Karnataka High Court
Bangalore Timber Industries And Others vs Madras Sapper Ex-Servicemen'S ... on 10 September, 1987
Equivalent citations: [1990]68COMPCAS641(KAR)
ORDER P.P. Bopanna, J.
1. This company petition is filed by the creditors of an unregistered company which is carrying on business under the name and style of madras Sapper Ex-Servicemen's Rehabilitaton Association. There are six petitioners and all are creditors of this unregistered company (hereafter referred to as ``the company'')
2. Petitioner No. 1 is the creditor of the company in a sum of Rs. 16,11,908.51,petitioner No. 2 is the creditor of the company in a sum of Rs. 1,72,949.03,petitioner No. 3 is the creditor in a sum of Rs. 7,80,284.94, petitioner No. 4 is the creditor in a sum of Rs. 1,98,752.79 and petitioner No. 6 is the creditor in a sum of Rs. 1,46,042.78. This, in all, an aggregate amount of Rs. 33,49,262.58 is admittedly due from the company to these petitioners since 1984.
3. The case of the petitioners is that these amount have been outstanding in spite of repeated demands and, therefore, they are entitled to 12% interest on the amounts due to them from the respective dates for the supply of timber made by them to this company. It should be noted at this stage that this company was registered under the Societies Registration Act with no share capital. The object of this company is to rehabilitate the exservicemen by engaging them in the manufacture of a variety of goods and products made out of wood. Therefore, they required a constant supply of raw material in the shape of timber and cut pieces of timber and towards this requirement, the petitioners have admittedly supplied the necessary raw material from time to time. Though the company had commenced its business in the year 1966, it does not appear to have made much progress as could be seen from the notice of the special general meeting held on December 26, 1985, at its headquarters in Bangalore. In that meeting, certain resolutions were passed. The first resolution was to the effect that subject to the provisions of the Industrial Disputes Act, the entire business undertaking carried on by respondent No. 1 should be closed down from April 1, 1986, after the receipt of the necessary sanction from the State Government and arrangements be made to pay the statutory dues to the workmen as per the provisions of the aforesaid Act, on the availability of funds for that purpose.
4. It was resolved further that the company be dissolved with effect from April 1, 1986, in accordance with article 28 of the articles of association read with section 22 of the Karnataka Societies Registration Act after receipt of the sanction from the State Government and necessary action be taken to dispose of the assets of the company and discharge the outstanding liabilities thereof to the extent feasible in the order of priority set out below :
(a) Secured creditors, if any.
(b) Cost, charges and expenses of dissolution.
(c) All revenues, taxes, cases and rates due to the Central and the State Governments and to a local authority.
(d) All wages/salaries and other amounts accrued and have become due as per service conditions.
(e) All amounts due in respect of contributions payable by the employer.
(f) Compensation/gratuity due to employees as per rules.
(g) Creditors.
5. The other resolutions are not relevant for the purpose of this case.
6. These resolutions were passed on December 26, 1985, and this petition was filed on January 15, 1986. The petitioners presumable have come to know of the resolution directing the closure of the business carried on by the company and, therefore, apprehending that there would be a fraudulent preference of creditors by the company, they have filed this petition under the provisions of section 482 read with section 439 and 444 of the Companies Act, 1956 (in short, ``the Act'').
7. The petitioners have alleged that the order of priority in the matter of payment of the debts of the company is not just and equitable and that there are no secured debts at all; that the total liabilities of the company as on December 10, 1985, is Rs. 56,59,595.43 ; that the assets of the company consist of only the factory, its machinery and the movable; though the company is unable to pay its creditors, it is actually allowing its creditors to take back the materials supplied to it and if some of the creditors are given access to the properties of the company, there would be a virtual scramble among them to take away as much as possible, leaving the petitioners and other creditors at the mercy of the company as there would be no assets at all to satisfy their claims. The petitioners have averred that they have served notices as required under the Act on the company, but in spit of such notices, the company has not discharged the debts due to the petitioners. On these grounds, the petitioners have sought the winding up of the company.
8. A preliminary objection was taken by the company that the company petition was not maintainable under the provisions of section 583 of the Act. This objection was overruled by this court by its order dated August 8, 1986*. The company has filed its statement of objections partly denying certain averments made by the petitioners and partly admitting certain other averments in the company petition. But the fact that the company is due in a sum of Rs. 33 lakhs odd to the petitioners is not disputed. Therefore, whether on this admitted fact, this is a fit case for winding up could be decided on the basis of the affidavits and documents on record. Parties have also not sought for any oral evidence to be adduced in support of their contentions.
