M/S Bakemans Industries Pvt.Ltd. Vs. M/S New
Mills & Ors.  INSC 965 (16 May 2008)
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE
JURISDICTION CIVIL APPEAL NO. _3628__ OF 2008 (Arising out of SLP (C) No. 12616
of 2007) M/s. Bakemans Industries Pvt. Ltd. ..... Appellant Versus M/s. New
Cawnpore Flour Mills and others .... Respondents WITH
CIVIL APPEAL NO. 3629_ OF 2008 (Arising out of SLP (C) No. 14427 of 2007) M/s.
Bakemans Industries Pvt. Ltd. ..... Appellant Versus M/s. New Cawnpore Flour
Mills and others .... Respondents
S.B. SINHA, J.
1. Leave granted in both the
2. Whether power of a Company
Court to sell the property of a company vis-a-vis the power of the Financial
Corporation can be merged 2 is the question involved in these appeals which
arise out of the judgments and orders dated 2nd July, 2007 and 6th July, 2007
passed in Company Appeal No. 27 of 2004 and Company Appeal No.2 of 2007
respectively passed by the Division Benches of the Delhi High Court.
3. Certain basic facts are not in
dispute which are as under :
SICOM Ltd. (SICOM in short)
advanced a loan of Rs.17 crores to the appellant (M/s. Bakemans Industries Pvt.
Ltd.). It became a defaulter. SICOM issued a notice under Section 29 of the
State Financial Corporations Act (1951 Act in short) on 22nd January, 2003.
Another notice was issued for taking over possession of the properties of the
sister concern of the appellant, viz. Captain Hygiene Products Ltd.
Appellant and its sister concern
filed two writ petitions in the Punjab and Haryana High Court at Chandigarh.
They were dismissed as withdrawn on 10th February, 2003.
4. 1st respondent and fourteen
others filed fifteen applications before the Delhi High Court for winding up of
the appellant-company. Notices were issued thereupon. SICOM issued a second
notice under Section 29 of the 1951 Act on 6th June, 2003.
3 5. Indisputably the factory of
the appellant was an ongoing concern.
SICOM took over the possession of
the appellant's factory at Patiala on 18th July, 2003. It was at that time in
operation. It had finished bakery products which were perishable in nature.
Allegedly the operations were shut down and the factory was locked.
6. We may notice here that
different proceedings were initiated either at the instance of the appellant or
at the instance of some of the respondents.
7. Appellant evidently took
recourse to a proceeding which was unknown to law. A purported agreement was
entered into by and between the appellant and one NRI Lead Bank. We are not aware
as to what were the disputes about between them. The said purported disputes
were referred to Arbitral Justice Tribunal of ADR Arbitration, a body said to
have been recognized by the Government of India in terms of Section 21 of the Arbitration and
Conciliation Act, 1996. A purported reference of disputes in terms of a
purported arbitration agreement contained in a composite instrument dated 14th
August, 2003 was referred on 16th August, 2003. It was accepted by the Tribunal
on 18th August, 4 2003 and notices were issued. The majority of the Tribunal
opined that there was no genuine arbitration agreement. The arbitration
proceeding was closed on 23rd August, 2003.
8. A new set of Arbitrators was
constituted by the Tribunal who rendered an award on 16th August, 2003 upon
holding a day's sitting only opining that (i) taking over of the unit was
illegal and (ii) a direction was issued to handover possession to Bakemans.
9. A purported execution petition
was filed by NRI Lead Bank before the Delhi High Court seeking execution of a
purported written agreement/settlement dated 16th August, 2003 passed by the
Board of Conciliation in the said proceedings.
10. The execution petition was
filed not only against the appellant and its sister concern, Captain Hygiene
Products Pvt. Ltd. but also against SICOM. Industrial Development Bank of
India, Industrial Finance Corporation of India, HUDF Bank, State Bank of
Patiala, and Punjab State Industrial Development Corporation Ltd. were also
impleaded as parties therein.
5 11. We shall deal with the
factual matrix thereabout a little later.
12. However, in the meantime,
another proceeding by way of an application under Section 9 of the Arbitration and
Conciliation Act, 1996 was filed before the Tis Hazari Courts, Delhi. It
was registered as Misc.
Suit No. 139 of 2003. Inter alia,
a prayer was made therein to appoint a receiver. However, it appears that
another Bank initiated a proceeding before the Debt Recovery Tribunal for
recovery of its dues. A Receiver was appointed by the said Tribunal in respect
of the perishable goods on 1st September, 2003.
13. Possession of the said perishable
goods lying in the factory was taken from SICOM. A spot report was prepared.
14. Appellant in the meantime
relying on or on the basis of the said purported Award of the Board of
Conciliation took forcible possession of the factory premises on 14th September,
15. SICOM filed an application in
the said purported execution proceeding seeking for the following directions :
6 to withdraw the proceeding
before the learned Additional District Judge ;
and handover the premises ;
prohibitory injunction ; and
to stay the
operation of the Arbitration Award.
16. An order of status quo which
had been passed earlier was directed to be maintained by the parties by the
High Court on 15th September, 2003.
17. An application for
modification of the order dated 15th September, 2003 was filed by SICOM on 16th
18. Appellant also filed an
application for permission to sell all perishable goods lying in the factory.
Allegedly, the Receiver was asked to sell the perishable goods.
It also directed the appellant to
pay some amount to show its bona fide. Appellant furthermore filed an
application for vacation of the order dated 15th/16th September, 2003. On 28th
November, 2003 an assurance was also given to the Court that the appellant will
come with a definite 7 proposal for payment to the creditors. By an order dated
18th December, 2003 the High Court directed the appellant to deposit a sum of
Rupees two crores failing which SICOM was given a liberty to proceed with the
statutory remedies available to it under the Act for sale of the properties.
An undertaking was given to the
Court by the Managing Director of the appellant in the following terms :-
" Mr.Rajiv Kumar Gupta, Managing Director of judgment debtor No.1 and
Director of judgment debtor No.2, who is present in Court, undertakes to the
Court that on or before 7.2.2004, a sum of Rs.2 crores would be deposited with
judgment debtor No.3, to be apportioned towards the liability of judgment
debtor Nos.3,4 and 5. Judgment debtor Nos.1 and 2 shall also give a proposal
for settlement, setting out a firm payment schedule for consideration of
judgment debtor Nos.3, 4 and 5. In the event the payment of Rs.2 crores is not
made on the date stipulated, judgment debtor No.3 would be at liberty to avail
of statutory remedies available at law for sale of the property.
Counsel for the parties also pray
that the modalities of restoration of possession be got done under the
supervision of officers of this Court, so as to avoid unseemly controversies
and a clear account of the equipments, machinery and the assets, of which
possession is taken over at the factory premises is available. Considering the
quantum of work required, counsel for the parties pray that at least three
Local Commissioners be appointed. Accordingly, I appoint Mr. D.K. Batra, Joint
Registrar of this Court, Mr.
