Andhra HC (Pre-Telangana)
T. Rajive And Ors. And Official ... vs A.P. State Financial Corporation And ... on 1 February, 2001
Equivalent citations: [2001]105COMPCAS350(AP)
Author: J. Chelameswar
Bench: J. Chelameswar
JUDGMENT J. Chelameswar, J.
1. Annavaram Spinning Mills Limited, a company now in liquidation, was directed to be wound up by an order of this court, dated November 16, 1998. These company applications are filed by various parties in the following manner : Company Application No. 43 of 1999 is filed by the Andhra Pradesh State Financial Corporation purportedly under Section 446 of the Companies Act, 1956, seeking the permission of the court to stand outside the liquidation proceedings. Company Application No. 88 of 1999 is filed by the official liquidator who took over the affairs of the company pursuant to the winding up orders referred to earlier, praying to set aside the sale conducted by the State Financial Corporation of the assets of the company now in liquidation sometime prior to the winding up order. The details would be adverted to later at the appropriate place. Company Application No. 529 of 1999 is filed by all the ex-directors of the company now in liquidation and some of the shareholders who stood as guarantors to the various financial institutions for the amounts of loans secured by the company once again for the relief praying that the sale conducted by the State Financial Corporation be set aside. Company Application No. 528 of 1999 is an application filed by the same persons as the applicants in Company Application No. 530 of 1999 praying that the guarantors of the company be discharged from their liability on the ground that the sale conducted by the State Financial Corporation of the assets of the company in liquidation is unauthorised and fraudulent, Company Application No. 530 of 1999 is filed once again by the same applicants who are the applicants in Company Application No. 529 of 1999 praying for a direction to have an enquiry conducted into the circumstances under which the State Financial Corporation conducted the sale. Company Application No. 531 of 1999 is filed that a receiver be appointed to take over possession of the assets of the company now in liquidation from the purchaser in the auction conducted by the State Financial Corporation and the same was filed by the same persons once again in Company Applications Nos. 529 and 530 of 1999.
2. The company now in liquidation became a sick company within the meaning of that expression as defined under Section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. Consequently, Case No. 170 of 1989 came to be registered by the BIFR, a body constituted under the said Act. While the affairs of the company were pending consideration before the BIFR, the BIFR addressed a letter dated May 26, 1994, to the State Financial Corporation, the substance of which is a direction to the State Financial Corporation to take steps for the safe custody of the property of the company now in liquidation. The circumstances under which such direction was issued may not be relevant for the purpose of this case. However, pursuant to the letter, the State Financial Corporation took possession of the assets of the company now in liquidation on August 51, 1994, under a panchnama. The BIFR on December 26, 1995, reached the conclusion after an elaborate enquiry stretching over a period of almost six years that the company now in liquidation should be wound up.
3. Thereafter the orders of the BIFR along with a letter dated January 3, 1996, in Devanagari script coupled with another letter without a date but said to have been signed in August, 1998, was received by the Registry of this court on August 29, 1998. The relevant portion of the undated English letter addressed by the Registry of the BIFR to the Registry of this court reads as follows :
"To, The Registrar, High Court of Andhra Pradesh, Hyderabad (A.P).
Sub : Case No. 170/89-Annavaram Spinning Mills Ltd.
Registered Office : Bendapudi--533 409, Mandal, E. G. Dist., Andhra Pradesh-Under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985.
Sir, The Board for Industrial and Financial Reconstruction (Bench-Ill) consisting of S/Shri K. D. Saksena and A. K. Puri, Members, has recorded the opinion under Section 20(1) of the aforesaid Act that it is just and equitable that M/s. Annavaram Spinning Mills Ltd., should be wound up and had directed to forward the aforesaid opinion of the Board to the Hon'ble High Court of Judicature at Hyderabad for further necessary action.
