1. Protection u/s 283(2) of the Companies Act, 1956 available to director against disqualification till disposal of appeal against conviction and sentence for an offence involving moral turpitude

V. Ranga Rao & Ors. vs. P. Jaya Prasad Raja & Ors [(2007) 138 Comp. Cas 198 (A.P)]

In a petition to review the order directing Petitioners Nos. 1 & 2 and Respondents Nos. 1 and 2 as directors to attend the day-to-day affairs of the company jointly, the Petitioners contended that the first Respondent incurred disqualification, from being continued as a director of the company, in view of the conviction and sentence passed against him by the Court of Special Judge for Economic Offences at Hyderabad. Therefore, it was contended that the Respondent No. 1 be restrained from participating in the meetings or management of the company.

The Court observed that the Companies Act maintains a distinction and dichotomy as to the operation of disqualification at the time of appointment of an individual as director, on the one hand and vacation of office by an existing director, on the other hand as a result of the disqualification suffered, in either case. While section 274 of the Act governs the matter, at the time of appointment of an individual as director, section 283 gets attracted in the matter of attaching disqualification to a person who is already on the Board of Directors.

When an existing director of a company who is sentenced to undergo imprisonment for six months he incurs disqualification under clause (c) of section 283(1) such disqualification shall not take effect, initially for a period of 30 days from the date on which the director was sentenced. In case an appeal is preferred within that period, to an appellate forum, the disqualification shall not take effect till expiry of 7 days from the date on which the appeal was disposed of, irrespective of the fact whether the appellate forum had granted any order of stay or suspension.

If the disqualification is suffered by an individual before he is considered for appointment as director, he is completely precluded from being appointed. The fact whether an appeal is preferred by him, or whether the Court of appeal has suspended the conviction and sentence, or any of them would hardly be of any significance. The impact of such disqualification on the existing director is, however, substantially different. Section 283(2) awards protection till the remedy of appeal is exhausted by the director, who incurred such disqualification.

On the above reasoning the Court, dismissing the petition, held that though the First Respondent had been sentenced to imprisonment and incurred disqualification under sections 274(1)(d) and 283(1)(e) of the Act, he could not be compelled to vacate the office, in view of the protection awarded to him under section 283(2) of the Act, since he had preferred an appeal against the order of conviction and sentence.

2. Power to amalgamate or not given in Memorandum of Association – Amalgamation permissible under sections 391 & 393 of the Companies Act, 1956

RBR Knit Process P. Ltd. In re, [(2007) 138 Comp Cas 176 (Mad)]

In petition filed under sections 391 & 394 of the Companies Act, 1956, the transferor company, a wholly owned subsidiary of transferee company, sought sanction of the scheme of amalgamation. The Regional Director raised objections to the effect that (a) the authorized capital of the company was a notional limit up to which the company could increase its paid-up capital, thereby it would not come within the purview of transfer of liabilities under the scheme and if the transferee company increased its authorized capital, it had to comply with the provisions of sections 94 and 97 of the Companies Act, 1956, (b) the application money could not be treated as the application money in the books of the transferee company but was to be shown as unsecured loan in its books, and (c) there was no provision for amalgamation in the Memorandum of Association of the transferee company.

The Court, as regards the first objection on the clubbing of two notional limits, followed the decision in the case of Cavin Plastics and Chemicals Pvt. Ltd. In re, [(2006) 129 Comp Cas 915 (Mad)] and held that there are no merits in the objection raised.

In so far as second objection, the Court observed that clause 2 of the scheme contemplates that all duties, liabilities and obligations of the transferor companies to be transferred or deemed to have been transferred to or vested in the transferee company, pursuant to the provisions of section 394 of the Act. Hence, it would be treated as an unsecured loan in the books of account of the transferee company.

As regards the third objection, the Court following the decision of the Delhi High Court in the case of Highland Electro Appliances P. Ltd., In re, [(2003) 2 Comp LJ 16(Del)] as well as other decisions of the Calcutta and the Bombay High Courts held that the company can still be amalgamated by invoking the powers under sections 391 and 393 of the Companies Act regardless of whether the power to amalgamate with another company was contained in the memorandum, of the concerned company.

