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TMI Blog1985 (1) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... cing 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 loss of Rs. 2.50 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 after the order without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 documents accepting these institutions as secured creditors. The present applications are filed under section 536(2) of the Act by way of abundant caution by the company with a view to seeing that if ultimately the winding-up petition gets through, these transactions in favour of the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 Application No. 4801 of 1984. The aforesaid three objections were raised by way of preliminary objections. On merits, further objections were raised as under: (4)The present applications should be dismissed as the company has not given any details about various transactions which it has entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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, under the Relief Undertaking Act came to be issued. These notifications are still current. However, merely because such notifications have been issued and all proceedings for enforcement of claims of creditors against the company have been stayed, it does not mean that the company cannot file an application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 permission of the Division Bench will have to be obtained by the company in the aforesaid writ petition before the entire scheme of rehabilitation assistance becomes fully operative for the company. The third preliminary objection also, therefore, stands repelled. So far as the objections on merits are concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant 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 record must be given to the objecting creditors represented through their learned counsel. So far as the fifth objection is concerned, it was vehemently submitted that the transactions in question which are sought to be validated have not been bona fide entered into for the purpose of running the concern and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urton 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. The court would not, except in the case of proven bad faith or other exceptional circumstances, interfere with the discretion conferred on the directors by a company's articles of association at the instance of a contributory even if a winding-up petition had been presented." In the aforesaid case, a private limited company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 done to those interested in the assets of the company, it would be in the discretion and duty of the court to validate such transactions." In the light of the aforesaid settled legal position, it is necessary to scrutinize various transactions entered into by the applicant company in favour of the financing bank, SBI. As alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 crores was to be given any more finance by the financing bank, SBI, it would be in the fitness of things and quite natural that the bank would insist that the company for being given any more facility for financial assistance, must adequately secure the financier and that assistance obviously would go a long way in keeping the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvited 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 overrun of the relevant facilities which went on mounting month by month clearly shows that the company's finances were in a very bad shape and for keeping the company as a going concern, more and more finance had to be sunk by the financing bank so that the company may not ultimately stop its manufacturing activities. However, unfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 company died down. It must, therefore, be held that all the aforesaid documents, annexures A, B, C and D, have been entered into by the company during the time it was facing an acute financial crisis and was quickly moving down the hill of economic progress and was hitting rock bottom. During that time, more and more financial facilities wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 resumed from September 8, 1984, and as the record shows, about 400 employees who were otherwise unemployed have been re-employed and if the entire rehabilitation loan of Rs. 118 lakhs as offered by SBI and Rs. 65 lakhs as offered by the IDBI and IRCI are made available to the company on the company executing necessary further documents in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 back upon, may get a fair chance of survival. For these unemployed workers, there is no other alternative. For these unemployed, the mill is the only source of livelihood. Once they are thrown out of employment, they are nowhere. Under these circumstances, it is difficult to appreciate the grievance made by the objecting creditors against granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently 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 granted under section 536(2) of the Act. Mr. G.N. Shah for the company rightly agreed to this legal position. He stated that despite the grant of these applications, if it is ultimately shown that the concerned directors misapplied the funds which were supplied by SBI for running the company and had misconducted themselves in conducting the affairs of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 working of various branches of the bank. Under these circumstances, even the last objection put forward by the objecting creditors must be repelled offhand both on the ground that it is irrelevant as well as on the ground that it is beside the point and does not have any impact on the moot question as to whether these applications should be granted under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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