9. In the statement of objections filed by the company, it is submitted that the outstanding liabilities and the order of priority are fixed in accordance with law; that there is no scope for any injustice to an party ; that the total liability of the company is to the tune of Rs. 283,93,934.15 as on September 30, 1985; that the company is taking proper steps to see that the debts are paid off as much as possible and that all possible and positive steps to minimise the hardship to its 255 workmen and the creditors are being taken by the board of directors ; that the company had already resolved to close down the factory and necessary application for permission to close down the industry is pending before the Government. In para 14 of its objection statement, the company has admitted that the balance-sheet for the year 1985 shows tow loans as secured loans, namely, Rs. 52 lakhs from the DGR (Director General of Resettlement, Ministry of Defence) and Rs. 5 lakhs from the Karnataka Sainik Board.
10. The workmen of the company have come on record in the light of the decision of the Supreme Court in National Textile Workers union v. P. R. Ramakrishnan [1983] 53 Comp Cas 184 (SC). They have filed a detailed statement of objections opposing the winding up of the company. According to them, the petition for winding up is wholly misconceived inasmuch as the company is still a viable business undertaking and with proper management and sufficient infusion of working capital, the industry that is run by the company could be put back on the rails, that the company has sustained losses only due to mismanagement and lack of professional expertise in the management of its business, that the claims of the workers should weigh heavily with the company court before an order of winding up could be made, that the petitioners, if at all they want to realise the amounts due to them, could always approach the civil court and obtain decrees and execute the same against the assets of the company. Mr. G. S. Rao appearing for the workmen has put up a spirited challenge to the petitioners' prayer. He has relied on a number of uncontroverted facts and figures in support of the objections of the workmen to the winding up of the company. According to him, the accumulated losses were not due to lack of production. The losses were because of the fact that the supplies were made by the factory on the basis of the lowest tender quoted which was not commensurate with the cost of the production, that the company had not availed itself of the concessions offered by the State Government for the supply of the raw materials but had always chosen to get raw materials from private parties ; therefore the rates would be naturally higher than the Government rates and that the financial position of the company had worsened because of continuous losses. He has also relied on the figures given in the balance-sheet as on April 7, 1986 (unaudited), and he has submitted that while the liabilities to be discharged are Rs. 56,595.43 as on December 10, 1985, the assets as per the books are the factory with the machinery and the movables and if the same are revalued, their worth will be Rs. 214.33 lakhs leaving a deficit of Rs. 110.33 lakhs. But this deficit could be made up by proper management of the business of the company. He has accused the management of the company of mismanaging the resources and finances of the company. He has stated that the management instead of taking steps to improve the efficiency by creating capital, and employing persons of practical experience in finance, costing, inventory management, production and planning and also inducting experts at the board level to run the factory on sound lines by improving production and productivity, had taken a decision to close down the factory after obtaining the permission of the Ministry of Defence. According to him. if competent personnel are employed by the company instead of depending on service officers who have absolutely no knowledge of running a business concern, the company could be made commercially viable and, therefore, it would not be just and equitable to wind up the company. He says that what is required is toning up the top management at the board level and also at the departmental heads' level. He has suggested a number of steps for the better management of the company by which the winding up of the company could be averted. He has maintained that the winding up is not just and equitable since the workmen will be unemployed if winding up orders were to be made and this court should keep in view the directive principles laid down in the Constitution and avoid loss of employment to the workmen who are in employment with the company. He has relied on the observations of the Supreme Court in National Textile Workers' case [1983] 53 Comp Cas 184 in which it is observed that though there is no specific provision in the Act permitting the workers to oppose an order of winding up, the directive principles of the Constitution and also the social and economic conditions of the workmen should be kept in view and the workers also should be heard before an order of winding up could be made.
11. The learned counsel for the petitioner, Mr. Holla, has submitted that though the decision of the Supreme Court in National Textile Workers' union [1983] 53 Comp Cas 184 is an authority for the proposition that the workers have a locus standi do oppose the winding up petition, that decision does not lay down any guidelines for this court for exercising its jurisdiction under section 433 read with section 439 of the Companies Act in the matter of winding up. He placed reliance on the decision of the supreme Court, in Harinagar Sugar Mills Co. Ltd. v. M. W. Pradhan [1966] 36 Comp Cas 426 (SC). But learned counsel for the workmen has relied on the Sick Industrial Companies (Special Provisions) Act, 1985 (in short ``the Sick Companies Act'') and also the provisions of the Act dealing with the investigation into the affairs of a company under section 235 and other relevant sections in support of the plea that this court should take into consideration the social and economic aspects involved in this case.