A certified copy of the relevant proceeding dated 26-12-95 of the Bench along with certified copies of earlier orders/proceedings dated 17-7-90, 11-4-91, 15-10-91, 18-2-92, 7-7-92, 9-10-92, 2-4-93, 15-9-94, 10-1-95 and 27-9-95 are enclosed.
Yours faithfully, (Sd.) Rupa Dutta, Registrar."
4. On the same day the Deputy Registrar of this court addressed another letter to the Registry of the BIFR enquiring whether any appeal had been preferred against the orders of the BIFR. The said letter was despatched on August 31, 1998 from this court.
5. Though the BIFR did not respond to the above correspondence of this Registry of this court, a letter dated September 9, 1998 was received by this court purported to have been sent by one Mr. T. Rajive who is one of the applicants in Company Applications Nos. 529, 530 and 531 of 1999 claiming to be the authorised signatory who admittedly was the managing director of the company now in liquidation as on the date of the winding up of the company. The relevant portion of the letter reads as follows :
"BIFR had referred to the High Court of Andhra Pradesh, Hyderabad, for winding up of the company after enquiry under Section 3(1)(o) of the SICA. We write to state and draw your kind notice to the fact that no appeal has been preferred by the company against the said orders of BIFR made under the Act.
This is for your information and record."
6. Of course, the letter does not indicate as to what was the occasion for the managing director to make the communication. Though the said communication was addressed to the Registry of this court, a copy was also marked to the BIFR and to an advocate of this court. After the receipt of the above-said letter from the ex-managing director, the Registry of this court numbered the matter as R. C. C. No. 19 of 1998 on October 19, 1998.
7. Therafter the matter was placed before the court. Notices were directed to be issued to all the respondents by an order of this court dated October 26, 1998. Subsequently by an order dated November 16, 1998, this court directed the company now in liquidation be wound up. In fact from the records of this court, it appears that two advocates--E. S, Kumar and K. V. R. Chowdary--entered appearance on behalf of the company now in liquidation and the Registry of this court received the appearance on November 16, 1998.
8. Company Application No. 414 of 1998 was filed by all the ex-directors of the company and some of the shareholders praying to condone the delay of 209 days in filing the application which was filed seeking the review of the orders of this court dated November 16, 1998 wherein the company now in liquidation was directed to be wound up. The said application was dismissed by an order of this court dated July 28, 1999. Aggrieved by the said order, an appeal was carried to the Division Bench of this court in O. S. A. No. 94 of 2000 and the same was also dismissed by an order of this court dated November 27, 2000.
9. In the meanwhile the State Financial Corporation which was in possession of the assets of the company now in liquidation made a paper publication on October 23, 1996 and October 24, 1996 in three newspapers The Deccan Chronicle, Eenadu and Economic Times proposing to sell away the assets of the company now in liquidation towards the recovery of arrears due to the State Financial Corporation. The State Financial Corporation purported to take such a step in exercise of the power vested in it by virtue of Section 29 of the State Financial Corporations Act. Thereupon in the auction proceedings dated June 23, 1997, Penna Textiles--the fifth respondent in Company Application No. 88 of 1999 became the successful bidder and the assets of the company now in liquidation were sold for a valuable consideration of Rs. 2.2 crores and in fact a sale deed was also executed to that effect in favour of the said Penna Textiles on August 30, 1997. For the sake of convenience, it is also relevant to mention here that about a year thereafter Penna Textiles itself sold away the assets so purchased by it to P. S. Textiles Ltd. This is an admitted fact on all hands.
10. For the purpose of deciding the various applications referred to earlier, the following are the crucial dates : (1) The auction conducted by the State Financial Corporation on June 23, 1997, and (2) the sale deed executed in favour of Penna Textiles pursuant to the above-mentioned auction is dated August 30, 1997 ; (3) on November 16, 1998, this court directed that the company now in liquidation be wound up.
