Delhi High Court
Company Law Board vs Ganesh Flour Mills Company Ltd. on 19 September, 1990
Equivalent citations: [1991]72COMPCAS459(DELHI)
Author: Y.K. Sabharwal
Bench: Y.K. Sabharwal
JUDGMENT Y.K. Sabhirwal, J.
1. Company Petition No. 45 of 71 has been filed by the Company Law Board under sections 397, 398 read with sections 401 and 402 of the companies Act, 1956 (for short, "the Act"), against Ganesh Flour Mills Co. Ltd. and others. The prayers made in the petition are as under :
(a) remove the present board of directors, respondents Nos. 2 to 9, from the office of directors;
(b) appoint an administrator or administrators or persons on the board of directors or to pass an appropriate order for the regulation of the conduct of the company's affairs in the future;
(c) termination of the agreements entered into between the company and respondents Nos. 10, 11 and 14 appointing them as purchase and selling agents on payments of commission at 3/4 percent. With retrospective effect from the date of execution of the said agreements;
(d) termination of the agreement for payment of 1/2 percent. commission to Shri Kripa Narayan and his brothers on the loans advanced to the company for which the said Shri Kripa Narayan stood personal guarantee.
(e) terminate the mortgage and other arrangements entered into between the company and the trustees for debentures of the value of Rs. 95 lakhs under which almost all the assets of the company in India have been mortgaged with the trustees;
(f) restrain the company from disposing of the assets of the company and to rescind all contracts, agreements and commitments which may have been made for disposal of any of the assets of the company in India; and
(g) to pass such other order or orders as may be deemed fit and proper in the circumstances of the case and for safeguarding the interests of the shareholders, creditors, the company and the public at large."
2. During the pendency of the petition, Ganesh Flour Mills Co, Ltd. was taken over under the Industries (Development and Regulation) Act, 1951, and its management remained with the Central Government till January 27, 1984. An ordinance "Ganesh Flour Mills Co. Ltd. (Acquisition and Transfer of Undertakings) Ordinance, 1984", was issued on January 28, 1984, to acquire the undertakings of the Ganesh Flour Mills Co. Ltd. in relation to Ganesh Flour Mills. Ultimately, the said Ordinance became an Act on enactment of the Ganesh Flour Mills Co. ltd. ( Acquisition and Transfer of Undertakings) Act, 1984 (for short, "the Act of 1984"). On the appointed date, namely, January 28, 1984, the Ganesh Flour Mills and the right, title and interest of the company (Ganesh Flouring Mills Co. Ltd., Delhi) in relation to Ganesh Flouring Mills, stood transferred to and vested in the Central Government in the first instance, and, thereafter, in a Government company called the Hindustan Vegetable Oil Corporation Ltd. Under section 7(1) of the Act of 1984, "for the transfer to, and vesting in the Central Government under section 3, of the Ganesh Flour Mills and the right, title and interest of the company in relation to Ganesh Flour Mills, there shall be given by the Central Government to the company in cash and in the manner specified in Chapter VI, an amount equal to a sum of one crore, fifty-seven lakhs and sixty-eight thousand rupees". Section 7(2) provides that, in addition to the amount specified in sub-section (1), there shall also be given to the company be the Central Government an amount calculated at the rate of ten thousand rupees per annum for the deprivation of the company of the management of the Ganesh Flour Mills for the period commencing on the date of taking over and ending with the appointed day. A Commissioner of Payments as stipulated by section 14 has been appointed for the purpose of disbursing the amounts payable under section 7 to the company. Under section 17, claims are required too be filed before the said Commissioner of Payments. Section 16 provides the principles according to which the claims shall have priorities.
3. C. A. No. 166 of 1987 has been filed by respondents Nos. 10,11,12,14 and 15 praying that Company Petition No. 45 of 1971 has become infructuous and is liable to be dismissed. It is claimed in the application that, by virtue of the taking over of the management of the company and its subsequent take-over under the Act of 1984, the prayers and the reliefs claimed in the petition have become infructuous; the applicants have filed their claims before the Commissioner of Payments appointed under the Act and the said Commissioner is proceeding to investigate those claims, and that the Commissioner of Payments is empowered and vested with the powers as are vested in a civil court under the Code of Civil Procedure and is thus competent to investigate the validity of the claims of the applicants. According to the applicants, on account of the aforesaid subsequent events, no relief can be granted be to petitioner in Company Petition No. 45 of 1971 which is, consequently, liable to be dismissed as infructuous.
