ca624-10.doc 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPLICATION NO.624 OF 2010 IN COMPANY PETITION NO.105 OF 2001 Uniworth International Ltd. .. Applicants A company incorporated under the Companies Act, 1956 having its office at 70-A, Shakespeare Sarani, Kolkata 700 017 .. Applicant Versus Official Liquidator, High Court Bombay 1] Asset Reconstruction Co. (I) Ltd. A company incorporated under the Companies Act, 1956 having its office at Times Tower, 9th floor, Kamla Mills Compound, Lower Parel, Mumbai 2] Webtech Industries Pvt. Ltd. A Company incorporated under the provisions of Companies Act, 1956 having its office at 210, Shree Krishna Commercial Centre, 6, Udyog Nagar, Off S.V.Road, Goregaon (West), Mumbai .. Respondents Mr.P.K.Samdani, Senior Advocate with Mr.Gaurav Joshi, Ms.Priya Ranade i/b. M.Gandhi & Co. for Applicants Mr.Virag Tulzapurkar, Senior Advocate with Dr.Birendra Saraf, ca624-10.doc 2 Sachin Chandarana, Pranika Bhatia, Shravanth Parchuri i/b. M.K.Ambalal & Co. for respondent No.2 ARCIL Dr.T.Pandian, O.L. Present CORAM : S.C.DHARMADHIKARI, J. Reserved on: 21st January 2011 Pronounced on: 7th March 2011 ORAL JUDGEMENT: 1] This is a company Application by the Applicant M/s.Uniworth International Ltd. praying for the following reliefs:- “(a) this Hon'ble Court be pleased to quash and set aside the sale of all the secured assets of the company viz Uniworth Apparels Ltd., by the respondent No.2 in favour of respondent No.3 purportedly pursuant to a Sale Certificate dated 12.4.2010; (b) that the respondent No.1 be ordered and directed to forthwith take physical possession and custody of all assets of the said company i.e the assets purportedly sold by respondent No.2 to respondent No.3;” 2] Although a preliminary objection was raised to the ca624-10.doc 3 maintainability of this application by Mr.Tulzapurkar, learned Senior Counsel appearing for the original petitioner and he questions the locus of the applicant, who is a third party and contended that the sale is not conducted by virtue of any order or proceedings under the Companies Act, 1956, bearing in mind the broad sweep of the arguments and the parties agreeing that all contentions including on merits of the application be dealt with, I am of the opinion that it is not necessary to give any ruling on the preliminary objection. Thus, the question whether the present proceedings are maintainable or not and this Court has jurisdiction as a Company Court to set aside a sale of secured assets by secured creditor under the Securitisation Act, 2002 are left open. I am proceeding in this case on the above agreed basis. 3] The applicant here is group company of the Uniworth Group and is also shareholder and contributory of the Company in Liquidation i.e. Uniworth Apparels Ltd. The present application is filed by the applicant to protect interest of all shareholders, unsecured creditors and workmen of the company viz., Uniworth ca624-10.doc 4 Apparels Ltd. The present petition was originally filed by ICICI Ltd., which had on or about 23.5.2000 issued a winding up notice claiming a sum in excess of Rs.35 Crores. ICICI Ltd. was a secured creditor of the said company. By an order dated 20th April 2001 passed by this Court in the present company petition, the petition was admitted, directions were given for advertisement thereof and the respondent No.1 was appointed as provisional liquidator of the company viz., Uniworth Apparels Ltd. 4] The said company was on or about 26th April 2001 referred to the Board of Industrial Finance and Reconstruction (BIFR) and Appellate Authority of Industrial Finance and Reconstruction, (AAIFR) both functioning under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. During the pendency of the proceedings, ICICI Ltd., had on or about 14th October 2003 started action against the said company under the provisions of the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 by issuing a demand notice under section 13(2) thereof. Thereafter, it ca624-10.doc 5 appears that on or about 31.3.2004 ICICI Ltd., transferred and assigned the amount owed to it and its rights to recover it, to the respondent No.2. During the pendency of the proceedings before the AAIFR, the respondent No.2 issued a notice dated 29th April 2008 under the provisions of section 13(4) of the Securitisation Act and took possession of the properties of the said company. 5] In view of the proceedings adopted under the provisions of the Securitisation Act, the AAIFR by its order dated 24th November 2008, inter alia, held that the reference filed by the company had abated and disposed off the appeal accordingly. In view thereof, the respondent No.1 was bound to continue as provisional Liquidator of the company to secure and take physical possession of its assets. It is stated that Respondent No.2 was fully aware of the order dated 20th April 2001 appointing respondent No.1 as provisional liquidator of the said company. Respondent No.2 had in fact on or about November 2009 filed an application being Company application No.1211 of 2009 to be brought on record as petitioner in the present company petition. By an order dated 26th ca624-10.doc 6 November 2009 passed by this Court, respondent No.2 was allowed to be brought on record as a petitioner in the present company petition. By another order dated 25th June 2010 this Court extended the returnable date of the present company petition for publication of the advertisement by respondent No.2. 