JUDGMENT
D.A. Mehta, J.
1. The learned advocate for the applicant Mrs. Swati Soparkar seeks permission to delete respondent Nos. 2 to 6. Permission granted.
2. This application has been moved by the applicant stating that there is non-compliance or violation of provisions of Section 488 of the Companies Act, 1956 (‘the Act’ for short) and the following prayers have been made in the Judge’s Summons taken out by the applicant.
“(a) to declare the failure in compliance with section 488(5) of the Companies Act, 1956 by the Arya Silk Mills Private Limited (in liquidation), (hereinafter referred to as ‘the Company’) and its directors being opponent No. 1 to 6.
(b) to cause the compliance of section 500 to 509 and in particular section 500(1) and (2) of the Companies Act, 1956 by the company and its directors being opponent No. 1 to 6,
(c) to appoint a professional chartered accountant or any other person as the Hon’ble Court may deem fit as the liquidator of the company under section 515(1) of the Companies Act, 1956,.
(d) to annul the transfer of any assets and properties of the company made by the directors and not by the liquidator of the company after the commencement of the winding up,
(e) to prevent the company from causing the transfer or disposal of any of its assets and properties under section 518(1)(b) of the Companies Act, 1956 in favour of any person.”
3. The case of the applicant is that the applicant is a creditor of respondent No. 1 for a sum of Rs. 1,23,218/- being the cost of colours and chemicals supplied to respondent no. 1 along with interest thereon of Rs. 91,707/- aggregating to a sum of Rs. 2,14,925/-. Respondent No. 1 was incorporated on 06-05-1986 as a Private Limited Company having its Registered Office and the place of business at the address mentioned in the cause title. It is further stated by the applicant that in pursuance of notice dated 01-02-2003 a general meeting of the shareholders of the Company (in liquidation) was convened on 08-03-2003 whereat a special resolution was passed opting for members’ voluntary winding up under Sections 484 and 488 of the Act. It is thereafter stated in the application that the subsequent statutory requirements prescribed under Sections 485 and 488 of the Act were not complied with and hence, according to the applicant, this was a fit case wherein the Court must grant the prayers made by the applicant.
4. After hearing the learned advocate for the applicant Mrs. Soparkar notice had been directed to be issued on 19-02-2004, but as respondent No. 1 and respondent Nos. 3 to 6 were not served, issuance of fresh notice was directed on 26-03-2004. Mr. B.P. Gupta, learned advocate, appears on behalf of respondent No. 1 and has tendered affidavit-in-reply dated 26-04-2004. Today, additional affidavit dated 06-05-2004 on behalf of respondent No. 1 has also been tendered by Mr. Gupta.
5. In the affidavit-in-reply dated 26-04-2004 it has been stated by one Shri Shailendrakumar Kanh Biharilal Agarwal, Liquidator for Arya Silk Mills Private Limited (in liquidation) that firstly, this Company Application has been filed suppressing several material facts and hence, deserves to be dismissed on this limited ground. Secondly, the application suffers from vice of delay and latches. Thirdly, the application has been filed with mala fide motive only with a view to create hurdles in the process of liquidation.
5.1 It was submitted by Mr. Gupta, as stated in the affidavit-in-reply, the Company has commenced members’ voluntary winding up and the Liquidator has taken concrete action : like repayment of bank liabilities and/or major government liabilities; the process of recovering monies from debtors and payment to the creditors is also initiated. It is stated that resolution for members’ voluntary winding up was passed on 03-07-2003 and a copy of Form No. 23 along with receipt issued by the Registrar of Companies has been annexed as R-1 to the affidavit. In relation to earlier resolution of 08-03-2003 it is stated in the reply affidavit that due to some deficiencies further proceedings were dropped and fresh resolution was passed on 03-07-2003. It is further averred in the affidavit that Form No. 23 was submitted in the Office of Registrar of Companies on 18-07-2003 and the said fact was within knowledge of the applicant but the applicant has chosen not to present the same to misguide the Court. It is further stated in the affidavit that in pursuance of resolution passed by the members on 03-07-2003 the entire procedure as prescribed under law has been followed by the Company including procedure prescribed under Section 485(1) of the Act. A copy of the resolution dated 03-07-2003 has been annexed as R-2 to the affidavit. Mr. Gupta also invited attention to the notice of appointment of the Liquidator given to the Registrar of Companies, publication of notice in newspaper on 16-07-2003, publication in Government Gazette in support of the submission that Section 485(1) of the Act had duly been complied with.
