2012 (9) TMI 5 - HC - Companies Law

Application seeking appointment of a provisional liquidator - Held that - As in the instant case, the respondent company has admitted its liability to the petitioner in the statement of account for the year ending 31.03.2002 in the sum of Rs. 8,00,04,000/ first being admitted in the balance-sheet for the year ending 31.03.2001 and thereafter reaffirmed in the balance-sheet for the year ending 31.03.2002 - The performance review of the company as is evident from the Directors Report dated 21.06.2002 also shows that during the year under review i.e. for the year ending 31.03.2002, the company had incurred a loss of Rs. 5,039 lacs as against a loss of Rs. 7,579 lacs. This is also reflected in the balance-sheet of the company for the year ending 31.03.2002. These admissions are of the year 2002, a decade has passed, even the admittedly liability by the respondent has not been liquidated. Reply filed by the respondent has merely averred that the financial ill-health of the company is not by itself a sufficient ground to order the appointment of a provisional liquidator, he has qualified this submission by stating that the health of the company is changing day to day, however, this reply is totally silent as to how the health of the company has improved over this period of 10 years, there is not a whisper in this reply that the financial condition of the company has either improved or is improving, no document i.e. no balance-sheet/statement of account of any year after 2002 has been filed to substantiate an argument which is now being pitched that the company has in fact gained a momentum, this submission is wholly un - substantiated - In this factual scenario submission of the petitioner that there is every possibility that the assets of the company will frittered away and the same may be alienated/transferred which will affect not only the interest of the petitioner creditor but the interest of the other creditors at large is also a submission not without force, thus this Court is of the opinion that there is danger of the properties of the respondent-company being transferred/alienated. It would thus be expedient to appoint a provisional liquidator to protect the assets of the company which appear to be in a jeopardy - direction to the respondent company, its directors, officers, employers, authorised representatives restrained from selling, transferring, alienating, encumbering and parting with the possession of any movable and immovable assets and funds - in favour of petitioner creditor.

Issues Involved:
1. Appointment of a Provisional Liquidator.
2. Admissibility of the Company Petition.
3. Compliance with Section 450 of the Companies Act, 1956 and Rule 106 of the Companies (Court) Rules, 1959.
4. Financial health and conduct of the respondent company.
5. Procedural compliance regarding advertisement of the petition.

Issue-Wise Detailed Analysis:

1. Appointment of a Provisional Liquidator:
The primary issue was whether a provisional liquidator should be appointed for the respondent company. The petitioning creditor argued that the respondent was unable to pay its debts, as evidenced by the company's balance sheet and directors' report. The respondent countered that financial stringency alone was not sufficient grounds for such an appointment. The Court noted that the respondent had admitted its liability in its balance sheets for the years ending 31.03.2001 and 31.03.2002. Despite this admission, the company had not liquidated its debts over a decade. The Court also observed that there was a risk of the company's assets being alienated, thus justifying the appointment of a provisional liquidator to protect these assets.

2. Admissibility of the Company Petition:
The Division Bench had previously admitted the company petition, concluding that the respondent was unable to pay its debts. The respondent's appeal against this admission was dismissed. The Court reaffirmed that the petition was rightly admitted, as the respondent's financial documents indicated significant liabilities and losses, supporting the petitioning creditor's claim.

3. Compliance with Section 450 of the Companies Act, 1956 and Rule 106 of the Companies (Court) Rules, 1959:
The respondent argued that the appointment of a provisional liquidator did not comply with Section 450 and Rule 106, which require notice to the company and a reasonable opportunity for representation. The Division Bench had set aside the initial appointment of the provisional liquidator due to lack of notice and special reasons. However, the Court noted that the current application for appointment had been properly notified to the respondent, who had filed replies. The Court found that the respondent had not provided any substantial evidence of improved financial health, thus justifying the appointment of a provisional liquidator.

4. Financial Health and Conduct of the Respondent Company:
The Court scrutinized the financial health of the respondent company, noting significant losses and liabilities admitted in the balance sheets and directors' reports. The respondent failed to provide any evidence of financial improvement over the past decade. Additionally, the Court observed that the respondent had withdrawn substantial sums of money after the provisional liquidator's initial appointment, indicating a risk of asset dissipation. This conduct further justified the need for a provisional liquidator to protect the company's assets.

5. Procedural Compliance Regarding Advertisement of the Petition:
The respondent contended that the petition had not been advertised according to Rule 99 of the Companies (Court) Rules, 1959. The Court dismissed this argument, noting that advertisements had been published in the 'Indian Express' and 'Jansatta,' and a gazette notification had been issued. The Court found no irregularity in the procedure, stating that the directions for advertisement had been complied with as per the Court's instructions.

Conclusion:
The Court concluded that the appointment of a provisional liquidator was necessary to protect the assets of the respondent company, given the significant admitted liabilities and the risk of asset dissipation. The Official Liquidator attached to the Court was appointed as the Provisional Liquidator, with directions to take charge of the company's assets and records. The respondent company, its directors, officers, and authorized representatives were restrained from transferring or encumbering any assets or withdrawing funds from the company's accounts. The directors were also directed to hand over all company records and file their statements of affairs within twenty-one days. The application was disposed of with these observations, and a status report was to be filed by the Official Liquidator.

← Previous Next →