TMI Blog1969 (6) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... r, after obtaining the sanction of the company judge, disposed of some of the stocks and stores of the company which were likely to deteriorate in value with the passage of time but he was obstructed in giving delivery of the goods by the workers who insisted that he should proceed to sell the textile mill so that it might be started by the purchaser and the workers might get employment. The official liquidator, therefore, made a report to the company judge on 5th March, 1968, for directions in regard to the sale of the textile mill comprising land, buildings, plant and machinery and other assets such as equipment, furniture, etc. It may be mentioned at this stage that prior to the making of this report for directions, on December 26, 1967, the directors of the company had made out and submitted to the official liquidator a statement as to the affairs of the company as required by section 454 of the Companies Act, 1956, and this statement showed the estimated value of the assets of the company to be in the neighbourhood of rupees sixty-six lakhs. The official liquidator in the report made by him pointed out this fact to the company judge and so-dght the directions of the company ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order were from : (1) Shri Vrajeshkumar A. Parekh for Rs. 11,12,111 (2) Shri Vithalbhai P. Patel, the second respondent, for Rs. 12,50,000 (3) Shri Ambubhai K. Patel for Rs. 12,00,000 It may be pointed out that Shri Vrajeshkumar A. Parekh who made an offer of Rs. 11,12,111 was one of the directors of the company at the date when it was ordered to be wound up by the court and he along with other directors was a signatory to the statement of affairs filed under section 454 of the Act. On receipt of these offers, the official liquidator made a report to Divan J. on 24th April, 1968, placing these offers before the learned judge and seeking his further directions on the points specified in the report. On the report the learned judge made an order dated 25th April, 1968, that it was not necessary to obtain any valuation report nor was it necessary to sell the textile mill of the company by public auction and that the official liquidator should write to the second respondent, the highest offerer, that his offer would be accepted provided he deposits ten per cent, of the purchase price with the official liquidator within one week ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and void. This summons was, however, subsequently, by an order dated 12th December, 1968, made by Divan J., allowed to be withdrawn by the appellant with liberty to adopt fresh proceedings if so advised in respect of the same subject-matter and without prejudice to the rights and contentions of the parties. The appellant did not thereafter adopt any fresh proceedings for setting aside the orders dated 5th March, 1968, and 25th April, 1968, but, in the meantime, the official liquidator took out a summons for directions in Company Application No. 3 of 1969 on 17th January, 1969. By this summons for directions, which we shall hereafter refer to as the first summons, the official liquidator sought sanction of the court in regard to the exercise of the power to sell the movable and immovable properties of the company. Now, obviously, this summons was futile since the official liquidator had already agreed to sell the textile mill comprising all the assets of the company to the second respondent after obtaining the sanction of the court and no other property of the company remained to be sold but the summons was taken out by him ex abundanli cautela in view of a judgment given by a D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies (Court) Rules, 1959, and the first summons for directions was, therefore, adjourned in order to enable the official liquidator to take out a summons for directions for confirmation of the sale. The official liquidator, accordingly, took out another summons for directions in Company Application No. 23 of 1969 on 1st February, 1969, for confirmation of the sale in favour of the second respondent. This summons for directions, which we shall hereafter refer to as the second summons, was also addressed to the appellant and the second respondent. The appellant opposed the summons for directions while the second respondent supported it. These two summonses for directions were heard together by D. A. Desai J. and by an order dated 12/13th March, 1969, the learned judge rejected the contentions of the appellant and upheld the proposed sale in favour of the second respondent. The learned judge held, following the judgment of the Division Bench in Anant Mills' case , that the official liquidator had failed to comply with the mandatory provision of rule 139 which required that if the official liquidator wants to exercise his power to sell any property of the company under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pursuant to those orders were null and void and the proposed sale in favour of the second respondent was not liable to be confirmed as claimed in the second summons for directions and fresh directions in regard to the sale of the textile mill of the company were necessary to be given as prayed for in the first summons for directions. This contention was disputed on behalf of the second respondent on several grounds. The second respondent, in the first place, submitted