1. Company Court has no jurisdiction to try offence relating to restriction on acquisition of shares

K. Sreenivasa Rao vs. H. Gangadhar & Ors. [(2007) 138 Comp Cas 555 (AP)]

The Appellants filed petitions before the Company Court u/s 108A of the Companies Act, 1956 alleging that the Respondents had violated the provisions contained in section 108A, which imposed restrictions on acquisition of certain shares. Thus, an offence had been committed by the Respondents in terms of section 108-I and they
could be punished. The Company Court relegated the Appellants to the Magistrates’ Court.

On appeal, the Division Bench of the Andhra Pradesh High Court held that "Court" is defined u/s 2(11) of the Companies Act as a Company Court having jurisdiction under the Act with respect to matters relating to the company as provided u/s 10 of the Act, but it excludes such "Court" from having jurisdiction with respect to offences against the Act. Thus u/ss. 2(11) and 622 of the Act, any offence committed under the Act or against the provisions of the Act had to be tried by a Presidency Magistrate or a Magistrate of First Class. The company judge did not pass any orders, which needs intervention of this Court. Hence, appeals are dismissed.

2. Section 633 of the Companies Act cannot be resorted to for relief from criminal liability under Indian Penal Code, 160

Aapka Bazar Ltd. (In Liquidation), In re [(2007) 138 Comp. Cas 712 (Raj)].

The company was originally incorporated as a private limited company, however, subsequently, it was converted into a public company. Upon initiation by the company for franchise from shop owners for running the business of or chain of super market shops, agreements for franchise were executed by several applicants. Some of the franchises failed to comply with the terms and conditions of the agreement which led to a standstill in the rotation of money lending to stoppage of further supply of goods for sale. As a result of which as many as 25 complaints were registered against the company for the offences under sections 420, 406 and 120B of the Indian Penal Code, 1860 and the books and records of the registered office of the company were seized by the police authorities. In the meanwhile, the company was wound up. The applicants its directors on the date of winding up order, filed an application u/s 633 (2) of the Companies Act, 1956 apprehending legal action being initiated u/s 454 of the Companies Act, against them by the official liquidator for failure to submit the statement of affairs.

The Court held that the applicants in the garb of an application u/s 633 of the Companies Act, were seeking anticipatory bail. Section 633 could not be resorted to for the liability under the Indian Penal Code, 1860. The Court followed the decision in the case of Rabindra Chamaria vs. Registrar of Companies [(1992) 73 Comp. Cas 257 (SC)] wherein it was held that section 633 has no application in respect of any liability under any other Act.

3. Director can exercise power of reference to BIFR even after appointment of Liquidator

Shreeji Concast Ltd. vs. Shreeji Oxygen P. Ltd. & Anr [(2007) 138 Comp Cas 717 (Guj)]

On a petition filed by the First Respondent against the applicant company u/ss. 433 and 434 of the Companies Act, 1956, the company was ordered to be wound up and the official liquidator was appointed. Subsequently, due to the overall market scenario becoming positive and future prospects of the company looking bright the company executed consent terms for full and final settlement of the entire outstanding liability due to the First Respondent. As the company had no other liabilities, it filed an application for recalling of the winding up order as well as for the restoration of the winding up petition.

The Official Liquidator inter alia, challenged the maintainability of the petition as well as well as recalling of the winding up order on the ground that the application is filed very late and no explanation is offered for occurrence of delay. Secondly, after the winding up order is passed, the applicant has no locus standi to file this application before this Court. It is only the Official Liquidator who represents the company after the winding up order is passed.

The Court, allowing the application held (i) that the Court had ample power under rules 6 and 9 of the Companies Court Rules, 1959 read with Order 47, rule 1 of the Code of Civil Procedure, 1908 to entertain a review petition if the circumstances so warrant, (ii) That a very strong and meritorious case should not be however out of the very threshold only on the technical ground of delay especially when the real interested party; i.e., the first respondent, had not raised any objection against condonation of delay and (iii) that in the case of Rishabh Agro Inds. Ltd. vs. P.N.B. Capital Services Ltd. [(2000) 101 Comp Cas 284 (SC)] wherein the Apex Court has negatived the contention that after the order of winding up and appointment of the Liquidator, the board of directors has no jurisdiction to move the BIFR by passing a resolution. In a winding up petition the liquidator is appointed to protect the assets of the company for the benefit of its creditors, secured and unsecured and others. It is not the function of the Official Liquidator to start the process of rehabilitation of the company under Sick Industrial Companies (Special Provision) Act, 1985. Despite the appointment of the Official Liquidator the Board of Directors continued to hold all residuary powers for the benefit of the company which includes the power to take steps for its rehabilitation. The Board of Directors are not in any way by any judicial order debarred from having recourse to the provisions of the SICA for the purposes of rehabilitation of the company. If there existed a power its exercise cannot be termed to be mala fide only because it was initiated after availing of the opportunity to make the payment of the amounts due and passing of the order winding up of the company.

In the present case the directors of the company had settled the dues of the creditors and were hopeful of the company’s future prospects. The company was not prevented by any statutory provision from approaching the court simply because the winding up order was passed. The company could not be restrained from approaching the Court for the purpose of recalling or reviewing the winding up order. No winding up petition was pending before the Court against the company in liquidation nor did any unsatisfied claim remain. Therefore, it was proper to recalling the winding up order.

4. Company Law Board has no jurisdiction to decide issues of forgery and manipulation of transfer entries

D. R. Talyarkhan vs. Transgene Biotek Ltd. & Anr. [[2007)] 138 Comp. Cas 727 (CLB)]

The Respondent company obtained a loan from the Petitioner against pledge of shares held in the name of the second Respondent, Managing Director of the company, and the Second Respondent lodged with the Petitioner the share certificates together with the duly executed transfer deeds by way of security. As the company failed to repay the loan in full, the Petitioner lodged the share certificates together with the instruments of transfer with the company for effecting the transfer in his name. The company allegedly effected the transfer in his name. The company allegedly effected the transfer in favour of the Petitioner and returned the original share certificates to the Petitioner through his representative Vinmar Capital Markets Ltd.

