Himachal Pradesh High Court
Tata Iron & Steel Co. vs Him Ispat Ltd. on 8 November, 2001
Equivalent citations: [2002]108COMPCAS537(HP)
Author: Arun Kumar Goel
Bench: Arun Kumar Goel
JUDGMENT Goel, J.
1. It is proposed to dispose of Company Petition No. 1 of 1998 and Company Petition No. 7 of 2001 by this common order. The facts of both these petitions are being briefly noted, which are as under :
Company Petition No. 1 of 1998:
2. The petitioner in this case has filed this petition under Sections 433, 434 and 439 of the Companies Act, 1956 ('the Act'), for the winding up of Him Ispat Limited, as according to it the respondent is unable to pay its debts despite having been put to notice under Section 434(1)(a). According to the petitioner it is a public limited company having its registered office at Mumbai. The respondent-company is also a limited company incorporated under the Act and its main object as contained in its memorandum of articles of association was as under :
(a) To carry on the business of manufacturers, processors, refiners, smellers, makers, converters, finishers, importers, exporters, agents, merchants, buyers, sellers and dealers in all kinds and forms of steels including tool and alloy steels, stainless and all other special steels, cold roll strips and hot rolled strips, iron and other metals and alloys; all kinds of goods, products, articles or merchandise whatsoever manufactured wholly or partly from steels and other metals and alloys; and also the business of iron masters, steel and metal converters, colliery proprietors, coke manufacturers, ferroalloy manufacturers, miners, smelters and engineers in all their respective branches, and to search for, get work, raise, make merchantable, manufacture, process, buy, sell and otherwise deal in iron, steel and other metals, coal, coke, brick-earth, fire-clay, bricks, ores, minerals and mineral substances, alloys, metal scrap, chemicals and chemical substances of all kinds.
(b) To carry on the business of the manufacturers of and dealers in all kinds of alloys, ferrous and non-ferrous, metallic and non-metallic, including ferro manganese/ ferro chromium, ferro columbium, ferro-molybdenum, ferro-phosphorus, ferro-silicon, ferro-titanium, ferro-tungsten, ferro vanadium, silico manganese metal, manganese dioxide, chemicals containing manganese, pig iron steel, coke, steel scrap, lead, copper, nickel, aluminium, zinc, tin, titanium and other metals, and to carry on the business of founders, moulders, costers, mechanical engineers and manufacturers of agricultural implements, and other sightland heavy machinery, tool-makers, brass founders, metal-workers, boiler-makers, mill wrights, machinists, iron and steel converters, smiths, wood-workers, builders, painters, metallurgists water supply engineers, gasmakers, and to buy, sell, manufacture, export, import, repair, convert, alter, let on hire and deal in machinery, implements, rolling stock, and hardware of all kinds, and to carry on any other business (manufacturing or otherwise) which may seem to the company capable of being conveniently carried on in connection with the above, or otherwise calculated directly or indirectly to enhance the value of any of the company's properties and rights for the time being.
(c) To conduct and carry on any business relating to rolling, casting, welding, extruding, stretch reducing, forging, forming, pressing, drawing, machining, grinding, or processing or working or finishing in any other manner all kinds of metals and alloys including the production or manufacture and trading and/or sale or dealing in all such processed products and goods; and to sell, process, manufacture, assemble, import, export, and deal in and with any or all products and goods processed as above, and also products, goods wares, or other merchandise produced or manufactured wholly or partly from them.
(d) To carry on the business of manufacturers, processors, finishers, buyers, sellers, agents, merchants, importers, exporters and dealers in all kinds of strips and strips specialties, sheets, tin plates, and other flat products, pipes and tubes and all kinds for water, steam, gas, and all other purposes, all above of iron, steel and other metals and alloys and non-metals; any or all products, articles, tin cans and boxes, and other goods and merchandise manufactured, developed or produced wholly or partly from above; strippings, seals, tools, equipment and supplied connected with or required for poking; and all kinds of valves and fittings.
