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1992 (3) TMI 279
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....nd 8 to 11 therein from exercising their voting rights in V. R. Textiles Limited to the extent of 7,000 equity shares issued to them on September 21, 1991, by V. R. Textiles Limited. Company Application No. 2261 of 1991, was filed by them to declare that the alleged meeting of the board of V. R. Textiles Limited dated September 21, 1991, is not a meeting of the board of V. R. Textiles Limited held in accordance with the provisions of the Companies Act, 1956, and consequently declare all the resolutions passed in that meeting including the allotment of 7,000 equity shares to respondents Nos. 5, 6 and 8 to 11 as null and void. To appreciate the facts leading to the filing of the said applications, we may take notice of the following facts: Company Petition No. 30 of 1981, was filed for winding up of Ramakrishna Industrials Private Limited. In Company Application No. 843 of 1991, the learned company judge appointed the official liquidator as the provisional liquidator of Rama-krishna Industrials Private Limited. The shareholding pattern of Rama-krishna Industrials Private Limited indicates that it is a company belonging to the family members of Sri Rangaswamy Naidu. Sri R. Venkatas....
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....in C.P. No. 44 of 1983, respectively, and the official liquidator has become the liquidator of these companies. The official liquidator has been appointed as the provisional liquidator of Jayalakshmi Mills Private Limited by order dated August 23, 1991, in Company Application No. 138 of 1988, in Company Petition No. 14 of 1988. In the case of Ramakrishna Industrials Private Limited, the winding-up petition was presented by Shri P.R. Ramakrishnan and others for reason of some disputes between himself and his brother, R. Venkataswamy Naidu. This company petition is still pending, but the official liquidator has been appointed as provisional liquidator, and thus this company is in his hands. V. R. Textiles Limited (one of the appellants before us), as on March 31, 1990, had the issuance of such subscribed capital of Rs. 7,69,000 divided into 7,690 equity shares of Rs. 100 each. Out of the issued and paid-up capital of 7,690 equity shares of Rs. 100 each of V. R. Textiles, Ramakrishna Industrials held 2,376 equity shares of Rs. 100 each, about 30.89 per cent, in the share capital of V. R. Textiles Limited. According to the records of the official liquidator, the shareholders of V.R. Te....
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....ited is more than Rs. 5 crores. The shareholding in favour of V. Radhakrishnan and his group of directors was only 925, and as against the above, the shareholdings of the two life directors and other members of the family excluding the shares held by the first respondent-company and the family trust was 2,554 equity shares. According to them, V. Radhakrishnan and his group of directors, respondents Nos. 4, 5 and 8 to 11 abused their position to falsify the records of V. R. Textiles Limited as well as the register of members to show the following transactions as having taken place: (a)A meeting of the board of directors of V. R. Textiles Limited is alleged to have been taken place on September 21, 1991. This meeting has been attended by the directors who are sought to be removed by the notice of Mr. S. R. K. Prasad including Mr. V. Radhakrishnan. (b)At the above board meeting, instantaneous decisions were taken to issue share capital for Rs. 7 lakhs, to consider applications for shares then and there placed before the board meeting, accept those applications and allot shares, to issue share certificates, and file return of allotment with the Registrar of Companies, Coimbatore.....
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....s of issuing 7,000 equity shares and allotting the same to the existing shareholders who held before September 21, 1991, only minority shares. The chart prepared at the Bar, and not in dispute, showing the paid-up capital divided into equity shares of Rs. 100 each before September 21, 1991, and after September 21,. 1991, in the hands of different shareholders depicts as follows: V. R. Textiles Ltd. NALLUR, PUNJAI PULLAMPATTI-638 459, SATHY TALUK, ERODE DISTRICT Shareholding pattern before and after the impugned allotment of shares on September 21, 1991 Before 21-9-1991 After 21-9-1991 (Paid-up capital Rs. 7,69,000 divided (Including the shares allotted on 21-9-91) into 7,600 equity shares of (paid-up capital Rs. 14,69,000 divided in- Rs. 100 each to 14.690 equity shares of Rs. 100 each) Name of shareholder No. of shares % of paid-up capital No. of shares allotted No. of shares held after allotment % of paid-up capital Increase/ decrease in percentage as a result of the allotment 1. Mr. V. Radhakrishnan (director) 795 10.33 1,500 2,295 15.62 4.29 (+) 2. Mrs. Vimala Radhakrishnan (director) 90 ....
