Karnataka High Court
Bellary Spinning And Weaving Co. Ltd. vs Syndicate Bank And Others on 1 March, 1991
Equivalent citations: [1991]70COMPCAS692(KAR), ILR1991KAR4494, 1991(3)KARLJ721
JUDGMENT K.A. Swami, J.
1. This appeal is preferred against the order dated October 19, November 6, 1987, passed by the learned company judge in Company Petition No. 34 of 1986 and the connected Company Petitions Nos. 13 and 39 of 1987 directing winding up of the appellant company under the provisions of section 433(c), (e) and (f) of the Companies Act.
2. During the pendency of the appeal, there was an interim order of stay passed on December 23, 1987. The interim order was vacated on February 13, 1989. We may also ;point out that maximum time was granted and indulgence was shown to the appellant before vacating the interim order. The appellant even failed to pay a sum of Rs. 10,00,000 to the first respondent - bank to show its earnestness as ordered on September 30, 1988, a on joint memo filed by the parties. Various orders passed in between December 23, 1987, and February 13, 1989, bear testimony to the fact that sufficient indulgence was shown to the appellant.
3. The first respondent - bank filed the aforesaid Company Petition No. 34 of 1986 for the winding up of the appellant company. There were two other similar petitions, being Company Petitions Nos. 13 and 39 of 1986 filed by the two other creditors under section 433(e) read with section 434 of the Companies Act which were also head along with Company Petition No. 34 of 1986 and were decided by a common order. Even if the order of winding up is passed in one company petition it will enure to the benefit of the petitioner in other similar petitions. In the appeal preferred by the aggrieved party, the petitioners in the other petitions ought to have been made parties to the appeal, as they have also filed petitions for winding up and those petitions have also been allowed along with Company Petition No. 34 of 1986. Thus, the petitioners in Company Petitions Nos. 13 and 39 of 1986 are necessary parties to the appeal. In this way, the appeal suffers from a legal infirmity. It is bad for non - joinder of necessary parties. As we have heard the appeal on merits and as we are not in agreement with the contentions raised by the appellant, we do not propose to dispose of the appeal on the aforesaid ground. Accordingly we decide the appeal on merits.
4. The case of the petitioner in Company Petition No. 34 of 1986 is that the appellant company is due to pay to the bank a sum of Rs. 3,09,53,445.20 as on June 19, 1986, and interest thereon at 19.5 per cent. until the date of repayment. The appellant had made certain payments, though it disputed the claim of the bank. The rate of interest charged by the bank was also disputed. However, it was not disputed that the amount due to the first respondent - bank as on the date of filing of the petition was more than Rs. 2 crores, therefore, the learned company judge proceeded on the basis that the appellant company was due to pay to the first respondent bank more than Rs. 2 crores. The company was registered as a public limited company with authorised capital of one crore divided into 75,000 equity shares of Rs. 100 each and 25,000 redeemable cumulative preference shares, redeemable at 13.5 per cent. Out of the 75,000 equity shares, 55,000 shares of Rs. 100 each had been issued and 5,000 redeemable cumulative preference shares of Rs. 500 each had also been fully subscribed. Out of the 55,000 equity shares, 47,280 equity shares had been fully subscribed. As on 31st October, 1988, a sum of Rs. 52,28,000 was the subscribed share capital of the company since its incorporation. These facts are not in dispute. The appellant company commenced its business in the year 1962 and so far it has not declared any dividend. For the commencement of the company, it availed of financial accommodation under loan account No. OSL 13 of 1973 to the tune of Rs. 36,24,000 from the first respondent - bank. Thus, the appellant company was established with borrowed capital from the first respondent - bank. In course of time, it is not disputed, this liability has exceeded Rs. 3 crores. It is not necessary in this appeal to determine the exact amount due to the first respondent - bank. It is sufficient for our purpose to notice that as on the date of filing of the petition for winding up and as on today, the sum payable to the first respondent - bank exceeded Rs. 2 crores. The learned company judge after taking into consideration the assets of the company and also its liabilities has come to the conclusion that it is not possible for the company to discharge its liabilities even after disposing of its entire assets.
