Bombay High Court
Maharashtra State Financial ... vs Official Liquidator, Sidhu Tyres (P.) ... on 27 November, 1987
Equivalent citations: [1988]64COMPCAS641(BOM)
JUDGMENT
G.D. Kamat J.
1. This is application under section 446 of the companies Act, 1956, for keeping the petitioners outside the liquidation and to permit them to proceed with the proceedings initiated by the petitioners against the company and its director which is already wound up by the order of the learned single judge of this court in company Petition No. 4S of 1986.
2. The petitioners are the Maharashtra State Financial Corporation, a financial institution created under the State Financial Corporation, a financial institution created under the State Financial Corporation Act,1951. The thrust in petition now is that the petitioners who are the secured creditors of M/s. Sidhu Tyres and Rubber Mfg. Co., a partnership firm, which subsequently converted itself and was incorporated into a company under the provisions of the Companies Act, 1956, sought voluntary winding up an having obtained an order for winding up, further obtained an order for staying the criminal proceedings and the civil suit pending in the courts elsewhere and that the two orders made in Company Petition No. 4S of 1986 and the appointment of the official liquidator come in their way and, therefore, they presently party that they be kept out of the liquidation proceedings and further be allowed to continue the civil proceedings and the criminal case against the directors.
3. Having regard to the controversy involved, the factual matrix for recording the background of the present petition may be advantageously done.
4. Shri Kartar Singh Sidhu, Shri Parvinder Singh Sidhu and Smt. Jasbir Sidhu, wife of the latter, constituted themselves into a partnership firm under the name and style of M/s. Sidhu Tyres and Rubber Products Mfg. Co. and obtained a loan from the petitioners in the sum of Rs. 9,40,000 is on hypothecating of the machinery and equipment, pursuant to the execution of a letter of hypothecation which was duly executed on August 18, 1981, by the parties concerned on condition that the loan advanced is repayable within a period of 10 years from the date thereof by 17 half-yearly installments commencing from the end of the second year from the disbursement of the first instalment. On obtaining the loan thus sanctioned and even before anything further happened in this matter in so far as the financial institution is concerned, the aforementioned partnership firm got itself converted into a private limited company under the provisions of the Companies Act, 1956, with the office of the Registrar under the Companies Act for Goa, Damman and Diu. It is not disputed that approval was sought from the petitioners for such conversion into a company and the petitioners had accorded permission on February 24, 1983.
5. The default persisted in the matter of repayment of the loan and the petitioners having found that it could no more bear with the debtor called upon them to repay the entire loan by a notice addressed in that behalf by their lawyer and having found that the situation is incorrigible, the managing director of the petitioners made an order under section 29 of the State Financial Corporations Act to take over the entire equipment and machinery existing in the sheds Nos. 9 and 10 of D-2. A panchnama was made and an inventory recorded and sheds were closed under lock by the petitioners. It was later discovered that some important and vital machinery was missing and this being outside the authority of the directors and being a criminal act, a criminal case, vide No. 184 of 1985 was instituted before the Judicial Magistrate, First Class at Bicholim. Despite at attachment carried and the panchanama duly made in respect of the machinery and equipment, the petitioners found that the directors were causing interference and had even put a lock over lock to the said sheds which conduct require to petitioners to file a special civil suit bearing No. 46 of 1985 in the Court of the Civil Judge, Senior Division, Bicholim, seeking permanent injunction restraining the aforementioned directors from, in any manner, interfering with the attachment and possession taken over. Although nothing turns on this, it may be mentioned that eventually, this Criminal Case No. 184 of 1985 and the Civil Civil Suit No. 46 of 1985 by an order of the District Court, were transferred from the court of the civil Judge, Senior Division- cum -Magistrate, First Class, Bicholim, to the Court of Civil Judge, Senior Division-cum-Magistrate, First class, Mapusa, where presently they are pending and stayed.
6. With an ulterior motive which now transpires, the company approached this court in Company Petition No. 4S of 1986 for voluntarily winding up the company on averment that the company could not proceeds with the manufacturing and other activities on account of various teething troubles and having no prospect in the immediate future nor any likelihood of commencing the business; that they are unable to pay the debts to the various creditors and, therefore, the company be wound up. Despite the dispute the disclosure in the petition that the company be wound up. Despite the disclosure in the petition that the company is indebted to Maharashtra State Financial Corporation and the reference to the suit and also the another creditor namely the Economic Development Corporation of Goa, by an order dated October 24, 1986, the learned single judge of this court made the following order:
"Heard Mr. Kolwarkar, learned counsel for the petitioner.