4. The application has been vehemently opposed by the Company Law Board and Hindustan Vegetable Oil Corporation Ltd. The Company Law Board has also filed an application (Company Petition No. 459 of 1984) under order 1, rule 10 and Order 6, rule 17 and section 151, Code of Civil Procedures, interalia, praying that the Commissioner of Payments and Hindustan Vegetable Oil Corporation Ltd. be imp leaded as parties to the main petition and that the applicant be permitted to amend the main petition. Besides other amendments, the Company Law Board seeks to add a prayer for restoration of a property at Bombay to the company and also seeks a declaration that the debenture trust deed dated May 20, 1970, be terminated in terms of prayers made in paragraphs (e) and (f) read as under :
"(e) To restore to the company, the property situated at Reay Road, Mazagaon Dock, Bombay and any other properties diverted by the Morarka group to themselves, and in the event the property is not returned or the respondent-company is deprived of the same for any reason whatsoever, to give such compensation to the company as this Hon'ble Court may determine and to reimburse the respondent company for a sum of Rs. 12 lakhs for its use and occupation.
(f) Declare Debenture Trust Deed dated May 20, 1970, to be terminated on the ground that the same is void as no debentures were issued under the same."
5. Company Application No. 459 of 1984 has been opposed by respondents Nos. 10 to 12, 14 and 15. This order will dispose of Company Application No. 166 of 1987 and Company Application No. 459 of 1984.
6. Respondent No. 10 and three other debenture-holders had earlier also made a motion praying that the company petition has become infructuous and should be disposed of in view of the changed circumstances and the supersession of the management of the company under the Industries (Development and regulation) Act. It was rejected by S.B. Wad J. on January 25, 1972. after the promulgation of the Ordinance referred above, another attempt was made by respondents Nos. 10 to 12, 14 and 15 to get the petition dismissed on the ground that the petition could not be sustained and was liable to be dismissed as infructuous in view of the said Ordinance. By orders made on May 18, 1984, by D.R. Khanna J., the plea of these respondents was rejected. It is not necessary to incorporate in this order the allegations made in the company petition as the same have been incorporated in the aforesaid orders dated January 25, 1982, and May 18, 1984. The submissions now made are substantially similar which were earlier rejected by the two learned Judges of this court.
7. Sh. Gokhale, learned counsel for the applicants, vehemently contended that, after the enactment of the Act of 1984, the reliefs prayed for in paras (c) and (d) and the other reliefs cannot be granted by the company court and thus the petition has become infructuous. After noticing the order of Wad J.,the contention was rejected by Khanna J. as under :
"It is relevant here to mention that this controversy arose earlier as well when the new board under the said enactment was constituted. It was sought to be pleaded then also that the petition under sections 397 and 398 had become infructuous. Wad J., however, by an order dated January 25, 1982, rejected this contention. It was observed that while deciding the matter under sections 397 and 398, the company court would be able to grant relief with respect to the termination of the commission agreements and the execution of mortgages and other arrangements resulting from the issue of debentures, etc. The plea that the validity of the issue of debentures could not be entertained after a lapse of a period of three months by the presentation of the petition under sections 397 and 398 of the Act was not accepted and it was observed that the matter could not be so disposed of summarily but really concerned the merits. The object of sections 397 and 398, it was noted, was not merely to trace whether the company had become insolvent due to fraudulent preference but has a much wider purpose of preventing conduct which is oppressive to any member or members of the company or prejudicial to the public or the company's interest. The conduct to be investigated might not be fraudulent preference but could still be treated as oppressive and prejudicial. It was, therefore, held that investigation into the affairs of the company could not be foreclosed on the plea that no relief could be granted under section 402. acts of oppression, mismanagement and conduct prejudicial to public interest and the interest of the company, it was observed, could not be adequately investigated under the Industries (Development and Regulation) Act.
8. There is, therefore, little doubt that the reliefs sought for in para 38(c)(d), (e) and (f) of the petition can primarily be granted under the Companies Act and sections 397 and 398 make provisions for their investigation. The large commissions allowed to the concerns controlled by Murarka groups, accumulation of interest thereon, and in consideration thereof issue of debentures in their favor, create secured liabilities over the assets of the Company, and if they prevail, there will hardly be anything left which the shareholders would get. If, however, the Company Law Board and the present management of the company are able to establish, as is their endeavor, that these agreements and creation of mortgages on the basis of debentures were fraudulent and invalid, the entire complexion of financial state of the company will change. No other forum is competent to go into these aspects at this stage. This petition under sections 397 and 398 now pending from the year 1971 cannot be, therefore, thrown out without proper adjudication of the controversies raised.
