TMI Blog1968 (8) TMI 197X X X X Extracts X X X X X X X X Extracts X X X X ..... g to ₹ 22,00,000 approximately and arrears of dearness allowance of ₹ 7,50,000 approximately and also by an employee of the company, Tulsi Chatterjee, claiming an amount of ₹ 2,707 on account of arrears of salary, provident fund etc., and by Ravindra Krishna Rohatgi, one of the principal shareholders of the company, holding shares of the face value of ₹ 2,56,000 and also claiming to be a creditor of the company for another sum exceeding ₹ 3,00,000. 2. The facts stated in the petition are as follows. The company was incorporated in December, 1930 as a public company limited by shares with its registered office at Diamond Harbour Road, Behala. The authorized capital of the company is ₹ 1,00,00,000 (one crore) divided into seven lacs equity shares of ₹ 10 each and 30,000 7 1/2% cumulative redeemable preference shares of ₹ 100 each. The amount of capital paid-up or credited as paid-up at present is Es.34,00,000. The company was incorporated for the purpose of taking over the business carried on by a firm or the name of the India Electric Works, which had been manufacturing electric fans and other electric goods and had acquired a reput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monies and grant accommodation to the company to the extent of ₹ 85,00,000 with interest at 1/2% over the State Bank of India Advance Rate with a minimum of 5 1/2%. As security therefor the authorised controller, for and on behalf of the company, executed a promissory note for ₹ 85,00,000 payable on demand in favour of the President of India which was in turn assigned to the petitioner and on the same date the President of India executed a deed guaranteeing the due re-payment of the amount of the principal and interest due on tie aforesaid promissory note by the company in favour of the petitioner. By way of further security the company, on the same date, also hypothecated its stock-in-trade and various other goods and also created a first charge on book debts, outstandings, claims, bills, contracts etc. by an agreement for Cash Credit Account Hypothecation of Debts and Assets. By a further agreement entered into in January, 1963 the petitioner agreed to advance monies or grant accommodation to the company by way of Cash Credit called the Second Cash Credit Account, to the extent of ₹ 55,00,000 and the said limit was subsequently raised upto ₹ 70,00,000 dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses year after year and such losses for the years ending 30.9.62, 30.9.63 30.9.64 amounted to ₹ 13,62,000, ₹ 9,05,000 and ₹ 12,67,000 respectively. The petitioner claims that the company is hopelessly insolvent and it is just and equitable that the company should be wound up. 3. Mr. Subrata Roy Choudhury, the learned counsel for the petitioner, submitted that the petition was based on two grounds, namely, (1) that the company is unable to pay its debts and (2) that the company is unable to carry on its business due to recurrent losses in the past years. Apart from the creditors supporting and opposing this petition, various other creditors have filed suits in this Court as well as other court against the company, the total amount of claims in such suits being over ₹ 19,17,756. The creditors opposing the winding-up as well as the shareholder Rohatgi contest the petitioner's right to a winding-up order mainly on two grounds, namely, (1) that the petitioner is a secured creditor which has not given up its security and as such it is not entitled to proceed with the winding-up and (2) that the Central Government, which had been in actual control of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 10 Ch D 681 and in Re: Borough of Portsmouth Tramways Co., (1892) 2 Ch D 362 where it had been held that a secured creditor is not debarred from presenting a petition for winding-up without giving up his security or without valuing the, security and proving for the balance. A similar view was also taken by the Madras High Court in K. V. O. Refineries Ltd. v. Madras Industrial Investment Corporation Ltd., where, following the decision in (1879) 10 Ch D 681 (supra), it was held that the rule in bankruptcy, that before a secured creditor could file a petition for winding-up he had to give up his security or to value the security and aver that after giving credit to such value there would be a balance due and payable to him, did not apply to a winding-up. It was therefore submitted that the fact that the State Bank was a secured creditor did not disentitle it from presenting the petition, 6. Several decisions of the English Courts were cited by Mr. Roy Chowdhury for the proposition that though the order which the petitioner for the winding-up seeks is not an order for his individual benefit but for the benefit of a class of which he is a member, yet the mere fact that the majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , AIR 1942 Bom 231, Chagla, as he then was, enunciated the principle to be followed in such cases in the following words:-- The test for determining whether a company should be wound up is whether the company is commercially insolvent at the date of the petition for winding-up. The expression, 'commercially insolvent' means that the existing assets and liabilities of the company are such as to make it reasonably certain that the existing and probable assets would be insufficient to meet the existing liabilities. The other test is whether at the date of the presentation of the winding-up petition there was any reasonable hope that the object of trading at a profit with a view to which a company was formed would be attained. 9. On the facts of the present case there can be no dispute that the company was commercially insolvent at the date of the petition for winding-up and there is no reasonable hope that the object of trading at a profit, with a view to which the company was formed, would ever be attained. Accordingly, an order for winding-up should be made ex debito justitiae. 