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Commercial Art Engravers Pvt. Ltd. Vs. Indian and Eastern Newspapers Society - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberCompany Petition No. 404 of 1975
Judge
Reported in[1978]48CompCas36(Bom)
ActsCompanies Act, 1956 - Sections 447, 454, 457, 457(1), 457(3), 458, 460, 460(6), 461, 461(2), 464, 546, 546(3) and 549
AppellantCommercial Art Engravers Pvt. Ltd.
RespondentIndian and Eastern Newspapers Society
Excerpt:
company - liquidator report - sections 447, 454, 457 (1), 457 (3), 458, 460 460 (6), 461, 461 (2), 464, 546, 546 (3) and 549 of companies act, 1956 - company in liquidation took on lease three flats - landlord filed suit in small cause court - landlord made offer before liquidator that they were willing to forgo arrears of rents and willing to purchase movable property in said flats if liquidator agrees to hand over possession - liquidator directed to take advice of his attorney with respect to advisability of defending suit filed by landlord - applicants who claimed to be creditors given liberty to place any facts before liquidator in connection of defending suit - petition seeking directions to liquidator to furnish applicants copy of his report in connection of suit filed by landlord -.....mridul, j.1. by this judge's summons three joint stock companies, which claim to be creditors of mass communications and marketing pvt. ltd. (in liquidation) (hereinafter referred to as 'the company'), pray for a direction that the official liquidator (hereinafter called 'the liquidator') be directed to furnish to them a copy of his report made to this court for direction in connection with a suit filed in the small causes court, bombay. the claim for such a direction by the applicants is founded on their legal rights as creditors of the company as also on the principles of natural justice. the applicants are supported by the petitioners at whose instance the company was directed to be wound up by this court. the liquidator resists the application. having regard to the importance of the.....
Judgment:

Mridul, J.

1. By this judge's summons three joint stock companies, which claim to be creditors of Mass Communications and Marketing Pvt. Ltd. (in liquidation) (hereinafter referred to as 'the company'), pray for a direction that the official liquidator (hereinafter called 'the liquidator') be directed to furnish to them a copy of his report made to this court for direction in connection with a suit filed in the Small Causes Court, Bombay. The claim for such a direction by the applicants is founded on their legal rights as creditors of the company as also on the principles of natural justice. The applicants are supported by the petitioners at whose instance the company was directed to be wound up by this court. The liquidator resists the application. Having regard to the importance of the questions involved, the Incorporated Law Society, a body which represents the profession of solicitors at Bombay, sought permission to intervene in the matter. Such permission was granted and the said Society appeared through its counsel and made submissions on various aspects of the matter.

2. The facts leading to the judge's summons are not much in dispute. On 19th August, 1970, the company took on lease three flats, being flats Nos. 702, 703 and 803 in a building called 'Bhaktvar' at Colaba, Bombay. The area of the said flats is in the vicinity of 7,000 sq. feet and the rent payable in respect thereof is Rs. 3,500 per month. The company was wound up by an order of this court on 23rd January, 1976. The said flats thereafter remained vacant and unoccupied. In fact, by an order made earlier at the instance of the landlords of the said flats, M/s. Pallen Mehrijibhoy Mistry and others (hereinafter called the 'landlords') a Metropolitan Magistrate had directed the company to desist from using the said flats in any other manner save and except for its business purposes. On 6th October, 1975, the landlords filed a suit in the Court of Small Causes at Bombay, being Suit No. ARE & R No. 993/5064 of 1975, inter alia, for possession of the said flats and for arrears of rent and mesne compensation. The arrears of rent aggregated to Rs. 24,500 for the period from 1st January, 1975, to 30th July, 1975. To that amount was added a sum of Rs. 7,000 as compensation for the period between 1st August, 1975, and 30th September, 1975. Besides the said amounts, a further sum of Rs. 3,500 per month was claimed as mesne compensation until the possession of the flats was delivered to the landlords. During the pendency of the said suit the landlords, by their letter dated 28th January, 1976, made a without prejudice offer to the liquidator. The landlords, inter alia, initiated to the liquidator that they were willing to forgo the arrears of rent and compensation which by then aggregated to Rs. 45,000 and were also willing to purchase movables lying in the said flats for a sum of Rs. 30,000 if the liquidator agreed to release and hand over possession of the said flats and to sell the said movables to the landlords.

3. On 11th February, 1976, the liquidator made a report to this court, inter alia, seeking directions whether 'he should defend the said Small Causes Court suit and if so what stand the official liquidator should take or whether the official liquidator should accept the offer of the landlord'. At the hearing of the said report some ex-directors of the petitioners and the applicants appeared before Madon J. The applicants also filed an affidavit, inter alia, opposing any acceptance of the offer made by the landlords. By an oral order made on 29th March, 1976, Madon J. adjourned the said matter and directed the applicants to take out a judge's summons for relief sought by them. It may be observed that the relief the applicants then sought was that the liquidator should be directed to defend the suit. On 19th April, 1976, the judge's summons taken out by the applicants (Company Application No. 95 of 1976) and the liquidator's report came up before Madon J. After hearing the parties, Madon J. passed an order, inter alia, directing the liquidator to take advice of his attorneys who were appointed by the court, 'with respect to the advisability of defending the suit' filed by the landlords and 'if the attorneys so think fit they will obtain counsel's opinion in the matter'. I is further significant to observe that by the said order the applicants were given liberty by the court in the following words :

'If the applicants desire to place any facts before the official liquidator in connection with the advisability of defending the said suit, they may do so, and the official liquidator will communicate such facts to his own attorneys who will apply their minds to them.'

