Case: M/S Bakemans Industries Pvt.Ltd Vs. M/S New Cawnpore Flour Mills

Gas and Petrochemical Co. v. Multinational Gas & Petrochemical Services Ltd. [1983 Ch. 258] directors owe fiduciary duties to the company though not to the creditors, present or future, or individual shareholders. Winkworth v. Edward Baron Development Co. Ltd. [(1987) 1 All ER 114], a House of Lords decision, might suggest that there has been a change to that position with Lord Templeman stating:‘...a company ownes a duty to its creditors, present and future. The company owes a duty to its creditors to keep its property inviolate and available for repayment of its debts. The conscience of the company, as well as its management, is confided to its directors. A duty is owed by the directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors." The learned author furthermore observed: "Support here for this approach can be found in West Mercia Safetywear Ltd. v. Dodd [(1986) 4 ACLC 215] where Dillon LJ approved the following statement of the position by the New South Wales Court of Appeal in Kinsela v. Russell Kinsela Pry Ltd. [(1989) AC 755]: In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If as a general body, they authorize or ratify a particular action of the director, there can be no challenge to the validity of what the directors have done. But where a company is insolvent, the interests of the creditors intrude. They become prospectively entitled through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the companys assets. It is in a practical sense their assets and not the shareholders assets that through the medium of the company are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration." 62. This is the meet of the matter. If the property which has been put to auction was the prime property over which the fate of the creditors depended, be they secured or non-secured ones, the company court, in exercise of its equity jurisdiction could not have obliterated it from its mind the cases of the others. If the assets belong to the creditors, that must mean the whole body of the creditors and not only one of the secured creditors. The inconsistency of is self-evident, as, on the one hand, it is stated that the property of the company does not vest in the court or the official liquidator, on the other hand, it is stated that it is vested in the body of the creditors and not only in SICOM.63. The High Court, therefore, could not have ignored the official liquidator only on the ground that a provisional official liquidator was appointed and not a regular official liquidator. The power and functions of the provisional official liquidator for all intent and purport would be the same as that of the official liquidator and, therefore, it was not necessary for the Company Judge to wait till the Company was wound up.64. If the jurisdiction of a Company Judge is limited, any substantial deviation and departure therefrom would result in unfairness. When an order is passed in total disregard of the mandatory provisions of law, the order itself would be without jurisdiction. In this case, however, even otherwise a fair procedure was not adopted. We, however, very much appreciate the anxiety on the part of the Court to see that otherwise just dues of SICOM be realized. Conduct of a party plays an important role in the matter of grant of a relief. However, only because the conduct of a party was not fair, the same, by itself, cannot be a ground to adopt a procedure which is unjust or unfair, particularly, when by reason thereof, not only the Company itself but also other creditors are seriously prejudiced. We fail to see any reason as to why the hearing of the case was to be preponed. Why even a days time could not have been granted when a prayer for adjournment was made. The jurisdiction of the Company Court is vast and wide. It can mould its reliefs. It may exercise one jurisdiction or the other. It may grant a variety of reliefs to the parties before it. The parties before the Company Judge are not only the Company or the creditors who had initiated the proceedings but also others who have something to do therewith. Even in a given case a larger public interest may have to be kept in mind. The court may direct winding up. It may prepare a scheme for its restructuring.65. We, therefore, are of the opinion that the Company Judge was not correct in its view and passed the impugned judgments only having regard to the wrongful conduct on the part of the appellant in obtaining an award from the conciliation tribunal or failure to bring a better offer from another bidder. 66. The question which is really an intricate one is what relief can be granted. On the one hand, the Company has committed wrongs, on the other, its property has been sold in auction. Even a part of the property has been permitted by us to be taken out of the country. The factory, we are told, has started operation. It has employed a large number of workmen. Would that itself mean that we should refrain ourselves from granting any relief? Direction issued by this Court in a case of this nature need not be a narrow one.The court has to take into consideration the fate of not only those workmen who are working but also those who have a claim against the Company. We must also take into consideration the fate of the other creditors.