Companies Act Case Law Pankaj Mehra And Anr. Etc.Vs State Of Maharashtra And Ors.

CASE NO.:
Appeal (crl.) 11 of 1999

PETITIONER:
PANKAJ MEHRA AND ANR. ETC.

RESPONDENT:
STATE OF MAHARASHTRA AND ORS.

DATE OF JUDGMENT: 15/02/2000

BENCH:
K.T. THOMAS & A.P. MISRA

JUDGMENT:
JUDGMENT

2000 (1) SCR 825

The Judgment of the Court was delivered by

THOMAS, J. Can a company escape from penal liability under Section 138 of
the Negotiable Instruments Ad (for short “the NI Act”) on the premise that
a petition for winding up of the company has been presented and was pending
during the relevant time? A Division Bench of the Bombay High Court held
that the company canno! avert its liability on the mere ground that such
petition was presented prior to the company being called upon by a notice
to pay the amount of the cheque. By holding so, the Division Bench
dismissed a batch of writ petitions filed by different companies
challenging the criminal proceedings initiated against them in different
criminal courts for the offence under Section 138 of the NI Act. We have
now to deal with the same question in this batch of appeals filed by
special leave.

Though different cases now before us have differing facts we arc not
bothering ourselves with such differences. The common features in all the
appeals, which alone are relevant for dealing with the aforesaid question,
can be culled out from one of the appeals. The company involved in the said
sample appeal will be referred to as “the Company”. The cheque which the
company issued bore the date 30.10.1996 and the amount covered by the
cheque was Rs. 5,72,432. [There is a contention that the cheque was
actually drawn much before that date). When the cheque was presented for
encashment the drawee bank dishonoured it on 26.12.1996. The payee of the
cheque issued a notice to the Company on 21.12.1996 calling upon it to pay
the amount. As the Company failed to pay the amount a complaint was filed
before the magistrate on 29.1.1997 against the Company and two of its
directors for the offence under Section 138 of the NI Act.

The magistrate who took cognizance of the offence issued process to all the
accused. It was that the accused challenged the criminal proceedings by
means of a writ petition filed before the Bombay High Court, on the premise
that a petition for winding up of the Company has been filed on 27.5.1996
before the court concerned and a provisional liquidator was appointed by
that court two years later i.e. on 21.4.1998. As the facts stated above
were not substantially disputed the Division Bench of the High Court
proceeded to hear the writ petition along with the other writ petitions in
the batch, on the limited question whether the Company can avert the penal
liability on that premise. The main footing on which the Company resisted
the prosecution was that under Section 536(2) of the Companies Act any
disposition of the property of the Com-pany shall be void if it was made
after the commencement of winding up proceedings by the court. To bolster
up the said ground the Company relied on Section 441(2) of the Companies
Act which says that winding up of a company by the court shall be deemed to
commence at the time of presentation of the petition for winding up. The
Division Bench of the High Court noticed the common features in all the
cases in the following sentences:

“In all these matters, a petition for winding up had been filed either
before the cheques were issued (in some cases) and in any event before the
period of 15 days, after receipt of notice, expired. Thus the question for
consideration is whether merely by reason of a winding up petition being
presented there was a bar or legal disability in making payment.”

Learned Judges proceeded to consider the question on the aforesaid admitted
premise and, therefore, examined the contention whether disposi-tion of any
property by the company would become “void” immediately on presentation of
the petition for winding up, or it would become void only when an order of
winding up had been passed, or at least when a provisional liquidator has
been appointed. Section 536(2) of the Companies Act was sought to be
interpreted in a wide dimension so as to render all transactions void
merely because a petition for winding up was presented – whether or not it
was succeeded by an order of winding up or appointment of a provisional
liquidator. The Division Bench of the High Court repelled the said
contention on the following reasoning :

“If this argument is accepted, persons who purchased shares in the open
market through the Stock Exchange without any knowledge of a petition for
winding up having been presented, would also get affected as all such
transactions would be void. Therefore, if this wide propositions were to be
accepted then once a petition for winding up is presented, even without an
order for winding up, there would be for all practical purposes closure of
the Company. All activities of the company would have to a standstill. If
this were the law then unscrupulous parties could blackmail/pressurise all
companies to succumb to unjustified demands by merely threaten-ing to or
presenting petitions for winding up. Conversely un-scrupulous companies
could avoid payment/discharge of its liabilities by having their own
parties present bogus petitions for winding up. After one is dismissed
another could be filed. In this manner, the company could avoid discharging
its liabilities in-definitely if not permanently. If the law was that
merely on the filing of a petition for winding up all dispositions were
void, it would lead to absurd or catastrophic results. In our view that can
never be the legal position.”

It was then argued before the Division Bench that the words “in the winding
up” appearing in Section 536(2) of the Companies Act should mean “during
winding up proceedings”. Reliance was placed on the decision in Kamani
Matallic Oxides Ltd. v. Kamani Tubes Ltd., (1984) Company Cases Page 19,
wherein it was held that the words “in the winding up” do not mean “after
or upon the passing of the winding up order”. Learned Judge of the Division
Bench of the High Court pointed out the distinguishing context in the said
case in which such a view was taken and then expressed the view that merely
because a petition for winding up has been presented all transactions or
dispositions undertaken during the period cannot become ab initio void. The
following reasoning of the Division Bench for repelling the said contention
is worthy to be extracted :

“If they were to be void ab initio i.e. immediately on their being entered
into, then on the petition being withdrawn or dismissed, they would not
revive. It is clear that if the petition is withdrawn or dismissed then the
transactions would never have been void. This clearly shows that the
transactions/dispositions are not void ab initio but become void on the
passing of an order for winding up or on appointment of a Provisional
Liquidator. What Section 536(2) read with Section 441(2) provides for is to
convert what was otherwise valid into void by virtue or the legal fiction.
Thus the voidness taken effect on the passing of the order of winding up or
appointment of Provisional Liquidator. By virtue of the legal fietion, in
Section 441(2), it then relates back to the date of presen-tation of the
petition for winding up.”

