1985 (1) TMI 252 - HC - Companies Law

Issues Involved:

1. Maintainability of applications under section 536(2) of the Companies Act, 1956.
2. Impact of notifications under the Bombay Relief Undertaking (Special Provisions) Act, 1958.
3. Effect of interim relief order in Special Civil Application No. 4801 of 1984.
4. Adequacy of details provided about transactions.
5. Bona fides of transactions for running the company.
6. Impact on unsecured creditors.
7. Potential protection of misconduct by directors.
8. Potential protection of negligent bank employees.

Detailed Analysis:

1. Maintainability of Applications under Section 536(2) of the Companies Act, 1956:

The court ruled that applications under section 536(2) can be entertained even if no winding-up order has been passed. This was supported by a Division Bench judgment in Company Application No. 95 of 1984, which established that such applications can be considered in pending winding-up petitions. Thus, the first preliminary objection was overruled.

2. Impact of Notifications under the Bombay Relief Undertaking (Special Provisions) Act, 1958:

The court noted that the issuance of notifications declaring the company as a relief undertaking does not prevent the company from filing applications under section 536(2). This was previously addressed in Company Application No. 209 of 1984, where it was held that such notifications do not bar the company from seeking validation of transactions. Consequently, the second preliminary objection was overruled.

3. Effect of Interim Relief Order in Special Civil Application No. 4801 of 1984:

The court clarified that the interim relief order restraining the company from transferring properties without court permission does not affect transactions entered into before the interim order. The company will need to seek further permission from the Division Bench for future documents required to implement the rehabilitation package. Therefore, the third preliminary objection was repelled.

4. Adequacy of Details Provided About Transactions:

Initially, the court acknowledged the lack of sufficient details in Company Application No. 160 of 1984. However, during the prolonged hearing, all relevant material was eventually produced. The court appreciated the vigilance of the objecting creditors' counsel in ensuring comprehensive details were provided. Thus, the fourth objection, though initially valid, was deemed insignificant by the end of the hearing.

5. Bona Fides of Transactions for Running the Company:

The court emphasized that transactions entered into for the bona fide purpose of keeping the company as a going concern should be validated. The transactions in question were scrutinized and found to be bona fide, aimed at providing necessary financial assistance to the struggling company. The court referred to established legal principles and previous judgments, including Burton and Deakin Ltd., In re [1977] 1 All ER 631, to support its decision. Consequently, the fifth objection was overruled.

6. Impact on Unsecured Creditors:

The court acknowledged that unsecured creditors might be displaced by secured creditors like SBI but emphasized that the primary concern was the potential revival of the company, which could benefit all creditors in the long run. The court noted that unsecured creditors were already in a precarious position and granting the applications could improve their chances of recovering dues. Therefore, the sixth objection was overruled.

7. Potential Protection of Misconduct by Directors:

The court clarified that granting the applications would not shield directors from liability for any misconduct. Directors would still be liable under relevant provisions of the Companies Act if found guilty of misapplying funds or other misconduct. The seventh objection was thus overruled.

8. Potential Protection of Negligent Bank Employees:

The court deemed this objection irrelevant to the proceedings under section 536(2). It stated that any negligence by bank employees in allowing financial facilities to overrun would be a matter for the bank's internal disciplinary procedures and not within the court's purview. Therefore, the eighth objection was repelled.

Conclusion:

The court validated the transactions in question under section 536(2) of the Companies Act, 1956, finding them bona fide and necessary for the potential revival of the company. The objections raised by the objecting creditors were systematically overruled, emphasizing the broader interest of rehabilitating the company and providing employment to its workers.

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