Case: Forbes & Company Limited & Another Vs. The Official Liquidator of The Hon'Ble Bombay High Court & Another

Oral Judgment: (Dr. D.Y. Chandrachud, J.)A company application under Section 466 of the Companies Act, 1956 was made before the Company Court by the Appellants seeking a permanent stay of an order of winding up passed by the Company Judge on 5 September 2005, by which the Svadeshi Mills Company Limited had been ordered to be wound up. Certain consequential reliefs were sought. The learned Company Judge by a judgment dated 14 October 2011 held that no ground enabling the exercise of the discretion under Section 466 has been made out and dismissed the application. The order of the Company Judge has been called in question in appeal.2 The Svadeshi Mills Company Limited was incorporated under Act VI of 1882 and for a period of ten decades operated a composite textile mill with spinning, weaving and processing sections for the manufacture of cotton, synthetic, interlining and non-woven fabrics. In 1997, a petition for winding up was filed by Ralli Brothers & Coney, a company incorporated under the laws of the UK. Several other petitions for winding up were filed. In February 1998, the company made a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 which declared it to be a sick company. The BIFR recommended, by an order dated 5 February 2001, that the company should be wound up and an appeal inter alia by the representative union was dismissed by the AAIFR on 14 May 2001. In pursuance of a GR dated 20 September 2001 of the State Government, a High Power Committee was appointed to look into the affairs of the company including the payment of the dues of the workers, banks and financial institutions. On 21 June 2002, this Court authorised the committee to dispose of the assets of the company following which the plant and machinery was sold. The sale was confirmed by this Court on 17 September 2003. In the meantime, on 13 February 2002, a Provisional Liquidator was appointed at the behest of the creditors in the winding up petitions. Eventually, by an order dated 5 September 2005, the company was ordered to be wound up. During the course of the winding up proceedings, the Official Liquidator has adjudicated upon some of the claims of the creditors and employees. Against the adjudication of the claims of the workmen, proceedings have been taken out before the Company Judge.3 The Appellants moved a company application for a permanent stay on winding up on 15 April 2011. The affidavit in support of the company application was affirmed by the Company Secretary of Forbes & Company Limited, a company which held together with its subsidiary 22.70% of the equity capital of the company and by the Chief Executive Officer of Grand View Estates Private Limited which had come to hold 29.29% of the total shareholding of the company. The Second Applicant had acquired its shareholding after the order of the winding up, though with the leave of the Company court. The Applicants, who are now in appeal, state that they hold an aggregate of 52% of the equity shares and are also secured creditors. Both the Applicants are part of the Shapoorji Pallonji Group, a corporate entity which engages in construction, infrastructure and real estate development business. The First Applicant stated that between 1998 and 2001, it had provided financial assistance of Rs.42 crores to the erstwhile company. The affidavit in support of the application states that on inspection of the reports of the Official Liquidator, it was found that the total liability of the company as on 31 March 2011 was Rs. 375.33 crores out of which the amount due and owing to the Applicants was Rs.280.90 crores. Apart from the First applicant, IDBI and Bank of Baroda were secured creditors of the company. The Applicants claim to have obtained an assignment of the debts due and owing to the other secured creditors which had been crystallised in a decree of the Debt Recovery Tribunal. The Applicants stated that the liabilities of the company comprised of;(i) Claims of the workmen / employees affiliated to the Rashtriya Mill Mazdoor Sangh (RMMS); comprising of 2800 workers / employees;(ii) Claims of workers / employees affiliated to the Mumbai Mazdoor Sabha (MMS) ;(iii) Claims of co-operative societies and bodies of workmen;(iv) Claims of statutory bodies(v) Claims of unsecured creditors including the First Applicant (70 of the 146 unsecured creditors are claimed to have assigned their claims to the Second Applicant and other claimants).4 The Appellants as promoters have entered into a Memorandum of Understanding with RMMS on 15 November 2010 for the payment of the dues of the workmen under which an amount of Rs.74.42 crores is due and payable. A separate MOU was entered into on 24 January 2011 with MMS to cover certain other employees. In their company application, the Applicants stated that since out of the aggregate liabilities of Rs.375.33 crores, an amount of Rs.280.90 crores was due and owing to them as of 31 March 2011, the Second Applicant undertook to deposit dues of Rs.86 crores with the Official Liquidator and in addition thereto to bring in such further amounts as may be directed towards payment of the creditors. Moreover, it was stated that the Second Applicant was ready and willing to bring in a further sum of Rs.20 crores. All amounts paid by the Second Applicant would be treated as a loan to be repaid by the company.5 Now in this background, the Appellants, in their company application, stated that being a part of the Shapoorji Palanji Group, who are experts in the business of construction, infrastructure and real estate, the Appellants will diversify the business of the company into real estate which is commercially viable, by amending the objects clause of the Memorandum of Association. According to the Appellants, it was no longer viable to run the business of the company as a manufacturer of textiles. The statement of the Appellants in the company application was as follows :Though the Company was in textiles business prior to winding up, due to disposal of all the stock in trade and entire plant and machinery, it is no longer viable to run the business as a manufacturer of textiles. In the present circumstances, in Mumbai even otherwise a textile mill is not viable. The Applicants are part of the Shapoorji Pallonji Group. Shapoorji Pallonji Group has expertise in the real estate business