We will presently consider the effect of Section 536(2) of the Com-panies
Act, The entire Section is quoted below :

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

(1) la the case of a voluntary winding up, any transfer of shares in the
company, not being a transfer made to or with the sanction of the
liquidator, and any alteration in the status of the members of the company,
made after the commencement of the winding up, shall be void.

(2) In the case of a winding up by or subject to the supervision of the
Court, any disposition 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 commen-cement of the winding up,
shall, unless the Court otherwise orders, be void.”

Contextually Section 441(2) of the Companies Act is very relevant and hence
that is also extracted here :

“441. Commencement of winding up by Court. – Where, before the presentation
of a petition for the winding up of a company by the court, a resolution
has been passed by the company for voluntary winding up, the winding up of
the company shall be deemed to have commenced at the time of the passing of
the resolution, and unless the Court on proof of fraud or mistake, thinks
fit to direct otherwise, all proceedings taken ia the voluntary winding up
shall be deemed to have been validly taken.

(2) In any other case, the winding up of a company by the Court Shall be
deemed to commence at the time of the presentation of the petition for the
winding up.”

Three modes of winding up have been prescribed in Part VII of the Companies
Act, (vide Section 425). First is, winding up by the court, next is
voluntary winding up and the third is winding up by subjecting to the
supervision of the court. We need not bother ourselves with the first sub-
section of Section 536 of the Companies Act as it deals with a case of
voluntarily winding up of the company, because none of the companies in the
present batch of appeals is involved in such a contingency. Sub-section (2)
deals with the other two types of winding up. Section 439 of the Companies
Act con-templates an application to the court for the winding up of the
company. It can be done by presenting a petition by any one of the persons
enumerated in sub-section (1) of Section 439. Such persons include any
creditor, including any prospective creditor.

Once a petition for winding up is presented it is not a necessary
concomitant that the winding up would follow. This position is made clear
in Section 440(2) which says that ”the court shall not make a winding up
order on a petition presented to it under sub-section (1), unless it is
satisfied that the voluntary winding up or winding up subject to the super-
vision of the Court cannot be continued with due regard to the interests of
the creditors or contributories or both.”

So a judicial exercise is called for to reach the satisfaction of the court
that winding up has to be continued with due regard to the interest of the
creditors or the contributors. Section 443 of the Companies Act is
important in this context. Sub-section (1) of that Section says that on
hearing a petition for winding up the court may either (1) dismiss the
petition or (2) make any interim order as it thinks fit or (3) make an
order for a winding up. Sub-section (2) says that “where the petition is
presented on the ground that it is just and equitable that the company
should be wound up, the Court may refuse to make ar order of winding up. if
it is of opinion that some other remedy is available to the petitioners and
that they are acting unreasonably in seeking to have the company wound up
instead of pursuing that other remedy.”

Two more provisions are relevant in this context. Section 450 says : “At
any time after the presentation of a winding up petition and before the
making of a winding up order, the Court may appoint the Officer Liquida-tor
to be liquidator provisionally”. Before appointing a provisional liquida-
tor the court has to give notice to the company and reasonable opportunity
to make his representation. Section 449 enjoins that “on a winding up order
being made in respect of a company the Official Liquidator shall, by virtue
of his office, become the liquidator of the company.” In the above backdrop
alone we can consider the impact of the legislative direction in Section
536(2) that any disposition of the property of the company made after the
commencement of the winding up (i,e. after the presentation of a petition
for winding up) shall be void. There are two important aspects here. First
is that the word “void” need not automatically indicate that any
disposition should be ab initio void. The legal implication of the word
“void” need not necessarily be a stage of nullity in all contin-gencies.
Black’s Law Dictionary gives the meaning of the word !’void” as having
different nuances in different connotations. Once of them is of course
“null, or having no legal force or binding effect”. And the other is
“unable in law, to support the purpose for which it was intended”. After
referring to the nuances between void and voidable the Lexicographer
pointed out the following :

“The word ‘void’ in its strictest sense, means that which has no force and
effect, is without legal efficacy, is incapable of being enforced by law,
or has no legal or binding force, but frequently the word is used an
construed as having the more liberal meaning of ‘voidable. The word ‘void’
is used in statutes in the sense of utterly void so as to be incapable of
ratification, and also in the sense of voidable and resort must be had to
the rules of construc-tion in many cases to determine in which sense the
Legislature intended to use it. An act or contract neither wrong in itself
nor against public policy, which has been declared void by statute for the
protection or benefit of a certain party, or class of parties, is voidable
only.”

For discerning the legislative idea in employing the word “void” in the
context set out in Section 536(2) of the Companies Act the second aspect to
be noticed is that the provision itself shows that the word void is not
employed peremptorily since court has power to order otherwise. The words
“unless the court otherwise order” are capable of diluting the rigor of the
word “void” and to choose the alternative meaning attached to that word.