S.P.Tara, Deputy Registrar of this
Court and Mr. Anil Kumar Arora, Sr.Personal Assistant of this Court, as the
Local Commissioners to visit the Factory Area, 8 Village Rasulpur Saidan,
Tehsil and District Patiala, State of Punjab. The Local Commissioners shall
make a complete inventory of the equipment, machinery, assets, raw materials,
finished, semi finished products, if any. The possession of factory and assets
be handed over to the representatives of respondent No.3.
Inventory be also got signed by
the parties. The Local Commissioners may in their discretion also make any
observation with regard to the condition or state of equipment, assets etc. The
Local Commissioners to execute the commission on 23.12.2003 at 11.00 a.m.
The fee of the Local
Commissioners, Mr.D.K.Batra is fixed as Rs.22,000, Mr.S.P.Tara is fixed as
Rs.20,000/- and Mr.Anil Kumar Arora is fixed as Rs.18,000/- , exclusive of out
of pocket, travel and lodging expenses.
Learned counsel for judgment
debtor Nos.1 and 2 submit that upon payment of Rs.2 crores and a firm schedule
being given for repayment, as acceptable to the financial institutions, the
Court should grant repossession to judgment debtor No.2. This aspect would be
considered upon the payment of Rs.2 crores having been made and firm schedule
for repayment having been given and accepted. Counsel for judgment debtor Nos.1
and 2 state that, in the meanwhile, they would not proceed further with the
arbitration proceedings, initiated before the ADR, Arbitral Tribunal No.3. Mr.
Arun Bhardwaj, counsel for judgment debtor No.1, further states that judgment
debtor No.1 would not proceed with Suit No.139/2003, pending in the Court of
S.K.Sarvaria, A.D.J., Delhi."
19. In the meantime, SICOM
obtained a valuation report in respect of the factory form a Public Sector
Organization known as Northern India 9 Technical Consultancy Organization Ltd.
(NITCOL). In the said proceeding, SICOM had also moved an application for
direction to permit them to publish an advertisement for sale of the moveable
properties of the appellant and to invite bids for sale.
20. We may now deal with the
process of sale of assets of the company. The factory of the appellant was
situated in village Rasulpur, District Patiala in the State of Punjab. The land
measured 30,544 sq.
yards. The building comprised of
three floors having RCC construction.
There were plants and machineries.
There was also unpacked material which had been imported from abroad. Pursuant
to the permission granted by the Court to SICOM to make an advertisement, one
was issued in Economic Times(All Editions), Business Standard (All Editions),
Tribune (Chandigarh Edition) and Dainik Bhaskar (Chandigarh and Patiala
Editions). As the appellant failed to deposit the said sum of Rupees two crores
and never submitted the definite proposal in terms of the order dated 28th
November, 2003, SICOM was given the liberty to proceed with the sale.
21. On or about 15th March, 2004,
respondent No.4, Ceylon Biscuits Pvt. Ltd. filed an application seeking
direction that they be also permitted 10 to inspect the factory on the premise
that they had held negotiations with the appellant for taking over the entire
unit. Counsel who was representing the appellant also represented Ceylon
Biscuits Pvt. Ltd.
22. A question was raised in
regard to the jurisdiction of the executing court to proceed with the matter of
sale of the properties. By reason of an order dated 16th March, 2004, the Court
noticed the bids submitted by the ITC Limited and Britannia Industries Ltd. not
only on the entire plant but also on item wise basis. The Court rejected the
contention of the appellant both in regard to its jurisdiction as also its valuation
report inter alia opining that it had failed to deposit a sum of Rupees two
crores and submitted the repayment schedule in terms of its earlier order as
such there was no other option but to proceed with the sale process.
In regard to the offer of M/s.
Ceylon Biscuits Ltd. it was directed :- "They shall file their bid
positively before 23.3.2004.
It is also made clear that if
there could be any other interested bidder, he/it could submit a bid in
accordance with the requirements, which shall be considered. It shall also be
open to the judgment debtor Nos.1 and 2 to obtain other/better offers from any
other bidder. It is made clear that in all the offers/bids which shall be
submitted by any other bidder, the bidders shall have to comply with the 11 formalities
and the terms that have been advertised on 23.2.2004."
23. Ceylon Biscuits Pvt. Ld. on or
about 24th March, 2004 offered the bid price at Rs.12.5 crores. It also
deposited the earnest money of Rs. 25 lakhs. There was another bidder M/s.
Longful Trading (India) Pvt. Ld.
who had made a bid of Rs. 11.7
crores. It had also deposited the earnest money of Rs. 25 lakhs. In regard to
the valuation of the properties both in respect of the factory of the appellant
as also its sister concern Captain Hygiene Products Pvt. Ltd. the Court noticed
:- " It is, however, pointed out by the counsel appearing for Bakemans
Industries Pvt. Ltd. and Captain Hygiene Products Pvt. Ltd. that valuation of
the said plant and machineries, and land and building would be much higher than
what is shown in the valuation report. A valuation report is placed on record
wherein it is stated that the realisable value of the aforesaid assets is
Rs.8,42,43,000/-. Counsel appearing for M/s. Bakemans Industries Pvt. Ltd.,
however, disputes the aforesaid valuation. In order to ascertain the valuation
of the aforesaid assets, it would be appropriate to pass an order directing for
re- evaluation of the entire aforesaid assets of the said company. M/s. SICOM
Ltd. is directed to get the entire assets re-evaluated by appointing an
approved valuer. The said valuation report shall be submitted before the next
date. The approved valuer shall visit the factory premises on March 29, 2004 at
when the representative of M/s.
Bakemans Industries Pvt. Ltd. could also be present at the site for the purpose
of assisting and giving appropriate guidance 12 to the approved valuer in
ascertaining real value of the assets. The necessary papers of the plant and
machineries and other connected records shall be produced by M/s. Bakemans
Industries Pvt. Ltd.
before the approved valuer in
order to assist him in evaluating the aforesaid property. It shall also be open
for the approved valuer to collect informations in respect of various assets
from other sources as well like custom authorities, Director General Foreign
Trade and such like authorities. He shall also give a separate valuation report
for un-installed plant and machinery, if any, so as to enable this Court to
ascertain the break-up value of the various plants and machineries and to
facilitate the process of sale by this Court.
It shall be open to any other
willing purchasers also to submit their fresh bids, if so desired, on or before
the next date."
24. Allegedly, the appellant filed
an application before the Executing Court with a prayer to decide its
jurisdiction at the first instance. It is stated at the Bar that neither there
is any record in respect thereof in the High Court nor any order appears to
have been passed thereon.
25. We may now notice the
proceeding before the learned Company Judge.
26. The Company Applications were
admitted by an order dated 6th April, 2004. A Provisional Liquidator was
appointed. It was directed to 13 take charge of the properties and books of
accounts of the company. On an application made by SICOM, however, the learned
Company Judge by order dated 16th April, 2004 directed that its possession may
not be disturbed.
27. As the Provisional Liquidator
had been appointed, the Executing Court transferred the petition to the Company
Judge by an order dated 19th April, 2004.
28. Some correspondences appear to
have passed between the Advocate of the appellant Official Liquidator and SICOM
as regards the effect of the provisions of the Companies Act viz-a-viz Section
29 of 1951 Act.
