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“In Kamani Metallic Oxides Ltd. V/s Kamani Tubes Ltd. ((1984) 56 Comp Cas 19 (Bom)), it has been laid down that every transactions are not void ab initio. If they were to be void ab initio, then on petition being withdrawn or dismissed, they would not revive. In case petition is withdrawn or dismissed, then transactions would never have been void. The Bombay High Court has observed that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a provisional liquidator. Considering the provisions of Section 536(2) read with section 441(2), the Bombay High Court in the case of Kamani Metallic Oxides Ltd. (supra) has laid down thus:-

If they were to be void ab initio, i.e., immediately on their being entered into, then on the petition being withdrawn or dismissed, they would not revive. It is clear that if the petition is withdrawn or dismissed then the transactions would never have been void. This clearly shows that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a provisional liquidator. What section 536(2) read with section 441(2) provides for is to convert what was otherwise valid into void by virtue of the legal fiction. Thus the voidness takes effect on the passing of the order of winding up or appointment of provisional liquidator. By virtue of the legal fiction, in section 441(2), it then relates back to the date of presentation of the petition for winding up.”


 

IN THE  HIGH COURT OF JUDICATURE FOR RAJASTHAN  AT

JAIPUR BENCH JAIPUR.

Misc.Application No.49 of 2011

In

D.B.Civil Special Appeal (Company) No.2 of 2010

Podar Finance Private Ltd. V/s Official Liquidator.

Date when the order was

reserved                                                                                                              :-              14.9.2011

Date of pronouncement of

order                                                                                                     :-             10.10.2011

PRESENT

HONBLE THE CHIEF JUSTICE MR.ARUN MISHRA

HONBLE MISS JUSTICE BELA M.TRIVEDI

 

 

Mr.J.P.Bhatt, Senior Advocate with Mr.R.C.Joshi for the applicant.

Mr.G.K.Garg, Senior Advocate with Mr.Anuroop Singhi and Mr.Kunal Jaiman for the respondent.

ORDER

BY THE COURT (Per Hon’ble Arun Mishra,CJ)

The Hon’ble Supreme Court vide order dated 11.3.2011 passed in the Petition for Special Leave to Appeal (Civil) No.3580/2011 has observed that the Division Bench of this Court while passing the order dated 25.10.2010 in D.B.C.Special Appeal No.2/2010 while dealing with the issue whether the applicant-Poddar Finance Private Limited (hereinafter referred to as the Poddar Finance) was a contributory or not, has only relied upon the balance sheet of the Company to say that the applicant-Poddar Finance was not a contributory and at the same time, the matter was disposed of in the alternative on the assumption that it may be a contributory. Hence, the Apex Court has required the High Court to record finding on the above issue after taking into consideration all the documents.

 

Pursuant to the aforesaid order of the Apex Court, the applicant-Poddar Finance has filed misc.application no.49/2011 before the Division Bench of this Court on 22.3.2011. It is averred in the application that the applicant-Poddar Finance is holding 1,65,010 equity shares of Rs.10/- each and 12,478 preference shares of Rs.100/- each of M/s Jaipur Spinning and Weaving Mills Ltd. (hereinafter referred to as Jaipur Spinning Mills) and the aforesaid shares were acquired from Shree Shakti Mills Limited, Bombay (hereinafter referred to as Shakti Mills) on 25.1.1979 and transferred on 10.5.1979. The aforesaid shares have been reflected in the balance sheets for the year ended March 1981 and March, 1983. The value of the aforesaid shares was shown Nil in the balance sheet ended March, 1984. On company being wound-up, it was advised that said shares could not be reflected as their value had become Nil for the purpose of accounting, as such, they were removed from the balance sheets of the applicant-Poddar Finance for the subsequent years. The share certificates constitute prima facie evidence of applicant’s title over the shares in question and therefore, Jaipur Spinning Mills and Official Liquidator are estopped from contending contrary. In terms of Section 428 of the Companies Act, 1956 (hereinafter referred to as the Act), the holder of fully paid up shares is deemed to be a contributory. Hence, it was prayed that applicant-Poddar Finance be held to be a contributory of Jaipur Spinning Mills in liquidation and finding to this effect may be sent to the Apex Court.

 

The application has been contested by the Official Liquidator by filing reply contending that list of contributories has not been settled so far. It was necessary for the Ex-management to cooperate the Official Liquidator in the matter of recovery of assets of the company as well as in settling the list of contributories and creditors. Winding up proceedings have already taken place by selling plant and machinery and making payment partly to the secured creditors. It is contended by the Official Liquidator in the reply that applicant-Poddar Finance never approached the Official Liquidator that it is a contributory. The share certificates stood in the name of Shakti Mills and the details of cost of purchase have not been given by the applicant. The provisions for transfer of shares are contained in Sections 108, 108A, 108B, 108C, 108D, 108E, 109, 110 of the Act. Since folio number of the shares claimed to be transferred has been changed, fresh share certificates should have been issued. The shares held by Shakti Mills could not have been transferred legally for the reason that it was under liquidation vide order dated 21.1.1981 passed by Bombay High Court in Company Petition No.308/78, which was presented on 25.4.1978. After presentation of petition, shares could not have been transferred. Transfer of shares is void by virtue of provisions of Section 536(2) of the Act. Reliance has also been placed on the provisions of Sections 531 and 531A of the Act. There is no clear mention in the balance sheet of the applicant-Poddar Finance that money was invested for acquisition of shares in question. The applicant-Poddar Finance has failed to establish that it is a contributory of the company in liquidation.

 

A rejoinder has been filed by the applicant-Poddar Finance. It is submitted that it was obligatory on the part of the Official Liquidator to finalize list of contributories. Reliance has been placed on the provisions contained in Section 428 of the Act. There was no infirmity in the shares obtained by the applicant. The creation of folio and recording thereof on the reverse of the share certificates was the common accepted legal practice that existed at the relevant time. The provisions of Sections 531, 531A and 536 of the Act are not applicable. The Official Liquidator of Shakti Mills in the Company Petition No.70/86 filed before the Bombay High Court sought to recover amount of Rs.17,08,069/- being loss suffered for the sale of the shares at alleged under-value by Shakti Mills to Poddar Finance. Whether aforesaid transfer was under valued is still pending adjudication in the Bombay High Court. Transfer of shares can be questioned only in the Bombay High Court. Every person, who is holder of fully paid up shares of the company in liquidation, is a contributory. Hence, the applicant-Poddar Finance should be treated as contributory of the company in liquidation.