4. It is not disputed by the applicants that they did not place any facts before the liquidator. However, by their attorney's letter dated 11th May, 1976, the applicants inquired of the attorneys of the liquidator as to what steps were being taken for defending the suit. As no reply was received by the applicants' attorneys, a reminder was sent to the liquidator on 6th June, 1976. By the said reminder, the liquidator was also required to furnish a copy of the opinion of the counsel obtained by the attorneys of the liquidator. In the meanwhile, the liquidator got the movables lying in the flats surveyed and evaluated. The valuers, M/s. Bennet Coleman & Co. Ltd., made an inventory and sent their valuation report to the liquidator. The said report is dated 28th April, 1976. The liquidator also received the opinions of the attorneys and the counsel.

5. On 7th June, 1976, the liquidator made the present report to this court. The report was made to Dighe J. in vacation. There are rival contentions as to what were the observations made by the learned judge. It is unnecessary to go into the rival contentions since they have no bearing on the questions which arise for determination. Suffice it to notice that the matter was adjourned by Dighe J. and came up before me on the report of the liquidator for directions. The applicants appeared before me and made an oral application that the liquidator be directions were sought by him. The applicants being relegated to judge's summons, the present summons was taken out on 21st June, 1976.

6. The grievance of the applicants is that they have not been consulted by the liquidator in a matter which is of great significance to the creditors, more particularly to the applicants who claim to be the creditors to the tune of Rs. 40,00,000. The applicants claim that the written-down value of the movables in question, according to the balance-sheet of the company for the year 1974, was more that Rs. 4,00,000. The applicants claim that refusal of the liquidator to furnish a copy of the report is in violation of the principles of natural justice and is at variance with the relevant principles of law. The liquidator claims that the report made by him is a privileged document; that it is not the practice of the court to give report to the creditors or any other persons except in exceptional circumstances; that the report having been made by the liquidator in his administrative capacity, does not require to be disclosed to the creditors and, lastly, that the report contains confidential pieces of advice received by the liquidator from the attorneys of the counsel.

7. Three principal aspects fall for consideration, viz : (i) the nature of the report made by the liquidator; the principles or provisions of law or the practice of this court sanctioning the procedure for such reports and the cases in which such a procedure should be permitted, (ii) whether the principles of natural justice are attracted in a case where the liquidator in a matter pertaining to the exercise of his discretion seeks directions from the court, the directions being only for providing him protection in respect thereof, and (iii) if the principles of natural justice are attracted, what are postulates thereof in such situation

8. Shri A. N. Modi, the learned counsel for the applicants, submits that a judge's summons is a more appropriate procedure having regard to the claims in respect of which directions are sought by the liquidator; says counsel, had a summons been taken out, the copies of the pleadings and the evidence respecting thereto would have been disclosed to the parties and the applicants would then have made a useful contribution in the matter. The learned counsel emphasises the fact that the direction which the liquidator seeks from this court pertain to the disposal of the movables belonging to the company and to the surrender of valuable leasehold rights in the said three flats. These directions, according to the learned counsel, come within the purview of clause (c) of sub-section (1) of section 457 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), and that, in making an order in that behalf, the court exercises a judicial function and passes a judicial order. The learned counsel submits that when the liquidator seeks directions in a matter covered by section 457, sub-section (1), he must comply with the provisions of the Act and the Companies (Court) Rules in that behalf. The procedure that should be adopted must be in consonance with the fundamental trappings of judicial procedure. This would be so, the learned counsel says, because in order to facilitate a just decision, the court has to consider the pros and cons of two alternative view-points. The court determines lis between the parties. Such judicial determination could be possible only when each side is given material on which the other side relies.

9. Shri M. H. Shah, the learned counsel for the Incorporated Law Society, submits that the winding up is the ultimate remedy of the creditor or the investor. The objects of such winding up are that the assets of the company should be realised, its debts ascertained and discharged by payment of dividends and the surplus distributed amongst contributories. These objectives can be subserved only if the realisation from the assets is maximised. In a winding up, the court has to ensure even-handed justice to all interests - the creditors, the contributories and others. The learned counsel further submits that the scheme unfolded by the relevant provisions of the Act and the Companies (Court) Rules, 1959 (hereinafter referred to as 'the Rules'), show that a creditor is entitled to be informed about various matters arising in winding up; that the creditor is entitled to apply to the court in respect of the exercise or proposed exercise of any of his powers by the liquidator and further that the rights of the creditors aforesaid cannot be defeated by bypassing the provisions of law which provide for proceedings by way of judge's summons and by adopting the mode of reports to the court and obtaining of directions thereon. Such a method, says the learned counsel, defeats and subverts several valuable safeguards and rights contemplated by relevant provisions of the Act and the rules.

