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Velji Shamji and Co. Vs. Official Liquidator, Bhavnagar Vegetable Products Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Application No. 177 of 1976 in Company Petition Nos. 5 and 57 of 1976
Judge
Reported in(1977)GLR889
ActsCompanies Act, 1956 - Sections 25, 391(2), 456 and 457(1)
AppellantVelji Shamji and Co.
RespondentOfficial Liquidator, Bhavnagar Vegetable Products Ltd.
Appellant Advocate M.R. Parpia, Adv.
Respondent Advocate B.R. Shah,; Bhaishankar Kanga and; Girdharlal, Advs.
Cases ReferredPanchamahals Steel Ltd. v. Universal Steel Traders
Excerpt:
company - default - sections 25, 391 (2), 456 and 457 (1) of companies act, 1956 - petitioner-creditor moved application for winding up - petitioner proposed on behalf of sponsor scheme of compromise - petitioner moved company petition under section 391 (2) to confirm impugned scheme - due to financial difficulties company could not pay membership fee in time - whether company ipso facto ceased to be member of association - rules of association constitute contract between members and association - company voluntarily joined association - rules binding on company - by order of winding up membership with association not terminated - company granted quota on basis of past performance. - - it is something like an object clause of a company running into several clauses from (a) to (x)......d.a. desai, j.1. this summons is taken out messrs. velji shamji & co., a partnership firm. the applicant is the petitioning-creditor in company petition no. 5 of 1976 which was a petition moved by the applicant praying for an order for winding up the company. it was presents on 15th january, 1976, and ultimately by an order made on 15th september, 1976, bhavnagar vegetable products ltd. (company for short) was ordered to be wound up. but, before winding-up order was made, on 8th march, 1976, the official liquidator was appointed as provisional liquidator and he worked as provisional liquidator till the winding-up order was made and the provisional liquidator was an appointed as liquidator of the company. an appeal has been preferred against the order for winding up the company and there.....
Judgment:

D.A. Desai, J.

1. This summons is taken out Messrs. Velji Shamji & Co., a partnership firm. The applicant is the petitioning-creditor in Company Petition No. 5 of 1976 which was a petition moved by the applicant praying for an order for winding up the company. It was presents on 15th January, 1976, and ultimately by an order made on 15th September, 1976, Bhavnagar Vegetable Products Ltd. (company for short) was ordered to be wound up. But, before winding-up order was made, on 8th March, 1976, the official liquidator was appointed as provisional liquidator and he worked as provisional liquidator till the winding-up order was made and the provisional liquidator was an appointed as liquidator of the company. An appeal has been preferred against the order for winding up the company and there was some interim relief granting the stay against the order of winding up. But, yesterday, that is, on 22nd December, 1976, when the summons was on board, I was informed that the stay is vacated as the appellant who had preferred the appeal did not invite any order for any further interim relief. The fact remains that there is no stay order.

2. During the interregnum, this very petitioner on behalf of one Tungabhadra Industries Ltd. (sponsor for short) proposed a scheme of compromise and/or arrangement between the company and its various classes of creditors and members in Company Application No. 74 of 1976 presented on 12th July, 1976. The court gave directions in the summons taken out for directions directing the meting of various classes of creditors and the members to whom the scheme was offered and appointed a chairman to president the meetings. The chairman submitted his report and thereafter this very petitioner on behalf of the sponsor moved Company Petition No. 57 of 1976 under section 391(2) of the Companies Act praying for confirming the scheme of compromise and arrangement. That proceeding is still pending as some further directions were sought with regard to the compromise offered to the banks and specified creditors.

3. The present summons was taken out on 4th December, 1976, praying for an order, inter alia, for allotting the quota of H.P.S. ground-nuts by the Indian Oil and Produce Exporters Association (association for short) to the company and for an injunction straining the association from treating the company as having ceased to be a member of the association and from distributing the quota to other members without serving the quota that would otherwise be available to the company. The summon is taken out by the applicant as petitioning-creditor in the winding-up petition as also in his capacity as one who has sponsored the scheme on behalf of the sponsor in the scheme petition.