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.... pany under Provisio- nal Liquidator in C.P. No. 30 of 1981, High Court, Madras) 2,376 30.89 - 2376 16.17 14.72 (-) 17. Jayalakshmi Mills Pvt. Ltd. (in liquidation) 185 2.40 - 185 1.25 1.15(-) 18. Late V. Rangaswamy Naidu 11 0.14 - 11 0.07 0.07(-) Summary of shareholding pattern Before allotment on After allotment on 21-9-1991 21-9-1991 No. of % of paid- No. of % of paid- shares up capital shares up capital 1. Mr. V. Radhakrishnan's group 925 12.02 7,925 53.91 2. Mr. R. Venkataswamy Naidu's group 4,193 54.51 4,193 28.50 3. Shareholders not belonging to any group : (a) Ramakrishna Industrials P. Ltd. 2,376 30.89 2,376 16.17 (b) Jayalakshmi Mills P. Ltd. ....
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....r, however, on October 23, 1991, informed them that it was not possible for him to initiate action forthwith without himself verifying the records. In view of the fact that the official liquidator indicated that it was not possible for him to take immediate action, the petitioners-respondents filed the above mentioned applications. The official liquidator has filed two reports dated November 4, 1991, and November 28, 1991, in the proceedings. He represented that the purported resolution of the board of directors dated September 21, 1991, declaring the allotment of 7,000 equity shares of Rs. 100 each is invalid. According to him, Ramakrishna Industrials Private Limited being a shareholder should have been offered such further shares in the shares allotted on September 21, 1991, in proportion to the shares held by Ramakrishna Industrials in V. R. Textiles Limited. He, however, received no notice offering further shares in relation to the allotment of 7,000 shares on September 21, 1991. Not offering the proportionate rights shares to Ramakrishna Industrials in accordance with law, and by allotting 7,000 shares on September 21, 1991, to respondents Nos. 5 and 8 to 11 in Original App....
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....t day. As the applicant and his group did not even care to attend the board meeting, the board allotted the shares to those offered and paid then and there in the interest of the company. (d)The official liquidator, who is in charge of Ramakrishna Industrials Private Limited and who had no surplus funds cannot flow money for the said purpose and under those circumstances, the empty formalities of offer was not made to him. (e)The necessary procedures and the issuance of proper notice as contemplated under section 286 of the Act have been followed both by certificate of posting and by registered post to S. R. K. Prasad, who intended service by such notice. (f)The notice with regard to the meeting to be held on September 21, 1991, has been duly sent to the concerned board of directors and it is false to state that the petitioners are hot aware of such resolution which is contrary to the records. The forum to decide the issue is not this court. (g)The petitioners, in spite of the notice and the agenda for the said meeting on September 21, 1991, have refrained from attending and participating in the board's meeting. (h)By notice dated September 13, 1991, all the sharehol....
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.... has come down to Rs. 75 lakhs. This finding may not be accurate, but is almost a recording of the admitted fact that as a consequence of the allotment of 7,000 equity shares as above, and not offering proportionate shares to Ramakrishna Industries Private Limited, the paid-up capital value of its shares has been reduced from 30.89% to 16.17%, whereas this allotment has benefited V. Radhakrishnan's group by the increase of 925 shares, to 7,925 shares (all 7,000 shares allotted to their group only) from 12.02% to 53.91%, the minority shareholding being converted to majority shareholding. Learned counsel for the appellants has not questioned any finding of fact including the finding that the liquidator was not given any notice or that other shareholders were not offered proportionate shares and allotment of all the 7,000 shares to the group which had only 925 shares in all, to give a boost to their shareholding from 12.02% to 53.91%. He has, however, contended that petitioners-respondents could not move the court of the learned company judge to agitate their rights in V.R. Textiles, and if they purported to represent the interests of Ramakrishna Industrials Limited as contributors....