that rule 139 had no application when the official liquidator wanted to exercise his power to sell any property of the company under section 457, sub-section (1), clause ( c ); it did not oblige him to follow the procedure therein set out; he could obtain necessary directions on a report without taking out a summons for directions. If, contrary to this submission, rule 139 was held applicable, then, said the second respondent, it was directory and not mandatory, and breach of it did not have any invalidating consequence. The second respondent also urged that if rule 139 was so construed as suggested by the appellant it went beyond section 643 which conferred rule-making power on the Supreme Court and was, therefore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rule 139, that would make nonsense of the provision in the opening part of the rule which says that a summons for directions shall be taken out by the official liquidator "as soon as practicable after the winding up order is made and, in any event, not later than seven days after filing his preliminary report under sub-section (1) of section 455". How can this prescription of the opening part of the rule fit in where the official liquidator proposes to sell any property of the company, say three or four years after the winding up order is made ? As a matter of fact, in a majority of cases, no question of selling any property of the company would arise until after various steps in the winding up have been taken by the official liquidator and that might take quite a long time. In such cases it would be impossible to comply with the requirement as to time set out in the opening part of rule 139. The learned Advocate-General pointed out that the summons for directions contemplated in rule 139 is a summons which is required to be taken out by the official liquidator without unreasonable delay in order that the court should have complete seizin of the winding up proceeding and the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required by rule 139 and that the order dated 6th June, 1968, not being in compliance with the mandatory requirement of rule 139, was, therefore, invalid. This contention was upheld by the Division Bench and the order, dated 6th June, 1968, was set aside. Bakshi J., speaking on behalf of the Division Bench, said : "On a plain reading of the rule its effect is that when any of the three matters mentioned above is to be considered and orders are to be taken in regard to it, a summons for directions and a notice to the petitioning creditor are essential. The rule specifically refers to the taking out of a summons and the issuance of a notice, and the words 'upon the hearing' in the rule make it amply clear that such orders are intended to be passed after a hearing. The matters included within the scope of the rule are such that while passing orders in regard to them, rights or interests of persons concerned and other similar questions of importance might have to be considered and it would be in consonance with the principles of justice that persons whose interests are likely to be affected should be heard before any orders were passed on matters in which they are likely to be conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y rule 139. These observations also conclude the contention of the second respondent that rule 139 is directory and not mandatory. Bakshi J. has emphasised at several places that the taking out of a summons for directions and giving notice of it to the petitioning creditor are "essential", which is the same thing as saying that they are mandatory. As a matter of fact, if rule 139 were directory and not mandatory, it is difficult to see how the Division Bench could have come to the conclusion that breach of it had the effect of invalidating the order dated 6th June, 1968. We must, therefore, reject the contention of the learned Advocate-General that rule 139 had no application when the official liquidator sought directions of the court in regard to the sale of the textile mill of the company and that, in any event, the provision enacted in it was directory and not mandatory. That takes us to the next question whether rule 139 is outside the scope of the rule-making power conferred on the Supreme Court under section 643. That section provides : "643. (1) The Supreme Court, after consulting the High Courts, (a)shall make rules providing for all matters relating to the winding u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r relating to the winding up of companies which, by the Act, is required to be prescribed within the meaning of section 643, sub-section (1), clause ( a ). Rule 139 as interpreted in Anant Mills' case, must therefore be held to be within the scope of the rule-making power of the Supreme Court under section 643 and the challenge to its validity must fail. We now pass on to consider the next question as to what is the effect of breach of the mandatory requirement of rule 139. Does it render the decision given in breach of it void or voidable ? Now, in order to answer this question, it is necessary first to appreciate the distinction between "void" and "voidable". As pointed out by Sir Frederick Pollock in his Law of Contracts, the words "void" and "voidable" are imprecise and apt to mislead and it is therefore all the more necessary that we should clear the ground by pointing out what exactly is the sense in which these words are used when we speak