1 ca243-11.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPLICATION NO.243 OF 2011 IN COMPANY PETITION NO.1068 OF 1997 In the matter of the Companies Act, 1956; And In the matter inter-alia Application under section 466 and other relevant provisions of the Companies Act, 1956, and of inherent powers under Rule 9 of the Companies (Court) Rules, 1959; And In the matter of the Swadeshi Mills Company Ltd (In Liquidation), a company incorporated under the Act of VI of 1882 of the Legislature Council of India, having its registered office at Swadeshi Mills Compound, Sion, Mumbai 400 022. Ralli Brothers & Coney Known as “Cargill Cotton”, a company incorporated under the Laws of United Kingdom having its registered office at Knowle Hill, Park Fairmile Land, Cowham Surry, KT 11, 2PD, England UK. And 2 ca243-11.doc 1 Forbes & Co Ltd (earlier known as Forbes Gokak Ltd), a Company, incorporated under the Companies Act, 1956, having its registered office at Forbes Building, Charanjit Rai Marg, Fort, Mumbai 400 001 2 Grand View Estates Pvt Ltd, a company incorporated under the Companies Act, 1956, having its registered office at 70, Nagindas Master Road, Fort, Mumbai 400 023 and administrative office at SP Centre, 41/44, Minoo Desai Marg, Colaba, Mumbai 400 005 .. Applicants Versus The Official Liquidator of The Swadeshi Mills Company Ltd (in liquidation), having its office at Bank of India, 5th Floor, M.G.Road, Fort, Mumbai 400 001. .. Respondent Mr.Virag Tulzapurkar, Sr. Advocate with Mr.Cyrus Ardeshir and Mr.Tapan Deshpande i/by Amarchand Mangaldas & S.A.Shroff & Co for the applicants. Mr.J.P.Cama, Sr.Advocate with Mr.K.S.Bapat i/by R.V.Sankpal for RMMS. Ms.Jane Cox for 735 workers from Mill and 28 staff members from the Head Office. Dr.T.Pandian, O.L., present. 3 ca243-11.doc CORAM : S.C.DHARMADHIKARI, J. RESERVED ON : 23rd September 2011. PRONOUNCED ON : 14th October 2011. JUDGMENT: . This Company Application invokes the powers of this Court under section 466 of the Companies Act, 1956 (“Act” for short). The Application is by the Applicants who are a Public Limited Company, namely, Forbes & Company Ltd and a Private Limited Company Grand View Estates Pvt Ltd, both registered under the Act. They have prayed that order dated 5th September 2005 passed by this Court of winding up the Swadeshi Mills Company Ltd (company in liquidation), be permanently stayed and the applicants be permitted to deposit with the Official Liquidator attached to this Court an aggregate sum of Rs.86 crores as per the chart at Annexure A to the application. Then, there are further prayers for making payment of this sum to the secured creditors, workers and employees of the company. After such payment, the applicants pray that the assets and properties of the company in liquidation be handed over to them and the Official Liquidator to stand 4 ca243-11.doc discharged. 2 An affidavit in support of this company application has been filed and it is stated therein by the applicants that the 1st applicant is a promoter shareholder, secured and unsecured creditor of the company in liquidation. It is in the business of engineering goods, shipping and office automation. The 1st applicant alongwith its wholly owned subsidiary company owns 17,64,430 equity shares constituting 22.70% of total equity shareholding of the company in liquidation. Applicant No.2 is a private limited company, duly incorporated under the provisions of the Companies Act, 1956 having its registered office and administrative office at the address mentioned in the cause-title of this company application. It is a major shareholder, a secured and unsecured creditor of the company in liquidation. Real estate business is one of the objects of applicant No.2. It owns 22,83,210 equity shares constituting 29.29% of the total shareholding of the company in liquidation. The said shares were acquired by the applicant No.2 after the winding up order, for which it has obtained requisite leave of this Court, under the Companies Act, 1956 and had those shares transferred in its name. Thus, the applicants own, in aggregate, 52% of the total equity shares of the 5 ca243-11.doc company. Further, the applicants are the only secured creditors of the company and thus are vitally interested in the affairs of the company. Both the applicants are part of Shapoorji Pallonji Group. The said Shapoorji Pallonji Group is a 140 year old leading corporate house with significant experience, inter alia, in the Construction, Infrastructure and Real Estate Development Business. 