Case Law Companies Act Ravindra Ishwardas Sethna And Anr Vs Official Liquidator High Court Bombay And Another

Case Law Companies Act

Ravindra Ishwardas Sethna And Anr Vs

Official Liquidator High Court Bombay And Another

 

DATE OF JUDGMENT-19/08/1983

BENCH: DESAI, D.A. BENCH:

DESAI, D.A. ERADI, V. BALAKRISHNA (J)

 

CITATION: 1983 AIR 1061  1983 SCR  (3) 657 1983 SCC  (4) 269  1983 SCALE  (1)203

ACT: Companies Act, 1956-Sec. 457(1) (b)-Power of liquidator to carryon business of the Company-Interpretation of. Bombay Rents,  Hotel and  Lodging House  Rates  Control Act, 1947  as amended in 1973-Sees. 13 and IS-Interpretation of-Statutory tenancy  confers rights of possession-Statutory tenant  completely  prohibited  from  giving  possession  on licence, sub-lease or under caretaker’s agreement.

HEADNOTE: The  respondent, official  liquidator,   after  being appointed by  the  Company  Judge  of  the  High  Court,  as Liquidator of  a Company,  took  possession  of  the  office premises of  the Company. The Liquidator sought direction of the Company  Judge whether the premises should be let out on lease or  licence. The  Company Judge  gave a direction that the  premises  be  given  on  caretaker  basis.  Under  that direction the  Liquidator entered into an agreement with the second respondent and gave possession of the premises to the second respondent.  The appellants,  who were the land-lords of the  building OF which the office premises of the Company formed  part,   took  out  Judge’s  summons  praying  for  a direction to  the Liquidator  to terminate  the  caretaker’s agreement and to hand over vacant possession of the premises to the  appellants. The  appellants contended  that the  so- called caretaker’s  agreement was  in contravention  of  the various provisions  of the  Bombay Rents, Hotel, and Lodging House Rates Control Act, 1947 as amended in 1973 (‘Rent Act’ for short).  The Company Judge held that in substance and in form the  agreement entered  into by the Liquidator with the second respondent  was a  caretaker’s  agreement  which  was permissible. A  Division Bench  of the  High Court dismissed the appeal preferred by the appellants. Allowing the appeal,

HELD: The Company Judge  could not have authorised the Liquidator to  enter into  caretaker’s  agreement  with  the second respondent. The Liquidator  does not need the use of the premises  for carrying  on the  winding up activities of tho Company  because he  sought direction  for parting  with possession. The only course open to the Company Judge was to direct  the   Liquidator  to  surrender  possession  of  the premises to the appellants.[664 F; B-C; H] 658 Section 457(1)  (b) of  the Companies  Act, 1956  gives power to  the Liquidator  in a winding up by the Court, with the sanction  of the  Court, to carry on the business of the Company so  far as  may  be  necessary  for  the  beneficial winding up  of the  Company. If  the  Liquidator  wanted  to exercise power under sec. 457(1) (b) to carry on business of the company  so far  as necessary for its beneficial winding up, the  business which  was to  be carried  on must  be the business of  the Company.  Giving premises on lease, licence or under  caretaker’s agreement  was not the business of the Company. Since the Company’s business of floating prize chit schemes came  to a  stand still,  the moment the Company was ordered to  the wound  up, there  was  no  question  of  the business of  the Company  to be carried on by the Liquidator and that  too for  the beneficial winding up of the Company. [661 H; 663 C-G] In re  Batey; Ex parte Emmanuel, [1881] 17 Ch.