In Chittoor District Cooperative Marketing Society Ltd. v. M/s. Vegetoh
Ltd, and Ors., [1987] Suppl. SCC 167 a two Judge Bench of this Court
considered a plea for validation of payments made by a company after
presentation of a petition for winding up. One set of payments were made
before the passing of the winding up order and the other set of payments
were made thereafter. This Court declined to validate such payments on the
ground that “there is no evidence to show that those payments were made
either under compulsion of circumstances in order to save or protect the
property of the company or that there was any commercial compulsion to
enable it to run its business”. The decision only indicates that such
payments could have been made valid if evidence was adduced to show that
there was compulsion of circumstances. In facts, this decision lands
support to the interpretation that the payments which were made after the
commencement of winding up proceedings, would not become ab initio void.

An early decision of a Division Bench of the Bombay High Court in Tulsidas
Jasraj Parekh v. Industrial Bank of Western India, AIR (1931) Bombay 2 was
sought to be relied on by most of the learned counsel who argued for
different appellant The question which the Court considered therein
pertained to Section 227(2) of the old Companies Act, 1913 which was
identical to Section 536(2) of the present Act. Certain payments made by a
company after commencement of the winding up proceedings were questioned
and the Division Bench considered the scope of the sub-section and noticed
that the principle had been borrowed from the English Com-panies Act. Hence
some of the English authorities were also referred to by Marten C.J., who
spoke for the Division Bench. Learned Judges stated thus :

“Now here as regards S 227(2) the Court has to steer a middle course
between two extremes. On the one hand the words of the section are wide
enough to include any sale or payment that a company may make after the
date of the winding-up petition. On that basis any business would
practically have to he stopped if a petition was presented, because it
would be unsafe to dispose of any of the company’s assets. For instance, a
mill company might not be able to buy a ton of coal for the use of its
furnaces or, on the other hand, it might not be able to sell any of its
goods in the ordinary course of business. Consequently, the Court has very
properly laid down that, speaking generally, any bona fide trans-action
carried out and completed in the ordinary course of current business will
be sanctioned by the Court under S. 227(2). On the Other hand it will not
allow the assets to be disposed of at the mere pleasure of the company, and
thus cause the fundamental principle of equality amongst creditors to be
violated. To do so would in effect be to add to the preferential debts
enumerated in s. 230 a further category of all debts which the company
might choose to pay wholly or in part.”

It is useful to refer to the reasoning adopted by a Division Bench of the
Gujarat High Court in Navjivan Mills Ltd., In re (1986) 59 Company Cases
201 in favour of adopting a pragmatic attitude when a Company Court was
approached for approval of certain dispositions which a com-pany made after
presentation of a petition for winding-up. A clear distinc-tion was drawn
by the Division Bench between the period till the passing of the order for
winding-up and thereafter, so far as dispositions are concerned. The
following reasoning is useful for consideration of the issues involved :

“The court can exercise the jurisdiction under section 536(2) of the
Companies Act, 1956, of giving directions validating proposed transactions
pending a petition for winding up but before the winding up order is made
for the obvious reason that unless these transactions are saved from the
consequence which may ensue, if at all, on an order of winding up being
made, the company might find it difficult to keep itself going and its
business might be paralysed. The purpose underlying the investment of the
power ia court is for the benefit and the interest of the company so as to
ensure that a company which is made the subject of a winding-up petition
may nevertheless obtain the money necessary for carrying out its business
and so as to avoid its business being paralyzed. If that is the purpose and
object of the section, it would hardly be proper and just to stultify the
power and restrict its operation since otherwise it is bound to be counter-
productive in the sense that the very purpose of keeping the company as a
going concern so as to ensure the interest of the shareholders and
creditors would be defeated,”

In Re Grays Inn Construction Company Ltd (1980) 1 All E.R. 814 the Court of
Appeal (Civil Division) considered the principle on which discretion of the
court to validate the dispositions of property made by a company, during
the interregnum between presentation of a winding up petition and the
passing of the order for winding up, has been dealt with. Section 227 of
the English Companies Act, 1948 is almost the same as Section 536(2) of the
Indian Companies Act. Dispositions which could be alidated are mentioned in
the decision. The said decision was cited before us in order to emphasise
the point that courts would be very circumspect in the matter of validating
the payments and the interest of the creditors as well as the company would
be kept uppermost in consideration. Be that so, the said decision is not
sufficient to support the contention that disposi-tion during the
interregnum would be irretrievably void.

It is difficult to lay down that all dispositions of property made by a
company during the interregnum between the presentation of a petition for
winding up and the passing of the order for winding up would be null and
void. If such a view is taken the business of the company would be
paralysed, for, the company may have to deal with very many day-to-day
transactions, make payments of salary to the staff and other employees and
meet urgent contingencies. An interpretation which could lead to such a
catastrophic situation should be averted. That apart, if any such view is
adopted, a fraudulent company can deceive any bona fide person transact-ing
business with the company by stage-managing a petition to be presented for
winding up in order to defeat such bona fide customers. This conse-quence
has been correctly voiced by the Division Bench in the impugned judgment.

If the payment is not ab initio void the company cannot contend that it is
legally forbidden from making payment of the cheque amount when notice was
issued by the payee regarding dishonour of the cheque. To circumvent this
hurdle an endeavour was made by some of the appellants’ counsel to show
that the very issuance of a cheque would amount to disposition of property.
We are unable to accept the said contention particularly in view of the
definition of “cheque” in the NI Act. “A Cheque is a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on
demand.”

