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TMI Blog2012 (4) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... kes a mockery of the process of law and exhorts the court to not merely sit by and endorse the alleged corrupt practices indulged in by the management. As in every case under Section 450 of the Companies Act, 1956, the basis of the petitioning-creditor's claim has first to be, prima facie, assessed and then the other grounds looked into. It is only upon finding a seemingly unimpeachable claim, that the court can proceed to investigate into the additional factors cited; for, the appointment of a provisional liquidator is an exceptional order. The claim in this case is founded on a transaction for supply of goods by the petitioningcreditor to the company and the company's admission of a part of the dues in a draft rehabilitation scheme that was placed before the Board for Industrial and Financial Reconstruction (BIFR) in course of a reference relating to the company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The petitioning-creditor says that its claim in the present proceedings is limited to the admission in the draft rehabilitation scheme of slightly over Rs.2 crore and it has lodged a suit elsewhere in this court for its balance claim. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited). Even during the period April, 2000 to May, 2001 the petitioning-creditor had sold and supplied further goods to the company against immediate payment. The petitioning-creditor has referred to a writing apparently issued on March 20, 2001 by the company, acknowledging that the amount then outstanding from the company to the petitioning-creditor was in excess of Rs.6.10 crore. It is, however, the admitted position that the petitioning-creditor obtained leave under Section 22(1) of the said Act of 1985 from the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) to institute legal proceedings against the company for recovering an amount in excess of Rs.2.03 crore. At paragraph 25 of the present application, the petitioning-creditor has referred to the date of the AAIFR order as May 20, 2003. The quality of the company's defence is typified by the second sentence in paragraph 10 of its affidavit dealing with paragraph 25 of the application: "10. ... I say that it is a matter of record that the AAIFR had granted leave to the applicant to recover the alleged outstanding to it by the company over and in excess of Rs.2.03 crores as alleged or at all." In purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 22 of the plaint if the petitioning-creditor made the entire claim in the suit, including the sum of Rs.2.03 crore that was allegedly admitted in a draft rehabilitation scheme submitted by the company in course of the reference before the BIFR, and an application for summary judgment in the suit has resulted in the company being required to deposit only a sum of Rs. 1 crore to defend the suit, the company's right to defend the claim of Rs.2.03 crore which is the subject-matter of the present winding-up proceedings has been recognised and the alleged undeniable character of the claim for Rs.2.03 crore has been destroyed. The company emphasises that if the suit court was given the impression that the entirety of the petitioning-creditor's claim was before it and the application for summary judgment in the suit culminated in only a deposit of Rs.1 crore being directed to be furnished, it is not open for the petitioning-creditor to assert or attempt to recover a part of the claim that has been included in the suit in any separate proceedings. The company would have been absolutely right in such assertion had the claim of Rs.2.03 crore made in the present proceedings been include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n May 5, 2011. More importantly, and contrary to the impression that the company attempts to convey, the suit court was alive to the fact that the petitioningcreditor's claim was restricted to what the petitioning-creditor perceived to be due from the company over and above the amount of Rs.2.03 crore that had been admitted by the company in the draft rehabilitation scheme. The same is evident from the following passage from the order dated June 21, 2005: "In the scheme the defendant has provided for payment of a sum of Rs.2.03 crore and the rest of the balance claim viz 3,61,54,627.54p was allowed by granting leave to be recovered in accordance with law. Hence, the suit has been filed by the plaintiff for recovery of above portion leaving the balance portion for recovery under the scheme." Since it is now evident that the claim for Rs.2.03 crore made in the present winding-up proceedings is not covered by the petitioning-creditor's previous suit for recovery of money against the company, it remains to be assessed, prima facie, as to whether the company has, or has been able to indicate, any defence to such claim for Rs.2.03 crore. A draft rehabilitation scheme is prepared in cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of tyres and tubes. It was operating profitably upto 1991-92 whereafter downtrend continued leading to closure of operations in February 1998 DIL made reference to BIFR u/s 15(1) of SICA in January 98 on the basis of its accounts for the financial year ending 31.3.97. The net worth of DIL as on 31.12.97 was held not to have been eroded. However, on 22.6.98, considering DIL's accounts as on 31.12.97, BIFR declared it sick. Thereafter, several developments took place: (a) litigation before AAIFR, Hon'ble High Court of Kolkata, Hon'ble Supreme Court of India; (b) failure