1954 (11) TMI 32 - SC - Companies Law

Whether the High Court had jurisdiction, in the circumstances of this case, to require the two respondents to pay the sum of ₹ 11,39,400 to the official liquidator under the provisions of section 185 of the Indian Companies Act? Held that - We are not been able to follow how the appeal Bench of the High Court arrived at the conclusion that the scheme propounded in the agreement was unlawful. We are constrained to observe that both the learned single Judge and the appeal Bench of the High Court completely lost sight of the fact that no rights could be vested either in the preference shareholders or the so-called trustees on the basis of a document which merely contained proposals and which was of an inchoate character and which was never completed or became operative and it is this opinion which led to an error in the decision of the case. We allow this appeal, set aside the decision of the appeal Bench and restore the decision of the single Judge ordering the return of the sum of ₹ 11,39,400 by the two respondents to the official liquidator of the Gaya Sugar Mills Ltd. in liquidation.

Issues Involved:
1. Jurisdiction of the High Court under Section 185 of the Indian Companies Act.
2. Validity and implementation of the scheme proposed in the agreement dated January 1, 1950.
3. Legal status and relationship between the company and the respondents.
4. Entitlement of the official liquidator to recover the money held by the respondents.

Detailed Analysis:

1. Jurisdiction of the High Court under Section 185 of the Indian Companies Act:
The principal question was whether the High Court had jurisdiction to require the respondents to pay Rs. 11,39,400 to the official liquidator under Section 185 of the Indian Companies Act. Section 185 provides a summary remedy for the court to direct any trustee, receiver, banker, agent, or officer of the company to deliver money or property to the official liquidator if the company is prima facie entitled to it. The appeal Bench held that the term "trustee" in Section 185 meant an "express trustee" and did not include a "constructive trustee," thus limiting the court's jurisdiction. However, the Supreme Court reversed this view, holding that the respondents were agents of the company and hence fell within the ambit of Section 185.

2. Validity and Implementation of the Scheme Proposed in the Agreement Dated January 1, 1950:
The agreement proposed a scheme for the future working of the company, including paying off debenture holders and preference shareholders. The scheme required the sanction of the court and shareholders. However, the scheme was never implemented as neither the creditors' meeting was held nor the court's sanction obtained. The Supreme Court noted that until the scheme was formally approved, the preference shareholders could not acquire any rights, and the ownership of the shares and the sale proceeds remained with Gaya Sugar Mills Ltd.

3. Legal Status and Relationship Between the Company and the Respondents:
The respondents were initially designated as preference trustees under the proposed scheme. However, since the scheme was never sanctioned, the Supreme Court held that the respondents did not become trustees for the preference shareholders. Instead, they were agents of the company, holding the sale proceeds of the Ryam Sugar Mills shares in custody for the company. The relationship of principal and agent was implied by the circumstances, and the respondents were acting on behalf of the company, not in their own right.

4. Entitlement of the Official Liquidator to Recover the Money Held by the Respondents:
The respondents admitted holding Rs. 11,39,400 but claimed it was held in trust for redeeming the preference shares. The Supreme Court held that since the scheme was never sanctioned, no trust was created, and the money remained the property of Gaya Sugar Mills Ltd. Consequently, the official liquidator was entitled to recover this amount under Section 185. The Supreme Court emphasized that the respondents were merely custodians of the money pending the sanction of the scheme, and since the scheme was not implemented, the money belonged to the company.

Conclusion:
The Supreme Court allowed the appeal, set aside the decision of the appeal Bench, and restored the decision of the single Judge, ordering the respondents to return Rs. 11,39,400 to the official liquidator. The Court clarified that the respondents were agents of the company and not trustees under the inchoate scheme. The official liquidator was entitled to recover the money under Section 185 of the Indian Companies Act, and the appeal Bench's interpretation of the scheme and the respondents' status was erroneous. The costs were awarded to the official liquidator against the respondents.

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