29. Appellant, thereafter filed an
application on 12th July, 2004 for restraining SICOM from taking any further
action for the sale/auction of the properties and also asked for an order of
status quo to be maintained by the parties. No order on the said application
was, however, passed.
In its order dated 17th July, 2004
the learned Company Judge observed that the offer of Ceylon Biscuits did not
appear to be improper.
14 However, appellant was given an
opportunity to bring a better offer.
Second report of NITCON as regards
valuation was also accepted.
30. Before the learned Company
Judge a valuation report of a Chartered Accountant was submitted which was
rejected stating that they were not the approved valuers and they had only
taken into account the book value and not the market value of the assets.
31. The matter was posted for
hearing on 22nd July, 2004. On that date, proceedings before the learned
Company Judge were in two sessions - one before lunch and another after lunch.
Before recess, appellant was granted one more opportunity to bring any other
bid and the judge adjourned the matter to 4th August, 2004. However, after
recess on a purported request made by the learned counsel for M/s.
Ceylon Biscuits the case was
preponed to 28th July, 2004. Learned counsel for the appellant was not present,
although it was mentioned that he had been informed. On the next date, i.e.
28th July, 2004 the Court recorded a statement that the respondent company was
negotiating with some buyers. An affidavit of the prospective buyer and its
Managing Director was directed to be filed in this behalf alongwith an
undertaking to honour the bid quoted by the prospective buyer. The matter came
up 15 before the learned Company Judge on 30th July, 2004. A prayer for
adjournment was made. An affidavit of the Ex-Managing Director of the appellant
was filed. However, adjournment was refused. The affidavit was called from the
registry and the matter was heard. The Court is said to have waited for the
learned counsel to appear till 4.00 O' clock and then took up the mater for
hearing at 4.45 p.m. In its order the learned Company Judge noticed the earlier
proceedings at some length. It was held :- " No affidavit is filed of any
Affidavit of Managing Director of
the respondent company is filed. It does not offer any bid of any buyer. On the
contrary, what is stated is that the Managing Director has been able to tie up
finances with the various associates and the first instalment would be received
on or before 5th August, 2004 on which date a pay order of Rs. 50 lacs shall be
produced in the court. It is also stated that the management and associates
thereafter would be definitely for the welfare of all the financial
institutions and workers and would be a far better than which is being offered
by the bidder. This affidavit, obviously, is not in compliance with the
directions contained in the earlier orders and Mr.
Chhabra's own statement to the
effect that the respondent company had negotiated with a buyer who was willing
to offer more than the amount offered by M/s. Ceylon Biscuits Ltd. such attempt
had been made earlier but failed. The arrangement offered in the affidavit does
not inspire confidence and it is only a delaying tactic. He offer to deposit
Rs. 50 lacs, in the first instance when the total liability of secured 16
creditors itself is more than Rs. 50 crores, is a pittance. The respondent
company has also not stated as to in what manner and within how much time it
would be in a position to discharge the entire liability.
It is also not stated as to from
where it would generate the resources/finances for this purpose. It is, thus,
clear that in spite of giving various opportunities to the respondent company
and its Managing Director the respondent company has not been able to produce
Property in question, which is
subject matter of sale, has been valued at Rs. 10 crores. Bid of Rs.12.50
crores of M/s. Ceylon Biscuits Ltd. is, therefore, reasonable more particularly
when other bidders whose bids were not only lesser have already withdrawn from
the bidding process, this bid is hereby accepted.
Let balance payment be made by the
successful bidder strictly in terms with the bidding conditions and the amount
would be deposited in the court. The amount so deposited should be kept in FDR
initially for a period of six months."
32. An intra-court appeal was
preferred against the orders dated 17th July, 2004, 27th July, 2004 and 30th
July, 2004. The matter was listed on 26th August, 2004. Before the appellate
court also an offer was made by the appellant to bring a higher offer of Rs. 15
crores. Pursuant to an order made in this regard, a sum of Rs. 50 lakhs was
directed to be deposited. The Division Bench also directed maintenance of status
quo in the meantime.
33. In the meantime, SICOM and
Ceylon Biscuits both filed applications for possession of the factory to be
handed over. Such permission was granted on 13th October, 2004.
34. Various applications were
filed before the Division Bench and/or this Court. Except noticing that in the
meantime another valuation report was filed on 21st November, 2006 in regard to
the intangible assets of the company as being Rs.35.88 cores which had been
sold by SICOM in favour of Ceylon Biscuits for a sum of Rs.10 crores, we need
not take note of any other fact. By reason of the impugned judgment dated 2nd
July, 2007 the Letters Patent Appeal preferred by the appellant was dismissed
and by an order dated 6th July, 2007 the sale certificate was directed to be
issued to M/s. Ceylon Biscuits.
It is these orders which are in
question before us.
35. Mr. Kapur, the learned senior
counsel appearing on behalf of the appellant inter alia would submit :-
learned Company Judge while proceeding to direct sale committed a serious
illegality in not directing a fresh 18 valuation of the assets of the company
and upon taking into consideration the interest of other creditors as also that SICOM itself before accepting the offer of M/s. Ceylon Biscuits.
Provisional Liquidator was appointed, his involvement in the process of sale was
imperative in character.
of Sections 441, 456, 450 and 457 read with Rule 293 of the Companies Act show
that the involvement of Official Liquidator was absolutely mandatory and the
Court could not, in the name of supervision over the sale, substitute itself in
the place of the Official Liquidator.
Company Judge completely disregarded the law laid down by this Court in a series
of decisions in each and every respect concerning the sale of the assets of a
company, in so far as :-
it did not
issue any fresh advertisement ;
advertisement issued being in small print and no guidelines having been issued,
the same was irrelevant;
Court did not fix any reserve price ;
19 d) the Company Court did not
make any attempt to secure the best possible market price which was its duty to
do for the sake of the general body of creditors including workmen and other
The Company Court on the one
hand appointed an independent valuer for valuing appellant's intangible assets;
the other it simply relied upon
two valuation reports made by NITCON without application of mind about its
correctness or otherwise.
SICOM's action is mala fide as
even it should not have been averse to the process of sale of the factory of
the appellant at a higher price, particularly when a memorandum of agreement
entered into by and between the appellant and Ceylon Biscuits show that the
actual value of the factory was very high as per the Ceylon Biscuits' own
valuation report dated 9th September, 2005.
Company Judge as also the Division Bench of the High Court proceeded to
determine the entire dispute only on the conduct of the appellant both in
respect of obtaining the Award of the Board of Conciliators as also its failure
to secure a better price and not on the basis of the 20 legal principles
involved in sale of assets of the company in liquidation.
Company was an ongoing concern, the Company Judge without involving the Official
Liquidator committed a serious error in directing sale of the assets of the
company at an early stage of the winding up proceeding without applying its mind
that a Scheme for revival of the Company was possible to be filed in terms of
Section 391 of the Companies Act.
