ccontents ontentsontents - taxmanna-2 contents for payment of stamp duty on ground that...

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STATUTES CIRCULAR/PRESS NOTE

RBI/FEMA

- Exim Bank’s Line of Credit (LoC) of USD 5 million to Nigerian Export-Import Bank - A.P.(DIR SERIES) CIRCULAR NO. 24, DATED 23-1-2008 46

SEBI

- Trading and settlement of trades in dematerialized scrips - CIRCULAR NO. MRD/SE/DEP/CIR-1/2008, DATED 22-1-2008 45

REPORTS TABLE OF CASES

Asha Anil Kumar Kataria v. Ashok Kumar (Bom.) 477

Director of Enforcement v. Kothari Vegetable Products Ltd. (ATFFE - New Delhi) 393

Erach Boman Khavar v. Tukaram Sridhar Bhat (Bom.) 416

Kultar Sehgal v. Broadvision Digital Prints (India) (P.) Ltd. (CLB - New Delhi) 401

Official Liquidator of Dunford Fabrics Ltd. v. G.C. Lohia (Kar.) 431

Rashtriya Chemicals & Fertilizers Ltd. v. State Bank of Patiala (Delhi) 461

State Bank of India v. Sapna Scooters Industries (P.) Ltd. (All.) 475

Union of India v. ABN Amro Bank (Delhi) 443

Waterfall Estate (East) (P.) Ltd. v. State of Tamil Nadu (Mad.) 434

SUBJECT INDEX

Companies Act, 1956

Oppression and mismanagement

- Whether where respondents had squarely refuted petitioners’ allegations of misman-agement and siphoning off of funds of company and their preliminary objection thatpetitioners had not come with clean hands was also found to be true, petition filed bypetitioners under section 397/398 deserved to be dismissed - Held, yes - Kultar Sehgalv. Broadvision Digital Prints (India) (P.) Ltd. (CLB - New Delhi) 401

Subsidiary company

- ‘K’ Ltd. transferred its two tea estates to its two subsidiary companies - While gettingregistered instruments of transfer, remission of stamp duty was claimed in accordancewith Notification No. 1224 issued by State of Tamil Nadu - Sub-Registrar allowed re-mission of stamp duty and registered documents - District Registrar, however, asked

SEBI AND CORPORATE LAWS ❑ FEBRUARY 4 - FEBRUARY 10, 2008 ❍ 3

ContentsA-2

for payment of stamp duty on ground that transferor-company did not hold 90 percent of issued share capital of transferee-companies as required under notification inquestion to avail stamp duty remission - Evidence on record showed that holding ofissued share capital of transferor-company was 14,493 shares out of issued share capi-tal of 90,350 shares in one company and 8,585 shares out of issued share capital of35,350 shares in other company - Whether there was any illegality in impugned order -Held, no - Waterfall Estate (East) (P.) Ltd. v. State of Tamil Nadu (Mad.) 441

Winding up

POWER OF COURT TO ASSESS DAMAGES AGAINST DELINQUENT DIRECTORS, ETC.

- Applicant filed application under section 543 for recovery of certain amount of debtsappearing in balance-sheet of company-in-liquidation from respondents, ex-directors,on ground that they were guilty of misfeasance for having not taken any steps to re-cover same - Whether in absence of any specific allegation of misconduct or misfea-sance, mere fact that no action was taken by ex-directors for recovery of amount,which was not barred by time even as per balance-sheet, would amount to any act ofmisfeasance or misconduct, particularly when assets of company had been taken overby financial corporation under section 29 of State Financial Corporation Act, 1951 and,consequently, question of directors recovering amount from sundry creditors wouldnot arise - Held, no - Whether, therefore, application filed by applicant was to be dis-missed - Held, yes - Official Liquidator of Dunford Fabrics Ltd. v. G.C. Lohia (Kar.) 431

SUITS STAYED ON WINDING UP ORDER

- Whether failure to obtain leave prior to institution of suit would not debar Court fromgranting such leave subsequently and only consequence of this would be that proceed-ings would be regarded as having been instituted on date on which leave was obtainedfrom High Court - Held, yes - Erach Boman Khavar v. Tukaram Sridhar Bhat (Bom.)416

- Applicant was owner of suit premises, which was given to a company on leave andlicence basis - Term of lease had expired, but company did not vacate premises andcontinued to pay rent, which was accepted by applicant - In meanwhile, company wasordered to be wound up and applicant filed application under section 446 seeking leaveof Company Court to file eviction suit against Official Liquidator and sub-tenant -Whether since it was clear from reply of Official Liquidator that he did not need suitpremises and, tenancy rights, which company had in premises, were not asset for pur-pose of liquidation proceedings and, thus, it would not be necessary for Official Liqui-dator to incur expenses to defend suit, it was a fit case for grant of leave to file evictionsuit - Held, yes - Erach Boman Khavar v. Tukaram Sridhar Bhat (Bom.) 416

UNPAID DIVIDENDS AND UNDISTRIBUTED ASSETS TO BE PAID INTO COMPANIES LIQUIDATIONACCOUNT

- Official Liquidator, after sale of assets of company-in-liquidation, deposited entire un-claimed and undistributed amount in Companies Liquidation Account under section555 - Applicant-bank, relying upon a compromise decree between applicant and com-pany-in-liquidation passed in mortgage suit, filed application seeking to realise amountdue from Official Liquidator - Whether since in mortgage suit, applicant-bank did notimplead Official Liquidator to represent company-in-liquidation, compromise decreewas not binding upon Official Liquidator - Held, yes - Whether further since mortgagewas not registered with Registrar of Companies, at best, applicant could be treated asunsecured creditor and its remedy was to file a claim, if it could prove legally recover-able debt, before Central Government under section 555(7) - Held, yes - State Bank ofIndia v. Sapna Scooters Industries (P.) Ltd. (All.) 475


Contents A-3

Companies Act, 1956

- Section 4 434

- Section 397 401

- Section 446 416

- Section 543 431

- Section 555 475

Foreign Exchange Management Act, 1999

Appellate Tribunal

APPEAL TO

- Whether though no statutory limit is prescribed for availing of remedy of revision, yetthat does not permit petitioner to file revision after expiry of reasonable period wherebyequity is defeated - Held, yes - Director of Enforcement v. Kothari Vegetable ProductsLtd. (ATFFE - New Delhi) 393

Foreign Exchange Management Act, 1999

- Section 19 393

Foreign Exchange Regulation Act, 1973

Establishment of place of business in India

RESTRICTIONS ON

- Adjudicating authority imposed penalties upon respondents for violation of varioussections holding that respondent No. 2-company was established in India at instance ofrespondent No. 4, which was a foreign company and held 51 per cent shareholding inrespondent No. 2, without permission of RBI in violation of sections 19(1)(a) and 29(1)(a);and that respondents had also violated RBI guidelines by opening bank accounts withrespondent No. 1-bank - Adjudicating authority also imposed penalty upon respondentNo. 1-bank for violation of section 6(4) and (5) for trading in gold coins vis-a-vis respon-dent No. 2 without RBI’s permission - Whether as Amending Act of 1993 had liftedrestrictions on foreigners to establish a company in India and Notification No. 180 of1998 permitted foreign investments up to 51 per cent in a trading company primarilyengaged in exports, incorporation/registration of respondent No. 2 in India by Indiannationals at instance of respondent No. 4 was not in violation of any of provisions ofAct - Held, yes - Whether fact that respondent No. 2 applied to FIPB for 100 per centequity holding by respondent No. 4, clearly rebutted presumption under section 59against respondents and established that respondent No. 2 and its officers were notintending to violate laws of India or notifications or guidelines issued by Governmentas well as RBI - Held, yes - Whether opening of bank account by foreign employees ofrespondent No. 2 with respondent No. 1 was not in violation of section 30, as they couldopen such bank accounts and repatriate part of their earnings to their respective coun-tries for maintenance of their families in view of amended section 30(1) - Held, yes -Whether allegations under section 6(5) against respondent No. 1-bank were also notestablished for reason that respondent No. 1 had imported gold not on behalf ofrespondent No. 2, but in its own right and on its own behalf and had then sold same torespondent No. 2 and received payment thereof in Indian currency - Held, yes - Whetheron facts, order passed by adjudicating authority was liable to be set aside - Held, yes -Union of India v. ABN Amro Bank (Delhi) 443

Payment for exported goods

- Whether contravention of section 18(2) relates to taking or not taking of effective stepswhich are required to be taken by a prudent exporter and it does not relate to non-realization of export proceeds - Held, yes - Respondent-company, which exported rice


ContentsA-4

to Russia, failed to repatriate part of export proceeds because a bank in Russia, throughwhich payment had to channelise, collapsed and went in liquidation - Adjudicatingauthority exonerated respondents from charges of contravention of sections 18(2) and18(3) on ground that respondent took reasonable steps to repatriate export proceeds -Whether when adjudicating authority, while passing impugned order, had taken intoconsideration all evidence on record, impugned order could be said to be perverseexercise of power in any sense of term - Held, no - Whether mere declination of RBI togrant write off or extension could fasten liability of contravention of section 18(2) againstrespondent - Held, no - Director of Enforcement v. Kothari Vegetable Products Ltd. (ATFFE- New Delhi) 393

Foreign Exchange Regulation Act, 1973

- Section 18 393

- Section 29 443

Securities and Exchange Board of India Act, 1992

Bar of jurisdiction

- Whether section 21 indicates that civil court shall continue to have jurisdiction oversubject-matters for which authorities under Act are not empowered to decide - Held,yes - Plaintiff was trading in shares, stocks and securities as sub-broker, but withouthaving necessary registration as sub-broker either with SEBI or with any recognisedstock exchange - She filed a recovery suit against defendants alleging that defendants,having traded in shares, etc., through her, failed to pay certain sum on account oftransaction in shares, etc. - Additional District Judge, considering fact that plaintiff wasnot registered as sub-broker, rejected suit holding that civil court had no jurisdiction toentertain suit - Whether there being no provision either under Act or Regulations madethereunder to enable any authority under Act to resolve a dispute regarding non-pay-ment between a client and an unregistered sub-broker, order of rejection of suit onground that civil court had no jurisdiction to entertain same, was patently erroneous -Held, yes - Whether further, recovery of dues is a right pre-existing under common lawand not a right created by Act and, therefore, it was not a case wherein statute itselfcreates a right and also provides machinery for enforcement of same, but it was a casewherein a right was pre-existing under common law and one more remedy was pro-vided by arbitration clause, if included in agreement, without expressly excluding ju-risdiction of civil court - Held, yes – Whether, consequently, it was a case wherein both,common law and statutory remedies, were concurrent remedies and impugned order,rejecting suit on ground of bar of jurisdiction, was liable to be set aside - Held, yes -Asha Anil Kumar Kataria v. Ashok Kumar (Bom.) 477

Securities and Exchange Board of India Act, 1992

- Section 20A 477

Sick Industrial Companies (Special Provisions) Act, 1985

Suspension of legal proceedings, contracts, etc.

- Whether it is only where guarantee is in respect of a loan or advance extended toindustrial company, that provisions of section 22(1) will enure to benefit of guarantorand guarantee in respect of outstanding sums in respect of commercial transactionscannot be said to be a guarantee in respect of any loan or advance extended to indus-trial company - Held, yes - Whether, therefore, bar created by section 22 will not applyto a suit invoking a bank guarantee executed by defendant-bank to secure payment forsupply of goods to an industrial company which stood referred to BIFR - Held, yes -Rashtriya Chemicals & Fertilizers Ltd. v. State Bank of Patiala (Delhi) 461

Sick Industrial Companies (Special Provisions) Act, 1985

- Section 22 461


Contents A-5

MAGAZINE FEATURESBANKING LAWS

ABHINAV KUMAR

- Role of asset management companies in resolving banking and financial crisis 75

MISCELLANEA

- Article browser 87

READERS’ VIEWS

VIVEK SADHALE (Company Secretary) AND VIKAS AGARWAL (Asstt. Manager-Secretarial,Persistent Systems Ltd., Pune)

- Go chase overseas entities, Indian Venture Capital Funds 73



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MODE OF CITATION [2008] 81 SCL. . . (. . .)TOTAL PAGES INCLUDING COVER [142]

872008]

ARTICLE BROWSER

Subject Author Journal/Newspaper Issue/Date

Anomalies in our Competition Kumkum Sen Business Standard January 21, 2008Laws

Analysis of revised clause 41 of Sudhendhra Putty SEBI and Corporate [2008] 81 SCL 33the listing agreement Laws (MAG.)

Balanced Score Card-Concept, C.S. Balasubramaniam SEBI and Corporate [2008] 81 SCL 20Implementation and Emerging Laws (MAG.)Perspectives

Competition test for Big Mergers Surendra U. Kanstiya SEBI and Corporate [2008] 81 SCL 37Laws (MAG.)

Corporate Law Referencer L.V.V. Iyer SEBI and Corporate [2008] 81 SCL 41Laws (MAG.)

Corporate Criminal Liability: A Ankur Sood and SEBI and Corporate [2008] 81 SCL 1post Standard Chartered Bank’s Vardaan Ahluwalia Laws (MAG.)case analysis

Good Profits, Bad Profits R. Devarajan Business Standard January 22, 2008

Industrial Sickness in India M. Srinivas SEBI and Corporate [2008] 81 SCL 10Laws (MAG.)

It’s Time to Repair the Crumbling Kumkum Sen Business Standard December 24,Companies Act 2007

Lessons from US Crisis S. Venkitaramanam The Hindu Business November 26,Line 2007

Managing External Shocks M.Y. Khan The Hindu Business December 8,Line 2007

Mandatory Merger Notification Surendra U. Kanstiya SEBI and Corporate [2007] 80 SCL 73Laws (MAG.)

Preservation of records - R. Balakrishnan SEBI and Corporate [2007] 80 SCL 78Provisions under the Laws (MAG.)Companies Act, 1956

Rising Rupee and Curbs Bhanoji Rao The Hindu Business November 27,on FII Inflows Line 2007

Revised Clause 41- Way Navin Agrawal The Economic Times December 7,To Go Forward 2007

Regulation Mergers & Amitabh Kumar The Economic Times December 20,Acquisitions 2007

Stock Market: Life @ 17,000 Dr. Tejinder Chartered Accountants Vol 10, Part 6,Singh Rawal Today November 2007

SEBI should clean up IPO Somasekhar Business Standard December 17,norms Sundaresan 2007

The Outsourcing Way Charu Malhotra SEBI and Corporate [2008] 81 SCL 17Laws (MAG.)

Tactics for Business Meetings Mamta Shah NIRC News Vol. 13, No. 01,January 2008

ARTICLE BROWSER


SCL - MAGAZINE [Vol. 8188

The Balanced Scorecard and David Crawford and The Management Vol. 42, No. 11,Corporate Social Responsi- Todd Scaletta Accountant November, 2007bility: Aligning Values for Profit

Vicarious Liability of Directors Kumkum Sen Business Standard November 26,2007

Your Queries L.V.V. Iyer SEBI and Corporate [2008] 81 SCL 7Laws (MAG.)

Subject Author Journal/Newspaper Issue/Date


C O R P O R A T E W O R L D

INSURERS CAN INVEST IN BONDS FLOATED BY SEZ’s

Insurance companies will be allowed to invest in bonds floated by developers of specialEconomic Zones (SEZs), with Insurance Regulatory Development Authority (IRDA)

giving its nod to broaden the definition of infrastructure for insurers. The new definitionwill cover all telecom services, including basic and cellular, radio paging, domesticsatellite services, broadband and internet services, construction of educational institu-tions, hospitals and projects relating to farm products processing. A wider definition willgive insurance companies more options to invest in bonds floated by infrastructurecompanies. The Government has notified 193 out of 404 SEZs that are proposed to beset-up in the country. The Government has projected a five-fold increase in investmentsby September. Life insurance companies are allowed to invest up to 15 per cent of theirportfolio in infrastructure instruments that qualify as approved investments. Non-lifecompanies are allowed to invest upto 10 per cent in infrastructure and 5 per cent inhousing. There has been no change in this cap. - THE ECONOMIC TIMES, NEW DELHI,JANUARY 26, 2008.

BANKS: RATIONALISE I-T ACT

Banks have asked for rationalisation of the Income-tax Act with the RBI guidelineson NPAs. There is a considerable divergence between provision made under the

RBI guidelines and those admissible under the I-T Act. There is a difference betweenincome determined as per the tax laws and the books of account, which are maintainedas per RBI guidelines. Hence, the deduction available is different in both cases. Theprovisions for NPAs under the I-T Act precede the RBI guidelines on the same. Theprovision for NPA debited to profit and loss account as per RBI Act, is not eligible fordeduction under the I-T Act. Bad debts under IT do not include doubtful debts. Theprovisions for NPA under the RBI directions is not only in respect of loss assets but alsodoubtful assets and sub-standard assets. Depending upon the period for which the assethas been considered as doubtful, various percentages of the amount are to be provided.So even as banks continue to provide for a doubtful asset, the definition for a doubtfulasset is yet to be ascertained and is at present under the consideration of the SpecialBench of the Income Tax Appellate Tribunal (ITAT). - THE ECONOMIC TIMES, NEW DELHI,JANUARY 25, 2008.

CII FOR FURTHER AMENDMENT TO COMPETITION ACT

Expressing serious reservations about certain sections of the amended CompetitionAct, the Confederation of Indian Industry has asked for the Act to be amended

further. “The industry has serious reservations to sections 5 and 6 of the Competition Actand the proposed Competition Commission (Combination) Regulations and the Compe-tition Commission (Determination of Cost of Production) Regulation,” the chamber said.- THE ECONOMIC TIMES, NEW DELHI, JANUARY 25, 2008.

NORMS FOR MORTGAGE GUARANTEE FIRMS MADE LENIENT

In line with the Finance Minister, P. Chidambaram’s directive to ensure housing to thelower classes, the Reserve Bank of India (RBI) has relaxed the norms for registration


ii CORPORATE WORLD

and operation of mortgage guarantee companies. The RBI on January 23 released themodified guidelines for mortgage guarantee companies (MGC), according to which amortgage guarantee company has to have a minimum net owned fund of Rs. 100 croreat the time of commencement. After three years of commencement of operations, theissue of enhancement of the minimum capital would be reviewed. The earlier guidelinesrequired a MGC to augment the capital to Rs. 300 crore within three years of commence-ment. The second relaxation is on capital adequacy, which has been stipulated at 10 percent, with tier-I stipulation reduced to 6 per cent. The previous guidelines requiredMGCs to maintain 12 per cent of its aggregate risk weighted assets as the minimumcapital adequacy ratio and at least 8 per cent of its aggregate risk weighted assets astier-I capital. However, RBI has retained the earlier provision for incurred-but-not-reported (IBNR) losses. The amount of required provisions shall be arrived at on anactuarial basis, depending upon the estimates of loss frequency and severity incurredbut not reported, which are derived from historic data, trends, economic factors andother statistical data in relation to paid claims; the provisions held for claims settled, etc.In case the amount of provisions already held is in excess of the amount as computedabove, the excess shall not be reversed. The National Housing Bank has been entrustedwith launching a MGC. - BUSINESS STANDARD, NEW DELHI, JANUARY 24, 2008.

RESERVE BANK MAY CHANGE SLBC PATTERN

In the coming days, there might be changes in the way banks in which States holdinteractive meetings to take stock of the collective responsibilities and problems they

face. The RBI has appointed a committee to study the possibility of changing the formatof the State-level bankers’ committees (SLBC) on the basis of an alternative format thatthe J&K Bank submitted in March last. The committee is led by Deputy Governor, Mrs.Usha Thorat. In J&K’s context, the bank that leads the sector in the State said the SLBClacks “stakeholder ownership” either by members, convener or the regulator with itslarge, unwieldy and widely dispersed format and a pre-reform and peripheral mandate.To overcome the basic problems, it has sought structural and organizational changesthat would alter its approach to the problems that States face on the ground by adoptingnew methodology. The alternative format of the SLBC, if approved, would make SLBCa yearly banking conclave that could go on even for two days. Sector-specific issueswould be taken care of by smaller sub-groups on a quarterly basis, while the vitalmonitoring committees would have monthly meetings. The design is a cascadingcommittee concept in which the Apex Committee would meet half-yearly to work onagenda and issues raised and filtered by small committees for credit, monitoring,implementation, administrative and regulation. The Apex Committee with representa-tion from private, nationalized, rural and cooperative banks, besides regulator and theGovernment, must work out a comprehensive three-year programme for financialinclusion with annual and half-yearly benchmarks. - THE ECONOMIC TIMES, NEW DELHI,JANUARY 23, 2008.

MSME SEEKS MORE SUPPORT

Budget support for the Ministry of Small and Medium Enterprises (MSME) could goup by as much as 50 per cent in the next fiscal to enable it to fund its new projects.

The Budget allocation for MSME in 2007-08 was pegged at Rs. 320 crore and aboutRs. 250 crore in 2006-07. The Ministry is pitching for an increase in budget allocation tofund expansion of its programmes for weavers like E-charkha. The allocation for 2008-09 is expected to go up to Rs. 500 crore. SME Minister, Mahabir Prasad has asked theMinistry and Khadi & Village Industries Commission (KVIC) to gear up to meet theBudget targets. The Ministry may ask the Finance Ministry for collateral-free loans forthe sector. - THE ECONOMIC TIMES, NEW DELHI, JANUARY 23, 2008.

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2008] 45

SEBICIRCULAR/PRESS NOTE

Trading and settlement of trades in dematerialized scripsCIRCULAR NO. MRD/SE/DEP/CIR-1/2008, DATED 22-1-2008, ISSUED

BY MARKET REGULATION DEPARTMENT, SEBI

1. Please refer to SEBI Circular No. SMDRP/POLICY/CIR-38/2000, dated August18, 2000* whereby the following scrips (listed subsidiaries of State Bank of India)were excluded from the list of scrips for compulsory demat trading.

1. State Bank of Bikaner and Jaipur (SBBJ)

2. State Bank of Travancore (SBT)

3. State Bank of Mysore (SBM)

2. Recent amendment to section 19 of State Bank of India (Subsidiary Banks) Act,1959, has omitted the restriction on holding more than 200 shares in the abovebanks by shareholders other than State Bank of India (SBI). In view of the saidamendment, in partial modification of SEBI Circular No. SMDRP/POLICY/CIR-38/2000, dated August 18, 2000, it has been decided that the aforementioned threescrips would also be traded and settled in compulsory dematerialized form.Separate intimation regarding the effective date for compulsory trading andsettlement by all investors in dematerialised form for these scrips would followafter these banks establish connectivity with the depositories and satisfy otherrequisite norms. Accordingly, the said 3 banks (i.e., SBBJ, SBT and SBM) areadvised to establish connectivity with both depositories within a period of 3months from the date of issue of this circular.

3. The Stock Exchanges and the Depositories are advised to :

3.1 Bring the provisions of this circular to the notice of their member brokers/clearing members, depository participants, the said three banks, and to dissemi-nate the same on their websites.

3.2 Communicate to SEBI, the status of the implementation of the provisions ofthis circular in the Monthly Development Report.

4. This circular is being issued in exercise of powers conferred under section 11(1)of the Securities and Exchange Board of India Act, 1992, and section 19 of theDepositories Act, 1996 to protect the interests of investors in securities and topromote the development of, and to regulate the securities market.

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*See [2000] 27 SCL 41 (St.).


SEBI - Circular/Press Note

SEBI & Corporate Laws - Statutes [Vol. 8146

RBI/FEMACIRCULAR/PRESS NOTE

Exim Bank’s Line of Credit (LoC) of USD 5 million toNigerian Export-Import Bank

A.P. (DIR SERIES) CIRCULAR NO. 24, DATED 23-1-2008, ISSUED BYFOREIGN EXCHANGE DEPARTMENT, RBI

Export-Import Bank of India (Exim Bank) has concluded an agreement datedSeptember 14, 2007 with the Nigerian Export-Import Bank, making available tothe latter, a Line of Credit (LoC) of USD 5 million (USD Five million only) forfinancing export of capital and engineering goods, industrial manufactures,consumer durables, commodities and services including consultancy servicesfrom India. The goods and services for export under the agreement are thosewhich are eligible for export under the Foreign Trade Policy of the Governmentof India and whose purchase may be agreed to be financed by Exim Bank underthis agreement. Out of the total credit under this Agreement, the goods andservices of the value of at least 85 per cent of the contract price shall be suppliedby the seller from India.2. The Credit Agreement under the LoC is effective from December 4, 2007. Underthe LoC, the last date for opening Letters of Credit and disbursement will beDecember 3, 2009 (24 months from the effective date of the Agreement).3. Shipments under the credit will have to be declared on GR/SDF Forms as perinstructions issued by Reserve Bank from time to time.4. While no agency commission shall be payable in respect of exports financedunder the above line of credit, the Reserve Bank may consider, on merit, requestsfor payment of commission up to a maximum of 5 per cent of the f.o.b/c&f/c.i.f.value in respect of goods exported and which require after sales service. In suchcases, commission will have to be paid by deduction from the invoice of relevantshipment to agents and the reimbursable amount by the Exim Bank to thenegotiating bank will be 90 per cent of the f.o.b/c&f/c.i.f. value. Approval for thepayment of commission should be obtained from the Regional Office of theReserve Bank of India (Foreign Exchange Department) within whose jurisdictionthe Head Office of the exporter is situated, before the relevant shipment iseffected. In other cases (i.e., exports not involving after sales service), if requiredthe exporter may use his own resources or utilize balances of his EEFC accountfor payment of agency commission in free foreign exchange. Authorised DealerCategory-I (AD Category-I) banks may allow such remittance after realisation offull payment of contract value subject to compliance of prevailing instructions onpayment of agency commission.5. AD Category-I banks may bring the contents of this circular to the notice of theirexporter constituents and advise them to obtain full details of the Line of Creditfrom Exim Bank’s office at Centre One, Floor 21, World Trade Centre Complex,Cuffe Parade, Mumbai 400 005.6. The directions contained in this circular have been issued under sections 10(4)and 11 (1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) andis without prejudice to permissions/approvals, if any, required under any other law.

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CLBCOMPANIES ACT

[2008] 81 SCL 327 (CLB - CHENNAI)COMPANY LAW BOARD, ADDITIONAL PRINCIPAL BENCH,

CHENNAIK.N. Shanth Kumar

v.

The Printers (Mysore) (P.) Ltd.K.K. BALU, VICE CHAIRMAN

PETITION NO. CP(10) OF 2007MARCH 27, 2007

Section 397/398 of the Companies Act, 1956 - Oppression and mismanagement- Petitioner was director and editor of respondent No. 1, a publishingcompany - He filed petition under section 397/398 complaining about hisremoval from post of editor and appointment of respondent No. 2 as editorwithout sanction of board of directors - CLB, by an ex parte interim order,directed respondents to maintain status quo regarding position of petitioneras editor - Respondents sought for quashing of said order, contending that ithad been practice in company for managing director to appoint editor andpetitioner’s appointment as editor was also not by board of directors, but byrespondent No. 2 who was occupying position of a managing director and,thus, appointment of respondent No. 2 as editor of publications followed bystatutory declarations was decision taken by competent person in normalcourse of business - Whether since in terms of articles of association ofcompany, power of managing director was not absolute, but only subject tosupervision, control and directions of board of directors, appointment orremoval of editor could be made only with sanction of board of directors ofcompany - Held, yes - Whether, therefore, board of directors of companywould convene meeting to deliberate and decide appointment of editor andtill that process was over, status quo in regard to position of petitioner aseditor would be maintained - Held, yes

FACTS

The respondent No. 1-company, engaged in the business of publishingnewspapers and periodicals, was managed by the petitioner, respondentNo. 2 and the wife of respondent No. 3 being the whole time directorsunder the supervision of the board of directors constituted by among

K.N. Shanth Kumar v. Printers (Mysore) (P.) Ltd. (CLB - Chennai)

SEBI AND CORPORATE LAWS ❑ JANUARY 28 - FEBRUARY 3, 2008 ❍ 55

328 SEBI & Corporate Laws - Reports [Vol. 81

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others, three non-executive directors. In a petition filed by the petitionerunder section 397/398, alleging his removal from the post of editor andappointment of respondent No. 2 in his place, the CLB, by an ex parteinterim order, directed the respondents to maintain status quo in regardto position of the petitioner as editor of the publications until further order.The respondents, while urging for vacation of the ex parte interim order,contended that the change of editorship and consequent filing of declara-tion as required under the Press and Registration of Books Act, 1867 werenot amenable to the jurisdiction of the CLB, and that it had been thepractice in the company for the managing director to appoint the editorand the petitioner’s appointment as editor was also not by board ofdirectors, but by respondent No. 2, who was occupying position of amanaging director and, thus, appointment of respondent No. 2 as editor ofthe publications followed by the statutory declarations was decision takenby the competent person in the normal course of business.

HELD

Clause 22(b) of the articles of association of the company stipulated that themanaging director would, subject to the supervision, control and directionsof the board of directors, have substantial powers of management andwould exercise all those powers of the management vested with the boardof directors of the company and not specifically required to be exercisedonly at a meeting of the board of directors of the company. It was, therefore,abundantly clear that the power of managing director was not absolute, butonly subject to the supervision, control and directions of the board ofdirectors. The minutes of the board meeting dated 19-10-2001, establishedthe fact that the resignation of the respondent No. 3 from the post ofdirector, managing director and editor was accepted by the board ofdirectors of the company. The agenda regarding appointment of editors ofthe company, pursuant to a communication dated 12-1-2002 of wife ofrespondent No. 3 addressed to the board of directors, came to be deliberatedat a board meeting, upon which the board felt that there was no need forappointing anyone else as editor in the place of the petitioner, which wasconcurred by the respondent No. 2. It, therefore, followed that anyappointment of editor would only be with sanction of the board of directorsof the company. The assertion of the respondent No. 2 regarding the allegedremoval of the petitioner and his appointment as editor was supported bymere pleadings without any documentary proof whatsoever, save thedisputed statutory declarations. The existing records would reveal thatappointment of the respondent No. 2 as editor was, prima facie, withoutsanction of the board. Even otherwise, if the joint managing director hadexercised his power as claimed by him, such exercise of the power ofappointment ought to have been in consultation of the board of directorsof the company. In view of the above, the board of directors of the companywould convene a board meeting to deliberate and decide the appointmentof editor for the publications and arrange to file necessary declarations


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under the 1867 Act. Any decision of the board of directors taken in thatregard, however, would be subject to outcome of the main petition. Tillthen, the order of status quo would remain in force. [Para 8]

CASES REFERRED TO

Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd. [2001] 33 SCL 78 (SC)(para 4), Krishna Das Paul v. Calcutta Chemical Co. Ltd. [1998] 5 Comp. LJ569 (para 6) and Kamal Kumar Dutta v. Ruby General Hospital Ltd. [2006]70 SCL 222 (SC) (para 6).

K.G. Raghavan and K. Arun Kumar for the Petitioner. S.S. Naganand,S. Sriranga, Aditya Sondhi and K.N. Tilak Kumar for the Respondent.

ORDER

1. This Bench by an ex parte interim order dated 20-2-2007 directed thatthe respondents will maintain status quo in regard to position of thepetitioner as Editor of the publications namely, Sudha and Mayura untilfurther order.

2. Shri S.S. Naganand, learned Senior Counsel, representing the respon-dents 1 and 2 while urging for vacation of the ex parte interim ordersubmitted :

The Company has been managed by the board of directors, consisting ofindependent directors and also members who do not belong to the familyof the petitioner and respondents 2 and 3 and has never been run on theprinciples of partnership. The Editors of publications have changed fromtime to time and the appointment of Editor has not been done by the boardof directors. The only grievance of the petitioner regarding his removalfrom the position of Editor being a single act cannot constitute an act ofoppression, whereas continuous acts which are oppressive can alone bethe ground for a petition under section 397 of the Companies Act, 1956.The change of Editorship and consequent filing of declarations asrequired under the Press and Registration of Books Act, 1867 are notamenable to the jurisdiction of the CLB. It has been the practice in theCompany for the managing director to appoint the Editor and thepetitioner’s appointment as Editor was not by the board of directors, butby the second respondent. The second respondent being the joint manag-ing director is occupying the position of a managing director as envisagedin section 2(26) of the Act. By virtue of section 2(26) coupled with article22(b) of the articles of association of the Company, the second respondenthas substantial powers of management of the Company. Furthermore, theCompany has granted a power of attorney in favour of the secondrespondent empowering him to employ, dismiss and remunerate workersof the Company. In this context, appointment of the second respondent asEditor of the publications followed by the statutory declarations aredecisions taken by the competent person in the normal course of business.The second respondent vested with the power of changing the Editor of




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publications filed necessary statutory declarations before the DistrictMagistrate for authentication of such declarations. The question of can-cellation of the authentication by the Magistrate does not apply in view ofthe fact that the circumstances mentioned in section 8B of the Act, 1867are absent in the present case.

3. The members of the board have been discussing from time to time thedivision of departments among the whole time directors but not theappointment of Editor for the publications. However, no decision has beenso far taken by the board of directors in the matter of division ofdepartments among the whole time directors. The second respondentnever misused his position as the joint managing director of the Company,especially when there is no requirement of approval of the board ofdirectors for appointing or removing the Editor. The appointment of thepetitioner as Editor was decided by the joint managing director on thelines of the appointment of any employee of the Company. The appoint-ment of Editor is being an administrative issue does not affect thepetitioner’s rights as a shareholder.

4. The petitioner filed writ petitions before the High Court of Karnatakachallenging the authentication of the declarations appointing the secondrespondent herein as Editor of the publications namely, Deccan Heraldand Prajavani which came to be unconditionally withdrawn by him.Pursuant to the appointment of the second respondent as Editor, therequisite declarations have been filed with the Magistrate and furtheracted upon in respect of the publications Deccan Herald and Prajavani asborne out by the respective issues. The issues relating to Deccan Heraldand Prajavani would indicate the change of Editorship in the name of thesecond respondent. The second respondent having acted lawfully andcomplied with the statutory requirements, petitioner cannot raise anydispute in this regard, especially when no prima facie case has been madeout by him. There is no balance of convenience in his favour. TheMagistrate has not so far initiated any proceeding under section 8B of theAct, 1867 and the Magistrate is competent person to go into cancellationof the declaration in respect of the petitioner before making any endorse-ment for change of the editorship in the name of the second respondent.The second respondent being the joint managing director originallyappointed the petitioner as Editor of the publications and has the powerto remove him from editorship. If the appointment of the second respon-dent as Editor is violative of the provisions of the Act, 1867, and illegal, theCLB is not to adjudicate the disputes in question. The petitioner failed toshow that there are circumstances warranting an order of winding up ofthe Company on just and equitable grounds in which case no relief can begranted to the petitioner in regard to section 397 of the Act as reiteratedby the Supreme Court in Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd.[2001] 105 Comp. Cas. 4931.

1. 33 SCL 78.


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5. Shri Aditya Sondhi representing the third respondent pointed out thatthe petitioner was not appointed as Editor of the publications by the boardof directors of the Company but only by the joint managing director. Noone has vested right to claim the Editorship. The second respondent cameto be appointed as Editor in the normal course of business.

6. Shri K.G. Raghavan, learned Senior Counsel while opposing the prayerfor vacation of the ex parte interim order submitted :

The appointment of Editor can be exercised only by the board of directorsand not the managing director of the Company. The petitioner herein hasheld the position of Editor of the publications since the year 2001, as borneout by copies of the declaration filed under the Act, 1867, endorsement ofthe Magistrate and the issues of periodicals published thereon. Thesedeclarations in respect of the petitioner have not been cancelled by theMagistrate and further appointment of the second respondent as Editorhas not been authenticated in accordance with the provisions of the Act,1867. Nevertheless, the publications effected in respect of Deccan Heraldand Prajavani would show that the second respondent is the Editor, whichis violative of section 5 of the Act, 1867 attracting the penal provisions forprinting/publishing the periodical without confirming to the Registrationof Newspapers (Central) Rules, 1956. Section 398 provides relief in case theaffairs of the Company are conducted in a manner prejudicial to publicinterest or in a manner prejudicial to the interest of the Company. Thedivision of departments among the whole lime directors is within thepower of board of directors as brought out by the minutes of variousboard meeting forming part of this Bench. The resolution passed at theboard meeting held on 23-1-2002 shows that the appointment of Editorsof the Company has been exercised by the Board of Directors. When theissues relating to the promotion and re-designation of the officials of thepublications came for discussion at a board meeting of the Company, thedirectors recorded that in all important matters consultation with thewhole time directors would be advisable. When the third respondent hadresigned from the post of managing director, director and editor, theboard of directors requested him to reconsider his decision to resign fromthese posts but ultimately accepted his resignation at the meeting held on19-10-2001. It is, therefore, far from doubt, that the second respondent isnot vested with the absolute power of appointing the Editor of thepublications and thus not made out a prima facie case for his continuanceas the Editor of the publication. The appointment of the second respon-dent as Editor without sanction of the board of directors is not sustainable.The petitioner has been heading the editorial department as reflected inthe minutes of various board meetings and no change in the division ofdepartment has so far been approved by the directors, but such decisionhas been deferred by the board of directors. The second respondentwould not suffer any prejudice in lawfully continuing the services of thepetitioner as the Editor of the publications. In section 397/398 petition,violation of any law/regulations can be gone into for the purpose of




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moulding appropriate reliefs under section 402 as held by this Board inKrishna Das Paul v. Calcutta Chemical Co. Ltd. [1998] 5 Comp. LJ 569. TheSupreme Court in Kamal Kumar Dutta v. Ruby General Hospital Ltd.[2006] 7 SCC 6131 held that section 398 deals much about the mismanage-ment or apprehension of mismanagement in the affairs of the companyand therefore, the grievances of members need not exist to claim anyremedy against the acts of mismanagement.

7. I have heard the arguments of learned Senior Counsel for the parties.The short issue for my consideration is whether there is any justificationto vacate the ex parte interim order directing the respondents to maintainstatus quo in regard to position of the petitioner as editor of the publica-tions, namely Sudha and Mayura, in the facts and circumstances of thepresent case. It is on record that the first respondent-company engaged inthe business of publishing newspapers and periodicals, is managed by thepetitioner second respondent and the wife of third respondent, being thewhole time directors under the supervision of the board of directorsconstituted by among others, three non-executive directors. The peti-tioner has been the editor, as borne out by the declaration dated 27-3-2002filed as required under the Act, 1867. While according to the secondrespondent, the appointment of editor is not done by the board ofdirectors, but only by the managing director, the petitioner claims that thesecond respondent proclaimed himself to be the Editor without theauthority of the board of directors of the Company and filed the requisitedeclarations under the Act, 1867. In this context, the communication dated17-2-2007 of Sri M.K. Govardhan Kumar, an independent director of theCompany assumes importance which reads as under :

“It is surprising to see through our own newspapers that somedevelopments have taken place in The Printers (Mysore) Pvt. Ltd.,especially regarding change of Editor. This subject was discussed manytimes in the Board with inconclusive decision. Hence we request you tokindly call for an immediate Board meeting and to explain why this majordecision was taken without the consent of the Board.”

8. The grievance of Sri M.K. Govardhan Kumar is that the major decisionregarding change of editor has been taken without the consent andknowledge of the board. Sri Kuldip Nayar, yet another independentdirector expressed his shock in his communication dated 18-2-2007addressed to the Chairman of the Company on the removal of thepetitioner as Editor thus : “I was never consulted nor has there been anyboard meeting.” It is relevant to observe from the relevant records thatdepartment comprising of advertisement, circulation and personnel isunder the control of the second respondent, while the petitioner is lookingafter the department with finance, material production and editorial. Theissue of division of departments among the whole time directors came upfor consideration at the board meetings held on 23-1-2002, 10-6-2004,

1. 70 SCL 222.


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9-8-2004, 17-9-2004. 18-11-2004, 5-2-2005, 21-3-2005 and 24-2-2006. How-ever, the board of directors after detailed discussions decided to defer thisitem of agenda for its next meeting and suggested at more than one boardmeeting to form a committee of members to make a study of departmentsto be handled by each director and place the same before the next meetingof the board. The board of directors at the meeting held on 24-2-2006decided to maintain the present status quo and deferred the matter inrelation to division of departments among the whole time directors. Therelevant copies of minutes of these board meetings are forming part I ofthe company petition and are not in dispute. The concern expressed by theindependent directors unequivocally indicate that the subject regardingchange of Editor came up for consideration of the board of directors onmany an occasion and remained inconclusive, as pointed out by Sri M.K.Govardhan Kumar. It is relevant to observe that division of departments,in spite of repeated discussions at several of the board meetings, couldnever be resolved, whereas appointment of the second respondent asEditor has been reportedly made, without even reference to the membersof the board. The plea of the second respondent that it is the matterrelating to division of departments but not the appointment of Editorwhich came to be discussed at various board meetings, does not hold goodin the light of the communications of the independent directors, discussedsupra, according to which the alleged change of Editor is without theconsent of the board. Furthermore, any major decision will have to bemade in consultation with the whole time directors, in terms of thedecision of the board of directors of the Company. Clause 22(b) of thearticles of association stipulates that the managing director shall subjectto the supervision, control and directions of the board of directors, havesubstantial powers of management and shall exercise all those powers ofthe management vested with the board of directors of the Company andnot specifically required to be exercised only at a meeting of the board ofdirectors of the Company. It is, therefore, abundantly clear that the powerof managing director is not absolute, but only subject to the supervision,control and directions of the board of directors. The minutes of the boardmeeting dated 19-10-2001 establish the fact that the resignation of thethird respondent from the post of director, managing director and editorwas accepted by the board of directors of the Company. The agendaregarding appointment of Editors of the Company, pursuant to a commu-nication dated 12-1-2002 of Ms. Parulshah, wife of third respondentaddressed to the board of directors came to be deliberated at a boardmeeting, upon which the board felt that there was no need for appointinganyone else as Editor in place of the petitioner, which was concurred bythe second respondent. The relevant extracts of the minutes of such boardmeetings have been produced by the third respondent. It therefore,follows that any appointment of Editor will only be with sanction of theboard of directors of the Company. The assertion of the second respon-dent regarding the alleged removal of the petitioner and his appointment




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as Editor is supported by mere pleadings without any documentary proofwhatsoever, save the disputed statutory declarations. The existing recordswould reveal that appointment of the second respondent as Editor is,prima facie, without sanction of the board. Even otherwise, if the jointmanaging director had exercised his power as claimed by him, suchexercise of the power of appointment ought to have been in consultationof the board of directors of the Company. The remaining contentiousissues including the purported violations of the provisions of the Act, 1867,would be considered while disposal of the Company petition on its merits.In view of the foregoing conclusions, I deem it fit that the board ofdirectors of the Company will convene a board meeting to deliberate anddecide the appointment of Editor for the publications namely Sudha,Mayura, Deccan Herald and Prajavani, and arrange to file necessarydeclarations under the Act, 1867. Any decision of the board of directorstaken in this behalf is, however subject to outcome of the main petition.The whole process shall be completed by 30-4-2007. Till such time, theorder of status quo in terms of the order dated 20-2-2007 shall remain inforce. Ordered accordingly.

■■

BOMBAY HIGH COURTCOMPANIES ACT

[2008] 81 SCL 334 (BOM.)HIGH COURT OF BOMBAY

Brij Mohan Grover

v.

O.L., High Court of BombayR.S. MOHITE, J.

COMPANY PETITION NO. 472 OF 2006 IN COMPANY APPLICATION NO. 527 OF2006 IN COMPANY PETITION NO. 404 OF 1986DECEMBER 22, 2006 AND JANUARY 15, 2007

Section 391, read with sections 392 to 394, of the Companies Act, 1956 -Compromise and arrangement - Whether wide powers have been given toCompany Court to modify scheme of a compromise or arrangement as it mayconsider necessary for proper working of compromise or arrangement andCourt can exercise these powers even suo motu without calling meeting of all


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members or creditors at time of sanctioning scheme - Held, yes - Whetherworkers of company, who were not paid their dues, were creditors ofcompany and, therefore, persons entitled to propose a scheme under section391 - Held, yes - Petitioner, who was shareholder and ex-managing directorof company in liquidation, filed petition seeking sanction of scheme ofarrangement between company and its shareholders, creditors and workers- Scheme was approved by shareholders and creditors, but workers did notapprove scheme and suggested modifications therein - Whether since noobjection had been raised to scheme as modified by workers and said schemewas more advantageous to all concerned, scheme as modified by workersshould be sanctioned and scheme proposed by petitioner was liable to berejected - Held, yes

FACTS

A company was ordered to be wound up and the Official Liquidator wasappointed as liquidator of the company. The petitioner, who was share-holder and ex-managing director of the company in liquidation, filed apetition under section 391 seeking for sanction of a scheme of compro-mise/arrangement between the company and its equity shareholders,secured creditors, unsecured creditors, statutory creditors and workers.The scheme was approved by shareholders and all the creditors in theirrespective meetings. However, at the meeting, the workers, who werecreditors of the company since they had not been paid, did not grantapproval to the scheme of the petitioner. Thereafter, one of the twoworkers’ union ‘Sabha’ filed an affidavit in the Court contending that theintention behind the scheme was to appropriate the assets of the companyby denying the workers’ re-employment. They suggested modificationsunder section 392 which, according to them were more beneficial to thedisplaced workers and contained a proposal aimed at getting eligibleworkers re-employed and re-habilitated. A prayer was made that since theproposed modification to the scheme only improved upon the scheme aspropounded by the petitioner, the scheme should be sanctioned along withthe modifications as proposed by the ‘Sabha’. The petitioner contendedthat the modifications, as proposed by the ‘Sabha’, ought not be grantedas the Company Court has no jurisdiction to sit in appeal over thecommercial wisdom of the majority of the class of persons who, with theiropen eyes have given their approval to the scheme, even if in the view ofthe Court, there could be a better scheme for the company and itsmembers or creditors for whom the scheme is framed; that the mattershould be sent again for reconsideration in a fresh meeting of the workers;that the modifications suggested by the ‘Sabha’ were effectively a schemeby the sponsor who was not a person eligible to propose a compromise orarrangement under section 391(1); and that the sponsor of the scheme wasnot financially solvent.

Brij Mohan Grover v. O.L., High Court of Bombay (Bom.)



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HELD

The scheme, as modified by the ‘Sabha’, was clearly equal to, in two respectsand more advantageous to all parties in several other respects, than thescheme as proposed by the petitioner. The scheme was also moreadvantageous to the secured creditor, particularly as it contemplated downpayment of the entire value of the property as calculated by the petitionerof the land and structures, which was the subject-matter of the scheme. Itwas more advantageous to the shareholders, as it reduced their burden oftaking further loans. [Para 34]

Insofar as the scheme of the petitioner was concerned, it did not findapproval from the workmen and that was evident from the report of thechairman of the meeting of workmen, which was on record. The scheme,as propounded by the petitioner, in the absence of approval by the workmenand thereafter also disapproved by the secured creditor, was clearly renderedunworkable and could not be sanctioned. [Para 36]

However, after the petition was admitted, all concerned parties had, by anotice, been given a further opportunity to appear at the stage of the finalhearing of the petition. All the workers supported the scheme as modifiedby the ‘Sabha’. No worker had appeared in any individual capacity toexpress his disapproval to the scheme as modified. The unsecured creditorshad granted their approval to the scheme and in spite of the notice, nounsecured creditor had appeared at the stage of the hearing of the petitionto oppose the modifications as suggested by the ‘Sabha’. As far as thestatutory creditors were concerned, since 3/4th of the statutory creditors invalue approved of the original scheme, all of them were deemed to havegranted their approval. The modifications of the ‘Sabha’ made no changein the amounts payable to them as proposed in the petitioner’s scheme.After notice, no statutory creditor had appeared before the Court to indicatethat they were withdrawing their approval or that there was any change intheir stance. The modifications, as suggested by the ‘Sabha’, took adequatecare of the interest of the secured creditor insofar as it not only offered todeposit the entire market value of the land and structure as calculated bythe petitioner and left uncontroverted by the secured creditor, but alsofurther offered to pay the entire decretal amount if and when the suit of thesecured creditor would be decreed. [Para 37]

As regards the contention of the petitioner that it would be desirable toagain send the matter for reconsideration in a fresh meeting of the workers,on a plain reading of section 392(1)(b), read with section 392(2), it appearsthat wide powers have been given to the Company Court to modify thescheme of a compromise or arrangement, as it may consider necessary, forthe proper working of the compromise or arrangement. In the instant case,the scheme of the petitioner was rendered completely unworkable due toopposition by the two unions representing the workers and even thesecured creditor. In view of such a situation, to ensure the working of thescheme, the more beneficial modifications suggested by the ‘Sabha’ could


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be sanctioned. The powers of the Court can be exercised even suo motuwithout calling the meeting of all the members or creditors at the time ofsanctioning the scheme. [Paras 38 and 39]

It was next contended that the modifications suggested by the ‘Sabha’ waseffectively a scheme by the sponsor who was not a person eligible to proposea compromise or arrangement under section 391(1), insofar as the sponsorwas not the company, its creditor or member. That submission must berejected as the modification to the scheme was not put by the sponsor, but,in fact, it was put up by the union which represented the workers. It wasconceded that the workers, who were yet to be paid, were creditors of thecompany and in fact, the Act, by virtue of section 529A, put them at paripassu with secured creditors. The scheme as such had not been put up bythe sponsor who was merely to bring in the finance and start a textile unit,but had been put up by the workers, who were creditors and, therefore,persons entitled to propose a scheme under section 391 and were alsopersons interested within the meaning of section 392. [Para 42]

The figures shown by the petitioner might not reflect the borrowingcapacity or the real capacity of the sponsor to raise the amount throughother sources, but the ‘Sabha’ and the sponsor had both filed affidavitspromising to bring in amounts under the scheme within a short period oftime. The proof of the pudding is in its eating. If they failed to do so, theywere not outside the jurisdiction of the Company Court and the Court hadthe power, jurisdiction and ability to pass further orders if thought necessary.What was important from the point of view of the workers, was that thetextile unit was established and run. The scheme, as modified by the‘Sabha’, offered a bank guarantee to secure the performance of thatpromise. The scheme envisaged the opening of a textile unit within amaximum period of 18 months from the date of possession includingconstruction of factory building and installation of plant and machinery.The sponsor and the ‘Sabha’ had undertaken to re-employ all the eligibleworkers, who would opt for re-employment and commence operationswithin 18 months from the date of the final sanction of the scheme. Thebank guarantee could be enforced by the Official Liquidator in case ofdefault. They had agreed to furnish the bank guarantee to the OfficialLiquidator within 90 days by the sanction of the scheme by the High Courtand the giving of such a guarantee secured the performance of the promiseto revive a textile unit. [Para 43]

In view of above, the scheme proposed by the petitioner was to be rejected,and the scheme with modifications as proposed by ‘Sabha’ was to besanctioned with certain clarifications.

CASES REFERRED TO

Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792/10SCL 70 (SC) (para 36), Shree Niwas Girni Kamgar Kruti Samiti v. RangnathBasudev Somani [2005] 127 Comp. Cas. 752/62 SCL 175 (Bom.) (para 38),




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S.K. Gupta v. K.P. Jain [1979] 49 Comp. Cas. 342 (SC) (para 39) andTungabhadra Industries Ltd. v. National Dairy Development Board [1984]55 Comp. Cas. 107 (Guj.) (para 39).

A.Y. Bookwalla, Shrikant Mehta, Roshan Kshatrashah, J.P. Cama,Sanjay Udeshi, Londhe, Sanjay Singhvi, Ms. Jane Cox, Bannet D’cousta,Fredun D’vtre, D.D. Madon, Ms. Neeta Rajda, Mrs. Madhuri Gaikwad,C.J. Joy and Pankaj Kapoor, Mrs. K.V. Gautam and M.H.I. Patel for theAppearing Parties.

JUDGMENT

R.S. Mohite J. - All parties are heard. Counsel for the petitioner uponinstructions states that his client is willing to raise the percentage ofinterest on amount payable as down payment to the workmen from 10 percent per annum to 11 per cent per annum. Mr. J. P. Cama, counsel forShramik Utkarsha Sabha (hereinafter referred to as the “Sabha”) andMr. Fredun D’vtre state on instructions that their clients are also willing tohike the said interest from 10.17 per cent per annum to 11 per cent perannum. The amount by way of down payment to workers offered by thepetitioner thus stands increased to Rs. 14,34,71,743 and the amount asoffered by the sabha and its sponsor stands increased to Rs. 14,36,37,497on the basis of 11 per cent interest on their own recorded offers in thisregard. These counsel also state that on the acceptance of the scheme,their clients will pay the full value of the property as quantified by thepetitioner in paragraph 20 of the petition, i.e., Rs. 52,07,50,000 to M/s. BaliProperties and Investments (P.) Ltd. Mr. Sanjay Singhvi appearing for therival workers union Shramik Mahasangh (hereinafter referred to as the“Mahasangh”) states that in view of these statements, the modified schemeas propounded by the Shramik Utkarsha Sabha would be preferred by hisclients. Also at the stage of arguments the advocate appearing for M/s. BaliProperties and Investments (P.) Ltd., submitted 2 documents, one being axerox copy of a letter dated 12-12-2006, said to have been written by oneSanjay Dalmia, a director of Prateek Apparels (P.) Ltd., to advocatesSanjay Udeshi and to his advocate Rajesh Shah and an auditor’s reportdated 31-8-2006, dealing with the balance-sheet of the said company. Hestates that these documents could not have been placed earlier on therecord since they have just been received. Hence, even at this late stage,in the interest of justice, he is permitted to place these documents onrecord by way of affidavit by 26-12-2006. All the parties have been heardon these two additional documents. Advocates Rajesh Shah and SanjayUdeshi who are present in the court state that they have never receivedsuch a letter dated 12-12-2006,from Sanjay Dalmi. Mr. J.P. Cama counselfor Shramik Utkarsha Sabha brings to my notice another letter of SanjayDalmia also dated 12-12-2006, which is annexed to the affidavit of KrishnaMokal dated 12-12-2006. This letter is also addressed to advocates RajeshShah and Sanjay Udeshi and is annexed in original. Mr. Cama startes thatunder this letter the textile unit under the scheme will be started in the


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name of BLR Knits, which is a nominee within the term “sponsor” asdefined under the modified scheme propounded by the sabha. All thesestatements are recorded and accepted and I proceed to deal with thematter on merits.

2. Company Petition No. 472 of 2006 has been filed by one Brij MohanGrover who is a shareholder and an ex-managing director of ModellaTextile Industries (P.) Ltd., which is a company in liquidation (hereinaftercalled “the company”).

3. By an order passed by this court on 14-8-1986, in the main CompanyPetition No. 404 of 1986, the Official Liquidator was appointed as aprovisional liquidator of the company. In due course, the company wasdirected to be wound up on 11-6-1987, and the Official Liquidator wascontinued.

4. Prior to the winding up of the company, in November 1986, the onlysecured creditor of the company, i.e., Central Bank of India filed a suit inthis court against the company and the present petitioner Brij MohanGrover seeking to recover an amount of Rs. 2,98,675,713 with interest atdiverse rates ranging between 12.5 per cent and 15.7 per cent per annumand for a further declaration that the repayment of the said amount andfurther interest was secured by an equitable mortgage and/or hypotheca-tion of various immovable and movable properties of the company. Thesuit further sought enforcement of the security in respect of the mort-gaged and charged properties, by sale thereof.

5. By an order dated 24-11-1986, passed by this court in the aforesaid suitbearing No. 3290 of 1986 filed by the Central Bank of India, the courtreceiver, High Court, Bombay was appointed as ad interim receiver of themovable and immovable properties of the company with all powers underOrder 40, rule 1 of the Civil Procedure Code, save and except the powersto sell the properties. The court receiver continues to-date.

6. It appears from the record that on the date of winding up of thecompany, there were in all 1312 workers working in the company. Someof these workers were staying within the factory premises of the companyat Thane. These workers who were residing in the premises resisted thetaking of the possession by the court receiver and claimed tenancy rights.There was litigation in this regard and attempts were made to evict them.At one stage this court had directed that they be evicted forcibly but thatorder was set aside in appeal and ultimately, the Official Liquidator wasdirected by this court to evict them in accordance with law by filingproceedings under section 630 of the Companies Act. Thirty such com-plaints under section 630 of the Companies Act were filed by the OfficialLiquidator before the Judicial Magistrate, First Class at Thane and thosecases are pending.

7. Apart from the factory premises at Thane, the company had severalother properties as listed in paragraph 5 of the Official Liquidator’s report




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dated 11-10-2006. All these properties of the company were also mort-gaged as security to the Central Bank of India who were the sole securedcreditors.

8. Since the Central Bank of India preferred to stand outside the windingup proceeding and made a separate claim by way of a suit and since thereceiver was appointed in that suit, the admitted position is that theworkers of the company could not be paid their full dues though thewinding up order was made in the year 1987. From some monies whichwere collected by the Official Liquidator from other properties andsources, two dividends of 15 paisa in a rupee each were released to theworkers. 70 per cent of the dues payable to the workers is yet to be paidwith accruing interest. In view of the pendency of such litigation for a verylong period of time of about 19 years, it is not disputed that several of theworkers expired and many others reached the age of superannuation.Many of these workers left their premises in and around Thane andMumbai to migrate to other places.

9. According to the petitioner, at his request a company by name BaliProperties and Investments (P.) Ltd. settled with the secured creditor, i.e.,the Central Bank of India and paid them an amount of Rs. 17 crores as perthe settlement and thereupon the said bank assigned their claim in the saidsuit in favour of said Bali Properties and Investments (P.) Ltd. Consequentto the agreement in favour of Bali Properties and Investments (P.) Ltd.,they were impleaded as plaintiffs in Suit No. 3290 of 1986 by an order dated18-10-1995, passed by this court. The said Bali Properties and Investments(P.) Ltd., is thus the substituted plaintiff in Suit No. 3290 of 1986 and isperusing the said suit with leave granted under the Companies Act.

10. In this background, the present company petition under sections 391to 394 of the Companies Act, 1956, came to be filed for a scheme ofcompromise/arrangement between the company and its equity share-holders, secured creditors, unsecured creditors, statutory creditors andworkers.

11. After the filing of this petition, the petitioner took out CompanyApplication No. 527 of 2006 for directions relating to convening of variousmeetings of equity shareholders, secured creditors, unsecured creditors,statutory creditors and workers and by an order dated 21-4-2006, thepetitioner was directed to convene separate meetings of equity sharehold-ers, secured creditors, unsecured creditors, statutory creditors and work-ers.

12. The scheme which was to be put up at these meetings was the schemeof compromise or arrangement as annexed at exhibit A to the petition. Thesubstance of the said scheme as originally filed in this court and put up atthe various meetings was as follows :

(a) The petitioner would borrow and bring in the sum not exceedingRs. 1,16,83,738 for payment of outstanding dues to the unsecured


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creditors and statutory creditors of the company (the statutoryliability being Rs. 53,77,359 and dues of unsecured creditors beingRs. 63,06,379).

(b) The applicant would arrange and borrow a further sum ofRs. 8,40,53,925 for payment of the dues of the workmen of thecompany and if there was any shortfall, inclusive of the claim of 65workers, which had not been adjudicated, to bring in further amountsto meet such claims.

(c) That upon acceptance and sanction, the winding up order dated11-6-1987, would be permanently stayed. The Official Liquidator willcease to act as such and will handover possession of all the propertiesof the company’s movable or immovable that may be in his posses-sion or custody to the company of which the petitioner,Mr. Vinodkumar Grover and one J. Joshi would be the directors.

13. The petition filed by the petitioner stated that the property in respectof which the scheme was being proposed was land with structures thereonsituated at Thane and that the value of the said land and structures wasRs. 52,07,50,000. The scheme originally stated that the claim of the securedcreditors was to the tune of Rs. 104 crores. As regards the securedcreditors the scheme did not originally contain any specific provision formeeting a possible future liability. In Clause IV-B the only statement maderegarding meeting the liability of the sole secured creditor was in thefollowing words :

“The claim of Bali Properties and Investments (P.) Ltd., being the securedcreditors is covered in H. C. Suit No. 3290 of 1986.”

14. It appears from the record that several meetings as directed by thiscourt were all held on 3-6-2006. The additional Prothonotary and SeniorMaster chaired these meetings and as per his report dated 30-6-2006, allthe 20 equity shareholders who were present in the meeting voted for thescheme. In the meeting of the secured creditors the only secured creditorwho attended the meeting voted in favour of the scheme. In the meetingof the unsecured creditors, all the eight unsecured creditors who attendedthe meeting voted in favour of the scheme. In the meeting of the statutorycreditors, one statutory creditor voted against the scheme but morethan 3/4th of the statutory creditors by value voted in favour of thescheme. In the meeting of the workers, however, confusion prevailed andno agreement regarding the scheme could be arrived at. The workers evenrefrained from voting and therefore, the chairman had no alternative butto conclude the workers’ meeting without any approval to the petitioner’sscheme. It is not in dispute therefore, that at the meeting the workers, (whoare creditors of the company since they have not been paid) did not grantapproval to the scheme of the petitioner as originally proposed.