6] It is contended that being aware of the appointment of the provisional liquidator, Assets Reconstruction Company (India) Ltd. (for short ARCIL) has fraudulently and illegally purported to sell and/or dispose of the secured assets of the company in favour of respondent No.3, purportedly pursuant to a certificate of sale dated 20th April 2010 for a sum of Rs.14 Crores. The sale is conducted by private treaty at a gross under valuation. The endorsement by the Collector of Stamps (Thane) Civil, shows the market value has been assessed at Rs.29 Crores and odd and, therefore, the entire sale is challenged as fraudulent and illegal. It is submitted that the assets of the company were in the custody and/or deemed to be in the custody of Official Liquidator who is appointed as provisional liquidator and thus custodia legis. The sale should not have been ca624-10.doc 7 conducted or carried out without consent of respondent No.1 and in any event without informing/ involving or associating respondent No.1 in order to ensure that proper price was fetched for the sale of assets of the company. Once the order appointing provisional liquidator was made ARCIL could not have realised the secured properties without consent of the Liquidator or without obtaining permission from this Court. More so, as the liquidator was appointed much prior to the initiation of the proceedings under the Securitisation Act. 7] It is contended that the Court is empowered and has jurisdiction to issue directions to respondent No.2 or any secured creditor which might have invoked section 13(4) of the Securitisation Act. In fact by stepping into shoes of the original petitioner, M/s.ARCIL has submitted to the jurisdiction of this Court. It has not decided to stay out of winding up proceedings. Even otherwise, the respondent No.2 was precluded from dealing with or selling any of the properties as secured creditors or otherwise and in such circumstances, the sale is illegal and requires ca624-10.doc 8 to be quashed and set aside. The sale is also sought to be challenged on other grounds and more particularly on those stated in paras 10 to 14 of the affidavit in support of the present company application. 8] M/s.ARCIL (respondent No.2) has filed an affidavit in reply and has contended that firstly this company application is not maintainable as this Court will have no jurisdiction to entertain and try any proceedings questioning the sale of the immovable property of the company under Securitisation Act. There is a remedy available in law to challenge the same. 9] It is then contended that the applicant has not sought any leave of this Court to join the purchaser. The purchaser is not a necessary party to the proceedings. For these reasons the application be dismissed. Even the Liquidator has filed a reply and has prayed that the sale be declared as void on account of section 536(2) and section 537(1) of the Companies Act, 1956. 10] It is on this material that I have proceeded to hear ca624-10.doc 9 Mr.Samdani, learned Senior Counsel appearing on behalf of the applicant and Mr.Tulzapurkar, learned Senior Counsel appearing on behalf of ARCIL. Mr.Samdani submits that this company petition was filed on 23rd May 2000. It was admitted and a provisional liquidator has been appointed on 20th April 2001. A reference was made to the BIFR but by an order dated 24th November 2008, AAIFR held that the Reference to BIFR has abated. Mr.Samdani then submits that M/s.ARCIL got an assignment of the debt in its favour from the original petitioner on 30th March 2004. ARCIL was brought on record as petitioner on 26th November 2009. This was done to enable it to effect sale of the property in favour of respondent No.3. That sale is effected on 12th April 2010 for Rs.14 Crores. However, the sale is by private treaty and of a property which is worth about Rs.28 Crores. The sale is, therefore, obviously fraudulent and bad in law. Mr.Samdani submits that an order of winding up of the respondent company has been made on 14th January 2011. That order by virtue of the provisions contained in section 441 of the Companies Act, 1956 relates back to the date of presentation of the company petition viz., 23rd May 2000. Once the ca624-10.doc 10 doctrine and principle of relation back applies, then, custody and control of the assets and properties of the company in liquidation is with the Court. A secured creditor stands outside the winding up proceedings and effects the sale of the property of a company in liquidation but without informing the liquidator or seeking any approval and consent from the company Court, then, the sale is void under the Companies Act, 1956. Leave of Company Court in such cases is condition precedent. The applicant is a shareholder and contributory and, therefore, he is entitled to initiate the present proceedings and in any event, as a derivative action. 