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TMI Blog2011 (10) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... een made out, this company application is dismissed - COMPANY APPLICATION NO. 243 OF 2011 COMPANY PETITION NO. 1068 OF 1997 - - - Dated:- 14-10-2011 - S.C. DHARMADHIKARI, J. Virag Tulzapurkar, Cyrus Ardeshir and Tapan Deshpande for the Applicant. J.P. Camaand K.S. Bapat for the RMMS. Ms. Jane Cox for the Head Office. Dr. T. Pandian for the Official Liquidator. JUDGMENT 1. This Company Application invokes the powers of this Court under section 466 of the Companies Act, 1956 ("Act" for short). The Application is by the Applicants who are a Public Limited Company, namely, Forbes Company Ltd. and a Private Limited Company Grand View Estates Pvt. Ltd., both registered under the Act. They have prayed that order dated 5th September, 2005 passed by this Court of winding up the Swadeshi Mills Company Ltd. (company in liquidation), be permanently stayed and the applicants be permitted to deposit with the Official Liquidator attached to this Court an aggregate sum of Rs. 86 crores as per the chart at Annexure A to the application. Then, there are further prayers for making payment of this sum to the secured creditors, workers and employees of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( b ) 98,50,000 ordinary shares of Rs. 10 each 9,85,00,000 Total ISSUED, SUBSCRIBED AND PAID UP: 77,95,450 ordinary shares of Rs. 10 each fully paid 7,79,54,500 Total 7,79,54,500 4. The company, prior to its winding up, was operating as a composite textile mill, having spinning, weaving and processing sections for the manufacture of cotton, synthetics, interlining and non-woven fabrics. It was engaged in the textiles business for more than 10 decades. It enjoyed a strong goodwill in the market and had drawn inspiration from Swadeshi movement of India. The operations of the company started deteriorating from 1982, because of prolonged textile strike in Mumbai, increase in cotton prices and recessionary conditions in the cotton textile industry. Factors like technological changes, high labour cost, higher cost of funds, sluggishness in textile industry and competitive disadvantage of mill against unorganized sector etc. further deteriorated the financial condition of the company. 5. In the year 1997, Ralli Brothers and Coney filed a petition in this Court for winding up of the company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cost of security agencies, other related expenses, part payment of the dues of the workers and employees dues and part payment of the statutory dues and that of these secured creditors. 7. The winding up order is then referred to and then in para 7 of the affidavit in support, this is what is stated: "In recent years, the Government of Maharashtra has initiated various activities for the promotion and facilitation of development of mill lands in Mumbai. Increasing the availability of housing has also been a thrust area. The said initiatives, along with the available immovable properties of the Company together, offer a favourable platform for the company to undertake real estate development operation. Though the company was in textiles business prior to winding up, due to disposal of all the stock in trade and entire plant and machinery, it is no longer viable to run the business as a manufacturer of textiles. In the present circumstances, in Mumbai even otherwise a textile mill is not viable. The applicants are part of the Shapoorji Pallonji Group, Shapoorji Pallonji Group has expertise in the real estate business and, therefore, intends to enable the company to under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Official Liquidator from the sale proceeds, that the package of additional amount has been drawn. 10. A reference is also made to the claim of the workers and employees affiliated to the Mumbai Mazdoor Sabha, claim of unsecured creditors, other claims and the total liability aggregating to the applicants is Rs. 86 crores. Although, advertisements were published inviting claims from various creditors other than those which are referred, none have been received and it is on this basis that the computation of Rs. 86 crores has been arrived at. It is stated that the applicants are part of Shapoorji Pallonji Group, who are experts in the business of construction, infrastructure and real estate. It is stated that the company is not in a position, now to carry on textile business as the entire finished goods, plant and machinery have been already sold. There is always a scope for diversification and in the present circumstances when in the city of Mumbai, no textile manufacturing business is feasible or practicable that the applicants prayed that this application be allowed. 11. Mr.Tulzapurkar, learned senior counsel appearing on behalf of the applicants invites my attenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that this application be allowed. Mr.Tulzapurkar has placed reliance on the following decisions in support of his above contentions: (1) Vasant Investment Corpn. Ltd. v. Official Liquidator, Colaba Land Mill Co. Ltd . [1981] 51 Comp. Cas. (Bom.) 20; (2) Textile Labour Association v. Official Liquidator of Jubilee Mills Ltd . [2000] 99 Comp. Cas. 189 (Guj.); (3) Maharashtra State Textile Corporation Ltd. v. Gopal Balu Saikar , since deceased by his heirs another [Writ Petition No. 4998 of 1987, decided on 7.1.2003]; (4) P. Chandrasekharan v. Official Liquidator of Ahmedabad Mfg Calico Ptg. Co. Ltd. [2009] 150 Comp. Cas. 829/[2010] 98 SCL 188 (Guj.); (5) Shaan Zaveri v. Gautam Sarabhai (P.) Ltd. [2009] 150 Comp. Cas. 499/[2010] 97 SCL 351 (Guj.). 