15. After the filing of this petition, in pursuance to the advertisement, onbehalf of one of the two workers’ unions of the company, i.e., the Shramik




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Utkarsha Sabha, an affidavit dated 12-10-2006, came to be filed. It wasmentioned in the affidavit that the union had approximately 338 membersand that their office bearers Mr. Vijay Kamble and Krishna Mokal hadattended the workers’ meeting but were not allowed to voice theirgrievances. By the said affidavit the opposition to the scheme of thepetitioner was placed on record. It was contended that the securedcreditor M/s. Bali Properties and Investments (P.) Ltd., was only a nomineeof the present petitioner and the intention behind the scheme was toappropriate the assets of the company by denying the workers’ re-employment. They suggested modifications under section 392 of theCompanies Act which according to the union were more beneficial to thedisplaced workers and contained a proposal aimed at getting eligibleworkers re-employed and re-habilitated. The proposal was to repay thefull value of the companies assets of Rs. 52,07,50,000 to the petitioner and/or Bali Properties and Investments (P.) Ltd. Another modification pro-posed was to provide an amount of Rs. 14,44,83,133 out of which workerscould be paid Rs. 13,27,99,395 and unsecured creditors and statutorycreditors could be paid an amount of Rs. 1,16,83,738 as provided for underthe scheme. The modification which related to the generation of re-employment contemplated that a built up area of approximately 20,000 sq.feet would be made available for starting a new textile unit and re-employing eligible workers. A prayer was made that since the proposedmodification to the scheme only improved upon the scheme as pro-pounded by the petitioner, the scheme should be sanctioned along withthe modifications as proposed by the “sabha”.

16. On 12-10-2006, Mr. Krishna Mokal filed a further affidavit on behalf ofthe sabha in which certain allegations were made against M/s. BaliProperties and Investments (P.) Ltd. The modifications as stated in theearlier affidavit were reiterated and once again this court was requestedto sanction the scheme with the modifications as proposed by the “sabha”and acceptable to the workers who were members of the sabha.

17. On 11-10-2006, the Official Liquidator filed a report which indicatedthe extent of the claims as adjudicated by the Official Liquidator. Theoutstanding liabilities as mentioned in this report dated 11-10-2006, wereas follows :

(Rs.)

(a) Towards workers’ claim : 3,53,37,896

(b) Towards preferential claim : 3,20,969

(c) Towards ordinary claim : 44,12,477

4,00,71,342

18. The Official Liquidator also referred to the modifications as suggestedby the “sabha”. There were however, no comments on merits or compara-tive merits made in this report regarding both the propounded scheme


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and the suggested modifications of the sabha. It however, appears thatthe workers’ claim of Rs. 3,53,37,896 as mentioned in this report dated11-10-2006, was without inclusion of interest due and payable to theworkers and I had therefore, directed the Official Liquidator to file anadditional report indicating the amount that was due and payable to theworkers after including interest.

19. On 12-10-2006, one Mr. Sanjay Dalmia as a director of the company byname Prateek Apparels (P.) Ltd., (hereinafter referred to as a “sponsor”)filed an affidavit contending that he had been approached by the “sabha”along with a copy of Company Petition No. 472 of 2006 and had been askedwhether he was willing to sponsor a scheme for revival of the company. Inthis affidavit, Mr. Sanjay Dalmia indicated his agreement to sponsor thescheme and to pay the following amounts in full and final discharge of allliabilities of the company :

(a) Rs. 52,07,50,000 to M/s. Bali Properties and Investments (P.) Ltd.,

(b) Rs. 13,27,99,395 to the workers of the company,

(c) Rs. 1,16,83,738 to the unsecured creditors and statutory creditors ofthe company.

20. It was placed on record that they were further willing to start a textileunit with a new name and that they had no objection if the name Modellawas retained by the erstwhile promoters of the company. In paragraph 8of the affidavit an undertaking was given to start the textile unit withina maximum period of 18 months from the date of conveyanceincluding construction of the built up premises and installation of plantand machinery. Pursuant thereto, they undertook to re-employ all theeligible workers who may opt for re-employment and also undertook torun and keep running the unit for a minimum period of 3 years. Further,that if they did not start the textile unit within 18 months from the date ofthe final sanction of the scheme as detailed in paragraph 8, a bankguarantee for the sum of Rs. 13,27,99,395 which would be given by thesponsor to this court could be enforced and this money could also be paidto the workers. A prayer was made to sanction the propounded scheme,along with modifications proposed by the “sabha”.

21. On 19-10-2006 Mr. Krishna Mokal the President of the “sabha” filed yetanother affidavit placing on record that the workers were agreeable toapprove the said scheme only with the modifications as suggested by the“sabha”. It was stated that 366 workers had submitted this on affidavit tothe sabha. A list of these 366 workers along with few sample affidavits ofthe workers is annexed at exhibit 1 to the affidavit.

22. In pursuance of the directions given by this court on 19-10-2006, theOfficial Liquidator submitted a updated report to this court which gavethe latest figures relating to the liability of the company and since thesefigures are at slight variance and included the interest payable to theworkers. They are reproduced as under :




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(Rs.)

(a) Amount due to the workers with 4per cent interest as per rule 179 : 7,33,69,757

(b) Amount due to statutory creditors : 3,20,969

(c) Claim of secured creditors : 44,12,477

Total : 7,81,03,203

23. On 19-10-2006, the Regional Director also filed a report in which heraised certain objections to the petitioner’s scheme. As mentioned in thesaid report the objection was that the scheme was silent as to who wouldbring in the funds to revive the business of the company and whether theex-workers would be taken back in the event of the revival of the company.There was also an objection regarding the affidavit filed by the sponsor,Prateek Apparels (P.) Ltd., supported by some group of workers and thisobjection was that the affidavit was silent as to how much fund was to bebrought in for revival of the company and whether the workers will betaken back at the event of revival of the company. A request was made thatthe petitioner may be directed to meet any contingent liability which mayarise in the future in respect of the company, after revival. I must say thatthe objections raised do not indicate a full and proper application of mind.

24. On 15-12-2006, for the first time another union by name ShramikMahasangh (hereinafter referred to as the “mahasangh”) filed an affidavitof their Vice-President Mr. Vilas Madhukar Naik and in this affidavit, themodifications sought by the rival union (sabha) were dealt with. It wasstated that the modifications put forward by the sabha as they stood wereillusory and less beneficial to the scheme as proposed by the petitioner BrijMohan Grover. It was placed on record that this union and a majority ofworkmen preferred the scheme as proposed by the petitioner (as court’stime is over, rest of the judgment is reserved).

25. In the course of hearing on various dates, as the sabha had come witha better deal for the workers (offering down payment of Rs. 13,27,99,395as against Rs. 8,40,53,395 proposed to be paid by the petitioner) and to thesecured creditor, I had called upon the petitioner’s counsel to see if hecould persuade the petitioner to better his offer in order to make thescheme more attractive vis-a-vis the workers and less vague as regards thesecured creditors. In consequence, the petitioner filed Company Applica-tion No. 1182 of 2006 for amending the scheme. By the said application,several improvements were sought to be made by the petitioner to hisscheme. The main improvements were that instead of an amount ofRs. 8,40,53,395, the petitioner now indicated his willingness to give interestat 10 per cent per annum on the adjudicated amount of Rs. 4,87,45,470from 11-6-1987, being the date of the winding up order till 15-12-2006. Thisamount according to the petitioner worked out to be Rs. 13,04,28,857 (thisamount still being less than the amount of Rs. 13,27,99,395 offered by themodification of the sabha). As regards the secured creditors the vague


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proposal in the original scheme was sought to be substituted by thefollowing words:

“The petitioner states that in the event of there being a decree in favourof the secured creditor in the said H. C. Suit No. 3290 of 1986 the saidclaim will stand satisfied and/or be met with from the mortgagedproperty. The secured creditor has agreed to waive the claim for thebalance, remaining unsatisfied, if any, provided the scheme of thepetitioner is sanctioned by this hon’ble court.”

26. When the matter was heard on 15-12-2006, the petitioner’s applicationfor amendment being Company Application No. 1182 of 2006 was allowedand the said amendments were accordingly, carried out on 20-12-2006.

27. However, at the hearing on December 15, 2006, itself the securedcreditors Bali Properties and Investments (P.) Ltd., filed an additionalaffidavit opposing the petitioner’s scheme as sought to be amended as wellas the modifications of the sabha thereto. In short, it was their case thatthey had given their approval to the petitioner’s scheme subject, to theirclaim of more than Rs. 104 crores against the company being satisfied andtaken care of in the pending suit filed against the company. They reliedupon their letter dated 1-6-2006, addressed to the chairman appointed forchairing the meeting of the secured creditors, which was received by himon 3-6-2006. On 15-12-2006, the sabha had also sought to place on recordof the court a document which incorporated the scheme along with thesuggested modifications. I had directed on 15-12-2006, that they shouldplace this document on record along with a supporting affidavit.

28. On 19-12-2006, an affidavit of Mr. Krishna Mokal on behalf of the sabhawas filed placing on record the proposed modified scheme of compromiseor arrangement. The said document which was an annexure to theaffidavit further crystallised the modifications propounded by the sabhaas under :

(a) that their sponsor would deposit with the Official Liquidator a sumof Rs. 1,16,83,738 for payments due to unsecured creditors andstatutory creditors within 15 days of the sanction of the scheme bythis court.

(b) The claim of Bali Properties and Investments (P.) Ltd., being thesecured creditors would be paid by their sponsor by settlement andif there was no settlement the sponsor agreed to pay the decretalamount as decreed in High Court Suit No. 3290 of 1986. That in theevent of there being a decree in favour of the secured creditors inHigh Court Suit No. 3290 of 1986 and in the event of the decreeremaining unsatisfied by the sale of the properties of the companythe sponsor would bring in or make good the shortfall amount, if any,to satisfy the decree. The sponsor would be entitled to be brought onrecord in the said suit as the defendants and would be entitled tocontest the said Suit No. 3290 of 1986.




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(c) That their sponsor would deposit a further amount of Rs. 13,27,99,395towards the down payment to be made to the workers within a periodof 15 days, (against the earlier offer of deposit in 30 days) from thedate of sanction of the scheme. This amount included interest at10.17 per cent on the adjudicated amount of Rs. 4,87,45,470 from11-6-1987, i.e., the date of the winding up order till 15-12-2006.

(d) That in addition to the amount of Rs. 13,27,99,395 the sponsor wouldprovide a bank guarantee for an amount of Rs. 13,27,99,395 to bedeposited with the Official Liquidator, High Court, Bombay, within90 days of the sanction of the scheme by this court, as a performanceguarantee to start a textile unit on a part of mill land and re-employall eligible workers who were desirous of employment. That thistextile unit would be started within a maximum period of 18 monthsfrom the date of possession including construction of the factorybuilding and installation of plant and machinery. Pursuant thereto,the sponsors would undertake to re-employ all the eligible workerswho opt for re-employment and also undertake to run and keeprunning the unit for a minimum period of 3 years. The sponsor hadagreed that if they do not start the textile unit within a period of 18months from the date of the final sanction of the scheme, the bankguarantee given by them could be enforced by the office of theLiquidator and this additional amount of Rs. 13,27,99,395 may thenalso be distributed between the workers.

29. On 22-12-2006, a further affidavit of Mr. Krishna Mokal on behalf of thesabha was filed placing on record a letter dated 12-12-2006, signed byMr. Sanjay Dalmia, a director of their sponsor M/s. Prateek Apparels (P.)Ltd., informing his and their advocates that the textile unit as per thescheme will be started in the name of M/s. BLR Knits (P.) Ltd. The originalof the said letter was annexed to the affidavit. Counsel contended thatunder the definition of sponsor of their scheme, the words “sponsors”meant “M/s. Prateek Apparels (P.) Ltd., or their group companies, familyconcerns or nominees”. My attention was drawn to this definition in PartII-A(1) of the modified scheme as annexed to the affidavit of Mr. KrishnaMokal dated 19-12-2006. The said affidavit gave certain further clarifica-tions and stated that M/s. BLR Knits (P.) Ltd., had also agreed that all theworkers who had not reached the age of superannuation will be offeredemployment in the textile unit which will employ approximate 300 work-men. In case after providing employment to all the eligible workers asabove, if there were any vacancies, then employment to the nominees ofthe other workmen will also be considered. That M/s. BLR Knits (P.) Ltd.,had also agreed to submit a project report which was under preparation,giving the details of the revival scheme including the plant and machinery,production capacity, cost of project, means of finance, etc., which will besubmitted within 60 days on the final sanction of the scheme by the HighCourt.


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30. On 22-12-2006, on behalf of the mahasangh a further affidavit was filedplacing on record that the sangh now supported the amendments as putforward by the sabha since the workers would stand to get an additionalamount of Rs. 23,70,538 as compared to the amount payable under theamended scheme by the petitioner and as this amount is promised to bepaid within 15 days of the sanction of the scheme.

31. Shri Sanjay Singhvi, learned counsel for mahasangh, however, arguedbefore the court that the stand of the workers would be, in his words,mercenary in nature and they would support the scheme/modificationwhich gave the maximum benefits to the workers. According to him, it wastherefore, clarified in the aforesaid affidavit that if the petitioner was tofurther amend the scheme to provide interest at a substantially higherrate, say at 11 per cent per annum and to provide for the payment of thisamount within 15 days of the sanction of the scheme, the mahasanghwould support the petitioner’s scheme instead.

32. As stated in paragraph one of this judgment, the petitioner as well asthe sabha then, through the recorded statements of their counsel, in-creased the interest payable to the workers to 11 per cent and in view ofcertain additional benefits like revival being offered by the sabha, astatement came to be made by the advocate of the mahasangh in such acase; all things considered, the scheme as modified by the sabha would bepreferable to the members of the mahasangh. It may be stated that afurther affidavit dated 26-12-2006, was filed by S.M. Hegde, a director ofM/s. Bali Properties and Investments (P.) Ltd., placing on record the twodocuments which are referred to in paragraph 1 of this judgment. This ishow the record in the case rests.

33. At this stage, it will be convenient to give a comparative table of thescheme offered by the petitioner and the said scheme as modified by thesabha. The comparative table is as follows :

(A) Amount offered to unsecured creditors and statutory creditors : Thescheme of the petitioner as well as suggested modification, both offerto liquidate the liability of the unsecured creditors and the statutoryauthorities by deposit of an amount of Rs. 1,16,83,738. This figure iswell above the adjudicated claim arrived at by the Official Liquidatorin this regard and the unsecured creditors present at the meetinghave unanimously granted their approval. The statutory creditorsexceeding 3/4th in value have also granted their approval. Thescheme and the modifications of the sabha are therefore, exactly atpar.

(B) Amount payable to workers : (i) The petitioner has offered to pay theadjudicated amount of Rs. 4,87,45,470 from June 11, 1987, withinterest at 11 per cent on the adjudicated amount totallingRs. 14,34,71,743, though it is not specifically mentioned in the petitionas to within how much time this amount would be paid. The amount




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is to be raised by obtaining a loan. The petitioner’s scheme is notapproved by both the workers unions or any worker.

(ii) As against this, the modified scheme of the sabha offers to pay anamount of Rs. 1,43,46,37,497 within 15 days of the sanction of thescheme by the High Court. However, in addition to this offer themodified scheme of the sabha offers a proposal for the revival of thecompany’s textile business and re-employment of such workers whohave not reached the age of superannuation by the putting up andstarting of a textile unit which will employ approximately 300 work-ers and which unit will be housed on an area of approximately 20,000sq. ft. This modified scheme submitted by the sabha is now supportedby both the unions who claim to represent and is not opposed by anyindividual worker.

(C) Amount due to secured creditor : (i) The scheme of the petitionerprovides that in the event of there being a decree in favour of thesecured creditor in the High Court Suit No. 3290 of 1986, the saidclaim will stand satisfied and/or be met with from the mortgagedproperty. It states that the secured creditor has agreed to waive theclaim for the balance, remaining unsatisfied, if any, provided thescheme of the petitioner is sanctioned by this court (which statementand alleged waiver is denied by the secured creditor on oath). Thesecured creditor does not approve of the petitioner’s scheme.

(ii) As per the modified scheme of the “sabha”, the claim of BaliProperties and Investments (P.) Ltd., would be settled and paymentmade as per settlement, failing which the sponsor agrees to pay thedecretal amount as decreed in the High Court Suit No. 3290 of 1986and in the event of there being a decree and the decree remainingunsatisfied by the sale of the properties of the company, the sponsorwill bring in or make good the shortfall amount, if any, to satisfy thedecree. The sponsor shall be entitled to be brought on record in thesaid suit for the defendants in order to contest the said suit. Therecord indicates that the secured creditor has granted his approvalsubject to the satisfaction of his claim in the High Court Suit No. 3290of 1986. In addition to that the sponsor of the sabha has agreed todeposit the full value of the company’s properties claimed by thepetitioner to be Rs. 52,07,50,000 and not controverted by the securedcreditor in this court within any reasonable period from the date ofthe sanction of the scheme by this court.

Though Bali Properties and Investments (P.) Ltd., have opposed boththe scheme as well as the modification, it can be seen that themodified scheme propounded by the sabha agrees to settle the entiredecretal amount and also contemplates an immediate down pay-ment of the value of the company’s properties as mentioned in thepetition, which value has never been controverted by the securedcreditor in the various affidavits which have been filed in this court


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on its behalf. It can also be seen from the Official Liquidator’s reportdated 11-10-2006, that apart from the factory premises at Thane, thecompany has several other properties which are yet to be sold andwhich are also a part of the security available to the secured creditor.It cannot be lost sight of at this stage that the secured creditorclaimed to have got executed an assignment deed in its favour fromthe Central Bank of India. They claimed to have purchased the rightsof the Central Bank of India for a settled amount of Rs. 17 crores inthe year 1995. Though an affidavit dated 15-12-2006, was filed onbehalf of the secured creditor, they have chosen not to place beforethis court the said deed of assignment, so that the details of theiralleged transaction with the Central Bank of India could be perusedby the court. It can be seen from paragraph 11 of the petition that thepetitioner has admitted that the said Bali Properties and Investments(P.) Ltd., have been acting at the request of the petitioner since 1994and the petitioner admits that it was his request that Bali Propertiesand Investments (P.) Ltd., paid to the bank by 30-9-1994, a sum ofRs. 6,05,43,723. This amount was added to the amount of Rs. 3,24,56,277which were the company’s existing fixed deposits and were directedby the court to be endorsed to the bank by an order dated 19-9-1994.That thereafter according to the petitioner, to make up the settle-ment amount of Rs. 17 crores the balance amount of Rs. 7,75,00,000was paid by Bali Properties and Investments (P.) Ltd., to the bank. Itthus appears that Bali Properties and Investments (P.) Ltd., has onlypaid an amount of Rs. 12,80,43,723. They have not disclosed to thiscourt as to how they now have a claim of Rs. 123 crores. Noparticulars of any such claim have been given and the claim as yetremains unproved. In the affidavits filed on their behalf they no-where contended the value of the company’s properties valued bythe petitioner as Rs. 52,07,50,000 was less. They have given noseparate valuation of the properties of the company which are a partof the mortgaged security and it cannot be lost sight of that there are30 cases under section 630 of the Companies Act against workmenresiding on the property which are pending before the Magistrateand wherein the workmen are claiming tenancy rights. The modifi-cation as suggested by the “sabha” clearly mentions that they will paythe amount as decreed by this court in the suit filed against thecompany. In my view, this statement coupled with the down depositof Rs. 52,07,50,000 provides sufficient security and coupled with thefact that if in fact, the value of the company’s property is more, thena decree in excess of Rs. 52,07,50,000 with accruing interest can berealised in execution, sufficiently safeguards the interest of thesecured creditor.

(D) Amount due to shareholders : (i) The scheme of the petitionerenvisaged that the shareholders would borrow an amount ofRs. 14,21,12,595 (which amount will now stand increased to




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Rs. 14,34,71,743 in view of the offer to pay interest at 11 per centinstead of 10 per cent to make payment to the workers, unsecuredcreditors and statutory creditors.(ii) The scheme as modified by the sabha proposes to raise withouttaking a loan, an amount of Rs. 13,27,99,395 for down payment toworkers (which amount will now stand increased to Rs. 14,36,37,497in view of the acceptance of payment of interest at 11 per cent to theworkers) and to give a further bank guarantee for an additionalamount of Rs. 13,27,99,395 by way of performance guarantee foropening and running a textile unit. In this regard the shareholderswho had agreed to taking on a liability by incurring further loans canhave no grievances against the bringing in of amounts for paymentto the workers, unsecured creditors and statutory creditors withouttaking a loan. Similarly, an amount of Rs. 1,16,83,738 is to be raisedand paid by the sponsor of the sabha without taking any loan. Themodification of the sabha saves the equity holders from theseadditional burdens as proposed by the scheme of the petitioner andthe shareholders can have no grievance if they are divested of theburdens as are proposed by the petitioner to be borne by thecompany and consequently the shareholders, by taking such loans.The company also gets to retain the name/brand name/mark Modella.

34. From the aforesaid comparative table, it is clear that the scheme as‘modified by the sabha is clearly equal to, in two respects and moreadvantageous to all parties in several other respects, than the scheme asproposed by the petitioner. The scheme as proposed by the petitioner isnow opposed by both the unions and their member workers. There is nodisapproval to it by any other individual worker. The scheme is also moreadvantageous to the secured creditor particularly as it contemplatesdown payment of the entire value of the property as calculated by thepetitioner of the land and structures at Thane which is the subject-matterof the scheme, it is more advantageous to the shareholders as it reducestheir burden of taking further loans.35. Faced with this situation, no serious argument was made by thecounsel appearing for the petitioner to contend that the scheme asproposed by the petitioner was superior to the scheme as sought to bemodified by the “sabha”. Counsel, however, submitted several legal propo-sitions to contend that in any case, the modifications as proposed by the“sabha” ought not to be granted and these submissions are now dealt withhereinbelow.36. The first submission made on behalf of the petitioner was that thecompany court’s jurisdiction while exercising powers under sections 391and 392 was not appellate in nature but was peripheral and supervisory.He relied upon paragraph 28 of the judgment in the case of Miheer H.Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 7921 (SC); 519, 520,

1. 10 SCL 70.


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to expound the scope of the jurisdiction of the company court. The settledlegal position relating to the jurisdiction of the company court was laiddown by the Apex Court in the said case in the following terms :

“In view of the aforesaid settled legal position, therefore, the scope andambit of the jurisdiction of the company court has clearly got earmarked.The following broad contours of such jurisdiction have emerged :

1. The sanctioning court has to see to it that all the requisite statutoryprocedures for supporting such a scheme has been complied withand that the requisite meetings as contemplated by section 391(1)(a)have been held.

2. That the scheme put up for sanction of the court is backed up bythe requisite majority vote as required by section 391, sub-section(2).

3. That the concerned meetings of the creditors or members or anyclass of them had the relevant material to enable the voters toarrive at an informed decision for approving the scheme in question.That the majority decision of the concerned class of voters is justand fair to the class as a whole so as to legitimately bind even thedissenting members of that class.

4. That all necessary material indicated by section 393(1)(a) is placedbefore the voters at the concerned meetings as contemplated bysection 391, sub-section (1).

5. That all the requisite material contemplated by the proviso to sub-section (2) of section 391 of the Act is placed before the court by theconcerned applicant seeking sanction for such a scheme and thecourt gets satisfied about the same.

6. That the proposed scheme of compromise and arrangement is notfound to be violative of any provision of law and is not contrary topublic policy. For ascertaining the real purpose underlying thescheme with a view to be satisfied on this aspect, the court, ifnecessary, can pierce the veil of apparent corporate purposeunderlying the scheme and can judiciously x-ray the same.

7. That the company court has also to satisfy itself that members orclass of members or creditors or class of creditors, as the case maybe, were acting bona fide and in good faith and were not coercingthe minority in order to promote any interest adverse to that of thelatter comprising of the same class whom they purported torepresent.

8. That the scheme as a whole is also found to be just, fair andreasonable from the point of view of prudent men of businesstaking a commercial decision beneficial to the class represented bythem for whom the scheme is meant.

9. Once the aforesaid broad parameters about the requirement of ascheme for getting sanction of the court are found to have beenmet, the court will have no further jurisdiction to sit in appeal over




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the commercial wisdom of the majority of the class of persons whowith their open eyes have given their approval to the scheme evenif in view of the court there would be a better scheme for thecompany and its members or creditors for whom the scheme isframed. The court cannot refuse to sanction such a scheme on thatground as it would otherwise amount to the court exercisingappellate jurisdiction over the scheme rather than its supervisoryjurisdiction.

The aforesaid parameters of the scope and ambit of the jurisdiction of thecompany court which is called upon to sanction a scheme of compromiseand arrangement are not exhaustive but only broadly illustrative of thecontours of the court’s jurisdiction.” (p. 818)

Relying on these observations, counsel for the petitioner contended thatthe Apex Court had laid down that the company court has no jurisdictionto sit in appeal over the commercial wisdom of the majority of the class ofpersons who, with their open eyes have given their approval to the scheme,even if, in view of the court, there could be a better scheme for thecompany and its members or creditors for whom the scheme is framed.In this regard, I find that insofar as the scheme of the petitioner wasconcerned, the requisite statutory procedure was duly followed. Thescheme of the petitioner did not find approval from the workmen and thisis evident from the report of the chairman of the meeting of workmenwhich is on record. Some of these workmen are residing on the company’sproperty in question. It is clear that the scheme as propounded by thepetitioner in the absence of approval by the workmen and now alsodisapproved by the secured creditor, is clearly rendered unworkable andcannot be sanctioned.

37. However, after the petition was admitted, all concerned parties, haveby a notice, been given a further opportunity to appear at the stage of thefinal hearing of this petition. The two unions representing the erstwhileworkers of the company, the sponsor of the “sabha” and the securedcreditor have chosen to appear through advocates and have been heardextensively. All the workers now support the scheme as modified on behalfof the “sabha”. The modifications as suggested by the “sabha” are nowsupported by the “mahasangh”. No worker has appeared in any individualcapacity to express his disapproval of the scheme as modified. Theunsecured creditors have granted their approval to the scheme and inspite of the notice, no unsecured creditor has appeared at the stage of thehearing of the petition to oppose the modifications as suggested by the“sabha”. As far as the statutory creditors are concerned, since 3/4th of thestatutory creditors in value approved of the original scheme, all of themare deemed to have granted their approval. The modifications of the“sabha” make no change in the amounts payable to them as proposed inthe petitioner’s scheme. After notice to statutory creditor has appearedbefore me to indicate that they are withdrawing their approval or thatthere is any change in their stance. The modifications as suggested by the


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“sabha”, in my view, takes adequate care of the interest of the securedcreditor insofar as it not only offers to deposit the entire market value ofthe land and structure as calculated by the petitioner and leftuncontroverted by the secured creditor but also further offers to pay theentire decretal amount if and when the suit of the secured creditor isdecreed.

38. It was contended by the counsel appearing for the petitioner that itwould be desirable to again send the matter for reconsideration in a freshmeeting of the workers. To counter this argument, it was contended by thecounsel appearing for the “sabha” and “mahasangh” that all the workersof the company are represented at the hearing. Both the existing unionshad accepted the scheme with the modifications as suggested by the“sabha” and it was pointless to send the matter back to the stage of holdinga meeting of the workers. Counsel for the sabha further contended thatthe powers of the court for modifying the scheme under section 392 wascouched in wide terms and that such powers could be exercised even suomotu without calling the meeting of all the members or creditors and thatthis power of modification could be exercised at the time of sanctioningthe scheme. He relied upon the judgment of the Division Bench of thiscourt in the case of Shree Niwas Girni Kamgar Kruti Samiti v. RangnathBasudev Somani [2005] 127 Comp. Cas. 7521 (Bom.) in which a DivisionBench of this court explained the powers of this court under section 392(2)of the Companies Act, 1956, in the following words :

“. . .it is true that sub-section (2) of section 392 gives the court power tomodify a compromise or arrangement and this power can be exercisedeven suo motu without calling a meeting of all the members or creditorsand this power can be exercised at the time of sanctioning the schemeand at any time thereafter during the period the scheme is beingimplemented. However, on a plain reading of section itself it is clear thatthe power could be exercised only when such modification is necessaryfor proper working of the compromise or arrangement.

In other words, the provisions to the extent can only be exercised so as toprovide smooth working of the compromise or arrangement. It is nobody’scase that the scheme submitted by Somanis with LBPL as sponsor is notworkable or substitution of sponsor is necessary for the proper workingof the compromise or arrangement....” (p. 781)

39. In my view, on a plain reading of section 392(1)(b) read with section392(2) wide powers have been given to the company court to modify thescheme of a compromise or arrangement as it may consider necessary forthe proper working of the compromise or arrangement. In the case beforethe Division Bench, the compromise/arrangement which was proposedby the Somanis with LBPL as sponsor was approved by all the concernedparties before the petition was filed. It was nobody’s case that the schemesubmitted by the Somanis with LBPL as sponsor was not workable or

1. 62 SCL 175.




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substitution of sponsor was necessary for the proper working of thecompromise or arrangement. The Division Bench rejected the schemes ofthe interveners who were rank outsiders and were not persons who couldpropose a scheme of compromise or arrangement within the scope ofsection 391(1) of the Companies Act and also concluded that the schemesof such interveners did not serve public interest. In the present casehowever, the situation is entirely different. The scheme of the petitioneris rendered completely unworkable due to opposition by the two unionsrepresenting the workers and even the secured creditor. In view of sucha situation, to ensure the working of the scheme, the more beneficialmodifications suggested by the “sabha” can be sanctioned. As laid down bythe Division Bench, the powers of this court can be exercised even suomotu without calling the meeting of all the members or creditors at thetime of sanctioning the scheme. In fact, the Division Bench reached itsconclusion about what was stated in the above quoted paragraph afterreferring to and relying upon an earlier judgment of the Apex Court in thecase of S.K. Gupta v. K. P. Jain [1979] 49 Comp. Cas. 342 and a judgment ofthe Gujarat High Court Tungabhadra Industries Ltd. v. National DairyDevelopment Board [1984] 55 Comp. Cas. 107.

40. In the case of S.K. Gupta’s case (supra) the Apex Court dealt with thequestion as to whether the scope of modification could include the makingof additions and omissions and the substitution of the sponsor or pro-pounder of a scheme. The Apex Court concluded that the substitution ofthe sponsor or propounder of a scheme or arrangement could be made byway of modification. The relevant observations of the Apex Court are asunder :

“Strictly speaking, omission of the original sponsor and substitutinganother one would not change the ‘basic fabric’ of the scheme. Thescheme in this case is one by which a compromise is offered to theunsecured creditors of the company and whoever comes in as sponsorwould be bound by it. Undoubtedly, a sponsor of the scheme enjoys animportant place in the scheme of compromise and/or arrangement butbasically the scheme is between the company and its creditors or anyclass of them, or the company and its members or any class of them, andnot between the sponsor of the scheme and the creditor or member. Thescheme represents a contract sanctified by court’s approval between thecompany and the creditors and/or members of the company. Thecompany may as well be in charge of directors and the implementationof the scheme may come through the agency of directors but that wouldnot lead to the conclusion that during the working of the scheme thedirectors cannot be changed. If the scheme has to be ultimatelyimplemented by the company as part of its contract and yet its directorscan be changed according to its articles of association, we see nodifference in the situation where a sponsor is required to be changed inthe facts and circumstances of a case. Therefore, it is not possible toaccept the submission that as and by way of modification one sponsor ofa scheme cannot be substituted for another sponsor”. (p. 359)


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41. In the case of Tungabhadra Industries Ltd. (supra), the Gujarat HighCourt relied upon the judgment of the Apex Court in S.K. Gupta’s case(supra). The Division Bench of the Gujarat High Court concluded that thevery birth of sections 391 and 392 had a purpose. These provisions hadbeen designed with a view that a productive unit was saved from eco-nomic disaster and was brought back to life. That there was no warrant forinterpreting these two provisions in a restricted fashion. It concluded thatin pursuance of the said power of modification, the court has power to dealwith the scheme of compromise or arrangement for the purpose ofmaking it workable and it has power to substitute, by way of modification,one sponsor for another. That the identity or the sponsor is not somethingbasic in the structure of the scheme. Whether or not it is of the essence ofthe scheme or a basic element in the scheme, is a question of factdepending on the circumstances of each case. Even if one has to proceedon the assumption in certain cases it may be a basic element in the scheme,whether or not it is a basic element is a question which can be examinedby the court.

42. It was next sought to be contended that the modifications suggestedby the sabha was effectively a scheme by the sponsor who was not aperson who could propose a compromise or arrangement under section391(1) of the Companies Act, 1956, insofar as the sponsor was not thecompany, its creditor or member. This submission must be stated to berejected as the modification to the scheme is not put by the sponsor butin fact, it is put up by the union which represents the workers. It wasconceded that the workers who are yet to be paid are creditors of thecompany and in fact, the Companies Act by virtue of section 529A putsthem at pari passu with secured creditors. The scheme as such has notbeen put up by the sponsor who is merely to bring in the finance and starta textile unit but has been put up by the workers who are creditors andtherefore, persons entitled to propose a scheme under section 391 and arealso persons interested within the meaning of section 392.

43. It was then contended that the sponsor of the scheme was notfinancially solvent. In this regard, counsel for the secured creditorsthrough an affidavit dated 26-12-2006, sought to bring to my notice theauditor’s report dated 31-8-2006. It was stated in the affidavit that theshare capital of the sponsor is Rs. 7 crores, whereas its current loansand liabilities aggregate to Rs. 29,39,05,329. The current net assets aggre-gate to Rs. 16,85,99,581 and hence the net worth of the sponsor companyis negative. In my view, these figures may not reflect the borrowingcapacity or the real capacity of the sponsor to raise the amount throughother sources. The sabha and the sponsor have both filed affidavitspromising to bring in amounts under the scheme within a short period oftime. The proof of the pudding is in its eating. If they fail to do so, they arenot outside the jurisdiction of the company court and this court has thepower, jurisdiction and ability to pass further orders if thought necessary.A reference must also be made to the document being a letter dated




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12-12-2006, said to have been written by the director of the sponsor,Sanjay Dalmia to his advocate Shri Rajesh Shah and the advocate for thesabha Shri Sanjay G. Udeshi informing them that the sponsor will not beinterested to implement the textile unit. Both the advocates who werepresent in the court denied that they have received such a letter. Counselappearing with such advocates submitted that this was a privilegeddocument. They contended that even assuming that such a letter was infact written, the same must be read along with another letter written bySanjay Dalmia dated 12-12-2006, which is annexed in the original to theaffidavit of Mr. Krishna Mokal dated 22-12-2006, and by which Mr. SanjayDalmia has informed the same advocates that the textile unit as per thescheme will be started in the name of BLR Knits and Mr. Anand Agarwalthe authorised signatory on behalf of BLR Knits was hereby authorized toappoint advocates, counsel, affirm affidavits, and to do all such acts anddeeds as may be required for giving effect to the aforesaid matter. In myview, what is important from the point of view of the workers is that thetextile unit is established and run. The scheme as modified by the sabhaoffers a bank guarantee to the tune of Rs. 13,27,99,395 to secure theperformance of this promise. The scheme envisaged the opening of atextile unit within a maximum period of 18 months from the date ofpossession including construction of factory building and installation ofplant and machinery. The sponsor and the sabha has undertaken to re-employ all the eligible workers who opt for re-employment and com-mence operations within 18 months from the date of the final sanction ofthe scheme. The bank guarantee can be enforced by the Official Liqui-dator in case of default. They have agreed to furnish this bank guaranteeto the Official Liquidator within 90 days by the sanction of the scheme bythe High Court and in my view the giving of such a guarantee secures theperformance of the promise to revive a textile unit.

44. In the net result, the following order is passed :

Order

(A) The scheme as proposed by the petitioner is rejected ;

(B) The said scheme with the modifications as proposed by the ShramikUtkarsha Sabha and as incorporated in the document at exhibit A to theaffidavit of Mr. Krishna Mokal on behalf of the Shramik Utkarsha Sabhadated December 19, 2006, and filed in this court on 20-12-2006, is sanc-tioned with the following clarifications (as expressly given in variousaffidavits of Mr. Krishna Mokal on behalf of the Sabha) and with furthermodifications as specified hereunder :

(i) That the amount of Rs. 1,16,83,738 and Rs. 14,36,37,497 will bedeposited by the sponsor with the Official Liquidator within 15 daysof the sanction of the scheme;

(ii) That a further amount of Rs. 52,07,50,000 will be deposited by thesponsor by a pay order in favour of the Prothonotary and Senior


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Master with the Official Liquidator within a period of 60 days of thesanction of the scheme by this court;

(iii) In addition to the amount mentioned in clause B(i) for downpayment to the workers, the sponsor will furnish a bank guaranteeto the Official Liquidator for an amount of Rs. 13,27,99,395 to fulfiltheir obligations of starting and running a textile unit as contem-plated by the modified scheme of the Sabha as sanctioned by thiscourt. This textile mill will not use the name, brand name or mark‘Modella’;

(iv) If the textile unit is not started by the sponsor within the period of 18months from the date of this order according final section to thescheme or if the textile unit is not kept running for a minimum periodof three years after it has been started, then the Official Liquidatorwill be at liberty to encash the bank guarantee and distribute theamounts realised to the eligible workers in the same proportion inwhich the down payment is distributed to them;

(v) That the textile unit which should be started by the sponsor will behoused on an approximate area of 20,000 sq. feet;

(vi) The textile unit will employ approximately 300 workers and all theworkers who have not reached the age of superannuation will beoffered employment in the textile unit and after providing employ-ment to the eligible workers, if there are vacancies then the employ-ment to the other nominees of the erstwhile ex-workers will beconsidered as mentioned in paragraph 3(b) of the affidavit ofMr. Krishna Mokal on behalf of the Sabha dated 22-12-2006;

(vii) That the sponsor will be responsible for meeting any contingentliability that may arise from the setting up of the textile unit;

(C) After the deposit of Rs. 52,07,50,000, on the filing of a further affidavitby the secured creditor M/s. Bali Properties and Investments (P.) Ltd.,accepting the modified scheme as sanctioned by this court, the securedcreditor will be at liberty to withdraw the said amount unconditionally ifhe withdraws Suit No. 3290 of 1986, and subject to giving solventsecurity to the satisfaction of the Prothonotary and Senior Master, ifhe chooses to peruse Suit No. 3290 of 1986. It is made, clearthat withdrawal of this amount on furnishing solvent security will notprevent the secured creditor from perusing Suit No. 3290 of 1986 or fromexecuting any decree for an amount exceeding Rs. 52,07,50,000 withinterest accruing thereon as on the date of the decree against the proper-ties of the company. If, however, there is no affidavit accepting thesanctioned scheme filed within 30 days from the date of deposit then thisamount of Rs. 52,07,50,000 will be transferred by the Prothonotary andSenior Master to the account of Suit No. 3290 of 1986 and invested in afixed deposit with a nationalised bank, initially for a period of three years.Further, disbursement of this amount will be in accordance with the




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orders which may be passed in the said suit. If, however, the suit isultimately dismissed or decreed for an amount lesser than the depositedamount, the deposited amount or the excess balance, if any will berepayable to the party depositing this amount;

(D) The Official Liquidator should commence the payment of the adjudi-cated claims of workers/their heirs or legal representatives after 30 days,without any further order of this court expeditiously. It is made clear thatthe heirs/legal representatives of any deceased worker will be entitled toreceive a share as due to them under applicable law. Liberty to the OfficialLiquidator to apply in case of any difficulty relative to disbursement;

45. Company Petition No. 472 of 2006 stands disposed of accordingly. Allparties, the Official Liquidator and the Prothonotary and Senior Master toact on a copy of this order duly authenticated by the associate of this court.Certified copy expedited. Advocate for the petitioner applies for stay. Ablanket stay is refused but the Official Liquidator is directed not to makefinal disbursement of any amount deposited for a period of 45 days fromthe date of this order.

46. Liberty to the parties to apply for orders in case any default iscommitted including seeking of rejection of the modified scheme. If anysuch application is made, the same will be considered by the regular courton merits. It is made clear that this clarification will not preclude thepetitioner for asking extension of time in accordance with law. If any suchapplication is made, such application will also be placed before the regularcourt for consideration on merits.

47. On deposit of all the amounts, furnishing of a bank guarantee andcompliance of directions given in this order, Company Petition No. 404 of1986 also to stand disposed of without any further orders of this court.

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SATSEBI (FUTP) REGULATIONS

[2008] 81 SCL 359 (SAT - MUMBAI)SECURITIES APPELLATE TRIBUNAL, MUMBAI BENCH

Shree Rama Multi-Tech Ltd.

v.

Securities and Exchange Board of IndiaJUSTICE N.K. SODHI, PRESIDING OFFICER

ARUN BHARGAVA AND UTPAL BHATTACHARYA, MEMBERAPPEAL NO. 377 OF 2004

AUGUST 1, 2007

Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair TradePractices Relating to Securities Market) Regulations, 2003 - Prohibition ofmanipulative, fraudulent and unfair trade practices - Appellant-company’sshares were listed, among others, on NSE and BSE - Board carried outinvestigations into trading of scrip of company, which revealed that companyand its directors provided funds through ‘G’ to five clients, who were theirassociates, to enable them to manipulate price of scrip of company - Board,after considering replies of appellants, found company and its directorsguilty of charge and, accordingly, restrained them from accessing capitalmarket for a period of five years - Whether since there were some basic errorsin charges against appellants which required correction and matter quaappellants required reconsideration, impugned order was to be set aside andmatter was to be remanded back to Board to pass fresh orders after obtainingfresh replies from appellants - Held, yes

FACTS

The shares of the appellant-company were listed, among others, on theNational Stock Exchange and the Bombay Stock Exchange. The Boardcarried out investigations into the trading of the scrip of the company andit transpired that most of the shares were traded by two brokers, whoexecuted trades on behalf of five clients. The investigations also revealedthat one ‘G’ played the role of a conduit for the movement of funds fordealing in the shares of the company, and that the funds moved from theaccounts of the company to the accounts of the aforesaid clients whotraded in the script. Based on those investigations, the Board issued show-cause notices to the appellant-company, and its directors. The appellantsfiled their replies denying the allegations. On a consideration of the entirematerial collected during the course of investigations and in the enquiry,

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the Board came to the conclusion that the funds had actually flown fromthe company to its associate entities, which, on the basis of those funds,had traded in the scrip of the company, thereby manipulating the pricethereof in the market. Accordingly, the appellant-company and its direc-tors had been restrained from accessing the capital market for a period offive years.

On appeal :

HELD

There were some basic errors in the charges which required correction.Whole matter qua the appellants required reconsideration after obtainingfurther clarifications, if any, from them. In that view of the matter, theimpugned orders were to be set aside without expressing any opinion inregard to the allegations levelled against the appellants and the case was tobe remanded to the Board. The charge levelled against the appellants wasquite clear and the Board would proceed to obtain a fresh reply, if any, fromthe appellants and on a consideration of the material, which it already hador would collect during the course of the enquiry, would pass a fresh orderexpeditiously in accordance with law. [Para 4]

Hetal Thakore, Agnes Basadia and Ms. Purvi Chhatrapati for the Appel-lant. Kumar Desai and Santosh Thakur for the Respondent.

ORDER

Justice N.K. Sodhi, Presiding Officer. - This order will dispose of threeconnected Appeal Nos. 377, 378 and 380 of 2004 in which commonquestions of law and fact arise. Since we are remanding the cases back tothe Securities and Exchange Board of India (‘the Board’) for passing afresh order in accordance with law, it is not necessary to state the facts ingreat detail.

2. Shree Rama Multi-Tech Ltd. (‘the Company’) is public limited companyincorporated under the provisions of the Companies Act and is engaged inthe manufacture of laminated web material lami-tubes and other types offilms etc. Its shares are listed, among others, on the National StockExchange and the Bombay Stock Exchange. The Board carried outinvestigations into the trading of the scrip of the Company and it tran-spired that most of the shares were traded by two brokers, namelyKhandwala Finance Ltd. and Jayantilal Khandwala & Sons Ltd. It furthertranspired that these brokers executed trades on their own behalf and onbehalf of 5 clients namely, East West Polyart Ltd., Ideal Petro ProductsLtd., Satellite Management Services (P.) Ltd., Shree Rama Polysynth (P.)Ltd. and Shree Developers (P.) Ltd. The investigations also revealed thatM/s. Global Finance played the role of a conduit for the movement offunds for dealing in the shares of the Company and that the funds movedfrom the accounts of the Company to the accounts of the aforesaid clientswho traded in the scrip. Based on these investigations, the Board issued


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show-cause notices to the Company, its directors, to Global Finance andalso to the five aforesaid clients on whose behalf the brokers had executedthe trades. It was alleged that on receipt of the funds from the Companythrough Global Finance the five clients had traded in the scrip wherebythey manipulated the price thereof in the market and after they hiked thesame, they off loaded their stocks by synchronized trades. After holding’an enquiry under the Securities and Exchange Board of India (Prohi-bitions of Fraudulent and Unfair Trade Practices Relating to SecuritiesMarket) Regulations the Board found the charges established and byseparate orders restrained the five clients from accessing the capitalmarket for a period of three years and since Global Finance had acted asa conduit in providing the finances for manipulating the trades, it wasrestrained for a period of five years. The Company and its directors havealso been restrained from accessing the capital market for a period of fiveyears. It is against these orders that a bunch of 10 appeals were filed by theappellants, the aforesaid five clients Global Finance and by one Asha Patelwho had also been found to have manipulated the price of the scrip in themarket. The Company and its directors have filed Appeal Nos. 377, 378 and380 of 2004 which came up for hearing along with Appeal Nos. 362, 374,379, 381, 389, 390 and 403 of 2004 filed by the clients and other entities. Thisbunch of appeals came up for hearing yesterday and by our separate orderpassed on 31-7-2007 we dismissed seven appeals (Nos. 362, 374, 379, 381,389, 390 and 403 of 2004) filed by the five clients and also by Global Financeand Asha Patel. The appeals filed by the Company and its directors havecome up for hearing today.

3. As earlier observed, the charge levelled against the company and itsdirectors is that they provided funds through Global Finance to the fiveclients who were their associates, to enable them to manipulate the priceof the scrip of the company. It will be relevant to State the precise chargelevelled in the show-cause notices which reads as under :

“Thus it was observed that SRMTL is vitally interested in the transactionsof its associate entities. The brokers Khandwala Finance Ltd. also leadmanaged the public issue of the company. Further, records suggest thatmisappropriation of the company funds took place and money wastransferred to associate companies to purchase the shares of SRMTL.Strategic partners such as CDC Financial Services (Mauritius) Ltd. havealso mentioned about mismanagement of funds and falsification ofaccounts. Further (in respect of the consideration its direct/indirectfinancing it can be concluded that SRMTL and its Directors aided andabetted price manipulation of the scrip of SRMTL and are guilty ofviolating the provisions of Regulation 4 of SEBI (Prohibition of Fraudulentand Unfair Trade Practices relating to Securities Market) Regulations,1995.”

4. The Company and its directors filed their replies denying the allegations.On a consideration of the entire material collected by the Board during thecourse of investigations and in the enquiry came to the conclusion that the

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funds had actually flown from the Company to its associate entities whichon the basis of those funds had traded in the scrip of the Company therebymanipulating the price thereof in the market. While arriving at thisconclusion the Board has placed reliance on some charts allegedly indicat-ing flow of funds from the Company to its associates and also to GlobalFinance and vice versa. These findings recorded by the Board are nowunder challenge before us in these appeals.

5. We have heard the learned counsel for the parties and having perusedthe impugned order and the charges relied upon therein we find that thereare some basic errors in the charges which require correction. We are alsosatisfied that the whole matter qua the appellants requires reconsidera-tion after obtaining further clarifications, if any, from them. In this viewof the matter and without expressing any opinion in regard to theallegations levelled against the appellants we set aside the impugnedorders and remand the case to the Board. The charge levelled against theappellant as reproduced hereinabove is quite clear and the Board shallproceed to obtain a fresh reply, if any, from the appellants and on aconsideration of the material that it already has or may collect during thecourse of the enquiry shall pass a fresh order expeditiously in accordancewith law but not later than 31-12-2007. Since a direction is being issued tocomplete the enquiry before the end of this year we also direct theappellants to cooperate with the Board in this regard. The appellants may,if they so like, file their reply to the show-cause notice already served onthem on or before 31-8-2007 and appear before the Board on 3-9-2007 forfurther proceedings.

6. Before parting, it may be mentioned that we had disposed of theconcerned appeals of the aforesaid clients and Global Finance yesterday.It is made clear that any observation made by us in our order disposing ofthose appeals shall not operate against the appeals as they were not partiesthereto. When these appeals were admitted the operation of the impugnedorder had not been stayed and by now the appellants have alreadysuffered the penalty for about three years and they have remained out ofthe market. In case the Board comes to the conclusion that the chargeagainst them stands established and that they deserve to be debarredfrom accessing the capital market, the period for which they have alreadysuffered the penalty shall be taken into consideration. The appeals standdisposed of accordingly with no order as to costs.

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ATFFEFERA

[2008] 81 SCL 363 (ATFFE - NEW DELHI)APPELLATE TRIBUNAL FOR FOREIGN EXCHANGE, NEW

DELHIEnforcement Directorate

v.

Sangeeta Granites Ltd.O.P. NAHAR, CHAIRPERSON

AND KM. VIJAY LAXMI, MEMBERREVISION PETITION NOS. 92 TO 95 OF 2001

APRIL 25, 2006

Section 18, read with section 50, of the Foreign Exchange Regulation Act,1973 - Payment for exported goods - Respondent-company exported certaingoods but foreign buyers failed to pay price - Proceedings for contraventionof sections 18(2) and 18(3) were initiated against respondent-company and itsthree directors - Respondent contended that concerned buyers had becomebankrupt and untraceable - Adjudicating authority considering two lettersfiled by respondents, i.e., one from some private agency relating to bankruptcyof buyers and other from solicitors relating to untraceability of buyers,dropped proceeding against directors, but imposed penalty on respondent-company for not taking reasonable steps for repatriating outstanding exportproceeds - Enforcement Directorate filed revision petitions challengingimpugned order on ground that adjudicating authority should not haveaccepted said letters as proof of bankruptcy or untraceability of foreignbuyers - Whether field of appreciation of evidence on facts solely lies withinjurisdiction of adjudicating authority and Tribunal cannot enlarge itsjurisdiction by looking at evaluation of evidence - Held, yes - Whether sinceadjudicating authority had accepted those two letters as proof of contentionof taking reasonable steps by respondents and no evidence was brought byEnforcement Directorate against acceptability of said letters, revision petitionswere to be dismissed as having no merits - Held, yes

FACTS

The respondent-company exported certain goods by different consign-ments, but the foreign buyers failed to pay the price. Proceedings under

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section 18 were initiated against the respondent and its three directors.The respondent contended that the buyers of said goods had becomebankrupt and untraceable. It also filed two letters, one from some privateagency and the other from solicitors in proof of bankruptcy and non-traceability of the foreign buyers. The adjudicating authority, after con-sidering said letters, dropped proceedings against the directors of therespondent-company, but imposed a penalty on the respondent-companyfor not taking reasonable steps for repatriation of outstanding exportproceeds. The Enforcement Directorate filed revision petitions challeng-ing adjudication order on the ground that dropping of proceedings withregard to outstanding export price was bad when based on the solitaryevidence in the form of two letters from some private agency and solicitorswith regard to non-traceability or insolvency of the foreign buyers.

HELD

It is a well-settled legal position that the Tribunal, under revisional powers,exercises a very limited jurisdiction. Further, this jurisdiction is required tobe sparingly used where grave injustice has occurred. The petitionernowhere stated that a serious illegality had occurred or a grave injusticehad been caused. Rather, the contentions were with regard to evaluationof evidence or the standard of value attached to a particular evidence. Thescope of the revisional jurisdiction does not extend to re-appreciation ofevidence. The Tribunal, even where on a second thought it could havereached a different conclusion, is prohibited to substitute its own view,unless conclusions arrived at by the adjudicating authority are shown to betotally wrong and illegal. The petitioner had not shown that how theconclusions arrived at by the adjudicating authority were outside thejurisdiction of the adjudicating authority. The revision petition hadsaid that evidence produced by the respondents was in the nature ofletters from solicitor or from any other private source from the USA whichshould not have been accepted, but why such proof could not be acceptedwas not known. The field of appreciation of evidence on facts solely lieswithin the jurisdiction of the adjudicating authority. Moreover, theEnforcement Directorate had not filed any appeal and, hence, the Tribunalcould not enlarge its jurisdiction by looking at the evaluation of evidence.[Para 4]

In the instant revision petitions, said two letters were available as evidence,which could either be accepted or rejected by doing proper evaluation. Theadjudicating authority had accepted those two letters as proof of thecontention of taking reasonable steps by the respondents. The question wasnot of proof beyond a reasonable doubt, but such question related only toasking about reasonable steps for repatriation of the export proceeds. Theadjudicating authority had accepted the said letters as proper proof against


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which there was no contrary evidence from the Enforcement Directorate.Therefore, the contention of the Enforcement Directorate did not containany merit. [Para 5]

Therefore, the revision petitions had been unnecessarily filed withoutbringing out any legal grounds under which the Tribunal could exercise itspowers of revision. Hence, the revision petitions were to be dismissedhaving no merits. [Para 7]

CASE REFERRED TO

Director of Enforcement v. Dr. Prakash N. Vaswani [2000] 78 ECC 779(para 6).

T.K. Gadoo for the Petitioner. Mahendra Singh for the Respondent.

ORDER

1-2. The Enforcement Directorate has filed these 4 revision petitionsagainst the respondent-company and other three respondents as Direc-tor/President of the respondent company challenging adjudication orderNo. SDE/(KRB)/VI/01/2001 dated 8-2-2001 passed by Special Director ofEnforcement whereby proceedings were dropped against other appel-lants but a penalty of Rs. 30,000 is imposed against appellant company onthe reasons of not taking reasonable steps for repatriation of outstandingproceeds of 3 GRIs amounting to US dollar 28036. It is also contended thatdropping of proceedings with regard to other outstanding export price isbad when based on the solitary evidence in the form of two letters fromsome private agency (read in contradiction to public authority) andsolicitors with regard to non-traceability or insolvency of foreign buyers.By these revision petitions, the jurisdiction of this Tribunal is invokedunder the provisions of section 52(4) of Foreign Exchange Regulation Act,1973 whereby this Tribunal is empowered to examine the legality, propri-ety and correctness of the adjudication order. We have heard elaboratearguments from Shri T.K. Gadoo, DLA on behalf of petitioner and Ld.Counsels Shri Seshanak Kumar and Shri Mahendra Singh on behalf of therespondents. The Ld. counsels for the respondents have also filed writtensubmissions which are taken on record.

3. The revision petition has inter alia stated that respondent company hasexported goods by different consignments with different GRI’s forms butthe foreign buyer failed to pay the price. It was contended before adjudi-cating authority that with regard to three GRIs of an amount of US dollar28036, the foreign buyer became bankrupt and proof in the form of abankruptcy latter from M/s. Mid Continental Adjustment, Fountain VallyCA USA was accepted by adjudicating authority. The agreement is madethat it is purely a private agency letter and cannot be treated as conclusiveproof. Further, the contention was made that other buyers as pleaded




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were untraceable and the acceptance of such plea on the basis of contentsof a letter from a local attorney from USA is bad. In substance, thecontentions are made that letter from a solicitor or any other private partycannot be accepted as proof of bankruptcy or untraceability but adjudi-cating authority did so. Hence, the conclusion is neither correct norreasonable. It is also contended that the type of letters discussed in aboveparagraph are at best interim kind of proof which should not have beenaccepted by adjudicating authority and better proof should have beencalled for. Lastly, it is contended that write off applied to RBI is notproduced before the adjudicating authority, hence, the absolving of guiltof the respondents is totally wrong and without proper appreciation of thecontentions of Enforcement Directorate.

4. This is a well settled legal position that this Tribunal under revisionalpowers is exercising a very limited jurisdiction. Further, this jurisdictionis required to be sparingly used where grave injustice has occurred. Thepetitioner nowhere states that a serious illegality has been occurred orgrave injustice has been caused. Rather, the contentions are with regardto evaluation of evidence or the standard of value attached to particularevidence. It is well settled that the scope of revisional jurisdiction does notextend to re-appreciation of evidence. This Tribunal even where on asecond thought could have reached different conclusion is prohibited tosubstitute its own view unless conclusions arrived at by the adjudicatingauthority are shown to be totally wrong and illegal. The petitioners havenot shown that how the conclusions arrive at by the adjudicating authorityis outside the jurisdiction of the adjudicating authority. As stated inparagraph 2 above, the revision petition has said that evidence producedby the respondents are in the nature of letter from Solicitor or from anyother private source from USA which should not have been accepted, butwhy such proof cannot be accepted is not known. This field of appreciationof evidence on facts solely lies within the jurisdiction of adjudicatingauthority. Moreover the Enforcement Directorate has not filed anyappeal, hence, this Tribunal cannot enlarge its jurisdiction by looking atthe evaluation of evidence.

5. According to Enforcement Directorate the two letters, i.e., one fromM/s. Mid Continental with regard to bankruptcy of certain foreign buyersand second letter from the Solicitor with regard to untraceability of theforeign buyer cannot be treated as conclusive proof and these letters arecontended to be ad interim proof. In the present revision petitions afore-said two letters are available as evidence which can either be accepted orrejected by doing proper evaluation. The adjudicating authority hasaccepted these two letters as proof of the contention of taking reasonablesteps by the respondents. The question here is not of proof beyondreasonable doubt but such question relates only to asking reasonable


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steps for repatriation of the export proceeds. The adjudicating authorityhad accepted the said letters as proper proof against which there is nocontrary evidence from the Enforcement Directorate. Therefore, thecontention of the Enforcement Directorate does not contain merit.

6. According to Ld. Counsel for the respondents the findings and conclu-sions of the adjudicating authority when based on appreciation of factscan neither be taken as arbitrary nor perverse. It is argued that againstsuch findings revisional powers cannot be exercised as held in Director ofEnforcement v. Dr. Prakash N. Vaswani [2000] 78 ECC 779. The argumentsof the Ld. Counsels are correct and revisional jurisdiction does not permitre-appreciation of the fact by this Tribunal. Rather, this is a limitedjurisdiction to oversee that proper procedure is followed for renderingjustice.

7. Therefore, these revision petitions have been unnecessarily filed with-out bringing out any legal grounds under which this Tribunal can exerciseits powers of revision. This is also an experience of this Tribunal that theEnforcement Directorate is regularly as a matter of routine invokingrevisional jurisdiction of this Tribunal and we have enormous pendinglitigation arising out of revision petitions which roughly comes to 1/5th ofthe total filing during last 3/4 years. Thus, the revisional powers are notinvoked sparingly but it is taken as a routine step without due applicationof mind. The present filing of revision petitions is no exception. Hence,these revision petitions are dismissed having no merits.

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ANDHRA PRADESH HIGH COURTCOMPANIES ACT

[2008] 81 SCL 368 (AP)HIGH COURT OF ANDHRA PRADESH

Vaishu Engineering Industries Ltd. (In Liquidation)

v.

A.P. Industrial Development Corpn.S. ANANDA REDDY, J.C.A. NO. 521 OF 2003

AND C.A. NO. 1071 OF 2005JUNE 5, 2006

Section 537, read with sections 441, 446 and 456, of the Companies Act, 1956- Winding up - Avoidance of certain attachments, executions, etc. - Whetherafter liquidation proceedings have commenced, any attachment or sale ofassets of said company, effected without leave of Court and without associationwith Official Liquidator, would be null and void - Held, yes - Whether onceproceedings of BIFR recommending winding up of company are received byregistry, proceedings for winding up would be deemed to have commencedand pending before High Court - Held, yes - Whether where auctionpurchaser, after purchasing company’s property in auction bona fide withouthaving any notice of pendency of winding up proceedings against company,had invested huge amount on purchased property and Official Liquidatoralso did not move High Court immediately after sale or within reasonabletime, but after seven years, sale in favour of auction purchaser could not beinterfered with - Held, yes

Section 29 of the State Financial Corporations Act, 1951, read with section529 of the Companies Act, 1956 - Rights of Financial Corporations in case ofdefault - Whether powers conferred on Financial Corporations under section29 are restricted by virtue of provisions of section 529 of Companies Act -Held, yes

FACTS

The company under liquidation became sick and approached the BIFRfor getting benefit of rehabilitation. The BIFR, on 20-1-1997, passedan order declaring that the company was not likely to become viablein future and, hence, it should be wound up. The said opinion wasforwarded to the concerned High Court, where on 22-7-1999, winding up


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order was passed. When the matter was pending before the BIFR, the firstrespondent-APIDC had sought permission of the BIFR to seize the assetsof the company, but the BIFR rejected the said request holding that whenthe winding up of the company was being considered, the Corporationcould not be granted permission for taking action under section 29 of theSFC Act and it should approach the concerned High Court.