10. Shri I. M. Chagla, the learned counsel for the liquidator, submits that the provisions of the Act and the rules indicate two alternative modes by which the liquidator can seek directions from the court, the said modes being a judge's summons under rule 139 or a report of the liquidator and a proceeding established by the practice of this court and preserved or sanctified by rules 6 and 10 of the Rules. According to the learned counsel, the report of the liquidator, in the present case, is in respect of exercise of the powers by the liquidator not under section 457, sub-section (1), but under section 458. This is so, says the learned counsel, because the order of winding up passed by this court on 23rd January, 1976, inter alia, conferred upon the liquidator a general authority to exercise all powers under section 457 of the Act to be exercised by him under section 458 'without sanction or intervention of the court save and except in the case of a sale of an immovable property'. According to the learned counsel, the directions which are sought by the liquidator appertains to the exercise of his discretion under section 458 and further that the directions relate only to the issue as to whether the liquidator should defend the suit filed by the landlord. The learned counsel submits that the surrender of a flat does not amount to a sale or transfer of an immovable property. He contends that, having regard to the authority conferred on the liquidator by the winding up order dated 23rd January, 1976, the directions relate to a matter in respect of which the sanction of the court is not the requirement of law. The learned counsel says that in seeking directions of the court the liquidator is merely asking for court's protective imprimatur. In other words, the liquidator wants to make an assurance doubly sure without in any manner fettering the exercise of his discretion of seeking sanction of the court in respect thereof. According to the learned counsel it would be anomalous if the liquidator is required to disclose his report to a creditor in a case where he could exercise his discretionary powers himself without being obliged to hear any creditor or to provide him an access to the material upon the basis whereof his discretion is exercised.

11. After the hearing of the above matter was concluded, orders were reserved. Before the judgment could be delivered an application was made on behalf of the liquidator for taking on file certain written submissions. Notices of this application was given to the learned counsel for the creditors and the Incorporated Law Society. The criticism of the learned counsel for the Society was that an extraordinary procedure was being adopted. I find substance in his submission. After the hearing of a matter is concluded, the courts do not reopen the matte unless and until there are sufficient grounds for it. In this case a further difficulty was that the submissions sought to be tendered ran contrary to what was argued by the learned counsel for the liquidator. The liquidator, however, insisted on such submissions being considered on the ground that any decision that might be given in this matter would have a serious impact on the functioning of the liquidator. I, therefore, directed the written submissions to be taken on file. I, however, do not desire to lay down any precedent in this behalf or encourage such applications.

12. In substance, the written submissions are to the effect that the liquidator represents the general body of creditors; that in the matter of exercise of his powers he is not controlled either by the court or by the wishes and desires of the creditors; that the creditors have no locus to challenge the exercise of power unless and until the said power is exercised and that in a proceeding challenging the action of the liquidator, burden heavily lies upon the creditor; and, lastly, that there is a distinction between the 'directions' and 'order'. According to the liquidator, in cases where the liquidator seeks directions from the court, he merely discharges administrative functions and that, in doing so, he merely extends what the liquidator characterised as 'courtesy' to the court : 'Courtesy extended by a subordinate officer of the court to the court which is ultimately responsible for the winding up proceedings.'

13. The issue as to whether with regard to sale of properties, the only mode available to the liquidator is the one provided by rule 139, is not res integra. A Division Bench of this court in Amba Tannin and Pharmaceuticals Ltd. v. Official Liquidator [1975] 45 Comp Cas 457 (Bom) was called upon to decide the controversy. On a comprehensive and, with respect, if I could say so, a profound review of the relevant provisions of law and the principles applicable thereto, the Division Bench of this court (Kanatawala C.J. and Bhasme J.) held that the report of the liquidator was an established practice of this court and that such a practice was permitted by the provisions of rule 10 of the Rules. The ipsissima verba of the court run as follows (page 479) :

'In exercise of the powers conferred by rule 10, it will be also permissible to the judge to allow the practice and the procedure of the court which was followed prior to this rule being made. There is nothing sacrosanct in rule 139 to indicate that it takes away from the judge the power to permit the procedure consistent with the practice and procedure earlier followed by the court before the Rules come into force. The provisions of rule 10 have to be read with rule 6 and if so read it will be open to a judgment to permit an application to be made in consonance with the practice and procedure prevailing in the court and when such permission is granted it is neither obligatory upon the party concerned or the official liquidator to follow the procedure prescribed by rule 139 or to make an application by a petition or a judge's summons as normally required under rule 10.'

'It is not disputed by Mr. Sorabjee that prior to the rule coming into force it was the uniform and consistent practice of this court to approach the learned judge taking company matters to seek directions on a report by the official liquidator for an appropriate sanction as required by section 457(1) of the Act including the one relating to the power to sell the movable or immovable property of the company in liquidation.'

14. The Division Bench in Amba Tannin's case dealt with a case of confirmation of a sale under section 457(1) of the Companies Act. It dealt with a situation where even though the decision or the direction given by the court was on the report, the said decision or the direction was of a judicial character. The decision was given after a lengthy hearing before the learned judge. In deciding whether an offer given by a particular offerer should be accepted in preference to the offers given by the others, the court was deciding a lis between the contestants relating to the claim for acceptance of their respective offers. The court was determining the issue as to whether a particular sale proposed by the liquidator should be sanctioned under section 457(1) of the Act. This was a case where, upon the mandate of section 457(1) the exercise of the powers by the liquidator was subject to the sanction of the court. By an express provision in sub-section (3) of section 457 a creditor there was entitled as of right to apply to the court with respect to the exercise of the said powers. Even in such a situation sustainability of proceedings by way of the liquidator's report was upheld by the court. It is clear that in that case, this court sub silentio accepted the position that even though there were conflicting claims requiring adjudication by the court, the procedure by way of the liquidator's report was permissible and justified. The Division Bench, however, was not called upon to and did not enunciate any principles upon which a judge could permit under rule 10 of the Rules, a deviation from the normal procedure, that is to say, the procedure of a judge's summons with respect to the confirmation of sale proposed by the liquidator. In the present case the principles which should govern the exercise of the discretion by the court in permitting the liquidator to bypass the normal procedure contemplated by rule 10, viz., by a petition or by a judge's summons, will have to be identified and ascertained.