Division 35 and  Panchmahals Steel  Ltd. v.  Universal Steel Traders, [1976] 46 Company Cases 706 at 722, referred to. The company was a tenant or a lessee of the premises of which the  appellants are  the land-lords.  The date  of the commencement of  the lease  is not made available, but it is also not  claimed on behalf of the Liquidator that there was lease of  long duration.  If so, the Company was a statutory tenant under the Rent Act. The statutory tenancy confers the right to  be in  possession but  if the  tenant does not any more require use of the premises, the provisions of the Rent Act and  especially Secs.  13  and  15  completely  prohibit giving the  possession of the premises on licence or on sub- lease. The  Company Judge, therefore, spelt out a third mode of parting with possession of the premises by the Liquidator namely, a caretaker s agreement. This appears to be a facade to wriggle  out of  the provisions of the Rent Act. The Rent Act is  no doubt  enacted for  protecting the  tenants,  and indisputably its provisions must receive such interpretation as to  advance the  protection and  thwart the action of the landlord in  rendering tenants destitutes. But this does not imply that  the court  should lend  its  aid  to  float  the provisions of the Rent Act so as to earn money by unfair and impermissible use of the premises. [663 H; 664 A-F]

 

JUDGMENT: CIVIL APPELLATE  JURISDICTION: CIVIL Appeal No. 2609 of 1983. Appeal by Special leave  from the  Judgment and  order dated the  1st July, 1982 of the Bombay High Court in Appeal No. 215 of 1981. D. V.  Patel,  T. U.  Mehta,  H.  J.  Zaveri  for  the Appellants. O. P.  Malhotra, P. H. Parekh and Ms. Indu Malhotra for Respondent No. l. U. R  Lalit   V. N.  Ganpule and  Mrs. V. D. Khanna for Respondent No. 2. 659 The Judgment of the Court was delivered by: DESAI.  J.       As  the  matter  brooked  no  delay,  after granting special  leave to  appeal. we proceeded to hear the appeal on  merits. When  hearing was over. we pronounced the following order  and stated  that the  reasons would follow. The order reads as under: “The appeal  is allowed  and the order made by the learned Single  Judge as  well as the Division Bench of the Bombay       High Court  rejecting the  Judge’s  Summons taken out       by the  appellants  is  set  aside  and  the Judge’s Summons  is granted  to  the  extent  indicated herein. The appellants shall deposit Rs. 1,50,000 by or be fore March       1, 1983  in this  Court. Respondent  No. 2- Smt.  Sabita  V.  Adapa  shall  hand  over vacant  and peaceful possession  of the  property being a shop Nos. 8/9 on  the ground floor of the building formerly known as ‘Jagmohan  Building No. 2’ or as ‘Ayaz Mansion’ and now styled  as ‘Ram  Kutir’ situated  at Station  Road, Andheri, Bombay-400058  to the  liquidator on or before February  28,   1983  who  shall  forthwith  hand  over possession on  March 1,  1983 to  the appellants, after taking a  statement from  the appellants that they have deposited the  amount Rs.  1, 50,  000 in this Court as herein indicated. On  respondent  No.  2  handing  over vacant  and peaceful possession of the afore-mentioned shops to the liquidator  by   or  before   February  28,  1983,  the liquidator shall  forthwith refund  to her the security deposit  of   Rs. 28,800   deposited  by   the  second respondent with the liquidator. Respondent No.  2 will be at liberty to remove all furniture and  fixtures placed  by her in the suit shop without Causing damage to the property. The amount  of Rs.  1, 50,  000 to be deposited by the appellants  in this  Court will with the consent of the appellants  be disbursed according to the direction to be  given  by  this  Court  to the  needy  and  the deserving  creditors  of  the  Chit  Centre  Pvt.  Ltd. already ordered to be wound up 660 by the  High Court.

Neither  the liquidator  nor  the creditors of  Chit Centre  Pvt. Ltd.  have any right to claim this amount of  Rs. 1,50,000 or any part thereof as it  is an  ex gratia  payment made by the appellants for alleviating  the misery  if any of some of the hard hit creditors of Chit Centre Pvt. Ltd. The distribution of   the  aforesaid  amount  will  be  at  the  absolute discretion of  this Court. The appeal is allowed to the extent herein indicated with no order as to costs.” These are the reasons. On a winding up petition filed under the Companies Act, 1956, a  learned Company Judge of the Bombay High Court made an order  on September  23,  1974  winding  up  Chit  Centre Private Ltd.  (‘Company’ for  short). The  Company  had  its office in  shops bearing Nos. 8 and 9 on the ground floor of the building  formerly known as ‘Jagmohan Building No. 2’ or as ‘Ayaz  Mansion’ now  known as ‘Ram Kutir’. On the winding up  order  being  made,  the  official  Liquidator  who  was appointed  as   Liquidator  of   the  Company  while  taking possession of the assets of the Company also took possession of the  office premises of the Company. It is in this manner that the  Liquidator acquired possession of shops Nos. 8 and 9, the  premises involved  in this appeal. Subsequently, the Liquidator sought  direction of  the court on April 25, 1979 whether the  premises should  be let out on lease or licence or whether the furniture and fixtures in the premises should be sold  ?