11. I shall now examine the individual applications : Company Application No. 529 of 1999, is filed by the ex-directors of the company now in liquidation along with some other shareholders, who are guarantors for the loans secured by the said company. The prayer in the application is that the sale conducted by the State Financial Corporation on June 23, 1997, be set aside. Apart from the various factual allegations as to how the sale conducted by the State Financial Corporation and the price fetched by such sale is very low and therefore detrimental to the interests of the applicants, learned counsel for the petitioner made the following legal submissions :
Firstly, that the State Financial Corporation could not have sold away the assets of the company now in liquidation without the leave of this court in view of the provision under Section 446 of the Companies Act, 1956, read with Section 441(2).
Secondly, it is submitted by learned counsel that the State Financial Corporation did not follow the procedural safeguard as contemplated under the State Financial Corporations Act, 1951, as interpreted by this court and the Supreme Court and consequentially the sale conducted by the State Financial Corporation is void.
The third submission is that the sale conducted by the State Financial Corporation under Section 29 of the State Financial Corporations Act, 1951, is required to be preceded by a seizure and in the present case no seizure was conducted by the State Financial Corporation as the assets of the company (now in liquidation) sold away by the State Financial Corporation went into the custody of the State Financial Corporation pursuant to a request made by the BIFR by its letter dated May 26, 1994.
12. On the other hand, learned senior counsel--Sri. S. R. Ashok appearing for the purchaser of the assets of the company now in liquidation, from the State Financial Corporation--argued that the applicants in Company Application No. 529 of 1999 having not contested R. C. C. No. 19 of 1998 earlier, and having allowed the company to be wound up without contest and having" unsuccessfully attempted to have the winding up order dated November 16, 1998, to be recalled, are now debarred from raising any question about the validity of the sale conducted by the State Financial Corporation.
13. In my view, the objection raised by Mr. Ashok is not tenable, for the reason that some of the applicants in Company Application No. 529 of 1999 being the former members of the managing board of the company now in liquidation, though did not evince any interest in contesting the above-said R. C. C., and allowed the winding up order to be passed, are not totally divested of their right in their capacity as shareholders to challenge any action which would adversely affect their rights as shareholders. Because, the directors of the company may opine and agree with the BIFR that it is not worthwhile continuing the existence of the company and therefore allow the court to pass an order for winding up. But that does not necessarily mean that the assets of the company should be allowed to be sold at a price which is less than the value the assets are worth. By allowing it, not only the interest but also the interest of all other shareholders and creditors would be jeopardised.
14. The question that falls for the consideration of this court is whether the directors or the shareholders can raise an objection with regard to a sale of the assets of the company in liquidation conducted by a secured creditor, In this case it happens that it is done (in exercise of the statutory right under Section 29 of the State Financial Corporations Act, 1951). If the answer to this question is in the positive, then, the further question would be what are the legal principles or parameters which regulate such a right.
15. The company court exercises its jurisdiction in accordance with the provisions of the Companies Act, which authorises the exercise of the jurisdiction by the court. It is not a civil court as contemplated under Section 9 of the Civil Procedure Code where every dispute of a civil nature could be entertained and decided. Nor is the company court a court exercising the extraordinary jurisdiction under the Constitution of India under Articles 226 and 227. In which case, the jurisdiction of this court, either to test the validity or give a declaration, that, some action of a party which affects the assets of the company in liquidation, is required to be ascertained from the express language of the Companies Act. The only provision, which was placed before this court by learned counsel for the applicants in this regard, is Section 446 of the Companies Act. Section 446 prescribes that no suit or other legal proceeding shall be commenced or if pending at the date of winding up order shall be proceeded with against the company except by leave of the court.
16. Section 446 is applicable only in two situations as can be seen from the language of Section 446 of the Companies Act. Firstly, when a winding up order is made or secondly, though no former order of winding up is made the official liquidator is appointed as a provisional liquidator of the affairs of the company, which is sought to be wound up. Though the section does not expressly declare that any suit or legal proceeding which is taken in contravention of the section is void, by a series of decisions of the higher courts of this country, the legal position is declared that such a contravention would normally be to render such actions void unless the company court otherwise decides.