of opportunity given for revival package u/s 17(2) of SICA; (c) appointment of IDBI and OA u/s 17(3) of SICA; (d) techno-economic viability study (TEVS) report by Tata Economic Consultancy Services (TECS) in June 2000; (e) asset valuation and valuation of shares by M/s Shah Gupta & Co. in March 2000 and by M/s Haribhakti & Co. in September 2000; (f) DIL's negotiations with workers' unions followed by Memoranda of Understanding (MOUs) with them; (g) formation of Assets Sale Committee (ASC) by BIFR for the disposal of surplus assets; (h) restart of the plants in 2000 by promoters by induction of Rs.26 cr and subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owning industrial undertakings) and the expeditious enforcement of the measures so determined," has been consistently abused and misused to be reduced to a tool of oppression, including against the employees that the Act seeks to protect, with references thereunder having nothing to do with speed or expedition. The manner in which the Act has been distorted and battered beyond recognition to be used as an engine of persecution against those that it seeks to protect is exemplified in the story Dunlop India Limited and its reference before the BIFR. During the pendency of the reference before the BIFR, the majority shareholding in the company was transferred to the persons now in control thereof in or about the year 2005. During the following financial year, 2006-07, a series of measures was adopted by the new management of the company as a part of a vicious and malafide design to cheat its creditors, deceive all authorities and, worst of all, hurt its employees, particularly the workmen at the two manufacturing facilities of the company in Ambattur near Chennai and Sahaganj near Calcutta. Even as creditors of the company, be they trade or statutory creditors or employees and workme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f commercial corruption that this country would have seen. The petitioning-creditor says that the misdeeds of the company, or those in management thereof, would be evident from the balance-sheets and other statutory documents of the company and its related business concerns and from the minutes of the meetings held before the BIFR. The petitioning-creditor refers first to the summary record of the proceedings of the hearing held before the BIFR on July 23, 2007. Apart from the company, representatives of the Government of West Bengal, operating agency State Bank of India, secured creditors Catholic Syrian Bank Limited and Punjab National Bank, the workers' union and several other creditors of the company attended the hearing. The minutes record that at a hearing held before the BIFR on April 11, 2007, the BIFR "had observed that the company needed to have close interaction with the OA in order to finalise formulation of the DRS ..." The BIFR recorded that at such previous hearing it had observed "that the company had to provide specific information with regard to (i) infusion of funds so far made by the new promoters; (ii) subscription of rights issue as permitted by the Bench vid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the company should not be de-registered from BIFR till it gains health through improved business operations." "8. The Advocate representing CSBL submitted that the Bank had not received a copy of the company's application for de-registration and requested that a copy of the same be given to the Bank. Although BIFR had constituted an Asset Sale Committee (ASC), it had not specified which assets were allowed to be sold. Thus any sale of assets by the company had been done behind the back of BIFR/ASC/secured creditors. Further, as the company was not paying the Banks dues and had already alienated some of its assets, Counsel for CSBL prayed for permission u/s 22(1) of SICA to proceed legally for recovery of their dues." "19. Counsel for PCBL and HTC further submitted that DIL has requested for de-registration based on its balance-sheet as on 28.2.2007 which is not a regular balance-sheet as it has no Auditor's report and is based only on an Auditors' certificate. Section 227 of the Companies Act specifies the powers and duties of Auditors in terms of which extensive comments are required to be made by the Auditors, with definite reports having to be submitted. The accounts ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whom it is to be issued. From Schedule-17B(2) Notes to Accounts it appears that certain assets of the company have been transferred/sold to its wholly owned subsidiaries/others. The company is directed to explain why this has been done without the permission of BIFR when restrictions u/s 22A of SICA were in force and further, why action should not be taken against the company/its Directors/officials u/s 24 of SICA and the sale/transfer nullified. The company should also explain whether valuation of the assets was done and reserve price fixed, advertisements given as required and whether the assets were transferred/sold through a transparent bidding process through the ASC. The company is further directed not to dispose of any assets without the permission of BIFR." The BIFR declined the company's prayer for de-registration of the reference and directed the company to submit certain particulars and explanations on several points, including whether the decrease in the current liabilities of the company from Rs.121 crore to Rs.20 crore was on account of actual payments made to trade creditors or it reflected a substantial amount having been written off with or without the consent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the