COMA/562/2007 1/58 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 562 of 2007 In COMPANY PETITION No. 250 of 1996 With COMPANY APPLICATION No. 77 of 2008 In COMPANY PETITION No. 205 of 1996 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= THE STATE OF GUJARAT - Applicant(s) Versus O.L. OF GSTC LTD. & 1 - Respondent(s) ========================================================= Appearance : MR SN SHELAT, SR.COUNSEL with MR MG NAGARKAR for Applicant(s) : 1, OFFICIAL LIQUIDATOR for Respondent(s) : 1, MR NITIN K MEHTA for Respondent(s) : 1, MR DS VASAVADA for Respondent(s) : 2, ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 05/03/2008 COMA/562/2007 2/58 JUDGMENT ORAL JUDGMENT 1. Since common issue is involved in both these Company Applications they are heard together and are being disposed of by this common judgment and order. 2. Both these Company Applications are filed by State of Gujarat through the Secretary, Industries & Mines Department, Sachivalay, Gandhinagar. 3. Company Application No.562 of 2007 is in relation to Priyalaxmi Mills, Vadodara a unit of Gujarat State Textile Corporation ( in liquidation) and Company Application No.77 of 2008 is in relation to Monogram Mills, Ahmedabad a unit Gujarat State Textile Corporation ( in liquidation). The common prayers are made in both these applications. The applicant – State of Gujarat has prayed for appropriate order or direction directing the Official Liquidator attached to this COMA/562/2007 3/58 JUDGMENT Court to transfer and hand over all immovable assets and properties belonging to and owned by GSTC in respect of its units, namely, Priyalaxmi Mills, Vadodara, particularly land admeasuring 64192 Sq.Mtrs., bearing City Survey No.586 and 609 and all immovable assets and properties belonging to and owned by the GSTC in respect of the unit, viz. Monogram Mills Rakhial Char Rasta, Ahmedabad City, including land admeasuring about 1,47,034 Sq.Mtrs., to the applicant State Government free from all encumbrances, liabilities and charges under Section 457(1) (e) of the Companies Act, 1956. The applicant – State of Gujarat has also prayed for the appropriate direction and/or order directing the Official Liquidator to give set off against the amount already paid by the Government which the Official Liquidator owes to the State Government to the tune of Rs.826.79 crores for discharging the liabilities towards all the dues of the COMA/562/2007 4/58 JUDGMENT Gujarat State Textile Corporation (in liquidation). 4. In Company Application No.562 of 2007 an affidavit is filed by Shri Rajesh Kantilal Shah – Dy. Secretary to the Government of Gujarat in Industries & Mines Department, Gandhinagar, in support of judge's summons whereas in Company Application No.77 of 2008 an affidavit is filed by Shri Kanubhai Atmaram Patel – Under Secretary, Government of Gujarat to the Industries & Mines Department, Gandhinagar, in support of judge's summons. 5. The case of the applicant – State Government in both these matters is that the GSTC Ltd., ( in liquidation) is a company duly registered and incorporated under the provisions of the Companies Act, 1956, which was incorporated vide Certificate of incorporation No.1546/68 dated 30.11.1968. COMA/562/2007 5/58 JUDGMENT This Company was wholly owned by the State Government and the main objectives for which the GSTC was incorporated are inter alia to take over and run as an unemployment relief or otherwise any textile mill in Gujarat State, which is closed or likely to be closed or has gone into liquidation or otherwise and to manage and control any textile mill in Gujarat which may be taken over by the Government of India under the Industries (Development and Regulation) Act, 1951 and the management of which may be entrusted to the Company, and to run textile mills taken over by the Central Government on payment of the reserve price or on reconstruction under the provisions of the Cotton Textile Companies ( Management of undertaking and Liquidation or Reconstruction) Act, 1967 and entrusted to the GSTC for management, and to lend money to textile mill or Guarantee Loans secured by textile mills for scheduled Banks, Industrial