Companies Act Case Law M/S Ngef Ltd.Vs M/S Ngef Ltd

CASE NO.:
Appeal (civil) 5199-5201 of 2004

PETITIONER:
M/s NGEF Ltd.

RESPONDENT:
M/s Chandra Developers Pvt. Ltd. & Anr.

DATE OF JUDGMENT: 29/09/2005

BENCH:
S.B. Sinha & C.K. Thakker

JUDGMENT:
JUDGMENT
WITH

CIVIL APPEAL NO.5202 TO 5205 OF 2004
S.B. SINHA, J :

These appeals are directed against a common judgment and order
dated 5.1.2004 passed by a Division Bench of the Karnataka High Court in
O.S.A. Nos.67, 68 and 70 of 2003 whereby and whereunder a judgment and
order dated 8.10.2003 passed by a learned Company Judge in C.A. No. 771
of 2003 was affirmed.
Background fact :

NGEF Ltd., (for short, ‘the Company’) herein, was a joint venture of
the Government of Karnataka, holding 90.18% shares and EHG Electro-
holding GMBH holding 9.72% shares therein. The Company became sick,
whereupon a reference was made to the Board for Industrial and Financial
Reconstruction (for short, ‘BIFR’) in terms of the provisions of the Sick
Industrial Companies (Special Provisions) Act, 1985 (for short, ‘SICA’). It
is not in dispute that virtually all its assets had been placed either under
mortgage and/or offered as collateral security to various financial institutions
amongst which the State Bank of Mysore was the lead bank.

It is furthermore not in dispute that from time to time the Company
with the permission of BIFR and its secured creditors has been selling some
of its surplus lands, inter alia, for the purpose of paying wages to the
workers and refund of loans to the financial institutions etc. It had sold
29.225 acres of land to the Nuclear Power Corporation for a sum of Rs.63.65
crores; 1.65 acres of land to CDAC for about Rs.4.29 cores and 0.625 acres
of land to Indian Oil Corporation for Rs.1.63 crores. All the vendees were
public sector undertakings.

It is also not in dispute that the State of Karnataka took a decision to
make disinvestment of its shares in the said Company pursuant whereto or
in furtherance whereof global tenders were invited by it in terms of an
advertisement dated 15.9.2001. The First Respondent herein, Chandra
Developers Pvt. Ltd. (for short, ‘Chandra Developers’) submitted its bid for
purchase of 40.45 acres of land offering the price of Rs.125/- per sq. ft.
which was later enhanced to Rs.278 per sq. ft. Allegedly, valuation of lands
had been done by Tata Economic Consultancy Services and Ernst & Young
Pvt. Ltd. The offer of the First Respondent was said to have been accepted
by the Board of Directors in its meeting dated 25.2.2002. The Company, it
appears, has also submitted an application to BIFR as regard progress made
by it in its attempt to privatize the Company, and praying for a direction to
the financial institutions to release their charge over the assets of the
Company so as to enable it to sell its surplus lands. BIFR, however, upon
considering the matter in some details by its order dated 19.4.2002 opined
that the Company cannot be revived.

Before BIFR some of the parties pleaded that the Company should not
be wound up but BIFR decided to recommend winding up of the company
and sent the same to the High Court. As regard request of the Company for
sale of its assets, an observation was made by BIFR in its order dated
24.08.2002 that the Company would have to seek an appropriate direction
from the concerned High Court.

Proceedings before the High Court :
Upon receipt of the said recommendations, the High Court of
Karnataka registered the same as Company Petition No. 154 of 2002. The
Respondent herein filed an application before the learned Company Judge of
the High Court purported to be under Rules 6 & 9 of the Companies (Court)
Rules praying for a direction upon the Company to execute a deed of sale in
its favour in respect of the said 40.45 acres of land relying on or on the basis
of the said purported resolution dated 25.02.2002, alleging that the same
constituted a concluded contract between the parties. Objections to the said
application were filed by the Appellants herein.

By reason of an order dated 8.10.2003, the said application was
allowed on the premise that the agreement between the Chandra Developers
and the Company constituted a concluded contract in relation to sale of
40.45 acres of land. A Review Application was filed by the Appellant
herein which came to be dismissed. Three appeals were preferred from the
said order viz. by the EHG, State Bank of Mysore and the Company before
the Division Bench of the High Court which came to be dismissed by reason
the impugned Judgment.

However, the learned Company Judge appears to have dismissed an
identical application filed by M/s Salapuria Housing (P) Ltd. being C.A.
No.1589 of 2003, which had been relied upon by the First Respondent
herein in its application, holding that the Company Court had no such
jurisdiction.

Submissions :

Mr. T.R. Andhiyarujina, the learned Senior Counsel appearing on
behalf of the Appellants, in Civil Appeal Nos. 5199-5201 of 2004, would,
inter alia, contend that the learned Company Judge and the Division Bench
of the High Court misdirected themselves in passing the impugned judgment
and order insofar as they failed to take into consideration that BIFR retains
the control over the assets of the company in terms of sub-section (4) of
Section 20 of SICA and, thus, it was BIFR alone which could issue a
direction as regard sanction of sale of assets of the company in respect
whereof the learned Company Judge had no jurisdiction. In any event, the
learned Company Judge had no jurisdiction to issue any direction to the
Company to execute a deed of sale which amounted to grant of a decree for
specific performance of contract. In any view of the matter, the finding of
the Company Judge to the effect that there existed a concluded contract
between the First Respondent and the Company is wholly erroneous.

