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In Re: New Swadeshi Mills of Ahmedabad Ltd. and Manjushri Textiles - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Application No. 115 of 1984 in Company Petition No. 185 of 1984
Judge
Reported in[1985]58CompCas86(Guj)
ActsCompanies Act, 1956 - Sections 529(2)
AppellantIn Re: New Swadeshi Mills of Ahmedabad Ltd. and Manjushri Textiles
Advocates: Gupta, official liquidator, party in person,; J.I. Mehta, Adv. for the financial institutions and;
Cases ReferredOfficial Liquidator v. Mazagaon Dock Ltd.
Excerpt:
.....- in light of proviso to section 529 (2) winding-up court has jurisdiction to direct concerned secured creditors to contribute towards maintenance and safe keeping of securities - such liability would arise only if secured creditors proceed to realise their securities. - - , four banks and four financial agencies were good enough to co-operate and consented to release sufficient funds with a view to seeing that these unpaid watchmen were paid at least rs. the said good gesture was shown on account of the fact that balov festival was drawing close and the unpaid employees had to be paid something to keep at least some smile on their faces. mehta's contention is that as the four banks as well as the three financial institutions are co-mortgages of various assets of the company as..........me earlier. the first order was passed on august 9, 1984, wherein all the financial institutions, secured creditors, viz., four banks and four financial agencies were good enough to co-operate and consented to release sufficient funds with a view to seeing that these unpaid watchmen were paid at least rs. 150 per head subject to account. the said good gesture was shown on account of the fact that balov festival was drawing close and the unpaid employees had to be paid something to keep at least some smile on their faces. thereafter, the company application dragged on for further time and janmashtami festival intervening. consequently, by my second interim order dated august 17, 1984, which was passed with the consent of four secured creditor-banks, but subject to opposition of three.....
Judgment:

Majmudar, J.

1. In this company application taken out by the official liquidator, he has prayed for certain directions against the concerned respondents which are nine in number calling upon them to release sufficient funds to the official liquidator with a view to enabling him to pay wages of watch and ward staff working in New Swadeshi Mill, Ahmedabad, and Manjushri Textiles, on a monthly consolidated salary of Rs. 350 to the watchman, Rs. 400 to head jamadar and Rs. 450 to security officer from the date of provisional liquidation order. He has requested for suitable directions as to whether the school which was earlier run by the company should be continued to run or not.

2. The concerned respondents against whom the main relief is prayed for in para. (b) of the application are four nationalised banks, viz., (i) Central Bank; (ii) Syndicate Bank; (iii) United Commercial Bank and (iv) Bank of Madurai; while the four financial institutions are (i) Industrial Finance Corporation of India (hereinafter referred to as 'IFCI'); (ii) Industrial Credit and Investment Corporation of India (hereinafter referred to as 'ICICI'); (iii) Industrial Development Bank of India (hereinafter referred to as 'IDBI'); and (iv) Gujarat Industrial Investment Corporation (hereinafter referred to as 'GIIC').

3. A few relevant facts leading to this application deserve to be noted at the outset. New Swadeshi Mills of Ahmedabad is a company in liquidation which was sought to be wound up in Company Petition No. 185 of 1984, filed by the petitioning-creditor, Dye-Chem Corporation. The said petitioning-creditor has been joined as respondent No. 2 herein. In the said company petition, earlier, I passed an order on June 26, 1984, appointing an official liquidator as provisional liquidator. Possession of the assets of the company was taken by the provisional liquidator and since that time, possession of the mill premises and its assets is with the liquidator. By a later order dated October 8, 1984, I have passed an order of winding up of the company and appointed the official liquidator as liquidator of the company. Now, it appears that the movable and immovable properties of the company in liquidation which was running two textile units, (i) New Swadeshi Mills and (ii) Manjushri Textile, have been subjected to a joint mortgage under a memo of entry dated June 25, 1982, under which equitable mortgage of these properties has been effected. By way of this joint mortgage all the movable and immovable properties mentioned therein have been subjected to charge of the four banks referred to above and the three financial institutions, viz., ICICI, IDBI and IFCI. So far as GIIC is concerned, it has an exclusive charges over two generation sets worth Rs. 26,00,000. After possession of the properties of the company was taken over earlier by the possession liquidator from June 26, 1984, and, subsequently, when they continued in possession of the official liquidator, the question of protecting the movable and immovable properties of the company assumed importance. Before the winding up proceedings, the mill company for both the unit (i) New Swadeshi Mills and (ii) Manjushri, had engaged watch and ward staff employees. A detailed charge regarding these employees working at both units with their monthly salary and total wage bill is furnished by the liquidator and the said charge reads as under :-

