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TMI Blog1975 (8) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... eptember, 1972, initially as a private limited company, but has been subsequently deemed to be a public limited company, limited by shares. The registered office of the company is situated at G.I D.C. estate, Kalol, district Panchmahals. The authorised capital of the company is Rs. 15 lakhs divided into one lakh equity shares of Rs. 10 each and 5,000 cumulative redeemable preference shares of Rs. 100 each. The issued, subscribed and paid up capital of the company is Rs. 12,40,000 consisting of 76,000 equity shares each of Rs. 10 fully paid, out of which 3,580 equity shares each of Rs. 10 fully paid were allotted for consideration other than cash ; 51,428 equity shares of Rs. 10 each fully paid were allotted to the promoters for payment towards the expenses incurred by them prior to incorporation, and 4,800 9 % redeemable cumulative preference shares of Rs. 100 fully paid held by the Gujarat Industrial Investment Corporation Ltd, (hereinafter referred to as GIIC) Gujarat State Financial Corporation (hereinafter referred to as GSFC) has advanced a big loan. Amongst various objects, the principal object for which the company was formed was to set up a modern mini-steel plant having r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, claiming to be unsecured creditor of the company to the tune of Rs. 6,27,511.50 served a notice under section 434 of the Companies Act on 25th March, 1975, calling upon the company to pay the amount within 21 days, failing which a petition for an order for winding up the company would be filed in the High Court of Gujarat. The company failed to pay the amount as also neglected to reply to the statutory notice, whereupon the creditor filed Company Petition No. 32 of 1975 on 24th April, 1975, under section 433 read with section 439 praying for an order for winding up the company. When the winding-up petition came up for admission, a notice under rule 96 of the Companies (Court) Rules was ordered to be served upon the company before giving any direction for advertisement of the petition. In response to the notice, the company appeared through one Kumar Vithalbhai Patel, the constituted attorney of the company, who is also the works manager of the plant on June 16, 1975, and filed a detailed affidavit opposing the admission of the petition. But simultaneously another development took place of which notice must be taken here. On the very day, the constituted attorney of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shi, B. H. Mehta and Miss Kusum M. Shah appeared for different unsecured creditors and Mr. C. C. Gandhi for the petitioning creditor. They urged that they have no idea of the scheme and they had little time to probe the implication of the summons taken out by Mr. Malhotra and that they must have time to consider the full ramifications of the situation and that the matter should be adjourned. In order to give everyone time to examine the implications of the summons, the matter was adjourned to 30th June, 1975. Before adjourning the matter the court took on record the affidavit filed by Shah Ramjilal Kampratap and also an additional affidavit of Mr. Malhotra. When the matter was called out on 30th June, 1975, one Girish J. Trivedi, legal adviser to GSFC, filed his affidavit in which it was in terms stated that GSFC and GIIC are secured creditors of the company and have decided to remain outside the winding up. Both the creditors specifically opposed the summons taken out by Mr. Malhotra for handing over the plant to him. It was also stated in para. 9 of this affidavit that in case the court wants to pass an order in favour of Mr. Malhotra, taking into account the interest and depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was supported by an affidavit of the managing director of GIIC. In the affidavit it was stated that on the court granting the summons, the GIIC with SCGL will undertake to start the plant and factory of the company within 15 days and the plant will be run at least for a period of four months or till the scheme to be submitted by GIIC/ SCGL is finally sanctioned by the court and SCGL will re-employ entire staff and workers of the company with benefit of continuity of service without any break and arrears of salary of the staff and workers of the company will be paid in such manner as may be determined by the court. It was further stated that compensation that GIIC/SCGL would offer would be at a rate which would be 20 per cent, higher than the compensation that may be offered by Mr. Malhotra. When the matter was being heard a specific offer was made on behalf of the GIIC/SCGL that a scheme of compromise and arrangement will be moved, the compensation will be offered at the rate of one lakh of rupees per month and payment will commence from the date of possession being handed over to GIIC/SCGL. The court directed a responsible officer to give an undertaking to the court and if such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the motion and adjourned it and ultimately this has turned out to the better advantage of Mr. Nanavati's client, which I would presently point out. However, a situation did develop on account of the action or inaction of both the corporations wherein had Mr. Nanavati's client been permitted to withdraw his offer, and summons in Company Application No. 33 of 1975, the court would have been left with no option but to proceed with the winding up petition, leading to the civil death of the company, which again, it would be presently pointed out, is neither to the benefit nor to the advantage of anyone either interested in the company or all interests represented in the company, or connected with the company. Anyway, sensing the fickle attitude of these corporations, the court did not permit Mr. Nanavati to withdraw his offer and ultimately to the advantage of all concerned. Pursuant to the statement made by learned Advocate-General, the court made an order that on the GIIC depositing Rs. 60,000 with the official liquidator appointed as court officer by an order made by me on 2nd July, 1975, for making inventory of the assets and books of accounts