 

In compliance of the order of the Apex Court dated 11.3.2011, the matter was taken up by the Division Bench of this Court for several times, but time was prayed by the applicant. On 26.5.2011, it was pointed out by the parties that list of contributories has not been settled so far in accordance with the provisions of Sections 428 and 467 of the Act and Rules 180 to 196 of the Companies (Court) Rules, 1959 (hereinafter referred to as the Rules). The Official Liquidator has to prepare provisional list of contributories under Rule 180 and notice has to be given of date of settlement of list under section 181 of the Rules. The provisions from Rules 180 to 196 pertain to settlement of the list of contributories in a winding up by the Court. Both the parties prayed that opinion of the Official Liquidator may be obtained with respect to the fact whether applicant-Poddar Finance can be treated to be a contributory and thus, Official Liquidator was asked to submit report. The Official Liquidator furnished the report before the Company Judge opining that applicant-Poddar Finance cannot be treated to be a contributory. Thereafter, on 5.7.2011, both the parties have prayed that opinion of the Company Judge may also be called for and therefore, the Company Judge was requested to send the opinion in accordance with the provisions of the Act and Rules. The Company Judge has remitted the opinion that applicant-Poddar Finance cannot be said to be a contributory.

 

The Official Liquidator in his report has submitted that applicant-Poddar Finance cannot be treated to be a contributory because of the following reasons:-

 

(i)            That 1,65,010/- equity shares of the face value of Rs.10/- each and 12,478 preference shares of the face value of Rs.100/- each were acquired by applicant-M/s Poddar Finance at a throw away price constituting 65% of the paid up capital of Jaipur Spinning Mills in liquidation.

 

(ii)           That balance sheets ending on 31.3.1980 and 31.3.1982 have not been furnished by the applicant, while copies of the balance sheets for the years 1981 and 1983 were not certified to be true copies by Registrar of Companies.

 

(iii)          That in the balance sheets of subsequent years 1984 onwards, the applicant-Poddar Finance has not shown investments made in shares of Jaipur Spinning Mills.

 

(iv)         That there is no due compliance of Section 108A, 108B and 108D of the Act and without prior approval/intimation to the Central Government, shares could not have been acquired.

 

(v)          That transfer of shares in question was void in terms of Sections 531, 531A and 536(1)(b) of the Act.

 

(vi)         That transfer of shares in question in terms of Section 536(2) after commencement of winding up proceedings of Shakti Mills is void.

 

(vii)        That applicant-Poddar Finance has failed to submit any application in any court for validation of transfer of shares in question.

 

(viii)       That transfer of shares in question is under-valued.

 

The Company Judge has assigned the following reasons while recording the finding that applicant-Poddar Finance cannot be treated to be a contributory of Jaipur Spinning Mills in liquidation:-

 

(i)            That transfer of shares in question in the same management by one company to another was made on the under valued price and therefore, transfer of shares cannot be said to be in the interest of creditors, which is paramount consideration and should not be defeated.

 

(ii)           That while examining the question whether the applicant-Poddar Finance is contributory, validity of transfer can be looked into. The Court has not validated the transaction, as such, applicant-Poddar Finance cannot be treated to be a contributory of Jaipur Spinning Mills in liquidation.

 

(iii)          That applicant-Poddar Finance cannot be held to be a contributory merely because it holds fully paid up shares of Jaipur Spinning Mills in liquidation.

 

(iv)         That transfer of shares in question is hit by the provisions of Section 536(2) of the Act.

 

(v)          That provisions of Sections 108A to 108G of the Act are not attracted as it was informed that transferor Shakti Mills was not a company registered under MRTP Act at the relevant point of time when fully paid up shares in question were transferred in favour of applicant-Poddar Finance.

 

It is not in dispute that the applicant-Poddar Finance purchased shares in question of Jaipur Spinning Mills from Shakti Mills for a total consideration of Rs.22,854.50 and the same were transferred on 10.5.1979. Shakti Mills was a holding company while Jaipur Spinning Mills was its subsidiary company. Shri G.N. Poddar is Director in Shakti Mills and also in Jaipur Spinning Mills and his son Ajay Poddar is also Director in Jaipur Spinning Mills and Poddar Finance and his another son Pawan Poddar is Director of applicant-Poddar Finance.

 

It is also not in dispute that a petition for winding-up of Shakti Mills was filed on 25.4.1978 before the Bombay High Court and shares in question were transferred thereafter on 10.5.1979. The winding-up of Shakti Mills was ordered by the Company Judge of the Bombay High Court on 21.1.1981. For winding up of Jaipur Spinning Mills, application was filed on 15.12.1980 and its winding up has been ordered on 2.12.1983.

 

Mr.J.P.Bhatt, learned Senior Advocate appearing with Mr.R.C.Joshi on behalf of the applicant submitted that in view of Section 428 of the Act, the applicant-Poddar Finance has to be treated as contributory of Jaipur Spinning Mills in liquidation. The Bombay High Court has not declared the transaction to be void. The Official Liquidator of Shakti Mills has filed application before the Bombay High Court for realization of Rs.17,08,069 on the ground that transaction was under valued, but not for declaring it to be void. It is for the Bombay High Court to record finding as to invalidity of the transaction of transfer of shares. The application regarding under valuation of the shares in question is still pending consideration. Thus, transaction cannot be said to be void. This Court cannot consider the validity of the transfer of shares in question. The learned Senior Counsel has placed reliance on the decision of the Apex Court in Pankaj Mehra and anr. V/s State of Maharashtra and ors. ((2000) 2 SCC 756) and submitted that finding be recorded that applicant-Poddar Finance is a contributory of Jaipur Spinning Mills in liquidation.

 

Per contra, Mr.G.K.Garg, learned Senior Advocate appearing with Mr.Anuroop Singhi and Mr.Kunal Jaiman on behalf of the respondent-Official Liquidator has submitted that transfer of shares in question is void in view of the provisions contained in Section 536(2) of the Act as Shakti Mills transferred the shares in 1979 in favour of applicant-Poddar Finance after commencement of the winding up proceedings in 1978. The winding up order made in the year 1981 relates back as per the provisions of Section 441 (2) of the Act to the date of commencement of the proceedings by presentation of the application for liquidation. No application has been filed for validation of transfer of shares in question before the Company Judge of either Bombay High Court or this Court. Considering the relationship of Directors of the Companies, the transaction was fraudulent and grossly under valued. It was not in the interest of creditors which is a paramount consideration. The learned Senior Counsel has relied upon the provisions of Sections 531, 531A, 536(2), 537(1)(b) of the Act. The applicant-Poddar Finance has not claimed any investment in Jaipur Spinning Mills as is evident from the balance sheets and thus, cloud is cast over the genuineness of the transaction in question. The Official Liquidator of Shakti Mills appointed by the Bombay High Court has also objected to the transfer of shares in question vide letter dated 2.8.2011. He has relied upon the decisions in Sarigam Containers Pvt. Ltd. and Videocon International Ltd. V/s Magatul Industries Ltd. (in liquidation) through the Official Liquidator, High Court ((2009) 90 SCL 321 (Bom))), Administrator, MCC Finance Ltd. V/s Ramesh Gandhi ((2005) 63 SCL 326 (Mad), In Re:Shivshakti Builders and Financial Company Limited (2011(1) PLJR 943), Ram Janam Sharma V/s JVG Finance Ltd. (2011 IIIAD (Delhi) 280) and Pankaj Mehra and anr. V/s State of Maharashtra and ors.(supra).

