TaxTMI 
TaxTMI 
2011 (10) TMI 513
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....ores as per the chart at Annexure A to the application. Then, there are further prayers for making payment of this sum to the secured creditors, workers and employees of the company. After such payment, the applicants pray that the assets and properties of the company in liquidation be handed over to them and the Official Liquidator to stand discharged. 2. An affidavit in support of this company application has been filed and it is stated therein by the applicants that the 1st applicant is a promoter shareholder, secured and unsecured creditor of the company in liquidation. It is in the business of engineering goods, shipping and office automation. The 1st applicant along with its wholly owned subsidiary company owns 17,64,430 equity shares constituting 22.70% of total equity shareholding of the company in liquidation. Applicant No.2 is a private limited company, duly incorporated under the provisions of the Companies Act, 1956 having its registered office and administrative office at the address mentioned in the cause-title of this company application. It is a major shareholder, a secured and unsecured creditor of the company in liquidation. Real estate business is one of the o....
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....mpany. 5. In the year 1997, Ralli Brothers and Coney filed a petition in this Court for winding up of the company. Thereafter, various other winding up petitions were also filed in this Court. Around February 1998, the company made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The BIFR declared the company a sick company. The BIFR vide its order dated 5th February 2001, recommended to this Court for winding up of the company. Appeal preferred against the said order by Rashtriya Mill Mazdoor Sangh, a registered trade union the Bombay Industrial Relations Act, 1946 and also the Representative and Authorized Union of the Company before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) was also dismissed vide its order dated 14th May, 2001. Applicant No.1, from time to time, had provided financial assistance aggregating to approximately Rs. 43,00,00,000/- (Rupees Forty Three Crores only) almost during the entire period of the proceedings before the BIFR and thus enabled the company to continue its operations. The details of financial assistanc....
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....siness and, therefore, intends to enable the company to undertake real estate development applicant No.2 has shown its willingness to bring in funds to meet all the legitimate liabilities of the company subject to the order of winding up being permanently stayed by this Court as sought by the applicants herein." 8. It is stated that the applicants being major shareholders and secured creditors, are vitally interested in bringing the company out of winding up. Applicant No.2 by a letter dated 11th November, 2010 addressed to the Official Liquidator, High Court, Bombay, sought information on various contributories of the company including its secured, unsecured and statutory creditors. In reply to the aforesaid letter, the Official Liquidator requested applicant No.2 to take inspection and after taking such information which was made available and on noticing the contents of the documents inspected, it is stated that the total liability of the company in liquidation as on 31st March, 2011 is approximately Rs. 375.33 crores. Out of that Rs. 280.90 crores is the liability of the applicants, which they have agreed to defer, as more particularly set out in this affidavit and as far as....
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.... appearing on behalf of the applicants invites my attention to section 466(1) of the Companies Act, 1956 and submits that, the provision vests the Company Court with a discretion to permanently stay the winding up. By the application, the applicants have demonstrated their bona fides. The permanent stay has to be granted, provided the Court is satisfied that there is concrete material, which in this case is produced in the form of payment to creditors and all claims which are outstanding are adequately and sufficiently protected. In the present case, there is no question of the application lacking in bonafides or being opposed to commercial morality. The public interest is also subserved inasmuch as 52% of the shareholding in the company in liquidation, is that of the applicants. In the present case, if the substantial secured creditors like applicants have deferred their claims and objection to the relief claimed is that the applicants want to take over the company and start some other business, then, that can be taken care of by clarifying that if the object clause in the memorandum does not include the business that is proposed to be carried out, subject to such modification or ....
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....eport of the Official Liquidator and submits that the Official Liquidator has referred to the sale of movables and she further submits that as per the records the Official Liquidator had received/adjudicated the claims which have been mentioned at para 46 of the report of the Official Liquidator dated 12th July, 2011. She submits that the payment in terms of the statement made in the Official Liquidator's report does not constitute discharge of liability of workers dues in full. 14. Ms. Cox submits that the workers dues cannot be restricted or computed only in terms of the Memorandum of Understanding. It is not as if the Rashtriya Mill Mazdoor Sangh is the sole arbiter or decision maker of the claims and, therefore, once the aggrieved workers have clarified that they do not wish to accept the terms of Memorandum of Understanding signed by the Rashtriya Mill Mazdoor Sangh, then, their claims have to be adjudicated independent of the Memorandum of Understanding and in accordance with law. The workers would then get much more amount which is assured in terms of the Memorandum of Understanding. Therefore, the Memorandum of Understanding with Rashtriya Mill Mazdoor Sangh ought not be....
