Company Petition No.35 of 1975 (O&M) -1- In the High Court of Punjab and Haryana at Chandigarh Date of decision: 26.07.2011. In the matter of: Hindustan Forests Company Private Limited in Voluntary Liquidation/winding up subject to supervision of Court. .... Petitioner Versus The State of Jammu & Kashmir through the Chief Secretary to the Government of Jammu & Kashmir and others. ... Respondents CORAM: HON'BLE MR. JUSTICE PERMOD KOHLI Present: Mr.Rajeev Sawhney, Senior Advocate, with Mr.Sanjeev Anand and Mr.Munishwar Puri, Advocates, for the petitioner. Mr.RK Chhibbar, Senior Advocate with Mr.Anand Chhibbar & Ms.Meenu Sharma, Advocate, for respondent No.1. Mr. LM Suri, Senior Advocate, with Mr.Deepak Suri, Advocate. PERMOD KOHLI, J. The petitioner-Company, namely, Hindustan Forests Company Private Limited was ordered to be wound up vide order Company Petition No.35 of 1975 (O&M) -2- dated 27.2.1975 passed in Company Petition No. 169 of 1974 under Section 433 (a) of the Companies Act, 1956 and B.K.Kapoor, one of the share-holder of the Company was appointed as the Liquidator for the Company. Present petition has been filed under Section 446 read with Sections 526, 518, 542 and 543 of the Companies Act, 1956 against the State of Jammu and Kashmir, its functionaries, United Commercial Bank, J & K State Financial Corporation and the Hindustan Ropeways & Saw Mills Co. Pvt. Ltd., Srinagar for a decree for (1) recovery of Rs.1,59,95,000/- on account of damages; (2) in the alternative, for restoration of the assets and properties of the Company; (3) for rendition of accounts since January, 1969 till the expiry of period of forest lease; (4) refund of Rs.35,000/- as security deposit etc. The Company petition was decided by this Court vide judgment dated 27.2.1990 and a decree for rendition of accounts came to be passed. Shri Ujjagar Singh, a retired Judge of this Court was appointed as the Commission for settlement of the accounts. Judgment dated 27.2.1990 became subject matter of challenge in five Company Appeals No.26, 31, 38, 40 and 41 of 1990. All the appeals except Appeal Nos.26 and 38 of 1990, came to be dismissed vide order dated 20.3.1996. This judgment of Hon'ble Division Bench was also challenged before Hon'ble the Supreme Court of India in Civil Appeals No.4413, 4416 and 4417 of 1997. Hon'ble Supreme Court of India vide judgment dated 22.9.2004, while upholding part of the judgment/findings, set aside the judgment of Hon'ble Division Bench as also of the Company Court (learned Single Judge) and directed the High Court (Single Judge) to dispose Company Petition No.35 of 1975 (O&M) -3- of the Company Petition as expeditiously as possible. It is relevant to notice some of the observations of the Hon'ble Supreme Court of India here-in-below:- "However, having regard to the submissions made by the learned counsel appearing on behalf of the Company that there was sufficient evidence on record, apart from the deposition of the parties concerned, to establish the Company's case with regard to the machinery, we deem it fit to set aside the decision of the High Court in so far as it pertains to the decree of Rs.8,50,000/- and remand the matter back to the learned Single Judge of the High Court for the purpose of re-determining the issue relating to the existence of the machinery, the value of the machinery and the de facto control and possession of the machinery subsequent to the arrangement. Needless to say if the evidence on record supports the Company's case, the Company will be entitled to a decree as has been directed by the earlier decision of the High Court which is set aside today. We make it clear that so far as the remaining directions of the Single Judge are concerned which have been affirmed by the Division Bench namely the reference of the amounts relating to the claims of the parties against each other to the determination of a Commissioner, we see no Company Petition No.35 of 1975 (O&M) -4- ground to interfere. Appeals are disposed of accordingly. It is requested that the learned Single Judge may dispose of this CP No.35 of 1975 as expeditiously as is conveniently possible." On account of the aforesaid remand order, this petition has been placed for de novo hearing in the light of the findings of the Hon'ble Apex Court. Briefly stated the facts of the case as emerge from the record are noticed here under. The petitioner-Company was engaged in Forest Leases, Saw Mills, Timber Trade and Merchants since the year 1944-45. It entered into a forest lease with the State of Jammu and Kashmir in the year 1961 and a lease deed dated 23.3.1961 came to be drawn and executed pursuant to sanction granted vide Government Order No.FST/214/61 of 1961 dated 4.3.1961, between the petitioner company and the