1. Protection to guarantors available only in respect of suits: Proceedings u/s 31 of State Financial Corporations Act, 1951 not a suit but in nature of miscellaneous petition.

Zenith Steel Tubes & Inds Ltd. & Anr. & Sicom Ltd. [(2008) 141 Comp Cas 387(Bom)] and [(2008) 141 Comp Cas 428 (SC)]

The Appellant No. 2 is the guarantor for Appellant No. 1 for repayment of loan by the latter to the Respondents. On account of default in repayment of loan, the Respondents took out proceedings under sections 31(1)(aa) and 32 of the State Financial Corporations Act, 1951 (hereinafter referred to as “SFC Act”). During the pendency of those proceedings, the BIFR by its order declared Appellant No. 1 as a sick industrial company. Consequent to the said declaration, objection were sought to be raised before the single judge in the proceedings under the said Act that in view of section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as “SICA”) the personal guarantee could be enforced unless the assets, which are mortgaged are realized. The single judge rejected both the contentions.

On an appeal, their Lordships of the Bombay High Court following the decision in case of Dewal Singhal vs. State of Maharashtra [(2001) 106 Comp Cas 587 (Bom)] held that section 22 of the SICA clearly specifies that no “suit” for 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 lie. It does not prohibit any proceeding other than a suit in that regard. Thus, the bar is only on “suit” and nothing else. Proceedings under section 31(1)(aa) of the SFC Act, against the guarantor are not barred. The creditor need not necessarily exercise his right as a mortgagee prior to proceeding against the guarantor to recover the dues. Merely because an industrial company is protected, the guarantor does not get protected automatically.

However, the Supreme Court held that in view of the conflict of views expressed in Kailash Nath Agarwal’s case [(2003) 114 Comp Cas 4 (SC)] to the effect that Legislature had knowingly used two different expressions “proceedings” and “suit” in section 22(1) of SICA and that the protection of section 22 extended to guarantors in respect of suits alone, and in Paramjeet Singh Pathaja’s case [(2006) 10 JT SC 41 to the effect that the expression “suit” which extends the protection of section 22(1) to guarantors, would have to be interpreted to include “proceeding” also, the matter had to be referred to a larger bench to resolve the existing anomaly resulting from the different views expressed in the cases.

2. Section 391 of 1956 Act is a complete code in the nature of a “single window clearance”, no separate fees or increase of authorized share capital need be paid

Regional Director & Anr vs. Cavin Plastics & Chemicals P. Ltd. [(2008) 141 Comp. Cas 475 (Mad)].

The proposed scheme of amalgamation, Clause 13.2 between the Respondent–transferor company and the transferee company provided that the filing fee already paid by the transferee company on its authorised share capital shall be deemed to have been so paid by the transferee company on the combined authorised share capital. The Regional Director of the Ministry of Company Affairs and the Registrar of Companies raised an objection that the authorised share capital of the company could be increased only after following the procedure prescribed under the relevant provisions of the Companies Act, 1956 and on payment of requisite fees to the Registrar of Companies. The single judge overruled the objection and sanctioned the scheme of amalgamation.

The court dismissing the appeal, held that the issue was not whether the fee which was already paid by the transferor company would automatically be transferred to the transferee company. But, what was intended by section 391 was to reconstitute the company without the company being required to make a number of applications under the Companies Act for various alterations which might be required in its memorandum and the articles of association for functioning as a reconstituted company under the Scheme. Section 391 is not only a complete code in itself but it is intended to be in the nature of a “single window clearance”. Therefore, no separate fees need be paid to the Registrar.

3. Where holding of annual general meeting under serious dispute, CLB not empowered to adjudicate dispute regarding validity of meeting – Validity of AGM to be adjudicated by Civil Court in Suit

Gracy Thomas vs. Four Square Estates P. Ltd. & Ors. [(2008) 141 Comp Cas 770 (CLB)]

The applicant, a director of the first Respondent-company, along with the fifth respondent had filed a suit against the sixth and seventh respondent for setting aside the sale of immovable properties owned by the company in favour of a third party. The applicant had contended that there was default in convening the annual general meetings, which resulted in criminal prosecution initiated by the Registrar of Companies against the company and its managing director, who pleaded guilty and paid a fine of Rs. 7,200/-. In an application u/s. 167 of the Companies Act, 1956, seeking directions to the company to call for the annual general meeting (AGM) for the years 1998-99 and 2003-04, the applicant contended that the company failed to convene the board meetings and the AGM for the years between 1998-99 and 2003-04.

