1984 (12) TMI 250 - HC - Companies Law

Issues Involved:
1. Validity of transactions under Section 536(2) of the Companies Act, 1956.
2. Financial assistance and revival of the company.
3. Interests of creditors and employees.
4. Court's discretion in winding-up proceedings.

Issue-Wise Detailed Analysis:

1. Validity of Transactions under Section 536(2) of the Companies Act, 1956:
The applicant company, Prasad Mills Ltd., sought the court's permission under Section 536(2) of the Companies Act, 1956, to enter into transactions by creating charges over its properties for obtaining financial assistance from the State Bank of India (SBI) and the Industrial Development Bank of India (IDBI). Section 536(2) states that any disposition of the property of the company made after the commencement of winding-up shall be void unless the court orders otherwise. The court referred to previous judgments, particularly in the cases of Navjivan Mills Ltd. and Commercial Ahmedabad Mills Co. Ltd., which established that the court could validate transactions before a winding-up order is made. Given this settled position, the court focused on whether the transactions were beneficial under the present circumstances.

2. Financial Assistance and Revival of the Company:
The applicant company had closed its textile unit due to financial difficulties, leading to wage-related legal actions and attachment of its properties. The company approached SBI and IDBI for financial assistance to restart operations. The Government of Gujarat also supported the revival by declaring the textile unit a relief undertaking and suspending certain liabilities and proceedings. The court had previously allowed an advance of Rs. 20 lakhs from SBI, which helped the company restart some production activities. The company now sought further permission to execute necessary documents to secure additional financial facilities worth Rs. 115.03 lakhs from SBI and IDBI. The court found that the company's revival efforts, supported by government resolutions and financial assistance, warranted approval of the transactions.

3. Interests of Creditors and Employees:
The court emphasized that reviving the company would benefit unsecured creditors and employees. The company had significant assets and liabilities, and the financial assistance would help it resume full operations, thereby safeguarding employment for about 1,200 workers. The court noted that allowing the company to enter into transactions with SBI and IDBI would not only regenerate employment prospects but also be in the better interest of unsecured creditors, who might receive better returns if the company revived successfully. The court highlighted the importance of promoting the company's revival over liquidation, considering the potential for economic recovery and job preservation.

4. Court's Discretion in Winding-Up Proceedings:
The court discussed its discretion under the Companies Act to decide on winding-up orders. It recognized that a company facing temporary financial adversity might recover with appropriate support and changing circumstances. The court stressed the need for a judicious approach, considering the overall circumstances and the potential benefits of revival over liquidation. In this case, the court found that permitting the company to enter into transactions for financial assistance was in the best interest of all concerned parties, including creditors and employees. Therefore, the court granted the application under Section 536(2), declaring the transactions with SBI and IDBI as authorized, valid, and binding on the company and creditors.

Conclusion:
The court allowed the application, declaring the transactions with SBI and IDBI as bona fide and binding, provided they were used for the company's operational needs and not for settling past dues. The court also clarified that the Rs. 20 lakhs advanced earlier would be part of the sanctioned amount. Consequently, Company Application No. 148 of 1984 was allowed, and Company Application No. 225 of 1984 was disposed of with no further orders.

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