5. During the course of hearing of the company petition, the workers of the company got themselves impleaded. They raised an objection that the industry was run by the company under the provision of the Sick Industrial Companies (Special Provisions) Act, 1985, and, therefore, it was not open to the company court to direct the winding up of the company. Reliance was placed on the provisions contained in section 4, 15(1), 16, 17, 20, 22, and 31 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to us "the Act"). The learned company judge has rejected the contention based upon the aforesaid provisions of the Act and has held that the provisions of the Act can be availed of by the company only when an enquirty under section 16 of the Act is pending or that any scheme referred to in section 17 of the Act is under preparation or consideration or that a sanctioned scheme is under implementation. as none of them is present in this case, the learned company judge has rejected the contention. Consequently, he has held that it would not be permissible and the company court will not have jurisdiction to stay the winding up proceedings as pleaded by the appellant - company.
6. Ultimately, the learned company judge has come to the conclusion that the company cannot carry on its business and it has ceased to carry on business for want of finances for more than one year, and it has suspended its operations for want of finances for over a period of one year. It has also been held that the company is not able to obtain finances from other s sources. The learned company judge has also held that winding up is the only way left.
7. In this appeal, it is contended by Sri Gururajan, learned counsel appearing for the appellant, that the learned company judge instead of directing winding up of the appellant - company, ought to have directed the first respondent - bank to approach the Board under section 15(2) of the Act ; that the provisions contained in section 15(2) of the Act should be construed as mandatory. This is also the contention of Sri Narasimhan, learned counsel appearing for the workmen of the appellant - company, that by reason of winding up of the company, not only the workmen of the company are affected inasmuch as they will be out of employment and the surrounding area wherein the cotton crop is grown in the surrounding area. That it is also one of the relevant factors to be taken into account while considering the question as to whether it is just and equitable to pass an order directing winding up of the company.
8. Sri Narasimhan, learned counsel appearing for the workmen contends that the interpretation placed by the learned company judge on the provisions contained in section 4, 15(1), 16, 17, 20, 22 and 31 of the Act is not correct and that this is not a case for winding up as it would result in throwing several workmen out of employment.
9. On the contrary, learned counsel appearing for the bank submits that in spite of the fact that several opportunities were afforded to the appellant company it was not able top generate funds and discharge even a small portion of the debt ; that there is no proceeding pending under the Act before the Board and, therefore, the provisions of the Act are not attracted to the case ; that the provisions of section 15(2) of the Act are not mandatory ; that there is no evidence adduced by the appellant company that the area in which the mill is located is a cotton growing area, that the mill in question was regularly purchasing the cotton from the surrounding area and utilising the said cotton for manufacturing textile commodities ; that in the absence of such evidence and proof of the same the contention does not hold water and, therefore, on this ground it will not be permissible to hold that it would not be just and equitable to order winding up.
10. In the light of the contentions urged on both sides, the following points arise for consideration :
"(1) Whether the provisions of the Act, i.e., the Sick Industrial Companies (Special Provisions), Act, 1985, are attracted to the industry in question ?
(2) Whether the order passed by the learned company judge directing winding up of the appellant company is liable to be interfered with ?"
Point No. 1. - There is no doubt that the appellant company is an industrial company as defined in the Act inasmuch as it was running a scheduled industry as peer the provisions of the Act. (See clauses (e), (f) and (n) of sub - section (1) of section 3 of the Act). But, in order to find out whether the provisions of the Act have become applicable to the appellant company, it is necessary that it must become a "sick industrial company", and on becoming a sick industrial company a proceeding before the Board must be initiated as per the provisions contained under section 15 and 16 of the Act. The expression "sick industrial company" as defined under section 3(o) of the Act reads thus :
"(o) `sick industrial company' means an industrial company (being a company registered for not less than seven years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year."
Explanation. - For the purposes of this clause -
(i) `cash loss' means loss as computed without providing for depreciation ;
(ii) `net worth' is the sum total of the paid up capital and free reserves ;
(iii) `free reserves' means all reserves credited out of the profits and share premium account but does not include reserves credited out of revaluation of assets, write - back of depreciation provisions and amalgamation ;"
11. Even if for the sake of argument it is presumed that the appellant company is a sick industrial company, it is not sufficient to attract section 15, 16 and 17 of the Act. The board of directors of the sick industrial company should make a reference to the Board established under section 4 of the Act for determination of measures which shall be adopted with respect to the sick industrial company as per sub - section (1) of section 15 of the Act which reads thus :
"15. Reference to Board. - (1) Where an industrial company has become a sick industrial company, the board of directors of the company, shall, ;within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company :
Provided that if the board of directors had sufficient reasons even before such finalisation to form the opinion that the company had become a sick industrial company, the board of directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company."
