COMA/428/2004 1/44 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 428 of 2004 WITH COMPANY APPLICATION No. 429 of 2004 COMPANY APPLICATION No. 430 of 2004 COMPANY APPLICATION No. 431 of 2004 In COMPANY PETITION No. 7 of 2001 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 ? ===================================================== STEEL AUTHORITY OF INDIA LTD. - Applicant(s) Versus O.L. OF GUJARAT STEEL TUBES LTD. & 5 - Respondent(s) ===================================================== Appearance : MR AC GANDHI for Applicant(s) : 1, OFFICIAL LIQUIDATOR for Respondent(s) : 1, MR SN SOPARKAR, SENIOR ADVOCATE WITH MRS SWATI SOPARKAR for Respondent(s) : 2, MR KR MODH for Respondent(s) : 3 - 6. ===================================================== COMA/428/2004 2/44 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 13/09/2005 COMMON ORAL JUDGMENT 1.The applicant in all these four Company Applications, namely, Steel Authority of India Limited (SAIL) is a Government Company within the meaning of Section 617 of the Companies Act, 1956. The applicant has taken out these Judge's Summons seeking transfer and disposal of the Criminal Case Nos. 1698, 1699, 1700 & 1701 of 2000 pending in the Court of Metropolitan Magistrate, Court No. 5, Ahmedabad, filed by the Opponent No. 2, namely, Shri Apurva Shantilal Shah, Ex-Managing Director of Gujarat Steel Tubes Limited (In Liquidation) against the applicant and Opponent Nos. 3 to 6 who were the Officers of the applicant at the relevant point of time, under Sections 120-B, 114, 34, 409 etc. of Indian Penal Code. The applicant has also prayed for stay against further proceedings of the above referred Criminal Cases pending before the Court of Metropolitan Magistrate, Court No. 5, COMA/428/2004 3/44 JUDGMENT Ahmedabad. 2.One Mr. Debashish Pramanik has filed an affidavit in support of the Judge's Summons. Mr. A.C. Gandhi, learned advocate appearing for the applicant has submitted that the Company in liquidation, prior to its liquidation was engaged in the business of production and trading of steel tubes. For the said purpose, the Company in liquidation used to purchase Steel Sheets and other materials, etc. from the applicant Company. The applicant Company used to supply goods as per the orders of the Company in liquidation and raised invoices for the same against the Company from time to time. Since the payment has not been made by the Company in liquidation, the applicant has filed Summary Suit No. 3006 of 1997 in the City Civil Court, Ahmedabad against the Opponent No. 1 Company for recovery of Rs. 5,95,73,087/- being the outstanding amount of various invoices with interest thereon upto 25.06.1997. As a counter blast to the said suit, the Opponent No. 1 Company COMA/428/2004 4/44 JUDGMENT has filed Civil Suit No. 637 of 1998 in the City Civil Court, Ahmedabad against the applicant. Both these suits are still pending before the City Civil Court, Ahmedabad. 3.Mr. Gandhi has further submitted that since certain cheques issued by the Opponent Nos. 1 & 2 were returned dishonoured, the applicant Company has filed Criminal complaints against the said opponents under Section 138 of the Negotiable Instruments Act. The Opponent No. 2 in order to escape the liabilities of the Company as well as his personal liability under Section 138 of the Negotiable Instruments Act, had filed criminal complaint registered as Criminal Case Nos. 1698, 1699, 1700 & 1701 of 2000 against the present applicant and Opponent Nos. 3 to 6 on or about 07.08.2000, for and on behalf of the Company, pursuant to the Resolution of the Board of Directors, under Sections 120-B, 34 read with Section 114 & 409 of the Indian Penal Code, 1860. The said complaint is pending in the Court of COMA/428/2004 5/44 JUDGMENT Metropolitan Magistrate, Court No. 5, Ahmedabad. 4.Mr. Gandhi has further submitted that the applicant Company as well as Opponent Nos. 3 to 6 have filed an application in the above criminal complaints before the Metropolitan Magistrate Court for discharge of the applicant as well as Opponent Nos. 3 to 6 and the said application is pending. The applicant and Opponent Nos. 3 to 6 having come to know that the Company had been ordered to be wound up and the Official Liquidator has been appointed as the Liquidator of the Company, gave an application dated 10/29.07.2003 inter alia pointing out to the learned Metropolitan Magistrate that the Company has been ordered to be wound up and the Official Liquidator has been appointed as the Liquidator of the