TMI Blog1976 (8) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... of the questions involved, the Incorporated Law Society, a body which represents the profession of solicitors at Bombay, sought permission to intervene in the matter, Such permission was granted and the said Society appeared through its counsel and made submissions on various aspects of the matter. The facts leading to the judge's summons are not much in dispute. On 19th August, 1970, the company took on lease three flats, being flats Nos. 702, 703 and 803 in a building called "Bhaktvar" at Colaba, Bombay. The area of the said flats is in the vicinity of 7,000 sq. feet and the rent payable in respect thereof is Rs. 3,500 per month. The company was wound up by an order of this court on 23rd January, 1976. The said flats thereafter remained vacant and unoccupied. In fact, by an order made earlier at the instance of the landlords of the said flats, M/s. Pallen Mehrijibhoy Mistry and others (hereinafter called the "landlords") a Metropolitan Magistrate had directed the company to desist from using the said flats in any other manner save and except for its business purposes. On 6th October, 1975, the landlords filed a suit in the Court of Small Causes at Bombay, being Suit No. ARE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icants were given liberty by the court in the following words: "If the applicants desire to place any facts before the official liquidator in connection with the advisability of defending the said suit, they may do so, and the official liquidator will communicate such facts to his own attorneys who will apply their minds to them." It is not disputed by the applicants that they did not place any facts before the liquidator. However, by their attorney's letter dated 11th May, 1976, the applicants inquired of the attorneys of the liquidator as to what steps were being taken for defending the suit. As no reply was received by the applicants' attorneys, a reminder was sent to the liquidator on 6th June, 1976. By the said reminder, the liquidator was also required to furnish a copy of the opinion of the counsel obtained by the attorneys of the liquidator. In the meanwhile, the liquidator got the movables lying in the flats surveyed and evaluated. The valuers, M/s. Bennet Coleman Co. Ltd., made an inventory and sent their valuation report to the liquidator. The said report is dated 28th April, 1976. The liquidator also received the opinions of the attorneys and the counsel. On 7th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of natural justice are attracted, what are the postulates thereof in such situations ? Shri A.N. Modi, the learned counsel for the applicants, submits that a judge's summons is a more appropriate procedure having regard to the claims in respect of which directions are sought by the liquidator ; says counsel, had a summons been taken out, the copies of the pleadings and the evidence respecting thereto would have been disclosed to the parties and the applicants would then have made a useful contribution in the matter. The learned counsel emphasises the fact that the directions which the liquidator seeks from this court pertain to the disposal of the movables belonging to the company and to the surrender of valuable leasehold rights in the said three flats. These directions, according to the learned counsel, come within the purview of clause ( c ) of sub-section (1) of section 457 of the Companies Act, 1956 (hereinafter referred to as "the Act"), and that, in making an order in that behalf, the court exercises a judicial function and passes a judicial order. The learned counsel submits that when the liquidator seeks directions in a matter covered by section 457, subsection (1), h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case, is in respect of exercise of the powers by the liquidator not under section 457, sub-section (1), but under section 458. This is so, says the learned counsel, because the order of winding up passed by this court on 23rd January, 1976, inter alia , conferred upon the liquidator a general authority to exercise all powers under section 457 of the Act to be exercised by him under section 458 "without sanction or intervention of the court save and except in the case of a sale of an immovable property". According to the learned counsel, the directions which are sought by the liquidator appertains to the exercise of his discretion under section 458 and further that the directions relate only to the issue as to whether the liquidator should defend the suit filed by the landlord. The learned counsel submits that the surrender of a flat does not amount to a sale or transfer of an immovable property. He contends that, having regard to the authority conferred on the liquidator by the winding up order dated 23rd January, 1976, the directions relate to a matter in respect of which the sanction of the court is not the requirement of law. The learned counsel says that in see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ischarges administrative functions and that, in doing so, he merely extends what the liquidator characterised as "courtesy" to the court: "Courtesy extended by a subordinate officer of the court to the court which is ultimately responsible for the winding up proceedings." The issue as to whether with regard to sale of properties, the only mode available to the liquidator is the one provided by rule 139, is not res integra. A Division Bench of this court in Amba Tannin and Pharmaceuticals Ltd. v. Official Liquidator [1975] 45 Comp. Cas. 457 (Bom.) was called upon to decide the controversy. On a comprehensive and, with respect, if I could say so, a profound review of the relevant provisions of law and the principles applicable thereto, the Division Bench of this court (Kanta-wala C.J. and Bhasme J.) held that the report of the liquidator was an established practice of this court and that such a practice was permitted by the provisions of rule 10 of the Rules. The ipsissima verba of the court run as follows (page 479) : "In exercise of the powers conferred by rule 10, it will be also permissible to the judge to allow the practice and the procedure of the court which