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TMI Blog2013 (9) TMI 913X X X X Extracts X X X X X X X X Extracts X X X X ..... were primarily concerned with the benefits attached to these lands. Thus, to avoid participation at a public auction and at a sale which will be conducted in a transparent and fair manner, that the application had been filed - If ultimately it was impossible to revive the company, then, it was better that the liquidator carries on its affairs till the dissolution of the company - It was only through the mechanism and participation of the liquidator, that the court can ensure settlement of claims of the secured and unsecured creditors in accordance with law - when claims of certain workmen have been given a preference over others or non-consenting employees, then, all the more it would not be in public interest and commercial morality to grant any reliefs - Relying upon Shaan Zaveri v. Gautam Sarabhai (P.) Ltd. [2009 (5) TMI 543 - HIGH COURT OF GUJARAT] - 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 - None of the grounds enabling exercise of discretion under section 466 have been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Real estate business is one of the objects of applicant No. 2. It owns 22,83,210 equity shares constituting 29.29 per cent. of the total shareholding of the company in liquidation. The said shares were acquired by applicant No. 2 after the winding up order, for which it has obtained requisite leave of this court, under the Companies Act, 1956 and had those shares transferred in its name. Thus, the applicants own, in aggregate, 52 per cent. of the total equity shares of the company. Further, the applicants are the only secured creditors of the company and thus are vitally interested in the affairs of the company. Both the applicants are part of Shapoorji Pallonji group. The said Shapoorji Pallonji group is a 140 years old leading corporate house with significant experience, inter alia, in the construction, infrastructure and real estate development business. 3. Prior to its liquidation, the company was a public limited company, incorporated under the Act of VI of 1882 of the Legislative Council of India. The company is currently under winding up and is represented by the official liquidator, attached to this court. The share capital of the company as per the last available fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty three crores only) almost during the entire period of the proceedings before the BIFR and thus enabled the company to continue its operations. The details of financial assistance during the said proceedings are as follows : Year Rupees in crore 1998 3 1999 19 2000 16 2001 5 6. However, due to the overall recessionary conditions and structural problems in the textile industry, the financial condition of the company did not improve. Pursuant to the recommendation of the BIFR, this court commenced winding up of the company. The official liquidator of this court was appointed as provisional liquidator of the company vide order dated February 13, 2002, with all powers available to him in terms of the Companies Act, 1956. 7. After referring to a sale of finished goods under the supervision of the court receiver, it is stated that by resolution dated September 20, 2001, issued by the Government of Maharashtra, a High Power Committee was appointed to look into the matters relating to the workers dues, bankers and financial institutions. That Committee was empowered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that the total liability of the company in liquidation as on March 31, 2011, is approximately Rs. 375.33 crores. Out of that Rs. 280.90 crores is the liability of the applicants, which they have agreed to defer, as more particularly set out in this affidavit and as far as the other claims and liabilities, the applicants will duly meet them. 10. A reference is made to the Rashtriya Mill Mazdoor Sangh, affiliated workers and employees and a memorandum of understanding dated November 15, 2010, signed by the applicants and the Rashtriya Mill Mazdoor Sangh which is stated to be a representative and authorised Union of the workers employed in the company in liquidation. It is stated that the claim was filed by Rashtriya Mill Mazdoor Sangh on behalf of the workers. Seventy five per cent. of the claim has been paid off by the official liquidator out of the sale proceeds of the machinery of the company and as part settlement of the memorandum of understanding, amounts have been disbursed. In terms of the chart annexure F, Rs. 74,42,97,519 are due and payable. There is also claim of 37 workers/employees who have opted for voluntary retirement scheme in about 1999 and that is referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the relief claimed is that the applicants want to take over the company and start some other business, then, that can be taken care of by clarifying that if the object clause in the memorandum does not include the business that is proposed to be carried out, subject to such modification or amendment thereof, the same would be carried out, that would suffice and protect the interest of all concerned. The law does not prohibit other business being carried on by the company in liquidation after the winding up order is stayed. Once such is the legal position, the application is bona fide and no factor militates against the exercise of the power of stay, then, the discretion in terms of section 466(1) of the Companies Act, 1956, be exercised in favour of the applicants. 