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...., is the land. They propose to develop it by constructing multi-storeyed buildings thereon. They are in real estate business and, therefore, looking at profits by development of land. They want to exploit the potential of the land in the present real estate market. There is nothing in the scheme which would enable this Court to be satisfied that the applicants have a bona fide intent of reviving the business of the company in liquidation. The real estate business is not the business of the company in liquidation. In such circumstances and when the intent of section 466(1) is to confer discretion on the Court to stay the winding up proceedings permanently so as to enable the revival of the company in liquidation, then, all the more the applicants are not entitled to any relief. They cannot in the garb of seeking such relief, firstly acquire and then sell and dispose of the assets to a third party. This is a mala fide act and the intent is to overreach the company Court by taking away the assets and properties of the company in liquidation from the control of this Court. The applicants desire to achieve indirectly what is prohibited directly in law. This is nothing but an attempt to ....
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....Rashtriya Mill Mazdoor Sangh, 75% of the wages have been paid by the Official Liquidator. This was after sale of movables. Now, there is no plant, no finished goods, no materials. Therefore, there is no possibility of revival of textile business nor is the company in a position to carry on the same. Taking into consideration the present day government policy and the position in the market, textile business has no future. In such circumstances and when there are no efforts of revival for past ten years, then, all the more the Memorandum of Understanding with the applicants is the only relieving factor. That atleast has brought in some monies for the workers. Rs. 30,000/- have been paid to each worker. The balance disbursement is of Rs. 754.42 crores. A sum of Rs. 86 crores is deposited in the Court. In these circumstances, when the liability is to the tune of the sum stipulated in the Memorandum of Understanding and if no monies are going to come in the near future, then, the Memorandum of Understanding should be permitted to be enforced. By refusing to exercise the discretion in favour of the applicants, the process initiated by Rashtriya Mill Mazdoor Sangh upon execution of the Me....
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....eedings either altogether i.e. permanently or for a limited time that means temporarily, on such terms and conditions as the Court thinks fit. The Court may before making an order, require the Official Liquidator to furnish a report in respect of the facts or matters which are relevant to the application. 23. On this application being placed before the Court earlier, an order was made on 23rd June, 2011 directing the Official Liquidator to submit his report within a period of three weeks from the date of the order. On 14th July, 2011, this Court perused the Liquidator's report and made an order without prejudice to the rights and contentions of the parties in the following terms: "(i) The applicant shall deposit an amount of Rs. 86 crores with the Official Liquidator within a period of two weeks from today. (ii) Upon such deposit by the applicant, the Official Liquidator shall forthwith invest the said amount in fixed deposit/s of nationalised bank/s. (iii) The Official Liquidator shall adjudicate the claims of the remaining workers." 24. In terms of both orders, the Official Liquidator has placed a report and his final report dated 20th August 2011 records the proce....
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....en determine as to whether he must undertake scrutiny of individual claims as prayed by Ms.Cox or disburse the sums to such workers who wish to abide by the terms of the Memorandum of Understanding. It will be open for both to place before the Official Liquidator the necessary documents so as to either seek enforcement of the terms and conditions of the Memorandum of Understanding or adjudication of individual claims in terms of the Companies Act, 1956 and the Companies Court Rules, 1959. All contentions in that behalf including with regard to the status and locus of the Union and of individual workman, are kept open. It is not necessary to go into the other aspects as to whether the claims have to be adjudicated with effect from the date of winding up or the date of appointment of the Provisional Liquidator and even contentions in that behalf can be kept open. This is not a stage where this Court should accept the statement of the applicants that they are ready and willing to settle the claims, not with effect from any prior date but from the date of appointment of the Provisional Liquidator. This is not a stage where this Court should determine the relevant date and decide as to ....