36. Mr. Rajiv Shakdher, learned
senior counsel appearing on behalf of SICON, on the other hand, urged :-
SICOM had never been averse to obtaining any higher price as would appear from
the proceedings before the High Court both in Execution Proceeding as also the
SICOM had all along exercised
its right to sell the mortgaged assets in exercise of its statutory powers
under Section 29 of the 1951 Act which being in consonance with 21 the
principles and guidelines laid by this Court, could not have been interfered
appellant having questioned the action of SICOM in invoking its statutory powers
under Section 29 of 1951 Act by filing two writ applications and having withdrawn the same,
it was entitled to take possession of the properties which it did on 18th July,
The appellant with a view to
get back the possession of the factory forged a settlement agreement to deceive SICOM in purported execution of the award of the Board of Arbitration.
recourse to adventurous litigations not only by getting the aforementioned case
filed but also filing an application under Section 9 of the Arbitration and
Conciliation Act, 1996 with a view to get a Receiver appointed, although it did
not succeed in that attempt.
not correct to contend that a Receiver was appointed by the Court in the
Arbitration proceeding but the Receiver was appointed by Debt Recovery Tribunal
in respect of perishable articles only.
22 The Executing Court at the
initial stage and subsequently the learned Company Judge, merely supervised the
sale with a view to bring about transparency in the entire process.
That when a
sale is held by a Financial Institution in terms of Section 29 of the 1951 Act,
opportunities are granted to the debtors to purchase the property at the price
for which the sale had been held or to bring a higher offer.
view to satisfy the set norms, the High Court not only permitted Ceylon Biscuits
and another to take part in the bidding process but also gave opportunities
after opportunities to the appellant to bring a better offer which it failing
and/or neglected to comply with.
Appellant having undertaken to
pay a sum of Rupees two crores and having failed to comply with the same, it
was not entitled to raise any objection in regard to the legality or otherwise
of the sale, particularly when it was on their suggestions, other bidders were
permitted to bid and the said bids were opened in the Court itself.
The advertisement issued by SICOM was in accordance with the usual practice and it is not correct to
contend that 23 no guideline was issued or bidders were not permitted to bid
(in accordance with the norms).
NITCON is a Public Sector
Organization with which SITCOM has no concern, thus it would not be correct to
contend that the second valuation report should not have been obtained by it,
particularly when the said valuation was in relation to the uninstalled
machinery lying at the factory premises in respect whereof the appellant moved
the learned Company Judge.
37. Mr. Sundaram, learned counsel
appearing on behalf of respondent No.4 (Ceylon Biscuits), would submit :-
SICOM had all along exercised its powers under Section 29 of the 1951 Act and
the Court merely supervised exercise of such powers and in that view of the
matter the appellant has not been prejudiced at all inasmuch as the same merely
provided for additional safeguard for fetching a proper price for the assets.
In view of the decision of
this Court in Rajasthan Financnial Corporation Ltd. and another vs. The
Official Liquidator : 24 (2005) 8 SCC 190 the
involvement of the Official Liquidator is necessary only to sell the assets of
the company in liquidation and as no winding up order has been passed,
involvement of Official Liquidator was not necessary.
Court exercised its jurisdiction in terms of Rule 293 of the Company Court Rules
which permitted it to sell the assets itself or through an agent.
If the learned Company Judge
thought that SICOM should act as an agent, no illegality can be set to have
been committed by reason thereof.
No.4 being a bona fide purchaser, pursuant to an offer, it would be highly
prejudiced if the auction sale is set aside at this stage.
38. The core issues which arise
for our consideration in view of the rival contentions of the leaned counsel
are :- 1) Whether in the facts and circumstances of the case the Executing
Court and consequently the Company Judge could have supervised the purported
sale of the assets of the 25 appellant on behalf of SICOM having regard to the
provisions of Section 29 of the 1951 Act? 2) Whether in a case of this nature and
particularly having regard to the fact that SICOM submitted itself to the
jurisdiction of the executing court and company court, can now turn around and
contend that in effect and substance it had exercised its statutory powers
under Section 29 of the Act and allowed the same only to be supervised by the
learned Company Judge? 3) Whether the statutory powers of a Financial
Corporation as envisaged under Section 29 of the 1951 Act would prevail over
the proceedings before a Company Judge in a winding up proceeding? 4) Whether
involvement of the Official Liquidator in the facts and circumstances of the
case and particularly in view of the fact that Official Liquidator brought to
the court's notice claims of other creditors, the Company Judge ought to have dealt
with the same in the manner laid down in the Companies Act and/or the Rules
framed thereunder and/or the decision of this Court? 26 5) Whether the High
Court while exercising its powers under Section 433 of the Companies Act read
with other provisions could ignore the claims of the other creditors, and in
particular the workmen, having regard to the provisions of Section 529A
6) Whether the High Court while
exercising its jurisdiction both in the execution proceeding as also winding up
proceeding can, in the fact situation obtaining herein, be said to have adopted
a fair procedure.
7) Whether in any event the High
Court could have ignored the legal requirements as regards the conduct of sale
of the assets of the appellant only on the basis of : (1) wrongful conduct on
the part of the appellant in obtaining an award from the Conciliation Tribunal;
and (2) its failure to bring a better offer from another bidder.
39. The 1951 Act indisputably is a
special statute. If a financial corporation intends to exercise a statutory
power under Section 29 of the 1951 Act, the same will prevail over the general
powers of the Company Judge under the Companies Act.
40. There cannot be any doubt
whatsoever that the proceedings under Section 29 of the 1951 Act would prevail
over a winding up proceeding before a Company Judge in view of the decision of
this Court in International Coach Builders Ltd. v. Karnataka State Financial
Corporation [(2003) 10 SCC 482] wherein it has been held:
"26. We do not really see a
conflict between Section 29 of the SFC Act and the Companies Act at all, since
the rights under Section 29 were not intended to operate in the situation of
winding up of a company. Even assuming to the contrary, if a conflict arises,
then we respectfully reiterate the view taken by the Division Bench of this
Court in A.P. State Financial Corpn. case. This Court pointed out therein that
Section 29 of the SFC Act cannot override the provisions of Sections 529(1) and
529-A of the Companies
Act, 1956, inasmuch as SFCs cannot exercise the right under Section 29
ignoring a pari passu charge of the workmen...
The view taken therein was
reiterated by a three-Judge Bench of this Court in Rajasthan State Financial
Corporation and Anr. v. Official Liquidator and Anr. ( 2005 ) 8 SCC 190 wherein
it was stated:
"18. In the light of the
discussion as above, we think it proper to sum up the legal position thus:
28 A Debts Recovery Tribunal
acting under the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 would be entitled to order the sale and to sell the properties of the
debtor, even if a company- in-liquidation, through its Recovery Officer but
only after notice to the Official Liquidator or the Liquidator appointed by the
Company Court and after hearing him.
A District Court entertaining
an application under Section 31 of the SFC Act will have the power to order
sale of the assets of a borrower company-in-liquidation, but only after notice
to the Official Liquidator or the Liquidator appointed by the Company Court and
after hearing him.