7. In view of the averment in paras 4,6,7,10 and 11 of the petition, the company. M/s. Sidhu Tyres Pvt. Ltd., is ordered to be wound up. The official liquidator to proceed with the liquidation.
8. The result is that the criminal proceeding instituted against the company an its director, pending in the Court of Judicial Magistrate, First Class, at Mapusa and Special Civil Suit No. 4S of 1986, subsequently transferred before the Court of Civil Judge, Senior Division, Mapusa, stand stayed and with the appointment of an official liquidator, Shri B.N. Harish, assistant official liquidator, has taken over the assets along with the machinery, equipment, laying therein with the result that the petitioner, thought a secured creditor, is unable to made any head way despite the order made by the managing director under section of 29 of the Maharashtra State Financial Corporation Act 1951.
9. Shri S, Tamba, learned counsel for the petitioners, in support of the present petition, has raised several contentions, in that he says that what every assets are hypothicated by the then partnership firm on August 18, 1981, do not belong to the company under liquidation on the proposition that the hypothecation had come much before the company was allowed to be incorporated and which fact took place only on October 1,1983. Alternatively, he canvasses that the partnership firm still subsists and no conversion under the law could take place by which it could become a company because there is no transfer and at any rate no evidence of any such transfer. The other side of the same argument is that the object of the company does not allow the take over of the aforementioned assets and this being so, it was impermissible for the company to have taken over the assets of the firm. The next submission is that action has overriding effect over all other provisions of the Companies Act or any other law for the time being in force and, therefore, there cannot be anything that can curtail the power of the petitioners vis-a-vis machinery and equipment which are taken over in attachment and subjected to the panchnama placed on record also with order dated March 29, 1985.
10. In the first instance, it may be recorded that counsel for the petitioners was trying to be on the fence in urging that in the absence of evidence, there is no conversion of the partnership into a company and, therefor, not action taken by the debtor company or nay orders obtained in that behalf can be said to affect the original partnership firm and that way the rights of the petitioners are intact vis-a-vis the original firm. In so many words,s the petitioner have also claimed relief on the footing that the original partnership firm has undergone a conversion and got itself incorporated as a private limited company. I am, therefore, not enamored by the several arguments taken by learned counsel for the petitioners that the assets hypothicated on August 18, 1981, do not belong to the company under liquidation or that the charge having been created originally by the partnership firm could not be binding once it has gone into a transformation merely because certain events have taken place subsequently. It is equally not possible to hold that the partnership firm still subsists and,d therefore, there is no transfer of assets to the company.
11. There is another way of looking at this. It must be accepted that the petitioners themselves by their communication dated February 24, 1983, have acceded to the request of the partnership firm to be converted and incorporated as a private limited company and this position is undeniable in so far as the petitioners are concerned.
12. But then, however, it must be seen that there is great justification for learned counsel for the petitioners to contend that the company under liquidation which came before the court for voluntary winding up lacked bona fides and obtained orders for winding up and appointment of the official liquidator and further order for staying the criminal and civil proceedings, surreptitiously removed vital and important machinery and have disappeared from the scene. Nothing was disclosed in the petition for winding up that action under section 29 had already been taken. He urges and, undisputably, that not notice was given to the petitioners as secured creditor in the winding up proceedings in Company Petition No. 4S of 1986 and the petitioners became aware of it much later. It is further not disputed that they had no notice of the said order standing the criminal proceedings and the civil suit. I have had the records of the case, Company Petition No. 4S of 1986, examined and it is clear that notice had not even been published and the learned single judge on the basis of the averment made in the petition granted the final relief for winding up the company, M/s. Sidhu Tyres P. Ltd. and further obliged them with the relief of staying the proceedings, both civil and criminal. Undoubtedly, therefore, an ex parte order operates against the petitioners to their prejudice in so far as the criminal case and the civil proceedings are stayed. The question as to whether the company was wound u or not is an entirely different matter. There is further enough justification for learned counsel for the petitioners to contend that the petitioners are a secured creditor having obtained letter of hypothecation against the grant of advance of a large sum of Rs. 9,40,000 clearly pledging the machinery, equipment, etc., as mentioned in the schedule to that agreement in favour of the petitioners. It will have to be, therefor, seen they, by virtue of the hypothecation letter, the machinery and the equipment vested in the petitioners,unless by the terms of the letter of hypothecation money was duly paid back and contract fulfilled. It is not in dispute that as on the date the order under section 29 of the Maharashtra State Financial Corporation Act was made, i.e., on March 29, 1985, a sum as high as over Rs. 16 lakhs was due and payable by M/s. Sidhu Tyres P. Ltd.