15. It does not admit of any doubt that in cases where directions which are sought by the liquidator have a serious impact on the rights of the creditors or where controversies involved therein are fierce and require adjudication of respective rights contentions or claims of the parties or where a comprehensive analysis of complicated facts or evidence is required, the proceedings by way of a petition of judge's summons would be more appropriate. These proceedings will be more suitable because the summary character or inquiry on liquidator's report or the ex parte or administrative character thereof would not provide a just procedure for dealing with the said situation. This would be so because such a procedure normally would not admit of an elaborate enquiry with regard to several aspects of the matter which can be gone into only when proper pleadings are filed and evidence in support of the various pleas is adduced by the parties. These facilities normally obtain only in cases where proceedings by way of petitions for judge's summons are adopted by the parties. In my opinion, the procedure by way of liquidator's report is inherently incapable of facilitating decisions where complicated questions are involved or lengthy evidence is needed, or where serious controversies arising between the parties justify fuller investigation and elaborate inquiries. It must, therefore, be held that, normally, subject to such exceptions as the facts of a particular case may justify, in cases where serious controversies are to be adjudicated upon by the court or where exercise of the powers by the liquidator is the subject matter for sanction of or review by the court or where a creditor has a statutory right to apply to the court, the liquidator should adopt the procedure of a petition or a judge's summons as provided by the rules. In other cases of routine nature or when no serious controversies are possible or directions sought for do not substantially impair creditors' rights, procedure by way of liquidator's report would be more apposite and conducive to the administration of justice.

16. A further distinction may also be made between cases where the liquidator's actions are subject to the sanction of the court and where they are merely subject to the control of the court. The exercise of the powers of the liquidator, the nature of the proceedings pertaining thereto and the functions of the court in respect of sanctions for sales are settled by the judgment of the Supreme Court in Shankarlal Aggarwal v. Shankarlal Poddar [1965] 35 Comp Cas 1. In that case, sanction was accorded by the Calcutta High Court to the official liquidator on a Master's Summons taken out by him for sale of certain properties belonging to the company in liquidation. The case was governed by the provisions of section 183(3) of the Companies Act, 1913. The corresponding section under the Act is section 460. Section 460 in terms contemplates sanction of the court in regard to 'administration of the assets of the company and distribution thereof amongst the creditors'.

17. The schemes of sections 457 and 460 are analogous. Both the sections postulate limitations on the liquidator's power, the right of the creditors to challenge the action of the liquidator and the court review upon an application by the aggrieved person. A fortiori, therefore, cases governed by the said sections must come within the purview of analogous principles. Different considerations, however, arise when directions which are sought by the liquidator concern a discretionary matter under section 458.

18. Section 458, inter alia, provides that the court may 'by order, provide that the liquidator may exercise any of the powers referred to in sub-section (1) of section 457 without the sanction or intervention of the court'. There is a proviso to this section. It lays down that the exercise by the liquidator of such powers shall be subject to the control of the court. There is a subtle but vital distinction in the content and the scope of sections 457(1) and 458 of the Act. Section 457 has three sub-sections. Sub-section (1) provides for exercise of power by he liquidator 'with the sanction of the court'. The matters contemplated relate, inter alia, to 'instituting or defending of suits for and on behalf of the company [clause (a)]; selling the immovable and movable properties [clause (c)] and raising security on the assets of the company [clause (d)] and carrying on such things as are necessary for winding up of the affairs of the company [clause (e)]'. Sub-section (2) provides for certain ancillary powers the exercise whereof is not subject to any sanction of the court. Sub-section (3) has two limbs : the first limb provides that the exercise by the liquidator of the powers conferred by the section shall be subject to the control of the court. The second limb deals with rights of the creditor or contributory. It confers a right of the creditor or the contributory to apply to the court 'with respect of the exercise or proposed exercise of any powers conferred by this section'. In other words, by virtue of an under the second limb of sub-section (3), any action of the liquidator or even a proposed action of the liquidator can sustain a proceeding at the instance of a creditor or contributory. In such a proceeding, the court of necessity has to judicially determine the rival claims and contentions of the parties thereto. Section 458 provides for discretion of the liquidator once he is authorised by the court to exercise the powers under sub-section (1) of section 457. This blanket authority is subject, however, to the proviso that the exercise of the powers by the liquidator is subject to the control of the court. The exercise of powers is not fettered by a provision similar to the one which is found in the section limb of section 457. Moreover, section 457(1) speaks of 'sanction of the court' whereas section 458 provides for 'the control of the court'. The distinction between the two concepts is thin but effective. The word control suggests 'the power to check, restrain or influence'. It postulates a check, a curb or a restraint. It is a word of limitation and connotes a supervisory power in the controlling authority. As against it, the word 'sanction' predicates a consent or a permission. It is not a limitation but an absence of power until such sanction is accorded. An exercise of power in the former case is valid and effective subject to the revision by the controlling authority but in the latter case exercise of power is not effective until sanction is accorded by the sanctioning authority. It is true that sub-section (3) of section 457 also speaks of control and not 'sanction'. The expression 'control' is used there so as to cover cases covered by both the sub-sections (1) and (2). It, however, does not detract from the scheme of sub-section (1) which postulates 'sanction' of the court. The word 'control' in sub-section (3) merely underpins the court's hegemonies position with regard to actions of the liquidator in respect of matter is enumerated in sub-section (1) of section 457. The scheme unfolded by the section 457(1) and 458 is that once a liquidator is granted general authority, the exercise of his discretion, the liquidator is subject to the control of the court. The court can review the action of the liquidator. Such a review, however, is of a limited character. The scope of the discretionary powers of the liquidator and the principles of non-interference therewith are succinctly articulated in Leon v. York-O-Matic, Ltd. [1966] 3 AII ER 277: [1966] 1 WLR 1450. In that case, Plowman J. declined to interfere with liquidator's action with the following observations, at pages 280, 281.