Company and, therefore, as per law, the Opponent No. 2 cannot continue as the complainant and prosecute the criminal litigation for and on behalf of the Company and that the notice of the proceeding is required to be issued to the Official Liquidator as Liquidator of the COMA/428/2004 6/44 JUDGMENT Company. Mr. Gandhi has further submitted that the learned Magistrate, without appreciating the provisions of the Companies Act, 1956, by an order dated 25.02.2004 has dismissed the said application inter alia on the ground that no legal provisions are pointed out requiring the Court to issue notice to the liquidator of the Company. As per the provisions contained in Section 445 read with Section 457 of the Companies Act, 1956, once winding up order has been passed and the Official Liquidator is appointed as the Liquidator of the Company and the order of winding up duly filed with the Registrar of Companies shall be deemed to the notice of discharge to the Officers and Employees of the Company and thereafter the Liquidator alone is empowered, that too, with the sanction of the Court, inter-alia to institute or defend any Suit, Prosecution or other Legal proceedings, Civil or Criminal in the name and on behalf of the Company. He has, therefore, submitted that Opponent No. 2 is now Functus-Officio and has no power or authority whatsoever to prosecute further Criminal Case Nos. COMA/428/2004 7/44 JUDGMENT 1698 to 1701 of 2000 filed by the Company in liquidation through him against the present applicant and Opponent Nos. 3 to 6 after passing of the winding up order. 5.Mr. Gandhi has further submitted that Opponent No. 2 is not bonafide prosecuting the criminal cases in question and at any rate now, he cannot be permitted to prosecute the criminal prosecution any longer. The Opponent No. 2 is interested only to escape altogether or to atleast delay the criminal proceedings filed by the applicant and others against him. On the other hand, the Opponent Nos. 3 to 6 as Officers of the applicant are liable to be transferred anywhere in India and accordingly, will cause immense hardship and harassment, if the pending impugned criminal prosecution is permitted to be continued in the Trial Court. Reading the Complaint at Annexure A to this application, no prima facie offence is made out against the applicant and Opponent Nos. 3 to 6 and the same deserves to be quashed and set aside. In view of COMA/428/2004 8/44 JUDGMENT the approach of the learned Metropolitan Magistrate and it is evident from the order passed by him on the application given by the applicants that it is just and proper and in the interest of justice that pending criminal complaints should not be proceeded further before the learned Magistrate's Court. Mr. Gandhi has, therefore, submitted that the pending criminal cases be transferred to this Court in exercise of jurisdiction and powers under Sub- Section (2) and (3) of Section 446 of the Companies Act, 1956 and till the disposal of these applications, the proceeding in the Trial Court are required to be stayed as prayed for. 6.In support of his submissions, Mr. Gandhi has invited the Court's attention to the provisions contained in Section 446 of the Act. Section 446 reads as under :- 446. Suits stayed on winding up order. (1) “When a winding up order has been made or the Official Liquidator has been appointed as COMA/428/2004 9/44 JUDGMENT provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending at the date of winding up order, shall be proceeded with, against the Company, except by leave of the [Tribunal] and subject to such terms as the [Tribunal] may impose. (2) [The Tribunal] 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; (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 COMA/428/2004 10/44 JUDGMENT course of the winding up of the Company; Whether such suit or proceeding has been instituted, or is 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.” 