State of Jammu and Kashmir for extraction of timber from Compartments No.39A, 39B, 40A, 40B, 40C, 40D and 41 of the Deodar, Kail in Siraj Range of the Doda Forest Division. The lease was for a period of seven years and was to expire on 15.12.1968. The lease was extendable upto March, 1970 for removal of the timber from the Forest Area. Under the terms of the lease, the Company was to start felling trees after these were made available to it. The quantity of timber for which right to convert, remove and dispose of, given to the Company was 23,00,566 Cft. Plus 465 poles and the total price/royalty stipulated under the agreement at Rs.48,60,000.00. The Forest Department was to hand over the trees after marking immediately on execution of the agreement. Quantity of Company Petition No.35 of 1975 (O&M) -5- trees to be felled each year was to be decided by the Chief Conservator of Forest, Jammu and Kashmir (respondent no.2) in consultation with the Government of the State. The royalty/price was to be paid proportionately as per the details provided in the agreement (lease), subject to the directions of the Conservator of Forest, Circle Jammu (respondent no.3) or other Forest Officers. From the record, it appears that during the years 1962 to 1967-68 about 2,28,000 sleepers and scantlings of mixed species i.e. Deodar, Kail and Fir and of assorted and mixed sizes, were removed from the allotted compartments out of which over 55,000 sleepers and scantlings were lost in transit and only about 1,80,000 sleepers and scantlings including over 18,000 broken sleepers or scantlings were collected and brought to Jammu and marketed by the Company. Taking the provision of normal river losses in transit at 5% as estimated by the Forest Department, about 44,000 or 45,000 sleepers and scantlings was the conservative estimated quantity of timber lost to the Company due to flood action and drifting down of the timber to Pakistan in the absence of Booms which were to be provided by respondents no.1 to 3. In accordance with the provisions of the agreement which provides normal river losses in transit at 5%, the Forest Department remitted the transit loss of the timber at about 44000 or 45,000 sleepers and scantlings. Based upon aforesaid remit, royalty was paid to the Government by the Company. The Company was unable to execute the lease due to various reasons including financial crisis with it. Accordingly, an arrangement was made between the Company, the State of Jammu and Kashmir and the Financial Institutions, namely, the United Company Petition No.35 of 1975 (O&M) -6- Commercial Bank and Jammu & Kashmir State Financial Corporation and Hindustan Ropeways & Saw Mills Co. Pvt. Ltd. Under the arrangement arrived at between the Company, the State and financial institutions referred to above, respondents no.1 to 3 were to take over the control and supervision of the Company and were to carry out the working of the lease, operation and sales. The term of the lease was extended upto 15.12.1971. It is alleged by the Company that respondents no.1 to 3 took over complete control of the assets and properties of the Company including machinery and installations, stocks, stores, tools and implements worth Rs.10.00 lacs. The advances made by the United Commercial Bank were utilised by the Forest Department for operating the lease and other related activities. The sale of the timber was also conducted by the Forest Department. But no accounts were rendered to the petitioner- Company. It is further alleged that the timber was brought to the sale depots and sold off without information to the Company and large stocks of timber extracted from the Forest remained unaccounted. It is further alleged that respondent no.3 also utilised several lacs of rupees recovered out of the sale proceeds of the Company's timber stocks as also the advances made by the United Commercial Bank. After the expiry of the period of lease, the present Company Petition has been filed claiming damages allegedly suffered by the Company with the following details:- Company Petition No.35 of 1975 (O&M) -7- (a) Losses caused to the Company due to flooding down and drifting down of timber to Pakistan in absence of Booms besides the interest thereon at 12% per annum amounting to Rs.8,50,000 Rs.9,00,000 (b) Shortfall and losses of Sleepers and scants and on account of timber sold by respondents no.1 to 3 at throw away prices from January, 1969 after the Sales Hammer of the Company was illegally taken over by the Conservator of Forests till September, 1969 when the respondents no.1 to 3 undertook the working out of the Forests of the Company, besides interest thereon @ 12% per annum which works out to Rs.3,00,000 (c) Value of timber lying at sales Depots and River side transit