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....ich the winding-up of the company is proceeding may, notwithstanding anything contained in any other, law for the time being in force, be transferred to and disposed of by that court. (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court". Section 456 of this Act, which speaks of the custody of the company's property, provides as follows: "456. Custody of company's property.-(1) Where a winding-up order has been made or where a provisional liquidator has been appointed, the liquidator or the provisional liquidator; as the case may be, shall take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled. (1A) For the purpose of enabling the liquidator or the provisional liquidator, as the case may be, to take into his custody or under his control, any property, effects or actionable claims to which the company is or appears to be entitled, the liquidator or the provisional liquidator, as the case may be, may by writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction....
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....ank and claim in the insolvency of any contributory, for any balance against his estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and rateably with the other separate creditors; (iii)to draw, accept, make and endorse any bill of exchange, hundi or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill, hundi or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business; (iv)to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company and in all such cases, the money due shall, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself; Provided that nothing herein empowered shall be deemed to affect the rights, duties and privileges of any Administrator-General;....
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....or the purpose of the dispute, outside the winding-up. He has contended that this opinion of the learned judges constituting the Bench of the Court of Appeal has withstood the test of time, and if it will not totally outwit and exclude the action of the petitioners-respondents in the court of the learned company judge, it shall surely affect such items of dispute relating to the agenda of the impugned meeting dated September 21, 1991. He has, it seems, in mind, the fact that the allotment pf shares to some of the members of the company only to the exclusion of other members is a dispute not falling within the jurisdiction of the company judge, as, according to him, it would be beyond the interest of the company under liquidation. He has referred to a judgment of the Calcutta High Court in Shree Tej Protap Textile Mills v. Granaries Ltd. [1961] 31 Comp Cas 610, in which, on the facts of the case in hand, a learned judge of the Calcutta High Court has said that the directors cannot file a suit against a debtor of the company even if the provisional liquidator wilfully refuses to institute a suit for the purpose. The Calcutta High Court considered the provisions in sections 171, 175, ....
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.... other law for the time being in force, have jurisdiction to entertain, or dispose of any claim made by or against the company; any question of priorities or any other question whatsoever whether of law or fact, which may relate to or arise in course of the winding-up of the company. Sub-section (3) confers power upon the court to withdraw any proceeding either by the company or pending against the company in any court to itself and to dispose it of according to law. Therefore, when the High Court is conducting winding-up proceedings of a company ordered to be wound up, its jurisdiction is not confined to its ordinary jurisdiction but a special jurisdiction is conferred upon it by section 446(2). If there is a suit or a proceeding by the company or against the company pending in any court, the same can be withdrawn and disposed of by the High Court. It may be that such a suit or proceeding would not ordinarily lie in the High Court. But, the High Court acquires jurisdiction because the company is being wound up and because special jurisdiction in respect of the companies which are ordered to be wound up is conferred by subsection (2) of section 446. The scope and ambit of the juris....
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.... all questions arising in-winding up. Under the Companies Act, 1956, jurisdiction is conferred upon the High Court alone to entertain winding-up proceeding. It is in the interest of all concerned that winding-up proceedings shall be proceeded with expeditiously and brought to an end to avoid the agonies of a large number of persons adversely affected by the fall of a company. The most important task assigned to the liquidator under the Companies Act, while acting as liquidator of a company ordered to be wound up is to collect the assets of the company and sell them and to distribute the realisation amongst all those who have claims against the company and payment must be made according to priorities fixed by law. This appears to me to be not only the foremost but the most basic duty of a liquidator of a company ordered to be wound up. Now, if the liquidator in the course of winding up is required to file suits for recovering properties and assets of the company, one has only to imagine at what length of time winding-up proceedings can be brought to a close". Proceeding further, the learned judge has pointed out (at page 142): "If a suit has to be filed it is implicit therein ....
