Basic concept of cause of action and provision of O 2 R 2 of cpc

On
the scope of Order II Rule 2, the Privy Council in
Payana Reena Saminathan v. Pana Lana
Palaniappa (1913-14) 41 IA 142 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 may arise
from the same transactions. In Mohd. Khalil Khan
v. Mahbub Ali Mian (1947-48) 75 IA 121, 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 Begum24)
(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. Brown25)
(3) If the evidence to support the two claims is
different, then the causes of action are also
different. (Brunsden v. Humphrey26)
(4) The causes of action in the two suits may
be 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 Singh27) 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)
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)
4

“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 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 Deva Ram v. Ishwar Chandand
State of Maharashtra v. National Construction
Co. have reiterated and re-emphasised this
principle.”
Reportable
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
Citation;(2015)3 SCC363

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
Page 2
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
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Page 3
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.
2. After approval of the scheme the respondent filed
an application under Section 391 (1) of the Act read with
Rule 9 the Companies (Court) Rules, 1959 seeking
permission for holding a meeting for consideration for
approval of compromise or arrangement proposed to be
made between companies and the creditors. The second
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Page 4
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 counteraffidavit
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
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Page 5
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.
3. BPL filed a reply stating, inter alia, that very
purpose of Section 391(6) of the Act is that till effective
consideration of the scheme and finalization of the scheme
under Section 391 of the Act there has to be a stage of
abeyance from 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
5
Page 6
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.
4. Be it stated, some of the respondents filed
affidavits supporting the scheme and some others
opposing the same, from many an angle.
5. 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
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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
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Page 8
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 shortterms
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
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Page 9
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
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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. ”
6. Be it stated, the court did not accept the contention
that the scheme could not be worked out on the ground
that the scheme was entitled to be amended either in the
meeting or even subsequently by the Court and it was not
the stage to suggest any amendment and accordingly
contentions raised by the respondents in that regard were
kept open.
7. On the basis of the aforesaid analysis, the Company
Judge held that MCA No. 84/2004 was maintainable and
other applications seeking grant of stay were sans merit
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:-
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“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.”
8. 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
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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.
9. The appellant argued that though as required by
the hypothecation deed, Form Nos. 8 and 13 thereof had
been submitted before the Registrar of Companies, yet 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
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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.
10. The next contention that was advanced in the
company appeal was that even if it could have been
assumed that because of the hypothecation deed, at one
point of time, the appellant could have been considered as
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 Chand1, a submission
was advanced that on principles gatherable from Order II,
1 AIR 1996 SC 378
1
Page 14
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.
11. 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 Department2.
12. 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
2 AIR 1990 SC 53
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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.
13. The Division Bench adverted to the deed of
hypothecation executed by the BPL in favour of the
appellant company and opined that the appellantcompany
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.
14. The Division Bench appreciating the contentions
further came to hold that the appellant was a secured
creditor after the hypothecation deed was executed; that
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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.
15. We have heard Mr. Shyam Divan, learned senior
counsel for the appellant and Mr. V. Giri, learned senior
counsel for the respondent.
16. It is submitted by Mr. Divan that that once an
arbitral award has been passed on consent between the
parties it extinguishes the status of the appellant as a
secured creditor and it stands on a different footing
altogether. It is further urged that the 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
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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 Bhagat3,
Jagad Bandu Chatterjee v. Nilima Rani4, Indian Bank
3 AIR 1928 PC 99
4 (1969) 3 SCC 445
1
Page 18
v. Official Liquidator, Chemmeens Exports (P) Ltd5.,
Ranganayakamma v. K.S. Prakash6 and Jitendra Nath
Singh v. Official Liquidator and ors.7
17. Mr. Giri, learned senior counsel appearing for the
respondent, resisting the aforesaid proponements, would
submit that the arbitral award, whether passed on consent
or on contest, has the status of a decree but such a decree
does not extinguish the charge and 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
5 (1998) 5 SCC 401
6 (2008) 15 SC 673
7 (2013) 1 SCC 462
1
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II, Rule 2 of the CPC. Learned senior counsel has
commended us to the decisions in Lonankutty v.
Thomman and Another8, Harbans Singh and others
v. Sant Hari Singh and others9, and Indian Bank v.
Official Liquidator, Chemmeens Exports (P) Ltd. and
others10.
18. From the narration of facts and the contentions
which have been highlighted, it is clear that two facts are
beyond dispute. First, the appellant stands registered as a
secured creditor of the respondent company on the record
of the Registrar of Companies under the Act; 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—
8 (1976) 3 SCC 528
9 (2009) 2 SCC 526
10 (1998) 5 SCC 401
1
Page 20
(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 threefourths
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, 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.”
2
Page 21
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.”
19. Sub-Section (1) of Section 391 stipulates that a
compromise or arrangement can be proposed between a
company or its creditor or any class of them or between a
company and its members or any class of them. It need
not be between all the creditors or all the members.
Contextually, “class of creditors” or “class of members”
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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.
20. 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 Court has to be
satisfied that the company or any other person
moving such an application for sanction under
11 (1997) 1 SCC 579
2
Page 23
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
2
Page 24
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.”
21. Thereafter, the Court referred to Section 392 of the
Act. The said provision deals with the supervisory
jurisdiction of the Company Court. It is necessary to
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.
2
Page 25
(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.”
22. In the said context, the Court posed the question
whether it has the jurisdiction of an appellate authority to
minutely scrutinize the scheme and to arrive at an
independent conclusion whether the scheme should be
permitted to go through or not and whether the majority
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
2
Page 26
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
2
Page 27
of the class which it is empowered to bind, or
some blot is found in the scheme.”
23. The Court also referred to the decision in
Alabama, New Orleans, Texas and Pacific Junction
Rly. Co. Re12 to cull out the principle relating to the power
and jurisdiction of the Company Court which is called upon
to sanction the scheme of arrangements or compromise
between the 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 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
12 (1891) 1 Ch 213
2
Page 28
an objection to it as that any reasonable man
might say that he could not approve it.”
24. The observations of Fry, L.J. were also reproduced.
A reference was made to the decision in Anglo-
Continental Supply Co. Ltd. Re13 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 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
13 (1922) 2 Ch 723
14 (1995) Supp (1) SCC 499
2
Page 29
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
2
Page 30
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.”
25. 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
3
Page 31
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. Dodd15, 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
15 1892 (2) Q.B. 573 CA
3
Page 32
make it impossible for them to consult together
with a view to their common interest.”
26. 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).
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
3
Page 33
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
3
Page 34
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
3
Page 35
present and voting in value terms; and that the Court has
approved and accepted the modified Scheme.
28. We have, hereinabove, referred to the fact that the
Scheme was amended and approved in the meetings 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
3
Page 36
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
3
Page 37
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.
29. 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
3
Page 38
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.
30. What is contended by Mr. Divan, learned senior
counsel for the appellant is that any further lis would be hit
by principles enshrined under Order II, Rule 2 as well as 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,
3
Page 39
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.”
31. In that context, reference was made to
Palaniappa Chettiar v. Alagan Chettiar16. 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 Sur17, State of Madhya Pradesh V.
16 AIR 1922 PC 228
17 AIR 1975 SC 207
3
Page 40
State of Maharashtra18, and Kewal Singh V. Mt.
Lajwanti19.
32. 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 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 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
18 AIR 1977 SC 1466
19 AIR 1980 SC 161
20 (1985) 58 Comp Cas 121 (Bom)
4
Page 41
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.”
33. Relying on the said passages, it is urged that when
the award has been passed on consent and has the status
of a decree that makes him an unsecured creditor, for it
has attained finalilty. To appreciate the said submission,
the quoted passages are to be appositely appreciated. As
4
Page 42
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:
4
Page 43
“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:-
i. Rs.17,500,000/- on or before 30th
Septemebr, 2004
ii. Rs.6,287,000/- on or before 15th April,
2017
iii. Rs.6,287,000/- on or before 15th April,
2018
iv. Rs.6,287,000/- on or before 15th April,
2019
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.
4
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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.
34. In this backdrop, we are to analyse whether the
deed of hypothecation would continue in spite of the
arbitration award. Mr. Divan submitted that it would not
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,
4
Page 45
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 titledeeds
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.
35. The said provisions came to be interpreted in S.
Nazeer Ahmed V. State Bank of Mysore and Others21.
Referring to the said provisions, the Court held the suit for
enforcement of mortgage could be filed even when in the
21 (2007) 11 SCC 75
4
Page 46
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
Palaniappa22 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 may arise
from the same transactions. In Mohd. Khalil Khan
v. Mahbub Ali Mian23, 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:
22 (1913-14) 41 IA 142
23 (1947-48) 75 IA 121