of the company, for the purpose of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompromise and arrangement. And lo and behold, Mr. Nanavati always using his skill to receive maximum advantage for his client had started with a miserly low offer of compensation of Rs. 35,000 per month which would not have been sufficient to pay off running interest, leave aside the penal interest of the two secured creditors, meaning thereby the court would permit a party to use the assets of the company with the liability of interest piling up with no chances of reducing it even if the plant of the company is working, raised his offer in the open auction to the respectable figure of Rs. 1,70,000 per mensem payable every month in advance. It would also be necessary to recall here that GIIC/GSFC had offered through the undertaking given by the managing director of GIIC compensation at the rate of Rs. 1 lakh per month payable in advance, other conditions being those to be Approved by the court. Now, therefore, the court suggested that a bid of less than Rs. 1 lakh of compensation per month would not be countenanced, and there started a process of outbidding each other and in the process Mr. Nanavati who once posed to withdraw his offer but the court did not grant the motion, outbid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is deep down to its neck in debt. Looking to the accumulated losses, its capital is completely wiped off. Number of causes were adumbrated which led to this mess and sorry state of affairs and they may be examined in an appropriate proceeding for finding out why the company met this cruel and unusual destiny. With what aspiration the company was started, one can visualise from the fact that the Government of India encouraged industrialists to go into the backward areas of the nation, called "specified areas". The purpose and motive was to take the pace of industrialisation to hitherto rural backward areas so as to reduce pressure on agriculture. There was a two-fold end in view. Such a step would provide local employment and create job opportunities. Secondly, manufacturing-cum-commercial activity on a large scale has the built in potentiality of stirring ancillary industries and provide employment in ancillary industries. To encourage the industrialists to go to such area, the Government of India agreed to give and did give Rs. 4.40 lakhs as subsidy. The two corporations advanced big loans. Performance of the State Bank of India deserves a specific mention in that it claims to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two corporations. Assuming that Mr. G.N. Shah is right that such would be strictly the legal course that the company law permits, let me examine the resultant effect thereof. The first effect is that this most modern steel plant set up only two years back in 1973 will remain idle, unused and will rust. The employees and especially technically skilled employees will remain unemployed and in these days of mounting unemployment and shrinking production, starvation would be their only lot. Production will not be forthcoming. Ancillary industries will certainly come to a grinding halt. Law must take note of the existing situation in which problems that arise in law and have a human content have to be disposed of. Law cannot divorce itself off the mores of the day. Philosophy of law is functional and not analytical. Now, if law takes note of the existing situation in which a problem has been put in the lap of the court, a solution must be sought through the machinery of law. Law cannot be static and its interpretation has to be dynamic. Law cannot operate in vacuum. Either by its pragmatic approach or progressive interpretation, law must find and offer a solution or it must perish. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t." If that is the direction in which the next step has to be taken, what useful purpose would be served in the present situation, if the court accedes to the suggestion of inaction till such time as the scheme petitions are processed especially when two parties are keen and ready to start the plant, which could be put back on steam with hardly two weeks' notice, to keep it idle and in the process deny production and deny employment. By adopting such a course, the goal set by development plans of this country, which has two targets, namely, expansion of job opportunities, and production with a view to bringing down prices, both will stand defeated and invested money of the shareholders, secured creditors and unsecured creditors will lie unused, unutilised and idle. It does not require a long intelligible argument to weigh the relative merits of these two options. If yet someone is bold enough to say that you can pay respect to the law of the land by crucifying its spirit, he can say that, let plant lie idle but give no fresh orientation to the legal principle involved. Whether this is an adventure or not, will be presently examined. I am more than certain that it can be put withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nyone connected with the industry knows that a plant which is working efficiently, and is in working condition and working order, would fetch much better price as a going concern than a plant which is allowed to remain idle and rust, only because law does not permit, so says the soothsayer, infusing any life into it till a certain stage in winding up is reached. Now, taking strictly the view as was once advanced that at this stage, the court has no jurisdiction till the scheme is sanctioned, to either take over possession of the plant, or to hand it over to Mr. Malhotra, would leave the plant high and dry for at least about 6 to 8 months, which an application for processing the scheme through various stages in the court would take. It would be unwise to accelerate the hearing of the winding-up petition; and on the winding-up order being made, to proceed to sell the immovable property of the company, thereby nipping the scheme petition in the bud. Even if an order for winding-up the company is made, the immovable property of the company cannot be sold off till the court records decision on one or other scheme petitions, because, if one or the other scheme is