TMI Blog2013 (8) TMI 1058X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a composite textile mill with spinning, weaving and processing sections for the manufacture of cotton, synthetic, interlining and non-woven fabrics. In 1997, a petition for winding up was filed by Ralli Brothers Coney, a company incorporated under the laws of the UK. Several other petitions for winding up were filed. In February 1998, the company made a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 which declared it to be a sick company. The BIFR recommended, by an order dated 5 February 2001, that the company should be wound up and an appeal inter alia by the representative union was dismissed by the AAIFR on 14 May 2001. In pursuance of a GR dated 20 September 2001 of the State Government, a High Power Committee was appointed to look into the affairs of the company including the payment of the dues of the workers, banks and financial institutions. On 21 June 2002, this Court authorised the committee to dispose of the assets of the company following which the plant and machinery was sold. The sale was confirmed by this Court on 17 September 2003. In the meantime, on 13 February 2002, a Provisional Liquidator was appointed at the behe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of unsecured creditors including the First Applicant (70 of the 146 unsecured creditors are claimed to have assigned their claims to the Second Applicant and other claimants). 4. The Appellants as promoters have entered into a Memorandum of Understanding with RMMS on 15 November 2010 for the payment of the dues of the workmen under which an amount of ₹ 74.42 crores is due and payable. A separate MOU was entered into on 24 January 2011 with MMS to cover certain other employees. In their company application, the Applicants stated that since out of the aggregate liabilities of ₹ 375.33 crores, an amount of ₹ 280.90 crores was due and owing to them as of 31 March 2011, the Second Applicant undertook to deposit dues of ₹ 86 crores with the Official Liquidator and in addition thereto to bring in such further amounts as may be directed towards payment of the creditors. Moreover, it was stated that the Second Applicant was ready and willing to bring in a further sum of ₹ 20 crores. All amounts paid by the Second Applicant would be treated as a loan to be repaid by the company. 5. Now in this background, the Appellants, in their company application, state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the textile business could not be carried on; (v) The company application essentially introduced a back-door method for the alienation of the assets of the company instead of taking recourse to revival. The claim of the workers could not be defeated; and (vi) The company application could not be allowed since it was contrary to commercial morality and public interest. 7. Learned Senior Counsel for the Appellants submits that; (i) A creditor has a finite right to be paid his debt fully by the company, no less and no more; (ii) Once the claim of the creditor is fully paid or when the court is satisfied that an appropriate provision has been made to satisfy the debt fully during the course of the liquidation, no higher right is conferred upon creditor; (iii) Under Section 466 of the Companies Act, 1956, the court can impose conditions while granting a permanent stay including a condition that the Official Liquidator shall adjudicate upon the claims and shall finally determine them. The order of permanent stay does not take the liquidation proceedings out of control of the court or of the Official Liquidator; (iv) Section 466 does not contemplate the setting asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresent 52% of the erstwhile shareholders who are now only contributories once the order of winding up has been passed; (iv) The expression 'revival' means the revival of the existing business of the company or at least such portion of the business as is legally permitted or can be carried on; (v) Revival is not just a revival of the corporate existence because once a permanent stay is granted, there would always be a revival of the corporate existence. Hence, what is required to be considered is, whether there is a genuine and bonafide attempt to bring about the revival of the business of the company; (vi) The expression commercial morality is not, as the Appellants assert something which is used in juxtaposition to the morality of the business but is a term which is used in juxtaposition to indicate that merely paying the dues of the creditors is not sufficient; (vii) In the present case, the proposal, is not for the revival of the business of the company but for the disposal of the assets as an alternative mode of winding up. This can never be permitted because it would enable the Appellants who claim to hold 52% of the share capital (prior to winding up) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Liquidator or of any creditor or contributory. The fundamental requirement of Section 466(1), is that the court may do so on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed. Section 466(1) confers a discretion on the court and not a mandate. The discretion has to be exercised on satisfaction that stay of the proceedings in relation to winding up ought to be granted. The legislature has carefully used the expressions on proof to the satisfaction and ought to be stayed . Before the court grants a stay, the statutory requirement is that there must be proof which is brought before the court on the basis of which it is satisfied that the proceedings ought to be stayed. 13. The language of Section 466 of the Companies Act, 1956 has been interpreted, as we shall indicate, by courts in India having due regard to the corresponding principles under the provisions of the English Companies Act. An early decision on the subject in the UK was a judgment of Lord Esher, M.R. speaking for the Court of Appeal Flatau, In re [1893] 2 QB 219. The judgment of the Court of Appeal followed an earlier decision Hester, In re [1889] 22 Q.B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions as the court thinks fit. Quite apart from any authority (and I may mention In re Telescriptor Syndicate Ltd. [1903] 2 Ch. 174) this language seems to me to make it abundantly clear that the jurisdiction is discretionary, and that it lies on those who seek a stay to make out a sufficient case for it. In particular, the words satisfied, just and beneficial, satisfaction of the court and ought to be stayed seem to me to indicate that the applicant for a stay must make out a case that carries conviction.' (Emphasis supplied) 14. In an early decision of the Calcutta High court in the matter of East India Cotton Mills Ltd.,In re AIR 1949 Cal. 69, Justice S.R. Das (as the learned Judge then was) adverted to the position in English law as summarised in Halsburry's Law of England, thus : In the exercise of its jurisdiction to stay, the Court, so far as possible, acts upon the principles applicable in exercising jurisdiction to rescind a receiving order or annul an adjudication in bankruptcy against an individual. The Court refuses, therefore, to act upon the mere assent of the creditors in the matter, and considers not only whether what is pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent authorities and the decision referred to hereinbefore it appears that the discretion for stay under section 466 can only be exercised by the Court (1) if the Court is satisfied on the materials before it that the application is bonafide (2) the Court would be guided by the principles and definitely come to the finding that the principles are applicable to the facts of a particular case, (3) mere consent of all the creditors for stay of winding up is not enough, (4) that offer to pay in full or make satisfactory provisions for the payment of the creditors is not