4. Before examining the rival contentions rising in this summons certain relevant and material dates may be taken note of. There is an association stayed as Indian Oil and Produce Exporters Association. It was said to be Unregistered association, though a association baring the same has been registered as a type of association conceived and contemplated by section 25 of the Companies Act. I was, however, informed that registered corporate association has not taken over the assets and liabilities of the present association which is the respondent herein and that the present association which is made a respondent in the summons is an unregistered. This association as formed for the various objects set out in rule 3 of the rule and regulations of the association. It is something like an object clause of a company running into several clauses from (a) to (x). Briefly stated the association is formed for protecting the interest of exporters of groundnut and oil, and for promoting research in the oil industry. The company was admittedly a member of this association. It was an ordinary member and was liable to pay membership fee of Rs. 1,000 every year and the year for the purpose of membership fee is calendar year. It is again not in dispute that membership fee payable by the company for the year 1976, which under rule 6(b) of the rules and regulations of the association (hereinafter referred to as 'the rules'), was to be paid on or before 31st January, 1976. The company had not paid the fee by or before 31st January, 1976. Company Petition No. 5 of 1976 praying for winding up order was presented on 15th January, 1976. By an order made by this court on 8th March, 1976, the official liquidator was appointed as provisional liquidator. The next event in the chronology of the events would be the ban imposed by the Government of India on the export of ground-nut kernel and in shell on 14th July, 1976. On the 13th August, 1976, a letter was addressed on behalf of the association to the company drawing its attention to the fact that its of is in arrears and it should be paid immediately. This letter has some relevance and would be referred to in detail a little while after. Suffice it to say that no action appears to have been taken on behalf of the company in response to this letter and if this letter is to be treated as notice for the purpose of paying within one month from the receipt of the notice, it should have been acted upon by 13th September, 1976, by an order made by this court, the company was ordered to be wound up. The secretary of the association addressed a letter to the company dated 26th October, 1976, inviting the attention of the company to the fact that its fee for the year 1976 is arrears and the company to the fact its fee for the year 1976 is in arrears and reminder was to be treated as a 1st reminder and the amount should be paid by or before 1st November, 1976, where after name of such of the members who are defaulters were to be placed before the managing committee of the association for necessary action and the decision of the managing committee would be treated as final and binding as per the rules of the association. The letter further proceeded to inform the addressee that the application of the members, who ar shown to be defaulters in payment of fees, for export authorisation certificates for H.P.S. groundnuts for the current season may not be considered if the membership is not renewed for the above period. Again, to clear the record, as per the last letter, action was to be taken by the company to pay fees for its continued membership before 1st November, 1976, and it was not done. On 4th November, 1976, one Mr. V. C. Pande, who is Joint Secretary in the Ministry of Commerce, Government of India, addressed a letter to Mr. J. T. Tanna, chairman of the association informing him that the Government has released a quota of 50,000 tones of H.P.S. groundnuts, for exports. That probably appears to be an advance intimation of an action which was officially to follow soon thereafter. The chairman was further informed that export quota was to be divided among the exporters of the association on the principle of past exports and the quota was not to be allowed on the basis of the first-come-first-served. Minimum expected realisation of the Government in releasing the quota was also set in the letter which is not material for the purpose of this summons. But this letter definitely conveyed the intimation to the association that the ban on export of groundnut was soon to be lifted to the extent of the quota released by the Government. The official communication in this behalf is to be found in the Export Trade Notice No. ETC (PN) /76 dated 9th November, 1976, issued by the Chief Controller of Imports & Exports (hereinafter referred to as CCI & E). This public notice resets the decision of the Government of India to lift the ban and allow exports of H.P.S. ground but both in shell and kernels within a limited ceiling. It further provided that the exports will be canalised through the Indian Oil and Produce Exporters Association, Bombay. Pursuant to this trade notice the Joint Chief Controller of Imports and Exports (hereinafter referred to JCCI & E) issued Export Trade Notice No. 167/76, dated 11th November, 1976, which amongst others recites that the canalising agency shall be responsible for monitoring the ceiling which was fixed at 50,000 tons and will be distributing it to its members on the basis of the past performance and the ceiling was not to be used on first-come-first-served basis. The association, by its Circular No IDPEA/82/1976, dated 16th November, 1976, issued to all members incorporating therein the aforementioned two trade notice gave information to all the members. Things moved swiftly thereafter. On the 11th November, 1976, the association issued Circular No IPEA/79/1976, addressed to all members of the association enclosing therewith a copy of the rules and procedure for the canalisation scheme for the export of H.P.S. groundnuts for the crop year 1976-77 as adopted by the managing committee at its meting held on 9th November, 1976. In the last paragraph it is stated that the member should note that the rules will be adhered to strictly. From amongst the rules annexed to the circular stayed as rules and procedure for export of H.P.S. groundnuts under the Canalisation scheme of the association, rule 2 deserves mention. It reads as under :

'2. Any town of four office-bearers of the associations, viz., chairman, vice chairman, hon. secretary and hon. treasurer are authorised to enrol members on receipt of application for membership along with full fees subject to subsequent rectification of the enrolment by the managing committee of the association.'

