I. Where ingredients of offence punishable u/s. 108-I of Companies Act, 1956 not made out in complaint, magistrate taking cognizance is an abuse of process of court

P.M. Padmanabhan & Ors. vs. K.P. Sethumadhavan & Anr. [(2007) 140 Comp Cas 536 (Ker)].

The company had paid–up capital of Rs. 1,00,000/-. As per an important change brought about by the Companies (Amendment) Act, 2000, every public limited company was bound to increase its paid-up capital up to Rs. 5,00,000/- within a period of two years. Accordingly, the company received a direction from the Central Government to enhance its share from Rs.1,00,000/- to Rs. 5,00,000/- within a period of two years. A complaint was made by the erstwhile director of the company; i.e., the Respondent against the Petitioners for violating the provisions of section 108A of the Companies Act, 1956. The complainant alleged that soon after the expiry of the period, without giving an opportunity to the existing shareholders to subscribe to the new share capital a special resolution under section 81(1)(a) of the Act was passed. The Petitioners were functioning as a group within the board of directors by trying to oust the other directors and shareholders thereby reducing the company to their fold. Based on the complaint cognizance was taken of an offence punishable u/s. 108-I of the Companies Act, 1956. The Petitioners filed a petition u/s. 482 of the Code of Criminal Procedure, 1973, seeking the quashing of the complaint.

The Court observed that in order to attract section 108A of the Act, the company has to be a “dominant undertaking” in view of section 108G of the Act. The expressions “group”, “same management”, “financial institutions”, “dominant undertaking” and “owner” used in section 108A and section 108G shall have the same meanings as the same expressions occurring in the Monopolies and Restrictive Trade Practices Act, 1969, in view of section 108H of the Companies Act. A dominant undertaking is one which produces, supplies, distributes or otherwise controls not less than one-fourth of the total goods that are produced, supplied or distributed in India or any substantial part thereof. Unless the company is a “dominant undertaking”, section 108A has no application. The MRTP Act was a legislation meant to provide an economic system which does not result in concentration of economic power to the common detriment and for the control of monopolies and for the prohibition of monopolistic and restrictive trade practices and for matters connected therewith.

The Court held that the annual general meeting was convened after giving 15 days’ statutory notice to all the shareholders including the complainant u/s. 81(1)(a) of the Act. Out of the three resolutions that were passed, one was for increasing the authorized capital and accordingly fresh allotments were made on the strength of the special resolution passed u/s. 81(1A) of the Act in the name of 20 shareholders. Twelve of the allottees were shareholders entitled to proportionate shares u/s. 81 of the Act. The Petitioners along with one M. Rasheed and eight others held 25.5% of the shares and were entitled to acquire 25.5% of the new shares. The company had complied with all the necessary statutory procedures and formalities required under the Act for the passing of the resolution to amend the Memorandum of Association and the articles of Association required under section 81(1A) of the Act. The complaint being silent about the offence falling under the definition of “dominant undertaking” within the meaning of the MRTP Act and the essential ingredients to attract the offence punishable u/s. 108-I of the Companies Act not having brought out in the complaint, the magistrate could not have taken cognizance of the offence. When the complaint itself did not disclose the ingredients of the offence, continuance of the proceedings would be an abuse of the process of the court. Under the circumstances it was not correct to state that the Petitioners could seek a discharge at the appropriate stage or an acquittal after trial. The cognizance taken by the Magistrate was to be quashed.

II. Appeal filed by a public sector company will not become invalid due to its privatisation

Ashok Kumar Gupta & Ors [(2007) 140 Comp Cas 610 (Cal)].

The Respondent company was referred to the Board for Industrial and Financial Reconstruction and a scheme of rehabilitation was sanctioned by the Board. When the scheme of rehabilitation sanctioned by the Board failed, the Government of India effected disinvestments by transferring its shares to a private party. The transfer of shares in favour of the private party was challenged and pending before the Supreme Court. In an appeal being a continuation of the writ proceeding, the appellants; i.e., voluntarily retired employees of the Respondent company, prayed for re-computation of the voluntary retirement scheme benefits in view of revision of pay scales introduced pursuant to the policy decision of the Government of India. The Respondent company challenged the maintainability of the appeal on the ground that the company had ceased to be a Government company within the meaning of Article 12 of the Constitution of India in view of privatization of the company.

The Court allowed the appeal and held that the Respondent company was a public sector company enterprise on the date of filing of the appeal and therefore, the appeal could not become invalid on account of privatization of the company. Further, as the Government of India had permitted the transfer of shares of the Respondent company during the pendency of the appeal, it could not avoid its responsibility to protect the rights of the employees to enjoy the benefits on the basis of the earlier circulars or orders issued by the competent authority of the Government of India.