10. Mr. Ganguly, the learned solicitor for one of the supporting creditors, Anwar Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am entirely unable to accept this contention. The said decision is a clear authority for the proposition that the rules in bankruptcy are not applicable to a petition for winding-up presented by a secured creditor and this view has also been accepted by the Courts of this Country. Mr. Ghose then submitted, that as all the assets are mortgaged to the petitioner it can realize its security without a winding-up. The petition was an abuse of the process of the Court, I am also unable to accept this contention as there can be no doubt that the Company is hopelessly insolvent and the assets are not sufficient even to satisfy the claim of the secured creditor. Mr. Ghose also wanted to raise an issue that as there is no affidavit from the Central Government, the sanction under Section 18E(1)(c) of the Industries (Development and Regulation) Act 1951 had not been proved to have been duly granted and as such the winding-up proceedings had not been validly initiated. In his view the interlocutory proceedings for the production and inspection of the written sanction by the Central Government at the instance of the shareholder Rohatgi have no relevance so far as the competency of the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. The authority cited for the above note is Re: African Farms Ltd, (1906) 1 Ch 640. The learned author also mentions a case where the Court allowed the affidavit to be made by a clerk of the solicitors of the petitioner who had full knowledge of the proceedings where the petitioners were resident abroad. It would, therefore, appear that the above rule is not mandatory, as claimed by Mr. Sen and even assuming that Samindra Kumar Gupta could not be said to be a principal officer of State Bank of India, the petition verified by his affidavit could not be rejected in limine. 15. The second argument advanced by Mr. Sen was that the alleged loan given by the Petitioner to the Company was ultra vires the Companies Act in as much as the said amount exceeded the aggregate of the paid-up capital of the Company and its reserves and no consent of the members in a general meeting had been obtained as provided in Section 293(1)(d). Under Section 18E(1)(c) of the Industries (Development and Regulation) Act, 1951 the person authorised under Section 18A of that Act to take over the management of an industrial undertaking, which is a company, shall for all purposes be the director of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority have been alleged. Mr. Sen submitted that in view of the rule issued by this Court no order should be made on the winding-up petition until the writ petition was heard and determined. Mr. Sen pointed out that in the event of a winding-up order, the winding-up proceedings would be conducted by the Official Liquidator, who is an officer of the Central Government and his client apprehends that the various allegations of misconduct against the controlling authority would not be properly investigated. Mr. Sen further submitted that both in England and in this country winding-up proceedings have been adjourned when there had been any doubts as to the competency of the petitioner to present a petition for winding-up. In Ex parte Lennox, In Re Lennox, (1885) 16 QBD 315 it was held that on a petition by the judgment creditor for a receiving order, even though the debtor had consented to the judgment, if at the time of the hearing of the petition facts are alleged by the debtor, which if proved, would show that notwithstanding the judgment, there was by reason of fraud or otherwise no real debt, the Court ought not to make a receiving order without first enquiring into the truth of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that in that case there was no doubt that the debts claimed by the Dominion of India were disputed and that the disputes with regard to these debts were bona Me and serious, But his Lordship felt some difficulty as to the form of the order to be passed by the Court of Appeal and observed that in his view the Court should not accede to the extreme contention raised by the appellant that the petition should be dismissed but should see that justice was done to both the parties and the only way in which justice could be done in that case was to set aside the winding-up order but to keep the application for winding-up on the file and to refuse to pass any final order thereon unless and until there was a determination of the assessment proceedings and until the adjudication by the proper forum determining what was the debt justly due to the Dominion of India. Mr. Sen submitted that in this case also the hearing of the petition for winding-up should be kept pending until the disposal of the writ petition determining the validity of the consent required under Section 18E(1)(c) of tie Industries (Development and Regulation) Act, 1951. 17. The next case relied on by Mr. Sen was anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act and also the factum and validity of the alleged consent given by the Central Government for the commencement of winding-up proceedings against the company. 