwith due and payable by  the
Respondents to  the  Claimants  and  the  Claimants  shall  be  entitled  to
forthwith execute the Award against the Respondents and recover  the  entire
dues.  In that even, any installments/s paid under Clause 2  will  be  first
appropriated towards the interest payable under Clause I  without  prejudice
and in addition thereto, the Claimants shall also be entitled  to  institute
criminal legal proceedings against the Respondents  including  for  dishonor
of cheque/s under the provisions of the Negotiable Instruments  Act,  1881."


In view of the aforesaid conclusions, in the award, we have no scintilla  of
doubt that the decision in Official Liquidator, Chemmeens Exports  (P)  Ltd.
(supra) is distinguishable.
In this backdrop, we are to analyse whether the deed of hypothecation  would
continue in spite of the arbitration award.  Mr.  Divan  submitted  that  it
would not survive because of the provisions contained in Order  II,  Rule  2
of the CPC.  We have already referred to the decree  and  distinguished  the
decision in Official Liquidator, Chemmeens  Exports  (P)  Ltd  (supra).   In
this context, reference to Order XXXIV Rule 14 and 15 of the  CPC  would  be
apposite.  They read as follows:
14.   Suit for sale necessary for bringing mortgaged property to sale -  (1)
Where a mortgagee has  obtained  a  decree  for  the  payment  of  money  in
satisfaction of a  claim  arising  under  the  mortgage,  he  shall  not  be
entitled  to  bring  the  mortgaged  property  to  sale  otherwise  than  by
instituting a suit for sale in enforcement  of  the  mortgage,  and  he  may
institute such suit notwithstanding anything contained in Order II, rule 2.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                             .............................J.
                                                              [Anil R. Dave]

                                               ...........................J.
                                                              [Dipak Misra ]
New Delhi;
January 09, 2015

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

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