This application has been filed by the petitioner in the main company petition seeking for an order under section 536(2) of the Companies Act, 1956 to the effect that the payments made or proposed to be made (disposition of assets) under the Memorandum of Understanding dated 19.4.2010, Escrow agreement dated 23.4.2010 and the Supply agreement dated 24.4.2010, as acknowledged by the Government of India, by the respondent to the applicant are valid in law.
2. As per
section 536 of the Companies Act, which is as follows:
"
Section 536. Avoidance of transfers, etc., after commencement of winding up.-
(1)In the case of a voluntary winding up, any transfer of shares in the company, not being a transfer made to or with the sanction of the liquidator, and any alteration in the status of the members of the company, made after the commencement of the winding up, shall be void.
(2)In the case of a winding up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void."
the issue covered in this case relates to
section 536(2) and particularly, the first portion of it, by which disposition of assets including actionable claims of the company which is facing an order of winding up by the Court, after the commencement of winding up proceedings, is declared void unless the Court otherwise orders.
3. Therefore, the power of this Court under
section 536(2) of the Act is to save any such disposition of assets of the company under liquidation which can be possible for this Court by taking into consideration the interest of the company in carrying out its business and such order is intended, in order to avoid paralyzing of the company and to avoid counter productivity and to protect the interest of shareholders and creditors.
4. On the facts of the present case, the applicant, which is a Company as per
section 617 of the Companies Act, engaged in the business of marketing oil and fuel inputs including naphtha and furnace oil, is acting exclusively in the public interest. The respondent which is a Limited Company, primarily engaged in the production of nitrogenous and phosphatic fertilizers was purchasing naphtha and furnace oil from the applicant as raw materials for the production of urea and fertilizers manufactured by it. It is stated that the respondents requirement was 28 TMT of naphtha and 15 TKL of furnace oil per month, to the approximate value of Rs.110 crores. There was some default in payments regarding the supply of the above said materials during the period from November, 2006 to March, 2007 by the respondent company amounting to Rs.296.96 crores and due to the said default, the applicant initiated winding up proceedings against the respondent and the respondent company subsequently shut down its urea plant and the winding up proceedings are pending as per the orders of this Court even though the Company Petition has not been admitted and no publication effected.
5. Pending the winding up proceedings, a settlement proposal was suggested, to enable the respondent company to restart its urea unit, on the basis of understanding that the applicant should resume supply of naphtha and furnace oil and an upfront part payment would be made of the amounts outstanding. The proposal was also on condition that on commencement of such supply and on receipt of subsidy payment from the Ministry of Chemicals and Fertilizers, Government of India, the respondent should pay the same to the applicant through an Escrow account. The additional condition was that the old claim would be cleared within a period of time from market collections. It is incidental that the Memorandum of Understanding between the petitioner and the respondent dated 19.4.2010 envisaged the resumption of supply of naphtha and furnace oil subject to certain conditions, particularly the condition of payment of Rs.80 crores to the applicant in partial discharge of debts and further condition that the Memorandum of Understanding as well as the agreed draft of supply agreement would be submitted to the Department of Fertilizers, Ministry of Chemicals and Fertilizers, Government of India and to obtain a letter of acknowledgment in respect of the Memorandum of Understanding and the said supply agreement.
6. There is also a condition to the effect that on opening of Escrow account, letter of consent should be obtained from the principal secured creditor viz., Asset Reconstruction Company (India) Ltd., (ARCIL) and consent from the authorized representative of the Corporate Debt Restructuring (CDR) Empowered Group. It is stated by the applicant that the respondent has in fact fulfilled all the conditions of the Memorandum of Understanding and thereafter the parties have executed Escrow agreement on 23.4.2010, apart from Supply agreement dated 24.4.2010.
7. It is stated that as per the Escrow agreement, the respondents should open an escrow account with the State Bank of India, Patiala making the applicant as the sole beneficiary. The Supply agreement enables the applicant to supply naphtha and furnace oil in order to ensure that the respondent would manufacture urea and other fertilizers and the payment in respect of such supply is required to be made through the above said escrow account. It is also stated that the respondent has agreed and undertaken to make payment towards future supplies and past supplies and also overdue interest notwithstanding the escrow mechanism and the supply agreement contains the entire frame work.
