2019 (11) TMI 187 - AT - Companies Law

Winding up of Company - initiation of CIRP during the pendency of the petition - Section 241 read with Section 242 of the Companies Act, 2013 - HELD THAT - From bare perusal of Section 241 if read with Section 242 of the Companies Act, 2013, it will be clear that on an application made under Section 241, if the Tribunal is of the opinion that company s affairs have been or are being conducted in a manner prejudicial to the interest of the company and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound-up, in such case, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. The purpose of Section 241 read with Section 242 of the Companies Act, 2013 is to save the company from winding up even if the company s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest. The essence of Sections 241 242 will be defeated if during the pendency of the petition, the Operational Creditors or Financial Creditors are allowed to trigger Corporate Insolvency Resolution Process itself. The Tribunal while dealing with the matter failed to notice the aforesaid fact. It is a fit case in which the Board of Directors should be allowed to take its own decision as to how it will meet its end for meeting the liabilities of the Operational Creditors / Financial Creditors and whether the liability is of one or other unit including Sonepat Unit and we, accordingly, allow the Board of Directors to take such decision to save the company from initiation of the Corporate Insolvency Resolution Process and not for other purpose. Impugned order set aside - appeal allowed.

Issues Involved:
1. Demerger of the 'Sonepat Unit' based on the 'Memorandum of Understanding' and the 'Arbitral Award'.
2. Financial distress and operational challenges faced by the 'Sonepat Unit'.
3. Resolution passed by the Board of Directors and its implications.
4. Non-core assets sale and its necessity for financial stability.
5. Legal challenges and proceedings under the Insolvency and Bankruptcy Code (IBC).
6. Interim relief sought by the appellants and its denial by the Tribunal.
7. Historical context of the family dispute and its impact on the company.

Detailed Analysis:

1. Demerger of the 'Sonepat Unit':
The respondents filed an application seeking the demerger of the 'Sonepat Unit' based on the 'Memorandum of Understanding' dated 31st August 2003 and the 'Arbitral Award' dated 1st November 2014. The Tribunal noted the historical context, including the family dispute and the subsequent arbitration proceedings, which culminated in an award directing the division of management, control, and ownership of the company. However, the Delhi High Court set aside the arbitral award concerning 'Atlas Cycles (Haryana) Ltd.', holding that the arbitrator had no jurisdiction over the company's matters.

2. Financial Distress and Operational Challenges:
The appellants highlighted the financial distress faced by the 'Sonepat Unit', including significant losses, liquidity crunch, and mounting liabilities. The 'Sonepat Unit' posted a loss of ?6.63 crores for FY 2017-18 and ?2.41 crores for the quarter ending June 2018. The overall financial condition of the company was severely impacted, with the 'Sahibabad Unit' paying ?21.59 crores to avoid the company's account becoming NPA, leading to a liquidity crunch. The company faced over 80 legal notices under the 'Negotiable Instruments Act' due to dishonored cheques issued by the 'Sonepat Unit'.

3. Resolution Passed by the Board of Directors:
The Board of Directors passed a resolution on 10th July 2018, seeking permission to approach consortium banks for the release of title deeds of non-core assets under the charge of the 'Sonepat Unit' to proceed with their sale. The assets included 'Atlas Steel Tube Industries', 'Atlas Auto Industries', and various residential properties. The resolution aimed to generate additional funds to stabilize the company's financial position.

4. Non-Core Assets Sale:
The appellants argued that the sale of non-core assets was imperative for a more meaningful interpretation of the Tribunal's orders and to address the financial distress. The proposed utilization of funds from the sale included paying ?15 crores to consortium banks and ?12 crores towards liquidation of liabilities to vendors and statutory liabilities of the 'Sonepat Unit'. The Tribunal, however, dismissed the application for sale, noting that the non-core assets of the 'Malanpur Unit' were already in the process of being sold.

5. Legal Challenges and Proceedings under IBC:
The company received notices from NCLT, Chandigarh, under Section 9 of the IBC by various suppliers/vendors of the 'Sonepat Unit'. The Tribunal observed that the impending threat of an IBC petition being admitted against the company could not be undermined. The appellants emphasized that the financial stringency was not a bogey, as all mutual funds and investments had been liquidated, and bank limits were fully exhausted.

6. Interim Relief Sought and Denial:
The appellants sought interim relief to sell non-core assets to generate funds. The Tribunal denied the relief, observing that the appellants had not infused funds into the 'Sonepat Unit' as directed in previous orders. The Tribunal noted that the appellants were pushing the 'Sonepat Unit' to penury by not infusing funds and creating a situation to file an application for direction.

7. Historical Context and Family Dispute:
The judgment detailed the historical context of the family dispute, including the 'Memorandum of Understanding' dated 8th January 1999, which aimed to split the management, ownership, and control of the companies and assets jointly owned by the family into three equal shares. The arbitration proceedings and subsequent legal challenges significantly impacted the company's operations and financial stability.

Conclusion:
The Appellate Tribunal set aside the impugned order dated 14th February 2019, allowing the Board of Directors to take decisions regarding the sale of non-core assets to meet the liabilities of 'Operational Creditors'/'Financial Creditors' and for the revival of the 'Sonepat Unit'. The Tribunal emphasized that the purpose of Sections 241 and 242 of the Companies Act, 2013, is to save the company from winding up and that the Board of Directors should be allowed to take necessary decisions to prevent the initiation of the 'Corporate Insolvency Resolution Process'. The appeal was allowed with the liberty to the respondents to bring any misuse of funds to the notice of the Appellate Tribunal for appropriate orders.

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