12. From the aforesaid provisions it is clear that the board of directors of the industrial company within 60 days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company shall make a reference to the Board for determination of the measures which shall be adopted with respect to the company. The proviso further provides that if the board of directors have sufficient reasons even before such finalisation of the duly audited accounts of the company to form the opinion that the company had become a sick industrial company, within sixty days after formation of such opinion the board of directors are required to make a reference to the Board established under section 4 of the Act for the determination of the measures which shall be adopted with reference to the company. In the instant case, no such step was taken either before filing the company petition for winding up or during the pendency of the said petition. Even to this day, no such step is taken. Of course, it is submitted that once an order for winding up is passed it cannot be considered that an industrial undertaking is carrying on a scheduled industry and , therefore, it would not be permissible to make a reference to the Board. Even if it be so, nothing prevented the appellant company from making a reference to the Board before the winding up order was passed. In fact, the company petition was adjourned several times to enable the appellant company either to make such an arrangement so that winding up can be avoided or to invoke the provisions of the Act. Nothing was done. When the industrial company itself is required to invoke the provisions contained in section 15(1) of the Act and it has failed to invoke the provisions of section 15(1) of the Act, it does not lie in its mouth to contend that the bank should have done it. Of course, if the provisions of the Act compel the bank to comply with the provisions of the Act, in spite of the fact that the industrial company has not invoked the provisions of section 15(1) of the Act, it would have been open to the appellant to so contend. But, in our view, the provisions contained in sub - section (2) of section 15 of the Act cannot be read as mandatory. There is a marked difference between sub - section (1) and sub - section (2) of section 15 of the Act even though both the sub - section deal with the same topic, viz., making a reference to the Board for determination of the measures which shall be adopted with respect to the industrial company but by different agencies. We may now refer to sub - section (2) of section 15 of the Act which reads thus :
"2. Without prejudice to the provisions of sub - section (1), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference i n respect of such company to the Board for determination ;of the measures which may be adopted with respect to such company :
Provided that a reference shall not be made under this sub - section in respect of any industrial company by -
(a) the Government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State ;
(b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to such company, an interest in such company."
13. When the provisions of section 15 are to be invoked for the very same purpose that is to make a reference to the Board for determination of the measures which shall be adopted with reference to the sick industrial company by the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank, the statute uses the expression "may", thereby leaving it to the discretion of the Central Government, the Reserve Bank, the state Government and other institutions mentioned therein to seek a reference to the Board for the determination of the measures which shall be adopted with respect to a sick industrial company. Whereas in sub - section (1) of section 15 of the Act, the expression used is "shall". Thus, the board of directors of the company were required to make a reference. They did not make a reference. There is no reason or explanation put forth why they failed to avail of the right or failed to avail of the opportunity to save the industry. They are the best judges of the industry because it is they who will be in the know of the actual condition and future prospects of the industry. Therefore, the board of directors of the company ought to have availed of the provisions of section 15(1) of the Act. Having regard to the expression "may" used in section 15(2) of the Act in juxtaposition to the expression "shall" used in section 15(1) of the Act in respect of the very same topic, it is not possible to hold that the use of these two expressions "may and "shall" is without any difference. Therefore, section 15(2) of the Act cannot be held to be mandatory. The discretion is left to the authorities mentioned therein to make or not to make a reference to the Board.
14. We may also notice the provisions contained in section 16(1) of the Act which read thus :
"16. Inquiry into working of sick industrial companies. - (1) The Board may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company, -
(a) upon receipt of a reference with respect to such company under section 5 ; or
(b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company."
15. From clause (b) of sub - section (1) of section 16, it is also apparent that it is open to the Board suo motu or upon information received with respect to such company or upon its own knowledge as to the financial condition of the sick industrial company to make such enquiry as it may deem fit for determining whether the industrial company has become a sick industrial company. The taking action by the Board suo motu under section 16(1)(b) of the Act is not mandatory as it is left to the discretion of the Board. Therefore, we are not in agreement with the contention of Sri Gururajan, learned counsel for the appellant - company, and also Sri Narasimhan, learned counsel for the workmen of the appellant - company, that sub - section (2) of section 15 of the Act should be construed as mandatory and that unless the bank exhausts that remedy, it should not be permitted to move the company court for the winding up of the company. It would amount to reading something into the statute which is not there and which is never intended by the Legislature. Therefore, we reject the contention.