 

The only question for consideration is whether the applicant-Poddar Finance can be said to be a contributory under section 428 of the Act. Section 428 is quoted below:-

 

  1. Definition of contributory.- The term contributory means every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid up; and for the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, includes any person alleged to be a contributory.

 

As per Section 428, contributory includes holder of any shares which are fully paid up. It includes any person alleged to be a contributory. Section 536(2) of the Act provides that in the case of a winding up by the Court, any transfer of shares in the company or alteration of the status of its members, made after the commencement of the winding up, shall, unless the Court otherwise orders, be void.

 

There is power given to the court to validate the transfer which has taken place after the commencement of the proceedings for winding up of the company. In the instant case, it is admitted fact that petition for winding up of Shakti Mills was presented in the Bombay High Court on 25.4.1978 and its winding up was ordered on 21.1.1981. The transfer of shares in question of Jaipur Spinning Mills was made by Shakti Mills in favour of applicant-Poddar Finance on 10.5.1979. As per provisions of Section 441(2) of the Act, winding up order relates back to the date of presentation of the petition for winding up. In the instant case, winding up of Shakti Mills has been ordered and since the transfer of shares in question was made after commencement of the winding up proceedings, the same is void under section 536(2) of the Act unless otherwise ordered by the Court. It is not the case of the applicant-Poddar Finance that any court has otherwise ordered. Thus, the expression unless otherwise ordered by the Court, any transfer made after the commencement of the winding up proceedings is void has to be given full effect. The Court is given power to validate the transaction. Thus, any disposition would not be ab initio void. The word ‘void’ is not conclusive as Court has been given power to order otherwise. However, the fact remains that in the instant case, the Court has not so far ordered otherwise.

 

In our considered opinion, under section 536 (2) of the Act transaction of transfer of share or other disposition is not required to be annuled by court. It is void unless court orders otherwise. An order to the otherwise is required to be made in order to validate transfer of share/other disposition. It was at option of the applicant to avoid it but he has not chosen that recourse. The submission to the contrary raised by Shri Bhatt cannot be accepted that it was for official liquidator to get transfer of shares declared void or court to make such declaration. It was for Poddar Finance to get transfer of shares validated. Whatever it may be, in the absence of validation, statutory expression as to voidity of transaction mandated in Section 536(2) of the Act has to be given full effect.

 

In Kamani Metallic Oxides Ltd. V/s Kamani Tubes Ltd. ((1984) 56 Comp Cas 19 (Bom)), it has been laid down that every transactions are not void ab initio. If they were to be void ab initio, then on petition being withdrawn or dismissed, they would not revive. In case petition is withdrawn or dismissed, then transactions would never have been void. The Bombay High Court has observed that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a provisional liquidator. Considering the provisions of Section 536(2) read with section 441(2), the Bombay High Court in the case of Kamani Metallic Oxides Ltd. (supra) has laid down thus:-

 

If they were to be void ab initio, i.e., immediately on their being entered into, then on the petition being withdrawn or dismissed, they would not revive. It is clear that if the petition is withdrawn or dismissed then the transactions would never have been void. This clearly shows that the transactions/dispositions are not void ab initio but become void on the passing of an order for winding up or on appointment of a provisional liquidator. What section 536(2) read with section 441(2) provides for is to convert what was otherwise valid into void by virtue of the legal fiction. Thus the voidness takes effect on the passing of the order of winding up or appointment of provisional liquidator. By virtue of the legal fiction, in section 441(2), it then relates back to the date of presentation of the petition for winding up.

 

Under section 443 of the Act, the Court may dismiss the petition or make an order of winding up. Under sub-section (2) of Section 443, the Court may refuse to make order of winding up. Before appointing a provisional liquidator, the Court has to give notice to the company and reasonable opportunity to make representation. As per Section 449 of the Act, on a winding up order being made in respect of a company, the official liquidator becomes the liquidator of the company. In the instant case, the order of winding up of Shakti Mills has been passed and official liquidator has been appointed by Bombay High Court with respect to Shakti Mills and thus, transaction in question has to be treated as void unless the court otherwise orders and the court has not ordered otherwise. Consequently, the transaction is void, the applicant- Poddar Finance cannot be said to be a contributory.

 

In Tulsidas Jasraj Parekh V/s Industrial Bank of Western India (AIR 1931 Bom. 2), it has been laid down by the Bombay High Court that any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the Court under Section 227(2) of Companies Act, 1913. On the other hand, it will not allow the assets to be disposed of at the mere pleasure of the company and thus, cause the fundamental principles of equity amongst creditors to be violated.

 

In Sarigam Containers Pvt. Ltd. and Videocon International Limited (supra), the Bombay High Court considering the provisions of Section 536(2) of the Act, has referred to the decision in the case of J.Sen Gupta (Private) Limited ((1962) XXXII Company Cases 876) in which following principles have been laid down:-

 

It seems to me, therefore, upon considering various authorities on this subject that the following principles are doubtless applicable to Sub section (2) of Section 536 of the Companies Act 1956:-

 

  1. The Court has an absolute discretion to validate a transaction.

 

  1. This discretion is controlled only by the general principles which apply to every kind of judicial discretion.

 

  1. The court must have regard to all the surrounding circumstances, and if from all the surrounding circumstances it comes to the conclusion that the transaction should not be void, it is within the power of the court under section 536(2) to say that the transaction is not void.

 

  1. If it be found that the transaction was for the benefit of, and in the interests of, the company or for keeping the company going or keeping things going generally, it ought to be confirmed.

 

Thus, the Court has absolute discretion to validate the transaction. However, discretion is to be controlled and exercised judicially. If it is found that the transaction was for the benefit of and in the interest of the company or for keeping the company going or keeping things going generally, it ought to be confirmed.

 

The Bombay High Court in the case of Sarigam Containers Pvt. Ltd. and Videocon International Limited (supra) held that company has to plead and prove that the transaction was for the benefit of and in the interest of the company or for keeping the company going or keeping the things going generally. It is also to be shown as to what were the compelling circumstances necessitating the company in liquidation to enter into such transaction during the pendency of winding up action. In absence of such pleadings that transaction was for the benefit and in the interest of company or for keeping the company going or for keeping things going generally, the question of validating such transaction by the court does not arise. No improper transaction which is covered by Section 536(2) of the Act can be validated by the Court.

 

In Administrator, MCC Finance Ltd. V/s Ramesh Gandhi (supra), the Madras High Court has considered the provisions of Section 536(2) of the Act and has observed that the object of Section 536 seems to be to prevent improper disposition or dissipation of the property or transfer of shares of the company otherwise available for distribution among the creditors of the company in liquidation. If the transfer is not bona fide, in terms of Section 536(2), the transaction would be void. Once winding up has been ordered, the provisions of Section 536(2) are attracted.

 

In Re:Shivshakti Builders and Financial Company Limited (supra), the Patna High Court has observed that any disposition after commencement of the winding up proceedings would be void in view of Section 536(2) of the Act.