The further case of the petitioner is that it has been supplying hot rolled strips to the respondent-company from time to time by way of credit sales from its stockyards situate at Delhi, Ludhiana and Chandigarh. Besides this, supplies were also made from the petitioner's plant in Jamshedpur on credit.
Since payments were not forthcoming therefor correspondence according to the petitioner was exchanged between both the companies.
3. A total sum of Rs. 510,15 lakhs together with interest calculated at 24.5 per cent was due and, outstanding payable. As such notice dated 9-4-1996, annexure F was issued. Notice was duly replied to though without prejudice by the respondent-company.
4. In this background, the petitioner has prayed for winding up of the respondent-company. When a reference is made to the reply filed in opposition to this winding up petition on behalf of Him Ispat Ltd., it is vague and cryptic to most of the pleadings. Though transactions between the parties were admitted from time to time. Similarly correspondence exchanged between them was also not disputed. However, liability qua the claim was denied without specifying whether any sum is due, outstanding and payable by it or not. Another plea set up in opposition to the winding up petition was the registration as well as pendency of the proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 ('the SICA'), as far back as in the year 1994. And the matter relating to its rehabilitation having also attended the attention of the Board for Industrial and Financial Reconstruction (BIFR), constituted under the SICA. Therefore, this was pleaded as an additional ground for rejecting the claim of the petitioner.
Company Petition No. 7 of 2001:
5. After the matter was registered with the BIFR under Section 15 of the SICA, it was being inquired into by the BIFR. The record of the case shows that after the rehabilitation scheme was prepared, things did not mature with the result that the BIFR came to the conclusion in the following terms:
"On consideration of the facts of the case and the submissions made at today's hearing, the Bench came to the conclusion that the promoters were not serious in rehabilitating the company nor were they resourceful enough to mobilize the funds required for this purpose. As such, there was no rehabilitation proposal with means of finance fully tied up for consideration of the board despite ample opportunities having been given to all concerned. Under the circumstances, the Bench confirmed its prima facie opinion that the sick industrial company M/s. Him Ispat Ltd. (HIL) was not likely to make its net worth exceed its accumulated losses within a reasonable time while meeting all its due financial obligations and that the company as a result thereof was not likely to become viable in future and hence it was just, equitable and in public interest that it should be wound up under Section 20(1) of the Act. This opinion may be forwarded to the concerned High Court along with copies of all earlier orders/ proceedings, for necessary action according to law."
Thus, it recommended winding up of the company Him Ispat Ltd.
6. Feeling aggrieved by this order of the BIFR passed in Case No. 129 of 1994, the company preferred an appeal as per the provisions of the SICA before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). Another appeal was also preferred by him Ispat Mazdoor Singh against the aforesaid order of the BIFR. Both these appeals were taken together by the appellate authority and vide its order dated 14-5-2001, those were dismissed. The operative portion of the order is as under:
"Neither HIL/promoters (appellants in Appeal No. 90 of 2001) nor HIMS (Appellant in Appeal No. 59 of 2001) have come up with any workable rehabilitation scheme. Sri R.D. Makheeja, learned counsel for HIMS, stated before us on 27-4-2001, that Appeal No. 59 of 2001 might be taken up along with Appeal No, 90 of 2001 on 9-5-2001, That request was accepted. Sri Makheeja did not appear on 9-5-2001. Sri G.K. Ahuja, counsel appearing for Sri R.D. Makheeja, requested for adjournment at 12.00 hrs. on 9-5-2001, on the ground that Sri R.D. Makheeja was busy in another matter. Request was declined, Request for adjournment was again made at 3 p.m. when Appeal No. 59 of 2001 was taken up after conclusion of arguments in Appeal No. 90 of 2001. Request was again declined. Opportunity was given to Sri G.K. Ahuja to argue but he expressed inability to do so. In the prayer clause in Appeal No. 59 of 2001, HIMS has supported the appeal of HIL/promoter and has not come up with any workable proposal of its own. The proposal of HIL/promoter was already rejected by the FIs/banks at the hearing before the BIFR and we also do not see any possibility of preparing any workable rehabilitation scheme on the basis of this proposal or otherwise because HIL is heavily indebted and cannot service its debt. The appellants in both the appeals have failed to make out any ground for interference in the impugned order.