of a void decision or a voidable decision. There are two points of distinction between void and voidable acts. Firstly, an act which is void is of no force and effect ab initio : it never had any binding force. On the other hand, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not mere matters of form : as we shall presently point out, they constitute "essentials of justice". Compliance with these requirements of rule 139 is a condition for the exercise of the power to give directions in regard to sale of the property of the company by the official liquidator. If the condition is not satisfied, the court cannot exercise the power, or, in other words, the court would lack power and the purported exercise of the power would be no exercise at all : it would be void and of no effect. This would appear to be the plain inevitable effect of the language used in rule 139 and no authority is needed to support it but we find that there are at least two decisions of high authority where identical approach has been adopted in construing similar statutory enactments. The first decision to which we may refer in this connection is the decision of the Privy Council in Raghunalh Das v. Sundar Das [1914] LR 41 IA 251; 24 IC 304, 307. In this case the judgment-debtor became insolvent pending attachment but no notice was given to the official assignee as required by Order 21, rule 22, of the Code of Civil Procedure, and the property was sold in execution of the decree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation from which it appears that a chief constable may have committed an offence against the Discipline Code, then the police authority must, "unless they are satisfied that he has not committed an offence, inform him in writing of the report or allegation and ask him whether or not he admits that he has committed an offence and give him an opportunity, if he so desires, of making to the police authority any oral or written statement he may wish to make concerning the matter". Regulation 2 of S.I. 1952 No. 1706 as applied to chief constables by regulation 18 carved out an exception from this rule and said that if the chief constable "admits that he has committed an offence, the police authority may impose a punishment in accordance with regulation 11 of these regulations without the case being heard in accordance with the following provisions of these regulations". On a plain construction of these provisions, Lord Morris of Borth-y-Gest observed: "The power to dismiss for an offence was a power that could only be exercised if the procedure of the regulations was set in motion. A purported dismissal in complete disregard of them cannot be recognised as having any validity." and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first quoted from Seneca's Media Lancaster v. Lowe sub-nom Boswel's case [1605] Cro. Jac. 92 ; 6 Co. Rep. 48b that no order shall be passed to the prejudice of any person unless he has been given a fair and reasonable opportunity to make any relevant statement which he might desire to bring forward and to correct or controvert any relevant statement prejudicial to his view. It is a rule of fundamental importance basic to our system of administration of justice and hallowed and sanctified by three centuries of judicial decisions in England. As far back as 1723, holding the deprivation of Dr. Bently of his degrees without notice to be illegal and invalid, Fortescue J. proclaimed the rule, in words which have become memorable : "Besides, the objection for want of notice can never be got over. The laws of God and man both give the party an opportunity to make his defence, if he has any. "Willes J. in Gooper v. Wandsworlh Board of Works [1863] 14 CBNS 180 , described the rule as one" of universal application, and founded upon the plainest principles of justice". So also, in Ridge v. Baldwin [1964] AC 40, 114 Lord Morris of Borth-y-Gest said of the rule : "My Lords, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 . There, Order 11, rule 6, provided that when the defendant is neither a British subject nor in British dominions, notice of the writ and not the writ itself should be served upon him. The defendant was not a British subject nor was he resident in British dominions and yet, contrary to the requirement of this rule, he was served out of the jurisdiction with the writ instead of with notice of the writ. No appearance was entered on behalf of the defendant and the plaintiff accordingly signed judgment against him. The defendant thereupon took out a summons to set aside the judgment on the ground that the service of the writ was a nullity and Wills J. held that the service of the writ instead of notice in breach of Order 11, rule 6, was a nullity and not a mere irregularity and, since there had been no service, the proceedings were void ab initio. We may also refer to the decision of the English Court of Appeal in King v. North ; Ex parte Oakey [1927] 1 K.B. 491 . There the Consistory Court had made an order requiring the vicar to pay certain expenses and costs but had given him no opportunity of being heard in his defence. The vicar applied for a writ of prohibition when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second argument was more serious in its nature. It was that the order was a nullity, and that, therefore, the defendant was entitled to have it set aside ex debito justiliae irrespective of Order LXX, rule 1." and after examining