19. 'Here, as I have said, there is no question of fraud, and, having considered all the evidence, which is fairly voluminous and lengthy, I am not satisfied that the liquidator here did not exercise his discretion bona fide; nor am I satisfied that he acted in way in which no reasonable liquidator could have acted.'

20. Pennington's Company Law, 3rd edition, page 718, states the law as follows :

'.......... the court will not interfere with the exercise of a discretionary power vested in the liquidator unless he has exceeded in power, or has acted fraudulently or in a way that no reasonable or responsible person would act. The liquidator, too, may apply to the court for directions in respect of any particular matter arising in the winding up, but here again the court will not exercise a discretion which the law vests in him and so will not decide, for example, whether a particular asset should be sold or a particular contract entered into.'

21. In my opinion, there is justification in Shri Chagla's submissions that, having regard to the express authority conferred on the liquidator by the winding up order dated 23rd January, 1976, the present applicant of the liquidator is not for a sanction as postulated by section 457(1) but is merely for an approval for his own protection in a matter which falls exclusive within his discretion under section 458.

22. I am not impressed by the submission that the power of the liquidator is an uncontrolled power. It is true that the liquidator represents the creditors in general. The liquidator has been held in several cases to be a trustee or quasi-trustee for the creditors. It cannot be said that there is no conflict of interest between the liquidator and the unsecured creditors. The provisions of the Companies Act envisage a conflict of interest. With that conflict in view, provisions have been made by sections 457(3), 460(6) and 546(3) and other associate sections for a right in the creditors to challenge the action or proposed action by the liquidator. Further, there are several provisions which provide for a right of the creditors to inspection of the records (see for example the provisions of section 461(2) and 549 : also rules 16, 305, 323(4), 332 and 360). I am of the view that, having regard to the conflict or possibility of conflict with regard to the actions taken or proposed to be taken by the liquidator, it cannot be denied that the creditors have a locus in respect of the exercise of the powers by the liquidator, whether those relate to the matters in which sanction of the court is a condition precedent or whether the exercise of the powers pertain to discretionary matters. Ultimately, the unsecured creditors have vested rights and legitimate expectations in respect of distribution of assets in winding up. These rights have been recognised and have been effectuated by courts in matters arising in winding up. In J. K. (Bombay) Private Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp Cas 689, the Supreme Court quoted with approval the decisions of the English courts in Bank of Scotland v. Macleod [1914] AC 311(HL) and In re Anglo Oriental Carpet Manufacturing Co. [1903] 1 Ch 914 (Ch D). and gave its imprimatur to the recognition of the vested rights of the unsecured creditors in winding up. Regard being has to right being impaired by an action of the liquidator, it must he held that the unsecured creditors have a locus and are entitled to be heard in respect of directions sought by the liquidator. They are also entitled to challenge the action of the liquidator.

23. The distinction sought to be made between the concept of the 'orders' and the 'directions' is untenable. As defined in Webster's Third New International Dictionary, the expression 'direct' means :

'to prescribe especially by formal or mandatory instruction or legal enactment (a court ordering that the person the brought to a court hearing). (Postal Inspectors directed to destruction of the obscene matter)'.

24. The words 'direction' has to be construed accordingly. So construed it would mean instructions given by a court. The said dictionary, therefore, says that 'direction' means

'something that is imposed as authoritative instruction or bidding.' In the said dictionary the word 'direction' is held as synonymous with 'order' and 'command'. It, therefore, follows that the direction like an order is a command of the superior authority. Direction given by a court, therefore, is a judicial order, a command of the judicial authority. Neither conceptually nor in point of law, can there be any distinction between the direction given by a court or the orders passed by it. Reference by the liquidator to the provisions relating to the filing of complaints or taking out misfeasance summons are not apposite.

25. I am also not impressed with the contention that when the liquidator seeks directions of the court the liquidator is merely extending courtesy shown by a subordinate officer to the court. The liquidator is undoubtedly answerable to a court because the relevant provisions provide for the overall supervision and the control of court in all matters relating to winding up. While giving directions, the court applies its judicial mind. The proceedings relating to this application of judicial mind cannot the characterised as merely a formality or what the liquidator claimed 'courtesy shown to the court'. I reject the contentions raised on behalf of the liquidator in written submission. I hold that the creditors have a locus in the matter of exercise of powers by the liquidator.