8. It is stated that the respondent has fulfilled the conditions including the payment of Rs.80 crores and the plant is being made fit for starting the commercial production. Under the Supply agreement as well as Escrow agreement, the respondent company which is under the orders of winding up, is to make substantial payment to the applicant in discharge of past dues, future supplies, etc. and as per
section 536(2) of the Act, such payment in the form of actionable claim would amount to disposition of assets of the company under liquidation. Therefore, the present application is filed by the applicant, as a matter of abundant caution in order to ensure validation of such amounts which would be paid by the respondent based on the above said agreements, in the interest of applicant as well as for the commencement of business by the respondent company.
9. It is stated that the agreements were entered only with a sole aim of restarting the urea plant of the respondent and the same were entered for consideration and that is the only way of realizing the amounts due to the applicant. That apart, the resumption of supply of naphtha and furnace oil by the applicant to the respondent company is in the public interest since it promotes agricultural sector in the South India. The revival of the respondent company is also beneficial to the interest of the creditors, shareholders, employees, etc.
10. The Corporate Debt Restructuring Empowered Group (CDR) through its Deputy General Manager in its letter in CDR (JCP) No.1528/2009-10, dated 13.3.2010 addressed to ARCIL, authorised ARCIL conferring statutory authority and the said letter was issued after deliberation based on the approval of tenders. It was based on the said communication of CDR, the ARCIL became the principal creditor and 19 banks, who have lent money to the respondent Company have already assigned their rights and liabilities in favour of the ARCIL.
11. It is also seen that the consent of the principal creditor of the respondent company viz., ARCIL (Asset Reconstruction Company (India) Limited) has been obtained, as it is seen in the letter from ARCIL in ARGII/SG/FY11/235, dated 5.4.2010, the contents of the consent given by ARCIL which is relevant are extracted as follows:
(iii)The past dues of IOC amounting to Rs.296.97 crore shall be paid through an upfront amount of Rs.80 crore (Rs.30 crore lying in the TRA account and Rs.50 crore being infused by the promoter(s). The balance shall be paid in monthly installments till August, 2011. The "No objection" of Arcil for this arrangement with IOC shall be valid till August 31,2011 except that in the event the company fails to honour its commitments to Arcil, the no objection for the above arrangement with IOC shall stand revoked/cancelled.
(iv)Company shall create exclusive charge on only such of the goods in transit, inventory, receivables and warehouse receipt which are financed/supplied by IOC.
(v)Upon extinguishment of the above understanding with IOC, Company shall obtain approval of the Monitoring Institution for entering into any new arrangement for working capital/purchase of naphtha with IOC/investor/lender.
Please note the above NOC is being issued on behalf of Arcil only.
Yours faithfully, Sd/-xxxx Sanjoy Gupta Senior Vice President."
12. Further, it is also seen that, in the deliberation, almost all the secured creditors of the respondent company were represented and a decision was taken. In such circumstances, the present application has been filed seeking for the above said relief.
13. On a reference to the Memorandum of Understanding entered between the applicant and the respondent company dated 19.4.2010 apart from the escrow agreement dated 23.4.2010 entered between the said parties along with the State Bank of India, Patiala Branch, New Delhi and the supply agreement dated 24.4.2010 between the parties, it is clear that the proposal is based on a common objective of settlement of dues by the respondent to the applicant in the course of time by way of revival of manufacturing process by the respondent with the knowledge of the Government of India, Ministry of Chemicals and Fertilizers, and to ensure the periodical payments by making the applicant as the beneficiary, the escrow agreement was entered and in order to enable the respondent company to revive its manufacturing process, the applicant agreed to supply naphtha and furnace oil.
14. On a perusal of the communication of CDR to ARCIL, it is clear that a proposal came out after deliberation and active participation of all the persons interested in the affairs of the respondent company including the secured creditors and it is obvious that the object is to perpetuate public interest.