However, the first respondent seized the unit and after an advertisement,the property was sold in auction in favour of highest bidder on 20-8-1998.The applicant-Official Liquidator filed the instant application, claimingthat the action of the first respondent was in violation of not only the orderpassed by the BIFR, but also the mandatory provisions of section 537, asthe said sale was effected by it after the commencement of the winding upproceedings on 12-2-1997, without the leave of this Court and, therefore,the sale was liable to be set aside. The employees union of the companyunder liquidation filed application under section 529A seeking a directionto the respondent Nos. 2 to 4, who were the secured creditors, to depositthe amounts received by them before the Official Liquidator to enable himto disburse the same to the creditors, including the workmen. In response,the first respondent submitted that the unit was seized by it, by exercisingits powers under section 29 of the SFC Act. The first respondent alsocontended that since no application was filed by any of the parties, thecommencement of the winding up proceedings could be only when thewinding up order was passed by this Court and since it had seized and soldproperty before winding up order was passed, there was no violation ofany provision. In a separate counter, the auction purchaser submitted thatit was a bona fide purchaser of the property and had invested hugeamounts, by raising further loans, not only on the buildings but also on theplant and machinery and, therefore, the sale effected in its favour mightnot be interfered with at that stage.

HELD

A perusal of section 537 shows that where any company is being wound upby or subject to the supervision of the Court, any attachment, distress orexecution put in force against the estate or assets of the company or any saleheld, without the leave of the Court, after the commencement of thewinding up, shall be void. Therefore, any action intended by anyparty, either secured creditor or otherwise, or any other party intending toget attached any execution or any proceedings or to effect the sale, leave ofthe Court is mandatory, once winding up proceedings are commenced.[Para 21]

In the instant case, an argument was advanced that since no winding uppetition was presented, the said provision might not be applicable. The saidcontention was clearly devoid of merit. Once a petition for winding up isregistered on receipt of the proceedings from the BIFR, the same has tobe construed as presentation of a petition for winding up. If so construed,

Vaishu Engineering Ltd. v. A.P. Industrial Devlp. Corpn. (AP)



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once proceeding of the BIFR was received, the proceeding for winding upwas to be deemed to have commenced and pending before the High Court.[Para 23]

Apart from that, an appeal was filed against the order of the BIFR and it waspending till it was disposed of on 15-7-1997, and during the pendency of thesaid appeal, the provisions of sub-section (1) of section 22 of the SICAapplied where there is prohibition from taking any proceedings against theassets of the company. [Para 24]

From the provisions of section 22(1), it is clear that without obtainingnecessary consent of the BIFR or the appellate authority, the APIDC, whichwas one of the secured creditors, was not entitled to proceed against theassets of the company. Therefore, the action of the APIDC was also incontravention of the provisions of the SICA. [Para 25]

When once proceedings are initiated for winding up of a company, anyattachment or sale of the assets of the said company effected without theleave of the Court, shall be null and void, in terms of section 537, read withsection 441. Therefore, the bar imposed under the provisions of the Actwould operate from the inception of the winding up proceedings before theCompany Court. Further, though it was contended by the APIDC that byvirtue of section 46B of the SFC Act, the provisions of section 29 of the SFCAct have got an overriding effect over the provisions of any other Act, butthe said contention was without any merit in view of the decision of theApex Court, wherein it was held that the powers conferred under section29 of the SFC Act are restricted by virtue of the provisions of section 529,read with section 529A, of the Companies Act, which provisions wereamended by the Amendment Act, 1985, in order to protect the interest of theworkmen of the company under liquidation. In fact, even the Apex Courthad gone to the extent of holding that even with reference to the proceedingsunder the Recovery of Debts Act for recovery of debts due to the financialinstitutions, the financial institutions are also bound by the provisions ofsection 529A and the Official Liquidator is required to be associated withthe sale as well as to the distribution of the sale proceeds among the securedcreditors, as the Official Liquidator represents the workmen who have apari passu charge over the assets of the company under liquidation and,consequently, the approval of the Company Court is also required. Therefore,under no circumstance, after the liquidation proceedings have commenced,any authority has got any right to proceed against the assets of the companywithout the leave of the Court and the association with the OfficialLiquidator attached to the High Court. [Para 52]

The judgments relied upon by the auction purchaser, no doubt, showedthat under the provisions of the Provincial Insolvency Act, the rights of thepurchaser of the property of the insolvent, during the pendency of theinsolvency proceedings, are protected, provided the purchaser is a bonafide purchaser for a consideration, without notice of the pendency of the


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proceedings. But the said proposition of law might not be of help either tothe auction purchaser or the other respondents as, admittedly, no suchprovision was incorporated either under section 537 or under section 441,protecting the interests of the parties. [Para 53]

In the instant case, the company case was pending before the High Court,the moment the proceedings of the BIFR were communicated to theregistry of the High Court for consideration to pass an order for winding up,which was received on 12-2-1997. Therefore, the moment the proceedingsof the BIFR were received by the registry, it should have been presumed thatthe proceedings were pending before the High Court. Therefore, theprovisions of section 537 were applicable, since the APIDC had seized theassets of the company on 15-2-1997, and effected the sale on 9-2-1998, andreceived the sale consideration on 19-8-1998, and delivered the possessionof the property on 20-8-1998, and all those acts had taken place only duringpendency of proceedings for winding up. [Para 54]

In addition, against the order of the BIFR dated 20-1-1997, an appeal wasfiled before the AAIFR on 15-2-1997, and the same was pending till 15-7-1997, on which date the appeal was dismissed. By virtue of the provisionsof section 22(1) of the SICA, there was a clear prohibition from proceedingagainst the assets of the company, except with the consent of the BIFR orthe appellate authority, as the case might be. Admittedly, the APIDC, whichtook the assets of the company, had approached the BIFR when the BIFRhad come to the conclusion to pass an order, referring the matter to theHigh Court for being wound up. At that stage, the APIDC requested for anorder to seize the assets of the company for realization of its debt due. Aspecific order was passed by the BIFR, negativing the request and, further,the APIDC was directed to approach the High Court for seeking permission.The APIDC, without seeking permission of either the appellate authority orthe High Court, seized the assets of the company deliberately, violating theexpress order of the BIFR, as well as the provisions of the SICA and the Act.The act of the APIDC could be considered only as an attempt to overreachthe specific order of the BIFR as well as the provisions of both the Actswhere there is a specific prohibition against the creditors to proceed againstthe assets of the company. [Para 55]

In spite of such specific declaration, the APIDC had proceeded in utterdisregard of the law declared by the High Court, prohibiting the institutionsexercising its powers under section 29 from proceeding against the assetsof the company under liquidation. The said act was again a deliberateattempt on the part of the APSFC also to overreach the assets of thecompany, thereby trying to deprive the rights of the workmen, even thoughthey had got a pari passu charge over the assets of the company underliquidation. In view of the above innumerable restrictions against theAPIDC from proceeding against the assets of the company, the sale effectedby the APIDC had to be declared as null and void and the sale was,accordingly, liable to be set aside. [Para 56]




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Coming to the claim of the purchaser, it was claimed by the purchaser thatit was bona fide purchaser for valuable consideration, without notice of thependency of the proceedings. No doubt, the auction purchaser participatedin the auction in response to the notice published by the APIDC and gaveits offer of a sum of Rs. 109 lakhs, which was considered as the highest andthe same was accepted and delivery of the assets of the company waseffected as early as on 20-8-1998. The application itself by the OfficialLiquidator was filed only in the year 2005. There was no proper explanationas to why the Official Liquidator did not move the High Court immediatelyafter the sale or at least within a reasonable time. It was not as if the OfficialLiquidator had no notice of the sale that was effected by the APIDC, sincea writ petition was filed against the sale, where the Official Liquidator wasalso impleaded as a party-respondent. [Para 57]

Apart from that, it was claimed by the auction purchaser that after thepurchase, the auction purchaser had invested huge amounts by raisingfurther loans, not only on the buildings, but also on the plant andmachinery and, therefore, it was claimed that the sale effected in its favourmight not be interfered with at that stage, i.e., nearly after 8 years of the sale.[Para 58]

That was opposed by the workers’ union, contending that a notice wasserved on the auction purchaser as to the pendency of the proceedings, butno material was brought on record, showing that any notice was served onthe auction purchaser at the time of auction, bringing to its notice thependency of the winding up proceedings or even the pendency of the appealbefore the AAIFR. In the absence of any such notice, there was no otherevidence to infer that the auction purchaser had the notice of the pendencyof the winding up proceedings before the High Court. Had the OfficialLiquidator approached the High Court immediately after the sale, eventhough the auction purchaser had no notice of the pendency of theproceedings, yet the sale ought to have been set aside, in view of thedeclaration that the said sale was void. But at instant stage at that length oftime, and further in view of the claim made by the auction purchaser thatit had made huge investments by raising loans from the financial institutions,it would not be appropriate to set aside the sale and dispossess the auctionpurchaser. [Para 59]

In view of above, the sale, that was effected in favour of the auctionpurchaser, should not be interfered with, though it was held that the salewas null and void. However, in view of the above circumstances, the APIDCwas to be directed to deposit the entire sale proceeds together with interestat 9 per cent per annum with the Official Liquidator. [Para 60]

Thus, the application was to be disposed of. [Para 61]

CASES REFERRED TO

International Coach Builders Ltd. v. Karnataka State Financial Corpn.[2003] 43 SCL 297 (SC) (para 8), T. Rajive v. A.P. State Financial Corpn.


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[2001] 32 SCL 570 (AP) (para 13), Mysore Surgical Cottons (P.) Ltd. v.Karnataka State Financial Corpn. [1988] 1 Comp. LJ 63 (Kar.) (para 27),M.K. Ranganathan v. Government of Madras [1955] 25 Comp. Cas. 344(SC) (para 27), K.S. Shivappa v. State Bank of Mysore [1986] 60 Comp. Cas.229 (Kar.) (para 28), B. Suresh v. A.P. Mahesh Co-operative Urban Bank Ltd.[2001] 34 SCL 939 (AP) (para 29), Sporolac Laboratories (P.) Ltd. v. A.P. StateFinancial Corpn. [2000] 27 SCL 559 (AP) (para 30), Rajasthan FinancialCorpn. v. Official Liquidator [1963] 2 Comp. LJ 309 (Raj.) (para 33),Karnataka State Industrial Investment & Development Corpn. Ltd. v.Shivmoni Steel Tubes Ltd. [1998] 94 Comp. Cas. 1 (Kar.) (para 36),Rajasthan Financial Corpn. v. Official Liquidator [2005] 63 SCL 468 (SC)(para 40), Allahabad Bank v. Canara Bank [2000] 101 Comp. Cas. 64 (SC)(para 40), A.P. State Financial Corpn. v. Official Liquidator [2000] 27 SCL133 (SC) (para 44), Rm. Nl. Ramaswami Chettiar v. Official Receiver AIR1960 SC 70 (para 48), Sankar Ram & Co. v. Kasi Naicker [2003] 11 SCC699 (para 49) and Damera Ramakrishna v. CTO [2005] 142 STC 515 (AP)(para 50).

Anil Kumar for the Appellant. Ajay Kumar, Smt. Y.N. Lohitha, K. GopalaKrishna Murthy and C. Kodandaram for the Respondent.

JUDGMENT

1. The first company application is filed by the Official Liquidator,representing the company under liquidation, viz., Vaishu EngineeringIndustries Ltd., under section 537(2) read with sections 456 and 458 of theCompanies Act (for short “the Act”) and rules 9 and 114 of the Companies(Court) Rules, 1959 (for short “the Rules”), seeking relief of the declarationthat the sale of the assets of the company in liquidation by A.P. IndustrialDevelopment Corporation (for short “the APIDC”), the first respondent,under section 29 of the State Financial Corporations Act, 1951 (for short“the SFC Act”) in favour of the fourth respondent during the pendency ofthe winding up proceedings, without the leave of this court, as void, andconsequentially direct the APIDC to forthwith deliver the vacant posses-sion of the company’s properties to the Official Liquidator. The secondcompany application CA No. 521 of 2003, is filed by the employees unionof the company under liquidation, viz., Vaishu Engineering Industries Ltd.,under section 529A of the Act read with rule 9 of the Rules, seeking adirection to respondent Nos. 2 to 4, who were the secured creditors, todeposit the amount received by them, before the Official Liquidator toenable him to disburse the same to the creditors, including the workmen.

2. Since both these applications are filed with reference to the samecompany, under identical circumstances, they were heard and disposed ofby this common order.

3. According to the Official Liquidator, by order dated 22-7-1999, made inRCC No. 14 of 1998, the company, viz., M/s. Vaishu Engineering IndustriesLtd., was ordered to be wound up and the Official Liquidator, attached to




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this court was appointed as a liquidator of the said company, to take overthe assets of the said company. It is stated that originally the company hadapproached the Board for Industrial and Financial Reconstruction (forshort “the BIFR”) for its rehabilitation in view of its huge accumulatedlosses. The BIFR, after conducting necessary enquiry under the provisionsof the Sick Industrial Companies (Special Provisions) Act, 1985 (for short“the SICA”) passed an order dated 20-1-1997, declaring that the companyis not likely to make its net worth exceeded its accumulated losses withina reasonable time, while meeting all its financial obligations, and that thecompany, as a result thereof, is not likely to become viable in future, and,hence, it should be wound up under section 20(1) of the SICA, therefore,the said opinion was ordered to be communicated to the concerned HighCourt for necessary action, according to law. It is stated that the said order,along with the letter of the registry of the BIFR dated 5-2-1997,was received by the registry of this court and the same was takenon record on 12-2-1997. Accordingly, winding up proceedings wereregistered in RCC No. 14 of 1998, and finally winding up orders werepassed on 22-7-1999.

4. It is stated that the first respondent as a secured creditor, exercising itspowers under section 29 of the SFC Act, seized the assets of the companyon 15-2-1997. Thereafter, the seized assets were sold by the first respon-dent in favour of the fourth respondent on 20-8-1998, for a considerationof Rs. 109 lakhs. Since the said sale was effected by the first respondent-corporation after the commencement of the winding up proceedings on12-2-1997, without the leave of this court, the same is hit by section 537(2)of the Act and is liable to be declared as void. It is further stated that therespondents/secured creditors including the first respondent were theparties before the BIFR and in fact, the proceedings of the BIFR dated20-1-1997, shows that the first respondent sought for permission of theBIFR that it may be allowed to seize the assets of the company. The saidrequest was specifically rejected by the BIFR, directing the first respon-dent to approach this court, in view of its conclusion that the company wasrecommended for winding up. But, contrary to the said order, the firstrespondent, without approaching this court, seeking leave of this court toproceed against the assets of the company, seized and sold the assets of thecompany, therefore, the said action is not only in violation of the orders ofthe BIFR, but also in violation of the mandatory provisions of the Act. Thefirst respondent, being party to the said proceedings, is bound by theorders. Further, it is stated that the workmen of the company underliquidation and the creditors in whose favour, in fact, even the IndustrialTribunal passed awards, even quantifying the liability of the company intheir favour and in terms of sections 529 and 529A of the Act, they are co-mortgagees along with other unsecured creditors, therefore, the firstrespondent cannot effect the sale of the assets, without their consent ormaking them as parties to the sale proceedings, therefore, sought for setaside the same.


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5. To the same effect are the pleadings in CA No. 521 of 2003, where theworkers union is the applicant, where they have even stated that the salewas effected by the first respondent in collusion with the purchaser. It wasalso stated that they have even filed EP No. 3 of 1998, in ID No. 91 of 1996,for realisation of the awarded amount of Rs. 77,83,623. It was also statedthat subsequently as per the orders of this court, the Official Liquidatorinvited claims of the workmen and the Official Liquidator determined theclaims of the workmen by an order dated 22-4-2003, admitting their claimat Rs. 99,44,457 of which Rs. 80,98,359.58 as secured claim andRs. 18,46,097.66 as unsecured claim. The said adjudication has becomefinal. Therefore, sought for appropriate orders, directing respondentNos. 2 to 4 in CA No. 521 of 2003, to deposit the sale proceeds with theOfficial Liquidator for distribution.

6. In response to the notices, a counter is filed by the deputy generalmanager (legal) on behalf of the first respondent. In the counter, it is statedthat the unit was seized by the first respondent on 15-2-1997, by exercisingits powers under section 29 of the SFC Act, since the company owes anamount of Rs. 179.84 lakhs as on 28-2-1998. The company under liquida-tion became sick and went before the BIFR on 31-7-1989, and it wasregistered as Case No. 107 of 1989, and finally order recommending forwinding up of the company was passed on 20-1-1997. An appeal was filedagainst the said order of the BIFR by the workmen in Appeal No. 132 of1997, before the AAIFR, which was dismissed on 15-7-1997. This respon-dent also stated that he had advertised the sale in the newspapers (thoughdid not give specific dates of publication in the counter) and confirmed thesale in favour of the fourth respondent, viz., M/s. Thermal Systems(Hyderabad) (P.) Ltd., for a total consideration of Rs. 109 lakhs to be sharedby respondent Nos. 1 to 3 (CA No. 1071 of 2005). It is also stated that the firstrespondent received an initial payment of Rs. 38.15 lakhs on 20-4-1998,and the balance amount was agreed to receive in instalments. The unit washanded over to the purchaser on 20-8-1998. According to the first respon-dent, he had initiated and completed seizure and sale of the unit of thecompany, prior to the appointment of the Official Liquidator and windingup of the said company. Therefore, the sale and receipt of the sale proceedscannot be considered as having effected while the company was underwinding up. It was also stated that the sale transaction was completed priorto the invocation of the provisions of section 529(1) of the Act and, thus, thesaid amount cannot be considered for the purpose of apportionment interms of section 529(1) of the Act. It is also stated that the adjudication bythe Official Liquidator, with reference to the employees claim, could nothave been taken as proved without calling for objections from thisrespondent. This respondent ought to have permitted to file objections tothe claims made by the employees’ union and the adjudication was madewithout following the due process of law, therefore, the same is void abinitio.




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7. Coming to the application filed by the Official Liquidator, seeking to setaside the sale, it is stated that the applicant failed to disclose as to how theprovisions referred to in the application are applicable for declaring thesale as void. It was also stated that except sections 529 and 529A, no otherprovisions of the Act will have any effect upon the action taken by therespondents, in view of the provisions of section 46B of the SFC Act. It isstated that since seizure and sale was effected after the order of the BIFRbefore the winding up orders passed by this court and appointment of theliquidator, the sale is not effected by any of the provisions of the orders.It is also stated that after the BIFR proceedings and prior to the windingup order, no leave is required as contemplated under section 537(2) of theAct, therefore, the sale is not effected and the same is also not violative ofany provisions of the Act. The counter is specifically silent about thereference made by the Official Liquidator to paragraph 5.1 of the orderpassed by the BIFR.

8. On behalf of the second respondent-Corporation, i.e., APSFC, theassistant general manager of the said Corporation filed a separate counter,almost on identical lines. It is stated that as per the judgment of the ApexCourt in International Coach Builders Ltd. v. Karnataka State FinancialCorpn. [2003] 114 Comp. Cas. 6141 the sale effected by the first respondenton behalf of the participating financial institutions cannot be impeachedsince the sale was effected before winding up order. This respondent alsoclaimed that the determination of the workers claimed by the OfficialLiquidator was without notice to the secured creditors and therefore thesaid adjudication is not binding on them. It is also stated that even afterattachment of the sale proceeds among the secured creditors, still thereis outstanding dues to the secured creditors, hence sought for dismissal ofthe application.

9. A separate counter is filed by the purchaser/fourth respondent. It isstated that the first respondent published advertisement in daily newspa-pers “Eenadu” and “Deccan Chronicle” for the sale of the assets of thecompany under liquidation on 3-2-1998, with reference to which thisrespondent participated in the auction and offered Rs. 109 lakhs, whichwas accepted. It is stated that he paid Rs. 38.15 lakhs being 35 per cent ofthe amount offered was paid initially, the balance amount was paid ininstalments. It is stated that the fourth respondent is engaged in thebusiness of designing, detailed engineering, procurement fabrication,erection and commissioning of boilers. It is stated that as on 31-3-2005, thisrespondent has a turnover of Rs. 106.94 crores, having employed 450workmen, in addition to, the indirectly employed persons are in 300families. It is stated that this respondent is a bona fide purchaser of theproperty in good faith for a valuable consideration, further incurred hugeamounts not only towards the sale consideration, but also further investedin the buildings and machinery by taking up loan to the tune of Rs. 1,266

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lakhs. It is stated that the first respondent being a public sector undertak-ing, the fourth respondent with a good intention, purchased the saidproperty. Further it is stated that the present application is filed after 7years, even though the Official Liquidator was aware of the sale as earlyas in the year 1999. It is further stated that the applicant was a party in WPNo. 7462 of 1999, filed by the first respondent, praying for the lifting of theattachment dated 18-1-1999, and the said writ petition was dismissed. It isstated that since this respondent has purchased the property bona fide andinvested further amounts, it would be inequitable to disturb the sale in hisfavour at this stage.

10. The learned official liquidator, in support of his application contendedthat as the sale effected by the first respondent-APIDC is not only contraryto the expressed order passed by the BIFR, but also in violation of themandatory provisions of the Act, the same is liable to be set aside. Theofficial liquidator also relied upon apart from various decisions cited at thetime of hearing, a decision of this court in WA No. 126 of 1999 and CA No.53 of 1999, where sale, effected by the APIDC under identical circum-stances without the leave of this court, was set aside. The learned officialliquidator also referred to the provisions of sections 537, 441 and con-tended that in view of the said express provisions a sale of assets of thecompany under liquidation, after the commencement of the winding upproceedings, without leave of the court, is void, therefore, the sale con-ducted by the APIDC is clearly in violation of the above said mandatoryprovisions. The official liquidator also brought to the notice of this courtthe express order passed by the BIFR, where the first respondent soughtfor permission to proceed against the assets of the company, which wasspecifically rejected. Therefore, the action of the first respondent, violat-ing the express orders of the BIFR, is liable to be set aside.

11. Sri V. Hari Haran, learned counsel appearing for the workers union ofthe company under liquidation, supported the contentions advanced bythe official liquidator. Learned counsel also contended that even thepurchase made by the auction purchaser is not without notice. It wascontended that when the first respondent issued sale publication, a noticewas sent by the workers union, therefore, the sale in favour of the auctionpurchaser is liable to be set aside. Alternatively, learned counsel con-tended that the sale proceeds realised by the first respondent by the saleof the assets, be directed to be deposited with the official liquidator so asto distribute the same, in accordance with the provisions of the Act.

12. Learned counsel appearing for the first respondent, while reiteratingthe counter averments, sought to contend that since the seizure and saleof the assets of the company were effected after the BIFR orders butbefore the winding up order was passed by this court, the same is noteffected. Learned counsel also tried to explain away the observationsmade by the BIFR while rejecting his request to proceed against the assetsof the company, stating that the necessity for the first respondent to




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approach this court would arise only in case this court comes to theconclusion that the winding up order is to be passed against the company.Since that stage has not reached by the date, the first respondent seizedthe assets of the company and effected sale, the same is not in contraven-tion to any of the order or the provisions of the Act. Learned counsel alsocontended that though section 441 read with section 537 of the Act showsthat after the commencement of the winding up proceedings, since noapplication was filed by any of the parties, therefore, the commencementof the winding up proceedings could be only when a winding up order ispassed by this court. Learned counsel also contended that section 446 hasno application since the said provision would come into operation onlywhen a winding up order has been made or the official liquidator isappointed as a provisional liquidator. Since the sale was effected before awinding up order and no provisional liquidator was appointed in thepresent case, therefore the said provision has no application, therefore,sought to dismiss the application.

13. Learned counsel for the second respondent-APSFC, while supportingthe arguments for counsel for the first respondent, referred to and reliedupon the decision of the Supreme Court in International Coach BuildersLtd.’s case (supra). According to learned counsel, the requirement forseeking permission of the court arises only when a winding up order ispassed. As long as there is no winding up order, the right conferred undersection 29 of the SFC Act can be unilaterally exercisable against thedebtor. Therefore, there is no obligation on the part of the first respondent-Corporation to seek permission of the company court. Learned counselalso relied upon a decision of the learned Single Judge of this court in T.Rajive v. AP State Financial Corpn. [2001] 105 Comp. Cas. 3501, wheresimilar applications were filed seeking to set aside the sale that waseffected by the State Financial Corporation. In that case the BIFR’s orderdated 26-12-1995, was received by the registry of this court on 29-8-1998,and a winding up order was passed on 16-11-1998, while the StateFinancial Corporation took possession of the assets of the company andissued a paper publication on 23-10-1996, 24-10-1996, in three dailynewspapers and the sale was conducted on 23-6-1997, for a sum of Rs. 2.2crores and sale deed was executed in favour of the purchaser on 30-8-1997. In those circumstances, since the sale was effected by the Corpora-tion even before the case was registered as RCC No. 18 of 1998, the courtheld that the provision of section 446 would not cover the situation and theapplication was filed.

14. Counsel appearing for the, third respondent-State Bank of India,adopted the arguments of respondent Nos. 1 and 2, while counsel for thefourth respondent/purchaser contended that the fourth respondent is abona fide purchaser for valuable consideration. Since 7 years have elapsedfrom the date of the sale and since the applicant though aware of the sale

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in the year 1999, itself, has approached this court only after six years, theapplication is liable to be dismissed on the ground of laches. It is alsocontended that since the applicant is a bona fide purchaser for a valuableconsideration without notice of the pendency of the proceedings, the salein his favour is not liable to be interfered with.

15. From the above rival contentions, the issues to be considered are :

(1) Whether the sale effected by the first respondent is void in view ofthe provisions of sections 537 and 441; and

(2) Whether the sale of the assets of the company under liquidation bythe first respondent is liable to be set aside.

16. The admitted facts of the case are that the company under liquidationbecame sick and approached the BIFR under section 15 of the SICA forgetting benefit of rehabilitation. The matter was pending before the BIFRfor about 5 years. The BIFR conducted necessary enquiry under section16 of the SICA and finally passed an order on 20-1-1997, recording itsfindings as under :

“M/s. Vaishu Engineering Industries Ltd., is not likely to make its networth exceed its accumulated losses within a reasonable time whilemeeting all its financial obligations and that the company as a resultthereof is not likely to become viable in future and hence it should bewound up under section 20(1) of the Act. This opinion may be forwardedto the concerned High Court for necessary action according to law.”

17. The said opinion was communicated by the registry of the BIFR to theregistry of this court by a letter dated 5-2-1997. The said matter was takenon record on 12-2-1997, and registered as RCC No. 14 of 1998, and finallywinding up order was passed on 22-7-1999.

18. When the matter was pending before the BIFR, the first respondent-APIDC sought permission of the BIFR to seize the assets of the company.The said request of the APIDC was rejected by the BIFR. The relevantportion of the order of the BIFR reads as under :

“The Bench clarified that at a stage when the winding up of the companyis being considered, the Corporation cannot be granted permission fortaking action under section 29 of the SFC’s Act and they should approachthe concerned High Court in case it is decided to confirm the prima facieopinion of winding up the company.”

19. Though such an order was passed, the first respondent seized the uniton 15-2-1997, and an advertisement was issued on 3-2-1998, for effectingthe sale, and the sale was conducted on 9-2-1998, and the same was statedto have been confirmed on 18-4-1998. Sale consideration was received on19-8-1998, and physical possession of the unit was delivered to the fifthrespondent on 20-8-1998. In fact, even before taking possession of theassets by the APIDC, an appeal was filed by the employees union on 15-2-1997, vide Appeal No. 132 of 1997, and the said appeal was heard and




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dismissed on 15-7-1997. In spite of the rejection of the request made by theBIFR, while directing the APIDC to approach this court, by violating thesaid direction, even though the winding up proceedings have been initi-ated since RCC No. 14 of 1998, was registered in pursuance of thecommunication sent by the BIFR, the APIDC not only seized the assets ofthe company, but also effected sale of the same, without seeking permis-sion of this court. Therefore, the Official Liquidator has come up with thepresent application, claiming that the action of the APIDC is in violation notonly of the order passed by the BIFR, but also the mandatory provisionsof section 537 of the Act and hence the sale is void.

20. Before proceeding further, it would be appropriate to refer therelevant provision of section 537(1)(a) and (b) as under :

“537. Avoidance of certain attachments, executions, etc., in winding up byor subject to supervision of court.—(1) Where any company is beingwound up by or subject to the supervision of the court-

(a) any attachment, distress or execution put in force, without leave ofthe court, against the estate or effects of the company, after thecommencement of the winding up; or

(b) any sale held, without leave of the Court, of any of the propertiesor effects of the company after such commencement; shall bevoid.”

21. A perusal of the above provision shows that where any company isbeing wound up by or subject to the supervision of the court, anyattachment, distress or execution put in force against the estate or assetsof the company or any sale held, without the leave of the court, after thecommencement of the winding up, shall be void, therefore, any actionintended by any party either creditor secured or otherwise or any otherparty intends to get attached any execution or any proceedings or to effectthe sale, leave of the court is mandatory, once winding up proceedings arecommenced.

22. Then with reference to the meaning of the expression “commencementof the winding up” is defined in section 441(2) of the Act, which reads asunder :

“In any other case the winding up of a company by the Court shall bedeemed to commence at the time of presentation of the petition for thewinding up.”

23. So, the presentation of the petition would amount to commencementof winding up. In the present case, an argument was advanced that sinceno company petition is presented, therefore, the said provision may not beapplicable. The said contention is clearly devoid of merit. Since a petitionfor winding up is registered on receipt of the proceedings from the BIFR,therefore, when once proceeding is received by the registry and the sameis taken on file, the same has to be construed as presentation of a petitionfor winding up. If so construed, once proceeding of the BIFR is received,


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the proceeding for winding up is deemed to have commenced and pendingbefore this court.

24. Apart from that, an appeal was filed against the order of the BIFR andit was pending till it was disposed of on 15-7-1997, and during the pendencyof the said appeal, the provisions of sub-section (1) of section 22 of the SICAapplies, where there is prohibition from taking any proceedings against theassets of the company. The relevant portion of section 22(1) of the SICAreads thus :

“Suspension of legal proceedings, contracts, etc.—Where in respect of anindustrial company, an inquiry under section 16 is pending or any schemereferred to under section 17 is under preparation or consideration or asanctioned scheme is under implementation or where on appeal undersection 25 relating to an industrial company is pending, then,notwithstanding anything contained in the Companies Act, 1956 (1 of1956), or any other law or the memorandum and articles of associationof the industrial company or any other instrument having effect underthe said Act or other law, no proceedings for the winding up of theindustrial company or for execution, distress or the like against any of theproperties of the industrial company or for the appointment of a receiverin respect thereof and no suit for the recovery of money or for theenforcement of any security against the industrial company or of anyguarantee in respect of any loans or advance granted to the industrialcompany shall lie or be proceeded with further, except with the consentof the Board or, as the case may be, the appellate authority.”

25. From the above provision also it is clear that without obtainingnecessary consent of the Board or the Appellate Authority, the APIDC,which is one of the secured creditors, is not entitled to proceed against theassets of the company. Therefore, the action of the APIDC is also incontravention of the provisions of the SICA.

26. On behalf of the applicant, reliance is placed in the following decisions :

27. In Mysore Surgical Cottons (P.) Ltd. v. Karnataka State Financial Corpn.[1988] 1 Comp. LJ 63 (Kar.), wherein, both the Official Liquidator as wellas the State Finance Corporation filed applications. The Official Liquida-tor sought the relief of handing over the possession of the assets, effects,books and records of the company forthwith since a winding up order waspassed by the court on 9-8-1985, while the finance corporation sought thepermission of the court to sell the assets of the company as a securedcreditor by staying outside the liquidation proceedings. The OfficialLiquidator contended that since the winding up order has been passed, theproperties of the company in liquidation vested in the court and theOfficial Liquidator would be incharge on behalf of the court as custodianof the property on behalf of the court, hence sought for taking possessionof the properties. This was contested by the finance corporation, statingthat section 29 of the SFC Act empowered the Corporation to take chargeof all the assets of the company, mortgaged to it, whether movable or




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immovable, and thereafter bring them to sale and realise its security. Inexercising of that power, the Corporation took over the assets of thecompany in liquidation, therefore, the liquidator cannot possibly have anyobjection for permitting the Corporation to sell the properties. Though theCorporation relied upon the decision of the Apex Court in M.K. Ranganathanv. Government of Madras [1955] 25 Comp. Cas. 344; the learned Judgedistinguished the said judgment since the facts in that case are totallydifferent and negatived the claim of the financial corporation to have theright to proceed against the assets of the company.

28. In K.S. Shivappa v. State Bank of Mysore [1986] 60 Comp. Cas. 229 (Kar.),wherein a guarantor of the company in liquidation filed the application,seeking to set aside the sale that was effected in execution of a mortgagedecree, obtained by a secured creditor. It was claimed that the securedcreditor, who has obtained decree in a Civil Court filed the EP and broughtthe property to sale and sale was effected for a sum of Rs. 1,75,000 thoughthe property would fetch Rs. 5 lakhs. Further, as the said sale was effectedduring the pendency of the company petition for winding up, whereas awinding up order was passed on 15-4-1982, since the said sale is void interms of section 537, sought to set aside the same. The learned CompanyJudge of the Karnataka High Court allowed the said application and setaside the sale since the sale was effected without seeking leave of thecourt, and, therefore, the sale is void, in terms of section 537 of the Act.

29. In B. Suresh v. A.P. Mahesh Co-operative Urban Bank Ltd. [2002] 108Comp. Cas. 2831 (AP), wherein a company petition CP No. 219 of 1998, wasfiled by a creditor, seeking winding up of the company. In that companypetition, Company Application No. 312 of 2001, was filed by B. Suresh, whoclaims to be another creditor of the company, against which winding uporder was sought for. He filed another two applications to declare theproposed sale of the assets of the company by the first respondent-bankin pursuance of the notice for sale as void and, accordingly, to restrain therespondent-bank from effecting sale without obtaining permission of thecourt as well as to stay of all the sale proceedings, initiated by therespondent-bank. The relief sought for by the applicant B. Suresh wasgranted, restraining the bank from proceeding with the sale as the saidbank was only an unsecured creditor, who is not entitled to proceed for thesale of the assets without obtaining permission of the Court, as contem-plated under the provisions of the Companies Act.

30. In Sporolac Laboratories (P.) Ltd. v. AP State Financial Corpn. [2000] 27SCL 559 (AP), wherein an application was filed by the official liquidatorunder sections 441 and 537 of the Act, seeking declaration that the sale ofthe assets, conducted by the AP State Financial Corporation is null andvoid and to deposit the sale proceeds with the Official Liquidator. In thatcase, the company petition was filed, seeking winding up of the company

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on 21-3-1996, which was registered as CP No. 22 of 1996, winding uporder was passed on 23-7-1998. The sale was effected by the Corporation,exercising its powers conferred under section 29 of the SFC Act on30-4-1997, and sale agreement was executed on the same day and posses-sion was delivered on 5-5-1997. Since the sale was effected after thecompany petition was presented, the same is void in terms of section 537of the Act.

31. The learned Company Judge, after hearing elaborately, passed orderssetting aside the sale made in favour of the third party. In that case therewas a specific declaration made by way of a direction not only to the StateFinancial Corporation, but also any other institutions that are exercisingthe powers under section 29 of the SFC Act, not to bring the sale of theassets of any debtor industrial concern without the leave of the court. Therelevant portion of the order reads as under :

“Having regard to the general importance of the issue as such matters arelikely to come up frequently, more particularly, in view of the lawdeclared by the Division Bench in A.P. State Financial Corporation’s case,it is declared that the State Financial Corporation or any other bodywhich has a right similar to the right conferred on the State FinancialCorporation under section 29 of the SFC Act shall not bring to sale theassets of any debtor industrial concern without the leave of this courtonce the winding up proceedings are initiated under the Companies Act,1956, with respect to such an industrial concern.”

32. Sri V. Hari Haran, learned counsel, appearing for the applicant in CANo. 521 of 2003, relied upon the following decisions :

33. In Rajasthan Financial Corpn. v. Official Liquidator [1963] 2 Comp. LJ309 (Raj.), where almost identical issue fell for consideration as to thecommencement of the winding up proceedings. In that case, four credi-tors of the company filed an application on 25-11-1958, before the learnedCompany Judge for winding up of the company under section 433 of theAct. The appellant-Corporation, exercising its powers under the SFC Act,moved the district court on 27-3-1959, under section 31 of the SFC Act toenforce its claim as a creditor for the sale of the mortgaged properties. Themortgaged properties were sold in auction in December, 1959, andpossession was delivered in January, 1960. Subsequently, the Corporationmade an application under section 446 of the Act before the CompanyJudge, seeking leave to continue its proceedings against the company andsought for the transfer of the proceedings from the District Court to thecompany court. The official liquidator opposed the application filed by theCorporation under section 446 of the Act, contending that in terms ofsection 537 of the Act, the winding up of the company should be deemedto commence on the date of the application, i.e., on 25-11-1958, and anyattachment or sale held after that date without leave of the court of anyof the properties of the company shall be void, and the State FinancialCorporations Act does not override the provisions of the Companies Act.




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The company court accepted the said contention and declared that thesale is void and the auction purchaser was directed to restore theproperties to the Official Liquidator.

34. The said order was the subject-matter of the appeal before the DivisionBench. The Division Bench, after considering the contentions elaborately,held the word “after the commencement of winding up” in section537(1)(a) of the Companies Act, 1956, must be read as meaning after thepresentation of the petition for winding up of the company and not afterthe winding up order. Section 537 read with section 441(2) of the Act fixesthe date of the commencement of the winding up as the date of thepresentation of the petition for winding up and not the winding up order.The object of section 537 is to preserve the assets of a company for fair andequitable distribution to all the creditors and to generally negative allpossibilities of a preference between creditors inter se from the date ofcommencement of the winding up proceedings. The words “is beingwound up” in section 537(1) may be suggestive of a process, but thestarting point of that process has been clearly laid down by section 441 ofthe Companies Act, and the language of section 537 has to be understoodby reference to section 441. The doctrine of “relating back” has beenimported and the date of commencement of winding up has been given afixed meaning.

35. Hence the sale by auction of the properties or assets of the company,held after the presentation of a petition for winding up, without leave ofthe court must be held to be null and void.

36. In Karnataka State Industrial Investments Development Corpn. Ltd. v.Shivmoni Steel Tubes Ltd. [1998] 94 Comp. Cas. 1 (Kar.), wherein twocompany petitions, viz., 157 of 1992 and 49 of 1994, were registered basedon the proceedings issued by the BIFR and AAIFR. All the securedcreditors were shown as respondents in those company petitions. An orderof winding up was passed on 8-9-1995. The Canara Bank and the SyndicateBank, which are shown as secured creditors and respondents in theoriginal company petitions, filed applications, seeking permission to sellthe hypothecated plant and machinery, while the workers’ union filed anapplication, pleading the cause of the 300 workmen who were claiming toget about Rs. 80 lakhs. In the meantime, the appellant-Corporation actingunder section 29 of the SFC Act, took over possession of the assets of thecompany under liquidation on 29-7-1994, and put for sale giving anadvertisement on 1-11-1994. In pursuance of the advertisement, theseventh respondent stood as the highest bidder, where negotiations areeven held before the court and the sale price was finalised at Rs. 486 lakhs.At that stage the appellant-Corporation filed an application before thecompany court to recognise and record its right as secured creditor tostand outside the winding up proceedings in enforcement of its securityfor realisation of the amount due to it and also sought approval of the salein favour of the seventh respondent. At that stage, a third party filed an


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application, offering higher price of Rs. 5.02 crores. At that stage, theofficial liquidator also filed an application under sections 456 and 457 ofthe Act for a declaration that the sale conducted by the applicant-Corporation in favour of the seventh respondent was void under section537 of the Act since the same had been finalised after winding up order andwithout leave of the court, and to direct the appellant-Corporation to re-auction the property in association with the Official Liquidator.

37. The Company Judge, who heard all those applications, allowed theapplication of the Official Liquidator, while setting aside the sale alreadyheld, and allowed the applicant-Corporation to stand outside the windingup and to sell the plant and machinery and immovable properties of thecompany in association with the official liquidator from the time of settlingthe terms of advertisement and in negotiating to secure the higher priceand subject to the condition that the sale has to be confirmed by the courtand the sale proceeds are to be deposited in the court. The sale alreadyeffected in favour of the seventh respondent was not approved.

38. Aggrieved by that, the appeal was filed by the appellant-Corporation,claiming that the State Financial Corporations Act had overriding effectin terms of section 46B of the SFC Act, and therefore the order passed bythe company court was sought to be set aside.

39. The Division Bench upheld the order of the Company Judge, havingnoticed that there is no conflict between the provisions of the StateFinancial Corporations Act and the Companies Act and further in view ofthe provisions of sections 529 and 529A of the Act, the official liquidator,representing the workmen, will have a pari passu charge over the assetsof the company and the Corporation cannot dispose of the assets withoutpermission of the court, where the winding up proceedings have alreadycommenced and without association of the official liquidator, who repre-sents the pari passu charge holder; the appeal was accordingly dismissed.

40. In Rajasthan Financial Corpn. v Official Liquidator [2005] 128 Comp.Cas. 3871 (SC), wherein the decision was rendered by a Larger Bench of theApex Court on a reference in view of the apparent conflict between twoof its earlier decisions, viz., Allahabad Bank v. Canara Bank [2000] 101Comp. Cas. 64 (SC) and International Coach Builders Ltd. v. KarnatakaState Financial Corpn. [2003] 114 Comp. Cas. 6142 (SC). In that case, theappellants are the Rajasthan State Financial Corporation and RajasthanState Industrial Development and Investment Corporation Ltd., which arethe financial institutions, entitled to exercise powers conferred under theSFC Act. They are the secured creditors of M/s. Vikas Woollen Mills Ltd.,which is a company under liquidation. By order dated 14-6-1994, theCompany Judge of the High Court of Bombay ordered the company inliquidation to be wound up. The Official Liquidator was directed to take

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charge of the assets of the company in liquidation. On 18-4-1995, theOfficial Liquidator applied for directions to the company court for gettingthe property valued by a valuer as well as for a direction to the securedcreditors to advance Rs. 25,000 each to meet the expenses for selling theassets of the company in liquidation. The secured creditors who hadalready obtained the valuation of the assets of the company in liquidation,filed applications opposing the report of the Official Liquidator, seekingpermission to stand outside the winding up as well as to realise thesecurities and apportion the net sale proceeds between them along withthe Bank of Baroda, which is another secured creditor. They undertook topay over the dues of the workmen on the same being adjudicated by theOfficial Liquidator to the extent of the availability of the funds out of thenet sale proceeds of the properties of the company in accordance withsection 529A of the Companies Act.

41. The company court rejected the application of the appellants-Corpo-rations. The company court took the view that the rights available to theCorporation under the State Financial Corporations Act had to be exer-cised in association with the official liquidator, who was a charge holderand ranked pari passu with the secured creditors in terms of section 529of the Act, even if they stood outside the winding up. The court permittedRajasthan State Financial Corporation to effect the sale in consultationwith the official liquidator. It was also directed that the reserve pricewould be fixed by the company court on the report of the official liquidatorand the sale proceeds were to be retained by the official liquidator untilfurther orders.

42. Aggrieved by that, the appellant-Corporation filed appeal before theDivision Bench unsuccessfully, hence the appeal before the Apex Court. Itwas observed that the rights claimed by the State Financial Corporationunder the SFC Act have to be considered in the light of section 529A readwith section 529 of the Companies Act. The court held as under :

“When the debtor is a company in winding up, the rights of financialcorporations are affected by the provisions in sections 529 and 529A ofthe Companies Act . . . As far as we can see, there is no conflict on thequestion of the applicability of section 529A read with section 529 of theCompanies Act to cases where the debtor is a company and is inliquidation. The conflict, if any, is in the view that the Debts RecoveryTribunal could sell the properties of the company in terms of theRecovery of Debts Act. This view was taken in Allahabad Bank v. CanaraBank [2000] 101 Comp. Cas. 64; in view of the Recovery of Debts Act beinga subsequent legislation and being a special law, which would prevailover the general law, the Companies Act. This argument is not availableas far as the SFC Act is concerned, since section 529A was introduced byAct 35 of 1985 and the overriding provision therein would prevail over theSFC Act of 1951 as amended in 1956 and notwithstanding section 46B ofthe SFC Act. As regards distribution of assets, there is no conflict. It seemsto us that whether the assets are realized by a secured creditor even if it


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be by proceeding under the SFC Act or under the Recovery of Debts Act,the distribution of the assets could only be in terms of section 529A of theAct and by recognizing the right of the liquidator to calculate theworkmen’s dues and collect it for distribution among them pari passuwith the secured creditors. The official liquidator representing a rankedsecured creditor working under the control of the company courtcannot, therefore, be kept out of the process.

Thus, on the authorities what emerges is that once a winding up proceedinghas commenced and the liquidator is put in charge of the assets of thecompany being wound up, the distribution of the proceeds of the sale ofthe assets held at the instance of the financial institutions coming underthe Recovery of Debts Act or of financial corporations coming under theSFC Act, can only be with the association of the official liquidatorand under the supervision of the company court. The right of afinancial institution or of the Recovery Tribunal or that of a financialcorporation or the Court which had been approached under section 31of the SFC Act to sell the assets may not be taken away, but the samestands restricted by the requirement of the official liquidator beingassociated with it, giving the company court the right to ensure that thedistribution of the assets in terms of section 529A of the Companies Acttakes place. . . . .” (p. 398)

43. Therefore, it was contended by learned counsel that in view of theabove law laid down by the Apex Court, the sale has to be set aside as it isnull and void or alternatively the sale proceeds have to be directed to bedeposited with the official liquidator for distribution under the supervi-sion of the company court.

44. As against the above decisions, learned counsel for the APSFC reliedupon a decision of the Apex Court in International Coach Builders Ltd.’scase (supra). In that case, the Apex Court noticed the conflicting views thathave been taken by different High Courts with reference to the rights ofthe Corporation under the provisions of the State Financial CorporationsAct vis-a-vis the provisions of the Companies Act. The court also consid-ered the contention on behalf of the Corporation that the provisions of theState Financial Corporations Act prevails over the provisions of theCompanies Act, being a special Act. But the said contention was rejectedholding that though the State Financial Corporations Act is a special Actand the Companies Act is a general Act, but in view of the amendmentsmade in sections 529 and 529A of the Act override and control the rightsunder section 29 of the SFC Act. The said view was expressed by the ApexCourt in A. P. State Financial Corpn. v. Official Liquidator [2000] 102 Comp.Cas. 11, was affirmed and further held that there was no conflict betweenthe provisions of the State Financial Corporations Act and the CompaniesAct. It was also observed that the Legislature has amended the CompaniesAct in 1985 with a special purpose, viz., to protect dues of the workmen. If

1. 27 SCL 133.




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the conditions are not imposed to protect the right of the workmen, thereis every possibility that the secured creditor may frustrate the above paripassu right of their workmen. In fact, in the judgment of the Apex Courtheld that the amendments that are made to sections 529 and 529A, beinga subsequent enactment, the non obstante clause in section 529A prevailsover section 29 of the Act of 1951. Finally, the court laid the followingprinciples in paragraph 33 as under :

“(1) The right unilaterally exercisable under section 29 of the SFC Actis available against a debtor, if a company, only so long as there isno order of winding up;

(2) The SFC’s cannot unilaterally act to realise the mortgaged propertieswithout the consent of the official liquidator representing workmenfor the pari passu charge in their favour under the proviso tosection 529 of the Companies Act, 1956;

(3) If the official liquidator does not consent, the SFCs have to movethe company court for appropriate directions to the officialliquidator who is the pari passu charge holder on behalf of theworkmen. In any event, the official liquidator cannot act withoutseeking directions from the company court and under itssupervision.” (p. 630)

45. Therefore, it was contended by learned counsel that the right unilat-erally exercised by the APIDC under section 29 of the SFC Act is unaf-fected since no winding up order was passed by the date of the exerciseof its powers by the APIDC.

46. Learned counsel also relied upon a decision of this court in T. Rajive’scase (supra), where the Company Judge of this court upheld the saleeffected by the finance corporation, exercising its powers under section 29of the SFC Act, where sale was effected much before the winding up orderwas passed. In that case, the Corporation effected the sale on June 23,1997,and sale deed was executed on 30-8-1997, while the order of the BIFR wasreceived by the registry of this court on 29-8-1998, which was registeredas RCC No. 19 of 1998 on 19-10-1998, therefore, it was held that the sale waseffected much before the receipt of the proceedings from the BIFR by thiscourt, hence, the provisions of section 446 of the Act has no application. Infact, in that case, an application was filed under section 446 of the Act,seeking to set aside the sale on the ground that the sale was effectedwithout obtaining permission from the court. The court held that theprovisions of section 446 of the Act is applicable either when a winding uporder is passed by the court or where the official liquidator is appointedas a provisional liquidator of the company, which is sought to be woundup. In the present case either of the things had happened by the date of sale,therefore, negatived the contention of the applicant. Therefore, it iscontended by learned counsel that the facts in the present case areidentical to that of the above case, therefore, the application filed by theofficial liquidator is liable to be dismissed.


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47. Learned counsel appearing for the auction purchaser (fourth respon-dent) relied upon the following decisions :

48. In Rm. Nl. Ramaswami Chettiar v. Official Receiver AIR 1960 SC 70which is a case, dealing in Provincial Insolvency Act, wherein the ApexCourt held that a transfer effected by the insolvent after the presentationof the insolvency petition, would be valid until the said transferee standsannulled by an express order of the court and the transaction wouldbecome invalid only from the date of annulling the transfer.

49. To the same effect, is another judgment of the Apex Court in SankarRam & Co. v. Kasi Naicker [2003] 11 SCC 699, whereat the Apex Court hadan occasion to consider the proviso of section 55 of the ProvincialInsolvency Act, 1920, and the protection available to the bona fide trans-feree. It was held that where the transfer has been made by the insolventafter presentation of the insolvency petition, the transfer cannot be heldas void ab initio, but its validity or otherwise depends upon a considerationof the question whether the conditions specified in section 55 are or are notsatisfied. It was further held that once the requirements of section 55 ofthe Provincial Insolvency Act were satisfied, the transferee is entitled tothe protection of the said section as a bona fide transferee.

50. In Damera Ramakrishna v. CTO [2005] 142 STC 515, wherein theDivision Bench of this court considered the provisions of section 16C of theAndhra Pradesh General Sales Tax Act, 1957. As per the said provision, thesales tax due to the Government shall be the first charge on the propertyof the dealer notwithstanding anything to the contrary contained in anylaw. Further, section 17A of the said Act lays down that any conveyanceof property in favour of any other person with the intention to defraud therevenue, would be void. But the proviso saves transfers made for adequateconsideration and without notice of the pendency of the proceedingsunder the Act or of tax or other sum payable by the dealer. Therefore, itwas held that the initial burden to show that the property was sold todefraud the Department and avoid payment of sales tax is on the Depart-ment, and thereafter the onus will shift to the purchasers to show that theywere bona fide purchasers and that they were not parties to the fraudbeing played by the dealer.

51. Learned counsel also contended that since the application is filed longafter the sale was effected, the same is also barred by limitation.

52. From the above decisions, it is clear that when once proceedings areinitiated for winding up of a company, any attachment or sale of the assetsof the said company effected without the leave of the court, shall be nulland void, in terms of section 537 read with section 441 of the Act.Therefore, the bar imposed under the provisions of the Act would operatefrom the inception of the winding up proceedings before the companycourt. Further, though it was contended for the APSFC and APIDC that byvirtue of section 46B of the SFC Act, the provisions of section 29 of the SFCAct has got an overriding effect over the provisions of any other Act, but




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the said contention is without any merit in view of the decision of the ApexCourt, wherein it was held that the powers conferred under section 29 ofthe SFC Act are restricted by virtue of the provisions of section 529 readwith section 529A of the Companies Act, which provisions were amendedby the Amendment Act, 1985, in order to protect the interests of theworkmen of the company under liquidation. In fact, even the Apex Courthad gone to the extent of holding that even with reference to theproceedings under the Recovery of Debts Act, for recovery of debts dueto the financial institutions, are also bound by the provisions of section529A of the Act and the official liquidator is required to be associated withthe sale as well as to the distribution of the sale proceeds among thesecured creditors, as the official liquidator was representing the workmenwho were having a pari passu charge over the assets of the companyunder liquidation, consequently the approval of the company court is alsorequired. Therefore, under no circumstance, after the liquidation pro-ceedings have commenced, any authority has got any right to proceedagainst the assets of the company without the leave of the court and theassociation with the official liquidator, attached to the High Court.

53. The judgments relied upon by the auction purchaser, no doubt showsthat under the provisions of the Provincial Insolvency Act, the rights of thepurchaser of the property of the insolvent, during the pendency of theinsolvency proceedings, are protected, provided the purchaser is a bonafide purchaser for consideration, without notice of the pendency of theproceedings. But the said proposition of law may not help either to theauction purchaser or the other respondents. As admittedly no suchprovision was incorporated either under section 537 or under section 441of the Act, protecting the interests of the parties as was laid down in theabove decision.

54. If we consider the facts of the present case in the light of the abovedecisions, admittedly, the company case was pending before this court,the moment the proceedings of the BIFR are communicated to theregistry of this court for consideration to pass an order for winding up,which was received on 12-2-1997. Therefore, the moment the proceedingsof the BIFR are received by the registry, it should be presumed that theproceedings are pending before this court. Therefore, the provisions ofsection 537 of the Act are applicable. Since the APIDC had seized the assetsof the company on 15-2-1997, and effected the sale on 9-2-1998, andreceived the sale consideration on 19-8-1998, and delivered the possessionof the property on 20-8-1998, and all these acts have taken place onlyduring pendency of proceedings for winding up.

55. In addition, against the order of the BIFR dated 20-1-1997, an appealwas filed before the AAIFR on 15-2-1997, and the same was pending till15-7-1997, on which date the appeal was dismissed. By virtue of theprovisions of section 22(1) of the SICA, there is a clear prohibition fromproceeding against the assets of the company, except with the consent of


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the Board or the appellate authority, as the case may be. Admittedly, theAPIDC, which took the assets of the company, had approached the BIFRwhen it has come to the conclusion to pass an order, referring the matterto the High Court for being wound up. At that stage, the APIDC requestedfor an order to seize the assets of the company for realisation of its debtdue. A specific order was passed by the BIFR, as already referred to,negativing the request and further the APIDC was directed to approachthis court for seeking permission. The APIDC, without seeking permissionof either the appellate authority or this court, seized the assets of thecompany deliberately, violating the express order of the BIFR, as well asthe provisions of the SICA and the Act. The act of APIDC can be consideredonly as an attempt to overreach the specific order of the BIFR as well asthe provisions of both the Acts where there was a specific prohibitionagainst the creditors to proceed against the assets of the company. At thisstage it would be appropriate to refer to the relevant declaration made bythis court in Sporolac Laboratories (P.) Ltd.’s case (supra) prohibiting thesale during the pendency of the winding up proceedings :

“. . . .it is declared that the State Financial Corporation or any other bodywhich has a right similar to the right conferred on the State FinancialCorporation under section 29 of the SFC Act shall not bring to sale theassets of any debtor industrial concern without the leave of this courtonce the winding up proceedings are initiated under the Companies Act,1956, with respect to such an industrial concern.” (p. 570)

56. In spite of such specific declaration, which was made with referenceto the State Financial Corporation, which was also in fact, associated withAPIDC not only in effecting the sale, but also in getting the distribution ofthe assets of the company, have proceeded in utter disregard of the lawdeclared by this court, prohibiting the institutions exercising its powersunder section 29 of the SFC Act from proceeding against the assets of thecompany under liquidation. The said act is again a deliberate attempt onthe part of the APSFC also to overreach the assets of the company, therebytrying to deprive the rights of the workmen, even though they have got apari passu charge over the assets of the company under liquidation. Inview of the above innumerable restrictions against the APIDC fromproceeding against the assets of the company, the sale effected by theAPIDC has to be declared as null and void and the sale is accordingly, liableto be set aside.

57. Coming to the claim of the purchaser, it is claimed by the purchaserthat it is bona fide purchaser for valuable consideration, without notice ofthe pendency of the proceedings. No doubt, the auction purchaser partici-pated in the auction, in response to the notice published by the APIDC, andgave its offer for a sum of Rs. 109 lakhs, which was considered as highestand the same was accepted and delivery of the assets of the company waseffected as early as on 20-8-1998. The application itself by the officialliquidator was filed only in the year 2005. There was no proper explanationwhy the official liquidator did not move this court immediately after the




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sale or at least within a reasonable time. It is not as if the official liquidatorhad no notice of the sale that was effected by the APIDC. Since a writpetition was filed against the sale, where the official liquidator was alsoimpleaded as a party respondent, the said writ petition was filed in the year1999 itself.

58. Apart from that, it is claimed by the auction purchaser that after thepurchase, the auction purchaser had invested huge amounts by raisingfurther loans, not only on the buildings but also on the plant and machin-ery, therefore, it was claimed that the sale effected in its favour may notbe interfered with at this stage, i.e., nearly after 8 years of the sale.

59. This was opposed by counsel for the workers union, contending thata notice was served on the auction purchaser as to the pendency of theproceedings, but no material is brought on record, showing that any noticewas served on the auction purchaser at the time of auction, bringing to itsnotice about the pendency of the winding up proceedings or even thependency of the appeal before the AAIFR. In the absence of any suchnotice, there is no other evidence to infer that the auction purchaser hadthe notice of the pendency of the winding up proceedings before thiscourt. Had the official liquidator approached this court immediately afterthe sale, even though the auction purchaser had no notice of the pendencyof the proceedings, the sale ought to have set aside, in view of thedeclaration that the said sale is void. But now at this length of time, furtherin view of the claim made by the auction purchaser that it had made hugeinvestments by raising loans from the Corporations or from the financialinstitutions, it may not be appropriate to set aside the sale and dispossessthe auction purchaser.

60. Under the above circumstances, this court declines to interfere withthe sale that was effected in favour of the auction purchaser, though it washeld that the sale is null and void. But, however, in view of the abovecircumstances, the APIDC is directed to deposit the entire sale proceedstogether with interest at 9 per cent per annum with the official liquidator,within a period of four weeks from the date of the order. Once the amountis deposited with the official liquidator, as directed by this court, then thecompany court can be moved by appropriate application by any of theclaimants for apportionment, in accordance with law.

61. In view of the deliberate attempt made by the APIDC, exemplary costsof Rs. 10,000 (rupees ten thousand only) are imposed on it, and the APIDCis at liberty to recover the said costs from the officers, responsible for thisillegal act of conducting sale, contrary to the express order of the BIFR.The company applications are, accordingly, disposed of.

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ATFFEFEMA

[2008] 81 SCL 393 (ATFFE - NEW DELHI)APPELLATE TRIBUNAL FOR FOREIGN EXCHANGE,

NEW DELHIDirector of Enforcement

v.

Kothari Vegetable Products Ltd.O.P. NAHAR, CHAIRPERSONAND R.N. PODDAR, MEMBER

REVISION PETITION NO. 275 OF 2005SEPTEMBER 9, 2005

Section 19 of the Foreign Exchange Management Act, 1999 - AppellateTribunal - Appeal to - Whether though no statutory limit is prescribed foravailing of remedy of revision, yet that does not permit petitioner to filerevision after expiry of reasonable period whereby equity is defeated - Held,yes

Section 18 of the Foreign Exchange Regulation Act, 1973 - Payment forexported goods - Whether contravention of section 18(2) relates to taking ornot taking of effective steps which are required to be taken by a prudentexporter and it does not relate to non-realization of export proceeds - Held,yes - Respondent-company, which exported rice to Russia, failed to repatriatepart of export proceeds because a bank in Russia, through which paymenthad to channelise, collapsed and went in liquidation - Adjudicating authorityexonerated respondents from charges of contravention of sections 18(2) and18(3) on ground that respondent took reasonable steps to repatriate exportproceeds - Whether when adjudicating authority, while passing impugnedorder, had taken into consideration all evidence on record, impugned ordercould be said to be perverse exercise of power in any sense of term - Held, no- Whether mere declination of RBI to grant write off or extension could fastenliability of contravention of section 18(2) against respondent - Held, no

FACTS

The respondent-company exported rice to Russia where rice was soldthrough an agent. Part of price of sold rice was received which wasimmediately paid, but other part being paid later, did not reach Indiabecause by then a bank in Russia, through which payment had tochannalise, collapsed and went in liquidation. The adjudicating authority,

Director of Enforcement v. Kothari Vegetable (ATFFE - N. Delhi)



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considering facts of case, exonerated the respondent from charges involv-ing contravention of section 18(2) and 18(3) on the ground that therespondent took reasonable steps to repatriate export proceeds. Therevenue filed instant revision petition on the plea that the adjudicatingauthority had committed error on exonerating the respondent, when RBIdeclined to accord write off against outstanding export proceeds. Therespondents challenged maintainability of revision petition as having beenfiled after expiry of nine months from the impugned order.

