Bombay High Court
Uco Bank A Body Corporate Having Its vs M/S. Spanco Ltd on 25 September, 2014
Author: S.J. Vazifdar
Bench: S.J. Vazifdar, Revati Mohite Dere
APPL455.14.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL (LODG) NO. 455 OF 2014
IN
COMPANY PETITION NO. 189 OF 2014
UCO Bank a body corporate having its ]
head office at 10, B.T.M. Sarani, Kolkata - ]
- 700001 and one of its Branches known as ]
Asset Management Branch, situated at 5, ]
Parliament Street, New Delhi 110 001 ]
through its Assignee J.M. Financial Asset ]
Reconstruction Company Private Limited.ig ] ... Appellant
Versus
M/s. Spanco Ltd., a company registered ]
under the Companies Act, 1956, having its ]
Registered Office at 8th Floor, Godrej ]
Coliseum, Somaiya Hospital Road, Off. ]
Eastern Express High Way, Sion (E), ]
Mumbai 400 022. ] ... Respondent
Mr. Ashish Kamat i/b N. Deshpande & Co. for the Appellant.
Mr. Zal Andhyarujina with Mr. Kersi Dastoor i/b Phoenix Legal for
the Respondent.
CORAM : S.J. VAZIFDAR &
REVATI MOHITE DERE, JJ.
THURSDAY, 25TH SEPTEMBER, 2014
SRP 1/10
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APPL455.14.doc
JUDGMENT :[Per S.J. Vazifdar, J.]
1. This is an appeal against an order of the learned company Judge placing the above petition for acceptance at a future date. The petitioners, however, are aggrieved by the concluding paragraph of the order, which reads as under :-
"4. It is clarified that no disposition of property by the Company or transfer of shares or alternation in the status of the Company's members from September 2013 till today shall be called into question in any winding up proceedings that may result from these particular petitions. The petitioners may well be held liable for any resultant losses or prejudice to other creditors."
2. Although the petition has not been considered even at the initial stage of acceptance, we find ourselves compelled to interfere with the order insofar as the above observation are concerned for two reasons.
Firstly, the facts of the case, did not warrant such a drastic order. An order for costs, at the highest, would have been sufficient. Secondly, the above observations have drastic consequences on the provisions of the Companies Act and the right of third parties in such proceedings.
3. The reasons that led to the learned Judge making the above SRP 2/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc observations are these. The petition was lodged in September, 2013.
Till the day prior to the impugned order dated 11th March, 2014, the objections raised by the office had not been removed as a result whereof the matters had not been placed for acceptance. There was, however, only one objection viz. the failure to provide a digital CD.
All other objections had been removed. In fact, the CD was ready even before the impugned order was passed.
4.Firstly, the order was passed when the matter appeared on board for acceptance, without affording the appellant an opportunity of explaining the delay in providing a digital copy of the petition on CD.
Although the petition was filed in September, 2013, the office took the same up for checking only on 9th October, 2013. Thereafter, certain objections were raised. Soon thereafter were the Diwali holidays from 30th October, 2013 till 18th November, 2013. During this period the appellant's advocate's office was closed. In view of the objections, the appellant called for the papers required for clearing the objections from its office at Delhi. On receipt thereof all the objections, except the said objection were removed on 18th December, SRP 3/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc 2013. It is important to note that upon clearing these objection, the office raised fresh objection on 18th January, 2014. What is even more important to note is the fact that on 27th January, 2014, the office issued directions for filing the CD. The CD was provided even before the impugned order was passed.
The matter had been placed on board on 7th March, 2014, on the lodging number. The learned Judge was informed that all the objections, except the said objection had been removed. The matter was stood over to 11th March, 2014, for dismissal. The impugned order is dated 11th March, 2014. The CD was, in fact, kept already and the same was provided to the Company Registrar the day before on 10th March, 2014, and the Company Petition was given its final number prior to the impugned order.
5. In the circumstances, although there was some delay in removing the office objection relating to furnishing a CD, the same did not warrant such a drastic order which has serious repercussions not merely on the petitioner but on third parties as well in view of the nature of the proceedings. The observations, therefore, were in any SRP 4/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc event not justified. Even absent these facts the above observations and order were not justified. The delay in failing to furnish the CD alone is not a justification for such a drastic order. An order of costs, at the highest, and another opportunity by way of an opportunity to remove the objections within a specified period with a self-operative order of dismissal in the event of the failure to do so, would have been an appropriate order in the facts and circumstances of the case.
6. Mr. Andhyarujina submitted that we ought not in appeal to interfere with the exercise of discretion by the learned Judge.