15. As it is seen in the various documents and the submissions made by Mr.Arvind P.Datar, learned senior counsel appearing for the applicant, inasmuch as the winding up petition against the respondent Company is pending, any payments made under the above said arrangements by the respondent company pending the petition to the applicant must be protected failing which such payments made either under the Memorandum of Understanding, escrow agreement or supply agreement would be hit by
section 536 (2) of the Companies Act.
16. It is no doubt true that such payments which are agreed to be made including the amount of Rs.80 crores stated to have been made by the respondent would become invalid as per the statutory provision stated above unless such payments are protected by orders of the Court. That depends upon the exercise of powers of the Court by making such protection orders, in order to save such disposition. It is common knowledge that any order of winding up passed by the Court will be effective from the date of filing of petition for winding up and thereafter, the powers of the company under liquidation in any transaction are restricted since the winding up order acts for the benefit of the creditors of the company. But, the fact remains that in all cases, when the company is under liquidation after the order passed by the Court, even though certain transactions are not valid statutorily in the sense that they are not binding on the creditors whose interest is of utmost importance at that stage, certainly the Company Court is entitled to protect some of the dispositions effected during the course of winding up, if the same is considered to be in the ultimate interest of the creditors of the company. That is squarely the reason for conferring such powers on the Court under
section 536(2) of the Companies Act.
17. Therefore, it cannot be said that after winding up order is made and during the course when winding up order passed by the Court is in operation, all dispositions to be blindly held as invalid without considering the nature of such disposition. On the facts of the present case, wherein by virtue of the supplies of materials made by the applicant company and payment of money in lieu of the past, present and future debts which are due from the respondent company to the applicant, is sought to have the seal of approval from this Court to protect such dispositions and to make such dispositions as valid, which is the life and blood of the expression, unless the Court otherwise orders. Certainly this Court can take into consideration the overall situation with particular reference to the protection of interest of the creditors and such powers are available to this Court when the winding up proceedings are pending and before passing of order of winding up of the company.
18. The availability of such power of the High Court has been confirmed by a Division Bench of the Bombay High Court in Kamani Metalic Oxides Limited vs. Kamani Tubes Limited (1984 Vol.56 Comp.Cas.19). The Division Bench in that case referred to a Special Bench decision of Rajasthan High Court reported in B.Gopal Das v. Kota Biran Board (P) Ltd., [(1972) Tax Law Reports 2285 (Raj.)]. The relevant portion of the judgment of the Division Bench is usefully extracted hereunder for understanding the issue involved in this case:
" In the case of B.Gopal Das (1972) Tax LR 2285, the Special Bench of the Rajasthan High Court overruled the earlier Division Bench decision in Ramesh Chandra's case, AIR 1963 Raj 187, and expressed their agreement with the view expressed by Buckley,J. In the case of A.I.Levy (Holdings) Ltd., The learned Judge also quoted the law on this point stated in Palmer's Company Law, Twenty-first edition, page 770. The relevant observations are as follows:
"The court has jurisdiction under
section 227 to authorise a disposition of the company's property for the benefit of creditors, notwithstanding that a winding up order has not yet been made."
We would also like to quote the observations appearing in para 4 of the judgment in B.Gopal Das's case (1972) Tax LR 2285 (Raj) at p.2286:
"As has been stated,
section 536 finds a place in that portion of the Act which deals with the effect of winding up on antecedent and other transactions, and there is nothing in sub-section (2) of the scheme of the winding up petition is pending but a winding up order has not been made. On the other hand, it may well be argued that, in the absence of any prohibition in the law, there is no reason why the court should be precluded from examining the propriety of a proposed disposition during the pendency of a winding-up petition if the company has a genuine case requiring early consideration."
We are respectfully in agreement with this view. We are, therefore, of the view that even before a winding up order is made, the jurisdiction of the court can be invoked under S.536(2) for permission for disposal of the assets of the company."