The Petitioner sold 1,000 shares from his total holding, delivered the share certificates and realised the sale proceeds. He lodged the 2,000 equity share certificates with the company for deleting the name of the second holder. The request was not acceded to by the company. The Petitioner sent 1,000 physical share certificates to his depository participant for dematerialisation, which were returned on the ground of discrepancy in the number of shares submitted for dematerialisation and the shares generated by the depository.

A legal notice was issued by the Petitioner calling upon the company to return the 2,000 shares already lodged in physical form duly registered and confirm dematerialisation of 1,000 shares sent to the depository. The company alleged that the Petitioner had played fraud by fabricating the transfer entries, rubber seal and register folio recorded on the reverse of the share certificates.

In a petition u/s 14A of the Companies Act, 1956, the Petitioner sought direction to the first Respondent company to rectify the register of members by entering the name of the Petitioner in respect of the equity shares. The company contended that it had already repaid the entire loan amount in a number of installments but the pledged shares were retained by the Petitioner under the premise of non payment of dues.

The Company Law Board observed that it is not bound to give any relief u/ss 111/111A of the Companies Act, 1956 if it finds that complicated questions of facts or law or disputes of a complicated nature or serious disputes relating to title are involved. Where the allegations are of forgery and fabrication of documents, which cannot be resolved by oral testimony or tested by cross examination they cannot be resolved on the strength of the averments made in affidavits, defeating the purpose and object of the summary procedure prescribed by section 111 or 111A of the Act. The proper course in such cases of complexity, necessitating investigation is to relegate the parties to a civil suit. The legal position is well-settled that the Company Law Board in exercise of its discretion would decide, on the facts of each case, whether to entertain a petition for rectification u/s 111A, despite seriously disputed controversies, or to relegate the parties to a civil suit.

The Company Law Board held that the Company had neither furnished the dates of repayment nor the names of the parties in whose presence the repayments were made. Other than the pleadings there was no other material placed evidencing discharge of the loan amount in full by the company. Further, there was variance in the number of share certificates, shares and transfer deeds lodged with the company for effecting transfer. And the issues of forgery and fraudulent manipulation of the transfer entries appearing in the share certificates were being adjudicated in a competent court of criminal jurisdiction and, therefore, unless and until the decision of the Court in the pending criminal proceedings was known, it would be premature to intervene at this stage. The matter could be decided on trial by evidence.

Thus, the Company Law Board relegated the parties to the Civil Court for resolving the controversies.

5. Provisions of Recovery of Debts Due to Banks and Financial Institution Act, 1993 has an overriding effect over Companies Act, 1956

Atiq Malik vs. State of Uttaranchal & Ors. [(2007) 139 Comp Cas. 355 (Uttaranchal)].

An advertisement was issued in the newspaper by the Recovery Officer attached to the Debts Recovery for sale of the industrial unit of a company for failure to repay the loan. The bid tendered by the Petitioner was accepted and on confirmation of the sale, a sale certificate in respect of the movable and immovable properties was issued and the receiver handed over possession to the Petitioner. Thereafter, the company was ordered to be wound up. In pursuance to the said winding up order, on request by the Official Liquidator for possession of the premises from the Petitioner, the District Magistrate passed an order restraining the Petitioner from alienating or dissipating the movable and immovable properties of the unit purchased by the Petitioner.

On a writ petition filed, the Court held that as per the provisions of section 34 of the Recovery of Debts Due to Banks and Financial Institution Act, 1993, which has an overriding effect over the provisions of the Companies Act, 1956, the District Magistrate cannot interfere with the property purchased by the Petitioner.

6. Sale for realization and distribution of assets of company on liquidation permissible after notice to Official Liquidator

Chaitra Fertilizers and Chemicals P. Ltd. vs. Manager, Karnataka State Financial Corporation & Anr. [(2007) 139 Comp Cas. 404 (Karn)]

M/s. Metallic Soaps & Chemicals P. Ltd. (hereinafter called "the company") obtained a loan from the Respondent, a State financial corporation, on the security of its assets by execution of the mortgage and hypothecation deeds. The company defaulted in repayment of the loan, hence the corporation took possession of the assets of the company on 25-4-1992 in terms of section 29 of the State Financial Corporations Act, 1951. The assets of the company were brought to sale by auction and the Appellant purchased it and executed an agreement of sale on 21-2-1994. The corporation handed over possession of the assets of the company to the appellant on the same day. By an application dated 28-10-1994, ordered to be wound up by an order dated 13-8-1993. The Official Liquidator sought the intervention of the company court to declare the transfer of assets void u/s. 537(1)(b) of the Companies Act, 1956, as no leave was obtained from the court u/s. 446 of the Companies Act.

The single judge declared the sale void and directed the appellant to hand over possession of the assets of the company to the Official Liquidator [see Official Liquidator, Metallic Soaps and Chemicals P. Ltd. (In Liquidation) vs. Manager, Karnataka State Financial Corporation (139 Comp Cas. 400, Karn.)].

On an appeal, the Division Bench of the Karnataka High Court setting aside the order of the single judge held, that the transfer of the assets had taken place under an agreement executed before the order of winding up, therefore it could not be invalidated by the company court. However, it was necessary that the Official Liquidator be associated in the completion of the transfer of assets in favour of the appellant, to ensure that the sale proceeds were distributed in terms of sections 529 and 529A of the Companies Act, 1956.