13. Mr. Tulzapurkar submits that section 466(1) imposes no condition, nor it states anywhere that the same business should be carried on. Once the objecting workers are being paid full dues as adjudicated by the official liquidator including interest accumulated in accordance with law, then, all the more the objections be over ruled. Mr. Tulzapurkar takes instructions and makes a statement that in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orkers would then get much more amount which is assured in terms of the memorandum of understanding. Therefore, the memorandum of understanding with Rashtriya Mill Mazdoor Sangh ought not be held to be conclusive and decisive of all claims and dues of the workers. 16. Ms. Cox submits that once the company is in liquidation, then, the Bombay Industrial Relations Act, 1946, or the Maharashtra Recognition of Trade Union and Prevention of Unfair Labour Practices Act, 1971, are inapplicable. There is no concept of representative union or recognised union any longer governing or operating in the field. The dues of all the workers have to be adjudicated and determined by the official liquidator. That has to be done by him in terms of the powers conferred by the Companies Act, 1956. The workers are placed in the position of secured creditors. Their claims cannot be given a go-by or diluted by any unilateral compromise by one union. The memorandum of understanding does not give any benefit to these workmen. She submits that winding up order is of 2005 and the balance that has been calculated is as of September 30, 2001. In this context, she invites my attention to page 112, viz., Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and properties of the company in liquidation from the control of this court. The applicants desire to achieve indirectly what is prohibited directly in law. This is nothing but an attempt to show revival of the company in liquidation on paper and thereafter to sell it off completely. There is no scheme for diversification nor of running the industry. In these 17.circumstances, this application should not be granted. 17. Ms. Cox submits that as the applicants are seeking permanent stay of winding up, then, once the discretion is exercised in their favour and the winding up proceedings are stayed, the employment of the workmen with the company in liquidation stands revived. There is no legal termination of their services. There is no compliance with sections 25N and 25O of the Industrial Disputes Act, 1947. There is no guarantee that those who are not consenting for settlement of their dues in terms of the memorandum of understanding, will get full payment including interest. Those claims may go to the tune of Rs. 5,000 crores. She, therefore, submits that in any event what is offered is less than what the creditors would get on winding up that the discretion under section 466(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of understanding should be permitted to be enforced. By refusing to exercise the discretion in favour of the applicants, the process initiated by the Rashtriya Mill Mazdoor Sangh upon execution of the memorandum of understanding, will be halted or obstructed. That would not be beneficial for the workers who are waiting for receipt of the monies. For all these reasons, this court should take a pragmatic and practical view of the situation and grant the reliefs as claimed. 20. Mr. Cama has also relied upon the following decisions to support his contentions : (1)Bombay Metropolitan Transport Corpn. Ltd. v. Employees of Bombay Metropolitan Transport Corpn. Ltd. (CIDCO) [1991] 71 Comp Cas 473 (Bom.) ; (2)Shivanand Gaurishankar Baswanti v. Laxmi Vishnu Textile Mills [2008] 144 Comp Cas 516 (SC) and (3)Ganesh Dattaram Shitap v. Swadeshi Mill Co. Ltd. (in liquidation) [2011] 168 Comp Cas 20 (Bom.). 21. With the assistance of learned counsel appearing for the parties, I have perused the application, the annexures thereto and the official liquidator s report on record. I have also perused with their assistance the legal provisions and the decisions brought to my notice. 22. For p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims of the remaining workers." 25. In terms of both the orders, the official liquidator has placed a report and his final report dated August 20, 2011, records the proceedings that were conducted by him pursuant to the order and direction of this court. He stated that the official liquidator has received 1,138 individual claim of workers for adjudication. Letters have been already sent to the workers for submission of further documentary proof/evidence to prove their individual claim. Rashtriya Mill Mazdoor Sangh vide its letter dated June 15, 2011, forwarded to the official liquidator, 1,909 letters received by them from the workers accepting the terms of the memorandum of understanding dated November 15, 2010, between Rashtriya Mill Mazdoor Sangh and the applicants have also confirmed the receipt of Rs. 30,000 by each of the workers towards advance payment. On the other hand, Ms. Cox submitted the letters of August 10, 2011 and August 17, 2011 forwarding therein letter of authority from 699 workers and 24 office staff. The official liquidator, therefore, sought permission to adjudicate and pay such claims in accordance with law and to pay the remaining workers as per the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with effect from any prior date but from the date of appointment of the provisional liquidator. This is not a stage where this court should determine the relevant date and decide as to whether it is from the date of the order of winding up or any date prior to the order of winding up. All pleas of parties in relation thereto are also kept open and they be dealt with and decided at an appropriate stage. 