12. It is well-settled that the remedy under section 433 read with section 439 of the companies Act is an equitable as also a discretionary remedy. it is also well-settled that the provisions of sections 433 and 439 providing for an order of winding up on the creditors' petition is one mode of enforcing payment of a just debt due by the company. This position of law cannot be challenged despite the observations made by the Supreme Court in National Textile workers' Union [1983] 53 Comp Cas 184. In Harinagar Sugar Mills' case [1966] 36 Comp Cas 426, an application by a receiver under the provisions of section 433 and 439 was permitted by the Supreme Court on the ground that it is one mode of realisation of a debt due to the joint family whom the receiver represented. In that case, the Supreme Court relying on Palmer's Company Precedents, Part II (1960 Edn.,) observed as follows (p. 430 of 36 Comp Cas) :
``A winding up petition is a perfectly proper remedy for enforcing payment of a just debt. It is the mode of execution which the court gives to a creditor against a company unable to pay its debts''.
13. This view is supported by the decision in Bowes v. Hope Life Insurance and Guarantee Co. [1865] 11 HLC 389, In re, General Company for Promotion of land Credit [1870] 5 LR Ch App. 363 (380) and In re National Permanent Building society [1869] 5 LR Ch App. 309. It is true that a winding up order is not a normal alternative in the case of a company to the ordinary procedure for the realisation of the debts due to it'; but none the less, it is a form of equitable execution. Propriety does not affect the power but only its exercise. If so, it follows that in terms of clause (d) of rule 1 of Order XL of the Code of Civil Procedure, a receiver can file a petition for winding up of a company for the realisation of the properties, movable and immovable, including debts, of which he was appointed the receiver. In this view, the respondent had power to file he petition for winding up of a company for the realisation of the properties, movable and immovable, including debts, of which he was appointed the receiver. In this view, the respondent had power to file the petition in the court for winding up of the company.
14. In the light of this ruling of the Supreme Court, the petitioners' right to approach the court for an order of winding up cannot to doubted and since the debt due to the petitioner is admitted by the company, the only point for consideration is whether this is a fit case for winding up the company, regard being had to the objections filed by the company as also by the workmen employed by respondent No. 1.
15. The objections of the company, in my view, do not merit any serious consideration. They had already approached the authorities concerned for the closure of the undertaking. As a matter of fact, the Union of India which was financing the company all these years had moved this court for vacation of the interim order granted against the closure and that interim order was also vacated. The Union of India has come on record in these proceedings as a supporting creditor and the State Government has also come on record as a supporting creditor. No other creditors of the company despite the advertisement of the petition have entered appearance with a view to appose the prayer for winding up. Therefore, the only person or group of persons who have an interest in opposing the petition are the workmen and their case will have to be considered in the light of the provisions of the Sick Companies Act and section 237 and the other relevant provisions of the Companies Act as urged by learned counsel for the workmen.
16. I will first deal with the provisions of the Sick companies Act. This Act came into force on January 8, 1986 (See [1985] 58 Comp Cas (St.) 303) :
17. The Statement of Objects and Reasons of this Act read as :
``This ill effects of sickness in industrial companies such as loss of production, loss of employment, loss of revenue to the Central and State Governments and locking up of investible funds of banks and financial institutions are of serious concern to the Government is accentuated by the alarming increase in the incidence of sickness in industrial companies. It has been recognised that in order to fully utilise the productive industrial companies. It has been recognised that in order to fully utilise the productive industrial assets, and to afford maximum protection of employment and optimize the use of funds of the banks and financial institutions, it would be imperative to revive and rehabilitate the potentially viable sick industrial companies as quickly as possible. It would also be equally imperative to salvage the productive assets and realise the amounts due to the banks and financial institutions, to the extent possible, form the non-viable sick industrial companies through liquidation of those companies''.