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....(3), with which provision we shall deal with particularly, later, and stated as follows (at page 51): "I am not impressed by the submission that the power of the liquidator is an uncontrolled power. It is true that the liquidator represents the creditors in general. The liquidator has been held in several cases to be a trustee or quasi-trustee for the creditors. It cannot be said that there is no conflict of interest between the liquidator and the unsecured creditors. The provisions of the Companies Act envisage a conflict of interests. With that conflict in view, provisions have been made by sections 457(3), 460(6) and 546(3) and other associate sections for a right in the creditors to challenge the action or proposed action by the liquidator. Further there are several provisions which provide for a right of the creditors to inspection of the records (see for example the provisions of sections 461(2) and 549: also (See Companies (Court) Rules, 1959) rules 16, 305, 323(4), 332 and 360). I am of the view that, having regard to the conflict or possibility of conflict with regard to the actions taken or proposed to be taken by the liquidator, it cannot be denied that the creditors ....
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....(India) Ltd. moved three petitions under section 439 of the Companies Act praying for winding up of the company on the ground that it was unable to pay its debts. The company judge passed an order winding up the company and appointed the official liquidator to be the liquidator of the company. That order was challenged in appeals before a Division Bench of the Kerala High Court. The appeals were disposed of after approving the scheme of compromise and arrangement under section 391 of the Companies Act directing that the winding-up order would be held in abeyance on certain undertakings to be filed by the company before the court within the prescribed time to abide by the conditions imposed in the judgment and if there be any default in the matter of performing of the conditions so imposed, and/or the undertaking is not filed as directed therein, the winding-up order made by the learned judge would stand confirmed. There was a further direction in this behalf which was as follows (at page 635): "On the first payment of Rs. 25,00,000 being made within four weeks from this date, the winding up order will be held in abeyance and thereupon the official liquidator will be considered a....
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....the court in which the winding up proceedings are pending.' (see para 207 of the Company Law Committee Report). To give effect to these recommendations, sub-section (2) was suitably amended to bring it to its present form by the Companies (Amendment) Act, 1960. The Committee noticed that on a winding up order being made and the official liquidator being appointed a liquidator of the company, he has to take into his custody company property as required by section 456. Section 457 confers power on him to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company. Power is conferred upon him to sell the properties both movable and immovable of the company and to realise the assets of the company and this was to be done for the purpose of distributing the assets of the company amongst the claimants. Now at a stage when a winding-up order is made the company may as well have subsisting claims and to realise these claims the liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the court which is winding up the company, its jurisdiction was enlarged t....
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....p order is made, the official liquidator acts as such. And let it be remembered that where a winding up order is made, it relates back to the date when the petition for winding up was presented. Referring to section 446(1) it becomes clear that the court will have jurisdiction to make the order therein contemplated where a winding up order has been made or prior to the making up of the winding up order, the official liquidator has been appointed as provisional liquidator as contemplated by section 450(1)". Speaking on section 446(2), the Supreme Court said (at page 639): "Sub-section (2) of section 446 confers jurisdiction on the court which is winding up the company to entertain and dispose of proceedings set out in clauses (a) to (d ). The expression 'court which is winding up the company' will comprehend the court before which a winding up petition is pending or which has made an order for winding up of the company and further winding up proceedings are continued under its directions. Undoubtedly, looking to the language of section 446(1) and (2) and its setting in Part VII which deals with winding up proceedings, would clearly show that the jurisdiction of the court to en....
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....d that the winding up proceeding was pending, and, accordingly, stated that the High Court was in error in rejecting the application made on behalf of the appellant company for directing the provisional liquidator to prefer claim petitions on the materials and expenses to be furnished by the company. Having thus seen the law laid down by the Supreme Court, if we refer to the earlier judgment of the Supreme Court in Great Indian Motor Works Ltd. v. their Employees, AIR 1959 SC 1186, we find that the case proceeded on a different footing altogether. That was a case of a company under liquidation ordered to be wound up and its assets were in the hands of the official liquidators. The court ordered for sale of the company's business free from all encumbrances, outgoings and liabilities, to the highest bidder, subject to confirmation by the court. The second appellant before the Supreme Court bid for the purchase of the business with the leave of the court, and he was declared the highest bidder and purchaser of the business. The sale was confirmed by the Calcutta High Court. The official liquidator issued a notice terminating the services of all the employees of the company, except ....