18. Mr. Sen then referred to various decisions of the Supreme Court where provisions of various Acts had been struck down on the ground that such provisions conferred an unfettered and unrestricted discretion and were as such invalid and unconstitutional, Even where the statute itself was not held to be ultra vires, the orders purported to be made thereunder were, in some cases, held to be ultra vires. Mr. Sen also pointed out that for violation of the principles of natural Justice, for instance, where no notice of an intended proceeding is given to the party affected thereby, the proceedings would be struck down and submitted that the rule in the writ petition in this Court was obtained on the aforesaid grounds challenging the vires of the Act and also the validity of the alleged consent given by the Central Government under the provisions of the Industries (Development and Regulation) Act. 19. Mr. Sen next submitted that though a secured creditor could apply for liquidation, the Court has always a discret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Appeal. Cotton, L. J., observed that in his opinion a petition ought not to be presented when it was clear that the company could not pay any of its debts and the main ground on which he decided the case was that nothing could be got for anybody by a winding-up order. Bowen, L. J., observed that it did not follow that if the machinery provided by the Act could not possibly avail itself for the purpose of paying debts, the creditor was still entitled to put that machinery in motion for his own delectation. It was an abuse of the procedure to set it in motion when it was shown that it could not accomplish the purpose for which it was established by the legislature. Mr. Sen submitted that in the present case also the assets of the company would, not be sufficient even to meet the claim of the petitioner who is the mortgagee of all the move-able and immovable properties belonging to the company. There would, therefore, be nothing left for the other creditors and the feneral body of creditors would not be benefited by the winding-up order. The petitioner could enforce its claim against the company by a suit and realise whatever it could from the sale of the assets belonging to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the winding-up petition and the date when the Court grants the company leave to re-verify the petition would also create a good deal of confusion. In the circumstances the Court refused to allow the petitioner to re-verify the petition. In my opinion, Mr. Ghose is not right when he contends that Form No. 3 of the Companies (Court) Rules require that in the case of a petition by a company, inter alia, for an order for winding-up, such a petition must contain an averment that the person affirming the affidavit is duly authorised by the company on their behalf. The said provision only applied to a case where the petition is affirmed by a person who is not an officer of the company. As in this case the petition was affirmed by an affidavit of the Superintendent of one of the departments of the State Bank it could not be said that the petition was not affirmed by an officer of the petitioner-company. I have already expressed my opinion as to the contention that Mr. Gupta was not a principal officer of the petitioner. 21. Mr. Ghose next argues that the loans given by the petitioner had exceeded the limits prescribed by Section 293(1)(d) and as such such borrowings were ultra v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any purpose whatsoever. He relied on the decision of this Court in In re. Sulekha Works Ltd., . But that decision only reiterates the principle enunciated by Chagla, C, J., in AIR 1943 Bom 231 that the winding-up petition must contain all the grounds on which an order was being sought. Mr. Chatterjee referred to Section 18E(2) of the Industries (Development and Regulation) Act and submitted that once the management of a company was taken over under the Act, neither the shareholders nor the directors of the company could interfere with the management and control of the company without the sanction of the Central Government. Undoubtedly, the share-holders are free to hold meetings but any resolutions passed in such a meeting would not be binding on the authorised person. An order under Section 18A therefore is a serious encroachment on the rights of the shareholders and directors of the company and the principle of natural justice would apply in such a case and where the Act confers on the executive arbitrary powers the doctrine of equality of law would be violated and in such a case the Act and any action taken thereunder would be liable to be set aside by the Courts. This point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Superintendent of the Advances Department of the Slate Bank of India and as such he is the officer who is conversant with all the facts relating to the loans made to the company. The petition consists of 27 paragraphs and Mr. Gupta has affirmed that the statements in all the paragraphs except paragraphs 2, 5 and 23 were true to his Knowledge and that the statements in the aforesaid three paragraphs were based on information derived from relevant records which are believed to be true. It would therefore appear that Mr. Gupta was the person most suitable for affirming this petition. Mr. Roy Chowdhury also pointed out that in Form No. 3, prescribed under the Companies (Court) Rules the provision for a declaration mat the person affirming the petition was duly authorised on behalf of the company applied only to the case where the petition is not affirmed by such an officer. As in this case the affidavit verifying the petition was affirmed by Mr. Gupta, who was an officer, and in the submission of Mr. Roychowdhury a principal officer of the petitioner, the petition could not be said to be defective. Mr. Roychowdhury further submitted that under the corresponding provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that the sanction was properly given. According to Mr. Roychowdhury it would not be proper for this reason to stay the hearing of this petition pending the disposal of the Article 226 -- matter as it may take years for a final decision to be arrived at. Even the rule that has been issued has not yet been served on the respondents to that application. Though there was a prayer in the petition for injunction restraining the State Bank from proceeding with the winding-up petition, no such injunction has been granted by the Writ Court. It was therefore submitted that the power of stay which this Court undoubtedly possesses should be exercised in very exceptional circumstances and this is not a fit case for its exercise. 