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Vivek Kumar Vs. Pearl Cycle Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Appeal Nos. 441 of 1979
Judge
Reported in[1983]54CompCas77(Delhi); ILR1981Delhi665
ActsCompanies Act, 1956 - Sections 446
AppellantVivek Kumar
RespondentPearl Cycle Industries Ltd.
Advocates: B.N. Nayar,; Nand Kishore,; S.B. Ghosh,;
Excerpt:
.....credit and investment corporation, called up their outstandings and a suit, being suit no. surender kumar sad his father was imp leaded as defendants, in addition to the company, in their capacity as guarantors. in 1967, compulsory winding up of the company was sought in the circuit bench of the punjab high court at delhi but the petition was eventually withdrawn as the creditors had apparently been satisfied with the-funds made available by the bank to the company to enable it to tide over its difficulties. 406/80 and 134/80 are intended to transpose the company as well as the wife of surender kumar as co-petitioners. joint stock company, it is well-settled, is a corporate entity, which is distinct from its members. (8) what is true of vivek and his mother would be equally true..........and, they are, thereforee, interested in the maximum possible realisation from the assets by the bank in execution proceedings so that their balance liability is correspondingly reduced. there 5bay also be some justification for the plea of surender kumar and the members of the family that they wish to explore the possibility of a settlement with the bank on the basis of further scaling down of liability and to discharge the obligation so as to avoid the distress sale of the assets of the company and try for the eventual restoration of the company. this court gave enough time to surender kumar but, unfortunately, he has not been able to either satisfy the bank or produce the necessary funds to pay more than the highest offer made for the assets. (5) the first question for consideration.....
Judgment:

H.L. Anand, J.

(1) By this Application, and connected Application being C.A. 144/80, u/s 446 of the Companies Act and C.As. 134 and 406/80, a former Joint Managing Director of a Company, in liquidation, and two members of his family, seek to challenge the validity of consent decrees passed against the Company in favor of a banking institution as early as the year 1966 and thereafter, inter alia, with a view to stall sale of the assets of the Company in execution of those decrees. C.A. 441/79 is by Vivek Kumar s/o. Surender Kumar, the former Joint Managing director of the Company. C.A. 144/80 is by Surender Kumar himself. By C.A. 134180, Kumud Kumar, respondent in C.A. 441/79, wife of Surender Kumar, seeks to be transposed as a co-petitioner in that application. By C.A. 406/80, Vivek Kumar seeks to transpose the Company, arrayed as a respondent in C.A. 441/79, as a co-petitioner. These applications were made in the backdrop of the following facts and circumstances.

