Bombay High Court
Bombay Metropolitan Transport ... vs Employees Of Bombay Metropolitan ... on 6 September, 1990
Equivalent citations: [1991]71COMPCAS473(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT Bharucha, J.
1. This is an appeal against the dismissal of the winding-up petition filed by the company itself under the provisions of section 433(a), (e) and (f) of the Companies Act, 1956 (hereinafter referred to as "the said Act").
2. The company was incorporated as a public company limited by shares on November 15, 1979, and was then called the CIDCO Transport Corporation Limited. It was a subsidiary of City and Industrial Development Corporation of Maharashtra Limited ("CIDCO") and its share capital was held by CIDCO and its nominees. The shares of CIDCO itself are owned by the State of Maharashtra and its nominees. The object of the company was to carry on the business of carriage of passengers by road and water within and around New Bombay. The nominal capital of the company is Rs. 50,00,000 divided into 50,000 shares and its issued and paid-up capital is Rs. 10,00,000 divided into 10,000 shares. On June 17, 1980, the name of the company was changed to that which it presently bears, namely, the Bombay Metropolitan Transport Corporation Ltd.
3. The company had losses and labour troubles between 1980-81 and 1983-84. In February, 1984, its fleet of buses was immobilised and it had no liquid funds to maintain them. On February 24, 1984, a meeting was held with the Chief Minister of Maharashtra and it was decided that the company should close down its services and that these should be taken over by the Maharastra State Road Transport Corporation.Accordingly, on March 1, 1984, a notice was issued for the suspension of the company's operations with effect from March 3, 1984. On March 18, 1984, a lock-our was declared.
4. On March 27, 1984, the company made an application to the State Government under the provisions of section 25-O of the Industrial Disputes Act seeking permission to close down its undertaking with effect from July 1, 1984. Permission was granted on May 24, 1984. Appeals against the order granting permission were filed by the workmen of the company and the trade unions representing them before the Industrial Tribunal, Bombay. By its judgment and order dated November 21, 1984, the Industrial Tribunal set aside the order, holding that the closure of the company's undertaking would prejudicially affect the interests of the general public. The company, by a writ petition filed on the appellate side of this court (being Writ Petition No. 5070 of 1984), impugned the order of the Industrial Tribunal. This court upheld the order of the Industrial Tribunal.
5. The services of the company remained suspended even thereafter and, in 1985, bus services in New Bombay were started by the BEST and the MSRTC.
6. On January 30, 1985, the company made a fresh application under section 25-O of the Industrial Disputes Act for permission to close down the factory which had been established for repairs and maintenance of its fleet of buses. The reason now given was financial incapacity. The application was rejected on March 29, 1985, by the then Minister of Co-operation, Labour and Legislative Affairs.Petition No. 5070 of 1984, as he read.
7. On May 14, 1985, the board of directors of the company resolved that an extraordinary general meeting be called to pass a special resolution to move this court for winding up the company. The notice in that behalf having been duly given, the extraordinary general meeting of the company's shareholders was held on May 28, 1985, and a special resolution was passed stating that "having regard to its financial incapacity to pay its outstanding debts and to resume its business of transport services suspended over the preceding period of more than a year", a petition should be presented by the company for its winding up under the said Act.
8. The petition was filed on March 14, 1986. On July 2, 1986, an ad interim order was made by the learned company judge appointing the official liquidator as the provisional liquidator of the company. On December 17, 1986, the petition was made absolute; the company was ordered to be wound up and the official liquidator was appointed its liquidator. On December 24, 1986, a company application for setting aside the winding-up order was filed by respondents Nos. 1 to 4, being four workmen of the company, representing according to them, 1700 other workmen. The company application was allowed and the winding-up petition came to be reheard. It was dismissed on April 10, 1987, by the judgment and order which is under appeal.
9. This appeal was filed on June 19, 1987. The Division Bench before which it came up for admission directed the State Government to file an affidavit explaining its stand, as it had earlier refused permission for closure.The affidavit was made on behalf of the State Government on July 15, 1987. It stated that, having regard to the insolvent condition of the company, the deteriorated condition of its buses, the dispersal of its labour force and the induction of the MSRTC and BEST in New Bombay, it had no plans to lend financial or other assistance to the company so as to revive it. On July 24, 1987, the affidavit was taken on record, the appeal was admitted, and the State Government was directed to be made a party thereto.