Further, it was held that the scheme protected the interest of the employees and there was no objectionable feature in the scheme which was detrimental either to the employees of the transferor or the transferee company. The scheme was fair, just, sound and not against any public policy or interest, not violative of any statutory provisions with no proceedings pending under sections 231 and 237 of the Companies Act, 1956. The scheme was thus, sanctioned.

3. In a winding up petition, it is mandatory to serve statutory notice at registered office of the company

Devi Travels P. Ltd. vs. Inter Globe Air Transport & Anr. [(2007) 138 Comp. Cas 172 (AP)]

On a petition filed on the ground of its inability to pay debt, the appellant company was ordered to be wound up. The appellant company filed an appeal on the ground that no notice u/s 434 of the Companies Act was served on the registered office of the company, and therefore even the subsequent knowledge of the appellant could not cure the defect and the application for winding up could not have been allowed.

The Court allowing the appeal, held that that in terms of section 434, a presumption would be available only if the notice had been served at the registered office, which admittedly had not been done by the respondent. Therefore, the order passed by the company judge was liable to be set aside.

4. Reference to BIFR abates where secured creditors representing not less than three-fourths in value of the amount outstanding takes measures to recover debt

Scope of doctrine of election

Golden Weaving Mills P. Ltd. vs. Tamil Nadu Industrial Investment Corporation Ltd. & Anr. [(2007) 138 Comp. Cas 336 (Mad)].

The respondent, a State Financial Corporation initiated recovery proceedings u/s 29 of the State Financial Corporation Act, 1951 (hereinafter referred to as the "SFC Act") against the Petitioner company as it failed to repay the loan amount.

The Petitioner company challenged the action of the Corporation and obtained an interim stay. During the pendency of the petition, the Petitioner approached the Board for Industrial and Financial Recordination (BIFR) and the Petitioner was declared a sick undertaking under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In view of the bar created by section 22 of the SICA, the respondent was unable to initiate any action under the SFC Act.

Meanwhile, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted. Section 41 of the SARFAESI Act introduced an amendment to section 15 of the SICA, whereby proceedings before the BIFR would abate if more than three-fourths of the secured creditors had taken any measures to recover their secured debt u/s 13(4) of the SARFAESI Act. The respondent issued a notice u/s 13(2) of the SARFAESI Act demanding repayment of the dues to the respondent.

The Petitioner challenged the legality and validity of the notice issued under the SARFAESI Act, inter alia, on the ground that any action taken in pursuance of section 13(4) of the SARFAESI Act would be in derogation of section 46B of the SFC Act read with section 22 of the SICA and would thus be barred in view of section 36 of the SARFAESI Act and when two distinct statutes provide two similar remedies, the doctrine of election would apply.

Their Lordships of the Madras High Court observed that the doctrine of election can be applied when two remedies are available for the same relief, the party to whom the said remedies are available has the option to elect either of them, but the doctrine would not apply to cases where the ambit and scope of the remedies are essentially different. A creditor is entitled to choose one or more cumulative remedies open to him, unless precluded by statutory provisions or by the doctrine of election, that in the absence of any bar it is open to the creditor to choose one or more of the cumulative remedies. The doctrine of election is a doctrine evolved by courts on equity. It is based on the principle that a man shall not be allowed to approbate and reprobate. If a person has chosen a particular remedy and has intentionally relinquished another remedy, he is debarred by the doctrine of election to pursue the remedy he has intentionally given up.

The Court, dismissing the petition, held that section 37 of the SARFAESI Act provided that the provisions of the SARFAESI Act were in addition to and not in derogation of the various Acts mentioned therein or any other law for the time being in force. The corporation was not pursuing both the remedies simultaneously. The remedy provided under the SFC Act was not available to the corporation in view of the express bar under section 22 of SICA. Therefore, the fact that the corporation was governed by the SFC Act and the petitioner could take action under section 29 or section 31 was of no consequence if the corporation decided to avail of the remedy available to it under a different statute which had been enacted with a view to protect the security of the banks and financial institutions. The doctrine of election had no application as the corporation was invoking solely the provisions of the SARFAESI Act and other remedies under sections 29 and 31 of the SFC Act were not available to the corporation. There was nothing in the SFC Act to show that there was any bar either express of implied in proceeding under the SARFAESI Act. There were two secured creditors and both had taken measures under the SARFAESI Act. Therefore, the bar created under section 22 of SICA would cease to operate in view of the provisions of the amendment to SICA contained in the schedule specified under section 41 of the SARFAESI Act.