Mr. Sundara Varadan, the learned Senior Counsel appearing for the
State Bank of Mysore appearing in Civil Appeal Nos.5203-05 of 2004,
supplemented the submissions of Mr. Andhyarujina, contending that the
learned Company Judge had a duty, in larger interest of the creditors, to
obtain the best price for the lands sold. Our attention, in this connection, has
been drawn to the fact that the total dues of the secured creditor banks and
financial institutions as on 26.02.2003 was Rs.5825.31 lakhs towards fund
based facilities and Rs.522.93 lakhs towards non-fund based facilities and,
thus, the consideration amount was not sufficient to meet the liabilities of
the Company. The contentions raised by the State Bank of Mysore, the
learned counsel would submit, as contained in various paragraphs of the
objections had not been taken into consideration either by the Company
Judge or by the Division Bench of the High Court. The learned counsel
would urge that assuming that such contentions had not been raised during
argument as was observed by the Division Bench, it was the duty of the
Company Judge to take into consideration those aspects of the matter. It
was urged that the considerations which arise before a Company Judge for
confirmation of sale are relevant factors for the purpose of directing
execution of a deed of sale even in a private transaction.

The learned counsel would argue that had a suit for specific
performance of contract been filed by a vendee against the Company, the
latter as also the Government of Karnataka could have raised several
contentions including one that the court should not in the facts and
circumstances of the case exercise its discretionary jurisdiction in favour of
the First Respondent herein. It was argued that having regard to the
statutory scheme and in particular the provisions contained in Sections 443,
446 and 447 read with Section 529-A of the Companies Act, 1956 the
Company Judge cannot be held to have any inherent power to direct the
Company to execute a deed of sale; and more so whence a Provisional
Liquidator had not been appointed. Such a direction could only be issued to
the Official Liquidator.

The First Respondent herein was represented by Mr. Dushyant A.
Dave, Mr. Udaya Holla and Mr. K.K. Venugopal. Mr. Dave would
submit that the power of the Company Judge as also BIFR being
concurrent, the latter could ask the company to approach the High Court for
a direction as regard sale of its surplus lands. The learned counsel would
contend that in view of the fact that global tenders had been invited and the
same having been accepted by the learned Company Judge, this Court may
not exercise its jurisdiction under Article 136 of the Constitution of India.

Mr. Dave would argue that the statutory scheme envisages various
stages of winding up as would appear from Section 456(1), sub-sections (1)
and (3) of Section 150, Sections 457, 446(2) and Section 536(2) of the
Companies Act, in terms whereof the learned Company Judge had the
requisite jurisdiction to direct sale of lands in a case of this nature. Relying
on or on the basis of a decision of this Court in M/s Kayjay Industries (P)
Ltd. vs. M/s Asnew Drums (P) Ltd. and Others [(1974) 2 SCC 213], the
learned counsel would contend that the discretion exercised by the learned
Company Judge cannot be said to be arbitrary meriting interference by this
Court.

Mr. Holla, has drawn our attention to a letter of the Government of
Karnataka dated 30.07.2002, and submitted on the basis thereof that the
Government of Karnataka had agreed to grant approval to such sale by
mutual agreement by asking the Company to approach the High Court for
the said purpose. Our attention has specifically been drawn to the orders
passed by BIFR, the learned Company Judge as also the Division Bench of
the High Court to show that apart from advancing an argument that
application for according sanction for sale of land could only have been
filed before BIFR, no other contention had been raised by the Appellants
herein.

Mr. Holla would submit that even Article 100 of the Memorandum
of Association of the Company to which a reference has been made by this
Court while issuing notice on 8.3.2004 is not attracted as in terms thereof
approval of the Government was not necessary.

It has, however, been contended that a new Memorandum of Articles
of Association has come into being; clause (6) of Article 100 whereof is as
under :

“(6) To let, mortgage, charge, sell or otherwise
dispose of, subject to the provisions of section 293
of the Act, any property of the Company either
absolutely or conditionally and in such manner and
upon such terms and conditions in all respects as
they think fit and to accept payment or satisfaction
for the same in cash or otherwise, as they think
fit.”
Thus, in terms of the said provision, the approval of the Government
of Karnataka was not necessary.

It was submitted that the court has inherent power to direct sale of
assets of a company during the pendency of winding up proceedings even
before the winding up order is passed in terms of section 536(2) of the
Companies Act.

It is further submitted that sanctity of an auction sale should be
maintained and in the event auctions are set aside and re-auctions are
ordered on less satisfactory material, loss to exchequer would be far greater.

Mr. K.K. Venugopal, the learned Senior Counsel, would submit that
having regard to sub-section (2) of Section 536 of the Companies Act, the
High Court has the jurisdiction to permit sale of assets of the company even
before passing of the winding up order, in relation whereto Section 20(4) of
SICA will have no application.