 

In the case of Navjivan Mills Ltd., In Re (1986(59) Company Cases 201), the Gujarat High Court has laid down that the Court can exercise jurisdiction under section 536(2) of the Act 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 these transactions are saved from the consequence which may ensue.

 

In Re Gray Inn Construction Company Ltd. (1980 (1) All E.R. 814), the Court of Appeal (Civil Division) has laid down that the court would be very circumspect in the matter of validating the payments and the interest of the creditors as well as the company would be kept upper most in consideration.

 

The Apex Court in NGEF Ltd. V/s Chandra Developers (P) Ltd. And anr. ((2005) 8 SCC 219) has considered the question of permissibility of delegation of power of BIFR to Company Court and held that Section 536(2) of the Act ipso facto does not confer any jurisdiction upon the Company Court to direct sale of assets of a sick company. Once the company is declared sick BIFR retains control over its assets. The Apex Court has considered the provisions of Section 536(2) and the decision in Pankaj Mehra (supra) and observed thus:-

 

  1. In Pankaj Mehra V. State of Maharashtra whereupon the learned counsel appearing on behalf of the first respondent placed strong reliance, construction of sub-section (2) of Section 536 of the Companies Act came up for consideration and it was held that having regard to the phraseology used therein, the transaction shall be void unless the court otherwise orders. It is interesting to note that in para 19 thereof, this Court noticed the principles laid down in Gray’s Inn Construction Co.Ltd. Re emphasizing the point that the courts would be very circumspect in the matter of validating the payments and the interests of the creditors as well as the Company would be kept upper most in consideration. Thus, a disposition of assets during the interregnum may not be irretrievably void but the courts are required to exercise power with circumspection and caution.

 

In the case of Pankaj Mehra (supra), the Apex Court has laid down that the word ‘void’ used in Section 536(2) of the Act need not automatically indicate that any disposition would be ab initio void. The provision itself shows that the word ‘void’ is not employed peremptorily since the court has power to order otherwise. The Apex Court has considered difference between the words ‘void’ and ‘voidable’ and laid down that the word ‘void’ used in Section 536(2) of the Act is not employed peremptorily. The Apex Court has further laid down that it cannot be accepted that disposition during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be irretrievably void. The Apex Court held thus:-

 

It is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralysed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bonafide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. This consequence has been correctly voiced by the Division Bench in the impugned judgment.

 

The Apex Court in the case of Pankaj Mehra (supra) has considered the provisions of Section 536(2) of the Act and the provisions of Section 138 of the Negotiable Instruments Act and held that every transaction is not null and void since the Court has power to order otherwise. The liability under section 138 of NI Act is penal liability. This section creates a statutory offence, which on the confluence of the various factors enumerated therein, commencing with the drawing of the cheque and ending with the failure of the drawer of the cheque to pay the amount covered by it within the time stipulated, ripens into a penal liability. Thus, Section 536(2) of the Act cannot be invoked to escape from the offence under section 138 of NI Act.

 

When we come to the facts of the present case, considering the aspect that interest of creditors is the paramount consideration, the Official Liquidator has rightly opined that transaction in question is grossly under-valued. The Official Liquidator of Shakti Mills has also preferred an application in the Bombay High Court alleging under-value of the transaction by more than Rs.17 lacs. 1,65,010 equity shares of Rs.10/- each and 12,478/- preference shares of Rs.100/- each of Jaipur Spinning Mills were transferred by Shakti Mills in favour of applicant-Poddar Finance for a paltry consideration of Rs.22,854.50. The transaction cannot in any manner be said to be for the benefit and interest of the company or for keeping the company going or keeping things going generally. It has not been shown as to what were the compelling circumstances necessitating Shakti Mills to transfer the shares in question of Jaipur Spinning Mills in favour of applicant-Poddar Finance after commencement of proceedings of winding up. Considering the surrounding circumstances and inter-se relationship of the Directors of all the three managements, the transaction in question cannot be said to be bona fide and it is to be treated as void in view of Section 536(2) of the Act. The court has not ordered otherwise under section 536(2) and even no application has been filed by the applicant for validation in court so as to order otherwise. The applicant has failed to satisfy as to bona fide nature of the transaction in question. Thus, we are of the opinion that transfer in question is to be treated as void in term of Section 536(2) of the Act. On the basis of such transaction, applicant cannot claim to be contributory.

 

No application for validation of transaction in question has been filed by the applicant-Poddar Finance for the last 30 years. In ICICI Ltd. V/s Ahmedabad Manufacturing & Calico Printing Co.Ltd. & anr. ((2004) 9 SCC 747), the Apex Court considered the question that ICICI Bank advanced loans to the Company between 23.2.1976 till 10.7.1986 and on 10.7.1986, an application for winding up was filed and thereafter, two further loans were sanctioned by ICICI to the Company. In 1990, the Company as well as ICICI made an application under section 536(2) of the Act for allowing the disposition of the company’s properties which may have to take place as a consequence of the loans advanced by the ICICI to the company from 1976. The Division Bench set aside the order of Single Bench. The Division Bench opined that what the appellant-ICICI was in fact seeking to do was to convert itself from an unsecured into a secured creditor in respect of transactions which had taken place 15 to 17 years ago. The Apex Court held that Division Bench did not err in rejecting the application of ICICI pertaining to the loan transactions prior to 10.7.1986. The Apex Court further held that the Division Bench was also correct that the grant of leave under section 536(2) would not be appropriate after this delay. Leave under section 536(2) may be granted for the benefit of the company in liquidation or the creditors of the company in general.

 

We find no force in the submission that it is for the Bombay High Court to look into the validity of transfer of shares in question as shares of Jaipur Spinning Mills were transferred in favour of applicant- Poddar Finance by Shakti Mills, Bombay. When winding up of Shakti Mills has been ordered, obviously transaction is void as per statutory mandate of Section 536(2) which cannot be ignored by us while adjudging the question whether the applicant Poddar Finance is contributory or not. The surrounding circumstances show that transaction was not to benefit creditors or to keep company going, it appears to be under-valued also. Unless and until transaction is legal and validated, the applicant-Poddar Finance cannot claim itself to be a contributory and the Company Court and Official Liquidator have rightly opined so. The applicant has as per agreement availed recourse of settlement of its claim as contributory with the Official Liquidator under the provisions of the Act and the Rules. Thereafter, finding has been recorded by the Official Liquidator that applicant cannot be treated to be a contributory and report was submitted to the Company Court and the Company Court has also expressed the same opinion that applicant cannot be held to be a contributory, which we found to be in accordance with the law. Since the transfer of shares in question is void in view of Section 536(2) of the Act, the applicant-Poddar Finance cannot be treated to be a contributory.