5. It would appear that even though rule 5(a) of the rules of the association confers power on the managing committee to finally determine the eligibility of an applicant for membership and their decisions which need not be a reasoned one is to be treated as final and conclusive, rule 2 herein referred to divested that powers of the managing committee and conferred it on the four office bearers mentioned in the rule subject to subsequent rectification by the managing committee. The change is very material and very necessary also for certain purposes, which would be implied in the course of this judgment. On the same day, that is, on 10th November, 1976, another Circular No. IDPEA/80/1976 was issued by the association addressed to all the members of the association informing them that the government of India has released 50,000 tons of HPS groundnuts for the crop year 1976-77 and the quantity would be disturbed to the members of the association based on their performance during any one of the last three years as may be chosen by them. The year to be reckoned was from 1st November to 31st October of the three years, i.e., 1973-74, 1974-75 and 1975-76. The members were also told to carry out certain preliminary requirements for being eligible fort the quota. The penultimate paragraphs of the letter states that it has also been decided that if any amount from members is outstanding and a payable to the association such members will not be issued any quota till the dies are cleared. There was some controversy between the parties as to whether the dues herein referred to were the dues of the membership fees or some other dues. In paragraph 17 of the affidavit-in-membership clarification has been offered that the dues referred to in the paragraph has reference to the export levy which the members have to pay to the association and in respect of which members may have committed default. This affidavit-in-reply cannot restrict the meaning which one can deduce from the language of the letter. But even if that meaning was to be given, it would have no impact on the outcome of the summons, because on 10th November, 1976, by the Circular No. IPEA/79/1976, rules were issued which even enabled the non-members to enrol themselves as members and it would mean that those who had failed to pay fees and had committed default which resulted in cessation of the membership as contended for on behalf of the association, will have a right to pay up fees, get enrolled as member and ask for quota on the basis of the past performance. So far, the events are not seriously disputed.

6. First brick was dropped by the liquidator by his letter dated 16th November, 1976, addressed to the association. By this letter, the liquidator informed the association that in respect of the company, petition for wounding up has been presented and on 8th March, 1976, the official liquidator has been appointed as provisions liquidator by the court. He has further stated that the company faced financial difficulties which ultimately resulted in the company not paying the membership fee in time but, as the scheme of compromise and arrangement has been presented, the dark future is not very bleak and things are brightening up and that the company would be interested in its continued membership in the association and sent with the letter a bank draft for Rs. 1,000 payable at Bombay. He also confirmed the telegram sent earlier by him that he is sending the draft. He soon followed with another letter dated 18th November, 1976, addressed to the association telling them that membership fee has been sent by demand draft payable at Bombay and there is no other outstanding amount payable by the company to the association. He also sent some statements showing that the company was exporter in the past and especially during 1st November, 1973, to 31st October, 1974, the company had exported 6993.3249 tons of HPS ground-unit shells. He also sent documents showing the details of shipped quantity in net metric tons, bills of lading number, invoice number with date, etc. He also sent copies of bank's certified invoice in order to convince the association that the company was exporter in the past and on past performance basis it is entitled to pro-rata quota. Till 27th November, 1976, the association appears to have been no action on the aforementioned two letters of the liquidator whereupon on 27th November, 1976, the liquidator addressed a third letter to the association seeking certain information form them,. He also informed the secretary of the association that M/s. K. N. Raval, advocate and C. M. Shah, who have been appointed to investigate into the work of the company and who in that connection were likely to be in Bombay some time during the next succeeding week, are being instructed to contact the secretary to collect necessary information. It was on 29th November, 1976, that M/s. Jeshtram & Co., attorneys for the association, sent a combined reply to three letters addressed on behalf of the liquidator. In the first paragraph of the letter, the attorneys have asked for certain information form the liquidator, more particularly whether he was authorised as provisional liquidator to carry on business of the company and whether he has sufficient finances for the purpose. Till then the letter purports to reply to the letters of the liquidator dated 16th November, 1976, and 18th November, 1976, and at that stage the third letter is referred to by saying that the letter was received after the reply was drafted up to a point. The attorneys further proceeded to state that, in view of the fact that it is only by their letter dated 27th November, 1976, the attorneys acquired information that the company is ordered to be wound up and, therefore, under the rules of the association the company has ceased to be a member and as such the company may not be entitled to any quota rights. So saying, the demand draft was returned. Thereafter, the present summons was taken out.

7. Before I examine the main contentions in this summons, it would be necessary to briefly refer to rules 8(c) and 8(e) of the rules of the association. They read as under :

'8. A member shall ipso facto cease to be member of the association :- .....

(c) in the case of a member being a joint-stock company, corporation or association, ineffective resolution is passed or an order made by an competent court for winding up or amalgamation;

(e) if such member fails to pay subscription within one month from the date of the same becoming die and if the same is not paid within one after the receipt of a written notice requiring the member to make payment of the same; provided that the committee may on an application made by any person ceasing to be member under this clause readmit such person on such conditions as they think fit.'

8. Under rule 5 the managing committee is constituted a sole judge as to the eligibility or otherwise of an applicant for membership of the association and the committee shall not be bound to assign any reason for their decision which shall be final and conclusive.

9. First contention is that as the company failed to pay membership fee within time or within such extended time, pursuant to the notice dated 13th August, 1976, the company ipso facto ceased to be a member of the association; and as quota released by government for export of H.P.S. ground-nuts on shell and kerel is to be disturbed amongst the exporters who are members of the association, the company would not be entitled to quota. Both the limbs of the submission may be separately examined.

