2002 (2) TMI 1244 - HC - Companies Law

Issues Involved:
1. Validity of the workers' claim over the properties sold in execution proceedings.
2. Jurisdiction of the Company Court to entertain the applications.
3. Applicability of the doctrine of lifting the corporate veil.
4. Relevance of admissions made by directors in affidavits.
5. Impact of the Payment of Wages Act orders on the creditors of the partnership firms.
6. Status of the interim stay and its effect on the execution proceedings.

Detailed Analysis:

1. Validity of the Workers' Claim Over the Properties Sold in Execution Proceedings:
The workers of Aarthi Petrochemical Industries (P.) Ltd. claimed that the properties sold in execution proceedings, which belonged to various partnership firms, were actually the properties of the company in liquidation. They argued that the directors of the company were also partners in these firms, and thus, the sale proceeds should be distributed among the workers and secured creditors of the company. However, the court found no material evidence indicating that the properties of the partnership firms were purchased with funds from the company in liquidation. The affidavits provided by the directors only suggested common management but did not prove financial interconnection. Consequently, the workers' claims were dismissed.

2. Jurisdiction of the Company Court to Entertain the Applications:
The court addressed the preliminary objection raised by Kalupur Bank regarding the maintainability of the applications. It was argued that the applications did not specify the provisions of law under which they were filed, violating rule 17 of the Companies (Court) Rules, 1959. Additionally, it was contended that the Company Court lacked jurisdiction as the execution proceedings involved properties of the partnership firms, not the company in liquidation. The court, however, decided not to delve into the jurisdictional issue as the applications were dismissed on merits.

3. Applicability of the Doctrine of Lifting the Corporate Veil:
The workers' union urged the court to lift the corporate veil to treat the properties of the partnership firms as those of the company in liquidation. The court referred to precedents, including the Supreme Court's decisions in *State of U.P. v. Renusagar Power Co.* and *Life Insurance Corpn. of India Ltd. v. Escorts Ltd.*, which allow lifting the corporate veil in cases of fraud or improper conduct. However, the court found no evidence of fraud or financial interconnection between the company and the partnership firms. Thus, the doctrine was deemed inapplicable.

4. Relevance of Admissions Made by Directors in Affidavits:
The workers' union relied on affidavits by the directors, which stated that the partnership firms and the company were treated as one for management and financial purposes. The court held that these affidavits did not bind the secured creditors who were not parties to the proceedings where the affidavits were filed. Moreover, the affidavits did not prove that the properties were purchased with the company's funds. Therefore, the admissions were not sufficient to convert the properties of the partnership firms into those of the company in liquidation.

5. Impact of the Payment of Wages Act Orders on the Creditors of the Partnership Firms:
The workers argued that orders under the Payment of Wages Act, which treated the companies and partnership firms as one entity, supported their claim. The court clarified that these orders were limited to the specific proceedings under the Act and did not bind the creditors of the partnership firms. The secured creditors, like the co-operative banks, were not parties to those proceedings and thus, were not affected by the orders.

6. Status of the Interim Stay and Its Effect on the Execution Proceedings:
The interim stay granted by the court in 1993 had halted the execution proceedings against the properties of the partnership firms. The court vacated this stay, allowing the execution proceedings to resume. It was clarified that any deposits or appropriations by the creditors from the sale proceeds would be without prejudice to the Official Liquidator's powers to pursue appropriate proceedings if it was found that the company's properties were diverted to the partnership firms.

Order:
The court dismissed Company Application Nos. 66, 67, and 68 of 1993, with a clarification that the Official Liquidator could still exercise his powers under the Companies Act, 1956, to trace any diverted properties. The interim stay was vacated, and Company Application No. 248 of 2000 filed by Bank of India was disposed of as infructuous. The court directed the Official Liquidator to expedite the sale of the company's unsold assets and disburse the proceeds among the secured creditors and workers. The interim stay was extended till 22-3-2002 to allow the workers' union to seek further recourse.

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