28. Once this course is adopted, then, it is not necessary to refer to the decisions which have been cited by Mr. Cama with regard to the locus of the union. The judgment in the case of Bombay Metropolitan Transport Corporation Ltd. (supra), rendered by the Division Bench of this court on September 5/6, 1990 (Appeal No. 747 of 1987 in Company Petition No. 138 of 1986) need not, therefore, be referred to in any further details. Equally, it would not be necessary to refer to the decision of the hon ble Supreme Court in the case of Shivanand Gaurishankar Baswanti (supra) 13 SCC 323. As far as the ambit and scope of section 466 of the Companies Act, 1956, is concerned, the principles in that regard are summarised in a decision of a learned single judge of the Calcutta High Court repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company ; (9) the court is to consider whether the proposal for revival of the company is for benefit of the creditor but also whether the stay will be conducive or detrimental to commercial morality and to the interest of the public at large ; (10) before making any order court must see whether the ex-directors have complied with their statutory duties as to giving information to the official liquidator by furnishing the statement of affairs ; (11) and any other relevant fact which the court thinks fit to be considered for granting or not granting the stay having regard to the peculiar facts of a particular case." 29. The learned judge also made reference to an earlier decision reported in the matter of East India Cotton Mills Ltd., In re [1949] 19 Comp Cas 61 ; wherein it was held thus : In the said case Justice S. R. Das (as his Lordship then was) held as follows (page 93 of 19 Comp Cas) : "In this application the petitioners also pray for the stay of the winding up proceedings under section 173 of the Companies Act. This section comes into play after an order for winding up has been made. It presupposes a good and valid winding up order. In an application under this secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise of its jurisdiction to stay the court, so far as possible, acts upon the principles applicable in exercising jurisdiction to rescind a receiving order or annul an adjudication in bankruptcy against an individual. The court refuses, therefore, to act upon the mere assent of the creditors in the matter, and considers not only whether what is proposed is for the benefit of the creditors, but also whether the stay will be conducive or detrimental to commercial morality and to the interests of the public at large. In particular, the court will have regard to the following facts : That directors have not complied with their statutory duties as to giving information to the official receiver or furnishing a statement of the affairs ; that there has been an undisclosed agreement between the promoter and the vendor to the company as to the participation by the former in fully paid-up shares forming the consideration for the purchase of property by the company on its formation ; that the promoter has made gifts of fully paid-up shares to the directors, that there are other matters connected with the promotion, formation, or failure of the company or the conduct of its business or affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it is necessary to advert to it at the present stage. The concept of a company has undergone radical transformation in the last few decades. The traditional view of a company was that it was a convenient mechanical device for carrying on trade and industry, a mere legal frame work providing a convenient institutional container for holding and using the powers of company management. The company law was at that time conceived merely as a statute intended to regulate the structure and mode of operation of a special type of economic institution called company. This was the view which prevailed for a long time in juristic circles all over the democratic world including United States of America, United Kingdom and India. That was the time when the doctrine of laissez faire held sway and it dominated the political and economic scene. This doctrine glorified the concept of a free economic society in which State intervention in social and economic matters was kept at the lowest possible level. But gradually this doctrine was eroded by the emergence of new social values which recognised the role of the State as an active participant in the social and economic life of the citizen in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omic concepts and values. Today social scientists and thinkers regard a company as a living, vital and dynamic, social organism with firm and deep rooted affiliations with the rest of the community in which it functions. It would be wrong to look upon it as something belonging to the shareholders. It is true that the shareholders bring capital, but capital is not enough. It is only one of the factors which contributes to the production of national wealth. There is another equally, if not more, important factor of production and that is labour. Then, there are the financial institutions and depositors, who provide, the additional finance required for production, and, lastly, there are the consumers and the rest of the members of the community who are vitally interested in the product manufactured in the concern. Then how can it be said that capital, which is only one of the factors of production, should be regarded as the owner having an exclusive dominion over the concern, as if the concern belongs to it ? A company, according to the new socio-economic thinking, is a social institution having duties and responsibilities towards the community in which it functions. The Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is why we find that in recent times there is considerable thinking on the subject of social responsibilities of corporate management and it is now acknowledged even in highly developed countries like the United States and England that maximisation of social welfare should