9911796707
TMI Blog1985 (1) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... SBI, financing banker, as listed in the said prayer are sought to be validated under the very same provision. In order to appreciate the circumstances under which the present company applications are filed, it will be necessary to have a look at certain relevant facts. Factual backdrop: Aryodaya Spinning and Weaving Co. Ltd. ("the company" for short) which is governed by the provisions of the Act and is having its registered office at Asarwa Road, Ahmedabad, has been sought to be wound up at the instance of certain unsecured creditors by this court under the provisions of the Act. A number of winding-up petitions have been filed against the company. In all, 51 such petitions have come to be filed beginning with Company Petition No. 33 of 1983 and ending with Company Petition No. 177 of 1984, details whereof are found in para. 2 of the affidavit filed by the executive director of the company in Company Application No. 160 of 1984. The textile undertaking run by the company used to employ about 2,500 workers in all. It appears that over the passage of years, the company suffered financial setback and became a losing concern. The balance-sheet for the year 1981-82 shows a los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayed. The aforesaid notifications declaring the company as a relief undertaking and suspending various proceedings taken against it by its creditors for enforcement of the dues were challenged in Special Civil Application No. 4801 of 1984 by one of the creditors of the company, M/s. Dropwell Textile Corporation. The said petition was admitted to a final hearing by a Division Bench of this court on September 8, 1984. This court also granted ad interim relief restraining respondent No. 2 (the present applicant) from transferring the properties by way of collateral security for the satisfaction of any new liability created thereafter without permission of the court. The said order came to be modified by the Division Bench on September 27, 1984, clarifying that the aforesaid interim order restrained only transfer by way of mortgage, hypothecation or pledge or charge by way of collateral security and not any day-to-day transaction of purchase and sale and that the said order did not stand against the working of the company but it certainly stood against encumbering the property of the company by way of hypothecation, mortgage, pledge or charge in respect of the new liability created aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. (in lakhs) Funded principal amount account 429.43 Funded interest account 255.00 684.43 Rehabilitation loans 118.00 Demand cash credit 263.00 Bills discounting.purchasing 105.00 Letters of credit 50.00 Ordinary guarantee 82.40 Deferred payment guarantee 96.75 715.15 Total 1399.58 and from the IDBI and the IRCI, by way of rehablitation, additional amount of Rs. 65 lakhs would be made available. It is obvious that when these additional financial facilities were made available to the company, the concerned financial institutions would like to see that, as they were sinking such a large amount in the mill company which was otherwise in the doldrums and when they were trying to resurrect the company and to put it once again on rails, these financing institutions would insist on the company executing necessary doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehta, Mr. R.K. Shah and Mr. Y.N. Oza who opposed these applications on behalf of the objecting creditors, hearing being spread over a number of days. ****** S/Shri R.H. Mehta, R.K. Shah and Y.N. Oza for the concerned objecting creditors raised the following contentions in opposition to these applications. (1)The present applications are not maintainable under section 536(2) of the Act as ho winding-up order has still been passed against the company. That such an application can be filed, if at all, after the company is actually ordered to be wound up by this court. (2)The present applications are not maintainable in view of the additional fact that the notifications have been issued by the State of Gujarat declaring the applicant company as a relief undertaking under the provisions of the Relief Undertaking Act. In view of these notifications, all proceedings pertaining to the company have to remain stayed for one year. Under the circumstances, the present applications under section 536(2) cannot be entertained. (3)The present applications also cannot be filed and cannot be considered in view of the interim relief order granted by the Division Bench in Special Civil Appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, it is true that no winding-up order has been passed against the applicant company uptil now. The order of advertisement and appointment of the provisional liquidator has already been stayed by the Division Bench in appeal. However, that does not prohibit the entertaining of proceedings under section 536(2) of the Act. This aspect of the matter is no longer res integra as there is a direct Division Bench judgment of this court on the point in Company Application No. 95 of 1984 in Company Petition No. 105 of 1983. The Division Bench of this court (See Navjivan Mills Ltd., In re [1986] 59 Comp. Cas. 201 (Guj.)), consisting of B.K. Mehta and D. H. Shukla JJ. speaking through B.K. Mehta J., has ruled that in proper cases, applications under section 536(2) can be entertained even if no winding up order is passed in a pending winding up petition. In view of this pronouncement of the Division Bench, the first preliminary objection stands overruled. So far as the second preliminary objection is concerned, it is to be noted that Company Application No. 160 of 1984 as well as Company Application No. 236 of 1984 have been filed after the notifications dated July 19, 1984, unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof, in terms stated that immediately after the court passes the orders under section 536(2) of the Act, the company will take steps to place before the Division Bench in Special Civil Application No. 4801 of 1984, the orders that may be passed in this application and inform the Division Bench about the progress of the company in its rehabilitation programme. Mr. G. N. Shah for the company made it clear that the company will file necessary application for permission of this court in the above special civil application for executing the necessary documents which are required to be executed for implementation of the package deal of