Companies Act Case Law Punjab State Industrial Dev.Corporation Ltd Vs P N F C Karamchari Sangh & Anr

Appeal (civil) 1392 of 2003

Punjab State Industrial Dev.Corporation Ltd

P.N.F.C.Karamchari Sangh & Anr

DATE OF JUDGMENT: 04/04/2006

Arun Kumar & R.V. Raveendran



M/s. Punjab National Fertiliser and Chemical Limited (hereinafter
referred to as ‘PNFC’) is a Company limited by shares and is registered as a
company under the Companies Act, 1956. This company was promoted by
the Punjab State Industrial Development Corporation Limited (hereinafter
referred to as ‘PSIDC’) and the PSIDC held 46.13% shares in it. On
recommendation of the BIFR (Board for Industrial & Financial
Reconstruction) under the Sick Industrial Companies (Special Provisions)
Act, 1985, the winding up order was passed qua the PNFC on 27th July,
In view of its financial difficulties the PNFC stopped paying the
wages to its workers from September, 1999. The workers were therefore
agitating for payment of their wages. It appears that they approached the
Chief Minister of the State of Punjab in this behalf. On a proposal put forth
by the concerned department, the Chief Minister on 25th August, 2001 made
the following note :
“It is not a question of legality or statutory obligation.
It is an issue involving of a large number of employees
who has going without salary. Even legally they are
entitled for their pay and emoluments till the actual date
of winding up.

Considering that there is resource constraint within the
PSIDC, the offer of Finance Department to permit
PSIDC to raise resources by market borrowing with
State guarantee should be pursued.

Exercise may be done in a time bound manner so that
disbursement of 6 months salary as requested by the
Food & Supplies Minister, is not delayed. After the
disbursement the matter be reported.”
The workers’ association, that is respondent No.1 filed an application
before the Company Judge in the High Court of Punjab and Haryana under
Rule 9 of the Companies (Court) Rules, 1959 seeking a direction to PNFC
(represented by Official Liquidator) and PSIDC to pay six months salaries to
the employees.