The Company Law Board passed an order dated 30-3-2005 directing the company to convene the AGM for the years between 2000-01 and 2004-05 and issued consequential directions in relation to holding and conducting the meetings.

The sixth and seventh respondent preferred an appeal before the Kerala High Court contending, inter alia, that they were not impleaded as parties to the proceedings before the Board and the direction of the Board was based on misrepresentation of the actual position. The Kerala High Court passed an order remitting the matter to the Board to decide whether there was any valid meeting held during the period in question.

Pursuant to the order, Respondent Nos. 2 to 7 were impleaded in the proceedings before the Board and the applicant and Respondent Nos. 2 to 5 contended that (i) no annual general meetings of the company had been held for the period between 1998-99 and 200-05 and (ii) all the copies of the notices of the purported annual general meetings, certificates of posting, which were contradictory to each other, were fabricated by the sixth and seventh respondents. The sixth and seventh respondents contested the application on the ground that the AGMs for all the financial years had been held in compliance with the statutory requirements.

The Company Law Board held that as the suit for setting aside the sale of immovable properties owned by the company included the dispute as to the validity of various annual general meetings purportedly held during the period between 1998-99 and 2003-04 and the suit was admittedly prior in point of time, the civil court would adjudicate the disputes. The applicant as well as the company was found guilty of suppression of all the material facts before the Company Law Board, which had misled the Board to direct the company to convene the meetings in terms of the order dated 30-5-2005.

Further, the CLB held that by virtue of section 167 of the Act, it could direct the company to call the AGM, if there was a default committed in holding the AGM. The holding of the AGMs for the period between 1998-99 and 2003-04 was under serious dispute, which did not fall within the scope of section 167 of the Act. The Board could not exercise the power under section 167 of the Act unless the civil court adjudicated the validity of the AGMs purportedly held during the disputed period in the pending suit, upon which the applicant was at liberty to apply before the Board for appropriate directions in terms of section 167 of the Act.

4. Refusal of interim injunction in suit for declaration of appointment of managing director as illegal but direction to convene general body meeting, not proper

James Frederick & Anr. vs. Coromandel Indag. Products India Ltd. & Ors [(2008) 141 Comp. Cas 893 (Mad)].

The appellants and respondents were members of a family. The Second Respondent was inducted as managing director of the First Respondent Company by way of a family arrangement arrived at in 1995. The father and the elder son opposed the induction of the Second Respondent who was the second son. The mother and daughters supported the second respondent. The appellants filed a suit for declaration that the appointment and continuation of the Second Respondent as managing director or director of the First Respondent company was illegal, null and void and for permanent injunction restraining the Second Respondent from holding himself out or interfering with the affairs of the First Respondent company as managing director or director or in any other capacity and other relief.

In the suit, the judge, while finding that there was a prima facie case made out by the Appellant, taking into consideration the balance of convenience, refused to pass an order of interim injunction as sought but directed the Second Respondent to convene the annual general body meeting. The court, allowing the appeal finally, held that the judge should not have issued such direction as no such prayer was made by either of the parties. If the Second Respondent prima facie, was found to be not the managing director or director of the First Respondent company, he could not convene the general body meeting of the First Respondent company. The general body meeting could be convened only in accordance with the provisions of the Companies Act at the instance of one of the shareholders. The First Respondent company was functioning without an interim order ever since the filing of the suit no order of interim injunction could be granted. [Liberty was granted to eligible shareholders to take steps to convene the general body meeting with regard to election of managing director].

5. No protection to sick company against rectification of register u/s. 111/111A of the Companies Act, 1956

Vallur Mohammad Saheb vs. Golden Agro-tech Industries Ltd. & Ors. [(2008) 141 Comp Cas 906(CLB)].