 

Coming to the submission of learned Senior Counsel appearing on behalf of the respondent based on Sections 531, 531A and 537(1) of the Act. We may observe that the provisions contained in Section 531 relating to fraudulent preference are not attracted. However, it provides that any transfer within six months before the commencement of winding up in the event of company being wound up shall be deemed a fraudulent preference and be invalid. In the instant case, transfer is after commencement of winding up proceedings. Similarly, provisions contained in Section 531A of the Act provide that any transfer of property by a company not being in good faith or is not in ordinary course of business if made within one year before the presentation of a petition for winding up by the Court, shall be void against the Liquidator. Section 537 of the Act provides for avoidance of certain attachments, executions etc. in winding up by Court. Sub section (1) of Section 537 provides that where any company is being wound up by the Court, any attachment, distress or execution without leave of the court after commencement of the winding up, shall be void. Though the aforesaid provisions are not attracted, but intendment is to prevent fraudulent preference, transactions which are not in good faith or are not effected in ordinary course of business and even attachment, distress or execution are avoided unless permitted by court. In the instant case, provisions of Section 536(2) of the Act are attracted.

 

In view of the discussion made above, we are of the opinion that applicant-Poddar Finance Private Limited is not a contributory of Jaipur Spinning and Weaving Mills Limited in liquidation. Thus, misc. application no.49/2011 filed by the applicant is dismissed. Let the finding recorded by this Court be sent to the Hon’ble Supreme Court in compliance of the order dated 11.3.2011 passed in the Petition for Special Leave to Appeal (Civil) No.3580/2011.

 

(BELA M.TRIVEDI)J.                            (ARUN MISHRA)C.J.

In K.G. Premshanker3, the effect of the above provisions (Sections 40 to 43 of the Evidence Act) has been broadly noted thus: if the criminal case and civil proceedings are for the same cause, judgment of the civil court would be relevant if conditions of any of Sections 40 to 43 are satisfied but it cannot be said that the same would be conclusive except as provided in Section 41. Section 41 provides which judgment would be conclusive proof of what is stated therein. Moreover, the judgment, order or decree passed in previous civil proceedings, if relevant, as provided under Sections 40 and 42 or other provisions of the Evidence Act then in each case the Court has to decide to what extent it is binding or conclusive with regard to the matters decided therein. In each and every case the first question which would require consideration is, whether judgment, order or decree is relevant; if relevant, its effect. This would depend upon the facts of each case.

In light of the above legal position, it may be immediately observed that the High Court was not at all justified in staying the proceedings in the civil suit till the decision of criminal case. Firstly, because even if there is possibility of conflicting decisions in the civil and criminal courts, such an eventuality cannot be taken as a relevant consideration. Secondly, in the facts of the present case there is no likelihood of any embarrassment to the defendants (respondent nos. 1 to 4 herein) as they had already filed the written statement in the civil suit and based on the pleadings of the parties the issues have been framed. In this view of the matter, the outcome and/or findings that may be arrived at by the civil court will not at all prejudice the defence(s) of the respondent nos. 1 to 4 in the criminal proceedings.

For the above reasons, appeal is allowed. The impugned order dated 24.11.2008 passed by the Division Bench of the Madhya Pradesh High Court is set aside. The proceedings in the civil suit shall now proceed further in accordance with law.

——————————————————————————————————————————————

 

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NO.   4166      OF 2013

(Arising out of SLP(C) No. 12644 of 2009)

 

Guru Granth Saheb Sthan Meerghat Vanaras               ……  Appellant

Vs.

Ved Prakash & Ors.                                        ……Respondents

JUDGMENT

R.M. LODHA, J.

Leave granted.

 

  1. The short question for consideration in this appeal by special leave is whether High Court was justified in staying the proceedings in civil suit till the decision in criminal case.

 

  1. It is not necessary to narrate the facts in detail. Suffice it to say that the appellant filed an FIR (P.S. Case No. 8 of 2003) at Dharampura Police Station against respondent nos. 1 to 4 for commission of the offences under Sections 420, 467, 468 and 120B, IPC alleging that they had executed a false, forged and fabricated will on 02.07.1997 in the name of late Devkinandan Sahay with the intention to grab his property. It was further alleged that based on the fabricated will, these respondents had obtained a mutation order dated 24.11.1999 from the Tehsildar, Ajaygarh. On completion of investigation in the above F.I.R., the challan has been filed against the above respondents and trial against them is going on in the Court of Judicial Magistrate, First Class, Ajaygarh, Panna (M.P.).

 

  1. On 09.02.2004, the appellant brought legal action in representative capacity against the respondents nos. 1 to 4 by way of a civil suit in the Court of District Judge, Panna (M.P.) praying for a decree for declaration of title, perpetual injunction and possession in respect of disputed lands and for annulling the sale deed dated 14.08.2003 and the mutation order dated 24.11.1999. In the suit, reference of will forged by the respondent nos. 1 to 4 has been made. The said suit has been transferred to the Court of Additional District Judge, Panna and bears Civil Suit No. 10A of 2006. The respondent nos. 1 to 4, who are defendants in the suit, have filed their written statement on 19.06.2006. The trial court has framed issues on the basis of the pleadings of the parties on 21.09.2007. On 21.04.2008, the defendants (respondent nos. 1 to 4 herein) filed an application under Section 10 read with Section 151, CPC for staying the proceedings in the civil suit during the pendency of above- referred criminal case.

 

  1. The Additional District Judge, Panna, by his order dated 21.04.2008 dismissed the application for staying the proceedings in the suit.

 

  1. The respondent nos. 1 to 4 herein challenged the order of the Additional District Judge in the High Court in a writ petition under Article 227 of the Constitution of India. The Division Bench of the Madhya Pradesh High Court by the impugned order has set aside the order of the Additional District Judge and, as noted above, has stayed the proceedings in Civil Suit till the decision of criminal case. It is from this order that the present civil appeal, by special leave, has arisen.

 

  1. We have heard Mr. Nagendra Rai, learned senior counsel for the appellant, and Mr. K.G. Bhagat, learned counsel for respondent nos. 1 to 4.

 

  1. A Constitution Bench of this Court in M.S. Sheriff & Anr. v. State of Madras & Ors.[1] has considered the question of simultaneous prosecution of the criminal proceedings with the civil suit. In paragraphs 14,15 and 16 (Pg. 399) of the Report, this Court stated as follows:

 

“14. . . . . . . . It was said that the simultaneous prosecution of these matters will embarrass the accused. . . . . but we can see that the simultaneous prosecution of the present criminal proceedings out of which this appeal arises and the civil suits will embarrass the accused. We have therefore to determine which should be stayed.