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]But, in this case, the sale in favour of Ceylon Biscuits Pvt. Ltd. having not taken place in terms of Section 29 of the 1951 Act, the said question cannot have any application whatsoever. It is, however, a case where the learned Company Judge was not authorized to exercise its power under Section 29 of the 1951 Act. It purported to exercise its power only under the Companies Act. SICOM submitted itself to its jurisdiction. It allowed the Company Judge to conduct the sale. The sale that was conducted was purported to be in terms of the Companies Act. We have noticed hereinbefore that when a provisional liquidator was appointed, the High Court instead of exercising its writ jurisdiction referred the matter to the Company Judge. It was the Company Judge, therefore, who proceeded in the matter. The Company Judge could exercise its jurisdiction only in terms of the Companies Act and not in terms of Section 29 of the 1951 Act. If it did not have the power under the 1951 Act, any decision purported to have been taken by it would be a nullity. SICOM indisputably has a statutory power but it could waive the same. It preferred the conduct of the auction at the hands of the Company Judge in stead and place of carrying on the same by itself. It submitted itself to the jurisdiction of the Company Judge. Not only it took part in the proceedings without any demur whatsoever, it actively participated therein. It is only at its instance that the bid was held. The other bidders were also brought in. It is, therefore, not a case where the learned Company Judge had no jurisdiction to exercise supervision of sale of the assets of the appellant on behalf of SICOM in terms of the provisions of Section 29 of the 1951 Act or otherwise. Respondents even never insisted to get the question of jurisdiction determined as a preliminary issue, although raised by it specifically. It, thus, for all intent and purport waived its right.The official liquidator brought to the courts notice the claims of the other creditors. The Company Judge having been exercising its jurisdiction under Section 433 of the Companies Act was, thus, under a statutory obligation to consider the cases of all creditors of the Company simultaneously. For the said purpose, the learned Company Judge was bound to follow the provisions of the Companies Act and/ or the Company Court Rules. The jurisdiction of a Company Court extends only to those matters which are specified in the Companies Act and apart therefrom it had no jurisdiction. It also has a duty to see that the claims of all creditors be dealt with, particularly having regard to the provisions of Section 529A of the Companies Act. We are informed that the workers had also filed their claims. Their claims having regard to a series of decisions of this Court could not have been ignored.The matter might have been otherwise if SICOM had remained outside the winding up proceedings. If it attained, disposal of the assets of the Company would be subject to pari passu claim of unpaid workmen in terms of Section 529A of the Companies Act.45. The sale has been effected by the court treating SICOM as an agent. Factually the court did not do so. Even otherwise, it is impermissible. It exercised its own jurisdiction. It was bound to do so. There cannot be any doubt whatsoever that in the matter of control over the assets of a company in liquidation, the courts exercise a wide jurisdiction. It may not only take recourse to the sale of the assets of the company whether before or after it is wound up, but also would be entitled to, nay obligated to, if the situation so warrants to attempt to rehabilitate the company itself. While doing so, it exercises its parens patriae power. It safeguards not only the interest of the mortgages, but also the interest of the mortgagor. It has a statutory obligation to safeguard the interest of the workmen as also other non-secured creditors.It is one thing to say as to how the assets shall be distributed but it is another thing to say that while exercising the power to cause the sale of the assets of the company, it would ignore the statutory provision. It must, while exercising its power, take into consideration a all relevant factors. The mode and manner as to how a sale would be conducted is one thing but it is another thing that before putting the assets of the company to sale, the court will undertake certain obligations which are inherent in exercise of its jurisdiction under the provisions of the Companies Act.46. We will assume that the court could appoint SICOM as an agent but apart from the fact that it, in fact, did not do so, we are inclined to hold that the stand of the learned counsel is mutually destructive. On the one hand, it is stated that SICOM was exercising its statutory power to cause sale of the assets of the mortgagor through the agency of the court but it is also contended that the sale was affected by the court through SICOM. Such a contradictory or inconsistent stand, in our opinion, is impermissible in law.The Executive Court being a co-ordinate court (as the Execution Petition was filed in the High Court itself) transferred the same to the Company Judge having regard to the fact that a provisional liquidator was appointed. Sub-section (4) of Section 446, therefore, has no application as the proceedings before the Executing Court was not a matter which came up in appeal from a judgment and order of another court. Section 447 provides for the effect of winding upis true that the court had not permitted the provisional liquidator to take over the assets. It protected the possession of SICOM. But the same by itself would not mean that the provisional liquidator was denied from performing its otherquestion which should be addressed, in our opinion, by the Company Court is that the ultimate interest of both secured and non-secured creditors must be kept in mind. Should Court have exercised its jurisdiction for directing the sale of the prime property and, in fact, the essence of the assets of the appellant at the initial stage. The answer, in our opinion, should be rendered in the negative.It is furthermore not a case where the rights of third persons were involved. We have held hereinbefore that SICOM failed to keep itself outside the winding up proceedings. It has become a party to it and, thus, when a sale is held by a Company Judge, it should not keep a