sanctioned, the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifically prescribed in the order appointing him or in any subsequent order, obviously the provisional liquidator will have all the powers of a liquidator of the company which is ordered to be wound up. But it is incontrovertible that the court can appoint a provisional liquidator and restrict or limit his powers as deemed proper by the court. Now, section 457(1) specifies the powers of the liquidator in a winding up by the court which he can exercise with the sanction of the court. Amongst others, the liquidator with the sanction of the court has the power to carry on business of the company so far as may be necessary for the beneficial winding up of the company. It is true that the liquidator cannot carry on business for any other purpose except the purpose for which the power is conferred upon him, namely, for the beneficial winding up of the company. He cannot carry on a speculative commercial activity. He cannot carry on any business on the ground that it would be beneficial to the creditors or contributories. The jurisdictional fact which must be ascertained and established for the exercise of the power by the liquidator to carry on business of a company, is that carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and provide further assets in the hands of the liquidator. And as an arrangement during the interregnum when the scheme petitions are processed through, it is unquestionable that the proposal to work the plant would considerably contribute to the beneficial winding up of the company. And if winding up is avoided on the sanctioning of one or the other scheme, the arrangement sanctioned by this order is beneficial to every one. I would in this connection refer to In re Great Eastern Electric Co. Ltd. [1941] 1 All ER 409; [1942] 12 Comp. Cas. 96 , 99 (Ch D). The directors of the company made a declaration of solvency and four days thereafter passed a resolution that the company should be wound up voluntarily and appointed Mr. Houston as liquidator. Mr. Houston carried on the business of the company for about a year and two months, when an order was made for compulsory winding-up of the company and a new liquidator was appointed. The assets of the company were then realised and the liquidator sought the directions of the court as to the order in which the creditors should be paid. A question was also raised challenging the action of the liquidator in carrying on business of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Willis v. Association of Universities of the British Commonwealth [1964] 2 All ER 39; [1965] 35 Comp. Cas. 412 (CA) , Lord Denning M.R. carried the proposition a little further, when he said that: " 'Beneficial winding up' referred, he said, to financial benefit. I cannot take this view. Even in an ordinary commercial company the objective of a winding up need not be financial. It may be for reconstruction, and the business can be carried on so as to facilitate the transfer..............It may be to ensure a smooth take-over by the new chartered company, and that is best achieved by keeping all the activities going until the transfer." (emphasis supplied) To any one having lurking doubt about the court's jurisdiction, this observation of Lord Denning M. R. would provide a complete and satisfactory answer. It need not be stated that the relevant provision of the English company law and our company law on this point is almost in pari materia. Apprehension voiced in this approach is that if by continuing the commercial activity by working the plant, further debts are to be piled up, the secured creditors as well as unsecured creditors and in the ultimate analysis the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bid was Rs. 1,70,000 per month payable in advance and after giving the other side time to consider whether he wants to give any higher bid the auction was closed. After the court was informed that GISCO would not go higher, the bid of Mr. Malhotra was accepted. There cannot be any doubt that the bid is the highest and best; and all who appeared in the matter gave their consent that the court should accept the bid of Mr. Malhotra. It need not be restated that in taking this action, I am not exposing the company to any risk. The liability of the company has become crystallised when it closed down or especially the date on which a winding up petition is presented. Thereafter, the standing charges are mounting up. They include the claim of the Gujarat Electricity Board, the interest payable to the secured creditors, interest payable to the State Bank of India and workers are idle. There are some very highly skilled technicians in the employ of the company, who if once they leave the company's service, their replacement would be very difficult. The company has been making losses is a statement which need not now be repeated. If the offer of Mr. Malhotra is accepted, he would be payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an occupier of the factory premises, office building and buildings of the company for the purpose of the Central Excises and Salt Act. ( iii ) It must be made distinctly clear that Mr. Malhotra fully understands the implication of section 456(2) in that on the appointment of a provisional liquidator, all the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order of the appointment of the provisional liquidator. Therefore, while taking custody from the provisional liquidator, as if the provisional liquidator is parting with it on behalf of the court, two undertakings filed by Mr. Malhotra, one on 24th July, 1975, and another also on the same day, are to be treated as integral parts of this order and are deemed to have been given pursuant to this order. In other words, Mr. Malhotra should return possession to the court within six weeks after the court directs him to do so without setting up any title as against the provisional liquidator. But it is distinctly understood that Mr. Malhotra is under an obligation to work the plant till either one or the other scheme petition is finally adjudicated upon by this court and sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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