It was urged that the provisions of both the statutes must be read
together and so read, it would be manifest that when a winding up
proceeding is initiated under the recommendations of BIFR in terms of
Section 20(1), the power of the Company Court to order approval of a
disposition, prior to passing of winding up order, would not in any manner
be affected by the provisions of SICA, in view of the provisions contained
in sub-section (2) thereof whereby and whereunder the Company Court has
been empowered to proceed with the winding up of the sick industrial
company in accordance with the provisions of the Companies Act, 1956. As
regard application of sub-section (4) of Section 20 of SICA, it was urged
that thereby the right of BIFR is also preserved for issuing any necessary
direction as regard sale of the assets of the company and by reason thereof
the jurisdiction of the Company Court has not been taken away. The learned
counsel would contend that the provisions of SICA did not intend to denude
the Company Court of its power under Section 536(2) read with Rule 9 of
the rules; once the recommendations for winding up by BIFR are made. On
the other hand, Section 20(2) and Section 22-A of SICA acknowledge the
powers of the Company Court and in that view of the matter there being no
inconsistency between the Companies Act and SICA, Section 32 thereof
will have no application.

As regard the requirement of the approval of the Government of
Karnataka, it was urged that the Articles of Memorandum of Association of
the Company cannot control and render ineffective the exercise of statutory
power under the Companies Act and in that view of the matter as the High
Court has approved sale in favour of the First Respondent after examining
the documents, it is not open to the Government of Karnataka to act as an
Appellate Authority thereover.

Relevant provisions of the Companies Act, 1956, Companies (Court)
Rules, 1958 & SICA :

The provisions relating to winding up by the courts occur in Chapter
II of the Companies Act, 1956. Section 433 of the Act enumerates the
circumstances in which company may be wound up by the court including
inability on the part of the company to pay its debts. Section 441 of the Act
specifies as to when the proceeding for winding up of a company by the
court shall commence at the time of the presentation of the petition for the
winding up. In a case, however, where winding up proceedings are initiated
in terms of recommendations made by BIFR or AAIFR, as the case may be,
no such petition is required to be presented. Section 443 lays down the
power of a court on hearing petition; clause (d) of Sub-section (1) whereof
provides for a power to make an order for winding up of the company with
or without costs or any other order that it thinks fit. Section 444 lays down
the consequences of winding up order. In terms of Section 446 of the Act, in
the event of passing of a winding up order or appointment of liquidator as
provisional liquidator, no suit or legal proceeding would commence or if
pending at the date of the winding up order, shall not be proceeded with
against the company except by leave of the court and subject to such terms
as the court may impose. Sub-section (2) of Section 446 provides for a non-
obstante clause, in terms whereof the company court shall have jurisdiction
to entertain or dispose of any suit or proceedings specified therein. Section
451 lays down general provisions as to liquidators. Section 457 specifies the
power of the liquidator which is required to be exercised with the sanction of
the court. Sub-section (2) of Section 536 reads as under:

“536. Avoidance of transfers, etc., after
commencement of winding up.

xxx xxx xxx

(2) In the case of a winding up by the
Tribunal any deposition of the property (including
actionable claims) of the company, and any
transfer of shares in the company or alteration in
the status of its members, made after the
commencement of the winding up, shall unless the
Tribunal otherwise orders, be void.”
Rules 6, 9 & 99 of Companies (Court) Rules, 1959 read as under :

“6. Practice and procedure of the Court and
provisions of the Code to apply.- Save as
provided by the Act or by these Rules, the practice
and procedure of the Court and the provisions of
the code so far as applicable, shall apply to all
proceedings under the Act and these Rules. The
Registrar may decline to accept any document
which is presented otherwise than in accordance
with these Rules or the practice and procedure of
the court.”
“9. Inherent powers of Court.- Nothing in these
Rules shall be deemed to limit or otherwise affect
the inherent powers of the Court to give such
directions or pass such orders as may be necessary
for the ends of justice or to prevent abuse of the
process of the Court.”

“99. Advertisement of petition.-Subject to any
directions of the Court, the petition shall be
advertised within the time and in the manner
provided by Rule 24 of these Rules. The
advertisement shall be in Form No.48.”

Sub-sections (1), (2) and (4) of Section 20, Section 22A & Section
32(1) of SICA read as under :

“(1) Where the Board, after making inquiry
under section 16 and after consideration of all the
relevant facts and circumstances and after giving
an opportunity of being heard to all concerned
parties, is of opinion that the sick industrial
company is not likely to make its net worth exceed
the accumulated losses within a reasonable time
while meeting all its financial obligations and that
the company as a result thereof is not likely to
become viable in future and that it is just and
equitable that the company should be would up, it
may record and forward its opinion to the
concerned High Court.

(2) The High Court shall, on the basis of the
opinion of the Board, order winding up of the sick
industrial company and may proceed and cause to
proceed with the winding up of the sick industrial
company in accordance with the provisions of the
Companies Act, 1956.

