TMI Blog1998 (6) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Mulla Mulla C.B. C., Naval A. Agarwal, Adv., i/b M/s. Apte Co., Vinay kumar Tiwari, Adv., i/b M/s. M.V. Kini Co., Miss Ruby Kerawala, Adv., i.b M/s. Little Co., J.J. Bhat, A.K. Desai, M.B. Sabnis and G.S. Rao, Advs., i/b M/s. Purnanand Co., Virendra Tulzapurkar and S.S. Parab, Advs., i/b M/s. Madehar Co., Sanjay Udeshi, Adv., i/b Sanjay Udeshi Co., Aspi Chinoy, Adv., i/b M/s. Mehta Girdharlal, J.D. Singh, Mrs. Vandana Jaisingh, Meher Gowala, Shrikant Bhat, Ishwar J. Mankani, V.V. Kanabar, Manoj Mohite, Vijay Tawde, S.H. Ahuja, Girish S. Godbole, Advs. For Official Liquidator : G.P. Yadav, C.P. Grade II, ORDER S.N. Variava, J. 1. By all these petitions the petitioners pray that the proceedings before the Metropolitan Magistrate Courts, under section 138 of the Negotiable Instruments Act, be quashed. In some of these petitions a prayer is also made that undertakings given by the concerned petitioners to those courts, to pay amounts, be also quashed and/or set aside. 2. Most of these petitions have been filed by Directors of two companies viz. Orkay Industries Limited and Atash Industries (India) Limited. In most of these petitions the conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have also paid to some of the creditors some amounts after the filing of the winding up petitions. We are informed that creditors in Company Petitions Nos. 580 of 1995, 581 of 1995, 582 of 1995. 583 of 1995 and 584 of 1995 have all been paid in full by Atash Industries (India) Ltd. and those petitions have been got dismissed on 25th September 1997 on the ground that the petitioners have been paid in full. Further in some of the proceedings under section 138 of the Negotiable Instruments Act, Atash Industries (India) Ltd. have given undertakings to the Court that they would pay the disputed amounts in certain installments. Some installments of some parties have been paid. 5. Mr. Manohar points out that against Orkay Industry Ltd., today there are pending 39 company petitions for winding up. He points out that the total liability in all these company petitions is in a sum of app. ₹ 36,67,12,803/-. Mr. Manohar points out that against Atash Industries (India) Limited 24 company petitions were filed of which 19 are still pending. He points out that the total liability of the company in these petitions is in the region of app. ₹ 5.30 crores. 6. Mr. Manohar has appeared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a petition, the bank accounts of the company are completely frozen. He points out that there is no such provision in the Indian Companies Act. He however submits that section 536(2) invalidates every transaction which had taken place after the commencement of the winding up. He submits that thus that cheques themselves would be void. 9. Mr. Manohar submits that the rational behind section 536(2) read with section 441(2) is to prevent disposition of the property of the company in order to ensure that the interest of the unsecured creditors will not be prejudiced. He submits that it is the basic concept of the law, governing the liquidation of insolvent estates, (including insolvent companies) that the assets of the insolvent should be distributed rateably amongst all the unsecured creditors. He submits that the expression in the case of a winding up by Court in section 536(2) of the Companies Act does not mean that section 536(2) is to come into force only after a winding up order is passed or only upon the passing of such an order. He submits that the expression in case of winding up by Court must be read in the light of section 441(2) and, therefore, once a petition for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors cannot be forced to make void payment. He submits that there is no provision in any law and the Court also cannot force a company or its Directors to make a void payment or do something which is not permitted by law. 12. In support of this last submission Mr. Manohar relied upon the authority in the case of Nawabkhan Abbaskhan v. State of Gujarat 1974CriLJ1054 . In this case an excitement order had been passed against the accused under section 56 of the Bombay Police Act. This order was passed without giving the accused any hearing. There was disobedience or order and prosecution was launched under section 142. The question was whether a conviction could be upheld. The Supreme Court held that the initial order of externment was rendered void ab initio as it did not comply with the provisions of the Act itself. The Supreme Court held that since it was void ab initio, the order was itself a nullity. The Supreme Court held that as the order itself was a nullity, the accused cannot be guilty of flouting an order which never legally existed. 