Case: The Collector of Sabarkantha Vs. Shankarlal Kalidas Patel & Another

Mudholkar, J.1. This is an appeal under S. 202 of the Indian Companies Act VII of 1913, from the order of the District Judge, Ahmedabad.2. The relevant facts are as follows: In the former State of Idar a private limited company called the Himatnagar Glass and Ceramic Industries Ltd. was founded. Originally it was a private limited company but eventually it was converted into a public limited company. Just before this conversion the State of Idar purchased preference shares of the face value of Rs. 1,00,000 in this company and paid the full amount of the share money. Along with these, shares the State also purchased ordinary shares of the value of Rs. 1,00,000. Only half of the share money had been called and, therefore, the State paid only Rs. 50,000. Thus, a balance of Rs. 50,000 was the unpaid call in respect of these shares. The State also lent Rs. 10,000 to the company partly on 5th March 1945 and partly on 6th April 1945.3. It would appear that this concern ran into difficulties and the Government of Idar was, therefore, desirous of getting rid of its shares. An agreement was thereupon entered into between a concern known as the M.D. Industries Ltd. of Ahmedabad and the Himatnagar Glass and Ceramic Industries Ltd. Under that agreement the former was to be appointed as the sole selling agents of the Himatnagar Glass and Ceramic Industries Ltd. In consideration of their agreeing to render financial help to the aforesaid industries it was also agreed that the M.D. Industries Ltd. were to take over all the shares which stood in the name of Idar State in the Books of the company. They were to pay an amount of Rs. 1,50,000 to the Idar State as purchase price of those shares within a certain period. They never paid this money.4. On 24-1-1948 the State of Idar took possession of the factory with all the properties of the company and was in possession of those properties through its Director of Industries till the date of merger. The Idar State merged in the State of Bombay on 10-4-1948 and it would appear that thereafter the Collector of Sabarkantha took possession of the factory and the other assets of the company on behalf of the State of Bombay.5. On 30-8-1950 the Collector and two shareholders of the company made an application to the District Judge at Himatnagar for the compulsory winding up of the company. An order of compulsory winding up of the company was eventually made by the District Judge and the respondent No. 1, Jiwanlal Sankarchand Shah, was appointed Liquidator. On the 15th or 16th of April 1952 Jiwanlal addressed a letter to the Collector of Sabarkantha. In that letter the Liquidator made a demand from the Government for the unpaid call of Rs. 50,000 and also claimed from the Government a certain sum of money by way of rent and some other amounts. The Government did not make any payment and, therefore, the Liquidator made an application to the Court on 25-2-1955 asking for certain reliefs. The most important reliefs are :-(a) Delivery of possession to him of the properties belonging to the company;(b) Permission to the Liquidator to sell the properties by auction or otherwise as the Court may direct him;(c) Ordering the State Government to pay Rs. 50,000 to the Liquidator with interest at 9 per cent per annum from 4-8-1946 :(d) Ordering the State Government to pay arrears of rent.6. The Collector on behalf of the State Government denied the liability of the State to pay any money to the liquidator. According to the Collector a charge had been created in favour of the State of Idar in respect of one lakh and fifty thousand rupees which was the value of the shares held by the Idar State in the company. It is also contended that by virtue of the agreement entered into in the year 1945 the liability was on the M.D. Industries Ltd. to pay the unpaid calls and not on the State Government. Further, according to the Government it is not liable to pay interest or rent to the Liquidator.7. The Court below held that the State of Bombay was liable to pay the unpaid calls and it also held that it was liable to pay interest at 9 per cent on this amount from 4-8-1946 and was also liable to pay rent for a certain period irrespective of this agreement. It directed the State Government to hand over possession of the property of the company to the Liquidator and granted permission to the Liquidator to sell those properties.8. Before us it was most strenuously urged by Mr. Rane, the Assistant Government Pleader, that the State of Bombay was not liable to pay any call money to the Liquidator. He disputed the liability of the State on three grounds. They are: In the first place the obligations of the former Idar State did not devolve on the State of Bombay. In the second place the legal effect of the agreement entered into in 1945 was to absolve the Idar State from paying the call money to the company and in the third place the State of Bombay was not a contributory whose name has been settled on the list of contributories by the Liquidator.9. Relying upon a decision of a Divisional