(4) Notwithstanding anything contained in
sub-section (2) or sub-section (3), the Board may
cause to be sold the assets of the sick industrial
company in such manner as it may deem fit and
forward the sale proceeds to the High Court for
orders for distribution in accordance with the
provisions of section 529A, and other provisions of
the Companies Act, 1956.”
“22-A. Direction not to dispose of assets. 
The Board may, if it is opinion that any direction is
necessary in the interest of the sick industrial
company or creditors or shareholders or in the
public interest, by order in writing, direct the sick
industrial company not to dispose of, except with
the consent of the Board, any of its assets 

(a) during the period of preparation or
consideration of the scheme under section 18; and

(b) during the period beginning with the
recording of opinion by the Board for winding up
of the company under sub-section (1) of section
20 and up to commencement of the proceedings
relating to the winding up before the concerned
High Court.”
“32. Effect of the Act on other laws.- (1)
The provisions of this Act and of any rules or
schemes made thereunder shall have effect
notwithstanding anything inconsistent therewith
contained in any other law except the provisions of
the Foreign Exchange Regulation Act, 1973 and
the Urban Land (Ceiling and Regulation) Act,
1976 for the time being in force or in the
Memorandum or Articles of Association of an
industrial company or in any other instrument
having effect by virtue of any law other than this
Act.

Approval of State :
The First Respondent herein admittedly filed an application for
direction to the Company to execute a deed of sale, inter alia, on the premise
that a concluded contract had been entered into by and between it and the
Company purporting to be relying upon or on the basis of the resolution
dated 25.02.2002 of the Board of Directors of the Company. It is not in
dispute that along with the said application while annexing the copy of the
resolution, the following sentence had been omitted.

“MD stated that the Board decision for the above
sale will be forwarded to the Government of
Karnataka and seek their formal approval.”
The First Respondent, as noticed hereinbefore, has relied upon a
Government Order issued by the Government of Karnataka dated
30.07.2002, which reads as follows :

“The company shall wind up the loan amount
sanctioned to it by the Government in full from the
proceeds of sale of assets of NGEF Ltd; and
It is, however, not in dispute that although the said Government Order
was placed before BIFR, the same was not placed either before the
Company Judge or before the Division Bench of the High Court. The First
Respondent furthermore relies upon a letter filed in Civil Appeal Nos.5203-
05 of 2004, to show that the Government of Karnataka granted implied
approval as the Company was asked to approach the High Court. It,
however, stands admitted that the First Respondent herein, offered its bid
pursuant to or in furtherance of an advertisement issued by the Government
of Karnataka and not by the Company.

BIFR, indisputably by an order dated 02.08.2002 stated :

“17. Shri M. Gowda, DS, GOK submitted that
GOK had decided to close the company subject to
approval of BIFR and GO had been issued in this
connection on 30.07.2002. The company has
cleared all the dues of FIs under OTS. The
working capital dues are secured by Govt.,
guarantee both for fund based and non-fund based
dues. Shri Gowda requested that permission be
accorded to the company to sell the remaining
assets in a transparent manner and discharge the
liabilities of the secured creditors, employees and
other creditors within a reasonable time. On a
query from the Bench, Shri Gowda clarified that
the funds for VRS would be provided by the State
Government.

18. Shri Govind Raj, MD of the company
submitted that GOK had decided to close down the
unit. The company had been assured adequate
funds from the State Govt., for VRS. The
company was having some problem in sorting out
the outstanding issued with FIs, so much so that
IFCI was demanding a sum of Rs.25,000/- for
issuing NOC even though their dues have been
fully paid. The company was not able to fulfill the
condition of working capital bankers for
converting their second charge on the assets of the
company into first charge because of non-
cooperation of FIs. Canara Bank Financial
Services were also not issuing NOC. The
company had sought permission to sell all the
assets to generate funds to pay the workers dues,
VRS dues, the dues of secured creditors and
others. The Bench noted that the company would
have to seek further directions in the matter from
the concerned High Court”.
BIFR evidently, thus, asked the Company to approach the High Court
if an occasion arises for obtaining sanction for disposing of its surplus lands.
The First Respondent herein was not a party before BIFR. Before the
Company Judge, however, it is the First Respondent herein, who filed the
said application and, as indicated hereinbefore, obtained an order from the
Company Judge by suppression of material fact that the Managing Director
of the Company, having regard to the aforementioned resolution dated
25.02.2002 stated that the approval of the Government of Karnataka would
be sought for.

The Order issued by the Government of Karnataka on 30.07.2002
does not suggest either expressly or by necessary implication that it had
granted its approval for the said sale. Whether such sanction was necessary
is, however, another question which we shall advert to a little later.

We may at this juncture notice that arguments had been raised before
the Division Bench of the High Court that the Government of Karnataka had
not approved the said transaction which is itself a pointer to the fact that the
Appellants herein never accepted that there had been a concluded contract.

It is also not correct to contend that the company will be acting as an
appellate authority over the High Court, if its approval is sought for. The
question should, in fact, be considered from a different angle. An application
before the Company Judge, if at all, was maintainable only upon obtaining
the approval of the Government of Karnataka and if such approval is
granted, then only it would constitute a concluded contract.

It is accepted that the advertisement was issued by the State in the
following terms :

“While preference would be given for bids offering
purchase of entire unit. GOK reserves the right to
accept/reject any of the offers. A party can bid for one or
more alternatives.”

In terms of the said advertisement, thus, the State reserved unto itself
the right to accept or reject the said offer. If the bid had been made pursuant
to the said advertisement indisputably the State’s approval was necessary.
In any event the records were required to be placed before the State so as to
enable it to apply its mind as to whether offer should be accepted or not.