provisional liquidator out of its purview. It may be true that the provisional liquidator could not sell the property without the sanction of the court, but then feed back of the provisional liquidator by the Company Court was necessary for the purpose of having a complete picture before it. The official liquidator has informed us that about 373 claims have been filed. The amount of claim is about 100 crores; amongst the claimants, there are banks in whose favour also deeds of mortgages have been executed. Provident Fund dues and other dues of statutory claims are also subject matter of the claim petition. They also have a priority. The claim of the provident fund is on behalf of the workmen. For scrutiny of the said claims, a Committee has been constituted and we had been informed that except the properties which have been sold in liquidation, there is hardly any other asset upon which the creditors can back upon for the purpose of realization of their dues.57. It is true that in a liquidation petition, secured creditors ought to be differently treated. A third party who has an independent right would not be affected by reason thereof. Ordinarily, even the statutory power of the said financial corporation would also not be affected.58. We, however, are not in a position to agree with the submissions of Mr. Sundaram that provisional liquidators have no statutory powers in relation to affecting sale of a moveable or immoveable property. Indisputably, it is subject to the direction of the court but, as indicated hereinbefore, the Court while undergoing the process of winding up and, in any event, resorting to sale of the assets of the company under winding up proceeding could not have a ignored the involvement of the provisional liquidator for any purpose whatsoever. At the cost of repetition, it is reiterated that the discretion of the court for selecting the mode and manner of sale has nothing to do with the process required to be gone into for the said purpose. It must have before it all these facts and figures so as to enable it to pass a final order one way or the other. In so doing, the court must keep in mind that it is not only determining an issue by and between the mortgagor and one mortgagee only but could also be determining the issue between a debtor and a vast number of creditors; whether secured or non-secured.This is the meet of the matter. If the property which has been put to auction was the prime property over which the fate of the creditors depended, be they secured or non-secured ones, the company court, in exercise of its equity jurisdiction could not have obliterated it from its mind the cases of the others. If the assets belong to the creditors, that must mean the whole body of the creditors and not only one of the secured creditors. The inconsistency of is self-evident, as, on the one hand, it is stated that the property of the company does not vest in the court or the official liquidator, on the other hand, it is stated that it is vested in the body of the creditors and not only in SICOM.63. The High Court, therefore, could not have ignored the official liquidator only on the ground that a provisional official liquidator was appointed and not a regular official liquidator. The power and functions of the provisional official liquidator for all intent and purport would be the same as that of the official liquidator and, therefore, it was not necessary for the Company Judge to wait till the Company was wound up.64. If the jurisdiction of a Company Judge is limited, any substantial deviation and departure therefrom would result in unfairness. When an order is passed in total disregard of the mandatory provisions of law, the order itself would be without jurisdiction. In this case, however, even otherwise a fair procedure was not adopted. We, however, very much appreciate the anxiety on the part of the Court to see that otherwise just dues of SICOM be realized. Conduct of a party plays an important role in the matter of grant of a relief. However, only because the conduct of a party was not fair, the same, by itself, cannot be a ground to adopt a procedure which is unjust or unfair, particularly, when by reason thereof, not only the Company itself but also other creditors are seriously prejudiced. We fail to see any reason as to why the hearing of the case was to be preponed. Why even a days time could not have been granted when a prayer for adjournment was made. The jurisdiction of the Company Court is vast and wide. It can mould its reliefs. It may exercise one jurisdiction or the other. It may grant a variety of reliefs to the parties before it. The parties before the Company Judge are not only the Company or the creditors who had initiated the proceedings but also others who have something to do therewith. Even in a given case a larger public interest may have to be kept in mind. The court may direct winding up. It may prepare a scheme for its restructuring.65. We, therefore, are of the opinion that the Company Judge was not correct in its view and passed the impugned judgments only having regard to the wrongful conduct on the part of the appellant in obtaining an award from the conciliation tribunal or failure to bring a better offer from anotherthe one hand, the Company has committed wrongs, on the other, its property has been sold in auction. Even a part of the property has been permitted by us to be taken out of the country. The factory, we are told, has started operation. It has employed a large number of workmen. Would that itself mean that we should refrain ourselves from granting any relief? Direction issued by this Court in a case of this nature need not be a narrow one.The court has to take into consideration the fate of not only those workmen who are working but also those who have a claim against the Company. We must also take into consideration the fate of the other creditors.