---------------------------------------------------------------------Sl. Particulars of Watch & Ward Watch & Ward at Rate of TotalNo. watch & ward at New Manjushri Text salarySwaedshi Mills each----------------------------------------------------------------------Rs. Rs.1. Security officer 1 1 450 9002. Asst.security 1 1 400 800officer3. Head jamadar 3 3 400 2,4004. Jamadar 39 28 350 23,4505. Watchman 1 - 350 350agriculture farm---- ---- -------45 33 27,9006. Wireman (L.T.connection) 3 - 400 1,2007. Submerciblepump operator 1 1 350 7008. do. Helper 1 1 300 600---------30,400---------------------------------------------------------------------

4. A mere look at the said chart shows that 45 watch and ward staff employees have been employed at New Swadeshi Mills while 33 in Manjushri Textile. Their total wage bill per month amounts to Rs. 27,900. In addition, there are wireman and submercible pump operator and submercible pump helper. There are five such employees in New Swadeshi mills and two in Manjushri Textile. The total wage bill of all the employees comes to Rs. 30,400. In addition thereto, Central Bank which is one of the secured creditor has engaged of its own ten additional security staff employees at each of the units. It is obvious that when the provisional liquidator took over the possession of these units with their existing assets, the question of making provision for adequate finances to pay the wage bill of these employees assumed importance. It is obvious that these staff members are protecting the securities of the concerned financing agents who are respondent in this application. This staff has to be paid and if they are not paid, they would naturally be entitled to walk out and that would creat a total hiatus and the securities themselves will come in jeopardy. Consequently, notices were issued concerned financial agencies and their views were solicited for resolving this problem and for meeting the financial requirements and for paying the wage bill of these employees. During the pendency of hearing of hearing of this application, two interim orders were passed by me earlier. The first order was passed on August 9, 1984, wherein all the financial institutions, secured creditors, viz., four banks and four financial agencies were good enough to co-operate and consented to release sufficient funds with a view to seeing that these unpaid watchmen were paid at least Rs. 150 per head subject to account. The said good gesture was shown on account of the fact that Balov festival was drawing close and the unpaid employees had to be paid something to keep at least some smile on their faces. Thereafter, the company application dragged on for further time and Janmashtami festival intervening. Consequently, by my second interim order dated August 17, 1984, which was passed with the consent of four secured creditor-banks, but subject to opposition of three financial institutions, further amount was ward employees at the rate of Rs. 100 per head. These ad hoc amounts were paid to them subject to final adjustment of the claims. These amounts have been duly released and paid to the concerned workmen on account. Thereafter, this application was heard on merits.

5. In opposition to this application, affidavits have been files by the contesting opponents. Mr. N. J. Mehta, law officer of ICICI, has field his affidavit in opposition. Mr. A. B. Rana, deputy manager of Western Regional Office, Ahmedabad of IDBI, has also filed a similar affidavit. The chief officer of Central Bank has filed his affidavit-in-reply. One Mr. Mahesh S. Sharma serving in Ahmedabad Electricity Co. has filed his affidavit which need not detain me any further as the question of passing any order against the said company does not arise at this stage and for which there is a separate application which will be decided hereafter. Mr. A. T. Bhasab, chief officer of Central Bank, has filed further affidavit-in-reply and it is followed by the affidavit of Mr. K. T. Patel, manager of GIIC.

6. Mr. J. I. Mehta, learned counsel for the contesting financial institutions, and Mr. N. J. Mehta, who appeared for the banks have made their submissions in opposition. However, in fairness to Mr. N. J. Mehta, it must be stated that he made it clear that if financial institutions agree to contributing their share which may be decided for meeting the expenses of security staff, the four banks whom he represents will have no objection in contributing their share. But if that contribution is not forthcoming, then the banks would of course stand on their own rights. Now, it must be stated that tall these secured creditors, viz., the four banks and the four financial institutions, have made it clear before me that they all stand outside the winding up and they are not subject to these winding up proceedings. So far as the four banks are concerned, Mr. N. J. Mehta fairly conceded that it may hardly be stated that these banks not only desired but have proceeded to realise their security by filing four suits in this court under sections 446(2)(a) of the Companies Act as per permission granted by me in Company Applications Nos. 138 of 1984, 169 of 1984, 170 of 1984 and 171 of 1984. However, Mr. N. J. Mehta's contention is that as the four banks as well as the three financial institutions are co-mortgages of various assets of the company as mortgaged to them by way of equitable mortgage as per the memo of entry dated June 25, 1982, these suits filed by the banks in this court will enure for the benefit of all the co-mortgagees. Therefore, they can be said to have taken steps and proceeded for realising their securities. The learned counsel appearing for the financial institutions joins issue on this point and submits that merely because banks without consulting them might have filed suits and joined these institution as defendants, it would not mean that they themselves have taken any steps for realising their security or that they can be said to have proceeded in that direction. I will refer to this aspect a little later.