The submission of Mr. Venugopal that in the event if it be held that
the company’s approval was necessary, the same would be contrary to the
statutory power of the Company Court is, thus, misconceived.

It is also not correct to contend that the question as regard the
concluded contract was not raised by the Appellants herein. In fact, the
Company filed a Review Petition before the Company Judge on 30.10.2003
wherein it was clearly averred that such a submission was not made in view
of the observations of the learned Company Judge during the course of
hearing that the issue whether there existed concluded contract would not be
determined and as such there existed an error on the face of its order dated
8.10.2003.

The very fact that original advertisement was issued by the
Government of Karnataka and there existed such a clause in the
Memorandum of Association of the Company is suggestive of the fact that
the Board of Directors of the Company proceeded on the basis that such
approval of the Government of Karnataka was imperative.
Jurisdiction of the Company Court :

The provisions of SICA contain non-obstante clauses. It is a special
statute. It is a complete code in itself. The jurisdiction of the Company
Court in such matters would arise only when BIFR or AAIFR, as the case
may be , has exercised its jurisdiction under Section 20 of SICA
recommending winding up of the company upon arriving at a finding that
there does not exist any chance of revival of the company.

Mr. Venugopal has placed reliance upon a decision of a learned Single
Judge of the Karnataka High Court in Karnataka State Industrial Investment
and Development Corporation Ltd. vs. M/s Intermodel Transport
Technology Systems and Others [AIR 1998 (Karnataka) 195] for the
proposition that despite the fact BIFR retains jurisdiction to get the assets of
a sick company sold in terms of sub-section (4) of Section 20 of SICA; still
the leave of the Company Court, therefore would be required. The said
decision, however has been reversed by the Division Bench of the Karnataka
High Court in BPL Limited, Bangalore vs. Intermodal Transport
Technology Systems (Karanataka) Limited, Bangalore (In Liquidation) and
Others. [2001 (3) Kar.L.J. 622 (DB)], holding that the company Court has
no such jurisdiction. We generally accept the views of the Division Bench.

It is difficult to accept the submission of the learned counsel
appearing on behalf of the Respondents that both the Company Court and
BIFR exercise concurrent jurisdiction. If such a construction is upheld, there
shall be chaos and confusion. A company declared to be sick in terms of
the provisions of SICA, continues to be sick unless it is directed to be wound
up. Till the company remains a sick company having regard to the
provisions of sub-section (4) of Section 20, BIFR alone shall have
jurisdiction as regard sale of its assets till an order of winding up is passed
by a Company Court.

Apart from the fact that sub-section (4) of Section 20 contains a non-
obstante clause and, thus, it shall prevail over the provisions contained in
sub-section (2). The said Act is also a latter statute.

The provisions of SICA would prevail over the provisions of the
Companies Act. Section 20 of SICA relates to winding up of the sick
industrial company. Before BIFR or AAIFR, as the case may be, makes a
recommendation for winding up of the company, an enquiry is made in
terms of Section 16 thereof wherefor all relevant facts and circumstances are
required to be taken into consideration. Before an opinion is arrived at in
that behalf, the parties are given an opportunity of hearing. The satisfaction
arrived at by BIFR that the company is not likely to become viable in future
and it is just and equitable that the company should be wound up must be
based on objective criteria. The High Court indisputably on receipt of such
recommendation of BIFR would initiate a proceeding for winding up in
terms of Section 433 of the Companies Act. Sub-section (2) of Section 536
ipso facto does not confer any jurisdiction upon the Company Court to direct
sale of the assets of the sick company. It has to exercise its power
thereunder subject to the provisions of the special statute governing the field.
Despite the fact that the procedures laid down under the Companies Act
would be applicable therefor but they must be read with sub-section (4) of
Section 20 of SICA which contains a non-obstante clause and in terms
thereof, BIFR is authorized to sell the assets of the sick industrial company
in such a manner as it may deem fit. By reason of the said provision, BIFR
is also empowered to forward the sale proceeds to the High Court for orders
for distribution in accordance with Section 529-A and other provisions of the
Companies Act which in no uncertain terms would mean that the distribution
of the sale proceeds would be for the purpose of meeting the claims of the
creditors in the manner laid down therein. The intention of the Parliament in
enacting the said provision becomes clear as in terms of Section 22-A of
SICA, BIFR is empowered to issue any direction in the interest of the sick
industrial company or its creditors or share-holders and direct the sick
industrial company not to dispose of its assets except with its assent.
Section 32, as noticed hereinbefore, again contains a non-obstante clause.
The scheme suggests that BIFR retains control over the assets of the
company and in terms of the aforementioned provisions may either prevent
any sale or permit any sale of the assets of the sick industrial company.
Such a power in BIFR remains till a winding up order is passed by the High
Court and a stage arrives at for the High Court for issuing orders for
distribution of the sale proceeds.

SICA was furthermore enacted subsequent to the provisions of the
Companies Act. It is not, thus, possible to accept the submission that the
High Court exercises a concurrent jurisdiction.

