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2018 (7) TMI 2073

..... HAT:- The leave sought by applicant under Section 446 of theCompanies Act 1956 to enforce the Consent Decree dated 9th July 2009 is refused. The Consent Decree dated 9th July 2009 is declared illegal and void as a fraudulent preference - applicant is directed to refund with interest at 12% p.a. theamount of ₹ 10,17,03,493/­ withdrawn by it from the sale proceeds of the Ambattur property - Application disposed off. - CA. No.341 Of 2016 With OLR No.84 Of 2017 With CA (L) No.85 Of 2018 In CP. No.505 OF 2006 - 13-7-2018 - K.R.Shriram, J. Shri J.P. Sen, senior advocate a/w. Shri Shushrit Desai for Official Liquidator. Shri Mahendhar Aithe, Company Prosecutor for Official Liquidator present. P.C.: 1. This application is filed seeking leave of this Court under Section 446 of the Companies Act 1956 to execute the Consent Decree dated 9th July 2009 obtained in suit no.164 of 2009 by applicant against Coromandel Garments Limited (in liquidation). Coromandel Garments Limited (in liquidation) is hereinafter referred to as the Company. Official Liquidator has, on behalf of the Company, filed a reply opposing grant of such leave. Official Liquidator has also filed Official Liquidator s .....

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..... Co. Ltd. having its registered office at Swadeshi Mills Compound, Sion, Mumbai - 400 022 and whereas The Swadeshi Mills Co. Ltd. is a Sick Company registered with the Board for Industrial and Financial Reconstruction (BIFR) and whereas the Borrower is also a sick company registered with BIFR. And whereas the Lender holds a significant portion of the share capital of the Swadeshi Mills Co. Ltd. and whereas the Borrower has finalized a scheme of VRS for its employees and for the purpose, has entered into a settlement with the Unions of its employees and whereas the Borrower has made an application to BIFR for availing of loan from the Lender and BIFR had approved availing of such Loan and providing security and the security for such loan, is agreed to by and between the Lender and the Borrower as detailed in Table A hereto. It is agreed to by and between the Lender and the Borrower as under: … 3.. The amount of the loan provided under the terms of the agreement together with the interest and all other costs recoverable by the Lender from the Borrower, shall be secured by a charge which is hereby provided by the Borrower to the Lender as set out in table A hereto. 4.. The loan .....

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..... Baroda in a no lien account. 7. On 29th June 2006, this Court passed an order directing that the communication dated 7th May 2002 of the BIFR recommending that the Company be wound up be treated as a petition. By the said order, the petition was admitted and Official Liquidator, High Court, Bombay was appointed as Provisional Liquidator of the Company. The order of the Hon ble Madras High Court setting aside the recommendation does not appear to have been brought to the notice of this Court. 8. On 22nd January 2007, BIFR passed a fresh order recommending that the Company be wound up. The said order was communicated to this Court on 5th July 2007. On 25th September 2007, Appeal No.58 of 2007 filed by the Bank of Baroda against the order dated 22nd January 2007 of BIFR was dismissed by AAIFR. Appeal No.85 of 2007 filed by the Company was withdrawn. These orders were not further tested. As such, the recommendation for winding up the Company became final. 9. By their letter dated 30th April 2008, applicant s advocates called upon the Company to repay the said sum of ₹ 3,25,00,000/ together with interest as agreed in terms of the Loan Agreement dated 29th September 2000… . .....

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..... ure applicant s alleged dues. The said figure of ₹ 13,92,45,091/­ was arrived at, as evident from the particulars of claim annexed to the plaint, by computing interest at a rate of 18% p.a. compounded quarterly. On 31st December 2008, applicant filed Notice of Motion No.372 of 2009 in the said suit seeking, inter alia, a decree on admission to the extent of ₹ 3.25 Crores as well as appointment of Court Receiver, High Court, Bombay as Receiver in respect of the Satara property described in Exhibit B to the plaint. This was a property in respect of which no charge had been created in favour of applicant under the Loan Agreement. 12. By its reply dated 4th March 2009, the Company sought to resist the grant of the said reliefs. In doing so, the Company repeatedly asserted that applicant s claim for interest was not sustainable, in view of no rate of interest having been agreed upon in the Loan Agreement and no rate having been stipulated by the BIFR. 13. By an order dated 12th February 2009, this Court declined to appoint Court Receiver in respect of the Satara property, but merely restrained the Company from creating any third party rights in respect thereof. On 9th Ju .....