HELD

Nothing was stated anywhere in the pleadings as to why EnforcementDirectorate took 9 months in filing instant revision petition. That long delayshowed waiver in acquiescence. The revision petition suffered from latches.Here the Latin maxim can be quoted i.e. Vigilantibus or non dermientubusjura sub veriunt. The law helps those who are watchful and do not sleepover their rights. Though no statutory time-limit is prescribed for availingof remedy of revision, yet that does not permit the petitioner to file revisionafter expiry of reasonable period whereby equity is defeated. The delay isrequired to be explained. Any negligent omission in assertion of right islikely to cause prejudice to the adverse party. This is named as latcheswhich flows from acquiescence and waiver. [Para 4]

The gravamen of charge under the provisions of section 18(2) consists ofnot taking reasonably effective steps in the particular circumstances of thecase which are required to be taken by a prudent exporter. The contraventionrelates to taking or not taking of effective steps. It is not the non-realizationof export proceeds. The Legislature has not made non-receipt of exportsproceeds an offence under the FER Act, 1973. Though sub-section (3) ofsection 18 further creates a legal presumption against the exporter, yet thesame is rebuttable and can be displaced, if taking of effective steps is provedby the exporter. [Para 6]

Admittedly, part of the price of sold rice was received which was immediatelypaid, but other part being paid later, did not reach India because by then,Tory Bank in Russia, through which payment had to channelise, collapsedand went in liquidation. The respondent had also brought on record otherfactors not of their own making, which caused non-receipt of exportproceeds. On the contrary, the Enforcement Directorate had not broughtout anything on record which could show an action or omission on behalfof respondent which caused non-receipt of export proceeds. [Para 7]

It was recorded in the impugned order that agent ‘R’, which was engagedafter obtaining permission from the RBI, cleared customs duty, freight,warehouse charges and loading/unloading, etc. It was also stated that ‘R’sold part of consignment of rice on immediate payment, but the remainingpart was sold on deferred payment. When said later date payment wasreceived by Tory Bank for repatriation to India, Tory Bank failed andcollapsed due to devaluation of the currency and failure of Russianeconomy. The adjudication order described how after failure of the Tory


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Bank Russia, the respondent requested the RBI for write-off. It was correctthat the RBI had not granted write-off, but such fact alone could not fastenliability of contravention of section 18(2) against respondent. Theadjudicating authority, while passing the impugned order, had taken intoconsideration all evidence produced before it. The challenge to theadjudication order by the Enforcement Directorate was based upon the RBIdeclination to grant write-off and non-grant of extension for repatriationof the export proceeds. Though the RBI enjoys independent authority togrant write-off or extension, yet that does not mean an automatic fasteningof liability without considering other evidence on record. The adjudicatingauthority had taken sufficient care to discuss the evidence available andhad arrived at conclusion of absolving the respondent from the liability ofcontravention of section 18(2). For those reasons, the challenge, by revisionpetition, to the impugned order was wrong and incorrect. [Para 8]

The impugned order was passed after exercising judicial discretion whichcould not be termed as perverse exercise of the power in any sense of theterm. Therefore, invoking of the revisional jurisdiction against properexercise of judicial discretion was uncalled for and had to be rejected. Evenif arguably two views were possible, the one adopted by adjudicatingauthority could not be set aside merely because the revisional court wouldhave preferred another view. Moreover, the revisional power does notallow the Tribunal to reappreciate the evidence. Therefore, the revisionpetition was liable to be dismissed.

CASES REFERRED TO

Rajnis International v. Director of Enforcement [1995] 83 Taxman 25(FERA) (para 5), D. Stephen v. Nosibolla 1951 SCR 284 (para 10), LogendraNath Jha v. Polai Lal Biswas 1951 SCR 676 (para 11), Amarchand Aggarwalav. Shanti Bose 1973 (4) SCC 10 (para 11), Akalju Ahir v. Ramdeo Ram 1973(2) SCC 583 (para 11) and Dulichand v. Delhi Administration AIR 1975 SC1960 (para 11).

T.K. Gadoo for the Appellant. J.S. Arora for the Respondent.

ORDER

O.P. Nahar, Chairperson. - This revision petition is filed under theprovisions of section 19(6) of the Foreign Exchange Management Act, 1999seeking indulgence of this Tribunal to examine legality, propriety orcorrectness of the Adjudication Order No. SDE(SSB)II/28/2004 dated25-6-2004 passed by Special Director, Enforcement Directorate exonerat-ing the respondents from the charges involving contravention of theprovisions of section 18(2), read with section 18(3) of Foreign ExchangeRegulation Act, 1973 and Central Government Notification Nos. F 1/67/EC 74.1 and 2, both dated 1-1-1974 on the reasons that respondents tookreasonable effective steps to repatriate export proceeds. This revisionpetition has been filed on the plea that the adjudicating authority hascommitted error by exonerating the respondents even when (1) Reserve




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Bank of India by letter dated 11-12-2004 as available on records, declinedto accord write-off against the outstanding export proceeds and (2)request for extension of period or grant of waiver was pending with RBI.Learned counsel Shri J.S. Arora on behalf of respondents has filed writtensubmissions which are taken on record.

2. This adjudication order is passed on 25-6-2004 but the revision petitionis filed on 21-3-2005 after expiry of about 9 months from the date of theimpugned order. The revision petition does not contain any statementexplaining the period of delay. According to Shri T.K. Gadoo, DLA revisionpetition is filed under the provisions of sub-section (6) of section 19 ofFEMA, 1999 where no limitation period is prescribed, hence, no explana-tion is required to be made. Further it is argued that revisional powers arewith this Tribunal and the petitioner is merely enabling the Tribunal toexercise the jurisdiction residing in it. Therefore, it is correct to state thatrevision petition can be filed at any point of time and filing revision afterabout 9 months from the date of impugned order cannot be termed asdelayed or wrong and in law. Along with this argument an Order dated19-5-2003 passed in revision petition No. 95/2002 by this Tribunal is citedwhere as per para 6 the following is observed :

“6. As rightly submitted on behalf of the appellant, there is no timeprescribed for filing revision petition and in order to grant an opportunityof being heard in the petition, I feel it fair to enter in the petition disregardthe delay caused in filing the same and so the petition being entertained,there is no time-bar for the petition.”

Per contra Shri J.S. Arora, learned counsel for the respondents argued thatthe power of revision can only be exercised exceptionally and not in aroutine manner. In the present case revision petition does not pleadserious illegality or grave injustice or perversity of adjudication order.Neither it is pleaded that interference by Tribunal is necessary for thenecessity of correction of manifest illegality or prevention of gross miscar-riage of justice. According to him revision petition can only be filed withina reasonable time, but not after expiry of long period of 9 months whichhas demonstrated latches signifying waiver and acquiescence. He arguedthat period of filing of appeal in this Tribunal from passing of adjudicationorder under section 19(2) of FEMA, 1999 is 45 days, which can also betaken as a standard period on facts and circumstances of this petition forinvoking revisional jurisdiction by this Tribunal.

3. While going through the contents of the revision petition it is nowherefound that petitioner is alleging grave injustice or perverse findings by theadjudicating authority. Rather, the pleadings in revision petition havecommonly used language like an appeal stating that (1) impugned ordercannot be sustained; (2) adjudicating authority failed to apply its mind andacted on insufficient defence; (3) it cannot be held that charges arebaseless; (4) the scheme intent or purport of Foreign Exchange RegulationAct, 1973 does not permit exoneration and (5) adjudication order is liableto be set aside, amended; otherwise the petitioner is likely to sufferSEBI AND CORPORATE LAWS ❑ FEBRUARY 4 - FEBRUARY 10, 2008 ❍ 22

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irreparable loss and damage etc. It is clear from the above that the presentpetition is no revision petition content-wise either when different para-graphs are read separately or the total petition is read as a whole exceptthat the title to the petition is given as revision petition. Therefore, on thisfactual scenario, this cannot be given the name of a revision petitionfactually and actually.

4. This Tribunal is empowered under the provisions of section 19(6) toexamine illegality, propriety and correctness of the adjudication order.The law is well settled that revision is an exceptional remedy unlike anappeal. Needless to say that this is an exceptional power which has to beinvoked sparingly. However, the position of filing of revision petition in theRegistry of this Tribunal by Enforcement Directorate is not so. In the year2005 (from 1st January to 9th September) 43 revision petitions are filed asagainst 68 in the year 2004. All these revision petitions are filed byDirectorate of Enforcement and none other. Though an appeal is alsoavailable to Central Government under the provisions of section 19(2) butnone has been filed by Enforcement Directorate during the year of 2004or 2005. The above figure shows that Enforcement Directorate is ofmorality and ethics. Nothing is stated anywhere in the pleadings that whyEnforcement Directorate took 9 months in filing this revision petition. Thislong delay shows waiver in acquiescence. The revision petition surfersfrom latches. Here the Latin maxim can be quoted i.e., Vigilantibus et nondermientubus jura sub veriunt. The law helps those who are watchful anddo not sleep over their rights. Though no statutory time limit is prescribedfor availing of remedy of revision but that does not permit the petitionerto file revision after expiry of reasonable period whereby equity isdefeated. The delay is required to be explained. Any negligent omission inassertion of right is likely to cause prejudice to the adverse party. This isnamed as latches which flows from acquiescence and waiver.

5. On merits it can be said that the provisions of section 18(2) of FERA, 1973provide that :

“(2) Where any export of goods, to which a notification under clause (a)of sub-section (1) applies, has been made, no person shall, except with thepermission of Reserve Bank, do or refrain from doing anything, or takeor refrain from taking any action, which has the effect of securing—

(A) in case falling under sub-clause (i) or sub-clause (ii) of clause (a) ofsub-section (1)—

(a) that payment for the goods—

(i) is made otherwise than in the prescribed manner; or

(ii) is delayed beyond the period prescribed under clause (a) ofsub-section (1); or

(b) that the proceeds of sale of the goods exported do not represent thefall export of value of the goods subject to such deductions, if any,as may be allowed by the Reserve Bank; and




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(B) in a case falling under sub-clause (ii) of clause (a) of sub-section (1),also that the sale of goods is delayed to an extent which is unreasonablehaving regard to the ordinary course of trade :

Provided that no proceedings in respect of any contravention of theprovisions of this sub-section shall be instituted unless the prescribedperiod has expired and payment for the goods representing the fullexport value has not been made in the prescribed manner within theprescribed period.”

It is clear from the plain reading of the above quoted provisions that anexporter cannot do anything or refrain from doing anything which has theeffect of not securing or delaying recovery of export proceeds except withthe permission of RBI. This Tribunal’s predecessor FERA Board in RajnisInternational v. Director of Enforcement [1995] 83 Taxman 25 has ob-served that “section 18(2) itself contemplates that a person may seekpermission of the RBI to do or refrain from doing anything or take orrefrain from taking any action which has the specified effect. If suchpermission is sought and given by the RBI, there would be no contraven-tion of section 18(2) even if export proceeds are not realized. If suchpermission is not sought at all, or if sought, the same has been refused, theexporter will be guilty of contravention of section 18(2) if he fails to provethat he had not taken all the effective steps as in the circumstances of thecase would have been reasonably taken by a prudent man dealing inexport business.”

6. The gravamen of charge under the provisions of section 18(2) consistsof not taking reasonably effective steps in the particular circumstances ofthe case which are required to be taken by a prudent exporter. Here thecontravention relates to taking or not taking of effective steps. It is not thenon-realization of export proceeds. The Legislature has not made non-receipt of export proceeds an offence under FER Act, 1973, though sub-section (3) of section 18 further creates of legal presumption against theexporter but the same is rebuttable and can be displaced, if taking ofeffective steps are proved by the exporter.

7. In the present case as described in para 23 of the Adjudication Orderthat Respondent No. (1) M/s. Kothari Vegetable Products Ltd. exportedrice to Syria after opening irrevocable L/C where payment on productionof document was not made because the foreign buyer found the riceinfected with insects. Hence, the title documents were rejected due todefective quality of goods. This rice was further shipped for sale to Russiawhere the rice was sold through an agent named M/s. Rustrade Moscow.Admittedly part of the price of sold rice was received which was imme-diately paid, but other part being paid later, did not reach India becauseby then Tory Bank in Russia, through whom payment has to channelisecollapsed and went in liquidation. The respondents had also brought onrecord other factors not of their own making, which caused non receiptof export proceeds. On the contrary the Enforcement Directorate has notbrought out anything on record which can show an action or omission on


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behalf of respondent which caused non-receipt of export proceeds. Ratherreliance is placed by Enforcement Directorate on the rebutable presump-tion available under the provisions of section 18(3) of the FER Act. Bybringing out the factors discussed in paras 26, 27 and 28 the respondentstried to rebut the legal presumption which according to adjudicatingauthority are acceptable so far as displacing the rebutable presumption isconcerned.

8. It is recorded in para 25 of the impugned order that agent M/s. RustradeMoscow was engaged after obtaining permission from RBI, who clearedcustoms duty, freight, warehouse charges and loading/unloading etc. It isalso stated that M/s. Rustrade Moscow sold part of consignment of rice onimmediate payment but the remaining part was sold on deferred payment.When this later date payment was received by Tory Bank Moscow forrepatriation to India Tory Bank failed and collapsed due to devaluation ofthe currency and failure of Russian economy. It is further recorded in para26 that M/s. Rustrade Russia later became untraceable. The next twoparagraphs of the Adjudication Order describe that how after failure ofthe Tory Bank Russia the respondents requested RBI for write-off. It iscorrect that RBI has not granted write-off but such fact alone cannotfasten liability of contravention of section 18(2) of FER Act, 1973 againstrespondents. The adjudicating authority while passing the impugnedorder has taken into consideration all evidence produced before it and itis so discussed in the impugned order. The challenge of the AdjudicationOrder by Enforcement Directorate is based on the RBI declination togrant write-off and non-grant of extension for repatriation of the exportproceeds. Though RBI enjoys independent authority to grant write-off orextension but that does not mean an automatic fastening of liabilitywithout considering other evidence on record. The adjudicating authorityhas taken sufficient care to discuss the evidence available and has arrivedat conclusion of absolving the respondents from the liability of contra-vention of section 18(2). For these reasons the challenge by revisionpetition of the impugned order is wrong and incorrect.

9. In the position discussed in the above paragraphs, it is difficult to say thatthe adjudicating authority has disregarded any evidence for arriving atthe conclusion in the impugned order or the adjudicating authority actedwith no evidence. The impugned order is passed after exercising judicialdiscretion which cannot be termed as perverse exercise of the power inany sense of the term. Therefore, invoking of the revisional jurisdictionagainst proper exercise of judicial discretion is uncalled for and has to berejected. Even if arguably two views are possible, the one adopted byadjudicating authority cannot be set aside merely because the revisionalcourt would have preferred another view.

10. Moreover, the revisional power does not allow this Tribunal toreappreciate the evidence. In this regard the observations from D. Stephenv. Nosibolla 1951 SCR 284 can be aptly quoted below :




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“The revisional jurisdiction conferred on the High Court under section439 of the Code of Criminal Procedure is not to be lightly exercised whenit is invoked by a private complaint against an order of acquittal, againstwhich the Government has a right of appeal under section 417. It couldbe exercised only in exceptional cases where the interests of publicjustice require interference for the correction of a manifest illegality orthe prevention of a gross miscarriage of justice. This jurisdiction is notordinarily invoked or used merely because the lower Court has taken awrong view of the law or misappreciated the evidence on the record.”

11. Though the Supreme Court has made above observations whilediscussing the provisions of section 397 of Cr. PC but the language of thatprovision is somewhat similar empowering the High Court or SessionsCourt to examine the legality, propriety or correctness of any order passedby lower court. Hence interpretation provided therein will have to beapplied for the purposes of interpretation of section 19(6) of FEMA, 1999.The law declared in other judicial pronouncements in :

(1) Logendra Nath Jha v. Polai Lal Biswas 1951 SCR 676

(2) Amarchand Aggarwala v. Shanti Bose 1973 (4) SCC 10

(3) Akalju Ahir v. Ramdeo Ram 1973 (2) SCC 583

are to the same effect and need not be reproduced here. Again HonourableSupreme Court in Dulichand v. Delhi Administration AIR 1975 SC 1960observed as follows :

“The appellant dissatisfied with the order, preferred a revision applicationin the High Court. Now the jurisdiction of the High Court in a CriminalRevision Application is severely restricted and it cannot embark upon are-appreciation of the evidence, but even so, the learned Single Judge ofthe High Court who heard the revision application, examined the evidenceafresh at the instance of the appellant.”

12. There is no substance in this revision petition. This Tribunal is notallowed to choose one out of two views even if any view taken byadjudicating authority is not preferred. Moreover, this Tribunal cannotembark upon an appreciation of the evidence. Therefore, this revisionpetition is liable to be dismissed having no substance and also due toinordinate delay, acquiescence and waiver.

13. For the reasons stated hereinabove this revision petition is dismissed.■■


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CLBCOMPANIES ACT

[2008] 81 SCL 401 (CLB - NEW DELHI)COMPANY LAW BOARD, PRINCIPAL BENCH, NEW DELHI

Kultar Sehgal

v.

Broadvision Digital Prints (India) (P.) Ltd.SMT. VIMLA YADAV, MEMBER

C.P. NO. 83 OF 2004MARCH 23, 2007

Section 397, read with section 398, of the Companies Act, 1956 - Oppressionand mismanagement - Whether where respondents had squarely refutedpetitioners’ allegations of mismanagement and siphoning off of funds ofcompany and their preliminary objection that petitioners had not come withclean hands was also found to be true, petition filed by petitioners undersection 397/398 deserved to be dismissed - Held, yes

FACTS

The petitioners filed a petition under section 397/398, alleging various actsof oppression and mismanagement against respondent Nos. 2 to 6. Whilepraying for various reliefs including order of detailed investigation intothe accounts of respondent No. 1 - company (R-1) and direction to therespondent Nos. 2 and 3 to bring back the moneys siphoned off by them,the petitioners submitted that the respondents had fraudulently removedR-1’s valuable property including one expensive printing machine andsold the same in a clandestine manner. The respondents, however, whiledenying all the allegations made against them, sought dismissal of thepetition, inter alia, on the grounds that the petitioners had not come withclean hands, inasmuch as they had suppressed and mis-stated the factsthat R-1 started its business at the instance of petitioner No. 1(P-1) himselfwithout any contribution from him; that it was at the P-1’s insistence thatrespondent Nos. 2 and 3 purchased the machine in question through theirpersonal contributions, but the machine started working improperly and,consequently, was sold on the P-1’s recommendations only ; that all theresolutions and other documents like minute books, account books wereprepared and kept by the Chartered Accountant (CA) who was also the CAof the companies owned by the P-1; that it was P-1 himself, who was maindebtor of R-1, inasmuch as he got the job work done for his othercompanies on the R-1’s machine, but never deposited the paymentreceived therefor in R-1’s accounts.

Kultar Sehgal v. Broadvision Digital Prints (CLB - New Delhi)



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HELD

The respondents had squarely refuted the allegations levelled againstthem. Their preliminary objection that the petitioners had not come withclean hands was also found to be true. It is a settled proposition of law thatthe conduct of the parties is a very relevant factor to be considered in theequitable proceedings under section 397/398. There had been allegationsand counter allegations in the instant petition. The chronology of events asnarrated by the respondent Nos. 1 to 6, which remained uncontroverted bythe petitioners, revealed that the petitioners had not come with cleanhands. From the date of their efforts to procure the machine till its returnto the supplier, all through the petitioner No. 1 had been associated in theendeavour. Rather, it was at his instance that the sequence of events tookthe shape as it did. P-1 had made only bald allegations against the respondentswithout substantiating the same and the chronology of events, as put forthby the respondents, had not been controverted by him. Even the allegationsof mismanagement and siphoning off of funds from his own concerns andgetting the job done at the R-1’s machinery, thereby misusing R-1’sresources had not been refuted by the petitioners. Even the charteredaccountant, who prepared the accounts, was said to be belonging to hiscamp. The conduct of affairs of the company by P-1 had not been in theinterest of the R-1. The fiduciary capacity, within which directors have toact, enjoins upon them a duty to act on behalf of the company with utmostcare and skill and due diligence and in the interest of the company. Thedirectors are not entitled to use their powers merely for the purpose ofmaintaining their control over the affairs of the company or merely fortheir extraneous purposes to benefit themselves. The directors have a dutyto make full and honest disclosure regarding all important matters relatingto the company. The acts of directors in a private limited company arerequired to be tested on a much finer scale in order to rule out any misuseof power for personal gains or ulterior motives. Considering the facts of theinstant case, the petition deserved to be dismissed at the threshold itself onaccount of tenable preliminary objection of the respondents that thepetitioners had not come with clean hands. However, even on merits, thepetitioners had failed to make out a case of siphoning off of funds againstthe respondents to justify their prayer for directing respondent Nos. 2 and3 to bring back the funds allegedly wrongfully siphoned off and therebycompensating the petitioners for the losses suffered due to the allegedmismanagement by the respondents. On consideration of the detailedarguments of respondent Nos. 1 to 3 corroborated and reiterated byrespondent Nos. 4, 5 and 6, no case of siphoning off of funds by therespondents had been proved by the petitioners. Similarly, the petitionershad failed to make out a case to justify granting of their other prayers in theinstant petition. The chronology of events, as narrated by all the respondentsin their separate arguments, pointed the accusing finger in the wholeepisode towards the petitioners themselves. The CLB, being a quasi judicialauthority, in exercise of its powers, is to be guided by the principles of


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natural justice. The balance of convenience in the instant case was againstthe petitioners. Therefore, their petition deserved to be dismissed. [Para 12]

CASES REFERRED TO

Sri Kanta Datta Narasimharaja Wadiyar v. Sri Venkateshwar Real EstateEnterprises (P.) Ltd. [1991] 72 Comp. Cas. 211 (Kar.) (para 12) and ShrimatiAbnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390(Delhi) (para 12).

Gurbaksh Singh for the Petitioner. Bhupendra S. Chauhan, O.P. Poplaiand R.P. Agrawal for the Respondent.

ORDER

1. In Company Petition No. 83/04 filed under section 397/398/399 readwith sections 402 and 403 of the Companies Act, 1956 (hereinafter referredto as ‘the Act’), the petitioners namely Shri Kultar Sehgal and Ms. ManpritKaur have alleged that the respondent Nos. 2 and 3 in connivance withrespondent Nos. 4, 5 and 6 mismanaged the affairs of the company byreselling a very expensive digital printer worth Rs. 1.90 crore, VUTEK 3360machine along with the accessories back to the supplier i.e., R-4 whofurther sold it to R-5 at the back of the petitioners besides alleging otheracts of oppression and mismanagement. Hence, the petitioners’ prayerthat books of account and statutory records be got produced and adetailed investigation into accounts be ordered; the respondents be askedto bring back the moneys siphoned off; R-2 and 3 along with otheradditional directors appointed irregularly be removed and R-2 and 3 berestrained from floating a new company.

2. The undisputed facts of this case are: M/s Broadvision Digital Prints (I.)Ltd. WZ-456, Street No. 25, Shiv Nagar, New Delhi was incorporated on28-3-2003. The main objects of the R-1 company for which it was incorpo-rated are to start, sell, rent and carry on all or any of the business ofprinters, digital printers photographers, stationers, lithographers, typefounders, pre-press processing, stereo types, block makers, engravers, diesinkers, book-binders, designers, draughtsman, booksellers, publishers,advertising agents and dealers. The authorised share capital of the respon-dent company was Rs. 50 lakhs divided into Rs. 50,000 (Rupees fiftythousand) equity shares of Rs. 100 each. Initially the petitioners as well asthe respondent Nos. 2 and 3 subscribed 250 shares each and thus thepetitioners had 50 per cent of paid up shares of the company.

3. Shri Gurbaksh Singh, counsel for the petitioners argued that R-2 and 3in furtherance of their common intentions for wrongful gains/inducedthe petitioners to invest in a very expensive digital printer machine. Themachine VUTEK 3360 alongwith its accessories costing Rs. 1.90 croreswas purchased from R-4 i.e., M/s. Arrow Coated Products Ltd. An amountof Rs. 1.19 crores was paid to R-4 at the time of delivery of machine. Thepetitioners at that time contributed Rs. 32 lakhs for purchase of the said




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machine and further Rs. 60 lakhs were raised from the Bank of Punjab Ltd.Karol Bagh, New Delhi (R-6) as a loan to this effect. It was pointed out thatR-2 and 3 induced the petitioners to install that machine in Mumbai at14-A, Paper Box Estate, Mahakali Caves Road, Andheri (E), Mumbai-400093 on the pretext of larger business potential. The petitioners wereresiding in Delhi and machine was installed in Mumbai, therefore, takingadvantage of the petitioners being far away from the site of work, R-2 and3 started misappropriating the profit earned by the company and in aclandestine manner, dishonestly and fraudulently removed the valuableproperty of the company, which included plant and machinery and booksof account of the company, without the knowledge of the petitioners andsold the same to R-4 for a settled amount of Rs. 70 lakhs. (Reliance wasplaced on letter dated 23-12-2003 to this effect issued by R-2 to R-4). Thefact of removal of the machinery of the company, it was contended, cameto the notice of the petitioner No. 1 when he visited Mumbai on 28-2-2004.After making enquiries, it was revealed that the said machine was soldback to M/s. Arrow Coated Products Pvt. Ltd. by R-2 and 3 withoutadequate consideration. R-2 and 3 were not authorised/empowered totransfer/sell the machine without the prior permission/consent of thepetitioners. They also could not sell the same without the approval of theboard of directors. No resolution with regard to selling of the machine waspassed by the board of directors. No consent of any kind was evenobtained from the petitioners to this effect. Immediately petitioner No. 1filed a complaint with the police station vide on 2-3-2004. It was stated thatthough the police did not take any action on the basis of the said complaintlodged by the petitioner No. 1, as the situation warranted, however, thiscomplaint is being proceeded in the Court at Andheri, Bombay.

4. Shri Gurbaksh Singh, Counsel for the petitioners further argued that thepresent petition was filed under sections 397/398 and 399 of the Compa-nies Act as the respondents in collusion with each other mismanaged thecompany’s affairs. The moot point in this petition is, it was argued, thatwhen the equipment was purchased by the company and stood in thename of the company, on what authority or power the respondent Nos. 2and 3 sold the same to the respondent Nos. 4 and 5. It was contended thatif company’s any property is required to be sold, the Companies Act doesprovide that there must be a resolution to this effect. Moreover, thecompany being a legal entity is required to be dealt as per the law andcompany’s property cannot be sold without the authority of law. Thatapart, it was argued, for selling the equipment in question the respondentNo. 2 further tried to deceive the petitioners by showing a letter dated23-12-2003 that the equipment in question was sold at Rs. 70 lakhs. Thesaid letter at page 31 of the petition has not been disputed. In respondentNo. 4’s reply which is reflected at page 4 the equipment is shown to havebeen purchased by them for Rs. 95 lakhs (as per respondent No. 2’s letterdated 17-11-2003 annexed by R-4 also the price of the equipment wasshown Rs. 95 lakhs). When the equipment was sold for Rs. 95 lakhs, it was


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argued why respondent No. 2 had shown the sale price at Rs. 70 lakhs. Itwas argued that it is apparent from the records itself that R-2 tried toembezzle Rs. 25 lakhs by showing different price as mentioned in the letterdated 23-12-2003 (page 31 of the petition) and letter dated 17-11-2003(page 19 of the respondent No. 4’s reply). If both these letters are consid-ered by the CLB it will clearly show that the respondent No. 2 intended toembezzle Rs. 25 lakhs from the company’s account.

5. It was further argued that it is apparent from the certified copy of thebank account of the company, at page Nos. 1 to 18 of Misc. Application No.170/06 that the petitioner No. 1 and the respondent No. 2 were authorizedto operate the company’s account, but it is strange that inspite of specificdirections, the respondent Nos. 4 and 6 in connivance with the respondentNos. 2 and 3 allowed only R-2 to operate the account unilaterally withoutany power or resolution or consent of the petitioner No. 1. Further, whenthe respondent No. 4 even though it purchased the equipment for Rs. 95lakhs as reflected at page No. 4 of their reply, yet as per the statement ofaccounts of the company which was filed alongwith the Misc. ApplicationNo. 178/06, only Rs. 60.5 lakhs were deposited into the company’s accountand the remaining Rs. 34.5 lakhs were not paid into the company’saccount. It was pointed out that it is strange to note that the respondentNo. 4 had purchased the equipment of the company i.e., respondent No. 1and they were required to remit the amount or issue the cheque in favourof the company and once they had not paid the amount of Rs. 34.5 lakhsinto the account of the company, therefore, it is apparent that they are alsoparty in the mismanagement of the affairs of the company. Further, it waspointed out that the respondent No. 5 who purchased the equipment, weresupposed to see whether there was any resolution passed by the companyfor the sale of the equipment. They just purchased the equipment withouteven observing the basic norms of the company. The respondent Nos. 4and 5 even did not pay the full amount of Rs. 95 lakhs, as is being admittedin their reply, into the account of the company. Therefore, it was argued,the respondent Nos. 4 and 5 are equally liable for their illegal acts undersections 397/398 and 399 of the Act. The respondent Nos. 2 and 3 were theparties in disposing off the equipment of the company without anyauthority or resolution of the company and further the respondent No. 6being the public body had allowed the respondent No. 2 to operate thebank account though he was not entitled to do so. Therefore, it wascontended, their acts of illegality are covered under sections 397/398 and399 of the Companies Act and they are required to be severely dealt with.

6. Shri Gurbaksh Singh, counsel for the petitioners pointed out that inresponse to the petition, the respondents have filed the reply but they havenot put up a single point which can be considered. The respondent Nos. 4and 5 have not explained that once they had purchased the equipment forRs. 95 lakhs how they have paid Rs. 60.5 lakhs into the company’s accountand how Rs. 34.5 lakhs was paid into individual’s account. There is nojustification for this and nothing has come on record even after a number




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of opportunities given to the respondents. In the similar manner, therespondent No. 6 has not come forward to explain that being a public bodywhat made them to allow the respondent No. 2 unilaterally operate thecompany’s account whereas there has been clear direction that P-1 andR-2 only can operate the account. It was contended that this is a clear caseof mismanagement of business affairs of the company and thus all therespondents are required to be severely dealt with as per the law in theinterest of justice. It was emphasized that it will be in the interest of justiceif the respondent Nos. 4 and 5 be directed to deposit Rs. 34.5 lacs along withinterest at the rate of 18 per cent per annum being the balance consider-ation of equipment in question into company’s account. Further, therespondent Nos. 2 and 3 be directed to deposit the amount which they havewithdrawn from company’s account without the authority of the company’sdirectors with interest at the rate of 18 per cent per annum. And furtherthat the legal action be taken against the respondent No. 6 for allowing therespondent No. 2 to operate the company’s account unilaterally.

7. Shri Bhupendra S. Chauhan counsel for the respondents 1, 2 and 3argued that the petitioner have no locus standi to file the present petition,as such the petition is liable to be dismissed with costs; the petitioners havenot come with clean hands they have suppressed and mis-stated the factsbefore this Hon’ble Court; the present petition is bad for misjoinder andnon-joinder of parties in the petition, it was pointed out that some wherein the month of February, 2003, the petitioner No. 1 approached therespondent No. 2 with a proposal of doing printing and signage businessand informed the respondent No. 2 that an exhibition was being held inMumbai in which some imported machinery required for said printingand signage business were kept and that the purchase of such machinecould fetch a good business. The petitioner No. 1 also asked for loan topurchase the machine but the respondent No. 2 refused to give the moneyon interest. Subsequently the petitioner No. 1 requested the respondentNo. 2 to accompany the petitioner to visit Mumbai to see the saidmachinery and on his request the respondent No. 2 negotiated the cost ofmachine and printing ink. The respondent No. 2 was in the business ofphotocopier and tonner and knew some manufacturers of ink, so duringmeeting the cost of machine was settled at Rs. 1.90 crores. Next day i.e.,11-2-2003 the petitioner No. 1 and the Respondent No. 2 met one estateagent at Andheri (E), Mumbai and the petitioner No. 1 asked the agent tosearch for the place to install the said machine and a gala belonging toShri Chainroop Dugar, situated at Paper Box, Mahakali Caves Road,Andheri (E), Mumbai, was finalized on rent of Rs. 45,000 per month and adeposit of Rs. 3 lakhs with effect from 1-3-2003. The petitioner No. 1requested the respondent No. 2 to pay an advance of Rs. 1 lakh as thepetitioner No. 1 was not having money, and assured the respondent No. 2to return the said amount in Delhi. The respondent No. 2 gave a sum ofRs. 1 lakh on behalf of the petitioner No. 1 to Mr. Dugar and obtained areceipt. The respondent No. 2 paid an amount of Rs. 25,00,000 to the


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respondent No. 4 (M/s. Arrow Coated) from his personal account and fromhis wife Mrs. Promila Ghai (respondent No. 3)’s account. Rs. 12 lakhs waspaid through cheque from the account of Respondent No. 2, Rs. 6,00,000through cheque from the account of respondent No. 3 (Mrs. Promila Ghai)and Rs. 7,00,000 was paid in cash to the petitioner No. 1 (Shri Kultar SinghSehgal) by respondent No. 2 (Shri Gurcharan Ghai). On 3-3-2003 therespondent No. 2 gave Rs. 10 lakhs and Rs. 1 lakh through cheque to therespondent No. 4. The cheque amounting to Rs. 7 lakhs given by thepetitioner bounced/got dishonoured. On 23-3-2003 a Memorandum ofUnderstanding was finalised and signed by the petitioner No. 1 (ShriKultar Singh Sehgal) and the respondent No. 2 (Shri Ghai) to run the saidbusiness having several terms and conditions including ‘that in case Mr.Gurcharan Ghai wanted to leave Mr. Kultar Singh Sehgal shall pay Mr.Gurcharan Ghai an assured return of 2 per cent per month on theinvestment made by Mr. Gurcharan Ghai alongwith investment. Howeverin case of loss arising due to natural calamity, it shall be born by both theparties equally.’ On 26-3-2003 the respondent No. 2 gave a cheque of Rs.2 lakhs from the account of respondent No. 3 (Promila Ghai). As such priorto forming the company the respondent No. 2 had paid an amount of Rs.13 lakhs from his account and Rs. 8 lakhs from his wife account (Mrs.Promila Ghai - R-3) to M/s. Arrow Coated (R-4). On 18-3-2003 the peti-tioner No. 1 applied to ROC for forming a private limited company and thename M/s. Broadvision Digital Prints Pvt. Ltd. was approved. So on 28-3-2003 the respondent No. 1 company under the name and style of M/sBroadvision Digital Prints (India) Pvt. Ltd. was formed having its regis-tered office at 12A/21, WEA, Saraswati Marg, Karol Bagh, New Delhi. Therespondent No. 2 also paid a draft amounting Rs. 1,08,000 and cashamounting Rs. 15,000 to one Mr. Des Raj, a Chartered Accountant who wasworking for the other companies owned by petitioner No. 1 Mr. KultarSingh Sehgal. An account was opened in the name of respondent No. 1company with Bank of Punjab, Karol Bagh Branch, New Delhi. It waspointed out that all the resolutions and other documents like minuteBooks, etc., were prepared and kept by Shri Des Raj the CharteredAccountant of the company (who was also the Chartered Accountant ofthe companies owned by Shri Kultar Singh Sehgal). At that stage anamount of Rs. 50 lakhs being share of the petitioners was to be brought bythe petitioner No. 1 and to be paid to the respondent No. 4 M/s. ArrowCoated, but, however, with one or the other excuses neither the petitionerNo. 1 nor the petitioner No. 2 brought a single rupee, and the petitioner No.1 requested the respondent No. 2 to arrange money on interest or from anyother source and assured that the petitioner No. 1 will repay the same tothe respondent No. 2, as such the respondent No. 2 approached themanager, Bank of Punjab (Respondent No. 6) and the Bank showed theirwillingness to give loan. To arrange the petitioners’ part of investment inthe company the aforesaid loan was arranged and as such Bank of Punjabsanctioned a loan amounting to Rs. 60 lakhs and a cash credit facility




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amounting to Rs. 15 lakhs to the respondent No. 1 against mortgage ofpersonal immovable property i.e., Hotel of respondent No. 2. Loan andcredit facility was granted so urgently because of immovable property ofrespondent No. 2 and reputation of respondent No. 2. On payment of Rs.1 crore to the respondent No. 4 M/s. Arrow Coated Company got themachine shipped on 23-4-2003. Thereafter an agreement was signed withthe respondent No. 4 company and 12 post dated cheques of Rs. 7 lakhseach were given to the said respondent No. 4. The machine reached Delhiand on 18-5-2003 the machine reached Mumbai and in the last week May2003 the machine was installed in a gala at Paper Box.

8. It was argued that the petitioner No. 1 got the products prepared atrespondent No. 1 company and supplied the finished goods/products tohis personal companies namely Dashmesh Arts, Dashmesh Industry,Dashmesh Limited, etc., and the money never came to respondent No. 1company. The petitioner kept telling the respondent No. 2 that paymentwas delayed due to some or the other reason and further kept assuring therespondent No. 2 that the payments would come. The machine was alsonot working properly as the company did not have fully trained engineersin India to attend to the complaints. The respondent No. 2 was notcomfortable in running this business and as such requested the petitionerthat he did not want to continue in this manner and asked him to arrangefunds from his share or to refund the respondent No. 2’s money with 2 percent per month interest as per the condition and clause in MOU dated23-3-2003. During the first week of August 2003 the petitioner No. 1 toldto the respondent No. 1 that he had negotiated with some one who wouldinvest and become his partner and as such the petitioner No. 1 would bein position to clear respondent No. 2’s account as per the clause of MOUin a month’s time. Further, petitioner No. 1 requested for Rs. 5 lakhs morefor the material so that he could run the expenses of the factory till theother party would bring the money. R-2 gave Rs. 5 lakhs to the petitionerNo. 1 again on the condition that he would do only cash business andreturn the said amount immediately. But the petitioner No. 1 neverreturned that amount also. During the first week of October 2003 thepetitioner No. 1 closed down the business without informing R-2. Thepetitioner No. 1 gave a letter to the landlord Shri Chainroop Dugar, statingthat he would be closing the business from 1-10-2003 and asked forreturning of the advance amount deposited against gala. After some daysthe respondent No. 2 received a call from the employees and came to knowthat the factory had been closed and the staff was not receiving theirsalaries and the doors of the machine room were not in place. Therespondent No. 2 also received a notice from the bank that the respondentNo. 1 company were not rotating any money from the accounts with theBank. There was no stock in the office and factory as stated in the last stockstatement to the bank and also no work was going on in the factory. R-6(bank) recalled the loan amount with up-to-date interest and put themachine in their possession. The R-2 being a renowned person having


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good reputation and values got astonished to know all this and went toMumbai alongwith his wife (respondent No. 3) and settled the accounts ofdifferent borrowers, suppliers and paid salaries to the employees from hispocket. The R-2 and petitioner No. 1 talked to R-4 (M/s. Arrow CoatedCompany) stating that their machine had not worked well. They requestedthem to take back the machine and to return the money. After longnegotiation with their foreign office and Mumbai office ultimately therespondent No. 4 agreed to take the machine back against payment ofRs. 1.10 crore in lieu of Rs. 1,19,50,000 but when R-2 and P-1 objected tothis amount, later on they agreed that the amount which they wouldreceive back from Octroi and Sales-tax would be given to respondentNo. 1 company after the refund as R-4 could sell the machine in Bangaloreonly and not in Mumbai. The petitioner No. 1 objected and assured therespondent No. 2 that he would arrange a good buyer, who could give ahigher price, as such the said deal with the respondent could not becompleted and the machine lay idle in the factory for four months, due towhich the respondent No. 1 company sustained loss of Rs. 3 lakhs permonth. In the meantime, prices of the machine went down in the interna-tional market and the petitioner No. 1 could not get any buyer. R-4 offereda price of Rs. 95 lakhs in instalments in the presence of the P-1 and the dealwas finalized and it was decided by the petitioner No. 1 and the respondentNo. 2 to return the machine to the respondent No. 4-M/s. Arrow Coated.The respondent No. 4 company went to the respondent No. 6 Bank for therelease order but the respondent No. 6 bank refused to give it without fulland final settlement of their loan amount. However, the respondent No. 4somehow settled the matter with the respondent No. 6 Bank and obtainedNOC and the respondent No. 6 Bank took the rest of the money ofoutstanding dues from the respondent No. 2 and respondent No. 3 as wellas from the account of family members of the respondent No. 2. Therespondent No. 6 bank also took the post dated cheques from the respon-dent No. 4 company. The landlord Mr. Dugar also did not allow the staffof respondent No. 4 company to take the machine then the respondentNo. 2 on the instruction of petitioner No. 1 (Kultar Singh Sehgal) went toMumbai to settle the issue and as such the respondent No. 2 settled thematter and paid the money to the landlord from his pocket. The respon-dent No. 2 chased the petitioner No. 1 several times to clear the paymentsas per terms and conditions settled in MOU dated 23-3-2003 but P-1 neverdid it and did not pay a single rupee to the R-2 and/or R-3 till date.Respondent No. 4-M/s. Arrow Coated cleared the payments and therespondent No. 6-Bank returned the money to the different accounts ofthe respondent Nos. 2 and 3 and their family members. The respondentNo. 6-bank did not return the full amount, R-2 because the amountreceived by R-6 from R-4 was short from their total outstanding amount.The main debtor of respondent No. 1 company is P-1 himself who has gotjob work and took out finalized goods worth Rs. 35 lakhs. It was stated byR-2 and 3 that P-1 never brought the money in the business as decided.




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However P-1 got the job work done for his other companies on themachine of R-1 company and received money for the same in his accountand the said money was never shown and/or deposited in R-1 company’saccount. P-1 had misappropriated the funds as well as day-to-day work ofthe respondent No. 1 company and did not provide any record, accountbooks, etc., including minute books of the respondent No. 1 company to therespondent Nos. 2 and 3 despite several reminders. P-1 himself brought theBoard of Directors resolution regarding selling of the Machine to therespondent No. 4. R-2 and 3 did not sell the machine without authority andwithout adequate consideration. The price of the machine was negotiatedwith the purchaser R-4 in the presence of P-1 and moreover, the sellingprice for the best market price because nobody was ready to offer higherprice of the said machine. Respondents 1, 2 and 3 denied for want ofknowledge that the machine is presently installed at the premises of the R-5. It was argued that it is totally baseless that the market price of the saidmachine was more than Rs. 1.5 crore at that time. It was also wrong toallege that the machine was sold to respondent No. 5 at a price of Rs. 70lakhs. It was wrong to allege that the respondent Nos. 2 and 3 disputed Rs.80 lakhs and also further misappropriated Rs. 60 lakhs and furthermisappropriated the profit of the respondent No. 1 company to the tuneof Rs. 45 lakhs. It was vehemently argued by the counsel for the respon-dent Nos. 1, 2 and 3 that the relief sought by the petitioners are frivolous,fictitious, vexatious and does not have an iota of truth.

9. Shri O.P. Poplai, counsel for the respondent No. 4 pointed out that therespondent No. 4 company registered under the Act, having its registeredoffice at 159 Mittal Industrial Estate, Sanjay Building No. 5B, Marol; Naka,Andheri Kurla Road, Andheri (E), Mumbai and its branches at Delhi,Ahmedabad, and Bangalore, and its factory at Ankleshwar in the State ofGujarat is engaged in the import of sign making (Printing) machinery andmaterials and also in the production of water soluble films. The respon-dent is the sole selling agent in India for the world renowned VUTEKdigital printing machines. Digital Printing Machine called VUTEK UltraVU 3360 FC was on display in the stall of the respondent in an exhibitioncalled ‘Printing Pack’ which was held on 12-2-2003 at Goregaon, Mumbai,Petitioner No. 1, Kultar Singh Sehgal was engaged in printing business andwas inter alia carrying on business under the name and style of DashmeshArts, and was known to the Directors. He visited the stall of the respondentin the said exhibition along with Shri Gurcharan Kumar Ghai, respondentNo. 2. They expressed keen interest in purchase of the VUTEK machinewhich was displayed in the stall and placed an order for the purchase ofthe machine. On 26-4-2003, respondent No. 4 company sent anacknowledgement of the aforesaid order, placed by the petitioner, andrespondent No. 2. Since the respondent No. 1 did not require certainoptional items, the total price of the machine was agreed to be reduced toRs. 1,78,50,000 out of which Rs. 94,50,000 was to be paid as down paymentand Rs. 84,00,000 by 12 monthly instalments of Rs. 7,00,000 each by way


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of post dated cheques. R-1 sent 12 post dated cheques Nos. 090761 to090772 for Rs. 7,00,000 each dated 10-11-2003 to 10-10-2004 drawn on theBank of Punjab Limited, Karol Bagh, New Delhi. The purchase of VUTEKmachine by R-1 company was to be partly financed by their banker, theBank of Punjab. Following payments were received by Respondent No. 4company towards down payment for the purchase of the said machine.Payment made by Mrs. Promila Ghai Respondent No. 3,Director of Respondent No. 1 company through her personalaccount with Bank of Punjab Ltd. on 22-2-2003 Rs. 6,00,000

on 26-3-2003 Rs. 2,00,000

Payment made by Shri Gurcharan Kumar Ghai, R-2, Director of

R-1 company through his personal account with Bank of Punjab Ltd.

on 22-2-2003 Rs. 12,00,000

on 6-3-2003 Rs. 1,00,000

Cheque received from Bank of Punjab Ltd. dated 6-4-2003 Rs. 54,00,000

Payments made by R-1 on 9-5-2003 Rs. 6,00,000

on 9-5-2003 Rs. 8,00,000

on 17-6-2003 Rs. 5.50,000

Rs. 94.50,000

The first instalment cheque of Rs. 7,00,000 was deposited by R-4 companyin its bank on 10-11-2003 and was returned unpaid on 13-11-2003. Thereturn was intimated to the R-1 company and its directors, but no stepswere taken to replace the cheque or make payment in lieu thereof. Thesecond cheque for Rs. 7,00,000 dated 10-12-2003 was deposited in theBank on 10-12-2003 and this was also returned unpaid on 12-12-2003. Nosteps were taken by R-1 company or its directors for replacement of thereturned cheque or its payment. Petitioner Nos. 1 and R-2 directors of theR-1 indicated to Shri Sameer Patel and Shri Prakash Chopra, Directors ofR-4 company that R-1 company was not in a position to meet theinstalments towards the cost of the machine, and that the printingoperations of the company had been closed. They requested them toexplore the possibility of the return of the machine. With this in view, ameeting between the directors of R-1 company and those of the R-4company was held on 15-11-2003 in Hotel Park Royal, New Delhi. Themeeting was attended by P-1, R-2 and two directors of R-4 alongwithManager (Sales). In the meeting, it was agreed by and between the partiesthat R-1 shall return the said VUTEK Ultra VU 3360 FC Printer and ColourBurst Software to R-4 and R-4 will pay a sum of Rs. 95,00,000 for the same.The said minutes were confirmed by R-4 company vide its letter dated17-11-2003. The decision by R-4 to accept the return of the machine wasinter alia influenced by the fact that the answering respondent wasconvinced that R-1 would not be in a position to honour its commitmentfor timely payment of the agreed instalments and further since the




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answering respondent had a ready buyer for the machine in view, R-4agreed to accept back the machine almost at the price which R-1 companyhad paid to R-4. The agreed payment of Rs. 95,00,000 was made by R-4company as under:

Date of cheque Cheque No. Name of Bank Amount in lakhs

22-12-2003 974218 Bharat Co-op Bank 42,00,000

23-1-2004 852863 State Bank of India 5,00,000

20-2-2004 40678 -do- 7,00,000

12-3-2004 780622 -do- 8,00,000

17-3-2004 825886 -do- 8,00,000

21-3-2004 825860 -do- 6,50,000

26-3-2004 780658 -do- 5,50,000

26-3-2004 825367 -do- 6,00,000

30-3-2004 640576 -do- 7,00,000

Rs. 95.00.000

10. Shri O.P. Poplai, counsel for the respondent No. 5 contended thatR-5 is neither a necessary, nor even a proper party in the presentproceedings for oppression and mismanagement against R-2 and 3,Directors of R-1 company. The relief claimed as against R-5 is beyond thescope and ambit of petition under section 397/398 of the Companies Act,and impleadment of R-5 is in manifest abuse of the process of law. It waspointed out that R-5 is a company registered under the Companies Act,1956 and has its Administrative Office and Works at Unit No. 1 Gupta MillsEstate, Devi Dayal Industrial Compound, Darukhana, Ray Road (E),Mumbai 400010. The respondent is engaged in the business of offset,screen, and digital printing for the last 10 years and is one of theestablished companies in the printing industry. The respondent has theprivilege of having top corporate houses as its regular customers and hasa substantial annual turnover. The respondent presently has 5 printingmachines and periodically keeps acquiring new machines to meet itsbusiness requirements. In the last quarter of 2003, the respondent was inurgent requirement of a digital printing machine. The respondent con-tacted respondent No. 4 - Arrow Coated Products Ltd. who are the soleselling agents in India for the world renowned VUTEK digital printingmachines, and were in negotiations for a latest available version of VUTEKdigital printer. The R-4 told R-5 that it would take few months for a newprinting machine to be imported to India. R-4 however, offered R-5 aVUTEK digital machine model 3360 FC S. No. 36203 which, it wasrepresented, had been scarcely used, and was as good as in new condition,and could be delivered to R-5 immediately. Since the requirement of R-5was extremely urgent in order to execute pending orders and the machinewas being offered with one year warranty, the respondent agreed topurchase the said printing machine and placed an order with R-4 for


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supply of the VUTEK printing machine for Rs. 1,62,00,000 and paid anadvance of Rs. 10,00,000 on 22-12-2003. R-4 issued an orderacknowledgement dated 31-12-2003 which was duly accepted and con-firmed by R-5. It was argued that R-5 was totally unaware, at the time ofnegotiations for the purchase of the machine, that there had been anytransaction with the respondent No. 1 with regard to the said machine. R-5 had agreed to purchase the VUTEK machine from respondent No. 4 inthe usual course of business without any knowledge of the said machinehaving been the subject matter of any controversy between R-1 and 4. Thepurchase of the machine was bona fide, in good faith, and for consider-ation without any knowledge about the controversy, if any, involving thesaid machine. The answering respondent came to know about it only onreceipt of notice from the Company Law Board. It was pointed out that thecomponents of the total payment of Rs. 1,62,00,000 which R-5 wasrequired to make for the said machine were as under:

Cost of VUTEK printing machine Rs. 1,35,50,000

Central Sales Tax @ 49% Rs. 5,42,000

Sign making software Rs. 7,50,000

Central Sales Tax @ 4% Rs. 30,000

Spares and installation charges Rs. 13,28,000

Rs. 1,62,00,000

Payment under the contract as per terms agreed by and between theparties, was made by R-5 to respondent No. 4 and the machine wasdelivered to the R-5. In reply to the facts and instances of mis-managementand oppression, as contained in para 6 of the petition, R-5 specificallydenied that there was any connivance or collusion between the answeringrespondent and the other respondents, as alleged, or otherwise. It wasfurther denied that R-5 derived any unfair, or undue advantage, out of thetransaction of the purchase of VUTEK machine from respondent No. 4.R-5 reiterated that the purchase of the printing machine by the respon-dent from respondent No. 4 was made bona fide, in good faith, and in theusual course of business, for full and adequate consideration, and thepetitioners have no right of recourse to the said VUTEK machine in thehands of R-5 who had been wrongfully impleaded and its name ought tobe struck off from the array of respondents.

11. Shri R.P. Agrawal, counsel for R-6 admitted that answering respon-dent had sanctioned a term loan of Rs. 60 lakhs for purchase of importedplant and machinery to the respondent No. 1 company. It was pointed outthat MIDC Police Station, Andheri East, Mumbai had closed the case on theground that the matter is of Civil nature. It was denied that any illegalitywas committed by the Bank’s officials or that there was any connivanceof the Bank’s officials with the respondent Nos. 2 and 3 in respect of closureof OD/Loan Account. It was also denied that the officials of the answering




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respondent had anything to do with the repurchase of the equipments inquestion by the respondent No. 4. It was argued that the Bank has actedin its best interest for recovery of its dues from the respondent No. 1company as the account of respondent No. 1 company had become NPA.It was denied that there was any connivance between respondent Nos. 2and 3 and the answering respondent Bank. The said allegations, it wasargued, are absolutely bogus, baseless and false.

12. On consideration of the pleadings and arguments of the counsels forthe petitioners and the respondents and looking at the documents fur-nished I find that the respondents have squarely refuted the allegationslevelled against them. Considering the facts and circumstances of the caseI find that the respondents preliminary objection that the petitioners havenot come with clean hands is also found to be true. I agree that it is a settledproposition of law that the conduct of the parties is a very relevant factorto be considered in the equitable proceedings under section 397/398. InSri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real EstateEnterprises (P.) Ltd. [1991] 72 Comp. Cas. 211 (Kar.), it was held that thepetitioner seeking equitable relief must come with clean hands and goodconduct, failing which the petitioner would constitute a gross abuse of theprocess of Court, and the petitioner is not entitled for any relief undersections 397 and 398. It also held that the conduct of the parties in otherproceedings could also be taken into consideration. However, it was heldthat the conduct of the petitioner before filing of the petition may not bea relevant factor. Regarding the principle of equity in Shrimati AbnashKaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390, theDivision Bench of Delhi High Court has held that while exercising equityjurisdiction, which clothes the Court with discretionary powers “.... thediscretion cannot be exercised arbitrarily or according to one’s own willor whim. It has to be regulated by law, allay its rigour advance the remedyand to relieve against abuse. The Court, therefore, exercising equityjurisdiction, cannot ignore the well known maxims of equity. Two suchmaxims are that he who seeks equity must do equity and he who comesinto equity must come with clean hands.” There have been allegations andcounter allegations in this petition. The chronology of events in this caseas narrated by the respondent Nos. 1 to 6 which remains uncontrovertedby the petitioners’ reveals that the petitioners have not come with cleanhands. From the date of their efforts to procure the machine till its returnto the supplier all through the petitioner No. 1 has been associated in theendeavour. Rather it is at his instance that the sequence of events took theshape as it did. Petitioner No. 1 has made only bald allegations against therespondents without substantiating the same and the chronology ofevents as put forth by the respondents has not been controverted by him.Even the allegations of mismanagement and siphoning off funds for hisown concerns namely Dashmesh Arts, Dashmesh Industry, DashmeshLimited, etc. and getting the job done at the respondent No. 1’s machinerythereby misusing R-1’s resources has not been refuted by the petitioners.


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Even the Chartered Accountant who prepared the accounts is said to bebelonging to his camp. The conduct of affairs of the respondent companyby the petitioner has not been in the interest of the Respondent No. 1. Thefiduciary capacity within which directors have to act enjoins upon thema duty to act on behalf of the company with utmost care and skill and duediligence and in the interest of the company. The directors are not entitledto use their powers merely for the purpose of maintaining their controlover the affairs of the company or merely for their extraneous purposesto benefit themselves. The directors have a duty to make full and honestdisclosure regarding all important matters relating to the company. Theacts of directors in a private limited company are required to be tested ona much finer scale in order to rule out any misuse of power for personalgains or ulterior motives. Considering the facts of this case the petitiondeserves to be dismissed at the threshold itself on account of tenablepreliminary objection of the respondents that the petitioners have notcome with clean hands. However, even on merits the petitioners havefailed to make a case of siphoning off funds against the respondents tojustify their prayer for directing respondent Nos. 2 and 3 to bring back thefunds allegedly wrongfully siphoned off and thereby compensating thepetitioners for the losses suffered due to the alleged mismanagement bythe respondents. On consideration of the detailed arguments of respon-dent Nos. 1 to 3 corroborated and reiterated by respondent Nos. 4, 5 and6 which for reasons of prolixity I refrain from repeating no case ofsiphoning off funds by the respondents has been proved by the petitioners.Similarly the petitioners have failed to make out a case to justify grantingof their other prayers in this petition. As pointed out earlier, the chronologyof events as narrated by all the respondents in their separate argumentsthe accusing finger in the whole episode points towards the petitionersthemselves. The CLB being a quasi judicial authority in exercise of itspowers is to be guided by the principles of natural justice. The balance ofconvenience in this matter is against the petitioners. Therefore, CP No. 83/2004 deserves to be dismissed.

13. In view of the above directions, the petition is disposed of. All interimorders stand vacated. All Company Applications stand disposed of. Noorder as to cost.

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BOMBAY HIGH COURTCOMPANIES ACT


Erach Boman Khavar

v.

Tukaram Sridhar BhatV.C. DAGA, J.

C.A. NO. 720 OF 2006IN C.P. NO. 201 OF 1994

MARCH 5, 2007

Section 446 of the Companies Act, 1956 - Winding up - Suits stayed onwinding up order - Whether failure to obtain leave prior to institution of suitwould not debar Court from granting such leave subsequently and onlyconsequence of this would be that proceedings would be regarded as havingbeen instituted on date on which leave was obtained from High Court - Held,yes

Section 446 of the Companies Act, 1956 - Winding up - Suits stayed onwinding up order - Applicant was owner of suit premises, which was given toa company on leave and licence basis - Term of lease had expired, butcompany did not vacate premises and continued to pay rent, which wasaccepted by applicant - In meanwhile, company was ordered to be wound upand applicant filed application under section 446 seeking leave of CompanyCourt to file eviction suit against Official Liquidator and sub-tenant -Whether since it was clear from reply of Official Liquidator that he did notneed suit premises and, tenancy rights, which company had in premises, werenot asset for purpose of liquidation proceedings and, thus, it would not benecessary for Official Liquidator to incur expenses to defend suit, it was a fitcase for grant of leave to file eviction suit - Held, yes

FACTS

The applicant was the owner of the suit premises, which was given to acompany on leave and licence basis. The licence although expired byafflux of time, the said company continued to occupy the suit premisesand tendered licence fee, which was accepted by the applicant withoutprejudice to his rights. Later, the company was ordered to be wound up bythe Court. The applicant filed application seeking return of the premisesto him, but the said application was dismissed by the Company Judge and


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appeal filed against the said order, was also dismissed. Thereafter, theapplicant filed an application under section 446 for leave to file evictionsuit in the Small Causes Court against the Official Liquidator and therespondent-sub-tenant. The Company Judge granted leave to the appli-cant. Accordingly, the applicant filed a suit before the Small Causes Court.Later, the applicant filed another company application before the Com-pany Judge under section 446 for leave to file eviction suit under section41 of the Presidency Small Causes Court Act against the Official Liquida-tor of the company-in-liquidation and the sub-tenant. The CompanyJudge, by order dated 23-2-2006, disposed of said application directing theapplicant to make amendment in the earlier suit. The applicant did not fileamendment application, but made a fresh application seeking fresh leaveof the Court under section 446 for filing fresh eviction suit against theOfficial Liquidator of the company-in-liquidation under section 41 of thePresidency Small Causes Court Act. The Company Judge allowed the saidapplication. The respondent filed an application challenging grant of leaveto the applicant on the ground that the prejudicial order granting of leavecame to be passed behind his back and in disregard to rule 117 of theCompanies (Court) Rules, 1959. The Division Bench set aside the im-pugned order and restored the application to the file of the CompanyJudge for decision on the application afresh in accordance with law afterhearing the sub-tenant. The respondent contended that since the subjectsuit had already been instituted without there being a prior permission ofthe Company Judge, the said suit itself was not maintainable and no postfacto leave could be granted; that no leave, as sought for, could be grantedas the applicant had failed to comply with the earlier order of the CompanyJudge dated 23-2-2006, which was binding on the applicant; and that inview of the provisions of sections 210 and 211 of the Companies Act, readwith rules 298 and 299 of the Companies (Court) Rules, 1959, the conceptof share capital was unknown to the company-in-liquidation and, there-fore, the benefit of section 3(1)(b) of the Maharashtra Rent Act was notavailable to the applicant.

