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TMI Blog2025 (1) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... an be used to revive the company or its business and not merely for the benefit of its creditors. This jurisdiction certainly cannot be used to acquire immovable properties or assets of the company at some throwaway price or at a price that bears no proportion to the price that the liquidator could have obtained at a free, fair, transparent public auction. The scope and import of Section 466 of the Companies Act and the principles on which the Company Court would exercise its powers to stay the proceedings in winding up either altogether or for a limited time on such terms and conditions as it thinks fit. The Appeal Court has held that Section 466(1) confers a discretion on the Court and not a mandate. The discretion must be exercised on the satisfaction that a stay of the proceedings in relation to winding up ought to be granted. The legislature has carefully used the expressions "on proof to the satisfaction" and "ought to be stayed". Before the Court grants a stay, the statutory requirement is that there must be proof brought before the Court based on which it is satisfied that the proceedings ought to be stayed. There is no question of this Court for the first time considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The first Respondent is a group company of the Shapoorji Pallonji Group of Companies and has 29.29% shares in the said company. The third Respondent is also a group company of Shapoorji Pallonji Group of Companies and holds 22.72% shares in the said company. Collectively, the first and third Respondents hold 52% of the shares in this said company. The fourth Respondent is a trade union of the erstwhile workers of the said company. The second respondent is the Official Liquidator. 6. Under a reference made by the said company to the Board for Industrial and Financial Reconstruction (BIFR), the BIFR declared the said company as a "sick company" under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 and recommended the winding up of the said company. By a composite order dated 05 September 2002, this Court, ordered the said company to be wound up and directed the provisional liquidator to act as the Official Liquidator and exercise all the powers under the Companies Act. 7. When the winding up under this Court's order dated 05 September 2002 was in progress, the first and third Respondents jointly filed Company Application No. 243 of 2011, seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 2015 and the amount which is payable under the Agreement for Settlement; (c) that it will make necessary provision for rehabilitation of the SSP ex-workers and/or their families who are in occupation of the residential quarters/chawls situated on the premises of the company and also those ex-workers and/or their families who were made to vacate the residential quarters/chawls, as they were rendered inhabitable and dilapidated. (iii) The Official Liquidator shall publish a notice in two local newspapers i.e. Free Press Journal (English) and Navshakti ( Marathi), inviting the attention of the stake holders of the company in liquidation to the proposal for permanent stay of the winding up order and revival of the company in liquidation and the aforesaid directions passed by this Court. (iv) Such notices be also pasted at the premises of the company in liquidation and given to the claimants whose names are mentioned in the list of claims Exhibit S to the Application. (v) The Applicant shall deposit a sum of Rs. 1,00,000/- with the Official Liquidator for the publication of the aforesaid notices on or before 7 January 2023. (vi) List on 8 February, 2023. (vii) Based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 21 December 2022. He submitted that even the order dated 21 December 2022, apart from making a cursory reference to the dismissal of an earlier application under Section 466 of the Companies Act, does not advert to or in any event consider the orders made by the Company Court, Appeal Court and the Hon'ble Supreme Court declining to stay the winding up of proceedings on the behest of the first and third Respondents. 16. Mr Khanna submitted that even if it were to be assumed that the principles of res-judicata would not apply to the second application under Section 466 of the Companies Act, still, the first Respondent was duty bound to plead and demonstrate a change of circumstances (if any)and further, that the findings recorded in the earlier order disposing of a similar application under Section 466 of the Companies Act, were no longer valid. He submitted that in all probabilities, the orders dismissing the earlier application under Section 466 of the Companies Act were not shown by the first Respondent to the Company Court when the impugned order dated 09 October 2023 or the order dated 21 December 2022 was made by the Company Court. He submitted that the non-consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an identical prayer in the past in paragraph 16. The learned counsel, therefore, urged that the orders dated 21 December 2022 and 09 October 2023 must be considered together, and based upon the same, no case is made out to warrant interference in this Appeal. 22. The learned counsel for the above Respondents submitted that the earlier application under Section 466 of the Companies Act was rejected due to the opposition of the workmen, with whom there were no agreements at the relevant time. The learned counsel submitted that the workman's dues were substantially settled by Agreements dated 28 February 2020 and 29 June 2021. They submitted that the dues of even the other creditors were settled significantly. Pursuant to the directions in the order dated 21 December 2022, the first Respondent deposited an amount of Rs.240 Crores in the Court, which amount was then distributed amongst the workmen. The learned counsel, therefore, submitted that there was a drastic change of circumstances since the dismissal of the earlier application under Section 466 of the Companies Act. The learned counsel submitted that principles of res-judicata do not apply in a matter of this nature. