Case: Forbes &amp; Company Limited &amp; Another Vs. The Official Liquidator of The Hon'Ble Bombay High Court &amp; Another

A company application under Section 466 of the Companies Act, 1956 was made before the Company Court by the Appellants seeking a permanent stay of an order of winding up passed by the Company Judge on 5 September 2005, by which the Svadeshi Mills Company Limited had been ordered to be wound up. Certain consequential reliefs were sought. The learned Company Judge by a judgment dated 14 October 2011 held that no ground enabling the exercise of the discretion under Section 466 has been made out and dismissed the application. The order of the Company Judge has been called in question in appeal.2 The Svadeshi Mills Company Limited was incorporated under Act VI of 1882 and for a period of ten decades operated a composite textile mill with spinning, weaving and processing sections for the manufacture of cotton, synthetic, interlining andfabrics. In 1997, a petition for winding up was filed by Ralli BrothersConey, a company incorporated under the laws of the UK. Several other petitions for winding up were filed. In February 1998, the company made a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 which declared it to be a sick company. The BIFR recommended, by an order dated 5 February 2001, that the company should be wound up and an appeal inter alia by the representative union was dismissed by the AAIFR on 14 May 2001. In pursuance of a GR dated 20 September 2001 of the State Government, a High Power Committee was appointed to look into the affairs of the company including the payment of the dues of the workers, banks and financial institutions. On 21 June 2002, this Court authorised the committee to dispose of the assets of the company following which the plant and machinery was sold. The sale was confirmed by this Court on 17 September 2003. In the meantime, on 13 February 2002, a Provisional Liquidator was appointed at the behest of the creditors in the winding up petitions. Eventually, by an order dated 5 September 2005, the company was ordered to be wound up. During the course of the winding up proceedings, the Official Liquidator has adjudicated upon some of the claims of the creditors and employees. Against the adjudication of the claims of the workmen, proceedings have been taken out before the Company Judge.3 The Appellants moved a company application for a permanent stay on winding up on 15 April 2011. The affidavit in support of the company application was affirmed by the Company Secretary of ForbesCompany Limited, a company which held together with its subsidiary 22.70% of the equity capital of the company and by the Chief Executive Officer of Grand View Estates Private Limited which had come to hold 29.29% of the total shareholding of the company. The Second Applicant had acquired its shareholding after the order of the winding up, though with the leave of the Company court. The Applicants, who are now in appeal, state that they hold an aggregate of 52% of the equity shares and are also secured creditors. Both the Applicants are part of the Shapoorji Pallonji Group, a corporate entity which engages in construction, infrastructure and real estate development business. The First Applicant stated that between 1998 and 2001, it had provided financial assistance of Rs.42 crores to the erstwhile company. The affidavit in support of the application states that on inspection of the reports of the Official Liquidator, it was found that the total liability of the company as on 31 March 2011 was Rs. 375.33 crores out of which the amount due and owing to the Applicants was Rs.280.90 crores. Apart from the First applicant, IDBI and Bank of Baroda were secured creditors of the company. The Applicants claim to have obtained an assignment of the debts due and owing to the other secured creditors which had been crystallised in a decree of the Debt Recovery Tribunal. The Applicants stated that the liabilities of the company comprised of;(i) Claims of the workmen / employees affiliated to the Rashtriya Mill Mazdoor Sangh (RMMS); comprising of 2800 workers / employees;(ii) Claims of workers / employees affiliated to the Mumbai Mazdoor Sabha (MMS) ;(iii) Claims ofsocieties and bodies of workmen;(iv) Claims of statutory bodies(v) Claims of unsecured creditors including the First Applicant (70 of the 146 unsecured creditors are claimed to have assigned their claims to the Second Applicant and other claimants).4 The Appellants as promoters have entered into a Memorandum of Understanding with RMMS on 15 November 2010 for the payment of the dues of the workmen under which an amount of Rs.74.42 crores is due and payable. A separate MOU was entered into on 24 January 2011 with MMS to cover certain other employees. In their company application, the Applicants stated that since out of the aggregate liabilities of Rs.375.33 crores, an amount of Rs.280.90 crores was due and owing to them as of 31 March 2011, the Second Applicant undertook to deposit dues of Rs.86 crores with the Official Liquidator and in addition thereto to bring in such further amounts as may be directed towards payment of the creditors. Moreover, it was stated that the Second Applicant was ready and willing to bring in a further sum of Rs.20 crores. All amounts paid by the Second Applicant would be treated as a loan to be repaid by the company.5 Now in this background, the Appellants, in their company application, stated that being a part of the Shapoorji Palanji Group, who are experts in the business of construction, infrastructure and real estate, the Appellants will diversify the business of the company into real estate which is commercially viable, by amending the objects clause of the Memorandum of Association. According to the Appellants, it was no longer viable to run the business of the company as a manufacturer of textiles. The statement of the Appellants in the company application was as follows :Though the Company was in textiles business prior to winding up, due to disposal of all the stock in trade and entire plant and machinery, it is no longer viable to run the business as a manufacturer of textiles. In the present circumstances, in Mumbai even otherwise a textile mill is not viable. The Applicants are part of the Shapoorji Pallonji Group. Shapoorji Pallonji Group has expertise in the real estate business and, therefore, intends to enable the Company to undertake real estate development. Applicant No.2 has shown its willingness to bring in funds to meet all the legitimate liabilities of the Company subject to the order of winding up being permanently stayed by this Honble Court as sought by the Applicants herein. (Para 7 of the company application)The company application was opposed by a group of workman. The opposition was on behalf of six workmen who had signed a valalatnama claiming to be authorised by 763 workmen and staff. The letter of authority was also filed before the Official Liquidator.6 By the impugned order dated 14 October 2011, the learned Single Judge has held that no case was made out for the exercise of the discretion under Section 466 of the Companies Act, 1956 to permanently stay the operation of the order of winding up. Broadly summarised, the findings of the learned Single Judge are that;(i) The Appellants do not plan to revive the textile business which was carried on by the company prior to the order of winding up;(ii) The object and purpose of the company application is to enable the Appellants to develop the properties of the erstwhile company as real estate;(iii) The effect of the grant of an order of permanent stay would be to deprive the court of its control over the winding up proceedings and to place the matter beyond the control of the Official Liquidator;(iv)There is nothing to indicate that the textile business could not be carried on;(v) The company application essentially introduced amethod for the alienation of the assets of the company instead of taking recourse to revival. The claim of the workers could not be defeated; and(vi) The company application could not be allowed since it was contrary to commercial morality and public interest.