10. By an order made earlier, the Maharashtra General Kamgar Union (respondent No. 5) was also directed to be made a party to the appeal.
11. The company then took our a notice of motion in the appeal (being Notice of Motion No. 2330 of 1987) and sought the appointment of the official liquidator as the provisional liquidator of the company. On November 2, 1987, an order was made accordingly.
12. On July 5, 1989, consent terms were entered into between the company and respondents Nos. 1 to 4 (representing 1,700 other workmen of the company). The consent terms were sought to be filed on August 7, 1989, but were opposed by respondent No. 5. No order in terms thereof was passed but the consent terms were taken on record. The consent terms stated that the parties thereto were aware that the State Government had decided in principle to establish a corporation in the name of New Bombay Transport Corporation under the Road Transport Corporation Act, 1950, and that the funds required by that corporation would be made available by CIDCO. Respondents Nos. 1 to 4 agreed not to object to the company being wound up and this appeal being allowed. It was agreed that the moneys that might be recieved by the official liquidator, upon the sale of the properties belonging to the company and in respect of 50 buses transferred by the company to the MSRTC, would be paid, in the first instance, towards the dues of the company, to its employees and workmen and the balance, if any, would be paid to CIDCO, which was the company's only other creditor. It was also agreed that the new corporation would consider the application of former workers and employees of the company at the time of recruiting its staff and that it would be free to absorb or employ such employees or workmen as it, in its discrettion, thought fit after careful screening.
13. In the judgment which is under appeal, the learned single judge took the view that the provisions of the Industrial Disputes Act prevailed over those of the said Act inasmuch as the petition for winding up had been filed by the company itself. This was because the Industrial Disputes Act was a piece of beneficial legislation and because it was a special legislation regulating the relationship between the employer and the employee. In view of the fact that no permission under section 25-O of the Industrial Disputes Act had been obtained by the company, the company could not be wound up. This is the most important issue in this appeal, namely, is there a conflict between the provisions of the said Act and the provisions of the Industrial Disputes Act in so far as the winding up of a company that is an industrial establishment is concerned, whether it be filed by the company itself or by a creditor. If there is such a conflict and, if permission to close down the undertaking of the company is required to be taken underr the provisions of section 25-O before or after a winding-up order is passed, there would seem to be a subordination of the order the High Court to the order of the appropriate Government or to make the operation of lthe former conditional upon the latter.
14. It is our view, having heard Mr.Chinoy for the company, Mr. Rana for the Attorney-General, on notice, and Mr. Ganguli for respondent No. 5, that, as urged by Mr. Chinoy and Mr. Rana, harmoniously constructed, there is no conflict between the provisions of the two statutes and that they operate in distinct and separate fields.
15. Under section 433 of the said Act, a company may be wound up by the court in the circumstances stated therein. These include (a) if the company has, by special resolution, resolved that it be wound up by the court, (e) if the company is unable to pay its debt, and (f) if the court is of opinion that it is just and equitable that it should be wound up. By reason of clause (a) of sub-section (1) of section 434, a company shall be deemed to be unable to pay its debts if it is proved to the satisfaction of the court that it is unable to do so. Section 445 deals with the consequences of a winding-up order.By reason of sub-section (1) thereof, it is the duty of the petitioner in the winding-up procceedings to file with the Registrar of Companies a certified copy of the order of winding up within thirty days from the date upon which it is made. Sub-section (3) states, "Such order shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued." Section 449 states that, upon the passing of the winding-up order, the official liquidator becomes the company's liquidator. Upon completion of the liquidation proceedings, the court is empowered by section 481 to pass an order dissolving the company.
16. The relevant provision of the Industrial Disputes Act is section 25-O. Sub-section (1) reads thus:
"An employer who intends to close down an undertaking of an industrial establishment to which this Chapter applied shall, in the prescribed manner, apply for prior permission at least ninety days before the date on which the intended closure is to become effective, to the appropriate Government, stating clearly the reasons for the intended closure of the undertaking and a copy of such application shall be served simultaneously on the representatives of the workmen in the prescribed manner.
Provided that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work."