Bill of exchange is “an instrument in writing containing an uncondi-tional
order, signed by the maker, directing certain person to pay a certain sum
of money only to, or to the order of a certain person or to the bearer of
the instrument”. The cheque, therefore, can be an order on the banker to
pay the amount to the holder thereof and no disposition of property would
take place until the payment is made by the banker pursuant thereto. At the
most, drawing of a cheque can be considered as a step towards disposition
of property, but that is insufficient to amount disposition of property.

It was next contended that since one of the conditions to constitute the
offence of Section 138 of the NI Act is that a cheque should have been
drawn for the discharge of a legally enforceable “debt or other liability”
no such cheque can possibly be conceived in a situation such as this
because the creditor would be disabled from legally enforcing the debt with
the commencement of winding up proceedings. Section 138 of the NI Act, no
doubt, contemplates only when the cheque is drawn by a person “for the
discharge, in whole or in part, of any debt or other liability”.
Explanation to Section 138 says that “for the purposes of this Section
‘debt or other liability* means a legally enforceable debt or liability”.
Therefore, the first limb of the contention is forceful that for the
offence under Section 138 the cheque should have been drawn for discharging
a legally enforceable debt or other liability. But the second limb of the
contention is tenuous as the debt would not cease to be legally enforceable
merely because some body has filed a petition for winding up.

In this context a reference to Section 139 of the NI Act is indispen-sable.
It reads thus :

“139. Presumption in favour of holder. – It shall be presumed, unless the
contrary is proved, that the holder of a cheque received the cheque, of the
nature referred to in Section 138 for the discharge, in whole or in part,
of any debt or other liability.”

Thus, when a cheque is received by a holder the court has to presume that
(1) it is a cheque of the nature referred to in Section 138; and (2) such
cheque was received for the discharge of a legally enforceable debt or
liability. It is a legislative mandate that the court should proceed with
the assumption that such cheque was received for the discharge of a legally
enforceable debt or other liability until the drawer proves that it is not
so. Learned counsel contended that the burden of proof cast On the drawer
of the cheque would stand discharged and the presumption would stand
rebutted when it is shown that the company has been brought into winding up
proceedings, as then no debt can be legally enforced against the company.
There is no provision in the Companies Act which prohibits enfor-cement of
the debt due from a company. When a company goes into liquidation,
enforcement of debt due from the company is only made subject to the
conditions prescribed therein. But that does not mean that the debt has
become unenforceable altogether. Perhaps due to want of sufficient assets
for the company the realisation of a debt would be difficult. But that is
no premise to hold that the debt is legally unenforceable. Enforceability
of a debt is not to be tested on the touchstone of the modality or the
procedure provided for its realisation or recovery. Hence the contention
that the special provision incorporated in the Companies Act regarding the
debts and liabilities due from the company will render the debt
unenforceable, cannot be accepted.

The alternative approach is this : Even assuming that any disposition of
the property made by a company after commencement of the winding up
proceedings is null and void, how that is an escape ground from the offence
under Section 138 of the NI Act? That section created a statutory offence
which on the confluence of the various factors enumerated therein,
commencing with the drawing of the cheque and ending with the failure of
the drawer of the cheque to pay the amount covered by it within the time
stipulated, ripens into a penal liability.

The last factor for constituting the offence under Section 138 of the NI
Act is formulated in clause c of the proviso to the Section which reads
thus : “the drawer of such cheque fails to make the payment of the said
amount of money to the payee or as the case may be, to the holder in due
course of the cheque within fifteen days of the receipt of the said
notice.”

The words “the drawer of such cheque fails to make the payment” are
ostensibly different from saying “the drawer refuses to make payment”.
Failure to make payment can be due to the reasons beyond the control of the
drawer. An illustrative case is, if the drawer is not a company but
individual who has become so pauper or so sick as he cannot raise the money
to pay the demanded sum. Can he contend that since failure to make payment
was on account of such conditions he is entitled to be acquitted? The
answer cannot be in the affirmative though the aforesaid conditions can be
put forth while considering the question of sentence.

We therefore feel that legislature has thoughtfully used the word “fails”
instead of other expressions as failure can be due to variety of reasons
including his disability to pay. But the offence would be complete when the
drawer “fails” to make payment within the stipulated time, whatever be the
cause for such failure.

The drawer of the cheque can have different explanations for the failure to
pay the amount covered by the cheque. But no such explanations would be
sufficient to extricate him from the tentacles of the offence contemplated
in the Section. Perhaps same kind of explanations would be sufficient to
alleviate the rigor of the offence which may be useful to mitigate the
quantum of sentence to be imposed. But that is no ground for consideration
at this stage.

For all the above reasons, we are not inclined to interfere with impugned
judgment of the Bombay High Court. However, learned counsel who argued for
one of the appellants in this batch of appeals (M/s. Atash Industries
(India) Ltd.) pointed out that an observation made by the Division Bench in
the impugned judgment would cause prejudice to that company when the case
proceeds to the trial. We noticed that the following observation in
paragraph 59 of the impugned judgment has the potency of creating a
prejudice against them :

“The conduct of Atash Industries (India) Limited in suppressing facts and
obtaining orders from Courts without pointing out cor-rect facts must be
deprecated. In our view this conduct precludes the Company from getting any
equitable reliefs.”

We make it clear that the observation was made only for the Writ Petition
pending in the High Court and that will not be counted against the said
company during the remaining stages of trial.

