Tata Finance Ltd. vs Chemox Chemical Industries Ltd.

F.I. Rebello, J.—Leave under Rule 19(3) of the Companies (Court) Rules, 1959, granted to the applicants to take out a judge''s summons in terms of draft judge''s summons handed in. By consent, made returnable forthwith.

The petitioners have filed the petition for winding up against the company. By order of this court dated November 13, 1998, the official liquidator was appointed as provisional liquidator. By the present application, the company has moved this court to stay the order dated November 13, 1998, admitting the company petition and appointing the official liquidator as the provisional liquidator till the disposal of the reference under the BIFR. By a further prayer Clause (b), the company has prayed that the official liquidator be restrained from taking further steps as per the order of this court dated November 13, 1998, without obtaining any prior permission from the BIFR.

A few facts need be stated.

A petition for winding up was filed in this court on May 18, 1998. According to the company, the accounts were made up on October 15, 1998. The company found that their net worth had been eroded by more than 50 per cent, and consequently at a board meeting held on November 3, 1998, they passed a resolution to move the BIFR under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. It is the case of the company that thereafter they sent the papers to their counsel at Delhi for lodging the application. They received the papers from their counsel on November 11, 1998. The application was signed by the chairman and managing director on November 12, 1998. The papers were thereafter sent to the advocate at Delhi, on November 18, 1998, and the application was lodged with the BIFR on November 19, 1998. The said application was registered with the BIFR on December 1, 1998. A communication to that effect dated December 1, 1998, was sent to the company, a copy of which has been annexed to the affidavit dated December 12, 1998, of Surendra Kumar Seth, constituted attorney and the vice president of the company. Pursuant to the order of this court an additional affidavit was filed on January 16, 1999. In the said affidavit, it is clarified that the papers were lodged with BJFR on November 19, 1998, by their advocate though the reference is dated November 12, 1998. This court admitted the petition on November 13, 1998, and appointed a provisional liquidator by the very same order.

On behalf of the company, it is contended that by virtue of the proceedings being registered with the BIFR on December 1, 1998, all further proceedings in the company petition must stand suspended and/or stayed.

On behalf of the petitioners it is contended that once a provisional liquidator was appointed by order of this court on November 13, 1998, the board of directors could have taken no steps to pass the resolution to refer the matter to the BIFR. It is secondly contended that the company suppressed the facts from this court as also the BIFR, inasmuch as, this court was not informed on November 13, 1998, that the company had approached the BIFR as also in the form it was not mentioned that a liquidator had been appointed. Learned counsel points out that in respect of another sister company, when the petition came up for admission on the very same day, in view of registration of the case under the Sick Industrial Companies (Special Provisions) Act, 1985, this court stayed all further proceedings against the said company. In the light of that and in view of the suppression of material facts before this court it is contended that the order of the BIFR is non est and/or should be ignored and the provisional liquidator should be allowed to formally take over possession of the assets of the company.

With this background the issues that need to be decided are as under :

(a) Whether on appointment of a provisional liquidator, the board of directors can move the BIFR under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 ?

(b) Whether on account of suppression of facts the order of the BIFR can be considered to be non est and of no effect and can be ignored by this court ?

(c) Whether the act of the official liquidator taking possession of the assets is merely an administrative act and consequently does not stand suspended in spite of registration of the case on December 1, 1998 ?

In so far as the first contention is concerned, reference needs to be made to Section 450(3) of the Companies Act, which reads as under :

"Where a provisional liquidator is appointed by the court, the court may limit and restrict his powers by the order appointing him or by a subsequent order but otherwise he shall have the same powers as a liquidator."

From a reading of this sub-section, it is sought to be contended that unless the court has limited or restricted the powers of the liquidator he has all the powers of the liquidator and in these circumstances the board of directors cannot act on behalf of the company and to that extent has become defunct till the continuation of the appointment of the liquidator. It is, therefore, contended that the resolution passed by the board and/or for that matter the decision to refer the matter to the BIFR after the petition was admitted and the order appointing the provisional liquidator was passed is non est as it could not have been registered at the instance of a defunct board. The question is whether on the appointment of a provisional liquidator the board becomes defunct or incapable of carrying out any function and as such incapable also of moving the board for the purpose of rehabilitation of the company. To my mind the very fact that in the petition where the provisional liquidator is appointed the company can still defend the proceedings and/or prefer an appeal against any order of winding up is itself indicative that the board does not become totally defunct but there are still some residuary powers left in the board. For that purpose useful reliance maybe placed on the judgment in Union Accident Insurance Co. Ltd., In re (1972] 1 All ER 1105 , a similar issue arose before the Chancery Division. While answering the said issue, Plowman J., speaking for the court, observed as under (page 1113) :

"It is of course well settled that on a winding up the board of directors of a company becomes functus officio and its powers are assumed by the liquidator, and my attention was drawn to Re Mawcon Ltd. [1969] 1 All ER 188 ; 1 WLR 78, where Pennycuick J., stated in effect that the appointment of a provisional liquidator had the same result. No doubt that is so, but it is common ground that notwithstanding the appointment of the provisional liquidator the board has some residuary powers, for example it can unquestionably instruct solicitors and counsel to oppose the current petition and, if a winding up order is made, to appeal against that order.