17. It will be seen that permission under section 25-O is required to be taken when an employer itends to close down an undertaking of his industrial establishment. The provision therefore, applies when the industrrial establishment, excluding the undertaking which is sought to be closed down, is intended to be operated by the employer. It, therefore, contemplates the continued existence of th employer and of the industrial establishment, less the undertaking which is intended to be closed down.
18. On the other hand, an order for winding up a company commences the process of winding it up at the hands of the official liquidator and it operates eventually to dissolve the company. As and from the date of the order, the company ceases to do business. Where the company is an industrial establishment, that establishment ceases to function upon the passing of the winding- up order. The winding-up order is deemed to be a notice of discharge of the officers and employees lof the company. The services of the employees, therefore, come to an end by operation of law.
19. It is true, as Mr. Ganguli pointed our, that the liquidator is empowered to carry on the business of the company, but this is only, as section 457 states, so far as may be necessary for beneficial winding up of the company. If it is found by the liquidator and by the High Court, under whose supervision he functions, that to carry on the business would be beneficial to the winding up of the company, then the liquidator may be authorised to carry on the business for this purpose and until it is achieved. Such carrying on of the business of the company is subsequent to the order of winding up and subject to it. Even in such circumstances, there would be no question of permission under section 25-O being required to close it down.
20. Mr. Ganguli urged that the provisions of section 445(3) were unconstitutional. We cannot countenance this argument in a winding-up petition.
21. The company made aggregate losses of Rs. 57,22,858 in the year 1980-81, Rs. 82,81,719 in the year 1981-82, Rs. 1,21,88,336 in the year 1982-83 and Rs. 1,67,43,693 in the year 1983-84. As on Merch 31, 1984, the accumulated losses aggregated to Rs. 4,37,41,951. The company's only assets on that day were 200 buses of the book value of Rs. 1,78,00,000 and other assets valued at Rs. 20,00,000. Its liabilities, excluding those in respect of its workmen, amounted to Rs. 7,92,00,000. Of these, Rs. 5,94,00,000 were payable to CIDCO, Rs. 1,12,60,000 to BMRDA and Rs. 24,89,000 to the State Bank of India. Its earnings from traffic operations were Rs. 3,92,61,000 and its miscellaneous earnings were Rs. 6,95,000, aggregating to about Rs. 4,00,00,000. As against this, the operating expenditure, namely, fuel, spares, repairs, administrative expenses and wages, aggregated to Rs. 4,49,00,0000. There was a liability towards interest of Rs. 58,84,000 and depreciation was calculated in the sum of Rs.60,29,000. Deducting the income of Rs. 4,00,00,000 kfrrom the expenditure of Rs. 5,67,00,000, there was a loss of Rs. 1,67,00,000.
22. The Comptroller and Auditor-General of India made observations in regard to the working results of the company for the period ended March 31, 1985, thus:
"5. Working results.-The working of the company resulted in loss of Rs. 121.88 lakhs in 1982-83, Rs. 167.44 lakhs in 1983-84 and Rs. 102.10 lakhs in 1984-85. The accumulated loss at the end of March, 1985 (Rs. 579.21 lakhs), exceeded the paid-up capital (Rs. 10.00 lakhs) by Rs. 569.21 lakhs. The company had suspended its operation and activities from 9th February, 1984."
23. These observations were quoted in the report of the company for the year ended March 31, 1985.
24. For the year ended March 31, 1986, which is the most proximate for the purpose of the winding-up petition, the liabilities of the company were Rs. 9,26,79,000 due to CIDCO and the approximate amount of Rs. 1,00,000,000 due to its employees and workmen. As against this, its only assets were its nuses whose book value was then Rs. 1,78,00,000 and its equipment, furniture and stock-in- trade whose book value was worth Rs. 27,00,000. (No depreciation has been taken into account in respect of the buses since March 31, 1984). The company's liabilities exceeded its assets, therefore, by Rs. 6,48,00,000.
25. In the affidavit made on July 15, 1987, on behalf of the State Government pursuant to the order of the appeal court, it was stated:
"...considering its insolvent financial state, the deteriorated condition of its fleet of buses having suffered exposure to the elements of nature since February, 1984, the dispersal of its labour force and the induction of the Maharashtra State Road Transport Corporation and the Bombay Electric Supply and Transport Undertaking to operate its bus services in New Bombay, the State Government does not consider it expedient to revive the appellant-company. I repeat and reiterate that the State Government has no plans to revive the appellant company.