HELD

The first contention which needed consideration was : whether failure toobtain permission prior to institution of suit debars the Court fromgranting such leave subsequently. This question has already been answeredby the Apex Court in the case of Bansidhar Shankarlal v. Mohd. Ibrahim[1971] 41 Comp. Cas. 21 and reiterated by the Apex Court in the recentjudgment in the case of State of Jammu & Kashmir v. UCO Bank [2006] 129Comp. Cas. 239/66 SCL 191, wherein the Apex Court held that the failureto obtain leave prior to institution of suit would not debar the Courtgranting such leave subsequently, and that the only consequence of thiswould be that the proceedings would be regarded as having been institutedon the date on which the leave was obtained from the High Court. In viewof this categorical pronouncement of the law, the objection to the

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maintainability of the application raised by the sub-tenant was devoid ofany substance. [Para 33]

The next objection sought to be raised was that the order passed by theCompany Judge dated 23-2-2006, would debar the applicant from movingand prosecuting another or fresh application for leave to file fresh suitunder section 41 of the Presidency Small Causes Court Act on the applicationof the principle analogous to the doctrine of res judicata. Said contentionwas also devoid of any substance in view of the fact that by order dated 23-2-2006, the Company Court did not decide the application praying for leaveunder section 446 on merits. In the order, only concession given by the sub-tenant, came to be recorded, who had said that he would not oppose prayerfor amendment of plaint. In that view of the concession given, the Court didnot find it necessary to grant Judge’s summons. However, liberty wasreserved in favour of the applicant to apply afresh, if necessary. It would,thus, be clear that by the impugned order, the Company Judge did notdecide the question of grant of leave on merits dealing with the contentionsof the rival parties. Apart from that, liberty was reserved in favour of theapplicant to apply, if necessary. In that view of the matter, in the absenceof any adjudication of the rights of the parties, neither doctrine of resjudicata nor concept of res judicata or the principle analogous theretocould be attracted. Thus, the submission made in that behalf held no water.[Para 34]

The object of the section 446 appears to be to save the company, which isbeing wound up, from unnecessary litigation and to protect the assets forequitable distribution among its creditors and shareholders. Theconsequence of the winding up order, therefore, is that no suit can be filedagainst the company without obtaining leave of the Court. In dealing withthe question of grant of leave, the Court has to necessarily consider theinterest of the company and to see that the assets are not wasted inunnecessary litigation. Leave to file suit ordinarily be granted where thequestion at issue is such which cannot be gone into and decided in thewinding up proceeding. [Para 36]

The Court while considering the prayer for grant of leave, has to bear inmind the aforesaid settled principles culled down from the various judgmentsof the various Courts. Now, the question was whether the interest of thecompany would get affected, if the leave to file suit as prayed for by theapplicant was granted. While considering this aspect, one has to keep inmind the law laid down by the Apex Court in the case of Smt. R. NirmalaBafna v. Khandesh Spg. and Wvg. Mills Co. Ltd. [1992] 74 Comp. Cas. 1,wherein the Apex Court ruled that in addition to the factual situation thereare two other circumstances which must be taken into consideration,namely, (a) the tenancy rights of the company in the tenanted premises isnot an asset for the purpose of liquidation proceeding; and (b) merelybecause the company moves in liquidation and a liquidator/OfficialLiquidator is appointed, the rights of the company vis-a-vis its landlord ortenants do not undergo any change. Keeping in mind these judicially


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recognized statements of law, if one turned to the reply filed by the OfficialLiquidator to oppose the application, it was amply made clear that theOfficial Liquidator did not need the premises for its use and, therefore, theOfficial Liquidator had no objection for releasing the premises in favour ofthe landlord. If that be so, it would not be necessary for the OfficialLiquidator to incur expenses to defend the suit, because the OfficialLiquidator did not need the suit premises and on the top of it, the tenancyrights, that the company had in the premises, was not the asset for thepurpose of liquidation proceedings. So far as the sub-tenant was concerned,he would be the only contesting party to the suit. Therefore, the questionof creating strain on the financial resources of the company-in-liquidationcould not be a factor, which should weigh with the Court while consideringthe application for grant of leave. [Para 37]

One of the limb of the arguments advanced revolved around thequestion : whether the concept of share capital was known or unknown tothe company under liquidation. [Para 38]

Under section 455, where a winding up order is made, the Official Liquidatoris required to submit a preliminary report to the Court as to the capitalissued, subscribed, and paid up, and estimated amount of assets andliabilities, giving separately, under the heading of assets, as contemplatedunder the said section. [Para 42]

Under section 458, the Official Liquidator has to realize uncalled residue ofthe company’s capital. The liquidator has to call upon the shareholders,who are then called contributory to pay unpaid balance. It was, therefore,clear that the rival submission made by the parties about the existence ofshare capital in the event of winding up of the company was an argumentof substance, which would have to be considered by the competent courtin the suit while adjudicating upon the rights of the rival parties. It was notfor the Company Court to decide that question since the Court wasconsidering limited question as to whether or not leave to prosecute suitshould be granted. [Para 43]

The issues involved in the suit and the reliefs claimed could not beadjudicated upon or decided by the Court in exercise of company jurisdiction.That jurisdiction would be with the Court trying the suit. The interest of thecompany in liquidation was not at all involved in the said suit. Therefore,the question of invocation of jurisdiction of the Small Causes Court eitherunder section 28 of the Bombay Rent Act or under section 33 of theMaharashtra Rent Act or under section 41 of the Presidency Small CausesCourt Act, was not relevant for the purpose of grant of leave because thequestion of jurisdiction of the Court would have to be decided on the basisof the plaint pleadings. [Para 44]

The Small Causes Court would be well within its right to decide its ownjurisdiction. In the event it comes to the conclusion that it has no jurisdictionto try a suit under the Presidency Small Causes Court Act, it would be openfor that Court either to return or reject the plaint or permit the conversion




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of the suit. All those conflicting questions did not need to be gone into andadjudicated upon by the Court at the stage of grant of leave. The Court hadonly to consider that the suit was not a frivolous suit; that the suit was notsuch which was bound to fail for the reasons apparent on the face of therecord; and that the same was not going to create strain on the resourcesof the Official Liquidator. At any stage, the question raised in the suit wasarguable one. [Para 45]

In the aforesaid view of the matter, it was a fit case for grant of leave,however, subject to the condition that in the event of the decree, the samewould not be executed against the company-in-liquidation without theleave of the Court. [Para 46]

CASES REFERRED TO

Smt. Nirmala R. Bafna v. Khandesh Spg. & Wvg. Mills Co. Ltd. [1992] 74Comp. Cas. 1 (SC) (para 22), Bhatia Co-operative Housing Society Ltd. v. D.C.Patel AIR 1953 SC 16 (para 22), Hindusthan Petroleum Corpn. Ltd. v. DilipPrabhakar Dingorkar [2006] Supp. BCR 592 (Bom.) (para 22), Godrej &Boyce Mfg. Co. Ltd. v. Shridhar Jagannath Naurkar [2005] 1 BCR 839 (Bom.)(para 22), Balkrishna Mahadeo Vartak v. Indian Association ChemicalIndustries Ltd. [1958] 28 Comp. Cas. 179 (Bom.) (para 23), T.V. Purushottam& Co. v. Provisional Liquidators, Subhodaya Publications Ltd. [1955] 25Comp. Cas. 49 (Mad.) (para 23), Harihar Nath v. State Bank of India [2006]131 Comp. Cas. 119/67 SCL 234 (SC) (para 24), State of Jammu & Kashmirv. UCO Bank [2006] 129 Comp. Cas. 239/66 SCL 191 (SC) (para 24), BalajiPatekar v. Official Liquidator [1968] 38 Comp. Cas. 16 (All.) (para 28), CITv. Official Liquidator, Palai Central Bank Ltd. [1979] 49 Comp. Cas. 268(Ker.) (para 28), Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp.Cas. 21 (SC) (para 31) and CIT v. Standard Vacuum Oil Co. [1966] 59 ITR685 (SC) (para 32).

Kamal Khata and J.A. Shah for the Applicant. Hiralal Thakkar, U.M.Mahajan and M.K. Nesari for the Respondent. Mrs. K.V. Gautam for theDeputy Official Liquidator.

JUDGMENT

1. The applicant has invoked the jurisdiction of this Court under section446 of the Companies Act, 1956 (‘the Companies Act’ for short), to seekleave to file and proceed with the suit in the Small Causes Court at Mumbaifiled under section 41 of the Presidency Small Causes Court Act, 1882,against the Official Liquidator and one another.

The Facts :

2. The factual matrix giving rise to the present application is as under :

3. The applicant herein is the owner of flat No. 12-A located in the buildingNew Sagar Darshan, 81/83, Bhulabhai Desai Road, Mumbai-400 026 (‘thesaid premises’ for short).


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4. M/s. Poysha Industrial Co. Ltd. (‘the said company’ for short), wasinducted on leave and licence basis on the terms and conditions set out inthe agreement of leave and licence dated June 17, 1975, executed betweenthe applicant’s father Mr. B. P. Irani and the said company. The licencealthough expired by afflux of time the said company continued to occupythe suit premises and tendered licence fee which was accepted by theapplicant’s father without prejudice to his rights.

5. The applicant’s father had filed an eviction suit being RAE Suit No. 901/2695 of 1990 in the Small Causes Court at Mumbai against the saidcompany under the provisions of section 13(1)(g), read with section 13(2)of the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1937,(‘the Bombay Rent Act’ for short) on the ground of bona fide requirementof the applicant’s father. During the pendency of the said suit, Mr. B.P.Irani, father of the applicant, died. His heirs and legal representativesbrought themselves on record of the said suit. The said suit has now beenwithdrawn on 12-7-2004.

6. In the meanwhile, M/s. Poysha Industrial Co. Ltd. was ordered to bewound up by order of this Court dated 9-1-1998. Company ApplicationNo. 731 of 1999 was made seeking return of the premises to the owner. Thesaid company application was dismissed by the learned Company Judgeon 14-2-2000. An appeal came to be filed against the said order, which wasdismissed on 22-8-2000.

7. On 20-12-2000, an application was made by the owner of the propertyunder section 446 of the Companies Act for leave to file eviction suit in theSmall Causes Court at Mumbai, against the Official Liquidator and thesub-tenant one Mr. Tukaram Shridhar Bhat.

8. After hearing the parties, leave was granted by the learned CompanyJudge on 15-2-2001. Consequently, the owner (landlord) filed suit beingRAE Suit No. 228/366 of 2001 before the Small Causes Court; wherein theOfficial Liquidator of the said company and the sub-tenant were madeparty defendants. In the said suit the landlord had prayed for a decreeagainst the company and occupant of the premises who failed to handoverpeaceful and vacant possession of the suit premises.

9. The present applicant made Company Application No. 45 of 2006 beforethe learned Company Judge under section 446 of the Companies Act forleave to file eviction suit under section 41 of the Presidency Small CausesCourt Act against the Official Liquidator of the said company in liquidationand the alleged sub-tenant (Mr. Tukaram Shridhar Bhat). The said com-pany application came to be disposed of by the learned Company Judge(Mr. Vazifdar, J.) on 23-2-2006, by the following order :

“2. Mr. Thakkar, learned senior counsel appearing on behalf of respondentNo. 2, states that in the event of the petitioner making an application foramendment of the plaint in RAE Suit No. 228/366 of 2001 on the basis ofthe averments made in the present Judges summons, respondent No. 3




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will not oppose the same. In view thereof, it is not necessary to grant thepresent Judges summons.

3. Liberty to the applicants to apply, if necessary. The amendment, ifgranted, will however, be subject to the rights and contentions ofrespondent No. 3 on merits.”

10. The applicant did not file amendment application to amend the plaintof RAE Suit No. 228/366 of 2001 which was pending before the SmallCauses Court at Mumbai.

11. The present applicant made a fresh application being CompanyApplication No. 720 of 2006 seeking fresh leave of the court under section446 of the Companies Act for filing fresh eviction suit against the OfficialLiquidator of the company in liquidation under section 41 of the Presi-dency Small Causes Court Act. At this stage it would be relevant to notethat the sub-tenant Mr. Tukaram Bhat was not impleaded as a partyrespondent to the said application. The learned Company Judge allowedthe said Application No. 720 of 2006 by the order dated 27-7-2006.

12. Pursuant to the leave granted by the learned Company Judge on 27-7-2006, the landlord chose to file eviction suit in respect of the suitpremises against the Official Liquidator of the company in liquidation aswell as the sub-tenant.

13. Mr. Tukaram Bhat (sub-tenant) after having acquired knowledge ofthe aforesaid order dated 27-7-2006, took out Company ApplicationNo. 863 of 2006 to recall the order dated 27-7-2006. However, the saidapplication came to be rejected by order dated 28-9-2006.

14. Being aggrieved by the aforesaid orders dated 27-7-2006, and 28-9-2006, an appeal being Appeal No. 779 of 2006 was preferred by the sub-tenant Mr. Tukaram Bhat, inter alia, on the ground that the prejudicialorder granting of leave came to be passed behind his back and in disregardto rule 117 of the Companies (Court) Rules, 1959.

15. The Division Bench was pleased to hear the above appeal. Afterhearing the parties to the appeal, the Division Bench was pleased to setaside the orders dated 27-7-2006, and 28-9-2006, and restored the Applica-tion No. 720 of 2006 to the file of the Company Judge and directedrehearing and decision on the application afresh in accordance with lawafter hearing the sub-tenant. All contentions of the parties were kept openfor being raised and agitated before the Company Judge in the CompanyApplication No. 720 of 2006. That is how, the above application came to beplaced before me for hearing and decision afresh on merits.

Submissions :

16. Mr. Kamal Khata, learned counsel appearing for the applicant, submitsthat the Bombay Rent Act was repealed and replaced by the MaharashtraRent Control Act, 1999 (‘the Maharashtra Rent Act’, for short). Clause (b)of sub-section (1) of section 3 thereof lays down that the Act shall not apply


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to the premises let or sub-let to banks, or any public sector undertakingsor any corporation established by or under any Central or State Act, orforeign missions, international agencies, multinational companies andprivate limited companies and public limited companies having a paid upshare capital of rupees one crore or more and therefore, submits that atenant such as the company in liquidation is exempted from the purviewof rent legislation by clause (b) of section 3(1) of the Maharashtra Rent Act.

17. The implication of the above provision is that the licence or tenancy ofsuch licensees or tenants are not governed by Rent Act but they aresubjected to the provisions of the Indian Contract Act, 1872, and/or theTransfer of Property Act, 1882, or by other laws other than Rent Law.

18. Learned counsel further submits that the paid up share capital ofM/s. Poysha Industrial Co. Ltd. being more than Rs. 1 crore, the saidcompany is not entitled to protection of the Maharashtra Rent Act byvirtue of the provisions of section 3(1)(b) of the said Act.

19. The applicant, accordingly, claimed to have terminated the tenancy ofthe said company by notice under section 106 of the Transfer of PropertyAct dated 21-9-2005, and as per legal advise had decided to file a suit foreviction under section 41 of the Presidency Small Causes Court Act andtook out Application No. 720 of 2006 which was finally heard and disposedof by the Company Judge (Dharmadhikari, J.) vide order dated 27-7-2006,whereby the applicant herein was granted leave to file suit.

20. Learned counsel for the applicant submits that though the relief forpossession was claimed in the suit already filed, the cause of action in twosuits was entirely different. Hence, under legal advise fresh applicationwas moved being Company Application No. 720 of 2006 seeking leave ofthe Court under section 446 of the Companies Act for filing fresh evictionsuit against the company in liquidation without joining the alleged sub-tenant as party respondent. He further submits that pursuant to the leavealready granted by the Company Judge vide order dated 27-7-2006, thesuit under section 41 of the Presidency Small Causes Court Act came tobe instituted. However, the said order dated 27-7-2006, having been setaside by the Division Bench in appeal, the applicant/plaintiff cannotproceed with the said suit, hence leave to proceed with the suit needs tobe granted in view of the subsequent event narrated hereinabove.

21. Learned counsel submits that the substantial question in the suitbetween the plaintiff and the defendants is that whether the premises isexempted from the provisions of the Maharashtra Rent Act with otherallied issues as to the status of the sub-tenant who is in occupation of thesuit premises cannot be gone into and decided in the winding up proceed-ing. The suit against the sub-tenant cannot be proceeded with in theabsence of the company. The Official Liquidator has already made astatement in reply to the present application that she is not in need of thetenanted premises. He further submits that in this view of the matter sincethe interest of third party is involved, which cannot be decided by this




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Court, as such this is a fit case for grant of leave under section 446 of theCompanies Act with liberty to the applicant herein to proceed with theeviction suit.

22. Learned counsel appearing for the applicant relies upon the ApexCourt judgment in the case of Smt. Nirmala R. Bafna v. Khandesh Spg. &Wvg. Mills Co. Ltd. [1992] 74 Comp. Cas. 1 (SC), to contend that (a) thetenancy rights the company had, in the flat cannot be regarded as asset forthe purpose of liquidation proceedings; and (b) merely because thecompany goes in liquidation and the Liquidator/Official Liquidator isappointed, the rights of the company vis-a-vis its landlord and/or itstenants do not undergo any change. He further submits that the applicantis well within his right to institute suit under section 41 of the PresidencySmall Causes Court Act and proceed with the same. He also placedreliance on the judgment of the Apex Court in the case of Bhatia Co-operative Housing Society Ltd. v. D.C. Patel AIR 1953 SC 16, to contend thatthe sub-tenant occupying the premises does not get protection of the rentlegislation once the protection or immunity given to the head tenant withrespect to the demise premises is taken out by the Legislature. He has alsoplaced reliance on the Division Bench judgments of this Court in the caseof Hindusthan Petroleum Corpn. Ltd. v. Dilip Prabhakar Dingorkar [2006]Supp. BCR 592, and Godrej & Boyce Mfg. Co. Ltd. v. Shridhar JagannathNaurkar [2005] 1 BCR 839, to contend that the landlord can file second suitfor eviction under the general law that is under the Transfer of PropertyAct against the tenant who does not have protection of the MaharashtraRent Act, notwithstanding, the previous suit filed by the landlord foreviction of tenant under the provisions of the Bombay Rent Act is pendingsince the cause of action for both suits are different.

23. So far as the power of this Court to grant leave under section 446 ofthe Companies Act is concerned, reliance is placed on the Division Benchjudgment of this Court in the case of Balkrishna Mahadeo Vartak v. IndianAssociation Chemical Industries Ltd. [1958] 28 Comp. Cas. 179, whereinChainani, J. (as he then was), stated that leave to file suit should ordinarilybe granted where the question at issue is one which cannot be gone intoand decided in the winding up proceeding. He also relied upon thejudgment of the Madras High Court in the matter of T.V. Purushottam &Co. v. Provisional Liquidators, Subhodaya Publications Ltd. [1955] 25Comp. Cas. 49 (Mad.), wherein the above principle governing grant of leaveto continue proceedings were laid down by the Madras High Court in thefollowing words :

“Cases where the company is necessary party to the action but there areother defendants as well, the Courts generally grant leave : and that Courtmay obtain undertaking of the applicant that he will not enforce againstthe company any judgment which he may obtain without the leave of theCourt.”


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24. He also pressed into service the recent judgments of the Apex Courtin the case of Harihar Nath v. State Bank of India [2006] 131 Comp. Cas. 1191

and State of Jammu & Kashmir v. UCO Bank [2006] 129 Comp. Cas. 2392

(SC), in support of his submission.

25. Per contra, Mr. Thakkar, learned senior counsel appearing for the sub-tenant, urged that no leave, as sought, can be granted as the applicant hasfailed to comply with the earlier order of the learned Company Judge(Vazifdar, J.) dated 23-2-2006. He further submits that the said order isbinding on the applicant as such the present application is hit by theprinciple analogous to doctrine of res judicata.

26. Mr. Thakkar further submits that since the subject suit has alreadybeen instituted without there being a prior permission of the CompanyJudge, the said suit itself is not maintainable and no post facto leave can begranted.

27. Mr. Thakkar further submits that in view of the provisions of sections210 and 211 of the Companies Act, read with rules 298 and 299 of theCompanies (Court) Rules, 1959, the concept of share capital is unknownto the company in liquidation and, therefore, the benefit of section 3(1)(b)of the Maharashtra Rent Act is not available to the applicant. As such thesuit as filed by the applicant is not maintainable and, if that be so, this Courtis not expected to grant leave to prosecute such suit which is not maintain-able in the eye of law.

28. Mr. Thakkar further submits that the leave of the Court is not to begranted as a matter of course or merely for the asking. On a formalapplication being made, the Court has to examine the fact and circum-stances of each case separately and exercise its discretion judicially andnot in a capricious or arbitrary manner. While exercising discretion theCourt must examine the tenability of the suit and if satisfied may grantconditional leave or may refuse it absolutely. In support of his submission,he placed reliance on the judgment in the case of T.V. Purushottam & Co.(supra) and that of the Allahabad High Court in the case of Balaji Patekarv. Official Liquidator [1968] 38 Comp. Cas. 16. Reliance is also placed on thejudgment of the Kerala High Court in the case of CIT v. Official Liquidator,Palai Central Bank Ltd. [1979] 49 Comp. Cas. 268, to buttress his submis-sions.

29. Mr. Thakkar, after laying the aforesaid foundation went a step aheadand urged that this Court has to examine not only the maintainability ofthe suit but the merits of the contention with regard to the applicability ornon-applicability of the provisions of the rent legislation, the jurisdictionof the Small Causes Court to entertain and try the suit, the question ofnecessity to grant successive leaves when the applicant is indulging in

1. 67 SCL 234.2. 66 SCL 191.




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spate of litigation against the company which causes financial strain on theresources of the company in liquidation.

30. Mr. Thakkar took me through the various provisions of the MaharashtraRent Act and advanced his submission on the length and width of section33 of the said Act to contend that all suits between the landlord and tenantmust be filed under section 33 of the said Act irrespective of the factwhether Act is applicable or not. In his submission suit under section 41 ofthe Presidency Small Causes Court Act is not tenable. In other words,submission of Mr. Thakkar is that notwithstanding the fact that theMaharashtra Rent Act is not applicable to the suit premises, still the suithas to be filed under section 33 of the said Act to seek possession of thetenanted premises from the tenant and as such it was obligatory on thepart of the applicant to amend the existing suit being RAE Suit No. 228/366 of 2001 on the basis of the leave granted by the learned CompanyJudge (Vazifdar, J.) vide order dated 23-2-2006, and no leave to prosecutefresh suit under section 41 of the Presidency Small Causes Court Act needsto be granted. He, thus, prayed that the application seeking leave toproceed with the fresh suit should be rejected.

31. In rejoinder, learned counsel appearing for the applicant urged thatclose and careful reading of section 446 of the Companies Act will makeit clear that leave of the Court is not a condition precedent for thecommencement of any suit or other proceeding. Leave of the winding upcourt can be obtained even after commencement of the proceeding. Heplaced reliance on the judgment of the Apex Court in the case of BansidharShankarlal v. Mohd. Ibrahim [1971] 41 Comp. Cas. 21. He also brought toany notice that the principle laid down in the said judgment of BansidharShankarlal’s case (supra) is reiterated by the Apex Court in the case ofState of Jammu & Kashmir (supra).

32. Learned counsel appearing for the applicant relying on the variousprovisions of the Companies Act, reference to which is made in the laterpart of the judgment, urged that the view of the Kerala High Court maybe a good view for the purposes of assessment of super profits tax underthe provisions of the Super Profits Tax Act, 1963, but the said principle orthe ratio of the said judgment cannot be extended while considering theeffect of exemption under the provisions of the Maharashtra Rent Act. Hefurther urged that the concept of share as understood under the provi-sions of the Companies Act is not a sum of money. It represents an interestmeasured by a sum of money and made up of diverse rights contained inthe contract evidenced by the articles of association of the company.Reliance is placed on the judgment of the Apex Court in the case of CIT v.Standard Vacuum Oil Co. [1966] 59 ITR 685. It is thus urged that Rent Actis not applicable, as such this is a fit case for grant of leave under section446 of the Companies Act.


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Consideration :

33. Having heard learned counsel appearing for the parties, the firstcontention which needs consideration is: whether failure to obtain per-mission prior to institution of suit debars the court from granting suchleave subsequently. This question has already been answered by the ApexCourt in the case of Bansidhar Shankarlal (supra) and reiterated by theApex Court in the recent judgment in the case of State of Jammu &Kashmir (supra) wherein the Apex Court held that the failure to obtainleave prior to institution of suit would not debar the Court from grantingsuch leave subsequently and that the only consequence of this would bethat the proceedings would be regarded as having been instituted on thedate on which the leave was obtained from the High Court. In view of thiscategorical pronouncement of the law, the objection to the maintainabilityof the application raised by the learned senior counsel appearing for thesub-tenant is devoid of any substance.

34. The next objection sought to be raised by Mr. Thakkar is that the orderpassed by the learned Company Judge (Vazifdar, J.) dated 23-2-2006,would debar the applicant from moving and prosecuting another or freshapplication for leave to file fresh suit under section 41 of the PresidencySmall Causes Court Act on the application of the principle analogous to thedoctrine of res judicata. This contention is also devoid of any substance inview of the fact that by order dated 23-2-2006, the Company Court did notdecide the application praying for leave under section 446 of the Compa-nies Act on merits. In the order only concession given by counsel appearingfor the sub-tenant, came to be recorded, who had said that he would notoppose prayer for amendment of plaint. In this view of the concessiongiven, the Court did not find it necessary to grant Judge’s summons.However, liberty was reserved in favour of the applicant to apply afresh,if necessary. It would, thus, be clear that by the impugned order theCompany Judge did not decide the question of grant of leave on meritsdealing with the contentions of the rival parties. Apart from this, libertywas reserved in favour of the applicant to apply, if necessary. In this viewof the matter in the absence of any adjudication of the rights of the parties,neither doctrine of res judicata nor concept of res judicata or the principleanalogous thereto could be attracted. Thus, the submission made in thisbehalf holds no water.

35. Having dealt with the aforesaid two preliminary contentions, let menow turn to the judicially recognised principle on which the question ofgrant of leave under section 446 of the Companies Act is required to beconsidered. Based on the survey of the various judicial pronouncement,the general principle, on which the leave is to be granted in an action, maybe shortly summarised as follows :

“The leave of the Court is not granted as a matter of course or merely forthe asking. On a formal application being made, the Court will examinethe facts and circumstances of each case and exercise its discretion




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judicially and not in a capricious or arbitrary manner. In the exercise ofits discretion, it may grant leave unconditionally or on terms or mayrefuse it absolutely.

The Court has the power to incorporate any terms while granting leave,and this is explicit by the words ‘except by leave of the Court and subjectto such terms as the Court may impose’.”

36. The object of the section appears to be to save the company which isbeing wound up, from unnecessary litigation and to protect the assets forequitable distribution among its creditors and shareholders. The conse-quence of the winding up order, therefore, is that no suit can be filedagainst the company without obtaining leave of the Court. In dealing withthe question of grant of leave, the Court has to necessarily consider theinterest of the company and to see that the assets are not wasted inunnecessary litigation. Leave to file suit should ordinarily be grantedwhere the question at issue is such which cannot be gone into and decidedin the winding up proceeding.

37. This Court, while considering the prayer for grant of leave has to bearin mind the aforesaid settled principles culled down from the variousjudgments of the various Courts. Now, let me turn to the question whetherthe interest of the company would get affected, if the leave to file suit asprayed for by the applicant is granted. While considering this aspect, onehas to keep in mind the law laid down by the Apex Court in the case of Smt.Nirmala R. Bafna (supra), wherein the Apex Court ruled that in addition tothe factual situation there are two other circumstances which must betaken into consideration, namely, (a) the tenancy rights of the company inthe tenanted premises are not an asset for the purpose of liquidationproceedings; and (b) merely because the company moves in liquidationand a Liquidator/Official Liquidator is appointed, the rights of the com-pany vis-a-vis its landlord or tenants do not undergo any change. Keepingin mind these judicially recognised statements of law, if one turns to thereply filed by the Official Liquidator to oppose this application, it is amplymade clear that the Official Liquidator does not need premises for its useand therefore the Official Liquidator has no objection for releasing thepremises in favour of the landlord. If that be so it would not be necessaryfor the Official Liquidator to incur expenses to defend the suit because theOfficial Liquidator does not need the suit premises and on top of it thetenancy rights that the company had in the premises, are not the asset forthe purpose of liquidation proceedings. So far as the sub-tenant is con-cerned, he would be the only contesting party to the suit. Therefore, thequestion of creating strain on the financial resources of the company inliquidation could not be a factor which should weigh with this Court whileconsidering the application for grant of leave.

38. Considerable length of arguments were advanced by both the partieswith respect to the exemption to the premises in question and maintain-ability of the suit under section 41 of the Presidency Small Causes Court


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Act. One of the limb of the arguments advanced revolved around thequestion : whether the concept of share capital is known or unknown tothe company under liquidation.

39. Mr. Thakkar, learned senior counsel, urged that the concept of sharecapital is unknown to such a company. Whereas learned counsel appear-ing for the applicant tried to contend that merely because the company isin the process of winding up, that by itself does not result in wiping out theconcept of share capital. Both rival counsel pressed into service variousprovisions of the Companies Act in support of their rival contentions.

40. In this behalf, it would be useful to note that for a company to haveshare capital, it is necessary that its memorandum should state theamount and its division. This share capital is different from membershipfee, even if the payment is symbolised by the issue of share. The amountstated in the memorandum becomes the authorised capital of the com-pany. The whole or any part of it may be issued. Supposing, only half of itis issued, then that becomes the issued capital of the company. If the offerof issue is made to the public the whole of it may not be taken up. That partof the issued capital which has been allotted is known as the subscribedcapital. The company need not immediately call upon the whole amount.The actual amount received is called the paid up capital. The uncalledcapital of a company can be converted into reserve capital. By passing aspecial resolution, the company may declare that a portion or whole of itsuncalled capital which shall not be called except in the event of windingup. Such a capital cannot be converted except with the leave of the court;it cannot be charged by the directors.

41. Section 69 of the Companies Act provides for subscription. The firstrequisite of valid allotment is that of minimum subscription. When sharesare offered to the public, the amount of minimum subscription has to bestated in the prospectus. Minimum subscription means the amount whichis, in estimate of directors, enough to meet the following needs, namely,purchase price of any property to be defrayed partly or wholly out of theproceeds of the issue, preliminary expenses and working capital. Undersection 69(3) no shares can be allotted unless at least so much amount hasbeen subscribed and the application money, which must not be less thanfive per cent of the nominal value of the share, has been received in cash.Therefore, it is clear that uncalled capital of the company can be called inthe event of winding up.

42. Under section 455 of the Companies Act where a winding up order ismade the Official Liquidator is required to submit a preliminary report tothe Court as to the capital issued, subscribed, and paid up, and estimatedamount of assets and liabilities, giving separately, under the heading ofassets, as contemplated under the said section.

43. Under section 458, the Official Liquidator has to realise uncalledresidue of the company’s capital. The Liquidator has to call upon theshareholders, who are then called contributory to pay unpaid balance. It




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is, therefore, clear that the rival submissions made by learned counselappearing for the parties about the existence of share capital in the eventof winding up of the company is an argument of substance which will haveto be considered by the Competent Court in the suit while adjudicatingupon the rights of the rival parties. It is not for this Court to decide thatquestion since this Court is considering limited question as to whether ornot leave to prosecute suit should be granted.

44. The issues involved in the suit and the reliefs claimed cannot beadjudicated upon or decided by this Court in exercise of companyjurisdiction. That jurisdiction shall be with the Court trying the suit. Theinterest of the company in liquidation is not at all involved in the said suitas already recorded hereinabove for the reasons stated. Therefore, thequestion of invocation of jurisdiction of the Small Causes Court eitherunder section 28 of the Bombay Rent Act or under section 33 of theMaharashtra Rent Act or under section 41 of the Presidency Small CausesCourt Act is not relevant for the purpose of grant of leave because thequestion of jurisdiction of the Court will have to be decided on the basisof the plaint pleadings.

45. The Small Causes Court would be well within its right to decide its ownjurisdiction. In the event it comes to the conclusion that it has nojurisdiction to try a suit under the Presidency Small Causes Court Act, inthat event, it would be open for that Court either to return or reject theplaint or permit the conversion of the suit. All these conflicting questionsneed not be gone into and adjudicated upon by this Court at the stage ofgrant of leave. Only this Court has to consider that the suit is not a frivoloussuit, that the suit is not such which is bound to fail for the reasons apparenton the face of the record and the same is not going to create strain on theresources of the Official Liquidator. At any stage the question raised in thesuit is arguable one.

46. In the aforesaid view of the matter, this is a fit case for grant of leave,however, subject to the condition that in the event of the decree the sameshall not be executed against the company in liquidation without the leaveof this Court.

47. In the result, the application is made absolute in terms of this order.

48. Company Application is disposed of accordingly, with no order as tocosts.

49. At this stage, learned counsel for the respondent prayed for stay of thisorder. I do not think it is necessary because decision of suit shall take itsown time during which this order can conveniently be challenged, ifadvised.

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KARNATAKA HIGH COURTCOMPANIES ACT

[2008] 81 SCL 431 (KAR.)HIGH COURT OF KARNATAKA

Official Liquidator of Dunford Fabrics Ltd.

v.

G.C. LohiaV.G. SABHAHIT, J.

COMPANY APPLICATION NO. 269 OF 2004IN COMPANY PETITION NO. 83 OF 1997

AUGUST 31, 2006

Section 543 of the Companies Act, 1956 - Winding up - Power of Court toassess damages against delinquent directors, etc. - Applicant filed applicationunder section 543 for recovery of certain amount of debts appearing inbalance-sheet of company-in-liquidation from respondents, ex-directors, onground that they were guilty of misfeasance for having not taken any steps torecover same - Whether in absence of any specific allegation of misconductor misfeasance, mere fact that no action was taken by ex-directors forrecovery of amount, which was not barred by time even as per balance-sheet,would amount to any act of misfeasance or misconduct, particularly whenassets of company had been taken over by financial corporation under section29 of State Financial Corporation Act, 1951 and, consequently, question ofdirectors recovering amount from sundry creditors would not arise - Held,no - Whether, therefore, application filed by applicant was to be dismissed -Held, yes

FACTS

The Official Liquidator of the company filed application under section 543seeking for recovery of certain amounts of debts outstanding as per thecompany’s balance sheet, from the respondents, the erstwhile directors,alleging that they were guilty of misfeasance inasmuch as they had nottaken any steps to recover the same. The respondents, on the other hand,sought dismissal of said application on the ground that the company’sassets were taken over by financial corporation under section 29 of theState Financial Corporation Act.

HELD

It was clear from the perusal of the material on record that there was nospecific allegation of misfeasance or misconduct on the part of each of the

Official Liquidator of Dunford Fabrics Ltd. v. G.C. Lohia (Kar.)



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respondents and the entire claim of the applicant was based upon the entryin the balance-sheet and the said entry in the balance-sheet would notprove that the debts were time-barred as on the date of balance-sheet. Thematerial on record showed that ‘K’ had taken assets of the company undersection 29 of the State Financial Corporation Act, and wherefore thequestion of directors recovering the amount from the sundry debtorswould not arise and in the absence of any specific allegation of misconductor misfeasance, mere fact that no action was taken by the ex-directors forrecovery of the amount, which was not barred by time even as per thebalance sheet, would not amount to any act of misfeasance or misconduct.The applicant had failed to prove that there was act of misfeasance ormisconduct or breach of conduct on the part of the respondents and thesame caused loss to the company. [Para 6]

The application was to be dismissed [Para 7]

Deepak for the Applicant. K.S. Ravishankar for the Respondent.

JUDGMENT

1. This application has been filed by the Official Liquidator under section543 of the Companies Act, 1956, seeking for recovery of Rs. 1,31,96,186from respondent Nos. 1 to 5 jointly and severally averring that as per thestatement of affairs and the entry in the balance-sheet the relevant entryshown as the debts outstanding for a period of six months amounting toRs. 31,03,400, considered doubtful Rs. 1,50,903, other debts Rs. 69,44,377total Rs. 1,01,98,680 and advances recoverable in cash or in kind or forvalue to be received Rs. 29,89,917 and cash and bank balances : cashbalance on hand Rs. 2,346 and bank balance Rs. 5,243 total Rs. 1,31,96,186.

2. It is averred that no statement of affairs has been filed and therespondents have not taken steps for recovery of the abovesaid amountand the respondents are guilty of misfeasance and are liable to pay theamount as sought for in the application.

3. Objections have been filed stating that the assets of the company weretaken over by KSIIDC under the State Financial Corporations Act and thesame was also brought to the notice of the Official Liquidator and in theminutes of the meeting held on 26-7-1999, the said fact of KSIIDC takingpossession under section 29 was brought to the notice of the OfficialLiquidator and, therefore, the application is liable to be dismissed. Thematter was posted for enquiry. On behalf of the applicant PW-1 wasexamined and Ex. P-1 a copy of the balance sheet has been got marked. Onbehalf of the respondents, RW-1 was examined and R1 to R3 were gotmarked.

4. I have heard learned counsel appearing for the applicant and learnedcounsel appearing for respondents 1 to 3.

5. Having regard to the contentions urged the point that arises forconsideration is :


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“Whether the applicant has proved that he is entitled to recoverRs. 1,31,96,186 from the respondents jointly and severally as sought forin the application?”

and I answer the above point in the negative for the following :

Reasons

I have considered the contentions of learned counsel appearing for theparties and perused the material on record including the evidence ad-duced by the parties. It is clear from the evidence of PW-1 the only witnessexamined on behalf of the applicant that the claimant only on the basis ofthe entry in the balance-sheet as per Ex. P1 for the year ending 31-3-1996,and apart from entries in the balance-sheet, no other material is produced.Apart from reliance upon the entries in the balance-sheet relied upon bythe applicant and stating that there is inaction on the part of the said ex-directors for recovering the amount from the sundry debtors and inrespect of loans and advances there is no other averment imputingmisfeasance on the part of the respondents, it is elicited in the crossexamination of PW-1, that he has not verified the account books as thesame has not been submitted apart from the balance-sheet he has notverified any other material regarding misfeasance alleged against therespondents.

6. On the other hand, on behalf of the respondents RW-1 has beenexamined and R1 to R3 were got marked. Ex. R2 is the minutes of themeeting held in the office of the Official Liquidator dated 26-7-1999, whichshows that in the said meeting which was held in the office of the OfficialLiquidator the ex-directors as managing directors of the company and ex-directors were present and joint manager of IRBI and Deputy Manager ofKSIIDC were also present and Manager of SBI, Mysore was present andit was brought to the notice of the Official Liquidator that the assets of thecompany have been taken over under section 29 of the State FinancialCorporations Act, 1951, and in the said meeting it was resolved that theState Bank of India should furnish the list of debtors which are chargedthem for releasing the same for filing application under section 446 of theAct for appointing a chartered accountant and wherefore, it is clear fromthe perusal of the material on record that there is no specific allegation ofmisfeasance or misconduct on the part of each of the respondents and theentire claim of the respondents is based upon the entry in the balance-sheet and the said entry in the balance-sheet would not prove that thedebts are time-barred as on the date of balance-sheet 31-3-1996, and apartfrom producing Ex. P1 no other material is produced and material onrecord shows that KSIIDC has taken assets of the company under section29 of the State Financial Corporations Act, 1951, and wherefore thequestion of directors recovering the amount from the sundry debtorswould not arise and in the absence of any specific allegation of misconductor misfeasance, mere fact that no action was taken by the ex-directors forrecovery of the amount which was not barred by time even as per the

Official Liquidator of Dunford Fabrics Ltd. v. G.C. Lohia (Kar.)



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balance-sheet would not amount to any act of misfeasance or misconductand wherefore, I hold that the applicant has failed to prove that there is actof misfeasance or misconduct or breach of conduct on the part of therespondents and the same caused loss to the company. It is submitted bylearned counsel appearing for the Official Liquidator that separate appli-cation has been filed under section 454 of the Act for not filing thestatement of affairs. The said application will be considered indepen-dently. Accordingly, I pass the following order.

7. The application is dismissed with the abovesaid observations anddismissal of the application would not preclude the Official Liquidator topursue the said application, in accordance with law.

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MADRAS HIGH COURTCOMPANIES ACT

[2008] 81 SCL 434 (MAD.)HIGH COURT OF MADRAS

Waterfall Estate (East) (P.) Ltd.

v.

State of Tamil NaduM.E.N. PATRUDU, J.

WRIT PETITION NOS. 12920 AND 12921 OF 2006AND WPMP NOS. 14511, 14512, 14514 AND 14515 OF 2006

FEBRUARY 9, 2007

Section 4 of the Companies Act, 1956 - Subsidiary company - ‘K’ Ltd.transferred its two tea estates to its two subsidiary companies - While gettingregistered instruments of transfer, remission of stamp duty was claimed inaccordance with Notification No. 1224 issued by State of Tamil Nadu - Sub-Registrar allowed remission of stamp duty and registered documents -District Registrar, however, asked for payment of stamp duty on ground thattransferor-company did not hold 90 per cent of issued share capital oftransferee-companies as required under notification in question to availstamp duty remission - Evidence on record showed that holding of issuedshare capital of transferor-company was 14,493 shares out of issued sharecapital of 90,350 shares in one company and 8,585 shares out of issued share


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capital of 35,350 shares in other company - Whether there was any illegalityin impugned order - Held, no

FACTS

‘K’ Ltd. transferred its two tea estates to its two subsidiary companies. Thetransferee-companies presented instruments of transfer before the Sub-Registrar for registration and claimed remission of stamp duty relyingupon Notification No. 1224 issued by the Government of Tamil Nadu. TheSub-Registrar accepted claim of the transferee-companies and registeredthe document. The District Registrar, however, found that to avail ofstamp duty remission under notification in question, transferor-companyshould hold 90 per cent of the issued capital of the transferee-companyand since transferor-company was holding less than 90 per cent of issuedcapital, stamp duty remission was wrongly given. Accordingly, he passedorder demanding stamp duty from the transferee-companies.

On revision petition, the revisional authority found that the holding of theissued share capital of the transferor-company was 14,493 shares out ofissued share capital of 90,350 shares in one transferee-company and 8,585shares out of the issued share capital of 35,350 shares of other transferee-company. Hence, the revisional authority came to a definite conclusionthat the condition laid down in the notification issued in G.O. Ms. No. 1224/Revenue, dated 25-4-1964, and G.O.Ms. No. 37/CT and RE Department,dated 25-1-1995, for according remission of transfer duty that at least 90per cent of the issued share capital of the transferee-company is in thebeneficial ownership of the transferor-company, was not satisfied in theinstant case and, hence, the petitioner-companies were liable to paystamp-duty.

HELD

A plain reading of the notification discloses that whenever there is transferof property between the companies limited by shares and in a case whereat least 90 per cent of the issued share capital of the transferee-company isin the beneficial ownership of the transferor-company or where thetransfer takes place between a parent company and the subsidiary companywhich is in a beneficial ownership of not less than 90 per cent of the issuedshare capital of the other, there only, the remission will apply. Therefore,the State, in its wisdom, had issued a notification as mentioned suprathrough Item No. 38 dealing with reductions and remissions in respect ofpayment of stamp duty, that the remission will apply only to cases oftransfer of properties between two as mentioned in the notification. In theinstant case, the revisional authority came to a definite conclusion that thecondition laid down in the notification issued in G.O.Ms. No. 1224/Revenue, dated 25-4-1964 and G.O.Ms. No. 37/CT and RE Department,dated 25-1-1995, for according remission of transfer duty is that at least 90per cent of the issued share capital of the transferee-company is in thebeneficial ownership of the transferor-company and since 90 per cent of

Waterfall Estate (East) (P.) Ltd. v. State of Tamil Nadu (Mad.)



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the issued share capital of the transferee-company was not held by thetransferor-company, the petitioner was liable to pay the stamp duty. Therewas no irregularity or illegality in the impugned order. It was a reasonedorder and, therefore, was to be upheld. [Paras 7 and 8]

CASES REFERRED TO

B. Ratnamala v. G. Rudramma AIR 2000 AP 167 (para 7), Martand Dairy &Farm v. Union of India AIR 1975 SC 1492 (para 7), Madras Refineries Ltd.v. Chief Controlling Revenue Authority, Board of Revenue AIR 1977 SC 500(para 7), Chief Controlling Revenue Authority, Board of Revenue v. M.Hamid Sultan, AIR 1975 Mad. 161 (FB) (para 7) and Albert David Ltd., In re68 CWN 163 (para 7).

Sathish Parasaran for the Petitioner. Smt. C.K. Vishnupriya for theRespondent.

JUDGMENT

1. Whether remission of stamp duty for registering the document ispermissible in the transfer of property between the parent and its subsid-iary company?

2. The said common question is involved hence common order is pro-nounced in both the writs.

3. The forceful argument of Shri Sathish Parasaran, learned counselappearing for the petitioner is that the petitioner is exempted from payingthe stamp duty and can get the document registered as per notificationissued by the State of Tamil Nadu and therefore the demand to pay thestamp duty is illegal and the order impugned is to be quashed.

4. If the said argument is accepted undoubtedly the writ petitions are tobe allowed.

5. But the contention of the learned Government advocate appearing forthe respondents is that the notification is not applicable in the case of thepetitioner’s transaction. Hence, the petitioner cannot claim any exemptionunder the notification.

6. Thus it is necessary to go into the details of the notification and thenature of notification and its application.

7. Before doing this exercise, the court has to read the relevant facts.

Facts:

(i) M/s. Kothari Industrial Corporation Ltd., transferred its two teaestates to two of its owned subsidiary companies by name;

(1) M/s. Waterfall Estate (East) (P.) Ltd.;

(2) M/s. Waterfall Estate (West) (P.) Ltd.;

(ii) Both of them are private limited and wholly owned by the petitioner.Two instruments of transfer dated 28-9-2001, and 30-11-2001, underDocument Nos. 2558 of 2001 and 2582 of 2001 are executed in favour


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of the above two private limited companies. The documents werepresented before the Sub-Registrar of Annamalai along with theother documents with certified copy of the annual returns, balance-sheet, etc., and claimed the remission of stamp duty relying on theNotification No. 1224 issued by the Government of Tamil Nadu.

(iii) In brief the notification says that where the transfer takes placebetween the parent company and its subsidiary company and one ofwhich is the beneficial owner of not less than 90 per cent issuedcapital share it is entitled to remission of stamp duty.

(iv) The Sub-Registrar registered the document and accepted the instru-ments of transfer.

(v) While so, the audit objected.

(vi) Hence the District Registrar, Tirupur had issued a show-cause noticedated 13-2-2003, under section 33A of the Indian Stamp Act asking toshow cause as to why stamp duty should not be collected from thepetitioners.

(vii) The basis for issuing the said show-cause notice is, to avail of stampduty remission under Notification No. 1224, the transferor-companyshould hold 90 per cent of the issued capital of the transfereecompany, and that the transferor-company was holding less than90 per cent of the issued capital and therefore the stamp dutyremission was wrongly given.

Case of the petitioner :

(i) The contention of the petitioners is that there is misconception of lawand reading of the provision of the Company Law Act. It is stated thatthere is no distinction between issued capital and subscribed capital,but there is difference between authorised capital on the one handand issued subscribed capital on the other. It is said that the law iswell-settled in this regard. Hence, the demand by the third respon-dent holding that the petitioners were not entitled to the remission ofstamp duty is incorrect.

(ii) When the petitioner appealed before the fourth respondent, thefourth respondent confirmed the earlier orders through the im-pugned order dated 14-3-2006.

(iii) The petitioners are challenging the legality and correctness of thesaid impugned order before this Court.

(iv) The main ground on which the petitioners is challenging are that therespondents did not properly appreciate the provisions of the Notifi-cation No. 1224. It is non-application of mind by the respondents andnotification has to be read as a whole.

(v) It is contended that M/s. Kothari Industrial Corporation Ltd., iscompany and the petitioners’ units are its subsidiary companies andthe notification is applicable in the instant case.




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Counter :

(i) The respondents filed a detailed counter.

(ii) It is stated that the deed of transfer executed by M/s. KothariIndustrial Corporation Ltd., in favour of M/s. Waterfalls Estate(West) Ltd., conveying the property in question for a considerationamount of Rs. 11 crores and the duty borne by the deed is nil.However, the said sale deed was registered. Then AccountantGeneral’s audit noted the incorrect remission of stamp duty wasaccorded leading to loss of proper stamp duty and it is huge lossof revenue.

(iii) The forceful contention of the respondents is that the transferor-company is not holding more than 90 per cent of the issued sharecapital of the transferee-company. Whereas, under the notifica-tion, the transferor-company must hold more than 90 per cent ofthe issued share capital of the transferee-company. It is stated thatthe deed in question is not entitled for remission. Parent companyis holding 100 per cent in the subscribed and paid up share capital

Discussion on point :

(i) Registration.—The law of registration is an important branch oflaw. The object and purpose of the registration of document is togive information to people regarding legal rights and obligationsarising or affecting a particular property, and to, perpetuatedocument which may afterwards be of legal importance, and alsomay prevent fraud. Therefore, the object of registering documentis to give notice to the world that such a document has beenexecuted, to prevent fraud and forgery and to secure a reliableand complete account of transactions effecting the title of theproperty.

(ii) The Registration Act, 1908, popularly known as Act No. XVI of1908, laid down formalities which must be complied with beforethe document is presented for registration. The State Governmentshall prepare a table of fees payable for the registration of docu-ment.

(iii) Stamp Act.—The Indian Stamp Act deals with the instrumentschargeable with duty and what are the nature of stamp duties.

(iv) The subject relating to stamp duty occurs at entry 44 in List 3 ofVII Schedule of the Constitution. The rates of stamp duty areprovided in entry 63 of List II.

(v) The Indian Stamp Act was enacted by Indian Parliament inexercise of entry 44, List III.

(vi) The Stamp Act is a fiscal measure enacted to secure revenue forthe State on certain classes of instruments, it is not enacted to arma litigant with a weapon of technicality to meet the case of his


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opponent. The stringent provisions of the Act are conceived in theinterest of the revenue.

(vii) In the fiscal statues like Stamp Act, the interpretation has to beaccording to strict letter of the law and not only in the case ofdoubt but even in the case of beneficial interpretation favouringthe subject, the rule is to tend in favour of the subject. The soleobject of the Indian Stamp Act is to increase revenue and itsprovisions must be construed as having in view only the protectionof revenue. The provisions contained in the Act impose pecuniaryburdens as this Act is a fiscal enactment.

(viii) In order to determine whether any, and if any, stamp duty ischargeable upon an instrument the legal rule is that the real andtrue meaning of the instrument is to be ascertained. It is a soundcanon of construction that all parts of a document are to be readtogether and no portion can be read disjunctly or in isolation oromitted.

(ix) In order to interpret a provision or a notification which is neitherambiguous nor incomplete, the recitals in the said documentought to be generally the safe and sole guide for any interpreta-tion.

(x) In B. Ratnamala v. G. Rudramma AIR 2000 AP 167, the DivisionBench of the Andhra Pradesh High Court has expressed thefollowing view on the interpretation of the provision under theStamp Act at paragraph 9 :

“9. While considering the provisions of the Indian Stamp Act, it has tobe borne in mind that the said Act being a fiscal statute, plainlanguage of the section as per its natural meaning is the true guide.No inferences, analogies or any presumptions can have any place. Asthe incidence of duty is on the execution of the deed, regard must,therefore, be had only to the terms of the document....” (p. 169)

(xi) It is to be borne in mind that this Act with which at present I amconcerned is a Act imposing liability for collecting stamp duty. Thenotification which I am dealing is fiscal in nature. Therefore, itmust not only literally construed but must be strictly construed inorder to find out whether a liability is fastened or not. The subjectis to be taxed or not to be taxed and for that purpose and also thatevery Act of Parliament or legislation must be read a wording toits natural construction of words.

(xii) Justice Rowlatt of England said long time ago, “that in a taxing Actone has to look merely and fairly what is clearly said. There is noroom for any intendment. There is no equities about a tax. Thereis no presumption as to tax. Nothing is to be read in. Nothing is tobe implied. One has to look fairly at the language used. Thequestion as to what is covered must be found out from the




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language, according to its natural meaning fairly and squarelyread”.

(xiii) Justice Krishna Iyer in Martand Dairy & Farm v. Union of India AIR1975 SC 1492 has observed that (page 631) : “tax considerationsmay stem from administrative experience and other factors of lifeand not artistic visualisation or neat logic and so the literal, thoughpedestrian, interpretation must prevail”.

(xiv) Therefore, to find out the intention of Legislature if possible itshould be found out from the language employed and in case ofdoubt, the purpose of legislation should be sought for to clarify theambiguity only if any. Thus, it is time to note the language in thenotification.

(xv) Notification : The said notification is extracted below :

“(38) Instrument evidencing transfer of property between companieslimited by shares as defined in the Companies Act, 1956, in a casewhere (i) at least 90 per cent of the issued share capital of thetransferee-company is in the beneficial ownership of the transferor-company, or (ii) where the transfer takes place between a parentcompany and a subsidiary company one of which is the beneficialowner of not less than 90 per cent of the issued share capital of theother, or (iii) where the transfer takes place between two subsidiarycompanies of each of which not less than 90 per cent of the sharecapital is in the beneficial ownership of a common parent company :

Provided that a certified copy of the relevant records of the companieskept in the Office of the Registrar of Companies, Madras, is producedby the parties in the instrument to prove that the conditions aboveprescribed are fulfilled.”

(xvi) Plain reading of the notification discloses whenever there istransfer of property between the companies limited by shares andin a case where at least 90 per cent of the issued share capital of thetransferee-company is in the beneficial ownership of the transferor-company or where the transfer takes place between a parentcompany and the subsidiary company which is in a beneficialownership of not less than 90 per cent of the issued share capitalof the other. Then only, the remission will apply. Therefore, theState in its wisdom has issued a notification as mentioned suprathrough Item No. 38 dealing with reductions and remissions inrespect of payment of stamp duty, that the remission will applyonly to cases of transfer of properties between two as mentionedin the notification. [Emphasis supplied]

(xvii) As the court has already indicated that in a case of fiscal naturetrue meaning of the statute is to be taken into consideration andthere is no scope for any interpretation.

(xviii) Shri Sathish Parasaran, learned counsel appearing for the peti-tioner forcefully contended that the notification is to be read for


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the benefit of the parties and beneficial owner becomes eligible tothe rights when the shares get subscribed from out of the issuedshare capital. Hence, it should be construed that the issued sharecapital means subscribed share capital.

(xix) It is also contended that the issued share capital break up is theamount approved by the shareholders for issue and allotment tothe persons subscribing to the said issued capital of the companyand it means directors of the company has power to issue and allotshares to the subscribers up to that nominee value of the issuedcapital and the entire nominal value which is essential require-ment to be fulfilled under the notification in order to becomeeligible for stamp duty exemption.

(xx) It is also forcefully contended that beneficial owner becomeseligible to the rights only when the shares get subscribed from outof the issued share capital. Hence, it should be construed that theissued share capital means subscribed share capital.

(xxi) It is stated that break up figures of the shares capital are shownand the same are also dealt by the fourth respondent in theimpugned order.

(xxii) Perused the impugned order : The Inspector General of Registra-tion who is the Chief Controlling Revenue Authority has passedthe impugned order on 14-3-2006, while considering the revisionpetitions of the petitioners herein, questioning the orders of theDistrict Registrar who is the third respondent demanding pay-ment of stamp duty. The description of the documents are fur-nished in the orders. In paragraph 3 of the order, it is clearly statedthat as per document No. 2558 of 2001, out of the issued sharecapital of 90,350 shares of the transferee-company only 14,500shares were paid and subscribed and out of that the transferor-company, i.e., the parent company is holding only 14,493 shares.Similarly, as far as document No. 2582 of 2001, out of the issuedshare capital of 35,350 shares of the transferee-company only8,850 shares were paid and subscribed and out of the transferor-company, i.e., the parent company is holding only 8,585 shares.

(xxiii) By noting the above, the fourth respondent has come to a specificconclusion that the holding of the issued share capital of thetransferor-company is 14,493 shares under in one transaction and8,585 shares in other transaction. Hence, the fourth respondentcame to a definite conclusion that the condition laid down in thenotification issued in G. O. Ms. No. 1224/Revenue, dated 25-4-1964, and G. O. Ms. No. 37/CT and RE Department, dated 25-1-1995, for according remission of transfer duty is that at least 90 percent of the issued share capital of the transferee-company is in thebeneficial ownership of the transferor-company and since 90 percent of the issued share capital of the transferee-company is not




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held by the transferor-company, the petitioner is liable to pay thestamp duty.

(xxiv) I do not find any irregularity or illegality in the impugned order. Itis a reasoned order. In the case of registration of payment of stampduty the real and true meaning of instrument is to be ascertainedto determine whether the stamp duty is to be chargeable and whatstamp duty is to be demanded upon instrument.

(xxv) The Supreme Court of India in various cases like Madras Refine-ries Ltd. v. Chief Controlling Revenue Authority, Board of RevenueAIR 1977 SC 500, clearly held that in order to determine whetherany, and if any what stamp duty is chargeable upon an instrument,the real and true meaning of the instrument is to be ascertainedfor description of it given in the instrument itself. The Full Benchof the Madras High Court in Chief Controlling Revenue Authority,Board of Revenue v. M. Hamid Sultan AIR 1975 Mad. 161, clearlyheld that when a question arises whether a document should bechargeable or not, the first thing to be looked into is the documentitself in order to determine the character thereof. Therefore, therecitals of the document should not be lost sight and all parts of thedocument has to be read together and it is a sound canon ofconstruction that all parts of the document are to be read together,no portion can be read disjunctly or in isolation or omitted and theRevenue Authorities cannot ignore recitals and terms of docu-ment in order to interpret a document which is neither ambiguousnor incomplete and the recitals in the said document ought to begenerally accepted and there is no further necessity to interpret ina different way. Therefore, the contention of counsel for thepetitioner that issued share capital must be treated as subscribedshare capital is unacceptable.

(xxvi) Shri Sathish Parasaran, while highlighting the arguments statedthat sections 397, 398 and 399 of the Companies Act deals with theissue. It is not correct, they are with application for relief in caseof oppression and application in case of mismanagement and rightto apply under sections 397 and 398. They are nothing to do withthe issue before us.

(xxvii) Learned counsel also cited a decision reported in Albert David Ltd.,In re 68 CWN 163. It is a case disposed of under the Companies Act,1956, under sections 397, 398 and 399 and while dealing with amatter under the Companies Act, there was detailed discussion onfacts with regard to averments in the petition and nature ofverification, circumstances justifying exercise of court’s discre-tion and appointment of administrator. In the above case thepriority under section 399 of the Act, the right to apply undersections 397 and 398 is gone into, inter alia, to members holding notless than one-tenth of the issued share capital of the company,


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provided that the applicant or applicants have paid all calls andother sums due on their shares. In the course of discussion it isnoted at page 170 that whether shares not actually issued, i.e.,subscribed and paid for are to be considered issued share capitalwithin the meaning of section 399 of the Act is the actual sub-scribed capital. Therefore, there was no interpretation under theCompanies Act what is meant by issued share capital and what ismeant by subscribed share capital.

(xxviii) The facts and circumstances and the findings in the above case arenot at all applicable in the case before me. In this case, we aredealing with the payment of stamp duty by the petitioners forregistration of the document and the very object of the Stamp Actis fiscal measure enacted to secure revenue of the State on certainclasses of instruments. I have highlighted that in a case of suchstatutes, the real and true meaning of the instruments, the provi-sion and the notification must be taken and there is no scope forany interpretation.

8. For all the foregoing reasons, I hold that there are no merit in the writpetitions. Therefore, the impugned order is upheld and the writ petitionsare dismissed. No costs.

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DELHI HIGH COURTFERA

[2008] 81 SCL 443 (DELHI)HIGH COURT OF DELHI

Union of India

v.

ABN Amro BankR.C. CHOPRA, J.

CRL. A. NO. 380 OF 2003SEPTEMBER 21, 2005

Section 29, read with sections 19, 30 and 59, of the Foreign ExchangeRegulation Act, 1973 - Establishment of place of business in India - Restrictionson - Adjudicating authority imposed penalties upon respondents for violationof various sections holding that respondent No. 2-company was established

Union of India v. ABN Amro Bank (Delhi)



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in India at instance of respondent No. 4, which was a foreign company andheld 51 per cent shareholding in respondent No. 2, without permission of RBIin violation of sections 19(1)(a) and 29(1)(a); and that respondents had alsoviolated RBI guidelines by opening bank accounts with respondent No. 1-bank - Adjudicating authority also imposed penalty upon respondent No. 1-bank for violation of section 6(4) and (5) for trading in gold coins vis-a-visrespondent No. 2 without RBI’s permission - Whether as Amending Act of1993 had lifted restrictions on foreigners to establish a company in India andNotification No. 180 of 1998 permitted foreign investments up to 51 per centin a trading company primarily engaged in exports, incorporation/registrationof respondent No. 2 in India by Indian nationals at instance of respondent No.4 was not in violation of any of provisions of Act - Held, yes - Whether fact thatrespondent No. 2 applied to FIPB for 100 per cent equity holding byrespondent No. 4, clearly rebutted presumption under section 59 againstrespondents and established that respondent No. 2 and its officers were notintending to violate laws of India or notifications or guidelines issued byGovernment as well as RBI - Held, yes - Whether opening of bank account byforeign employees of respondent No. 2 with respondent No. 1 was not inviolation of section 30, as they could open such bank accounts and repatriatepart of their earnings to their respective countries for maintenance of theirfamilies in view of amended section 30(1) - Held, yes - Whether allegationsunder section 6(5) against respondent No. 1-bank were also not establishedfor reason that respondent No. 1 had imported gold not on behalf ofrespondent No. 2, but in its own right and on its own behalf and had then soldsame to respondent No. 2 and received payment thereof in Indian currency- Held, yes - Whether on facts, order passed by adjudicating authority wasliable to be set aside - Held, yes

FACTS

According to the prosecution, respondent No. 4, a foreign company,through respondent No. 3 and one ‘C’, established respondent No. 2-company in India under automatic approval route without disclosing thatits main object was trading in gold coins. A misleading statement wasmade in Form FC(RBI) that the activities of the company were covered bythe “NIC Code 893” which related to ‘Business Management Consultancyfor trading, marketing and selling of goods and services’, while respondentNo. 2 never intended to undertake any activity relating to consultancy andits only aim was to trade in gold coins in India, which it started in violationof the Notification No. 180 of 1998, and, as such, violated the provisions ofsections 29(1)(b) and 19(1)(a). It was further alleged that not only respon-dent Nos. 2 and 4 established a foreign company without permission of theRBI; allotted the shares of the company to a foreign company, i.e.,respondent No. 4 without the RBI’s permission in violation of sections19(1)(a) and 29(1)(a), read with sections 68(1) and 30(1), but they also


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violated the RBI guidelines by opening bank accounts with respondent No.1-bank, which also violated section 6(4) and (5) for trading in gold coins vis-a-vis the respondent No. 2 without the RBI’s permission. The adjudicatingauthority found the respondents guilty and, as such, imposed penalties. Onappeal, the Appellate Tribunal set aside the orders of the adjudicatingauthority, holding, inter alia, that respondent Nos. 2 to 4 were covered bythe Notification Nos. 180 and 188; that it was after getting legal advice onlythat the automatic approval route was available; respondent No. 2 wasincorporated in India by the Indian nationals and thereafter 51 per centshareholding was transferred to respondent No. 4; that the respondentsnever had any dishonest or mala fide designs; that the act of opening abank account with repatriation facilities was also not in violation of section30(1) in view of the amendment of the Act in 1993; that there was noviolation of any condition subject to which registration was accorded bythe RBI for foreign equity participation up to 51 per cent; that no furtherpermission was required for transfer of the equity or its holding by foreignnationals; that respondent No. 4 was a foreign company and its function-aries being foreign nationals had acted in good faith and bona fide beliefon legal advice. Regarding respondent No. 1-bank, it was held that therewas no bar under the Act or the RBI guidelines for opening an account inany company; and that it was importing gold on its own behalf.