7. Mr. J. I. Mehta for the financial institutions vehemently contended before me that as a winding up court, I have no jurisdiction to pass any order without consent of the secured creditors regarding any contribution to be made by them for meeting the financial requirements of the liquidator. He invited my attention to certain provisions of the Companies Act which may be noticed. Section 448 of the Act provides for appointment of the official liquidator and states that for the purpose of this Act, so far as it relates to the winding up of companies by the court, there shall be attached to each High Court, an official liquidator appointed by the Central Government. Section 449 enjoins that the official liquidator will be the liquidator of the company the moment a winding up order is made. Section 451 was the next section which Mr. Mehta pointed out in support of his contention and the said section provides that the liquidator shall conduct the proceedings in winding up the company and perform such duties in reference thereto as the court may impose. Sub-section (2) of s. 451 says that where the official liquidator becomes or acts as liquidator, there shall be paid to the Central Government out of the assets of the company such fees as may be prescribed. The next section to which my attention was invited is s. 456 which lays down that where a winding up order has been made or where a provisional liquidator has been appointed, the liquidator or the provisional liquidator, as the case may be, shall take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. Section 457 refers to the powers of the liquidator which are mentioned at paras. (1) and (2) of the said section. The next section pressed into service is s. 470 which deals with the power of court to make calls on contributories. Section 480 was also pressed into service to show that any powers conferred on the court by the Act shall be in addition to, and not in derogation of, any existing powers of instituting proceedings against any contributory or debtor of the company, or the estate of any contributory or debtor, for the recovery of any call or other sums. The next section to which my attention was invited is section 529 which provides for application of insolvency rules in the winding up of insolvent companies. As this section has a vital bearing on the fate of this application, it requires to be quoted in extenso :

'(1) In the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to -

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and

(c) the respective rights of secured and unsecured creditors as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent.

(2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding-up, and make such claims against the company as they respectively are entitled to make by virtue of this section : Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realisation by the secured creditor.'

8. Section 530 provides for preferential payment. Sub-section (6) thereof lays down that subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith. This provision was pointed out to show that expenses of winding up will have to be defrayed first and thereafter payments have to be made. The aforesaid were the relevant sections to which my attention was invited.

9. Now, turning to the Companies (Court) Rules, 1959, we find two rules to which my attention was drawn by the learned counsel for the opponents. The first rule is r. 292 which says that where a company, against which a winding up order has been made has no available assets, the official liquidator may, with the leave of the court, incur any necessary expenses in connection with the winding up out of any permanent advance or other fund provided by the Central Government, and the expenses so incurred shall be recouped out of the assets of the company in priority to the debts of the company. Rule 338 was the next rule which was pointed out. It provides for costs and expenses payable out of the assets in a winding up by the court and it lays down that the assets of a company in a winding up by the court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets including, where the company has previously commenced to be wound up voluntarily, such remuneration, costs and expenses as the court may allow to the liquidator in such voluntary winding up, shall, subject to any order of the court and to the rights of secured creditors, if any, be liable to the payments mentioned under the said rule.

