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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY APPLICATION NO.243 OF 2011
IN
COMPANY PETITION NO.1068 OF 1997
In the matter of the Companies Act,
1956;
And
In the matter inter-alia Application under
section 466 and other relevant
ig provisions of the Companies Act, 1956,
and of inherent powers under Rule 9 of
the Companies (Court) Rules, 1959;
And
In the matter of the Swadeshi Mills
Company Ltd (In Liquidation), a
company incorporated under the Act of
VI of 1882 of the Legislature Council of
India, having its registered office at
Swadeshi Mills Compound, Sion,
Mumbai 400 022.
Ralli Brothers & Coney
Known as "Cargill Cotton", a
company incorporated under the
Laws of United Kingdom having
its registered office at Knowle Hill,
Park Fairmile Land, Cowham Surry,
KT 11, 2PD, England UK.
And
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1 Forbes & Co Ltd (earlier known
as Forbes Gokak Ltd), a Company,
incorporated under the Companies
Act, 1956, having its registered
office at Forbes Building, Charanjit
Rai Marg, Fort, Mumbai 400 001
2 Grand View Estates Pvt Ltd, a
company incorporated under the
Companies Act, 1956, having its
registered office at 70, Nagindas
Master Road, Fort, Mumbai 400 023
and administrative office at SP Centre,
41/44, Minoo Desai Marg, Colaba,
Mumbai 400 005 .. Applicants
Versus
The Official Liquidator of
The Swadeshi Mills Company Ltd
(in liquidation), having its office at Bank
of India, 5th Floor, M.G.Road, Fort,
Mumbai 400 001. .. Respondent
Mr.Virag Tulzapurkar, Sr. Advocate with Mr.Cyrus Ardeshir and Mr.Tapan
Deshpande i/by Amarchand Mangaldas & S.A.Shroff & Co for the
applicants.
Mr.J.P.Cama, Sr.Advocate with Mr.K.S.Bapat i/by R.V.Sankpal for
RMMS.
Ms.Jane Cox for 735 workers from Mill and 28 staff members from the
Head Office.
Dr.T.Pandian, O.L., present.
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CORAM : S.C.DHARMADHIKARI, J.
RESERVED ON : 23rd September 2011.
PRONOUNCED ON : 14th October 2011.
JUDGMENT:
. This Company Application invokes the powers of this Court under
section 466 of the Companies Act, 1956 (“Act” for short). The
Application is by the Applicants who are a Public Limited Company,
namely, Forbes & Company Ltd and a Private Limited Company Grand
View Estates Pvt Ltd, both registered under the Act. They have prayed
that order dated 5th September 2005 passed by this Court of winding up
the Swadeshi Mills Company Ltd (company in liquidation), be
permanently stayed and the applicants be permitted to deposit with the
Official Liquidator attached to this Court an aggregate sum of Rs.86
crores as per the chart at Annexure A to the application. Then, there are
further prayers for making payment of this sum to the secured creditors,
workers and employees of the company. After such payment, the
applicants pray that the assets and properties of the company in
liquidation be handed over to them and the Official Liquidator to stand
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discharged.
2 An affidavit in support of this company application has been filed
and it is stated therein by the applicants that the 1st applicant is a
promoter shareholder, secured and unsecured creditor of the company
in liquidation. It is in the business of engineering goods, shipping and
office automation. The 1st applicant alongwith its wholly owned
subsidiary company owns 17,64,430 equity shares constituting 22.70%
of total equity shareholding of the company in liquidation. Applicant No.2
is a private limited company, duly incorporated under the provisions of
the Companies Act, 1956 having its registered office and administrative
office at the address mentioned in the cause-title of this company
application. It is a major shareholder, a secured and unsecured creditor
of the company in liquidation. Real estate business is one of the objects
of applicant No.2. It owns 22,83,210 equity shares constituting 29.29%
of the total shareholding of the company in liquidation. The said shares
were acquired by the applicant No.2 after the winding up order, for
which it has obtained requisite leave of this Court, under the Companies
Act, 1956 and had those shares transferred in its name. Thus, the
applicants own, in aggregate, 52% of the total equity shares of the
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company. Further, the applicants are the only secured creditors of the
company and thus are vitally interested in the affairs of the company.
Both the applicants are part of Shapoorji Pallonji Group. The said
Shapoorji Pallonji Group is a 140 year old leading corporate house with
significant experience, inter alia, in the Construction, Infrastructure and
Real Estate Development Business.
3 Prior to its liquidation, the company was a public limited company,
incorporated under the Act of VI of 1882 of the Legislature Council of
India. The company is currently under winding up and is represented by
the Official Liquidator, attached to this Court. The share capital of the
company as per the last available financial statement with the applicants
i.e as on 31st March 2001 was as under:
Particulars Amount (Rs.)
AUTHORISED:
(a) 15,000 unclassified shares of Rs.100 each 15,00,000
(b) 98,50,000 ordinary shares of Rs.10 each 9,85,00,000
Total
ISSUED, SUBSCRIBED AND PAID UP:
77,95,450 ordinary shares of Rs.10 each fully paid 7,79,54,500
Total 7,79,54,500
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4 The company, prior to its winding up, was operating as a
composite textile mill, having spinning, weaving and processing sections
for the manufacture of cotton, synthetics, interlining and non woven
fabrics. It was engaged in the textiles business for more than 10
decades. It enjoyed a strong goodwill in the market and had drawn
inspiration from Swadeshi movement of India. The operations of the
company started deteriorating from 1982, because of prolonged textile
strike in Mumbai, increase in cotton prices and recessionary conditions
in the cotton textile industry. Factors like technological changes, high
labour cost, higher cost of funds, sluggishness in textile industry and
competitive disadvantage of mill against unorganized sector etc further
deteriorated the financial condition of the company.
5 In the year 1997, Ralli Brothers and Coney filed a petition in this
Court for winding up of the company. Thereafter, various other winding
up petitions were also filed in this Court. Around February 1998, the
company made a reference to the Board for Industrial and Financial
Reconstruction (BIFR) under the provisions of the Sick Industrial
Companies (Special Provisions) Act, 1985. The BIFR declared the
company a sick company. The BIFR vide its order dated 5th February
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2001, recommended to this Court for winding up of the company.
Appeal preferred against the said order by Rashtriya Mill Mazdoor
Sangh, a registered trade union the Bombay Industrial Relations Act,
1946 and also the Representative and Authorized Union of the
Company before the Appellate Authority for Industrial and Financial
Reconstruction (AAIFR) was also dismissed vide its order dated 14th
May 2001. Applicant No.1, from time to time, had provided financial
assistance aggregating to approximately Rs.43,00,00,000/- (Rupees
Forty Three Crores only) almost during the entire period of the
proceedings before the BIFR and thus enabled the company to continue
its operations. The details of financial assistance during the said
proceedings are as follows:
Year Rupees in Crore
1998 31999 19
2000 16
2001 5However, due to the overall recessionary conditions and structural
problems in the textile industry, the financial condition of the company
did not improve. Pursuant to the recommendation of the BIFR, this
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this Court was appointed as Provisional Liquidator of the company vide
order dated 13th February 2002 with all powers available to him in terms
of the Companies Act, 1956.
6 After referring to a sale of finished goods under the supervision of
Court Receiver, it is stated that by resolution dated 20th September 2001
issued by the Government of Maharashtra, a High Power Committee
was appointed to look into the matters relating to the workers dues,
bankers and financial institutions. That Committee was empowered by
this Court to dispose off the assets of the company. By order dated 21st
June 2002, the High Power Committee disposed off the entire plant and
machinery of the company and realised amount of Rs.15.53 crores. The
amount received from the sale of finished goods and the entire plant
and machinery was distributed for reimbursement of the cost of security
agencies, other related expenses, part payment of the dues of the
workers and employees dues and part payment of the statutory dues
and that of these secured creditors.
7 The winding up order is then referred to and then in para 7 of the
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affidavit in support, this is what is stated:
“In recent years, the Government of Maharashtra has initiated
various activities for the promotion and facilitation of
development of mill lands in Mumbai. Increasing theavailability of housing has also been a thrust area. The said
initiatives, alongwith the available immovable properties of
the Company together, offer a favourable platform for thecompany to undertake real estate development operation.
Though the company was in textiles business prior to windingup, due to disposal of all the stock in trade and entire plant
and machinery, it is no longer viable to run the business as amanufacturer of textiles. In the present circumstances, in
Mumbai even otherwise a textile mill is not viable. Theapplicants are part of the Shapoorji Pallonji Group, Shapoorji
Pallonji Group has expertise in the real estate business and,therefore, intends to enable the company to undertake real
estate development applicant No.2 has shown its willingnessto bring in funds to meet all the legitimate liabilities of the
company subject to the order of winding up being
permanently stayed by this Court as sought by the applicantsherein.”