10. Taking the second limb of the argument first, is it true to say that the Government released the quota only to be distributed amongst the exporters, who, for being eligible as condition-precedent, must be a member of the association Power to release quota for export vests in the Government. Government through its own department can release the quota subject to the ceiling fixed by it. Ceiling for export is fixed by the Government. The quota is not granted to the association. The association is described as canalising agency for export of ground-nuts. If quota were to be granted to the association with a condition that it must be disturbed amongst the members, different consideration will come into play. But the power to release quota vests in the Government. It is for the Government to decide under what conditions and through which particular agency groundnut will be exported. Therefore, while using the association as a canalising agency for export of groundnuts, it is necessary to collect the intention of the government as to who should be eligible for export quota. The trade notice dated 9th November, 1976, which is the earliest document on record issued by the CCI & E clearly shows that exports will be canalised through the association. It is a canalising agency. It is not grantee of the quota. It is merely a monitoring and distributing agency. This conclusion is reinforced if one were to refer to subsequent export trade notice issued by the JCCI & E on the 11th November, 1976, in which it is stated that canalising agency shall be responsible for monitoring the ceiling and will be disturbing it to its members on the basis of past performance. The ceiling shall not be used on first-come-first-served basis. Mr. Bhatt, learned counsel for the association, urged that even if the export trade notice issued by the CCI & E there is no reference to the distribution of the quota amongst members of the associations, the subsequent notice issued by the JCCI & E makes it abundantly cleat that it has to be distributed amongst the members of the association. It is not possible to accept this submission. Government released the quota and the association was appointed as canalising agency and that has been clearly stated by the CCI & E. The JCCI & E, a subordinate officer, cannot impose a further restrictions on what has been granted by the CCI & E possibly acts in these matters on behalf of the Government of India. The legibility for exports quota is clearly defined, namely, past performance, and the association will be merely a canalising agency. Therefore, those who seek quota must approach the association and it has to be granted on the past performance and not on first-come-first-served basis. The condition that quota shall be granted on past performance basis shows that those who are in the line of export should get the benefit of the quota, meaning thereby those who have necessary expertise in this work. Even if one is a member of this association and if he is a member who has never undertaken this work in the past irrespective of the fact that he is a member, he would not be entitled to the quota because of the eligibility criterion for quota prescribed by the Government while releasing the quota. Quota must be given on the basis of the past performance and certainly not on first-come-first-served basis. Two trade notices would clearly show that any one who is in the export business of groundnuts can go to the canalising agency and ask for quota on the basis of past performance. His application cannot be rejected on the sole ground that he is not a member of a that association. It may be that for keeping certain check, vigilance and supervisions the association may ask such a person to become a member. It is, therefore, that rule 2 of the rules and regulation for export of groundnuts under Canalisation scheme specifically provided for last minute enrolment of members because there may be one man who because of his performance would be entitled to quota and who would not be a member of the association and who may have to be enrolled as a member at the last minute and normal processing of application may take a long tome and, therefore, four officers were authorised to admit and enrol such persons as members subject to subsequent rectification by the managing committee. It may happen that there may be some who may not be happy to continue his membership in the association and yet who was in export business of groundnuts and would be entitled to quota on the basis of past performance and he would be entitled to approach the canalising agency for allotment of the quota on the basis of his past performance. The association cannot impose upon him a condition precedent that unless he becomes a member he shall not benefited to quota. If such a construction is possible, it would be adding one additional criterion for eligibility which Government while releasing the quota did not prescribe. In this connection, it would be advantages also to refer to the letter of Mr. V. C. Pande, Joint Secretary in the Ministry of Commerce, government of India, New Delhi, dated 4th November, 1976, addressed to the chairman of the association, in which it is clearly stated that the export quota should be divided among the exporters of the association on the principles of their be divided among the exporters of the associations on the principles of their past exports. It does not say members of the association. An exporter through association may not be a member of the association. An I fail to understand why Government who merely says the association is canalising agency should restrict the quota right to only the members of the association If the Government itself undertook the task of first prescribing there quota and then distributing it, Government would not reject the application of one who is not a member of the association. Merely because the association was a canalising agency, can it interpose itself and say that unless the applicant for quota is a member of the association, he would not be entitled to the quota. Government did not choose to confer such right on the association. At best canalising agency would be agent of the Government for distribution of the quota. Agent are not prescribe an additional condition which the principal did not prescribe. Therefore, it cannot be said that unless one is a member of the association, he would not be entitled to the quota. That would be adding to the eligibility criterion prescribed by government which the association had no power to do.

11. Mr. Bhatt, however, urged that it is not open to the applicant to raise this contention in view of the recital in para. 4 of the affidavit in support of the summons in which it is clearly and in terms admitted that the association was required to make allocations amongst the members of the association only and on the basis of the past export performance of the members. It was said that if the applicant himself admits that the quota was to be distributed amongst the members only, that was the only case with the association was called upon to meet and it is not open to the applicant now to say that continued membership on enrolment as member of association was not a condition precedent for being eligible for the quota. I see no merit on this contention. The company is ordered to be wound up and the liquidator represent the company. If the quota is to be granted or allocated it would be to the company. It is not to be granted or allocated to the applicant. The applicant is the petitioning creditor. He, as a petition in creditor, may have subsisting interest preserving the assets of the company. But any affidavit on behalf of this petitioning creditor would not bind the liquidator. The court is required to examine whether the liquidator as a representative of the company would be entitled to the quota. Court is not granting quota to the applicant; and his admission would hardly bind the liquidator. Apart from that, even if that was the understanding of the applicant, the court having all the rules, regulation and other material before it, cannot ignore that material merely because there is a statement in affidavit in support of the summons which is not accurate. Therefore, it cannot be said that either continued membership of the association or subsisting membership of the association at the relevant time is a condition precedent or a necessary qualification for eligibility for quota.