be the legitimate goal of a company and shareholders should be regarded not as proprietors of the company, but merely as suppliers of capital entitled to no more than a reasonable return and the company should be responsible not only to shareholders but also to workers, consumers and the other members of the community and should be guided by considerations of national economy and progress. This new concept of a company was felicitously expressed by Desai J., sitting as a judge of the Gujarat High Court in Panchmahals Steel Ltd. v. Universal Steel Traders [1976] 46 Comp Cas 706, in the following words (at page 718) : Time-honoured approach that the company law must safeguard the interest of investors and shareholders of the company would be too rigid a framework in which it can now operate. New problems call for a fresh approach. And in ascertaining and devising this fresh approach, the objective for which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the workers from an integral part of the company is ignored by the law . (4th edition, page 10). 45. The Indian Constitution recognises the role of workers in the management of the industrial inasmuch as article 43A requires that the State shall take steps by suitable legislation or in any other way to secure the participation of workers in the management of undertakings, establishments or other organisations engaged in any industry. While holding that the workers have the locus standi to appear and be heard in a petition for winding up of the company both before the petition is admitted and also after the admission until an order is made for winding up of the company, Bhagwati J., (as the learned Chief Justice then was), in National Textile Workers Union v. P. R. Ramakrishnan [1983] 53 Comp Cas 184 ; [1983] 1 SCR 922, has thus elaborated this idea : . . . 46. In the same case, Chinnappa Reddy J., in his concurring judgment, has stated (page 209 of 53 Comp Cas) : The movement is now towards socialism. The working classes, all the world over, are demanding "workers control" and "Industrial Democracy". They want security and the right to work to be secured. They w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the management in the asbestos industry to carry on its business is subject to their obligation to protect the health of the workmen and to preserve a pollution-free atmosphere and to provide safe and healthy conditions to the workmen. The authorities or private persons or industries are bound by the directives contained in Part IV, Part III and the Preamble to the Constitution. It would thus be clear that the right to carry on trade is subject to the directives contained in the Constitution, the Universal Declaration of Human Rights, the European Convention of Social, Economic and Cultural Rights and the Convention on Right to Development for Socio-economic Justice. Social security is a facet of socio-economic justice to the people and a means of livelihood." 34. Thus, it is not as if public interest, commercial morality and corporate responsibility are alien concepts in the era of globalisation, liberalisation and privatisation. The courts have to apply the above principles and be vigilant and on guard against any action by which its control over companies as envisaged by the statute and particularly in the cases of companies under liquidation is sought to be interfered with. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulars as are necessary and if default is made in complying with the requirement of furnishing and submitting the statement of affairs then that act is viewed very seriously, and, it is an offence in terms of the relevant provisions. 36. Section 455 is titled "Report by official liquidator". The liquidator s report has to be comprehensive. It may be preliminary or final. He can seek sanction of the company court for taking such steps as are necessary to preserve, protect and safeguard the properties and assets of the company. The custody of the company s property in terms of section 456 is with the official liquidator. He must take into his custody or control all the properties, effects and actionable claims to which the company is or appears to be entitled. He has very wide powers including seeking assistance of the police for taking possession of the company s properties and effects. Sub-section (2) of section 456 states that all the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order winding up of the company. This provision is salutary in nature. The Legislature was conscious of the fact that it may be assumed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not proper to see this provision in isolation for that would mean that the affairs of the company in winding up is the absolute prerogative of the liquidator and the court has only to act on the reports of the liquidator. The court has the paramount duty and obligation and it has to uphold the object of the Companies Act, 1956. 