8 It is stated that the applicants being major shareholders and
secured creditors, are vitally interested in bringing the company out of
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winding up. Applicant No.2 by a letter dated 11th November 2010
addressed to the Official Liquidator, High Court, Bombay, sought
information on various contributories of the company including its
secured, unsecured and statutory creditors. In reply to the aforesaid
letter, the Official Liquidator requested applicant No.2 to take inspection
and after taking such information which was made available and on
noticing the contents of the documents inspected, it is stated that the
total liability of the company in liquidation as on 31st March 2011 is
approximately Rs.375.33 crores. Out of that Rs.280.90 crores is the
liability of the applicants, which they have agreed to defer, as more
particularly set out in this affidavit and as far as the other claims and
liabilities, the applicants will duly meet them.
9 A reference is made to the Rashtriya Mill Mazdoor Sangh,
affiliated workers and employees and a Memorandum of Understanding
dated 15th November 2010 signed by the applicants and the Rashtriya
Mill Mazdoor Sangh which is stated to be a representative and
authorised Union of the workers employed in the company in liquidation.
It is stated that the claim was filed by Rashtriya Mill Mazdoor Sangh on
behalf of the workers. Seventy five percent of the claim has been paid
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off by the Official Liquidator out of the sale proceeds of the machinery of
the company and as part settlement of the Memorandum of
Understanding, amounts have been disbursed. In terms of the chart
Annexure F, Rs.74,42,97,519/- are due and payable. There is also claim
of 37 workers/employees who have opted for voluntary retirement
scheme in about 1999 and that is referred to in chart at Annexure G.
The claim of resigned/retired employees prior to 31st September 2001, it
then adverted to and it is stated that, that is enlisted in the chart at
Annexure H to the affidavit in support. It is in these circumstances and
when these employees are in managerial cadre, whereas 75% of the
claim has been paid up by the Official Liquidator from the sale proceeds,
that the package of additional amount has been drawn.
10 A reference is also made to the claim of the workers and
employees affiliated to the Mumbai Mazdoor Sabha, claim of unsecured
creditors, other claims and the total liability aggregating to the applicants
is Rs.86 crores. Although, advertisements were published inviting claims
from various creditors other than those which are referred, none have
been received and it is on this basis that the computation of Rs.86
crores has been arrived at. It is stated that the applicants are part of
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Shapoorji Pallonji Group, who are experts in the business of
construction, infrastructure and real estate. It is stated that the company
is not in a position, now to carry on textile business as the entire
finished goods, plant and machinery have been already sold. There is
always a scope for diversification and in the present circumstances
when in the city of Mumbai, no textile manufacturing business is feasible
or practicable that the applicants prayed that this application be allowed.
11
Mr.Tulzapurkar, learned senior counsel appearing on behalf of the
applicants invites my attention to section 466(1) of the Companies Act,
1956 and submits that, the provision vests the Company Court with a
discretion to permanently stay the winding up. By the application, the
applicants have demonstrated their bonafides. The permanent stay has
to be granted, provided the Court is satisfied that there is concrete
material, which in this case is produced in the form of payment to
creditors and all claims which are outstanding are adequately and
sufficiently protected. In the present case, there is no question of the
application lacking in bonafides or being opposed to commercial
morality. The public interest is also subserved inasmuch as 52% of the
shareholding in the company in liquidation, is that of the applicants. In
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the present case, if the substantial secured creditors like applicants
have deferred their claims and objection to the relief claimed is that the
applicants want to take over the company and start some other
business, then, that can be taken care of by clarifying that if the object
clause in the memorandum does not include the business that is
proposed to be carried out, subject to such modification or amendment
thereof, the same would be carried out, that would suffice and protect
the interest of all concerned. The law does not prohibit other business
being carried on by the company in liquidation after the winding up order
is stayed. Once such is the legal position, the application is bonafide
and no factor militates against the exercise of the power of stay, then,
the discretion in terms of section 466(1) of the Companies Act, 1956 be
exercised in favour of the applicants.
12 Mr.Tulzapurkar submits that the section 466(1) imposes no
condition, nor it states anywhere that the same business should be
carried on. Once the objecting workers are being paid full dues as
adjudicated by the Official Liquidator including interest accumulated in
accordance with law, then, all the more the objections be over ruled.
Mr.Tulzapurkar takes instructions and makes a statement that in the
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present case, the Provisional Liquidator was appointed on 13th February
2002. The applicants are entitled to interest in terms of Rule 179 of the
Companies Court Rules, 1959. If interest is to be computed, the
applicants state that the same may be made payable with effect from
the date of appointment of the Provisional Liquidator. For all these
reasons, it is submitted that this application be allowed. Mr.Tulzapurkar
has placed reliance on the following decisions in support of his above
contentions:
(1)[1981] 51 Company Cases (Bom) 20 – Vasant
Investment Corporation Ltd Vs. Official Liquidator,
Colaba Land and Mill Co Ltd;
(2)[2000] 99 Company Cases 189 (Guj.) – Textile Labour
Association Vs. Official Liquidator of Jubilee Mills Ltd;
(3)2003(4) Bombay Cases Reporter 836 – Maharashtra
State Textile Corporation Ltd Vs. Gopal Balu Saikar,
since deceased by his heirs & another (Writ Petition
No.4998/1987 decided on 7.1.2003);
(4)[2009] 150 Company Cases 829 (Guj) -
P.Chandrasekharan Vs. O.L of Ahmedabad Mfg &
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Calico PTG Co Ltd & others;
(5)(2010) 1 Company Law Journal 74 (Guj.) – Shaan
Zaveri & Ors Vs. Gautam Sarabhai (P) Ltd
13 On the other hand, Ms.Jane Cox submits that she is appearing on
behalf of 748 workmen. Each one of them have lodged their claim with
the Official Liquidator. Each one of them is entitled to the amount in
accordance with law. As far as their dues are concerned, there has to be
a adjudication by the Official Liquidator. She invites my attention to the
report of the Official Liquidator and submits that the Official Liquidator
has referred to the sale of movables and she further submits that as per
the records the Official Liquidator had received/adjudicated the claims
which have been mentioned at para 46 of the report of the Official
Liquidator dated 12th July 2011. She submits that the payment in terms
of the statement made in the Official Liquidator’s report does not
constitute discharge of liability of workers dues in full.
14 Ms.Cox submits that the workers dues cannot be restricted or
computed only in terms of the Memorandum of Understanding. It is not
as if the Rashtriya Mill Mazdoor Sangh is the sole arbiter or decision
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maker of the claims and, therefore, once the aggrieved workers have
clarified that they do not wish to accept the terms of Memorandum of
Understanding signed by the Rashtriya Mill Mazdoor Sangh, then, their
claims have to be adjudicated independent of the Memorandum of
Understanding and in accordance with law. The workers would then get
much more amount which is assured in terms of the Memorandum of
Understanding. Therefore, the Memorandum of Understanding with
Rashtriya Mill Mazdoor Sangh ought not be held to be conclusive and
decisive of all claims and dues of the workers.
15 Ms.Cox submits that once the company is in liquidation, then, the
Bombay Industrial Relations Act, 1946 or the Maharashtra Recognition
of Trade Union and Prevention of Unfair Labour Practices Act, 1971, are
inapplicable. There is no concept of representative Union or recognised
Union any longer governing or operating in the field. The dues of all
workers have to be adjudicated and determined by the Official
Liquidator. That has to be done by him in terms of the powers conferred
by the Companies Act, 1956. The workers are placed in the position of
secured creditors. Their claims cannot be given a go bye or diluted by
any unilateral compromise by one union. The Memorandum of
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Understanding does not give any benefit to these workmen. She
submits that winding up order is of 2005 and the balance that has been
calculated is as of 30th September 2001. In this context, she invites my
attention to page 112, viz., Schedule II to the Memorandum of
Understanding and submits that the dues subsequent to the 30th
September 2001 upto date of winding up and outstanding payable even
thereafter is much more. That cannot be restricted by any Agreement or
Memorandum of Understanding. This amounts to contracting out of a
statue and giving up the statutory benefits permanently. She, therefore,
submits that merely because a Memorandum of Understanding has
been executed by the applicants with the Rashtriya Mill Mazdoor Sangh,
that by itself will not enable the Court to exercise its discretionary
powers under section 466(1) of the Companies Act, 1956. By unilateral
act of parties, this Court cannot be called upon to exercise its discretion
in granting permanent stay of the winding up. She submits that different
considerations and tests will have to be applied and there is no right
vested in the applicant to seek permanent stay of winding up and
particularly on the grounds which are set out in the affidavit in support.