12. Assuming I am not correct in holding that continued membership was not necessary for being eligible for the quota, let me examine the company's claim for allotment of quota. The company, was admittedly a member of the association. If was an ordinary member. Under the rules of the association, it had to pay Rs. 1,000 as membership fee per annum. Under rule 6(b) this fee has to be paid by 31st January every year. Admittedly, fee was not paid till 31st January, 1976. It would be so because by 15th January, 1976, winding-up petition was already presented and an usual everyone had left the burning ship. In fact there is converted effort of all the directors loudly shouting that each one was never the director of the company. How could anyone except on 31st January, 1976, if fee is not paid by 31st January, 1976, that is by the end of the first month of the calendar year, no consequences ensued. Rules do not provide that the failure of a member to pay membership fee by 31st January every year would result in cessation or termination of membership. There is no such provisions. In fact rule 8(e) postulates a written notice to be served on behalf of the association to such erring or defaulting member. It was urged that letter dated 13th August, 1976, addressed to the company on behalf of the association calling upon the company to pay Rs. 1,000 being the membership fee for the year 1976, would be such notice as contemplated by rule 8(e). This notice ought to be of one month's duration. It was said that the month would expert on 13th September, 1976, and till that date as fee was not paid, the member ipso facto ceases to be a member of the association. Rule 8 does not provide for ipso facto cessation of membership. The expression 'ipso facto' clearly connotes 'by the very fact', that is, in some event contemplated therein happening, the consequence must necessarily ensue. Now, rule 8 begins by saying that a member shall be so fact cease to be a member of a the association, if within one month after receipt of the written notice demanding fee, fee is not paid. There is a proviso engrafted to sub-rule (e) which permits such a defaulting member ceasing to be a member to make an application for being readmitted as member. It was aid that in order to invoke the benefit of the proviso, the company should have made an application and that no such application has been made by the company. I will assume that it is so. Now, look at how the association has understood rule 8. It does say that on failure to pay fee within one month after receipt of notice demanding the same, and default continues, the member will ipso facto ceases to be a member of the association. It would be worthwhile to refer to the letter dated 26th October, 1976, addressed by the secretary of the association to the company. The relevant paragraph may be reproduced. It reads as under :

'You are also requested to please note that no fees will be accepted on or after 1-11-1976 and the names of such members will be placed before the managing committee of the association for necessary action and the decision of the managing committee will be final and will be binding as per the rules of the association.'

13. Where does the association claim that on 13th September, 1976 the company ceased to be member of the association. It is in argument presented to court. Association did not assert that company had ceased to be a member of the association on 13th September, 1976. On the contrary, by the specific letter addressed to the company, the secretary of the association called upon the company to pay fees by 1st November, 1976, and if it was paid by that date, membership was treated as continued and would have continued further. But the company was further informed that even if the company makes default in payment by deadline of 1st November, 1976, yet the association will ton invoke its power of ipso facto provision of rule 8(e) but would place the name of such defaulting member before the managing committee for appropriate action. There is nothing in the record to show that name of this company, on its having failed to pay the amount by 1st November, 1976, was placed before the managing committee of the association and the managing committee of the association resolved that the company has ceased to be a member of the association. Therefore, rule 8(e) is not interpreted by the association to mean that on the export of one month after receipt of the written notice, demanding fee in arrears, defaulting member ceased to be member without any further action on the part of the association. Association understands the rule to mean that if such a default is committed, the case of the member has to be taken to the managing committee who would decide as to what action should be taken. That having not been done, membership of the company continues uninterrupted. But the matter does not rest there. On 10th November, 1976, by a general circular issued to all the members of the association, they were told that now that the quota is to be allotted to exporters of the association, if any amount from a member payable to the association is outstanding, such member will not be issued any quota till dies are cleared by them. If this has reference to the membership fee there was still locus penitentiae granted to the member to pay up the fees and thereby clear the dues that be eligible for the quota. But Mr. Bhatt urged that, at an rate, dues herein referred to have nothing to do with fees being in arrears but it has something to do with some other dues, namely export levy imposed by the association on the exporting members. Language of the circular does not admit of such a construction. It may include fee in arrears, which will also be the due payable by the member to the association as well as the export levy also. There is nothing to show that this company had failed to pay export levy, if any. There was no such demand in the past. Even in the letter dated 26th October, 1976, specifically addressed to the company, demand was for fee in arrears and that too for the calendar year 1976 only. Undoubtedly, circular dated 10th November, 1976, has been addressed have committed default in paying fees was well as export levy. Therefore, the expression 'dues' itself in this paragraph need not get restricted meaning but must be given the widest connotation. Whatever dues are there have to be paid up and on paying up the dues quota can be claimed. At any rate, letter dated 26th October, 1976, and circular dated 10th November, 1976, first addressed to the company in particular and second in general did invite all members to pay up their arrears under an head to claim quota, and if they satisfy other conditions for eligibility for quota.