11] Mr.Samdani, then invites my attention to section 441, 447, 448, 450, 457(1)(a) and Section 528 to 530 and 536 and 537 of the Companies Act. He submits that the provisions of the Securitisation Act are not in any manner over-riding the Companies Act, 1956 and particularly when section 37 of the Securitisation Act specifically refers to the Companies Act. Section 34 of the Securitisation Act refers to the term “Civil Court” and not “company court”. In these circumstances, the company court can be ca624-10.doc 11 approached and in no way its jurisdiction is diluted or taken away by any provisions of the Securitisation Act leave alone section 17 thereof. Mr.Samdani has, therefore, contended that the application be allowed and the sale be set aside. 12] In support of his contentions, he relies upon the following decisions:- “1. (2005) 8 Supreme Court Cases 190 (Rajasthan State Financial Corporation & Anr. Vs. Official Liquidator & Anr); 2. AIR 1993 Bombay 392 (Maharashtra State Financial Corporation, Bombay And Ballarpur Industries Ltd Vs. The O.L, High Court Bombay and Liquidator of M/s.Atrois Chemicals Pvt Ltd); 3. 2004 Company Cases Vol.122 (State Bank of India Vs. Pro.O.L, of Volvo Steel Ltd (Stanrose Steel Ltd)); 4. 1994 Company Cases 599 (Indian Textiles & Anr Vs. Gujarat State Financial Corporation & Ors); 5. (2010) 158 Company Cases 168 (P & H) (Haryana State Industrial and Infrastructure Development Corporation Vs. Haryana Concast Ltd & Anr); 6. (2009) 150 Company Cases 280 (All) (BPL Display Devices Ltd, In re (erstwhile Uptron Colour Picture Tube Ltd); 7. (2009) 152 Company Cases 215 (P & H) (Pegasus Asset Reconstruction Pvt Ltd Vs. Haryana Concast Ltd); ca624-10.doc 12 8. 1984.... (Bom) 19 (Kamani Metallic Oxides Ltd Vs. Kamani Tubes Ltd); 9. A.I.R. 2004 S.C. 2371 (Mardia Chemicals Ltd Vs. Union of India & Ors)” 12] On the other hand Mr.Tulzapurkar, learned Senior Counsel appearing on behalf of the original petitioner – respondent No.2 to this application (ARCIL) submits that the Securitisation Act is a latter Act. It prevails over the Companies Act 1956. The Company Court has no jurisdiction to question the sale held under the Securitisation Act. He submits that the company was not in liquidation on the date of the sale and that is the crucial date and factor. Once the company was not in liquidation on the date of sale, then, any subsequent order of winding up of the company will not affect the sale conducted prior thereto. The deeming fiction under section 441 will not come into play. In any event, it has limited operation. It is submitted that the date of sale is 12th April 2010 on which date there was no order of winding up. Therefore, in any event, the sale is not bad in law. Hence, there is no question of any doctrine of relation back applying in this case. He submits that the argument of Mr.Samdani overlooks the Securitisation Act and ca624-10.doc 13 section 13 thereof. Mr.Tulzapurkar submits that section 529A of the Companies Act and other provisions thereof relied upon, come into play after the order of winding up. Therefore, the Legislature was aware of this position and in the Securitisation Act, it makes a reference thereto and in this behalf, he relied upon section 13(9) of the Securitisation Act. Mr.Tulzapurkar submits that the consideration of Rs.14 Crores received from the sale is with the original petitioner ARCIL. It is not as if the ARCIL will not abide by section 529A but merely because the priorities under that provisions have to be determined, does not mean that the sale is bad in law. That aspect is distinct from the legality and validity of the sale itself. The proceeds of the sale will have to be distributed in accordance with section 529 A of the Companies Act, 1956. Once this provision has no application unless the order of winding up is made and the sale was conducted prior thereto, then, mere reliance upon other provisions of the Companies Act, 1956 is of no assistance to the applicant. For these reasons, this application is misconceived and must be dismissed. ca624-10.doc 14 13] Mr.Tulzapurkar relies upon following decisions in support of his contentions:- “1. (2010) 8 Supreme Court Cases 110 (United Bank of India Vs. Satyawati Tondon & Ors); 2. 2006 (1) Bom.C.R.362 (Akola Oil Industries Vs. State Bank of Maharashtra); 3. (2000) 4 Supreme Court Cases 406 (Allahabad Bank Vs. Canara Bank & Anr); 4. Company Application No.1170 of 2009 in Company Petition No.970 of 1997 decided on 26th November 2009 by learned single Judge of this Court (Mineral Sales Pvt Ltd And Otoklin Plants & Equipment Ltd (In Liqn) And International Asset Reconstruction Co.Pvt Ltd And The Official Liquidator); 5] AIR 2006 Supreme Court 755 (Rajasthan Financial Corporation & Anr Vs. Official Liquidator & Anr); 6] 1992 Company Cases 89 (Kishan Tulpule & Ors Vs. Kishco Mills Pvt Ltd & Anr); 7] 2000 Company Cases 417 (Pankaj Mehra & Anr Vs. State of Maharashtra & Ors); 14] For properly appreciating rival contentions, a reference will have to be made to both Companies Act, 1956 and the ca624-10.doc 15 Securitisation Act. Companies Act, 1956 is an Act to consolidate and amend the laws relating to companies and certain other associations. It is not necessary to refer to all the definitions, save and except, the definition of the term “Court”, appearing in section 2(11) and the word “District Court” in section 2(14) and the “Jurisdiction of Courts” as set out in section 10. The Court having jurisdiction under the Act is the one specified in sub-section 1 and 2 of the said section. 