She submits that in this case, the discretion should not be exercised
because the applicants are not reviving the company in liquidation. They
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are interested in exploiting immovable assets and properties of the
company. She submits that after the manufacturing activities have
stopped, the plant and machinery has been sold according to the
applicants, then, all that they are interested in, is the land. They propose
to develop it by constructing multi-storeyed buildings thereon. They are
in real estate business and, therefore, looking at profits by development
of land. They want to exploit the potential of the land in the present real
estate market. There is nothing in the scheme which would enable this
Court to be satisfied that the applicants have a bonafide intent of
reviving the business of the company in liquidation. The real estate
business is not the business of the company in liquidation. In such
circumstances and when the intent of section 466(1) is to confer
discretion on the Court to stay the winding up proceedings permanently
so as to enable the revival of the company in liquidation, then, all the
more the applicants are not entitled to any relief. They cannot in the
garb of seeking such relief, firstly acquire and then sell and dispose of
the assets to a third party. This is a malafide act and the intent is to
overreach the company Court by taking away the assets and properties
of the company in liquidation from the control of this Court. The
applicants desire to achieve indirectly what is prohibited directly in law.
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This is nothing but an attempt to show revival of the company in
liquidation on paper and thereafter to sale it off completely. There is no
scheme for diversification nor of running the industry. In these
circumstances, this application should not be granted.
16 Ms.Cox submits that as the applicants are seeking permanent stay
of winding up, then, once the discretion is exercised in their favour and
the winding up proceedings are stayed, the employment of the workmen
with the company in liquidation stands revived. There is no legal
termination of their services. There is no compliance with section 25N
and 25O of the Industrial Disputes Act, 1947. There is no guarantee that
those who are not consenting for settlement of their dues in terms of the
Memorandum of Understanding, will get full payment including interest.
Those claims may go to the tune of Rs.5,000 crores. She, therefore,
submits that in any event what is offered is less than what the creditors
would get on winding up that the discretion under section 466(1) should
not be exercised. If the applicants desire to take over the company or
present a scheme or arrangement with the creditors, then, they cannot
resort to section 466(1), but, they must comply with sections 391 and
394 of the Companies Act, 1956. Merely to by-pass the same, that this
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application is filed. Once their intent is as aforestated, then, the
application may be dismissed and the Official Liquidator should be
directed to take steps to sell the assets and properties in winding up. It
will be more beneficial for the creditors of the company including these
workers. Ms.Cox, therefore, submits that the application be dismissed.
17 Ms.Cox relies upon following decisions in support of her
contentions:
(1)[2005] 127 Company Cases 752 (Bom) – Shree
Niwas Girni Kamgar Kruti Samiti & Ors Vs. Rangnath
Basudev Somani & Ors;
18 Mr.Cama, learned senior counsel appearing on behalf of the
Rashtriya Mill Mazdoor Sangh states that the Sangh represents 2800
workers. He submits that the plight of the workers is deplorable. They
have not earned any wages from 2001. The company has been wound
up in 2005. There are no benefits. The claim as stated by Ms.Cox is
highly inflated and there are no documents to justify figure of Rs.5,000
crores. This is not an admitted sum. Mr.Cama submits that on the other
hand, by virtue of Memorandum of Understanding and the efforts
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initiated by Rashtriya Mill Mazdoor Sangh, 75% of the wages have been
paid by the Official Liquidator. This was after sale of movables. Now,
there is no plant, no finished goods, no materials. Therefore, there is no
possibility of revival of textile business nor is the company in a position
to carry on the same. Taking into consideration the present day
government policy and the position in the market, textile business has
no future. In such circumstances and when there are no efforts of revival
for past ten years, then, all the more the Memorandum of
Understanding with the applicants is the only relieving factor. That
atleast has brought in some monies for the workers. Rs.30,000/- have
been paid to each worker. The balance disbursement is of Rs.754.42
crores. A sum of Rs.86 crores is deposited in the Court. In these
circumstances, when the liability is to the tune of the sum stipulated in
the Memorandum of Understanding and if no monies are going to come
in the near future, then, the Memorandum of Understanding should be
permitted to be enforced. By refusing to exercise the discretion in favour
of the applicants, the process initiated by Rashtriya Mill Mazdoor Sangh
upon execution of the Memorandum of Understanding, will be halted or
obstructed. That would not be beneficial for the workers who are waiting
for receipt of the monies. For all these reasons, this Court should take a
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pragmatic and practical view of the situation and grant the reliefs as
claimed.
19 Mr.Cama has also relied upon the following decisions to support
his contentions:
(1) [1991] Vol.71 Company Cases 473 – Bombay
Metropolitan Transport Corporation Ltd Vs.
Employeesig of Bombay Metropolitan Transport
Corporation Ltd (CIDCO) and Ors;
(2) (2008) 13 Supreme Court Cases 323 –
Shivanand Gaurishankar Baswanti Vs. Laxmi Vishnu
Textile Mills and others;
(3) Company Application No.14 of 2011 decided on
3rd February 2011 – Ganesh Dattaram Shitap and OrsVs. M/s.Swadeshi Mill Co Ltd (In Lqn) and Ors.
20 With the assistance of the learned counsel appearing for the
parties, I have perused the application, the annexures thereto and the
Official Liquidator’s report on record. I have also perused with their
assistance the legal provisions and the decisions brought to my notice.
21 For properly appreciating the rival contentions, a reference to
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section 466 is necessary. That provision reads thus:
“466. Power of Tribunal to stay winding up.-(1) The Tribunal
may at any time after making a winding up order, on the
application either of the Official Liquidator or of any creditoror contributory, and on proof to the satisfaction of the Tribunal
that all proceedings in relation to the winding up ought to be
stayed, make an order staying the proceedings, eitheraltogether or for a limited time, on such terms and conditions
as the Tribunal thinks fit.
(2) On any application under this section, the Tribunal may,
before making an order, require the Official Liquidator tofurnish to the Tribunal a report with respect to any facts or
matters which are in his opinion relevant to the application.
(3) A copy of every order made under this section shall
forthwith be forwarded by the company, or otherwise as maybe prescribed, to the Registrar, who shall make a minute of
the order in his books relating to the company.”
22 Perusal thereof would indicate that the Court may at any time after
making a winding up order on the application either of the Official
Liquidator or of any creditor or contributory and on proof to the
satisfaction of the Court, that all proceedings in relation to the winding
up ought to be stayed, make an order staying the proceedings either
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altogether i.e permanently or for a limited time that means temporarily,
on such terms and conditions as the Court thinks fit. The Court may
before making an order, require the Official Liquidator to furnish a report
in respect of the facts or matters which are relevant to the application.
23 On this application being placed before the Court earlier, an order
was made on 23rd June 2011 directing the Official Liquidator to submit
his report within a period of three weeks from the date of the order. On
14th July 2011, this Court perused the Liquidator’s report and made an
order without prejudice to the rights and contentions of the parties in the
following terms:
“(i) The applicant shall deposit an amount of Rs.86 crores
with the Official Liquidator within a period of two weeks from
today.
(ii) Upon such deposit by the applicant, the Official
Liquidator shall forthwith invest the said amount in fixed
deposit/s of nationalised bank/s.
(iii) The Official Liquidator shall adjudicate the claims of
the remaining workers.”
24 In terms of both orders, the Official Liquidator has placed a report
and his final report dated 20th August 2011 records the proceedings that
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were conducted by him pursuant to the order and direction of this Court.
He stated that Official Liquidator has received 1138 individual claim of
workers for adjudication. Letters have been already sent to the workers
for submission of further documentary proof/evidence to prove their
individual claim. Rashtriya Mill Mazdoor Sangh vide its letter dated 15th
June 2011 forwarded to the Official Liquidator, 1909 letters received by
them from the workers accepting the terms of the Memorandum of
Understanding dated 15th November 2010 between Rashtriya Mill
Mazdoor Sangh and the applicants have also confirmed the receipt of
Rs.30,000/- by each of the workers towards advance payment. On the
other hand, Ms.Cox submitted the letters of 10th August 2011 and 17th
August 2011 forwarding therein Letter of Authority from 699 workers and
24 office staff. The Official Liquidator, therefore, sought permission to
adjudicate and pay such claims in accordance with law and to pay
remaining workers as per the terms of Memorandum of Understanding
with Rashtriya Mill Mazdoor Sangh. He seeks orders of the Court
permitting him to disburse the sums and also allow the aggrieved
workers to file their claims with him within such period as may be
prescribed and permit the Official Liquidator to adjudicate and pay such
claims in accordance with law.