13. This petition is being opposed by the assistant official liquidator and he has placed on record an affidavit duly instructed, dated June 9, 1987. While opposing the grant of prayer sought for by the petitioners, the contention raised by the official liquidator is that once the firm, M/s. Sidhu Tyres P. Ltd. has become a company on October 1, 1982, and so long as the charge in favour of the petitioners is not duly registered as required by he provisions of the Companies Act, the same is not binding on the official liquidator and, therefore, the question of the petitioners securing their debt from the defunct company cannot arise and that, on the contrary, by virtue of the requirement of section 456(1) of the Companies Act and pursuant to the order of the learned single judge, the liquidator is required to take over possession of all assets, property, etc., of the company in liquidation, to satisfy all the creditors including the unpaid salaries of the employees, if way, and, in that view of the matter, it is his contention that no relief be given to the petitioners.
14. I may have to observe that the assistant official liquidator is not correct when he avers that since the charge qua the petitioners had not been registered with the office of the Registrar of Companies, the same is not binding on the official liquidator. I will succinctly show what in my view is the correct position. Ist is common ground that the original firm got converted and incorporated into a company on October 1,1982, with the result that the firm, M/s. Sidhu Tyres Mfg. Co. became Sidhu Tyres P. Ltd. company. The hypothecation made in favour of the petitioners was by the erstwhile partnership firm on August 18, 1981. Therefore, when there was a certain to charge by the partnership firm in favour of the petitioners, there was no question of registering any charge in the office of the Registrar of Companies by the requirements of the provisions of the Companies Act, 1956. If at all, once the transformation had taken place, it was obligatory on the part of the directors of the company to have brought it to the notice of the Registrar of Companies or to have got the charge registered.
15. As mentioned earlier, the very formation of the partnership firm, its subsequent conversion into a company and filing of the petition for voluntary winding up, were all a well-calculated move to defraud the petitioners and run away fro this territory with important items of the machinery and that exactly has been achieved by the aforementioned directors who are all family members. They further succeeded in their ulterior motives in obtaining orders in Company Petitions No. 4S of 1986 even to the excluding of the secured creditors which included the petitioners. It is in this view of the matter that I am unable to accept what is urged on behalf of the assistant official liquidator and, on the contrary, must hold that the justice of the case requires that the secured creditors be given the necessary relief.
16. It may be seen in the first pace that the petitioners have a right in cases of default to take over the management of possession as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothicated or assigned to themselves. This unlimited power given to financial corporation is apart from proceeding in a judicial manner under section 31 thereof. Section 31 requires a sort of an execution to be preferred before the District Court for attachment and sale of the properties. At any rate, action under section 29 of the State Financial Corporation Act, 1951, was undeniably taken on March 29, 1985, and, what is more, the petitioner had not only attached the equipment and machinery lying in sheds Nos. 9 and 10 of D-2 of the Industrial Estate at Bicholim but had even taken possession of the sheds and put a lock of their own. Mr. Tamba, learned counsel for the petitioners rightly places reliance on the decision in Kerala Financial Corporation v. C.K.Sivaswnkara Panicker (1978) 8 TLR 1850 (Ker). The question there arose with regard to the width of section 46B as to whether it has overriding effect over section 125 of the Companies Act. Section 125 of the Companies Act speaks of every charge created on or after April 1, 1914, by a company as void against the liquidator or nay creditor of the company unless the charge was filed with the Registrar for registration in the manner required for that purpose. On an analysis of these two sections, that is to say, section 46B of the State Financial Corporations Act, 1951, and section 125 of the Companies Act, 1956, it is ruled in this decision that section 125 of the companies ACt, 1956, it is ruled in this decision that section 46B, being a special Act, the effect of an order passed under that Act would be binding on the liquidator of the company notwithstanding what is mentioned is section 125 of the Companies Act. Having come thus far, it must be further observed that the petitioners had no chance to participate in the winding up proceedings, vide Company Petition No. 4S of 1986, and, therefore, just not possible to hold that such orders can bind the petitioners for all time to come and having regard to the facts and the circumstances already set out, it is just not possible to deny the reliefs sought for by them in the present petition under section 446 of the Companies Act.