III. Winding up cannot be ordered where debtor-creditor Jural relationship established but quantum of debt not admitted

Juneja Chemical Industries P. Ltd. vs. Alam Tannery P. Ltd [(2007) 140 Comp. Cas 833 (Cal)]

The Petitioner company was a supplier of various chemicals to the Respondent company. The Petitioner issued a statutory notice indicating that there was routine transaction of orders being placed and supplies accompanied by bills therefore being made to the company and also mentioning the amount due to it, which had been admitted by the company. In reply to the statutory notice issued by the Petitioner, the company asserted that the parties had entered into 13 high seas sale agreements with regard to leather chemicals and claimed a certain amount which had been paid to the custom authorities towards custom duty because of diversion of goods by the Petitioner to other parties and the company had also claimed a certain amount, thereafter the company instituted a suit in support of the claim. The company denied that it had admitted a certain amount due to be payable to the Petitioner and that there was any business carried on by and between them after the company became aware of the fraudulent activities of the Petitioner.

In a winding up petition, the Petitioner contended that it was evident from the cheques issued by the company requesting it to present the cheque only after the company could arrange for funds in its bank account that it had unequivocally admitted its liability and the company was impecunious and attempting to throw a cloak over its inability to pay the amounts due to the Petitioner.

The Court observed that in a winding up petition not only the failure indebtedness should be affirmatively established, but the quantum of debt also should be quantified. If indebtedness of the company is apparent as to a part of the claim, the company court may receive such part of the Petitioner’s claim that is free from doubt and require the other undetermined part to be established elsewhere. Despite the company conveying the overwhelming sense of being a debtor in its letter dated 3-6-2004, substantial part of the company’s defence in response to the statutory notice being thereby discredited, the Petitioner had failed to quantify such part of its claim that could be said to be free from doubt. The cheques issued for Rs. 57 lakhs could have gone some distance to pin the company down as to the quantum of its unimpeachable debt, but the company’s charge against the Petitioner of having sold goods to others in its letter dated 3-6-2004 would rob the sanctity of the amount covered by the cheques issued by it as being the sum admittedly due. As the Petitioner had disputed the charge framed by the company and the charge being reflected, there was a dispute that needed to be adjudicated upon. It would be hazardous to accept the sum covered by the cheques issued by the company to be the quantum of the company’s indebtedness. Despite the debtor-creditor jural relationship established by the company’s letter dated 3-6-2004, there was no admission of the quantum of debt. Therefore, the Petitioner’s claim was disputable.

There is a good reason for the company court to require the quantum of indebtedness to be established before it permits a creditor’s petition for winding up to proceed. Firstly, even though the floor limit set by the provision of the Companies Act is a meagre amount of Rs. 500/-, it would be unfair to subject a functioning company to the consequences of a winding up petition being admitted merely on the company judge’s subjective assessment of the quantum of debt being in excess of Rs. 500/-. Secondly, it is open to a company to secure a claim and such option presupposes an amount being determined. Thirdly, in the practice followed by the Court where a winding up petition is considered at two stages, the usual order passed is one permitting the company to pay or secure the amount, prima facie found due, so that advertisements do not ensue and the matter does progress to the second and more prejudicial stage. If the company judge is unable to ascertain the sum that is due to the Petitioner, albeit prima facie, then no condition for avoiding publication of advertisements can be set.

In view of the aforesaid the Court relegated the claim of the Petitioner to a suit and permanently stayed the Petition.

IV. Fresh petition on the same cause of action maintainable where earlier petition neither registered nor adjudicated on merits

Duroflex Ltd. vs. Johnny Mathew [(2007) 140 Comp Cas 903 (CLB)]

In a petition filed by Johnny Mathew under sections 397 and 398 of the Companies Act, 1956 alleging acts of oppression and mismanagement in the affairs of the applicant company, the company filed an application challenging the maintainability of the petition on the ground of res judicata. The Company Law Board vide its order dated 24-2-2004 (Duroflex Ltd. vs. Johnny Mathew – 125 Comp Cas 845) held that the petition was maintainable and directed the parties to file counter affidavit for further consideration. Upon an appeal filed by the company, the High Court upheld the findings of the Board that the main company petition was not barred by the principles of res judicata and remanded the matter for consideration of the issue whether the Respondent was estopped from filing the company petition for the reason that the first company petition was withdrawn without reserving the right to file a fresh petition on the same cause of action in the light of the principles of Order 23, rule 1 of the Code of Civil Procedure.