the relevant decisions on the point, the learned Master of the Rolls proceeded to state : "Those cases appear to me to establish that a person who is affected by an Older which can properly be described as a nullity is entitled ex debito justiliae to have it set aside. So far as procedure is concerned, it seems to me that the court in its inherent jurisdiction can set aside its own order, and that it is not necessary to appeal from it .......it is beyond question that failure to serve process where service of process required goes to the root of our conceptions of the proper procedure in litigation. Apart from proper ex parte proceedings, the idea that an order can validly be made against a man who has had no notification of any intention to apply for it has never been adopted in this country. It cannot be maintained that an order which has been made in those circumstances is to be treated as a mere irregularity and not as something which is affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not think this contention is correct. It proceeds upon a misreading of the judgment of Lord Morris of Eorth-y-Gest. It is difficult to see how Lord Morris of Borth-y-Gest can be taken to have supported Lord Evershed and Lord Devlin when he clearly and repeatedly held that the decision against the chief constable was void in the sense of nullity and would have been so even if there had been no express contravention of the police regulations : vide the observations of Lord Morris of Borth-y-Gest in the extract from his speech quoted above. It is clear from his judgment that he argued against the contention that the decision was only voidable in the sense understood by Lord Evershed and Lord Devlin by pointing out that all that "voidable" can mean in this context is that the issue must at some stage, if the parties are irreconcilable, be determined by the court. But "that was only to say that the decision of the court was awaited" and in no way affected the claim that the purported decision was "no decision". It is therefore indisputable that the majority decision in Ridge v. Baldwin [1964] AC 40 was that a decision given in breach of audi alterant partem rule is void and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sense in which he was using that word. He pointed out: "Their Lordships entirely agree...that if the decision is challenged by the person aggrieved on the grounds that the principle has not been obeyed, he is entitled to claim that as against him it is void ab initio and has never been of any effect. But it cannot possibly be right in the type of case which their Lordships are considering to suppose that if challenged successfully by the person entitled to avoid the order yet nevertheless it has some limited effect even against him until set aside by a court of competent jurisdiction." "Voidable", as now conceived by the Judicial Committee, therefore, differs from "nullity" only in that its assertion is confined to the party directly affected. This decision of the Judicial Committee lays down only a limited proposition, namely, that a decision given in breach of audi alterant partem rule is not absolutely void in the sense that even a third party can set up its voidness but is only relatively void qua the party affected. The same view as to the effect of audi alteram partem rule has also been consistently taken by courts in India. In Collector of Customs v. A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax had merged in the order of the President. If the order of dismissal passed by the Commissioner of Income-tax was a nullity, then obviously it could not merge in the appellate order passed by the President and, in that event, it would be competent to this court to examine whether it was a nullity and was liable to be set aside but not so otherwise. The Division Bench was therefore called upon to consider whether the order of dismissal passed by the Commissioner of Income-tax was a nullity and it was in this connection that the Division Bench, after referring to the decision of the Supreme Court in Mohammad Nook's case AIR 1958 SC 86, pointed out: "It is clear, therefore, that every defect in a proceeding does not make the order of the authority of the first instance a nullity. The defect must be concerning either want of jurisdiction or excess of jurisdiction or a patent violation of the principles of natural justice, such as want of notice or inquiry. It is such a defect which would render an order null and void and which would take the case out of the principle of merger." This was also re-affirmed by the Supreme Court in State of Orissa v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1945] AC 271 were decisions relating to orders made by superior courts and, in those cases, it was clearly held that where there is failure of natural justice by non-observance of audi alteram partem rule, the order is a nullity and the party aggrieved is entitled to have it set aside ex debito jusliliae in exercise of the inherent jurisdiction of the court. But, quite apart from authority, even on principle, we do not see any reason why breach of audi alteram: partem rule should be held to render an order or decision merely voidable and not void. If it is voidable in the sense in which that term was used by Lord Evershed and Lord Devlin in Ridge v. Baldwin [1964] AC 40 it would be voidable at the discretion of the court and it would be open to the court to refuse to set