  1. As between the civil and the criminal proceedings we are of the opinion that the criminal matters should be given precedence. There is some difference of opinion in the High Courts of India on this point. No hard and fast rule can be laid down but we do not consider that the possibility of conflicting decisions in the civil and criminal Courts is a relevant consideration. The law envisages such an eventuality when it expressly refrains from making the decision of one Court binding on the other, or even relevant, except for certain limited purposes, such as sentence or damages. The only relevant consideration here is the likelihood of embarrassment.
  2. Another factor which weighs with us is that a civil suit often drags on for years and it is undesirable that a criminal prosecution should wait till everybody concerned has forgotten all about the crime. The public interests demand that criminal justice should be swift and sure; that the guilty should be punished while the events are still fresh in the public mind and that the innocent should be absolved as early as is consistent with a fair and impartial trial. Another reason is that it is undesirable to let things slide till memories have grown too dim to trust. This, however, is not a hard and fast rule. Special considerations obtaining in any particular case might make some other course more expedient and just. For example, the civil case or the other criminal proceeding may be so near its end as to make it inexpedient to stay it in order to give precedence to a prosecution ordered under S. 476. But in this case we are of the view that the civil suits should be stayed till the criminal proceedings have finished.”
  3. The ratio of the decision in M.S. Sheriff1 is that no hard and fast rule can be laid down as to which of the proceedings – civil or criminal – must be stayed. It was held that possibility of conflicting decisions in the civil and criminal courts cannot be considered as a relevant consideration for stay of the proceedings as law envisaged such an eventuality. Embarrassment was considered to be a relevant aspect and having regard to certain factors, this Court found expedient in M.S. Sheriff1 to stay the civil proceedings. The Court made it very clear that this, however, was not hard and fast rule; special considerations obtaining in any particular case might make some other course more expedient and just. M.S. Sheriff1 does not lay down an invariable rule that simultaneous prosecution of criminal proceedings and civil suit will embarrass the accused or that invariably the proceedings in the civil suit should be stayed until disposal of criminal case.

 

  1. In M/s. Karam Chand Ganga Prasad and Another etc. v. Union of India and Others[2], this Court in paragraph 4 of the Report (Pg. 695) made the following general observations, “it is a well established principle of law that the decisions of the civil courts are binding on the criminal courts. The converse is not true.” This statement has been held to be confined to the facts of that case in a later decision in K.G. Premshanker v. Inspector of Police and Another[3], to which we shall refer to a little later.

 

  1. In V.M. Shah v. State of Maharashtra and Another[4], while dealing with the question whether the conviction under Section 630 of the Companies Act was sustainable, this Court, while noticing the decision in M.S. Sheriff1 in para 11 (pg. 770) of the Report, held as under:

 

“11. As seen that the civil court after full-dressed trial recorded the finding that the appellant had not come into possession through the Company but had independent tenancy rights from the principal landlord and, therefore, the decree for eviction was negatived. Until that finding is duly considered by the appellate court after weighing the evidence afresh and if it so warranted reversed, the findings bind the parties. The findings, recorded by the criminal court, stand superseded by the findings recorded by the civil court. Thereby, the findings of the civil court get precedence over the findings recorded by the trial court, in particular, in summary trial for offences like Section 630. The mere pendency of the appeal does not have the effect of suspending the operation of the decree of the trial court and neither the finding of the civil court gets nor the decree becomes inoperative.”

  1. The statement of law in V.M. Shah4, as quoted above, has been expressly held to be not a good law in K.G. Premshanker3 .

 

  1. In State of Rajasthan v. Kalyan Sundaram Cement Industries Ltd. and Others[5], this Court made the following statement in paragraph 3 (pgs. 87-88):

 

“3. It is settled law that pendency of the criminal matters would not be an impediment to proceed with the civil suits. The criminal court would deal with the offence punishable under the Act. On the other hand, the courts rarely stay the criminal cases and only when the compelling circumstances require the exercise of their power. We have never come across stay of any civil suits by the courts so far. The High Court of Rajasthan is only an exception to pass such orders. The High Court proceeded on a wrong premise that the accused would be expected to disclose their defence in the criminal case by asking them to proceed with the trial of the suit. It is not a correct principle of law. Even otherwise, it no longer subsists, since many of them have filed their defences in the civil suit. On principle of law, we hold that the approach adopted by the High Court is not correct. But since the defence has already been filed nothing survives in this matter.”

  1. We may now refer to a three-Judge Bench decision of this Court in K.G. Premshanker3. The three-Judge Bench took into consideration Sections 40, 41, 42 and 43 of the Evidence Act, 1872 and also the decision of this Court in M.S. Sheriff1 and observed in paragraph 32 of the Report that the decision rendered by the Constitution Bench in M.S. Sheriff case1 would be binding wherein it has been specifically held that no hard and fast rule can be laid down and that possibility of conflicting decision in civil and criminal courts is not a relevant consideration.

 

  1. Section 40 of the Evidence Act makes it plain that the existence of any judgment, order or decree which by law prevents any Courts from taking cognizance of a suit or holding a trial is a relevant fact when the question is whether such Court ought to take cognizance of such suit, or to hold such trial.

 

  1. Section 41 provides for relevancy of judgments passed in the exercise of probate, matrimonial admiralty or insolvency jurisdiction by the Competent Court. It reads as follows :

 

“S. 41. Relevancy of certain judgments in probate, etc., jurisdiction.—A final judgment, order or decree of a competent Court, in the exercise of probate, matrimonial admiralty or insolvency jurisdiction which confers upon or takes away from any person any legal character, or which declares any person to be entitled to any such character, or to be entitled to any specific thing, not as against any specified person but absolutely, is relevant when the existence of any such legal character, or the title of any such person to any such thing, is relevant.

Such judgment, order or decree is conclusive proof— that any legal character, which it confers accrued at the time when such judgment, order or decree came into operation;

that any legal character, to which it declares any such person to be entitled, accrued to that person at the time when such judgment, order or decree declares it to have accrued to that person;

that any legal character which it takes away from any such person ceased at the time from which such judgment, order or decree declared that it had ceased or should cease;

and that anything to which it declares any person to be so entitled was the property of that person at the time from which such judgment, order or decree declares that it had been or should be his property.”

  1. Section 42 deals with relevancy and effect of judgments, orders or decrees, other than those mentioned in Section 41. It reads as under:

 

“S.42. Relevancy and effect of judgments, orders or decrees, other than those mentioned in section 41.—Judgments, orders or decrees other than those mentioned in section 41, are relevant if they relate to matters of a public nature relevant to the enquiry; but such judgments, orders or decrees are not conclusive proof of that which they state.”

  1. Section 43 provides that the judgments, orders or decrees other than those mentioned in Sections 40, 41 and 42 are irrelevant unless the existence of such judgment, order or decree is a fact in issue or is relevant under some other provisions of the Evidence Act.

 

  1. In K.G. Premshanker3, the effect of the above provisions (Sections 40 to 43 of the Evidence Act) has been broadly noted thus: if the criminal case and civil proceedings are for the same cause, judgment of the civil court would be relevant if conditions of any of Sections 40 to 43 are satisfied but it cannot be said that the same would be conclusive except as provided in Section 41. Section 41 provides which judgment would be conclusive proof of what is stated therein. Moreover, the judgment, order or decree passed in previous civil proceedings, if relevant, as provided under Sections 40 and 42 or other provisions of the Evidence Act then in each case the Court has to decide to what extent it is binding or conclusive with regard to the matters decided therein. In each and every case the first question which would require consideration is, whether judgment, order or decree is relevant; if relevant, its effect. This would depend upon the facts of each case.