If a financial corporation
acting under Section 29 of the SFC Act seeks to sell or otherwise transfer the
assets of a debtor company-in-liquidation, the said power could be exercised by
it only after obtaining the appropriate permission from the Company Court and
acting in terms of the directions issued by that court as regards associating
the Official Liquidator with the sale, the fixing of the upset price or the
reserve price, confirmation of the sale, holding of the sale proceeds and the
distribution thereof among the creditors in terms of Section 529-A and Section
529 of the Companies
In a case where proceedings
under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
or the SFC Act are not set in motion, the creditor concerned is to approach the
Company Court for appropriate directions regarding the realisation of its
securities consistent with the relevant provisions of the 29 Companies Act
regarding distribution of the assets of the company-in-liquidation."
[See also ICICI Bank Ltd. v. SIDCO
Leathers Ltd. and Ors. 2006 (5) SCALE 27] But, in this case, the sale in favour
of Ceylon Biscuits Pvt. Ltd.
having not taken place in terms of
Section 29 of the 1951 Act, the said question cannot have any application
It is, however, a case where the
learned Company Judge was not authorized to exercise its power under Section 29
of the 1951 Act. It purported to exercise its power only under the Companies Act.
SICOM submitted itself to its jurisdiction. It allowed the Company Judge to
conduct the sale. The sale that was conducted was purported to be in terms of
Act. We have noticed hereinbefore that when a provisional liquidator was
appointed, the High Court instead of exercising its writ jurisdiction referred
the matter to the Company Judge.
It was the Company Judge,
therefore, who proceeded in the matter. The Company Judge could exercise its
jurisdiction only in terms of the Companies Act
and not in terms of Section 29 of the 1951 Act. If it did not have the power
under the 1951 Act, any decision purported to have been taken by it would be a
nullity. SICOM indisputably has a statutory 30 power but it could waive the
same. It preferred the conduct of the auction at the hands of the Company Judge
in stead and place of carrying on the same by itself. It submitted itself to
the jurisdiction of the Company Judge. Not only it took part in the proceedings
without any demur whatsoever, it actively participated therein. It is only at
its instance that the bid was held. The other bidders were also brought in.
It is, therefore, not a case where
the learned Company Judge had no jurisdiction to exercise supervision of sale
of the assets of the appellant on behalf of SICOM in terms of the provisions of
Section 29 of the 1951 Act or otherwise. Respondents even never insisted to get
the question of jurisdiction determined as a preliminary issue, although raised
by it specifically. It, thus, for all intent and purport waived its right.
41. It is in the aforementioned
situation, we must consider the question as to whether in the facts and
circumstances of this case, the involvement of official liquidator was
42. The official liquidator
brought to the court's notice the claims of the other creditors. The Company
Judge having been exercising its jurisdiction under Section 433 of the Companies Act
was, thus, under a statutory obligation to consider the cases of all creditors
of the Company 31 simultaneously. For the said purpose, the learned Company
Judge was bound to follow the provisions of the Companies Act
and/ or the Company Court Rules. The jurisdiction of a Company Court extends
only to those matters which are specified in the Companies Act
and apart therefrom it had no jurisdiction. It also has a duty to see that the
claims of all creditors be dealt with, particularly having regard to the
provisions of Section 529A of the Companies Act.
We are informed that the workers had also filed their claims. Their claims
having regard to a series of decisions of this Court could not have been ignored.
[See Allahabad Bank v. Canara Bank (2000) 4 SCC 406 and Andhra Bank v.
Official Liquidator and Anr.
(2005) 5 SCC 75].
43. The claim of the workmen
having regard to the special provision as contained in Section 529A of the Companies Act
is pari passu to the secured creditors of the Company.
Clause (11) of Section 2 of the Companies Act, 1956
provides for the definition of `the court'. In A. Ramaiya, 16th Edn. 2004, the
learned author opines that the jurisdiction of a companies court extends only
to those matters which are specified in the Act and apart from those matters it
has no jurisdiction.
44. The matter might have been
otherwise if SICOM had remained outside the winding up proceedings. If it
attained, disposal of the assets of the Company would be subject to pari passu
claim of unpaid workmen in terms of Section 529A of the Companies Act.
45. The sale has been effected by
the court treating SICOM as an agent. Factually the court did not do so. Even
otherwise, it is impermissible. It exercised its own jurisdiction. It was bound
to do so.
There cannot be any doubt
whatsoever that in the matter of control over the assets of a company in
liquidation, the courts exercise a wide jurisdiction. It may not only take
recourse to the sale of the assets of the company whether before or after it is
wound up, but also would be entitled to, nay obligated to, if the situation so
warrants to attempt to rehabilitate the company itself.
While doing so, it exercises its
parens patriae power. It safeguards not only the interest of the mortgages, but
also the interest of the mortgagor. It has a statutory obligation to safeguard
the interest of the workmen as also other non-secured creditors.
It is one thing to say as to how
the assets shall be distributed but it is another thing to say that while
exercising the power to cause the sale 33 of the assets of the company, it
would ignore the statutory provision. It must, while exercising its power, take
into consideration a all relevant factors. The mode and manner as to how a sale
would be conducted is one thing but it is another thing that before putting the
assets of the company to sale, the court will undertake certain obligations
which are inherent in exercise of its jurisdiction under the provisions of the Companies Act.
46. We will assume that the court
could appoint SICOM as an agent but apart from the fact that it, in fact, did
not do so, we are inclined to hold that the stand of the learned counsel is
mutually destructive. On the one hand, it is stated that SICOM was exercising
its statutory power to cause sale of the assets of the mortgagor through the
agency of the court but it is also contended that the sale was affected by the
court through SICOM. Such a contradictory or inconsistent stand, in our
opinion, is impermissible in law.
47. In NGEF Ltd. v. Chandra
Developers Pvt. Ltd. and Anr., [(2005) 8 SCC 219], this Court opined:
"The Company Judge moreover
will have to bear in mind the provisions contained in Section 529A of the Companies Act
in terms 34 whereof the dues of the workman and the debts due to the secured
creditors to the extent such debts rank in clause (c) of the proviso appended
to Sub- section (1) of Section 529 pari passu therewith and shall have a
priority over all other debts."
In A.P. State Financial
Corporation v. Official Liquidator [(2000) 7 SCC 291], this Court held :
"Under the proviso to
Sub-section (I) of Section 529, the liquidator shall be entitled to represent
the workmen and force the above pari passu charge. Therefore, the Company Court
was fully justified in imposing above conditions to enable the Official
Liquidator to discharge his function properly under supervision of the Company Court
as the new Section 529A of the Companies Act
confers upon a Company Court a duty to ensure that the workmen's dues are paid
in priority to all other debts in accordance with provisions of the above
Section. The Legislature has amended the Companies Act
in 1985 with a social purpose viz. to protect dues of the workmen. If
conditions are not imposed to protect the right of the workmen there is every
possibility that secured creditor may frustrate the above pari passu right of
35 At this stage we may also
notice a decision of Three- Judge Bench of this Court in Andhra Bank (supra)
wherein this Court had to consider the correctness of the decision in Allahabad
Bank (supra). The questions therein, inter alia, to be decided were :
"Whether after a winding-up
order is passed under Section 446(1) of the Companies Act
or a provisional liquidator is appointed, whether the Company Court can stay
proceedings under the RDB Act, transfer them to itself and also decide
questions of liability, execution and priority under Section 446(2) and (3)
read with Sections 529, 529-A and 530 etc. of the Companies Act
or whether these questions are all within the exclusive jurisdiction of the
This court after referring to the
provisions of Section 529 and 529- A stated the law in the following terms :
"In terms of the
aforementioned provisions, the secured creditors have two options (i) they may
desire to go before the Company Judge; or (ii) they may stand outside the
winding up proceedings. The secured creditors of the second category, however,
would come within the purview of Section 529- A(1)(b) read with proviso (c)
appended to Section 529(1). The 'workmen's portion' as contained in proviso (c)
of sub-section (3) of Section 529 in relation to 36 the security of any secured
creditor means the amount which bears to the value of the security in the same
proportion as the amount of the workmen's dues bears to the aggregate of (a)
workmen's due, and (b) the amount of the debts due to all the creditors."