19. The underlying principle which weighed the mind of the Division Bench is that the power of Court to order under
section 536(2) of the Companies Act cannot be said to have arisen after the winding up order is passed, and during the winding up proceedings which commenced from the date of filing of the petition for winding up, any bona fide disposition of assets of the company should not be allowed to be in the hands of the liquidator in the event of winding up order being passed ultimately, for, there are occasions where dispositions of assets during the pendency of winding up would necessarily be available for the interest of the company and for the ultimate interest of the creditors. If it is construed that such powers are available to the Court for passing orders under
section 536(2) of the Act only after winding up order is ultimately passed, the bona fide disposition in the interest of the company and in the interest of the creditors would not be effected since the directors would be reluctant to enter into any such transaction fearing that the same would be declared invalid at the time of passing of the winding up order and it is due to that reason of avoiding such delicate situation, in order to safeguard and protect the interest of the company in liquidation, the Company Courts are given such power to protect the dispositions made even before the winding up orders are passed.
20. Such powers of this Court to declare bona fide dispositions as valid so as to protect such transactions, when winding up order is ultimately passed, have also been approved by a Division Bench of Gujarat High Court in NAVJIVAN MILLS LTD., In re (1986 Volu.59 Comp.Cas.201) in the following words:
" On the facts, that where pending petitions for the winding up if a company which had carried on a textile mill, the State Government declared it a relief undertaking under the Bombay Relief Undertakings (Special Provisions) Act, 1958, with the result that for a period of one year, the winding up order and advertisement was stayed and there was a moratorium and no further action could be taken on the petitions, four public financial institutions and its bank came forward to give financial aid for running the mill and the company applied to the court under
section 536(2) for an order so as to ensure the institutions that the dispositions of its properties in their favour as security for the advances may not be avoided in the future if and when a winding up order should be made, the validity of the disposition of property intended by the company for securing the advance of loans from those institutions on the security of its property and the payment of monies by the company in the ordinary course of business for carrying on its trade should be protected by an order of the Court under
section 536(2).21. The said decision of the Gujarat High Court has been approved by the Honble Apex Court in Pankaj Mehra vs. State of Maharashtra [(2000) 2 SCC 756] in the following words:
" 18. It is useful to refer to the reasoning adopted by a Division Bench of the Gujarat High Court in Navjivan Mills Ltd., In re (1986) 59 Comp Cas 201 (Guj) in favour of adopting a pragmatic attitude when a Company Court was approached for approval of certain dispositions which a company made after presentation of a petition for winding up. A clear distinction was drawn by the Division Bench between the period till the passing of the order for winding up and thereafter, so far as dispositions are concerned. The following reasoning is useful for consideration of the issue involved:
"The court can exercise the jurisdiction under
Section 536 (2) of the Companies Act, 1956 of giving directions validating proposed transactions pending a petition for winding up but before the winding up order is made for the obvious reason that unless these transactions are saved from the consequence which may ensue, if at all, on an order of winding up being made, the company might find it difficult to keep itself going and its business might be paralyzed. The purpose underlying the investment of the power in court is for the benefit and the interest of the company so as to ensure that a company which is made the subject of a winding up petition may nevertheless obtain the money necessary for carrying out its business and so as to avoid its business being paralyzed. If that is the purpose and object of the section, it would hardly be proper and just to stultify the power and restrict its operation since otherwise it is bound to be counterproductive in the sense that the very purpose of keeping the company as a going concern so as to ensure the interest of the shareholders and creditors would be defeated."
22. In this case, one must look into the matter from the angle of the applicant at whose instance the company petition for winding up was filed as narrated above, to whom huge amount is due from the respondent, since the respondent company had stopped the manufacturing process. Under the scheme as narrated above, by way of three agreements entered with the approval of the secured creditors, the manufacturing process of the respondent company was allowed to commence on supply of materials by the applicant with the main intention that the applicant which is one of the creditors has to receive large amounts from the respondent and therefore, not only public interest is involved in the said agreements, but the agreements also work for the betterment of the respondent company and its creditors, particularly, secured creditors since the agreements give scope for revival of the respondent company and ultimately, in that event, it would result in the dismissal of the company petition itself. But, the question is that even in the event of a decision being taken otherwise in the company petition, the dispositions which are sought to be made during the course of pendency of the winding up proceedings are certainly to be protected in the interest of not only the applicant, a public sector corporation, but also of other creditors of the respondent company.
In such view of the matter, I am of the considered view that the applicant is entitled for such order of protection from this Court and accordingly, the application stands allowed. No costs.
Kh