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..... ra Bank Limited (claiming rights as a purported assignee of Bank of Baroda), this Court admitted winding up proceedings against the Company and once again appointed Official Liquidator, High Court, Bombay as its Provisional Liquidator. In doing so, the Learned Company Judge referred in the following terms to the failure of the Company to bring to the notice of the earlier Company Judge the recommendation dated 22nd January 2007 of the BIFR : xi) On 16th October 2008 an application being application (lodging) No. 951 of 2008 was filed before this Court by the respondent seeking setting aside of the order passed by this Court on 29th June, 2006 on the ground, that at the time when the said order was passed, the appeal of the respondent was pending before the AAIFR, which application was allowed. However, it appears that it was not pointed out to the Court that BIFR had again recommended on 22nd July 2007 that the respondent should be wound up and that the appeal preferred therefrom by the company was also withdrawn by the company on 25th September 2007. If this would have been pointed out to this Court, this Court would surely have again passed a fresh order admitting the petition an .....

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..... sum of ₹ 51 Crores (approximately) lying with Kotak Mahindra Bank Limited be paid over to Official Liquidator to secure the claim of the workmen of the Company (in liquidation), with the balance to be distributed in the ratio of 80% to Kotak Mahindra Bank and 20% to applicant herein. However, the order noted that this would be an interim arrangement and subject to final outcome of the issue on status of the creditors of the Company in Liquidation including Kotak Mahindra Bank Limited. The order also noted that it was being passed at the instance of applicant and Respondent No.3 and without prejudice to the rights and contentions of Official Liquidator , Applicant and Respondent No. 3 being Kotak Mahindra Bank and applicant herein, respectively. At this stage, it is stated, the papers and proceedings in Suit No.164 of 2009 filed by applicant against the Company in which consent terms had been taken were not available with Official Liquidator. Official Liquidator had, accordingly, not raised before either the DRT or this Court any issue regarding the legality of the consent terms nor was such an issue considered or decided by either forum. 17. Pursuant to the order dated 21st .....

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..... right to sue first accured , under Article 59 would be when the facts entitling the Plaintiff to have the instrument or decree cancelled or set aside or the contract rescinded first becomes known to him . The plea of illegal decree having been raised for the first time on 11th April 2017 by filing Official Liquidator's Report No.84 of 2017 is clearly beyond 3 years. Even otherwise, Official Liquidator was a party in O.A. No.27 of 2008 filed by Kotak Mahindra Bank Limited in which DRT passed order dated 21st May 2009 directing impleadment of applicant as one of the creditors of the Company. The limitation for applying to the Company Court for holding that the Decree is a fraudulent preference or filing a suit under Section 31 of the Specific Relief Act 1963 would therefore first commence on 27th August 2010, then on 24th June 2011. (d). In any case, the present application is not a collateral proceeding where the defence of the alleged nullity of the Decree can be raised by Official Liquidator. Shri Godbole relied upon Prem Singh & Ors. V/s. Biebal & Ors. (2006) 5 SCC 353). (e). Further assuming without admitting, that Official Liquidator's Report seeking reliefs aga .....

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..... ved money under consent terms with Kotak Mahindra Bank in proceedings before DRT. The consent terms in DRT are valid and subsisting and is a result of commercial arrangement between applicant and Kotak Mahindra Bank and are outside the purview of this Court. Even for sake of argument, it is assumed that applicant has received excess money and is required to return it even in that case only Kotak Mahindra Bank can have cause of action. Even otherwise, except DRT, no other Court would have jurisdiction to do so. Any application/proceeding seeking recovery of alleged excess cannot be entertained. Once Kotak Mahindra Bank and Bank of Baroda being secured creditors are entitled to stand outside winding up to sell the property, which was done pursuant to the order of Madras High Court and DRT permitted to retain the same, except the liability to pay dues to workers under Section 529 of the Companies Act, 1956, no other claim can be entertained. Kotak Mahindra Bank and not Official Liquidator can claim as Kotak Mahindra Bank still has not recovered the entire amount owed to it in full satisfaction of its claim/charge. (i). Further, applicant is an undisputed second charge holder with resp .....

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..... in any case, on or before 24th June 2011 since applicant had filed an intervention application in the winding up proceeding which was allowed on 26th August 2010 after hearing Official Liquidator. Even the Learned Single Judge being aware of the factual position did not think it fit to nullify the Decree on the ground of fraudulent preference under Section 531 of the Companies Act 1956. The contention about the fraudulent preference is therefore not open on the principles of res judicata under Section 11 (Explanation 4) of the Civil Procedure Code 1908 and principles analogous thereto. Even otherwise, the Division Bench of Gujarat High Court in the case of Bank of Maharashtra V/s. Official Liquidator (1998) SCC Online Guj 370) has extensively considered the law in this regard and held that mere admission of an existing liability by a Company prior to its winding up can never amount to a fraudulent preference. (k). Section 531 of the Companies Act 1956 uses the word invalid and not void . Thus at the highest the Consent Decree against the Company would be voidable only at the instance of Official Liquidator. The difference between the terms invalid, voidable and void are judicially .....