13. Mr. Manohar showed to Court section 138 of the Negotiable Instruments Act. He submitted that under section 138 of the Negotiable I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon the authority of the Supreme Court in the case of A.P.C.M.E. Society v. Government of Andhra Pradesh [1986]2SCR749 , In this case the Supreme Court has held that the courts cannot by their fiat direct the University to disobey the statute to which it owes its existence and the regulations made by the University itself. The Supreme Court has held that they cannot imagine anything more destructive of the rule of law than a direction by the Court to disobey the law. Mr. Manohar also relied upon the authority of the Supreme Court in the case of Johrilal Soni v. Smt. Bhanwari Bai [1978]1SCR231 . In this case the Supreme Court has held that there is a clear distinction between a void and the voidable transfer. The Supreme Court has held that this distinction is well-known to law. The Supreme Court has held that a void transfer is one where there is no transfer at all and is completely destitute of any legal effect. The Supreme Court has held that a void transfer is a nullity and does not pass any title at all. The Supreme Court has held that on the other hand a voidable transfer is otherwise a valid transaction which continues to be good until it is avoided by the party aggrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any payment has been obtained either for the purpose of getting an adjournment in a winding up petition or through the Court process, the same must be returned by the creditor. The Division Bench has held that before a petition is presented, it is the ordinary course of business to pay all the debts and even to give security for the overdraft or loan. The Division Bench has held that after the petition is presented the situation is different and all debts have to be paid pan passu. The Division Bench has held that therefore it is no longer in the ordinary course of business to pay one creditor in full to the detriment of their fellow creditors. 17. Mr. Manohar also relied upon the judgment in the case of Official Liquidators v. Messrs Siemens (India) AIR1940All514 wherein it has been held that payment of debt due to some creditors during the period that a winding up petition is pending should not be validated by the Court if it would result in the loss to the other creditors who are to be treated equally with those who have been paid. However, it is also held that the business of the company can be continued in good faith. It is also held that to carry on the business it might ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be made even prior to an order for winding up being passed. 21. Based upon all the above authorities, Mr. Manohar submits that by reason of section 536(2) of the Companies Act, the company and its Directors could validly refuse to make payment after a petition for winding up was presented. He submits that such refusal would not amount to failure to make payment and therefore there would be no deemed offence under section 138 of the Negotiable Instruments Act. 22. He submitted that in any event the correct course for this Court would be to stay all the proceedings under section 138 of the Negotiable Instruments Act till such time as all the pending petitions for winding up were finally disposed off. In support of this Mr. Manohar relied upon the authority in the case of Sunil Chandra v. Krishna Chandra, reported in A.I.R. 1949 Cal. 689. In this case the Company Court had passed a general order of stay till an application for sanction of amalgamation was disposed off. The criminal proceedings against the manager had also been stayed. The question was whether on the disposal of the application for sanction of the scheme of amalgamation, the criminal proceedings revived and/o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch an order there cannot be any winding up in fact. It is held that the first step is taken only after the passing of the order for winding up. It is held that section 441 of the Companies Act introduces a statutory fiction. It is held that in section 441 the Legislature has significantly used the words shall be deemed to commence and not shall commence . It is held that this is done to indicate that although the winding up does not in fact commence at time of presentation of petition, it nevertheless shall be taken to commence from that stage. In this case it is held that there is no conflict between section 441 of the Companies Act and section 20 of the Displaced Persons (Debt Adjustment) Act, 1951. 25. Mr. Chinoy also relied upon the case of Gorakpur Electric Supply Co. Ltd. v. Nariman Co., reported in (1947) 17 CC 87 wherein it is held that there is no provision in the Companies Act that after an application for winding up is made any payment or realisation automatically becomes void even though the application for winding up may be ultimately rejected. It is held that the only reasonable interpretation would be that after the winding up order is made, any payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or may not protect/sanction the payment/disposition. He submits that the offence is deemed committed for non payment. He submits that subsequent winding up order cannot affect the offence as in this case there is no disposition or payment. 28. Mr. Chinoy relied upon the cases of Travancore Rayons Ltd. v. Registrar of Companies, reported in (1998) 64 CC 819 and In Re Navjivan Mills, reported in (1986) 59 CC 201. He also pointed out that almost all the authorities relied upon by Mr. Manohar, in support of the submission that transfers/dispositions made after presentation of winding up petition would be void, recognise that the Company can carry on its business and activities. He submits that the' courts recognise the fact that the company has to make dispositions/payments in order to run its business. He submits that some of those authorities are dealing with the question whether Court can protect the transaction during the period that the petition for winding up is pending. He points out the courts have held that there is power to protect even though a winding up order has not been passed. He points out that the order which will be passed will always provide that it will oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which it is created. It is stated that the legal fiction cannot be extended by importing another fiction. It is also stated that a legal fiction in terms enacted for the purposes of one Act is normally restricted to that Act and cannot be extended to cover another Act. 31. Mr. Tulzapurkar also relies upon the case of Union of India v. Sampat Raj Dugar, reported in 1992(58)ELT163(SC) . In this case the Supreme Court has held that the interpretation which is to be placed upon a provision should be consistent and designed to achieve the object of the Act. Mr. Tulzapurkar submits that to extend the legal fiction, as suggested by the petitioners, would amount to defeating the object for which section 138 of the Negotiable Instruments Act was enacted. 