and, therefore, intends to enable the Company to undertake real estate development. Applicant No.2 has shown its willingness to bring in funds to meet all the legitimate liabilities of the Company subject to the order of winding up being permanently stayed by this Honble Court as sought by the Applicants herein. (Para 7 of the company application)The company application was opposed by a group of workman. The opposition was on behalf of six workmen who had signed a valalatnama claiming to be authorised by 763 workmen and staff. The letter of authority was also filed before the Official Liquidator.6 By the impugned order dated 14 October 2011, the learned Single Judge has held that no case was made out for the exercise of the discretion under Section 466 of the Companies Act, 1956 to permanently stay the operation of the order of winding up. Broadly summarised, the findings of the learned Single Judge are that;(i) The Appellants do not plan to revive the textile business which was carried on by the company prior to the order of winding up;(ii) The object and purpose of the company application is to enable the Appellants to develop the properties of the erstwhile company as real estate;(iii) The effect of the grant of an order of permanent stay would be to deprive the court of its control over the winding up proceedings and to place the matter beyond the control of the Official Liquidator;(iv)There is nothing to indicate that the textile business could not be carried on;(v) The company application essentially introduced a back-door method for the alienation of the assets of the company instead of taking recourse to revival. The claim of the workers could not be defeated; and(vi) The company application could not be allowed since it was contrary to commercial morality and public interest.7 Learned Senior Counsel for the Appellants submits that;(i) A creditor has a finite right to be paid his debt fully by the company, no less and no more;(ii) Once the claim of the creditor is fully paid or when the court is satisfied that an appropriate provision has been made to satisfy the debt fully during the course of the liquidation, no higher right is conferred upon creditor;(iii) Under Section 466 of the Companies Act, 1956, the court can impose conditions while granting a permanent stay including a condition that the Official Liquidator shall adjudicate upon the claims and shall finally determine them. The order of permanent stay does not take the liquidation proceedings out of control of the court or of the Official Liquidator;(iv) Section 466 does not contemplate the setting aside of an order of winding up but a stay of further proceedings so that the control of the court in winding up is not completely taken away even if a permanent stay is granted;(v) The object of Section 466 is revival of the company. The revival that is contemplated is of the company which includes the carrying on such business as the company thinks feasible and profitable to engage. It is not a prerequisite for the grant of an order of stay under Section 466 that the company should carry on the same business as it did prior to winding up and no creditor can dictate to a company what business it can do. So long as the creditors / workers are fully paid, they have no reason to oppose the grant of permanent stay;(vi) There is nothing to prevent the company from changing its objects clause so as to carry on a new line of business which was not pursued prior to the winding up. There is a distinction between revival of the company and revival of the business activity the company was doing;(vii) If the company was to be wound up, the workers would only obtain a satisfaction of their claims and that would not result in a revival of the textile business. It would be impossible for the purchasers of the assets in an auction to carry on the textile business;(viii) Though the order under Section 466 lies in the discretion of the company court, the exercise of the discretion has to be on judicial considerations and on grounds that are relevant and germane. The exercise of discretion in the present case by the learned Single Judge cannot be regarded as a judicious exercise of that discretion.8 On the other hand, it has been urged on behalf of the objecting workmen by learned counsel that :(i) The fundamental requirement of Section 466 is that the Court before it grants a permanent stay must be satisfied that all proceedings in relation to the winding up ought to be stayed. The expression ought to be stayed imports a requirement that the court must be convinced that the case is fit for the grant of stay;(ii) For the purposes of Section 466, it is not sufficient that all the creditors have been satisfied and it is the bounden obligation of the court to have due regard to the interests of commercial morality and to the public interest at large. The onus of establishing these grounds lies on the party which claims a stay;(iii) The Appellants represent 52% of the erstwhile shareholders who are now only contributories once the order of winding up has been passed;(iv) The expression revival means the revival of the existing business of the company or at least such portion of the business as is legally permitted or can be carried on;(v) Revival is not just a revival of the corporate existence because once a permanent stay is granted, there would always be a revival of the corporate existence. Hence, what is required to be considered is, whether there is a genuine and bonafide attempt to bring about the revival of the business of the company;(vi) The expression commercial morality is not, as the Appellants assert something which is used in juxtaposition to the morality of the business but is a term which is used in juxtaposition to indicate that merely paying the dues of the creditors is not sufficient;(vii) In the present case, the proposal, is not for the revival of the business of the company but for the disposal of the assets as an alternative mode of winding up. This can never be permitted because it would enable the Appellants who claim to hold 52% of the share capital (prior to winding up) to obtain the benefit of developing a huge tract of land admeasuring nearly 50 acres with an estimated market value of Rs.5000 crores. The proposal is, hence, contrary to commercial morality and to public interest;(viii) Since the company is not carrying on business at present, what the Appellants essentially seek to do is