IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No 284 of 1997 in COMPANY PETITIONNo 121 of 1995 For Approval and Signature: Hon'ble MR.JUSTICE H.L.GOKHALE Sd/- ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? Yes 2. To be referred to the Reporter or not? Yes @@ef rred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Repo ter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to t e Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferr d to the Reporter or not? Yes @@eferred to the Reporter or no ? Yes @@eferred to the Reporter or not? Yes @eferred to the Reporter or not? Yes @@eferred to the Reporte or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the Reporter or not? Yes @@eferred to the eporter or not? Y 3. Whether Their Lordships wish to see the fair copy of the judgement? No 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? No 5. Whether it is to be circulated to the Civil Judge? No -------------------------------------------------------------- Y.S. SPINNERS LIMITED Versus O.L. OF AMBICA MILLS LTD. -------------------------------------------------------------- Appearance: MR KS NANAVATI with MR CHUDGAR for Petitioner MR ASHOK L SHAH for Respondent No. 1 MR DS VASAVADA for TEXTILE LABOUR ASSOCIATION -------------------------------------------------------------- CORAM : MR.JUSTICE H.L.GOKHALE Date of decision: 30/12/98 ORAL JUDGEMENT Company Petition No.66 of 1988 was filed on 12th April 1988 for winding-up Shri Ambica Mills Ltd. This was one of several petitions filed for this purpose. During the pendency of that petition, Reference under Sick Industrial Companies (Special Provisions) Act 1985 was filed before the Board of Industrial & Financial Reconstruction (BIFR). The Board forwarded its opinion to this court under Section 20 of the said Act to the effect that it was just and equitable that the company be wound up. The opinion from the said Board was registered as Company Petition No.121 of 1995 and winding-up order came to be passed on 17.1.1997 on Company Petition No.66 of 1988 with Petition No.121 of 1995 and others. Under that order (Coram: Pandit, J.), the Official Liquidator attached to this High Court was appointed as the Liquidator for that company and the Liquidator was directed to take charge of the company together with all its assets, records, books, machineries, spare parts, stores, manufactured goods, land and buildings and all other properties after taking an inventory in that behalf. The order stated that he will have all the powers prescribed under Sections 456 and 457 of the Companies Act, 1956 and would also be at liberty to seek permission from this court whenever he felt it necessary. 2. Shri Ambica Mills Ltd. is having its properties situated mainly at four different places: (i) Unit No.1 situated in the Khokra area of Ahmedabad. (ii) Unit No.2 which is situated near Railway Lines at Ahmedabad. (iii) A textile mill at Baroda. (iv) M/s. Ambica Tubes Division at Vatva. 3. In the present Application we are concerned with Unit No.2 which is situated near Railway Lines at Ahmedabad. The present Application is an application under Section 446 of the Companies Act which seeks leave through prayer (B) to continue to proceed with Civil Suit No.4780 of 1995 filed by the applicant against the company in winding-up on 14.9.1995 in the City Civil Court at Ahmedabad. Alternatively, it is prayed in the later part of the said prayer clause (B) that the said suit may be transferred to this court for proceeding further. For that purpose it is prayed in prayer clause (A) that the Applicant may be permitted to join Official Liquidator as a party in that suit. 4. An affidavit of one Shri P.K.Jain who is described as the Authorised Representative of the applicant company affirmed on 9.7.1997 is filed in support of this Application. Para 1 of the affidavit states that the said suit is filed for recovery of a sum of Rs.23,99,81,507 against Shri Ambica Mills Ltd. (now in liquidation). Para 2 of the affidavit states that a Memorandum of Understanding had been executed on 2.11.1989 and thereafter a supplementary agreement on 6.12.1989 between the Applicant company (which was then known as Y.S.Syntext Projects Ltd.) and Shri Ambica Mills Ltd. (now in liquidation) which provided for purchase of Unit No.2 of Shri Ambica Mills Ltd. by the Applicant for a sum of about Rs.6.2 crores. It is further stated that the Applicant was handed over possession of the said unit on 9.12.1989. In para 3 of the affidavit it is stated that although some four years passed after signing of the aforesaid agreement, Shri Ambica Mills Ltd. was not in a position to transfer any right, title or interest in the said unit No.2 to the Applicant. Later on, the Applicant came to know that Shri Ambica Mills Ltd. had given a 'unilateral' undertaking on 27.5.1997 (the correct date is 27.5.1987) to the Hon.'ble Supreme Court in a dispute pertaining to the dues of ONGC that it would not alienate any of its immovable assets with effect from 15.4.1997 (the correct date is 15.4.1987) except with the leave of that Court. It is stated therefore that the Applicant company rescinded the Memorandum of Understanding and the supplementary agreement dated 2.11.1989 and 6.12.1989 respectively on 24.1.1995 and requested Shri Ambica Mills Ltd. to take back possession of the said Unit No.2. Thereafter, it is stated in para 4 of the application that, in the meanwhile, the said