All the appeals are accordingly dismissed.

 

 

CASE NO.:
Appeal (crl.) 11 of 1999

PETITIONER:
PANKAJ MEHRA AND ANR. ETC.

RESPONDENT:
STATE OF MAHARASHTRA AND ORS.

DATE OF JUDGMENT: 15/02/2000

BENCH:
K.T. THOMAS & A.P. MISRA

JUDGMENT:
JUDGMENT

2000 (1) SCR 825

The Judgment of the Court was delivered by

THOMAS, J. Can a company escape from penal liability under Section 138 of
the Negotiable Instruments Ad (for short “the NI Act”) on the premise that
a petition for winding up of the company has been presented and was pending
during the relevant time? A Division Bench of the Bombay High Court held
that the company canno! avert its liability on the mere ground that such
petition was presented prior to the company being called upon by a notice
to pay the amount of the cheque. By holding so, the Division Bench
dismissed a batch of writ petitions filed by different companies
challenging the criminal proceedings initiated against them in different
criminal courts for the offence under Section 138 of the NI Act. We have
now to deal with the same question in this batch of appeals filed by
special leave.

Though different cases now before us have differing facts we arc not
bothering ourselves with such differences. The common features in all the
appeals, which alone are relevant for dealing with the aforesaid question,
can be culled out from one of the appeals. The company involved in the said
sample appeal will be referred to as “the Company”. The cheque which the
company issued bore the date 30.10.1996 and the amount covered by the
cheque was Rs. 5,72,432. [There is a contention that the cheque was
actually drawn much before that date). When the cheque was presented for
encashment the drawee bank dishonoured it on 26.12.1996. The payee of the
cheque issued a notice to the Company on 21.12.1996 calling upon it to pay
the amount. As the Company failed to pay the amount a complaint was filed
before the magistrate on 29.1.1997 against the Company and two of its
directors for the offence under Section 138 of the NI Act.

The magistrate who took cognizance of the offence issued process to all the
accused. It was that the accused challenged the criminal proceedings by
means of a writ petition filed before the Bombay High Court, on the premise
that a petition for winding up of the Company has been filed on 27.5.1996
before the court concerned and a provisional liquidator was appointed by
that court two years later i.e. on 21.4.1998. As the facts stated above
were not substantially disputed the Division Bench of the High Court
proceeded to hear the writ petition along with the other writ petitions in
the batch, on the limited question whether the Company can avert the penal
liability on that premise. The main footing on which the Company resisted
the prosecution was that under Section 536(2) of the Companies Act any
disposition of the property of the Com-pany shall be void if it was made
after the commencement of winding up proceedings by the court. To bolster
up the said ground the Company relied on Section 441(2) of the Companies
Act which says that winding up of a company by the court shall be deemed to
commence at the time of presentation of the petition for winding up. The
Division Bench of the High Court noticed the common features in all the
cases in the following sentences:

“In all these matters, a petition for winding up had been filed either
before the cheques were issued (in some cases) and in any event before the
period of 15 days, after receipt of notice, expired. Thus the question for
consideration is whether merely by reason of a winding up petition being
presented there was a bar or legal disability in making payment.”

Learned Judges proceeded to consider the question on the aforesaid admitted
premise and, therefore, examined the contention whether disposi-tion of any
property by the company would become “void” immediately on presentation of
the petition for winding up, or it would become void only when an order of
winding up had been passed, or at least when a provisional liquidator has
been appointed. Section 536(2) of the Companies Act was sought to be
interpreted in a wide dimension so as to render all transactions void
merely because a petition for winding up was presented – whether or not it
was succeeded by an order of winding up or appointment of a provisional
liquidator. The Division Bench of the High Court repelled the said
contention on the following reasoning :

“If this argument is accepted, persons who purchased shares in the open
market through the Stock Exchange without any knowledge of a petition for
winding up having been presented, would also get affected as all such
transactions would be void. Therefore, if this wide propositions were to be
accepted then once a petition for winding up is presented, even without an
order for winding up, there would be for all practical purposes closure of
the Company. All activities of the company would have to a standstill. If
this were the law then unscrupulous parties could blackmail/pressurise all
companies to succumb to unjustified demands by merely threaten-ing to or
presenting petitions for winding up. Conversely un-scrupulous companies
could avoid payment/discharge of its liabilities by having their own
parties present bogus petitions for winding up. After one is dismissed
another could be filed. In this manner, the company could avoid discharging
its liabilities in-definitely if not permanently. If the law was that
merely on the filing of a petition for winding up all dispositions were
void, it would lead to absurd or catastrophic results. In our view that can
never be the legal position.”

It was then argued before the Division Bench that the words “in the winding
up” appearing in Section 536(2) of the Companies Act should mean “during
winding up proceedings”. Reliance was placed on the decision in Kamani
Matallic Oxides Ltd. v. Kamani Tubes Ltd., (1984) Company Cases Page 19,
wherein it was held that the words “in the winding up” do not mean “after
or upon the passing of the winding up order”. Learned Judge of the Division
Bench of the High Court pointed out the distinguishing context in the said
case in which such a view was taken and then expressed the view that merely
because a petition for winding up has been presented all transactions or
dispositions undertaken during the period cannot become ab initio void. The
following reasoning of the Division Bench for repelling the said contention
is worthy to be extracted :

“If they were to be void ab initio i.e. immediately on their being entered
into, then on the petition being withdrawn or dismissed, they would not
revive. It is clear that if the petition is withdrawn or dismissed then the
transactions would never have been void. This clearly shows that the
transactions/dispositions are not void ab initio but become void on the
passing of an order for winding up or on appointment of a Provisional
Liquidator. What Section 536(2) read with Section 441(2) provides for is to
convert what was otherwise valid into void by virtue or the legal fiction.
Thus the voidness taken effect on the passing of the order of winding up or
appointment of Provisional Liquidator. By virtue of the legal fietion, in
Section 441(2), it then relates back to the date of presen-tation of the
petition for winding up.”