26. The report of the liquidator in the present case seeks a direction as to whether the liquidator should defend the suit and, if so, on what term The liquidator seeks a further direction as to whether the offer given by the landlords to compromise the suit should or should not be accepted. In may opinion, the surrender of the leasehold rights when the tenancy is a statutory one, is not a sale or transfer of immovable property under section 5 of the Transfer of Property Act. (See Makhan Lal Laha v. Nagendra Nath Adhikari : AIR1933Cal467 ). A surrender of leasehold rights has been characterised by this court in Balaji Sitaram Naik Salgavkar v. Bhikaji Soyare Prabhu Kanolkar ILR [1884] Bom 164, as a contract by mutual consent.

27. The present report deals with the sale of movables and the right of liquidator to defend a suit. The right to compromise a suit follows from the right to defend. These directions pertain to matters in respect whereof there is discretion vested in the liquidator under section 458 of the Act and in respect whereof a general authority has been conferred upon the liquidator under the winding up order dated 23rd January, 1976. The procedure adopted by the liquidator is in consonance with the established practice of this court and is permissible under the provisions of rules 6 and 10 which preserve the practices of this court or the discretion of the judge to permit such a procedure. I, therefore, hold that the present matter being wholly within the discretion of the liquidator and a matter in respect whereof the liquidator merely seeks the administrative sanction of the court for his own protections is a fit case where the liquidator advisedly invoked the practice of this court relating to the obtaining of directions on the liquidator's report. That this practice was permitted in the present case cannot be gainsaid. The liquidator applied for directions to Madon J. The learned judge gave direction on 19th March, 1976. Further directions on the liquidator's report were given by the learned judge on 19th April, 1976. In the circumstances, it must be held that Madon J. permitted the liquidator within the meaning of rule 10 of the Rules to adopt the procedure of report to this court. I must also be deemed to have sanctioned the course adopted by the liquidator when I rejected the applicants to the judge's summons in respect of their claims to have a copy of the liquidator's report furnished to them. In my opinion, the facts and circumstances of the present case sustain the invocation by the liquidator of the mode of obtaining direction on the liquidator's report. The facts of the case warrant the approach adopted, if I may say so, with great respect, by Madon J. and the approach humbly emulated by me in that regard.

28. The attractability of the principles of the natural justice cannot be disputed. The supreme Court in Shankarlal's case [1965] 35 Comp Cas 1 categorised an order sanctioning sale to be a judicial order. Even if the directions that are sought by the liquidator, on the present report are held to be, as indeed they must be, held to be, of administrative nature, they do not detract from the applicability of audi alteram partem rule. I find substance in the contention that the principles of natural justice apply to the present case and that all contesting parties are entitled to a hearing before directions are given by the court on the liquidator's report. The principles of natural justice are not embodied rules. They are flexible concepts with variable determinants depending upon facts and circumstances of each case. The principles of natural justice have postulates which are responsive in their character. These principles are an essential upshot of the rule of law enshrined in the corpus juris of this country. As noticed by the Supreme Court in A. K. Kraipak v. Union of India : [1970]1SCR457 , these principles have ever expanding horizons. There is a consensus of judicial opinion that even administrative matters come within the pale of the rules of natural justice. All administrative directions which cause prejudice to rights or interests or even legitimate expectations of a person must conform to the principles of natural justice. (See Erusian Equipment and Chemicals Ltd. v. State of West Bengal : [1975]2SCR674 ).

29. There is justification in the submission of Shri Shah that the rational of compulsory winding up is that the courts do even handed justice amongst its creditors and contributories. The purposes of the winding up as submitted by Sri Shah are that the assets of the company in winding up should be realised and distributed amongst its creditors and if surplus is available, amongst its contributories. A winding up of a company as contemplated by section 447 is for the benefit of all the creditors. The scheme unfolded by section 447, 454, 457, 460, 461, 464 and 546 other cognate sections as also by rules 140, 141, 146, 230, 231, 232, 272, and 273 and other associate rules, is clear. It postulates that the creditors are vitally concerned with or have a legitimate expectation in the matter of realisation of the assets of the company or in regard to the exercise of his powers by the liquidator in that behalf. These provisions provide a nexus to the creditors even in regard to a matter which falls within the discretion of the liquidator under section 458 of the Act. This is so because under section 458 the exercise of the powers by the liquidator is still subject to the control of the court. It is true that in regard to the obtaining of directions in that behalf there is no express provision for a creditor or contributory to apply to the court in respect thereto as it provided in case covered by section 457. Even so, it would be unreasonable to hold that absence of a corresponding provision in section 458 would completely negative the locus or nexus of a creditor in matters where his most vital interests are impaired by court action. In cased governed by section 458 the court while sanctioning the action or the proposed action of the liquidator has to objectively determine the facts. This objective ascertainment would be possible only if the court has before it both the prose and cons. The pros of the matter are supplied by the liquidator by his report. The cons can only be furnished by the others viz., creditors or contributories whose ultimate rights, interests or expectations are affected by the direction or approval sought by the liquidator. This may not constitute determination of lis within the proper meaning of the said expression but it does amount to an objective ascertainment of facts and such situations are also governed by the rules of natural justice (See Daud Ahmad v. District Magistrate : [1972]3SCR405 ).