The Court gave  a direction that the premises be given on  caretaker basis  after obtaining a proper document on a  compensation not  less than  Rs.  2,  250  per  month. Pursuant to this direction  the Liquidator  invited  offers from persons  willing to  occupy the  premises on  terms and conditions laid  down by  the Court.  On July  2, 1980,  the Liquidator sought  the direction  of the  Court  whether  to accept the  offer of  M/s  Modern  Caterers  represented  by respondent No.  2 herein,  Smt. Sabita V. Adapa. The Company Judge  by   his  order  dated  July  3,  1980  directed  the Liquidator to  accept the  offer as modified by the Court of the second  respondent. The  Liquidator there  upon  entered into  an   agreement  on  July  29,  1980  with  the  second respondent and gave possession of the premises to the second respondent on terms and conditions set out in the agreement. Appellants herein  are the Landlords of the building of which the  premises involved  in this  appeal  formed  part. Appellants took 661 out  Judge’s   summons  praying   for  a  direction  to  the Liquidator to  terminate the  caretaker’s agreement  entered into with  the 2nd  respondent under  the directions  of the Court, and  to hand  over vacant  and peaceful possession of the premises  to the appellants. There were other prayers in the Judge’s  summons with which we are not concerned in this appeal. The learned  Company Judge  repelled the  contention of the appellants  that  the  so-called  caretakers’  agreement entered into  by the  Liquidator with the 2nd respondent was in contravention  of the  various provisions  of the  Bombay Rents, Hotel  and Lodging  House Rates  Control Act, 1947 as amended in  1973 (‘Rent  Act’ for  short) and  held that  in substance and  in form  it was a caretaker’s agreement which was permissible. Accordingly, the learned Judge rejected the Judge’s summons  in respect  of both the prayers. Appellants preferred an appeal to the Division Bench of the High Court. The Division Bench held that appellants were not entitled to the notice  in  respect  of  the  report  submitted  by  the Liquidator for  directions in  respect of  the premises  and further observed  that the  appellants had  no right  to the present possession  of the  premises, more  so, because  the appellants had  already filed  a suit  for eviction  in  the Small Causes Court at Bombay against the official Liquidator and on  this short  ground the  appeal was  dismissed.

 

Hence this appeal by special leave. The Company  is already  ordered to  be wound up by the order of the Court dated September 23, 1974. The name of the Company clearly  spells out  the objects  for which  it  was formed. The  name of  the Company  was Chit Centre Pvt. Ltd. The Company  had undertaken  the business  of floating prize chit schemes.  The nature  of business  in modern  times  is sufficiently well  known and  does not  require elaboration. The Company  had set  up an  office  for  carrying  on  this business and  the office  was set  up in  premises taken  on lease. The  business of  the Company  of floating prize chit schemes came  to a stand still, the moment it was ordered to be wound  up. It  is not  the Liquidators’  case that  he is carrying on  business of the Company which is being wound up with the  permission of  the Court  under sec.  457  of  the Companies Act. Sec.