Finance Corporation, Industrial COMA/562/2007 6/58 JUDGMENT Development Bank or any other Financial Institution for all or any one or more of the purpose of working finance, rehabilitation, expansion or modernization etc. 6. At the relevant time, there were 17 textile mills of GSTC as per the Annual Report & Accounts for the year 1994-95. On account of stringent crisis in the textile industry in the whole of the State of Gujarat and other relevant regions, GSTC could not do well and, therefore, GSTC approached by the Board of Industrial and Financial Reconstruction (BIFR) for revival of and reconstruction of the Company. After hearing all parties concerned, the BIFR found that it was not possible to meet the losses suffered by GSTC within a reasonable time and there was no likelihood of GSTC being revived in future and, therefore, an opinion was forwarded by the BIFR to this Court under Section 20 of the Sick Industrial Companies (Special COMA/562/2007 7/58 JUDGMENT Provisions) Act, 1985 for winding up of GSTC. This opinion was registered as Company Petition No.205 of 1996 and after hearing the parties, this Court vide its order dated 6.2.1997 had passed an order to wind up the GSTC and the Official Liquidator attached to this Court was appointed to take charge of all the assets and properties of GSTC including possession thereof and the Gujarat Industrial Development Corporation (GIDC) was appointed as an agent of Official Liquidator under Section 457(2)(v) of the Companies Act, 1956 for the purpose of preservation, protection and disposal of the property and the said agent, the GIDC is to act under the instructions of the Official Liquidator. 7. So far as Priyalaxmi Mills, Vadodara is concerned, a report of the Chartered Accountant – M/s.Suketu Trivedi & Co., was obtained on 22.6.2007 in relation to the COMA/562/2007 8/58 JUDGMENT liabilities and other issues on the take over of Priyalaxmi Mill, Vadodara, which contains certain facts relevant to this application and hence reproduced as under:- (i) Shri Keshariya Investment Ltd., purchased Textile Undertaking – Priyalaxmi Mills Ltd., from Shri Sayaji Mills Ltd., at an aggregate price of Rs.88.25 lacs with effect from 1.5.1973 by sale deed dated 26.5.1973. On 24.4.1975, Textile Undertaking was closed. The Gujarat State Textile Corporation Ltd., was appointed as authorized controller by the Central Government under Section 18A of the Industries Development Regulation Act, 1951 by a Notification dated 23.7.1977. The Textile Undertaking was thereafter managed by the Gujarat State Textile Corporation as authorised controller. (ii) with effect from 1.1.1986 under the provisions of the Gujarat Sick Textile Undertaking Nationalization Ordinance, 1986 COMA/562/2007 9/58 JUDGMENT the Textile Undertaking was nationalized The rights, title and interest of the owner stood transferred absolutely in the State Government and, thereafter, in GSTC free from any trust, charge line and encumbrances with effect from 1.1.1986 retrospectively. The Gujarat State Textile Undertaking Nationalization Ordinance, 1986 was repealed and substituted by the Gujarat Sick Textile Undertaking Nationalization Act, 1986. (iii) The Textile Undertaking was managed by the GSTC as an owner of the undertaking. The winding up order against the GSTC Ltd., was passed on 6.2.1997 by this Court. (iv) The period of management by the GSTC as authorised controller is post-take over management period. The period of management prior to that i.e. Management by private owner is pre-take over management period. (v) The post-take over period is classified as period prior to nationalization that is, management by authorised controller and the COMA/562/2007 10/58 JUDGMENT post nationalization i.e. subsequent to the nationalization as the owner of the undertaking. (vi) The liabilities of pre-take over management period i.e. till the appointment of the authorised controller and the period between the management as authorized controller by the GSTC Ltd., is taken care of under the Nationalization Act. The compensation is paid under the said Act and liabilities prior to 1.1.1986 are to be discharged by the Commissioner