We will presently consider the effect of Section 536(2) of the Com-panies
Act, The entire Section is quoted below :

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

(1) la the case of a voluntary winding up, any transfer of shares in the
company, not being a transfer made to or with the sanction of the
liquidator, and any alteration in the status of the members of the company,
made after the commencement of the winding up, shall be void.

(2) In the case of a winding up by or subject to the supervision of the
Court, any disposition 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 commen-cement of the winding up,
shall, unless the Court otherwise orders, be void.”

Contextually Section 441(2) of the Companies Act is very relevant and hence
that is also extracted here :

“441. Commencement of winding up by Court. – Where, before the presentation
of a petition for the winding up of a company by the court, a resolution
has been passed by the company for voluntary winding up, the winding up of
the company shall be deemed to have commenced at the time of the passing of
the resolution, and unless the Court on proof of fraud or mistake, thinks
fit to direct otherwise, all proceedings taken ia the voluntary winding up
shall be deemed to have been validly taken.

(2) In any other case, the winding up of a company by the Court Shall be
deemed to commence at the time of the presentation of the petition for the
winding up.”

Three modes of winding up have been prescribed in Part VII of the Companies
Act, (vide Section 425). First is, winding up by the court, next is
voluntary winding up and the third is winding up by subjecting to the
supervision of the court. We need not bother ourselves with the first sub-
section of Section 536 of the Companies Act as it deals with a case of
voluntarily winding up of the company, because none of the companies in the
present batch of appeals is involved in such a contingency. Sub-section (2)
deals with the other two types of winding up. Section 439 of the Companies
Act con-templates an application to the court for the winding up of the
company. It can be done by presenting a petition by any one of the persons
enumerated in sub-section (1) of Section 439. Such persons include any
creditor, including any prospective creditor.

Once a petition for winding up is presented it is not a necessary
concomitant that the winding up would follow. This position is made clear
in Section 440(2) which says that ”the court shall not make a winding up
order on a petition presented to it under sub-section (1), unless it is
satisfied that the voluntary winding up or winding up subject to the super-
vision of the Court cannot be continued with due regard to the interests of
the creditors or contributories or both.”

So a judicial exercise is called for to reach the satisfaction of the court
that winding up has to be continued with due regard to the interest of the
creditors or the contributors. Section 443 of the Companies Act is
important in this context. Sub-section (1) of that Section says that on
hearing a petition for winding up the court may either (1) dismiss the
petition or (2) make any interim order as it thinks fit or (3) make an
order for a winding up. Sub-section (2) says that “where the petition is
presented on the ground that it is just and equitable that the company
should be wound up, the Court may refuse to make ar order of winding up. if
it is of opinion that some other remedy is available to the petitioners and
that they are acting unreasonably in seeking to have the company wound up
instead of pursuing that other remedy.”

Two more provisions are relevant in this context. Section 450 says : “At
any time after the presentation of a winding up petition and before the
making of a winding up order, the Court may appoint the Officer Liquida-tor
to be liquidator provisionally”. Before appointing a provisional liquida-
tor the court has to give notice to the company and reasonable opportunity
to make his representation. Section 449 enjoins that “on a winding up order
being made in respect of a company the Official Liquidator shall, by virtue
of his office, become the liquidator of the company.” In the above backdrop
alone we can consider the impact of the legislative direction in Section
536(2) that any disposition of the property of the company made after the
commencement of the winding up (i,e. after the presentation of a petition
for winding up) shall be void. There are two important aspects here. First
is that the word “void” need not automatically indicate that any
disposition should be ab initio void. The legal implication of the word
“void” need not necessarily be a stage of nullity in all contin-gencies.
Black’s Law Dictionary gives the meaning of the word !’void” as having
different nuances in different connotations. Once of them is of course
“null, or having no legal force or binding effect”. And the other is
“unable in law, to support the purpose for which it was intended”. After
referring to the nuances between void and voidable the Lexicographer
pointed out the following :

“The word ‘void’ in its strictest sense, means that which has no force and
effect, is without legal efficacy, is incapable of being enforced by law,
or has no legal or binding force, but frequently the word is used an
construed as having the more liberal meaning of ‘voidable. The word ‘void’
is used in statutes in the sense of utterly void so as to be incapable of
ratification, and also in the sense of voidable and resort must be had to
the rules of construc-tion in many cases to determine in which sense the
Legislature intended to use it. An act or contract neither wrong in itself
nor against public policy, which has been declared void by statute for the
protection or benefit of a certain party, or class of parties, is voidable
only.”

For discerning the legislative idea in employing the word “void” in the
context set out in Section 536(2) of the Companies Act the second aspect to
be noticed is that the provision itself shows that the word void is not
employed peremptorily since court has power to order otherwise. The words
“unless the court otherwise order” are capable of diluting the rigor of the
word “void” and to choose the alternative meaning attached to that word.