On revenue’s appeal :

HELD

A conjoint reading of various clauses of section 59 makes it abundantlyclear that although the Courts are under an obligation to presume theexistence of a culpable mental state in prosecution or proceedings inrelation to any offence under the Act, the presumption is rebuttable and anaccused can rebut this presumption by proving that he had no suchculpable mental state. However, a heavy burden is cast upon an accused/respondent for rebutting the presumption. The law is well-settled that anaccused is not to prove his defence only by defensive evidence. He mayprove his defence through the facts and circumstances brought on recordby the prosecution even and rebut the presumption. The Appellate Tribunal,therefore, could examine the facts and circumstances of the case to find outas to whether the respondents had succeeded or not in proving on recordthat they had no culpable mental state to commit offences under sections19, 29, 47 and 49. In view of the discussions made by the Appellate Tribunalin regard to culpable mental state of the respondents and findings arrivedat in respect thereof, no question of law had been raised in the instantappeal as the findings given by the Tribunal were findings of fact only basedon material on record. No finding was arrived at upon mis-interpretationof law, nor any issue was perversely decided. On that ground itself, theappeal was liable to be dismissed as it raised no question of law. [Para 14]

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of the Act as the amending Act of 1993 had lifted restrictions on foreignersto establish such a company. The Notification No. 180 of 1998 permittedforeign investments up to 51 per cent in a trading company primarilyengaged in exports. Such a trading company was not required to fill upForm FC(RBI) in terms of sub-clause (viii) of clause (3) of Notification,unless it was engaged in any of the activities mentioned in Annexure III.Respondent No. 2 had never tried to conceal that its 51 per cent equity waswith a foreign company. It applied to FIPB also for transfer of remainingequity to respondent No. 4. In FIPB form also, it was stated that foreignequity was proposed to be 100 per cent and it was also clarified that besidesbusiness management and consultancy, which was the existing activity ofcompany, it was proposing to do trading in gold and other precious metalsas well as exports. Therefore, the incorporation/registration of respondentNo. 2 in India by the Indian nationals at the instance of respondent No. 4,which had 51 per cent equity therein, was not in violation of any of theprovisions of the Act. The agreement in regard to the transfer of 49 per centshares handed over to one ‘A’ was also not in violation of any provisions ofthe FERA, as respondent No. 4 was trying to preserve its shareholding tillit got permission from FIPB for its transfer. Application for FIPB’s approvalwas filed on 24-8-1998, and was stated to be still pending. If respondent No.2 had any criminal intention or mala fides, it could not have opted for suchan open route to establish a company in India. [Para 21]

Actual exports might or might not have taken place, but there remained nodoubt that respondent No. 2 was established in India not only for thepurpose of trading, but for the purpose of exports also and, as such, it wasfully covered by the Notification No. 180 of 1998. Those findings of factgiven by appellate authority were, therefore, fully justified and warrantedand, as such, could not be interfered with. [Para 22]

The fact that respondent No. 2 applied to FIPB for 100 per cent equityholding by respondent No. 4 clearly rebutted the presumption undersection 59 against the respondents and established that respondent No. 2and its officers were not intending to violate the laws of India or thenotifications or guidelines issued by the Government as well as the RBI.Automatic approval route was adopted as the company was engaged inmanagement consultancy also. The documents on record clearly showedthat respondent No. 2, instead of establishing a marketing network, tried toinvolve general public for the sale of its gold coins and offered themcommission on sales. For that purpose, respondent No. 2 planned to trainthose, who were willing to participate in the scheme to make earnings.Form FC(RBI) was required to be filled up not because of trading or exportactivities which were permitted by the Notification No. 180 of 1998, butbecause of business management consultancy which was an Annexure IIIactivity. Therefore, the ticking of code 893 of the automatic approval routeby respondent No. 2 was neither false nor mala fide and as such, theAppellate Tribunal was justified in holding that the respondents had not


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tried to circumvent the provisions of the FERA or the notifications/circulars issued by the Government of India. [Para 23]

Respondent Nos. 2 to 4 had not transferred any money out of India excepta part of salary by ‘C’ and ‘P’. Foreign equity in respondent No. 2 waspermissible. The only restriction was against the payment of dividend toforeign investors, which could be done only after respondent No. 2 hadstarted exports from India, earned profits and got itself registered as anexport house. Section 76 clearly shows that the Act aims at bringing foreignexchange into our country to the extent possible and prevent its outflow. Inthe instant case, respondent Nos. 2 and 4 had done nothing to offend section76, as no dividend was declared or remitted to foreign investors. Theopening of the bank accounts also by respondent No. 3 and others withrespondent No. 1 was not in violation of section 30 inasmuch as they beingthe employees of respondent No. 2, could open such bank accounts andrepatriate part of their earnings to their respective countries for themaintenance of their families in view of Act 29 of 1993 which amendedsection 30(1). [Para 24]

The allegations under section 6(5) against respondent No. 1-bank were alsonot established for the reason that respondent No. 1 had imported gold noton behalf of respondent No. 2, but in its own right and on its own behalf andhad then sold the same to respondent No. 2 and received payment thereofin Indian currency. Therefore, the gold was not imported on behalf ofrespondent No. 2. [Para 27]

Thus, neither any question of law had been raised, nor any legal infirmityhad been found in the impugned orders passed by the Appellate Tribunal.The orders of Appellate Tribunal returned findings of fact in favour of therespondents that they had not committed any offence under the Act. Thefindings were neither perverse nor against material on record. [Para 28]

The appeal, therefore, stood dismissed. [Para 29]

P.P. Malhotra, Sunil Matta and Ashok Pandey for the Appellant. J.S.Arora and Amit Sibal for the Respondent.

JUDGMENT

1. The Enforcement Directorate through Union of India has filed thisappeal under section 54 of the Foreign Exchange Regulation Act, 1973,read with section 35 of the Foreign Exchange Management Act, 1999,against an order dated 10-3-2003, passed by the Appellate Tribunal bywhich the order of the adjudicating authority was set aside.

2. The facts relevant for the disposal of this appeal, briefly stated, are thataccording to prosecution, respondent No. 4, a foreign company throughrespondent No. 3, and one Cliff Roy established respondent No. 2,M/s. Maple Leaf, International Trading in India. According to the appellantthough this company was established and incorporated through Indiannationals but it was actually a company established and incorporated on




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behalf of the foreign company, respondent No. 4, for trading in importedgold in India. According to the appellant such a company could beestablished only with prior permission of the Reserve Bank of India undersection 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (hereinafterreferred to as “FERA” only) but it was established without any permission.It is alleged that the respondents adopted automatic approval route andestablished this company by filing Form FC(RBI) representing that thiscompany was covered by Annexure III list whereas it was being estab-lished for trading only and the automatic approval route was not availableto it in terms of Notification No. 180 of 1998 (RBI), dated 13-1-1998, issuedby the RBI.

3. According to appellant in Form FC(RBI), dated 21-5-1998, respondentNo. 2, Maple Leaf Trading International, the newly incorporated companydid not declare that it was a trading company and would mainly makeexports. It was also alleged that the company had ensured 100 per centequity in the hands of the foreigners as 51 per cent of its shares were issuedto respondent No. 4, a foreign company, on 20-5-1998, and 49 per centshares were issued to Indian shareholders which were kept firstly withShri V.S. Jaffa and thereafter with Shri A.R. Khan under an agreement,providing that the said shares would ultimately go to respondent No. 4. Itis also alleged that the company did not disclose that its business in Indiawas trading in imported gold coins, the sale of which was started even anda large number of contracts were entered with general public. Variousdocuments and statements of the witnesses were placed on record toshow that Mr. Cliff Roy was making inquiries on behalf of respondentNo. 4 in regard to the import and trading of gold in India. M/s J.C. Bhallaand Co., chartered accountants, from whom inquiries were being made,were told that the object of the company was sale of Maple Leaf gold coinsin India.

4. According to the appellant, M/s. J.C. Bhalla and Co. wrote a letter dated18-1-1998, to Mr. Cliff Roy informing him that if a non-resident Indianwanted to make investments in India for trading he had to make anapplication to the Ministry of Industry and their best bet would be to makean application as per original approval route and wait for the new policies.Mr. Cliff Roy on 14-1-1998, wrote a letter to M/s. J.C. Bhalla and Co., thatthey were going to establish a company with local directors arranged byMessrs. Abacus Legal Group. On 18-1-1998, he again wrote to M/s. J.C.Bhalla and Co., that Messrs. Abacus Legal Group had already been allotteda name by the Registrar of Companies and suggested that a company beset up and established with Indian directors/shareholders. The letterdated 4-2-1998, from Mr. Cliff Roy to respondent No. 3, Lambert Krogerstated that the new policy of the Government allows foreign companies tocome under automatic approval route without prior permission as long asthe primary aim was exports and general trading and as such, respondentNo. 4 would own 51 per cent shares and an Indian citizen would own49 per cent shares. It was stated that once the company was established,


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an application would be submitted to Foreign Investment PromotionBoard for permission to respondent No. 4 to buy the remaining 49 per centshares also from the Indian shareholders and within the first few monthsof operations they must have some exports also to keep inside theregulations for an automatic approval route company.

5. It is alleged that the company, respondent No. 2, was thus establishedunder automatic approval route without disclosing that its main objectwas trading in gold coins. A misleading statement was made in FormFC(RBI) that the activities of the company were covered by the “NIC code893” which related to “Business Management Consultancy for trading,marketing and selling of goods and services”. Under column VIII(3) it wasdeclared that the company was a trading company primarily engaged inexports. According to the appellant respondent No. 2 never intended toundertake any activity relating to consultancy and their only aim was totrade in Maple gold coins in India which they started in violation ofNotification No. 180 of 1998 and as such, violated the provisions of section29(1)(b) and section 19(1)(a) of the FERA, 1973. According to the appellantnot only that respondent Nos. 2 to 4 established a foreign company withoutpermission of RBI, allotted the shares of the company to a foreigncompany, i.e., respondent No. 4 without permission of RBI in violation ofsections 19(1)(a) and 29(1)(a) read with section 68(1) and section 30(1) ofthe Act, they also violated the RBI guidelines by opening bank accountswith respondent No. 1-ABN Amro Bank, which also violated section 6(4)and (5) of the Act for trading in gold coins vis-a-vis respondent No. 2without permission of the RBI. According to the appellant NotificationNos. 180 of 1998 and 188 of 1998 issued by the RBI were not applicable tothe activities of respondent No. 2 as it was neither a consultancy firm norhad come to India for exporting gold. It had come only to import gold andthen sell the same in the Indian market.

6. The adjudicating authority found the respondents guilty and as suchimposed various penalties. The respondents went in appeal before theAppellate Tribunal which set aside the orders of the adjudicating authorityholding that respondent Nos. 2 to 4 were covered by the NotificationNos. 180 and 188 and as such did not violate any of the provisions of theAct. The Tribunal held that the respondents never intended to carry outany illegal activity in India and as such were making inquiries from its CAand advocates in Delhi. After getting legal advice only that the automaticapproval route was available, respondent No. 2 was incorporated in Indiaby Indian nationals and thereafter 51 per cent shareholding was trans-ferred to respondent No. 4. It was held that the respondents never had anydishonest or mala fide designs. It was a company established by Indiansonly and as such there was no violation of sections 29(1)(a), 19(1)(d), 47(1)and 49 read with section 68(1) of the Act. It was also held that the act of therespondents in opening a bank account with repatriation facilities was alsonot in violation of section 30(1) of the Act in view of the amendment of theAct in 1993. It was held that the respondents were made to believe that




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their actions were lawful and within the laws of the country. Regardingregistration of respondent No. 2 with RBI it was held that if the appellanthad any doubt about the validity of information on which the RBI hadallowed the registration of the company, the appellant ought to havebrought the same to the notice of the RBI which could have reviewed thematter and taken a decision or could have revoked the registration aftergiving an opportunity to the respondent-company to show cause as to whyits registration should not be revoked. It was also held that there was noviolation of any condition subject to which registration was accorded bythe RBI for foreign equity participation up to 51 per cent and no furtherpermission was required for transfer of the equity or its holding by foreignnationals. It was held that the company having been incorporated as perNotification No. 180 of 1998 was covered by the automatic approval routeand had complied with the conditions mentioned in paragraph 3 of thenotification. It was also held that respondent No. 4 was a foreign company,and its functionaries who were foreign nationals had acted in good faithand bona fide belief on legal advice tendered to them by the experts inIndia and had not violated any provision intentionally. It was also held thatif at all the company had contravened any of the provisions of the Act ithad acted in good faith only and their activities were lawful. It was heldthat the respondents had no intention to commit breach of laws. Regard-ing respondent No. 1-ABN Amro Bank also it was held that there was nobar under the Act or the RBI guidelines for opening an account in anycompany and so far as the import of gold was concerned the bank wasimporting gold on its own behalf. It was held that the sale of the gold byrespondent No. 1 to respondent No. 2 was against Indian currency and assuch provisions of section 6 of the Act were not attracted.

7. Learned counsel for the respondents have vehemently argued that thisappeal under section 54 of the FERA, 1973, could be only on a question oflaw and since the appellant is assailing only factual findings given by theTribunal there is no question of law to be decided by this Court and as suchthe appeal is not even maintainable. It is submitted that respondentNos. 2 to 4 were within the Notification Nos. 180 and 188 of 1998. As persub-clause (viii) of clause (3) Form FC(RBI) is required to be filled up onlyby Annexure III companies or industries. In Form FC(RBI), they had givenonly those details which were required under Annexure III regarding theirconsultancy activities. Trading activities were not declared as it was not anAnnexure III activity. It is contended that respondent Nos. 2 to 4 had notindulged in any illegal activity and had not committed breach of provisionsof the FERA as respondent No. 2 was a company incorporated in India byIndian nationals.

8. It is submitted that prior to the amendment of the Act in 1993 section29(1)(a) of the Act could be applied to respondent No. 2 since it was acompany incorporated in India in which non-residents interest was 51 percent. However after the amendment of the Act with effect from 8-1-1993,the words “or in which the non-residents interest is more than 40 per cent”


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were deleted and as such no act of respondent Nos. 2 to 4 was in violationof the Act. It is submitted that Notification Nos. 180 and 188 had simplifiedthe procedure for approval of foreign investments in order to attractforeign exchange and since the remittances in the present case hadresulted in foreign exchange in-flow into India and none of the respon-dents had remitted any amount out of India no provision of the Act wasviolated. It is also submitted that the incorporation of the company byIndian nationals at the instance of and on behalf of a foreign company wasnot illegal as Notification No. 180 of 1998 permitted a newly set up tradingcompany primarily engaged in exports to issue 51 per cent of its equity toa foreign company provided the company was registered as export housebefore remittance of dividend to foreign investors. It is submitted that theregistration as an export house is required before remittance of dividendonly to the foreign investors and since respondent No. 2 had neverremitted any dividend to foreign investor, i.e., respondent No. 4, there wasno violation of the Notification No. 180 of 1998.

9. It is pointed out that till January, 1998, prior clearance from RBI wasrequired for issue of shares of such company to foreign investors butthereafter, only the requirement was that company should make a reportwithin 30 days of the issuance of the shares. It is submitted that a newlyset up company cannot already have on going exports and it can startexports only after its establishment and as such mere issuance of equitycannot be a violation of the FERA. The object of Notification No. 180 wasto encourage exports and attract foreign exchange in the country. It isstated that in July, 1999, when respondent No. 2 was shut down it was inthe process of increasing its exports and had already exported goodsworth about Rs. 43 lakhs. It was also having firm export orders of the valueof Rs. 8.21 crores and further orders in regard to leather goods, etc., werein the pipeline. Learned counsel for respondent Nos. 2 to 4 submits thateven if respondent No. 2 had not exported anything after its incorporationit could not be held liable for violation of any provision of the FERA sinceit had never remitted any dividend to foreign investors.

10. It is also argued that the respondents had not made any misstatementfor the reason that Form FC(RBI) was not applicable to companies whichwere engaged in trading activities. Respondent No. 2 was providingbusiness consultancy services also and that is why this form was filled upand declaration was made in regard to the business managementconsultancy services. Therefore there was no misstatement or wrongdeclaration in FC(RBI) by respondent No. 2 and as such sections 19,21(1)(b), 27, 49 and 68 of the FERA were not attracted. Referring to certaincolumns in Form FC(RBI) it is submitted that this form was old and outdated as it was first introduced in 1997 but was still being used unchangedalthough the rules and regulations had undergone substantial change. Itis shown that this form continued to mention about the application forforeign technology transfer although a separate application form hadalready been introduced for foreign technology transfer. Similarly for




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item No. VII(a) also, after Notification No. 180 of 1998, no prior permissionwas required for issuance of shares. It is submitted that this form hadbecome redundant in regard to trading companies primarily engaged inexports also and as such for its trading activities respondent No. 2 wasneither required to fill up this form nor there was any misstatement oromission therein. In regard to contention of learned counsel for theappellant that respondent No. 2 was never engaged in any managementconsultancy activities, it is submitted that business consultancy activitieswere actually undertaken. Moreover Form FC(RBI) merely incorporateda proposal to engage in the activities and even if the company was unableto undertake those activities for any reason it could not be held to haveviolated FERA provisions.

11. It is also submitted that no remittances were ever made by respondentNo. 3 and as such, it had not violated section 30(1) of the Act by merelyopening a bank account with respondent No. 1. It is argued that after theamendment of 1993 respondent No. 3 and others who were employees ofrespondent No. 2 were entitled to open a bank account with repatriationfacilities as they were entitled to remit up to 75 per cent of their salariesfor their family maintenance.

12. I have heard Shri P.P. Malhotra, senior advocate, learned ASG for theappellant, Shri Amit Sibal, advocate for respondent Nos. 2 to 4 andShri J.S. Arora, learned counsel for respondent No. 1.

13. It is true that under section 54 of the Foreign Exchange Regulation Act,1973, an appeal against an order of the Appellate Board lies only on aquestion of law but learned ASG has argued that the impugned orderpassed by the learned Appellate Tribunal is contrary to law inasmuch assection 59 of the FERA was completely ignored. It is submitted that thelearned Appellate Tribunal without adverting to section 59 of the FERA,which enjoins upon the Courts to presume the existence of a culpablemental state on the part of the accused for the commission of an offenceunder the Act, the Tribunal proceeded to set aside the orders passed by theadjudicating authority on the ground that respondent Nos. 2 to 4 had noculpable intention. He draws the attention of this Court to observationsmade by the Appellate Tribunal in paragraphs 12, 13, 15, 16, 26 and 28 ofthe impugned order. According to him this erroneous approach of theAppellate Tribunal raises a question of law and calls upon this Court todecide as to whether the Appellate Tribunal had remained within thelimits of law and correctly applied the law for passing the impugned order.On the other hand, learned counsel for the respondents have argued thatthe findings returned by the Appellate Tribunal were purely factual, basedon facts and circumstances of the case and as such neither any infirmityis attached to the impugned order nor any question of law arises forconsideration of this Court.

14. After considering the submissions made by learned counsel for theparties, this Court is of the view that although section 59 of the FERA


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makes it incumbent for the Courts to presume the existence of a culpablemental state on the part of an accused in prosecution for an offence underthe Act for which, a culpable mental state is required, but it also says thatit shall be a defence for the accused to prove that he had no such mentalstate. Sub-clause (2) of section 59 clarifies that for the purpose of thissection, a fact is said to be proved only when the Court believes it to existbeyond reasonable doubt and not merely when its existence is establishedby preponderance of probability. Sub-clause (3) further adds that theprovisions of this section shall, so far as may be, applied in relation to anyproceedings before an adjudicating authority also as they apply in relationto any prosecution for an offence under the Act. A conjoint reading ofaforesaid clauses of section 59 of the FERA makes it abundantly clear thatalthough the Courts are under an obligation to presume the existence ofa culpable mental state in prosecution or proceedings in relation to anyoffence under the Act, the presumption is rebuttable and an accused canrebut this presumption by proving that he had no such culpable mentalstate. However, a heavy burden is cast upon an accused/respondent forrebutting the presumption. The law is well-settled that an accused is notto prove his defence only by defence evidence. He may prove his defencethrough the facts and circumstances brought on record by the prosecu-tion even and rebut the presumption. The Appellate Tribunal, therefore,could examine the facts and circumstances of the case to find out as towhether the respondents had succeeded or not in proving on record thatthey had no culpable mental state to commit offences under sections 19,29, 47 and 49 of the FERA, 1973, as alleged by the appellant. LearnedAppellate Tribunal did not chose proper words while considering thisquestion but it is found that on the basis of facts and circumstancesbrought on record only the learned Appellate Tribunal was trying to findout as to whether the respondents had rebutted or not the presumptionagainst them under section 59 of the Act. In view of the discussions madeby learned Appellate Tribunal in regard to culpable mental state of therespondents and findings arrived in respect thereof, no question of law hasbeen raised in this appeal as the findings given by the Tribunal werefindings of facts only based on material on record. No finding was arrivedat upon mis-interpretation of law nor any issue was perversely decided. Onthis ground itself, this appeal is liable to be dismissed as it raises noquestion of law.

15. The adjudicating authority vide its order dated 22-9-2000, had heldthat respondent No. 2 was established in India without permission of theRBI, shares of the company were allotted to respondent No. 4, a foreigncompany, respondent No. 3 opened bank account in violation of the RBIguidelines and remitted money to his own country and respondent No. 2imported gold through the bank, respondent No. 1, without permission ofthe RBI. According to learned ASG, respondent Nos. 2 to 4 had violatedsection 29(1)(a), section 19(1)(d) and section 29(1)(a), read with section 49and section 8 of the FERA. They also violated sections 30(1), 6(4) and 6(5)




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of the Act. He draws the attention of this Court to the statements ofShri Anil Bhalla, Shri Vikrant Singh Jaffa and Shri A.R. Khan, witnesses forthe prosecution and the fax messages dated 4-8-1997, 28-10-1997, 1-1-1998, 12-1-1998, 14-1-1998, 18-1-1998, 22-1-1998, and 4-2-1998, to showthat since August, 1997, respondent No. 4, a foreign company and itsrepresentatives were contemplating to establish a trading company inIndia for the sale of gold coins and in pursuance of this design only, theyestablished the Indian company M/s. Maple Leaf Trading International,respondent No. 2, of which respondent No. 3 was the managing director.According to him, the Indian promoters/shareholders were dummypromoters/directors, who were holding shares on behalf of the foreigncompany, respondent No. 4 only, and the transfer of shares to Mr. A.R.Khan was also under a share transfer agreement dated 16-4-1999, onlywith a view to ensure that ultimately, 100 per cent shareholding ofrespondent No. 2 goes to respondent No. 4.

16. It is argued that the application dated 21-5-1998, made by respondentNo. 2 under Notification No. 180 of 1998 contained misleading informationinasmuch as it was made under NIC code 893 falsely representing that thecompany was engaged in business management consultancy. It is submit-ted that in column No. 3 of this application, it was specifically mentionedthat it was not a trading company. It was signed by a representative ofrespondent No. 4, Mr. Cliff Roy as the managing director of respondentNo. 2. It is submitted that respondent No. 2 deliberately adopted theautomatic approval route as it could not get RBI permission for trading ingold in India and it had no intention to engage in exports. The letter dated8-6-1999, written by the RBI is relied upon to show that the RBI granteda registration number to respondent No. 2 for foreign collaboration interms of the Notification No. 180, dated 13-1-1998, on account of the factthat its activities were described under the National Industrial Classifi-cation (NIC) code No. 893 for business and management consultancyactivities as per Annexure III.

17. Learned ASG submits that not only a foreign company managed toestablish its 100 per cent subsidiary, respondent No. 2, in India for apurpose which was not permissible under the automatic approval route,out of 20,000 shares, only 20 shares were registered in the names ofShri Anil Bhalla and Shri Rajesh Sethi and 9,780 shares of the value of Rs.100 each, were given to Mr. Jaffa on payment of Re. 1 per share only. On19-5-1998, the shares of Anil Bhalla and Rajesh Sethi were purchased byMr. Cliff Roy, managing director of respondent No. 2 and a representativeof respondent No. 4 and remaining 9,780 shares were kept with one A.R.Khan, an Indian national under an agreement which provided that theseshares were to be passed on to respondent No. 3 and Mr. Cliff Roy, whowere not residents of India. 10,200 shares were sold to respondent No. 4,a company established in Switzerland. According to him, this companywas established by foreign nationals in a clandestine manner and inviolation of the provisions of the FERA. Form FNC 2 or FNC 3, which are


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prescribed for trading activities were never filled up by respondentNos. 2 to 4 and their proposed trading in gold coins was not in any of thecategories provided for automatic approval route. It is also argued thatNotification No. 180, dated 13-1-1998, or Notification No. 188 of 1998 donot protect the respondents as respondent No. 2 was not a companyprimarily engaged in exports. These notifications allowed trading in Indiabut only with the object of encouraging foreign companies to makeexports from India. The opening of the bank accounts by respondent No.3 and others and remittance made to their countries was also in violationof the provisions of the FERA. It is, therefore, submitted that the impugnedorders passed by the learned Appellate Tribunal are liable to be set asideand the orders passed by the adjudicating authority are to be restored.

18. Learned counsel for respondent Nos. 2 to 4 has, however, argued thatthe learned Appellate Tribunal has returned findings of fact that respon-dent Nos. 2 to 4 never intended to violate Indian laws and had taken allprecautions as well as legal advice before establishing respondent No. 2 inIndia and as such, the impugned orders were fully warranted and justified.According to him, respondent No. 2 was incorporated in India by Indiannationals in terms of the Amending Act of 1993 and the notification dated13-1-1998, which had made it clear that 100 per cent foreign investmentwas permissible. The company made no concealment that its 51 per centequity was from a foreign investor, i.e., respondent No. 4 and it had appliedto FIPB approval also because it intended 100 per cent control of thecompany. According to learned counsel for respondent Nos. 2 to 4,respondent No. 2 was established in India not only for trading but forexports also, which had started and were likely to pick up in due course.It had started giving business consultancy also to Indian nationals, whowanted to get involved in business of gold coins. According to him, theNotification No. 180, dated 13-1-1998, permitted the setting up of a tradingcompany if it was primarily for exports. According to him, there wasnothing wrong in allotting 51 per cent shares to respondent No. 4 andwaiting for FIPB permission for 100 per cent control of respondent No. 2.The respondents had no intention to transfer 49 per cent shareholding torespondent No. 4 without the permission of FIPB for which an applicationwas also moved on 24-8-1998, and was pending. According to him, nomisleading statement was made in Form FC(RBI), no funds were trans-ferred by the respondents to a foreign company and FNC 2 or 3 were notrequired to be filled up as respondent No. 2 was not a foreign company. Herefers to the press notes dated 20-8-1991, and 31-12-1991, and the Notifi-cation No. 180 of 1998 and the RBI circulars dated 7-4-1997, and 20-1-1998,to argue that till some dividend is remitted to a foreign investor, noviolation of the FERA is made out. According to him, the dividend couldbe sent to foreign investor if the company was registered as an exporthouse for which also, sometime was required to develop exports, getregistration as an export house and earn profits for remittance thereof toforeign investors. He also submits that the letter dated 28-10-1997, written




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by Cliff Roy to Anil Bhalla speaks of exports from India. The letters dated9-1-1998, 13-1-1998, 15-1-1998, and the project report attached with theFIPB form also mentioned that respondent No. 2 was proposing toundertake exports from India. He submits that if respondent No. 2 had nointention to undertake exports, this correspondence could not have beenthere and even Anil Bhalla, on whose statement dated 12-7-1999, theappellant relies, says that exports were contemplated and even codenumber for exports was obtained. Section 47(1) of the Act was notattracted as a trading company was incorporated, which had definiteplans to undertake exports but if exports were not possible for somereason the company could not be hauled up alleging that it had no plansfor exports.

19. He points out that respondent No. 2 instead of having a marketingnetwork, started training people on payment of fee, to enable them to sellgold coins and make profits and as such, it was not falsely stated byrespondent No. 2 in Form FC(RBI) that it proposed to provide businessmanagement consultancy under NIC code 893. Column No. 4 was notticked in this form as trading or export activities were not part of AnnexureIII activities and this form was for disclosing existing activities only. It ispointed out that Form FC(RBI) was an out-dated and old form variouscolumns of which had already become redundant in view of the amend-ment of the Act in 1993 and subsequent notifications and circulars issuedby the RBI. It is also argued that section 30 of the Act also is not attractedagainst the respondents inasmuch as under the new Act, the wordemployment had been deleted to permit the foreign nationals to takeemployment in India and under regulation 11(d) of the Exchange ControlManual, remit up to 75 per cent emoluments to their families. However,there are no allegations against respondent No. 3 or others that anyamount was remitted by them out of India.

20. Regarding respondent No. 1-ABN Amro Bank, the case of the appellantis that it has violated section 6(4) and section 6(5) of the FERA as well asparagraph 11(d)(3) of the Exchange Control Manual by importing gold onbehalf of respondent No. 3 and allowing Cliff Roy, Paul Singh, Clairerespondent No. 3 Lambert Kroger to open QA-22 accounts which permit-ted repatriation of foreign exchange. It is submitted that actual repatria-tion is not required and even if intention of repatriation is there, theoffence stands committed. Learned counsel for respondent No. 1, how-ever, contends that it had permission to import gold and sell it. The sale ofgold was not through foreign exchange and it is not alleged that respon-dent No. 2 violated any provision of the FERA in purchasing gold fromrespondent No. 1. It is submitted that the price of gold supplied byrespondent No. 1 to respondent No. 2 was paid in Indian currency and noforeign exchange was sent out of India through respondent No. 1. Noforeign currency was ever deposited with respondent No. 1 and respon-dent No. 1 was importing gold not on behalf of respondent No. 2 but on itsown behalf for which it had RBI permission.


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21. A perusal of the material on record and the impugned orders passedby learned Appellate Tribunal clearly reveals that respondent No. 2 wasincorporated in India. Even if it was established at the instance of foreigncompany respondent No. 4, there was no violation of the FERA, as theamending Act of 1993 had lifted restrictions on foreigners to establishsuch a company. The Notification No. 180 of 1998 permitted foreigninvestments up to 51 per cent in a trading company primarily engaged inexports. Such a trading company was not required to fill up Form FC(RBI)in terms of sub-clause (viii) of clause (3) of Notification, unless it wasengaged in any of the activities mentioned in Annexure III. RespondentNo. 2 had never tried to conceal that its 51 per cent equity was with aforeign company, respondent No. 4. It applied to FIPB also for transfer ofremaining equity to respondent No. 4. It is apparent on record thatrespondent No. 4 wanted to establish its 100 per cent subsidiary in Indiaand was only waiting for FIPB permission for transfer of 49 per centremaining equity to it. In FIPB form also, it was stated that Foreign equitywas proposed to be 100 per cent and it was also clarified that besidesbusiness management and consultancy which was the existing activity ofcompany, it was proposing to do trading in gold and other precious metalsas well as exports. Therefore, the incorporation/registration of respon-dent No. 2 in India by Indian nationals at the instance of respondent No.4, which had 51 per cent equity therein was not in violation of any of theprovisions of the FERA. The agreement in regard to the transfer of 49 percent shares handed over to Mr. A.R. Khan of Meerut was also not inviolation of any provisions of the FERA as respondent No. 4 was trying topreserve its shareholding till it gets permission from FIPB for its transfer.Application for FIPB approval was filed on 24-8-1998, and is stated to bestill pending. If respondent No. 2 had any criminal intention or mala fides,it could not have opted for such an open route to establish a company inIndia. It is also worth mentioning that in share transfer agreement evenwith Mr. Khan, it was specifically stated that these shares were to betransferred after FIPB approval as Mr. V.S. Jaffa had an understandingwith respondent No. 4 that these shares would be transferred afternecessary approvals.

22. It is also shown on record that Notification No. 180 of 1998 allowed acompany incorporated in India to have foreign equity if it was to indulgein trading but its primary aim was to do exports. The correspondencebetween the representatives of respondent No. 2 with their charteredaccountants and advocates shows that the company wanted to engageitself not only in trading but in exports also. Even Anil Bhalla, who was aprosecution witness, in his statement dated 12-7-1999, stated that exportswere aimed at. A project report giving the export projections is Annexure1. The letter written by Cliff Roy to Anil Bhalla on 28-10-1997, also spokeof exports from India. The project report was attached with FIPB form alsoto make the intentions or respondent No. 2 clear that it wanted to doexports from India. Actual exports might or might not have taken place but




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there remains no doubt that respondent No. 2 was established in India notonly for the purpose of trading but for the purpose of exports also and assuch it was fully covered by Notification No. 180 of 1998. These findingsof fact given by appellate authority were, therefore, fully justified andwarranted and as such, cannot be interfered with by this Court.

23. In Form FC(RBI) in which respondent No. 2 had ticked NIC code 893to say that the company was engaged in business management consultancy,there was no need to tick the column regarding trade as the same waspermitted by Notification No. 180 of 1998 and was not an existing businessof respondent No. 2. In FIPB application, respondent No. 2 had disclosedthat its existing business was management consultancy but it was propos-ing to undertake trading in gold as well as exports of various products. FNC2 or 3 or 4 were not applicable to respondent No. 2 as it was a companyincorporated in India in terms of Notification No. 180 of 1998, whichpermitted foreign investments up to 51 per cent in such companies. Thefact that respondent No. 2 applied to FIPB for 100 per cent equity holdingby respondent No. 4 clearly rebuts the presumption under section 59 of theFERA against the respondents and establishes that respondent No. 2 andits officers were not intending to violate the laws of India or the notifica-tions or guidelines issued by the Government as well as RBI. Automaticapproval route was adopted as the company was engaged in managementconsultancy also. The documents on record clearly show that respondentNo. 2 instead of establishing a marketing network tried to involve generalpublic for the sale of its gold coins and offered them commission on sales.For this purpose, respondent No. 2 planned to train those, who were willingto participate in the scheme to make earnings. It is pertinent to note thatCliff Roy as well as Paul Singh Claire had described themselves asacademic instructors in their bank account opening forms. Had therebeen no business consultancy programme, this fact could not have comein the account opening forms of these persons. Form FC(RBI) wasrequired to be filled up not because of trading or export activities whichwere permitted by Notification No. 180 of 1998 but because of businessmanagement consultancy which was an Annexure III activity. Therefore,the ticking of code 893 of the automatic approval route by respondentNo. 2 was neither false nor mala fide and as such, the learned AppellateTribunal was justified in holding that the respondents had not tried tocircumvent the provisions of the FERA or the notifications/circularsissued by the Government of India.

24. It is also shown that respondent Nos. 2 to 4 had not transferred anymoney out of India except a part of salary by Cliff Roy and Paul SinghClaire. Foreign equity in respondent No. 2 was permissible. The onlyrestriction was against the payment of dividend to foreign investors,which could be done only after respondent No. 2 had started exports fromIndia, earned profits and got itself registered as an export house. Theexports by respondent No. 2 had just started and its registration as anexport house was to follow but in the meanwhile, respondent No. 2 was


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proceeded against by the appellant and its activities came to a standstill.Section 76 of the FERA clearly shows that the Act aims at bringing foreignexchange into our country to the extent possible and prevent its outflow.In this case, respondent Nos. 2 to 4 appear to have done nothing to offendsection 76 of the FERA as no dividend was declared or remitted to foreigninvestors. The opening of the bank accounts also by respondent No. 3 andothers with respondent No. 1 was not in violation of section 30 of the FERAinasmuch as they being the employees of respondent No. 2, could opensuch bank accounts and repatriate part of their earnings to their respec-tive countries for the maintenance of their families in view of Act 29 of1993 which amended section 30(1) of the FERA. There is no allegation thatany dividend was remitted by respondent No. 2 to respondent No. 4, aforeign company, which had made investments in respondent No. 2.

25. Section 47(1) of the FERA was also not violated for the reason that,respondent No. 2 was a trading company which had plans to export. Actualexports could not be done from day one and in some cases, exports mightnot even take place for a variety of reasons but that does not mean that itcan be held that the company never intended to undertake exports fromIndia and was here for the purpose of trading only.

26. It is also shown on record that Form FC(RBI) regarding which detailedsubmissions have been made by learned counsel for the parties was an outdated and old form and had not been updated in the light of the newnotifications. For example, the foreign technology transfer was not de-leted from this form in spite of the fact that a new form had been issuedfor the said purpose. Item VI(a) of this form also speaks of permissionwhich is no longer required. Therefore, Form FC(RBI) as filled up byrespondent No. 2 does not establish that respondent No. 2 had tried tomislead the authorities or had tried to conceal something from them. Ifany misstatement was made therein, RBI could have itself sought clarifi-cations from respondent No. 2 and its representatives. The letter dated8-6-1999, written by the RBI which says that approval for 51 per centforeign equity induction under automatic approval route was given onlyin view of the declaration that its activities were covered under NIC Code893 and there was no approval for trading in gold coins does not defeat theargument of respondent Nos. 2 to 4 that the company was protected underthe Notification Nos. 180 and 188 of 1998 and as such, their application forautomatic approval under NIC code 893 does not ipso facto establish thatit had violated the provisions of the FERA since it is shown that respondentNo. 2 was engaged in the business management consultancy also.

27. The allegations under section 6(5) of the FERA against respondentNo. 1 bank are also not established for the reason that respondent No. 1had imported gold not on behalf of respondent No. 2 but in its own rightand on its own behalf and had then sold the same to respondent No. 2 andreceived payment thereof in Indian currency. Therefore, the gold was notimported on behalf of respondent No. 2 as alleged. The plea that there was




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a duty cast upon respondent No. 1 to reasonably satisfy itself that thetransaction was not in contravention of any provisions of the FERA or anyrule, notification, direction or order made thereunder cannot be sustainedas this duty is only in those cases where the bank undertakes some foreignexchange transaction on behalf of someone but where respondent No. 1itself imported the gold and sold it to respondent No. 2, a companyincorporated in India, against Indian currency no violation of section 6(5)of the FERA is made out. Respondent No. 2 was purchasing gold in Indiaand selling it also in India. Both the transactions were through Indiancurrency. Since respondent No. 2 was a company incorporated in Indiaand was not a foreign company, respondent No. 1 was under no obligationto refuse a deal with it. It has been found that respondent No. 2 was atrading company which was to undertake exports also from India. Re-spondent No. 1, therefore, had not breached any provision of the FERA.Respondent No. 1 had no material to suspect that respondent No. 2 was inviolation of the FERA or any rule or notification thereunder and as such,the sale of gold to it was not prohibited. The transfer of funds on behalf ofCliff Roy and Paul Singh Claire was also not in violation of section 30 of theFERA for the reason that after the amendment of section 30 of the FERAthe bar imposed on foreign nationals to take up employment in India hadbeen removed and they were permitted to repatriate funds for themaintenance of their families. However, the adjudicating authority evenhad exonerated respondent No. 1 of this charge and as such, it is a non-issue.

28. In the result, this Court is of the considered view that in the presentappeal, neither any question of law has been raised nor any legal infirmityhas been found in the impugned orders passed by the Appellate Tribunal.The orders of Appellate Tribunal returned findings of fact in favour of therespondents that they had not committed any offence under FERA, 1973.The findings were neither perverse nor against material on record. Theappellant has not been able to raise any question of law. No grounds aremade out for interfering with the impugned orders.

29. The appeal, therefore, stands dismissed.■■


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DELHI HIGH COURTSICA

[2008] 81 SCL 461 (DELHI)HIGH COURT OF DELHI

Rashtriya Chemicals & Fertilizers Ltd.

v.

State Bank of PatialaREVA KHETRAPAL, J.

CS (OS) NO. 543 OF 2001NOVEMBER 14, 2006

Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 -Suspension of legal proceedings, contracts, etc. - Whether it is only whereguarantee is in respect of a loan or advance extended to industrial company,that provisions of section 22(1) will enure to benefit of guarantor andguarantee in respect of outstanding sums in respect of commercial transactionscannot be said to be a guarantee in respect of any loan or advance extendedto industrial company - Held, yes - Whether, therefore, bar created by section22 will not apply to a suit invoking a bank guarantee executed by defendant-bank to secure payment for supply of goods to an industrial company whichstood referred to BIFR - Held, yes

FACTS

The defendant-bank furnished a bank guarantee to the plaintiff on behalfof M Ltd. to secure payment of purchase price of goods supplied by theplaintiff to M Ltd. As the M Ltd. failed to pay the invoices raised by theplaintiff within stipulated period, the plaintiff invoked bank guarantee andcalled upon the defendant to make payment due. The defendant con-tended that since M Ltd., on whose behalf the bank guarantee was issued,was registered with the BIFR, the guarantee in question could not beinvoked by the plaintiff without the permission of the BIFR because thebar of section 22 was attracted. As the defendant did not make anypayment, the plaintiff filed a suit praying for a decree for the amount duetogether with interest. The defendant contended that the suit was notmaintainable in view of the provisions of section 22.

HELD

The Bombay High Court, in Ved Prakash Agarwal v. Rama PetrochemicalsLtd. [2004] 56 SCL 116, has expressed the view that if a guarantor isto invoke the protection conferred by section 22(1), it must prove that

Rashtriya Chemicals v. State Bank of Patiala (Delhi)



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the concerned guarantee is in respect of a loan or advance granted tothe industrial company. In other words, it is only where guarantee isin respect of a loan or advance extended to the industrial company, thatthe provisions of section 22(1) will enure to the benefit of the guarantor.[Para 20]

The Delhi High Court, in LML Ltd. v. Saraswati Trading Co. Ltd. [1995] 35DRJ 233 (Delhi), categorically held that a loan is undoubtedly a debt, butevery debt may not be a loan liability. It was also held that an agreement topay the balance of consideration due by the purchaser does not in truth giverise to a loan. [Para 22]

Viewed from any angle, the transaction, in the instant case, could not besaid to be a loan given by the plaintiff to ‘M’ Ltd., nor could it be said to bean advance extended by the plaintiff to the said industrial company. Thetransaction between plaintiff and the said company was unquestionably ofa commercial nature. The guarantee in respect of outstanding sums inrespect of aforesaid commercial transactions could not, therefore, be saidto be a guarantee in respect of any loan or advance extended by the plaintiffto the said industry. Therefore, the instant suit could not be labelled as a suitfor enforcement of a guarantee in respect of a loan or advance to theindustrial company, but was a suit based on an independent contractbetween the plaintiff and defendant to which the industrial company wasnot a party. The necessary corollary was that the sanction of the BIFR or theappellate authority under section 22(1) could not be said to be a sine qua nonfor the institution of suit. [Para 25]

Therefore, the suit was maintainable.

CASES REFERRED TO

Syndicate Bank v. Vijay Kumar [1992] 2 SCC 330 (para 11), Patheja Bros.Forgings & Stamping v. ICICI Ltd. [2000] 26 SCL 404 (SC) (para 12), KailashNath Agarwal v. Pardeshiya Industrial & Investment Corpn. of UttarPradesh Ltd. [2003] 42 SCL 689 (SC) (para 13), Chandan Capital Services v.Mid East India Ltd. [2002] 39 SCL 824 (Delhi) (para 16), LML Ltd. v.Saraswati Trading Co. Ltd. [1995] 35 DRJ 233 (Delhi) (para 17), BombaySteam Navigation Co. (1953) (P.) Ltd. v. CIT AIR 1965 SC 1201 (para 18) andVed Prakash Agarwal v. Rama Petrochemicals Ltd. [2004] 56 SCL 116(Bom.) (para 19).

Akhil Sibal, Ms. Ruchira Gupta and Ms. Vaishnavi Krishnamani for thePetitioner. Ms. Amita Gupta for the Respondent.

JUDGMENT

1. The short question which arises for decision in the instant case iswhether the bar created by section 22 of the Sick Industrial Companies(Special Provisions) Act (1 of 1986 as amended by Act No. 12 of 1994) willapply to a suit invoking a bank guarantee, executed by the bank to securepayment for supply of goods to an industrial company which stands


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referred to the Board for Industrial and Financial Reconstruction (forshort ‘BIFR’).

2. The facts are in a very narrow compass :

2.1 A summary suit under order XXXVII, rule 2, of the Civil ProcedureCode, 1908, was filed by the plaintiff, Rashtriya Chemicals and FertilizersLtd., against the defendant, State Bank of Patiala, praying for a decree inthe sum of Rs. 40,83,759.82 (Rupees Forty Lakhs Eighty Three ThousandSeven Hundred Fifty Nine and Paise Eighty Two only) together withfurther interest on the principal sum of Rs. 33,36,792.10 (Rupees ThirtyThree Lakhs Thirty Six Thousand Seven Hundred Ninety Two and PaiseTen only) at the rate of 18 per cent per annum from the date of the filingof the suit till payment and/or realization.

2.2 The plaintiff has averred that the suit is for a liquidated sum arising ona bank guarantee (Annexure-B to the plaint), which has been filed as thedefendant has wilfully failed and neglected to make payment to theplaintiff, when the plaintiff invoked the said bank guarantee. The saidbank guarantee was furnished by the defendant to the plaintiff on behalfof one Montari Industries Ltd. to enure the due payment of the purchaseprice of ‘Anhydrous DMA’, which the plaintiff was supplying to the saidMontari Industries since the year 1994. The supply of the said product wason a 30 days’ credit from the date of supply, and to enure the due paymentof the purchase price of the said product (Anhydrous DMA) by MontariIndustries, the defendant executed in favour of the plaintiff a bankguarantee bearing No. SBP/NPND/ BG/64/1994-95, dated 9/12-9-1994,for an amount not exceeding Rs. 50,00,000 (Rupees Fifty Lakhs only) onthe terms and conditions more particularly set out therein. The saidguarantee was to remain in force up to 7-9-1995, and a claim under thesame was to be made and served on the defendant on or before 6-3-1996.

2.3 The said bank guarantee was irrevocable and specifically providedthat the defendant agreed and undertook to pay the amount due andpayable under the said guarantee without any demur, merely on ademand from the plaintiff that the amount claimed had become due byreason of the said Montari Industries’ failure to pay to the plaintiff theamount of their invoices within 30 days; the said guarantee furtherprovided that any such demand made by the plaintiff would be conclusivein regard to the amount due and payable by the defendant to the plaintiffunder the said bank guarantee. The validity of the said bank guaranteedated 12-9-1994 was extended from year to year, the last extension beingup to 7-9-2000 and a demand under the same was to be made on or before6-3-2001.

2.4 As the said Montari Industries failed to pay the invoices raised by theplaintiff within 30 days as stipulated, the plaintiff invoked the bankguarantee issued by the defendant vide letter dated 29-5-2000, addressedfrom their registered office at Mumbai, and called upon defendant to




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make payment of sum of Rs. 47,38,693.69 (Rupees Forty Seven LakhsThirty Eight Thousand Six Hundred Ninety Three and Paise Sixty Nineonly) including interest within two days from the receipt of the said letter.As there was no response from the defendant, the plaintiff by their letterdated 7-6-2000 once again called upon the defendant to pay the aforesaidsum of Rs. 47,38,693.69 (Rupees Forty Seven Lakhs Thirty Eight ThousandSix Hundred Ninety Three and Paise Sixty Nine only) under the said bankguarantee to the plaintiff. In reply thereto, the defendant by their letterdated 8-6-2000, inter alia, contended that even though they were intendingto honour the amount under the said bank guarantee, they were unableto do so because of the provisions of section 22 of the Sick IndustrialCompanies (Special Provisions) Act, 1985.

2.5 In the course of subsequent correspondence between the parties, theplaintiff informed the defendant that Montari Industries Ltd. had madepayment of a sum of Rs. 10,00,000 (Rupees Ten Lakhs only) and that, inview thereof, the plaintiff’s claim under the said bank guarantee nowstood revised to Rs. 38,34,186.17 (Rupees Thirty Eight Lakhs Thirty FourThousand One Hundred Eighty Six and Paise Seventeen only), includingthe details of the invoices. The plaintiff requested the defendant to releasethe aforesaid amount by demand draft in terms of clause 4 of the bankguarantee within two days from the date of receipt of the said letter. Inreply thereto, the defendant by their letter dated 7-8-2000 repeated thestand taken by them in their earlier letters, that since Montari IndustriesLimited on whose behalf the bank guarantee was issued was registeredwith the BIFR, the bar of section 22 of Sick Industrial Companies Act wasattracted and the guarantee in question could not be realized by theplaintiff without the permission of the BIFR.

3. It is the case of the plaintiff that there is no dispute that there has beena failure on the part of the Montari Industries Limited to make paymentof the invoices within 30 days as required under the bank guarantee andthe bank guarantee being unconditional and irrevocable, the defendantcannot take refuge under the provisions of section 22 of SICA. It is furtherthe case of the plaintiff that the bar of section 22 is to the filing of aproceeding against the industrial company or a suit on a guarantee ‘inrespect of any loan or advance granted to the industrial company’.Plaintiff asserts that it is apparent that the bank guarantee given by thedefendant was not in respect of any loan or advance granted to industrialcompany and, thus, there is no bar under the said section for the defendantto make payment under the said bank guarantee.

4. The defendant does not dispute the bank guarantee dated 12-9-1994 orthat the said bank guarantee was extended from year to year or that theplaintiff invoked the said bank guarantee vide its letter dated 29-5-2000,but categorically denies that the bank guarantee in the present case standson a different footing than any other third party guarantee given to securea loan or advance. Defendant asserts that the cause of action never arose


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in favour of the plaintiff, as it could not invoke the bank guarantee inquestion without taking permission from BIFR and AAIFR.

5. By order dated 28-8-2003, this court granted leave to defend to thedefendant, holding that the defendant has succeeded in raising a triableissue in regard to the maintainability of the suit filed by the plaintiff in viewof the provisions of section 22 of the SICA.

6. On the pleadings of the parties, the following issues were framed forconsideration on 9-5-2005 :

(i) What would be the impact of the fact that Montari Industries Limitedstood referred to the Board of Industrial and Financial Reconstruc-tion on the bank guarantee issued by the defendant at behest ofMontari Industries Limited in favour of the plaintiff? Onus on parties.

(ii) If Issue No. 1 is decided in favour of the plaintiff, to what amountwould plaintiff be entitled to and at what rate of interest?

7. Learned counsel for the parties agreed, as recorded in order dated 9-5-2005, that qua Issue No. 1, no evidence would be required. Counsel for theparties further agreed that qua Issue No. 2, the sum under the bankguarantee is to be ascertained in terms of the guarantee, which is anadmitted document. Counsel for parties, therefore, stated that the onlyevidence required would be on the rate of interest and agreed that limitedevidence pertaining to the rate of interest would be led by them. Accord-ingly, two affidavits by way of evidence were filed on behalf of the plaintiffon this aspect alone. The defendant, however, did not care to file anyaffidavit by way of evidence on the issue of rate of interest.

7.1 Having heard learned counsel for the parties at length and scrutinizedthe records, my findings on the issues are as follows :

Issue No. 1

7.2 Before dealing with the rival contentions of parties, I propose first toset out the provisions of section 22(1) of the SICA, as amended by the Actof 1994. The same read as follows :

“22. Suspension of legal proceedings, contracts, etc.—(1) Where in respectof an industrial company, an inquiry under section 16 is pending or anyscheme referred to under section 17 is under preparation or considerationor a sanctioned scheme is under implementation or where an appealunder section 25 relating to an industrial company is pending, then,notwithstanding anything contained in the Companies Act, 1956 (1 of1956), or any other law or the memorandum and articles of associationof the industrial company or any other instrument having effect underthe said Act or other law, no proceedings for the winding up of theindustrial company or for execution, distress or the like against any of theproperties of the industrial company or for the appointment of a receiverin respect thereof and no suit for the recovery of money or for theenforcement of any security against the industrial company or of anyguarantee in respect of any loans or advance granted to the industrial




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company shall lie or be proceeded with further, except with the consentof the Board or, as the case may be, the Appellate Authority.”

7.3 Looking to the plain and unambiguous wording of section 22(1) ofSICA, it is clear that where an industrial company has been referred to theBoard, as is the case here with Montari Industries Limited, no suit for therecovery of money or for the enforcement of any security against anindustrial company would lie without the consent of the Board.

7.4 Counsel for the plaintiff, however, contends that the instant claim isnot directed against the industrial company at all but against the defen-dant bank which executed an irrevocable bank guarantee in favour of theplaintiff. As such the instant suit is founded on an independent contractbetween the plaintiff and the defendant bank to which the provision ofsection 22(1) of the SICA are not attracted.

8. The question, thus, which arises for consideration is whether the barcreated by section 22(1) of SICA applies to the instant proceedings forencashment of a bank guarantee against the defendant bank and whetherthe instant suit is not maintainable in the absence of the consent of theBoard for Industrial and Financial Reconstruction as envisaged by theprovisions of the said section.

9. At the outset, learned counsel for the plaintiff emphasized the followingundisputed facts :

(i) The defendant bank has not disputed that it executed a bankguarantee dated 12-9-1994 in favour of the plaintiff for an amountnot exceeding Rs. 50,00,000 (Rupees fifty lakhs only) at the requestof Montari Industries Limited, and had thereby irrevocably agreedand undertaken to pay to the plaintiff the said amount in caseMontari Industries Limited (the buyer) fails to pay to the plaintiff theamounts due under the plaintiff’s invoices within 30 days of supplyof ‘Anhydrous DMA’ to the buyer.

(ii) The defendant bank has not disputed that the said guarantee pro-vided that the bank agrees that the plaintiff’s decision with regard tothe amount of the guarantees having become payable by the buyershall be final and binding on the bank.

(iii) The defendant bank has not disputed that the said guarantee pro-vides that the bank agrees and undertakes to pay the amount due andpayable under the guarantee without demur, merely on a demandfrom the plaintiff that the amount claimed has become due by reasonof the buyer’s failure to pay the plaintiff’s invoices within 30 days,and, further, that such demand shall be conclusive as regards theamount due and payable by the bank under the said guarantee.

(iv) The defendant bank has not disputed that it did not inform theplaintiff that Montari Industries Limited had been referred to theBIFR. Not only this, the defendant bank did not inform the plaintiff


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that the said Montari Industries was declared sick on 1-8-1997,despite being fully aware of the same, but further extended the termof the bank guarantee on 31-8-1999 in flagrant breach of trust.

(v) The defendant bank has not disputed that the term of the said bankguarantee was further extended up to 7-9-2000.

(vi) The defendant bank has not disputed that the plaintiff invoked thesaid bank guarantee vide its letter dated 29-5-2000 and since therewas no response from the defendant, the plaintiff vide letter dated7-6-2000 again called upon the defendant to pay Rs. 47,38,693.69(Rupees forty seven lakhs thirty eight thousand six hundred ninetythree and paise sixty nine only) under the said bank guarantee to theplaintiff.

(vii) The defendant bank has not disputed that the State Bank of India,Mahul Road (Chembur Branch), Mumbai, addressed a letter dated14-6-2000 to the defendant stating that its Law Department, LocalHead Office, Mumbai, had opined that section 22(1) of the SICA is notapplicable in cases of bank guarantee which is a contract under theContract Act, and, therefore, it would be in order for the defendantbank to honour the guarantee commitment in terms of the contract,without any further delay.

(viii) Admittedly, vide letters dated 8-6-2000, 18-7-2000, 7-8-2000 and 3-11-2000 addressed to the plaintiff, the defendant bank has not disputedthe amounts due and payable under the bank guarantee, but seeksto take refuge under the embargo engrafted in section 22(1) of theSick Industrial Companies (Special Provisions) Act, 1985.

(ix) Admittedly also, by letter dated 3-11-2000, addressed to the plaintiff,the defendant bank reiterated its earlier stand :

“The guarantee in question is to secure payment of material supplied tothe borrowing company on credit. The bar of section 22 of SICA is thusattracted and the guarantee in question cannot be realized by thebeneficiary without the permission of BIFR.”

10. As regards the second part of section 22(1), counsel for the plaintiffurges that though it is apparent from a plain reading of section 22(1) of theAct that no suit for the encashment of any guarantee in respect of any loanor advance granted to an industrial company that has been referred toBIFR would lie or can be proceeded with, except with the consent of theBoard, the instant bank guarantee was not in respect of any loan oradvance granted to Montari Industries Limited (the Industrial company),but admittedly was executed to secure payment for material supplied toMontari Industries Limited by the plaintiff. As such, it is not a guarantee‘in respect of any loan or advance granted to any industrial company’,within the meaning of the aforesaid section, and the instant suit forenforcement of the same is not, therefore, barred by the provisions ofsection 22(1) of the SICA.




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11. The further contention of learned counsel for the plaintiff is that theabove view is bolstered by the well-settled principles regarding enforce-ment of bank guarantees, according to which a bank guarantee is anautonomous contract, imposing an absolute obligation on the bank tofulfil the bank guarantee. Payment becomes due under a bank guaranteeon the happening of a contingency, on the occurrence of which theguarantee becomes enforceable. In the instant case, there is no disputethat the said contingency has occurred - see Syndicate Bank v. Vijay Kumar[1992] 2 SCC 330.

12. Dealing first with the contention of the plaintiff that the guarantee inquestion is not in respect of any loan or advance granted to the industrialcompany, it would be apposite to note that the Apex Court in PathejaBrothers Forgings & Stamping v. ICICI Ltd. [2000] 6 SCC 5451 held that thewords ‘no suit for the recovery of money or for the enforcement of anysecurity against the industrial company or any guarantee in respect of anyloans or advance granted to the industrial company’, inserted into section22 by the Act 12 of 1994, ‘are crystal clear. There is no ambiguity therein’.The court further held that no suit for the enforcement of a guarantee inrespect of a loan or advance granted to the industrial company will lie orcan be proceeded with, without the consent of the Board or the AppellateAuthority under the said Act. It was observed by the Apex Court that whenthe words of legislation are clear, the court must give effect to them as theystand and cannot demur on the ground that the Legislature must haveintended otherwise, therefore, the respondent’s suit for the enforcementof the guarantees in respect of the loans granted to the appellant cannotbe proceeded with unless consent as required by section 22 is obtained.

13. In a subsequent decision, of the Hon’ble Supreme Court Kailash NathAggarwal v. Pardeshiya Industrial & Investment Corpn. of Uttar PradeshLtd. [2003] 4 SCC 3052, the court held that having regard to the semanticdifference between the words ‘suit’ and ‘proceeding’ and the absence ofsuch ‘omnibus expression’ and expansive words ‘or the like’, which appearafter the expression ‘proceedings’, after the word ‘suit’, it is not possible toaccede to the submission of the appellants that the word ‘suit’ in section22(1) of the Act means anything other than some form of curial process.In the report, the court further held as follows :

“34. ...The court in Patheja case merely observed that the creditor couldrecover its sum from the principal debtor under the scheme and,therefore, the ‘ claim on the guarantee would not arise if the amount isso recovered under the scheme. We do not read the observations quotedas holding that protection of guarantors of loan to a sick company is anobject of the 1994 amendment which object must colour our interpretationof the amendment. Till 1994 no protection was afforded to the guarantorsunder the Act at all. A limited protection has been given in 1994. The

1. 26 SCL 404.2. 42 SCL 689.