Both the appeals are dismissed. The impugned order is confirmed."
7. This petition came up before the court on 6-7-2001, when notices were ordered to be issued to the parties concerned. It was accepted on behalf of Him Ispat Ltd. and Tata Iron & Steel Co. Thereafter, appearance was put on behalf of Tata Iron and Steel Co., Industries Department of the State and PNB on 3-8-2001. On 14-9-2001, besides others, State Bank of India also appeared before the court. No objections to this petition have been filed till date. A prayer has been made on behalf of Him Ispat Ltd. to allow another opportunity to file objections in opposition to Company Petition No. 7 of 2001. Looking to the overall circumstances of this case, this prayer is hereby declined.
8. Shri K. D. Sood, the learned counsel appearing on behalf of Tata Iron & Steel Co. Ltd. submitted that despite service of notice under Section 434(1)(a) the amount having not been paid within the statutory period and liabilities have not been expressly denied, therefore, the case is squarely covered under Section 433(1)(e). Further there is no other legal impediment in passing of the winding up order. He further pointed out that para. 10 of the reply projects the case of Him Ispat Ltd., which is based on pendency of the proceedings under the SICA. Thus, according to him this is a case of no defence on the part of Him Ispat Ltd., besides liability to pay the amount having not been specifically disputed, as such there is no escape but for passing the order of winding up petition.
On the other hand the learned counsel appearing for the company has controverted all these pleas. Besides objecting to Company Petition No. 1 of 1998 on the facts he raised legal pleas, namely,
(a) that there is no legal and valid notice issued to his client, before instituting the proceedings for winding up which was a sine qua non to maintain the petition, as such it was liable to be dismissed;
(b) Company Petition No. 1 of 1998 did not lie in view of bar of Section 22 of the SICA, because the reference made by his client stood registered prior to the filing of the said petition; and
(c) material averments in the petition having not been admitted therefore, unless it was prima facie established that his client is commercially insolvent, the petition was liable to be dismissed.
He also urged on facts and stated that claim as in Company Petition No. 1 of 1998 has not been admitted, so this is a further ground for its dismissal. Company Petition No. 7 of 2001 was examined on the basis of materials on record and what was urged on behalf of the parties.
9. As per requirement of Section 434(1)(a), a company shall be deemed to be unable to pay its debts if after delivery or service of notice at its registered office, by registered post or otherwise it fails to pay the amount within the prescribed period. For ready reference Section 434(1)(a) is extracted hereinbelow:
"Company when deemed unable to pay its debts- (1) A company shall be deemed to be unable to pay its debts--
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditors;"
A bare perusal of this sub-section clearly shows that notice was required to be delivered at the registered office of the company. When a reference is made to Annexure F it is addressed to the managing director instead of the company. Though its copies have been endorsed to the company but not at its registered office as is evident from the endorsement made in the said notice.
10. In case an order of winding up is passed, it leads to the financial ruination of a company incorporated under the Act. Besides this, a winding up petition is not an alternative mode for effecting recovery of its dues by a creditor. In any case before passing an order under Section 433, the court is to see that one of the grounds enumerated in it exists. Then only an order of winding up can be passed. The provision being stringent strict compliance with law has to be insisted upon. The effect of non-compliance with Section 434(1)(a), in my view will make the petition under Section 433 not maintainable.