to substitute the erstwhile textile business for real estate development. This would involve a change of the objects which would not be permissible under Section 17(1)(d) of the Companies Act, 1956. The so called revival in the form of the company carrying on real estate development without taking any of the workers back in employment, will also be in violation of the provisions of Section 25N and 250 of the Industrial Disputes Act, 1947.9 It may also be noted at this stage that one of the shareholders of the company, Mr.Bipin Bagadia, has filed an intervention application and was heard in opposition to the appeal. Mr.Bagadia has submitted that the property of the company should be auctioned in the open market to obtain a fair price of the shares.10 The rival submissions now fall for consideration :11 Section 466 of the Companies Act, 1966 provides as follows:-466. POWER OF COURT TO STAY WINDING UP(1) The Court may at any time after making a winding up order, on the application either of the Official Liquidator or of any creditor or contributory, and on proof to the satisfaction of the Court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the Court thinks fit.(2) On any application under this section, the Court may, before making an order, require the Official Liquidator to furnish to the Court a report with respect to any facts or matters which are in his opinion relevant to the application.(3) A copy of every order made under this section shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the Registrar, who shall make a minute of the order in his books relating to the company.12 Sub-section 1 of Section 466 empowers the Company court to stay the proceedings in winding up either altogether or for a limited time on such terms and conditions as it thinks fit. Such an order can be passed on the application either of the Official Liquidator or of any creditor or contributory. The fundamental requirement of Section 466(1), is that the court may do so on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed. Section 466(1) confers a discretion on the court and not a mandate. The discretion has to be exercised on satisfaction that stay of the proceedings in relation to winding up ought to be granted. The legislature has carefully used the expressions on proof to the satisfaction and ought to be stayed. Before the court grants a stay, the statutory requirement is that there must be proof which is brought before the court on the basis of which it is satisfied that the proceedings ought to be stayed.13 The language of Section 466 of the Companies Act, 1956 has been interpreted, as we shall indicate, by courts in India having due regard to the corresponding principles under the provisions of the English Companies Act. An early decision on the subject in the UK was a judgment of Lord Esher, M.R. speaking for the Court of Appeal in Re Flatau (1893 (2) Queens Bench 219). The judgment of the Court of Appeal followed an earlier decision in re Hester (22 Q.B.D. 632) which had laid down the rules for a rescission of a receiving order in bankruptcy. In that context, Lord Esher had held as follows:18-A. In the Court of Appeal, Lord Esher, M.R., stated (p.639):Although the consent of all the creditors has been obtained, the Court will still consider whether what they have agreed to is for the benefit of the creditors as a whole. The Court has gone still further, and, I think rightly so, and has said that under the present Bankruptcy Act it will consider not only whether what is proposed is for the benefit of the creditors, but also whether it is condusive or detrimental to commercial morality and to the interests of the public at large; and they will take into consideration the position of the bankrupt with regard to his creditors, and see whether what is proposed will not place his future creditors, who must come into existence immediately, in a position of imminent danger. The Court has said this before, and I adhere to it now.Fry, L.J., observed (at p. 641):We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.(emphasis supplied)The same principle was followed in the subsequent decision in Flatau by Lord Esher, M.R. while holding that even though the present creditors are fully satisfied and are entirely indemnified, the court must yet consider as to whether its jurisdiction should be exercised. This principle was subsequently followed in a judgment of Buckley J. in re Telescriptor Syndicate Ltd. (1903 2 Chancery Division 174) Buckley, J held as follows :I have here to see whether it is proved to my satisfaction that all proceedings in relation to this winding-up ought to be stayed. I decline to say that I am satisfied as to that by the mere fact that since the winding-up order was made the assent of all the creditors and of a large majority of shareholders has been obtained.In a judgment of more recent origin in the UK, Mergarry, J. in Re Calgary and Edmonton Land Co.Ltd. (In Liquidation) (1975 1 W.L.R. 355), held as follows :Under Section 256 itself the court may on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed make an order for the stay on such terms and conditions as the court thinks fit.Quite apart from any authority (and I may mention In re Telescriptor Syndicate Ltd. [1903] 2 Ch. 174) this language seems to me to make it abundantly clear that the jurisdiction is discretionary, and that it lies on those who seek a stay to make out a sufficient case for it. In particular, the words satisfied, just and beneficial, satisfaction of the court and ought to be stayed seem to me to indicate that the applicant for a stay must make out a case that carries conviction.