13. On the other hand, Ms.Jane Cox submits that she is appearing on behalf of 748 workmen. Each one of them have lodged their claim with the Official Liquidator. Each one of them is entitled to the amount in accordance with law. As far as their dues are concerned, there has to be a adjudication by the Official Liquidator. She invites my attention to the report of the Official Liquidator and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or Memorandum of Understanding. This amounts to contracting out of a statue and giving up the statutory benefits permanently. She, therefore, submits that merely because a Memorandum of Understanding has been executed by the applicants with the Rashtriya Mill Mazdoor Sangh, that by itself will not enable the Court to exercise its discretionary powers under section 466(1) of the Companies Act, 1956. By unilateral act of parties, this Court cannot be called upon to exercise its discretion in granting permanent stay of the winding up. She submits that different considerations and tests will have to be applied and there is no right vested in the applicant to seek permanent stay of winding up and particularly on the grounds which are set out in the affidavit in support. She submits that in this case, the discretion should not be exercised because the applicants are not reviving the company in liquidation. They are interested in exploiting immovable assets and properties of the company. She submits that after the manufacturing activities have stopped, the plant and machinery has been sold according to the applicants, then, all that they are interested in, is the land. They propose to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956. Merely to by-pass the same, that this application is filed. Once their intent is as aforestated, then, the application may be dismissed and the Official Liquidator should be directed to take steps to sell the assets and properties in winding up. It will be more beneficial for the creditors of the company including these workers. Ms.Cox, therefore, submits that the application be dismissed. 17. Ms.Cox relies upon following decisions in support of her contentions: (1) Shree Niwas Girni Kamgar Kruti Samiti v. Rangnath Basudev Somani [2005] 127 Comp. Cas. 752/ 62 SCL 175 (Bom.) 18. Mr.Cama, learned senior counsel appearing on behalf of the Rashtriya Mill Mazdoor Sangh states that the Sangh represents 2800 workers. He submits that the plight of the workers is deplorable. They have not earned any wages from 2001. The company has been wound up in 2005. There are no benefits. The claim as stated by Ms.Cox is highly inflated and there are no documents to justify figure of Rs. 5,000 crores. This is not an admitted sum. Mr.Cama submits that on the other hand, by virtue of Memorandum of Understanding and the efforts initiated by Rashtriya Mill Mazdoor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after making a winding up order, on the application either of the Official Liquidator or of any creditor or contributory, and on proof to the satisfaction of the Tribunal that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the Tribunal thinks fit. (2) On any application under this section, the Tribunal may, before making an order, require the Official Liquidator to furnish to the Tribunal a report with respect to any facts or matters which are in his opinion relevant to the application. (3) A copy of every order made under this section shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the Registrar, who shall make a minute of the order in his books relating to the company." 22. Perusal thereof would indicate that the Court may at any time after making a winding up order on the application either of the Official Liquidator or of any creditor or contributory and on proof to the satisfaction of the Court, that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their claims with him within such period as may be prescribed and permit the Official Liquidator to adjudicate and pay such claims in accordance with law. 25. Thus, there is a situation where the Rashtriya Mill Mazdoor Sangh on the strength of the Memorandum of Understanding executed with the applicants dated 15th November, 2010, seeks to press the claims of those workers who are covered by the Memorandum of Understanding and whose consent and letter of Authority/acceptance has been forwarded by it to the Official Liquidator. On the other hand, there are bout 700 and odd workers who do not wish to abide by Memorandum of Understanding but are pressing for adjudication of their individual claims in accordance with law. 26. To my mind, as far as the contentions of Mr. Cama on the issue of locus of the workers represented by Ms.Cox is concerned, that is a matter which need not be gone into and decided in this application. The status of Rashtriya Mill Mazdoor Sangh as a representative/recognised union, would hold good or not, is a matter which must be left for the Official Liquidator to decide. It will be open to him to scrutinise such material as is placed by the parties and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p petition was filed against the company and a winding up order came to be passed on 5th July, 1988. The Liquidator took possession of the company and he filed a complaint against the Ex-Directors including Nilkanth Kolay for taking cognizance and for punishment of the offence of not filing the statement of affairs in terms of section 454 of the Act. The summons was served and Nilkanth appeared in pursuance thereof. He thereafter stating that there are three contributories and during the course of hearing of the appeal against an order on the winding up petition and when directions were issued for sale of the properties, belatedly made an application on 20th January, 1992 under section 466 of the Companies Act, 1956. That application was made before the Appellate Court and that is how the matter was remanded for a decision on that application in terms of section 