In their application, the workers sought relief mainly on the basis of
the said note of the Chief Minister terming it as an order of the Chief
Minister. On the said application of the workers, the learned Company
Judge passed an order on 16th May, 2002 directing PSIDC to release funds in
terms of the order of Chief Minister dated 25th August, 2001 to the Official
Liquidator within a period who was directed to disburse it to the workmen
after examining the claim of each workman.
The PSIDC applied for review of the said order of the Company Judge
on the ground that it was not in a sound financial position to make the
payment. Secondly, the PSIDC denied its liability to pay on the ground that
the workers who were to be paid were not the workers of the PSIDC. Lastly,
it was represented that the interest of the workers was protected because the
workers dues were the first charge on the sale proceeds of assets of the
Company in view of Section 529 A of the Companies Act. The review
application was dismissed vide order dated 7th June, 2002. Thereafter, the
appellant filed an appeal against the order of the Company Judge dated 16th
May, 2002 before a Division Bench of the High Court. The said appeal was
dismissed vide order dated 4th July, 2002 which is subject-matter of the
present appeal.
While disposing of the appeal, the High Court rightly observed that
the question for consideration in the appeal was whether the Company Court
had jurisdiction to direct the PSIDC to release funds in terms of the order
passed by the Chief Minister on 25th August, 2001. However, the appeal
was dismissed on the ground that the Company Court had jurisdiction to
issue such a direction having regard to Section 446 (2) (d) of the Companies
Act without adverting to the question of liability of the PSIDC in law, for
making such payment.
There is no dispute that under Section 446 the Company Court can
pass orders in relation to the Company in liquidation. The real question in
issue in the case was whether the liability with respect to money due from
the Company in liquidation towards its workers could be fastened on an
independent corporation. The Company Court has chosen to fasten liability
on a third party, i.e., the PSIDC while seized of proceedings with respect to
the Company in liquidation (the PNFC). Was it legally permissible?
The learned counsel for the appellant submitted that the PSIDC was
formed in the year 1966 as one of the State Financial Institutions for
promoting and developing industries in the State of Punjab. In its role of
promotion and development of the industries in the State, the PSIDC
promoted more than 100 companies. The object was to ensure industrial
development in the State. The PNFC was one of the several companies
promoted by the PSIDC. As already notified, the PNFC is a separate legal
entity being a Company limited by shares under the Companies Act. The
PNFC is not a Government company while the PSIDC is a wholly owned
undertaking of the Government of Punjab. Even according to respondents,
PSIDC hel only 46.23% of equity, other public financial institutions held
14.59% and public held the remaining 39.18% .
After drawing our attention to the legal status of the two companies
involved, the learned counsel for the appellant drew our attention to the note
of the Chief Minister of Punjab. It is submitted with reference to the said
Note that it can neither be said to be an order of the State Government nor
can it has any binding force so far as the PSIDC is concerned. The
submission of the learned counsel for the appellant is that the note is in the
nature of a suggestion/request by the Chief Minister and the PSIDC has no
legal liability so far as the dues of the PNFC to its workers are concerned.
Both the companies were separate legal entities. Though PSIDC might
have been involved in promotion and thereafter in guiding the affairs of the
PNFC, that is not enough to fasten the liabilities of the PNFC to the PSIDC.
In reply, the learned counsel appearing for the respondent – workers
association, submitted that as the affairs of PNFC are entirely managed and
controlled by the PSIDC, the corporate veil has to be lifted to show that
PSIDC was responsible for the acts of PNFC and liabilities of PNFC and it
was therefore liable for the dues of the workers. In their application under
Rule 9 of the Companies (Court) Rules the workers have pleaded that the
PSIDC exercised control over financial and administrative affairs of the
PNFC. It is also submitted that the fact that the PSIDC holds 46.13% shares
in the PNFC shows the financial interest of the PSIDC in the PNFC. The
officers of the PSIDC are also said to have been posted from time to time in
the PNFC to manage its affairs. The learned counsel relied on Section 446
of the Companies Act to suggest that a Company Judge has wide powers
with respect to a company in liquidation. He invited reference to Sudarsan
Chits (I) Ltd. vs. O. Sukumaran Pillai and Ors. (1984) 4 SCC 657 in
support of this contention. In our view this judgment does not help the
respondent. Under Section 446 the powers of the Company Judge qua a
Company under liquidation may be wide, but that does not empower the
Company Judge to pass an order making a distinct and separate corporation,
a third party, liable for the liabilities of the Company in liquidation. This
aspect unfortunately has not been adverted to either by the learned Company
Judge or by the Division Bench of the High Court.
Reliance was placed on the so called order of the Chief Minister
permitting the PSIDC to raise funds in order to meet the liability of the
PNFC towards salary of its workers for at least six months. We have
carefully perused the note of the Chief Minister dated 25th August, 2001.
The said note cannot be said to be an order of the State Government and
therefore is not binding on the PSIDC. The orders of the State Government
are issued in a prescribed manner and the note dated 25th August, 2001
cannot be treated as one.
The learned counsel for the respondent also brought to our notice
Article 135 of the Memorandum and Articles of Association of the PSIDC
under which the State Government can issue directives to the PSIDC.
Article 135 is reproduced as under:
“Notwithstanding anything contained in any of the
Articles, the Government may from time to time; issue
such directives as they may consider necessary in
matters of broad policy and in like manner may vary
and annul any such directive. The company shall give
immediate effect to directives so issued.
Reliance on Article 135 is misplaced in the present case because the
note of the Chief Minister cannot be said to be a directive of the State
Government nor it is in relation to broad policy of the Company. Article
135 does not help the respondent.

While contending that the veil has to be lifted, the learned counsel
relied on Calcutta Chromotype Ltd. vs. Collector of Central Excise,
Calcutta AIR 1988 SC 1631. This was a case of alleged evasion of excise
duty by a manufacturer selling its manufactured products through a sole
selling distributor, who sold the goods in market at a higher price. The idea
was to show a lesser price of manufacture in order to save central excise
duty. The manufacturing company as well as the business of the sole selling
agent though shown as independent, were owned by the members of the
same family. In such a case the focus is from a different angle and the issue
is different. In the present case there is no evasion of any tax. Here the
issue is when there are two independently legal entities can an order be
passed that one company will be liable for the dues of the other to a third
party. Can a Company Court pass such a direction without consideration of
the question of legal liability of the company sought to be made liable?
As a result of the above discussion we hold that the PSIDC could not
be made liable for the dues owed by the PNFC to its workers. The appeal is
accordingly allowed. The orders of the Company Court as well as of the
Division Bench of the High Court which are under challenge in this appeal
are set aside. No costs.

Though we have found as a matter of law that the PSIDC could not be
made liable for the dues owed by the PNFC to its workers, we notice that the
then Chief Minister had taken a sympathetic view in the matter while
appending his note dated 25th August, 2001. In view of the fact that the case
relates to the dues of the workers the State Government may sympathetically
consider whether it can provide some relief to the workers.

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