 

20 In light of the above legal position, it may be immediately observed that the High Court was not at all justified in staying the proceedings in the civil suit till the decision of criminal case. Firstly, because even if there is possibility of conflicting decisions in the civil and criminal courts, such an eventuality cannot be taken as a relevant consideration. Secondly, in the facts of the present case there is no likelihood of any embarrassment to the defendants (respondent nos. 1 to 4 herein) as they had already filed the written statement in the civil suit and based on the pleadings of the parties the issues have been framed. In this view of the matter, the outcome and/or findings that may be arrived at by the civil court will not at all prejudice the defence(s) of the respondent nos. 1 to 4 in the criminal proceedings.

 

  1. For the above reasons, appeal is allowed. The impugned order dated 24.11.2008 passed by the Division Bench of the Madhya Pradesh High Court is set aside. The proceedings in the civil suit shall now proceed further in accordance with law. The parties shall bear their own costs.

 

……………………….J.

 

(R.M. Lodha) ..…..…………………J.

 

(Sharad Arvind Bobde) NEW DELHI MAY 1, 2013.

 

———————–

 

[1]     AIR 1954 SC 397

[2]     1970 (3) SCC 694

[3]     (2002) 8 SCC 87

[4]     (1995) 5 SCC 767

[5]     (1996) 3 SCC 87

“It cannot be laid down as a general proposition that whenever the decree is against a company, its Directors/shareholders would also be liable. To hold so would be contrary to the very concept of limited liability and obliterate the distinction between a partnership and a company. Though the courts have watered down the principle in Solomon (supra), to cover the cases of fraud, improper conduct etc, as laid down in Singer India Ltd. Vs. Chander Mohan Chadha (2004) 7 SCC 1 but a case therefor has to be made out. The decree holder in the present case has not made out any case whatsoever. As aforesaid not only were the Directors not parties to the arbitration proceedings but were not impleaded in the execution petition also. There are no averments whatsoever in the execution petition or even in the application under consideration of fraud or improper conduct or of incorporation of the company to evade obligations imposed by law and in which situations the Supreme Court in Singer India Ltd. (Supra) has held that the corporate veil can be disregarded. All that the decree holder has pleaded is that one of the Directors has paid part of the decretal amount. Such voluntary payment by one of the Directors cannot entitle the decree holder to execute the decree against the other Directors also. The only other averments are that the income generated from the company was the income of the Directors. However there are no specific pleadings of fraud and as required to be made under Order 6 Rule 4 of the CPC. It is significant that the three Directors are not stated to be related to each other but are only described as friends of each other. Such faith amongst the Directors is implicit for them to come together to incorporate a company. However, the said circumstance alone is not sufficient to make out a case for lifting of the corporate veil. It has been vaguely stated that the claims of the decree holder are pending since 1996 and the assets of the company have been done away with. There are no averments whatsoever as to what were the assets of the company and as to when they were transferred. In Saurabh Exports, on the pleadings and evidence recorded, the court had found that the company was only a front for the business of its Directors and it was on such evidence that the decree was passed not only against the company but against the Directors also. In the present case no efforts whatsoever have been made out by the decree holder to even plead that the assets of the Directors against whom the decree is sought to be executed were not in existence prior to the incorporation of the company or that the business through the company was only a front for the business of the said Directors.”

*IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                 Ex. App. No.516/2009 in Ex.P. No.295/2003

%                                                  Date of decision: 9th February, 2010

V.K. UPPAL                                                                    ….. Decree Holder

Through: Mr. Rajat Aneja, Advocate.

Versus

M/S AKSHAY INTERNATIONAL PVT. LTD.                                        ….. Judgment Debtor

Through: Mr. Santosh Paul & Mr. Arun Francis, Advocates for JD

No.2&3.

CORAM :-

HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW

  1. Whether reporters of Local papers may

be allowed to see the judgment?                          Yes

  1. To be referred to the reporter or not? Yes
  2. Whether the judgment should be reported Yes

in the Digest?

 

RAJIV SAHAI ENDLAW, J.