By virtue of Order 23, rule 1 of the Code of Civil Procedure, 1908, the court is empowered to allow the plaintiff at any point of time to withdraw his suit unconditionally or to withdraw from the suit on the fulfilment of certain conditions. The underlying object of the rule is not allow a litigant the opportunity to commence the trial afresh after he has failed to conduct the suit with due care and diligence and prove his case. Sub-rule (3) contemplates withdrawal from the suit with liberty to file a fresh suit, in which case the plaintiff must seek leave and make out a case within sub-clause (a) or (b) of sub-rule (3). The principle under Order 23, rule 1(3) is founded on public policy in order to prevent institution of a suit again and again on the same cause of action and to discourage vexatious litigations.

The Court held that the Respondent’s brother had filed a petition in August 2000, alleging oppression and mismanagement in the affairs of the company, which came to be amicably settled in terms of an order made on
13-7-2001 and subsequent dates, in order to give effect to the terms of settlement between the parties. Meanwhile, the Respondent’s application to implead himself to redress his grievances in the affairs of the company was not entertained on account of resistance by the company. Thereafter, the Respondent withdrew the first company petition in September, 2002, through his power of attorney holder invoking the jurisdiction of the Board under sections 378 and 379 of the Act, with a view to bringing to an end the acts complained of in the affairs of the company. The company raised a preliminary objection that no company petition could be filed through his attorney, compelling the Respondent to file a memo dated 18-9-2002, seeking permission to withdraw the company petition filed under sections 397 and 398. The sequence of events showed that the first company petition was neither registered in terms of the Company Law Board Regulations, 1991, nor adjudicated on the merits by the Board. At the same time, no leave was either sought or liberty granted to bring a fresh company petition on the same cause of action. It could not, therefore, be construed that the Respondent had abandoned his claim in respect of the subject-matter covered by the first company petition, in which case he could not be precluded from instituting a fresh petition.

Further, the first company petition filed through the power agent came to be withdrawn on mere technicalities even before it was registered. The company petition was filed after the first unnumbered petition was withdrawn by the Respondent. As the company did not raise any contention on the petition based on the principles governing Order 23, rule 1 of the Code of Civil Procedure, the defence based on this rule was deemed to have been waived by the company and therefore, it was not open to the company at this belated stage to question the maintainability of the present petition on the strength of Order 23, rule 1, of the Code of Civil Procedure. It could not further be said at this preliminary stage whether the Respondent was engaged in vexatious and bogus litigation.

V. Overriding preferential Payments: Whether provident funds organization entitled to recover money before settlement of dues of secured creditors and workmen

Non-obstante clause in subsequent law then the provision of the latter prevails over the earlier law Official Liquidator (Jiyajeerao Cotton Mills Ltd) (in liquidation) vs. Board for Industrial and Financial Reconstruction & Ors. [(2008) 141 Comp Cas 1 (MP)].

The company had closed down in the year 1992 and it came under liquidation from the year 1998. Up to the year 1998, the workers neither lodged their claim nor did the Employees’ Provident Funds organization assert its right to recover the contributions of the employees or of the employer by appropriate proceedings either under the Companies Act, 1956 or under the 1952 Act. The single judge directed the Official liquidator to deposit an amount of Rs. 6,45,40,834/- with the Employees’ Provident Funds organization and this was deposited by the Official Liquidator.

The Employees’ Provident Funds Commissioner contented that the provisions of section 11(2) of the Provident Funds Act, 1952 shall have an overriding effect over the provisions of the Companies Act, 1956, therefore, section 529A of the Companies Act would be sub serving section 11(2) of the Provident Funds Act.

The Court held that the Employees’ Provident Funds and Miscellaneous Act is of the year 1952 while the Companies Act is of the year 1956. If one Act fixes the priorities and rights of the parties to some extent or makes it absolute then such provisions of the Act would be applicable but if another Act comes into force or operation subsequently and the later Act starts with a non obstante clause that that “notwithstanding anything contained in any other law for the time being in force” then the provisions of the subsequent law would override the first law. The Companies Act being an Act of 1956 would even otherwise have an overriding effect over the provisions of the Employees’ Provident Fund and Miscellaneous Act, 1952.