Thus, the High Court could not
have disregarded the pari passu charge of the workmen upon the company's
48. The role of the official
liquidator in a situation of this nature assumes great importance.
49. Chapter II of the 1956 Act
deals with winding up of a company by the court. Section 433 provides for
winding up, inter alia, by two modes.
One, if the company has by special
resolution resolved that it should be wound up by the court; or (2) if the
company is unable to pay its debts.
An application for winding up is
to be filed in terms of Section 431 of the Act. Section 441 provides that
winding up of a company by the court shall be deemed to commence at the time of
presentation of petition for winding up. The provision has since been omitted
(Amendment) Act, 2002. Section 442 provides for the power 37 of the court
to stay or restrain proceedings against the company, Section 443 envisages
power of the court on hearing petition. Section 446 provides for stay of all
suits shall. Sub-section (3) of Section 446 reads as under :
"S. 446. Suits stayed on
winding up order.-- (1)...
(3) Any suit or proceeding by or
against the company which is pending in any Court other than that in which the
winding up of the company is proceeding may, nothwithstanding anything
contained in any other law for the time being in force, be transferred to and
disposed of by that court."
50. The Executive Court being a
co-ordinate court (as the Execution Petition was filed in the High Court
itself) transferred the same to the Company Judge having regard to the fact
that a provisional liquidator was appointed. Sub-section (4) of Section 446,
therefore, has no application as the proceedings before the Executing Court was
not a matter which came up in appeal from a judgment and order of another
court. Section 447 provides for the effect of winding up order.
51. Section 448 provides for
appointment of `official liquidator'. An official liquidator would be a
liquidator on a winding up order being made in respect of a company. Section
450 provides for appointment and powers of provisional liquidator; sub-sections
(1), (2) and (3) whereof read as under :
450--Appointment and powers of provisional liquidator--
At any time
after the presentation of a winding up petition and before the making of a
winding up order, the1 [Tribunal] may appoint the Official Liquidator to be
appointing a provisional Liquidator, the Tribunal shall give notice to the
company and give a reasonable opportunity to it to make its representations, if
any, unless, for special reasons to be recorded in writing, the Tribunal thinks
fit to dispense with such notice.
provisional liquidator is appointed by the Tribunal, the Tribunal may limit and
restrict his powers by the order appointing him or by a subsequent order, but
otherwise he shall have the same powers as a liquidator."
52. Section 456 envisages that
when a winding up order has been made or where a provisional liquidator has
been appointed, the liquidator or the provisional liquidator, as the case may
be, shall take into his custody nay his control of the property, assets and
actionable claims to which the company is or appears to be entitled. It is true
that the court 39 had not permitted the provisional liquidator to take over the
assets. It protected the possession of SICOM. But the same by itself would not
mean that the provisional liquidator was denied from performing its other
Section 457 provides for the
powers of liquidator. It is in two parts, one which had to be exercised with
the sanction of the tribunal and the other which had to be exercised by itself.
A liquidator, in terms of clauses (c) and (ca) is entitled to sell the moveable
and immoveable property. Exercise of such jurisdiction by a provisional
liquidator, therefore, shall not be denied of his powers only because it did
not obtain possession of the properties. Section 529 of the Act which occurs in
Chapter V provides for application of insolvency rules in winding up proceeding
of the insolvent companies.
Section 529A expressly saves the
rights of the workmen. It contains a non obstente clause. A statutory parri
passu charge is created in support of the dues of the workmen being equivalent
to the dues of a secured creditor for the purpose enforcing the insolvency
rules as contained in clause (c) of sub-Section (1) of Section 529.
Section 538 of the Companies Act
provides for offences by officers of companies in liquidation.
53. The rights, jurisdiction and
powers of the provisional liquidator may not be the same as that of an official
But in a case of this nature, only
because the financial institution stands outside the winding up proceedings,
would it mean that the court shall, for all intent and purport, ignore its
officer and concentrate on the interest of the financial institution alone? Can
it be said that supervision of the court is necessary only in a post winding
scenario and not prior to it? The question which should be addressed, in our
opinion, by the Company Court is that the ultimate interest of both secured and
non- secured creditors must be kept in mind. Should Court have exercised its
jurisdiction for directing the sale of the prime property and, in fact, the
essence of the assets of the appellant at the initial stage. The answer, in our
opinion, should be rendered in the negative.
54. The Chancery Division in Re.
Dry Docks Corporation of London [1888 (39) Chancery Division 88], wherein Fry
J. held "But then there are circumstances which, in my opinion, vary the
rights of the parties. On the 8th of March a provisional liquidator had been
appointed. Now the provisional liquidator's appointment is not only
provisional, but contingent in this sense, that it operates to protect the
property for an equal distribution only in the event of an order for compulsory
winding-up being made; and if no such order be 41 made, then his appointment
ought not to interfere with the rights of third persons. He was in the position
of a receiver, whose appointment might interfere with the rights of third
persons. Now with regard to that, the practice of the Court is perfectly plain,
as was stated by Lord Truro, in the case of Russel v.
East Angilan Railway Company n(1),
in very clear terms. He said : "I apprehend then it may be taken as a rule
that, though this Court may have issued a process or have made an order which
may interfere with the supposed rights and interests of other parties not
parties to the cause, it is always competent for such parties to make an
application to the Court for relief; and it is not to be presumed or doubted,
but that justice will be duly administered to them on that application."
55. The courts in India have to
keep in mind different considerations.
The concept of right of property
which was existing in 19th Century in England would not stand the test of the
act and the interpretation it deserves keeping in view the object and purport
of the 1956 Act. In India, the Company Courts have a statutory duty to protect
and rights of workmen keeping in view the parri passu charge created in their
favour in terms of Section 529A of the Act. Power and functions of a
provisional liquidator subject to the limitations imposed by the court are the
same as that of an official liquidator.
56. It is furthermore not a case
where the rights of third persons were involved. We have held hereinbefore that
SICOM failed to keep itself outside the winding up proceedings. It has become a
party to it and, thus, when a sale is held by a Company Judge, it should not
keep a provisional liquidator out of its purview. It may be true that the
provisional liquidator could not sell the property without the sanction of the
court, but then feed back of the provisional liquidator by the Company Court
was necessary for the purpose of having a complete picture before it.