30. Under section 458, the liquidator exercise statutory powers : may be that they are of a discretionary character. An exercise of the statutory powers must have its corresponding jural obligation in favour of those for whose benefit the statutory powers are exercised. The exercise of the powers by the liquidator, therefore, cannot be divorced from the corresponding rights of the creditors and contributories respecting thereto. The exercise of these powers has civil consequences. It is established law that if the exercise of powers, whether statutory or administrative, has civil consequences it must conform to the principles of natural justice and fair play. There is no escape from the conclusion that in cases where court's approval is sought with regard to the sale of the properties both the court and the liquidator are bound by the audi alteram partem rule. Dicta of the Supreme Court in Jatan Kanwar Golcha v. Golcha Properties Private Ltd. [1971] 41 Comp Cas 230 is apposite. It was a case where the official liquidator made a report to the court and obtained sanction for sale of certain immovable properties. It is true that it was a case where interests of a third party were involved and that rule 139 was invoked. But what is of significance is the view taken by the Supreme Court that even the official liquidator was bound by the rules of natural justice. A page 232 Grover J., speaking for the court, observed - See : [1971]3SCR247 :

'The only question is whether because the official liquidator failed to discharge his duties properly by having a notice issued to the appellant, whose rights were directly affected by the order proposed to be made, the appellant was debarred from filing the appeal. In our opinion, apart from rule 139 to which reference has been made by the High Court the official liquidator as well as the learned company judge were bound by the rules of natural justice to issue a notice to the appellant and hear her before making the order appealed against.'

31. In my opinion, the principle is the same in a case where rights of creditors are prejudicially affected. I must, therefore, hold that the creditors in general and the petitioning creditors in particular, are entitled to be heard even in cases where the liquidator makes a report to the court and seeks mere administrative directions.

32. The arguments of Shri Chagla that an anomalous situation would arise on the above-mentioned view being taken by the court, is not sound. It is doubtful whether even in exercise of discretionary powers by himself, the liquidator is not bound to adhere to the principles of natural justice and fair play. The law appears to be that even administrative actions fraught with civil consequences to the person affected requires conformity with the principles of natural justice and fair play. I need not express any opinion on this subject, as this point does not arise for determination in the present case. Even assuming that a liquidator is free to exercise his discretionary powers untrammelled by rules of natural justice, it does not follow therefrom that when the court sanctions discretionary action of the liquidator, the court need not conform to the requirements of the rule of natural justice. Strictly speaking, when the court accords approval to the action of the liquidator, the court has to apply a judicial mind by following a just procedure. The court has to determine objectively whether circumstances exist which warrant such an approval or whether existing circumstances militate against that grant of approval. It cannot be disputed that the judicial process involved in such a grant or an approval must be process devised to subserve the fundamental objective of arriving at a just decision. A just decision cannot be arrived at by obviating compliance with the rules of natural justice. It can be reached only when the principles of natural justice and fair play are observed. Stronger becomes the case when such decisions involve large stakes or have a serious or highly detrimental effect on the person concerned. I have, therefore, no hesitation in rejecting submissions made on behalf of the official liquidator in this behalf.

33. The right of a creditor to be heard having been established, the only question that remains to be determined is what are the postulates of the principles of natural justice that are attracted in the present case. The principles of natural justice are not a body of procrustean formulae. They have dynamic adaptability and responsiveness. It is an established law that as to what particular ingredients of natural justice apply to a given case depends on the facts and circumstances of that case, the framework of the law operating in respect thereof and the natural function of the authority concerned therewith. As held by the Supreme Court in Union of Indian v. P. K. Ray : (1970)ILLJ633SC , the application of the doctrine depends upon the nature of the jurisdiction conferred on the authority, upon the character of the rights of the persons affected, the scheme and the policy of the statutes and other relevant circumstances of a particular case.

34. The factual framework within which the claim of the applicants has to be considered is not a very wide or nebulous one. The grievance of the applicants relates to the advisability or otherwise of the liquidator defending the Small Causes Suit filed by the landlords. The applicants took out the judge's summons for a direction that the liquidator be directed to defend the suit. The applicants also suggested defences that the liquidator ought to adopt in defending the said suit. By an order dated 19th April, 1976, while disposing of the liquidator's report in that behalf, as also the judge's summons relating thereto, Madon J. gave an opportunity to the applicant 'to place any facts before the official liquidator in connection with the advisability of defending the said suit.' The liquidator was directed to communicate such facts as may be placed before him to him attorneys. It is not disputed before me that the applicants did not place any facts before the liquidator in regard to the advisability of defending the suit. The liquidator obtained legal advice. He also obtained valuation of the movables. Upon the basis of the advice and the valuation report received by the liquidator, the liquidator made the present report.

35. The report of the liquidator comprises, as indeed all such reports would normally comprise, of four parts : (a) a summary of facts relevant for the purposes of directions sought, (b) opinion and advice received from the legal advisers, (c) reports of the experts such as valuers, etc.; and (d) direction sought by the liquidator. In regard to part (b) there cannot be any dispute that the opinion received by the liquidator from his legal advisers would be privileged. Any disclosure of any legal advice would be contrary to the public policy enshrined in the Evidence Act which places an embargo on a privileged communication being disclosed in adverse proceedings. Shri Shah fairly and in may opinion correctly concedes the position that the privileged professional communications cannot be directed to be disclosed to adverse parties.