writ proceedings, could not have taken any coercive measures against the company or its goods. The Madras High Court noted that though the net worth of the company was negative for the ten financial years up to the year ended March 31, 2006, the balance-sheet of the company showed that for the year ended March 31, 2007 its net worth was a positive sum of Rs.242.65 crore. The court noticed that a financial restructuring had been undertaken by the company following which its net worth had become positive and observed that notwithstanding the BIFR and AAIFR orders, the BIFR "cannot retain its jurisdiction over the petitioner company any further." The court read the 1985 Act to imply that there was no necessity to apply "for de-registration of a reference when net worth becomes positive wiping out the accumulating loses ...(and) there is no question of BIFR being concerned with the sick company any longer." Though the writ petition was dismissed on such ground, the order had the incidental effect of absolving the company of any obligation to explain its conduct of alienating its immovable properties without so much as a "by your leave" of the BIFR. Buoyed by such order, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of Dunlop Properties for the year ended March 31, 2008 reveals that it had cash and bank balance of Rs.1,000/- and it had obtained loans and advance of Rs.33,000/-. Dunlop Properties does not appear to have carried on any business during the relevant financial year and it had incurred preliminary expenses of Rs.4.28 lakh in such period. The petitioning-creditor has relied on a copy of the form No. 8 relating to creation or modification of charges that was filed by Dunlop Properties with the Registrar of Companies sometime after September, 2008. The company has not questioned the veracity of the document. The document reveals the creation of a charge by Dunlop Properties by way of a registered deed of mortgage. The petitioning-creditor says that the charge was obviously created in respect of the only property standing in the name of Dunlop Properties which had been acquired from Dunlop India Limited. The charge was created on September 26, 2008 for securing an amount of Rs.575 crore. The document describes the immovable property as the land admeasuring 58.52 acre in Athipattu village in Chennai's peripheral district of Ambattur "to secure the facilities sanctioned to Shalini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mauritius company against a consideration that is not known as the company does not volunteer any information in such regard. The petitioningcreditor's perception of daylight robbery in the company is vindicated and the transaction lends support to the petitioning-creditor's request for a provisional liquidator to be immediately appointed over the company. The Ambattur property transaction was not a solitary, one-off case of the company being stripped of a valuable property against virtually no consideration at all and the property being made over to an entity controlled by the same management. The same scheme has been adopted in respect of another property of ostensible value of Rs.60 crore that was sold off in favour of another company controlled by the same management around the same time. The balance-sheet of Dunlop Infrastructure Private Limited (hereinafter referred to as Dunlop Infrastructure) for the year ended March 31, 2008 reveals that it had issued 6,10,000 shares of Rs.10/- each fully paid up. Dunlop Infrastructure's cash and bank balance was of value of Rs.10,000/- at March 31, 2008. The related parties disclosure in its notes on account forming part of the same bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r referred to as Bhartiya Hotels) declares in its balance-sheet for the year ended March 31, 2008 that it had land and building of value of Rs.150 crore that appears to have been acquired in financial year 2006-07. The notes on accounts in the same balance-sheet contain a similar list of related parties as in Dunlop Properties, Dunlop Infrastructure and Dunlop Estates. According to the same balance-sheet, Bhartiya Hotels had not commenced its commercial activities till March 31, 2008. But Bhartiya Hotels had purchased land "worth Rs.150 Crores from Dunlop India Limited, and allotted 15,00,000 Equity Shares of Rs.10/- each at a premium of Rs.990/- per share towards consideration." The shares in Bhartiya Hotels that were allotted to Dunlop India Limited were, in course of financial year 2008-09, substantially transferred to Rapid Investments Limited, another Mauritius company, as is evident from the balance-sheet of Bhartiya Hotels for the year ended March 31, 2009. Though the issued share capital in Bhartiya Hotels remained the same as at March 31, 2011 as it was at March 31, 2009, the shares held by its holding company increased by about four per cent by the end of financial year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions were in breach of the provisions of the said Act of 1985, they are good enough grounds to be cited to seek the appointment of a provisional liquidator over the company. It must not be lost sight of that Dunlop India Limited is a listed company and its controlling shareholding may not even constitute fifty per cent of its paid-up capital. Since the four immovable properties have been alienated from the company and parked with entities under the exclusive control of the group holding the controlling shareholding in the company, such act would also amount to gross mismanagement qua the other shareholders of the company and