18. With these Objects and Reasons, this Act was promulgated by the Central Government and it applies to a scheduled industry mentioned in the First Schedule to the Industries (Development and Regulation) Act, 1951. A ``sick industrial company'' is also defined in section 2(O) of that Act. ``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 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. Under section 3(d), ``company'' means a company as defined in section 3 of the Companies Act, 1956 (1 of 1956), but does not include a Government company as defined in section 617 of that Act. This petition was filed, as noticed earlier, by an unregistered company which is not a company as defined under section 3 of the Act. An unregistered company can invoke the provisions of winding up under Chapter II of the Act. The definition of the word ``company'' under section 3 of the Act does not include an unregistered company. So the right of an unregistered company to invoke the provisions of section 433 and 439 is a special right conferred under Chapter II in terms of the provisions of sections 582 and 583 of the Act. Therefore, the Sick Companies Act does not in any manner control the proceedings for winding up of an unregistered company under Chapter II of the Act. Whether this Act applies for the purpose of reviving the respondent No. 1 company does not arise for consideration in a winding up petition even if the winding up is ordered by this court. Hence for the purpose of this petition, it is unnecessary for this court to go into the various provisions of the Sick Companies Act as also the schemes envisaged for the revival of sick industries under this Act.
19. That takes me to the next contention of learned counsel for the workmen that this is a fit case where an investigation into the affairs of the company under the provisions of section 237 of the Act should be ordered. The provisions of section 235 of the Act authorise the Central Government to appoint one or more competent persons as inspectors to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct. Under section 235(1), the Central Government can appoint an inspector in regard to a company having a share capital, on the application either of not less than two hundred members or of members holding not less than one-tenth of the total voting power therein. On a plain reading of section 235(1) and (2), it is clear that the provisions of section 235 would not be applicable to an unregistered company. Therefore, it is not open to the workmen to contend that it is a fit case where this court should make a direction to the Central Government to investigate into the company. However, it is contended by learned counsel for the workmen that section 237(a)(ii) of the Act provides that :
``Without prejudice to its powers under section 235, the Central Government-
(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if -
(ii) the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government ; and ...''
20. The word `company' as it occurs under section 237 is only relatable to a company which is covered by section 235. If section 235 is not applicable to an unregistered company, section 237 is equally not applicable to that company. Even otherwise, the Central Government itself having supported the winding up of the company in questing, section 235 of the Companies Act is not applicable to the facts of this case, and under section 237, I do not think that it is a matter which requires investigation through the orders of this court, since this company was managed throughout by a board consisting of Central Government officials in the Ministry of Defence.
21. Learned counsel for the workmen has relied on the decision of the Privy Council in the case of D. Davis & Co. Ltd. v. Bruns Wick (Australia) Ltd., and reported in [1936] 6 Comp Cas 227. That is a case of winding up under the just and equitable clause of the New South Wales Companies Act, 1899. But the petitioners' case is not solely dependent on the provisions of the just and equitable clause in section 433 of the Act. It is well-settled that an order of winding up could be made on any one of the grounds mentioned in section 433. If the petitioners had based their case solely on the just and equitable clause, the decision of the Privy Council would have definitely supported the case of the workers. As noticed earlier, the petitioners have mainly based their case on the undisputed debt due to them to the tune of Rs. 32 lakhs odd. This debt remained unpaid in spite of the statutory notice. That apart, the total cumulative losses of the company on the date of the petition is Rs. 2 crores 50 lakhs and the total liabilities of the company is Rs. 3 crores 25 lakhs. In the circumstances, the chances of the petitioners realising these debts by going to the civil court and by having recourse to the attachment of the assets of the company are also very remote. Therefore, the petitioners have to rest content with whatever they can recover in the winding up proceedings, regard being had to the rights of the secured creditors will have to be investigated in the winding up proceedings.
22. The company court would be traversing beyond its jurisdiction to go into the various aspects of the rehabilitation of the company from the workers' point of view in order to arrive at a just conclusion. But I would have been inclined to consider their case seriously, if there had been a definite proposal to pay the petitioners' debts with interest either in a lump sum or in instalments. The suggestions made by the workmen are all laudable but the chances of revival without the Central and State Governments' aid are almost nil. In the circumstances, this court cannot and should not allow the petitioners to wait indefinitely to recover the debts due to them by refusing an order of winding up. Therefore, it is a fit case for winding up and it is ordered accordingly.
23. The petitioners shall deposit a sum of Rs. 2,000 with the official liquidator within a period of two weeks tow meet the contingent expenses. The petitioners shall take out an advertisement of this order in one issue of Deccan Herald within 14 days from the date of receipt of this order.
24. Office to draw up the order in the requisite form. Parties to bear their own costs in this petition.