14. On a mere reference at this stage to rule 2 of the rules and procedure for export of HPS groundnuts framed by the association and circulated to the members with Circular No. 79/1976 of the same date namely, 10th March, 1976, clearly indicates the intention of the association that any one, who is qualified for quota on the criterion prescribed by the Government of India, viz., past performance, may come down to the association at that very late stage and enrol himself or itself as a member, and on paying full fees, by eligible for the quota. If anyone who has to apply rule 2, obviously, the members who are already members of the association and offer to continue membership, if removed for not paying the fee in time, would certainly be entitled to take the advantage of rule 2. Can it ever be urged that will anyone who has applied for membership afresh can come under rule 2, the past member, assuming that his membership has ceased, could not take advantage of rule 2. That would be gross discrimination which a public body like the association would not indulge in and rule 2 presents no difficulty in construction. The word used is 'enrol' as member which may be a first application for membership. It may be renewal of membership. In any case, on an application not in usual course not to be processed by the managing committee but to be processed by specified officers by paying full fee, one can become a member so as to be eligible for quota. And no time limit is prescribed in rule 2. Even if it is issued on 10th November, 1976, in due course it should reach the members on 12th November, 1976, and the liquidator, as per his letter dated 16th November, 1976 paid up the fees by demand draft payable at Bombay. Therefore, in this case, rule 8(e) even according to the association never operated. The company did not cease to be a member ipso facto by not paying fees in time. It could have paid fees as per letter dated 26th October, 1976, by 1st November, 1976, and even if it was not paid, its case was to be referred to the managing committees. It as not don, meaning thereby that its membership was treated as subsisting. It may have been done under Circular No. 80 of 1976, dated 10th November, 1976. The company could have enrolled itself as a member under rule 2 of the rules annexed to Circular No. 79/76, again dated 10th November, 1976. In respect of the last assertion, Mr. Bhatt stated that one has to apply for being enrolled as a member and no such application was forthcoming. Rule 2 does not say there shall be an application in some prescribed form. It only provides for being enrolled as a member on payment of fees. Letter of the liquidator can be treated as an application for enrolment as member and demand draft for fees accompanied the letter. Therefore, the liquidator had fully complied with rule 2. Therefore, there is on substance in the contention that, as the company had ceased to be a member of the association, it was not entitled to the quota unless it had again enrolled itself as a member. The membership of the company continued unmarred and uninterrupted and did not cease on the only ground that membership fee had not been paid in time.

15. It was contended that a the company is order to be wound up ipso facto it has ceased to be a member under rule 8(c). Bhavnagar Vegetable Products Ltd. was certainly a joint stock company registered under the Companies Act. By an order dated 15th September, 1976, it has been ordered to be wound up. Official liquidator has been appointed as Liquidator of the company in winding-up. Can rule 8(c) be allowed to operate to the detriment of the company To start with, Mr. Bhatt urged that where anyone voluntarily joins an association, rules of the association are binding as contract inter se between the members and if members have agreed by a contract reflected in the rules, that decision of the committee elected by the members is final and binding; such a decision is not justiciable. On a parity of reasoning like the articles of association, I may assume that rules of the association constitute a contract between the members an the association. Company voluntarily joined the association and the rules are binding on the company. It is a contract which the company entered into with the association. Test would be whether on winding-up order being made, contract by that very fact came to an end or stood terminated on that account Even if rules provide for it, the legal position of a subsisting contract between the company which is ordered to be wound up and another person will have to be examined within the four corners of the Companies Act. In this case the company was ordered to be wound up on 15th September, 1976. Up to a point of time operation of the order was stayed but I would not rely on that fact because stay on more survives. It must be accepted as a fact that the company is ordered to be wound up and the liquidator represents the company. On that account alone membership of the company with the association could not stand terminated. If one were to subscribe to such a position, it would mean that every subsisting contract with the company would stand terminated without uniting further being done and without any consequence on mere passing of the order of winding up. This is not the scheme of law itself. If a company ordered to be wound up is a member of another joint stock company, and the articles of the letter company provide that on the shareholder who is a member, if it is a joint stock company and if it is ordered to be wound up member, if it is a joint stock company and if it is ordered to be wound up it shall ipso facto cease to be a member of the company, such a membership would be an asset of the company and amongst other it shall be at the disposal of the liquidator in winding up. Membership of a company confers rights and imposes obligations. On a winding-up order being made such a company holding shares in another company does not forfeit shares nor gets free from obligation say that of a contributory. Section 456 of the Companies Act requires the liquidator to take into his custody or under this control, all the proper effects and actionable claims to which the company is or appears to be entitled. Sub-section (2) provides that all the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order for winding up of the company. Assuming membership fee was paid before 31st January, 1976, merely because at a subsequent date the court directed that a company would be wound up, can the association be heard to say that on that account the fee which is appropriated would be forfeited and membership would ipso fact cease. If the quota was already granted before winding-up order could be made can it ever recall it on the ground that the company is now ordered to be wound up. Assets of the company ordered to be wound up are in the custody of the court and at the disposal of the Liquidator for pari passu distribution against various claimants against the company.