10. On the basis of the above sections and rules, it was contended by the learned counsel for the opposing secured creditors who stand outside winding up to make any contribution and that power to ask for payment enures only against contributories and that secured creditors who stand outside winding up can never be said to be contributories. On the contrary, they are creditors. They are not debtors of the company. Placing reliance on the judgment in Ranganathan v. Government of Madras [1955] 25 Comp Cas 344 (SC) and the decision of the Bombay High Court in Gleitlargor (India) P. Ltd. and Kamlani, Official Liquidator v. Mazagaon Dock Ltd. [1983] Tax LR 2472; [1985] 57 Comp Cas 742 (Bom), especially paras. 17 to 20 (at pp. 750 and 751 of 57 Comp Cas) thereof, it was submitted that unless secured creditors consent, the official liquidator cannot even function on their behalf and that once secured creditors stand outside winding up, the winding up court cannot compel them to make any contribution. At the first blush, the objections raised on behalf of the secured creditor appear to be insurmountable. However, there is a silver lining to this dark cloud and it is provided by the proviso to sub-s. (2) of s. 529 which is quoted above. That can be the only peg on which any order of contribution by the concerned financing agencies can at all be hung. The proviso in terms lays down that if a secured creditor instead of relinquishing his security proceeds to realise the security, he shall be liable to pay the expenses incurred by the liquidator including a provisional liquidator, it any, for the preservation of the security before its realisation by the secured creditor. Now, it cannot be disputed that the provisional liquidator or, for that matter, the liquidator, has to spend large amounts for preservation of the security, benefit of which will naturally go to the secured creditors, however safe distance at which they may remain outside the winding up. In fact, the proviso is meant to cater to such situations. It postulates that secured creditors instead of relinquishing his security and proving his debt in winding up, may stand outside the winding up. Still the expenses which the liquidator incurs for preserving his security must be met by him because he remains liable to pay these expenses. Once the provisional liquidator spends for preserving his security, the corresponding liability of the secured creditor standing outside the winding up automatically arises. Then, the short question remains as to when such liability can be enforced. Should it be at the end after the provisional liquidator or the liquidator has actually incurred the expenses for preserving the security by getting finance from the secured creditors themselves who would remain ultimately liable to reimburse these expenses In my view, it would be taking too truncated and unrealistic a view of the provisions of s. 529(2), proviso, to even contend that even though ultimately the secured creditor standing outside the winding up would be liable to reimburse all the expenses incurred by the liquidator for preservation of the security, in the process of preservation, no contribution can be asked for from such secured creditor. Mr. J. I. Mehta invited my attention to the commentary of A. Ramaiya in his book captioned 'Guide to the Companies Act', Tenth Edn., at p. 1031, wherein the object and reasons for enacting the proviso in question have been mentioned. It has been stated that :

'The proviso at the end of the section has been added on the following recommendation of the Companies Act Amendment Committee : 'The insolvency law contained in Schedule II to the Presidency Towns Insolvency Act and section 47 of the Provincial Insolvency Act relating to the rights of a secured creditor is applicable in the winding-up of an insolvent company. It has been pointed out by an official liquidator that a secured creditor who realises his security should be made liable to reimburse the liquidator all amounts spent by the latter for the preservation or protection of the asset before it is sold by or at the instance of the secured creditor. If the secured creditor does not relinquish the security, it is proper that he should pay the expenses of preservation or protection of the asset during the pendency of the liquidation proceedings and before the sale of the asset'.'

11. It is obvious that when secured creditor realises security outside winding-up, he gets all the benefits of the preservation of the security by the liquidator who might have been put in possession pursuant to the winding-up order. Once he gets that benefit, in fairness and equity, he must be made liable to reimburse the cost of actual preservation of security. It is for this reason that the proviso in question has been added. Keeping in view this object, it cannot be said that the winding-up court cannot order a secured creditor, however far from the winding-up proceedings he may like to remain, to contribute towards the cost of actual preservation of his security by the liquidator. I, therefore, overrule the objections raised on behalf of the secured creditor and hold that in proper cases, the winding-up court has jurisdiction in the light of the proviso to s. 529(2) to direct the concerned secured creditors who choose to remain outside the winding-up and who do not relinquish their securities to contribute towards the maintenance and safe-keeping of their securities as they are the ultimate beneficiaries of this exercise and in fact, that is precisely the legislative intention underlying the enactment of this proviso. However, one aspect cannot be lost sight of. Liability of the secured creditors who stand outside the winding-up would arise for being called upon to contribute towards the expenses for preservation of the security as per the aforesaid proviso if they proceed to realise their securities.

12. Mr. N. J. Mehta for the banks fairly conceded that on facts, it can definitely be said that the banks have proceeded to realise their securities. But, as already indicated above, the learned counsel for the financial institutions other than banks, has stated that they have not proceeded to realise their security and, therefore, the proviso is not applicable at least in their case, even though it might be applicable to the four banks. So far as this aspect is concerned, the liquidator had addressed letters to all these financial institutions telling them to inform this court as to whether they are deciding to proceed to realise their security in the near future or not. The learned counsel for these institutions tells me today that on October 18, 1984, a policy decision is going to be taken in this connection. Under these circumstances, the only proper course open to me at this stage is not to pass any final orders but to pass a further interim order having resolved the main controversy between the parties and having turned down the main objection of these secured creditors.