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....hat the discretion for stay under Section 466 can only be exercised by the Court (1) if the Court is satisfied on the materials before it that the application is bona fide; (2) the Court would be guided by the principles and definitely come to the finding that the principles are applicable to the facts of a particular case; (3) mere consent of all the creditors for stay of winding up is not enough; (4) that offer to pay in full or make satisfactory provisions for the payment of the creditors is not enough; (5) Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories; (6) Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation; (7) a firm had accepted proposal for satisfying all the creditors must be before the Court with material particulars; (8) the jurisdiction for say can be used only to allow in proper circumstances a resumption of the business of the Company; (9) the Court is to consider whether the proposal for revival of the company is for benefit of the creditor but also whether the stay will be conducive or detrimental to commercial morality and to the interest of....
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....estion whether the settlement with him was on any condition or whether the condition has been broken. Admittedly Rs. 25,000 is due to him. The petitioners through their counsel offer to pay Rs. 25,000 to him in full settlement which Manabendra is not prepared to accept. There is also one Khagendra Lal Saha who appeared before Edgley, J. and filed an affidavit claiming Rs. 6,444-4-6 and objected to any stay but who has not been served with the present summons. Lastly there are the Banks and other creditors shown in the balance sheet as on 31st December, 1944 about whose claim nothing has been said in the petition and the affidavits before me. Further even if all the creditors consent to stay, is the Court bound to grant a stay? The principles on which the Court proceeds on an application of this kind have been summarised in Halsbury's Laws of England, 2nd Edition, Vol.2, Art.1209 at p.724 in the following terms: "In the exercise of its jurisdiction to stay, the Court so far as possible, acts upon the principle applicable in exercising jurisdiction to rescind a receiving order annulled an adjudication in bankruptcy against an individual. The Court refuses, therefore, to act upon t....
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....o whether the stay will be conducive or detrimental to commercial morality and to the interest of the public at large; any other relevant fact which the Court thinks fit be considered for granting or not granting the stay having regard to the peculiar facts in a particular case also would govern the exercise of the power. 30. In my view, what the submissions canvassed by Mr.Tulzapurkar overlook is, that a company is not an enterprise only of the shareholders. It is not only they who are interested in setting up and running companies. The status of a company incorporated and registered under the Indian Companies Act, 1956 has been best summarised in the judgment of the Hon'ble Supreme Court in the case of National Textile Workers' Union v. P.R.Ramakrishnan [1983] 53 Comp. Cas. 184 in the following words: "4. There is one very important consideration which we must bear in mind while dealing with this question and it is necessary to advert to it at the present stage. The concept of a company has undergone radical transformation in the last few decades. The traditional view of a company was that it was a convenient mechanical device for carrying on trade and industry, a mere lega....
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....nineteenth century view which regarded a company merely as a legal device adopted by shareholders for carrying on trade or business as proprietors has been discarded and a company is now looked upon as a socio-economic institution wielding economic power and influencing the life of the people. 5. It is now accepted on all hands, even in predominantly capitalist countries, that a company is not property. The traditional view that the company is the property of the shareholders is now an exploded myth. There was a time when a group controlling the majority of shares in a company used to say: "This is our concern. We can do what we like with it." The ownership of the concern was identified with those who brought in capital. That was the outcome of the property-minded capitalistic society in which the concept of company originated. But this view can no longer be regarded as valid in the light of the changing socio-economic concepts and values. Today social scientists and thinkers regard a company as a living, vital and dynamic, social organism with firm and deep rooted affiliations with the rest of the community in which it functions. It would be wrong to look upon it as something b....
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....s at one time a serious controversy between two schools of thought, one represented by Adolf Berle and the other by Professor Dodd, as regards the nature of duties and obligations owed by director representing management of a company. Adolf Berle took the view that directors are trustees only for shareholders-that is the traditional view which directly flows from a purely capitalistic approach which identifies ownership and dominion with capital-while Prof. Dodd believed that directors are trustees not only for shareholders but also for the entire community. Ultimately, however, in his subsequent book, "Twentieth Century Capitalist Revolution", Adolf Berle conceded that Prof.Dodd was right and that modern directors are not omitted to running business enterprise for maximum profit motive alone, but are in fact administrators of community system or of a social institution. That is why we find that in recent times there is considerable thinking on the subject of social responsibilities of corporate management and it is now acknowledged even in highly developed countries like the United States and England that maximisation of social welfare should be the legitimate goal of a company an....