Depots and extracted timber lying in the forests or on route to the Saw- Mills etc. taken over by respondents no.1 to 3 at the time when the working out of the Forests was undertaken by respondents no.1 to 3 besides interest thereon at 12% per annum amounting to Rs.5,00,000 Rs.3,30,000 Company Petition No.35 of 1975 (O&M) -8- (a) Losses caused to the Company due to flooding down and drifting down of timber to Pakistan in absence of Booms besides the interest thereon at 12% per annum amounting to Rs.8,50,000 Rs.9,00,000 (d) The Machinery and installations Machinery stocks and stores and Tools and Implements etc. etc. taken over by respondents no.1 to 3 at the time when they undertook the working out of the Forests or in the alternative the estimated cost or value for replacement thereof and interest thereon at 12% per annum amount to Rs.10,00,000 Rs.6,60,000 (e) Misc. Stocks and Stores of Food-grains and Foodstuffs and Forestry Hand tools and equipment etc., and interest thereon @ 12% per annum amount to Rs.1,00,000 Rs.60,000 (F) Amount advanced by the United Commercial Bank and placed at the disposal of respondents no.1 to 3 besides interest thereon as chargeable or found due to the United Commercial Bank. Rs.6,50,000 Rs.4,30,000 Company Petition No.35 of 1975 (O&M) -9- (a) Losses caused to the Company due to flooding down and drifting down of timber to Pakistan in absence of Booms besides the interest thereon at 12% per annum amounting to Rs.8,50,000 Rs.9,00,000 (G) Estimated surplus of Sales over the costs of extraction and transportation etc., etc., on the timber taken over by the respondents no.1 to 3 (out of which the actual price or royalty or the proportionate cost of the timber found payable or due to the respondent no.1 has to be deducted) besides interest thereon @ 12% per annum on say Rs.44 lacs from 1969-70 for average say 3 years Rs.64,00,000 Rs.15,84,000 The Company also pleaded for restoration of status quo ante and compensation for the damages caused to it since 1969. The Company also pleaded that since the arrangement was arrived at with the financial institutions i.e. New Bank of India, Jammu & Kashmir, State Financial Corporation, United Commercial Bank, it is not liable to pay any loan etc. to the financial institutions. In the alternative, the Company prayed that the dues of the financial institutions be recovered from respondents no.1 to 3 out of the decretal amount, as a result of the decree passed against respondents no.1 to 3. The Company has prayed for following relief in the petition:- "a) that the claim of the petitioner Company in regard to the restoration of the Assets and the undertaking of the Company Petition No.35 of 1975 (O&M) -10- Company be decreed and ordered in its favour and it be held that the Company is entitled to restoration of the status quo ante and to work out the operations of the Forests under the Agreement for the period for which it was being operated by respondents no.1 to 3 since January, 1969 and that the Company is also entitled to the grant of further reasonable extensions in the period of working out the forests under the Agreement, including such general or regular or special extensions that are or have been or generally may be given in any such cases. Furthermore, the Compensation, losses and damages found due to the Company on account of the defaults and Acts of mismanagement, misfeasance and misappropriation, omission and commission out of the claims detailed in para 13 of the petition and prayed for under prayer (b) below may be decreed and ordered against respondents in favour of the Company. (b) that a payment of the claims of Rs.1,59, 95,000.00 detailed here under and as stated in para 13 above, may be decreed and ordered in favour of the petitioner Company against the respondents alongwith interest at 12% per annum till realisation:- (i) Losses caused to the Company 17,50,000/- due to flooding down and drifting down of timber to Pakistan in the absence of Booms together with interest thereon (b) Shortfall and losses of 11 to 5,25,000/- Company Petition No.35 of 1975 (O&M) -11- 12,000 Sleepers and Scantlings and on account of timber sold by respondents no.1 to 3 at throw away prices from January, 1969 after the Sales Hammer of the Company was illegally taken over till September, 1969 when the respondents no.1 to 3 undertook the working out of the Forests of the Company together with interest thereon. (iii) Value of timber lying at sales Depots and 8,30,000/- River side transit Depots and extracted timber lying in the Forests as well as felled trees and converted logs lying in the forests or enroute to the Saw-Mills etc., taken over by respondents no.1 to 3 at the time when the working out of the forests was undertaken by respondents