Unit No.2 was closed down on 24.10.1994 due to disconnection of power supply and that the premises came to be sealed by the order of the Labour Court in November 1994 for recovery of workers' dues. In para 5 of the application it is stated that it was in these circumstances that the applicant was constrained to file Civil Suit No.4780 of 1995. It was thereafter that the winding-up order came to be passed on 17.1.1997 which came to be confirmed on 31.3.1997 in O.J. Appeal No.7 of 1997 filed by another concern, namely, one Sunil Mills Ltd. In para 6 of the application it is stated that the Official Liquidation has taken over possession of Unit No.2 since then. 5. A copy of the aforesaid Civil Suit No.4780 of 1995 is produced in this court. The said civil suit inter alia prays for - (a) leave to sue under Order 2 Rule 2 of the Civil Procedure Code; (b) a declaration that the agreement/ contract dated 2.11.1989, 6.12.1989 and 9.12.1989 are no longer subsisting and have been lawfully rescinded; (c) a declaration that the plaintiff (applicant) is not liable to perform any obligation in or arising out of the said agreements; (d) a decree for Rs.18,28,31,901 (which is principally for the expenditure allegedly incurred by the plaintiff on behalf of the company in winding-up); (e) an inquiry for compensation and charges for the loss incurred and the damage suffered; (f) decree for specific delivery of the plant and machinery and equipments in favour of the applicant (g) if delivery of the said items cannot be given, then a decree for a sum of Rs.23,99,81,507 or such an amount as may be deemed by the court. 6. The Official Liquidator initially filed a report on 13.2.1998 being OLR No.35 of 1998. In para 2 of the said report it was stated that the matter was a complicated one involving various questions of fact as well as law and that legal assistance was necessary in the interest of justice to defend the said proceeding. It was, however, stated later on that alternate prayer (B) made in the Application for transfer of the said suit to the High Court may be granted. In para 4 of the report it was stated that ex-directors of the company had violated the undertaking given to the Hon.'ble Supreme Court and hence the ex-directors were personally liable and they should be joined as principal defendants in that suit. The above-referred Mr.Jain thereafter filed another affidavit giving names of these ex-directors who are Jayakrishna Harivallabhadas (Chairman and Managing Director) and 8 others. The Official Liquidator, however, subsequently took legal advice and filed a further report on 15.12.1998 stating that the earlier report was without any legal assistance and having received legal advice, the O.L. submitted that the Company Application cannot be and should not be granted. The O.L. has filed one more affidavit on 21.12.1998 producing therewith following documents: Exh.A - Photocopy of the Minutes of Extraordinary General meeting of the Company held on 30.3.1989; Exh.B - A copy of Form No.23 along with the Resolution passed in the above meeting under Section 293 (1) (a) of the Act which were forwarded to the Registrar of Companies and the Explanatory Statement annexed therewith pursuant to Section 173 of the Act. In para 4 of this affidavit, it is stated that the said Explanatory Statement did not disclose to the share holders the very material facts inasmuch as it did not at all disclose even the existence of the injunction/prohibitory order dated 15.4.1987 directing that the company shall not charge, encumber or alienate any of its immovable assets except with the leave of the Supreme Court and that the company shall make its immovable assets available for discharge of its liabilities to the ONGC. The said Explanatory Statement also did not disclose that the company had accordingly given an undertaking to the Hon.'ble Supreme Court, that it shall not charge, encumber or alienate its immovable assets except with the leave of the Supreme Court and that it shall make available its immovable assets for discharging the liabilities of ONGC that may arise on account of difference in price at which gas was being supplied to the company and the price which may ultimately be determined by the court. 7. It has so happened that as referred to above there was a prior litigation between ONGC on the one hand and the Association of Natural Gas Consuming Industries (including Ambica Mills Ltd.) on the other hand regarding the unpaid dues to ONGC for supply of gas. The matter was initially contested in this High Court and subsequently, the order passed by this Court was carried to the Hon.'ble Supreme Court being Civil Appeal No.8350-40 of 1983. During the pendency of those appeals, the Hon.'ble Supreme Court had directed ONGC on 15.4.1987 to continue to supply gas to these companies including Shri Ambica Mills Ltd. at the rate of Rs.1000/- for one thousand cubic metres. That was subject to an Undertaking to be given by the companies concerned that they will not charge, encumber or alienate except with the leave of the Supreme Court any of the immovable assets and they will make their immovable assets available for discharging their respective liabilities on account of the difference in the price of all the gas supplied which will be governed by the orders to be made by the court while disposing of the appeals. The order passed by the Supreme Court on 15th April 1987 reads as follows: " These appeals will be listed peremptorily on July 21, 1987 as the very first case for regular hearing and above all other causes. We direct that during the pendency of the appeals, the Oil and Natural Gas Commission will not disconnect the supply of gas to the respondents namely the Association of Natural Gas Consuming Industries of Gujarat, M.S.Jayant Paper Mills Ltd., M/s. Alembic Glass Industries Ltd., M/s. Alembic Chemical Works Company Services Ltd., New India Industries Ltd., Punjab Steel Rolling Mills Pvt. Ltd., Chanden Metal Products Ltd., and Shri Ambica Mills Ltd., Mill No.2 and will continue to supply gas as hitherto charging at the rate of Rs.1000/- for one thousand cubic meters subject however to the undertaking by the Respondents which has been given and has been accepted here, that the said Respondents will not charge, encumber or alienate, except with the leave of this Court, any of their immovable assets included in the respective undertakings and that they will make their immovable asset available for discharging the respective liabilities on account of the difference in the price of all the gas supplied to and further during the pendency of the appeals as permitted by orders made by the Court while disposing of the Appeals. The undertaking will be filed within four weeks from today." 8. Pursuant to that order, an undertaking was given by Mr.Prahladbhai S. Brahmbhatt, who was the Secretary of this company. The undertaking dated 27.5.1987 reads as follows: "UNDERTAKING I, Prahladbhai S.Brahmbhatt, do hereby solemnly affirm, undertake and state as under: 1. I am working as Secretary in Shri Ambica Mills Ltd. Respondent No.10 herein which is one of the members of the respondent No.1 i.e. Association of Natural Gas Consuming Industries of Gujarat. 2. I am conversant with the facts and circumstances leading to the present proceedings and, therefore, I am competent as well as authorised to give this undertaking on behalf of the respondent No.10 company pursuant to their Hon.'ble Court's order dated 15.4.1987 passed in Civil Misc. Petitions No.7875-85 of 1987 in the present civil appeals. I state that the copy of the said order was made available to the respondent No.10 company by the office of this Hon.'ble Court only on 14.5.1987. 3. I state that respondent No.10 company undertake that none of immovable assets of the company will be further charged and encumbered hereafter with effect from 15.4.1987 i.e. from the date of order of this Hon'ble court except with the leave of this Hon.'ble Court. 4. I state that respondent No.10 company further undertake not to alienate any of its immovable assets hereafter with effect from 15.4.1987 except with the leave of this Hon.'ble Court. Respondent No.10 company further undertakes to make available all its immovable assets in the event of discharging the liabilities which may arise on account of the difference between the price at which all the gas being supplied in the company during the pendency of the proceedings in this connection and the price which may be determined by this Hon.'ble Court while disposing of the present appeals finally. Solemnly affirmed on 27th day of May 1987 at Ahmedabad. Dated: 27th May 1987 Sd/- P.S.Brahmbhatt, Secretary". 9. It is relevant to note that, subsequently, those appeals filed by ONGC came to be allowed and the prices charged by ONGC for supply of gas to various respondents were upheld. The said judgment dated 4.5.1990 ONGC v. ASSOCIATION OF NATURAL GAS CONSUMING INDUSTRIES OF GUJARAT is reported in 1990 (Supplementary) Supreme Court Cases 397 and the interim order passed by the Hon.'ble Supreme Court on 15.4.1987 is recorded in para 11 of the judgment appearing in the aforesaid report of the Supreme Court Cases. 10. Mr.Nanavati, learned Senior Advocate with Mr.Chudgar have appeared for the applicant whereas Mr.Ashok L.Shah has represented the Official Liquidator. Mr.D.S.Vasavada appeared for Textile Labour Association representing the workmen as intervener. Mr.Nanavati submitted that scope of proceeding under Section 446 of the Companies Act was a limited one and under sub-section (1) thereof the court has to consider whether the permission to proceed with the pending civil suit ought to be granted or not. He submitted that in dealing with such a situation, the court has to consider the interests of the company and has to see that its assets are not wasted in frivolous or unnecessary litigation. However, the Section did not impose a total prohibition against the proceeding either being taken or continued against the company in liquidation and leave should ordinarily be granted when the issues in the suit cannot be gone into and decided in winding up proceeding, that is, without holding a full-fledged trial and affording an opportunity to the contesting parties. He submitted that the inquiry contemplated under Section 446 of the Act is of a summary nature and the court was not expected to go deeply into the merits or demerits of the claim of the plaintiff. In short, Mr.Nanavati submitted that when complicated and triable issues are involved, leave was generally expected to be granted. It would be profitable to refer to Section 446 at this stage. It reads as follows: "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 which is winding up the company 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 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 (65 of 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 pending in appeal before the Supreme Court or a High Court." 