13. I may mention one aspect of the matter. Notice was ordered to be issued to the Central Government with a view to finding out as to whether the Central Government if in a position to make any funds available to the liquidator and unfortunately we have drawn a blank. Mr. S. R. Shah, learned counsel for the Central Government, informs me that the Central Government is not in a position to make any funds available for this company to meet the expenses for preservation of the security on on-going basis. I may also mention one submission of Mr. N. J. Mehta for the secured creditor-banks. He submitted that once a secured creditor takes up a contention that once a secured creditor takes up a contention that he does not want to relinquish his security and stands outside the winding up, ipso facto, it should be held that he has proceeded to realise his security. It is not necessary for me at this stage to examine this contention as it may perhaps become academic as these financial institutions are going to take a policy decision on October 18, 1984, and tell me whether they propose to relinquish their security. However, one aspect of the matter must be kept in view. All the movable and immovable properties of this company which has gone in doll-drums are charged for meeting the financial obligation of the company as incurred on the basis of the loans advanced by these secured creditors. In fact, there is no room left for realising any loan from any other source in view of this position. In fact, all the assets of the company are bound hand and foot and the secured creditors naturally having their large extent of charge over these properties are setting tight over them. In these circumstances, with a view to preserving these securities, benefit of which will necessarily go to the secured creditors themselves, proper orders can be passed and have to be passed under the proviso to s. 529(2).

14. Now, coming to the interim order which is to be passed at this stage it is to be noted that it will be the third interim order in sequence and it is found necessary at this stage on account of the Diwali festival which is in the offing. It may gives some relief to these hungry employees from whom work has been taken by the liquidator for all these months and who earned their wages and who are unfortunately not paid till today. I, therefore, pass the following interim directions :

The concerned employees who are listed in the chart extracted earlier whose total wage bill works up to Rs. 1,21,600 for four months from July to October, 1984, have to be paid for the period as well as for nine days, from June 22, 1984, to June 30, 1984, as the provisional liquidator took charge of the company's properties from that date. The extent of contribution and the percentage of the contribution of each of the financing institutions including banks will have to be decided hereafter. For the present, I may adopt the same yardstick and the formula which was adopted by me while passing the earlier two interim orders. On that basis, the four banks will contribute 50%, each in equal proportion, meaning thereby each will contribute 12 1/2%. Similarly, the four financial institutions, viz., ICICI, IDBI, IFCI and GIIC, will contribute 12 1/2% each.

15. The total amount to be deposited on that basis by the concerned secured creditors with the liquidator should be enough to cover four months' wage bill which works up to Rs. 1,21,600. In addition thereto, the amount for covering unpaid wages from June 22, 1984, shall also be deposited. The official liquidator will work out these figures and the amount of 12 1/2% contribution which each of these institutions and agencies has to contribute pursuant to this order. It must be made clear that from the total amount so calculated, deductions should be effected to the extent of Rs. 250 per each workman as these payments are already made on two occasions by way of ad hoc payments on account to the concerned employees for meeting their urgent needs during the earlier two festivals. The official liquidator shall calculate the net amount payable to the concerned employees up to October 31, 1984, accordingly and intimate the required contribution amount on 12 1/2% basis to each of the secured creditors. The said exercise shall be completed by the official liquidator by Thursday, October 18, 1984. Thereupon, the concerned secured creditors shall deposit their respective amounts of contribution by Friday, October 19, 1984. The collected amount shall be distributed to the concerned workmen by October 20, 1984, or latest by October 21, 1984, at the mill premises and the liquidator shall adopt the same modus operandi as adopted on earlier two occasions. It is made clear that the present directions are purely ad hoc and will enure the final decision of this company application after the financial institutions decide as to what they propose to do in connection with the realisation of their security. For that purpose, the application stands adjourned to November 6, 1984.

16. I must further mention that the learned counsel for the financial institutions vehemently contended that no interim order can be passed at this stage. It is not possible to accept this submission for the simple reason that their main objection regarding lack of power is company court to pass this order has been overruled on merits. So far as inter se contribution is concerned, all the banks as well as these financial institutions are inherently sound. It cannot be suggested that compliance with the ultimate order of adjustment of contribution as and when passed by this court will meet with any difficulty. Therefore, no prejudice will be caused to these financial institutions if each of them is made to contribution 12 1/2% on ad hoc basis. Request on behalf of the financial institutions by their learned counsel to stay the operation of my present order is rejected as the very purpose of passing the present order will be frustrated by granting any stay.


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