11. In N.L. Mehta Cinema Enterprises (P.) Ltd. v. Pravinchandra P. Mehta [1991] 70 Comp. Cas. 31 (Bom), a Division Bench of the Bombay High Court while dealing with a matter relating to notice under Section 434(1)(a) observed as under :
"Held, allowing the appeal, (i) that the failure by the company to point out an irregularity in the notice till the filing of its affidavit-in-reply to the petition could not disentitle the company from relying on the plea of illegality of the notice at the stage of hearing of the petition;
(ii) that Section 434 clearly requires the notice of demand to be sent to the company at its registered office. Service of the notice at the administrative office of the company was not sufficient to raise the presumption under Section 434. Therefore, the petition was liable to be dismissed." (p. 31)
12. In B. Viswanathan v. Seshasayee Paper & Boards Ltd. [1992] 73 Comp. Cas. 136 (Mad.) while examining the question regarding maintainability of the petition under Section 433, the court held as under:
"Unless the statutory notice served on a company under Section 434 of the Companies Act is in conformity with the mandatory requirements of Section 434(1)(a) of the Act, the presumption under the section as to the company's inability to pay its debts cannot be raised. Where the notice is not served on the company at its registered office, but on its managing director, the notice does not conform to the mandatory requirements of Section 434(1)(a) of the Act." (p. 136) This is exactly the position in Company Petition No. 1 of 1998. In Gangadhar Narsinghdas Agrawal v. Timble (P.) Ltd. [1992] 74 Comp. Cas. 846 (Bom.) while dealing with almost an identical situation, a similar view was taken by the Bombay High Court.
13. In Vysya Bank Ltd. v. Randhir Steel & Alloys (P.) Ltd. [1993] 76 Comp. Cas. 244 (Bom.), while dealing with Sections 433(1)(e) and 434(1)(a), the petition was dismissed and it was observed as under:
"Held, dismissing the petition (i) that under Section 434(1)(a), the demand has to be served on the company by causing it to be delivered at its registered office'. Admittedly, the demand was not delivered at the registered office of the company;
(ii) that Section 434 of the Companies Act does not require that there should be any functioning office. All that the section says is that the demand should be delivered at the registered office of the company. It was quite possible for delivery of the demand to be made at the registered office of the company. That had not been done;
(iii) that the deemed inability of the company to pay its debts arises by satisfaction of the requirements laid down in Section 434 and that was the basis of the company petition, and, therefore, there could be no question of waiver by the company;
(iv) that the company might carry on its ordinary correspondence from another address but that did not mean that the provision of Section 434(1)(a) could be said to have been complied with by a demand made at that address;
(v) that Section 434 does not speak of 'delivered to' but it speaks of 'delivered at'. It was possible for the petitioners to serve the demand in the manner provided in Section 434(1)(a) at the registered office of the company. As that had not been done, this petition had to be dismissed." (p. 244)
14. Faced with this situation Mr. Sood pointed out that the purpose of notice under Section 434(1)(a) is to appraise the company enabling it to liquidate the amount and nothing more. As such none of these decisions advances the plea urged on behalf of Him Ispat Ltd. According to him for want of notice this petition cannot be dismissed. From a perusal of Annexure F attached with Company Petition No. 1 of 1998, it is clear that it is addressed to the managing director of Him Ispat Ltd., and not to the company itself. Its copy is endorsed to the company, but not to its registered office. Thus there is clear cut non-compliance with Section 434(1)(a).
15. After having considered the respective submissions on behalf of the parties, as also the provisions of the Act, as well as the law cited at the Bar, I am satisfied that notice was not issued to the company and its endorsement to the company having not been made at its registered address, as such, the contention urged by the learned senior counsel deserves to be upheld and it is ordered accordingly.
16. Now coming to the defence based on Section 22(1) of the SICA. For ready reference this provision is extracted hereinbelow :
"Suspension of legal proceedings, contracts, etc.--(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company) shall He or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority."
17. A bare perusal of this provision indicates that two situations are envisaged under this section. Firstly, where a proceeding was pending it may not proceed further after the enquiry had commenced under Section 16 of the SICA. Secondly, if the inquiry is pending, a proceeding shall not lie.