38. As held by the hon ble Supreme Court, the company court cannot take a narrow and pedantic view of the matter and proceed on the basis that the company is the property of the shareholders and it is their wish which has to be given effect to. Similarly, it is only the interest of the shareholders and the creditors which has to be borne in mind. The larger role that has now been highlighted makes it abundantly clear that a company is a social institution. It is not the interest of those who invest their money in a company which has primacy or they alone have to be placed in the forefront. Once the society as a whole has a stake in a company, then, the company court cannot overlook that aspect, for it would be shirking its duty and ignoring public interest. The company court has to keep public interest and public good in the forefront as well. Therefore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates revival of the business of the company, makes provisions for paying off creditors or for satisfying their claims as agreed to by them and for meeting the liability of the workers in terms of section 529 and section 529A of the Act. Of course, the court has to see the bona fides of the scheme and to ensure that what is put forward is not a ruse to dispose of the assets of the company in liquidation. In fact, it was on this basis that the Division Bench of the High Court proceeded when it passed the order dated April 4, 1995. Apart from the fact that the correct principle was adopted, the directions therein are binding on the company court and the Division Bench of the High Court of coequal jurisdiction when the proposal for amendment of the earlier scheme came up. It has to be noted that it was not a fresh scheme that was being mooted, but it was a proposal for an amendment of the scheme already considered by the Division Bench when it passed the order dated April 4, 1995. It was the plain duty of the Division Bench on the latter occasion to keep in focus the suggestions earlier made. It was argued before us on behalf of the appellant that sections 391 to 394A were procedur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no conflict in applying both the provisions and in harmoniously construing them and in finding that while the court will not sit in appeal over the commercial wisdom of the shareholders of a company, it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality. We cannot understand the decision in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp Cas 792 ; [1997] 1 SCC 579, as standing in the way of understanding the scope of the provisions of the Act in the above manner. We are therefore satisfied that the company court was bound to consider whether the liquidation was liable to be stayed for a period or permanently while adverting to the question whether the scheme is one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Ultimately, the applicants may claim to be shareholders and substantial secured creditors, but if the purpose in presenting this application is to enable them to take over the company s properties and assets which are indeed valuable at a price or value which they unilaterally determine, then, that cannot be permitted. A careful scrutiny of this application would reveal that what the applicants are projecting is, that they have the necessary wherewithal and strength. Applicant No. 1 claims to be a promoter, secured creditor and unsecured creditor of the company in liquidation. It has projected that it along with its wholly owned subsidiary owns 17,64,430 shares of the company in liquidation constituting 22.70 per cent. of the total equity shares of the company in liquidation, whereas applicant No. 2 owns 22,83,210 equity shares of the company constituting 29.29 per cent. of the total shareholding of the company in liquidation. On the own showing of the applicants, applicant No. 2 has acquired this shareholding after the winding up order. Therefore, they may be owning in aggregate about 52 per cent. of the total equity shares of the company, they may claim to be vitally intereste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng them to their advantage, the applicants are not agreeable to the liquidator and the court controlling their actions in interest of all creditors and general public. The business opportunities on account of spiralling prices in the Real Estate Market is the only attraction for the applicants. The proceeds and gains from such opportunities ought to have been shared by them with all. However, that is not their intent, is clear from their stand. If these lands are sold by the official liquidator under the supervision of this court and at open, fair and transparent public auction, the applicants may not stand any chance and hence they desire to obtain the lands at a throwaway price by a back-door method. That is the sole intent in making this application. By invoking sympathy of some creditors and stating that the monies to meet the claims of the workers would be brought in immediately, what the applicants are seeking to do is to take away the entire proceedings in winding up from the supervision and control of this court. They may make, give or seek some concessions here and there. However, their object is not to run the business of the company in liquidation. They have not brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with law. 44. At this stage, when claims of certain workmen have been given a preference over others or non-consenting employees, then, all the more it would not be in public interest and commercial morality to grant any reliefs. 45. As a result of the above discussion, this company application fails and it is dismissed. 46. In the view that I have taken, it is not necessary to refer to all the decisions that have been brought to my notice. Suffice it to note that the decisions that have been brought to my notice by Mr. Tulzapurkar deal with a situation in which the court has permitted carrying on a distinct business under a scheme of arrangement or compromise by adherence to the provisions of law. That was a case where on a over all view, the scheme proposed and the arrangement placed before this court in terms of sections 391 to 394 of the Companies Act, 1956, was in the interest of the shareholders, creditors and general public. It is in that backdrop, that the court took the view relied upon by the applicants. It is in such circumstances that the amendment to the object clause or to the memorandum, was permitted. The judgment in the case of Maharashtra State T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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