5.2 It is further stated in the affidavit that respondent No. 1 had complied with provisions of Section 488(1) of the Act and that the directors of the Company had formed an opinion regarding the financial capacity and capability of the Company to pay up all its dues within the specified period of three years from the commencement of the winding up. It is further averred that after obtaining valuation report of the assets and considering the Profit & Loss A/c as on 31-03-2003, the directors had taken a decision which was bona fide and based on reasonable belief and there was no question of taking any penal action either against the Company and/or its directors.
5.3 In the affidavit it is further stated that not only declaration was made in accordance with provision of Section 488(5) of the Act but there was compliance with provisions of Sections 485(1) read with 488(2) of the Act and for this purpose, declaration dated 05-06-2003 has been annexed as R-6 to the affidavit.
5.4 Resisting attempt to appointing any other person as Liquidator of the Company, in Paragraph 13 of the affidavit-in-reply, it is averred that “almost all the assets have been sold and most of the statutory dues have been paid up and the payment of rest of the creditors is in progress and be made within the prescribed period of 3 years. It is hoped that payment in full and final settlement will be made to the creditors of the company as soon as the money is realized from the debtors of the company for which all the necessary efforts are being made by the Liquidator.”
6. When the matter was taken up for hearing on 06-05-2004 it was found that Form No. 23 pertaining to registration of resolution was dated 03-07-2003 and the resolution passed at Extraordinary General Meeting of the members of the Company held on 03-07-2003 was annexed thereto. The notice by Liquidator was dated 03-07-2003. However, the declaration of solvency in the form of affidavit is dated 05-06-2003, and the same is accompanied by a statement showing assets at estimated realisable values and liability expected to rank as on 31-05-2003. Receipt issued by the Office of the Registrar of Companies shows that in relation to document dated 05-06-2003 the same was received in the Office of the Registrar of Companies on 29-07-2003. The type of document shown in the receipt was Form 4A. Therefore, in the circumstances, to ascertain as to whether there was compliance with provision of Section 488(2) of the Act the learned advocate appearing on behalf of respondent No. 7 Registrar of Companies was directed to produce relevant record in relation to these proceedings from the Office of respondent No. 7. The same has been placed on record today by Mrs. P.J. Davawala appearing on behalf of respondent No. 7.
7. The learned advocate on behalf of respondent No. 1 has tendered additional affidavit dated 06-05-2004 wherein it is stated that as per provisions of Section 488(2) of the Act a declaration was made and the copy of the said declaration along with report of auditors of the Company on the Profit and Loss A/c. and balance sheet as on 31-03-2003 and the statement of the Company’s Assets and Liabilities as on 31-05-2003 was sent to the Registrar of Companies on 30-06-2003 by post and “as per my information the said declaration has been received by the Registrar of Companies thereafter in due course by post”. Thereafter it was submitted that the requirement of Section 488(2) of the Act has been properly complied with and a request was made that the Court call for the files of the Registrar of Companies or the report from the Registrar of Companies to ascertain the correctness of the averments made in the affidavit on 06-05-2004.
8. As stated hereinbefore, accordingly, the learned advocate for respondent No. 7 Mrs. Dawavala has produced copy of the declaration dated 05-06-2003 wherein the stamp of receipt No. 475553 appears, which goes to show that the same was received by the Office of the Registrar only on 29-07-2003. At this stage Mr. Gupta submitted that the documents were received in the Office of the Registrar of Companies at an earlier point of time, but because the necessary fees required to be paid with the documents and the form were not paid, it could not be stated that the documents were furnished only on 29-07-2003. It was also submitted that the documents having been dispatched by post on 30-06-2003 from Surat the said date must be taken to be the date on which compliance as required under Section 488(2) of the Act was made.
9. Section 488 of the Act deals with declaration of solvency in case of proposal to wind up voluntarily and reads as under :-
“488. (1) Where it is proposed to wind up a company voluntarily, its directors, or in case the company has more than two directors, the majority of the directors, may, at a meeting of the Board, make a declaration verified by an affidavit, to the effect that they have made a full inquiry into the affairs of the company, and that, having done so, they have formed the opinion that the company has no debts, or that it will be able to pay its debts in full within such period not exceeding three years from the commencement of the winding up as may be specified in the declaration.