(2) Pearl Cycle Industries Ltd., in liquidation, was incorporated as a private joint stock company in 1955, as an enterprise of Raghunath Prasad, father of Surender Kumar. In 1960. the Company, which had been incorporated with the object of manufacturing bicycles and accessories, was converted into a public company. At all material times, the family had controlling interest in the Company. In the year 1966-67, the Company was faced with financial difficulties as a result of which. Mercantile Bank Ltd., which had advanced large amounts of money to the Company, as well as the Industrial Credit and Investment Corporation, called up their outstandings and a Suit, being Suit No. 175/66 was filed jointly by the Bank and the Corporation for the recovery of Rs. 40,50,000 in Delhi. The Suit was based on a mortgage of all the moveable and immovable assets of the Company. Surender Kumar sad his father was imp leaded as defendants, in addition to the Company, in their capacity as guarantors. A consent decree was passed in the Suit in the year 1966 itself apparently because the plaintiffs waived claim to substantial amount due and payable on account of interest. In 1967, compulsory winding up of the Company was sought in the Circuit Bench of the Punjab High Court at Delhi but the petition was eventually withdrawn as the creditors had apparently been satisfied with the-funds made available by the Bank to the Company to enable it to tide over its difficulties. The Company was, however, unable to financially restore itself and the Bank was compelled to enforce another claim based on mortgage and got another consent decree against the Company based on an arbitration award in Suit No. 373/70 for a sum of Rs. 1,10,84,588.42P. The Company was eventually ordered to be wound up by an order of July 31, 1975 in Company Petition No. 94/73. The Bank, being a secured creditor is outside the winding up and is apparently the only creditor of the Company. The Bank sought the execution of the two decree in the Court of the District Judge, Gurgaon, within whose jurisdiction the land, building, machinery, plant and other assets of the Company were situated. At one stage the assets were being auctioned for a bare 18 lakhs. The execution proceedings were eventually transferred to this Court in view of the winding up of the Company. While settling the proclamation of sale, this Court found that the value of the land, building and machinery would be a little more than 60 lakhs and that amount was fixed as the 'reserved price'. The publication of the proclamation elicited offers for the sale of the entire assets ranging from Rs. 24 lakhs to Rs. 80 lakhs. In the open bidding in Court, ordered by this Court, K. C. Nahar's bid was the highest at Rs. 60 lakhs. It appears that during the pendency of the proceedings, possibilities were being explored by Surender Kumar and his associates to arrange funds to pay off the Bank or to enter into an appropriate settlement with the Bank so as to avoid distress sale of assets. It further appears that Surender Kumar was not successful in the effort and the sale of the assets for Rs. 60 lakhs seemed to be imminent. It is at this stage that C.A. 441/79 was filed by Vivek Kumar to annul the two decrees and to stall the sale of the assets in execution thereof apparently to get a little more time to arrange the necessary funds to pay off the Bank, wholly or partly, and seek a restoration of the Company to the family. C.A. 144/80 was filed by Surender Kumar during the pendency of the other application and C.As. 406/80 and 134/80 are intended to transpose the Company as well as the wife of Surender Kumar as co-petitioners. The Company and the Bank were imp leaded as the respondents. Vivek Kumar also imp leaded Surender Kumar, his father and his mother as Respondents. Surender Kumar in his application imp leaded his wife and son as respondents in addition to the Company.

(3) Vivek Kumar seeks to void the two decrees and to have them declared inexhaustible on the grounds that the Board of Directors of the Company, including the Joint Managing Directors had not been duly constituted and were, thereforee, incapable of giving consent to the claims being decreed and his father Surender Kumar had been acting against the interest of the members of the co-parcenary in getting the aforesaid decrees passed and was acting prejudicially to the interest of .the members of the family Surender Kumar seek to void the decrees on the ground that the Company had not given a valid consent for the decrees as he was incompetent to give such consent for and on behalf of the Company or to validly act for or on behalf of the Company and that, in any event, the consent to the decrees had not been validly ratified by or on behalf of the Company. Surender Kumar, Vivek Kumar and Kumud Kumar support each other but the Applications and the proposed transpositions are opposed by the Bank. The Bank resists the two Applications on the preliminary grounds of locus standi, limitation and maintainablility. The Official Liquidator has been indifferent to the proceedings.

(4) Before considering the three preliminary questions in controversy, it must be pointed out that while the Bank contends, and not unjuslifiably, that these belated attempts to assail the-validity of the decrees by Surender Kumar or his wife or son is a mala fide attempt to frustrate the execution proceedings to stall the realisation of the outstandings by the sale of the assets of the Company, Surender Kumar and the members of the family appear to have a genuine grievance and a reasonable apprehension that valuable assets of the Company, which may be reasonably estimated to be of the value of 1 crore at present market value could, but for their effort, have been auctioned at the throw-away-price of Rs. 18 lakhs. and ft may not even now be possible to realise their real worth. Whatever may be the validity of the objections of Surender Kumar and the members of his family to the validity of the decree and of their executability, there is little doubt that in the course of execution proceedings in the Ballabgarh Court, the highest bid was only Rs. 18 lakhs and the Bank, being a conservative banking institution, was not willing to run any further risks and was ready to dispose of the property on that basis. The value for which the assets are sold in execution of the decrees are equally important for Surender Kumar and the members of the family because of the personal decree against him of the corresponding amount as a guarantor and, they are, thereforee, interested in the maximum possible realisation from the assets by the Bank in execution proceedings so that their balance liability is correspondingly reduced. There 5Bay also be some justification for the plea of Surender Kumar and the members of the family that they wish to explore the possibility of a settlement with the Bank on the basis of further scaling down of liability and to discharge the obligation so as to avoid the distress sale of the assets of the Company and try for the eventual restoration of the Company. This Court gave enough time to Surender Kumar but, unfortunately, he has not been able to either satisfy the Bank or produce the necessary funds to pay more than the highest offer made for the assets.