7. While an appellate court does exercise restraint in interfering with the discretion exercised by the trial court, we are constrained in this case to do so in view of the facts of this case and in view of the implications of the order.
8. We have already dealt with the facts of the case and come to the conclusion that the lethargy, if any, did not warrant such a drastic SRP 5/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc order.
9. We have referred to the above facts from the Memorandum of Appeal in view of the fact that the appellant did not have an opportunity of placing the same before the learned Judge when the impugned order was passed.
10. Section 536(2) of the Companies Act reads as under :
"536. Avoidance ig of transfers, etc., commencement of winding up.-(1) ... ... ... ...
after (2) In the case of a winding up by the Tribunal, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall unless the Tribunal otherwise orders, be void".
The company Judge has discretion to validate a transaction.
The discretion must be exercised having regard to all the surrounding circumstances. The provision is to prevent disposition of property of the company without the permission of the Court and is with a view to avoid fraudulent transactions and to prevent any abuses by those in management of the company. The bar is to the disposition of any property of the company. It is only when the transaction comes up for SRP 6/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc consideration must the court exercise its discretion whether or not to validate it. The discretion is exercised not merely keeping in mind the interests of the petitioner alone, but of all parties concerned, including of the general body of creditors of the company. The learned Judge has, in effect, barred the exercise of the discretion by the company court for all time to come in the event of the company being wound up. The effect of this order will be felt not merely by the petitioner on account of whose default it was passed, but by all the other creditors of the company for no fault of theirs.
ig The effect of the order is to deprive all the other creditors the benefit of the provision of section 536(2).
11. We entirely agree with Mr. Kamat that the order can lead to the most undesirable results. Assume, for instance, that the company is finally wound up and a particular transaction between the company and another party is found and established to be dishonest. The effect of the impugned order would be to prevent the company court from invalidating it. In fact, the order would ipso facto validate even such fraudulent transactions. The order does not prevent only the petitioner SRP 7/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc from calling into question the disposition of the property by the company or transfer of shares or alteration in the status of the company's members. It prevents anybody from doing so. Even if the order is restricted to the petitioner, it would make no difference. If the petitioner is in a position to establish a fraudulent transaction, the company court would be bound to exercise its discretion accordingly under section 536(2).
13.The impugned order, in fact, would enable the company to subvert the entire winding up proceedings by entering into fraudulent transactions knowing that the same cannot be called into question in winding up proceedings resulting from the above petitions.
14. The last sentence in paragraph 4 of the impugned order that the appellant/petitioner may well be held liable for any resultant losses or prejudice to the other creditors is of little comfort to the other creditors. The same cannot sustain the impugned order. The petitioner, for instance, may not be in a position to make good the resultant loss that the other creditors may suffer. There is no SRP 8/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc justification for prejudicing the other creditors in this manner.
15. The learned Judge also observed that the delay is potentially detrimental to the company for should a final order be made in favour of the petitioner winding up the company, all disposition of properties and even share transfers effected after September 2013 i.e. the date of the presentation of the petition will be called into question in view of sections 536(2) read with section 441 of the Companies Act.
16. The learned Judge has himself observed that such transactions would be void unless the Court otherwise orders. As far as the company is concerned there can be no question of the alleged delay being detrimental to it. If the company is wound up it would be for the reason that it is unable to pay its debts including the debts of the petitioning creditor. Further, if the transaction is bona fide and in the interest of the company it can always be validated by the court. There would be no question then of any detriment being caused to the company. If, on the other hand, the transaction is found not to be bona fide or in the interest of the company, there cannot be said to be any detriment to the company. It is a consequence that the company must SRP 9/10 ::: Downloaded on - 27/09/2014 23:48:58 ::: APPL455.14.doc face on account of its inability to pay the debts and on account of it having entered into a transaction which the court does not deem appropriate to validate. We see no reason why the company should not be subjected to these consequences viz. its transactions being invalidated if they are found by the court to be contrary to the provisions of law, fraudulent preferences or not in the interest of the company for any other reason.
17.Even assuming that there was negligence on the part of the petitioner, the appropriate order would have been one for costs. The learned Judge could even have dismissed the petition. Such an order would affect the petitioners alone. The impugned order, however, cannot be sustained for it affects the entire winding up proceedings.
18. In the circumstances, the impugned order is set aside except to the extent that the petition was placed for acceptance. The petition shall proceed accordingly.
REVATI MOHITE DERE, J. S.J. VAZIFDAR, J. SRP 10/10 ::: Downloaded on - 27/09/2014 23:48:58 :::