16. Now, assuming that the company being eligible for quota, because it was carrying on some business in the past, could it be taken away from the company without the liquidator having the right of option to use it. Section 457(1)(b) enables the liquidator in a winding up with the sanction of the court to carry on business of the company so far as may be necessary for the beneficial winding up of the company. Mr. Bhatt contended that the provisions contained in section 457(1)(b) can never be invoked because the business of this company was already closed, can conceive of a business which was subsisting till the date of the order of winding-up to be continued by the liquidator for the beneficial winding up of the company. But the provision cannot be involved to enable the liquidator to start a business which was already closed. Stoppage of business and closure of a business are two independent things. Liquid finance was not forthcoming and business stopped. Suppose the company was not ordered to be wound up and directors had stopped the plant of the company for some time, could it be said that they cannot reopen it unless a fresh licence is forthcoming under the Industries Development and Regulation Act. Obviously, the answer must be in. the negative. Stoppage for a period does not amount to closure of the business. Closure requires something being done by a party competent to close. If the board was in charge of the affairs of the company, a resolution will be necessary to close the business. What happened here is that when liquid finance was not forthcoming and it became impossible for the board of directors to manage the affairs of the company, as usual every on left the sinking ship. Liquidator stepped in on winding-up order being made. Now, in order to wind-up effectively the company either to its reconstruction or its dissolution, it may be necessary for the liquidator to carry on business. Let me take an illustration of textile mills. Anyone conversant with manufacture in textile mills knows that once cotton is fed into blow-room and finished products comes out, it passes through a number of stages, namely, first spinning, weaving, dyeing, bleaching, printing, and packing to mention only the leading stages. A textile mill closed down. It just suddenly closed down. It was not closed in gradual stages. In every stage of production and manufacture there will be cotton yarn, cloth, etc., and that too in the machine. If the Liquidator were to run the mill, finished product can fetch better price. If he runs, could it be said that he has started a new business. His action would squarely fall under section 457(1)(b) and could anyone be bold enough to any such a power to the liquidator. Therefore, the liquidator has power, undoubtedly with the sanction of the court, to carry on business of the company for the beneficial winding up of the company. This power can even by utilised for reconstruction of the company and that may be achieved under the scheme for sanctioning which a petition is pending in this court. I would not examine this position in greater detail, suffice it to refer to my own earlier judgment in Panchamahals Steel Ltd. v. Universal Steel Traders [1976] 46 Comp Cas 706 (Guj) at page 722, wherein it is observed that if once a liquidator was satisfied that it was necessary for the beneficial winding up, of the company that the business of the company shall be carried on the business for the sole purpose of beneficial winding up. It often happens that the business of the company is its most valuable asset, and in such a case it may be very proper to carry on the business and sell it as a going concern. If there is a scheme the vary power can be exercised for the reconstruction of a company. Winding up may or may not precede reconstruction. This very power can be exercised pending reconstruction of a company or for effective transfer. Practically the situation her is identical and observations made in that judgment will mutatis mutandis apply here. There also ministeel plant was closed and winding-up petition was pending. Provision liquidator was appointed. Petition for reconstruction was pending. A question arose whether during the pendency of the petition, the plant can be given to someone for running it, and the argument was that if winding-up order was not to be made because the sole object was to sanction the scheme the power under section 457(1)(b) could not be exercised. Negativing that argument it was hold that power of the widest amplitude conferred by section 457(1)(b) cannot be restricted or whittled down. In this manner same power can be utilised even pending reconstruction of the company.

17. If such be the power of the liquidator could it be nullified by the holding that though membership was an asset, by mere order of winding up membership ceased and the asset was lost to the liquidator The asset must be available to the liquidator. The asset is in the form of contract and contract with the company did not come to an end merely because winding-up order is made. In a recent edition of Gore-Browne on Companies, edited by Boyle and Sykes, at page 957, the following observations is to be found :

'The liquidation does not automatically bring the business of the company to an end, and dealings with third parties may (depending on whether the liquidator desires and obtains leave to carry on business) proceed; nor does the Liquidator of itself constitute a breach of unperformed contracts nor can third parties refuse to perform their contract with the company; if the Liquidator carries out a contract on the company's behalf he can recover the consideration. It, however, the liquidator had declared his inability to perform the company's contracts, the other contracting parties may treat this as an immediate breach of contract, and claim damages as in the case of an individual refusing or admitting inability to carry out his contracts.'

18. It thus appears that an order winding up the company, does not abrogate the subsisting contract. There was a membership which constituted contract between the company and the association. It is an asset because even according to the association the member is eligible for quota right incidental to membership, and it cannot be unilaterally withdrawn. Winding up could not destroy the asset. It is a right of the liquidator to take the befit or advantage which the association cannot unilaterally terminate.

