Admission in rehabilitation scheme and asset stripping justified provisional liquidation to preserve the company's estate.

A company's draft rehabilitation scheme can operate as an admission of indebtedness, and a creditor's claim was treated as prima facie unimpeachable where the earlier suit did not cover that amount. The court also held that prima facie transfers of valuable immovable assets to related entities at gross undervalue, with resulting risk to creditors, workmen and shareholders, justified appointment of a provisional liquidator under Section 450 of the Companies Act, 1956. The remedy was used to preserve the estate and prevent further dissipation of assets.

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Issues: (i) Whether the petitioning-creditor had made out a prima facie unimpeachable claim for Rs. 2.03 crore on the basis of the company's admission in the draft rehabilitation scheme and whether that claim was displaced by the earlier suit proceedings. (ii) Whether the company's conduct in alienating valuable immovable properties and the resulting jeopardy to creditors, employees and shareholders justified appointment of a provisional liquidator under Section 450 of the Companies Act, 1956.

Issue (i): Whether the petitioning-creditor had made out a prima facie unimpeachable claim for Rs. 2.03 crore on the basis of the company's admission in the draft rehabilitation scheme and whether that claim was displaced by the earlier suit proceedings.

Analysis: The amount reflected in the draft rehabilitation scheme constituted an admission by the company of the extent of its indebtedness to the petitioning-creditor. A draft scheme prepared in BIFR proceedings is based on the company's own books and records and the figure shown against a creditor is not deprived of its character as an admission merely because the scheme is not ultimately sanctioned. The earlier suit did not cover the present claim of Rs. 2.03 crore, and the suit court itself had proceeded on the basis that that amount was being left to be recovered in accordance with law under the scheme. The company's objection that the claim was already covered by the earlier suit was therefore untenable.

Conclusion: The petitioning-creditor's claim for Rs. 2.03 crore was held to be prima facie unimpeachable and was not barred by the earlier suit proceedings.

Issue (ii): Whether the company's conduct in alienating valuable immovable properties and the resulting jeopardy to creditors, employees and shareholders justified appointment of a provisional liquidator under Section 450 of the Companies Act, 1956.

Analysis: The company had transferred substantial properties to related entities at gross undervalue, received only share consideration in shell or newly formed group companies, and thereafter moved the shares out of its fold. The transactions were effected while creditors were kept at bay by the protection of the sick-industrial-company regime. The Court treated the transfers as fraudulent in substance, noted that the assets of the company were in serious jeopardy, and held that public interest, the protection of creditors and workmen, and the likelihood of dissipation of assets all justified immediate intervention. The exceptional remedy of a provisional liquidator was therefore warranted on a strong prima facie basis.

Conclusion: Appointment of a provisional liquidator was justified and was ordered in favour of the petitioning-creditor.

Final Conclusion: The company was placed under provisional liquidation, with the official liquidator empowered to protect and recover the company's assets, including steps to arrest further alienation of the transferred properties.

Ratio Decidendi: Where a company's own rehabilitation materials amount to an admission of debt and the company's management has prima facie stripped valuable assets in a manner that endangers creditors, workmen and shareholders, the company court may appoint a provisional liquidator to preserve the estate and prevent further dissipation of assets.

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