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25 Thus, there is a situation where the Rashtriya Mill Mazdoor Sangh
on the strength of the Memorandum of Understanding executed with the
applicants dated 15th November 2010, seeks to press the claims of
those workers who are covered by the Memorandum of Understanding
and whose consent and letter of Authority/acceptance has been
forwarded by it to the Official Liquidator. On the other hand, there are
bout 700 and odd workers who do not wish to abide by Memorandum of
Understanding but are pressing for adjudication of their individual claims
in accordance with law.
26 To my mind, as far as the contentions of Mr.Cama on the issue of
locus of the workers represented by Ms.Cox is concerned, that is a
matter which need not be gone into and decided in this application. The
status of Rashtriya Mill Mazdoor Sangh as a representative/recognised
union, would hold good or not, is a matter which must be left for the
Official Liquidator to decide. It will be open to him to scrutinise such
material as is placed by the parties and then determine as to whether he
must undertake scrutiny of individual claims as prayed by Ms.Cox or
disburse the sums to such workers who wish to abide by the terms of
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the Memorandum of Understanding. It will be open for both to place
before the Official Liquidator the necessary documents so as to either
seek enforcement of the terms and conditions of the Memorandum of
Understanding or adjudication of individual claims in terms of the
Companies Act, 1956 and the Companies Court Rules, 1959. All
contentions in that behalf including with regard to the status and locus
of the Union and of individual workman, are kept open. It is not
necessary to go into the other aspects as to whether the claims have to
be adjudicated with effect from the date of winding up or the date of
appointment of the Provisional Liquidator and even contentions in that
behalf can be kept open. This is not a stage where this Court should
accept the statement of the applicants that they are ready and willing to
settle the claims, not with effect from any prior date but from the date of
appointment of the Provisional Liquidator. This is not a stage where this
Court should determine the relevant date and decide as to whether it is
from the date of the order of winding up or any date prior to the order of
winding up. All pleas of parties in relation thereto are also kept open and
they be dealt with and decided at an appropriate stage.
27 Once this course is adopted, then, it is not necessary to refer to
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decisions which have been cited by Mr.Cama with regard to the locus of
the Union. The judgment in the case of Bombay Metropolitan Transport
Corporation Ltd Vs. Employees of Bombay Metropolitan Transport
Corporation Ltd (CIDCO) and others rendered by Division Bench of this
Court on 5th/6th September 1990 (Appeal No.747 of 1987 in Company
Petition No.138/1986) need not, therefore, be referred in any further
details. Equally, it would not be necessary to refer to the decision of the
Hon’ble Supreme Court in the case of Shivanand Gaurishankar
Baswanti Vs. Laxmi Vishnu Textile Mills and others reported in (2008)
13 Supreme Court Cases 323. As far as the ambit and scope of section
466 of the Companies Act, 1956 is concerned, the principles in that
regard are summarised in a decision of a learned single Judge of the
Calcutta High Court reported in AIR 1996 Calcutta 171 [Nilkanta Kolay
Vs. The Official Liquidator (Company Petition No.120 of 1986, decided
on 30th August 1995)]. There, an application was made by the said
petitioner under section 466 of the Companies Act, 1956 by stating that
winding up petition was filed against the company and a winding up
order came to be passed on 5th July 1988. The Liquidator took
possession of the company and he filed a complaint against the Ex-
Directors including Nilkanth Kolay for taking cognizance and for
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punishment of the offence of not filing the statement of affairs in terms of
section 454 of the Act. The summons was served and Nilkanth
appeared in pursuance thereof. He thereafter stating that there are
three contributories and during the course of hearing of the appeal
against an order on the winding up petition and when directions were
issued for sale of the properties, belatedly made an application on 20th
January 1992 under section 466 of the Companies Act, 1956. That
application was made before the Appellate Court and that is how the
matter was remanded for a decision on that application in terms of
section 466 of the Companies Act, 1956. The learned single Judge of
the Calcutta High Court made reference to earlier decisions of the said
High Court summarising the principles as under:
“23 ….
“Therefore, from the above principles which have been
summarised in different authorities and the decision referred
to hereinbefore it appears that the discretion for stay underSection 466 can only be exercised by the Court (1) if the
Court is satisfied on the materials before it that the
application is bonafide; (2) the Court would be guided by the
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ca243-11.docare applicable to the facts of a particular case; (3) mere
consent of all the creditors for stay of winding up is notenough; (4) that offer to pay in full or make satisfactory
provisions for the payment of the creditors is not enough; (5)
Court will consider the interest of commercial morality and not
merely the wishes of the creditors and contributories; (6)Court will refuse an order if there is evidence of misfeasance
or of irregularity demanding investigation; (7) a firm had
accepted proposal for satisfying all the creditors must bebefore the Court with material particulars; (8) the jurisdiction
for say can be used only to allow in proper circumstances a
resumption of the business of the Company; (9) the Court isto consider whether the proposal for revival of the company is
for benefit of the creditor but also whether the stay will be
conducive or detrimental to commercial morality and to theinterest of the public at large; (10) before making any order
Court must see whether the Ex-Directors have complied with
their statutory duties as to giving information to the Official
Liquidator by furnishing the statement of affairs; (11) and anyother relevant fact which the Court thinks fit to be considered
for granting or not granting the stay having regard to the
peculiar facts of a particular case.”
28 The learned Judge also made reference to an earlier decision
reported in the matter of East India Cotton Mills Ltd reported in AIR
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1949 Calcutta 69 wherein it was held thus:
“In the said case Justice S.R.Das (as his Lordship then
was) held as follows:
“In this application the petitioners also pray for stay of
the winding up proceedings under section 173, Companies
Act. This section comes into play after an order for winding
up has been made. It presupposes a good and valid windingup order. In an application under this section, there can be no
question of attacking the order. Any creditor or contributorymay make an application under this section. Therefore, each
of the petitioners is fully qualified to maintain this applicationinsofar as it is one under this section. The company, however,
independently of the Liquidator, does not appear to me tohave any locus standi in such an application. The section
requires proof of the satisfaction of the Court that allproceedings in relation to the winding up ought to be stayed.
What has happened to justify a stay of proceedings? I have
already dealt with and rejected the allegations of collusion
between Shiva Prosad and Manabendra and the suppression
of service of the petition. Has anything happened since the
order was made? All that has happened is that the petitioning
creditor has been satisfied, not by the company but by
Dulichand a creditor of the company. But is the satisfaction of
the petitioning creditor’s debt by itself sufficient to stay the
winding up when there are other creditors? It is said that
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Dulichand who in his firm of Murarilal Dulichand claims about
Rs,90,000, Jewraj Ram Kissen who claims about also Rs.
90,000 and is represented by Mr.M.N.Banerjee are
supporting this application. On the other hand there is the
creditor Manabendra. Manabendra claims to be a creditor in
the sum of Rs.5,24,651/-. It is probable that he agreed to
accept Rs.25,000/-. I do not propose to go into the question
whether the settlement with him was on any condition or
whether the condition has been broken. Admittedly Rs.25,000
is due to him. The petitioners through their counsel offer to
pay Rs.25,000 to him in full settlement which Manabendra is
not prepared to accept. There is also one Khagendra Lal
Saha who appeared before Edgley, J and filed an affidavit
claiming Rs.6,444-4-6 and objected to any stay but who has
not been served with the present summons. Lastly there are
the Banks and other creditors shown in the balance sheet as
on 31st December 1944 about whose claim nothing has been
said in the petition and the affidavits before me. Further even
if all the creditors consent to stay, is the Court bound to grant
a stay? The principles on which the Court proceeds on an
application of this kind have been summarised in Halsbury’s
Laws of England, 2nd Edition, Vol.2, Art.1209 at p.724 in the
following terms:
“In the exercise of its jurisdiction to stay, the Court so
far as possible, acts upon the principle applicable in
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exercising jurisdiction to rescind a receiving order annulled an
adjudication in bankruptcy against an individual. The Court
refuses, therefore, to act upon the mere assent of the
creditors in the matter, and considers not only whether what
is proposed is for the benefit of the creditors, but also
whether the stay will be conducive or detrimental to
commercial morality and to the interests of the public at large.
In particular the Court will have regard to the following facts
that the Directors have not complied with their statutory
duties as to giving information to the official receiver or
furnishing a statement of affairs that there has been an
undisclosed agreement between the promoter and the vendor
to the company as to the participation by the former in fully
paid up shares forming the consideration for the purchase of
property by the company on formation; that the promoter has
made gifts of fully paid up shares to the Directors, that there
are other matters connected with the promotion, formation or
failure of the company of the conduct of its business or
affairs, which appear to the Court to require investigation. The
same principles are apparently applicable whether the
company has or has not invited the public to subscribe for its
shares except, possibly, in the case of a private company,
where all the shareholders have full knowledge of what has
been done.”