466 of the Companies Act, 1956. The learned Single Judge of the Calcutta High Court made reference to earlier decisions of the said High Court summarising the principles as under: "23 .... "Therefore, from the above principles which have been summarised in different authorities and the decision referred to hereinbefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this section. The company, however, independently of the Liquidator, does not appear to me to have any locus standi in such an application. The section requires proof of the satisfaction of the Court that all proceedings in relation to the winding up ought to be stayed. What has happened to justify a stay of proceedings? I have already dealt with and rejected the allegations of collusion between Shiva Prosad and Manabendra and the suppression of service of the petition. Has anything happened since the order was made? All that has happened is that the petitioning creditor has been satisfied, not by the company but by Dulichand a creditor of the company. But is the satisfaction of the petitioning creditor's debt by itself sufficient to stay the winding up when there are other creditors? It is said that Dulichand who in his firm of Murarilal Dulichand claims about Rs. 90,000, Jewraj Ram Kissen who claims about also Rs. 90,000 and is represented by Mr. M.N. Banerjee are supporting this application. On the other hand there is the creditor Manabendra. Manabendra claims to be a creditor in the sum of Rs. 5,24,651/-. It is probable that he agreed to accept Rs. 25,000/-. I do not propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders have full knowledge of what has been done." "The summary of the law is based on the observation of Buckley, J in the case of In re: Telescriptor Syndicate Ltd. , (1903) 2 Ch.174 pp.180-181: (72 LJ Ch 480), wherein reference was made to the Trenchand observation of French, L.J. in the earlier case of In re: Hester , (1882) 22 QBD 632 at p.641 : (60 LT 943). I, therefore, proceed to consider the facts in the light of these principles." 29. Thus, the broad principles are that the Court must be satisfied on the materials before it that the application is bona fide , mere consent of all creditors for stay of winding up is not enough; that offer to pay in full or make satisfactory provisions for payment of the creditors is not enough; the Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories; the Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation; the jurisdiction for stay can be used only to allow in proper circumstances a resumption of the business of the company and the Court is to consider whether proposal for revival of the company is for the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their activities, began to be increasingly recognised. It began to be realised that the company is a species of social organisation, with a life and dynamics of its own and exercising a significant power in contemporary society. The new concept of corporate responsibility transcending the limited traditional views about the relationship between management and shareholders and embracing within its scope much wider groups affected by the trading activities and other connected operations of companies, emerged as an important feature of contemporary thought on the role of the corporation in modern society. The adoption of the socialistic pattern of society as the ultimate goal of the country's economic and social policies hastened the emergence of this new concept of the corporation. The socio-economic objectives set out in Part IV of the Constitution have since guided and shaped this new corporate philosophy. We shall presently refer to some of the Directive Principles of State Policy set out in Part IV which clearly show the direction in which the corporate sector is intended to move and the role which it is intended to play in the social and economic life of the nation. But, one th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own and it must not be regarded as the concern primarily or only of those who invest their money in it." Pt. Govind Ballabh Pant also pointed out in one of his speeches: "... ... ... industry is not an isolated concern of the shareholders or the managing agents alone. It reacts on the entire people in the country, on their economic conditions, on employment or standard of living, on everything that conduces to the material well being." The same view was also expressed at the International Seminar on Current Problems of Corporate Law, Management and Practice held in New Delhi where it was observed that "an enterprise is a citizen. Like a citizen it is esteemed and judged by its actions in relation to the community of which it is a member as well as by its economic performance." That is why it is regarded as one of the paramount objectives of a company to bring about maximisation of social welfare and common good. This necessarily involves reorientation of thinking in regard to the duties and obligations of a company not only vis-a-vis the shareholders but also vis-a-vis the rest of the community affected by its operations such as workers, consumers and the Government re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t performs a collective action for the common good. In recent years a debate is going on in the world at large on the functions and foundations of corporate enterprise. The "preservationists" and the "reformers" are vigorously propounding their views on the possible reform of company, the modern trend emphasising the public interest in corporate enterprise." The learned Judge elaborated this "modern trend" by quoting from Prof. Gower's book on "The Principles of Modern Company Law": "One section of the community whose interests as such are not afforded any protection, either under this head or by virtue of the provisions for investor or creditor protection, are the workers and employees of the taken-over company. This is a particularly unfortunate facet of the principle that the interest of the company means only the interest of the members and not of those whose livelihood is in practice much more closely involved." 