7.The plain reading of Section 446 makes it clear that it empowers the Court to entertain or dispose of any suit or proceeding by or against the Company irrespective of the fact whether such suit or proceeding has been instituted or is instituted before or after the order for the winding up of the Company. Here in the present case, admittedly, on behalf of the Company in liquidation, the Opponent No. 2 in his capacity as Managing Director of the Company has filed Criminal complaints against the applicant Company and Opponent Nos. 3 to 6 before the order of winding up passed by this Court and the said proceedings are still pending before the COMA/428/2004 11/44 JUDGMENT Court of Metropolitan Magistrate, Court No. 5, Ahmedabad. In view of the provisions contained in Section 446 (2)(a), the Magistrate's court has no jurisdiction to entertain or dispose of the said criminal complaints filed by the Company in liquidation through its Managing Director against the applicant and Opponent Nos. 3 to 6. Mr. Gandhi has further submitted that the term 'proceeding' used in Section 446(2)(a) is very wide and it inter alia includes criminal proceedings. In support of this submission, he relied on the decision of the Punjab & Haryana High Court in the case of Official Liquidator Khosla Fans (India) P. Ltd. (In Liquidation) V/s. Ramesh Khosla and Others, 53 Company Cases 858 wherein the Court has held that Section 446 of the Companies Act, 1956 is a special provision, which has vested the High Court with jurisdiction to entertain or dispose of any suit or proceedings by or against the Company. The prosecution sought to be launched by the Official Liquidator on behalf of the Company is a proceeding by the company against the acts of the Office COMA/428/2004 12/44 JUDGMENT bearers. There are offences against the Act in which the Official Liquidator has to launch the prosecution proceedings. In appropriate cases, the High Court may exercise jurisdiction in entertaining or transferring the said proceedings to do complete justice between the parties, especially when the Company has been ordered to be wound up. Rule 9 of the Companies (Court) Rules, 1959, also provides that nothing in the Rules shall be deemed to limit or otherwise affect the inherent powers of the Court to give such direction or pass such orders as may be necessary for the ends of justice or to prevent the abuse of the process of the Court. The Court has, therefore, held that the High Court can exercise its jurisdiction in suits and proceedings including criminal proceedings in appropriate cases by or against the Company filed by the Official Liquidator. 8.Mr. Gandhi has further relied on the decision of the Delhi High Court in the case of Official Liquidator, R.C. Abrol and Co. P. Ltd. V/s. R.C. COMA/428/2004 13/44 JUDGMENT Abrol and others, 47 Company Cases 537 wherein the Official Liquidator filed a criminal complaint in the High Court, which ordered winding up of the Company, against its directors and officials under Sections 538 & 541 of the Companies Act, 1956, on account of failure to hand over books of account and records of the Company and failure to keep proper books of account during the two years immediately preceding the winding up of the Company. While returning the plaint to the Official Liquidator (Complainant) to be filed before the proper Court, the Court held that the High Court's jurisdiction to take cognizance of offences was restricted to that contained in Section 454(5A) of the Companies Act, 1956, and the High Court had no jurisdiction to take cognizance of any other offences such as the offences under Section 538 or Section 541. The Court has, however, made it clear that the High Court had power under Section 446 (3) to transfer a pending complaint before the Magistrate for trial to itself. Sub-section (3) of Section 446 is omitted COMA/428/2004 14/44 JUDGMENT by the Companies (Second Amendment) Act, 2002. Prior to its omission, it stood as under :- “ 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. Mr. Gandhi has , therefore, submitted that even after deletion of Sub-section (3), the Court can certainly exercise its power under Section 446(2) (a) of the Act. 9.Mr. Gandhi has further submitted that the learned Magistrate has committed a serious error in law in not entertaining the application moved by the applicant Company for joining the Official Liquidator as party. It is contrary to the provisions contained in Section 446 of the Act. In support of his submission, he relied on the decision of the Calcutta High Court in the case of International Shipping Limited V/s. Chandpur Jute COMA/428/2004 15/44 JUDGMENT Co. Ltd., 52 Company Cases 121 wherein it is held that after a company is wound up, it is only the Official Liquidator who becomes the custodian of all the assets and properties of the Company which come into the custody of the Court under Section 456 of the Companies Act, 1956, read with r. 233 of the Companies (Court) Rules, 1959, and, in law and in fact, nobody else has the right to represent the Company save and except the Official Liquidator. The Court