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expression used being clear and unambiguous, it is not for us to questionthe wisdom of the Legislature in giving the limited protection it did or whysuch protection was necessary at all.” (p. 701)

14. After making the above observations, the Supreme Court in KailashNath Agarwal’s case (supra), held that since section 22(1) only prohibitsrecovery against the industrial company, there is no protection affordedto guarantors against recovery proceedings under the U.P. Public Moneys(Recovery of Dues) Act, 1972.

15. On the basis of the aforesaid, counsel for plaintiff contended that nodoubt there is a certain protection provided to a guarantor under section22(1) of the SICA, but this protection is limited in nature. He furthercontended that where the concerned guarantee, as in the instant case, isnot in respect of ‘any loan or advance’ granted to an industrial company,a suit for the enforcement of the said guarantee can be proceeded withwithout the permission required in terms of section 22(1) of the SICA. Thecourt in Patheja Bros. Forgings & Stamping’s case (supra) and Kailash NathAgarwal’s case (supra), he pointed out, was not concerned with thequestion whether a suit for enforcement of a guarantee will lie or can beproceeded with against the guarantor in view of section 22(1), where theguarantee is not in respect of a loan or advance granted to the concernedindustrial company. Therefore, the judicial pronouncements of the ApexCourt in Patheja Bros. Forgings & Stamping’s case (supra) and KailashNath Agarwal’s case (supra) are not applicable to the facts of the presentcase, where the bank guarantee is not in respect of a loan or advancegranted to the concerned industrial company viz. Montari IndustriesLimited.

16. Likewise, he contended that the judgment of this court in ChandanCapital Services v. Mid East India Ltd. [2002] 39 SCL 824 wherein afterreferring to Patheja Bros. Forgings & Stamping’s case (supra) this courtheld that the Legislature clearly intended that a guarantor who gives aguarantee in respect of any loan or advance granted to the industrialcompany should be equally placed with the industrial company which isdeclared sick, and no proceedings in the nature of suit shall be allowed tobe proceeded with for enforcement of such a guarantee without obtainingthe consent of the Board, is clearly distinguishable. The question whicharose for consideration in Chandan Capital Services’s case (supra) waswhether execution proceedings could continue against a guarantor forenforcement of a guarantee in respect of a loan or advance granted to theindustrial company? This is to be contradistinguished with the bankguarantee in the instant case which is not in respect of loan or advanceextended to the industrial company.

17. Reliance was placed by learned counsel for the plaintiff on the decisionof this court in LML Ltd. v. Saraswati Trading Co. Ltd. [1995] 35 DRJ 233,holding therein that the suit for enforcement of guarantee in respect ofdeferred sale consideration of Rs. 9.45 lakhs was not barred by the




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provisions of section 22 of the SICA. At page 240 of the report, it wasobserved as follows :

“10. (...) Under section 22 of the Sick Industrial Companies (SpecialProvisions) Act, no suit or proceedings for enforcement of any guaranteein respect of any loan or advance granted to the industrial company shalllie or be proceeded with further except with the consent of the Board or,as the case may be, appellate authority. The present suit filed by theplaintiffs is for enforcement of guarantee which is alleged to have beengiven by defendants 1 and 2 for payment of the amount allegedly duefrom defendant No. 3. However, for stay of this suit, it has to be provedthat this guarantee was in respect of any loan or advance granted to theindustrial company. In case the guarantee given by defendants 1 and 2was not in respect of any loan or advance granted to the sick company,the present suit can proceed and the provisions of section 22 of the Actwill not apply.”

17.1 At page 241 of the report, it was observed :

“12. (...) Prima facie, I am of the opinion that deferred sale considerationcannot be a loan or an advance. In case it is not a loan or an advancegranted to the company, the provisions of section 22 of Sick IndustrialCompanies (Special Provisions) Act, 1985 will not be applicable, and,consequently, the suit is not barred by the said Act.”

18. Reference was made in the aforesaid case to the decision of the ApexCourt in Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT AIR 1965 SC1201 wherein it was held that :

“. . . An agreement to pay the balance of consideration due by thepurchaser does not in truth give rise to a loan. A loan of money undoubtedlyresults in a debt, but every debt does not involve a loan. Liability to paya debt may arise from diverse source and a loan is only one of suchsources. Every creditor who is entitled to receive a debt cannot beregarded as a lender. . . .” (page 1203)

19. Next, reliance was placed by counsel for the plaintiff on a DivisionBench decision of the Bombay High Court in Ved Prakash Agarwal v.Rama Petrochemicals Ltd. [2004] 56 SCL 116. In the said case, the suit claimwas with respect to the unpaid lease rental in an agreement of leasefinance for equipment, the payment of which rental was guaranteed bythe appellant. The affairs of the company to which the equipment wasgiven on lease were under investigation before the BIFR and, therefore,the question arose whether the suit could not be proceeded against theguarantor (appellant) in view of the provisions of section 22(1) of the SICA.It was urged that the lease finance was essentially a loan or advancegranted to the industrial company and, therefore, the suit should not beproceeded with. After noting that in Patheja Bros. Forgings & Stamping’scase (supra), there was no dispute that it was the repayment of the loanwhich was guaranteed by the guarantor, the Bombay High Court ob-served that the material question to be examined was whether the lease


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finance granted by the respondent to the industrial company was in facta loan or advance granted to the industrial company and, therefore, thesuit had to be suspended in view of the provisions of section 22(1) of SICA.Having crystallized the question it was called upon to answer, the BombayHigh Court held as follows :

“12. (...) When it comes to guarantors, it is only the suits for enforcementof any guarantee which would be stayed as against them provided theyare in respect of loans or advances granted to the industrial company.Thus it is not that merely because the industrial company has becomesick that the suits against the guarantors thereof would automatically gethalted. The guarantors will have to show that they are suits in respect ofloans or advances granted to the industrial company to get the protectionand not otherwise. Therefore, merely because the industrial company isprotected, the guarantor does not get protected automatically. All thatwas submitted before the learned Single Judge was that the industrialcompany to which equipment was given on lease by the guarantor, wasbefore the BIFR and, therefore, the suit against the guarantor cannot beproceeded with. On the submission, as it was placed before him, thelearned Judge was right in answering that the suit cannot be stayedmerely on that footing.” (p. 126)

19.1 In paragraph 25 of its judgment, the Bombay High Court furtherheld :

“25. It is clear from the narration that it was the obligation of the industrialcompany to make the periodical payment and use the machines. Theindustrial company had defaulted in making the payment and, therefore,the respondent had every right to get back the machinery. As far as thepresent suit is concerned, it is with respect to the guarantee given by theappellant to fulfil the obligations of the industrial company on his own thetext of the guarantee is also very clear. That guarantee cannot be said tobe a guarantee with respect to the repayment of a loan. Similarly, asstated earlier, in an advance of money the right of the financier is onlywith respect to money and not in the property. In the present case thereare clear rights of the financiers in the property. That being so, it cannotbe said that the lease finance given by the respondent to the industrialcompany was in fact a loan or an advance and which was guaranteed bythe appellant. In view of this conclusion arrived at, on the second pointfor determination also there is no substance in the appeal.” (p. 133)

20. From the above, it would appear that the Bombay High Court inVed Prakash Agarwal’s case (supra) has expressed the same view asthis court in LML Ltd.’s case (supra) namely, that if a guarantor is to invokethe protection conferred by section 22(1) of the SICA, it must provethat the concerned guarantee is in respect of a loan or advance grantedto the industrial company. In other words, it is only where the saidguarantee is in respect of a loan or advance extended to the industrialcompany that the provisions of section 22(1) will enure to the benefit of theguarantor.




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21. Per Contra, learned counsel for the defendant, apart from relying uponthe decisions of the Apex Court in Patheja Bros. Forgings & Stamping’s case(supra) and Kailash Nath Agarwal’s case (supra) and of this Court inChandan Capital Services’ case (supra), contended that the object of SICAis to revive and rehabilitate such industries as have gone sick on accountof economic and other related reasons. As such, any narrow constructionto the words of section 22 would render the provision nugatory and defeatthe remedial object sought to be achieved. Counsel for defendant alsoplaced reliance upon the meaning of the words ‘advance’ and ‘debt’ as setout in the ‘New Shorter Oxford Dictionary’, which are as under :

“Advance means : payment before hand, or on security, an anticipatorypayment, a loan.

Debt means : something owed or due; Something (as money), goods, orservice which one person is under an obligation to pay or render toanother.

A liability or obligation to pay or render something; the condition of beingso liable or obligated; floating debt, payable on demand or at a certaintime.”

22. As already noticed, this court in LML Ltd.’s case (supra) categoricallyheld that a loan is undoubtedly a debt, but every debt may not be a loanliability - Bombay Steam Navigation Co. (1953) (P.) Ltd.’s case (supra). It wasalso held that an agreement to pay the balance of consideration due by thepurchaser does not in truth give rise to a loan.

23. In the Usurious Loans Act, 1980, the term ‘loan’ has been defined asfollows :

“Section 2 defines :

2. In this Act, unless there is anything repugnant in this context.—(1)........

(2) Loan means a loan whether of money or any kind and includes anytransaction which is, in the opinion of the court, in substance, a loan.”

24. From the above definition of loan, it is clear that the touchstone fordetermination of the fact whether a liquidated sum of money due to aperson or institution is a loan or not has been held to be one in the opinionof the court : needless to state that the said opinion is not to be formed onarbitrary or whimsical grounds. The court must carefully and minutelyexamine the various facets of transaction in question to assess if insubstance the same is a loan.

25. Viewed from the above angle, in my considered view, the transactionin the instant case cannot be said to be a loan given by the plaintiff toMontari Industries Limited nor can it be said to be an advance extendedby the plaintiff to the said industrial company. The transaction betweenRashtriya Chemical Fertilizers Limited and Montari Industries was un-questionably of a commercial nature. The guarantee in respect of out-standing sums in respect of aforesaid commercial transactions cannot,


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therefore, be said to be a guarantee in respect of any loan or advanceextended by the plaintiff to Montari Industry Limited. In my consideredview, therefore, the present suit cannot be labelled as a suit for enforce-ment of a guarantee in respect of a loan or advance to the industrialcompany, but is a suit based on an independent contract between theplaintiff and defendant to which the industrial company, viz., MontariIndustries is not a party. The necessary corollary is that the sanction of theBoard or the Appellate Authority under section 22(1) of the SICA cannotbe said to be a sine qua non for the institution of the suit.

26. Issue No. 1 is accordingly decided in favour of the plaintiff.

Issue No. 2

27. Issue No. 1 having been decided in favour of the plaintiff, the onlyquestion which remains to be decided is to what amount would theplaintiff be entitled to and at what rate of interest?

28. As already stated, the plaintiff has prayed for grant of a decree in thesum of Rs. 40,83,759 (rupees forty lakhs eighty three thousand sevenhundred fifty nine) as per particulars set out in ‘Annexure-U’ to the plainttogether with further interest on the principal sum of Rs. 33,36,792(Rupees thirty three lakhs thirty six thousand seven hundred and ninetytwo only) at the rate of 18 per cent per annum from the date of the filingof the suit till payment and/or realization. There is no specific denial to thecalculation of the amount claimed by the defendant in the writtenstatement of the defendant. In the course of hearing also, counsel for thedefendant did not contest the position that the principal amount due andpayable as on 21-10-1999 was Rs. 43,36,792.10 (Rupees forty three lakhsthirty six thousand seven hundred ninety two and paise ten only) and thatafter deduction of Rs. 10,00,000 paid to the plaintiff by Montari Industries,the balance principal amount due was Rs. 33,36,792.10 (Rupeesthirty three lakhs thirty six thousand seven hundred ninety two and paiseten only).

29. As regards the interest payable by the plaintiff to the defendant, twoaffidavits by way of evidence were filed by the plaintiff. Both the affidavitsare of Shri K.C. Prakash, son of Shri K. Ramamoorthy, company secretaryof the plaintiff, stating on oath that there are no directives issued by theReserve Bank of India relating to the rate of interest chargeable and thatall banks are free to fix their own prime lending rates (PLR) and thatdifferent banks have different prime lending rates, the only requirementbeing that PLR should be published by each bank for information to thepublic. It is further stated on oath that the plaintiff would be entitled to therate of interest on the amounts due and payable to the plaintiff by thedefendant under the bank guarantee as per the certificate dated 3-8-2005issued by the State Bank of India. The said certificate dated 3-10-2005certifies that the prime lending rates of the State Bank of India, Commer-cial Branch, Chembur, from 1-4-2002 to 1-11-2004, varied from 11 per centon 1-4-2002 to 10.25 per cent on 1-11-2004.




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30. After calculating the interest on the principal amount from 21-10-1999to 1-5-2006, the amount due and payable, according to the plaintiff, worksout to Rs. 65,46,735.77 (Rupees sixty five lakhs forty six thousand sevenhundred thirty five and paise seventy seven only). It was, however, fairlyconceded by counsel for the plaintiff that clause 2 of the deed of guaranteelimits the bank guarantee to the sum of Rs. 50,00,000 (Rupees fifty lakhsonly). It was also not disputed from the side of counsel for the plaintiff, andindeed the same is borne out from the deed of guarantee (‘Annexure B’)that clause 2 thereof provides as follows :

“The bank agrees that our total liability under this guarantee is restrictedto Rs. 50,00,000 (Rupees fifty lakhs only) which is inclusive of interest. Thebank further agrees to pay to RCF interest at one per cent more thanborrowing rate of interest on default in prompt payment on the amountsdue and payable by the buyer from the due date to the actual date onwhich payment is made to RCF with a condition that the total claimamount including interest does not exceed Rs. 50,00,000 (Rupees fiftylakhs only).”

31. Accordingly, in view of clause 2 of the bank guarantee, though a largeramount is due to the plaintiff, the decree must be restricted to the sum ofRs. 50,00,000 (Rupees fifty lakhs only). In the circumstances, therefore, adecree in the sum of Rs. 50,00,000 (Rupees fifty lakhs only) inclusive ofinterest is passed in favour of the plaintiff and against the defendant. Thedefendant shall, however, be liable to pay interest at the rate of 10 per centper annum to the plaintiff from the date of the suit till the date of thedecree and further interest at the rate of 6 per cent per annum from thedate of the decree to the date of payment.

32. The suit stands disposed of accordingly.

33. Parties are left to bear their own costs.■■


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ALLAHABAD HIGH COURTCOMPANIES ACT

[2008] 81 SCL 475 (ALL.)HIGH COURT OF ALLAHABAD

State Bank of India

v.

Sapna Scooters Industries (P.) Ltd.SUNIL AMBWANI, J.

COMPANY PETITION NO. 28 OF 2004SEPTEMBER 7, 2005

Section 555 of the Companies Act, 1956 - Winding up - Unpaid dividends andundistributed assets to be paid into Companies Liquidation Account -Official Liquidator, after sale of assets of company-in-liquidation, depositedentire unclaimed and undistributed amount in Companies LiquidationAccount under section 555 - Applicant-bank, relying upon a compromisedecree between applicant and company-in-liquidation passed in mortgagesuit, filed application seeking to realise amount due from Official Liquidator- Whether since in mortgage suit, applicant-bank did not implead OfficialLiquidator to represent company-in-liquidation, compromise decree was notbinding upon Official Liquidator - Held, yes - Whether further since mortgagewas not registered with Registrar of Companies, at best, applicant could betreated as unsecured creditor and its remedy was to file a claim, if it couldprove legally recoverable debt, before Central Government under section555(7) - Held, yes

JUDGMENT

1. The applicant-bank is a unsecured creditor of the company, M/s. SapnaScooters India (P.) Ltd., which was wound up by this court on 31-3-1994.After the sale of the assets, the Official Liquidator with the permission ofthe court invited the claims, vide advertisement in the news papersannexed vide Official Liquidator Report No. 98 of 1997. He did not receiveany claim, and thus after seeking permission of the court vide OfficialLiquidator Report No. 35 of 1998, the official deposited the entire amountunclaimed and undistributed amount of Rs. 2,92,230 under section 555(1)of the Companies Act, 1956, in the company’s liquidation account of theCentral Government.

2. The charge of the applicant-bank was not registered with the Registrarof Companies vide certificate dated 28-6-1994, for payment of unsecured

State Bank of India v. Sapna Scooters Industries (P.) Ltd. (All.)



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dues vide mortgage deed for Rs. 8,72,455.08. The applicant-bank has reliedupon the compromise decree passed by Additional District Judge, CourtNo. 11, Aligarh, in O.S. No. 457 of 1989, in which a compromise was struckbetween the State Bank of India and Sapna Scooters Industries (P.) Ltd.(in liquidation), to realise the amount of Rs. 2,92,230 from the OfficialLiquidator, after auction sale of the assets of the company (in liquidation).

3. After the company is wound up the assets come in possession of thecourt and the company is represented by the liquidator. There is noaverment in the application that permission of the court was obtainedunder section 446 of the Companies Act, 1956, to continue the suit but oncethe company was wound up on 31-3-1994, it was necessary for therespondents to have impleaded the Official Liquidator to represent theinterest of the company (in liquidation). The decree dated 10-1-2003,passed by Additional District and Sessions Judge, Court No. 11, Aligarh,and the compromise dated 7-4-2001, which is part of the decree, does notshow the fact of winding up was brought on record and the OfficialLiquidator was impleaded as party representing the company SapnaScooters India (P.) Ltd. (in Liquidation).

4. The decree, as such, is not binding upon the company (in liquidation).After the company is wound up under the Companies Act, 1956, the assetsof the company came into the possession of the court and that the OfficialLiquidator represents the interest of the company. Since the company waswound up, the permission to pursue the suit was necessary and incumbentupon the plaintiff-bank. The bank did not implead the Official Liquidatorto represent the company. The compromise shows that it was madebetween the State Bank of India and defendant Nos. 2 and 3, namely, SriBabu Lal Sharma and Sri Prem Shanker Sharma, who could not haverepresenting the company and compromised the mortgage suit.

5. The compromise decree is, as such, not binding upon the OfficialLiquidator. The mortgage was not registered with the Registrar of Com-panies and as such, at best State Bank of India is to be treated as unsecuredcreditor. The remedy of the State Bank of India, in my opinion, lies to filea claim, if the bank can prove the legally recoverable debt before theCentral Government under section 555(7)(b) of the Companies Act, 1956.The company application is accordingly disposed of.

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BOMBAY HIGH COURTSEBI ACT


Asha Anil Kumar Kataria

v.

Ashok KumarN.V. DABHOLKAR

AND M.G. GAIKWAD, JJ.FIRST APPEAL NO. 111 OF 2006

JUNE 13, 2007

Section 20A, read with section 21, of the Securities and Exchange Board ofIndia Act, 1992 and section 9, of the Code of Civil Procedure, 1908 - Bar ofjurisdiction - Whether section 21 indicates that civil court shall continue tohave jurisdiction over subject-matters for which authorities under Act arenot empowered to decide - Held, yes - Plaintiff was trading in shares, stocksand securities as sub-broker, but without having necessary registration assub-broker either with SEBI or with any recognised stock exchange - Shefiled a recovery suit against defendants alleging that defendants, havingtraded in shares, etc., through her, failed to pay certain sum on account oftransaction in shares, etc. - Additional District Judge, considering fact thatplaintiff was not registered as sub-broker, rejected suit holding that civilcourt had no jurisdiction to entertain suit - Whether there being no provisioneither under Act or Regulations made thereunder to enable any authorityunder Act to resolve a dispute regarding non-payment between a client andan unregistered sub-broker, order of rejection of suit on ground that civilcourt had no jurisdiction to entertain same, was patently erroneous - Held,yes - Whether further, recovery of dues is a right pre-existing under commonlaw and not a right created by Act and, therefore, it was not a case whereinstatute itself creates a right and also provides machinery for enforcement ofsame, but it was a case wherein a right was pre-existing under common lawand one more remedy was provided by arbitration clause, if included inagreement, without expressly excluding jurisdiction of civil court - Held, yes- Whether, consequently, it was a case wherein both, common law andstatutory remedies, were concurrent remedies and impugned order, rejectingsuit on ground of bar of jurisdiction, was liable to be set aside - Held, yes

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FACTS

The plaintiff was dealing in business of shares and securities as a sub-broker but without having necessary registrations as a sub-broker eitherwith the SEBI or with any recognised stock exchange. She filed a recoverysuit against the defendants alleging that the defendants, who had beentrading in stock business through her, failed to pay certain sums whichbecame due on account of transaction in shares. The Additional DistrictJudge, considering fact that the plaintiff was not a registered sub-broker,rejected the plaint and disposed of the suit by arriving at conclusion thatthe civil court had no jurisdiction to entertain the suit.

On appeal :

HELD

Having gone through all the provisions of the Act pertaining to ‘ variousauthorities under the Act and their powers, no provision is found thatempowers either authority to deal with a dispute regarding non-paymentby client to the sub-broker the amounts due. On the contrary, section 20A,regarding bar of jurisdiction of a civil court, is followed by a saving clauseas contained in section 21. Hence, at least section 21 indicates that civilcourt shall continue to have jurisdiction over the subject-matters for whichthe authorities under the Act are not empowered to decide. [Paras 11.3and 11.4]

So far as the Securities Contracts (Regulation) Act, 1956 is concerned, theprocedure and powers of the Securities Appellate Tribunal are laid downin section 22B. None of the sub-sections of section 22B deals with any of thematters that can be considered by the said Tribunal. Thus, in fact, there isno provision specifying the subject-matters under that Act, to be handledby the said Tribunal. However, on reference to sections 22 and 22A, it isevident that when a recognized stock exchange, acting in pursuance of anypowers given to it by its bye-laws, refuses to list the securities of any publiccompany or any company, the appeals are available, respectively, to theCentral Government and the Securities Appellate Tribunal. By virtue ofsection 23-I, an officer appointed by the SEBI for the purpose, can adjudgethe penalties to be imposed for defaults as prescribed by sections 23A to 23H.[Para 12.1]

Having taken a survey of the orders, that can be passed by the adjudicatingofficers and the SEBI under section 4B and also as to what are the powersof the recognized stock exchange, no provision is found that enables eitherof these three authorities to resolve the dispute regarding non-paymentbetween a client and an unregistered sub-broker. [Para 12.2]

The plaintiff, although acted as a sub-broker, yet was not a registered sub-broker. Even as a sub-broker, the plaintiff would not get status of being a


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member of the SEBI/stock exchange and, thus, the dispute was a disputebetween two persons, both of whom were non-members, although thedispute related to price of shares purchased and sold by the plaintiff onbehalf of the defendants. [Para 16]

The defendants submitted that the dispute was required to be referred toan arbitration. Such an argument was based on the submission thatarbitration clause is a statutory term and condition of the contract betweenbroker and sub-broker, as also between sub-broker and client. Afterconsidering the SEBI Rules and Regulations framed in exercise of powersunder sections 29 and 30 of the Act, it was not possible to agree with sucha submission. The Regulations seem to lay down that there must be anagreement between broker and sub-broker, as also between sub-brokerand client, specifying the scope of their authority and responsibilities, butRegulations do not seem to compel incorporation of all the terms andconditions in the agreement, as per the model agreements in Annexure 4and more particularly arbitration clause. It was, therefore, not possible toaccept the argument that arbitration clause is a statutory term and conditionof a contract between the broker and sub-broker, or between sub-brokerand a client. The attempt to claim that section 8 of the Arbitration andConciliation Act, 1996 would operate as bar against entertainment of thesuit, therefore, must fail. [Para 17]

With above observations regarding provisions creating bar againstjurisdiction of the civil court, read with section 21 of the Act, laying downthat nothing in the Act shall exempt any person from any suit or otherproceedings which may, apart from the Act, be brought against him, it didnot appear to be a situation wherein exclusion of jurisdiction of civil courtcould be readily inferred. This was not a case where cognizance of suit forrecovery of dues, although arising out of sale purchase of securities, wasexpressly barred. The intent of the Legislature, if section 21 is to beexamined, speaks against total exclusion of jurisdiction of civil court.Recovery of the dues is a right pre-existing under common law and not aright created by the SEBI Act. It, therefore, was not a case wherein thestatute itself creates a right and also provides machinery for enforcementof the same. On the contrary, it was a case wherein a right was pre-existingunder common law and one more remedy was provided by arbitrationclause, if included in the agreement, without expressly excluding thejurisdiction of the civil court. Consequently, it was a case wherein both, thecommon law and the statutory remedies, were the concurrent remedies.Since the transactions were of a period prior to coming into force of theArbitration and Conciliation Act, 1996, the difference in the legal positionunder the Arbitration Act, 1940 and 1996 Act, also could not be ignored,because when the model agreements were prescribed, the 1996 Act was notin existence. [Para 17.2]




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Therefore, the submission of the defendants, that there was impliedagreement containing arbitration clause between sub-broker and client byvirtue of statutory terms and conditions, and that, therefore, jurisdiction ofthe civil court was taken away, could not be accepted. [Para 17.3]

The Trial Judge, at the conclusion of the impugned order, had rejected theplaint. On reference to Order VII, rule 11, of the Code of Civil Procedure,1908, the plaint is required to be rejected, if it does not disclose a cause ofaction or if relief claimed is undervalued and the plaintiff, on beingrequired to correct the valuation, fails to do so, or if the plaint is properlyvalued but insufficiently stamped and the plaintiff fails to remove deficiencieseven on being required by the Court to do so, or if the suit is barred by anylaw. The instant case certainly did not fall within the first three categories.Even if the trial court were to arrive at a conclusion that the civil court hadno jurisdiction, either territorial or of the subject-matter, it would have toreturn the plaint under rule 10 of Order VII. Even if the argument of thedefendant was upheld that there was implied agreement containingarbitration clause, the Court would have to return the plaint (if governedby section 8 of the 1996 Act). [Para 18]

The Trial Judge observed that the plaintiff was a sub-broker, not havingobtained mandatory registration certificate. Although Judge had notexpressly said so, if the Judge was of the view that the suit by the plaintiffwas not maintainable, the order should have been for dismissal of the suit.The possibility of rejection of plaint under Order VII, rule 11(d), of the Codeof Civil Procedure, because it was ‘barred by any law’, did not survive, if itwas the claim of the defendants that the SEBI Act, SCRA and Rules andRegulations thereunder, had provided an alternate remedy. The order ofrejection of the plaint, therefore, was patently erroneous. [Para 18.1]

However, arriving at a conclusion that the jurisdiction of the civil court wasnot excluded and more so, because both the parties were non-members ofthe stock exchange, the impugned order could not be sustained and, hence,the same was to be quashed and set aside. The trial court would proceedwith the suit on merits. [Para 18.2]

CASE REVIEW

Hyderabad Vanaspathi Ltd. v. A.P. State Electricity Board AIR 1998 SC 1715- Distinguished on law [Para 14.8]

Stock Exchange, Mumbai v. Vinay Bubna [1999] 20 SCL 175 (Bom.) -Distinguished on facts [Para 15.3].

CASES REFERRED TO

Trilochana K. Doshi v. Stock Exchange of India [2000] 24 SCL 1 (para 6.1),Prashant Commercial v. Rajratan Mohta [2006] 69 SCL 241 (Bom.) (Nag.)(para 7), St. Ulai High School v. Devendraprasad Jagannath Singh [2007]


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1 Mh. L.J. 597 (para 7), Dhulabhai v. State of MP AIR 1969 SC 78 (para 13),Raja Ram Kumar Bhargava v. Union of India AIR 1988 SC 752 (para 13),Rajasthan State Road Transport Corpn. v. Krishna Kant AIR 1955 SC 1715(para 13), Hyderabad Vanaspathi Ltd. v. A.P. State Electricity Board AIR1998 SC 1715 (para 14.3), Stock Exchange, Mumbai v. Vinay Bubna [1999]20 SCL 175 (Bom.) (para 15.3) and Hemendra V. Shah v. Stock Exchange[1995] 6 SCL 234 (Bom.) (para 15.5).

P.V. Mandlik for the Appellant. P.M. Shah for the Respondent.

JUDGMENT

N.V. Dabholkar, J. - Appellant original plaintiff, by present appeal, chal-lenges the judgment and order dated 23-12-2005 delivered by 4th AdhocAdditional District Judge, Jalgaon, in Special Civil Suit No. 212 of 1999. Bythe impugned judgment and order, learned Additional District Judge waspleased to reject the plaint and dispose of suit by arriving at a conclusionthat civil court had no jurisdiction to entertain the suit. Although suit isdisposed of by rejection of plaint, since the decree as defined by section2(2) of the Code of Civil Procedure, 1908, includes ‘rejection of plaint’,appeal under section 96 is preferred, challenging the said judgment andorder.

2. Special Civil Suit No. 212 of 1999 was filed in the Court of Civil Judge,Senior Division, Jalgaon, by present appellant for the purpose of recoveryof amount of Rs. 1,80,19,089.55 along with future interest at the rate of 22per cent per annum on the basis of averment to following effect :

2.1 Plaintiff is the sole proprietor of the proprietary concern Kat Stocksand her husband Anilkumar Kataria works as general manager of the saidproprietary concern. In fact, the suit, is filed through Shri Anilkumar,because he had dealings with defendants and he is fully conversant withthe facts of the suit claim. This is because, he looks after day-to-daytransactions of the firm, he takes majority decisions regarding businessand executes those. The plaintiff firm is engaged in the business of sub-brokership in the trade of shares stocks and securities.

2.2 Defendant Nos. 1 and 2 are real brothers and sons of defendant No. 3.One Abhaykumar of Madras (Chennai) is common relative of plaintiff anddefendants. Defendants were introduced to plaintiff by said Abhaykumarand the defendants claimed to be wizards in stock trading. The plaintiffwas impressed by the tall claims then made by defendant Nos. 1 and 2 andaccepted them as clients of Kat Stocks. Defendants started trading in stockbusiness through plaintiff concern.

2.3 Kat Stocks has an office at Jalgaon and also at Bombay and so manytimes, business talks, personal meetings regarding shares and stocksbusiness between plaintiff and defendants were held at Jalgaon office. As




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per the normal practice, all share business, and as requested by defendantNos. 1 and 2, majority of transactions, were of square-up nature, i.e., theywere bought and sold in the same settlement period and margin/differ-ence, as the case may be, would be credited or debited to the account ofdefendants. Defendant Nos. 1 and 2 always represented that they werewell informed persons and that they were the best persons to takedecisions as to which securities and shares they should deal and which ofthe positions of various companies to be kept or sold. The orders wereplaced by defendant Nos. 1 and 2 and received by Anilkumar on telephone.The plaintiff firm has maintained regular, current, mutual and runningaccounts in the name of defendant No. 1, wherein the transactionsexecuted on behalf of defendants were regularly entered on day-to-daybasis. The accounts, thus, reflect the amount due to and from thedefendants.

2.4 In or around January 1996, the accounts maintained by the plaintiff inrespect of defendant No. 1 showed huge debit of more than 70,00,000. Thiswas informed to defendant Nos. 1 and 2 and a demand was made forpayment by defendant Nos. 1 and 2 paragraphs 5 to 9 contain the detailsas to the efforts made by Shri Anilkumar to recover the amount and as tohow defendant Nos. 1 and 2, although initially admitted the liability;avoided the payment, by making assurances and promises of differentnature. In order to show bona fides, defendant No. 1 acknowledged thedues and also promised to pay interest at 22 per cent per annum on theoutstanding dues, by his letters dated 10-4-1996 and 28-10-1996.

2.5 Initially, the transactions were entered into the account of the plaintiffconcern, in the name of firm K. Ashokkumar Bafna. In January 1996,defendant Nos. 1 and 2 represented Mr. Anilkumar that transactions bythat firm name have proved to be unlucky and, hence, insisted to continuethe transactions in the firm name Ashok & Co. All the while defendantsrepresented that irrespective of the firm name, it was the firm businessand not the business of either defendant alone.

2.6 According to the plaintiff, on the date of filing of the suit, accounts ofthe plaintiff concern showed an amount of Rs. 1,54,63,856.20 as due fromK. Ashokkumar Bafna and further sum of Rs. 25,55,233.29 to be due fromAshok & Co.

2.7 It is the contention of the plaintiff that in spite of repeated attempts,demands through telephonic calls, visits, meetings and letters from timeto time, the defendants have failed and neglected to pay the amountsoverdue and, hence, the suit. The cause of action for the suit is said to havepartly arisen at Jalgaon, Mumbai and Harda and, hence, suit can be filedat either of the three places. Cause of action is said to have arisen on10-4-1996 and 28-10-1996 when the defendant firm acknowledged the


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amounts due to the plaintiff from it. The suit is, therefore, said to be withinlimitation.

3. In the lengthy written statement filed by defendant No. 1, paras 1 to 14(pp. 1 to 16), are utilised for denying verbatim all the averments in theplaint. Ultimately, it is contended that the suit and criminal case (referredin paragraph 12 of the plaint) filed by the plaintiff are false and without anycause. Defendant Nos. 2 and 3 have no concern with suit contract or claim.There is no joint family of three defendants. There was oral partition andfamily arrangement between them in the year 1988 and the propertiessought to be attached under the suit are of defendant No. 3 alone.Defendant Nos. 1 and 2 have no legal right, title or interest in respect ofthose properties. It is pleaded that suit as against defendant Nos. 2 and 3deserves to be dismissed.

3.1 In fact, in paragraph 7 of the written statement, defendant No. 1 hasdenied execution of any acknowledgement of any outstanding dues orpromise to pay interest at the rate of 22 per cent per annum on theoutstanding dues, vide his letter dated 10-4-1996 and 28-10-1998 (in fact,28-10-1996 as per the plaint). It is contended that these letters were notwritten by defendant No. 1 voluntarily and those were obtained by undueforce, coercion and deceit. In paragraph 18, it is pleaded that defendantNo. 1 and Jain Irrigation System Ltd. (‘JISL’) forced defendant No. 1 to givein writing dated 28-10-1998 (in fact, 28-10-1996). The same not beingvoluntary and not by free consent, is void and not binding on defendantNo. 1 and, hence, it is prayed that the suit deserves to be dismissed.

3.2 It is claimed that the suit filed on 28-10-1999 is barred by limitation.

3.3 It is pleaded that the plaintiff had no office at Jalgaon, Anilkumar neverresided at Jalgaon, none of the transactions took place at Jalgaon. Therewas no meeting at Jalgaon and no single telephonic conversation was toor from Jalgaon by either defendants. It is, thus, pleaded that no part of thecontract has taken place, or was performed at Jalgaon and, therefore, thecourt at Jalgaon has no jurisdiction to entertain, try and decide the suit.

3.4 It is contended that the ancestral business of the family is agriculture,defendant Nos. 2 and 3 have no concern with the business dealings insecurities stock and shares. The same is new and separate business ofdefendant No. 1 and, therefore, defendant Nos. 2 and 3 are not liable tosatisfy any loan pleaded in the suit.

3.5 It is pleaded that the plaintiff is not a registered sub-broker and is thus,incapacitated from entering into contract for purchase and sale of shares.The suit, therefore, is liable to be dismissed under section 12 of the Act[Securities and Exchange Board of India Act, 1992 (‘the SEBI Act’)].Square-up transactions are not permissible by law. Those are againstpublic policy and hence, such a contract cannot be enforced in law.




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3.6 It is also pleaded that Kat Stocks is unregistered partnership firm and,therefore, is not entitled to file a suit, in view of section 69 of IndianPartnership Act. Suit is said to be bad for non-joinder of necessary partybecause, broker Jain is not impleaded as party. Defendants not only haveprayed for dismissal of suit, but have also prayed for compensatory costsof Rs. 5,000 in favour of defendant Nos. 2 and 3.

4. All three defendants have filed applications titled as ‘Application undersection 20 read with section 151 of Code of Civil Procedure’, praying fordismissal of suit for want of jurisdiction. The applications filed by defen-dant Nos. 1, 2 and 3 are at Exhibits 35, 34 and 33 respectively, copies ofwhich are available at paperbook pages 31 to 37, 24 to 26 and 17 to 19,respectively. All three defendants have specifically referred to paragraph14 of the plaint, wherein it is claimed that part of cause of action arose atJalgaon, Mumbai and Harda and, therefore, the plaintiff has a right to filesuit at any of these three places.

4.1 Defendant No. 3 has contended that he resides at Harda (MadhyaPradesh) and has no business relations with defendant No. 1. Aftercompleting his education, defendant No. 1 has started his own financialactivities out of his own earnings and savings, in which defendant No. 3 hasno role to play. Plaintiff has, with ulterior motive and mala fide intentions,pleaded absolute falsehood that defendant No. 3 was the person takingultimate decisions. In fact, defendant No. 3 has no knowledge about stocksand security trade of defendant No. 1. Defendant No. 3 is added only witha view to exert pressure on him. In view of continued residence ofdefendant No. 3 at Harda and his having no connection whatsoever withthe affairs of defendant No. 1, the suit filed as against defendant No. 3 atJalgaon, is without territorial jurisdiction. No cause of action or partthereof, has accrued in favour of the plaintiff against defendants withinthe territorial limits of Court at Jalgaon.

4.2 Defendant No. 2 has contended that defendant No. 1 alone is proprietorof Shri Ashok Bafna and Ashok Kumar & Co. which has its own commer-cial/business activities carried on from Madras. In spite being youngerbrother of defendant No. 1, defendant No. 2 has no involvement withfinancial transactions of defendant No. 1 as alleged by the plaintiff.Defendant No. 2 has no contractual relationship with the plaintiff. Defen-dant No. 2 has his own independent activities at Harda (Madhya Pradesh).He has nothing to do with any of the alleged financial transactionsbetween plaintiff and defendant No. 1, and defendant No. 2 is impleadedwith ulterior motive and mala fide intentions.

4.3 Both defendant Nos. 2 and 3 have, thus, prayed for dismissal of suit asagainst them for want of territorial jurisdiction.

4.4 Defendant No. 1 in his application has pleaded, that he has nocontractual relationship with plaintiff who has styled herself as sole


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proprietor of Kat Stocks and she is not the sole proprietor of the firm, norShri Anilkumar is her constituted attorney. Defendant No. 1 has neverdealt with Anilkumar as authorised signatory of Kat Stocks.

4.5 According to defendant No. 1, Shri Bhavarilalji Jain, Chairman of JISL,has many other companies which are either independently incorporated,or held by JISL. One such company dealing in the trade of stocks andstores was Jain Securities, address of which is the same as that of KatStocks at Mumbai. All the documents pertaining to transactions withdefendant No. 1 filed by the plaintiff are from the office of Jain Securitiesat Bombay. None of the contract notes, or communications are signed inthe name of Anilkumar Kataria. Thus, none of the transactions in stockand trade took place at Jalgaon and, therefore, the suit filed in the Jalgaoncourt is without jurisdiction.

4.6 Shri Anilkumar Kataria is in the employment of JISL since many yearsand at present, he is the director of JISL. In the year 1995-96 and prior tothat, Anilkumar and his wife were residing either at Mumbai or Madras.Because Shri Bhavarilal Jain and his company Jain Securities could notfile any money suit against defendant No. 1, the plaintiff has fabricatedcontents of certain documents annexed to the plaint. Defendant No. 1 hadno contractual relationship, much less within territorial limits of Jalgaoncourt, with the plaintiff. While entering into all the transactions regardingsecurities and shares with Kat Stocks, defendant No. 1 was always givento understand by Shri Anilkumar that the company is a subsidiary of JISLand that defendant No. 1 is dealing with the said company. All security andshare contracts received by defendant No. 1 from Kat Stocks are receivedfrom Mumbai office and always signed by Anilkumar and not by AnilkumarKataria. All contractual transactions between defendant No. 1 and KatStocks regarding securities and shares were from Madras to Bombay andBombay to Madras. There is nothing on record, according to defendants;to indicate that any kind of activities of the plaintiff were carried on fromJalgaon.

4.7 Defendant No. 1 is residing at Madras and carrying on his financialactivities from Madras and so far as transactions with Kat Stocks areconcerned, those are with its office at Bombay.

4.8 According to defendant No. 1, plaintiff Kat Stocks posed itself as sub-broker. It is neither sub-broker nor an entity recognised under SEBI tocarry on any trades, securities and shares. If a person is not given statusof sub-broker, he cannot deal in any transactions of securities or sharesand, therefore, all transactions, allegedly entered into by Kat Stocks withdefendant No. 1, have no legal standing or clothing and, therefore, the suitis barred by law.

4.9 It is, therefore, prayed that the suit is bad for want of jurisdiction to thecourt at Jalgaon.




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5. Appellant-plaintiff has filed three separate replies to all these threeapplications of defendants. Generally, each and every averment in theapplications is specifically denied, by contending that those are untrue andfrivolous averments.

5.1 So far as reply to application by defendant No. 3 is concerned, it isreiterated that defendant Nos. 1 to 3 are carrying on their business inpartnership even at Harda in the name and style Pratapchand KevalchandBafna and in the income-tax returns submitted to the Income-tax Depart-ment, the firm is shown as HUF firm. The plaintiff claims that she hassufficient documentary evidence to establish that defendant No. 3 isactively involved in the business and was taking ultimate decisions.

5.2 In reply to the application filed by defendant No. 2, it is contended thatit was represented by defendant Nos. 1 and 2 that every transaction of thebusiness of stock trading was required to be reported to defendantNo. 3 for his approval and advice, as also final consent. It is, thus, deniedthat defendant No. 1 is the sole proprietor of ‘Shri Ashok Bafna’ or ‘Ashok& Co.’. Contention of defendant No. 2 that he has no involvement in thefinancial transactions of defendant No. 1, is denied as false to the knowl-edge of defendant No. 2. It is said that defendant Nos. 1 and 2 were stayingtogether at Madras and defendant No. 2 shifted to Harda only in the year1996. It is the claim of the plaintiff that she has sufficient documentaryevidence to establish active involvement of defendant No. 2 in the businessof securities and shares.

5.3 So far as reply to application (Exh. 35) of defendant No. 1 is concerned,it is pleaded that the documents signed by defendant Nos. 1 and 2, as alsocorrespondence exchanged between the plaintiff and defendants,clinchingly establishes contractual relationship between the plaintiff anddefendants. It is admitted that Jain Securities Ltd. and Kat Stocks sharedoffice at Mumbai, but it is added that there is no relation of whatsoevernature between the two companies. It is also denied that the documentsfiled by plaintiff are regarding transactions of defendant No. 1 with JainSecurities, Bombay. According to the plaintiff, the defendants have fullknowledge of following facts :

(i) Defendants are distant relatives of Anilkumar. (Defendant No. 1 isson-in-law of Anilkumar’s aunt).

(ii) Mr. Anilkumar and Anilkumar Kataria are one and the same person.

(iii) All defendants have visited Jalgaon in connection with the dealingswith Kat Stocks.

(iv) All defendants always dealt with Mr. Anilkumar.

(v) All the orders for buying and selling of stocks and securities used tobe on telephone only, communicated either from Madras or Hardaand at Mumbai, or Jalgaon, wherever Anilkumar used to be at aparticular point of time.


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5.4 It is denied that Anilkumar was in the employment of JISL or thatpresently he is a director. It is denied that plaintiff had filed suit on the basisof fabrication of contents of certain documents, because Jain Securitiescould not legally file any money suit. It is submitted that there is noquestion of plaintiff posing herself as sub-broker because Kat Stocks is asub-broker.

5.5 It is denied that in case a person is not given status of sub-broker, suchperson cannot deal in the transactions of securities or share trading or thatbecause the Kat Stocks is not a sub-broker recognised under SEBI Act, allthe transactions entered by Kat Stocks with defendants have no legalsanctity and, hence, court has no jurisdiction to entertain the suit. Defend-ants were aware that the plaintiff is not registered as sub-broker and yetthey have consciously dealt with the plaintiff. Prior to 1977, such registra-tion was not mandatory and thousands of unregistered brokers werefreely doing the business without any hindrance from SEBI which madethe registration compulsory from 1997. The clients or the brokers dealingwith unregistered sub-brokers do so at their risk and the SEBI can, at themost, penalise the broker for dealing with unregistered sub-brokers.Hence, it is not open for the defendants to say that the transactionsbetween them and the Kat Stocks were without legal sanctity. Accordingto the plaintiff, provisions cited by the defendants, viz. SO 627, section 28of the SEBI Act, Chapter III of the Ordinance, clause 14 of regulation, areof no consequence.

5.6 It is generally contended that the application for dismissal of the suiton the ground that the Court of Civil Judge, Senior Division, Jalgaon hadno jurisdiction, is mala fide and misconceived. It is also added that noprejudice would be caused to defendants, if the suit is tried by the Courtof Civil Judge, Senior Division. Defendants have raised several questionsof facts, mixed questions of facts and law and pure question of law, whichcan only be decided at the final hearing of the suit and, therefore, theapplications are said to be premature. In order to challenge the applica-tions, the plaintiff has relied upon contentions in the plaint, application forattachment before judgment and solemn affirmation in support of those.

6. From the impugned order, it appears that for considering the issue,‘whether this court has jurisdiction to entertain the suit ?’ deposition ofAnilkumar is recorded on behalf of the plaintiff at Ext. 112 and the witnesswas cross-examined on behalf of the defendants. Of course, defendantshave not led any oral evidence for decision on this preliminary issue.However, instead of considering the issue of jurisdiction (territorial),learned Judge considered the issue, ‘whether the suit is maintainable inthe court as per (in view of) the rules and regulations under the SEBI Act ?’.After considering the definitions of ‘Security’ and ‘Board’, learned Judgehas recorded that mainly objection is on the ground that, in view of section




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20A of the SEBI Act, no civil court shall have jurisdiction in respect of anymatter, which the Board is empowered by or under the Act, to pass anyorder and no injunction shall be granted by any court, or any otherauthority in respect of any action or to be taken in pursuance of any orderpassed by the Board under the Act, Thereafter, referring to section 11 ofthe SEBI Act, learned Judge has observed that the section conferssupervisory powers and control over the transactions by stock brokersand sub-brokers. Referring to section 12 of the SEBI Act, it is observed thatthe registration of stock broker, sub-broker is mandatory. Referring toevidence of Anilkumar, it is observed that he has been dealing with sharesand securities since 1987. The plaintiff is also dealing in the business assub-broker since 1992. Thus, Anilkumar and the plaintiff are aware ofrequirement of SEBI Act and Regulations thereunder, but still they are nothaving registration certificate. Although Anilkumar had volunteered dur-ing his oral evidence that he had applied for registration certification andpaid registration fees as required by Regulation, 1992, learned Judgeseems to have disbelieved him on that count, because no documentaryevidence is placed on record to support such a contention. This was alsobecause Anilkumar could not remember the date when he had so appliedand that he had not thereafter approached SEBI for the certificate. Bytaking into consideration admission that the suit is filed for price of theshares which were purchased and sold to defendants, learned Judge hasexpressed that the plaintiff is a sub-broker without registration certificatewhich is mandatory under the SEBI Act. The learned Judge, thus, appearsto have arrived at a conclusion that the suit by the plaintiff is notmaintainable in absence of registration certificate under the SEBI Act.According to the learned Judge, the case law relied upon by the learnedcounsel for the plaintiff was relating to territorial jurisdiction, but the casein hand was based upon the issue of jurisdiction on law point ?

6.1 Observing that the matter at hands is governed by the SEBI Act, aspecific enactment; brought into force for dealing with cases relating tosecurities, stock, shares, etc., civil court does not have jurisdiction to trythe suit and placing reliance on the observations of this High Court in thematter of Trilochana K. Doshi v. Stock Exchange of India [2000] 24 SCL 1,learned Judge was pleased to answer the issue in the negative and orderrejection of the plaint.

7. During the course of his arguments, senior counsel, Shri P.V. Mandlikpointed out that all the applications (Exts. 33, 34 and 35) by all the threedefendants are titled as one under section 20 read with section 151 of theCode of Civil Procedure, thereby indicating that the challenge was regard-ing territorial jurisdiction of the Court of Civil Judge, Senior Division,Jalgaon. Only in para 4(k) of Ext. 35 by defendant No. 1, some differentground is made out that, if a person is not conferred status of sub-brokerunder SEBI Act, the said person cannot deal in any transaction of


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securities, shares or trade and since the Kat Stocks is not the sub-brokerrecognised under SEBI Act, all the transactions entered into by Kat Stockswith defendant No. 1, had no legal standing or clothing and, therefore, itis a legal bar for entertaining the suit. The paragraph is concluded, bysaying that on this count also, the court has no jurisdiction. It wassubmitted that, the plaintiff has no registration with SEBI and, hence,provisions of the SEBI Act or the Securities Contracts (Regulation) Act,1956 (‘SCRA’), are not at all applicable. According to learned seniorcounsel, Shri Mandlik, entire order, findings and result are perverse.

7.1 Shri P.M. Shah, learned senior counsel, representing the cause ofrespondent Nos. 1 to 3-original defendants, submitted that the trade name“Kat Stocks” itself suggests that the plaintiff is a dealer in stock market.Exts. 33 and 34 filed by respondent Nos. 3 and 2 respectively, raise anobjection about territorial jurisdiction of Civil Court at Jalgaon, but byparagraph 4(k) of Ext. 35, defendant No. 1 has raised an objection to thejurisdiction of the court so far as ‘subject-matter’ is concerned. Objectionraised by defendant No. 1 is, thus, not confined to territorial jurisdictionof Civil Court at Jalgaon. He has placed reliance upon judgment of learnedSingle Judge at Nagpur Bench in the matter of Prashant Commercial v.Rajratan Mohta [2006] 69 SCL 241 (Bom.-Nag.) and more particularlyparagraphs 9 and 13 of the same, to support his submission that the civilcourt at Jalgaon has no ‘subject jurisdiction’ to adjudicate the dispute inquestion. In paragraph 13 of the reported judgment, it is observed :

“Thus, above case law demonstrates that, by 1956 Act and Regulation/bye-law of Bombay Stock Exchange, a special procedure and machineryhas been evolved for looking into the grievance of the person dealing withthe sale and purchase of securities.”

According to learned senior counsel Shri P.M. Shah, the averments in theplaint disclose the nature of business of the plaintiff, as also the nature ofthe transaction on which the suit claim is based. Therefore, according toShri Shah, the dispute is of such a nature that the SEBI will have to referit to arbitrator which will have to resolve the dispute. In spite of being anon-member, according to learned senior counsel Shri P.M. Shah, theplaintiff is governed by the SEBI Act. Referring to section 9(2)(k)/(n) of theSCRA, it was submitted by Shri P.M. Shah that recognised stock exchangeis empowered to make bye-laws for the purpose of regulation of theentering into, making, performance, recession and termination of con-tracts between member and his constituent and between a member anda person who is not a member and the consequences of default orinsolvency, etc. It is also empowered to make rules regarding method andthe procedure for settlement of the claims or dispute, including settlementby arbitration. Securities and Exchange Board of India (Stock Brokersand Sub-brokers) Regulations, 1992 (‘SEBI Regulations’), are the bye-lawsframed by the SEBI in exercise of the powers conferred by section 30 of




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the SEBI Act and as per the provisions of those Regulations, a disputebetween the sub-broker and a client is required to be referred to thearbitration through member-broker. In fact, reliance placed by learnedcounsel, Shri P.M. Shah, is on different provision than the one relied uponin the reported judgment of Nagpur Bench. The learned Judge in thereported judgment, has placed reliance upon the procedure for arbitra-tion as prescribed under article 248(a)/(b) under chapter ‘arbitration’.Reliance is also placed on paragraph 7 and the discussion therein of thejudgment of Full Bench of this High Court in the matter of St. Ulai HighSchool v. Devendraprasad Jagannath Singh [2007] 1 Mh. LJ 597, on theissue of “exclusion” of jurisdiction, although otherwise it is a judgment inthe matter under MEPS (Conditions of Service) Regulation Act, 1978. It issubmitted that SEBI Act and SCRA, being special laws, provisions of thoseActs shall prevail over the Code of Civil Procedure.

8. Learned senior counsel Shri Mandlik was more elaborate while replyingarguments advanced by respondents/defendants. It was contended that,the transactions in question have taken place in the year 1995. This isevident from the fact that respondents had acknowledged the liability, bycommunications dated 10-4-1996 and 28-10-1996, whereafter, there hasbeen attempt to settle by discussion, but no transaction. The bye-laws areframed in 1997 and, hence, those are not at all applicable to the presentcase. It was also submitted that the defendant is neither a member norregistered as sub-broker. The plaintiff is not a registered sub-broker and,therefore, provisions of the SEBI Act and SCRA, are not applicable.Referring to sub-section (2)(k) of section 9 of the SCRA, relied upon by thelearned senior counsel for the respondents/defendants, it was submittedthat the reference is to dispute between a member and non-member ormember and non-members. It has no reference to dispute between a non-member and another non-member. Otherwise also, bye-laws are framedand published in the year 1997 and, hence, those are not applicable to thetransactions in question. According to him, sections 22E, 22A and 22B ofthe SCRA, do not cover the subject-matter and, therefore, jurisdiction ofthe civil court is not barred.

8.1 Submitting that the transaction between the plaintiff and defendantsbeing purely private transactions, the plaintiff is not prohibited from suingthe defendants for recovery of the dues under the said transactions, forthe purpose; he has placed reliance upon section 21 of the SEBI Act andurged that the learned counsel for defendant has not referred to anyprovisions that empower either SEBI or any other authority under the Actto deal with the subject-matter and, therefore, the jurisdiction of the civilcourt cannot be said to be barred.

9. Coming back to the impugned order, after referring to several reportedjudgments, relied upon by the learned counsel for the plaintiff, in para-graph 13, learned Judge observed, thus, in paragraph 14 :


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“Having gone through the ratio laid down in the above cited rules, itseems that the observations are made on the territorial jurisdiction.However, the case in my hand, is based upon the issue of jurisdiction oflaw point.”

By the contents quoted hereinabove, learned Judge has given clearindication that she is not dealing with the issue of jurisdiction on the basisof territorial limits of the court.

9.1 In earlier paragraphs 9 to 11, learned Judge has clearly recorded afinding that the plaintiff is a sub-broker having no registration certificateas required by the SEBI Act or the Regulations. Negative finding isrecorded on the issue of jurisdiction with cryptic observations as under,in paragraph 15 :

“The case in my hand is certainly governed by the provisions of SEBI Actand the civil court has no jurisdiction to pass any order or to decide thecontroversy arisen between the parties. .... It is also observed earlier thatto deal with the cases of securities stock, etc., specific enactment likeSEBI Act, has come into force. As such, when there is a statutoryenactment, the civil court certainly does not have any jurisdiction to trythe suit.”

Before entering into examination of the provisions of the SEBI Act, SCRAand Regulations under either of the Acts, in order to find out whether thelegislation has provided alternate forum, thereby expressly taking awayjurisdiction of civil court, to deal with the dispute of the nature before usat present, we must make it clear that neither the trial court has dealt withnor we are dealing with the aspect that the suit is not maintainable,because the transaction between plaintiff, as unregistered sub-broker;although registration is compulsory, and defendants, is void, being againstpublic policy. This is because, the aspect is regarding maintainability of thesuit on merits and not regarding the competence of the court to deal withthe suit, either because no part of cause of action has arisen within itsterritorial limits, or because the subject-matter is such, for which juris-diction of the civil court is taken away.

9.2 We have also pointed out that learned trial Judge has not recorded afinding that civil court at Jalgaon has no territorial jurisdiction of dealingwith the issue. Learned senior counsel, while advancing submissions onbehalf of the defendants, has categorically claimed that defendant No. 1has challenged the competence of the court to deal with the matter, on thebasis ‘subject jurisdiction’. So far as territorial jurisdiction is concerned,the plaintiff has repeatedly claimed that part of the cause of action hasarisen at Jalgaon, because many a times orders were placed by thedefendants while Anilkumar was at Jalgaon and he had sent confirmationmessages also from Jalgaon. These averments are reiterated on behalf ofthe plaintiff, also in the affidavit filed as evidence for the purpose ofadjudication of issue of jurisdiction. Defendants have not obtained anadmission, although plaintiff was allowed to be cross-examined, to the




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effect that no cause of action arose within territorial limits of civil courtat Jalgaon. Although insisted for decision on the issue of jurisdiction aspreliminary issue, the defendants have not entered the box to counter thecontention of the plaintiff that, part of the cause of action arose within theterritorial limits of civil court at Jalgaon. Consequently, it must be said thatso far as challenge to the territorial jurisdiction of civil court is concerned,the same is required to be dismissed.

10. From the cross-examination of Anilkumar, two things are clear. Theplaintiff has been dealing in the business of shares and securities since1994 as a sub-broker, but without having necessary registration as a sub-broker either with the SEBI or any other recognised stock exchange.Although, it is claimed that she has recently applied for such registration,as at present, we do not have any document supporting such a claim. It isalso admitted position that the suit claim is towards price of the sharespurchased and sold by the defendants.

11. This brings us to consider the Scheme of the SEBI Act and whether thatAct specifically bars jurisdiction of the civil court. Reliance is placed uponsection 20A of the SEBI Act, which reads, thus :

“20A. Bar of jurisdiction.—No. order passed by the Board or theAdjudicating Officer under this Act shall be applicable except as providedin section 15T or section 20 and no civil court shall have jurisdiction inrespect of any matter which the Board or the Adjudicating Officer isempowered by or under this Act to pass any order and no injunction shallbe granted by any court or other authority in respect of any action takenor to be taken in pursuance of any order passed by the Board or theAdjudicating Officer by or under this Act.”

Since this is not a case wherein any order passed either by the Board orthe Adjudicating Officer is being challenged or injunction being soughtagainst any such order, we are not concerned with first and third part ofthe section. The relevant portion of the section, which creates a bar ofjurisdiction is underlined for the purpose of emphasis. The jurisdiction ofcivil court is barred in respect of the matters which the Board or theAdjudicating Officer is empowered by or under this Act to pass any order.Naturally it becomes necessary to refer to the provisions which enableBoard or Adjudicating Officer to pass any orders and the nature of thesubject upon which those authorities are empowered to pass orders. Onlysubject-matters of that nature shall stand excluded from the jurisdictionof civil court and for the purpose of a reference to provisions elsewherebecomes necessary.

11.1 So far as nature of subjects and the orders those can be passedthereon by the Board, the same can be seen in Chapter IV of the titled as‘Powers and functions of the Board’. From the text of section 11, it isevident that it is the duty of the Board to protect the interest of investorsin securities and to promote the development of and to regulate thesecurities market by measures as it thinks fit. Some of the measures those


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can be taken by the Board are enlisted in sub-section (2), which includesregistration and regulation of the working of the stock brokers and sub-brokers. The nature of the orders those can be passed finds place in sub-section (4) of section 11. By sub-section (3), the Board is empowered withall the powers of civil court while exercising the powers under clauses (i)and (ia) of sub-section (2) of section 11, such as discovery and productionof books of account, summoning and enforcing the attendance of wit-nesses, inspection of books, registers and documents, issuing commis-sions, etc., section 11B is another provision speaking about powers of theBoard to issue directions and the Board is empowered to issue appropriateorders in the interest of investors in the securities and the securitiesmarket, upon being satisfied that it is so necessary. Section 11C empowersthe Board to investigate when there are reasonable grounds for takingsuch a step. On going through entire chapter, there is nothing to indicatethat the Board is empowered to resolve a dispute between sub-broker andthe client regarding non-payment of dues. Section 15Y is another provi-sion which bars jurisdiction of the civil court. It reads :

“15Y. Civil court not to have jurisdiction.—No civil court shall havejurisdiction to entertain any suit or proceeding in respect of any matterwhich an Adjudicating Officer appointed under this Act or a SecuritiesAppellate Tribunal constituted under this Act is empowered by or underthis Act to determine and no injunction shall be granted by any court orother authority in respect of any action taken or to be taken in pursuanceof any power conferred by or under this Act.”

In order to find out which subject-matters are taken out of competence ofcivil court, it becomes necessary to find out the subject-matters aboutwhich the Adjudicating Officer and the Securities Appellate Tribunal areempowered to deal with.

11.2 Section 15-I refers to Adjudicating Officer and it is evident from thesaid provision that the Board is required to appoint an officer not belowthe rank of a division chief to be an Adjudicating Officer for holding anenquiry in the prescribed manner after giving any person concerned areasonable opportunity of being heard for the purpose of imposing anypenalty under sections 15A to 15G, 15H, 15HA and 15HB in fact. ChapterVI-A, which is titled as ‘Penalties and Adjudication’ is the chapter withinwhich section 15-I is placed. Section 15Y is placed in next Chapter VI-Bregarding establishment, jurisdiction, authority and procedure of Appel-late Tribunal. On reference to these provisions, it is evident that these arepenal provisions empowering the Adjudicating Officer to impose penaltyupon any person who commits a default as mentioned in those respectiveprovisions. And the defaults are, failure to furnish information/return,failure to enter into agreement with clients, failure to redress investors’grievances, certain defaults in mutual funds, failure to observe rules andregulations by an asset management company, defaults on the part ofstock brokers, etc. Suffice it to say that these are penal provisions for




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various defaults and Adjudicating Officer does not seem to have anyjurisdiction to deal with any civil disputes.