(emphasis supplied)14 In an early decision of the Calcutta High court in the matter of East India Cotton Mills Ltd. (A.I.R. (36) 1949 Calcutta 69), Justice S.R. Das (as the learned Judge then was) adverted to the position in English law as summarised in Halsburrys Law of England, thus :In the exercise of its jurisdiction to stay, the Court, so far as possible, acts upon the principles applicable in exercising jurisdiction to rescind a receiving order or annul an adjudication in bankruptcy against an individual. The Court refuses, therefore, to act upon the mere assent of the creditors in the matter, and considers not only whether what is proposed is for the benefit of the creditors, but also whether the stay will be conducive or detrimental to commercial morality and to the interests of the public at large. In particular, the Court will have regard to the following facts; That directors have not complied with their statutory duties as to giving information to the official receiver or furnishing a statement of the affairs; that there has been an undisclosed agreement between the promoter and the vendor to the company as to the participation by the former in fully paid up shares forming the consideration for the purchase of property by the company on its formation; that the promoter has made gifts of fully paid up shares to the directors, that there are other matters connected with the promotion, formation, or failure of the company or the conduct of its business or affairs, which appear to the Court to require investigation. The same principles are apparently applicable whether the company has or has not invited the public to subscribe for its shares except, possibly, in the case of a private company, where all the shareholders have full knowledge of what has been doneThe Calcutta High Court also proceeded on the basis of the law laid down in re Telescriptor Syndicate Ltd. (supra) and in re Hester (supra). 15 The effect of an order of stay under Section 466 is to place the order of winding up in a state of suspended animation as held by the judgment of the Supreme Court in SudarsanChits (I) Ltd. vs. G. Sukumaran Pillai and others (AIR 1984 SC 1579 at para 13) as follows :When winding up order is kept in abeyance it is in a state of suspended animation. The fact that the Appellate Bench directed that pending the implementation of the scheme as sanctioned by the High Court, the winding up order will be kept in abeyance itself without anything more shows that the order was neither cancelled nor recalled nor revoked nor set aside. It continued to exist but was inoperative.In other words, despite the grant of the stay, order of winding up continues to exist but is rendered inoperative.16 In a judgment of a learned Single Judge of the Calcutta High Court in Mahabir Prasad Agarwalla and Ors. vs. Ashkaran Chattarsingh and Ors. (85 C.W.N. 557), the principles for the exercise of the discretion under Section 466 have been summarised as follows:28. Therefore, from the above principles which have been summarised in different authorities and the decision referred to hereinbefore it appears that the discretion for stay under section 466 can only be exercised by the Court (1) if the Court is satisfied on the materials before it that the application is bonafide (2) the Court would be guided by the principles and definitely come to the finding that the principles are applicable to the facts of a particular case, (3) mere consent of all the creditors for stay of winding up is not enough, (4) that offer to pay in full or make satisfactory provisions for the payment of the creditors is not enough, (5) Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories, (6) Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation, (7) a firm and accepted proposal for satisfying all the creditors must be before the Court with material particulars, (8) the jurisdiction for stay can be used only to allow in proper circumstances a resumption of the business of the company, (9) the Court is to consider whether the proposal for revival of the company is for benefit of the creditors but also whether the stay will be conducive or detrimental to commercial morality and to the interest of the public at large, (10) before making any order Court must see whether the Ex-directors have complied with their statutory duties as to giving information to the Official Liquidator by furnishing the statement of affairs, (11) and any other relevant fact which the Court thinks fit to be considered for granting or not granting the stay having regard to the peculiar facts of a particular case. (emphasis supplied)A judgment of a learned Single Judge of the Delhi High Court in ShaymS. Rastogi vs. Nona Sona Exports P.Ltd. (1986 59 Company Cases 832) , places importance on the role of the company court in relation to the exercise of the discretion while ordering a stay of winding up :Company court is not a mere conduit pipe or stamping authority to whatever scheme that may be laid before it. Not unoften, motivations in the moving of such schemes are oblique. It is in fact for the court to first look at the scheme whether it has any strength or merits of its own and is financially viable or a mere attempt to take back the affairs and the assets of the company which had been earlier perforce taken over at the time of winding up. In my considered opinion, there is no scheme worth giving a trial which has been put forth by the applicant and, therefore, has to be rejected.A learned Single Judge of the Gujarat High court has also emphasised the principle that the mere consent of the creditors is not sufficient for the grant of stay under Section 466 in Shaan Zaveri and others vs. Gautam Sarabhai (P) Limited (2010) I Company Law Journal 74 (Guj.).17 Now it is in this background that the court would have to consider whether the exercise of the discretionary jurisdiction of the company court under Section 466 has to be interfered with in appeal. At the outset, it must be noted that this Court in appeal is not called upon to determine in the first instance as to whether a case was made out for the exercise of the discretion under Section 466 but whether the judgment of the learned Single Judge would warrant interference in appeal, based on well settled principle of law that the court in the exercise of its jurisdiction under Clause 15 of the Letters Patent would not interfere with an order of the learned Single Judge even if the learned Single Judge has taken a possible view. The judgment of the learned Single Judge is, in our view, not merely a possible view to take but the only correct view based on the facts and circumstances of the case.18 The Appellants moved the learned Company Judge on the basis of an application which postulates that the business of the erstwhile company in liquidation which consisted of the manufacture of textiles is no longer viable and what the Appellants seek to do in its stead and place is to carry on development of real estate, utilising the assets of the company. The Appellants belong to the Shapoorji Pallonji group, a real estate company. Admittedly, the Second Appellant has acquired 29% of the equity share capital of the erstwhile company in liquidation after the order of winding