31. Lest it may be said, that after globalisation, liberalisation and privatisation so also the change in economic scenario since 1990, these principles may no longer hold good, in a judgment which was once again delivered by five Judges Bench of the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishments or other organisations engaged in any industry. It is in this context of changing norms and waxing values that one has to judge the workers' demand to be heard". (p. 958) (of (1983) 1 SCR 922) : (at p. 83 AIR 1983 SC 75). 47. Similarly, Baharul Islam, J. has observed: "Our 'Democratic Republic' is no longer merely 'Sovereign' but is also 'Socialist' and 'Secular'. A Democratic Republic is not Socialist if in such a Republic the workers have no voice at all. Our Constitution has expressly rejected the old doctrine of the employers' right to 'hire and fire'. The workers are no longer cipher; they have been given pride of place in our economic system". (p.980) (of SCR) : (at p.105 of AIR). 32. Once again, the view in the case of P.R. Ramakrishnan ( supra ) has been followed and applied. In a later decision reported in L.I.C of India v. Consumer Education and Research Centre AIR 1995 SC 1811, the Hon'ble Supreme Court held thus: "In National Textiles Workers' Union etc. v. P.R. Ramkrishnan 1983 (1) SCR 922, the Constitution Bench per majority held that the socio-economic objections set down in the directive principles of the Constitution should guide and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets and properties of the company in liquidation will always make an attempt to get out of the clutches of the company Court so as to have a free hand in dealing with the assets and properties of the company. The erstwhile directors, shareholders and other stake-holders including influential secured creditors would be interested in either putting an early end to the affairs of the company in liquidation or by taking advantage of the delay seek to take charge or intermeddle in the affairs and matters relating to winding up in an indirect or oblique manner. The very purpose of the Act is defeated if such attempts are allowed to succeed. Section 447 of the Companies Act, 1956 states that an order for winding up of a company shall operate in favour of all the creditors and all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. 34. The provisions of the Companies Act, 1956 commencing with the presentation of a petition for winding up, go to show that the company Court has very wide powers. It can dismiss such petition with or without costs. It can adjourn its hearing conditionally or unconditionally. It can make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcised by him with the sanction of the Court and that is evident by section 457. In section 457, in sub-section (1) in addition to clauses ( a ) to ( c ), clause ( ca ) has been added by Act 11 of 2003 and that confers power on the Official Liquidator to sell whole of the undertaking of the company as a going concern. This is evident by the fact that once the Liquidator has taken custody of the property and puts it under the control of the Court, he can with the sanction of the Court and to ensure effective so also proper winding up of its affairs, sell whole of the undertaking of the company as a going concern so as to enable him to meet the claims that may be received from all the creditors. There is a discretion in the Liquidator and that is evident by section 458. 36. Then comes section 459 under which the Court can sanction legal assistance to Liquidator. The exercise and control of Liquidator's powers is subject to the provisions of the Act, but in the administration of the assets of the company and distribution thereof among its creditors, the Liquidator shall have regard to any directions which may be given by the resolution of the creditors or contributories at any gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Father of Nation, namely, "Commerce Without Morality is a Social Sin". The company Court cannot permit any arrangement or scheme or grant any relief which would defeat public interest or would contravene public policy. Ultimately, whether it is a compromise between conflicting stake holders or persons having same interests, when it comes to winding up the affairs of a company, the Court must necessarily act for public good and in public interest. If the discretion vested in the company Court is not exercised on sound judicial and social principles, then, people at large would lose faith in the administration of justice itself. They would carry an impression that the company Court places its seal of approval on any arrangements or schemes brought before it by interested parties, mechanically. 38. Even as late in 2007 the Hon'ble Supreme Court in the case of Meghal Homes (P.) Ltd. v. Shree Niwas Girni K.K.Samiti [2007] 139 Comp. Cas. 418/ 78 SCL 482 , while reversing a decision of the Division Bench of this Court modifying the scheme of arrangement in exercise of the powers under section 392 of the Companies Act, 1956 had the following to say: "22. When a Company is ordere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 391 is a self-contained code and read with Section 392 of the Act, which was peculiar to our Act, it was clear that a Company Court could approve, independently of Section 466 of the Act, a scheme and could take the company out of liquidation and even pass an order of stay in terms of Section 391 read with Section 392 of the Act. Section 466 of the Act was not attracted when a scheme approved by the shareholders, creditors, members of the Company and so on was put forward before the Company Court. 