be seen as a fraud on such other shareholders. The petitioning-creditor has referred to a judgment reported at 63 Comp. Cas. 299 (Canara Bank v. Brunton and Company Engineers Limited) that set out some of the relevant considerations for the appointment of a provisional liquidator over a company as it quoted from Pennington's Company Law (4th Ed.) as follows: "The purpose of making the appointment is to preserve the company's assets and to prevent the directors from dissipating them before a winding up order can be made. It has been said that a provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 450 of the Companies Act is to be exercised has statutory support, inter alia, in Sections 397 and 398 of the Companies Act that deal with oppression and mismanagement, respectively. The consideration as to public interest will be even more relevant if the company is a listed company. Dunlop India Limited was once a blue-chip company that now appears to be in the clutches of a marauding bunch of corporate predators which is single-mindedly devoted to stripping the company bare of its assets while leaving the company's creditors, employees and workmen in the lurch. The company has made no attempt - none at all - to show that the said four transactions were necessary or they were made in the interest of the company or for the purpose of augmenting resources to discharge the company's debts. Indeed, the company's resources were not enhanced upon the company being denuded of the four properties. As noticed above, two of the creditor's winding-up petitions against the company have been admitted and advertised and a third has been pending from before a reference relating to the company was made to the BIFR. Under Section 441(2) of the Companies Act, the winding up of a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors of the company being taken up at the post-advertisement stage in two of the petitions, the company has filed an affidavit through Ashok Kumar Agarwal affirmed on January 6, 2012 wherein it has furnished three lists detailing what according to the company are the amounts outstanding to its secured creditors, the value of its present assets and the extent of its statutory liabilities. In the list pertaining to its secured creditors, the company has shown a total outstanding of Rs.127 crore, though the figure appears to have been depressed as at least one of the secured creditors, Catholic Syrian Bank, has asserted that it has a claim of Rs.42 crore against the company whereas the company has acknowledged only Rs.7.5 crore in the list. In the list pertaining to its assets, the company has claimed the value of the assets to be Rs.1,339 crore, including inventory of value in excess of Rs.50 crore that is primarily made up of the perceived worth of raw materials that the company holds. In the list of statutory liabilities, the company has shown a total amount of about Rs.26 crore, including workmen's wages in excess of Rs.1 crore and gratuity as per actuarial valuation in excess of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble High Court at Madras, the Appellate Authority for Industrial and Financial Reconstruction and all the shareholders of the company and the public at large. Thus, there was no clandestine sale or transfer by the company." According to the same affidavit by the company, it has 850 workmen at its Sahaganj factory and 550 workmen at its Ambattur manufacturing facility. In addition, the company has another 100 managerial or administrative employees in its rolls. Both the Sahaganj and the Ambattur factories are now closed, according to the company. The Sahaganj workmen have not been paid their wages after July, 2011 and the Ambattur workmen after January, 2012. The State says that it pays the Sahaganj workmen Rs.1,500/- per month as dole. The State maintains that there has been no commercial production at Sahaganj since the year 2005 through the factory has been intermittently opened during the interregnum for apparent "cleaning up" operations by the company. The State insinuates that the company may have opened the Sahaganj factory at times for other reasons. The State says that its electricity utility has a claim of Rs.11.20 crore in respect of the Sahaganj factory; the We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty governed by the Constitution which spells out its aspirations and even a sense of morality, no constitutional functionary - far less a court owing not only allegiance but its existence to it - can condone the acts of graft that have come to light. The company and its management may appear to be unconcerned upon the discovery of the brazen acts of defalcation, doubtless inspired by the perception of corruption elsewhere in the society; but even without elevating the discussion to a moral highground, it is apparent that the assets of the company are in serious jeopardy in the hands of those at present responsible for protecting the same. If the workmen of the company have a paramount charge over its assets for their dues and stand at par with the secured creditors of a company even in respect of the secured assets, the immediate appointment of a provisional liquidator is called for over the company with full authority as liquidator. The more sagacious judicial pronouncements instruct that a judgment should not betray any agitation on the part of the judge and should not be intemperate in its expression. But public interest demands at times that a cheat be described as such for hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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