enough, (5) Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories, (6) Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation, (7) a firm and accepted proposal for satisfying all the creditors must be before the Court with material particulars, (8) the jurisdiction for stay can be used only to allow in proper circumstances a resumption of the business of the company, (9) the Court is to consider whether the proposal for revival of the company is for benefit of the creditors but also whether the stay will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Judge is, in our view, not merely a possible view to take but the only correct view based on the facts and circumstances of the case. 18. The Appellants moved the learned Company Judge on the basis of an application which postulates that the business of the erstwhile company in liquidation which consisted of the manufacture of textiles is no longer viable and what the Appellants seek to do in its stead and place is to carry on development of real estate, utilising the assets of the company. The Appellants belong to the Shapoorji Pallonji group, a real estate company. Admittedly, the Second Appellant has acquired 29% of the equity share capital of the erstwhile company in liquidation after the order of winding up was passed on 5 September 2005 though of course with the permission of the court. Even the debts which have been acquired by the Second Applicant from IDBI and from the Bank of Baroda are under deeds of assignment after the order of winding up was passed. The contention of the Appellants is that when the court exercises its discretion for the purposes of Section 466, what is postulated is the revival of the corporate existence of the company and not necessarily the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the intention behind the presentation of the scheme appeared to be to acquire a huge tract of land and other real estate belonging to the company at a throw away price. The Division Bench was of the view that the company judge should issue directions for obtaining a viability report and thereafter consider the following suggestions : (1) Whether it is possible and viable to reopen the mills and/or any portion of it and run it profitably and without disposing of immovable assets of the Company; (2) In case the mills cannot be re-started then whether any department or process of the mills could be started as viable; (3) In case any party who comes forward with an offer to pay off all the creditors, take the company out of winding up and revive and restart the mills happens to be a shareholder of the Company, such party should surrender the shareholding in the capital of the Company at the value to be determined by the Court; (4) In case above courses are not workable then whether the mills can be restarted by disposing of part of its assets to generate finance after payment to all the creditors; (5) In case even the course under Clause (4) above is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 391 of the Companies Act could be accepted by the court without reference to the fact that it is a company in liquidation and without considering whether the compromise proposed as intending to take the company out of liquidation, contemplates the revival of the company and whether it puts forward a proposal for revival and whether such a proposal also satisfies the element of public interest and commercial morality, the elements required to be satisfied for the court to stop the winding up proceeding in terms of Section 466 of the Act. (Emphasis supplied) The Supreme Court noted that it was the view of the Division Bench of this Court that it was not mandatory in law that the compromise or arrangement has to be for revival of the very activity in which the company was engaged in at the time of winding up and the anxiety of the court while sanctioning the scheme was to see that the company must continue its corporate existence. While reversing the judgment of this court, the Supreme Court held that the company in liquidation did not intend taking up any revival activity in the properties belonging to SCML other than retaining certain buildings and it is difficult to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nently while adverting to the question whether the Scheme is one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the properties, realize the assets and distribute the same in accordance with law. (Emphasis supplied) 22. The judgment of the Supreme Court in Meghal Homes (P.) Ltd. (supra) is sought to be distinguished by learned Senior Counsel appearing on behalf of the Appellant on the ground that in that case, there was a private arrangement between the promoters and developer under which the assets of the company in liquidation were sought to be sold to the developer whereas in the present case, there would be no transfer of the assets of the company and the assets would be used to carry on real estate business. We are unable to subscribe to the submission. In the present case, what has happened is that after the order of winding up was passed, there has been a transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he averments in the company application that the Appellants themselves proceeded on the basis that an amendment of the objects would be required in order to enable the company to enter upon real estate construction. Whether such an amendment would or would not be granted is something which may depend upon the decision of the competent authority in future but it is evident that presently, the carrying on of real estate construction would be ultra-vires the objects of the company. Besides, under Section 17 of the Companies Act, 1956, an amendment of the objects requires a special resolution which in view of the provision of Section 189 requires 3/4th majority of members present and voting. No circumstances have been placed before the Court to indicate as to whether the Appellants have the support of the requisite majority for a special resolution under Section 189. 24. Another aspect of the case, which has a bearing on the exercise of the discretion by the learned Single Judge is that the present status of the Appellants after an order of winding up has been passed is as a contributory. Section 428 defines the expression contributory to mean every person liable to contribute to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Section 256(1) of the English Companies Act, 1948 which were pari materia with the provisions of Section 466 by our Companies Act. While considering the effect of Section 302 of the English Act (corresponding to Section 511 of the Indian Act), the learned Judge held as follows : The effect of that section on the rights of members of the company seems to me to be very considerable. Before the winding up, each member has no right to be paid any sum in respect of his capital, but only the right to such dividends as the directors recommend and the company votes. Once there is a winding up, each member becomes instead entitled to an aliquot share of the company's assets after all liabilities have been discharged. The judgment of the court also considered the rights of members upon liquidation and their effect while considering an application for stay of winding up. The observations in that regard were as follows : That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1981] 51 Comp Cas. 20 (Bom.). However, in Vasant Investment Corpn. Ltd. (supra), the learned Single Judge held that in the case of a scheme or arrangement which is proposed Cas. 20 (Bom.) under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary and Edmonton Land Co. Ltd.(In Liquidation) (supra) where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent. 27. That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no materia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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