25. It is a well settled rule of interpretation that provisions in an enactment must be read as a whole before ascertaining the scope of any particular provision. This Court has held that it is a rule now firmly established that the intention of the Legislature must be found by reading the statute as a whole. In Principles of Statutory Interpretation by Justice G.P. Singh, it is stated: "The rule is referred to as an "elementary rule" by VISCOUNT SIMONDS; a "compelling rule" by LORD SOMERVELL OF HARROW; and a "settled rule" by B.K. MUKHERJEE, J." ( See pages 31 and 32 of the Tenth Edition) When we accept this principle, what we have to do is to read Sections 391 to 394A not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany which was carrying on identical, viz. , textile business and placing them in the hands of developers and builders, namely, M/s. Lodha Builders Pvt. Ltd. The said M/s. Lodha Builders Pvt. Ltd. were not at all interested in revival of the company or its business by taking over the undertaking of the company as a going or running union. It was interested in starting an industry of its own in that property. This was not approved by the Supreme Court as a modification in the scheme necessary for proper working of the compromise or arrangement earlier arrived at. This was a substitution of the scheme itself. Therefore, unless the scheme with the modifications was placed before the general body by reconvening the meeting in terms of section 391 of the Act, the modification could not have been sanctioned, was the view taken by the Supreme Court. Therefore, howsoever laudable the object may be, the company Court cannot approve an arrangement by which the assets of the company in liquidation are disposed off or taken over by some private arrangement and to put it more clearly by circumventing the company Court itself. The Court even in matters of sections 391 to 394 and 466 of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and processing sections for the manufacture of cotton, synthetics and non-woven fabrics. Although the company ran into rough weather, what has been placed for this Court's consideration and seeking reliefs in its equitable and discretionary jurisdiction is, that Government of Maharashtra has initiated various measures for promotion and facilitation of development of mill lands in Mumbai. It is projected that in accordance therewith, the availability of houses has also been a thrust area. The initiative along with available immovable properties of the company together, offer a favourable platform for the company to undertake real estate development operation. Now, if para 7 of the affidavit in support, which is reproduced herein above is carefully perused, it is apparent that the applicants do not desire to revive the business of the company in liquidation by developing part of its properties or portions of its lands, but desire to take over the said lands for exploitation in the real estate market. It is clearly their motive that these lands should be taken over without offering the market price, but via this application so that once the permanent stay of winding up is obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which will be conducted in a transparent and fair manner, that the application has been filed. The applicants have not come out with a positive case that business of the company in liquidation cannot be revived at all. They do not say that the textile business cannot be carried on or is totally prohibited. They claim that it is not practicable and feasible to carry on such business. However, it is their perception. The Liquidator has not come forward with any conclusive or decisive report on this aspect. In such circumstances, if all the above tests and principles are applied, it is evident that this company application is filed for seeking a stay of the winding up not for revival of the company's business or to smoothen the process of liquidation and winding up, but to take over the company itself in an indirect and oblique manner. There is substance in the objection of Ms.Cox that this is a take over of the company without recourse to the provisions in law enabling such take over and particularly sections 391, 392 to 394 of the Act. To by pass and avoid compliance with such provisions, that this application is filed. Once such is the motive, then, the enormity of the funds, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and seeking discharge of the Liquidator. There, the scheme was found to be not contravening any of the provisions of law that the discretion was exercised on the sound judicial principles. That must be seen in the facts of that case and that this judgment does not lay down any general rule. 47. Thus, finding that the none of the grounds enabling exercise of discretion under section 466 have been made out, this company application is dismissed but without any order as to costs. The Official Liquidator should now proceed expeditiously and adjudicate the claims received and take all such steps as are necessary and permissible in law for winding up the company in liquidation. With such directions, his report also is disposed off. 48. At this stage, it is requested that an amount of Rs. 86 crores which is deposited in this Court by the applicants be directed to be returned with accrued interest. Mr.Tulzapurkar submits that this withdrawal will be without prejudice to the rights and contentions of the applicants to challenge this order in higher court. 49. In the light of this request, the applicants are allowed to withdraw the amount of Rs. 86 crores with accrued in ..... 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