in that case has held that the order of dismissal of a suit, which was ripe for hearing, passed by the Trial Court on the submissions of the Solicitor for the Plaintiff-Company after the passing of the winding up order relating to itself without notice of the suit to the Official Liquidator on a complete suppression of material facts (as to the winding up) from the Trial Court, out of sheer negligence and oversight of the solicitor, when Chap. 10, r. 35, itself provides that the suit should be placed in the special list on notice to the parties or their attorneys, must be held to be a nullity and can have no legal COMA/428/2004 16/44 JUDGMENT effect whatsoever, as, after the Company went into liquidation without notice to the Official Liquidator, no suit can be dismissed under the special list or any other list and the Court has no jurisdiction to dismiss the same without giving notice to the parties, and the order being a nullity, no right can flow to anybody, either to the plaintiff or to the defendant, and the suit would be still alive. 10.Mr. Gandhi has further submitted that after the passing of winding up order by this Court, the Opponent No. 2 who has filed the complaints against the applicant and Opponent Nos. 3 to 6 has no right to prosecute the said complaint as the powers of Directors of a Company cannot be exercised once the Company goes into liquidation and its property and assets come under the custody of the Court under the provisions of the Act. In this connection, he relied on the decision of the Calcutta High Court in the case of Shree Tej Protap Textile Mills V/s. Granaries Ltd. and others, 31 Company Cases 610 COMA/428/2004 17/44 JUDGMENT wherein it is held that the Directors cannot file a suit against a debtor of the Company even if the provisional liquidator willfully refuses to institute a suit for the purpose. The remedy of the Directors, should the liquidator cause loss by refusing to file a suit, would be against the liquidator himself and willful refusal might be a proper ground for his removal. 11.Mr. Gandhi has further relied on the decision of the Karnataka High Court in the case of Maharashtra State Co-operative Cotton Growers Marketing Federation Limited and Another, 70 Company Cases 440 wherein it is held that before a reference can be made to the Board for Industrial and Financial Reconstruction to institute an enquiry into the causes of sickness of the industrial Company and make recommendations for its rehabilitation, the pre-requisite is the existence of a Board of Directors to the industrial company which is sick. If that board of directors does not exist, the competence to make a reference disappears. From COMA/428/2004 18/44 JUDGMENT the date of communication of the order of the Court winding up the industrial Company, its board of directors ceases to hold office for all purposes other than for filing the statement of affairs in aid of the winding up proceedings. Therefore, the reference made, if any, by any body of persons claiming to be the board of directors after the winding up order was passed, was wholly incompetent and the provisions of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, were not attracted. 12.Mr. Gandhi has further relied on the decision of Allahabad High Court in the case of Sushila Pulp and Papers Limited V/s. Official Liquidator and Others, 124 Company Cases 281 wherein it is held that in view of Sections 445(3) and 457(1)(a) of the Companies Act, 1956, a Company under liquidation can be represented only by the Official Liquidator and any action for or on behalf of the Company has to be taken only through the Official Liquidator. Except in cases where the business of COMA/428/2004 19/44 JUDGMENT the Company is continuing, the Directors cannot appeal against the order. 13.Mr. Gandhi has further relied on the decision of the Hon'ble Supreme Court in the case of Sirmur Chemical and General Industries Limited V/s. Union of India and another, 32 Company Cases 826 wherein the Hon'ble Supreme Court has held that when an order for winding up a Company is made, the Managing agent of the Company ceases to be the Managing agent as from the date of the commencement of the winding up and he loses his right to institute any legal proceeding or appeal from any legal proceeding started by him, in the name and on behalf of the Company, for on an order of winding up being made no person other than the liquidator has the power to institute or defend any legal proceedings on behalf of the Company. The Court