up was passed on 5 September 2005 though of course with the permission of the court. Even the debts which have been acquired by the Second Applicant from IDBI and from the Bank of Baroda are under deeds of assignment after the order of winding up was passed. The contention of the Appellants is that when the court exercises its discretion for the purposes of Section 466, what is postulated is the revival of the corporate existence of the company and not necessarily the revival of the business activity which was carried on by the company prior to its liquidation. As we shall note, the law laid down by the Supreme Court does not support such a proposition as a matter of principle. But even as a matter of first principle, it is not possible to accept the submission that a mere revival of the corporate existence of the erstwhile company in liquidation would be sufficient for the intervention of the court to grant stay of winding up. An order of stay once issued under Section 466 would necessarily result in the revival of the corporate existence. Hence, that itself is not sufficient for the exercise of the discretion. When winding up has been ordered under the direction of the court, the provisions of Section 466 mandate that the court must be satisfied on proof that an order of stay ought to be granted. These words place an affirmative duty and obligation on the court to consider several aspects of the case, not just the interests of the creditors in determining as to whether an order of stay should be granted.19 Now in approaching the facts of the case, it would be necessary for the court to dwell on the judgment of the Supreme Court in M/s.Meghal Homes Pvt.Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. (AIR 2007 Supreme Court 3079). In that case, Shreeniwas Cotton Mills Limited (SCML) was a company which had been incorporated in 1935 and was conducting a textile mill in the then industrial heart of Mumbai at Lower Parel. SMCL was ordered to be wound up by the company court in 1984. The company court issued an order in 1994 directing the Official Liquidator to invite offers for the revival of the mills and absorption of the workmen. At that stage, the contributories filed a company application for holding a meeting of the creditors and contributories to consider a claim for revival which was allowed by the company court. This order was challenged in appeal before a Division Bench of this Court but during the pendency of the appeal, the meeting was held and an application for sanctioning the scheme was filed. The Division Bench by its order dated 4 April 1995 allowed the appeal against the order of the learned Single Judge for the convening of the meeting and consequently dismissed the company application, holding that the scheme which was proposed was not on the basis of a bonafide proposal based on a viability report. The Division Bench was of the view that the intention behind the presentation of the scheme appeared to be to acquire a huge tract of land and other real estate belonging to the company at a throw away price. The Division Bench was of the view that the company judge should issue directions for obtaining a viability report and thereafter consider the following suggestions :(1) Whether it is possible and viable to reopen the mills and/or any portion of it and run it profitably and without disposing of immovable assets of the Company;(2) In case the mills cannot be re-started then whether any department or process of the mills could be started as viable;(3) In case any party who comes forward with an offer to pay off all the creditors, take the company out of winding up and revive and restart the mills happens to be a shareholder of the Company, such party should surrender the shareholding in the capital of the Company at the value to be determined by the Court;(4) In case above courses are not workable then whether the mills can be restarted by disposing of part of its assets to generate finance after payment to all the creditors;(5) In case even the course under Clause (4) above is not possible, then the Official Liquidator may sell the assets by public auction in which even the shareholders of the Company will be at liberty to bid.The Division Bench noted that the anxiety was to revive the company and to restart the mills not merely in the interest of the workers and but also in the general interest of the public.20 A Special Leave Petition against the judgment of the Division Bench was dismissed by the Supreme Court. Following this, a viability report was obtained which opined that it was not possible to restart the entire mill but only a section of the spinning division. Subsequently, in pursuance of a new industrial location policy of the State Government, an MOU was executed between shareholders and a developer under which the developer agreed to develop the properties of the company against payment of a consideration of Rs.78 crores and handing over of a built up area of 70,000 sq.ft. or in the alternative, on the payment of Rs.97.50 crores. On the basis of this MOU, a company application was filed before the company court propounding a scheme. An amendment was proposed to the earlier scheme under which the revival of the textile mill unit was sought to be substituted by development and transfer of the properties of the company to the developer. If extra funds were available with the company, it was proposed to start a viable industry in any part of Maharashtra. The amended scheme was rejected by the company Judge of this court who held that the scheme presented was not a scheme for revival but was in substance for the disposal of the companys assets which had vested with the Liquidator and the claim was only a mode of disposal of the assets for which it would be appropriate for the company court to invite offers. The order of the company judge was challenged in appeal. A Division Bench of this Court passed an order directing the shareholders and various intervenors to place their proposals for rehabilitation on record. The Division Bench allowed the appeals and while setting aside the order of the company judge, sanctioned the scheme as modified. The judgment of the Division Bench was questioned in appeal before the Supreme Court.21 The Supreme Court formulated the issue before the court in the following observations:-17. The question in this case really is whether the compromise put forward under Section 391 of the Companies Act could be accepted by the court without reference to the fact that it is a company in liquidation and without considering whether the compromise proposed as intending to take the company out of liquidation, contemplates the revival of the company and whether it puts forward a proposal for revival and whether such a proposal also satisfies the element of public interest and commercial morality, the elements required to be satisfied for the court to stop the winding up proceeding in terms of Section 466 of the Act.