rehabilitation assistance which is proposed to be made available by SBI and IRCI to the applicant company and that such application will be promptly made by the company before the Division Bench of this court in the aforesaid special application. It is, therefore, obvious that the grant of interim order by this court in the aforesaid writ petition does not come in the way of my considering these company applications under section 536(2) of the Act on merits. All that can happen is that even after these applications are granted, if at all, further permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. However, on the facts of the present case, it must be stated that during the course of the prolonged hearing of these company applications, all relevant material was produced by the company and SBI stage by stage and by the time these company applications came to be fully and finally argued, all the relevant material was placed before me for scrutiny and consideration. Thus, the initial objection taken regarding absence of sufficient material on record concerning the transactions did not further survive. The fourth objection therefore, though initially well made out pales into insignificance by emergence of relevant material on record stage by stage. Consequently, in the light of the existing material on record, this objection no longer survives. Before parting with this objection, I must put on record the fact that but for the vigilance exhibited by the objecting creditors through their learned counsel, it would have been difficult for the court to get a comprehensive picture about the transactions in question and it would have been very difficult for the court to grant the present applications. Consequently, due credit for ultimately getting all the relevant material on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be void, it is within the power of the court, under section 536(2) to say that the transaction is not void. (4)If it be found that the transaction was for the benefit of and in the interest of the company or for keeping the company going or keeping things going generally, it ought to be confirmed." In the case of Burton and Deakin Ltd., In re [1977] 1 All ER 631, Slade J. at English Chancery Division, while considering an application under section 227 of the English Companies Act, 1948, which was a provision analogous to section 536(2) of the Indian Companies Act, held (headnote): "If, on an application under section 227 relating to a solvent company, its directors placed before the court evidence that they considered that a particular disposition falling within their powers was necessary or expedient in the interests of the company, and if the court considered that the reasons given were such as an intelligent and honest man could reasonably hold, the court would normally sanction the disposition notwithstanding the opposition of a contributory, unless the contributory had adduced compelling evidence which proved that the disposition was likely to injure the company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistance was required to be received by the company sought to be wound up, from the financiers of the company executing the relevant documents for effecting the requisite securities in favour of the financing institutions. Reliance was placed on the ratio of Burton's case [1977] 1 All ER 631 (Ch D). The Division Bench, on the scope and ambit of section 536(2) of the Act, made the following pertinent observations (at page 214 of 59 Comp. Cas.). "It is well-settled on matter of principle and authority that if the company court is satisfied that a particular disposition of the property of a company which is the subject-matter of a winding up petition, is necessary or expedient in the interest of the company and particularly its creditors and shareholders and the transactions are in the ordinary course of its current trade bona fide entered into and completed, and it is in the interest of every one to preserve the company as a going concern, and if such transactions are not maintained, and the presentation of the petition, groundless or well founded, would result ipso facto in paralyzing the trade of the company and a great injury without any counter-balance of advantage would be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional limit of Rs. 20,00,000 for establishing letters of credit on its behalf from time to time in respect of their import purchase of raw materials required by the company in the ordinary course of business and for the purpose of carrying on the same. It was further recited that the company and the guarantors had requested the bank to continue the various facilities aggregating to Rs. 9,48,75,000 and the present overrun of Rs. 85,59,891.38 and for securing the same, the document in question was executed. The aforesaid two documents clearly indicate that in those days, the company was a going concern. Its manufacturing unit was on stage. But it required more and more finance for carrying on its manufacturing activities. The SBI was also a secured creditor to the tune of Rs. 9,48,75,000 so far as its charge on all the movable properties of the company was concerned. This charge was extended to cover overrun on various facilities. It is easy to visualise that overrun of certain facilities would clearly postulate the ordinary course of business in which these facilities given to the company got overrun. When the company which was heavily indebted to the tune of more than Rs. 8 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... howed that the manufacturing activities of the company required more and more finance which came through various facilities and that overrun was made available to the company by SBI with a view to seeing that the company went on as a going concern and did not come to a grinding halt. The learned counsel for the objecting creditors invited my attention to the fact that by 1981-82, the company had sustained a loss of Rs. 2.50 crores as seen from the profit and loss account and the balance-sheet and that even in the earlier years, the company was a losing concern. This is no doubt true. But that itself shows that the company's financial and economic positions were running downhill. But they had not reached rock-bottom. Under these circumstances, when the company was gasping for breath and was struggling to keep itself out of a total mess, if more and more finance was supplied by SBI by way of providing the company finance beyond the limits of facilities which resulted