15] As far as the instant application is concerned Part VII entitled “Winding Up” is relevant. Chapter I thereunder is entitled as “Preliminary”. The modes of winding up are set out in section 425 and they read thus:- “425. Modes of Winding up:- (1) The winding up of a company may be either – (a) by the Court; or (b) voluntary (2) The provisions of this Act with respect to winding up apply unless the contrary appears, to the winding up of a company in any of those modes.” ca624-10.doc 16 16] Section 426 onwards deal with the contributories. Chapter II is entitled “winding up by the Court” and its sub-heading is “cases in which the company may be wound up by the Court”. Section 433 sets out the circumstances in which a company may be wound up by the Court. Section 434 creates a deeming fiction with regard to inability of the company to pay its debts. Then comes Section 439 which is relevant and it is under the sub-heading “petitions for winding up”. Section 441 appears under a sub- heading “Commencement of Winding Up” and reads thus:- “441:- (1) Where, before the presentation of a petition for the winding up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.” (2) In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up.” ca624-10.doc 17 17] A bare perusal of the same would indicate that the first part i.e. Sub-section 1 deals with commencement of voluntary winding up whereas sub-section 2 deals with a case wherein the company is wound up not voluntarily but by petition to the Court. That is deemed to commence at the time of presentation of the petition for winding up. Section 443 enumerates powers of the Court on hearing a petition for winding up and it is specifying the orders that may be passed by the Court. Consequences of the winding up are then provided in section 444 onwards. Section 446 and 447 falling thereunder read thus:- “446 Suits stayed on winding up order – (1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose. (2) The Court shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of - (a) any suit or proceeding by or against the company; ca624-10.doc 18 (b) any claim made by or against the company (including claims by or against any of its branches in India); (c) any application made under section 391 by or in respect of the company; (d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company; Whether such suit or proceeding has been instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) act, 1960; (3) Any suit or proceeding by or against the company which is pending in any Court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that Court.” (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding in appeal before the Supreme Court or a High Court.” “447 Effect of winding up order – An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory.” ca624-10.doc 19 21] Thereafter appears the provisions relating to Official Liquidator and the only section that is relied upon is Section 456 which deals with custody of company's property and section 457 enumerating powers of liquidator. There is discretion given to liquidator vide section 458 and there are ancillary provisions. In the light of the wide powers that are conferred on the liquidator, as a corollary, the liquidator can, depending upon other conditions take such decisions, as he has been empowered to by the afore-referred provisions. 22] Chapter V is entitled “provisions applicable to every mode of winding up”. Section 528, 529, 529A are material and since they are referred to frequently by both Counsel, it would be appropriate to reproduce them. “528. Debts of all descriptions to be admitted to proof:- In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, ca624-10.doc 20 shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency; or may sound only in damages, or for some other reason may not bear a certain value.” “529. Application of insolvency rules in winding up of insolvent companies - )1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to --- (a) debts provable; (b) the valuation of annuities and future and contingent liabilities; and (c)the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security - (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security whichever is less, shall rank pari passu with the workmen's dues for ca624-10.doc 21 the purposes of section 529A. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section; Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security before its realisation by the secured creditor. (Explanation:- For the purposes of this proviso, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen's portion in relation to the security bears to the