“The summary of the law is based on the observation of
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ca243-11.docBuckley, J in the case of In re: Telescriptor Syndicate Ltd.,
(1903) 2 Ch.174 pp.180-181: (72 LJ Ch 480), whereinreference was made to the Trenchand observation of French,
L.J.in the earlier case of In re: Hester, (1882) 22 QBD 632 at
p.641 : (60 LT 943). I, therefore, proceed to consider the facts
in the light of these principles.”
29 Thus, the broad principles are that the Court must be satisfied on
the materials before it that the application is bonafide, mere consent of
all creditors for stay of winding up is not enough; that offer to pay in full
or make satisfactory provisions for payment of the creditors is not
enough; the Court will consider the interest of commercial morality and
not merely the wishes of the creditors and contributories; the Court will
refuse an order if there is evidence of misfeasance or of irregularity
demanding investigation; the jurisdiction for stay can be used only to
allow in proper circumstances a resumption of the business of the
company and the Court is to consider whether proposal for revival of the
company is for the benefit of the creditor but also whether the stay will
be conducive or detrimental to commercial morality and to the interest of
the public at large; any other relevant fact which the Court thinks fit be
considered for granting or not granting the stay having regard to the
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peculiar facts in a particular case also would govern the exercise of the
power.
30 In my view, what the submissions canvassed by Mr.Tulzapurkar
overlook is, that a company is not a enterprise only of the shareholders.
It is not only they who are interested in setting up and running
companies. The status of a company incorporated and registered under
the Indian Companies Act, 1956 has been best summarised in the
judgment of the Hon’ble Supreme Court in the case of National Textile
Workers Union Vs. P.R.Ramakrishnan reported in AIR 1983 Supreme
Court 75 in the following words:
“4 There is one very important consideration which we
must bear in mind while dealing with this question and it
is necessary to advert to it at the present stage. Theconcept of a company has undergone radical
transformation in the last few decades. The traditional view
of a company was that it was a convenient mechanicaldevice for carrying on trade and industry, a mere legal frame
work providing a convenient institutional container for
holding and using the powers of company management.
The company law was at that time conceived merely as a
statute intended to regulate the structure and mode of
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operation of a special type of economic institution called
company. This was the view which prevailed for a long
time in juristic circles all over the democratic world including
United States of America, United Kingdom and India. That
was the time when the doctrine of laissez faire held sway
and it dominated the political and economic scene. This
doctrine glorified the concept of a free economic society in
which State intervention in social and economic matters
was kept at the lowest possible level. But gradually this
doctrine was eroded by the emergence of new social
values which recognised the role of the State as an active
participant in the social and economic life of the citizen in
order to being about general welfare and common good of
the community. With this change in socio-economic
thinking, the developing role of companies in modern
economy and their increasing impact on individuals and
groups, through the ramifications of their activities, began
to be increasingly recognised. It began to be realised that
the company is a species of social organisation, with a life
and dynamics of its own and exercising a significant
power in contemporary society. The new concept of
corporate responsibility transcending the limited traditional
views about the relationship between management and
shareholders and embracing within its scope much wider
groups affected by the trading activities and other
connected operations of companies, emerged as an
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important feature of contemporary thought on the role of
the corporation in modern society. The adoption of the
socialistic pattern of society as the ultimate goal of the
country’s economic and social policies hastened the
emergence of this new concept of the corporation. The
socio-economic objectives set out in Part IV of the
Constitution have since guided and shaped this new
corporate philosophy. We shall presently refer to some
of the Directive Principles of State Policy set out in Part IV
which clearly show the direction in which the corporate
sector is intended to move and the role which it is intended
to play in the social and economic life of the nation. But, one
thing is certain that the old nineteenth century view which
regarded a company merely as a legal device adopted by
shareholders for carrying on trade or business as
proprietors has been discarded and a company is now
looked upon as a socio- economic institution wielding
economic power and influencing the life of the people.
5 It is now accepted on all hands, even in predominantly
capitalist countries, that a company is not property. The
traditional view that the company is the property of the
shareholders is now an exploded myth. There was a time
when a group controlling the majority of shares in a
company used to say: “This is our concern. We can do
what we like with it.” The ownership of the concern was
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identified with those who brought in capital. That was the
outcome of the property-minded capitalistic society in which
the concept of company originated. But this view can no
longer be regarded as valid in the light of the changing
socio-economic concepts and values. Today social
scientists and thinkers regard a company as a living, vital
and dynamic,social organism with firm and deep rooted
affiliations with the rest of the community in which it
functions. It would be wrong to look upon it as something
belonging to the shareholders.
ig It is true that the
shareholders bring capital, but capital is not enough. It is
only one of the factors which contributes to the production
of national wealth. There is another equally, if not more,
important factor of production and that is labour. Then there
are the financial institutions and depositors, who provide
the additional finance required for production and lastly,
there are the consumers and the rest of the members of
the community who are vitally interested in the product
manufactured in the concern. Then how can it be said that
capital, which is only one of the factors of production, should
be regarded as owner having an exclusive dominion over
the concern, as if the concern belongs to it?A company,
according to the new socio-economic thinking, is a social
institution having duties and responsibilities towards the
community in which it functions. The Supreme Court
pointed out as far back as 1950 in Chiranjeetlal v. Union of
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India (AIR 1951 SC 41 at p.59):
“We should bear in mind that a corporation, which is
engaged in production of commodities vitally essential to
the community, has a social character of its own and it
must not be regarded as the concern primarily or only of
those who invest their money in it.” Pt.Govind Ballabh Pant
also pointed out in one of his speeches:
"... ... ... industry is
ig not an isolated concern of the
shareholders or the managing agents alone. It reacts on
the entire people in the country, on their economic
conditions, on employment or standard of living, on
everything that conduces to the material well being.”
The same view was also expressed at the International
Seminar on Current Problems of Corporate Law,
Management and Practice held in New Delhi where it was
observed that “an enterprise is a citizen. Like a citizen it is
esteemed and judged by its actions in relation to the
community of which it is a member as well as by its
economic performance.” That is why it is regarded as one of
the paramount objectives of a company to bring about
maximisation of social welfare and common good. This
necessarily involves reorientation of thinking in regard to
the duties and obligations of a company not only vis-a-
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vis the shareholders but also vis-a- vis the rest of the
community affected by its operations such as workers,
consumers and the Government representing the society.
There was at one time a serious controversy between two
schools of thought, one represented by Adolf Berle and
the other by Professor Dodd, as regards the nature of duties
and obligations owed by director representing management
of a company. Adolf Berle took the view that directors are
trustees only for shareholders-that is the traditional view
which directly flows from a purely capitalistic approach
which identifies ownership and dominion with capital-while
Prof. Dodd believed that directors are trustees not only for
shareholders but also for the entire community.
Ultimately, however, in his subsequent book, “Twentieth
Century Capitalist Revolution”, Adolf Berle conceded that
Prof.Dodd was right and that modern directors are not
omitted to running business enterprise for maximum profit
motive alone, but are in fact administrators of community
system or of a social institution. That is why we find that in
recent times there is considerable thinking on the subject
of social responsibilities of corporate management and it is
now acknowledged even in highly developed countries like
the United States and England that maximisation of social
welfare should be the legitimate goal of a company and
shareholders should be regarded not as proprietors of the
company, but merely as suppliers of capital entitled to no
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more than reasonable return and the company should
be not only to shareholders but also to workers,consumers
and the other members of the Community and should be
guided by considerations of national economy and progress.
This new concept of a Company was felicitously expressed
by Desai, J sitting as a Judge of the Gujarat High Court in
Panchmahal Steel Ltd. v. Universal Steel Traders(1) in the
following words:
“Time-honoured approach
ig that the company law
must safeguard the interest of investors and shareholders of
the company would be too rigid a framework in which it
can now operate. New problems call for a fresh
approach. And in ascertaining and devising this fresh
approach, the objective for which the company is formed
may provide a guide line for the direction to be taken. As
Prof. De Wool of Belgium puts it, the company has a
three-fold reality economic, human and public-each with
its own internal logic. The reality of the company is much
broader than that of an association of capital; it is a human
working community that performs a collective action for the
common good. In recent years a debate is going on in the
world at large on the functions and foundations of corporate
enterprise. The “preservationists” and the “reformers” are
vigorously propounding their views on the possible reform
of company, the modern trend emphasising the public
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interest in corporate enterprise.”
The learned Judge elaborated this “modern trend” by
quoting from Prof. Gower’s book on “The Principles of
Modern Company Law”: “One section of the community
whose interests as such are not afforded any protection,
either under this head or by virtue of the provisions for
investor or creditor protection, are the workers and
employees of the taken-over company. This is a
particularly unfortunate
ig facet of the principle that the
interest of the company means only the interest of the
members and not of those whose livelihood is in practice
much more closely involved.”