it aside unless, in the words of Lord Evershed, there was "real substantial miscarriage of justice". This view would introduce wide judicial discretion since only the court could say in any given case whether miscarriage of justice was substantial enough to activate the law. It would also provoke wide judicial disagreement one has only to read the nine judicial opinions given in Ridge v. Baldwin [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st a particular person, a third party cannot challenge its validity but the person against whom it is void can always set up its voidness in a collateral proceeding, for against him it is void ab initio and has never been of any effect : it has always been a nullity so far as he is concerned : vide the decision of the Privy Council in Durayappah v. Fernando [1967] 2 AC 337 . A decision given in breach of audi alteram partem would therefore be void as against the party affected but it would be valid as against the rest of the world. It was then contended that a breach of audi alteram partem and so also a breach of the requirement of rule 139 could be waived by the party affected and therefore an order or decision given in breach of it must be held to be voidable and not void. This contention was sought to be supported by reference to certain observations in the decision of the Supreme Court in Dhirendra Nath Gorai v. Subal Chandra Nath Saha AIR 1964 SC 1300. Subba Rao J., speaking on behalf of the Supreme Court, pointed out in that case that a workable test for the purpose of determining when an act done in breach of a mandatory provision would be a nullity or an ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction which can be waived. Consequently, the fact that audi alteram parlem can be waived does not automatically prove that breach of it does not go to jurisdiction. Moreover, in questions of this kind, we must adopt a functional approach and we do not see why nullity should be made to depend on total lack of jurisdiction. When can the law not regard a decision as nullity if it is arrived at in breach of a vital and basic principle of justice ? The question of waiver has no relevance to the question of nullity. A nullity may be capable of waiver : it would be, where the rule violated is one laid down in the interest of the parties but not, where it is laid down in the interest of public policy. The circumstance that breach of audi alleram partem is capable of being waived cannot therefore deflect us from the view we are taking. To hold that breach of audi alleram partem is a mere irregularity like any other defect in procedure, rendering an order or decision merely voidable by the court in a properly constituted proceeding would be to ignore the great importance and sanctity which is attached to this principle. Such an attempt to pull down this vital and basic principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te application to the court. It was sufficient for the appellant to assert the voidness of these orders when the official liquidator took out the two summonses for directions. D.A. Desai J. was, therefore, with the greatest respect to him, not right in holding that these orders could not be disregarded or ignored by him as nullity in disposing of the two summonses for directions before him. If-these orders were void as held by us, then obviously, the proposed sale in favour of the second respondent could not be confirmed and, in that event, fresh directions should have been given by the learned judge to the official liquidator in connection with sale of the textile mill of the company. This view taken by us renders it unnecessary to consider whether, on merits, D.A. Desai J. was right in confirming the proposed sale in favour of the second respondent. But, since the question was debated before us, we would briefly express our opinion upon it. The only ground on which the appellant contended that the proposed sale in favour of the second respondent should not be confirmed was that the price at which the textile mill was proposed to be sold was unduly low and, in support of this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, there was no material placed before the learned judge by the appellant to show that the offer of Rs. 12,50,001 made by the second respondent was inadequate. On the contrary, the balance-sheet showed that the written down value of the assets was about rupees 12,00,000 and in comparison to this written down value, the offer of Rs. 12,50,001 was not at all low. It may also be noted and this is a notorious fact that at the time when Divan J. sanctioned acceptance of the offer of the second respondent, there was heavy recession in the textile industry and it was difficult to find purchasers for textile mills. Moreover, any person who purchased a textile mill such as the one in the present case would have to sink a very large amount, running into several lakhs of rupees, in running the mill and that also had an adverse effect on the price realisable for the textile mill. It may also be pointed out that, at the hearing of the summons for directions, the learned judge suggested to the appellant that, in the interests of the creditors, he would be prepared to set aside the sale in favour of the second respondent provided the appellant gave an undertaking that in case a smaller price w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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