26. The decisions of the Appeal Court in and the decisions of the Single Judge in the Company Court in (1952) 56 Cal WN 29 and (1967) 71 Cal WN 38 were all cases of disputed debts. The company was strenuously contesting the claim of the petitioning creditor and it was in those circumstances that the Courts held that the dispute should be decided in an appropriate Court of law and the Company Court should not itself proceed to decide the disputes. In this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the company should be wound up. Now, I took the view in AIR 1942 Bom 231 that the insolvency contemplated by the Companies Act was that the company should be commercially insolvent, not in any technical sense, but plainly and commercially insolvent, that is to say, that its assets and existing liabilities must be such as to make the Court feel satisfied that the existing and probable assets will be insufficient to meet the existing liabilities. It is difficult to conceive of a stronger case than this where the Mills are not only commercially insolvent, but hopelessly insolvent, howsoever the expression 'insolvent' may be construed or interpreted. There was not even a suggestion before the learned Judge below as to how the Company proposed to meet its liabilities of ₹ 1,41,50,000 with assets at the the most aggregating to ₹ 60,00,000, No scheme was proposed, no suggestion was made, no financier came to salvage the Mills. It was further observed It is hardly necessary to point out what serious consequences a decision refusing to pass an order of winding-up may have in certain circumstances. A company may go on functioning, it may go on frittering away its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs nor the shareholders it would be preposterous to suggest that the notice of the proceedings for granting such a sanction should be given to the shareholders or the creditors of the company. The learned counsel relied on the following observations in Basu's Commentary on the Constitution:-- Administrative orders are not, generally reviewable unless and until they impose an obligation, deny a right or fix some legal relationship as a consummation of the administrative process. Whore a corporation is primarily affected by the administrative action, a stockholder can challenge it only if he has a 'substantial financial or economic interest distinct from that of the corporation which is directly and adversely affected'. Mr. Roychowdhury submitted that as the consent granted did not affect any substantial financial or economic interest of the shareholders or of the creditors as distinct from those of the company such a sanction could not be constitutionally challenged. The decision of the Supreme Court in Radhesyam v. State of M. P., has been referred by Mr. Basu in his aforesaid work for the proposition that the doctrine of natural justice is applicable only to judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. 30. Mr. Sen, in reply, pointed out that the resolution of the company in general meeting produced under subpoena was passed in the year 1956. The Companies Act was amended in 1960 and the Central Government took over this company in 1961. So the loan transactions by the company with the State Bank after 1960 could not be validated under Section 293 by such a resolution. Mr. Sen further submitted that under Order 27-A of the Civil Procedure Code suits involving a substantial question of law as to the interpretation of the Constitution cannot be heard by the Court without notice to the Attorney-General of India or to the Advocate-General of a State as the case, may be. Section 141 of the Code makes the provisions applicable to suits also applicable to all proceedings in any Civil Court, It was submitted that a suit challenging a statute as ultra vires or inconsistent with a mandatory provision of the Constitution has been held to involve a question of Constitutional interpretation and accordingly these proceedings cannot continue without the notice required under Order 27-A. 31. I am entirely unable to appreciate the last point urged by Mr. Sen. By no stretch of imaginat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easance or non-feasance by anybody they can be properly investigated in the winding-up proceedings and the persons responsible therefor might be made to make reparations to the Company. No useful purpose would be served by allowing the company to go on in its present state. It is not a happy decision to make as it would deprive a large number of employees of this company of the means of their livelihood. I have racked my brains to find out a suitable solution and also requested the learned counsel appearing for the different parties to suggest some practical means of keeping the company going. Everybody is agreed that it is only the Central Government who can revive the company and make it a going concern. I am given to understand that there is no lack or orders or demands for the products of the company and if a further initial capital outlay of ₹ 60 lacs to 80 lacs could be made, the company could be turned into a profit making concern. No private financiers would be willing to undertake such a big risk and it is only the Government who can bear this burden. I am also not unimpressed by the fact that the State Bank of India, though a secured creditor, has not proceeded to r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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