9. Even otherwise, a perusal of the said Ordinance by which Ganesh Flour Mills was vested in the Central Government shows that it is not the entire company, the Ganesh Flour Mills Co. Ltd., which is vested in Central Government. This is clear from section 3 itself which is the vesting section. It reads as under :
"On the appointed day, the Ganesh Flour Mills and the right, title and interest of the Ganesh Flour Mills Co. Ltd. in relation to the Ganesh Flour Mills shall, by virtue of this Ordinance, stand transferred to and shall vest in the Central Government."
10. Earlier, section 2(c) defines company as to mean "the Ganesh Flour Mills Co. Ltd., Delhi, a company within the meaning of the Companies Act, 1956, and having its registered office at Subzi Mandi, Delhi. Section 2(e) next is to the following effect :-
'Ganesh Flour Mills' means-
(i) the Delhi vanaspati Factory, Delhi;
(ii)the Hindustan Breakfast Food Manufacturing Factory, New Delhi, including the Ganesh Electrical Factory, New Delhi, which is interlinked with it by reason of its location, common services and infrastructure ;
(iii) the Kanpur Vanaspati Factory, Kanpur ; and
(iv) the Solvent Extraction Plant, Bombay."
11. Section 2(i) defines the "Government Company" as under :-
" 'the Government Company' means the Government company in which the Ganesh Flour Mills are directed to vest under sub-section (1) of section 5."
These provisions thus clearly show it is not the entire Ganesh Flour Mills Co. Ltd. which has vested in the Central Government. The company rather is allowed to exist. It has certain factories, plant, etc. as defined in section 2(e) which have been taken over. Bereft of them which are termed as "Ganesh Flour Mills", the Ganesh Flour Mills company Ltd. continues to subsist."
12. Section 7 further provides that for the transfer to and vesting in the Central Government under section 3 of the Ganesh Flour Mills, and the right title and interest of the company in relation to the Ganesh Flour Mills Company ltd. an amount equal to a sum of Rs. 1,57,688888,000. A commissioner of payments for the purpose of disbursements has to be appointed under section 14. Thus the company has still receive that much compensation and there is, therefore, substantial force in its contention that in case the debentures are allowed to stand and not stuck down, the entire compensation would be taken away by the Murarks group thought the concerns holding those debentures. If, however, the debentures are struck down, the benefit of that compensation would go to the shareholders and would result in elimination of other valid liabilities and improvement of the financial state and working of the company. I am further in agreement with the contentions of the company as well as the Company Law Board that the determination of the claims and priorities under sections 16 to 18 of the Ordinance by the Commissioner of Payments would not involve the adjudication of the validity of commission agreements and the issue of debentures. They can only be determined by the company court.
13. The objections raised by respondents No. 10 to 12 and 14 and 15 to the maintainability of the present petition under sections 397/398 of the Companies Act after the issue of the said Ordinance are, therefore, rejected. They will pay Rs. 500 as costs to the Company Law Board and the company."
14. In view of the aforesaid, it is not necessary to examine again the contention of Mr. Gokhale in any detail. I am in respectful agreement with the views expressed in the said two orders.
15. The heading of Chapter VI of the Act "Prevention of Oppression and Mismanagement" and the words used in sections 397 and 398, "are being conducted in a manner prejudicial to public interest", according to the contention of Mr.Gokhale, show that the alleged prejudicial activity should be a continuing one and, to prevent it, the company court, under section 397 or 398, as the case may be, can pass such orders as the interest of justice may demand in the facts and circumstances of the particular case. Learned counsel argued that section 397 or 398 of the Act does not confer any power on the company court to correct past acts of mismanagement and oppression and impose any penalty therefore. In short, the contention was that these provisions are preventive and not penal in nature. There is no difficulty in accepting the broad proposition put forth by learned counsel. There cannot also be any doubt that, because of legislation and subsequent events, the reliefs (a) and (b) have become infructuous. But the same is not correct in respect of reliefs (c) and (d). Mr.Gokhale, however, contended that these reliefs can be granted by the Commissioner of Payments while adjudicating on the validity of claims of the applicants. The Commissioner of Payments, under the Act of 1984,has limited power while determining the claims and priorities under sections 16 to 18 of the said Act. It is not open to the Commissioner of Payments to go into the question whether the agreements in regard to which relief is claimed in the company petition are prejudicial to public interest or, in any manner, oppressive to any member. An act need not always necessarily be fraudulent to be declared as oppressive and prejudicial under the provisions of the Act. That, however is not within the scope of the powers of the Commissioner of Payments under the Act of 1984. In case the Company Law Board or the Hindustan Vegetable Oil Corporation Ltd. are ultimately able to show that the agreements, etc., are fraudulent, invalid or otherwise amount to acts of oppression or prejudicial to public interest, the claim of the applicants before the Commissioner of payments will be vitally and substantially affected and, in that event, the benefit of compensation may go to the shareholders. These aspects can be gone into only by the company court and not by the Commissioner of Payments.