(5) The first question for consideration is as to the locus standi of Surender Kumar and Vivek Kumar to assail the decrees passed against the Company.

(6) So far as Vivek Kumar is concerned, he is neither a judgment-debtor, nor a shareholder of the Company. He has also no interest in the assets of the Company, which are sought to be proceeded against in execution. No movable or immovable property belonging to him is sought to be either affected by he decrees or to be proceeded against in execution thereof. The only right in which he claims to haw the necessary standing to assail the decrees and stall their execution is based on the allegation that the controlling interest in the Company consisted of shares or included shares belonging to Hindu U divided Family, of which he was a co-parcener. Even if it be assumed that part of the shareholding belonged to Hindu Undivided Family, a matte on which there is considerable controversy between the parties, and that he was a member of the coparcenary, that does not give him the necessary standing. No decree has been passed against the Hindu Undivided Family nor is any property of the family sought to be proceeded against in execution. Joint Stock Company, it is well-settled, is a corporate entity, which is distinct from its members. The share in a joint stock company is the property of the registered holder but the assets of the Company are 'the assets of the joint stock entity. They are in no sense the assets or property of a shareholder, much less a member of a co-parcenary, which may hold the shares in the name of the Karta. If the Karta of the family abused his position, either as a shareholder or as a director of the Company, the remedy of the member of the co-parcenary or of the shareholder of the Company, as the case may be, would lie elsewhere. Neither the decrees nor the course of execution thereof could be challenged by a shareholder unless his rights as such shareholder are sought to be affected. Vivek would, thereforee, have no locus standi to maintain the present Application.

(7) What has been said above about Vivek would be equally true of his mother.

(8) What is true of Vivek and his mother would be equally true of Surender Kumar as well except to the extent that the decrees were paused not only against the Company but also against Surender Kumar by virtue of being the guarantor. Even Surender Kumar would not have the necessary locus standi to challenge the decree or its execution in so far as they affect the Company, Subject to various other conditions, he may be entitled to challenge the personal decree passed against him or against the Company in which his property is sought to be proceeded against. But short of these, he has no locus standi to challenge the decrees pasted against the Company nor the course of execution so long as the execution proceeds against the assets of the Company. For the purpose of determining the question of standing, I am, however, assuming that there is no bar to his challenging the decrees on the basis that even though he gave the consent, he did not have the necessary competence either to give the consent or to ratify the consent already given. That is a separate facet of the matter which could be decided if the proceedings survive this challenge.

(9) I have, thereforee, no hesitation in holding that none of the applicants have the necessary locus standi to challenge the two decrees or their execution.

(10) Whether the (Applications are maintainable u/s 446 of the Companies Act, is the next question that requires consideration.

(11) There are two facets of the plea with regard to maintainability. One is that the Applications are not maintainable u/s 446 of the Act. Second is that the challenge to the decrees in collateral proceedings of execution could be only on the ground of nullity and on the allegations as laid down, they could not be said to be nullity, whatever else may be said about their validity.

(12) This is how Section 446 reads:

'SUITS stayed on winding up order When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, on suit or other legal proceedings shall be commenced, or if pending as the date of the winding up order. shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.

(2)The Court which is winding up the company shall, notwithstanding anything contained in any other law for the lime being in force, have jurisdiction to entertain, or dispose of

(A)any suit or proceeding by or against the company;

(B)any claim made by or against the company (in chiding claims by or against any of its branches in India);

(C)any application made under Section 391 by or in respect of the company,

(D)any question of priorities or any other question whatsoever, whether of law or fact which may relate to or arise in course of the winding up of the company.

whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the ending up of the company or before or after the commencement of the Companies (Amendment) Act, 1960.

(3)Any suit or proceeding by or against the company which is pending in. any Court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for time being in force, be transferred to and disposed of by that Court.

(4)Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.'