of Payments appointed under the said Act, in order to priority. (vii) The Official Liquidator is required to discharge its liabilities after 1.1.1986 when the GSTC owned the said undertaking. The statement of affairs of the GSTC in winding up provides break up of liabilities as on 6.2.1997. It is a statement of affairs certified under Section 454 of the Companies Act and is filed before this Court by the Directors of Company under winding up COMA/562/2007 11/58 JUDGMENT on 6.5.1997. The liabilities are for the period between 1.1.1986 and 5.2.1997 when the order for winding up was passed. Secured Creditors:- There are no secured creditors having any charge registered with the Registrar of Companies between the period from 1.1.1986 till 6.2.1997. In the statement of affairs secured dues of Gujarat Electricity Board (GEB) are relating to the energy charges and to the extent of security deposit lodged with GEB. The security deposit is against electricity bills and cannot confer any right to the GEB over any asset of the undertaking except appropriation of outstanding dues against such deposit. The total outstanding dues of GEB are shown to be Rs.15,34,908/-. The amount lodged as security deposit is COMA/562/2007 12/58 JUDGMENT Rs.1,14,840/-. The GEB appropriated the said deposit and, therefore, the amount due is unsecured debt of Rs.14,20,068/-. The State Government has negotiated with the various companies of the Ex.GEB and has stated in their communication dated 9.10.2007 to the effect that only the amount payable to the Board is Rs.14,20,000/- in respect of this mill and the company does not object to the application for return of the assets preferred by the State Government. A copy of the letter from Principal Secretary, Energy and Petrochemicals Department, Gandhinagar is placed on the record of this application. 8. The preferential Creditors shown in the statement of affairs are as under:- Particulars Amount Dues relating to State Government. Deferred Sales Tax on Yarn 10,99,266 Deferred Sales Tax on Electricity Duty 27,33,381 Deferred Electricity Duty GEB 1,49,60,744 COMA/562/2007 13/58 JUDGMENT Particulars Amount Unpaid Turnover Tax 496 Sales Tax Recovered to be paid 4,394 Baroda Municipal Corporation (Water Tax) 5,11,055 Unpaid Land Revenue 1,15,928 Baroda Municipal Corporation (Gas Octroi) 7,69,184 Sub Total (a) 2,01,94,448 Dues relating to Central Government Central Division Baroda (Income Tax TDS) 12 Central Excise Authority, Baroda 11,359 Textile Committee Cess 1,29,908 Sub Total – (b) 1,41,279 Workers dues including salary deductions Workers dues 6,15,461 Sub Total – (c) 6,15,461 Total (a + b + c) 2,09,51,188 9. The municipal Commissioner, Vadodara has intimated to the State Government that they will negotiate amount due and payable to the State Government towards the dues of GSTC and this letter is placed on the record of this application. It is further stated that major parties relate to the dues of State Government and dues relating to the Central Government would be settled and paid after due negotiation. COMA/562/2007 14/58 JUDGMENT 10. The unsecured creditors shown in the statement of affairs are as under:- Particulars Amount Dues relating to State Government. Gujarat Electricity Board (GEB) 14,20,088 Gujarat Industrial Investment Corp. (GIIC) 16,35,467 Sub Total (a) 30,55,535 Dues discharged by State Government (Covered under State Government Guarantee or otherwise) Cotton Corp. of India (CCI) 1,76,50,734 Bogaingaon Refinery (BRPL) 3,34,079 Oil & Natural Gas Corp. (ONGC) 1,67,58,286 Sub Total (b) 3,47,43,099 Other Creditors (Including Deposits and other old unclaimed Balances) Maharashtra Cotton Growers Fed. 47,94,336 Others 28,95,210 Sub Total (c) 76,89,546 Total (a + b + c) 4,54,88,180 11. Gujarat Industrial Investment Corporation (GIIC) has given no due certificate by letter dated 8.10.2007 so as to enable the State Government to approach this Court for return of the assets of Priyalaxmi Mills. The dues COMA/562/2007 15/58 JUDGMENT of CCI and BRPL have been settled and paid vide G.R. Dated 16.10.2006 & 21.12.2006 respectively. The settlement with ONGC and Maharashtra Cotton Growers Federation are underway. Relevant correspondence entered into between these parties are placed on the record of this application. 