3 Prior to its liquidation, the company was a public limited company, incorporated under the Act of VI of 1882 of the Legislature Council of India. The company is currently under winding up and is represented by the Official Liquidator, attached to this Court. The share capital of the company as per the last available financial statement with the applicants i.e as on 31st March 2001 was as under: Particulars Amount (Rs.) AUTHORISED: (a) 15,000 unclassified shares of Rs.100 each 15,00,000 (b) 98,50,000 ordinary shares of Rs.10 each 9,85,00,000 Total ISSUED, SUBSCRIBED AND PAID UP: 77,95,450 ordinary shares of Rs.10 each fully paid 7,79,54,500 Total 7,79,54,500 6 ca243-11.doc 4 The company, prior to its winding up, was operating as a composite textile mill, having spinning, weaving and processing sections for the manufacture of cotton, synthetics, interlining and non woven fabrics. It was engaged in the textiles business for more than 10 decades. It enjoyed a strong goodwill in the market and had drawn inspiration from Swadeshi movement of India. The operations of the company started deteriorating from 1982, because of prolonged textile strike in Mumbai, increase in cotton prices and recessionary conditions in the cotton textile industry. Factors like technological changes, high labour cost, higher cost of funds, sluggishness in textile industry and competitive disadvantage of mill against unorganized sector etc further deteriorated the financial condition of the company. 5 In the year 1997, Ralli Brothers and Coney filed a petition in this Court for winding up of the company. Thereafter, various other winding up petitions were also filed in this Court. Around February 1998, the company made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The BIFR declared the company a sick company. The BIFR vide its order dated 5th February 7 ca243-11.doc 2001, recommended to this Court for winding up of the company. Appeal preferred against the said order by Rashtriya Mill Mazdoor Sangh, a registered trade union the Bombay Industrial Relations Act, 1946 and also the Representative and Authorized Union of the Company before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) was also dismissed vide its order dated 14th May 2001. Applicant No.1, from time to time, had provided financial assistance aggregating to approximately Rs.43,00,00,000/- (Rupees Forty Three Crores only) almost during the entire period of the proceedings before the BIFR and thus enabled the company to continue its operations. The details of financial assistance during the said proceedings are as follows: Year Rupees in Crore 1998 3 1999 19 2000 16 2001 5 However, due to the overall recessionary conditions and structural problems in the textile industry, the financial condition of the company did not improve. Pursuant to the recommendation of the BIFR, this 8 ca243-11.doc Court commenced winding up of the company. The Official Liquidator of this Court was appointed as Provisional Liquidator of the company vide order dated 13th February 2002 with all powers available to him in terms of the Companies Act, 1956. 6 After referring to a sale of finished goods under the supervision of Court Receiver, it is stated that by resolution dated 20th September 2001 issued by the Government of Maharashtra, a High Power Committee was appointed to look into the matters relating to the workers dues, bankers and financial institutions. That Committee was empowered by this Court to dispose off the assets of the company. By order dated 21st June 2002, the High Power Committee disposed off the entire plant and machinery of the company and realised amount of Rs.15.53 crores. The amount received from the sale of finished goods and the entire plant and machinery was distributed for reimbursement of the cost of security agencies, other related expenses, part payment of the dues of the workers and employees dues and part payment of the statutory dues and that of these secured creditors. 7 The winding up order is then referred to and then in para 7 of the 9 ca243-11.doc affidavit in support, this is what is stated: “In recent years, the Government of Maharashtra has initiated various activities for the promotion and facilitation of development of mill lands in Mumbai. Increasing the availability of housing has also been a thrust area. The said initiatives, alongwith the available immovable properties of the Company together, offer a favourable platform for the company to undertake real estate development operation. 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 Court as sought by the applicants herein.” 