16. The other provisions relied upon, viz., sections 17, 20 , 22 and 31, are not of much relevance in a case where s section 15 itself is not invoked nor the Board has invoked its power under section 16(1)(b) of the Act. Therefore, we do not consider it necessary to refer to those provisions. Accordingly, we answer point No. 1 as follows :
"As the provisions of the Act are not invoked by taking recourse to section 15(1) of the Act, the provisions of the Act are not attracted to the industrial company in question and also to the proceedings in question."
17. Point No. 2. - When the company is neither able to discharge its debts nor is it in a position to generate funds, and it has not placed any scheme before the court for improvement of its industry, the only course open is to order winding up as otherwise it would not be possible to discharge its debts. Therefore, we do not consider it necessary to go into the matter whether the debts of the company exceeded the assets of the company. No purpose is served, in the absence of any viable scheme, to allow the company to exist which would only result in increasing its liabilities. Therefore, the earlier it is wound up the better it is for the company. Hence we are of the view that the learned company judge is justified in coming to the conclusion that there is no course open except to order the winding up of the company.
18. Before concluding this point, we may also refer to the two decisions of the Supreme Court which were relied upon by learned counsel for the appellant company in E. I. D. Parry (India) Ltd. v. State of Tamil Nadu, and Navnit R. Kamani v. R.R. Kamani . In E.I.D. Parry's case, , the winding up of the company was involved. Learned counsel placed reliance on para 5 of the decision (at page 754) :
"In the course of hearing we were impressed by the fact that the factory was almost a century and a half old and appeared to be the most ancient as also the premier industry of the area. In view of the fact that the factory required a sizeable quantity of sugarcane for its business, people in the locality had been growing sugarcane and the Tribunal had found that a lot of sugarcane was standing in the fields. Closure of the factory was not only going to affect adversely the workmen but also the producers of sugarcane and was, therefore, likely to bring about unemployment to a sizeable population in the locality. Though the Tribunal came to hold that the closure notice was valid and justified, it also recorded a finding pursuant to the direction of this court dated August 10, 1983, that with a viable unit of 925 workers, including staff, the factory could run. We found that if the factory was not closing down and was to operate, apart from providing a ready market for the sugarcane growers, provision for employment of at least 925 people would be made. In the course of hearing we had, therefore, suggested to learned counsel for the parties that every effort should be made to keep the factory going and the scope for employing as many of the displaced workmen as possible should be explored. With a view to providing adequate opportunity for the said purpose the hearing of the matter was adjourned on more than one occasion. We were satisfied that learned counsel appearing for the parties appreciated our approach to the matter and took considerable pains to evolve an acceptable formula which would alleviate the hardship of workmen to the maximum extent possible land ultimately left the matter to us for final disposal. Keeping in view the submission and facts placed after exploring the possibilities of settlement, we direct disposal of all the aforesaid cases on terms indicated below."
19. All that we can point out is that no foundation is laid in this case for applying the principles stated in para 5 of the aforesaid decision. It is neither pleaded not is nay evidence adduced is this case that the area surrounding the industrial company in question is a cotton growing area and the industrial company manufactured its textile products only by purchasing cotton grown from the surrounding area. In the absence of any such plea and evidence, it is not possible to apply the decision of the E.I.D. Parry's case, . Learned counsel also stressed on para 5 of the judgment in Navnit R. Kamani's case [1989] 66 Comp Cas 132 (SC). In that case, in the course of winding up, there was a scheme presented. Therefore, in the light of that scheme, the winding up was not allowed. Such a situation does not arise i this case and we have pointed out earlier that no scheme has been presented even though the petition was pending for a long time nor is nay such scheme presented before us even though the appeal is pending for more than four years. Hence, the decision in Navnit R. Kamani's case is not of any help to the appellant company. Accordingly, point No. 2 is answered in the negative.
20. For the reasons stated above, the appeal fails and the same is dismissed. In the facts and circumstances of the case, there will