I say and submit respectfully in conclusion in reply to the specific query of this Hon'ble High Court that the State Government has no plans to lend financial or other assistance to revive the appellant company ...."
26. It is patent that, in these circumstances, the company is in no position to pay its debts or to run its business. The State Government having shut the door upon all further advances, the company can expect no funds from it. No financial institution can, reasonably, be expected to provide it with funds. In any event, a loan from a financial institution would need to be backed by security which the company would be quite unable to give and by guarantees which only CIDCO or the State Government could have provided but which, having regard to the categorical statement in the State Government's affidavit, they will not do.
27. Mr. Ganguli, fairly, did not contest the insolvent circumstances of the company. He argued that the company was wholly owned by CIDCO which, in turn, was wholly owned by the State Government. The company had been incorporated for running transport services in New Bombay. Such services could only be run by Government. The transport services had not been run on a commercial basis by the company. Its losses were due to the introduction of highly subsidised routes; to the introduction of routes meant only to facilitate the transport of Government servant; to the issuance of concessional passes to students; to the rise in dearness and other allowances and to the hike in the price of fuel, lubricants, tyres and spare parts. In the circumstances, it was not open to the company to seek its winding up. Public utility services could not make a grievance of the losses they sustain.In any event, the company had been mismanaged. It had taken over buses purchased by CIDCO which were not in a fit condition to run and 10 had to be scrapped. There was no purchase planning; spare parts were purchased at random and haphazardly from a small retail shop where the quality of what was available was doubtful. There had been thefts of spare parts and cash. contracts for the construction of the bus bodies had not been awarded at the lowest tender rates. Destination boards had been ordered without inviting tenders. Having regard to these acts of mismanagement, the company could not take advantage of its own wrong and claim to be wound up on the ground of commercial insolvency. That the liabilities exceeded the assets of the company was not, in the circumstances, a ground to wind up the company. The State Government was obliged to subsidise the company since it had allowed it to be so run. The State Government was a party to the appeal and the court should direct it to subsidise the shortfalll in the company's income because the company had been obliged to run its buses as per the State Government's orders. Even if the company was commercially insolvent, it was the interest of the general public, resident and working in New Bombay, and of the workmen of the company that had to be considered. There was fraud and mala fides in the passing of the special resolution seeking the winding up of the company under the orders of the court because the company could not have complied with the provisions of the said Act in so far as voluntary winding up was concerned.The only object was to get rid of the workmen and, having failed to get permission under section 25-O, the company had resorted to the special resolution. The villagers in the New Bombay area had passed resolutions expressing satisfaction with the services rendered by the company so that it was not open to the company to urge that there was dissatisfaction with its services. The corporates veil had to be lifted when the State carried on business through the instrumentality of the company. It was not just and equitable to wind up such a company. If it was beyond the powers of the company court to issue directions to the State Government to fund the company so as to enable it to be run, such directions could be obtained on a writ petition and the company was not wound up but remained a going concern, the workment could arrive at a settlement with it.
28. Whether or not a writ court would have power to compel the State Government to fund the company so as to enable it to be revived and run, we are clear that the court entertaining a winding-up petition cannot do so. If it was thought that a writ court could do so, proceedings in that behalf ought to have been filed long back.
29. The company is a legal entity. It is a limited liability company. It is the financial position of the company which is relevant to the winding-up petition and not the financial position of either its principal shareholder, CIDCO, or of the State Government. The lifting of the corporate veil, assuming it can be done in winding-up proceedings, can make this position no different.
30. That the company is unable to pay its debts is not, as it cannot be, disputed. It is not relevant that the company got into its present straitened financial position due to its own misdoings or mismanagement, not is the motive behind the filing of the winding-up petition relevant. This court said in Bachharaj Factories Ltd. v. Hirjee Mills Ltd. [1955] 25 Comp Cas 227, 251: " If the petitioners have made our a case for the winding up of the company, if they have placed materials before the court which satisfy the court that the company is insolvent, if they have placed materials before the court which satisfy the court that the substratum of the company is gone, it is difficult to understand what the motive of the petitioners has got to do with the question whether an order of winding up should be made or not." Where the company is not in a position to pay its debts and finds that its substratum has gone, it is entitled to resort to winding-up proceedings after a resolution as provided by section 433(1)(a) and it is difficult to see how such proceedings can be an abuse of the process of court. Where the company is unable to pay its debts, winding up ought generally to follow in public interest, so that the public do not unwarily deal with the company and jeopardise their interests.