32. Mr. Tulzapukar also relied upon the authority in the case of Punjab National Bank another v. The Punjab Finance Pvt. Ltd. others, reported in (1974) TLR1884. In this case the question was whether leave under section 446 of the Companies Act was necessary to continue or commence any suit during the pendency of a petition for winding up where no winding up order had been passed. In this context the Court held that the deeming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y right which had been conferred on it by the Social Security Act, 1975. The Court held that the Social Security Act gave a right to proceed in the Magistrates Court and it was for the Magistrate to decide whether the department was to be deemed to have been paid all its contribution in full. The Court held that it would not prevent the department from recovering in criminal proceedings a penalty imposed by statute. 37. Mr. Jethmalani appearing for the 2nd respondent in Criminal Writ Petition No. 296 of 1998 submits that section 138 of the Negotiable Instruments Act and section 536(2) of the Companies Act operate in entirely different fields. He submits the term void' means when an act has no legal effect. He relied upon Blacks Law Dictionary, 2nd Edition, Volume 2, pg. 1869, wherein it is stated that even though an agreement or a contract may be void it may still subject the parties to penal consequences. He submits that merely because an agreement or a contract is void does not mean that the offences will not be deemed to have been committed. 38. Mr. Jethmalani relied upon the case of Abdul Jabbar Ibrahim v. M/s. Serkop Builders others (1985)87BOMLR258 . In this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l disability to pay. Similarly if there was an order of injunction preventing payment there would be a legal disability. If a legal disability prevented the company or its Directors from making payment, an arguable question may arise whether the party who has been so prevented could be said to have failed to make payment . The question does not arise before us in these petitions. We therefore do not express any opinion on that point. 43. In all these matters till the end of the period of 15 days, there has been no order of winding up nor any order appointing Provisional Liquidator. However in all these matters, a petition for winding up had been filed either before the cheques were issue J (in some cases) and in any event before the period of 15 days, after receipt of notice, expired. Thus the question for consideration is whether merely by reason of a winding up petition being presented there was a bar or legal disability in making payment. 44. To consider this question what is to be seen is whether under section 536(2) dispositions of property become void immediately on the presentation of a petition for winding up or become void only on an order of winding being passed or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly on their being entered into, then on the petition being withdrawn or dismissed, they would not revive. It is clear that if the petition is withdrawn of dismissed then the transactions would never have been void . This clearly shows that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a Provisional Liquidator. What section 536(2) read with section 441(2) provides for is to convert what was otherwise valid into void by virtue of the legal fiction. Thus the voidness takes effect on the passing of the order of winding up or appointment of Provisional Liquidator. By virtue of the legal fiction, in section 441(2), it then relates back to the date of presentation of the petition for winding up. 46. Undoubtedly that legal fiction has been created in order to ensure equitable distribution of the property of the company amongst all its unsecured creditors and to see that some unsecured creditors do not get preference over other unsecured creditors. However, it is to be seen from almost all the authorities relied upon by the parties, including Mr. Manohar, that the company can carry on its business and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods or raw materials required by the company for its survival, no monies could be raised even though it may be required for the purposes of running the company. The effect would be that merely on presentation of a petition for winding up the company would get completely paralyzed. The law never contemplated or envisaged such a drastic result merely on the presentation of a petition for winding up. It is clear that for the purpose of carrying on commercial activities of the company payments can be made, goods can be purchased and the normal activities of the company can be carried on. Of course if and only when a winding up order is passed then at that stage there may be risk that payments which have been made would become void unless the Court otherwise directs. The risk is that the creditors may be directed to bring back the amounts or the goods or the property. We are not holding that all the creditors will be so directed. It is possible that the Company Court may come to the conclusion that the payment or disposition was in good faith for the benefit of the company and its creditors and was necessary for the purpose of keeping the company running. We are unable to accept submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lack of funds or for some other reasons best known to the Companies. 