Other Laws

Company Law Update

1. Failure to register charge – Not entitled to payment in preference over other creditors

Rajasthan Financial Corporation vs. Jaipur Spinning and Weaving Mills Ltd. & Anr. (2006) 133 Comp. Cas. 1(SC)

Long after a winding up order was passed and the assets of the company in liquidation had been sold by the Liquidator, the Appellant, a State Financial Corporation, filed a claim with the Liquidator claiming to be a secured creditor. The official liquidator admitted the corporation as an ordinary creditor. The appellants, therefore, filed an appeal against the order of the Official Liquidator. The claim of the appellants to be treated as a secured creditors was dismissed on the ground that no charge in its favour was registered u/s. 125 of the Companies Act, 1956.

Their Lordships of the Supreme Court, affirming the decision of the Rajasthan High Court, dismissed the appeal of the appellant and held that the State Corporation not having resorted to the remedies for speedy recovery of loans available under the provisions of the Stock Financial Corporation Act, 1961, its application before the Official Liquidator would, by virtue of section 32(10) of the State Financial Corporations Act, 1951, be governed by the Companies Act, 1956. The Corporation cannot now get any preference over other creditors, in cases like the present.

2. Director’s liability – Individual liability to be proved to make director liable

Krishan Kumar Bangur vs. Director General of Foreign Trade [(2006) 133 Comp. Cas. 83 (Del)].

A company, M/s. Hastings Mill, had obtained an export licence, one of the conditions of which was that it would make exports of a certain stipulated quantity. On failure to perform its export obligations, the Respondent issued notice u/s. 14 for action u/ss. 8 and 11 of the Foreign Trade (Development and Regulation) Act, 1992 to the company as well as its directors. The respondent came to the conclusion that as the company had not fulfilled the export obligation, it had violated the conditions of the advance licence issued to it as well as the provisions of export import policy and therefore, penalty was imposed on the company as well as the directors. However, the reasons for arriving at the conclusion that the petitioner as a director has personally become liable for such action had not been adumberated. On appeal, the petitioner contended that he was not a whole time director and had nothing to do with the day-to-day working of the company. However, the appeal was dismissed on the ground that the Petitioner was a director in the company on the date of issue of the licence and remained in position till expiry of the export obligations undertaken against the licence. The import of capital goods imported duty free involved huge Government revenue, hence this becomes the responsibility of the directors also to complete the obligation of the licence taken by the company.

Their Lordships of the Delhi High Court held that section 5 of the Companies Act, 1956 was not applicable as it deals with defaults under the Companies Act and not in any other statute. There was no specific finding in the original order as well as in the appellate order that the petitioner was a whole time director, the respondent ought to have dealt with this point. In order to sustain the imposition of a punishment on an individual director it was incumbent on the respondents to allege and assert the existence of a duty or obligation cast on one or all the directors of the defaulting company and the failure to fulfil it. The show cause notice did not mention the grounds on which individual liability was sought to be fastened on the director. Neither of the orders, i.e., the original order or the appellate order, disclosed the reasons which had persuaded those authorities to come to the conclusion that the petitioner had assumed an obligation or duty in ensuring the exports corresponding to four times the CIF value would be undertaken within the prescribed period. Therefore the order was liable to set aside.

3. Doctrine of Election of remedies is not applicable where two different remedies are provided for two different reliefs

Bank of Nova Scotia vs. RPG Transmission Ltd. [(2006) 133 Comp. Cases 172 (Del))]

The appellant filed a company petition under the provisions of sections 433, 434 and 439 of the Companies Act, praying for winding up of the respondent company on the ground that it has become insolvent and that it is unable to pay its debt. The appellant had also instituted a recovery proceeding under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred as the “RDB Act”). The said proceeding before the Debts Recovery Tribunal was instituted by the appellant prior to the filing of the winding up petition.