Bench of this Court in the case of Ganpatrao Shankarrao v. State of Bombay, 60 BLR 888 : (AIR 1959 Bom 263 ), Mr. Rane contended that after the merger a former subject of the Idar State was incompetent to hold the State of Bombay liable upon any contract which had been entered into with him by the Idar State. He relied in particular upon the observations of Shah J., who delivered the Judgment of the Court at p. 891 (of Bom LR) : (at p. 265 of AIR) :-"It is well settled rule of international law that a successor State by whatever process the succession is effected whether by conquest, by merger, by agreement or by treaty is not under any obligation to recognise the liabilities of the former State, and unless the obligations have been recognised the municipal Courts of the successor State are not competent to enforce that liability against the successor State". The law on the point has been laid down by the Supreme Court in Maharaj Umeg Singh v. State of Bombay, (1955) 2 SCR 164 : ((S) AIR 1955 SC 540 ), which itself accepts the view of the Privy Council as expressed in the case of Vajesinghji Joravarsinghji v. Secy., of State, 51 Ind App 357 : (AIR 1924 PC 216 ). The Privy Council has laid down in that case :-"But a summary of the matter is this : when a territory is acquired by a sovereign state for the first time that is an act of state. It matters not how the acquisition has been brought about. It may be by conquest, it may be by cession following on treaty, it may be by occupation of territory hitherto unoccupied by a recognised ruler. In all cases the result is the same. Any inhabitant of the territory can make good in the municipal Courts established by the new sovereign only such rights as that sovereign has, through his officers, recognised. Such rights as he had under the rule of predecessors avail him nothing. Nay more, even if in a treaty of cession it is stipulated that certain inhabitants should enjoy certain rights, that does not give a title to those inhabitants to enforce these stipulations in the municipal Courts. The right to enforce remains only with the high contracting parties". It will thus be clear that the Privy Council has recognised the right of a subject or an inhabitant to enforce against the successor State such rights as are recognised by that State. Now, it has been made clear by the Supreme Court that a successor State can do this either expressly or by implication. We have considered this aspect of the matter in Special Civil Appln. No. 3251 of 1958, D. 22-4-1959 and have observed :"The effect of all these cases is that when a sovereign acquires or seizes any property or territory for the first time it amounts to an act of State and the Municipal Court has no power to enquire into the justice or injustice of the act and the subject of the ceding sovereign could not carry oh the previously acquired rights under the new sovereign. The only enforceable rights they could have against the new sovereign are those that the new sovereign has by agreement, express or by legislation conferred upon him".Here we have the fact that the State of Idar had entered into possession of this property by virtue of the agreements of 1945 on the ground that it was a share-holder to the extent of two lakhs of rupees. After the merger the State of Bombay entered into possession of this property. It would therefore, follow that the State of Bombay intended to assert the same rights which the former Idar State purported to assert when it had entered into the agreement. Those rights were based, as already stated, upon the initial fact that the State of Idar was a shareholder to the extent of Rs. 2 lakhs and in respect of which it had paid,Rs. 1,50,000 by way of share money. A balance of Rs. 50,000 was payable by the State to the company. This liability must naturally attach to the right which the State of Idar had by reason of the fact that it had paid Rs. 1,50,000. Now the State of Idar could not have exercised those rights and ignored the liabilities which were attached to those rights. The State of Bombay did not repudiate expressly any liability after it entered into possession of this property. It could, therefore, be said that by implication the State of Bombay accepted that liability. Apart from that the Court cannot permit a party to allow itself to take only the benefits arising out of a contract or a bargain and dispute the liabilities arising therefrom. Therefore, looking at the matter either way, it would be clear that the State of Bombay as the successor State is bound by the same obligation by which the State of Idar was bound. Alternatively it can be said that the State of Bombay cannot be allowed to assert their rights as share-holders but dispute the liabilities arising from the fact that they are the share-holders.10. As regards the second ground we may point out that though the agreement between the State of Idar and the M.D. Industries Ltd. whereunder the latter had undertaken to take over the shares standing in the name of the State and pay for them and though there is also an agreement between the company on the one hand and the