8 It is stated that the applicants being major shareholders and secured creditors, are vitally interested in bringing the company out of 10 ca243-11.doc winding up. Applicant No.2 by a letter dated 11th November 2010 addressed to the Official Liquidator, High Court, Bombay, sought information on various contributories of the company including its secured, unsecured and statutory creditors. In reply to the aforesaid letter, the Official Liquidator requested applicant No.2 to take inspection and after taking such information which was made available and on noticing the contents of the documents inspected, it is stated that the total liability of the company in liquidation as on 31st March 2011 is approximately Rs.375.33 crores. Out of that Rs.280.90 crores is the liability of the applicants, which they have agreed to defer, as more particularly set out in this affidavit and as far as the other claims and liabilities, the applicants will duly meet them. 9 A reference is made to the Rashtriya Mill Mazdoor Sangh, affiliated workers and employees and a Memorandum of Understanding dated 15th November 2010 signed by the applicants and the Rashtriya Mill Mazdoor Sangh which is stated to be a representative and authorised Union of the workers employed in the company in liquidation. It is stated that the claim was filed by Rashtriya Mill Mazdoor Sangh on behalf of the workers. Seventy five percent of the claim has been paid 11 ca243-11.doc off by the Official Liquidator out of the sale proceeds of the machinery of the company and as part settlement of the Memorandum of Understanding, amounts have been disbursed. In terms of the chart Annexure F, Rs.74,42,97,519/- are due and payable. There is also claim of 37 workers/employees who have opted for voluntary retirement scheme in about 1999 and that is referred to in chart at Annexure G. The claim of resigned/retired employees prior to 31st September 2001, it then adverted to and it is stated that, that is enlisted in the chart at Annexure H to the affidavit in support. It is in these circumstances and when these employees are in managerial cadre, whereas 75% of the claim has been paid up by the Official Liquidator from the sale proceeds, that the package of additional amount has been drawn. 10 A reference is also made to the claim of the workers and employees affiliated to the Mumbai Mazdoor Sabha, claim of unsecured creditors, other claims and the total liability aggregating to the applicants is Rs.86 crores. Although, advertisements were published inviting claims from various creditors other than those which are referred, none have been received and it is on this basis that the computation of Rs.86 crores has been arrived at. It is stated that the applicants are part of 12 ca243-11.doc Shapoorji Pallonji Group, who are experts in the business of construction, infrastructure and real estate. It is stated that the company is not in a position, now to carry on textile business as the entire finished goods, plant and machinery have been already sold. There is always a scope for diversification and in the present circumstances when in the city of Mumbai, no textile manufacturing business is feasible or practicable that the applicants prayed that this application be allowed. 11 Mr.Tulzapurkar, learned senior counsel appearing on behalf of the applicants invites my attention to section 466(1) of the Companies Act, 1956 and submits that, the provision vests the Company Court with a discretion to permanently stay the winding up. By the application, the applicants have demonstrated their bonafides. The permanent stay has to be granted, provided the Court is satisfied that there is concrete material, which in this case is produced in the form of payment to creditors and all claims which are outstanding are adequately and sufficiently protected. In the present case, there is no question of the application lacking in bonafides or being opposed to commercial morality. The public interest is also subserved inasmuch as 52% of the shareholding in the company in liquidation, is that of the applicants. In 13 ca243-11.doc the present case, if the substantial secured creditors like applicants have deferred their claims and objection to the relief claimed is that the applicants want to take over the company and start some other business, then, that can be taken care of by clarifying that if the object clause in the memorandum does not include the business that is proposed to be carried out, subject to such modification or amendment thereof, the same would be carried out, that would suffice and protect the interest of all concerned. The law does not prohibit other business being carried on by the company in liquidation after the winding up order is stayed. Once such is the legal position, the application is bonafide and no factor militates against the exercise of the power of stay, then, the discretion in terms of section 466(1) of the Companies Act, 1956 be exercised in favour of the applicants. 