The company judge vide his orders dated 31-10-2002 dismissed the petition of the appellant for the reason that the petitioner had already chosen a forum of recovery; i.e., before the Debts Recovery Tribunal and therefore, the petition for winding up cannot be entertained. Being aggrieved the appellant filed an appeal before the High Court.

Their Lordships of the Delhi High Court held that the intention and the purpose of initiating a proceeding under the RDB Act is to recover the amount which is allegedly due and payable to the bank or financial institution whereas the purpose of invoking the provisions of sections 433 and 434 of the Companies Act, 1956 is to wind up a company on the ground that it has become commercially insolvent. The intention and purpose of instituting the two proceedings are, therefore, distinctly separate and not identical. The jurisdiction of the Tribunal under the RDB Act is to adjudicate the liability of the debtor during the course of which it is ascertained what debt is due to the bank or financial institution and after ascertainment of the liability to issue a certificate of recovery thereof, which jurisdiction is not vested on the company court. The winding up proceeding is initiated with the intention of declaring a particular company commercially insolvent and to see that such insolvent company is wound up in the interest of the general public.

Since, there is no inconsistency between the two Acts and the provisions for winding up and the provisions for recovery are two distinct remedies and procedures mutually exclusive of each other, there is no reason why a financial institution or a bank should be deprived of invoking the remedy of institution of proceedings for winding up a company in respect of which it has also instituted a recovery proceeding under the provisions of the RDB Act.

4. Reduction of rate of interest awarded by arbitrator by High Court for pendente lite and post award period not proper

Manarlal Prabhudayal vs. Oriental Insurance Co. Ltd. [(2006) 133 comp. Case 247 (SC)].

The appellant firm had taken a policy of insurance with the respondent insurance company, in respect of its shop. The insurance coverage was to the tune of Rs.1,50,000/-. When in March 1991, the shop was looted and destroyed during riots, the appellant lodged a claim with the insurance company for a sum of Rs.1,93,075/- with interest @ 12% p.a. The insurance company offered a sum of Rs.50,425/- as assessed by its surveyor but the appellant did not accept it and referred the matter to arbitration by notice dated 19-9-1995, appointing an arbitrator. The arbitrator passed an award on 13-6-1999, directing the insurance company to pay to the appellant the sum of Rs. 1,50,000/- with interest at the rate of 12% p.a. from the date of claim till the date of payment. The civil court made the award a rule of court rejecting the insurance company’s application for setting aside the award.

On appeal by the insurance company, the Orissa High Court modified the award, during payment of interest at 12% p.a. for the pre-reference period, but at 6% p.a. for the period pendent lite and thereafter till payment.

Their Lordships of the Apex Court, reversing the decision of the High Court, held that the direction of the arbitrator could not be termed arbitrary or unreasonable and when the trial court not having found any infirmity in it, affirmed it, it ought not to have been interfered with by the High Court.

5. Dues of Government company governed by the Companies Act

Kerala State Financial Enterprises Ltd. vs. Official Liquidator, High Court of Kerala [(2006) 133 Comp Cas 915 (SC)]

The appellant company was a government company engaged in conduct of chits. A company had jointly with its sister concern, taken a loan from the appellant company against mortgage of property, but had failed to repay it. The appellant took proceedings under the Revenue Recovery Act, 1968 against the company and obtained an order of attachment of the properties on 1-9-1999.

In the meanwhile, the company went into liquidation, a provisional liquidator was appointed and the appellant was informed. The appellant thereupon filed an application before the court in the company proceedings seeking leave to proceed with the sale of the properties, which the company objected to on the premise that the charge in respect of the debt was not registered with the Registrar and, thus, it was an unsecured creditor. The single judge rejected the application of the appellant for leave to proceed with the revenue recovery proceedings. An appeal against the said order of the single judge was dismissed by a Division Bench of the High Court.