In Chittoor District Cooperative Marketing Society Ltd. v. M/s. Vegetoh
Ltd, and Ors., [1987] Suppl. SCC 167 a two Judge Bench of this Court
considered a plea for validation of payments made by a company after
presentation of a petition for winding up. One set of payments were made
before the passing of the winding up order and the other set of payments
were made thereafter. This Court declined to validate such payments on the
ground that “there is no evidence to show that those payments were made
either under compulsion of circumstances in order to save or protect the
property of the company or that there was any commercial compulsion to
enable it to run its business”. The decision only indicates that such
payments could have been made valid if evidence was adduced to show that
there was compulsion of circumstances. In facts, this decision lands
support to the interpretation that the payments which were made after the
commencement of winding up proceedings, would not become ab initio void.

An early decision of a Division Bench of the Bombay High Court in Tulsidas
Jasraj Parekh v. Industrial Bank of Western India, AIR (1931) Bombay 2 was
sought to be relied on by most of the learned counsel who argued for
different appellant The question which the Court considered therein
pertained to Section 227(2) of the old Companies Act, 1913 which was
identical to Section 536(2) of the present Act. Certain payments made by a
company after commencement of the winding up proceedings were questioned
and the Division Bench considered the scope of the sub-section and noticed
that the principle had been borrowed from the English Com-panies Act. Hence
some of the English authorities were also referred to by Marten C.J., who
spoke for the Division Bench. Learned Judges stated thus :

“Now here as regards S 227(2) the Court has to steer a middle course
between two extremes. On the one hand the words of the section are wide
enough to include any sale or payment that a company may make after the
date of the winding-up petition. On that basis any business would
practically have to he stopped if a petition was presented, because it
would be unsafe to dispose of any of the company’s assets. For instance, a
mill company might not be able to buy a ton of coal for the use of its
furnaces or, on the other hand, it might not be able to sell any of its
goods in the ordinary course of business. Consequently, the Court has very
properly laid down that, speaking generally, any bona fide trans-action
carried out and completed in the ordinary course of current business will
be sanctioned by the Court under S. 227(2). On the Other hand it will not
allow the assets to be disposed of at the mere pleasure of the company, and
thus cause the fundamental principle of equality amongst creditors to be
violated. To do so would in effect be to add to the preferential debts
enumerated in s. 230 a further category of all debts which the company
might choose to pay wholly or in part.”

It is useful to refer to the reasoning adopted by a Division Bench of the
Gujarat High Court in Navjivan Mills Ltd., In re (1986) 59 Company Cases
201 in favour of adopting a pragmatic attitude when a Company Court was
approached for approval of certain dispositions which a com-pany made after
presentation of a petition for winding-up. A clear distinc-tion was drawn
by the Division Bench between the period till the passing of the order for
winding-up and thereafter, so far as dispositions are concerned. The
following reasoning is useful for consideration of the issues involved :

“The court can exercise the jurisdiction under section 536(2) of the
Companies Act, 1956, of giving directions validating proposed transactions
pending a petition for winding up but before the winding up order is made
for the obvious reason that unless these transactions are saved from the
consequence which may ensue, if at all, on an order of winding up being
made, the company might find it difficult to keep itself going and its
business might be paralysed. The purpose underlying the investment of the
power ia court is for the benefit and the interest of the company so as to
ensure that a company which is made the subject of a winding-up petition
may nevertheless obtain the money necessary for carrying out its business
and so as to avoid its business being paralyzed. If that is the purpose and
object of the section, it would hardly be proper and just to stultify the
power and restrict its operation since otherwise it is bound to be counter-
productive in the sense that the very purpose of keeping the company as a
going concern so as to ensure the interest of the shareholders and
creditors would be defeated,”

In Re Grays Inn Construction Company Ltd (1980) 1 All E.R. 814 the Court of
Appeal (Civil Division) considered the principle on which discretion of the
court to validate the dispositions of property made by a company, during
the interregnum between presentation of a winding up petition and the
passing of the order for winding up, has been dealt with. Section 227 of
the English Companies Act, 1948 is almost the same as Section 536(2) of the
Indian Companies Act. Dispositions which could be alidated are mentioned in
the decision. The said decision was cited before us in order to emphasise
the point that courts would be very circumspect in the matter of validating
the payments and the interest of the creditors as well as the company would
be kept uppermost in consideration. Be that so, the said decision is not
sufficient to support the contention that disposi-tion during the
interregnum would be irretrievably void.

It is difficult to lay down that all dispositions of property made by a
company during the interregnum between the presentation of a petition for
winding up and the passing of the order for winding up would be null and
void. If such a view is taken the business of the company would be
paralysed, for, the company may have to deal with very many day-to-day
transactions, make payments of salary to the staff and other employees and
meet urgent contingencies. An interpretation which could lead to such a
catastrophic situation should be averted. That apart, if any such view is
adopted, a fraudulent company can deceive any bona fide person transact-ing
business with the company by stage-managing a petition to be presented for
winding up in order to defeat such bona fide customers. This conse-quence
has been correctly voiced by the Division Bench in the impugned judgment.

If the payment is not ab initio void the company cannot contend that it is
legally forbidden from making payment of the cheque amount when notice was
issued by the payee regarding dishonour of the cheque. To circumvent this
hurdle an endeavour was made by some of the appellants’ counsel to show
that the very issuance of a cheque would amount to disposition of property.
We are unable to accept the said contention particularly in view of the
definition of “cheque” in the NI Act. “A Cheque is a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on
demand.”