18. As already observed proceedings were registered against Him Ispat Ltd. with the BIFR vide Case No. 129 of 1994, i.e., in the year 1994. Admittedly Company Petition No. 1 of 1998 was filed on 27-12-1997, much after the registration of the case of Him Ispat Ltd. with the BIFR and during its pendency there. As such Company Petition No. 1 of 1998 could only be maintained with the consent of the Board (BIFR). Admittedly there is no such consent placed on record nor was shown at the time of hearing.
19. Faced with this situation, the learned counsel for the petitioner-company persisted that after the decision of the BIFR this objection of Him Ispat Ltd. does not hold good, therefore, deserves to be rejected. This argument has been raised simply to be rejected. The reason being that jurisdiction of the court was to be seen on the day when the winding up petition was filed. A bare perusal of Section 22(1) prohibits maintaining of the petition itself. Therefore, subsequent orders will not ratify what was initially prohibited by law. For taking this view, reference can be made to C.J. Gelatine Products Ltd., In re [1994] 81 Comp. Cas. 890 (Bom.) wherein it was held as under :
"Held accordingly, dismissing the petition for winding up the company,
(i) That since the petition had been filed after the inquiry in relation to the company under Section 16 had commenced, without the consent of the BIFR, it was void ab initio, the court having no jurisdiction to entertain it.
(ii) That since the filing of the petition was itself void, the pendency of the petitioners' application before the BIFR for consent at that stage was not relevant, nor was the fact that the petitioners had no knowledge till much later of the company being declared sick.
(iii) That when the petition could not in law be entertained, the question of the company being estopped from challenging the maintainability of the petition did not arise." (p. 891) Thus, the plea urged on behalf of Him Ispat Ltd. that Company Petition No. 1 of 1998 did not lie, is upheld.
20. So far as the plea that the material averments made in the petition having not been denied on the merits is concerned, it cannot be accepted. The reason being that the petitioner had pleaded specific facts. However those were required in accordance with law of pleadings either to be admitted or denied specifically. That having not been done, the contents of Company Petition No. 1 of 1998 shall be taken to have been admitted. The reason being that vague or evasive denial of facts can be taken to be an admission on the part of the party. I may hasten to add that technicalities of the code of Civil Procedure, 1908 may not apply to the proceedings under the Act, but still the principles can be considered while examining the pleadings of the parties.
21. At this stage another submission urged by the learned senior counsel needs to be noted. That both the orders of the AAIFR and the BIFR are the subject-matter of Civil Writ Petition No. 604 of 2001. It was not disputed that prayer for stay of operation of both these orders was made, but no orders have been passed yet. Only notices have been issued. In this behalf suffice it to observe that mere filing of appeal or any other lis does not operate as stay unless directed otherwise by the court concerned. Since Company Petition No. 7 of 2001 and Company Petition No. 1 of 1998, both were being taken up together, on 19-10-2001, when following order was passed by the court:
"Adjourned at the request of Mr. Bimal Gupta, advocate. To be listed in the week commencing from November 5, 2001.
A longer date was given on September 14, 2001, so as to enable the respondent-company to pray for the grant of interim relief in the writ petition that was stated to have been filed before the Division Bench challenging the order of the AAIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. Admittedly, no order of stay against the said order of AAIFR has been granted in favour of the company. Therefore, the matter will be taken up on the next date of hearing for disposal in accordance with law unless the Division Bench orders otherwise."
This is the prevailing reason to deny the further adjournment as was urged on behalf of Him Ispat Ltd.
22. After going through the materials on record as well as the orders passed by the AAIFR as well the copy of the order passed by the BIFR in the case of Him Ispat Ltd., this court is of the opinion that it would be just and equitable if Him Ispat Ltd., is wound up. How the opinion of the BIFR and the AAIFR is to be dealt with is being now taken up.
