2009 (12) TMI 513 - HC - Companies Law

Whether there was justification for passing the direction for handing over possession of the property to the company in liquidation which had already been taken by the official liquidator pursuant to the earlier order of the company court consequent to the default already committed by the company in liquidation? Held that - There is no dispute that the second instalment pursuant to the initial order passed by the company court was not paid and consequently the official liquidator had taken possession of the property of the company. It appears from the application filed for stay supported by an affidavit that the application was totally silent on the fact that the cheque dated January 6 2009 issued by the company for payment of such second instalment was dishonoured on presentation. In paragraph 5 of the said affidavit it was alleged that on January 7 2009 the company tendered a draft to the petitioning creditor. It would however appear from the annexure of the said affidavit that the alleged draft was posted on January 10 2009. Thus the order impugned was obtained with mala fide motive after suppression of material facts of dishonour of the cheque dated January 6 2009. The mere fact that after committing default the company on a subsequent date was in a position to pay the entire dues was not sufficient to order stay as pointed out above. It appears from the order impugned that the learned single judge has without recording any reason directed the official liquidator to return possession already taken pursuant to the earlier order and fixed a date for further hearing. The procedure adopted by the learned single judge was totally irregular as mentioned above and was opposed to the well-settled principles which are required to be followed before exercising the discretion of stay. Appeal allowed

Summary

Issues:
1. Stay of winding up order and possession of property.
2. Default in payment of instalments by the company.
3. Application for stay based on suppression of material facts.
4. Principles governing the discretion for stay under section 466 of the Companies Act, 1956.

Analysis:
1. The appeal concerned a petitioning creditor challenging an order staying the winding up of a company and directing the official liquidator to hand over possession of a hotel owned by the company to the said company. The company had defaulted in rent payments, leading to the winding up petition. The court stayed the winding up order and directed the possession to be handed over. The appeal raised the question of justification for this direction, given the default by the company.

2. The company had defaulted in payment of instalments as per the winding up order. Despite making the first instalment, the second instalment cheque was dishonored. The petitioning creditor followed the necessary procedures after default, leading to the possession being taken by the official liquidator. The company later attempted to make payment, but the court found the application for stay to be based on suppression of material facts regarding the dishonored cheque.

3. The court analyzed the principles governing the discretion for stay under section 466 of the Companies Act, 1956. It emphasized factors such as the bona fide nature of the application, the interests of commercial morality, evidence of misfeasance, and the need for a firm proposal for satisfying creditors. The court found that the order for handing over possession was irregular and opposed to established principles, as the company had suppressed material facts and failed to justify the stay.

4. Ultimately, the court allowed the appeal, set aside the order for possession, and rejected the application for stay due to the lack of justification. The court directed the payment made by the company to be adjusted towards the creditor's claim. No costs were awarded in the case. The judgment highlighted the importance of adhering to legal principles and transparency in applications for stay of winding up orders.