12. IN view of the aforesaid details, the amount remains due and payable as identified in the Statement of Affairs is as under:- a. ONGC Rs.1,67,58,258 b. Workers dues Rs. 6,15,461 c. Dues of Maharashtra Cotton Growers Ltd Rs. 47,94,336 d. Other creditors Rs. 28,95,210 13. So far as Monogram Mill is concerned, it is located at Rakhial Char Rasta in Ahmedabad City. The Mill was established on various plots of land taken on lease bearing Survey Nos.245 to 253. Manilal Mulchand obtained all the plots of different survey numbers except land of Survey No.252 on permanent COMA/562/2007 16/58 JUDGMENT lease. The land of Survey No.245 was taken on permanent lease on 25.8.1927 and land of other remaining survey numbers was taken on lease on 14.7.1927. Manilal Chunilal obtained the land of Survey No.252 on permanent lease from Harmandas Khushaldas and Baldevdas Harmandas on 30.8.1918 who gave this plot to Ben Marsden on lease. Subsequently all the plots under different survey numbers were consolidated under a tripartite agreement executed on 19.11.1927 among Manilal Mulchand, Ben Marsden and Monogram Mills to construct a Mill on the entire land under different survey numbers. Under the said agreement, Monogram Mills was established as lessee and it was the responsibility of the Mill to pay lease rent as per terms of original lease deed. The total area of the land taken on lease was 37.45 Acres. As per the Valuation Report of GITCO, the total area of the land taken on permanent lease by the Mills is 1,47,034 COMA/562/2007 17/58 JUDGMENT Sq.Mtrs. Prior to the closure of the Mills in the month of October, 1982 Board of Directors managed it. The other mill under the same management or associated with the same management group was Marsden Mills. 14. Before winding up of GSTC under an order of this Court, a voluntary retirement scheme (VRS) was announced by GSTC under an agreement executed with recognised union. All the employees who were on the roll at that time were entitled to the benefits of the scheme. Accordingly, almost all the employees tendered their voluntary resignations to the management and were paid their terminal benefits and other dues in terms of the VRS Agreement. The total amount spent on payment of terminal benefits to the employees of the Mill under the said VRS Agreement is Rs.3,075.19 lacs. The said amount was paid by GSTC out of the funds provided by the State Government. The credit COMA/562/2007 18/58 JUDGMENT balance of GSTC in the books of Mills as on 6.2.1997 was Rs.8,922.46 lacs which represents the total amount advanced to the Mills since its Nationalization by GSTC out of the funds provided by the State Government. 15. It is further stated that the period of management of Mills by its Board of Directors prior to the closure of the Mill in October, 1982 and, thereafter, till Nationalization with effect from 8.11.1985 is pre- nationalization period. The period of management by GSTC since nationalization on 8.11.1985 to its winding up on 6.2.1997 is post nationalization period. The period of management by Official Liquidator since its winding up on 6.2.1997 is post liquidation period. Thus, various stages of life tenure of the Mill can be summarized as under:- COMA/562/2007 19/58 JUDGMENT A Pre-Nationalization period Prior to the closure of Mills in October, 1982 and thereafter till nationalization on 8.11.85. B Post-Nationalization Period Subsequent to nationalization on 8.11.1985 till its winding up on 6.2.1997. C Post Liquidation Period Period subsequent to liquidation on 6.2.1997. 