So far as the opinion of the BIFR and the AAIFR under the SICA is concerned, it is relevant to be taken note of by the court. And it is thereafter that it has to form its own opinion, whether the company is to be wound up or not. As an expert body, that matter appears to have been examined under the SICA both by the BIFR and the AAIFR. Then only the opinion is forwarded to this court in Company Petition No. 7 of 2001. On the other hand there is no material brought on record in opposition to Company Petition No. 7 of 2001.
23. In J.M. Malhotra v. Union of India [1997] 89 Comp. Cas. 600 (Mad.) it is held as under :
"Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, enables the Board for Industrial and Financial Reconstruction (BIFR), after making enquiry and after considering all relevant facts and material to report and recommend the winding up of a sick industrial company. The Board for Industrial and Financial Reconstruction consists of persons who are experts in the field and is presided over by a person who has been or is qualified to be a judge of a High Court and acts as a judicial body. The report of the BIFR would become the basis for a proceeding to be continued against the sick industrial company for winding up in accordance with the provisions of the Companies Act, dispensing with the requirements under Section 439 or 440 of the Companies Act for initiating winding up.
Even though the opinion submitted by the BIFR forms the basis for ordering winding up of the sick industrial company by the High Court, it is nevertheless open to the High Court to go into the correctness of the opinion so submitted by the BIFR and decide as to whether it should proceed with the winding up of the sick industrial company, in accordance with the provisions of the Companies Act. This is clear by the use of the words, 'and may proceed and cause to proceed' in Sub-section (2) of Section 20 of the Sick Industrial Companies (Special Provisions) Act. Therefore, it cannot be held that it is obligatory on the High Court to order winding up of the sick industrial company once it receives an opinion from the BIFR in this regard without examining the correctness of such opinion, on hearing the concerned parties.
Even if it were held that Section 20, to a certain extent, mutilates the jurisdiction of the High Court, it cannot be held to be unconstitutional on that ground. Because both the enactments are passed by Parliament, it is open to Parliament to modify the powers conferred on the High Courts under the Companies Act. It would have affected the very functioning of the BIFR and the rehabilitation of sick industrial companies and defeated the very objects of the Sick Industrial Companies (Special Provisions) Act, if winding up petitions were to be entertained by the High Court in the case of sick industrial companies to which Sections 20 and 22 of that Act are attracted.
Section 20 of the Sick Industrial Companies (Special Provisions) Act is in no way opposed to Article 14 of the Constitution. The Board for Industrial and Financial Reconstruction acts as a judicial body. There is no scope for the BIFR to act arbitrarily and adopt different procedures and apply different modes or norms. Whether in the case of a particular sick industrial company, an opinion for winding up should be submitted to the High Court or not, depends upon the particular relevant facts and circumstances of that company. There is no question of any comparison of one company with another, because proceedings against each company will have to be decided in accordance with the particular facts and circumstances of each case." (p. 601)
24. In V.R. Ramaraju v. Union of India [1997] 89 Comp. Cas. 609 (SC) while upholding the decision of the High Court in the case of J.M. Malhotra (supra), the Supreme Court held as under:
"Delay condoned.
We do not find any ground to interfere with the High Court's view which has rejected the challenge to the constitutional validity of Sub-section (2) of Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985.
It is obvious that Sub-section (2) has to be construed to mean that the High Court in deciding the question of winding up of the company has to take into account the opinion of the Board forwarded to it under Sub-section (1) and is not to abdicate its own function of determining the question of winding up. So road, Sub-section (2) does not suffer from any infirmity. This in substance is the view taken by the High Court in the impugned order.
The special leave petition is, therefore, dismissed." (p. 610)
25. No other point is urged.
26. In view of the aforesaid discussion and materials on record, Company Petition No. 1 of 1998 is hereby rejected and Company Petition No. 7 of 2001 is allowed and as a consequence of it Him Ispat Ltd., is ordered to be wound up. The official liquidator attached to this court is appointed as liquidator of Him Ispat Ltd. The registry is directed to send a copy of this order to the said liquidator to take further action as per law. An authenticated copy of this order be placed on the file of Company Petition No. 7 of 2001.