(emphasis supplied)The Supreme Court noted that it was the view of the Division Bench of this Court that it was not mandatory in law that the compromise or arrangement has to be for revival of the very activity in which the company was engaged in at the time of winding up and the anxiety of the court while sanctioning the scheme was to see that the company must continue its corporate existence. While reversing the judgment of this court, the Supreme Court held that the company in liquidation did not intend taking up any revival activity in the properties belonging to SCML other than retaining certain buildings and it is difficult to conceive of this as a revival of SCML, a company in liquidation. Moreover, the Supreme Court held that This is more in the realm of disposal of the assets of the company in liquidation, no doubt, with a view to pay off all the creditors, debenture-holders and workers from the funds generated out of the sale of the lands. (At para 20 page 3089)The following principles have been laid down in the judgment of the Supreme Court.22. When a Company is ordered to be wound up, the assets of it, are put in possession of the Official Liquidator. The assets become custodia legis. The follow up, in the absence of a revival of the Company, is the realization of the assets of the company by the Official Liquidator and distribution of the proceeds to the creditors, workers, and contributories of the company ultimately resulting in the death of the company by an order under Section 481 of the Act, being passed. But, nothing stands in the way of the Company Court, before the ultimate step is taken or before the assets are disposed of, to accept a scheme or proposal for revival of the Company. In that context, the Court has necessarily to see whether the Scheme contemplates revival of the business of the company, makes provisions for paying off creditors or for satisfying their claims as agreed to by them and for meeting the liability of the workers in terms of Section 529 and Section 529A of the Act. Of course, the Court has to see to the bona fides of the scheme and to ensure that what is put forward is not a ruse to dispose of the assets of the Company in liquidation. (emphasis supplied)Finally, it is necessary to note that the Supreme Court held that not merely was the judgment of this court in the earlier round binding on the parties (since a special leave petition had been dismissed) but that the correct principle was adopted by the earlier Division Bench in its order dated 4 April 1995 (At para 23). Finally, the Supreme Court emphasised that both while dealing with Section 391 to 394A and Section 466, there was no incongruity in looking into the aspects of public interest, commercial morality and into whether there is a bonafide intention to revive the company. In that regard, the Supreme Court observed as follows :We are therefore satisfied that the Company Court was bound to consider whether the liquidation was liable to be stayed for a period or permanently while adverting to the question whether the Scheme is one for revival of the company or that part of the business of the company which it is permissible to revive under the relevant laws or whether it is a ruse to dispose of the assets of the company by a private arrangement. If it comes to the latter conclusion, then it is the duty of the court in which the properties are vested on liquidation, to dispose of the properties, realize the assets and distribute the same in accordance with law. (emphasis supplied)22 The judgment of the Supreme Court in Meghal Homes (supra) is sought to be distinguished by learned Senior Counsel appearing on behalf of the Appellant on the ground that in that case, there was a private arrangement between the promoters and developer under which the assets of the company in liquidation were sought to be sold to the developer whereas in the present case, there would be no transfer of the assets of the company and the assets would be used to carry on real estate business. We are unable to subscribe to the submission. In the present case, what has happened is that after the order of winding up was passed, there has been a transfer of the shares of the erstwhile company in liquidation as well as an assignment of debts in favour of the Second Applicant. But quite part from this, it is impermissible for this court to distinguish the judgment of the Supreme Court when as a matter of fact the principle which has been laid by the Supreme Court would apply to this case. First and foremost, the judgment of the Supreme Court clearly holds that the earlier decision of a Division Bench of this Court dated 4 April 1985 which had placed a considerable degree of importance on the reopening and the revival of the textile mill reflected the correct position of law. Secondly, the subsequent judgment of the Division Bench of this Court which had sought to distinguish the revival of the business activity from the revival of the corporate existence has been disapproved by the Supreme Court. Thirdly, as the observations of the Supreme Court would make it clear, it is the bounden duty of the company court while exercising its discretion under Section 466 to determine as to whether the exercise of discretion has been invoked bonafide and to ensure that what is put forward is not a ruse to dispose of the assets of the company in liquidation. It is with that perspective that the Court must have due regard to matters of public interest, commercial morality and to whether there exists a bonafide intention to revive the business of the company.23 Applying the test which has been enunciated by the Supreme Court in Meghal Homes (supra), we are of the view that the exercise of the discretion by the learned Single Judge was correct and proper. The object and purpose of the Company application is not to revive the business of the Company. The whole purpose is to dispose of the