(13) Mr. Nayar who argued a difficult- case rather skillfully, sought to justify the Applications u/s 446(2)(a) and (b) of the Act, even though he conceded that these Applications could not be said to be proceeding or any claim made against the Company in that the Company was only a proforma party and no relief was sought against it. He, however, urged of the basis of decision of Federal Court in the case of Dr. Satya Charan Law & Others v. Rameshwar Prasad Bajoria and Others(l) and certain other English and Indian decisions, that an Application be treated as an application by the Company, either by transposing the Company as a co-petitioner or on the principle recognised by the Federal Court in the above case. The principle enunciated by the Federal Court has no possible application to the situation in this case. Federal Court conceded the right of a majority shareholder to file proceedings for and in the name of the Company where those in the management of the Company were themselves wrongdoers and obviously, would not initiate such proceedings. The Company in the present case is in liquidation and the Official Liquidator alone was competent to initiate appropriate procecdings, by a Company and there was no averment that the Official Liquidator was the wrongdoer or was acting unreasonably in not initiating appropriate proceedings for the annulment of the decrees. It would be interesting to point out in this context that the Bank is apparently the only creditor of the Company and that. is perhaps the reason, why the Official Liquidator has not. taken any positive step to stall the execution of the decrees by the Bank as a secured creditor even 'though the Official Liquidator was naturally interested in the assets fetching the highest possible price in execution proceedings. A factor, which is not altogether irrelevant, is that whatever bo the proceeds, the claim of the Bank, which according to the two decrees would be over a crore and 50 lakhs and would have increased considerably Or account of further interest would be too large to leave any surplus that may fall into the hands of the Official Liquidator. Another factor which may have influenced the Official Liquidator is the patent fact that the two decrees were not only consent decrees and were not challenged for a period of almost 20 years, the Company, as indeed, the guarantors had obtained considerable concession, from the Bank by way of scaling down of interest. It is. thereforee, not possible to accept the contention that the Applications could be treated 1. 1950 FC 133. as the Applications of the Company by transposition or otherwise. There would be no ground for transposition, either.

(14) Faced with this almost insurmountable difficulty, Mr. Nayar sought to justify maintainability of the Applications with reference to Section 446(2)(d) of the Act on the ground that the challenge to the decrees could be said to either 'relate to or arise in course of the winding up of the Company' within the meaning of clause (d). There is no substance in this contention either because the validity of the decrees is not a question that relates to the winding up of the Company and it could not be said to have arisen in the course of winding up because it arose during the proceedings of execution of the decrees. It is, however, not possible to ignore the fact that even though the question as to the validity of the decrees arose in execution proceedings, it could be said to have arisen in the course of winding up because the challenge has been incorporated in proceedings u/s 446 of the Act and if these proceedings are maintainable and there is the necessary locus standi, there would be justification for the contention that the Company Court should, in any event, entertain the question to the validity of the decree and decide it on the material available, irrespective of the question of locus standi or maintainability. But there is another infirmity which is fatal and that is what brings me to the other facet of maintainability.

(15) It is well-settled that a collateral challenge to a decree could be mounted only on the ground that the decree was a nullity. It is equally well-settled that a decree is not a nullity merely because it is wrong, improper or even contrary to law. A decree may be a nullity where there is a total lack of jurisdiction in the Court which made it or it was passed in proceedings of which the Judgment-debtor had no notice. Any challenge to a decree on other grounds must be in proper proceedings against a decree and not in collateral proceedings. Execution proceedings are certainly collateral proceedings and would be within the limitation of this principle. If a Suit or a claim u/s 446(2)(a) or (b) was maintainable, it would perhaps not be a case of collateral proceedings because such proceedings would be in the nature of a regular proceedings but same is not true of the question that may be raised u/s 446(2)(d) of the Act. If any question is raised with regard to a decree under sub-section 2(d), it would in its nature be a question raised in collateral proceedings, that is, proceedings for the winding up of the Company, at whose instance or against whom a decree has been passed. Any such question, must, thereforee, satisfy the requirement for a valid challenge to a decree i.e. the decree is a nullity.