no.1 to 3 together with interest thereon. (iv) The Machinery and installations, 16,60,000/- Machinery stocks and stores and Tools and Implements etc., etc. taken over by respondents no.1 to 3 at the time when they undertook the working out of the Forests or in the alternative the estimated cost or value for replacement together with interest thereon, (v) Misc. Stocks and Stores of 1,66,000/- Food-grains and Foodstuffs and Forestry Company Petition No.35 of 1975 (O&M) -12- Hand tools and equipment etc., together with interest thereon (vi) Amount advanced by the 10,80,000/- United Commercial Bank and placed at the disposal of respondents no.1 to 3 together with interest thereon. (vii) Estimated surplus of Sales over 99,84,000/- the costs of extraction and transportation etc., etc., on the timber taken over by the respondents no.1 to 3 (out of which the actual price or royalty or the proportionate cost of the timber found payable or due to the respondent no.1 has to be deducted) together with interest thereon calculated on Rs.44 lacs for an averaged out period of 3 years making provision for progressive accruals since 1969. Total Rs.1,59,95,000/- viii) Besides the sum of Rs.1,59,95,000.00 (Rupees One Crore flfty nine lacs and ninety five thousand only) claimed and prayed for herein the petitioner Company may also be granted a decree against the respondents for the losses and damages of the Company arising due to non-fulfillment of obligations to third parties and the claim arising against the Company thereby on account of damages and interest etc. (c) That in the alternative, in case this Hon'ble Court comes to conclusion that a novation took place of the agreement Company Petition No.35 of 1975 (O&M) -13- between respondent no.1 and the Company for the sale of Timber as stated in para 20 above, the Assets and the Undertaking of the Company be ordered to be restored to it and/or this Hon'ble Court may be pleased to grant damages to the Company in respect thereof as prayed for under (b) above. (d) That the respondents be directed to render true and proper accounts of their dealings since January, 1969 when they took over the Sale Hammer of the Company and subsequently undertook the working out of the Forests of the Company. (e) That the Security deposited by the Company in the form of Cash Certificates of United Commercial Bank to the amount of Rs.35,000.00 (Rupees Thirty five thousand only) be ordered to be refunded to the Company together with interest thereon till the date of realisation. (f) That the dues of respondent no.7, if anything is found due to it, may be ordered to be recovered on pro rata basis out of the surplus arising in the course of working out of the Siraj Forests Contract Undertaking of the Company or Alternatively on pro-rata basis out of the amounts decreed in favour of the Company (now in Liquidation) under prayer (b) (vii) in respect of its old dues and under prayer (b) (vi) in respect of the funds placed by it at the disposal of respondents no.1 to 3. g) That the dues of respondent no.8, if any, may be ordered to be recovered on pro-rata basis out of the surplus arising in the course of working out of the Siraj Forests Undertaking of the Company or alternatively on pro rata basis out of the amount decreed in favour of the Company (now in liquidation) under prayer (b) (iv) above. Company Petition No.35 of 1975 (O&M) -14- h) That the old dues of respondent no.9, may be ordered to be recovered on pro-rata basis out of the surplus arising in the course of working out of the Siraj Forests Undertaking of the Company or alternatively on pro-rata basis, out of the amount decreed in favour of the Company (now in liquidation) under prayer (b) (iii) above and other dues out of (b) (vii) and (viii) above; and in the meanwhile the Company Petition No.21 of 1974 be ordered to be adjourned sine die. i) Such other and further relief as this Hon'ble Court may consider just and proper in the circumstances of the present case may also be granted in the interest of justice and fair play. j) Costs of these proceedings may be ordered against the respondents." Respondents no.1 to 3 in their common disclaimer while denying the allegations made in the petition raised certain preliminary objections, including in regard to the territorial jurisdiction of this Court. The respondent-State also raised the plea that the dispute is referable to arbitration and arbitration proceedings were earlier initiated by the Company and are pending before Former Chief Justice of High Court of Jammu and Kashmir where parties have already appeared and the proceedings are being conducted. On merits, the claim of the Company that it suffered losses is denied. The State also denied that the lease was worked out by the