16. With regard to liabilities of pre- nationlisation period, compensation was fixed for each undertaking under the said Ordinance No.18 of 1985 and liabilities prior to the appointed day i.e. 8.11.1985 were to be discharged out of the said compensation by Commissioner of Payments appointed under the Gujarat Closed Textile Undertakings (Nationalization Act, 1986 – Gujarat Act 10 of 1986) Act in order of the priorities laid down in the Act. The liabilities created during the post nationalization period and remaining outstanding as on 6.2.1997 as well as the liabilities created by the Official Liquidator since 6.2.1997 and remaining outstanding till the date are to be discharged, out of the assets of the COMA/562/2007 20/58 JUDGMENT undertaking by the Official Liquidator. The category wise break up of liabilities as on 6.2.1997 for post nationalization period is given in the Statement of Affairs of the GSTC prepared upon its winding up as per statutory requirement under Section 454 of the Companies Act, 1956. It was prepared by GSTC and filed before this Court under the affidavit by the then Directors of the GSTC on 6.5.1997. The said statement of affairs contains details of liabilities and assets of all the unit Mills of GSTC individually and consolidated as a whole of GSTC including Monogram Mills. 17. The Chartered Accountant appointed by the State Government had verified the affairs of GSTC under liquidation as on 6.2.1997 and according to the summary of statement and according to verification, total outstanding dues are Rs.56,625,677. As stated earlier, approximately an amount of Rs.56 crores is COMA/562/2007 21/58 JUDGMENT lying credited to the account of company with the Official Liquidator and hence the liabilities, if any, of all these units of the Company can be discharged from the said amount. The relevant break up of liabilities in respect of the Monogram Mills is determined by M/s.Suketu Trivedi & Co., in their report dated 16.8.2007 and relevant break up is as under:- Post Nationalization period liabilities:- A. Secured Creditors List B :- There are no secured creditors as on 6.2.1997 of post nationalization period having any charge registered with Registrar of Companies. B. Preferential Creditors – List C: Particulars Amount Dues relating to State Government. Sales - tax 35,25,775 Deferred Electricity Duty GEB 1,73,64,523 Ahmedabad Muni.Corp.(Tax) 27,95,190 Others 1,63,308 Sub Total (a) 2,38,48,796 Dues relating to Central Government Textile Committee Cess 4,12,086 COMA/562/2007 22/58 JUDGMENT Particulars Amount Sub Total (b) 4,12,086 Workers dues including salary Deductions: 2,36,049 Sub Total (c) 2,36,049 Total (a + b + c) 2,44,96,931 Thus, as stated above, total liability to preferential creditors as per Statement of Affairs drawn on 6.2.1997 from Audited Books of Account is Rs.2,44,96,331/-. Out of total such dues, major portion relates to the dues of the State Government alone. Dues relating to Central Government and dues of workers including on account of deductions from salary aggregate to Rs.6,48,135/- as against dues of Rs.2,38,48,796/- relating to State Government alone. C Unsecured Creditors – List: E The break up of unsecured creditors listed in List: E of the Statement of Affairs as on 6.2.1997 drawn from the Audited Books of Accounts of GSTC, is as under:- Dues relating to State Government COMA/562/2007 23/58 JUDGMENT Ahmedabad Municipal Corporation - interest 41,72,373 Gujarat Industrial Investment Corporation (GIIC) 76,000 Gujarat Mineral Development Corpora 8,067 Sub Total (a) 42,56,440 Dues discharged by State Government (Covered under State Govt. Guarantee or otherwise) Cotton Corp. of India (CCI) 1,35,16,002 Torrent Power Ltd., AEC 85,73,657 Sub Total (b) 2,20,89,659 Other Creditors (including deposits and other old unclaimed balances) Maharashtra Cotton Growers Fed. 19,73,559 Gujarat Lease Finance Ltd., 1,563 Others 13,63,073 Majoor Mahajan Sangh 1,70,728 Sub Total (c) 36,18,285 Total (a + b + c) 2,99,64,384 18. It is further stated that dues of CCI which were covered under State Government, have already been paid at an agreed amount. In addition to that, the dues of net of security deposit of Torrent Power Ltd., (former AEC) have also been paid by the State Government at an agreed amount. Government orders and undertakings are placed on record. COMA/562/2007 24/58 JUDGMENT Thus, out of total dues of Rs.2,99,64,384/- major portion has been discharged by State Government and out of remaining dues, Rs.42,56,440/- relate to undertakings/ authorities owned/controlled by State Government. Other outsider remaining dues aggregate to Rs.36,18,285/- of which dues of Maharashtra Cotton Growers Federation are under verification, reconciliation and quantification under the instructions of the State Government and upon completion of that exercise, the same will be paid off by the State Government directly. Relevant communication received from GIIC and AMC are placed on the record of this application. 