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TMI Blog2005 (9) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... us the impugned judgment of the High Court cannot be sustained. - CIVIL APPEAL NOS. 5199-5205 OF 2004 - - - Dated:- 29-9-2005 - S.B. SINHA AND C.K. THAKKER, JJ. R. Sundaravardan, T.R. Andhiyarujina, Delep Goswami, Abhay Kumar, Subramonioum Prasad, Sandeep Kumar, P.R. Ramasesh, R.N. Keshwani, Ram Lal Roy, C.G. Sivakumaran, K. T. Anantharaman, Ashish Chughy and Vasudevan Raghavan for the Appellant. K.K. Venugopal, Udaya Holla, Dushyant Dave, Shashikant Sharma, Sanjay Kumar Dubey, A.S. Bhasme, Sanjay R. Hegde, Prashant Kumar and Sumit Goel for the Respondent. JUDGMENT S.B. Sinha, J. - These appeals are directed against a common judgment and order dated 5-1-2004 passed by a Division Bench of the Karnataka High Court in O.S.A. Nos. 67, 68 and 70 of 2003 whereby and whereunder a judgment and order dated 8-10-2003 passed by a learned Company Judge in C.A. No. 771 of 2003 was affirmed. Background fact : 2. NGEF Ltd., (for short, the Company ) herein, was a joint venture of the Government of Karnataka, holding 90.18% shares and EHG Electroholding GMBH holding 9.72% shares therein. The Company became sick, whereupon a reference was made to the Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -8-2002 that the Company would have to seek an appropriate direction from the concerned High Court. Proceedings before the High Court : 6. Upon receipt of the said recommendations, the High Court of Karnataka registered the same as Company Petition No. 154 of 2002. The respondent herein filed an application before the learned Company Judge of the High Court purported to be under rules 6 9 of the Companies (Court) Rules praying for a direction upon the Company to execute a deed of sale in its favour in respect of the said 40.45 acres of land relying on or on the basis of the said purported resolution dated 25-2-2002, alleging that the same constituted a concluded contract between the parties. Objections to the said application were filed by the appellants herein. 7. By reason of an order dated 8-10-2003, the said application was allowed on the premise that the agreement between the Chandra Developers and the Company constituted a concluded contract in relation to sale of 40.45 acres of land. A Review Application was filed by the appellant herein which came to be dismissed. Three appeals were preferred from the said order viz., by the EHG, State Bank of Mysore and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel would urge that assuming that such contentions had not been raised during argument as was observed by the Division Bench, it was the duty of the Company Judge to take into consideration those aspects of the matter. It was urged that the considerations which arise before a Company Judge for confirmation of sale are relevant factors for the purpose of directing execution of a deed of sale even in a private transaction. 11. The learned counsel would argue that had a suit for specific performance of contract been filed by a vendee against the Company, the latter as also the Government of Karnataka could have raised several contentions including one that the court should not in the facts and circumstances of the case exercise its discretionary jurisdiction in favour of the First respondent herein. It was argued that having regard to the statutory scheme and in particular the provisions contained in sections 443, 446 and 447 read with section 529A of the Companies Act, 1956 the Company Judge cannot be held to have any inherent power to direct the Company to execute a deed of sale; and more so whence a Provisional Liquidator had not been appointed. Such a direction could only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , subject to the provisions of section 293 of the Act, any property of the Company either absolutely or conditionally and in such manner and upon such terms and conditions in all respects as they think fit and to accept payment or satisfaction for the same in cash or otherwise, as they think fit." 17. Thus, in terms of the said provision, the approval of the Government of Karnataka was not necessary. 18. It was submitted that the court has inherent power to direct sale of assets of a company during the pendency of winding up proceedings even before the winding up order is passed in terms of section 536(2) of the Companies Act. 19. It is further submitted that sanctity of an auction sale should be maintained and in the event auctions are set aside and re-auctions are ordered on less satisfactory material, loss to exchequer would be far greater. 20. Mr. K.K. Venugopal, the learned Senior Counsel, would submit that having regard to sub-section (2) of section 536 of the Companies Act, the High Court has the jurisdiction to permit sale of assets of the company even before passing of the winding up order, in relation whereto section 20(4) of SICA will have no application. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the winding up. In a case, however, where winding up proceedings are initiated in terms of recommendations made by BIFR or AAIFR, as the case may be, no such petition is required to be presented. Section 443 lays down the power of a court on hearing petition; clause ( d ) of sub-section (1) whereof provides for a power to make an order for winding up of the company with or without costs or any other order that it thinks fit. Section 444 lays down the consequences of winding up order. In terms of section 446 of the Act, in the event of passing of a winding up order or appointment of liquidator as provisional liquidator, no suit or legal proceeding would commence or if pending at the date of the winding up order, shall not be proceeded with against the company except by leave of the court and subject to such terms as the court may impose. Sub-section (2) of section 446 provides for a non obstante clause, in terms whereof the company court shall have jurisdiction to entertain or dispose of any suit or proceedings specified therein. Section 451 lays down general provisions as to liquidators. Section 457 specifies the power of the liquidator which is required to be exercised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany in accordance with the provisions of the Companies Act, 1956. (4) Notwithstanding anything contained in sub-section (2) or sub-section (3), the Board may cause to be sold the assets of the sick industrialcompany in such manner as it may deem fit and forward the sale proceeds to the High Court for orders for distribution in accordance with the provisions of section 529A, and other provisions of the Companies Act, 1956." "22A. Direction not to dispose of assets. The Board may, if it is opinion that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order in writing, direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets ( a )during the period of preparation or consideration of the scheme under section 18; and ( b )during the period beginning with the recording of opinion by the Board for winding up of the company under sub-section (1) of section 20 and upto commencement of the proceedings relating to the winding up before the concerned High Court." "32. Effect of the Act on other laws. (1) The provisions of this Act and of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dues. Shri Gowda requested that permission be accorded to the company to sell the remaining assets in a transparent manner and discharge the liabilities of the secured creditors, employees and other creditors within a reasonable time. On a query from the Bench, Shri Gowda clarified that the funds for VRS would be provided by the State Government. 18. Shri Govind Raj, MD of the company submitted that GOK had decided to close down the unit. The company had been assured adequate funds from the State Government, for VRS. The company was having some problem in sorting out the outstanding issued with FIs. so much so that IFCI was demanding a sum of Rs. 25,000 for issuing NOC even though their dues have been fully paid. The company was not able to fulfil the condition of working capital bankers for converting their second charge on the assets of the company into first charge because of non-cooperation of FIs. Canara Bank Financial Services were also not issuing NOC. The company had sought permission to sell all the assets to generate funds to pay the workers dues, VRS dues, the dues of secured creditors and others. The Bench noted that the company would have to seek further directions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e event if it be held that the company s approval was necessary, the same would be contrary to the statutory power of the Company Court is, thus, misconceived. 36. It is also not correct to contend that the question as regards the concluded contract was not raised by the appellants herein. In fact, the Company filed a Review Petition before the Company Judge on 30-10-2003 wherein it was clearly averred that such a submission was not made in view of the observations of the learned Company Judge during the course of hearing that the issue whether there existed concluded contract would not be determined and as such there existed an error on the face of its order dated 8-10-2003. 37. The very fact that original advertisement was issued by the Government of Karnataka and there existed such a clause in the Memorandum of Association of the Company is suggestive of the fact that the Board of Directors of the Company proceeded on the basis that such approval of the Government of Karnataka was imperative. Jurisdiction of the Company Court : 38. The provisions of SICA contain non obstante clauses. It is a special statute. It is a complete code in itself. The jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by BIFR that the company is not likely to become viable in future and it is just and equitable that the company should be wound up must be based on objective criteria. The High Court indisputably on receipt of such recommendation of BIFR would initiate a proceeding for winding up in terms of section 433 of the Companies Act. Sub-section (2) of section 536 ipso facto does not confer any jurisdiction upon the Company Court to direct sale of the assets of the sick company. It has to exercise its power thereunder subject to the provisions of the special statute governing the field. Despite the fact that the procedures laid down under the Companies Act would be applicable therefore but they must be read with sub-section (4) of section 20 of SICA which contains a non obstante clause and in terms thereof, BIFR is authorized to sell the assets of the sick industrial company in such a manner as it may deem fit. By reason of the said provision, BIFR is also empowered to forward the sale proceeds to the High Court for orders for distribution in accordance with section 529A and other provisions of the Companies Act which in no uncertain terms would mean that the distribution of the sale p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... courts may arise, which must be avoided. 46. It is interesting to note that a learned Single Judge of the said Court dismissed a similar application filed by M/s. Salapuria Housing (P.) Ltd. although the First respondent s application categorically mentions about the pendency of the said application. Inherent Power : 47. The Company Court has inherent power. Such inherent power of the Company Court is saved in terms of rules 7 and 9 of the Companies (Court) Rules. The Company Court, therefore, may have the requisite jurisdiction to approve sale of the assets of a company but the question which arises for consideration is as to whether such inherent power can be exercised despite existence of a provision contained in another statute. 