16. The other contention of Mr. Gokhale that relief under section 402 can be given only after the court passes an order under sections 397 and 398 of the Companies Act was rejected by Wad J. While interpreting sections 397 and 398, it was held that the company court is entrusted with powers of the widest amplitude. Justice Wad said: "This plenary nature of the powers is not cut down by section 402. The specific powers under section 402 are in addition to powers that a company court can exercise as plenary powers. Section 402 enlarges the power under section 397 and 398 by specific addition." There is, thus, no substance in the contention of Mr. Gokhale.
17. In view of the above, C.A.No. 166 of 1987 is dismissed with costs. Counsel's fee Rs. 2,000.
18. Reverting now to C.A.No. 459 of 1984, it may be noticed that, under section 4(6) read with section 5 of the Act of 1984, any suit, appeal or others proceedings of whatever nature instituted or preferred by or against the company, in relation to Ganesh Flour Mills, may be continued, prosecuted or enforced by or against the Central Government or, where the Ganesh Flour Mills vest in a Government company under section 5, by or against the Government company. Hindustan Vegetable oil Corporation Ltd. has been vested with the right, title and interest of the company in relation to Ganesh Flour Mills which vested under the Central Government under section 3 of the said Act. In view of the said provisions, Mr. Gokhale did not seriously dispute the right of Hindustan Vegetable Oil Corporation Ltd. to appear in these proceeding but contended that the said company can appear and prosecute these proceedings without being imp leaded as a party. The objection to the impleading of Hindustan Vegetable Oil Corporation Ltd. seems to be only for the sake of objection and is, consequently, rejected. Hindustan Vegetable Oil Corporation is, accordingly permitted to be imp leaded as one of the respondents.
19. The applicant also seeks impleading of the Commissioner of Payments as a party in these proceedings. The Commissioner of Payments has been appointed by the Central Government for the purpose of disbursing the amounts payable under section 7 to the company. The said Commissioner has to decide the claims in accordance with the provisions of the Act of 1984. The powers of the Commissioner are quasi-judicial and it has not been shown as to how the Commissioner is a necessary or even a proper party. The prayer for impleading of the Commissioner of payments as a party is , accordingly, declined.
20. The main allegation which are sought to be added by way of amendment are in regard to the premises at Bombay. The petitioner has situate at Reay Road, Mazagaon Dock,Bombay, and any other properties diverted by Murarka group to themselves and, in the event the property is not returned or the company is deprived of the same, for any reason whatsoever, to give such compensation to the company as this court may determine and to reimburse the company a sum of Rs.12 lakhs for its use and occupation. In brief, the petitioner seeks to incorporate by amendment allegations that the Murarka group, after capturing the control of the company, manoeuvred to hand over the said premises to respondent No.10,i.e.,W.H.Brady and Co. Ltd. and the said transfer is unwarranted,illegal, fraudulent,coercive and ineffective. It says that being found,the suit filed by the landlady for recovery of the possession of the said premises and for other reliefs would be vitally affected. At this stage, this court is not concerned with the merits of the allegations sought to be added by amendment and thus the amendment sought cannot be rejected on that score. The applicant has recited in the application that, at the time of filing of the petition, it was not aware of the company having been deprived of the said property and that the decision to amend the petition was made soon after the promulgation of the Ordinance and the application for amendment was filed thereafter. It may be noticed that in the earlier order vacating stay of the proceedings of Bombay suit, it was, inter alia, observed that in the main petition, no relief with regard to Bombay property had been claimed. Soon after that order, the present application was filed. It cannot be held, on the facts of the case, that the amendments are being sought with any mala fide intention. The delay, as already noticed earlier, has been explained and in any case the delay by itself cannot be the sole ground for refusing amendment. The amendments sought are necessary for effectively determining the controversy in the petition as the decision on the matters sought to be incorporated by amendment would vitally affect the company and its members. The law with regard to amendment is very liberal. The amendment will promote the ends of justice. Accordingly, C.A.No.459 of 1984 is allowed.The applicant is directed to file amended petition within four weeks showing Hindustan Vegetable Oil Corporation Ltd. as respondent No. 16,as the prayer for impleading of the Commissioner of Payments has been declined.
21. C.As. Nos. 166 of 1987 and 459 of 1984 are disposed of in the above terms.