assets by embarking upon real estate construction and development. The company application before the learned Single Judge has proceeded on the basis that what the Appellants would do is to diversify the business of the company into real estate by amending the objects clause of the Memorandum of Association of the company. Admittedly, the company had not carried on any real estate business in the past. Though a faint attempt was made during the course of the hearing, relying upon Clauses 4, 12, 16 and 26 of the Memorandum of Association to show that the objects clause permitted carrying on of real estate business, it is evident from the averments in the company application that the Appellants themselves proceeded on the basis that an amendment of the objects would be required in order to enable the company to enter upon real estate construction. Whether such an amendment would or would not be granted is something which may depend upon the decision of the competent authority in future but it is evident that presently, the carrying on of real estate construction would be ultra-vires the objects of the company. Besides, under Section 17 of the Companies Act, 1956, an amendment of the objects requires a special resolution which in view of the provision of Section 189 requires 3/4th majority of members present and voting. No circumstances have been placed before the Court to indicate as to whether the Appellants have the support of the requisite majority for a special resolution under Section 189.24 Another aspect of the case, which has a bearing on the exercise of the discretion by the learned Single Judge is that the present status of the Appellants after an order of winding up has been passed is as a contributory. Section 428 defines the expression contributory to mean every person liable to contribute to the assets of the company in the event of it being wound up and to include the holder of any shares which are fully paid. Section 511 provides as follows :511. DISTRIBUTION OF PROPERTY OF COMPANYSubject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up be applied in satisfaction of its liabilities paripassu and subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.As far back as in 1955, a Constitution Bench of the Supreme Court in Mrs.BachaF. Guzdar, Bombay, Appellant v. Commissioner of Income Tax, Bombay, Respondent (AIR 1995 SC 74) held that the true position of the shareholder is that he becomes entitled to participate in the profits of the company in which he holds shares if and when the company declares, subject to the Articles of Association, that the profits or any part thereof should be distributed by way of dividend among shareholders. A shareholder has a further right to participate in the assets of the company which would be left over after winding up (at para 7 page 77). The winding up of a company brings about a distinct change in the position of a member of the company. Prior to an order of winding up, a member has only a right to payment of dividend against his capital. Once an order of winding up is passed, each member is entitled to the distribution of the companys assets in accordance with his right and interest in the company after liabilities have been discharged. This is a right of a proprietary nature and the member is entitled to a protection of that right in any order that may be passed in the course of winding up by the court.25 The leading authority on the subject is the judgment of Megarry, J. in Re Calgary and Edmonton Land Co.Ltd. (In Liquidation) (1975 1 W.L.R. 355). That was a case of a company in voluntary liquidation. The company was a property development company with assets valued at several millions of pounds. The assets were such that their realisation would result into a substantial balance for the shareholders after payment of creditors and upon meeting the expenses of liquidation. A summons was sought to be issued by shareholders seeking a stay of winding up. The summons was refused, whereupon the petitioning shareholder moved a motion to discharge the dismissal order. Megarry, J. considered the provisions of Section 256(1) of the English Companies Act, 1948 which were pari materia with the provisions of Section 466 by our Companies Act. While considering the effect of Section 302 of the English Act (corresponding to Section 511 of the Indian Act), the learned Judge held as follows :The effect of that section on the rights of members of the company seems to me to be very considerable. Before the winding up, each member has no right to be paid any sum in respect of his capital, but only the right to such dividends as the directors recommend and the company votes. Once there is a winding up, each member becomes instead entitled to an aliquot share of the companys assets after all liabilities have been discharged.The judgment of the court also considered the rights of members upon liquidation and their effect while considering an application for stay of winding up. The observations in that regard were as follows:That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation, and so leave a surplus for the members of the company, there are plainly three categories to consider. First, there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the pound. .......................Third, there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good causeThe decision of Megarry, J. in Re Calgary is a clear authority for a proposition that in normal circumstances, no stay should be granted of winding up unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it, (3) or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. The expression in normal circumstances in this formulation also recognises that in an appropriate case and for a good cause, the court may still order a stay of winding up even if none of the three criteria are met. But that still requires a sufficient cause to be made out to the satisfaction of the court to make an exception to the normal rule. At the very minimum, this would indicate that non-existence of any of these conditions is an important criterion that would contribute to the exercise of the discretion by the court on an application for stay of winding up.26 The formulation of Megarry, J. in Re Calgary (supra) was accepted in a judgment of this Court delivered by Mrs.Justice Sujata Manohar (as the learned Judge then was) in VasantInvestment Corporation Ltd. vs. Official Liquidator, Colaba Land