48. Section 32 of SICA contains a non obstante clause stating that provisions thereof shall prevail notwithstanding anything inconsistent with the provisions of the said Act and of any rules or schemes made thereunder contained in any other law for the time being in force. It would hear repetition to state that in ordinary course although the Company Judge may have the jurisdiction to pass an interim order in exercise of its inherent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the winding up shall be subject to review by the liquidator and held that he had no jurisdiction while the petition was pending. Roxburgh, J. went to the other extreme and on an application made after the winding up order refused to validate the transaction on the ground that the applicant ought to have applied before the transaction was entered into. Buckley, J, held that he had jurisdiction to sanction and did sanction while the petition was pending a proposed transaction which on any possible view would be beneficial to the creditors, one of the objects of the section being to protect the interests of the creditors during the pending of the petitions. Since this last decision such orders have regularly been made, normally in one of two cases : the first being where the proposed transaction is not in the ordinary course of business (as in the case last cited) and the second where it is necessary to persuade the company s bankers to unfreeze the account in order to enable the business to be carried on." 52. In Pankaj Mehra v. State of Maharashtra [2000] 2 SCC 756 whereupon the learned counsel appearing on behalf of the First respondent placed strong reliance, constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not considered by the High Court. 56. In Sudarsan Chits (India) Ltd. v. O. Sukumaran Pillai [1984] 4 SCC 657, this Court observed : "10. The Appellate Bench declined to direct the Provisional Liquidator to file claim petition at the instance of the Company under section 446(2)( b ) on the sole ground that such a petition at the instance of the Liquidator would be maintainable in the course of winding up of proceedings which means that the winding-up proceedings are pending. Undoubtedly, section 446(1) manifests the legislative intention that the procedure thereunder prescribed could be availed of when the winding-up order has been made or where the Official Liquidator is appointed as the Provisional Liquidator. Section 446(1) envisages two situations in which the court will have jurisdiction to make the order thereunder contemplated. These two situations are: where a winding-up order has been made or where the Official Liquidator has been appointed as Provisional Liquidator. The first of the two situations envisages an order for winding-up of the company having been made and which is subsisting. The second situation is where without making a winding-up order, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant factors for proper and reasonable exercise of the judicial discretion vested in it. There cannot be any doubt or dispute that when an auction is held upon compliance of the statutory provisions, withholding of auction on the ground that still higher price may be obtained may prove to be self-defeating exercise as has been held in Kayjay Industries (P.) Ltd. s case ( supra ) and State of Punjab v. Yoginder Sharma Onkar Rai Co. [1996] 6 SCC 173 but having regard to the accepted position that the Company Judge in a case of this nature exercises a discretionary jurisdiction; it is bound to act with great circumspection and caution. Such a jurisdiction should ordinarily be exercised in exceptional cases and when necessary for seeing the company as an on-going concern. 60. It may, furthermore, be true that before the Company Judge or before the High Court the secured creditors did not raise objections which have been raised before us although specifically taken in their objections, as would appear from paragraphs 7, 9, 11, 12 and 13 thereof, but if such considerations were relevant having regard to the statutory duties imposed upon the court, the learned Company Judge mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute of Mental Health Neuro Sciences v. C. Parameshwara [2005] 2 SCC 256]. 65. In re A.I. Levy (Holding) Ltd. [1964] 1 Ch.D 19 Buckley, J. while considering the provisions of section 227 of the English Companies Act which is pari materia with section 536(2) of the Indian Companies Act, opined that the object of the said section was to protect the interests of the creditors from the possible unfortunate results which would ensue from the presentation of a petition and to protect their interests as much during the period while the petition was pending as after an order has been made on it. The said decision, therefore, does not lay down a law that the provision of section 536(2) of the Act is meant to benefit the vendee. In fact such a provision enures to the benefit of the creditors. A Company Judge granting sanction in terms of the aforementioned provision, thus, has a duty to see that the transaction is one which must benefit the unsecured creditors of the company. 66. In A.I. Levy (Holdings) Ltd. s case ( supra ) it was held : "In these circumstances, this being a case in which it appears to me to be manifest that the transaction is one which must benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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