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....d in Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd. AIR 1994 SC 2696, this is what is held: âEUR¦âEUR¦ "Assuming that the factors mentioned in sub-section (3) of section 25N as substituted by Amending Act 49 of 1984, are declaratory in nature and are required to be taken into consideration by the appropriate Government or the authority while passing an order under sub-section (2) of section 25N, as originally enacted, it is not possible to hold that the interests of the workmen is not a relevant factor for exercising the said power. As pointed out by Prof. Gower in his treatise on Principles of Modern Company Law: "Insofar as there is any true association in the modern public company it is between management and workers rather than between shareholders inter se or between them and the management. But the fact that the workers from an integral part of the company is ignored by the law". (4th Edn., p.10). 45. The Indian Constitution recognises the role of workers in the management of the industries inasmuch as Article 43A requires that the State shall take steps by suitable legislation or in any other way to secure the participation of work....
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....te philosophy. The management of the private company should show profound concern for the workers. The socio-economic justice will inform all the institutions of textiles in the nation to promote fraternity and dignity of the individuals. In Workmen of Meenakshi Mills Ltd. v. Meenakshi Mills Ltd., 1992 (3) SCC 336, the right of the management to declare lay off under section 25N of the Industrial Disputes Act, 1984 under Article 19(1)(g) of the Constitution are subject to the mandates containing Arts.38, 39A, 41 and 43. Therefore, right under Article 19(1)(g) was held to be subject to the directive principles. In Consumer Education & Research Centre v. Union of India JT 1995 (1) SC 637, the right of the management in Asbestos industry to carry on its business is subject to their obligation to protect the health of the workmen and to preserve pollution free atmosphere and to provide safety and healthy conditions of the workmen. 42. The authorities or private persons or industry are bound by the directives contained in part IV, Part III and the Preamble of the Constitution. It would thus be clear that the right to carry on trade is subject to the directives contained in the Consti....
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....ake an order for winding up of the company with or without costs or any other order that it thinks fit. However, once a winding up order has been passed, the consequences are that the order has to be communicated to the Official Liquidator. The suits and other proceedings against the company get stayed on winding up order and cannot be initiated or proceeded with, save and except, with the sanction of the Court winding up the company. Section 447 has already been noted above. Section 448 to section 450 enumerate the appointment and powers of the Official Liquidator. The Official Liquidator then has to ensure that a statement of affairs of the company is submitted to him. He can call for such particulars as are necessary and if default is made in complying with the requirement of furnishing and submitting the statement of affairs then that act is viewed very seriously, and, it is an offence in terms of the relevant provisions. 35. Section 455 is entitled "Report by Official Liquidator". The Liquidator's report has to be comprehensive. It may be preliminary or final. He can seek sanction of the company Court for taking such steps as are necessary to preserve, protect and safe-guar....
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....n. The Liquidator may apply to the Court in the manner prescribed, if any, for directions in relation to any particular matter arising in the winding up. Therefore, by sub-section (6) of section 460, it is evident that anything that the Liquidator does even by using his own discretion, is ultimately subject to the confirmation by the Court. The Liquidator has to keep books and he has to also have audit conducted of his accounts is clear from the further provisions. The Central Government has control over Liquidators but as is evident, in individual matters it is ultimately the Court, which has all the powers. It is in this backdrop that section 466 must be construed. It is not proper to see this provision in isolation for that would mean that the affairs of the company in winding up is the absolute prerogative of the Liquidator and the Court has only to act on the reports of the Liquidator. The Court has the paramount duty and obligation and it has to uphold the object of the Companies Act, 1956. 37. As held by the Hon'ble Supreme Court, the Company Court cannot take a narrow and pedantic view of the matter and proceed on the basis that the company is the property of the shareho....