19. It is further stated that out of total post nationalization dues of Rs.5,44,61,315/- outstanding as on 6.2.1997, dues aggregating to Rs.2,81,05,236/- are related to State Government and dues aggregating to Rs.2,20,89,659/- have been directly settled COMA/562/2007 25/58 JUDGMENT by State Government. Thus, out of the total liabilities, the aggregate quantum of dues relating to State Government and dues directly discharged by the State Government works out to 92.17% of the total dues. Thus, the major stake in the form of liabilities is of the State Government. 20. In addition to the discharge of dues of post nationalization period covered under State Government guarantee or otherwise, State Government has directly discharged the pre-nationalization secured dues of Banks and Financial Institutions having charge on the assets of the undertaking duly registered in favour of respective Bank and Financial Institution with Registrar of Companies. However, such charges were released by virtue of the provisions contained in the Nationalization Act. The pre-nationalization dues comprised only of dues created under the management by private owner. The pre- COMA/562/2007 26/58 JUDGMENT nationalization dues of such secured creditors from subject matter undertakings have been paid since nationalization to winding up and thereafter as under :- Name of Bank/Institution Amont Bank of Baroda 103.81 Dena Bank 75.75 IDBI 52.92 Total 232.48 21. Based on the above facts, Mr.S.N.Shelat, learned Senior Counsel appearing with Mr.M.G.Nagarkar, for the applicant – State of Gujarat has submitted that the State Government has discharged almost entire liability of the Company in liquidation and still an ongoing process is initiated by the State Government to discharge the dues of remaining outside creditors. The State Government has undertaken to settle dues relating to State Government directly with respective department and respective institution. On the date of passing of the COMA/562/2007 27/58 JUDGMENT winding up order by this Court, balance with Bank of Monogram Mills was Rs.72,557/- only. Official Liquidator sold the plant and machineries of the Mills in the year 1999 at a consideration of Rs.445 lacs. The Sale Committee constituted for the liquidation proceedings had invited offers for sale of buildings of the Mills and the highest offer of Rs.400 lacs is under process of approval by this Court. The said amount which realized together with principal amount of Rs.445 lacs already realized by sale of plant and machineries of the Mills in the year 1999 will be more than sufficient to discharge entire liabilities of the Mills stated in the Statement of Affairs. As per the available information, sizable balance approximately to the tune of more than Rs.5,000 lacs is available with Official Liquidator for GSTC as a whole out of sale proceeds of the assets of some of the undertakings, which is in addition to the proposed sale proceeds. The COMA/562/2007 28/58 JUDGMENT balance available with the Official Liquidator is much in excess of the total liability of outside creditors appearing in the Statement of Affairs of GSTC as a whole. Thus, after payment to remaining creditors either by Official Liquidator or by the State Government directly, the surplus balance of sizable magnitude will have to be surrendered by the Official Liquidator to State Government as a sole shareholder of GSTC. On the other hand, as per available information, since winding up order of GSTC and handing over the affairs and assets of the undertaking to the Official Liquidator, none of the creditors as mentioned in the Statement of Affairs has been discharged by the Official Liquidator. 22. Mr.Shelat has further submitted that the liabilities relating to the period from the date of nationalization of the undertaking till the winding