2012 (9) TMI 5 - HC - Companies Law

Provisional Liquidator Appointed to Safeguard Company Assets against Dissipation

ESPN Software India (P.) Ltd. Versus Modi Entertainment Network Ltd.

ESPN Software India (P.) Ltd. Versus Modi Entertainment Network Ltd. - [2012] 115 SCL 51 (DELHI) (MAG.) , [2012] 173 COMP. CAS. 465 (DELHI) Issues Involved:1. Appointment of a Provisional Liquidator.2. Admissibility of the Company Petition.3. Compliance with Section 450 of the Companies Act, 1956 and Rule 106 of the Companies (Court) Rules, 1959.4. Financial health and conduct of the respondent company.5. Procedural compliance regarding advertisement of the petition.Issue-Wise Detailed Analysis:1. Appointment of a Provisional Liquidator:The primary issue was whether a provisional liquidator should be appointed for the respondent company. The petitioning creditor argued that the respondent was unable to pay its debts, as evidenced by the company's balance sheet and directors' report. The respondent countered that financial stringency alone was not sufficient grounds for such an appointment. The Court noted that the respondent had admitted its liability in its balance sheets for the years ending 31.03.2001 and 31.03.2002. Despite this admission, the company had not liquidated its debts over a decade. The Court also observed that there was a risk of the company's assets being alienated, thus justifying the appointment of a provisional liquidator to protect these assets.2. Admissibility of the Company Petition:The Division Bench had previously admitted the company petition, concluding that the respondent was unable to pay its debts. The respondent's appeal against this admission was dismissed. The Court reaffirmed that the petition was rightly admitted, as the respondent's financial documents indicated significant liabilities and losses, supporting the petitioning creditor's claim.3. Compliance with Section 450 of the Companies Act, 1956 and Rule 106 of the Companies (Court) Rules, 1959:The respondent argued that the appointment of a provisional liquidator did not comply with Section 450 and Rule 106, which require notice to the company and a reasonable opportunity for representation. The Division Bench had set aside the initial appointment of the provisional liquidator due to lack of notice and special reasons. However, the Court noted that the current application for appointment had been properly notified to the respondent, who had filed replies. The Court found that the respondent had not provided any substantial evidence of improved financial health, thus justifying the appointment of a provisional liquidator.4. Financial Health and Conduct of the Respondent Company:The Court scrutinized the financial health of the respondent company, noting significant losses and liabilities admitted in the balance sheets and directors' reports. The respondent failed to provide any evidence of financial improvement over the past decade. Additionally, the Court observed that the respondent had withdrawn substantial sums of money after the provisional liquidator's initial appointment, indicating a risk of asset dissipation. This conduct further justified the need for a provisional liquidator to protect the company's assets.5. Procedural Compliance Regarding Advertisement of the Petition:The respondent contended that the petition had not been advertised according to Rule 99 of the Companies (Court) Rules, 1959. The Court dismissed this argument, noting that advertisements had been published in the 'Indian Express' and 'Jansatta,' and a gazette notification had been issued. The Court found no irregularity in the procedure, stating that the directions for advertisement had been complied with as per the Court's instructions.Conclusion:The Court concluded that the appointment of a provisional liquidator was necessary to protect the assets of the respondent company, given the significant admitted liabilities and the risk of asset dissipation. The Official Liquidator attached to the Court was appointed as the Provisional Liquidator, with directions to take charge of the company's assets and records. The respondent company, its directors, officers, and authorized representatives were restrained from transferring or encumbering any assets or withdrawing funds from the company's accounts. The directors were also directed to hand over all company records and file their statements of affairs within twenty-one days. The application was disposed of with these observations, and a status report was to be filed by the Official Liquidator.