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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 ..... dmission stage, subject to any overnight part-heard matters. 3. Admit. Considering the orders made from time to time earlier and with the consent of the learned counsel for the parties, the appeal was heard finally. 4. This appeal questions the order of 09 October 2023, read with the order dated 21 December 2022, made by the Company Court disposing of the Interim Application No. 3663 of 2022 made by the first Respondent under Section 466 of the Company's Act, 1956, and staying the proceedings for the winding up of Swadeshi Mills Company Limited (in liquidation) ("said company"). 5. The first and second Appellants hold 5400 and 250 shares, respectively, in the said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of six weeks from the date of uploading of this order. (ii) The Applicant shall file undertakings to the effect : (a) that in case the amount of Rs.240 Crores, to be deposited by the Applicant with the Official Liquidator, falls short to satisfy the liabilities of the Company in liquidation, the Applicant will deposit such further amount as may be necessary to discharge those liabilities; (b) that it will pay to any individual ex-worker who is not willing to accept the amount in accordance with the Agreement for Settlement, higher of the amount that may be adjudicated by the Official Liquidator in accordance with the order of the Division Bench dated 22 December 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the principles to be followed for deciding such an application. He submitted that the impugned order dated 09 October 2023 also does not take any cognizance of the Company Court's order dated 14 October 2011, the Appeal Court's judgment and order dated 23 August 2013 and the Hon'ble Supreme Court's order dated 23 February 2016, by which the Company Application No. 243 of 2011, again seeking a stay on the winding up proceedings under Section 466 of the Companies Act was dismissed with strong observations and findings. 15. Mr Khanna submitted that such non-consideration vitiates the impugned order dated 09 October 2023, even if such order is read along with the order 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the above reasons, Mr Khanna submitted that the impugned orders should be quashed and set aside. 20. Mr Tulzapurkar, learned Senior Advocate for the first Respondent; Mr Amir Arshiwalla, learned counsel for the third and fifth Respondents; and Mr Cuyrus Ardeshir, the learned Senior Advocate for the fourth Respondent, defended the impugned orders based on the reasoning reflected therein. 21. The learned counsel for the above Respondents submitted that though the impugned order dated 09 October 2023 may not have referred to the orders dismissing the earlier application under Section 466 of the Companies Act, the order dated 21 December 2022 did refer to the rejection of 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause, the Court may still order a stay of winding up even if none of the three criteria for grant of stay in normal circumstances are made out. He submitted that in the present case, the first Respondent had shown sufficient cause for making an exception to the normal rule regarding grant of stay to the winding up proceedings. He submitted that this Appeal Court should consider this case, and based upon such consideration, this Appeal should be dismissed instead of remanding the matter to the Company Court for fresh consideration. 26. The learned counsel for the above Respondents submitted that the Appellants hold a miniscule percentage of shares in the said company. They 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to the public interest involved in reviving the said company. Here, the first Respondent has pleaded that the revival of the said company will allow the re-development of chawls located on its lands and the re-development of the land, which will lead to the construction of low-cost housing by MHADA as per law. There is also a statement that erstwhile workers would be entitled to participate and apply for these low-cost housing units, a portion of which will also be offered free of cost to eligible erstwhile workers. The first Respondent also stated that it proposes establishing and operating a textile educational institution on the company's property. 36. The first 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or otherwise as may be prescribed, to the Registrar, who shall make a minute of the order in his books relating to the company." 41. The principles based on which an application under Section 466 of the Companies Act ought to be decided were summarized by the learned Single Judge of the Calcutta High Court in Neelkantha Kolay Vs. The Official Liquidator AIR 1996 Calcutta 171 in the following terms: - "23 .... "Therefore, from the above principles which have been summarised in different authorities and the decision referred to hereinbefore it appears that the discretion for stay under Section 466 can only be exercised by the Court; (1) if the Court is satisfied 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under Section 466 of the Companies Act. Paragraph 29 of the Company Court's order dated 14 October 2011 reads as follows: - "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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, while exercising its powers under section 466, the company Court cannot do anything which shakes the confidence of the public at large 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of public interest, commercial morality and the intention to revive the company." (See para 39) 47. Apart from laying down the above principles and observations, in the precise context of Company Application No. 243 of 2011 filed by the first and third Respondents, the Company Court, in its order dated 14 October 2011, held the following:- "I will have to test the present application and the request of the applicants therein on the touchstone of the above principles. All discretion has to be exercised judiciously and not arbitrarily. The Court cannot pick and choose shareholders and creditors. The Court cannot in the garb of conflicting claims of workers or because 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreeable to the Liquidator and the Court controlling their actions in interest of all creditors and general public. The business opportunities on account of spiraling 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the principles that should guide a Company Court in deciding application under Section 466 of the Companies Act and after recording clear and categorical findings that the first and third Respondents, who are a part of the Shapoorji