The issue is to the extent of those residuary powers, and in particular whether they extend to the launching of the present motion. I think that it may sometimes be helpful to test the matter by considering the other side of the coin, namely to enquire whether the power which the board is said to have lost is one which can be said to have been assumed by the liquidator. If the answer is that it cannot, that may be a good reason for saying that the board still retains it."

To my mind this would be an answer to the question in so far as proceedings for winding up are concerned and appointment of a provisional liquidator. The only question is whether the said principle can be extended in so far as the proceedings under the BIFR are concerned. The Sick Industrial Companies (Special Provisions) Act, 1985, is an Act brought into force by Parliament with a view to bring out a company from sickness and to see to its rehabilitation. Therefore, the very object and the purpose behind the Act is to enable a sick company to stand on its own legs. The official liquidator is appointed so as to protect the assets of a company so that in the event a company is wound up the assets are available to its creditors, secured and unsecured and others, who may be entitled to share. It is not the object of the official liquidator to start the process of rehabilitation of the company. Therefore, these will not be powers to be exercised by the official liquidator. If this be so, then if the test applied in Union Accident Insurance Co. Ltd., In re [1972] 1 All ER 1105 is applied to the facts of this case, it must be held that this is a residuary power in the board of directors and as such they will have powers to take steps with the aim and object of rehabilitating the company. The judgment in Union Accident Insurance Co. Ltd., In re [1972] 1 All ER 1105 (Ch D) has also been considered by a single judge of the Delhi High Court in Anil Kumar Sachdeva v. Four ''A'' Asbestos (P.) Ltd. [1980] 50 Comp Cas 122. The learned single judge of the Delhi High Court relying on the observation of Plowman J. held that there are still residuary powers in the board of directors in spite of the appointment of a provisional liquidator. In In Re: New Era Manufacturing Co. Ltd., , a single judge of the Kerala High Court was considering the question whether in spite of the appointment of a provisional liquidator, the board of directors could call a general meeting u/s 166. The learned single judge held that a liquidator whether provisional or otherwise has not the power and is under no duty either to convene a meeting u/s 166 or to lay the account of the balance-sheet u/s 210. In other words, therefore, it is clear that it is the board of directors who will have powers in spite of the appointment of a provisional liquidator. These would be powers which cannot be exercised by the liquidator, provisional or final.

Once it is held that the board has still powers left after appointment of the liquidator, the question will have to be answered is what is the effect of the registration of the case as communicated by the BIFR on December 1, 1998. The relevant section which needs to be considered is Section 15 of the Act, which casts a duty on the board within 60 days from the date of finalisation of the duly audited accounts of the company for the financial year at the end of which the company has become a sick industrial company, to make a reference to the board for determination of the measures which shall be adopted with respect to the company. On failure to do so by virtue of Section 33 the board of directors or whoever violates the provision is liable to be punished with simple imprisonment for a term which may extend to three years and shall also be liable to fine. As there are residuary powers in the board it will be the board who will have to act u/s 15. In other words as long as there is a board of directors the board is duty bound to intimate to the Board or the Appellate Authority whether the company is sick or not. The next relevant section is Section 22. I need not repeat verbatim the said section. However, what is material to note is that in respect of an industrial company where an inquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or consideration or sanctioned scheme is under implementation, notwithstanding anything contained in the Companies Act or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for'' execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit shall lie or be proceeded with further, except with the consent of the board or, as the case may be, the Appellate Authority. The other provision which needs to be referred to is Section 51. Section 31 is a section which saves certain proceedings which were pending when the Act came into force. Section 31 sets out that where a receiver or an official liquidator has been appointed in any proceedings pending immediately before the commencement of this Act, in any High Court for winding up of an industrial company, such proceedings shall not abate but continue in that High Court and no proceeding in respect of such industrial company shall lie or be proceeded with further before the Board. In other words, Section 31 makes it clear that where before the Act came into force the receiver or official liquidator has been appointed in any proceedings for winding up then in so far as those proceedings are concerned, no proceeding could lie or proceeded with further before the Board, In other words reading Section 31 conjointly with Section 32, which section makes the provisions of this Act override the provisions of any other Act, even in a case where a petition for winding up has been presented or for that matter a provisional liquidator is appointed, the board of directors will have power to move the Board or the Appellate Authority as the case may be. The section as interpreted by some judgments of the apex court may now be noted for the purpose of considering the issue involved in the matter. In The Gram Panchayat and another Vs. Shree Vallabh Glass Works Ltd. and others, , the apex court observed as under (page 172) :