(2) A declaration made as aforesaid shall have no effect for the purposes of this Act, unless–
(a) it is made within the five weeks immediately preceding the date of the passing of the resolution for winding up the company and is delivered to the Registrar for registration before that date; and
[(b) it is accompanied by a copy of the report of the auditors of the company (prepared, as far as circumstances admit, in accordance with the provisions of this Act) on the profit and loss account of the company for the period commencing from the date up to which the last such account was prepared and ending with the latest practicable date immediately before the making of the declaration and the balance sheet of the company made out as on the last-mentioned date and also embodies a statement of the company’s assets and liabilities as at that date.]
(3) Any director of a company making a declaration under this section without having reasonable grounds for the opinion that the company will be able to pay its debts in full within the period specified in the declaration, shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to five thousand rupees, or with both.
(4) If the company is wound up in pursuance of a resolution passed within the period of five weeks after the making of the declaration, but its debts are not paid or provided for in full within the period specified in the declaration, it shall be presumed, until the contrary is shown, that the director did not have reasonable grounds for his opinion.
(5) A winding up in the case of which a declaration has been made and delivered in accordance with this section is in this Act referred to as “a members’ voluntary winding up”; and a winding up in the case of which a declaration has not been so made and delivered is in this Act referred to as “a creditors’ voluntary winding up”
10. On a plain reading of sub-section (1) of Section 488 of the Act, it is apparent that where a proposal to wind up a company voluntarily is made, its director or the majority of the directors, where there are more than two directors at a meeting of the Board, shall make a declaration verified by an affidavit, to the effect that the said directors have made a full inquiry into the affairs of the company and after such verification have formed an opinion that the company has no debts, or that where there are debts it will be able to pay off its debts in full within such period as may not exceed three years from the commencement of the winding up as may be specified in the declaration.
10.1 The declaration which is annexed at R-6 is dated 05-06-2003 and is made by way of an affidavit by two of the directors viz. Shailendrakumar K. Agarwal and Rekha S. Agarwal. The said affidavit states that the said two directors, being majority of the directors of Arya Silk Mills Private Limited, solemnly affirm and declare that they have made full inquiry into the affairs of the Company, and after having done so, have formed the opinion that the Company will be able to pay its debts in full within a period of 36 months from the commencement of the winding up. It is further averred in the affidavit that the said directors append a statement of the company’s assets and liabilities as at 31-05-2003. On perusal of record produced by the learned advocate for Registrar of Companies, it becomes apparent that the said declaration has been submitted with the Office of the Registrar of Companies only on 29-07-2003.
10.2 Sub-section (2) of Section 488 of the Act states that a declaration made under sub-section (1) shall have no effect for the purpose of this Act, unless– (A) such declaration is made within the five weeks immediately preceding the date of the passing of the resolution for winding up the company and is delivered to the Registrar for registration before that date; and (B) it is accompanied by a copy of the report of the auditors of the company on the profit and loss account of the company for the date as stated in Clause (b) of sub-section (2) of Section 488 of the Act. In the present case, admittedly, the resolution is dated 03-07-2003 having been passed in the Extra Ordinary General Meeting held on 03-07-2003. The declaration is dated 05-06-2003. Therefore, so far as compliance with the former part of Clause (a) of sub-section (2) of Section 488 of the Act is concerned, it can safely be stated that there is due compliance, the declaration having been within the five weeks immediately preceding the date of passing of the resolution, but the later portion of Clause (a) of sub-section (2) of Section 488 of the Act which requires that the declaration must be delivered to the Registrar for registration before that date is admittedly not fulfilled. What the provision stipulates is two conditions and by virtue of the employment of the term ‘and’ in clause (a) it denotes that both the conditions have to be fulfilled so that the declaration shall have effect for the purpose of the Act. The delivery of the declaration to the Office of the Registrar for registration has to be before the date of passing of the resolution, mere making of the declaration within the five weeks preceding the date of resolution is not sufficient. The use of terms “shall have no effect” and “unless” in the opening part of sub-section (2) of Section 488 of the Act make it clear that clause (a) which provides for two pre-requisite conditions stipulates mandatory compliance, and failure of any one makes the declaration of no effect. Therefore, on the face of it respondent No. 1 has failed to fullfil the pre-requisite conditions prescribed under Section 488(2)(a) of the Act.