457 enables the Liquidators in a winding-up by the Court, with  the sanction  of the  court, amongst others, to carry on  the business  of the  Company so  far  as  may  be necessary for the beneficial 662 winding-up of  the Company.  If the  floating of the schemes for prize  A chits  came to  a stand  still, the  moment the Company was ordered to be wound up, there was no question of the business  of  the  Company  to  be  carried  on  by  the Liquidator and that too for the beneficial winding up of the Company. Whether  to carry  on the  business of  the Company which is  ordered to  be wound  up is  not a  matter left to uncontrolled discretion  of the  Liquidator. The  Liquidator undoubtedly has  the power  under sec.  457 to  carry on the business  of  the  Company,  if  it  is  necessary  for  the beneficial winding  up of the Company. And this power can be exercised not  at the  discretion of the Liquidator but with the sanction  of the  court. Reliance  was placed  on In  re Batey; Ex parte Emmanuel(1) wherein it was observed that the power to carry on the business can only be exercised for the purpose of  the beneficial  winding up  of the  Company  not because the  creditors may think that the business will be a very profitable one and that the longer it is carried on the better it  will, and  that they  will make a profit from it. Reliance was  also  placed  on  Panchmahals  Steel  Ltd.

v. Universal Steel Traders,(2) wherein it was held that amongst others’ the  Liquidator with  the sanction  of the court has the power  to carry on business of the Company so far as may be necessary  for the  beneficial winding up of the Company. It is  true that the Liquidator cannot carry on business for any other  purpose except the purpose for which the power is conferred upon him, namely, for the beneficial winding up of the Company.  He cannot  carry on any business on the ground that  it  would  be  beneficial  to  the  creditors  or  the contributors.  The   jurisdictional  fact   which  must   be ascertained and established for the exercise of the power by the Liquidator  to carry  on business  of a Company, is that carrying on  of the business of the Company is necessary for the beneficial  winding-up of  the  Company.’  However,  the language of  the section  being unambiguous  and clear,  one does not  need the  assistance of  precedents to  come to  a conclusion that  the Liquidator  with the  sanction  of  the court can  carry on  the business of the Company only to the extent that  such carrying  on of  the business is necessary for the beneficial winding-up of the Company. Let it  at once be made clear that there is no order of the Court  brought to  our notice which accorded the Court’s sanction to  the exercise  of the  power  to  carry  on  the business of the Company by 663 the Liquidator, and we posed a question as to which business of the  Company was  to be carried on by the Liquidator? The business of  A floating  prize chits  scheme has  come to  a stand still,  the moment the Company was ordered to be wound up.

It  is not  for a moment suggested that a Liquidator was to float  some prize  chit schemes  or that a pending scheme was to  be continued or perused by him. That is not even the Liquidator’s case nor was it so contended before the learned Company Judge. The Liquidator  has  adopted  a  contradictory  posture which  the   learned   Company   Judge   has   unfortunately overlooked. If the Liquidator wanted to exercise power under Sec. 457  (1) (b) to carry on business of the Company so far as necessary  for its  beneficial winding-up,  the  business which was  to be  carried on  must be  the business  of  the Company.  Giving   premises  on   lease,  licence  or  under caretaker’s agreement  was not  the business of the Company. If some other business of the Company was to be carried, the use of  the office  premises would be necessary for carrying on the  business  of  the  Company.  If  possession  of  the premises was  to be retained for carrying on the business of the Company,  the  Liquidator  could  not  have  sought  the direction of  the court  to hand  over possession under. any nomenclature such  as lease,  licence, caretaker’s agreement or any  other facade  to the  second respondent.  Now if the Liquidator wanted  to exercise power under Sec. 457 (1) (b), he ought to have, with reference to the object clause in the Memorandum of  Association of the Company, shown that giving on lease  or licence or under caretaker’s agreement was part of the routine business of the Company. Such is not the case here.