Bill of exchange is “an instrument in writing containing an uncondi-tional
order, signed by the maker, directing certain person to pay a certain sum
of money only to, or to the order of a certain person or to the bearer of
the instrument”. The cheque, therefore, can be an order on the banker to
pay the amount to the holder thereof and no disposition of property would
take place until the payment is made by the banker pursuant thereto. At the
most, drawing of a cheque can be considered as a step towards disposition
of property, but that is insufficient to amount disposition of property.

It was next contended that since one of the conditions to constitute the
offence of Section 138 of the NI Act is that a cheque should have been
drawn for the discharge of a legally enforceable “debt or other liability”
no such cheque can possibly be conceived in a situation such as this
because the creditor would be disabled from legally enforcing the debt with
the commencement of winding up proceedings. Section 138 of the NI Act, no
doubt, contemplates only when the cheque is drawn by a person “for the
discharge, in whole or in part, of any debt or other liability”.
Explanation to Section 138 says that “for the purposes of this Section
‘debt or other liability* means a legally enforceable debt or liability”.
Therefore, the first limb of the contention is forceful that for the
offence under Section 138 the cheque should have been drawn for discharging
a legally enforceable debt or other liability. But the second limb of the
contention is tenuous as the debt would not cease to be legally enforceable
merely because some body has filed a petition for winding up.

In this context a reference to Section 139 of the NI Act is indispen-sable.
It reads thus :

“139. Presumption in favour of holder. – It shall be presumed, unless the
contrary is proved, that the holder of a cheque received the cheque, of the
nature referred to in Section 138 for the discharge, in whole or in part,
of any debt or other liability.”

Thus, when a cheque is received by a holder the court has to presume that
(1) it is a cheque of the nature referred to in Section 138; and (2) such
cheque was received for the discharge of a legally enforceable debt or
liability. It is a legislative mandate that the court should proceed with
the assumption that such cheque was received for the discharge of a legally
enforceable debt or other liability until the drawer proves that it is not
so. Learned counsel contended that the burden of proof cast On the drawer
of the cheque would stand discharged and the presumption would stand
rebutted when it is shown that the company has been brought into winding up
proceedings, as then no debt can be legally enforced against the company.
There is no provision in the Companies Act which prohibits enfor-cement of
the debt due from a company. When a company goes into liquidation,
enforcement of debt due from the company is only made subject to the
conditions prescribed therein. But that does not mean that the debt has
become unenforceable altogether. Perhaps due to want of sufficient assets
for the company the realisation of a debt would be difficult. But that is
no premise to hold that the debt is legally unenforceable. Enforceability
of a debt is not to be tested on the touchstone of the modality or the
procedure provided for its realisation or recovery. Hence the contention
that the special provision incorporated in the Companies Act regarding the
debts and liabilities due from the company will render the debt
unenforceable, cannot be accepted.

The alternative approach is this : Even assuming that any disposition of
the property made by a company after commencement of the winding up
proceedings is null and void, how that is an escape ground from the offence
under Section 138 of the NI Act? That section created a statutory offence
which on the confluence of the various factors enumerated therein,
commencing with the drawing of the cheque and ending with the failure of
the drawer of the cheque to pay the amount covered by it within the time
stipulated, ripens into a penal liability.

The last factor for constituting the offence under Section 138 of the NI
Act is formulated in clause c of the proviso to the Section which reads
thus : “the drawer of such cheque fails to make the payment of the said
amount of money to the payee or as the case may be, to the holder in due
course of the cheque within fifteen days of the receipt of the said
notice.”

The words “the drawer of such cheque fails to make the payment” are
ostensibly different from saying “the drawer refuses to make payment”.
Failure to make payment can be due to the reasons beyond the control of the
drawer. An illustrative case is, if the drawer is not a company but
individual who has become so pauper or so sick as he cannot raise the money
to pay the demanded sum. Can he contend that since failure to make payment
was on account of such conditions he is entitled to be acquitted? The
answer cannot be in the affirmative though the aforesaid conditions can be
put forth while considering the question of sentence.

We therefore feel that legislature has thoughtfully used the word “fails”
instead of other expressions as failure can be due to variety of reasons
including his disability to pay. But the offence would be complete when the
drawer “fails” to make payment within the stipulated time, whatever be the
cause for such failure.

The drawer of the cheque can have different explanations for the failure to
pay the amount covered by the cheque. But no such explanations would be
sufficient to extricate him from the tentacles of the offence contemplated
in the Section. Perhaps same kind of explanations would be sufficient to
alleviate the rigor of the offence which may be useful to mitigate the
quantum of sentence to be imposed. But that is no ground for consideration
at this stage.

For all the above reasons, we are not inclined to interfere with impugned
judgment of the Bombay High Court. However, learned counsel who argued for
one of the appellants in this batch of appeals (M/s. Atash Industries
(India) Ltd.) pointed out that an observation made by the Division Bench in
the impugned judgment would cause prejudice to that company when the case
proceeds to the trial. We noticed that the following observation in
paragraph 59 of the impugned judgment has the potency of creating a
prejudice against them :

“The conduct of Atash Industries (India) Limited in suppressing facts and
obtaining orders from Courts without pointing out cor-rect facts must be
deprecated. In our view this conduct precludes the Company from getting any
equitable reliefs.”

We make it clear that the observation was made only for the Writ Petition
pending in the High Court and that will not be counted against the said
company during the remaining stages of trial.

All the appeals are accordingly dismissed.

 

 

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