31. It is difficult to see how it is in the interests of the workmen of the company to oppose its winding up. The company has not done business since 1984. Since then, the value of its assets has dwindled and the amount of its liabilities has increased. Consequenctly, the workmen's slice of the cake would have become increasingly smaller.
32. In the consent terms which were taken on record as aforestated, it was agreed between the company and respondents Nos. 1 to 4, as representing 1,700 workmen of the company, that the liquidator would sell either by private treaty or by public auction the company's properties. He would also receive moneys payable by the MSRTC to the company in respect of some 50 buses. From the moneys that would be received by the liquidator, the company's workmen and employees would be paid their dues first and CIDCO, the other solitary creditor, would be paid only if there was any amount left over. Lest there be any doubts on this score, we make it clear that the moneys that are received by the official liquidator upon the sale of the assets of the company and the moneys received from the MSRTC for the buses will be used, in the first instance, towards paying all the dues of the company's employees and workmen. Mr. Paranjape, learned counsel for the State Government, has told us that CIDCO and the State Government are agreeable and accept this. By reason of this, the company's liability to its employees and workmen will be met.
33. The consent terms also provided that the new corporation that was proposed to be established by the Government under the Road Transport Corporation Act, 1950, would consider the applications of former workers and employees of the company at the time of recruiting staff but would be free to absorb or employ such workers or employees as it, in its discretion, thought fit after screening. Pursuant to queries raised by us, Mr. Paranjape has now made a statement on behalf of the State Government which we record.
"The new organization contemplated for providing for transport in New Bombay will be strictly run on a commerical basis.
The Government believes that, in the BMTC, the recruitment was indiscriminate even in supervisory categories. In certain categories, there was overstaffing. Therefore, the new organization will, on expert advice, determine its requirements of staff and workers. The employees of the BMTC no doubt will be given preference in the employment in the new organization, but as fresh recruits and if found suitable.
The suitability will be decided on the employee concerned possessing the requisite trade skill and satisfactory past record with the BMTC. Only such employees against whom no criminal cases are pending will be considered.
For the purpose of determining suitability, an expert Committee will be appointed by the new organization and , on scrutiny, will arrange the names in accordance with seniority of service with BMTC in a particular category.
While determining staff and workers requirement in the new organization, it may be necessary to fan out certain operations such as retreading of tyres, etc., and to that extent the staff and workers requirement of the new organisation will be reduced.
The new organisation will start its operations in the beginning on a modest scale and will gradually go on expanding them. Therefore, recruitment will be done as and when required.
So far as past legal dues and/or terminal benefits of the employees of the BMTC are concerned, they will have to be met from the proceeds of sale of all the assets of the BMTC by appropriating them towards the payment of these dues on priority basis; and, for the same, neither the State nor the new organization will be liable in any manner whatsoever."
34. This statement makes it clear that the employees and workmen of the company will be given preference for employment in the new corporation and that their suitability will be decided by an expert committee. In addition, it has been stated by Mr. Paranjape that the fact that the workmen and employees had been employed by the company will not be treated as a black mark against them. There is, accordingly, a fair hope that a large number of the company's workmen will find jobs in the new corporation.
35. A great many of the company's workmen are project affected persons and had been given employment in the company on that score. If the fact that their services with the company have now come to an end given them any cause for action against the State, they shall be free to take such action.
36. The company has satisfied us that it has passed a special resolution that it be wound up by the court, that it is unable to pay its debts and that its substratum has gone so that it is just and equitable that it should be wound up. Accordingly, the appeal is allowed. The judgment and order of the learned single judge are set aside. The petition is made absolute in terms of prayer (a).
37. On Mr. Ganguli's application, the operation of the order is stayed for a period of six weeks. It is made clear that the official liquidator shall remain the provisional liquidator of the company during this period of six weeks.