Their Lordships of the Supreme Court, dismissing the appeal, held that u/s. 125 of the Companies Act if a charge is not registered, the same would be void against the liquidator or creditors. An attachment itself does not create any charge in the property. By reason of attachment, no decree is passed. The appellant was a Government company. Its dues were not Government dues. The provisions of the Kerala Revenue Recovery Act might have been made applicable, but only by reason thereof, the dues of a Government company would not become the dues of the Government within the meaning of sub-section (2) of section 537 of the Companies Act. The High Court had not committed any error in refusing to exercise its discretionary jurisdiction under section 446 of the Companies Act.

6. Powers of Board of Directors to ratify – Section 291

Maharashtra State Mining Corpn. vs. Sunil [(2006) 70 SCL 351 (SC)]

The appellant corporation’s managing director terminated the services of the respondent on 25-11-1991 for various misconducts committed by him. The respondent filed a writ petition challenging the said dismissal order on the ground that the Managing Director had no authority to do so since the same was vested in the appellant’s board of directors. While the said petition was pending, the Board of Directors passed a resolution ratifying the managing director’s impugned action. The High Court, however, while setting aside the impugned termination order, allowed respondent’s writ petition. The appellant appealed to the Supreme Court.

Their Lordships of the Supreme Court held that the High Court was right when it held that an act by a legally incompetent authority is invalid. But it was entirely wrong in holding that such an invalid act cannot be subsequently rectified by ratification of the competent authority. Ratification, by definition, means making valid an act already done. The principle is derived from the Latin maxim ‘rati habitio mandato aequiparatur‘, namely, ‘a subsequent‘ ratification of an act is equivalent to a prior authority to perform such act. Therefore, ratification assumes an invalid act, which is retrospectively validated. In the instant case, the Board of Directors on 20-2-1991 ratified the order of the Managing Director whereby the respondent had been dismissed from service. The board of directors unquestionably had the power to terminate the services of the respondent. Therefore, such ratification related back to the date of the order and validated it. Therefore, the instant appeal is allowed, the impugned order of the High Court is quashed and the dismissal order dated 25-11-1991 is upheld.

7. Machineries leased under Hire Purchase agreement – Suit for repossession of machinery not barred by virtue of section 22(1) of SICA

Elgi Finance Ltd. vs. Essrope Mills Ltd. [(2006) 70 SCL 308 (Mad)].

The petitioner company, engaged in the business of finance and hire purchase, leasing, leased out some machineries to the respondent company under Hire Purchase agreement. The Respondent, however, committed defaults in repaying the monthly instalments thereof and Petitioner to repossess the plant and machineries was also opposed and objected to by the respondent. Consequently, the petitioner filed a suit for permanent injunction restraining the respondent from creating any obstruction in the petitioner’s way to get back repossession of those machineries. On interim application of the Respondent, however, the trial court stayed the Petitioner’s said suit in view of section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 pending disposal of its case before the BIFR.

On a petition filed in the High Court, His Lordship of the Madras High Court observed that section 22(1) of the Act makes it very clear that when enquiry under section 16 is pending or any scheme under section 17 is under consideration or a sanctioned scheme is under implementation or an appeal u/s 25 is pending, then no proceedings (1) for winding up of the industrial company or (2) execution, distress on the like against any of the properties of the company or (3) for the appoints out of a receives in respect thereof or (4) no suit for the recovery of money or (5) for the enforcement of any security against the company and (6) or of any guarantee in respect of any loans or advances granted to the company, shall lie or be proceeded with, except with the consent of the board or the appellant authority.

It was held that the suit filed by the petitioner was not for winding up or for execution, distress or the like against any of the properties of the respondent company. The properties, namely, the machineries were still the properties of the petitioner and the payer in the suit was only for mere injunction restraining the respondent from obstructing the repossession of the machineries from the premises of the respondent. No relief by the petitioner had been sought for the recovery of the money or for the enforcement of any security and in such circumstances section 22(1) of the Act would not apply in the facts of the instant case, the order of the Civil Court staying the suit proceedings were held to be erroneous and liable to be set aside.