M.D. Industries on the other that the latter would pay the price of the shares to the Idar State and get the shares transferred to themselves, there has in fact been no transfer of the shares in the name of M. D. Industries Ltd.In the absence of any such transfer we are clear that the liability of the original share-holders, i.e., the State of Idar, continued. Since the State of Idar was liable, the State of Bombay, which is the successor of the State Idar, is also liable.11. The third ground urged by Mr. Rane was that the order of the Court below requiring the Collector of Sabarkantha to hand over possession of the factory and the other assets of the company is bad because though it purports to be made under S. 185 of the Companies Act, the conditions of that section are not satisfied in this case. Now, S. 185 provides that an order of the Court could be made against a contributory whose name is settled in the list of contributories. Mr. Rane points out that no such list has been made and at any rate the State of Bombay has not been settled in the list of contributories. That may be so. Here again the point was not taken either in the Court below or in the Memo of appeal. In such a circumstance we do not permit Mr. Rane to raise this point.12. Then Mr. Rane contended that the claim of the Liquidator is barred by time. In this connection he relies on Art. 112 of the Limitation Act. That Article provides that the suit has to be instituted within three years of the date from which the call by a company is payable. Mr. Rane points out that a resolution was passed on 4-8-1946 by the Board of Directors calling for the money and providing for payment apparently by the end of September 1946. Therefore, according to Mr. Rane the suit was to be brought within three years of the September 1946. Since the suit was not brought in time he contends that the Court could not allow the application of the Liquidator wherein he claims for recovery of an unpaid call money from the State of Bombay. Now, there are two sections of the old Companies Act which deal with the applications of a Liquidator in winding up proceedings for recovery of call money. One is S. 186 and the other is S. 187.These sections are as follows :-"186. At any time after the making of the winding up order the Court may make an order on any contributory for the time being settled on the list of contributories to pay in the manner directed by the order any money due from him or from the estate or the person whom he represents to the company exclusive of any money payable by him on the estate by virtue of any call in pursuance of the Act. The Court shall not allow any set off in such a case except as provided below :-(a) In the case of an unlimited company the Court ..............(b) In the case of a limited company, make any director whose liability is unlimited or to his estate the like allowance; and(c) In the case of a limited or unlimited company, when all the creditors are paid in full, the Court may allow the contributory by way of set-off any money due to him on whatever account against any subsequent call"."187. At any time after the making of the winding up order and before or after it has ascertained the sufficiency of the assets of the company, the Court may make calls on and order payment thereof by all or any of the contributories to the extent of their liability, for payment of any money which the Court considers necessary to satisfy the debts and liabilities of the company and the costs, charges and expenses of winding up, and for the adjustment of the rights of contributories among themselves. In making the call the Court may take into consideration the probability that some of the contributories may partly or wholly fail to pay the calls".It will be clear that S. 186 deals with recovery of debts that is, the recovery of money due upon a contract. Now, where a Liquidator makes an application for recovery of such moneys then obviously the claim has to be within time. Therefore, the Liquidators application in so far as it is referable to S. 186 of the Companies Act would be beyond time. Mr. Rane says that the Liquidators application must fall under S. 186 only because he wants to recover the unpaid call money in pursuance of the resolution of 4-8-1946. It seems to us that this contention is not correct because no reference whatsoever is made to that resolution in the Liquidators letter. Apart from that, under that resolution only Rs. 25 per share, i.e., in all a sum of Rs. 25,000 was called, while the total amount of unpaid share-money was Rs. 50,000.The Liquidator in his letter had made a demand for the amount of Rs. 50,000. Therefore, it is clear that his demand is not based upon the resolution. Since it is not based upon that resolution he could not have recourse to the provisions of S. 186 of the Act.13. Mr. Rane then points out that in his application to the Court the Liquidator has claimed interest at 9 per cent from the date of the resolution and, therefore, it must be inferred that the demand made by the Liquidator was based on the resolution. The most that can be said is that the