31 Lest it may be said, that after globalisation, liberalisation and
privatisation so also the change in economic scenario since 1990, these
principles may no longer hold good, in a judgment which was once
again delivered by five Judges Bench of the Hon’ble Supreme Court
post this era and reported in AIR 1994 Supreme Court 2696 (Workmen
of Meenakshi Mills Ltd etc Vs. Meenakshi Mills Ltd and another), this is
what is held:
….. “Assuming that the factors mentioned in sub-s (3) S.25N
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as substituted by Amending Act 49 of 1984, are declaratory
in nature and are required to be taken into consideration by
the appropriate Government or the authority while passing
an order under sub-s.(2) of S.25-N, as originally enacted,
it is not possible to hold that the interests of the workmen
is not a relevant factor for exercising the said power. As
pointed out by Prof. Gower in his treatise on Principles of
Modern Company Law:
“In so far as there is any true association in the
modern public company it is between management and
workers rather than between shareholders inter se or
between them and the management. But the fact that the
workers from an integral part of the company is ignored
by the law”. (4th Edn., p.10).
45 The Indian Constitution recognises the role of workers
in the management of the industries inasmuch as Article
43A requires that the State shall take steps by suitable
legislation or in any other way to secure the participation of
workers in the management of undertakings, establishments
or other organisations engaged in any industry. While
holding that the workers have the locus standi to appear and
be heard in a petition for winding up of the company both
before the petition is admitted and also after the admission
until an order is made for winding up of the company,
Bhagwati, J., (as the learned Chief Justice then was), in
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National Textiles v. P.R.Ramakrishnan, [1983] 1 SCR 922,
has thus elaborated this idea:
46 In the same case, Chinnappa Reddy, J., in his
concurring judgment, has stated:
“The movement is now towards socialism. The working
classes, all the world over, are demanding ‘workers’ control
and ‘Industrial Democracy. They want security and the right
to work to be secured.They want the control and direction
of their lives in their own hands and not in the hands of
the industrialists, bankers and brokers. Our Constitution has
accepted the workers’ entitlement to control and it is one of
the Directive Principles of State Policy that the State shall
take steps, by suitable legislation or in any other way, to
secure the participation of workers in the management of
undertakings, establishments or other organisations
engaged in any industry. It is in this context of changing
norms and waxing values that one has to judge the
workers’ demand to be heard”. (p.958) (of (1983) 1 SCR
922) : (at p.83 AIR 1983 SC 75).
47 Similarly, Baharul Islam, J. has observed:
“Our ‘Democratic Republic’ is no longer merely ‘Sovereign’
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but is also ‘Socialist’ and ‘Secular’. A Democratic Republic is
not Socialist if in such a Republic the workers have no
voice at all. Our Constitution has expressly rejected the old
doctrine of the employers’ right to ‘hire and fire’. The
workers are no longer cipher; they have been given pride of
place in our economic system”. (p.980) (of SCR) : (at p.105
of AIR).
32 Once again, the view in the case of P.R.Ramakrishnan (supra) has
been followed and applied. In a later decision reported in AIR 1995
Supreme Court 1811 (L.I.C of India and another Vs. Consumer
Education and Research Centre and others), the Hon’ble Supreme
Court held thus:
“In National Textiles Workers’ Union etc. Vs P.R.
Ramkrishnan, 1983 (1) SCR 922, the constitution benchper majority held that the socio-economic objections set
down in the directive principles of the Constitution should
guide and shape the new corporate philosophy. Themanagement of the private company should show
profound concern for the workers. The socio-economic
justice will inform all the institutions of textiles in the
nation to promote fraternity and dignity of the individuals.
In Workmen of Meenakshi Mills Ltd v. Meenakshi Mills
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Ltd., 1992 (3) SCC, 336, the right of the management to
declare lay off under s.25-N of the Industrial Disputes Act,
1984 under Article 19(1)(g) of the Constitution are subject
to the mandates containing Arts.38, 39A, 41 and 43.
Therefore, right under Article 19(1)(g) was held to be
subject to the directive principles. In Consumer Education
& Research Centre v. Union of India, JT 1995 (1) SC 637,
the right of the management in Asbestos industry to carry
on its business is subject to their obligation to protect
the health of the workmen and to preserve pollution free
atmosphere and to provide safety and healthy conditions of
the workmen.
42) The authorities or private persons or industry are
bound by the directives contained in part IV, Part III and
the Preamble of the Constitution. It would thus be clear
that the right to carry on trade is subject to the
directives contained in the Constitution, the Universal
Declaration of Human Rights, European Convention of
Social Economic and Cultural right and the Convention on
Right to development for socio-economic justice. Social
security is a facet of socio-economic justice to the people
and a means to livelihood.”
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33 Thus, it is not as if public interest, commercial morality and
corporate responsibility are alien concepts in the Era of Globalisation,
Liberalisation and Privatisation. The Courts have to apply the above
principles and be vigilant and onguard against any action by which its
control over companies as envisaged by the statute and particularly in
the cases of companies under liquidation is sought to be interfered with.
The company Court cannot permit even by exercise of a discretion, any
shareholder or creditor to carry forward a scheme or proposal by which
the matter gets out of its hands and control altogether. When an order of
winding up is passed by a Court and an Liquidator is appointed to
manage and administer the affairs of a company, the matter comes
under supervision and control of the company Court. Parties who have
a vested interest and particularly in valuable assets and properties of
the company in liquidation will always make an attempt to get out of the
clutches of the company Court so as to have a free hand in dealing with
the assets and properties of the company. The erstwhile directors,
shareholders and other stake-holders including influential secured
creditors would be interested in either putting an early end to the affairs
of the company in liquidation or by taking advantage of the delay seek
to take charge or intermeddle in the affairs and matters relating to
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winding up in an indirect or oblique manner. The very purpose of the Act
is defeated if such attempts are allowed to succeed. Section 447 of the
Companies Act, 1956 states that an order for winding up of a company
shall operate in favour of all the creditors and all the contributories of the
company as if it had been made on the joint petition of a creditor and of
a contributory.
34 The provisions of the Companies Act, 1956 commencing with the
presentation of a petition for winding up, go to show that the company
Court has very wide powers. It can dismiss such petition with or without
costs. It can adjourn its hearing conditionally or unconditionally. It can
make any interim order as it thinks fit or make an order for winding up of
the company with or without costs or any other order that it thinks fit.
However, once a winding up order has been passed, the consequences
are that the order has to be communicated to the Official Liquidator. The
suits and other proceedings against the company get stayed on winding
up order and cannot be initiated or proceeded with, save and except,
with the sanction of the Court winding up the company. Section 447 has
already been noted above. Section 448 to section 450 enumerate the
appointment and powers of the Official Liquidator. The Official Liquidator
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then has to ensure that a statement of affairs of the company is
submitted to him. He can call for such particulars as are necessary and
if default is made in complying with the requirement of furnishing and
submitting the statement of affairs then that act is viewed very seriously,
and, it is an offence in terms of the relevant provisions.
35 Section 455 is entitled “Report by Official Liquidator”. The
Liquidator’s report has to be comprehensive. It may be preliminary or
final. He can seek sanction of the company Court for taking such steps
as are necessary to preserve, protect and safe-guard the properties and
assets of the company. The custody of the company’s property in terms
of section 456 is with the Official Liquidator. He must take into his
custody or control all the property, effects and actionable claims to
which the company is or appears to be entitled. He has very wide
powers including seeking assistance of the police for taking possession
of the company’s properties and effects. Sub-section 2 of section 456
states that all the property and effects of the company shall be deemed
to be in the custody of the Court as from the date of the order winding
up of the company. This provision is salutary in nature. The legislature
was conscious of the fact that it may be assumed that on winding up
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order being passed, the properties and assets are in custody or under
control of the Official Liquidator, but that is not what is really intended by
the statute. It is the company Court which has the custody as and from
the date of the order of winding up. For the Court to exercise its powers
under the Act and to enable it to take custody, that the Official Liquidator
is appointed. The powers of the Official Liquidator have to be exercised
by him with the sanction of the Court and that is evident by section 457.
In section 457, in sub section (1) in addition to clauses (a) to (c), clause
(ca) has been added by Act 11 of 2003 and that confers power on the
Official Liquidator to sell whole of the undertaking of the company as a
going concern. This is evident by the fact that once the Liquidator has
taken custody of the property and puts it under the control of the Court,
he can with the sanction of the Court and to ensure effective so also
proper winding up of its affairs, sell whole of the undertaking of the
company as a going concern so as to enable him to meet the claims
that may be received from all the creditors. There is a discretion in the
Liquidator and that is evident by section 458.