17. If that is the case, even to declare illegal the sale conducted by the State Financial Corporation--which is undoubtedly a "legal proceeding" against the company now in liquidation, the fundamental requirement is that such a sale must have been held in contravention of Section 446 of the Companies Act. In other words that such a sale must have been held after the date of the winding up order passed by this court as it is not the case that a provisional liquidator was ever appointed in the instant matter.
18. From the earlier narration of the facts, it can be seen that the sale was conducted on June 23, 1997 and the sale deed was executed on August 30, 1997 whereas the winding up order came to be passed on November 16, 1998 ; therefore, it cannot be said that the sale transaction conducted by the State Financial Corporation is hit by Section 446 of the Companies Act.
19. However, learned counsel for the applicants--Sri Ramanarayana argued that in view of the scheme of Sections 20, 22 and 22A of the Sick Industrial Companies (Special Provisions) Act, 1985, the proceedings in the company petition are only a continuation of the proceedings before the BIFR which is a body created under Section 4 of the above-said Act. By virtue of the declaration made under Section 22 of the Act that during the pendency of the proceedings before the BIFR, no creditor could have initiated legal proceedings of whatever nature for the recovery of the amounts due to such a creditor. If that is so on the completion of the enquiry if the BIFR reaches the conclusion that the company is not likely to make its net worth positive within a reasonable time to meet all its obligations, and therefore it is just and equitable that the company be wound up, the BIFR is required to record the same and forward the matter to the concerned High Court for winding up of the company. It would be illogical to say that the assets of the company could not be proceeded against pending an enquiry before the BIFR but could be proceeded against, the moment the BIFR reaches a conclusion that the company should be wound up, more particularly, in view of the specific provision of Section 446 of the Companies Act, the scope of which was already noticed earlier.
20. Learned counsel further tried to draw support from the scheme of Section 22A of the Sick Industrial Companies (Special Provisions) Act, 1985, which enables the BIFR to direct the sick industrial company not to dispose of any of its assets during the periods specified under the section except with the consent of the BIFR.
21. I am afraid that the submission of learned counsel cannot be accepted for the reason, the general right of the creditor to proceed against the assets of his debtor cannot be taken away except by an express declaration of law or by an implication, which is so necessary that it would exclude any other possibility. In so far as the express declaration is concerned, neither under Section 20 of the Act nor under Section 446 of the Companies Act, such a declaration is made. The limited curtailment of the right of the creditor, under Section 446 of the Companies Act is already noticed. In my view, Section 22A of the Sick Industrial Companies (Special Provisions) Act, 1985, instead of supporting the argument of learned counsel would itself go to demolish the submission made by learned counsel as the direction contemplated under Section 22A of the Sick Industrial Companies (Special Provisions) Act, 1985 is not mandatory in every case where the BIFR finds that the sick industrial company should be wound up. Consequently, even in a case where the BIFR decides to pass such a direction after recording the recommendation that a sick industrial company should be wound up, the direction could be issued only for such a period as is contemplated under Section 22A(b) of the Sick Industrial Companies (Special Provisions) Act, 1985, which reads as follows :
"(b) during' the period beginning with the recording of opinion by the Board for winding up of the company under Sub-section (1) of Section 20 and up to commencement of the proceeding relating to the winding up before the concerned High Court."
22. If Parliament really intended to keep the assets of a sick industrial company which is recommended for being wound up, out of the reach of either the secured or unsecured creditors Parliament would have positively made such a declaration. Having" given an option to the BIFR to make or not to make such a declaration, Parliament cannot be said to have made such a declaration by necessary implication.
23. The more important aspect of Section 22A of the Sick Industrial Companies (Special Provisions) Act, 1985 is that a direction is to be issued only to the company but not its creditors. Whereas in contradistinction Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, injuncts the creditors from taking any proceedings against such a company during the pendency of the proceedings before the BIFR. Obviously the purpose behind Section 22A appears to be that the assets of the company may not be disposed of by the management and thereby making the claims of the creditors and others more difficult to be realised.