Further, the Court held that section 529A of the Companies Act, 1956 deals with overriding preferential payments and treats the dues of the workmen and debts due to the secured creditors at par. Before entering into any other controversy the company court is obliged to see as to whether the amounts already paid or proposed to be paid to the workmen would stand pari passu with the rights of the secured creditors. The right to recover money is conferred upon the workmen and also on the secured creditors. The amount is to be distributed pari passu. After the claims of the secured creditors and workmen are satisfied the balance money shall be paid in accordance with section 530 of the Companies Act, 1956. (see the decision in the case of Regional Provident Fund Commissioner vs. Official Liquidator, High Court, Calcutta [(2007) 140 Comp Cas 237 (Cal)] wherein it is held workmen’s dues stand in priority over dues of other employees interpreting sections 529, 529A and 530 of the Companies Act). The single judge did not see as to whether the payment of amount of Rs. 6,45,40,834/- would still be under the provisions of section 529A, whether it would come beyond the pari passu claim of the workmen and whether the Department still would be entitled to recover the money before settlement of the dues of the secured creditors so also of the workmen.

Thus, the order of the single judge was set aside. As a consequence, the Employees’ Provident Funds Commissioner was directed to deposit back the amount of Rs. 6,45,40,834/- with the Official Liquidator.

VI. Contractual Liability is different from tortuous liability: Suit for damages on account of defamation not barred u/s. 22(1) of the SICA

Andhra Printers Ltd. vs. Arjun Rao & Anr. [(2008) 141 Comp Cas 7 (AP)]

The Respondents filed a suit against the Petitioner company claiming damages of a sum of Rs. 1,01,000/- for libel. It was pleaded that in a daily newspaper published by the Petitioner, certain derogatory and defamatory remarks about the Respondents were published. The Petitioner filed an interlocutory application u/s. 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, with the trial court dismissed the application.

On a civil revision petition filed by the Petitioners, the Court dismissing the petition, held that the suit filed against the Petitioners arose out of tortuous liability. The breach of contract gave rise to entitlement to recover liquidated damages or other consequences, agreed by the parties. On the other hand, a tort, if committed, enables a wronged person to seek redressal of his rights. The quantification of damages in such cases is only a measure of retribution of the wrong in terms of money, not a payment of any liquidated sum. Contractual liability is different from tortuous liability. When contractual obligations, under a lease agreement or a negotiable instrument are kept outside the protective umbrella of section 22(1) of the Act, the suit filed by an individual against a sick industrial company for damages on account of defamation could not be treated as barred under the provisions of the Act.

VII. Proceedings u/s. 542 & 543 not to be initiated against ex-director where allegations of misfeasance and non-feasance were general without pinpointing specific act of dishonesty and misappropriation.

Official Liquidator, High Court, Madras vs. Gautham Dhiraj Mal Ranka and Ors. [(2008)] 141 Comp Cas 129 (Mad)]
An application was filed to examine the conduct of the Respondents, ex-directors of the company in liquidation, in terms of sections 542 and 543(1)(a) of the Companies Act, 1956 and order that they were jointly and severally liable to contribute to the assets of the company in liquidation by way of compensation for the loss caused by them to the company in liquidation and the future claims from the creditors with interest. The Respondents submitted that the application had to be rejected as there was no specific allegation against the directors of dishonesty, misappropriation of funds and thereby illegally enriching themselves; the allegations levelled were general in nature and in such circumstances, sections 542 & 543 could not be invoked; even on the merits the ex-directors could not be personally held liable as in spite of their best management, the company went into liquidation.

The Court, dismissing the application, held that the report of the Official Liquidator showed that the allegations of misfeasance and non-feasance were general in nature without pinpointing a specific act of dishonesty and misappropriation on the part of the individual ex-director. Therefore, proceedings in terms of sections 542 & 543 against the ex-directors could not be proceeded with, as the report of the Official Liquidator was found wanting with regard to material particulars and specific acts of commission and omissions which were a must to proceed against the ex-directors under sections 542 & 543 of the Companies Act, 1956.

VIII. Winding up remedy not available in existence of bona fide dispute

ICICI Lombard General Insurance Co. vs. AFL P. Ltd. [(2008) 141 Comp Cas 188 (Bom)]