(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 Begum24)
(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. Brown25)
(3) If the evidence to support the two claims is
different, then the causes of action are also
different. (Brunsden v. Humphrey26)
(4) The causes of action in the two suits may
be 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 Singh27) 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)
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)
4

“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 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.

Rajashetty28, Deva Ram v. Ishwar Chand29 and
State of Maharashtra v. National Construction
Co.30 have reiterated and re-emphasised this
principle.”
36. Applying the said test to the present case, it can be
stated with certitude that there is no shadow of doubt that
the consent award in an arbitral proceeding would not 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.
28 (1970) 1 SCC 186
29 (1995) 6 SCC 733
30 (1996) 1 SCC 735

37. 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 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).
38. The said plea has been advanced on the foundation
that the controversy between the parties having been
5
Page 52
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.
39. Mr. Divan, learned senior counsel has drawn our
attention to Section 63 of the Contract Act. To buttress
the applicability of the said provision, he has commended
us to the decision in Firm Chunna Mal 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
5
Page 53
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 Municipality31,
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
31 5 Bom. L.R. 689
5
Page 54
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.”
40. 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 Kaisha32
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
32 62 IA 100, 108
33 (1959) Supp 2 SCR 217, 226
5
Page 55
release. It signifies nothing more than an
intention not to insist upon the right”.....
41. The stress on the aforesaid decisions by the
learned senior counsel is to highlight that the respondent
have waived the hypothecation by accepting the
arbitration award. The said submission has its own fallacy.
The arbitral 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.
5
Page 56
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.”
42. The aforesaid two provisions when read in a
conjoint manner clearly establish that a pledge does not
get extinguished and, in fact, continues even when the
pawnee has sued and recovered a part of the debt without
enforcement of the pledge or the security. As per Section
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
5
Page 57
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 another34, 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.
34 AIR 1967 SC 1322
5
Page 58
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
5
Page 59
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”.
43. More than eight decades back, the Bombay High
Court in Gulamhusain Lalji Sajan V. Clara D’Souza35,
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.”
35 AIR 1929 Bom. 471
5
Page 60
Be it noted, in the said case reliance was placed on
Nim Chad Babu v. Jagabandhu Ghose36 and Mahalinga
Nadar v. Ganapathi Subbien37.
44. We will be failing in our duty if we do not advert to
the issue that the appellant shall remain as a secured
creditor, for it was registered as such under the Registrar
of Companies. The formalities for creating the charge
having duly followed, the Division Bench has referred to
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.
45. After registration of the deed of hypothecation, if a
condition subsequent is not satisfied, that would be in a
different realm altogether. In any case, the finding has
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.
36 [1894] 22 Ca. 21
37 [1902] 27 Mad. 528
6
Page 61
46. 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.
47. 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
6

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