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..... fer as alleged by Official Liquidator and intervenors), Section 531A of Companies Act 1956 would, in any case, be inapplicable. Section 536(1) of the Companies Act 1956 is per se inapplicable as it deals with transfer of share of a company. Section 536(2) is also not applicable for the same reason. Since in view of the Hon'ble Supreme Court judgment in NGEF Limited (Supra), the Company Court does not have jurisdiction to hold that the act of submitting to a Consent Decree is void and if Official Liquidator ever desires to seek an order of submitting to such Decree, the only course was open to approach Board for Industrial and Financial Reconstruction (BIFR) of NCLT as SICA 1985 was repealed by Section 252 of the Insolvency and Bankruptcy Code, 2016 (IBC) w.e.f. 1st December 2016. This is strictly without prejudice to the contention that Section 536(2) of the Companies Act 1956 is even otherwise inapplicable since it was attachment in judgment and not disposal of property. (m). Even otherwise, the Consent Decree dated 9th July 2009 was entered into bona fide and did not constitute a fraudulent preference within the meaning of Section 531 of the Companies Act 1956; (n). The attac .....

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..... Section 20 of SICA 1985,Division Bench of Madras High Court in J.M. Malhotra V/s. UOI (1994) SCC Madras 349) has clearly held that Section 20(2) of SICA merely dispenses with the procedural requirements of Section 349 or 440 of the Companies Act 1956 and it is not obligatory on the part of High Court to wind up a sick Company once it receives an opinion from the Board in this regard without examining correctness of such opinion on hearing the concerned parties. This judgement has been subsequently approved by the Hon'ble Supreme Court in V.R. Ramaraju V/s. UOI (1997) 89 Company Cases 609) and it is held that High Court has to take into account the opinion, but it is not to abdicate its own function of determining the question of winding up. The Learned Single Judge in Modistone (Supra) (R.D. Dhanuka, J.), has relied upon the Hon'ble Supreme Court judgement in NGEF Limited (Supra) and the real issue involved in the said judgement of the Hon'ble Supreme Court was not regarding the date of commencement or deemed commencement for winding up. (r). The ratio of the judgment in NGEF Limited (Supra) was that the Board and Company Court exercise concurrent jurisdiction and the p .....

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..... ent Decree dated 9th July 2009, which was entered into after the commencement of the winding up proceedings, constitutes a fraudulent preference within the meaning of Section 531 of the Companies Act 1956 and is ex­facie illegal and void. (c). In any event, the attachment in respect to the Satara property effected by the Consent Decree does not constitute a charge in favour of applicant and does not make it a secured lender entitled to any priority over other payments. (d). Applicant is therefore liable to refund the amount of₹ 10,17,03,493/­ withdrawn by it from the sale proceeds of the Ambattur property along with interest at such rate as this Court may deem appropriate. (e). Even otherwise, applicant not having any prior charge inrespect to the Satara property, the leave sought by it to execute the Consent Decree and to put the Satara property to sale and execution ought to be refused and; (f). The interest of all stakeholders would be better served if the1/3rd undivided share of the Company in the Satara property were to be sold by Official Liquidator under the supervision of the Company Court. 20. Ms. Kumbhat, counsel appearing for Interveners apart from adopting .....

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..... payable forthwith and the Plaintiffs shall be at liberty to execute the decree for the entire decretal amount as per clause - 1 above then outstanding. 5.. The immovable property being one­third undivided share, right, titleand interest in Final Plot No.540 situate lying and being in the Village of Taighat Registration Sub­District of Wai in the District of Satara together with structure standing thereon more particularly set out in Schedule - Ex­B hereto is hereby stand attached forthwith in execution of the decree and Defendants also undertake not to sell and dispose of or create any third party interets into the said property or any part thereof,. 6.. The Plaintiffs are at liberty to execute the decree on the basis of theMinutes of Consent Terms without sealing of decree and sealing of decree is dispensed with under Rule 314 of the High Court Original Side Rules, 1980. The Prothonotary and Senior Master is directed to act on the authenticated copy of the Minutes of Order and Consent Terms duly authenticated by the Associate and issuance of decree is expedited. 7.. 2/3rd of Institution fees be refunded to the Plaintiffs. 8.. Suit stand disposed of in the aforesaid te .....