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....session of the Official Liquidator. The assets become custodia legis. The follow up, in the absence of a revival of the Company, is the realization of the assets of the company by the Official Liquidator and distribution of the proceeds to the creditors, workers, and contributories of the company ultimately resulting in the death of the company by an order under Section 481 of the Act, being passed. But, nothing stands in the way of the Company Court, before the assets are disposed of, to accept a Scheme or proposal for revival of the Company. In that context, the Court has necessarily to see whether the Scheme contemplates revival of the business of the Company, makes provisions for paying off creditors or for satisfying their claims as agreed to by them in terms of Section 529 and Section 529A of the Act. Of course, the Court has to see to the bona fides of the Scheme and to ensure that what is put forward is not a ruse to dispose of the assets of the Company in liquidation. 23. In fact, it was on this basis that the Division Bench of the High Court proceeded when it passed the order dated 4.4.1995. Apart from the fact that the correct principle was adopted, the directions the....
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.... for the respondents, but with reference to the other relevant provisions of the Act. We see no difficulty in reconciling the need to satisfy the requirements of both Sections 391 to 394A and Section 466 of the Companies Act while dealing with a Company which has been ordered to be wound up. In other words, we find no incongruity in looking into aspects of public interest, commercial morality and the bona fide intention to revive a company while considering whether a compromise or arrangement put forward in terms of Section 391 of the Companies Act should be accepted or not. We see no conflict in applying both the provisions and in harmoniously construing them and in finding that while the court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality. We cannot understand the decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd. (supra) as standing in the way of understanding the scope of the provisions of the Act in the above manner. We are therefore sat....
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....f public interest, commercial morality and the intention to revive the company. 40. I will have to test the present application and the request of the applicants therein on the touchstone of the above principles. All discretion has to be exercised judiciously and not arbitrarily. The Court cannot pick and choose shareholders and creditors. The Court cannot in the garb of conflicting claims of workers or because of any rift inter se between them, allow the claims of the said workers and other creditors to be compromised or defeated altogether. Ultimately, the applicants may claim to be shareholders and substantial secured creditors, but if the purpose in presenting this application is to enable them to take over the company's properties and assets which are indeed valuable at a price or value which they unilaterally determine, then, that cannot be permitted. A careful scrutiny of this application would reveal that what the applicants are projecting is, that they have the necessary wherewithal and strength. The applicant No.1 claims to be a promoter, secured creditor and unsecured creditor of the company in liquidation. It has projected that it along with its wholly owned subsidia....
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....operties can no longer be controlled by the Court. They would develop these lands by constructing buildings and sell off the units therein and earn profits. 42. However, the desire to cash on the lands with a view to fully exploit their potential is not matched with the same approach as far as the creditors of the company. By not reviving the company after taking it out of winding up shows that the applicants are primarily concerned with the benefits attached to these lands. By exploiting and utilising them to their advantage, the applicants are not agreeable to the Liquidator and the Court controlling their actions in interest of all creditors and general public. The business opportunities on account of spiraling prices in the Real Estate Market is the only attraction for the applicants. The proceeds and gains from such opportunities ought to have been shared by them with all. However, that is not their intent, is clear from their stand. If these lands are sold by the Official Liquidator under the supervision of this Court and at open, fair and transparent public auction, the applicants may not stand any chance and hence they desire to obtain the lands at a throwaway price by a....
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....ettlement of the dues of creditors, cannot persuade this Court to grant any discretionary relief to them and prevent the Liquidator from proceeding to wind up the company in accordance with law. If ultimately it is impossible to revive the company, then, it is better that the Liquidator carries on its affairs till the dissolution of the company. It is only through the mechanism and participation of the Liquidator, that the Court can ensure settlement of claims of the secured and unsecured creditors in accordance with law. 43. At this stage, when claims of certain workmen have been given a preference over others or non-consenting employees, then, all the more it would not be in public interest and commercial morality to grant any reliefs. 44. As a result of the above discussion, this company application fails and it is dismissed. 45. In the view that I have taken, it is not necessary to refer to all the decisions that have been brought to my notice. Suffice it to note that the decisions that have been brought to my notice by Mr.Tulzapurkar deal with a situation in which the Court has permitted carrying on a distinct business under a scheme of arrangement or compromise by ad....