12 Mr.Tulzapurkar submits that the section 466(1) imposes no condition, nor it states anywhere that the same business should be carried on. Once the objecting workers are being paid full dues as adjudicated by the Official Liquidator including interest accumulated in accordance with law, then, all the more the objections be over ruled. Mr.Tulzapurkar takes instructions and makes a statement that in the 14 ca243-11.doc present case, the Provisional Liquidator was appointed on 13th February 2002. The applicants are entitled to interest in terms of Rule 179 of the Companies Court Rules, 1959. If interest is to be computed, the applicants state that the same may be made payable with effect from the date of appointment of the Provisional Liquidator. For all these reasons, it is submitted that this application be allowed. Mr.Tulzapurkar has placed reliance on the following decisions in support of his above contentions: (1)[1981] 51 Company Cases (Bom) 20 – Vasant Investment Corporation Ltd Vs. Official Liquidator, Colaba Land and Mill Co Ltd; (2)[2000] 99 Company Cases 189 (Guj.) – Textile Labour Association Vs. Official Liquidator of Jubilee Mills Ltd; (3)2003(4) Bombay Cases Reporter 836 – Maharashtra State Textile Corporation Ltd Vs. Gopal Balu Saikar, since deceased by his heirs & another (Writ Petition No.4998/1987 decided on 7.1.2003); (4)[2009] 150 Company Cases 829 (Guj) – P.Chandrasekharan Vs. O.L of Ahmedabad Mfg & 15 ca243-11.doc Calico PTG Co Ltd & others; (5)(2010) 1 Company Law Journal 74 (Guj.) - Shaan Zaveri & Ors Vs. Gautam Sarabhai (P) Ltd 13 On the other hand, Ms.Jane Cox submits that she is appearing on behalf of 748 workmen. Each one of them have lodged their claim with the Official Liquidator. Each one of them is entitled to the amount in accordance with law. As far as their dues are concerned, there has to be a adjudication by the Official Liquidator. She invites my attention to the report of the Official Liquidator and submits that the Official Liquidator has referred to the sale of movables and she further submits that as per the records the Official Liquidator had received/adjudicated the claims which have been mentioned at para 46 of the report of the Official Liquidator dated 12th July 2011. She submits that the payment in terms of the statement made in the Official Liquidator’s report does not constitute discharge of liability of workers dues in full. 14 Ms.Cox submits that the workers dues cannot be restricted or computed only in terms of the Memorandum of Understanding. It is not as if the Rashtriya Mill Mazdoor Sangh is the sole arbiter or decision 16 ca243-11.doc maker of the claims and, therefore, once the aggrieved workers have clarified that they do not wish to accept the terms of Memorandum of Understanding signed by the Rashtriya Mill Mazdoor Sangh, then, their claims have to be adjudicated independent of the Memorandum of Understanding and in accordance with law. The workers would then get much more amount which is assured in terms of the Memorandum of Understanding. Therefore, the Memorandum of Understanding with Rashtriya Mill Mazdoor Sangh ought not be held to be conclusive and decisive of all claims and dues of the workers. 15 Ms.Cox submits that once the company is in liquidation, then, the Bombay Industrial Relations Act, 1946 or the Maharashtra Recognition of Trade Union and Prevention of Unfair Labour Practices Act, 1971, are inapplicable. There is no concept of representative Union or recognised Union any longer governing or operating in the field. The dues of all workers have to be adjudicated and determined by the Official Liquidator. That has to be done by him in terms of the powers conferred by the Companies Act, 1956. The workers are placed in the position of secured creditors. Their claims cannot be given a go bye or diluted by any unilateral compromise by one union. The Memorandum of 17 ca243-11.doc Understanding does not give any benefit to these workmen. She submits that winding up order is of 2005 and the balance that has been calculated is as of 30th September 2001. In this context, she invites my attention to page 112, viz., Schedule II to the Memorandum of Understanding and submits that the dues subsequent to the 30th September 2001 upto date of winding up and outstanding payable even thereafter is much more. That cannot be restricted by any Agreement or Memorandum of Understanding. This amounts to contracting out of a statue and giving up the statutory benefits permanently. She, therefore, submits that merely because a Memorandum of Understanding has been executed by the applicants with the Rashtriya Mill Mazdoor Sangh, that by itself will not enable the Court to exercise its discretionary powers under section 466(1) of the Companies Act, 1956. By unilateral