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y submitted that some shares were purchased even after an order for a winding up was made. Accordingly, they submitted that there were no bona fide in instituting this Appeal. The learned counsel for the above Respondents submitted that the Appellants' insistence about the said company carrying on the mill business smacks of unreasonableness. They pointed out that such a business is now banned. They submitted that the Articles and Memorandum have been suitably amended after following the due procedure and obtaining the consent from a majority of shareholders present at the AGM. Accordingly, they submitted that there is no merit in this Appeal. 27. Mr Tulzapurkar also submitted that the Company Court's order dated 14 October 2011 has been merged with the Appeal Court's Judgment and Order dated 23 August 2013. He also submitted that the Hon'ble Supreme Court's order dated 23 February 2016, by which the SLP was dismissed, does not constitute a merger. Based on this, Mr Tulzapurkar submitted that we should not even look into the Company Court's order dated 14 October 2011 or consider the findings recorded therein. 28. For all the above reasons, the learned counsel for the above Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Respondent has also referred to "future business" that could be undertaken after the revival of the said company. Again, the emphasis is on diversifying its business activities into other fields, "including real estate development". The first Respondent has explained how continuing the company's earlier business of manufacturing textiles is no longer feasible. The first Respondent has reiterated how the company can utilize its immovable property "for the purposes of real estate development as per law" and how the first Respondent, being a part of the Shapoorji Pallonji Group, which has expertise in real estate business, is competent to guide the company in undertaking real estate development. 37. The first Respondent also offered to deposit approximately Rs.240 crores within ninety days of an order passing for the permanent stay of winding up of the said company. This amount could then be used to clear certain immediate liabilities of the said company. The first Respondent admitted that the company's total liability as of 31 March 2022 was approximately Rs.1100.52 crores. 38. The first Respondent, along with the Interim Application No.3663 of 2022, annexed several exhibits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the materials before it that the application is bona fide; (2) the Court would be guided by the principles and definitely come to the finding that the principles are applicable to the facts of a particular case; (3) mere consent of all the creditors for stay of winding up is not enough; (4) that offer to pay in full or make satisfactory provisions for the payment of the creditors is not enough; (5) Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories; (6) Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation; (7) a firm had accepted proposal for satisfying all the creditors must be before the Court with material particulars; (8) the jurisdiction for say can be used only to allow in proper circumstances a resumption of the business of the 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-Dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction 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 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; any other relevant fact which the Court thinks fit be considered for granting or not granting the stay having regard to the peculiar facts in a particular case also would govern the exercise of the power." 45. The Company Court, in its order dated 14 October 2011, while rejecting the earlier application under Section 466, observed that public interest, commercial morality and corporate responsibilities are not alien concepts in the era of globalisation, liberalisation and privatisation. So therefore, the Courts must apply the above principles and be vigilant and on guard against any action by which its control over companies as envisaged by the statute, particularly when companies under liquidation, are sought to be interfered with. The Company Court held that it could not permit, even by the exercise of discretion, any shareholder or credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge in the functioning or working of the company Court or that of the Liquidator. Once commercial morality and corporate responsibility are inbuilt in the administration and management of companies, then, these principles would have to be applied even by the company Court. We, in India, follow the principle and philosophy emphasised by the 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."(See para 37) "What is further interesting and releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of any rift inter-se between them, allow the claims of the said workers and other creditors to be compromised or defeated altogether. 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. The applicant No. 1 claims to be a promoter, secured creditor and unsecured creditor of the company in liquidation. It has projected that it alongwith its wholly owned subsidiary owns 17,64,430 shares of the company in liquidation constituting 22.70% of the total equity shares of the company in liquidation, whereas the applicant No. 2 owns 22,83,210 equity shares of the company constituting 29.29% 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 anything on record by which it could be conclusively held that textile manufacturing business is altogether prohibited or not permitted in the Island city. In fact, if the affidavit in support is perused carefully, it is evident that the Shapoorji Pallonji Group is interested in the lands of this textile company and if they have to obtain the same at public auction or by bidding at a sale of this land and assets of the company in liquidation under the aegis of the Liquidator and pursuant to the sanction of this Court, they may not be able to acquire 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 has been filed. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was evident that it was the Shapoorji Pallonji Group that was interested in the lands of the said company, and if they had to obtain such lands at a public auction or by bidding at a sale of these lands and assets of the said company in liquidation under the aegis of the liquidator and pursuant to the sanction of the Company Court, they may not be able to acquire these lands. Thus, to avoid participation at a public auction and at the sale, which would be conducted transparently and fairly, the application under Section 466 was filed. The Court held that once this was found to be the motive for filling the application under Section 466 of the Companies Act, then the enormity of the funds that the first and third Respondents had stated that they were willing to pump in, could not persuade the Company Court to grant any discretionary relief and displaced the liquidator from proceeding to wind-up the company in accordance with the law. 50. The Company Court, in its order dated 14 October 2011 also referred to the interplay between Sections 391 to 394 and Section 466 of the Companies Act. The Company Court held that there was no incongruity in looking into the aspect of public inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the first and third Respondents by instituting Appeal No. 34 of 2012. By yet another detailed order that ran into almost 24 pages, the Appeal Court upheld the Company Court's order dated 14 October 2011 and dismissed the Appeal. 54. Mr Tulzapurkar's contention that since the Company Court's order dated 14 October 2011 had merged with the Appeal Court's judgment and order dated 23 August 2013, we must not even "look into or refer the Company Court's order dated 14 October 2011" cannot be accepted. This is more so because the Appeal Court, in its judgment and order dated 23 August 2013 clarified that its non-interference with the Company Court's order dated 14 October 2011 was not on the ground that the view taken by the Company Court was merely "a possible view" but the Appeal Court held that the view was "the only correct view" based on the facts and circumstances of the case. 55. It was not as if any execution was claimed based on the merged order dated 14 October 2011 or that there was a variance between the original and appeal Court order on a principle or facts. We believe the two orders could not have been lightly ignored or departed from unless some significant circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Reference was made to an early decision of Lord Esher, M.R., speaking for the Court of Appeal in Re Flatau 1893 (2) Queen's Bench 219. "The judgment of the Court of Appeal followed an earlier decision in re Hester 22 Q.B.D. 632 which had laid down the rules for a rescission of a receiving order in bankruptcy. In that context, Lord Esher had held as follows: "18-A. In the Court of Appeal, Lord Esher, M.R., stated (p.639): "Although the consent of all the creditors has been obtained, the Court will still consider whether what they have agreed to is for the benefit of the creditors as a whole. The Court has gone still further, and, I think rightly so, and has said that under the present Bankruptcy Act it will consider not only whether what is proposed is for the benefit of the creditors, but also whether it is condusive or detrimental to commercial morality and to the interests of the public at large; and they will take into consideration the position of the bankrupt with regard to his creditors, and see whether what is proposed will not place his future creditors, who must come into existence immediately, in a position of imminent danger. The Court has said this before, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uspended animation. In other words, despite the grant of the stay, the order of winding up continues to exist but is rendered inoperative. The Appeal Court also referred to the decision in Mahavir Prasad Agarwala (supra) in which the principles for exercising discretion under Section 466 had been summarized. 61. The Appeal Court also referred to the decision of the Delhi High Court in Shyam S. Rastogi Vs. Nona Sona Exports P. Ltd. 1986 59 Company Cases 832 dealing with the importance of the role of the Company Court in relation to the exercise of discretion while ordering a stay of winding up:- "Company court is not a mere conduit pipe or stamping authority to whatever scheme that may be laid before it. Not unoften, motivations in the moving of such schemes are oblique. It is in fact for the court to first look at the scheme whether it has any strength or merits of its own and is financially viable or a mere attempt to take back the affairs and the assets of the company which had been earlier perforce taken over at the time of winding up. In my considered opinion, there is no scheme worth giving a trial which has been put forth by the applicant and, therefore, has to be rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme is one for the 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 private arrangement. If it comes to a later conclusion, then it is the duty of the Court in which the properties are vested on liquidation to dispose of the properties, realise the assets and distribute them following the law. 66. The Appeal Court thwarted the attempt of the first and third Respondents to distinguish the judgment of the Hon'ble Supreme Court in the case of Meghal Homes Pvt. Ltd. (supra) by giving cogent reasons in paragraph 22 of its judgment and order dated 23 August 2013. Applying the test enunciated by the Supreme Court in Meghal Homes Pvt. Ltd. (supra), the Appeal Court held that the exercise of discretion by the Company Court was correct and proper. The Appeal Court also held that the object of the company application was not to revive the company's business, but its whole purpose was to dispose of the assets by embarking upon real estate construction and development. 67. The Appeal Court considered in detail the judgment of Megarry J. in Re Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible." 70. Thus, the observations in paragraph 27 of the Appeal Court's judgment and order suggest that in a situation such as the present one, where all shareholders have not been joined or joined in the application for a stay of an order of winding up, it would be more appropriate if the Company Court were to be moved by way of an application for reconstruction, under Section 391 to take the company out of winding up. In such a case, the members of the company would have an opportunity to consider and vote on the proposal, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to and rely upon the papers and proceedings of the earlier application and the orders made therein. In Dabriwala Vanijya Udyog Ltd. v. Alka Dalmia (2010) 154 Com cases 131, a stay of the winding-up order was obtained by suppressing material facts, and the reasons for the grant of the stay order were not recorded. The stay order was set aside. 