50. It has also been shown to us that oh 26th March 1998 in Company Petition No. 360 of 1997 a statement was made that in the proceedings under section 138 of the Negotiable Instruments Act, an undertaking had been given to satisfy the claims. On the basis of this statement, the company petition is got dismissed. This in spite of fact that this criminal writ petition was filed on 10th March 1998 and an ad-interim order of stay of the proceedings under section 138 had been obtained on 17th March 1998. It appears to us that the company and its Directors are not being honest with courts. For that reason also no reliefs should be passed in their favour. 51. That brings us to another aspect raised by Mr. Manohar. As set out above, Mr. Manohar had made a statement on behalf of Orkay Industries Limited that the company was not going to oppose the winding up order. As set out above, it is pointed out to Court that as many as 24 company petitions are filed against this company and the claim in all these petitions are in very large amount. As set out above a statement has been made that this company was not going to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice, the subsequent order of winding up or appointment of Provisional Liquidator does not absolve the failure during the period of 15 days. For this reason we do not accept the submission of Mr. Manohar that the subsequent order appointing the provisional liquidator and also that the certainty of an order of winding up being passed in case of Orkay Industries Limited absolves the offence which has already been committed much earlier. 54. Mr. Manohar also submitted that there is a conflict between the provisions of section 138 of the Negotiable Instruments Act and the provisions of section 536(2) read with section 441(2) of the Companies Act. He submitted that a conflict arises because if during the pendency of winding up proceedings, certain payments were made or dispositions took place then on an order of winding up being passed, they would definitely relate back. He submitted that it is very possible that the winding up petition may remain pending for a long period of time and it may be years before the final order of winding up is passed. He submitted that in the meantime prosecution and proceedings under section 138 may proceed and may result in conviction and sentence. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be no stay of the proceedings under section 138 of the Negotiable Instruments Act. As stated above, these proceedings have no bearing and are entirely unrelated and unconnected with the pending petitions. Even if an order of winding up is now passed and/or the order appointing Provisional Liquidator can have no effect on the proceedings under section 138 of the Negotiable Instruments Act. Therefore, there can be no stay of these proceedings. The authority relied upon by Mr. Manohar in the case of Sunil Chandra has no relevance at all. That was a case where the Company Court in exercise of its power under the Companies Act had granted a stay of proceedings. In this case the Company Court has granted no stay of proceedings. In view that we have taken, we seen no reason to grant the stay of the proceedings under section 138 of the Negotiable Instruments Act. 57. There is one last aspect which must be dealt with. It would appear that in some of the petitions there is a difference. In the cases covered by Criminal Writ Petition No. 393 of 1998 and Criminal Writ Petition No. 296 of 1998, the facts are different. In Criminal Writ Petition No. 393 of 1998, the Company Petitions bearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o to be noted that at the time that the company gave the undertaking to the Magistrate, it had not been stated or pointed out that there were pending company petitions. The fact has been suppressed and/or not mentioned to the concerned Magistrate undoubtedly because the company and its Directors never considered the pendency of company petitions as a bar which precluded them from making payments. 59. It must be mentioned that this company has also given undertaking to the Magistrate in proceedings under section 138 launched by the 2nd respondent in Criminal Writ Petition 360 of 1998 and Criminal Writ Petition No. 353 of 1998. As pointed out above in this case the company had filed the criminal writ petition on 10th March 1998. They had obtained a stay of the proceedings under section 138 on 17th March 1998. Still on 26th March 1998 the Company Court was informed in Company Petition No. 360 of 1998 that an undertaking to pay had been given in section 138 proceedings and on the basis of this statement got the company petition dismissed. The conduct of Atash Industries (India) Limited in suppressing facts and obtaining orders from courts without pointing out correct facts must be d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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