Forest Department on behalf of the Company. The State further pleaded that the Company was not in a position to work out the lease as it was having a meagre bank balance of Rs.4190.20 and to help it overcome the financial crisis, the Department arranged supply of Company Petition No.35 of 1975 (O&M) -15- ration on credit and also paid to the Labourers out of the sale proceeds of the timber. Some of the creditors of the Company filed suits against the Company for recovery and the department paid Rs.68,000/- out of the sale proceeds to M/s Baldev Raj. The Forest Department never took over the tangible assets of the Company or any of the installed machinery, installation or machinery stocks, stores, tools and implements. It is, however, mentioned that after the termination of the lease of the Company, the felled or unfelled stocks of the timber were taken over by the respondents in accordance with the lease agreement. According to the State-respondent, the felled or unfelled timber lying within Coupe Area as on the date of the termination of the lease, vested in the Government under the terms and conditions of the agreement. All felled timber converted or otherwise lying outside the coupe boundary at the time of termination of the lease, credit whereof could be given to the Company, had been duly auctioned with the notice to the Company and maximum care and caution was taken to recover the maximum price thereof by open auction. It also pleaded that entire money recovered in this behalf has been duly credited and adjusted with the outstanding dues of the Company, with the State of Jammu and Kashmir. The State also stated that the lease was terminated vide Government Order No.FSD/55 dated 8.1.1972 and action has been taken under Sections 53 and 54 of the Jammu and Kashmir Forest Act read with Sections 90 and 91 of the Jammu and Kashmir Land Revenue Act. Jammu and Kashmir State Financial Corporation- respondent no. 8 in the petition, while controverting the material allegations in the petition, denied arrangement or compromise Company Petition No.35 of 1975 (O&M) -16- between the Company with the State of Jammu and Kashmir, Jammu & Kashmir State Financial Corporation and the financial institutions and stated that it was not a party to any such arrangement. Reply of respondent no.7- United Commercial Bank, however, revealed that an additional loan of Rs.6.00 lacs was sanctioned by the Bank in favour of the Company. This amount was withdrawn by the Company through its Managing Director- Shri B.K.Kapoor or his authorised Operator by means of cheques and the same were transferred to the Account "Conservator of Forests, Chenab Circle, Jammu account Hindustan Forests company". The Bank also stated in the reply that the Bank was unwilling to entertain request for any further advance to the Company as there was no prospect of a possible rehabilitation of the Company so as to enable it to repay the loan. However, before the request of the Company could be declined, the Conservator of Forest Mr.P.N.Kaul intervened in view of the huge involvement of the Forest Department and negotiations started between the Company, the authorities of the United Commercial Bank and the Conservator of Forests. The Bank further stated that Jammu & Kashmir State Financial Corporation was also an interested party in view of its financial involvement with the Company and its Managing Director also associated himself with the negotiations at almost every vital stage. The Bank has also mentioned that the Conservator of Forest wanted financial assistance from the United Commercial Bank to enable the Company to carry out the working of the lease. But for the loan, the Company would have become defunct or completely crippled. The Company executed necessary bank documents and as Company Petition No.35 of 1975 (O&M) -17- per the arrangement opened another account with the Jammu Branch of the Bank in the name and style of "Conservator of Forest, Chenab Circle, Jammu Account Hindustan Forests Company". The Bank's reply further revealed that all cheques were drawn by the Managing Director of the Company against the Company's Accounts and credited to the newly opened account Conservator of Forest Account Hindustan Forest Company for meeting the expenses of the working of the lease and this arrangement continued for a number of years. Respondent no.9-Hindustan Ropeways & Saw Mills Co. Pvt. Ltd. fully supported the version of the petitioner-Company in its written statement. On the basis of the pleadings of the parties, following issues were framed in the matter by learned Company Judge:- (1) Whether the petition is barred because of the arbitration clause in the lease agreement dated 23rd March, 1961 or because of the arbitration proceedings initiated