It may be true that the High Court’s jurisdiction is that of the
Appellate Authority but keeping in view the terminology contained in sub-
section (4) of Section 20 read with Section 32 of the Act leaves no manner
of doubt that the provisions of SICA shall prevail over the provisions of the
Companies Act. For the aforementioned purpose, it was not necessary for
the Parliament to mention specifically the provisions of sub-section (4) of
Section 20 that the same shall prevail over Section 536 of the Companies
Act, as was suggested by the learned counsel appearing for the First
Respondent. The construction of the provisions of both the Acts, as
suggested by the learned counsel, that both the provisions of sub-section (4)
of Section 20 and Section 536 should be read conjointly so as to enable an
applicant to obtain a sanction of both BIFR and the Company Court, thus,
do not appeal to us.

It is inconceivable that in law not only the approval will have to be
taken from both the courts; in case of any private sale, the Company will
have to obtain the consent of both the Company Court or BIFR. While
interpreting the provisions of the two statutes, the court cannot remain
oblivious of the fact that in a given case, possibility of a conflict in the
orders passed by the two courts may arise, which must be avoided.

It is interesting to note that a learned Single Judge of the said Court
dismissed a similar application filed by M/s Salapuria Housing (P) Ltd.
although the First Respondent’s application categorically mentions about the
pendency of the said application.
Inherent Power :

The Company Court has inherent power. Such inherent power of the
Company Court is saved in terms of Rules 7 and 9 of the Companies (Court)
Rules. The Company Court, therefore, may have the requisite jurisdiction to
approve sale of the assets of a company but the question which arises for
consideration is as to whether such inherent power can be exercised despite
existence of a provision contained in another statute..

Section 32 of SICA contains a non-obstante clause stating that
provisions thereof shall prevail notwithstanding anything inconsistent with
the provisions of the said Act and of any rules or schemes made thereunder
contained in any other law for the time being in force. It would bear
repetition to state that in ordinary course although the Company Judge may
have the jurisdiction to pass an interim order in exercise of its inherent
jurisdiction or otherwise directing execution of a deed of sale in favour of an
applicant by the Company sought to be wound up; but keeping in view the
express provisions contained in sub-section (4) of Section 20 of SICA such
a power, in our opinion, in the Company Judge is not available. [See BPL
Limited (supra).

We may, however, observe that the opinion of the Division Bench in
BPL Limited (supra) to the effect that the winding up proceeding in relation
to a matter arising out of the recommendations of BIFR shall commence
only on passing of an order of winding up of the company may not be
correct. It may be true that no formal application is required to be filed for
initiating a proceeding under Section 433 of the Companies Act as the
recommendations therefor are made by BIFR or AAIFR, as the case may
be, and, thus, the date on which such recommendations are made the
Company Judge applies its mind to initiate a proceeding relying on or on the
basis thereof, the proceeding for winding up would be deemed to have been
started; but there cannot be any doubt whatsoever that having regard to the
phraseology used in Section 20 of SICA that BIFR is the authority proprio
vigore which continues to remain as custodian of the assets of the Company
till a winding up order is passed by the High Court.

Some precedents on court’s power:
The decisions of the Karnataka and Bombay High Courts reported in
Smt. Usha R. Shetty and Others vs. Radeesh Rubber Pvt. Ltd. and Another
[1995 (84) CC 602] and Kamani Metallic Oxides Limited vs. Kamani Tubes
Limited [1984 (56) CC 19], relied upon by Mr. Holla cannot be said to have
any application in the instant case. The other decisions cited at the bar
taking the similar view also have no application.

In Buckley on the Companies Acts , the law is stated, thus :

“When the application should be made.- In an
early case it was argued that the sanction of the court
should be obtained before the transaction is entered into
and cannot be given afterwards, but Malins VC,
disagreed, ‘for it would be almost impossible that
directions could from time to time be obtained; but when
the matter is brought before the court, it must have regard
to all the surrounding circumstances’. Vaisey J agreed
that the object of the section is that, if a winding up order
is made, any transaction which has been entered into
since the commencement of the winding up shall be
subject to review by the liquidator and held that he had
no jurisdiction while the petition was pending. Roxburgh
J went to the other extreme and on an application made
after the winding up order refused to validate the
transaction on the ground that the applicant ought to have
applied before the transaction was entered into. Buckly J
held that he had jurisdiction to sanction and did sanction
while the petition was pending a proposed transaction
which on any possible view would be beneficial to the
creditors, one of the objects of the section being to
protect the interests of the creditors during the pending of
the petitions. Since this last decision such orders have
regularly been made, normally in one of two cases: the
first being where the proposed transaction is not in the
ordinary course of business (as in the case last cited) and
the second where it is necessary to persuade the
company’s bankers to unfreeze the account in order to
enable the business to be carried on.”
In Pankaj Mehra and Another vs. State of Maharashtra and Others
[(2000 (2) SCC 756] whereupon the learned counsel appearing on behalf of
the First Respondent placed strong reliance, construction of sub-section (2)
of Section 536 of the Companies Act came up for consideration and it was
held that having regard to the phraseology used therein, the transaction
shall be void unless the court otherwise orders. It is interesting to note that
in para 19 thereof, this Court noticed the principles laid down in Gray’s Inn
Construction Col. Ltd., Re [1980 (1) All.E.R. 814 (CA)] emphasizing the
point that the courts would be very circumspect in the matter of validating
the payments and the interests of the creditors as well as the company would
be kept uppermost in consideration. Thus, a disposition of assets during the
interregnum may not be irretrievably void but the courts are required to
exercise power with circumspection and caution.