A company, Hitachi Home and Life Solutions (India) Ltd. entrusted a consignment of air-conditioning systems for transportation to the Respondent company, a carrier of goods which were insured by the company, under a policy of insurance with the Petitioner, an insurance company. The company claimed a certain amount under the insurance cover provided by the insurance company on account of loss suffered by the consignor which was paid by the company. The insurance company was subrogated to the rights and remedies of the insured under the policy of insurance according to the declaration executed by the company, in favour of the insurance company. The insurance company, presented a winding up petition under sections 433 & 434 of the Companies Act, 1956 on the ground of inability to pay its debts despite issue of statutory notice to the Respondent to pay the outstanding dues with further interest. The carrier company contested the maintainability of the winding up petition on the ground that the negligence of the carrier could be proved in a civil suit and that there was neither a debt due nor any ascertained liability. It raised an objection that the claim of the insurance company was on the basis of subrogation. The insurance company submitted that in a suit for loss, damage and non-delivery of goods, against a common carrier it was not necessary for the plaintiff to prove that such loss, damage or non-delivery of goods was due to the negligence or a criminal act of the carrier, his servants or agents under the provisions of the Carrier’s Act, 1865.

The Court dismissed the petition and held that a winding up petition under sections 433 and 434 of the Companies Act, 1956 could be entertained where there was a debt due or an ascertained liability. Unless the negligence of the carrier stands established in accordance with the provisions of sections 8 and 9 of the Carrier’s Act, 1865 there was no occasion for a debt being due as there was no ascertained liability. The question as to the establishment of negligence on the part of the carrier necessitated adjudication on the basis of evidence recorded at the trial of a civil suit. The report of a surveyor had to be tested on the anvil of evidentiary principles when evidence was addressed in a suit for recovery. The report of a surveyor did not ipso facto establish a debt due and payable and the remedy of winding up was clearly not available when there was a bona fide dispute. The ascertainment of liability and the quantification of damages were issues on which evidence had to be adduced at the trial of a civil suit and a finding of fact had to be recorded. Further, the Court held that the objection of the Respondent that the claim of the Petitioner was on the basis of subrogation could not be considered in view of the conclusion arrived at by the Court that the winding up Petition was even otherwise not maintainable.

IX. Company Court directing revaluation and re-advertisement without cancelling previous bid and inviting fresh tenders on ground of rise in price, not proper

Vishnu Kant Gupta vs. Official Liquidator, High Court of Allahabad and Ors [(2008) 141 Comp. Cas 249 (All).

The company known as Champaran Sugar Co. Ltd. went into liquidation on the recommendation of the BIFR. In the winding up proceedings, the High Court invited separate tenders for sale of two factories; i.e., Barachakia unit and Chanpatia unit of the company in liquidation. The appellant’s bid was accepted for Barachakia unit and six months' time was granted for payment of sale consideration on deposit of the first installment within three months from the date of bid. On appeal by two companies, the order accepting the bid of the appellant was stayed initially and subsequently the appeals were dismissed for non-prosecution. In the meantime, the appellant deposited part of the sale consideration and offered to pay the remaining amount within three days.

Upon three other companies offering to pay more than the amount offered by the appellant, the company judge ordered re-valuation and the re-advertisement inviting fresh tenders for sale of the Barachakia unit by depositing a certain amount before participating in the bid.

On appeal, the appellant contended that (a) re-advertisement could not be ordered without cancelling the bid of the appellant and without issuing show cause notice against proposed cancellation (b) there was no default in payment on the part of the appellant and (c) mere rise in price during the pendency of the case was not a ground for cancellation.

The Court observed that unless the acceptance of a bid was cancelled, the question of re-valuation or re-advertising would not arise. The acceptance of bid by the Court is in a way equivalent to an agreement for sale. After acceptance of the bid, if the successful bidder fulfils his obligation, the bid acceptance order carried with it an assurance that the Court could execute or direct execution of the sale deed or sale certificate. Legally no sale to a third party and morally no negotiation with a third party can be made by the Vendor during the subsistence of his obligation to the original promisee under the agreement for sale.

The Court allowing the petition held that there was no good ground for cancelling the accepted bid and consequently there was no occasion to revalue or re-advertise the property. The fact that somebody made a higher offer after six years was not sufficient in the absence of such reservation of power in the terms and conditions of sale to warrant cancellation of the appellant’s bid. Further, the departure from the original payment schedule, in making the deposit of sale consideration was not because of any fault on the part of the appellant but because of the stay orders passed in special appeals which remained pending for almost six years. The short delay between the dismissal of the special appeals and the deposits was also not sufficient for cancelling the appellant’s bid and the delay could be compensated by ordering the appellant to pay interest at the rate of 10% per annum from the date on which the special appeals were dismissed till the date on which the order was passed and thereafter pursuant to the order. Interest would cease to be payable on any part of the amount deposited as from the date of the deposit. The period after February 12, 2007, was excluded from interest liability because non-deposit after that date would be attributable to the order under challenge and would not be attributable to the Appellant.