has further held that the rule that an appeal is a continuation of the suit cannot be applied in such a case so as to give a right to the managing agent to file an appeal after the winding up order has COMA/428/2004 20/44 JUDGMENT been made from a decree in a suit instituted by him. 14.Based on the aforesaid statutory provisions as well as the decided case law, Mr. Gandhi has strongly urged that Opponent No. 2 has no right to continue or prosecute the pending criminal complaints filed by him on behalf of the Company in liquidation against the applicant and Opponent Nos. 3 to 6. He has, therefore, submitted that the learned Metropolitan Magistrate has committed an error in not entertaining the application filed by the applicant Company. He has, therefore, submitted that in the interest of justice and for proper and appropriate adjudication of the issue raised by the applicant, all the four criminal cases which are pending before the Court of Metropolitan Magistrate at Ahmedabad should be transferred to this Court while exercising power under Section 446(2)(a) of the Act. 15.Mr. S.N. Soparkar, learned Senior Counsel COMA/428/2004 21/44 JUDGMENT appearing with Mrs. Swati Soparkar, learned advocate for respondent No. 2 has submitted that the present applications filed by the applicant Company are nothing but abuse of process of law and such applications should not be entertained by this Court. He has further submitted that before filing the present applications before this Court, the applicant Company has tried to delay the proceedings by filing several applications before the Trial Court. All these Criminal cases were filed on 05.08.2000 wherein the learned Metropolitan Magistrate, Ahmedabad has issued process under Section 120-B, 34, 114, 409 of Indian Penal Code on 17.08.2000. The present applicant and the Opponent Nos. 3 to 6 had not challenged the process issued by the learned Metropolitan Magistrate before the learned Sessions Judge by filing Criminal Revision Application or before this Court by filing quashing petition under Section 482 of the Code of Criminal Procedure Code. After service of summons, the accused persons have preferred a stay application dated 27.07.2001 COMA/428/2004 22/44 JUDGMENT wherein written arguments were filed on 03.01.2002. After hearing the parties, the said stay application was rejected on 30.09.2002. Thereafter, the present applicant and the Opponent Nos. 3 to 6 had applied for time to file an appropriate petition before the higher Court for challenging the order passed below the stay application but till this date, the said order has not been challenged by them. He has further submitted that on 29.07.2003, original accused i.e. applicant and Opponent Nos. 3 to 6 have preferred an application for issuing notice to the Official Liquidator wherein reply was filed on 11.01.2004 and after hearing the parties on merits, the said application came to be rejected by a reasoned order dated 25.02.2004 and the matter was kept for recording the evidence of the complainant. The original accused, however, on one or the other pretext asked for adjournment and did not allow the matter to be proceeded further. He has further submitted that at one of the adjourned dates, the applicant had to pay to the original complainant COMA/428/2004 23/44 JUDGMENT upon the order of the Magistrate, a cost for delaying the proceedings on frivolous grounds. The time was also sought for on the ground that the original accused wanted to challenge the aforesaid order, but till this date, the said order has not been challenged and the present applicant thereby killed time of almost five years on various grounds and now the original accused has filed the present application before this Court to further delay the matter. 16.Mr. Soparkar has further submitted that the Company in liquidation has filed Civil Suit No. 6371 of 1998 in the City Civil Court at Ahmedabad for recovery of excess amount charged by the present applicant agreegating to Rs.5,41,08,437/- against the present applicant and the said suit is still pending before the Civil Court. The original accused have misappropriated large amount of Rs.9,70,11,467/- and in respect of the said misappropriated amount, four criminal cases were filed against them. The present applicant had COMA/428/2004 24/44 JUDGMENT filed a Summary Suit No. 3006 of 1997 in the City Civil Court, Ahmedabad against the Company in liquidation for recovery of Rs. 5,95,73,087/- being the outstanding amount of various invoices with interest