11. Mr.Nanavati relied upon various judgments in support of the aforesaid submission. Firstly, he relied upon the judgment of a Division Bench of this Court in the case of STAR ENGINEERING WORKS v O.L. OF KRISHNA KUMAR MILLS reported in (1997) 47 Company Cases 30. That was a case where the petitioner - plaintiff had been supplying goods to the defendant - company. The plaintiff had filed a suit in the Bombay High Court on 13.3.1972 for recovery of certain amounts for those goods with interest and costs. Prior to that, on 7.2.1972, the Gujarat High Court had passed a winding-up order and hence an application was made to the Gujarat High Court for leave to proceed with that suit or to transfer it to the Gujarat High Court. After scrutiny of the facts of the case, the division bench prima facie came to the conclusion that the goods had been supplied on an 'approval and return' basis and since rejection had not been intimated within a reasonable period, the goods had passed to the defendant company in liquidation. The court however took the view that the term 'any claim' under Section 446 (2) (b) of the Act was wide enough to cover such claims for the goods and the court stated that it would be open for the party to lodge its claim and for the court to decide it. In that context, the Division Bench of this court relied upon an earlier Division Bench judgment of Bombay High Court in the case of BALKRISHNA M. VARTAK v. INDIAN ASSOCIATION OF CHEMICAL INDUSTRIES reported in (1958) 28 Company Cases 179. In that case, the Division of the Bombay High Court had held that the company in winding up should not be exposed to unnecessary litigation and unnecessary costs. In that context, the Gujarat High Court also held that " in dealing with such an application, the court has necessarily to consider the interests of the company and to see that its assets are not wasted in frivolous and unnecessary litigation". I do not understand as to how this judgment or the proposition in any way helps the applicant. 12. Mr.Nanavati, the learned Counsel for the petitioner also relied upon three judgments of the Hon.'ble Supreme Court. Firstly, he relied upon the judgment of the Supreme Court in the case of SUDARSHAN CHITS FUND LTD. v. SUKUMARAN PILLAI reported in (1984) 4 SCC 657. In that case, the Hon.'ble Supreme Court was concerned with a situation wherein the winding up order of the company court was kept in abeyance by the appellate court and the Supreme Court had to consider as to whether the company court would have jurisdiction under Section 446 (2) during that period. We are certainly not concerned with such a situation in the present case. It is, however, relevant to note that in this judgment the Hon.'ble Supreme Court has observed that summary remedy under this section had been conferred on the Company Judge to save the company which is ordered to be wound up 'from prolix and expensive litigation'. In that context, the Court observed: 'This was the object behind enacting Section 446 (2) and therefore it must receive such construction at the hands of the court as would advance the object and at any rate not thwart it' (para 8 of the report in SCC). Then Mr.Nanavati relied upon the judgment of the Hon.'ble Supreme Court in the case of ICICI v. SRINIVAS AGENCIES reported in (1996) 4 SCC 165. In that case, the court was concerned with the proceedings before the Debt Recovery Tribunal and the court held the Company Court should not transfer suit to itself merely for its own convenience. The Hon.'ble Supreme Court laid down that the question as to when the company court should grant leave under Section 446 would depend upon facts and circumstances of each case. In fact, it was specifically submitted before the court (as can be seen from para 10 of the judgment) that as a rule, leave be granted subject to reasonable conditions. In para 13 of the judgment, the Hon.'ble Supreme Court observed " we are therefore of the view that the approach to be adopted in this regard by the company court does not deserve to be put in a straight jacket formula". Then, Mr. Nanavati relied upon the judgment of the Hon.'ble Supreme Court in the case of INDIAN BANK v. O.L. OF CHEMMEENS EXPORTS PVT. LTD. reported in (1998) 5 SCC 401. In that case, the court was concerned with the question as to whether under the provisions of section 446 the Company Court could declare the decree of a competent court to be void and the Supreme Court held that it could not. I fail to see as to how any of these judgments advance the proposition sought to be canvassed by Mr.Nanavati. In fact, in CENTRAL BANK OF INDIA v. ELMOT ENGINEERING CO. reported in (1994) 3 SCC 159, the Supreme Court has held that the aim of section 446 was to safeguard the asset of the company against wasteful or expensive litigation. It was also observed that while granting leave the court always takes into consideration whether the company is likely to be exposed to 'unnecessary litigation and cost'. 13. Mr.Nanavati then relied upon the judgments of other High Courts to canvass that when there are other defendants in a suit, courts would generally grant leave. This is because in the present case, the suit which is sought to be proceeded against Shri Ambica Mills Ltd. has ICICI, Ahmedabad Electricity Co. Ltd. and State of Gujarat as defendants