11.3 So far as Securities Appellate Tribunal is concerned, section 15Tindicates that a person aggrieved by an order of the Board passed aftercommencement of the Securities Laws (Second Amendment) Act, 1999,or by an order passed by an Adjudicating Officer, can prefer an appeal toSecurities Appellate Tribunal. It is needless to say that the SecuritiesAppellate Tribunal shall be dealing with the same subject-matters whichthe Board and the Adjudicating Officer are empowered to deal with. Areference may be made also to section 15K(2), which runs, thus :

“15K. Establishment of Securities Appellate Tribunals.—(1)** ** **

(2) The Central Government shall also specify in the notification referredto in sub-section (1) the matters and places in relation to which theSecurities Appellate Tribunal may exercise jurisdiction.”

No notification of the Central Government is relied upon by learnedcounsel for the respondents to demonstrate that the civil dispute regard-ing non-payment by the client to the sub-broker is covered as a subjectover which Securities Appellate Tribunal can exercise jurisdiction. Havinggone through all the provisions of the SEBI Act, pertaining to variousauthorities under the Act and their powers, we have not been able to findout a provision, that empowers either authority to deal with a disputeregarding non-payment by client to the sub-broker the amounts due. Onthe contrary as pointed out by Shri Mandlik, senior counsel for theplaintiff, section 20A regarding bar of jurisdiction of a civil court isfollowed by a saying clause as contained in section 21 of the SEBI Act andthe said provision reads, thus :

“21. Savings.—Nothing in this Act shall exempt any person from any suitor other proceedings which might, apart from this Act, be brought againsthim.”

11.4 We are of a considered view that at least section 21 indicates that civilcourt shall continue to have jurisdiction over the subject-matters forwhich the authorities under the Act are not empowered to decide.

12. Although no particular provision of the SCRA, was specifically re-ferred to, we desire to examine the scheme of the Act also in the samemanner we have examined the scheme under SEBI Act in paragraph 11above.

12.1 Section 22E is a provision excluding jurisdiction of the civil court andthe same reads as follows :

“22E. Civil court not to have jurisdiction.—No civil court shall havejurisdiction to entertain any suit or proceeding in respect of any matterwhich a Securities Appellate Tribunal is empowered by or under this Actto determine and no injunction shall be granted by any court or otherauthority in respect of any action taken or to be taken in pursuance of anypower conferred by or under this Act.”


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In fact, Securities Appellate Tribunal established under sub-section (1) ofsection 15K of the SEBI Act, is the Appellate Tribunal referred in this Act.We have already discussed regarding the matters which can be dealt withby the said Tribunal under the SEBI Act. So far as SCRA, is concerned, theprocedure and powers of the said Tribunal are laid down in section 22B.None of the sub-sections of section 22B deal with any of the matters thatcan be considered by the said Tribunal. Thus, in fact, there is no provisionspecifying the subject-matters under this Act, to be handled by the saidTribunal. However, on reference to sections 22 and 22A, it is evident thatwhen a recognised stock exchange acting in pursuance of any powersgiven to it by its bye-laws refuses to list the securities of any publiccompany or any company, the appeals are available respectively to theCentral Government and Securities Appellate Tribunal. By virtue ofsection 23-I, an officer appointed by SEBI for the purpose, can adjudge thepenalties to be imposed for defaults as prescribed by sections 23A to 23H.Section 23L empowers the Securities Appellate Tribunal to entertain theappeals against orders/decisions of recognised stock exchange, or Adju-dicating Officer or orders passed by SEBI under section 4B. Section 4B isregarding approval by the SEBI of the scheme for corporatisation anddemutualisation submitted by recognised stock exchanges. As alreadyreferred hereinabove, adjudicating officer deals with penal provisions ascontained in sections 23A to 23H.

12.2 Section 7A empowers the recognised stock exchange to make rulesrestricting voting rights, etc. Section 9 empowers them to make bye-laws,and reliance is placed by learned counsel for the respondents upon clauses(k) and (n) of sub-section (2) of section 9, which run, thus;

“(k) regulation of entering into, making, performance, recession andtermination of contracts including contracts between membersand between a member and his constituent and between a memberand a person who is not a member and the consequences of defaultor insolvency on the part of a seller or buyer or intermediary,consequences of a breach or omission by a seller or buyer and theresponsibility of members, who are not parties to such contracts;

(n) method and procedure for settlement of claims or disputes includingsettlement by arbitration.”

Having taken a survey of the orders those can be passed by the adjudicat-ing officers, SEBI under section 4B and also what are the powers of therecognised stock exchange, we are unable to find out any provision thatenables either of these three authorities to resolve the dispute regardingnon-payment between a client and unregistered sub-broker.

13. We feel justified in taking such an assessment of the scheme of boththe statutes, i.e., the SEBI Act and SCRA, in view of the observations of theFull Bench of this court in the matter of St. Ulai High School (supra). Infact, portion from paragraph 7 of the reported judgment, relied upon bylearned counsel for respondents, discusses the principles laid down by the




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Hon’ble Apex Court for considering the issue of exclusion of jurisdictionof civil court. In para 7.1, the Full Bench has, after discussing the principlesformulated by the Hon’ble Apex Court in the matter of Dhulabhai v. Stateof MP AIR 1969 SC 78, summed up the principles as follows :

“The exclusion of jurisdiction of the civil court is not readily inferred.Section 9 of the Code of Civil Procedure, 1908 provides that Court shallhave jurisdiction to bring all suits, ‘excepting suits of which the cognisanceis either expressly or impliedly barred.’ Where there is no expressexclusion, the intent of the Legislature must be examined with referenceto the rights created by the legislation, the remedies provided and thescheme of the Act. Where the statute gives finality to the orders of a SpecialTribunal the jurisdiction of the civil court is held to be excluded if thereis an adequate remedy to do what the civil court would normally do in thesuit.” [Emphasis supplied]

The SEBI Act is enacted to provide for the establishment of a Board toprotect the interest of the investors in securities and to promote thedevelopment of and to regulate the securities market. The SCRA is aimedat preventing undesirable transactions in securities, by regulation ofbusiness therein. Taking into consideration this nature of the agreementof the Act and after having examined the provisions which provideremedies through the authorities established under those statutes, wehave not been able to refer to any provision that will enable an unregis-tered sub-broker or the client to recover the amount due from other party,by obtaining an executable decree/order. In para 7.3, the Full Bench hasborrowed observations of the Supreme Court in the matter of Raja RamKumar Bhargava v. Union of India AIR 1988 SC 752, which read, thus :

“Generally speaking, the broad guiding considerations are that wherevera right, not pre-existing in common law, is created by a statute and thatstatute itself provided a machinery for the enforcement of the right, boththe right and the remedy having been created uno flatu and a finality isintended to the result of the statutory proceedings, then, even in theabsence of an exclusionary provision the civil courts’ jurisdiction isimpliedly barred. If, however, a right pre-existing in common law isrecognized by the statute and a new statutory remedy for its enforcementprovided, without expressly excluding the civil courts’ jurisdiction, thenboth the common law and the statutory remedies might becomeconcurrent remedies leaving open an element of election to the person ofinherence.”

The observations of the Supreme Court in the matter of Rajasthan StateRoad Transport Corporation v. Krishna Kant AIR 1955 SC 1715, assummarised in paragraph 32 of the judgment and referred to in para 7.4by the Full Bench of our High Court are on the same lines, as observationsin Raja Ram Kumar’s case (supra).

14. Although reliance is placed by learned counsel for the respondents onobservations in the judgment of Nagpur Bench (SJ) in the matter ofPrashant Commercial (supra), the provision with which the court was


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dealing with in that matter, was different than the provision on whichreliance is being placed by learned counsel for respondents in the presentmatter.

14.1 For the present matter, learned counsel has referred us to StockBrokers Regulations and the code of conduct for the sub-brokers pre-scribed by the said Regulations and contents of model agreement be-tween the broker and sub-broker, as also sub-broker-client agreement.Before taking us to the Stock Broker Regulations, our attention is drawnto the SEBI (Stock Brokers and Sub-brokers) Rules, 1992, and moreparticularly rule 3. These are the rules framed by the Central Governmentin exercise of powers conferred by section 29 of the SEBI Act which havecome into force, on 20-8-1992, the date of their publication in the OfficialGazette. Rule 3 reads:

“3. Not to act as stock broker or sub-broker without registration.—No stockbroker or sub-broker shall buy, sell, deal in securities unless he holds acertificate granted by the Board under the Regulations.”

At the cost of repetition, we may say that, we are not dealing with the issue,“Whether the suit is not maintainable on merits, because the plaintiff isunregistered sub-broker?” and learned senior counsel for the respondentshas not challenged the finding of the trial court that the plaintiff is not aregistered sub-broker.

14.2 Stock Brokers Regulations are framed by SEBI in exercise of powersconferred by section 30 of the SEBI Act. Chapter III provides the proce-dure for registration of sub-brokers. General obligations and responsibili-ties (Chapter IV), procedure for inspection by the Board (Chapter V) andthe procedure for action in case of default (Chapter VI) as applicable to thebrokers, are made applicable to the sub-brokers by regulation 16.

14.3 Learned counsel for the defendants has referred to clause 17 fromModel agreement between brokers and sub-brokers and more particu-larly later half of the same which relates to dispute between sub-brokerand client. A clause identical to this later half is incorporated within clause6 of sub-broker-client agreement. Clause 17 from model agreementbetween brokers and sub-brokers reads, thus :

“If any dispute arises between a member-broker and the sub-broker, thesame shall as far as possible be settled with the help of officials of the saidexchange and if no such settlement is possible, parties hereby agree torefer such dispute to arbitration in accordance with rules, bye-laws andregulations of the said stock exchange. The member broker and the sub-broker hereby agree that they shall co-operate with the exchangeofficials and provide all relevant documents in their possession so as toexpedite the settlement through arbitration process. If any dispute arisesbetween sub-broker and client, the same shall be brought to the noticeof main broker within six months from the date of dispute and the sameshall as far as possible be settled with the help of broker, failing which itshall be brought to the notice of exchange official for resolution. If the



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dispute persists, the same shall then be referred to the arbitration inaccordance with rules, bye-laws and regulations of the said stock exchange.The broker shall continue to be responsible for replacing bad deliveriesin accordance with applicable “good and bad delivery norms” even aftertermination of the agreement.

Relying upon these contents of model agreement, it was contended bysenior counsel Shri P.M. Shah that reference to arbitration is part ofterms and conditions which are statutory in the character and, therefore,those are binding upon the plaintiff, irrespective of the fact whether thereis/is not a written agreement executed between plaintiff and thedefendant. For supporting the proposition, learned counsel has placedreliance upon observations of the Hon’ble Supreme Court in the matterof Hyderabad Vanaspathi Ltd. v. A.P. State Electricity Board AIR 1998 SC1715, and more particularly the contents in paragraph 20 of the judgment,which is captioned as ‘nature of agreement, statutory or contractual’.”

14.4 In the reported case, the appellant, a manufacturer of vanaspathi, hadentered into two agreements with Andhra Pradesh State ElectricityBoard, for supply of high tension power. The officers of the Board, afterinspection of the factory, noticed pilferage of energy. The power supplywas, therefore, immediately disconnected and the provisional assessmentof the loss was made at Rs. 61,28,535. A prosecution was launched undersection 379 of the Indian Penal Code read with section 39 of IndianElectricity Act, 1910. Upon considering objections filed by the company,which denied the allegations, final assessment was made, fixing the loss atRs. 55,72,511.81. The order was challenged by the company in appeal, butin vain. The appellant-company, therefore, filed a suit in the Court ofAdditional Chief Judge, City Civil Court (Temp.), Hyderabad, for a decla-ration that it was not liable to pay any amount as penal damages andprayed for a direction for refund of amount of Rs. 22.50 lakhs.

14.5 Several issues, including challenge to jurisdiction of civil court, wereraised. The trial court held that it had jurisdiction to try the suit, butnegatived all the contentions of the plaintiff-company and dismissed thesuit. On appeal, Division Bench of the Andhra Pradesh High Court rejectedthe pleas of the appellant and dismissed the appeal. The High Court heldthat the terms and conditions of supply, on the basis of which theagreements were entered into between the appellant and the Board, didnot, in any way, contravene provisions of either Electricity Act, or Elec-tricity Supply Act and that ample opportunity was given to the appellant,before final order of the assessment was made and the enquiry was notvitiated. Aggrieved by the decision, the appellant-company had approachedthe Supreme Court with special leave.

14.6 The questions decided by the High Court in the aforesaid proceedingswere again raised in writ petitions under article 226 by some industrialundertakings, which had also entered into agreements with the Board forsupply of electricity, when the Board had initiated proceedings againstthose industrial undertakings on the ground of pilferage of energy. In one

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of the writ petitions, appeal was filed against the interlocutory order,refusing interim relief to the petitioner therein. While admitting thatappeal, the Division Bench referred the matter to a Full Bench for disposal,as the Division Bench opined that, the view taken by the Division Bench inthe civil appeal referred earlier, was likely to be in conflict with the‘possible view that the contractual obligation upon the consumer ofelectricity that in case of a dispute as to the consumption, the adjudicationshall be by the officers of the Board, shall be deviative of article 14 of theConstitution of India’. The Full Bench of three judges opined that, thecreation of adjudicatory process by contractual obligation in conditionNo. 39 of the ‘Terms and Conditions of Supply’ of electricity was whollyvitiated and that though there is no bar against the Board to recovercompensation for the loss caused to it, even when a consumer is pros-ecuted for the same offence, under the Act, the enquiry into and estimateof the loss should be made by an independent and properly constitutedbody. Ultimately, the Full Bench concluded that condition 39 of theconditions framed by the Board, to the extent it prescribes the procedurefor adjudication of the dispute relating to pilferage or malpractice ofenergy and for final assessment of additional charges, is ultra vires ofsections 24, 26(6) and clause IV(3) of Schedule of the Act of 1910 andsection 49 of Act of 1948, and is wholly vitiated as being arbitrary andviolative of article 14 of the Constitution and was accordingly struck down.

14.7 Observations in para 20 of the judgment of the hon’ble SupremeCourt in Hyderabad Vanaspathi’s case (supra) read, thus :

“We have already seen that section 49 of the Supply Act empowers theBoard to prescribe such terms and conditions as it thinks fit for supplyingelectricity to any person other than a licensee. The section empowers theBoard also to frame uniform tariffs for such supply. Under section 79(j)the Board could have made regulation therefor but admittedly noregulation has so far been made by the Board. The terms and conditionsof supply were notified in BPMs. No. 690, dated 17-9-1975 in exercise ofthe powers conferred by section 49 of the Supply Act. They came intoeffect from 20-10-1975. They were made applicable to all consumersavailing supply of electricity from the Board. The section in the Act doesnot require the Board to enter into a contract with individual consumer.Even in the absence of an individual contract, the terms and conditionsof supply notified by the Board will be applicable to the consumer and hewill be bound by them. Probably, in order to avoid any possible plea bythe consumer that he had no knowledge of the terms and conditions ofsupply, agreements in writing are entered into with each consumer. Thatwill not make the term purely contractual. The Board in performance ofa statutory duty supplied energy on certain specific terms and conditionsframed in exercise of statutory power. Undoubtedly the terms andconditions are statutory in character and they cannot be said to be purelycontractual.”

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powers, the terms and conditions were held to be statutory in characterand not contractual.

14.8 There is a fine distinction in the legal position as in the reported matterand the case on hands. In the reported matter, section of the Act did notrequire the Board to enter into a contract with individual consumer.Consequently, the terms and conditions framed in exercise of powersunder section 49 for supply of energy to the consumer, are held to bebinding on the consumer, irrespective of whether a written contract isentered into by the Board and the consumer, or not. The conditionsframed in exercise of statutory powers, were held to be statutory.

14.9 In the matter at hands. Rules and Regulations made in exercise ofpowers conferred by sections 29 and 30 respectively of the SEBI Act, arerelied upon for demonstrating that a sub-broker requires a registrationand also for demonstrating that there is required to be an agreementbetween a broker and sub-broker [regulation 17(1)(m)] and a sub-brokerand client [regulation 15(1)(b) and (c) read with model agreement]. In fact,we have already observed that the model agreements between broker andsub-broker, as also sub-broker and client, contain a clause that disputebetween a sub-broker and a client, if cannot be resolved by the broker andthereafter by the Board, is required to be referred to arbitrator inaccordance with the rules. Although regulations 17(1)(m) and 15(1)(b) and(c) compel the broker and sub-broker to enter into agreement, thoseregulations do not prescribe that the agreement must be in absoluteconformity with the model agreement and, therefore, terms and condi-tions demonstrated in the model agreement possibly cannot be termed asstatutory in nature. In the reported matter, the Electricity Board was notrequired by the section to enter into a written agreement with theconsumer, although it had so entered.

14.10 In the matter at hands, the sub-broker is required by regulation toenter into a written agreement with the client and no such agreement isrelied upon by the defendants/clients while resisting suit on the point ofjurisdiction of the civil court, by relying upon the provision of requirementof reference to arbitration. The moot question that is required to beconsidered is, when the regulation, having the statutory force, requiredthe sub-broker to enter into an agreement but not necessarily containingarbitration clause, with the client, whether the existence of arbitrationclause can be presumed as bar to entertainment of civil suit when, in fact,the sub-broker has not entered into an agreement with the client. And inthe matter at hands, it is an established position that the plaintiff is not aregistered sub-broker at all.

14.11 Some reliance was placed on section 9(2)(k) of the SCRA, whichrefers to the subject on which the recognised stock exchange with theapproval of SEBI can make bye-laws. We have already reproduced thesame in para 11 ante and the opening part reads, thus :

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“9. Power of recognized stock exchanges to make bye-laws.-...

(k) the regulation of the entering into, making, performance, recissionand termination of contracts, including contracts between membersor between a member and his constituent or between a memberand a person who is not a member and the consequences ofdefault...”

The regulation contemplated, is about the contracts between the memberand member, member and his constituent and between a member and aperson who is not a member. The regulation contemplated does notgovern a contract or transaction between two persons, both of whom notbeing members.

14.12. In the matter at hands, the defendants, as client, are not membersof recognised stock exchange, or SEBI. The plaintiff, as a sub-broker, bytaking into consideration definition of “sub-broker” in rule 2(f) of 1992Rules, is bound to be not a member of stock exchange, and the plaintiff isadmittedly not a registered sub-broker. The dispute before us is, therefore,a dispute between the two persons, who are not members of a registeredstock exchange and the question to be considered, therefore, will be,“whether the rules or regulations of recognised stock exchange or SEBIwill be capable of governing, controlling and regulating the transactionsbetween the two persons, who are not its members ?”

15. Reliance is placed upon the judgment of learned Single Judge of thisHigh Court in the matter of Prashant Commercial (supra), wherein inparagraph 9, the learned Single Judge observed :

“It is to be noted that even dispute between two non-members isregulated under it and full effect needs to be given to these fictions.”

The learned Judge was dealing with bye-law No. 248(a) of Bombay StockExchange Regulations/Bye-laws, the text of which is reproduced inparagraph 8 of the judgment. It is somewhat worded as section 9(2)(k) ofthe SCRA. For the sake of convenience, we reproduce opening part of thesaid bye-law.

“All claims (whether admitted or not) difference and disputes between amember and a non-member, or non-members. (The term “non-member”and “non-members” shall include a remisier, authorised clerk, a sub-broker who is registered with SEBI as affiliated with that member oremployee or any other person with whom the member shares brokerage)arising out of or in relation to dealings transactions and contracts madesubject to the Rules, Bye-laws and Regulations of the Exchange or withreference to anything incidental thereto....”

Since the observations in paragraph 9 are relied upon for the purpose ofpropounding a submission that even disputes between two non-membersare regulated by the regulations/bye-laws of SEBI/recognised stockexchange, we have quoted only opening part of regulation No. 248(a) ofBombay Stock Exchange, relied upon before the learned Single Judge. We



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are afraid, we are unable to read the regulation in the same manner as readby the learned Single Judge. It speaks about claims, differences anddisputes between a member on one side and a non-member or more thanone non-members on the other side. It does not seem to be referring adispute between member and member or a non-member and non-member. If a dispute between non-member and non-member was desiredto be controlled by regulation 248(a), the words ‘between a member anda non-member or non-members’ would have been required to be ‘betweena member and a non-member and ‘between a non-member and non-members’. With the bye-law as it is worded, we are unable to agree withthe learned Single Judge that it contemplates dispute between two non-members to be regulated under it. The term ‘non-member’ is not defined,but illustrated by the words in the bracket and that, by no stretch ofimagination, expands the scope of the bye-law, regarding parties to thedispute. It refers to dispute between a member on one side and single ormore non-members on the other. It does not include even a disputebetween a member and another member, much less a dispute betweentwo non-members. With due respect, we are inclined to disagree with thelearned Single Judge, so far as interpretation of bye-law 248(a) as done inparagraph 9 of his judgment relied upon by learned counsel for respon-dents, is concerned. The language of bye-law 248(a) is plain and unam-biguous and scope of the provision regarding nature of parties, disputesbetween whom are to be referred to arbitration could not have beenexpanded by illustrating definition of non-member as quoted in thebracket and to which the learned Single Judge has referred as “full effectneeds to be given to these fictions”. There is nothing in regulation 248(a)which will attract a dispute between two non-members.

15.1 We may state here that while deciding the issue regarding jurisdic-tion of civil court, learned Single Judge has neither referred to relevantprovisions which create a bar against the jurisdiction of civil court, whichwe have discussed at length in the earlier part of this judgment and he hasalso not referred to section 21 of the SEBI Act which dilutes bar ofjurisdiction created by section 20A [both provisions are reproduced inearlier part (para 10) of our judgment].

15.2 The learned Single Judge has observed in paragraph 13 that theabove case law demonstrates that by SCRA and Regulations/Bye-law ofBombay Stock Exchange, a special procedure and machinery has beenevolved for looking into the grievance of person dealing with the sale andpurchase of securities. It appears that the two cases were referred beforethe learned Single Judge, as can be seen from paragraph 6 of his judgment.

15.3 In the matter of Stock Exchange, Mumbai v. Vinay Bubna [1999] 20SCL 175 (Bom.), there was a reference to arbitration under bye-law 248,by mutual consent and reference was to two arbitrators, one named byeach party. Respondent No. 1 was the original petitioner in the arbitrationpetition. Differences had arisen between him and respondent No. 2, who

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was a broker with the exchange and, hence, a reference was made toarbitrators. The issue involved was, as to which provision will prevail bye-law 249(a) which was a statutory bye-law having force of ‘enactment’within the meaning of section 2(4) of the Arbitration and Conciliation Act,1996 (‘the 1996 Act’), and provided for reference to even number ofarbitrators, this being inconsistent with the provision of section 10 of the1996 Act, which prescribes that number of arbitrators should not be even.It was held by Division Bench that requirement of section 10 of numberof arbitrators to be uneven is not applicable.

15.4 The issue of exclusion of jurisdiction of civil court was not underconsideration and reference to the arbitration was regarding a disputebetween parties out of which at least one was a member of the stockexchange, respondent No. 2 being a broker of the exchange. Definition of“stock-broker” as contained in rule 2(e) makes it clear that a stock brokermeans a member of a stock exchange. Thus, this was dispute betweenparties out of which at least one was a member, thereby justifying areference to arbitrators.

15.5 Second case relied upon before the learned Single Judge wasHemendra V. Shah v. Stock Exchange [1995] 6 SCL 234 (Bom.). This wasa petition filed for a declaration that there is no valid, subsisting andbinding agreement between the petitioner and the 6th respondent. Thepetitioner was a clerk of 6th respondent and the 6th respondent was amember of Bombay Stock Exchange. On petitioner’s application formembership, 6th respondent gave his no objection and also stood asguarantor and, hence, the petitioner was enrolled as a member. The 6threspondent filed before Bombay Stock Exchange, a claim in the sum ofRs. 2.80 crores against the petitioner in respect of transactions in groupsof shares. Arbitration under the rules, bye-laws and regulations of BombayStock Exchange, was invoked. The argument advanced was that anarbitration under the rules, bye-laws and regulations of the Bombay StockExchange, can only take place, provided there are contract notes betweenthe parties. Challenge was dismissed by learned Single Judge of this HighCourt, observing :

“. . . . Bye-law 226(a) provides that all contracts made by a member for orwith a non-member, for the purchase or sale of securities in whichdealings are permitted on the exchange, shall in all cases be deemed tobe made subject to the Rules, Bye-laws, Regulations and Usage of theExchange.” [para 18]

As can be seen from paragraph 17, during the period of relevant transac-tions, the petitioner was not a member and, therefore, this was a disputebetween non-member petitioner and a member-respondent No. 6. In thematter before us, no such bye-law, as bye-law 226(a) in the reportedmatter, making all contracts subject to rules, bye-laws, regulations andusages of the exchange, is referred. But, the requirement of making areference to an arbitrator is demonstrated by longer route that, bye-law



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requires an agreement between a broker and sub-broker, as also anagreement between sub-broker and client and that model agreementsinclude within those, an arbitration clause. The requirement of regulationis execution of agreement between broker and sub-broker, as also be-tween sub-broker and client. Even regulation 17(1)(m) and 15(1)(b)(c)pertaining to agreements between stock broker and his sub-broker andsub-broker-client do not seem to lay down that the parties must stick to allthe terms and conditions as indicated in the model agreement. We havealso not been able to locate regulation that will compel the sub-broker tostick to all the terms and conditions as contained in the model sub-broker-client agreement (both model agreements are in Annexure 4).

15.6 Regulations 15(1)(c) and 17(1)(m), both provisions referring toagreement between the stock broker and sub-broker, lay down that thereshould be agreement “specifying scope of authority and responsibilities”of the stock broker and sub-broker, but do not make it obligatory that suchan agreement must be in conformity with the model agreement providedin Annexure 4. So far as sub-broker is concerned, the code of conduct forsub-brokers, in regulation 15, does not contain any such compulsion,requiring the sub-broker to stick to model sub-broker-client agreement.Therefore, there is room to infer that the stock broker-sub-broker agree-ment, as also sub-broker-client agreement, can be different than themodel agreement given in Annexure 4.

16. We have taken a note that the plaintiff although acted as a sub-broker,was not a registered sub-broker. Even as a sub-broker, the plaintiff will notget status of being a member of SEBI/stock exchange and, thus thedispute before us is a dispute between two persons, both of whom are non-members, although the dispute relates to price of shares purchased andsold by the plaintiff on behalf of the defendants. This factual aspect isfound by us to be of crucial importance, because all the provisions reliedupon by learned senior counsel Shri P.M. Shah for respondents, are theprovisions pertaining to agreements and contracts between parties, out ofwhich at least one is a member, i.e., dispute between a member andmember, member and non-member’s. No provision touching the disputebetween two non-members was brought to our notice.

16.1 We have considered in para 10 above, all the provisions creating a barof jurisdiction against entertainment of an issue by a civil court, i.e., section20A and section 15Y of the SEBI Act, and section 22E of the SCRA, in thelight of provisions relating to powers of the authorities under the respec-tive Acts, i.e., Adjudicating Officer, Securities Appellate Tribunal and theBoard, and found that none of the provisions enable either of theseauthorities to resolve a dispute regarding non-payment between a clientand sub-broker (much less unregistered sub-broker).

17. We have considered at length the arguments advanced by learnedsenior counsel for the respondents that the dispute is required to bereferred to an arbitration. Such an argument was based on the submission

2008] 505

A

B

C

D

E

F

G

that arbitration clause is a statutory term and condition of the contractbetween broker and sub-broker, as also sub-broker and client. Afterconsidering SEBI Rules and Regulations framed in exercise of powersunder sections 29 and 30 of the SEBI Act, we have found ourselves to beunable to agree with such a submission. The regulations seem to lay downthat there must be an agreement between broker and sub-broker, as alsosub-broker and client, specifying the scope of their authority and respon-sibilities, but regulations do not seem to compel incorporation of all theterms and conditions in the agreement, as per the model agreements inAnnexure 4, and more particularly arbitration clause. It is, therefore, notpossible to accept the argument that, arbitration clause is a statutory termand condition of a contract between the broker and sub-broker, or sub-broker and a client. The attempt to claim that section 8 of the 1996 Act,would operate as bar against entertainment of the suit, therefore, mustfail.

17.1 If at all, for the sakes of arguments, arbitration clause is presumed tobe a statutory condition, all the transactions between the parties are priorto 10-4-1996, the date of first acknowledgement of dues by defendantNo. 1 and the 1996 Act has come into force with effect from 22-8-1996 and,therefore, whether the 1996 Act and more particularly section 8 thereofwould come into play, is also a doubtful question.

17.2 With above observations regarding provisions creating bar againstjurisdiction of the civil court read with section 21 of the SEBI Act, layingdown that nothing in this Act shall exempt any person from any suit orother proceedings which might, apart from this Act, be brought againsthim, it does not appear to be a situation wherein exclusion of jurisdictionof civil court can be readily inferred. This is not a case, where cognisanceof suit for recovery of dues, although arising out of sale-purchase ofsecurities, is expressly barred. The intent of the Legislature, if to beexamined, section 21 of the SEBI Act, speaks against total exclusion ofjurisdiction of civil court. Recovery of the dues is a right pre-existing undercommon law and not a right created by the SEBI Act. This, therefore, is nota case wherein the statute itself creates a right and also provides machin-ery for enforcement of the same. On the contrary, it is a case wherein aright is pre-existing under common law and one more remedy is providedby arbitration clause, if included in the agreement, without expresslyexcluding the jurisdiction of the civil court. Consequently, this is a casewherein both, the common law and the statutory remedies, are theconcurrent remedies. Since the transactions are of a period prior tocoming into force of the 1996 Act, the difference in the legal position asunder Arbitration Act, 1940 and 1996 Act, also cannot be ignored, becausewhen the model agreements were prescribed, 1996 Act was not in exist-ence.

17.3 We are, therefore, unable to accede to the submission of learnedcounsel for the respondents that there is implied agreement containing



A

B

C

D

E

F

G

arbitration clause between sub-broker and client by virtue of statutoryterms and conditions and that, therefore, jurisdiction of the civil court istaken away.

18. The learned trial Judge, at the conclusion of the impugned order, hasrejected the plaint. On reference to order VII, rule 11, of the Code of CivilProcedure, 1908, the plaint is required to be rejected, if it does not disclosea cause of action or if relief claimed is undervalued and the plaintiff, onbeing required to correct the valuation, fails to do so, or if the plaint isproperly valued but insufficiently stamped and the plaintiff fails toremove deficiencies, even on being required by the court to do so, or if thesuit is barred by any law. The case certainly does not fall within first threecategories. Even if the trial court were to arrive at a conclusion that thecivil court has no jurisdiction, either territorial or of the subject-matter, itwould have been required to return the plaint as under rule 10 of order 7.Even if we were to uphold the argument of advocate Shri P.M. Shah thatthere is implied agreement containing arbitration clause, we would havebeen required to return the plaint (if governed by section 8 of the 1996 Act).

18.1 In paragraph 11 of her judgment, the learned trial Judge observedthat the plaintiff is a sub-broker, not having obtained mandatory registra-tion certificate. Although learned Judge has not expressly said so, if theJudge was of the view that, hence, the suit by plaintiff is not maintainable,the order should have been for dismissal of the suit. The possibility ofrejection of plaint under order 7, rule 11(d) of the Code of Civil Procedure,because it is “barred by any law” does not survive, if it is the claim of thedefendants that SEBI Act, SCRA and Rules and Regulations thereunder,have provided an alternate remedy. The order of rejection of plaint,therefore, is patently erroneous.

18.2 However, arriving at a conclusion that the jurisdiction of the CivilCourt is not excluded and more so, because both the parties before us arenon-members of the stock exchange, the impugned order cannot besustained and, hence, the same is quashed and set aside. The Trial Courtshall proceed with the suit, on merits. Once again, we clarify that we havenot dealt with issue of non-maintainability of the suit, because the plaintiffis not a registered sub-broker. We have also not dealt with issue, whetherthe transactions between the parties are void, against public policy and,therefore, right to recover dues thereunder is not enforceable in the courtof law.

■■

732008]

READERS’ VIEWSGO CHASE OVERSEAS ENTITIES, INDIAN

VENTURE CAPITAL FUNDS

Vivek Sadhale* and Vikas Agarwal**

Indian Venture Capital Industry is fast catching up with its overseascounterparts. Large investments are being made by the SEBI registeredventure capital funds (VCFs) in start up/unlisted Indian companies. Manyof these investments are in the maturity phases with the companies hittingthe markets with their initial public offering.

Till recently, the SEBI registered VCFs were able to invest only in thedomestic Indian companies with the RBI restriction on their investmentin the foreign companies.

In order to give more teeth to the domestic VCFs, the Reserve Bank ofIndia has granted permission to Indian (VCFs) which are registered withthe SEBI to invest in equity or equity-linked instruments of foreignventure capital undertakings with a ceiling of USD 500 million.

The SEBI had already made an enabling amendment to the SEBI (VentureCapital Funds) (Amendment) Regulations, 2006 on January 25, 2006allowing the VCFs to invest in foreign companies as defined under theCompanies Act, 1956, subject to the stipulation by the RBI.

The SEBI has been empowered to make allocations of limits to individualVCFs and can impose such terms and conditions as it may deem necessarywhile granting approval to domestic VCFs.

With the April 30, 2007 circular issued by the RBI, domestic VCFsregistered with SEBI, desirous of making investments in off-shore VCFscan approach SEBI for prior approval for making investment in foreigncompanies and need not take any separate permission from the RBI.

With the increase in cross border mergers and acquisitions, this amend-ment is a welcome for both Indian companies as well as overseas compa-nies.

The corporates now have flexibility to leverage their existing relationshipthat they may have with the domestic VCFs to make investment oracquisition along with the domestic VCFs, both in domestic as well asinternational market.

*The author is a Company Secretary and Head — Legal, Persistent Systems Ltd., Pune.**The author is an Assistant Manager — Secretarial, Persistent Systems Ltd., Pune.

READERS’ VIEWS



Earlier, the Indian corporates were forced to partner with an overseasVCF. But, no more. Corporates can now jointly structure overseas trans-actions with domestic VCFs.

India is observing a lot of financial market experts who have gainedvaluable experience in the overseas market returning to India. They aretoday in a position to leverage the local as well as overseas knowledge tostructure a transaction and will also be in a position to understand themarkets well. The amendment and granting of permission by RBI willboost the opportunities to the domestic VCFs.

The amendment is a welcome step and is in the right direction. This couldnot have come at any better time with the economy booming and moreoverseas opportunities being explored by the corporates. Only the timewill tell whether the limit of US$ 500 million is adequate or not.

7-S


752008]

INTRODUCTION

1. In recent decades, several countries haveexperienced severe banking and financialproblems that have largely crippled theireconomies, necessitating a complete restruc-turing of the banking sectors. According to astudy conducted in 1999, 112 episodes ofsystemic banking crisis occurred in 93 coun-tries since the late 1970s.1-2 Often identifiableby a high level of non-performing loans, thesebanking problems have contributed to majoreconomic catastrophes, a prime example ofwhich is the East Asian financial crisis of1997. In such situations, while extensive fi-nancial restructuring is needed for the long-term health of the banking sector, there is anequally pressing need to take care of thebanks, which are often in a highly distressedstate or even insolvent - and their non-performing assets, so that they can resumetheir role in facilitating the steady growth ofthe economy.3 It is in this context that theconcept of asset management companiesbecomes extremely relevant.

NPAs AND NEED FOR ASSET MANAGE-MENT

2. An analysis of the need for and effective-ness of asset management companies mustnecessarily be preceded by a discussion onthe concept of non-performing assets (NPAs)and their impact on the health of the economy,since the accumulation of NPAs in the bank-ing sector forms the raison d’etre for AMCs.For a bank, a loan that it gives out is an ‘asset’since it earns revenue, while a deposit is a‘liability’ because it has to be repaid at somepoint of time. In practical terms, a bank loan

BANKING LAWSROLE OF ASSETMANAGEMENTCOMPANIES INRESOLVINGBANKING ANDFINANCIAL CRISIS

Abhinav Kumar

This article seeks toprovide acomprehensive review of

asset management companiesand their role and effectivenessas a tool in the resolution ofbanking and financial crisis. Itlooks into the various objectiveswith which asset managementcompanies are created, citingexamples from cross-countryexperiences, and tries to assesswhich of these objectives ismost successfully achieved bythe mechanism of an assetmanagement company (AMC).The merits and demerits of acentralized AMC approach forresolution of banking crisis vis-a-vis a decentralized approach,and the legal factors thatcontribute to the successfuloperation of an AMC in aparticular context have beenanalysed here with a detailed

1-2. Daniela Klingebiel, The Use of Asset Management Companies in the Resolution ofBanking Crisis: Cross-Country Experiences, World Bank Policy Research Paper No.2284 (2000) 1.

3. Ben Fung et al., Public Asset Management Companies in East Asia : A ComparativeStudy, Occasional Paper for the Financial Stability Institute (2004) 5.

BANKING LAWS



discussion on the concept ofAsset Reconstruction Compa-nies (ARCs), as it exists withinthe Indian legal framework. Ittries to assess whether theapproach adopted in India withrespect to ARCs is likely toachieve the desired results.

or an asset becomes ‘non-performing’ whenit ceases to generate income for the bank.

In India, according to RBI guidelines, anasset is classified as a non-performing asset(NPA) if dues in the form of principal andinterest remain unpaid for more than 180days. However, with effect from March 31,2004, default status is given to a borrower ifdues are not paid for 90 days4. Further, if any

advance or credit facilities granted by a bank to a borrower become non-performing, then the bank will have to treat all the advances/creditfacilities granted to that borrower as non-performing without havingregard to the fact that there may still exist certain advances/creditfacilities having performing status. This means that if, for example, theinterest is paid but the principal is due, the loan must still be classified asan NPA.

It is also worth mentioning, in this context, that banks generally set asidea part of their current profits every year to ‘provide’ for contingencies likenon-performing loans, and this practice is known as loan provisioning.Higher levels of NPAs signify greater provisioning, which reduces the netprofits of the bank.

Thus, it follows that NPAs do not generate interest income for the banks,but at the same time, banks are required to make provisions for such NPAsfrom their current profits. However, the most important business implica-tion of NPAs is that it leads to the credit risk management assumingpriority over other aspects of the bank’s operations. The bank’s wholemachinery, thus, becomes pre-occupied with recovery procedures ratherthan concentrating on expanding business.5 This has adverse repercus-sions for the economy of the country as a whole, as the level of NPAs in thebanking sector largely determines the creditworthiness of a country ininternational markets. NPLs epitomize bad investment. They misallocatecredit from good projects, which do not receive funding, to failed projects.6Bad investment ends up in misallocation of capital and, by extension,labour and natural resources which results in the economy performingbelow its production potential. The overhang of bad debt in the financialsystem can be largely addressed by the creation of specialized bodiescalled Asset Management Companies (AMCs), which acquire, manage andrecover non-performing assets from banks and financial institutions on aprofessional basis.7 Relieving banks from the burden of NPAs allows themto focus better on their primary objective of financing the development of

4. RBI Guidelines, 1993 as conveyed by the Basel Accord of 1988.5. Sumant Batra, Developing the Asian Markets for Non-Performing Assets: Develop-

ments in India, 3rd Forum on Asian Insolvency Reform (2003) 1.6. ibid.7. See Daniela Klingebiel (1999).


772008]

new business opportunities, while the AMCs restructure bad loans forfuture sale. After the East Asian Financial Crisis, the setting up of AMCs tomanage the non-performing loans of banks and financial institutions hasbecome a global phenomenon and notable instances of countries usingthis approach include Mexico, Philippines, Spain, USA, Malaysia, Sweden,Korea and Indonesia.

PROCESS OF ASSET RESOLUTION BY AMCs

3. The basic operational structure of an AMC may be examined at twolevels - the process of acquisition of bad loans and the post-acquisitionhandling of those bad loans. In the first stage, the AMC buys distressedloans from the bank. In this regard, there are two main issues of concern:8

Selection of NPAs - One of the first logistical questions that an AMCfaces is with regard to the kind of assets it should purchase from thebanks. In principle, it should acquire only those assets which it iscapable of managing efficiently. For instance, small loans, the recov-ery of which can be undertaken more efficiently by the originatorbank itself, should be left with the bank.

Valuation and pricing of the elected NPAs - One of the most importanttasks an AMC faces in the acquisition of NPAs is the effectivehandling of valuation and price-fixation issues. The transfer of assetsto AMCs, regardless of the methods of transfer, should be executedat a fair market value. This is highly important due to two reasons.Firstly, private AMCs set up as subsidiaries of banks should not serveas a means by which the banks boost their capital by transferringtheir non-performing assets at above market value to the AMCs.9Secondly, Government-funded AMCs should not serve as a means bywhich the Government bails out private financial institutions bybuying their non-performing assets at above market value, sincesuch a process is at the taxpayers’ expense and lacks transparencyand accountability.10

The second operational stage is when the assets have been acquiredby the AMC and are in a position to be disposed of or restructured.Here also, there are two issues of concern :

Classifying NPAs - The AMC must differentiate between impairedassets and better quality loans. Unimpaired performing loans willretain their value if left in the banking system and, consequently,should be transferred to other operating banks as quickly as pos-sible.11

8. See Stefan Ingves et al., Issues in the Establishment of Asset Management Compa-nies, IMF Policy Discussion Paper (2004) 20.

9. ibid. at p. 22.10. ibid.11. In the United States, the FDIC typically transfers the good loans to an assuming

bank at the time of failure resolution. In Korea, this was done through bridge banks,while in Thailand the assets of the closed finance companies were sold throughpublic auctions.

BANKING LAWS



Resolving NPAs - Following asset transfers, the focus of an AMC is toresolve NPAs by adopting either of the following two approaches ora combination of both. The first approach is to convert an NPA intoa performing asset, mainly through restructuring of either the loan,or the business of the borrower, or both. The second approach is todispose of assets, including the associated collateral if possible,through various means.

In practice, most Asian AMCs have embraced both resolution approaches,including Korea, Malaysia and Thailand. At this juncture, we may take upa comparative study of the AMCs in three major Asian Countries (Korea,Indonesia and Malaysia) and the extent to which it has helped in strength-ening their failing economies in the aftermath of the East Asian financialcrisis.

ASSET RESOLUTION BY AMCs : CASE STUDY FROM THREE ASIAN COUN-TRIES

4. Banking systems play an important role in most Asian economies. Forexample, firms in Japan and Korea raise, on an average, 30-40 per cent oftheir funds from banks, compared with only 12 per cent in the UnitedStates.12 Moreover, state-owned banks play a dominant role in most EastAsian economies, with the result that high NPA levels in these banks oftenrequire direct Government involvement in their resolution.13

In general, banks begin to feel pressure on their earnings and a strain oncapital when NPLs begin to exceed 5 per cent of their loan portfolio. In2000, three years after the Asian crisis, Korea had an NPL ratio of 11.2 percent, Malaysia had 12 per cent while in Indonesia the ratio was as high as26 per cent14. The rapidly rising NPL levels drove these countries toimmediately set up AMCs to rapidly resolve the NPLs and restructure thebanking sectors. We can examine the methods and achievements of eachof these AMCs :

(i) Korea - Korea had established a centralized AMC called the KoreaAsset Management Corpn. (KAMCO) in the early 1960s to collecttroubled debts of banks in return for a fee. In late 1997, the mandateof the KAMCO was extended to include the purchase of NPAs for therehabilitation of the financial sector. A Fund for Resolution of Non-Performing Loans was created within KAMCO, with initial capitalcontributions by 24 commercial banks, the Korean Government andthe Korean Development Bank. The main goal of the KAMCO was tospeedily dispose of NPAs to increase liquidity and performance of thefinancial institutions and this was to be accomplished by 2003. As itsdisposition strategy, KAMCO tapped the help of foreign partners inasset management and disposition through joint ventures with

12. See Ben Fung et al., Public Asset Management Companies in East Asia : A Compara-tive Study, Occasional Paper for the Financial Stability Institute (2004) 9.

13. ibid.14. Source: Asia Week (2000) quoted in Vishakha Mulye, Ajay Sharma & Madan

Sabnavis, Valuation of NPLs, Bank Economists’ Conference (2001).


792008]

foreign institutional investors. Because of the involvement of foreignconsultants, the disposition process has been largely considered astransparent and efficient.15 Its recovery processes focused on assetsecuritization schemes, outright sales and workout schemes.

(ii) Malaysia - In 1998, the Malaysian Government created an AMC calledDanaharta which was centrally organized and Government-funded.The two basic objectives of Danaharta were to remove bad loansfrom the books of the banks and to maximize the recovery value ofthe assets. It had a sunset clause that limited the number of years forwhich it operated; thus, the Danaharta was expected to wind up itsactivities in 2005. This was important in order to limit Governmentcosts and accelerate asset-disposition. Moreover, it had clear-cutcriteria for acquisition of assets, which was limited to big loans witha minimum value of 5 million as well as assets from banks with morethan 10 per cent ratio of NPL to total loans. Furthermore, the assetsacquired were only loans that have potential value and mostlysecured by property or shares.

To circumvent the complexities and shortcomings of the legal debtrecovery system, the Danaharta was endowed with special legalpowers. For instance:

It was authorized to dispose of transferred assets without-seeking the permission of the original owners of the assets;

It was insulated against undisclosed claims made after it hadacquired the assets from the selling banks, and this protectionwas extended to subsequent purchasers as well;

It was allowed to appoint special administrators to dispose ofassets without resorting to formal legal mechanisms;

It was empowered to abrogate underlying contracts when itforeclosed on collateral.16

Like the KAMCO, Danaharta also tapped the skills of foreign expertsas a disposition strategy, with special emphasis on the valuation ofassets to be acquired. It also made use of special administrators tomanage specific types of assets, to increase its efficiency.

(iii) Indonesia - The Indonesian approach to asset resolution was quitedifferent from Korea and Malaysia, in view of the fact that the ratioof NPLs in Indonesia was much higher. It was clear that for thefinancial system to continue operating, the Indonesian Government’sstrong intervention was called for. The Indonesian Bank Restructur-

15. In fact, the knowledge spillovers created by this approach was such that KAMCOis now able to market its own know-how in NPL management to other countries likePRC, India and Vietnam.—See Akiko Terada-Hagiwara & Gloria Pasadilla, experi-ence of Asian Asset Management Companies : Do they Increase Moral Hazard?—Evidence from Thailand, ADB Working Paper (September 2004) 19.

16. See S. Ingves, The Role of Asset Management Companies in Bank Restructuring,Financial Sector Restructuring Authority, Thailand (November 9, 2000).

BANKING LAWS



ing Agency (IBRA) was established by a presidential decree in 1998,to be responsible for crisis resolution, including asset management.It had multiple mandates, including :

Administration of the Government’s blanket guarantee pro-gram;

Recovery of the liquidity support granted to banks early duringthe Asian crisis;

Bank restructuring;

Asset disposal; and

Management of shareholder settlement by former bank own-ers.

The IBRA had little choice but to take over a huge port folio of bankingassets without any pre-selection criteria, including the assets of frozenbanks, many of which had dubious recoverability.17 Moreover, theseassets were acquired at practically zero value but with the Governmentwithstanding the bank losses. In contrast to the KAMCO and Danaharta,the IBRA was wary of foreign participation and relied mostly on localbanks to help it collect and manage commercial loans.

4.1 PERFORMANCE OF THREE AMCs - The relative performances of thesethree AMCs may be judged on the basis of two variables, i.e., the disposalrate18 and the cash recovery rate.19 The following table displays a compara-tive study of the success achieved by AMCs in Korea, Malaysia andIndonesia, measured in terms of these two variables.20

Disposal Rate of AMCs:

Year Indonesia Korea Malaysia

2004 — 71.6 —

2003 — — —

2002 20.1 57.2 100.0

2001 6.7 57.8 99.9

2000 1.7 48.0 75.5

1999 — 52.2 33.1

17. Supra n. 14 at p. 13.18. It refers to the ratio of assets disposed over the book value of acquired assets. The

higher this ratio, the more efficient the AMC is thought to be, because undisposedassets imply higher carrying cost and thus higher operating cost for the AMC.

19. It is the ratio of recovered cash over book value of disposed assets. Again, higher therecovery ratio, better is the quality of the AMC’s disposition strategy.

20. Source: Country AMC’s annual and monthly reports as of the following dates: Korea- November 2003; Malaysia and Indonesia - September 2003.


812008]

Cash Recovery of AMCs

AMC in the region Cash Recovery (over Cash Recovery (overface value of assets amount of

transferred) disposed assets)

Indonesia 31.4 44.6

Korea 34.1 58.7

Malaysia 29.2 47.4

On the basis of cash recovery ratio, Korea’s KAMCO and Malaysia’sDanaharta are considered relatively successful, while Indonesia’s IBRA isless so. The primary factors that account for the perceived successfulrestructuring by the KAMCO and Danaharta are the innovative strategiesthey adopted to dispose of bad loans, including foreign participation andexpertise in the management and resolution of assets. These two AMCswere also relatively much more independent from political interferencethan the IBRA, which also contributed to their success.21 One significantfactor contributing to the limited success of the IBRA is the multiplicity ofits mandates, which made too many demands on its personnel andlessened the institution’s focus on its primary objective of disposal andrecovery of bad assets.22

OWNERSHIP OF AMCs - CENTRALIZED Vs. DECENTRALIZED MODELS

5. A common feature of most Asian AMCs, including those discussedabove, is that all are centrally organized and funded by the Government.However, AMCs may be privately owned and managed as well. Thus,based on the ownership structure, there are two models for establishingAMCs: the ‘centralized’ and the ‘decentralized’ approaches. The formermodel envisages the setting up of a Government-owned centralizedAMC endowed with special legal powers and tax incentives. The latterapproach envisages a number of competing AMCs, set up, in most cases,as subsidiaries of banks, independent entities or workout departmentswithin the bank itself.

Each model has its advantages and disadvantages and different countriesadopt either of these models or a combination of both according to thedegree of financial distress. For example, while Korea and Malaysialargely relied on centralized AMCs, Thailand used a more mixed approach,wherein each commercial bank was encouraged to set up its own AMCand at the same time, a public AMC was established to expedite restruc-

21. KAMCO and Danaharta purchased bad bank assets at fair market prices and notat highly subsidized rates as IBRA (or the Indonesian Government) had done byassuming all the bank losses.

22. In the case of Indonesia, as previously discussed, not only did it have to restructurebad loans, it also had to manage the Government blanket guarantees on depositsas well as the settlements of banks that violated the central bank’s prudentialnorms.

BANKING LAWS



turing of the banking sector. In Indonesia, private AMCs to deal with failedbanks were ruled out due to governance concerns.23

Cross-country experiences indicate that a centralized AMC is usuallyeffective when the problem of non-performing loans is systemic and thelegal infrastructure for debt resolution is weak.24 This is evidenced by thefact that almost all the countries affected by the Asian crisis set upcentrally organized AMCs for the disposal, collection, and restructuring ofnon-performing loans. Besides halting debt overhang, the establishmentof centralized AMCs can also help preserve the economic values of bankloans by effectively setting a minimum price for bad assets. At a time whenno private investor would want to buy loan assets, the centralized AMCprovides the demand for them; and when the legal infrastructure is weak,the centralized AMC can expedite the legal process in disposing of badloans.

On the other hand, the establishment of a centralized AMC requires anenormous amount of funds from the Government, which explains whysome countries are reluctant to establish one. Thailand did not establisha centralized AMC until 2001, while India and the Philippines have, instead,provided legal cover and fiscal incentives for the establishment of privateAMCs. Often, centralized AMCs are prey to political interference and lackadministrative flexibility; lack of trained personnel is another concern incentralized AMCs.

In contrast, because of lesser layers in the decision making process, privateAMCs possess greater managerial flexibility than centralized AMCs. Forthis reason, when a single bank has a medium to large amount of bad loansand assets, the best option is to set up an AMC as a subsidiary of thesame bank.25 In the case of workout departments within banks or banksubsidiaries, debt restructuring is easier since the bank benefits from itspersonal knowledge and close contacts with borrowers. Hence, in general,private AMCs offer greater advantage over Government AMCs, especiallyif the loans are not too complicated in nature. However, though this modelcan allow separate entities to focus more on their primary objectives,concerns regarding expertise, objectivity and incentives arise. In suchsituations, the legal framework governing asset management companiesin a particular country and the degree of independence and the specialpowers granted to the AMC assumes critical importance in determiningthe success or failure of the AMC.

LEGAL FRAMEWORK FOR AMCs

6. It must be borne in mind that regardless of the ownership structure anddebt resolution strategies, for any model - centralized or decentralized, astrong and efficacious legal framework that supports the AMC is a key

23. See Akiko Terada-Hagiwaka & Gloria Pasadilla, (2004).24. See Daniela Klingebiel (1999).25. Stefan Ingves et al., Issues in the Establishment of Asset Management Companies,

IMF Policy Discussion Paper (2004) 7.


832008]

element in ensuring its success, a fact that is borne out by cross-countryevidence. Thus, the legal system should clearly define the rights ofownership as well as the legal obligations between debtors and creditorsand provide for the orderly resolution of debts and enforcement ofsecurity interest. There is also a need to balance the rights of creditors andborrowers. However, when the existing legal system is not well equippedto promptly deal with the magnitude of NPAs, it becomes necessary togrant special legal powers to AMCs to facilitate asset recovery andrestructuring. The obvious drawback of this approach is the potentialabuse of these special powers, which also needs to be addressed by thelegal system.

THE SARFAESI ACT AND ARCs IN INDIA26

7. In the context of the legal environment supporting AMCs, it is relevantto undertake a discussion of the Indian scenario, in view of the fact thatit is being touted as the largest new market for NPLs, with new lawsenabling the establishment of asset management companies. TheSecuritization and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 provides a formal legal basis for setting upwhat are known as ‘asset reconstruction companies’ (ARCs) in India. TheReserve Bank of India has formulated various guidelines to govern theseARCs. The key features of the existing legal framework relating to ARCscan be enumerated as follows :

The Act envisages non-Government-supported multiple ARCs, whichmay be set up by the lenders, NPA investors or corporate firms. Itrecognizes any person holding not less than 10 per cent of the paid-up equity capital of the ARC as a sponsor and places restrictions onany sponsor holding a controlling interest or being the holdingcompany of the ARC or controlling its management.

Under the Act, the term ‘asset reconstruction’ implies the acquisitionof any right or interest in the financial assets of the bank or thefinancial institution, for the purpose of realization of the same by theasset reconstruction company.

The Act permits the ARC to commence operations with a minimumnet-owned fund of Rs. 20 million. It permits the ARCs to acquirefinancial assets either by way of a simple agreement assigning theassets to the ARC or by an issue of bonds and debentures to theoriginating lenders.27 Banks/FIs are required to ensure that the saleof the assets to the ARC is a true sale transaction and there should be

26. See generally, Amarchand Mangaldas & Blake Dawson Waldron, Developing theEnabling Environment for and Structuring Asset Reconstruction Companies inIndia, Technical Assistance No. 3943-IND Final Report (2004).

27. The RBI Guidance Notes suggest that NPAs shall be acquired at a ‘fair price’ in aninformed market in an arm’s length transaction. The notes also suggest that ARCsshould value the acquired assets in an objective manner and use a uniform processfor all assets of the same profile.

BANKING LAWS



no known liability devolving on them after assets are taken off fromthe banks’ balance sheets.

The RBI Directions lay down a maximum resolution time frame offive years (including a one-year planning period) from the date ofacquisition of the assets.

The Act stipulates several measures that can be undertaken by ARCsfor asset reconstruction.28 These include :

(a) Enforcement of security interest;

(b) Taking over/changing the management of the business of theborrower;

(c) The sale or lease of the business of the borrower;

(d) Entering into settlements; and

(e) Restructuring or rescheduling of debt.

It must, however, be borne in mind that ARCs and the securedcreditors cannot enforce the security interest under SARFAESIunless at least 75 per cent of value of the secured creditors agree tothe exercise of this right.

The Act states that all the rights of the lender shall vest in the ARCafter the asset is acquired. The ARC shall become party to all thecontracts/deeds/agreements etc. and all the suits and appeals appli-cable to the financial asset acquired.

Finally, the Act provides that no fresh reference to BIFR can be madeonce assets are acquired by an ARC.

ASSET RECONSTRUCTION COMPANY OF INDIA LTD. (ARCIL)

8. ARCIL is the first ARC in the country to be licensed by RBI under theSARFAESI Act. It is promoted by State Bank of India (SBI), ICICI BankLtd., IDBI, Punjab National Bank and other private sector banks/institu-tions.

During the first one-and-a-half years of its operations, ARCIL acquiredassets worth more than 15,000 crores. The acquisition price forNPAs offered by ARCIL is presently 24 per cent of total dues, as against28 per cent offered in developed countries like USA — a value which isconsidered quite attractive according to international benchmarks.

However, there are certain obstacles which limit the performance of theARCIL :

Firstly, ARCIL has been acquiring NPAs only from such States wherestamp duties and registration fees on acquisition of financial assetsare relatively low.

28. Although these measures have been laid down, the guidelines in respect of powersunder ‘b’ and ‘c’ are still awaited from the RBI and until these are issued, ARCs arenot permitted to use them.


852008]

Another significant problem that the ARCIL faces is that banks thathave sold their NPAs to ARCIL are mostly those with a strong capitalbase. Banks with a weak capital base have lower provisioningcoverage and are, therefore, reluctant to transfer assets to ARCIL, inview of the difference between the high book value of the assets andthe low realizable value at which ARCIL buys them.

These problems have limited the success of ARCIL to a certain extent, forwhich appropriate amendments to the legal framework for ARCs arecalled for; however, ARCIL can be said to have achieved a considerablemeasure of success in the last two years of its existence.

CONCLUSION

9. In view of the cross-country experiences with AMCs and their varyingmeasures of success as well as the performance of the ARCIL certainsuggestions can be made for amendment of the existing legal frameworkin India relating to ARCs:

Firstly, the restriction imposed by the SARFAESI Act on a singleentity acquiring control over an ARC is likely to act as a significantdeterrent for large reputed private investors from investing in ARCs,since in most cases, such investors typically like to have completecontrol over their investments.29 The involvement of independentinvestors is critical to expedite and facilitate the process of asset-resolution as they introduce ‘a combination of skills, experience,objectivity and commercialism to the resolution process.’30 Further,the case studies from Korea and Malaysia provide ample evidenceabout the role of independent investors — both domestic andinternational — as a key driver of success of the AMC. It is, therefore,suggested that the Act should allow single entity to control an ARC,subject to adequate safeguards prescribed by the RBI.

Secondly, the willingness of banks/FIs to transfer NPAs to the ARCsis a key area of concern, as has been previously mentioned. Unlikemost other countries, the current regulatory framework in Indiaprovides neither sufficient incentive nor sufficient pressure to in-duce or compel lenders to transfer NPAs. For instance, to inducebanks to sell their bad loans to Danaharta, the Government sets aceiling on NPLs at 10 per cent of total bank loans. Ensuring consis-tency of application of prudential norms on asset classification andprovisioning across different lenders will go a long way in creatingsuch pressures. Incentives may be offered in the form of provisionsthat have the effect of reducing transaction costs in the acquisitionof NPAs by ARCs.

Thirdly, high transaction costs involved in acquisition of financialassets is one of the biggest deterrents to asset reconstruction activi-

29. See Amarchand Mangaldas & Blake Dawson Waldron (2004), supra n. 25 at p. 33.30. ibid at p. 11.

BANKING LAWS



ties in India. Under the current legal regime, transfer of financialassets in some States could attract ad valorem stamp duty of up to 14per cent, thereby affecting the overall financial attractiveness of theproposed transaction. The SARFAESI Act indirectly addresses thisissue under section 5(1)(a), which provides for the acquisition offinancial assets by an ARC by way of an issue of debentures to theoriginators. However, most investors are reluctant to take this routesince the Act does not provide for a clear vesting of title in ARCsacquiring assets through this route. These issues urgently need to beaddressed in the Act.

Fourthly, the determination of ‘fair value’ of the NPA for the purposeof transfer to an ARC is a highly problematic issue, compounded byasymmetric information on the part of the lenders and the ARCs.Therefore, there is a need for adequate guidance on the valuationprocess by the RBI, which should attempt to standardize the valua-tion techniques adopted in this regard and at the same time, providemaximum flexibility and scope for negotiated settlements to thelenders and ARCs.

Fifthly, the current legal framework requires an ARC to obtainconsent of secured creditors holding 75 per cent of the outstandingamount before taking any action for enforcement of security inter-est. In this regard, the Act does not differentiate between lenders withdifferent classes of securities, for instance, there is no differentiationbetween 1st charge holders (term loan) and 2nd charge holders(working capital), which often results in inordinate delays in the assetdisposal process. In this regard, suitable amendments need to bemade to the SARFAESI Act to lower this threshold.

Finally, it has to be borne in mind that asset reconstruction activityis critical to appropriate value, which lies locked in non-performingassets, which can be employed for more productive purposes. How-ever, investments in such activities carries more than the ‘normalequity risk’, since the returns depend on the performance of theunderlying assets; which are already non-performing. Given thesefacts, there needs to be a sufficiently incentive-based tax regime forpromoting asset reconstruction activity.

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