10.3 Similarly, sub-clause (b) of sub-section (2) of Section 488 of the Act is also a condition precedent which goes to show that such a declaration has to be accompanied by a copy of the report of the auditors of the Company and such report has to embody a statement of the company’s assets and liabilities as at the prescribed date. The emphasised portion of clause (b) shows that the declaration referred to in clause (a) has to be accompanied by the report of the auditors of the Company, and such report has also to embody a statement of the assets and liabilities. Thus, the requirement of the provision is a report containing Profit & Loss A/c., a Balance Sheet, and one which also embodies a statement of debts and liabilities. In absence of such a report of the auditors only a statement of debts and liabilities does not show necessary compliance.
10.4 On going through the facts of the case as the record of the Registrar of Companies reveals, the declaration is accompanied only by a statement, which is dated 05-06-2003, showing assets at estimated realisable values and liabilities expected to rank as on 31-05-2003; the said statement is signed by the two directors who have made the declaration. There is no report of the auditors of the Company as required under Clause (b) of sub-section (2) of Section 488 of the Act. Therefore, even this condition which is also a necessary condition is not fulfilled. Mr. Gupta for respondent No. 1 raised a contention during course of hearing to the effect that even if such a report of the auditors has not been submitted, at the highest it is a technical lapse once the statement of assets and liabilities was presented before the Registrar of Companies and it should not be held against respondent No. 1. Considering the statutory language it is not possible to treat this as a technical lapse. The directors are interested persons — auditors are not, at least not expected to be. The Company has failed to comply with requirements of Section 488(2) of the Act.
11. Once it is found that provisions of sub-section (2) of Section 488 of the act have not been complied with the direct consequence in so far as the Company is concerned, is provided in sub-section (5) of Section 488 of the Act. The said sub-section provides that in a case where a declaration has been made and delivered in accordance with Section 488 of the Act the winding up will be referred to as “a members’ voluntary winding up”; however, where a declaration has not been made and delivered as provided by Section 488(2) of the Act the winding up shall be referred to as “a creditors’ voluntary winding up”. Therefore, this sub-section not only provides for the consequence but also indicates that requirement of sub-section (2) of Section 488 is mandatory in nature in as much as not only a declaration is required to be made but the same is required to be delivered with the period as provided under clause (a) of sub-section (2) of Section 488 of the Act.
12. Hence, it is apparent on facts that there is failure to comply with mandatory requirements of Section 488(2) of the Act resulting in the winding up as “creditors’ voluntary winding up.”
13. Therefore, to safeguard interest of all concerned the Official Liquidator attached to this High Court is hereby appointed as Liquidator of the Company i.e. Arya Silk Mills Private Limited with all the powers as available to him under provisions of the Act.
14. In the aforesaid facts and circumstances of the case it is necessary that to verify the basis of the declaration made under Section 488 of the Act the accounts of the Company are examined and verified by an independent agency. For the purpose Shri Ravindra N. Vepari, Chartered Accountant, based at Surat is hereby appointed to assist the Official Liquidator in undertaking the exercise of examination and verification of the accounts and tender his report in relation to, not only the accounts upto the date of the resolution, but he shall also take into consideration the transactions stated to have been entered into by the Liquidator i.e. respondent No. 1 during the course of voluntary winding up stated to have been initiated by resolution dated 03-07-2003. It will be open to the said Chartered Accountant to have the exercise of verification of accounts carried out through any responsible person of his office under his supervision and guidance. Shri Vepari shall furnish his report at the earliest, preferably within a period of six weeks from today. The said report shall be submitted to the Court through the Official Liquidator.
The Company Application accordingly stands allowed in the aforesaid terms.
15. At this stage Mr. Gupta makes a request that the operation of order may be stayed for a period of two weeks so as to enable Mr. Shailendrakumar K. Agarwal, the Liquidator of members’ voluntary winding up to challenge this order. In light of the facts which have come on record no case is made out for staying the operation of the order. Moreover, once the facts show that the voluntary winding up is not in accordance with provisions of the Act, there cannot be any Liquidator in relation to members’ voluntary winding up. Even otherwise the Liquidator was required to act only for the purpose of liquidating the properties of the Company so as to discharge its liabilities and for this purpose the Official Liquidator has already been appointed. In the circumstances, the request for stay of operation of the order stands rejected.