in the granting of the overrun, it cannot be said that this accommodation given by SBI to the company was in any way mala fide or was not bona fide given with a view to keeping the company on the rails. In my view, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... October 3, 1983, worked out to Rs. 11,21,28,791.98. This clearly shows that by October, 1983, the company which was carrying on its manufacturing activities was hopelessly a losing concern and it was practically a drowning enterprise. It was a sinking ship. But in order to see that it did not actually sink, SBI went on extending various financial facilities under different heads and poured more and more money into the company with the result that the overrun shot up on the concerned items of facilities to Rs. 1,72,53,791.98 by October, 1983. It must be kept in view that the original facilities granted by the bank to the company even prior to the filing of the first winding-up petition stood at Rs. 9,48,75,000. SBI was a secured creditor for this amount from the very beginning. After the first winding-up petition, all that has happened is that as the company in order to keep its head above water was in need of more and more finance, certain limits of facilities were exhausted and that resulted in an overrun which went on galloping and skyrocketing and reached the highest figures of Rs. 1,72,53,791.78 by October, 1983, and in December, 1983, the manufacturing activities of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 118 lakhs which is sought to be given by SBI under the package deal for reviving the unit. It must, therefore, be held that all the aforesaid documents (annexures A to C) have been entered into with a view to seeing that the company revives and continues to be a going concern and have been bona fide entered into in the ordinary course of business of the company. The documents (annexures A to D) have been executed during the time when the company was practically sinking and they reflect a heroic attempt to pull out the company from its bad shape when large overruns of various facilities were being provided during the day to day working of the company, while the last three documents (annexures E F G) have been executed as a part of the package scheme by which rehabilitation assistance of Rs. 118 lakhs has been offered by SBI with a view to seeing that the company whose manufacturing activities have died down may revive and may again become healthy and start kicking. It must be noted that even though the company's manufacturing activities came to a grinding halt in December, 1983, after issuance of relief undertaking notifications, manufacturing activities have been partially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to fall back upon. If these creditors are pushed to the background by secured creditors like SBI which by extension of mortgage and hypothecation can very well be visualised as displacing all other creditors, even then, the petitioning creditors who are objecting to those applications cannot be said to have suffered irreparably in the sense that they were otherwise also unsecured creditors while SBI was a secured creditor worth at least more than Rs. 9 crores even before the filing of the first winding up petition. SBI was a wholly secured creditor having all the movable and immovable properties of the company in its charge. Objecting creditors were at the end of the queue being essentially unsecured creditors. They were already displaced by SBI. If they are displaced any more, it would not substantially alter their position which even otherwise was bleak and it would remain the same while if the applications are granted and the company gets a fair chance of revival, at least 1,900 workers who are otherwise unemployed would get their livelihood. On an average of three members per family of workman, at least 5,700 souls who are otherwise starving and who have nothing else to fall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up, within the twelve months next before the commencement of the winding up or at any time thereafter, conceals any part of the property of the company of the value of one hundred rupees or upwards, or conceals any debt due to or from the company or within the twelve months next before the commencement of the winding up or any time thereafter, fraudulently removes any part of the property of the company of the value of one hundred rupees or upwards, he shall be punishable in the case of any of the offences mentioned above with imprisonment for a term which may extend to two years or with fine, or with both. Section 542 of the Act deals with liability for fraudulent conduct of business by the concerned persons in charge of the company's affairs. Section 543 deals with the power of the court to assess damages against delinquent directors, etc . It is, therefore, obvious that if in any future proceedings, it is found that the concerned directors had misapplied the company's funds and had incurred liabilities, both criminal and civil, as laid down by the aforesaid provision, they will have to face the music and they cannot escape the same, merely because the present applications are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is found that the company which is sought to be wound up had disposed of the property in favour of the creditor with a view to seeing that its ordinary course of business does not get disrupted, the matter ends so far as section 536(2) proceedings are concerned. This court is not concerned with the disciplinary jurisdiction which the SBI may exercise over its delinquent officers. It is entirely their domestic matter. If some of the bank officers allowed certain facilities given to customers to get overrun, it would be open to the bank to take proper steps against the concerned officers. This court is not concerned with the same. Even if these transactions between the company and the bank get validated in the present proceedings, the alleged default and negligence of the concerned bank officers for allowing the overrun to grow would still remain a matter for inquiry by the concerned bank against its officers. Whether the bank should inquire into the same or not is entirely a domestic question of the bank. This court is not concerned with the same. The objecting creditors are not holding a brief on behalf 6f the employer bank with a view to upholding discipline and proper worki ..... X X X X Extracts X X X X X X X X Extracts X X X X
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