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....' as no relationship of employer and employee existed between the auction-purchaser, and the old staff who had been discharged earlier. Hence, I agree with the learned advocate of the auction-purchaser that the reference so far as the auction-purchaser is concerned is incompetent. Apart from that, when the auction-purchaser purchased the business free from encumbrances and all outgoings end liabilities and when there is nothing to show that the auction-purchaser undertook at any time to maintain the old staff in his service, it cannot be said that his refusal to continue the employment of 142 employees was unjustified. Only when one purchases with all assets and liabilities as a going concern, he is bound to continue the old employees in service and not otherwise. I award accordingly". Against the award which, in terms, was made only against the liquidators and not against the auction-purchaser aforesaid, only one of the two liquidators made an application for necessary directions regarding preferring an appeal. The other liquidator opposed the said application for leave to appeal. The High Court thereupon made an order on April 30, 1956, refusing leave to the liquidators to ....
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....inst the liquidators. K.D. Nundy, as a creditor or contributory, was not subjected to the award. He, as auction-purchaser, was free from all liabilities including the liability created on the basis of the award. It was in that context that the Supreme Court found the appeal at his instance not maintainable. The law on this subject seems to have been settled by the Supreme Court in Sudarsan Chits ( I.) Ltd. v. G. Snhumaran Pillai [1985] 58 Comp Cas 633 and the jurisdiction and the locus standi of the liquidator and in case of the liquidator not acting or refusing to act, the locus standi of the creditors or the contributories has been clearly recognised by the Supreme Court. It is relevant to notice a similarity in the language in section 45B of the Banking Companies Act, 1949, which is more or less retained in the same section in the Banking Regulation Act, and some of the clauses of sub-section (2) of section 446 of the Companies Act. Section 45B of the Banking Companies Act gives to the High Court jurisdiction to entertain and decide any claim made by or against the banking company which is being wound up or any question of properties and all other questions whatsoever, whethe....
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....r other legal proceedings. It does not permit any suit or other legal proceedings to commence, or if pending on the date of the winding up order, to be proceeded with against the company except by leave of the court and subject to such terms as the court may impose. It thus makes it obligatory upon any person suing the company under liquidation or the official liquidator in a suit or any other legal proceeding to seek the leave of the court. The court for the purpose of this section is obviously the court which has ordered the winding-up or in which court the winding up proceeding is pending, and pending proceedings the official liquidator has been appointed as the provisional liquidator. Sub-section (2) of section 446 confers or creates a special jurisdiction in the court which is winding-up the company. This jurisdiction the court winding up the company gets notwithstanding anything contained in any other law for the time being in force in respect of the matters enumerated in clauses (a), (b), (c ) and (d). Clause (a) says that the court which is winding up the company shall have jurisdiction to entertain or dispose of any suit or proceeding by or against the company. There is th....
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....oever, whether of law or fact, which may relate to or arise in the course of the winding-up of the company". This special jurisdiction of the court which ordered winding-up or in which the winding up proceeding is pending and the official liquidator is appointed as provisional liquidator, is wide and comprehensive, and it is designed to facilitate the protection and realisation of the assets of the company under liquidation with a view to ensure an equitable distribution thereof among those entitled and to prevent the administration from being embarrassed by a general scramble among creditors and others. If a suit or proceeding by or against the company or a claim made by or against the company or any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding-up of the company, shall lie in the court which is winding up the company, it is obvious that any person who has got a right to represent the company or who has a claim against the company can apply to the court which is winding up the company, and the court may entertain thus any dispute with respect to the property or assets of the company and dispos....