Further the Court held that the reference of the Petitioner company was still pending before the BIFR and as per the amended provisions of section 15 of SICA such reference shall abate if the secured creditors, representing not less than three-fourths in value outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debts under sub-section (4) of section 13 of the SARFAESI Act.

5. Where suit for recovery of same debt pending, petition for winding up not maintainable

Euro Containers vs. Morepen Laboratories Ltd. [(2007) 138 Comp Cas 422 (HP)]

The appellant had filed a winding up petition, which was dismissed by the single judge on the ground that the appellant had already instituted a suit for recovery of amount and the suit was pending disposal in the civil court.

On an appeal filed by the appellant, their Lordships of the Himachal Pradesh High Court dismissing the appeal held that the liability to pay was disputed and based on that the appellant had filed a civil suit, which was pending adjudication. Unless the liability to pay was acknowledged by the company, for recovery of a debt if a civil suit had already been filed with respect to a disputed liability, a winding up application would not lie.

6. Where official liquidator retaining property after termination of lease, rent to be paid in priority to lessor for period in possession of the official liquidator

S.P. Jain & Ors. vs. Official Liquidator & Ors. [(2007) 138 Comp Cas 472 (P&H)]

The company in liquidation was a tenant in the premises of the appellants. The company did not hand over vacant possession of the premises despite the termination of the lease. Therefore, the appellants filed a suit and during the pendency of the suit the company was ordered to be wound up. The Court passed a decree for possession and mesne profits at Rs. 25,000/- per month with effect from 1-10-1989. On 26-4-2001 when the appellants filed an execution petition, the official liquidator sought time till sale of assets to hand over the possession. On 29-12-2001, vacant possession was handed over to the appellants. The Appellants filed an application pleading that as the tenanted premises were occupied by the official liquidator to store assets of the company including the record so as to facilitate the sale of the company’s assets, the sum of Rs. 25,000/- per month payable from 15-7-1999 to 29-12-2001, partook of the nature of liquidation expenses, in terms of section 530(6) of the Companies Act, 1956, and should be paid to the appellants by assigning priority over and above the other creditors.

The single judge held that though it was open to the appellants to seek rescission of the contract of tenancy after the order of winding up was passed, they instead sought permission to continue with the suit for possession and therefore payment of rent for use and occupation of the premises would rank as an ordinary debt, payable on a pro rata basis along with other creditors. The application for review was also dismissed.

The Court observed that where the liquidator retains possession of leasehold property to ensure and facilitate a successful fruition of the proceedings of winding up, the claim for mense profits/rent would necessarily partake of the nature of expenses of liquidation and would thus have to be accorded priority in matters of payment. Where possession of the premises remains with the liquidator and it does not appear or is not shown that the property was used for the purpose of winding up, the claim for rent/mense profits would partake of the nature of an ordinary debt with no priority being accorded to it in matters of payment.

Their Lordships thus, allowing the appeal, held that the official liquidator in the discharge of his duties, conferred upon him by the provisions of the Companies Act, 1956, rightly opposed the application for possession, by pleading that it was necessary to retain possession of the leased premises so as to enable him to ensure a successful conclusion of the sale of the assets of the company without compromising the rights of the creditors and or the company in liquidation in any manner. The official liquidator, thus, put forth an unequivocal plea that it was imperative that he retained possession of the premises, for a successful sale of the assets of the company, lying stored in the premises. Therefore, the retention of the premises by the official liquidator could not be categorized as possession of the premises in the ordinary course of duties. The appellant’s claim would necessarily partake of the nature of expenses of liquidation and could not have been categorized as an ordinary debt and would thus be entitled to be accorded priority in matters of payment, in accordance with the provisions of section 520 of the Companies Act, 1956.