24. Sri Ramanarayana submitted that in view of the declaration contained under Section 441 of the Companies Act that the winding up of a company shall be deemed to commence on a particular date depending" upon the nature of the winding up proceeding's also, in my view, does not in any way support the submission made by Sri Ramanarayana. The fiction created under Section 441 of the Companies Act, might have a bearing for certain purposes under the Companies Act and what exactly are those purposes may not be necessary for this court to go into, but in my view, having regard to the language of Section 446 of the Companies Act, the fiction created under Section 441 of the Companies Act have no relevance for the purpose of Section 446 of the Companies Act. Therefore, the submission made by Sri Ramanarayana that the sale conducted by the State Financial Corporation must be declared illegal as it is in contravention of the provisions of the Companies Act and the Sick Industrial Companies (Special Provisions) Act, 1985, must be rejected.
25. Coming" to the other submission of Mr. Ramanarayana that the State Financial Corporation while conducting the sale did not follow the procedure, which is required to be followed, in my view, cannot be gone into by the Company Court in view of my finding that the sale preceded the winding up order as the company court is neither a civil court nor constitutional court as described earlier. It is a different matter and the considerations would be different if such a sale were to be held subsequent to either the winding up order of this court or subsequent to the appointment of a provisional liquidator, with which situation I am not presently concerned.
26. For all the above-mentioned reasons, Company Application No. 529 of 1999 is dismissed.
27. Coming to Company Application No. 530 of 1999, the prayers are as follows :
"1 . ..... to conduct an enquiry by appointing Technical Commissioner or other officer to determine the market value of the said assets alleged to have been sold by APSFC.
2. For such other relief or reliefs as the hon'ble court deems fit and proper in the circumstances of the case."
28. In view of the fact that the sale conducted by a public auction after due advertisement and further in view of the fact that the sale took place two years prior to the date of the present application, I do not see any reason to grant any relief as prayed for by the applicants in this petition. The application is therefore dismissed. I do not want to go into the question of the jurisdiction of this court to grant such a relief.
29. Coming" to Company Application No. 531 of 1999, in view of the orders passed in Company Applications No, 529 of 1999 and 530 of 1999, this application is also dismissed,
30. Company Application No. 528 of 1999 is filed with a prayer as follows :
"... to direct all the directors of the said company under winding up and the said guarantors stood discharged from all their liabilities in law against the said creditors viz., APSFC, APIDC, SBI and/or AB in view of the aforesaid fraudulent and negligent conduct and to restore the said assets to the said company under winding up and pass such other order or orders."
31. In the light of the orders passed in Company Applications Nos. 529 and 530 of 1999, I do not see any reason to grant any relief in this petition apart from the fact the relief such as the one sought, cannot be granted by the company court.
32. Company Application No. 88 of 1999 : This is an application filed by the official liquidator with the following prayers :
"(a) kindly consider and pass appropriate order declaring" the sale of assets conducted by the Andhra Pradesh State Financial Corporation as null and void ;
(b) direct the Andhra Pradesh State Financial Corporation to deposit the sale proceeds of Rs. 220.60 lakhs with the official liquidator immediately ;
(c) direct the Andhra Pradesh State Financial Corporation to furnish a copy of panchnama prepared at the time of taking possession of the assets of the company and also a list of assets disposed of by it and also a list of assets if any remaining in their hands unsold ;
(d) order the costs of this application to come out of the assets of the company ; and pass such other order or orders as this hon'ble court may deem fit and proper in the premises."
33. For the reasons assigned in Company Application No. 529 of 1999 this application is also to be rejected, however, the State Financial Corporation is directed to make available to the official liquidator such funds as may be demanded by the official liquidator to satisfy the supporters' claims of others statutorily recognised under section 529A of the Companies Act as and when such a demand is made.
34. Coming to Company Application No. 43 of 1999, the office is directed to post this matter in the next week.