Jurisdiction of the Company Court, if any, how should be exercised :
Assuming that the Company Court alone has the jurisdiction to
sanction sale of the assets of a sick company, it having regard to its duties
towards the debtors was required to apply its mind as regard the question as
to whether the disposition of the asset of the company is in the interest of its
creditors. In this case, the company was not the applicant. It did not join the
First Respondent in its application. It had all along resisted its claim.
In the winding up proceeding no order admitting the petition was
passed at the relevant time. Order admitting the petition was passed much
later. Even no provisional liquidator was appointed.

Reliance has been placed on a decision of the learned Single Judge of
the Allahabad High Court in Bengani Food Products Private Ltd. vs. Official
Liquidator and Others [1998 (94) CC 762] wherein it was held that the court
has the jurisdiction to approve the disposition of the property provided it is
found that the scheme or proposal which has been put forward is a viable
scheme and would be in the interest of the creditors as well as beneficial for
the general public.

It may be true that therein the Allahabad High Court was considering
the case involving a sick industrial company but the questions which have
been raised herein were not raised there. The High Court considered the
prayer made in the application and was of the opinion that the proposal
given by the applicant was not a viable one for the benefit of the company or
its creditors. In the instant case, the said relevant factors were also not
considered by the High Court.

In Sudarsan Chits (I) Ltd. vs. O. Sukumaran Pillai and Others [(1984)
4 SCC 657], this Court observed :

“10. The Appellate Bench declined to direct the
Provisional Liquidator to file claim petition at the
instance of the Company under Section 446(2)(b) on the
sole ground that such a petition at the instance of the
Liquidator would be maintainable in the course of
winding up of proceedings which means that the
winding-up proceedings are pending. Undoubtedly,
Section 446(1) manifests the legislative intention that the
procedure thereunder prescribed could be availed of
when the winding-up order has been made or where the
Official Liquidator is appointed as the Provisional
Liquidator. Section 446(1) envisages two situations in
which the court will have jurisdiction to make the order
thereunder contemplated. These two situations are: where
a winding-up order has been made or where the Official
Liquidator has been appointed as Provisional Liquidator.
The first of the two situations envisages an order for
winding-up of the company having been made and which
is subsisting. The second situation is where without
making a winding-up order, the court has appointed
Official Liquidator to be the Provisional Liquidator.
Section 450(1) of the Companies Act confers power on
the Company Court to appoint Official Liquidator to be
Provisional Liquidator at any time after the presentation
of the winding-up petition and before making of the
winding-up order. The court before which a winding-up
petition is presented has power to appoint Official
Liquidator as Provisional Liquidator of the company
even before making the winding-up order. If ultimate
winding-up order is made, the Official Liquidator acts as
such. And let it be remembered that where a winding-up
order is made, it relates back to the date when petition for
winding-up is presented. Referring to Section 446(1) it
becomes clear that the court will have jurisdiction to
make the order therein contemplated, where a winding-
up order has been made or prior to the making up of the
winding-up order, Official Liquidator has been appointed
as Provisional Liquidator as contemplated by Section
450(1).”
Once the Company Judge proceeds to direct disposition of assets of
the Company whether during pendency of the proceedings or upon
culmination thereof, ordinarily a provisional liquidator is appointed.

There lies a distinction between accord of sanction for private
negotiation of sale of assets of the Company vis-`-vis the auction held by the
Official Liquidator. It is not in dispute that no Provisional Liquidator was
appointed. The court may have an inherent power to approve a transaction
of sale entered into by and between the Company and the third party; but it
is beyond any cavil of doubt that while doing so the Company Court must
bear in mind its duties towards the creditors. While exercising jurisdiction
under Section 433 of the Companies Act, the Company Court remains the
custodian of the interest of the Company and its creditors. It has, thus, a
duty to satisfy itself that having regard to the market value of the property,
the price offered is reasonable. [See M/s Kayjay Industries (P) Ltd.
(supra)]. It is further more required to be borne in mind that upon
liquidation, the assets and properties of the Company vest in the Official
Liquidator for the benefit of its creditors. [See Allahabad Bank and Others
vs. Bengal Paper Mills Co. Ltd. and Others [(1999) 4 SCC 383].

The satisfaction as regard adequacy of the price is one of the relevant
factors for proper and reasonable exercise of the judicial discretion vested in
it. There cannot be any doubt or dispute that when an auction is held upon
compliance of the statutory provisions, withholding of auction on the ground
that still higher price may be obtained may prove to be self-defeating
exercise as has been held in M/s Kayjay Industries (P) Ltd. (supra) and State
of Punjab vs. Yoginder Sharma Onkar Rai & Co. and Others [(1996) 6 SCC
173] but having regard to the accepted position that the Company Judge in a
case of this nature exercises a discretionary jurisdiction; it is bound to act
with great circumspection and caution. Such a jurisdiction should ordinarily
be exercised in exceptional cases and when necessary for seeing the
company as an on-going concern.