17. I will, however, now come to certain steps that may be required to be taken care of. Mr. Bhobe, learned standing counsel appearing for the official liquidator, has pointed out that if the relief sought for by the petitioners is granted in its entirety, it may cause a lot of difficulties to the assistant official liquidator and he may face harassment in the criminal case as well as in the civil suit by virtue of this status. It is pointed out by Mr. Bhobe that with the appointment of Mr. Harish a official liquidator will have to represent the company . According to Mr. Bhobe, it is necessary to see that the whole gamut of the charge of fraud is personally on the director and in this view of the matter, he urges that while giving any relief in favour of the petitioners, this aspect of the matter be taken care of. He further points out that is is not knows whether the defunct company under liquidation had any permanent or otherwise any staff and they may have a claim as far as the delayed and unpaid wages are concerned. He further points out that as ruled by the Supreme Court, the wages of the staff of employees of the company would stand on equal footing with the secured creditors as a charge on the assets of the company and that will have also to be taken care of..
18. It is true that Mr. Tamba points out, by reading several passages from the documents of the defunct company, that the same had never started functioning even on a trial basis and the whole project failed like a still-born baby and, therefore, the question whether it would arise or whether it would not arise cannot be determined by this court and if such an eventuality does arise in future it is needless to mention that the claim of the workers insofar as the unpaid salaries are concerned, must stand on par with secured creditors.
19. Mr. Tamba, however, brings to may notice that in so far as Special Civil Suit No. 46 of 1986 is concerned, the same need not be prosecuted by the petitioners because what was sought therein was the relief of permanent injunction and since the directors have now disappeared, there is hardly any apprehension that the company or its directors would interferes or that they would interfere with the sheds or whatever items that are lying in those sheds. Mr. Tamba, therefor, says that he will not prosecute that suit but however the petitioners are interested in prosecurint their criminal with a view to bringing the ex-directors to book. By the time the said Special Civil Suit No. 46 of 1986, is withdrawn, the question of the official liquidator representing the company therein would not arise and the trial court shall not insist on his presence.
20. Criminal Case No. 184 of 1985, has been stayed by the orders of the learned single judge,made on October 24, 1986. It is not only against the company but also individually against the directors thereof. However, the directors are not before me in this petition. It is not possible for me to undo or review the orders of the learned single judge unless al the parties are heard. I, however, fail to understand Mr. Tamba's apprehension that the petitioners are in a dilemma. The fact remains that the order of stay had been made ex parte as far as the petitioners are concerned. It is, therefore , open and I find no difficulty for the petitioners to move an application in Company Petition No. 4S of 1986, to vacate the stay of criminal proceedings and obtain orders thereon. Since Mr. Tamba says that he ;will proceed against the directors and not against the company in the event stay order is vacated, the Judicial Magistrate, First Class, Mapusa, is not to insist upon the present of the liquidator in the criminal case.
21. In the event of any claim being made by the employees of the company under liquidation, the Maharashtra State Financial Corporation shall be bound to contribute on pro rata basis out of the monies realised by them from the sale of machinery, equipment, or whatever assets that are available and taken charge of and sold by them.
22. It is now clear that the assistant official liquidator has taken possession of the two sheds and presently is in charge thereof and has since sealed them. A direction must be given to the assistant official liquidator to remove his seal affixed on the sheds and after taking the necessary inventory and on confirming what machinery and equipment is the subject-matter of the hypothication, shall segregate and give them to the possession of the petitioners. The petitioners shall be at liberty to deal with these items of machinery and equipment in the manner they like including its sale by auction or otherwise, maintain an account thereof for the purpose of making an order if required in future in relation to the claim for unpaid wages by the employees if any.
23. Summing up, the Maharashtra state Financial Corporation is allowed to be kept outside the liquidation. The petitioners shall withdrawn the special Civil Suit No. 46 of 1985. In so far as the Criminal Case. Mapusa, is concerned, the petitioners to file an appropriate application in Company Petition No. 4S of 1986, for vacating the stay granted ex parte. The assistant official liquidator shall segregate the equipment and machinery which stand hypothicated to the said financial institution and hand over the same to them.
24. In this view of the matter and subject to the aforesaid observations, this petition succeeds. The rule is accordingly made absolute. There shall be , however, no order as to costs.