The Petitioner had purchased 2,700 shares of Rs. 10 each of the First Respondent-company from the Third Respondent. On execution of the transfer deeds the Petitioner lodged the transfer deeds along with the original share certificates with the Second Respondent, the registrar and share transfer agent of the company, for transfer of shares in his favour, but no action was taken. The Petitioner approached the transferor, the Third Respondent, who entered into correspondence and submitted indemnity bond, fresh transfer deed for obtaining duplicate share certificates and transferring the shares in favour of the Petitioner. The Registrar of the Company assured in its communication 5-11-1997, addressed to the Third Respondent, that the issue of duplicate share certificates and transfer in favour of the Petitioner would take some time due to certain formalities, but failed to take any action in this regard. The Petitioner filed a petition before the Consumer Disputes Redressal Forum, which was dismissed on the ground that it had no jurisdiction to entertain the complaint. Thereafter, the Petitioner lodged a complaint with the Lok Adalat, which was dismissed as the parties failed to appear before it.

In a petition filed under section 111/111A of the Companies Act, 1956, the Petitioner sought a direction to the company and the registrar either to pay an amount of Rs. 1,38,560/- with future interest from the date of filing of the petition till the date of realization or to issue duplicate share certificates to the Petitioner. The company contended that (i) as the company was registered with the Board for Industrial and Financial Reconstruction, the petition was not maintainable in view of section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as SICA); and (ii) it was not aware of the transaction that had taken place between the Third Respondent and the Petitioner as the Petitioner had directly purchased the shares from the Third Respondent and the Registrar of the company was entitled to deal with issuance and transfer of shares by the company.

The Court held that though the company was reportedly a sick company, it could not take protection u/s. 22 of SICA, as the ban embodied u/s. 22 of the Act did not extend to any direction, which may be issued by the Company Law Board u/s. 111/111A of the Companies Act, 1956, for rectification of the register of members of the company.

Further, the Court held that the company being the principal of the Second Respondent could not escape its responsibility on account of the inaction of the Second Respondent who was its agent. The documents enclosed with the petition clearly indicated that the Third Respondent had sold the shares to the Petitioner and even corresponded with the Second Respondent to transfer the shares in favour of the Petitioner after issue of duplicate share certificates. The events established that the title to the shares in question belonged to the Petitioner. The Court directed the company to rectify its register of members by substituting the name of the Third Respondent with the Petitioner’s name and consequently issue fresh share certificates to the Petitioner within 30 days of the order.

6. Overriding preferential pay-ments: Secured creditors not entitled to interim payment before adjudication of claims by liquidator

IFCI Ltd. & Ors. vs. A.P. Scooters Ltd. (In Liquidation) [(2008) 141 Comp Cas 911 (AP)]

The Respondent company was ordered to be wound up and the official liquidator took possession of the assets from the receiver. Pursuant to the order of the court, the official liquidator sold the assets of the company in liquidation.

On an application by the secured creditors for interim payment, the court passed an order directing on payment of Rs. 561.50 lakhs to all the secured creditors. Again on an application for disbursement of at least fifty per cent pending adjudication of claims by the official liquidator, the court dismissed the application and directed the official liquidator to complete the adjudication. However, once again an application was filed.

The Court observed that immediately after realisation of the assets by sale of the properties of the company in liquidation by the official liquidator, the practice of the company court is to permit the official liquidator to make interim payment to the secured creditors. The reason for the court to allow such interim payment is that by paying at least a part of the loan amount to the secured creditors, the financial damage already done can be ameliorated to certain extent. However, the practice cannot ignore sections 529, 529A and 530 of the Act. Under sections 457 and 529A, the company court or the official liquidator has no power to make interim payment out of liquidation assets to the secured creditors even before claims of such secured creditors are adjudicated by the official liquidation in accordance with rules 159, 163 and 169 of the Companies (Court) Rules, 1959.

The Court, dismissing the application, held that no provision of law had been brought to its notice, which confers jurisdiction on the court to grant interim payment. Thus, the application was not maintainable A similar application filed by the applicants was already rejected by the court and hence, the application could not be entertained. Furthermore, the claims made by the secured creditors as well as the workers were under adjudication and in such a situation even if an interim order was passed in exercise of inherent jurisdiction, it would result in denying the right of workers to claim their dues and also render section 529A ineffective. Such an interpretation was neither permissible nor proper.