It may, furthermore, be true that before the Company Judge or before
the High Court the secured creditors did not raise objections which have
been raised before us although specifically taken in their objections, as
would appear from paragraphs 7, 9, 11, 12 and 13 thereof, but if such
considerations were relevant having regard to the statutory duties imposed
upon the court, the learned Company Judge must be held to have failed
and/or neglected to exercise its discretionary jurisdiction in a fair and
reasonable manner.
In any event having regard to the importance of the questions
involved and in particular the question as to whether the impugned order is
contrary to the statutory provisions contained in sub-section (4) of Section
20, we have thought it proper to consider the same.

The Company Judge moreover will have to bear in mind the
provisions contained in Section 529-A of the Companies Act in terms
whereof the dues of the workman and the debts due to the secured creditors
to the extent such debts rank in clause (c) of the proviso appended to sub-
section (1) of Section 529 pari passu therewith and shall have a priority over
all other debts.

In Andhra Bank vs. Official Liquidator and Another [(2005) 5 SCC
75] , a three-Judge Bench of this Court, observed :

“Section 446 of the Companies Act indisputably confers
a wide power upon the Company Judge, but such a power
can be exercised only upon consideration of the
respective contentions of the parties raised in a suit or a
proceeding or any claim made by or against the
company. A question of determining the priorities would
also fall for consideration if the parties claiming the same
are before the court. Section 446 of the Companies Act
ipso facto confers no power upon the court to pass
interlocutory orders. The question as to whether the
courts have inherent power to pass such orders, in our
opinion, does not arise for consideration in this
proceeding. Assuming such a power exists, it was
imperative that the same should have been exercised on
consideration of the factors laid down by this Court in
Morgan Stanley Mutual Fund etc. vs. Kartick Das etc.
[(1994) 4 SCC 225]. An unreasoned order does not
subserve the doctrine of fair play [See M/s. Mangalore
Ganesh Beedi Works Vs. The Commissioner of Income
Tax, Mysore and Anr. JT 2005 (2) SC 442 ]”.

It was further observed that for judging the correctness of an equitable
order even the subsequent events can be taken into consideration. In any
view of the matter an equitable order passed by a Company Court in exercise
of its inherent jurisdiction or otherwise must conform to the requirements of
the relevant statutes. [See Manohar Lal Chopra vs. Rai Bahadur Rao Raja
Seth Hiralal -AIR 1962 SC 527, Vareed Jacob vs. Sosamma Geevarghese
and Others (2004) 6 SCC 378 & National Institute of Mental Health &
Neuro Sciences vs. C. Parameshwara (2005) 2 SCC 256]

In re A.I. Levy (Holdings) Ltd. [1964 (1) Chancery Division 19]
Buckley J. while considering the provisions of Section 227 of the English
Companies Act which is pari materia with Section 536(2) of the Indian
Companies Act, opined that the object of the said section was to protect the
interests of the creditors from the possible unfortunate results which would
ensue from the presentation of a petition and to protect their interests as
much during the period while the petition was pending as after an order has
been made on it. The said decision, therefore, does not lay down a law that
the provision of Section 536(2) of the Act is meant to benefit the vendee.
In fact such a provision enures to the benefit of the creditors. A Company
Judge granting sanction in terms of the aforementioned provision, thus, has a
duty to see that the transaction is one which must benefit the unsecured
creditors of the company.

In A.I. Levy (Holdings) Ltd. (supra) it was held :

“In these circumstances, this being a case in which it
appears to me to be manifest that the transaction is one
which must benefit the unsecured creditors of the
company if in due course a winding up order is made, the
reason which affected Vaisey J.’s mind, that is to say,
that the liquidator should be given an opportunity to
investigate the matter and bring it before the court
representing the interests of all the creditors, does not
affect my mind, for I do not think the liquidator could
make the position clearer to me than it is at the present
time on the facts.”
CONCLUSION :

BIFR had admittedly power to sell the assets of the Company but the
High Court until a winding up order is issued does not have the same. BIFR
in its order dated 02.08.2002 might have made an observation to the effect
that the Company may approach the High Court in case it intended to
dispose of its property by private negotiation but the same would not mean
that BIFR could delegate its power in favour of the High Court. BIFR
being a statutory authority in absence of any provision empowering it to
delegate its power in favour of any other authority had no jurisdiction to do
so. ‘Delegatus non potest delegare’ is a well-known maxim which means
unless expressly authorized a delegatee cannot sub-delegate its power.
Moreover, the said observations of BIFR would only mean that the
Company Court could exercise its power in accordance with law and not
de’hors it. If the Company Court had no jurisdiction to pass the impugned
order, it could not derive any jurisdiction only because BIFR said so.

In any view of the matter, BIFR had permitted only the Company to
approach the High Court in case any occasion arises therefor. BIFR did not
permit any other person to do so. The Company did not file such an
application. It opposed the prayer of the First Respondent The Company, as
noticed hereinbefore, had preferred an appeal before the Division Bench of
the High Court questioning the correctness of the order passed by the
learned Company Judge. The Company has since been directed to be
wound up and is now being represented by the Official Liquidator who also
questions the correctness of the order. Before us an application has been
filed by the Government of Karnataka for impleading it as a party being I.A.
Nos.2-4 of 2005 in Civil Appeal No.5199-5201 of 2004 wherein also, the
validity of the impugned order is in question.

In this view of the matter, we are of the opinion that the impugned
judgment of the High Court cannot be sustained. It is set aside accordingly.

For the reasons aforementioned, the Appeals are allowed. No costs.

 

 

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