was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that in that case, this court sub silentio accepted the position that even though there were conflicting claims requiring adjudication by the court, the procedure by way of the liquidator's report was permissible and justified. The Division Bench, however, was not called upon to and did not enunciate any principles upon which a judge could permit under rule 10 of the Rules, a deviation from the normal procedure, that is to say, the procedure of a judge's summons with respect to the confirmation of sale proposed by the liquidator. In the present case the principles which should govern the exercise of the discretion by the court in permitting the liquidator to bypass the normal procedure contemplated by rule 10, viz. , by a petition or by a judge's summons, will have to be identified and ascertained. It does not admit of any doubt that in cases where directions which are sought by the liquidator have a serious impact on the rights of the creditors or where controversies involved therein are fierce and require adjudication of respective rights, contentions or claims of the parties or where a comprehensive analysis of complicated facts or evidence is required, the proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The case was governed by the provisions of section 183(3) of the Companies Act, 1913. The corresponding section under the Act is section 460. Section 460 in terms contemplates sanction of the court in regard to "administration of the assets of the company and distribution thereof amongst the creditors". The schemes of sections 457 and 460 are analogous. Both the sections postulate limitations on the liquidator's power, the right of the creditors to challenge the action of the liquidator and the court review upon an application by the aggrieved person. A fortiori, therefore, cases governed by the said sections must come within the purview of analogous principles. Different considerations, however, arise when directions which are sought by the liquidator concern a discretionary matter under section 458. Section 458, inter alia , provides that the court may "by order, provide that the liquidator may exercise any of the powers referred to in sub-section (1) of section 457 without the sanction or intervention of the court". There is a proviso to this section. It lays down that the exercise by the liquidator of such powers shall be subject to the control of the court. There is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsence of power until such sanction is accorded. An exercise of power in the former case is valid and effective subject to the revision by the controlling authority but in the latter case exercise of power is not effective until sanction is accorded by the sanctioning authority. It is true that sub-section (3) of section 457 also speaks of control and not "sanction". The expression "control" is used there so as to cover cases covered by both the sub-sections (1) and (2). It, however, does not detract from the scheme of sub-section (1) which postulates "sanction" of the court. The word "control" in sub-section (3) merely underpins the court's hegemonous position with regard to actions of the liquidator in respect of matters enumerated in sub-section (1) of section 457. The scheme unfolded by section 457(1) and 458 is that once a liquidator is granted general authority, the exercise of his discretion, the liquidator is subject to the control of the court. The court can review the action of the liquidator. Such a review, however, is of a limited character. The scope of the discretionary powers of the liquidator and the principles of non-interference therewith are succinctly articulate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 549 : also (Companies (Court) Rules, 1959 rules 16, 305, 323(4), 332 and 360). I am of the view that, having regard to the conflict or possibility of conflict with regard to the actions taken or proposed to be taken by the liquidator, it cannot be denied that the creditors have a locus in respect of the exercise of the powers by the liquidator, whether those relate to the matters in which sanction of the court is a condition precedent or whether the exercise of the powers pertain to discretionary matters. Ultimately, the unsecured creditors have vested rights and legitimate expectations in respect of distribution of assets in winding up. These rights have been recognised and have been effectuated by courts in matters arising in winding up. In J . K. ( Bombay ) Private Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp. Cas. 689 , the Supreme Court quoted with approval the decisions of the English courts in Bank of Scotland v. Macleod [1914] AC 311(HL) and In re Anglo Oriental Carpet Manufacturing Co. [1903] 1 Ch 914 (Ch D). and gave its imprimatur to the recognition of the vested rights of the unsecured creditors in winding up. Regard being had to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at terms ? The liquidator seeks a further direction as to whether the offer given by the landlords to compromise the suit should or should not be accepted. In my opinion, the surrender of the leasehold rights when the tenancy is a statuory one, is not a sale or transfer of immovable property under section 5 of the Transfer of Property Act. (See Makhan Lal Laha v. Nagendra Nath Adhicary AIR 1933 Cal. 467). A surrender of leasehold rights has been characterised by this court in Balaji Sitaram Naik Salgavkar v. Bhikaji Soyare Prabhu Kanolkar [1884] ILR 8 Bom. 164, as a contract by mutual consent. The present report deals with the sale of movables and the right of liquidator to defend a suit. The right to compromise a suit follows from the right to defend. These directions pertain to matters in respect whereof there is discretion vested in the liquidator under section 458 of the Act and in respect whereof a general authority has been conferred upon the liquidator under the winding up order dated 23rd January, 1976. The procedure adopted by the liquidator is in consonance with the established practice of this court and is permissible under the provisions of rules 6 and 10 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssential upshot of the