(16) The challenge to the decrees in the present case ex facie could not be said to be on the ground that it is a nullity. Mere incompetence of the Board of Directors or a defect in their constitution or any disqualification or any termination of their status would be incapable of vitiating the decree or making it a nullity, whatever else one may say with regard to the proceedings. Section 290 of the Companies Act would be a complete answer to any such challenge because that Section clearly saves the action of the Board and their act will be valid notwithstanding that it may afterwards be discovered that the appointment or their constitution was invalid by reason of any defect or disqualification by virtue of any provision in the Act or the Articles. The only exception is where an action was done by a director or the Board after the appointment had been shown to be invalid. Mere doubt that may be cast with regard to the validity of an appointment would be insufficient even to attract the proviso to Section 290. In any event, in the present case, nothing was done by the Board or any director subsequent to the discovery of the so-called defect. The allegation that Surender Kumar was acting in collusion with or in a manner that was prejudicial to the interest of any member of the family would be incapable of visiting the decrees with the vice of being a nullity. That being so, the challenge would not be maintainable in the present proceedings.

(17) Whether the Applications are barred bytime, is the next question that falls for determination. The first of the two decrees was passed in 1966 while the second was passed in 1971. Ordinarily, thereforee, the challenge to the decrees would be barred by time on any process of computation. The execution proceedings, however, were capable in certain circumstances of giving a fresh cause of action and if the challenge was brought within 3 years of the execution, it may still be within time. Execution Application was filed on October 26, 1976. C.A. 441 was filed on August, 1979 and was, thereforee, within time. C.A. 144 was, however, filed on March 19, 1980 and was, thereforee, out of time. C.A. 441 was also within time because Vivek Kumar admittedly attained majority on January 27, 1979 and would be within his right to challenge the decrees assuming that he had the necessary locus standi and the Application was otherwise maintainable. C.A. 144 would, thereforee, be liable to dismissed on ground of limitation.

(18) Whether any of the applicants could legitimately invoke Section 457 or Section 531 to void the decrees, assuming , question of locus standi in their favor, is the next question that falls for determination. Section 456 enumerates the powers of the Liquidator and whatever be the extent of the powers of the Liquidator and there certainly is a power to institute claims with the sanction of the Court, none of these are able to sublimate the proceedings filed by the applicants. This Application is, thereforee, of no avail to prop up the present proceedings. Section 531 deals with fraudulent preference and declares that any transfer of property, delivery of goods, payment, execution or other act relating to property made, taken or done by or against the Company 'within six months before the commencement of its winding up' be invalid if certain conditions are satisfied. This contention was raised in the context of an averment that the winding up order was made on the basis of winding up petitions filed in 1966-67 and if that was so, the commencement of winding up would naturally relate back to the institution of the proceedings It was, however, not disputed that the winding up petition filed in . 1967 was eventually withdrawn and dismissed as such and the winding up order was made on July 31, 1975 was made in a winding up petition, being C.P. 94/73, filed on November 29, 1973. The acts complained of, whether of 1966 or of 1971, were clearly outside the reach of Section 531 on that basis.

(19) It must, however, be pointed out that while none of the applicants has the locus standi to challenge the decrees or their executability and their Applications are not maintainable u/s 446 of the Act or under any other provision of the Companies Act, Surender Kumar is certainly interested in the proceedings for the realisation of the amount by the Bank by the disposal of the assets of the Company because on the amount realised would depend the quantum of the shortfall which he would be bound to make good by virtue of the personal decree passed against him as a guarantor. He is, thereforee, certainly interested in the securities sought to be proceeded against in execution getting the best possible price and if there is anything in the manner in which execution proceedings are carried out which may affect the quantum of realisation, he would certainly have the locus standi to approach the Court either u/s 446(2)(d), or the execution Court, seized of the execution proceedings, for appropriate directions with a view to ensure that the securities are not only fully protected under disposal but also that they fetch the maximum possible price.

(20) In the result, C.A. 441/79 and C.A. 144/80 fail and ate hereby dismissed. C.As. 134/80 and 406/80, which merely seek transposition, also consequently fail and are hereby dismissed. The execution proceedings would be listed for further directions, before the learned Company Judge on March 3, 1981.

(21) In the peculiar circumstances, parties would bear their respective costs.


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