2025 (1) TMI 1218 - HC - Companies Law

Company cannot escape winding up proceedings through mere creditor settlements under Section 466 Companies Act 1956

Bipin J. Bagadia, Ashish Jagmohan Mooni alias Ashish Jagmohan Muni Versus Grand View Estates Private Limited, The Official Liquidator of the Swadeshi Mills Company Limited, Forbes and Co. Ltd., Rashtriya Mill Mazdoor Sangh, The Svadeshi Mills Company Limited.

The Bombay HC set aside orders granting stay of winding up proceedings under Section 466 of the Companies Act, 1956. The court held that mere settlement ... Winding up of Company - Section 466 of the Companies Act, 1956 - applicability of principles of res judicata apply to the second application under Section 466 of the Companies Act, given the dismissal of a similar earlier application - HELD THAT:- The Courts in NILKANTA KOLAY VERSUS THE OFFICIAL LIQUIDATOR [1995 (8) TMI 327 - CALCUTTA HIGH COURT] have held that bona fide must be established before a stay on winding up proceedings can be granted. Mere consent of the creditors or an offer of full payment to them is insufficient. The Court must consider the interests of commercial morality, not merely the wishes of the creditors or contributories. The jurisdiction to stay can be used to revive the company or its business and not merely for the benefit of its creditors. This jurisdiction certainly cannot be used to acquire immovable properties or assets of the company at some throwaway price or at a price that bears no proportion to the price that the liquidator could have obtained at a free, fair, transparent public auction. The scope and import of Section 466 of the Companies Act and the principles on which the Company Court would exercise its powers to stay the proceedings in winding up either altogether or for a limited time on such terms and conditions as it thinks fit. The Appeal Court has held that Section 466(1) confers a discretion on the Court and not a mandate. The discretion must be exercised on the satisfaction that a stay of the proceedings in relation to winding up ought to be granted. The legislature has carefully used the expressions “on proof to the satisfaction” and “ought to be stayed”. Before the Court grants a stay, the statutory requirement is that there must be proof brought before the Court based on which it is satisfied that the proceedings ought to be stayed. There is no question of this Court for the first time considering the materials on record and deciding whether the discretion should be exercised for grant of stay under Section 466 of the Companies Act. Perhaps, on the ground that there was no substantial change of circumstances or that no material was placed on record to displace the strong findings recorded regarding the motives of the first and third Respondents, we would have declined to exercise our discretion and stayed the proceedings under Section 466 of the Companies Act. But that is, to some extent, besides the point. The impugned orders deserve to be set aside for failure to consider vital material. Conclusion - i) The principles governing the exercise of discretion under Section 466 of the Companies Act were not noticed and applied at either stage. ii) Mere settlement of the creditors or workers does not entitle any party to a stay of the winding up proceedings under Section 466 of the Companies Act. The stay on the winding-up proceedings of the said company is dissolved - the impugned orders set aside - appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:- Whether the impugned orders dated 09 October 2023 and 21 December 2022, granting a stay on the winding-up proceedings of Swadeshi Mills Company Limited, were made in accordance with the legal principles governing Section 466 of the Companies Act, 1956.- Whether the principles of res judicata apply to the second application under Section 466 of the Companies Act, given the dismissal of a similar earlier application.- Whether there was a significant change in circumstances justifying the stay of winding-up proceedings.- Whether the first and third Respondents' motives were genuinely aimed at reviving the company or acquiring its properties for real estate purposes.- Whether the lack of consideration of previous judicial orders and principles affects the validity of the impugned orders.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Compliance with Legal Principles under Section 466- Relevant Legal Framework and Precedents: Section 466 of the Companies Act allows the court to stay winding-up proceedings if satisfied that it ought to be stayed. The principles for exercising this discretion include assessing the bona fides of the application, considering commercial morality, and ensuring no misfeasance or irregularity.- Court's Interpretation and Reasoning: The court noted that the impugned orders did not reference the principles governing discretion under Section 466, nor did they consider previous orders from the Company Court, Appeal Court, and Supreme Court.- Key Evidence and Findings: The court found that previous significant judicial orders were not considered, and there was no discussion on the principles required for granting a stay.- Application of Law to Facts: The court held that the lack of consideration of binding precedents and the absence of principles in the impugned orders invalidated them.- Treatment of Competing Arguments: The Respondents argued that the settlement with workers and creditors justified the stay, while the Appellants contended that the motives were to acquire the company's properties.- Conclusions: The court concluded that the impugned orders were made without proper consideration of legal principles and previous judicial findings, thus warranting their setting aside.Issue 2: Applicability of Res Judicata- Relevant Legal Framework and Precedents: The doctrine of res judicata prevents re-litigation of issues already decided. However, it may not apply if there is a significant change in circumstances.- Court's Interpretation and Reasoning: The court noted that even if res judicata did not apply, the first Respondent failed to demonstrate a change in circumstances that would justify revisiting the issue.- Key Evidence and Findings: The court found no substantial change in circumstances to justify the stay, apart from the settlement with workers.- Application of Law to Facts: The court held that the earlier findings regarding the Respondents' motives remained valid, as no new evidence was presented to counter them.- Treatment of Competing Arguments: The Appellants argued that the earlier judicial findings should stand, while the Respondents claimed changed circumstances.- Conclusions: The court concluded that the principles of res judicata, while not directly applicable, reinforced the need for a demonstrable change in circumstances, which was lacking.Issue 3: Motives of the First and Third Respondents- Relevant Legal Framework and Precedents: The court must consider whether the application for a stay is bona fide and not for ulterior motives, such as acquiring company assets at undervalue.- Court's Interpretation and Reasoning: The court reiterated findings from previous orders that the Respondents' motives were to acquire the company's properties for real estate development.- Key Evidence and Findings: The court found no new evidence to alter the previous findings of the Respondents' motives.- Application of Law to Facts: The court applied the principle that bona fide intentions must be established, which the Respondents failed to do.- Treatment of Competing Arguments: The Respondents argued for the company's revival, while the Appellants highlighted the real estate interests.- Conclusions: The court concluded that the Respondents' motives were not aligned with the genuine revival of the company, supporting the decision to set aside the impugned orders.3. SIGNIFICANT HOLDINGS- The court emphasized that 'the principles governing the exercise of discretion under Section 466 of the Companies Act were not noticed and applied at either stage.'- The court reiterated that 'mere settlement of the creditors or workers does not entitle any party to a stay of the winding up proceedings under Section 466 of the Companies Act.'- The court held that 'the impugned orders deserve to be set aside for failure to consider vital material in the form of the order dated 14 October 2011, the judgment and order dated 23 August 2013 and the Hon'ble Supreme Court's order dated 23 February 2016.'- The final determination was to allow the appeal, quash the impugned orders, and revive the winding-up proceedings, with the Official Liquidator resuming control of the company's affairs.