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..... sick industrial company in accordance with the provisions of the Companies Act, 1956 (1 of 1956). ….......... (c). Applicant relied on various judgments, both of the Hon bleSupreme Court and of various High Courts on the issue as to whether a recommendation by the BIFR to wind up a Company was conclusive or whether the High Court had any discretion in the matter. It is applicant s case that the High Court indeed has discretion in the matter of winding up a Company before it and was not bound to accept without reflection, the recommendation made in this behalf by the BIFR. However, this issue is of limited relevance since the Company has already been wound up. The only question that survives for consideration is the date when the winding up proceedings must be treated as having commenced. (d). The question as to when winding up proceedings must be deemed to have commenced when a Company is wound up pursuant to the recommendation by the BIFR has been considered by various Courts. This issue fell for consideration by the Hon ble Supreme Court in NGEF Limited (Supra) where, while overruling the opinion of the Division Bench of the Hon ble Gujarat High Court that a winding up pr .....

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..... mpanies Act, 1956 for an enquiry as to whether a transaction constitutes a fraudulent preference. 23. The Consent Decree and Section 531 : . (a) The next question that arises is as to whether the Consent Decree in question falls foul of section 531. Section 531 (1) reads as under : 531. FRAUDULENT PREFERENCE (1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly : Provided that, in relation to things made, taken or done before the commencement of this Act, this sub­section shall have effect with the substitution, for the reference to six months, of a reference to three months. (b) It is the Official Liquidator s case as submitted by Shri Sen, with whom I a .....

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..... fully aware that no interest was payable on the Promoter s contribution brought in by applicant. Both the letter and the Affidavit refer specifically to the absence of any interest being stipulated by the BIFR; (vii). a mere three months after the filing of the affidavit inreply opposing aggressively the grant of any interlocutory reliefs in favour of applicant in Suit No.164 of 2008 including a prayer for a decree on admission for a sum of ₹ 3.25 Crores, the Company is alleged to have agreed to a decree on admission for a much larger sum of ₹ 12,49,27,897/­ along with interest thereon at the rate of 15.76% p.a. with quarterly rests from 8th June 2009 till payment and/or realization. There is nothing whatsoever on record to explain or justify this abrupt reversal in position by the Company. The only possible inference in the circumstances can be that the Company was attempting to favour applicant, a promoter group company, in preference to its other creditors; (viii). Applicant was fully aware of the recommendationdated 22nd January 2007 of the BIFR that the Company be wound up. In fact, there is a reference to it in the plaint. However, neither applicant nor the Co .....

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..... agination the withdrawal or compromise of the suit without legal authority amounts to bringing the suit to ultimate conclusion. In ordinary sense, the terms "ultimate conclusion" connotes getting the suit decreed by making honest and bonafide efforts to prove the claim in the suit. If the suit is to be disposed of by way of compromise, it may loosely be termed as "ultimate conclusion" but for such a conclusion of the suit, specific authority has to be given to the attorney. Even otherwise in the power of attorney the words 'prosecute the suit' don't figure. There is only reference in the plaint. 15.. The attorney has only those powers which arespecified in the power of attorney and mere reference in the plaint that he is also authorised to prosecute the plaint does not mean that he is vested with the power to withdraw the suit or settle it by way of compromise. 19.. As is apparent these clauses gave the power to pursuethe suit. Pursue means to continue or proceed along a course of action and not to withdraw. 20.. Power of attorney is always to be interpreted strictlyin its terms. There is no scope for searching meanings or intentions. Nor is it permi .....

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..... pany (in liquidation). Applicant has been unable to explain the aforementioned circumstances which are plainly suspicious and allow no inference save that of a fraudulent preference. 24. Remedy Available to Official Liquidator : (a). Applicant, however, sought to contend that Official Liquidator was not entitled to challenge the Consent Decree, either by means of a report filed before the Company Court or by his reply to the application for leave under Section 446. Shri Godbole relied on the judgment of the Hon ble Supreme Court in Indian Bank V/s. Official Liquidator Chemmeens Exports (P) Ltd. & Ors. (1998) 5 SCC 401) and in particular paragraph 12 thereof, which is reproduced hereinbelow: It may be noted that these provisions have no application to any proceeding pending in appeal before a High Court or the Supreme Court. From this what follows is when a suit is instituted in the court of competent jurisdiction with the leave of the court under sub­section (1) and a decree is passed by that court whether on the basis of mortgage or otherwise, it would be binding on Official Liquidator and no plea inconsistent with the decree passed against Official Liquidator can be raise .....