The official liquidator has
informed us that about 373 claims have been filed. The amount of claim is about
100 crores; amongst the claimants, there are banks in whose favour also deeds
of mortgages have been executed. Provident Fund dues and other dues of
statutoryclaims are also subject matter of the claim petition. They also have a
The claim of the provident fund is
on behalf of the workmen. For scrutiny of the said claims, a Committee has been
constituted and we had been informed that except the properties which have been
sold in liquidation, there is hardly any other asset upon which the creditors
can back upon for the purpose of realization of their dues.
57. It is true that in a
liquidation petition, secured creditors ought to be differently treated. A third
party who has an independent right would not 43 be affected by reason thereof.
Ordinarily, even the statutory power of the said financial corporation would
also not be affected.
58. We, however, are not in a
position to agree with the submissions of Mr. Sundaram that provisional
liquidators have no statutory powers in relation to affecting sale of a
moveable or immoveable property.
Indisputably, it is subject to the
direction of the court but, as indicated hereinbefore, the Court while
undergoing the process of winding up and, in any event, resorting to sale of
the assets of the company under winding up proceeding could not have a ignored
the involvement of the provisional liquidator for any purpose whatsoever.
At the cost of repetition, it is
reiterated that the discretion of the court for selecting the mode and manner
of sale has nothing to do with the process required to be gone into for the
It must have before it all these
facts and figures so as to enable it to pass a final order one way or the
other. In so doing, the court must keep in mind that it is not only determining
an issue by and between the mortgagor and one mortgagee only but could also be
determining the issue between a debtor and a vast number of creditors; whether
secured or non-secured.
44 The ratio of the decision of
the Madras High Court in Sri Chamundi Theatre Mysore Talkies Ltd. v. S.
Chandrasekara Rao [1975 (45) Company cases 60] whereupon reliance has been
placed by Mr.
Sundaram may be noticed. In that
case, an advocate was appointed as a provisional liquidator. The distinction
between appointment of an official liquidator as a provisional liquidator and
an advocate as a provisional liquidator must be viewed differently. When an
official liquidator is appointed as a provisional liquidator, the purpose is
that he must become aware of all the processes of winding up leading to
exercise of his statutory power, if ultimately the courts find it just and
equitable to direct the winding up of a company. In that case, the application
for winding up was not pressed by the petitioner-creditor.
Provisional liquidator, however,
was directed to continue unless he hands over the charge to the Managing
Director to be elected in terms of the order passed by the learned Company Judge.
The provisional liquidator, in view of the orders of the court, ceased to be in
judicial control or statutory control over the properties of the company.
Interpretation of Section 450 as
opined by the learned judges of the Madras High Court must be viewed from the
aforementioned factual matrix in mind.
45 It is not the law nor has such
a proposition been canvassed before us that the properties vested in the
provisional liquidator, as was the submission in that case. But then, however,
the learned judges opined that the appointment and power of an official
liquidator is controlled by the instrument which appoints him and that his
office is not in equation to that of an official liquidator, the same, however,
would not mean that even when there does not exist such limitation, the
services of provisional liquidator shall not be resorted to.
59. Strong reliance has been
placed on in Re A.I. Levy (Holdings) Ltd.
[1964 (1) Chancery Division 19].
60. We may at this stage notice
the statutory provisions as regards the provisional liquidator in the United
Kingdom. The Insolvency Act, 1986 governs the winding up proceedings in England
Briefly stated the scheme of the
said Act is as under :
"office-holder" is defined in section 234(1). It means the
administrator, the administrative receiver, the liquidator or the provisional
liquidator, as the case may be. For the purposes of section 236 the expression
includes, in the case of a company which is being 46 wound up by the court in
England and Wales, the official receiver, whether or not he is the liquidator.
Under the heading "The
liquidator's functions" section 143 of the Insolvency Act describes the
general functions of the liquidator in a winding up by the court as follows:
"General functions in winding
up by the court (1) The functions of the liquidator of a company which is being
wound up by the court are to secure that the assets of the company are got in,
realised and distributed to the company's creditors and, if there is a surplus,
to the persons entitled to it.
(2) It is the duty of the
liquidator of a company which is being wound up by the court in England and
Wales, if he is not the official receiver- (a) to furnish the official receiver
with such information, (b) to produce to the official receiver, and permit
inspection by the official receiver of, such books, papers and other records,
and (c) to give the official receiver such other assistance, as the official
receiver may reasonably require for the purposes of carrying out his functions
in relation to the winding up."
47 In Official Receiver
(Appellant) v. Wadge Rapps & Hunt (a firm) and another and two other
actions  UKHL 49, the question which was to be decided by the House of
Lords was whether the official receiver can have recourse to the powers
conferred by section 236 of the Insolvency Act 1986 ("the Insolvency
Act") for the sole purpose of obtaining evidence for use in
disqualification proceedings against a former director.
Observing the functions of the
liquidator vis-`-vis disqualification proceedings envisaged under the Section
236 of the Act, Lord Millett opined:
"The first of these strands
proceeds from the premise that the powers conferred by section 236 are
conferred on a liquidator "for the better discharge of his functions in
the winding up".
These words are not derived from
the express terms of the section but are evidently considered to be implicit in
it. The unspoken assumption is that a liquidator's "functions in the
winding up" are limited to the collection and distribution of the
company's assets. I agree that the bringing of disqualification proceedings is
not a function which is conferred on the official receiver "in the winding
up"; if it were, the costs of the proceedings would be payable out of the
assets of the estate. It is not necessary to consider whether the gathering of
evidence for the purpose of such proceedings is part of "his functions in
the winding up", for this 48 formulation is unduly narrow. The
liquidator's functions in relation to the company which is being wound up are
not and never have been limited to the recovery and distribution of the
company's assets. It would be very odd if the liquidator of a company in
voluntary liquidation could apply to the court to direct a public examination
in the wider public interest but could not invoke section 236 to order a
private examination in the same interest. In practice the liquidator would
usually prefer to invite the official receiver to make the application; and
even where the application was made by the liquidator the court would be
disposed to invite the views of the official receiver. But it is impossible to
say that the liquidator would be acting outside his proper role in the one case
and not in the other.
Section 236 contains no express
limitation on the purpose for which it may be invoked. Of course it may be
invoked only for a legitimate purpose in relation to the company which is being
wound up, and the court, which has discretion to make or refuse an order,
should be astute to see that the powers conferred by the section are not
abused. It would plainly be an abuse to use those powers for a purpose which is
foreign to the functions of the applicant in relation to the company which is
being wound up. But I reject the unspoken assumption that the functions of a
liquidator are limited to the administration of the insolvent estate. This is
only one aspect of an insolvency proceeding;
the investigation of the causes of
the company's failure and the conduct of those concerned in its management are
another. Furthermore such an investigation is not undertaken as an end in
itself, but in the wider public interest with a view to enabling the
authorities to take appropriate action against those who are found 49 to be
guilty of misconduct in relation to the company. If the investigation yields
information material to the Secretary of State's decision to bring or continue
disqualification proceedings, it must be reported."