19. In the view that I am taking it is not necessary to examine one submission of Mr. Parpia, learned counsel appearing for the applicant, that the contention of the association that on a winding-up order being made, ipso facto membership of the company ceases, is an after-thought and later development and court should not take this into consideration. It is not necessary to decide this contention. Suffice it to say that the attempt of the association to say that the liquidator has misled the association by saying that he is provisional liquidator and not also disclosing that already a winding-up order was made in the latter dated 16th September, 1976, is clearly unfounded. I will assume that the secretary of such an august body like the association has at least some perfunctory knowledge of company law. Liquidator has stated that the company is in liquidation and he has signed the letter as official liquidator. He clearly states in his letter that he is official Liquidator of the company and the company is in liquidation. That is mentioned at the top. He recites the events that application was presented and provisional liquidator was appointed at some stage and that is merely recital of chronological events only. No one was sought to be misled and no purpose was to be achieved by misleading anyone about the obvious fact that winding-up order is made because it is generally published and the Registrar has to be informed about it. In fact the petition for winding up has of necessity to be published in the Government Gazette and if a very technical approach was to be adapted its publication in the Gazette provide a notice to all concerned who is connected with the company including the association who has denied the membership to the company. Therefore, any reflection on the liquidator implying that he wanted to suppress some fact is thoroughly unjustified. The liquidator had put all the facts before the association. It is the association which is quibbling in this matter and it is not necessary to decide this point at all in the view that I ma taking in respect of cessation of membership on the ground that the company is ordered to be wound up.

20. The company was an exporter. Liquidator had tendered fees in arrears. It is not suggested that there were some other dues of the company payable to the association and in view of the waiver disclosed by letter dated 26th October, 1976, and general circular dated 10th November, 1976, the association had accepted the company as a continuing member. Therefore, its application for quota should have been entertained and the company would be entitled to quota according to the criterion laid down by the Government of India in the trade notice issued by CCI & E on 9th November, 1976, namely, on the basis of past performance.

21. Mr. Bhatt, learned counsel for the association, rightly voiced two apprehensions and I propose to give due consideration to the apprehension. He said that amongst others past management is trying to take shelter behind the present petitioner who was a proper in the export of groundnuts and they want to take advantage of the quota right. His other apprehension is very genuine and has to be examined in depth. He said that if quota was to be allotted to the Liquidator he would require liquid finances to the tune of Rs. 80 to 90 lakhs. It is not possible, he said, for the liquidator to arrange for such finance. If there is any profit to be derived from this transaction, it should go to the Liquidator representing the company and not to any outside agency and the court should see that this national asset of earning foreign exchange is not frittered away nor lost wasted. These are genuine and weighty apprehensions and one must guard against the same.

22. The liquidator must inform the court by 7th January, 1977, whether he is in a position to arrange for finance and to go into the market by employing persons with the prior sanction of the court to buy groundnuts and make it available for export, apply for necessary certificate so that he would be able to complete the export by 31st March, 1977, that is the deadline fixed by the Government of India while releasing the quota. It would be open to him to enter into firm contract through recognised brokers and I do not see any good reason why the applicant should be denied that opportunity except that if he is to be employed as broker, it must be shown that in case other exporters have approached him would accord the same treatment to the liquidator which he is according to others. Firm contract for export may be negotiated through the broker which if the liquidator thinks proper may include the applicant. The partners of the firm of the applicant should give an unconditional undertaking to this court within a week from today that in case the venture undertaken pursuant to this order results in loss, the liquidator would be fully indemnified to the extent of loss according to the direction that may be given in the very proceeding without challenging the jurisdiction of the at any other time. The applicant will not be entitled to share profit. The Liquidator is completely prohibited from appointing any agent on the basis of sharing profits and employment on emoluments has to be first approved by the court. Compliance with this order may be reported to the court within a week so as to be sure that the benefit under this order is effectively utilised the quota is not wasted. All steps taken to indicate that he is effectively utilising the quota, brought to the notice of the court till 17th January, 1977, are not satisfactory; liberty to all the parties to move to cancel or withdraw the order.

23. Summons with the aforementioned conditions granted directing the association to grant quota to the company on the basis of past performance figures submitted by the company along with other applicants for the quota and simultaneously with them. The quota falling to the shares of the company should not be distributed to other members and to that extent the association is strained by an injunction of this court from withholding the quota available to the company on its past performance and distribution that quota to other exporters. The injunction of the court should be understood to mean that once the quota to which the company is eligible is either retained or grated or set apart, the association is free to distribute the balance of the quota to others who are eligible for the same with the condition that the company should be treated on the same lines and should be eligible for the quota according to the same criterion as the association accords to other members. Order accordingly with no order as to costs.

24. At the request of Mr. S. H. Sanjanwala, learned advocate for the association, operation of that part of the order by which association is restrained from withholding the quota to the company is stayed up to and inclusive of 27th December, 1976, on condition that the said quota should not be released in favour of the other members.


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