demand for interest was based on that resolution but nothing more. We do not think that this circumstance conclusively indicates that the Liquidator had based his demand for the unpaid call money on the resolution of the Board of Directors.14. Under the Companies Act a Liquidator is given a right to move the court for recovery of moneys due under certain provisions of that Act. Section 187 of the Act is a provision which empowers the Court to order in certain circumstances the payment to the Liquidator of moneys which he can claim under the Statute. It is contended by Mr. Rane that even in such a case the question of interest would arise. Whether it does so or not it is sufficient for the purpose of this case to say that no proper application was made by the liquidator under S. 187 of the Act. The Companies Act provides a form for making an application in this behalf. The Liquidator should have made an application in that particular form and given all the particulars which are required to be mentioned in the application. Then again before the Court can grant an application under S. 187 it must be satisfied that the payment of the money sought by the Liquidator is necessary to satisfy the debts and liabilities of the company and costs, charges or expenses of the winding up or for the adjustment of the rates of the contributories themselves. The application which is before us cannot be ascribed to S. 187 of the Act because all the particulars which are necessary to be placed before the Court for enabling it to decide the various matters referred to in S. 187 are not set out in that application. There is apparently no time limit for making an application under this section, and it will be open to the Liquidator to make such an application even now. The consequence of our view would, therefore, be that the order of the court below requiring the State to pay Rs. 50,000 to the Liquidator in respect of the call money will have to be set aside.15. The next question to be considered is whether the direction regarding the payment of interest at 9 per cent on Rs. 50,000 is correct. In our opinion, in the absence of a provision in the Companies Act and in the absence of a demand for interest in the letter of the Liquidator it was not competent to the Court to award interest against the State. That direction is also liable to be set aside.16. Finally, there remains the question of payment of rent. It is said that the Court was competent to make such an order under S. 185 of the Act. That section runs thus:-"At any time after the making of the winding up order, the Court may require any contributory and any trustee, banker, agent or officer of the company to pay, deliver, surrender, or transfer forthwith or within such time as the Court directs, to the, official liquidator any money, property or documents in his hands to which the company is prima facie entitled".We have already held that the State must be regarded as a contributory and that the contention that it does not appear that a list of contributories had been settled ought not to be permitted to be raised on behalf of the State. From this it would follow that the provisions of S. 185 could be availed of against the State. There is, however, nothing in those provisions which entitled the Court to require a contributory to pay rent in respect of property in the possession of the contributory. If the State had collected any money belonging to the company or had in its possession any money belonging to the company then, of course, an order could have been made by the Court requiring the State to pay such money to the Liquidator. Mr. Shah, who appears for the respondent, says that the State of Bombay had let out the buildings belonging to the company to the Civil Supplies Department on a rent of Rs. 500 per month and that after collecting the rent from the Civil Supplies Department, the State had actually paid a part of the rent so collected to one of the Directors of the Company and that consequently the State must be held liable to pay the rent for the entire period during which the Civil Supplies Department was in occupation of the building. For one thing it does not appear that any rent was collected by the State from the Civil Supplies Department except for a period of five months or so and a part of the rent for this period was actually paid by the Government to a Director of the Company. Apart, however from that it cannot be disputed that the Civil Supplies Department is a limb of the State and is not a separate entity. Therefore, even though the premises may have been made available for the use of the Civil Supplies Department and even though a rent of Rs. 500 per month was fixed with respect to those premises and actually recovered for a period of five months, it cannot be said that the State had in its hands moneys belonging to the Company collected by the State from any person or entity. In these circumstances, we are of the opinion, that no order can be made against the Government requiring it to pay rent of Rs. 500 per month to the Company in respect of rent payable by the Civil Supplies Department.