36. There is no inflexible rule that the adverse or relevant material ought to be disclosed in their entirety. Very often disclosures of summary of such materials have been held to be sufficient compliance with the rules of natural justice. In may view, the disclosure of the entire report of the liquidator would not facilitate the arriving at a just and fair decision. It would not further the cause of justice. On the contrary, it may thwart it. The rule as to full disclosure admits of several well-defined exceptions. Two of the exceptions relevant for the purpose of the present controversy may be noticed. These exceptions are : (i) where disclosure of a material would be injurious to the public interest, and (ii) such a disclosure will discourage frankness in official reports. Professor S. A. de Smith in Judicial Review of Administrative Action, 3rd edition, at page 180, expounds the law as follows :

'To the general rule there are various exceptions, some of which have already been indicated. There are cases where disclosure of evidential material might inflict serious harm on the person directly concerned (e.g., disclosure of a distressing medical report to a claimant for social security benefit) or other persons or where disclosure would be a breach of confidence or might be injurious to the public interest (e.g., because it would involve the revelation of official secrets, inhibit frankness of comments and the detection of crime and might make it impossible to obtain certain classes of essential information at all in the future). In such situation the person claiming to be aggrieved should nevertheless be adequately apprised of the case he has to answer, subject to the need for withholding details in order to protect other overriding interests'.

37. Thus, in my opinion, full disclosure would not be necessary in cases where it constricts frankness of comments or where it involves disclosures in breach of confidence or disclosures injurious to public interest. The recent judicial trends have not watered down the said overriding considerations. The Frank Committee appointed in England to go into the questions of ministers' powers, noticed that the non-disclosure of the inspector's report was defended 'by invoking the concept of ministerial responsibility and asserting the need for encouraging frankness in official reports (p. 72 of the report). Professor Smith notices that non-disclosure is now defended 'more persuasively on the ground that disclosure would be likely to show down a creaking machine'. (Smith in Judicial Review of Administrative Acts, 3rd edition, page 135). The learned author also notices a universal assumption that the minister is free not to divulge purely intra-departmental consultations and advice (page 185).

38. Seen in the context of above-mentioned principle, it must be held that full disclosure of the liquidator's report of parts (a), (c) and (d) thereof referred to above will inhibit administration of justice and thwart the whole purpose of the liquidator's report in matters pertaining to his discretionary powers and relating to winding-up affairs of a company. The liquidator seeks approval or advice of the court for his own protection. The liquidator's report is made to the court because the court is constituted by the act an overall supervisor of the liquidator's actions. These reports must disclose to the court freely and frankly the opinion of the liquidator in regard to the directions sought by him. These reports may also contain material of a confidential or of a privileged nature. They may also refer to the opinions or advice received by the liquidator in professional confidence or in confidence from the employees who would not like to divulge their names. The case of employees not intending to divulge their names might assume great significance in cases where the direction sought by the liquidator pertain to acts of malfeasance and misfeasance of the former directors or the former senior officers of the companies in liquidation. These reports of the liquidator are of an administrative nature and seek administrative directions from the court. In my opinion, the full disclosure of the reports made by the liquidator the court or parts (a), (c) and (d) thereof adverted to above will inhibit frankness in such reports and will result in revealing opinions or information received in confidence. Such disclosures would dry up sources of information which are normally available to the liquidator in respect of fraudulent, illegal and criminal actions of the directors and other officers of the companies in liquidation. It must, therefore, be opined that on broad principles any full or free disclosure of the report of the liquidator would not be in consonance with justice, equity and fair play.

39. The opinion expressed above, however, does not mean that a creditor is not at all entitled to any disclosure. Nothing has been shown to me to make a finding as to any practice of not disclosing the report of the liquidator except in very exceptional cases. I am of the view that there ought to be some disclosures of the reports of the liquidator. In my opinion a creditor is entitled to a summary of allegations i.e., summary of the facts contained in the liquidator's report, i.e., part (a) thereof referred to above and of directions sought by the liquidator, i.e., part (d) thereof referred to above. These disclosures can be made by the liquidator by sending a letter in that behalf to the petitioning creditor or to such of the creditors as desire information from the liquidator in that behalf or desire to be heard by the court in connection therewith. Such creditors shall also be entitled to an inspection of valuation reports adverted to in part (c) of the reports as referred to above. It is my view that such a course would strike a synthetic balance and resolve the conflicting requirements of the principles of natural justice and that of administrative exigencies of liquidator's functions or powers in the winding up of the companies.

40. Turning to the facts of this case, I am constrained to observe that it does not lie in the mouth of the applicants to complain of the violations of the principles of natural justice when they themselves did not choose to place any facts before the liquidator even though they were expressly given such an opportunity by Madon J. by his order dated 19th April, 1976. This, however, does not, in my opinion, disqualify the applicants from seeking such reliefs as will enable them to make effective representation to the court with regard to the directions sought by the liquidator. In the facts and circumstances of the present case I think that it would be sufficient compliance with the rules of natural justice if the liquidator is directed (a) to communicate to the applicants, by a letter addressed to their attorneys, a summary of the facts on which his report is based, as also a summary of the directions sought by the liquidator and (b) to disclose to the applicants and give them inspection of the valuation report of the movables obtained by the liquidator from M/s. Bennet Coleman & Co.

41. In the circumstances, I dismiss the judge's summons, subject to the direction that the liquidator to intimate by a letter sent to the petitioners' attorneys within 7 days from date of this order a summary of the facts contained in his report and a summary of the directions sought by the liquidator and further that the liquidator do disclose and give inspection of the valuation report of M/s. Bennet Coleman & Co. dated 28th April, 1976, to the applicants within 7 days of this order.

42. In the circumstances of the case, I direct the applicants to pay costs of the liquidator. Other parties to bear their own cost`


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