It was furthermore opined:
" In my opinion, the only
limitation which is implicit in section 236 is that it may be invoked only for
the purpose of enabling the applicant to exercise his statutory functions in
relation to the company which is being wound up.
Whether the applicant is the
official receiver or the liquidator or other office-holder these include the
provision of information to the Secretary of State or the official receiver
which is relevant to the bringing or continuing of disqualification
61. Interestingly, Mr. Rajiv
Shakdher has made extensive reference from Farar's Company Law, Third Edition
to contend that as the appellant had defaulted in payment of its dues to
various secured and non-secured creditors including SICOM, it was admittedly
heading towards insolvency and in that view of the matter, the assets of the
company were really in a practical sense their assets and not the assets of the
creditors. We may notice the observations made by the learned author :
50 "As we have seen,
directors do not owe duties to shareholders as such. Neither do they owe duties
to the company's creditors. The orthodox position being as stated by Dillon LJ
in Multinational Gas and Petrochemical Co. v.
Multinational Gas &
Petrochemical Services Ltd. [1983 Ch. 258] directors owe fiduciary duties to
the company though not to the creditors, present or future, or individual
Winkworth v. Edward Baron
Development Co. Ltd. [(1987) 1 All ER 114], a House of Lords decision, might
suggest that there has been a change to that position with Lord Templeman stating
`...a company ownes a duty to its
creditors, present and future. The company owes a duty to its creditors to keep
its property inviolate and available for repayment of its debts. The conscience
of the company, as well as its management, is confided to its directors.
A duty is owed by the directors to
the company and to the creditors of the company to ensure that the affairs of
the company are properly administered and that its property is not dissipated
or exploited for the benefit of the directors themselves to the prejudice of
The learned author furthermore
"Support here for this
approach can be found in West Mercia Safetywear Ltd. v. Dodd [(1986) 4 ACLC
215] where Dillon LJ approved the following statement of the position by the
New 51 South Wales Court of Appeal in Kinsela v.
Russell Kinsela Pry Ltd. [(1989)
AC 755] :
`In a solvent company the
proprietary interests of the shareholders entitle them as a general body to be
regarded as the company when questions of the duty of directors arise. If as a
general body, they authorize or ratify a particular action of the director,
there can be no challenge to the validity of what the directors have done. But
where a company is insolvent, the interests of the creditors intrude.
They become prospectively entitled
through the mechanism of liquidation, to displace the power of the shareholders
and directors to deal with the company's assets. It is in a practical sense
their assets and not the shareholders' assets that through the medium of the
company are under the management of the directors pending either liquidation,
return to solvency, or the imposition of some alternative
62. This is the meet of the
matter. If the property which has been put to auction was the prime property
over which the fate of the creditors depended, be they secured or non-secured
ones, the company court, in exercise of its equity jurisdiction could not have
obliterated it from its mind the cases of the others. If the assets belong to the
creditors, that must mean the whole body of the creditors and not only one of
the secured creditors. The inconsistency of is self-evident, as, on the one 52
hand, it is stated that the property of the company does not vest in the court
or the official liquidator, on the other hand, it is stated that it is vested
in the body of the creditors and not only in SICOM.
63. The High Court, therefore,
could not have ignored the official liquidator only on the ground that a
provisional official liquidator was appointed and not a regular official
liquidator. The power and functions of the provisional official liquidator for
all intent and purport would be the same as that of the official liquidator
and, therefore, it was not necessary for the Company Judge to wait till the
Company was wound up.
64. If the jurisdiction of a
Company Judge is limited, any substantial deviation and departure therefrom
would result in unfairness. When an order is passed in total disregard of the
mandatory provisions of law, the order itself would be without jurisdiction. In
this case, however, even otherwise a fair procedure was not adopted. We,
however, very much appreciate the anxiety on the part of the Court to see that
otherwise just dues of SICOM be realized. Conduct of a party plays an important
role in the matter of grant of a relief. However, only because the conduct of a
party was not fair, the same, by itself, cannot be a ground to adopt a
procedure which is unjust or unfair, particularly, when by reason thereof, 53
not only the Company itself but also other creditors are seriously prejudiced.
We fail to see any reason as to why the hearing of the case was to be preponed.
Why even a day's time could not have been granted when a prayer for adjournment
was made. The jurisdiction of the Company Court is vast and wide. It can mould
its reliefs. It may exercise one jurisdiction or the other. It may grant a
variety of reliefs to the parties before it. The parties before the Company
Judge are not only the Company or the creditors who had initiated the
proceedings but also others who have something to do therewith. Even in a given
case a larger public interest may have to be kept in mind. The court may direct
winding up. It may prepare a scheme for its restructuring.
65. We, therefore, are of the
opinion that the Company Judge was not correct in its view and passed the
impugned judgments only having regard to the wrongful conduct on the part of
the appellant in obtaining an award from the conciliation tribunal or failure
to bring a better offer from another bidder.
66. The question which is really
an intricate one is what relief can be granted. On the one hand, the Company
has committed wrongs, on the other, its property has been sold in auction. Even
a part of the property has been permitted by us to be taken out of the country.
The factory, we 54 are told, has started operation. It has employed a large
number of workmen. Would that itself mean that we should refrain ourselves from
granting any relief? Direction issued by this Court in a case of this nature
need not be a narrow one.
The court has to take into
consideration the fate of not only those workmen who are working but also those
who have a claim against the Company. We must also take into consideration the
fate of the other creditors.
67. We, therefore, are of the
opinion that interest of justice would be subserved if while allowing the
appeal, the learned Company Judge is requested to go into the question afresh
in accordance with the provisions of the Companies Act
and hold a fresh auction.
While doing so, indisputably,
Ceylon Biscuits Pvt. Ltd.'s offer would be considered. The Company Judge may
consider the question of grant of some preference to Ceylon Biscuits Pvt. Ltd.
but while an auction is to be held, there should be a proper valuation of all
the assets of the Company both movable and immovable.
The court, indisputably, may
consider the question of framing an appropriate scheme if it is found that there
is a possibility of revival of 55 the Company. In other words, we leave all
options open to the learned Company Judge as are available in terms of the
provisions of the Companies
Act including adjustment of equities amongst the parties.
Till, however, a final order is
passed, Ceylon Biscuits Pvt. Ltd.
would continue to function not as
an auction purchaser but as a Receiver of the Company
Court. Ceylon Biscuits Pvt. Ltd. shall file
all statement of accounts in regard to the amounts which it had invested and
all other requisite statements including the valuation of machinery it had
taken out of the country before the Court. The Court may appoint a Chartered
Accountant to verify the said statements. The court, if it thinks fit and
proper, may, apart from the provisional liquidator, appoint another person to
supervise the works and functioning of Ceylon Biscuits Pvt.
Ltd. as a receiver of the Court.
As Ceylon Biscuits Pvt. Ltd. is being appointed as a receiver, it goes without
saying that it shall act strictly under the supervision of the court and abide
by the orders which may be passed by it from time to time.
69. For the reasons
aforementioned, the appeals are allowed to the aforementioned extent. In the
facts and circumstances of the case, however, there shall be no order as to
[V.S. Sirpurkar] New Delhi;