act of parties, this Court cannot be called upon to exercise its discretion in granting permanent stay of the winding up. She submits that different considerations and tests will have to be applied and there is no right vested in the applicant to seek permanent stay of winding up and particularly on the grounds which are set out in the affidavit in support. She submits that in this case, the discretion should not be exercised because the applicants are not reviving the company in liquidation. They 18 ca243-11.doc are interested in exploiting immovable assets and properties of the company. She submits that after the manufacturing activities have stopped, the plant and machinery has been sold according to the applicants, then, all that they are interested in, is the land. They propose to develop it by constructing multi-storeyed buildings thereon. They are in real estate business and, therefore, looking at profits by development of land. They want to exploit the potential of the land in the present real estate market. There is nothing in the scheme which would enable this Court to be satisfied that the applicants have a bonafide intent of reviving the business of the company in liquidation. The real estate business is not the business of the company in liquidation. In such circumstances and when the intent of section 466(1) is to confer discretion on the Court to stay the winding up proceedings permanently so as to enable the revival of the company in liquidation, then, all the more the applicants are not entitled to any relief. They cannot in the garb of seeking such relief, firstly acquire and then sell and dispose of the assets to a third party. This is a malafide act and the intent is to overreach the company Court by taking away the assets and properties of the company in liquidation from the control of this Court. The applicants desire to achieve indirectly what is prohibited directly in law. 19 ca243-11.doc This is nothing but an attempt to show revival of the company in liquidation on paper and thereafter to sale it off completely. There is no scheme for diversification nor of running the industry. In these circumstances, this application should not be granted. 16 Ms.Cox submits that as the applicants are seeking permanent stay of winding up, then, once the discretion is exercised in their favour and the winding up proceedings are stayed, the employment of the workmen with the company in liquidation stands revived. There is no legal termination of their services. There is no compliance with section 25N and 25O of the Industrial Disputes Act, 1947. There is no guarantee that those who are not consenting for settlement of their dues in terms of the Memorandum of Understanding, will get full payment including interest. Those claims may go to the tune of Rs.5,000 crores. She, therefore, submits that in any event what is offered is less than what the creditors would get on winding up that the discretion under section 466(1) should not be exercised. If the applicants desire to take over the company or present a scheme or arrangement with the creditors, then, they cannot resort to section 466(1), but, they must comply with sections 391 and 394 of the Companies Act, 1956. Merely to by-pass the same, that this 20 ca243-11.doc application is filed. Once their intent is as aforestated, then, the application may be dismissed and the Official Liquidator should be directed to take steps to sell the assets and properties in winding up. It will be more beneficial for the creditors of the company including these workers. Ms.Cox, therefore, submits that the application be dismissed. 17 Ms.Cox relies upon following decisions in support of her contentions: (1)[2005] 127 Company Cases 752 (Bom) – Shree Niwas Girni Kamgar Kruti Samiti & Ors Vs. Rangnath Basudev Somani & Ors; 18 Mr.Cama, learned senior counsel appearing on behalf of the Rashtriya Mill Mazdoor Sangh states that the Sangh represents 2800 workers. He submits that the plight of the workers is deplorable. They have not earned any wages from 2001. The company has been wound up in 2005. There are no benefits. The claim as stated by Ms.Cox is highly inflated and there are no documents to justify figure of Rs.5,000 crores. This is not an admitted sum. Mr.Cama submits that on the other hand, by virtue of Memorandum of Understanding and the efforts 21 ca243-11.doc initiated by Rashtriya Mill Mazdoor Sangh, 75% of the wages have been paid by the Official Liquidator. This was after sale of movables. Now, there is no plant, no finished goods, no materials. Therefore, there is no possibility of revival of textile business nor is the company in a position to carry on the same. Taking into consideration the present day government