Pallonji Group, were only interested in acquiring the said company's immovable properties at a throwaway price and by a backdoor method by taking away the entire proceedings in winding up from the supervision and control of the Court, the Company Court, dismissed the application under Section 466 of the Companies Act. 49. The Company Court also held that if the affidavits of the first and third Respondents were perused carefully, it 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the Companies Act or without having to purchase such property in free, fair and transparent auction proceedings that the Official Liquidator would be obliged to hold, was not brought to the notice of the Company Court when the Company Court made the impugned order dated 09 October 2023 and for that matter the order dated 21 December 2022. If this order were brought to the notice of the Company Court, we are quite sure that at least the same would have been referred to and some attempt made to distinguish the same before allowing the application under Section 466 of the Companies Act. 53. The Company Court's detailed order, running into 68 pages, was challenged 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 bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 58. The Appeal Court referred to several decisions of the English Courts and the Indian Courts interpreting provisions like Section 466 of the Companies Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se for it. In particular, the words "satisfied," "just and beneficial," "satisfaction of the court" and "ought to be stayed" seem to me to indicate that the applicant for a stay must make out a case that carries conviction." (emphasis supplied)" 60. The Appeal Court also referred to and approved the decision of Justice S R Das (as the learned Judge then was) in the matter of East India Cotton Mills Ltd (supra). The Appeal Court also referred to the Hon'ble Supreme Court's decision in Sudarsan Chits (I) Ltd Vs. G. Sukumaran Pillai & Ors AIR 1984 SC 1579. in which it was held that an order of stay under Section 466 is to place the order of winding up in a state of suspended 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 466 mandate that the Court must be satisfied on proof that an order of stay ought to be granted. These words place an affirmative duty and obligation on the Court to consider several aspects of the case, not just the interests of the creditors in determining as to whether an order of stay should be granted. 65. The Appeal Court considered in detail the decision of the Hon'ble Supreme Court in the case of M/s Meghal Homes Pvt. Ltd. Vs. Shree Niwas Girni K.K.Samiti & Ors AIR 2007 SC 3079 in which it was held 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 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 dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the 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 have an opportunity to consider and vote on a proposal 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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned judges before the impugned orders were made. 74. The parties' vague reference to earlier applications being dismissed due to the workmen's resistance was insufficient. The copies should have been annexed, and the judgments and orders should have been explicitly brought to the Company court's attention. Since the first Respondent was seeking a discretionary order under Section 466 of the Companies Act, it was their duty to have placed copies of such judgments and orders before the Company Court and not merely rest content by the pleading in paragraph No. 23 of the Interim Application No. 3663 of 2022 and after that, craving leave of the Court to refer 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 settli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial capacity of the first Respondent. Therefore, the order dated 21 December 2022 (made by N J Jamadar, J.) stipulates that "based on the aforesaid compliances and response, if any, the Court would consider the prayer for permanently staying the winding up order and revival of the company, and consequential reliefs". 79. Therefore, it could be argued that the non-application of the various principles required to be applied when considering an application under Section 466 of the Companies Act may not be very relevant. Similarly, it could be argued that the non-consideration of the orders dismissing the earlier application, and the strong observations may not 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 befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 2022 and 09 October 2023. 83. Mr Tulzapurkar referred to the first Respondent's case falling within the exceptions referred to by Megarry J. in Re Calgary (supra). As noted earlier, the said decision is a clear authority for the proposition that "in normal circumstances no stay should be granted of winding up, unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it; (3) or else there is secured to him, the right to receive all that he would have received had the winding up proceeded to its conclusion." Therefore, if the first respondent was confident that its case fell within the exception from the normal circumstances, then 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Official Liquidator would have held under the supervision of the Court. 87. The Appeal Court, in its judgment and order dated 23 August 2013 at paragraph 27, has noted that where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court was to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. Despite such precise observations and even though, in the Interim Application No.3663 of 2022, not all shareholders have been joined, the impugned order has stayed the winding up proceedings so that the first and third 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 order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere also consequential to or in the context of the stay application. Since the impugned orders on the stay application are dissolved or set aside, such orders on the liquidator's reports would also not survive. Interim Applications, if any, would not survive and the same are disposed of. 92. After arguments, Mr Tulzapurkar submitted that if this Court allows the Appeal, the stay on the winding-up proceedings should be continued for a reasonable period so that the Respondents can challenge our judgment and order. He pointed out that the first Respondent had already deposited Rs.240 Crores in the Court, which has already been disbursed to the workers. 93. The amount 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 sai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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