In  fact, as the business has come to a grinding halt, the office  premises are of no use to the Liquidator. He has therefore, devised  a scheme  by which  he can knock out the compensation for the use and occupation of the premises, not necessary for  the use  of the  Company, in contravention of the Rent  Act and  unfortunately the Court accorded sanction of this  venture of the Liquidator disregarding the relevant provisions of the Companies Act. The Company was a tenant or a lessee of the premises of which the  appellants are  the landlords.  The date  of  the commencement of  the lease  is not made available to us, but it is  also not  claimed on  behalf of  the Liquidator  that there was  lease of  long duration. If so, the Company was a statutory tenant  under the  Rent Act. The statutory tenancy confers the right to be in possession but 664 if the tenant does not any more require use of the premises, the provisions  of the  Rent Act and especially Secs. 13 and 15 completely prohibit giving the possession of the premises on  licence  or  on  sublease.  The  learned  Company  Judge therefore  spelt  out  a  third  way  of  parting  with  the possession by  the Liquidator,  namely, that he may give the premises  to  the  second  respondent  under  a  caretaker’s agreement. This caretaker’s agreement appears to us to be an euphemism for  collecting compensation which is nothing else but the  charge for  use  and  occupation  of  the  premises exclusively by  the second  respondent.

Whether  it is  sub- lease or licence does not call for decision. For the purpose of the  present proceedings  it is enough for us to say that the Company  and its  Liquidator no more needs. the premises for its own use. The Liquidator does not need the use of the premises for  carrying on  the winding  up activities of the Company  because   he  sought  direction  for  parting  with possession. We are not impressed by the learned Judge saving that there  is some third mode of parting with possession of the premises exclusively in favour of the second respondent, namely, caretaker’s  agreement which  appears to  us to be a facade to wriggle out of the provisions of the Rent Act. The Rent Act is no doubt enacted for protecting the tenants, and indisputably its provisions must receive such interpretation as to  advance the  protection and  thwart the action of the landlord in  rendering tenants destitutes. But this does not imply that  the court  should lend  its  aid  to  flout  the provisions of the Rent Act so as to earn money by unfair and impermissible use  of the  premises. And  that is  what  the Liquidator sought  to do  and the Court extended its help to the  Liquidator.   This,   in   our   opinion,   is   wholly impermissible. The  learned Company  Judge  could  not  have authorised the  Liquidator to  enter into  such an agreement and therefore his order is liable to be set aside. In the  appeal before  the Division  Bench, this aspect was not at all examined because it h stated that this aspect was not  canvassed before  the Bench hearing the appeal. The point we  have examined  goes to the root of the matter and, therefore, we  consider it  immaterial whether the point was examined at the hearing of the appeal.

The learned  Company Judge  could  not  have  permitted holding on  to possession  of the  premises, not  needed for efficiently carrying  on winding  up proceedings.  The  only course open to him was to direct the Liquidator to surrender possession to  landlords and save recurring liability to pay rent. Before we part with this judgment, we must 665 take note  of one  submission that was made on behalf of the respondent. It  was said  that the  creditors and members of the Company  in liquidation have suffered huge losses and if the Liquidator  would have  been permitted  to enter into an agreement with  the second  respondent,  it  would  fetch  a steady income  which would  have gone towards mitigating the hardships of  the creditors  and members of the Company. The accounts of  the Company  in liquidation were not brought to our notice  nor can  we permit  violation of  law  howsoever laudable the  object of  such act  may be.  However, we must record a statement made on behalf of the appellants when the aforementioned argument  was being  examined by  us. It  was said that  the second  respondent was  to pay  Rs. 2,500 per month as  compensation under  the directions  of the  Court. That would  have fetched  the Liquidator  an income  of  Rs. 30,000 per year and deducting the costs, expenses and taxes, the Liquidator  may have  been able  to realise at least Rs. 25,000 per  year. The  learned counsel  for  the  appellants submitted that  adopting a  multiplier of six, assuming that roughly six  years was  the period  for which  the agreement would have  been renewed  from year  to year, the appellants unconditionally offered to deposit Rs. 1,50,000 in the Court to be  distributed at  the discretion  of this Court amongst the creditors  of the  Company in  liquidation. We  recorded this offer  in our order disposing of the appeal. We are now informed that  the amount has been deposited. The Liquidator is accordingly  directed to submit the list of the creditors of the Company with the names, addresses and claims admitted by him within 4 weeks from today when the matter will appear again on board for directions. These are the reasons  which persuaded us to allow the appeal and  make the  order extracted at the commencement of this judgment. H.S.K.

Appeal allowed. 666

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