2003 (3) TMI 537 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the Government Order dated 24-10-1991 directing winding up of Karnataka Pulpwood Limited.
2. Authority of the State Government to direct the winding up of a joint sector company.
3. Validity of the subsequent amalgamation decision.
4. Impact on the financial health of Karnataka Forest Development Corporation Limited.
5. Judicial review of policy decisions.

Detailed Analysis:

1. Legality of the Government Order dated 24-10-1991:
The Government of Karnataka issued an order on 24-10-1991 directing the winding up of Karnataka Pulpwood Limited (Respondent No. 4) and transferring its assets and liabilities to Karnataka Forest Development Corporation Limited (Respondent No. 3). The order also directed the return of equity amount to the appellant. The learned single Judge found that the Government lacked statutory or contractual authority to issue such a direction, noting, "The respondents are not in a position to point out any statutory or contractual provision enabling the State Government to issue such a direction to the first respondent, in regard to winding up of the second respondent."

2. Authority of the State Government to Direct Winding Up:
The Court held that the decision to wind up a joint sector company or purchase of shares by one shareholder from another should be taken by the companies themselves and not directed by the State Government. The judgment states, "It is declared that the decision to wind up second respondent is to be taken by respondents 1 and 4 and not by the State Government."

3. Validity of the Subsequent Amalgamation Decision:
Despite the initial order for winding up, the Government later directed the amalgamation of Respondent No. 4 with Respondent No. 3. The Court found that this decision was a result of serious deliberation and voluntary acts by the Boards of both companies, stating, "Sufficient and acceptable materials are placed before the Court to satisfactorily prove that the decision to wind up the fourth respondent-company and subsequently to amalgamate that company with the third respondent-corporation is the outcome of a serious deliberation in the Board of Directors of third respondent-corporation and resultant resolution."

4. Impact on Financial Health of Karnataka Forest Development Corporation Limited:
The Trade Union (Respondent Nos. 1 and 2) argued that the winding up would jeopardize the financial health of Respondent No. 3. However, the Court found this apprehension unfounded, noting that the decision was based on financial, technical, and managerial considerations. The judgment states, "The Trade Union has utterly failed to demonstrate any violation of any of their rights guaranteed under the law."

5. Judicial Review of Policy Decisions:
The Court emphasized the limited scope of judicial review in policy decisions, stating, "The scope of judicial review of policy decisions is very much circumscribed and limited by a catena of decisions of the Supreme Court and High Courts." The Court found the decision to wind up and subsequently amalgamate the company to be reasonable and not arbitrary, thus not warranting judicial interference.

Conclusion:
The appeal by the Management of Harihar Polyfibres was allowed, setting aside the order of the learned single Judge and dismissing the Writ Petition No. 25799 of 1991. The Court held that the decision to wind up and subsequently amalgamate Karnataka Pulpwood Limited with Karnataka Forest Development Corporation Limited was a policy decision taken after due deliberation and was not arbitrary or against public interest. The Court also reaffirmed the limited scope of judicial review in such policy matters.