rule of law enshrined in the corpus juris of this country. As noticed by the Supreme Court in A.K. Kraipak v. Union of India AIR 1970 SC 150, these principles have ever expanding horizons. There is a consensus of judicial opinion that even administrative matters come within the pale of the rules of natural justice. All administrative directions which cause prejudice to rights or interests or even legitimate expectations of a person must conform to the principles of natural justice. (See Erusian Equipment and Chemicals Ltd. v. Stale of West Bengal AIR 1975 SC 266). There is justification in the submission of Shri Shah that the rationale of compulsory winding up is that the courts do even handed justice amongst its creditors and contributories. The purposes of the winding up as submitted by Shri Shah are that the assets of the company in winding up should be realised and distributed amongst its creditors and if surplus is available, amongst its contributories. A winding up of a company as contemplated by section 447 is for the benefit of all the creditors. The scheme unfolded by sections 447, 454, 457, 460, 461, 464 and 546 and other cognate section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f powers, whether statutory or administrative, has civil consequences it must conform to the principles of natural justice and fair play. There is no escape from the conclusion that in cases where court's approval is sought with regard to the sale of the properties both the court and the liquidator are bound by the audi alterant partem rule. Dicta of the Supreme Court in Jotan Kanwar Golcha v. Golcha Properties Private Ltd. [1971] 41 Comp. Cas. 230 is apposite. It was a case where the official liquidator made a report to the court and obtained sanction for sale of certain immovable properties. It is true that it was a case where interests of a third party were involved and that rule 139 was invoked. But what is of significance is the view taken by the Supreme Court that even the official liquidator was bound by the rules of natural justice. At page 232 Grover J., speaking for the court, observed See [1971] 41 Comp. Cas. 230 (SC) : "The only question is whether because the official liquidator failed to discharge his duties properly by having a notice issued to the appellant, whose rights were directly affected by the order proposed to be made, the appellant was debarred from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation in rejecting submissions made on behalf of the official liquidator in this behalf. The right of a creditor to be heard having been established, the only question that remains to be determined is what are the postulates of the principles of natural justice that are attracted in the present case. The principles of natural justice are not a body of procrusteam formulae. They have dynamic adaptability and responsiveness. It is an established law that as to what particular ingredients of natural justice apply to a given case depends on the facts and circumstances of that case, the framework of the law operating in respect thereof and the natural function of the authority concerned therewith. As held by the Supreme Court in Union of India v. P.K. Ray AIR 1968 SC 850, the application of the doctrine depends upon the nature of the jurisdiction conferred on the authority, upon the character of the rights of the persons affected, the scheme and the policy of the statutes and other relevant circumstances of a particular case The factual framework within which the claim of the applicants has to be considered is not a very wide or nebulous one. The grievance of the applicants r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll disclosure admits of several well-defined exceptions. Two of the exceptions relevant for the purpose of the present controversy may be noticed. These exceptions are : ( i ) where disclosure of a material would be injurious to the public interest, and ( ii ) such a disclosure will discourage frankness in official reports. Professor S.A. de Smith in Judicial Review of Administrative Action, 3rd edition, at page 180, expounds the law as follows : "To the general rule there are various exceptions, some of which have already been indicated. There are cases where disclosure of evidential material might inflict serious harm on the person directly concerned ( e.g. , disclosure of a distressing medical report to a claimant for social security benefit) or other persons or where disclosure would be a breach of confidence or might be injurious to the public interest ( e.g. , because it would involve the revelation of official secrets, inhibit frankness of comment and the detection of crime and might make it impossible to obtain certain classes of essential information at all in the future). In such situation the person claiming to be aggrieved should nevertheless be adequately apprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation. These reports of the liquidator are of an administrative nature and seek administrative directions from the court. In my opinion, the full disclosure of the reports made by the liquidator to the court or parts ( a ), ( c ) and ( d ) thereof adverted to above will inhibit frankness in such reports and will result in revealing opinions or information received in confidence. Such disclosures would dry up sources of information which are normally available to the liquidator in respect of fraudulent, illegal and criminal actions of the directors and other officers of the companies in liquidation. It must, therefore, be opined that on broad principles any full or free disclosure of the report of the liquidator would not be in consonance with justice, equity and fair play. The opinion expressed above, however, does not mean that a creditor is not at all entitled to any disclosure. Nothing has been shown to me to make a finding as to any practice of not disclosing the report of the liquidator except in very exceptional cases. I am of the view that there ought to be some disclosures of the reports of the liquidator. In my opinion a creditor is entitled to a summary of allegations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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