75. We get an impression that the first Respondent took advantage of the fact that there was no opposition to the application under Section 466 of the Companies Act after settling the matters with the workers' union and some creditors. It was the duty of the first respondent not only to have placed the copies of the Company Application No. 243 of 2011 (earlier application) and the orders made by the Company Court, Appeal Court and Hon'ble Supreme Court before the Company Court at the time when the Company Court was persuaded to make the orders dated 21 December 2022 and 09 October 2023. 76. Mr Tulzapurkar submitted that the order dated 21 December 2022 does contain a reference to the earlier application and the orders made therein. For this, he referred to paragraph No. 16 of the order dated 21 December 2022, which reads as follows: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be relevant at that stage. However, this argument could not have been raised when the Interim Application was finally heard and disposed of by order rated 09 October 2023. At that stage, it was necessary to apply all the principles set out in the various decisions of this Court, Calcutta High Court, and the Supreme Court. Further, since the orders made by the Company Court, Appeal Court and Hon'ble Supreme Court were highly relevant to exercising discretion one way or the other, the same should have been considered before making the order dated 09 October 2023. 80. The impugned order dated 09 October 2023 refers to no principles governing the discretion to stay proceedings in winding up on an application under Section 466 of the Companies Act. The Company Court's order dated 14 October 2011, the Appeal Court's order dated 23 August 2013 and the Hon'ble Supreme Court's order dated 23 February 2016 is not even adverted to, much less considered. The impugned order only refers to the compliance of the directions issued in the orders dated 21 December 2022 and, based upon the same, allows the application under Section 466 and passes various consequential orders. Thus, the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was for the first Respondent to have made out an exceptional case, firstly in the pleadings, and then by placing adequate material on record regarding the exceptional circumstances. Since the attempt before the Appeal Court was to rely upon the exception, the first Respondent had a very significant burden to discharge. At least from the reading of Interim Application No. 3663 of 2022, we do not think any circumstances based on which the normal rule could be deviated were pleaded, let alone established. 84. At least prima facie, the only change of circumstance that is pleaded and, to some extent, established is the settlement of the worker's dues. To some extent, some pleadings and material about the creditors' settlement exist. However, as was repeatedly emphasised, mere settlement of the creditors or workers does not entitle any party to a stay of the winding up proceedings under Section 466 of the Companies Act. That may be one of the considerations, but surely, that could not be the sole consideration. In ARC Holdings Ltd. v. Rishra Steels P. Ltd. (2010) 157 Com Cases 364 (Cal), the Court found that the stay application did not address the gaps it had pointed out while reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondents are now in complete control of the assets of the said company. This was, as observed in paragraph 27 of the Appeal Court's judgment and order, without evidence of the first Applicant mustering a 3/4th majority. The shareholding of the first and third Respondents comes to 52%. This means that a substantial percentage of members (i.e. 48%) are not involved in the process. 88. All this was possible, perhaps only because the Appeal Court's judgment and order was not shown to the Company Court. Suppose the orders made by the Company Court, Appeal Court and Hon'ble Supreme Court were to be shown to the Company Court. In that case, we believe that no stay would have been granted to the winding up process by exercising discretion under Section 466 of the Companies Act. Even the liquidator's report has not sufficiently addressed the concerns in the previous orders or opined any substantial change in material circumstances. At least the liquidator should have specifically invited the Court's attention to the strong observations in the earlier orders of the company court and the appeal Court. 89. There is no question of this Court for the first time considering the materials on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was deposited before the impugned order dated 9 October 2023 was made. The disbursal was subject to the orders in this appeal. Therefore, no equities as such could be claimed. There would have been no difficulty continuing the stay for, say, four weeks. However, if the stay on the winding-up proceedings is continued. In that case, the Official Liquidator may be powerless to exercise any control over the assets and properties of the said company. The first and third Respondents, who now appear to be in control of the said company, could then fritter away the assets and immovable properties without any restriction and control. Also, we are not made aware of the financials of the said company and the extent to which the first and third respondents have dealt with the company's properties and assets. Therefore, we are hesitant to continue the stay on the winding up proceedings, and that too, unconditionally. 94. Suppose the relief applied for by the first Respondent is refused. In that case, all that will happen is that the affairs and the properties of the said company would revert to the Official Liquidator and remain custodia legis. If there is anything that the first and third Res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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