Reasoning:
The judgment of the court also considered the rights of members upon liquidation and their effect while considering an application for stay of winding up. The observations in that regard were as follows:That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation, and so leave a surplus for the members of the company, there are plainly three categories to consider. First, there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the pound.there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good causeThe decision of Megarry, J. in Re Calgary is a clear authority for a proposition that in normal circumstances, no stay should be granted of winding up unless each member, (1) either consents to it; (2) or is otherwise bound not to object to it, (3) or else there is secured to him the right to receive all that he would have received had the winding up proceeded to its conclusion. The expression in normal circumstances in this formulation also recognises that in an appropriate case and for a good cause, the court may still order a stay of winding up even if none of the three criteria are met. But that still requires a sufficient cause to be made out to the satisfaction of the court to make an exception to the normal rule. At the very minimum, this would indicate thatof any of these conditions is an important criterion that would contribute to the exercise of the discretion by the court on an application for stay of winding up.26 The formulation of Megarry, J. in Re Calgary (supra) was accepted in a judgment of this Court delivered by Mrs.Justice Sujata Manohar (as the learned Judge then was) in VasantInvestment Corporation Ltd. vs. Official Liquidator, Colaba Land and Mill Co.Ltd. (1981) Volume 51 Company Cases 20). However, in VasantInvestment Corporation Ltd., the learned Single Judge held that in the case of a scheme or arrangement which is proposed under Section 391 of the Companies Act, 1956 (as was the case there), the case would fall under the second category contemplated in Re Calgary where the members become bound by the scheme. Hence, it was not necessary to obtain from each member his express consent to the scheme of reconstruction on a stay of winding up. In this regard, it would be necessary to advert to the provisions of Section 391(2) where the scheme of compromise or arrangement, upon being sanctioned by the court, binds all the creditors and members including those who would dissent.27 That brings us to the last aspect of the present appeal. In the present case, all the shareholders of the erstwhile company in liquidation did not join in the application for stay of winding up nor have they consented to it. Learned Senior Counsel appearing on behalf of the Appellants had, in fact, during the course of hearing submitted that the Appellants were unaware of and had no material available to them at present of how the other shareholders would respond when a meeting is called. In a situation such as the present, where all the shareholders have not been joined in the application for the stay of an order of winding up, it would be more appropriate if the company court were to be moved by way of an application for reconstruction under Section 391 to take the company out of winding up. In such a case, the members of the company have an opportunity to consider and vote on a proposal and the company court has the benefit of the commercial wisdom of the members (3/4th of them in value) and would still consider the aspects of commercial morality and public interest in order to bind the dissenting minority while sanctioning the scheme. The Appellants have clearly shied away from doing that. Without mustering a 3/4th majority, the Appellants want the court to stay winding up so as to interfere with the proprietary interest of a substantial percentage of members (48%) without placing any material before the court in regard to the exercise of preference by that substantial body of shareholders. This, in our view, would clearly be impermissible.28 Before we conclude, we may note that RMSS a registered union of the objecting workers has sought to allege that RMMS as a representative union is alone entitled to represent the textile mill workers. We make it clear that for the purposes of these proceedings, the legality and the validity of the MOU which was entered into by RMSS with the Appellants has not been an issue which falls for consideration. Insofar as the locus of the workmen represented by Mr.Singhvi is concerned, we have no doubt in coming to the conclusion that they have a substantial standing in these proceedings. When the court has to consider whether a permanent stay should be granted in regard to the order of winding up, every creditor, and workmen in this case being preferential creditors, is entitled to be heard.29 For these reasons, we have come to the conclusion that the learned Single Judge was not in error in refusing to stay the winding up of Svadeshi Mills. There is no merit in theApplying the test which has been enunciated by the Supreme Court in Meghal Homes (supra), we are of the view that the exercise of the discretion by the learned Single Judge was correct and proper. The object and purpose of the Company application is not to revive the business of the Company. The whole purpose is to dispose of the assets by embarking upon real estate construction and development. The company application before the learned Single Judge has proceeded on the basis that what the Appellants would do is to diversify the business of the company into real estate by amending the objects clause of the Memorandum of Association of the company. Admittedly, the company had not carried on any real estate business in the past. Though a faint attempt was made during the course of the hearing, relying upon Clauses 4, 12, 16 and 26 of the Memorandum of Association to show that the objects clause permitted carrying on of real estate business, it is evident from the averments in the company application that the Appellants themselves proceeded on the basis that an amendment of the objects would be required in order to enable the company to enter upon real estate construction. Whether such an amendment would or would not be granted is something which may depend upon the decision of the competent authority in future but it is evident that presently, the carrying on of real estate construction would bethe objects of the company. Besides, under Section 17 of the Companies Act, 1956, an amendment of the objects requires a special resolution which in view of the provision of Section 189 requires 3/4th majority of members present and voting. No circumstances have been placed before the Court to indicate as to whether the Appellants have the support of the requisite majority for a special resolution under Section 189.