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....akrishna Industrials and without any notice or such offer to the official liquidator, V. Radhakrishnan's group has managed to add the entire 7,000 shares to their 925 shares. The value of the paid-up capital of Ramakrishna Industrials, which stood at the level of 50.89% has been reduced to 16.17%, while that of V. Radhakrishnan's group has been increased to 53.91%. This situation created on account of allotment of 7,000 shares at the alleged meeting dated September 21, 1991, has not been disputed. It was in this situation that the petitioners-respondents who are contributories of Ramakrishna Industrials and who independently have their shareholdings in V. R. Textiles, approached the official liquidator and requested him to exercise his powers under section 457. The official liquidator did not decline, but wanted to verify the records and accordingly to postpone the exercise of the power under section 457 until he verified the records. The petitioners-respondents thus found that the liquidator had power to act under section 457, but would not exercise his power until he himself verified the records, and hence they moved the court and questioned, inter alia, the validity of the meeti....
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....e company by allotment of further shares, then such shares shall be offered to the persons, who on the date of the offer are holders of equity shares of the company, in proportion as early as circumstances admit to the capital paid-up on these shares and such offer shall be made by notice specifying the number of shares offered and limiting the time not being less than 15 days from the date of offer, within which the offer, if not accepted, will be deemed to have been declined. Learned senior counsel for the petitioners submit that the sequence of events should be, (a)first a meeting of the board of directors of V. R. Textiles, wherein a decision should be taken regarding the issue of further capital; and (b)on such decision being taken, offer being made to the existing shareholders as contemplated in section 81(1)(a) of the Act; and (c)such offer being in terms of section 81(lXb)". After referring to the judgment of the Calcutta High Court in Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. [1984] 55 Comp Cas 160 , in which the above sequence has been indicated, the learned company judge has said: "The said decision applies to the facts of this case in ....
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....urpose of protecting the interests of Ramakrishna Industrials in V. R. Textiles. The argument which has been emphasised before us is with respect to the maintainability of the petitions at the instance of the creditors or contributories. All that is said in this regard has to be understood with respect to sub-section (3) of section 457 of the Act. A comparable provision is found in sub-section (6) of section 460, which provides inter alia that any person aggrieved by any act or decision of the liquidator may apply to the court, and the court may confirm,' reverse or modify the act or decision complained of, and make such further order as it thinks just in the circumstances, with respect to the acts of the liquidator in the administration of the assets of the company and the distribution thereof among its creditors. Section 460 puts control upon the liquidator's power and gives to the creditors or contributories authority to give directions by resolution at any general meeting or by the committee of inspection, to the liquidator in the administration of the assets of the company and the distribution thereof among its creditors. The liquidator under this provision has been given p....
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...., and do anything and everything, and do nothing, without informing the court and without the knowledge of the court. The second part of sub-section (3) of section 457, "any creditor or contributory may apply to the court with respect to the exercise or proposed exercise of any of the powers conferred by this section" is a provision that alone enables any creditor or contributory to apply to the court with respect to the powers that are conferred upon the liquidator under section 457(1) and (2), under sub-section (1) to exercise the powers conferred therein with the sanction of the court, and under subsection (2) without the consent of the court, but in view of the first part of sub-section (3) of section 457, subject to the control of the court. If this provision is read only as enabling a creditor or contributory to complain to the court with respect to the exercise or proposed exercise of any of the powers conferred by sub-section (1) and sub-section (2), and to seek the court's direction to the liquidator to exercise his power in the interests of the company under liquidation, we shall have to import in this part of sub-section (3) words indicating that any creditor or contribu....
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....t, prosecution or other legal proceeding, civil or criminal, be that a proceeding under the provisions of the Companies Act or any other law, or instead entertain the creditor's or contributory's petition and summon all concerned including third parties, who by their acts are causing legal injury to the property or assets of the company under liquidation. We thus do not find in the words of sub-section (3) of section 457 any inhibition on the jurisdiction of the court to entertain any application of a creditor or contributory, if that application is with respect to the exercise or proposed exercise of any of the powers by the liquidator under section 457(1) or (2) of the Act. The word "exercise" may also mean non-exercise of power. "Proposed exercise" in the same way may mean proposal not to exercise. How the court shall in such a situation find on facts and decide to make suitable orders to ensure that no damage is caused to the interests of the company under liquidation by somebody's illegal acts, must be left to the discretion of the court. In the instant case, however, it is on record that the liquidator readily offered that in case there is any technical difficulty to pr....