36 Then comes section 459 under which the Court can sanction legal
assistance to Liquidator. The exercise and control of Liquidator’s powers
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is subject to the provisions of the Act, but in the administration of the
assets of the company and distribution thereof among its creditors, the
Liquidator shall have regard to any directions which may be given by the
resolution of the creditors or contributories at any general meeting or by
the committee of inspection. The Liquidator may apply to the Court in
the manner prescribed, if any, for directions in relation to any particular
matter arising in the winding up. Therefore, by sub-section (6) of section
460, it is evident that anything that the Liquidator does even by using his
own discretion, is ultimately subject to the confirmation by the Court.
The Liquidator has to keep books and he has to also have audit
conducted of his accounts is clear from the further provisions. The
Central Government has control over Liquidators but as is evident, in
individual matters it is ultimately the Court, which has all the powers. It
is in this backdrop that section 466 must be construed. It is not proper to
see this provision in isolation for that would mean that the affairs of the
company in winding up is the absolute prerogative of the Liquidator and
the Court has only to act on the reports of the Liquidator. The Court has
the paramount duty and obligation and it has to uphold the object of the
Companies Act, 1956.
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37 As held by the Hon’ble Supreme Court, the Company Court
cannot take a narrow and pedantic view of the matter and proceed on
the basis that the company is the property of the shareholders and it is
their wish which has to be given effect to. Similarly, it is only the interest
of the shareholders and the creditors which has to be borne in mind.
The larger role that has now been highlighted makes it abundantly clear
that a company is a social institution. It is not the interest of those who
invest their money in a company which has primacy or they alone have
to be placed in the forefront. Once the society as a whole has a stake in
a company, then, the company Court cannot overlook that aspect, for it
would be shirking its duty and ignoring public interest. The company
Court has to keep public interest and public good in the forefront as
well. Therefore, while exercising its powers under section 466, the
company Court cannot do anything which shakes the confidence of the
public at large in the functioning or working of the company Court or that
of the Liquidator. Once commercial morality and corporate
responsibility are inbuilt in the administration and management of
companies, then, these principles would have to be applied even by the
company Court. We, in India, follow the principle and phiolosphy
emphasised by the Father of Nation, namely, “Commerce Without
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Morality is a Social Sin”. The company Court cannot permit any
arrangement or scheme or grant any relief which would defeat public
interest or would contravene public policy. Ultimately, whether it is a
compromise between conflicting stake holders or persons having same
interests, when it comes to winding up the affairs of a company, the
Court must necessarily act for public good and in public interest. If the
discretion vested in the company Court is not exercised on sound
judicial and social principles, then, people at large would lose faith in the
administration of justice itself. They would carry an impression that the
company Court places its seal of approval on any arrangements or
schemes brought before it by interested parties, mechanically.
38 Even as late in 2007 the Hon’ble Supreme Court in the case of
M/s.Meghal Homes Pvt Ltd v. Shree Niwas Girni K.K.Samiti & Ors
reported in AIR 2007 Supreme Court 3079, while reversing a decision of
the Division Bench of this Court modifying the scheme of arrangement
in exercise of the powers under section 392 of the Companies Act, 1956
had the following to say:
“22. When a Company is ordered to be wound up, the
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assets of it, are put in possession of the Official Liquidator.
The assets become custodia legis. The follow up, in the
absence of a revival of the Company, is the realization of
the assets of the company by the Official Liquidator and
distribution of the proceeds to the creditors, workers, and
contributories of the company ultimately resulting in the
death of the company by an order under Section 481 of the
Act, being passed. But, nothing stands in the way of the
Company Court, before the assets are disposed of, to
accept a Scheme or proposal for revival of the Company. In
that context, the Court has necessarily to see whether the
Scheme contemplates revival of the business of the
Company, makes provisions for paying off creditors or for
satisfying their claims as agreed to by them in terms of
Section 529 and Section 529A of the Act. Of course, the
Court has to see to the bonafides of the Scheme and to
ensure that what is put forward is not a ruse to dispose of
the assets of the Company in liquidation.
23. In fact, it was on this basis that the Division
Bench of the High Court proceeded when it passed the
order dated 4.4.1995. Apart from the fact that the correct
principle was adopted, the directions therein are binding on
the Company Court and the Division Bench of the High
Court of coequal jurisdiction when the proposal for
amendment of the earlier scheme came up. It has to be
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noted that it was not a fresh scheme that was being mooted,
but it was a proposal for an amendment of the scheme
already considered by the Division Bench when it passed
the order dated 4.4.1995. It was the plain duty of the
Division Bench on the latter occasion to keep in focus the
suggestions earlier made.
24. It was argued before us on behalf of the appellant that
Sections 391 to 394A were procedural provisions and when
once a company was under liquidation, the Chapter dealing
with winding up applied and the only provision or
substantive provision conferring power of stopping the
winding up was conferred on the court by Section 466 of
the Act, and unless the court is satisfied that the Company is
being taken out of liquidation by way of revival and that it will
sub-serve public interest and will conform to commercial
morality, the court cannot accept a scheme proposed under
Section 391 of the Act. The argument on the side of the
respondents is that Section 391 is a self-contained code and
read with Section 392 of the Act, which was peculiar to our
Act, it was clear that a Company Court could approve,
independently of Section 466 of the Act, a scheme and
could take the company out of liquidation and even pass an
order of stay in terms of Section 391 read with Section 392
of the Act. Section 466 of the Act was not attracted when a
scheme approved by the shareholders, creditors, members
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of the Company and so on was put forward before the
Company Court.
25. It is a well settled rule of interpretation that provisions
in an enactment must be read as a whole before
ascertaining the scope of any particular provision. This
Court has held that it is a rule now firmly established that the
intention of the legislature must be found by reading the
statute as a whole. In Principles of Statutory Interpretation
by Justice G.P. Singh, it is stated:
“The rule is referred to as an “elementary rule” by
VISCOUNT SIMONDS; a “compelling rule” by LORD
SOMERVELL OF HARROW; and a “settled rule” by B.K.
MUKHERJEE, J.”
(See pages 31 and 32 of the Tenth Edition)
When we accept this principle, what we have to do is to
read Sections 391 to 394A not in isolation as canvassed for
by learned counsel for the respondents, but with reference
to the other relevant provisions of the Act. We see no
difficulty in reconciling the need to satisfy the requirements
of both Sections 391 to 394A and Section 466 of the
Companies Act while dealing with a Company which has
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been ordered to be wound up. In other words, we find no
incongruity in looking into aspects of public interest,
commercial morality and the bona fide intention to revive a
company while considering whether a compromise or
arrangement put forward in terms of Section 391 of the
Companies Act should be accepted or not. We see no
conflict in applying both the provisions and in harmoniously
construing them and in finding that while the court will not sit
in appeal over the commercial wisdom of the shareholders
of a company, it will certainly consider whether there is a
genuine attempt to revive the company that has gone into
liquidation and whether such revival is in public interest and
conforms to commercial morality. We cannot understand
the decision in Miheer H. Mafatlal Vs. Mafatlal Industries
Ltd. (supra) as standing in the way of understanding the
scope of the provisions of the Act in the above manner. We
are therefore satisfied that the Company Court was bound
to consider whether the liquidation was liable to be stayed
for a period or permanently while adverting to the question
whether the scheme is one for revival of the company or
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that part of the business of the company which it is
permissible to revive under the relevant laws or whether it is
a ruse to dispose of the assets of the company by a private
arrangement. If it comes to the latter conclusion, then it is
the duty of the court in which the properties are vested on
liquidation, to dispose of the properties, realize the assets
and distribute the same in accordance with law.”
39
What is further interesting and relevant to note is, that the
Supreme Court frowned upon an arrangement which was of a like
nature. There, Supreme Court was considering the correctness of the
view taken by the Division Bench under which it permitted modification
or replacement of an earlier scheme. That earlier scheme envisaged
revival of the company in liquidation. However, the modifications that
were suggested in the compromise or arrangement envisaged not
revival, but taking over of the lands of the company which was carrying
on identical, viz., textile business and placing them in the hands of
developers and builders, namely, M/s.Lodha Builders Pvt Ltd. The said
M/s.Lodha Builders Pvt Ltd were not at all interested in revival of the
company or its business by taking over the undertaking of the company
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as a going or running union. It was interested in starting an industry of
its own in that property. This was not approved by the Supreme Court as
a modification in the scheme necessary for proper working of the
compromise or arrangement earlier arrived at. This was a substitution of
the scheme itself. Therefore, unless the scheme with the modifications
was placed before the general body by reconvening the meeting in
terms of section 391 of the Act, the modification could not have been
sanctioned, was the view taken by the Supreme Court. Therefore,
howsoever laudable the object may be, the company Court cannot
approve an arrangement by which the assets of the company in
liquidation are disposed off or taken over by some private arrangement
and to put it more clearly by circumventing the company Court itself.