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..... verse. We do not agree with the High Court that "there is no legal duty cast upon the plaintiff to come to court with a true case and prove it by true evidence". The principle of "finality of litigation" cannot be pressed to the extent of such an absurdity that it becomes an engine of fraud in the hands of dishonest litigants. The courts of law are meant for imparting justice between the parties. One who comes to the court, must come with clean hands. We are constrained to say that more often than not, process of the court is being abused. Property­grabbers, tax­evaders, bank­loan­dodgers and other unscrupulous persons from all walks of life find the court­process a convenient lever to retain the illegalgains indefinitely. We have no hesitation to say that a person, who's case is based on falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the litigation. (d). The Consent Decree in question, which has been procured by fraud can be set aside at any stage including in an application for leave to execute it or in an Official Liquidator s Report challenging it. Even otherwise, the scope of the Company .....

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..... concerned, in my view, there is no merit in this submission of the learned senior counsel. Under Section 455 of the Companies Act, 1956 read with Rule 135 and 137 of the Companies (Court) Rules, 1959, Official Liquidator is empowered to submit a report in a case where the winding up order is made by the Company Court for appropriate directions and reliefs. Official Liquidator is not required to file any suit for seeking any reliefs which can be granted by the Company Court by exercising powers under Section 446(2) of the Companies Act, 1956. All contentious issues can be decided by the Company Court by exercising powers under Section 446(2) of the Companies Act, 1956 including any claims by or against the company in liquidation (including any claims by or against any of its branches in India. 116. Under Section 446(2)(d) of the Companies Act, 1956, the Company Court is also empowered to entertain or dispose of any question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. In my view, there is no substance in the submission of the learned senior counsel for Modi Rubber Ltd. that only an administrative direction can be grant .....

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..... ereby and permitting redemption thereof within the stated period, we find that the unregistered charge created by the company in favour of the mortgagees is kept alive. The order of sale of the mortgage property under the decree is to operate only if by the stated period redemption has not been effected. Upon such sale the charge could be extinguished. The provisions of s. 125, therefore, apply to the unregistered charge created by the equitable mortgage and declared by the decree and it is void as against the Official Liquidator. The unregistered charge has no effect upon the property of the company in liquidation. The mortgagees cannot sell the mortgage property notwithstanding the decree obtained prior to the order winding­up the company. 44.It was contended by Shri Tulzapurkar that Official Liquidator could not go behind the decree unless there be fraud or collusion. In view of the provisions of s. 125 Official Liquidator is entitled, if not obliged, to place before the executing court his objection based thereon. (g) The present case bears a striking resemblance to the facts considered by the Division Bench, save for the added feature that the Consent Decree that applicant .....

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..... ing aside the Consent Decree are time barred. Shri Godbole for applicant relied on the judgment of the Andhra Pradesh High Court in Official Liquidator, High Court V/s. Andhra Pradesh State Financial Corporation (2001 (3) ALT 334) in support of the proposition that the law of limitation would apply as much to Official Liquidator as to any other litigant and that an application of the nature brought by Official Liquidator was required to be brought within three years from when the cause of action accrued. The Consent Decree having been passed on 9th July 2009, applicant contends that the reliefs sought in the Official Liquidator's Report were clearly barred by time. (b). The argument of applicant is misconceived. While the Limitation Act would undoubtedly apply to Official Liquidator subject to the qualification introduced in Section 458A (Section 458A : Exclusion of certain time in computing periods of limitation. Notwithstanding anything in the Indian Limitation Act, 1908 (9 of 1908) or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application in the name and on behalf of a company which is being wound up by the .....

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..... l to qualify the order by the observation that it would be an interim arrangement subject to final outcome of the issue on status of the creditors of the Company (in liquidation) and that the order was being passed at the instance of Kotak Mahindra Bank and applicant and without prejudice to the rights and contentions of the Official Liquidator . As such, this order merely permitted an ad­hoc distribution of the sale proceeds and did not conclude any rights between the parties. (d). Indeed, this issue regarding the illegality of the Consent Decree sought to be enforced by applicant was neither considered nor determined by either the DRT or this Court. This was on account of the fact that the papers and proceedings in Suit No.164 of 2009, which induced Official Liquidator to form the view that the Consent Decree is a fraudulent preference, was not then in his possession. His omission in these circumstances to raise a specific plea that the Consent Decree was fraudulently procured cannot preclude Official Liquidator, being more fully informed, from raising that plea now. 28. In these circumstances, (a). the leave sought by applicant under Section 446 of theCompanies Act 1956 to e .....

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