Decision reasoning: 0[ds]Here we have the fact that the State of Idar had entered into possession of this property by virtue of the agreements of 1945 on the ground that it was a share-holder to the extent of two lakhs of rupees. After the merger the State of Bombay entered into possession of this property. It would therefore, follow that the State of Bombay intended to assert the same rights which the former Idar State purported to assert when it had entered into the agreement. Those rights were based, as already stated, upon the initial fact that the State of Idar was a shareholder to the extent of Rs. 2 lakhs and in respect of which it had paid,Rs. 1,50,000 by way of share money. A balance of Rs. 50,000 was payable by the State to the company. This liability must naturally attach to the right which the State of Idar had by reason of the fact that it had paid Rs. 1,50,000. Now the State of Idar could not have exercised those rights and ignored the liabilities which were attached to those rights. The State of Bombay did not repudiate expressly any liability after it entered into possession of this property. It could, therefore, be said that by implication the State of Bombay accepted that liability. Apart from that the Court cannot permit a party to allow itself to take only the benefits arising out of a contract or a bargain and dispute the liabilities arising therefrom. Therefore, looking at the matter either way, it would be clear that the State of Bombay as the successor State is bound by the same obligation by which the State of Idar was bound. Alternatively it can be said that the State of Bombay cannot be allowed to assert their rights as share-holders but dispute the liabilities arising from the fact that they are the share-holders.As regards the second ground we may point out that though the agreement between the State of Idar and the M.D. Industries Ltd. whereunder the latter had undertaken to take over the shares standing in the name of the State and pay for them and though there is also an agreement between the company on the one hand and the M.D. Industries on the other that the latter would pay the price of the shares to the Idar State and get the shares transferred to themselves, there has in fact been no transfer of the shares in the name of M. D. Industries Ltd.In the absence of any such transfer we are clear that the liability of the original share-holders, i.e., the State of Idar, continued. Since the State of Idar was liable, the State of Bombay, which is the successor of the State Idar, is alsoS. 185 provides that an order of the Court could be made against a contributory whose name is settled in the list of contributories. Mr. Rane points out that no such list has been made and at any rate the State of Bombay has not been settled in the list of contributories. That may be so. Here again the point was not taken either in the Court below or in the Memo of appeal. In such a circumstance we do not permit Mr. Rane to raise thisseems to us that this contention is not correct because no reference whatsoever is made to that resolution in the Liquidators letter. Apart from that, under that resolution only Rs. 25 per share, i.e., in all a sum of Rs. 25,000 was called, while the total amount of unpaid share-money was Rs. 50,000.The Liquidator in his letter had made a demand for the amount of Rs. 50,000. Therefore, it is clear that his demand is not based upon the resolution. Since it is not based upon that resolution he could not have recourse to the provisions of S. 186 of the Act.13.Mr. Rane then points out that in his application to the Court the Liquidator has claimed interest at 9 per cent from the date of the resolution and, therefore, it must be inferred that the demand made by the Liquidator was based on the resolution. The most that can be said is that the demand for interest was based on that resolution but nothing more.We do not think that this circumstance conclusively indicates that the Liquidator had based his demand for the unpaid call money on the resolution of the Board ofCompanies Act provides a form for making an application in this behalf. The Liquidator should have made an application in that particular form and given all the particulars which are required to be mentioned in the application. Then again before the Court can grant an application under S. 187 it must be satisfied that the payment of the money sought by the Liquidator is necessary to satisfy the debts and liabilities of the company and costs, charges or expenses of the winding up or for the adjustment of the rates of the contributories themselves. The application which is before us cannot be ascribed to S. 187 of the Act because all the particulars which are necessary to be placed before the Court for enabling it to decide the various matters referred to in S. 187 are not set out in that application. There is apparently no time limit for making an application under this section, and it will be open to the Liquidator to make such an application even now. The consequence of our view would, therefore, be that the order of the court below requiring the State to pay Rs. 50,000 to the Liquidator in respect of the call money will have to be setour opinion, in the absence of a provision in the Companies Act and in the absence of a demand for interest in the letter of the Liquidator it was not competent to the Court to award interest against the State. That direction is also liable to be setone thing it does not appear that any rent was collected by the State from the Civil Supplies Department except for a period of five months or so and a part of the rent for this period was actually paid by the Government to a Director of the Company. Apart, however from that it cannot be disputed that the Civil Supplies Department is a limb of the State and is not a separate entity. Therefore, even though the premises may have been made available for the use of the Civil Supplies Department and even though a rent of Rs. 500 per month was fixed with respect to those premises and actually recovered for a period of five months, it cannot be said that the State had in its hands moneys belonging to the Company collected by the State from any person or entity. In these circumstances, we are of the opinion, that no order can be made against the Government requiring it to pay rent of Rs. 500 per month to the Company in respect of rent payable by the Civil Supplies Department.