The Court even in matters of sections 391 to 394 and 466 of the
Companies Act, 1956 has to take into consideration the aspect of public
interest, commercial morality and the intention to revive the company.
40 I will have to test the present application and the request of the
applicants therein on the touchstone of the above principles. All
discretion has to be exercised judiciously and not arbitrarily. The Court
cannot pick and choose shareholders and creditors. The Court cannot in
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the garb of conflicting claims of workers or because of any rift inter-se
between them, allow the claims of the said workers and other creditors
to be compromised or defeated altogether. Ultimately, the applicants
may claim to be shareholders and substantial secured creditors, but if
the purpose in presenting this application is to enable them to take over
the company’s properties and assets which are indeed valuable at a
price or value which they unilaterally determine, then, that cannot be
permitted. A careful scrutiny of this application would reveal that what
the applicants are projecting is, that they have the necessary
wherewithal and strength. The applicant No.1 claims to be a promoter,
secured creditor and unsecured creditor of the company in liquidation. It
has projected that it alongwith its wholly owned subsidiary owns
17,64,430 shares of the company in liquidation constituting 22.70% of
the total equity shares of the company in liquidation, whereas the
applicant No.2 owns 22,83,210 equity shares of the company
constituting 29.29% of the total shareholding of the company in
liquidation. On the own showing of the applicants, applicant No.2 has
acquired this shareholding after the winding up order. Therefore, they
may be owning in aggregate about 52% of the total equity shares of the
company, they may claim to be vitally interested in its affairs as well, but
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they are part of a distinct group of companies, viz., Shapoorji Pallonji
Group which is not in textile business admittedly. That group is in the
business of Construction, Infrastructure and Real Estate Development
Business.
41 The applicants have stated in the affidavit in support that the
company in liquidation is a Public Limited Company incorporated and
registered under the Companies Act VI of 1882 of the Legislative
Council of India. Its shareholding and activities are set out and
admittedly the company was operating composite textile mills having
spinning, weaving and processing sections for the manufacture of
cotton, synthetics and non-woven fabrics. Although the company ran
into rough weather, what has been placed for this Court’s consideration
and seeking reliefs in its equitable and discretionary jurisdiction is, that
Government of Maharashtra has initiated various measures for
promotion and facilitation of development of mill lands in Mumbai. It is
projected that in accordance therewith, the availability of houses has
also been a thrust area. The initiative alongwith available immovable
properties of the company together, offer a favourable platform for the
company to undertake real estate development operation. Now, if para
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7 of the affidavit in support, which is reproduced herein above is
carefully perused, it is apparent that the applicants do not desire to
revive the business of the company in liquidation by developing part of
its properties or portions of its lands, but desire to take over the said
lands for exploitation in the real estate market. It is clearly their motive
that these lands should be taken over without offering the market price,
but via this application so that once the permanent stay of winding up is
obtained or granted, that would mean that the company’s prime assets
and properties can no longer be controlled by the Court. They would
develop these lands by constructing buildings and sell off the units
therein and earn profits.
42 However, the desire to cash on the lands with a view to fully
exploit their potential is not matched with the same approach as far as
the creditors of the company. By not reviving the company after taking it
out of winding up shows that the applicants are primarily concerned with
the benefits attached to these lands. By exploiting and utilising them to
their advantage, the applicants are not agreeable to the Liquidator and
the Court controlling their actions in interest of all creditors and general
public. The business opportunities on account of spiraling prices in the
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Real Estate Market is the only attraction for the applicants. The
proceeds and gains from such opportunities ought to have been shared
by them with all. However, that is not their intent, is clear from their
stand. If these lands are sold by the Official Liquidator under the
supervision of this Court and at open, fair and transparent public
auction, the applicants may not stand any chance and hence they
desire to obtain the lands at a throwaway price by a back-door method.
That is the sole intent in making this application. By invoking sympathy
of some creditors and stating that the monies to meet the claims of the
workers would be brought in immediately, what the applicants are
seeking to do is to take away entire proceedings in winding up from the
supervision and control of this Court. They may make give or seek some
concessions here and there. However, their object is not to run the
business of the company in liquidation. They have not brought anything
on record by which it could be conclusively held that textile
manufacturing business is altogether prohibited or not permitted in the
Island city. In fact, if the affidavit in support is perused carefully, it is
evident that the Shapoorji Pallonji Group is interested in the lands of this
textile company and if they have to obtain the same at public auction or
by bidding at a sale of this land and assets of the company in liquidation
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under the aegis of the Liquidator and pursuant to the sanction of this
Court, they may not be able to acquire these lands. Thus, to avoid
participation at a public auction and at a sale which will be conducted in
a transparent and fair manner, that the application has been filed. The
applicants have not come out with a positive case that business of the
company in liquidation cannot be revived at all. They do not say that the
textile business cannot be carried on or is totally prohibited. They claim
that it is not practicable and feasible to carry on such business.
However, it is their perception. The Liquidator has not come forward with
any conclusive or decisive report on this aspect. In such circumstances,
if all the above tests and principles are applied, it is evident that this
company application is filed for seeking a stay of the winding up not for
revival of the company’s business or to smoothen the process of
liquidation and winding up, but to take over the company itself in an
indirect and oblique manner. There is substance in the objection of
Ms.Cox that this is a take over of the company without recourse to the
provisions in law enabling such take over and particularly sections 391,
392 to 394 of the Act. To by pass and avoid compliance with such
provisions, that this application is filed. Once such is the motive, then,
the enormity of the funds, the applicants are willing to pump in, the
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schemes or arrangements of settlement of the dues of creditors, cannot
persuade this Court to grant any discretionary relief to them and prevent
the Liquidator from proceeding to wind up the company in accordance
with law. If ultimately it is impossible to revive the company, then, it is
better that the Liquidator carries on its affairs till the dissolution of the
company. It is only through the mechanism and participation of the
Liquidator, that the Court can ensure settlement of claims of the secured
and unsecured creditors in accordance with law.
43 At this stage, when claims of certain workmen have been given a
preference over others or non-consenting employees, then, all the more
it would not be in public interest and commercial morality to grant any
reliefs.
44 As a result of the above discussion, this company application fails
and it is dismissed.
45 In the view that I have taken, it is not necessary to refer to all the
decisions that have been brought to my notice. Suffice it to note that the
decisions that have been brought to my notice by Mr.Tulzapurkar deal
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with a situation in which the Court has permitted carrying on a distinct
business under a scheme of arrangement or compromise by adherence
to the provisions of law. That was a case where on a over all view, the
scheme proposed and the arrangement placed before this Court in
terms of sections 391 to 394 of the Companies Act, 1956 was in the
interest of the shareholders, creditors and general public. It is in that
backdrop, that the Court took the view relied upon by the applicants. It is
in such circumstances that the amendment to the object clause or to the
memorandum, was permitted. The judgment in the case of Maharashtra
State Textile Corporation Ltd Vs. Gopal Balu Saikar (supra), is also
distinguishable. There, the Government of Maharashtra had acquired
the assets of the mill and the question was whether the employment of
respondent No.1 continues on such acquisition. It was argued that it
was re-employment after the take over whereas the dispute was
whether it is a fresh employment in law. It is in that context, that the
observations have to be seen.
46 The decision of the learned single Judge of the Gujarat High Court
in Shaan Zaveri & Ors Vs. Gautam Sarabhai (P) Ltd (supra), once again
must be seen in the backdrop of a relief of permanent stay of voluntary
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liquidation of the company and seeking discharge of the Liquidator.
There, the scheme was found to be not contravening any of the
provisions of law that the discretion was exercised on the sound judicial
principles. That must be seen in the facts of that case and that this
judgment does not lay down any general rule.
47 Thus, finding that the none of the grounds enabling exercise of
discretion under section 466 have been made out, this company
application is dismissed but without any order as to costs. The Official
Liquidator should now proceed expeditiously and adjudicate the claims
received and take all such steps as are necessary and permissible in
law for winding up the company in liquidation. With such directions, his
report also is disposed off.
48 At this stage, it is requested that an amount of Rs.86 Crores which
is deposited in this Court by the applicants be directed to be returned
with accrued interest. Mr.Tulzapurkar submits that this withdrawal will
be without prejudice to the rights and contentions of the applicants to
challenge this order in higher court.
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49 In the light of this request, the applicants are allowed to withdraw
the amount of Rs.86 Crores with accrued interest, without prejudice to
their rights and contentions.
(S.C.DHARMADHIKARI, J)
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