and Mill Co.Ltd. (1981) Volume 51 Company Cases 20). However, in VasantInvestment Corporation Ltd., the learned Single Judge held that in the case of a scheme or arrangement which is proposed under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent.27 That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court were to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. In such a case, the members of the company have an opportunity to consider and vote on a proposal and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible.28 Before we conclude, we may note that RMSS a registered union of the objecting workers has sought to allege that RMMS as a representative union is alone entitled to represent the textile mill workers. We make it clear that for the purposes of these proceedings, the legality and the validity of the MOU which was entered into by RMSS with the Appellants has not been an issue which falls for consideration. Insofar as the locus of the workmen represented by Mr.Singhvi is concerned, we have no doubt in coming to the conclusion that they have a substantial standing in these proceedings. When the court has to consider whether a permanent stay should be granted in regard to the order of winding up, every creditor, and workmen in this case being preferential creditors, is entitled to be heard.29 For these reasons, we have come to the conclusion that the learned Single Judge was not in error in refusing to stay the winding up of Svadeshi Mills. There is no merit in the Appeal.

Decision:
0[ds]The judgment of the court also considered the rights of members upon liquidation and their effect while considering an application for stay of winding up. The observations in that regard were as follows:That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation, and so leave a surplus for the members of the company, there are plainly three categories to consider. First, there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the pound.there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good causeThe decision of Megarry, J. in Re Calgary is a clear authority for a proposition that in normal circumstances, no stay should be granted of winding up unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it, (3) or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. The expression in normal circumstances in this formulation also recognises that in an appropriate case and for a good cause, the court may still order a stay of winding up even if none of the three criteria are met. But that still requires a sufficient cause to be made out to the satisfaction of the court to make an exception to the normal rule. At the very minimum, this would indicate thatof any of these conditions is an important criterion that would contribute to the exercise of the discretion by the court on an application for stay of winding up.26 The formulation of Megarry, J. in Re Calgary (supra) was accepted in a judgment of this Court delivered by Mrs.Justice Sujata Manohar (as the learned Judge then was) in VasantInvestment Corporation Ltd. vs. Official Liquidator, Colaba Land and Mill Co.Ltd. (1981) Volume 51 Company Cases 20). However, in VasantInvestment Corporation Ltd., the learned Single Judge held that in the case of a scheme or arrangement which is proposed under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent.27 That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court were to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. In such a case, the members of the company have an opportunity to consider and vote on a proposal and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible.28 Before we conclude, we may note that RMSS a registered union of the objecting workers has sought to allege that RMMS as a representative union is alone entitled to represent the textile mill workers. We make it clear that for the purposes of these proceedings, the legality and the validity of the MOU which was entered into by RMSS with the Appellants has not been an issue which falls for consideration. Insofar as the locus of the workmen represented by Mr.Singhvi is concerned, we have no doubt in coming to the conclusion that they have a substantial standing in these proceedings. When the court has to consider whether a permanent stay should be granted in regard to the order of winding up, every creditor, and workmen in this case being preferential creditors, is entitled to be heard.29 For these reasons, we have come to the conclusion that the learned Single Judge was not in error in refusing to stay the winding up of Svadeshi Mills. There is no merit in theApplying the test which has been enunciated by the Supreme Court in Meghal Homes (supra), we are of the view that the exercise of the discretion by the learned Single Judge was correct and proper. The object and purpose of the Company application is not to revive the business of the Company. The whole purpose is to dispose of the assets by embarking upon real estate construction and development. The company application before the learned Single Judge has proceeded on the basis that what the Appellants would do is to diversify the business of the company into real estate by amending the objects clause of the Memorandum of Association of the company. Admittedly, the company had not carried on any real estate business in the past. Though a faint attempt was made during the course of the hearing, relying upon Clauses 4, 12, 16 and 26 of the Memorandum of Association to show that the objects clause permitted carrying on of real estate business, it is evident from the averments in the company application that the Appellants themselves proceeded on the basis that an amendment of the objects would be required in order to enable the company to enter upon real estate construction. Whether such an amendment would or would not be granted is something which may depend upon the decision of the competent authority in future but it is evident that presently, the carrying on of real estate construction would bethe objects of the company. Besides, under Section 17 of the Companies Act, 1956, an amendment of the objects requires a special resolution which in view of the provision of Section 189 requires 3/4th majority of members present and voting. No circumstances have been placed before the Court to indicate as to whether the Appellants have the support of the requisite majority for a special resolution under Section 189.