"Section 22(1) provides that in case the enquiry u/s 16 is pending or any scheme referred to u/s 17 is under preparation or consideration by the Board or any appeal u/s 25 is pending then certain proceedings against the sick industrial company are to be suspended or presumed to be suspended. The nature of the proceedings which are automatically suspended are : (1) winding up of the industrial company; (2) proceedings for execution, distress or the like against the properties of sick industrial company ; and (3) proceedings for the appointment of a receiver. The proceedings in respect of these matters could, however, be continued against the sick industrial company with the consent or approval of the Board or of the Appellate Authority as the case may be."

Thereafter in Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd. [1993] 78 Comp Cas 803, the apex court observed as under (page 813) :

"It is for that reason that Section 22(1) provides that during the pendency of (i) an inquiry u/s 16, or (ii) preparation or consideration of a scheme u/s 17, or (iii) an appeal u/s 25, no proceedings for winding up of the concerned industrial company or for execution, distress or the like shall lie or be proceeded with in relation to the properties of that concern unless the BIFR/appellate authority has consented thereto. The underlying idea is that every such action should be frozen unless expressly permitted by the specified authority until the investigation for the revival of the industrial undertaking is finally determined. It is thus crystal clear that the main thrust of this special legislation is on revival or rehabilitation of the sick industrial undertaking and it is only when it is realised that the same is not feasible that the option of winding up of the unit can be resorted to."

All these judgments came up for consideration before the apex court in Real Value Appliances Ltd. Vs. Canara Bank and Others, . Two more questions came up for consideration. The first question before the apex court was whether by suppression of material facts before the High Court the reference application to the BIFR could become bad. In answering the question in paragraph 15, the apex court has observed as under (page 33) :

"We are at a loss to understand as to how any conduct of the appellant-company before the High Court of Bombay could make the registration of the reference before the BIFR bad. If any orders were obtained by the company from the High Court by way of fraud it was certainly open to the respondent to ask the High Court to recall such orders."

The second question which arose was whether mere registration of reference by the BIFR would result in the automatic cessation of all the proceedings which are pending either in the civil court or in the company court. After examining the two differing views taken by the different High Courts, the apex court in para. 29 held that for the purpose of Section 22 the proceedings are deemed to have commenced and the prohibitions contained in Section 22 shall immediately come into play. In other words, the moment proceedings are registered before the BIFR, the provisions of Section 22 spring into play with full effect.

The net effect of all this would be that all proceedings have to be stayed. The underlying purpose being that every action should be frozen unless expressly permitted by the specified authority until the investigation or the revival of the undertaking is finally determined. If this be the background the moment the case was registered, Section 22 having sprung into action it would apply to all pending proceedings.

It was, however, sought to be contended that the provisional liquidator has already been appointed and, therefore, the question of staying the proceedings in so far as the provisional liquidator is concerned, will not arise as the act of taking possession is purely administrative. To my mind it is impossible to accept the said contention. Firstly what is stayed or suspended are all proceedings in winding up. The official liquidator has been appointed in proceedings in winding up. The sum effect of all this is that the moment the case is registered under the BIFR, proceedings in winding up stand suspended and cannot proceed further. To test the argument let us take another illustration. What happens in the event this court had passed an order admitting the petition and directing advertisement. The act of advertisement is but purely an administrative act. What will happen in a case where proceedings are registered after an order admitting a petition is made, but before the petition could be advertised. A clear answer would be that no further steps can be taken as the effect of advertisement has serious consequences on the company and is a part of the procedural requirement for winding up of a company. If the answer to the above illustration is that proceedings stand suspended, it will be difficult to hold that in so far as the official liquidator is concerned he can still take possession. The language of Section 22 is clear. The said language has been interpreted in Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd. [1993] 78 Comp Cas 803 (SC) and in Real Value Appliances Ltd. Vs. Canara Bank and Others, . It leaves no manner of doubt that all proceedings from the date the case is registered stands suspended and cannot be proceeded further.

As pointed out earlier it was also sought to be contended that on account of various acts of the company, this court should not consider the same. To my mind, in view of para 15 of the judgment in Real Value Appliances Ltd. Vs. Canara Bank and Others, the issue is no longer res integra. If a party is aggrieved by suppression of material fact, it is open to such party to move the Board for recalling the order and/or such other steps which in law they may be entitled to. At any rate it cannot be held that the order is non est.

In the light of that all further proceedings against the company are stayed in terms of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985. Needless to say the petitioners can always move this court in the event the order of the BIFR is set aside or the BIFR passes any other order which would have the effect of the court assuming jurisdiction in the matter of appointment of provisional liquidator.