  1. The decree holder has applied for execution of arbitration award under the Arbitration Act, 1996, stated to be having force of a decree. The decree holder in the execution petition stated that as per the arbitration award, a sum of Rs.8,54,250/- along with costs of Rs.75,000/- and interest at 18% p.a. had been awarded to it against the judgment debtor company. The arbitration proceedings as well as the execution petition was filed only against the judgment debtor company i.e. M/s Akshay International Pvt. Ltd.
  1. The judgment debtor company was sought to be served with the notice of execution through its Director Shri Prakash Baliga. On 19th May, 2005, the counsel for the judgment debtor company made a statement, recorded in the order of that the date that the judgment debtor company was in a bad shape and that Mr. Prakash Baliga was gathering resources and keen to settle the matter. Mr. Prakash Baliga was directed to remain present in the court on the next date of hearing. Mr. Prakash Baliga appeared before the court on 12th August, 2008 and again informed that the financial condition of the judgment debtor company was very poor and he will have to consult “the other partners”. However, this court finding that the execution had been pending since the year 2003 issued warrants of attachment of a bank account particulars whereof were given by the decree holder. However on the next date of hearing i.e. 28th August, 2008 the decree holder informed the court that “the judgment debtor No.3” was co-operating and had already paid Rs.50,000/- and two post dated cheques to the decree holder in part satisfaction of the decree and sought recalling of the earlier order attaching the savings bank account “of the judgment debtor No.3 Mr. Prakash Baliga” and this court ordered accordingly. It may be mentioned that the execution as aforesaid was filed only against the judgment debtor company and there is nothing in the file to show that any of the Directors of the judgment debtor company were at any time also impleaded as judgment debtors.
  1. This Court on 28th August, 2008 also directed the other two Directors of the judgment debtor company namely Mr. AJS Sidhu and Mr. S.S. Velkar to present themselves in the court. Subsequently, warrants of arrest of the said Mr. S.S. Velkar and Mr. AJS Sidhu were issued and they appeared before this Court on 1st July, 2009 and informed that the judgment debtor company has ceased operations and the only assets of the judgment debtor company are certain receivables from foreign parties and the judgment debtor company has no other means to satisfy the decree. They also contended that they were not personally liable. Per contra, the counsel for the decree holder contended on that date that the third Director Mr. Prakash Baliga has already paid Rs.6 lacs out of the decretal amount and the other two Directors should pay the balance decretal amount. This Court directed the balance sheet and statement of affairs of the company to be filed and the same were filed.
  1. However, the decree holder rather than responding thereto has filed this application pleading that the judgment debtor company is a closely held company of the three Directors aforesaid who were friends; that keeping in view the nature of constitution of the judgment debtor, it has become extremely imperative for the court to direct the lifting of the corporate veil to provide justice to the decree holder; that the court has already directed one of the Directors to pay part of the decretal amount to the decree holder and accordingly the other two Directors should also be directed to pay the decretal amount and upon their failing to do so the decree should be executed against their properties. No need was felt to call for a reply of the said application from the other two Directors against whom the application was directed and the counsel for the decree holder and the counsel for the other two Directors have been heard. It may be mentioned that there is no order of this Court directing Mr. Prakash Baliga, Director of Judgment Debtor company to pay any decretal debts of the company and the payment if any was a private arrangement between the Decree Holder and the said Director, who appears to have come under pressure owing to attachment of his personal bank account as aforesaid.
  1. The counsel for the decree holder has relied upon (i) Ashish Polyfibres (Bihar) Ltd. Vs. State Bank of India 2009 (107) DRJ 1 (DB); (ii) Jawahar Lal Nehru Hockey Tournament Vs. Radiant Sports Management 149(2008) DLT 749; (iii) M.R. Khanna Vs. Union of India 133 (2006) DLT 114; (iv) Iyer & Son Pvt. Ltd.Vs. LIC 2007 X AD (Delhi) 643 and Saurabh Exports Vs. Blaze Finlease & Credits Pvt. Ltd. 129 (2006) DLT 429.
  1. The admitted position is that the arbitration award having force of the decree is against the judgment debtor company only and not against its Directors. The question which arises is whether a money decree against a Private Limited Co. can be executed against its Directors. There is no provision therefor in the CPC. Order 21 Rule 50 does provide for execution of a money decree against a firm from the assets of the partners of the said firm mentioned in the said rule but there is no provision with respect to the Directors of a company. The executing court, as this Court is cannot go behind the decree and can execute the same as per its form only. The decree is against the company. This Court as the executing court cannot execute the decree against anyone other than the judgment debtor or against from the assets/properties of anyone other than the judgment debtor. The identity of a Director or a shareholder of a company is distinct from that of the company. That is the very genesis of a company or a corporate identity or a juristic person. The classic exposition of law in this regard is contained in Solomon Vs. Solomon & Co. Ltd. 1897 AC 22 where the House of Lords had held that in law a company is a person all together different from its shareholders and Directors and the shareholders and Directors of the company are not liable for the debts of the company except to the extent permissible by law.
  1. The counsel for the decree holder has sought to, by relying upon the judgments aforesaid make out a case for invoking the principle of lifting of the corporate veil. The question which arises is, in what circumstances and in which proceedings is the corporate veil to be lifted. Whether it can be lifted in execution proceedings also or it has to be lifted in the substantial proceedings, of orders/decrees wherein execution is sought. In the judgment of the single judge in Jawahar Lal Nehru Hockey Tournament (supra) there is an observation that there could be a case where the court even in an execution proceeding lifts the veil of a closely held company, particularly a private limited company and in order to satisfy a decree, proceeds against the personal assets of its Directors and shareholders. However, I may notice that the aforesaid judgment has been overruled by the Division Bench in EFA(OS) No.17/2008 decided on 7th November, 2008 and reported as MANU/DE/1756/2008. Though the Learned Single Judge had held no case of lifting of the corporate veil in execution to be made out in that case, the Division Bench found that the Director of the company had agreed to be personally liable to satisfy the decree and held him liable. However, the Division Bench refrained from commenting authoritatively on the aspect of lifting of the corporate veil in execution. Thus the said judgment cited by the counsel for the decree holder does not come to his rescue.
  1. I also do not find any of the other judgments relied upon by the decree holder to be relevant. In Ashish Polyfibres (Bihar) Ltd., in a suit by a bank for recovery of dues, decree had been passed not only against the company but also against its Directors. The said decree was under challenge before the Division Bench on the ground of the Directors being not liable. The Division Bench dismissed the appeal for the reason that in that case the money had been mistakenly credited by the bank in the account in the name of the company and it was found that the Directors of the company in spite of knowledge of such mistake misappropriated the amounts. It was in those circumstance that they were held liable and not merely for the reason of being the Directors. Moreover that was a substantive proceeding and not an execution proceeding. M.R. Khanna (supra) was a case of recovery of dues under the Employees’ State Insurance Act, 1948. The corporate veil was pierced in that case because the ESI’s contributions recovered from the salaries of the poor workers had not been deposited but had been misappropriated by the Directors for their own benefit. That was also not a case of execution of a decree but of steps taken under the Employees’ State Insurance Act, 1948. The observations relied upon in Iyer & Son Pvt. Ltd. (supra) were also made in the context of public dues. No public dues are involved in the present case; that was also not the case of a money decree. Similarly, Saurabh Exports (supra) was a suit for recovery of money against the company and its Directors and not a case of execution.
  1. From the aforesaid, it would be evident that the counsel for the decree holder has been unable to show a single precedent where the money decree against a company has been executed against the Directors or against the assets of the Directors. The provisions of law as aforesaid, also do not permit the same. The Transfer of Property Act in Section 53 thereof allows a creditor to have a transfer of property made with an intent to defeat the creditor set aside. However, the decree holder has not made out/pleaded any case of transfer also.
  1. It cannot be laid down as a general proposition that whenever the decree is against a company, its Directors/shareholders would also be liable. To hold so would be contrary to the very concept of limited liability and obliterate the distinction between a partnership and a company. Though the courts have watered down the principle in Solomon (supra), to cover the cases of fraud, improper conduct etc, as laid down in Singer India Ltd. Vs. Chander Mohan Chadha (2004) 7 SCC 1 but a case therefor has to be made out. The decree holder in the present case has not made out any case whatsoever. As aforesaid not only were the Directors not parties to the arbitration proceedings but were not impleaded in the execution petition also. There are no averments whatsoever in the execution petition or even in the application under consideration of fraud or improper conduct or of incorporation of the company to evade obligations imposed by law and in which situations the Supreme Court in Singer India Ltd. (Supra) has held that the corporate veil can be disregarded. All that the decree holder has pleaded is that one of the Directors has paid part of the decretal amount. Such voluntary payment by one of the Directors cannot entitle the decree holder to execute the decree against the other Directors also. The only other averments are that the income generated from the company was the income of the Directors. However there are no specific pleadings of fraud and as required to be made under Order 6 Rule 4 of the CPC. It is significant that the three Directors are not stated to be related to each other but are only described as friends of each other. Such faith amongst the Directors is implicit for them to come together to incorporate a company. However, the said circumstance alone is not sufficient to make out a case for lifting of the corporate veil. It has been vaguely stated that the claims of the decree holder are pending since 1996 and the assets of the company have been done away with. There are no averments whatsoever as to what were the assets of the company and as to when they were transferred. In Saurabh Exports, on the pleadings and evidence recorded, the court had found that the company was only a front for the business of its Directors and it was on such evidence that the decree was passed not only against the company but against the Directors also. In the present case no efforts whatsoever have been made out by the decree holder to even plead that the assets of the Directors against whom the decree is sought to be executed were not in existence prior to the incorporation of the company or that the business through the company was only a front for the business of the said Directors.

No case for attaching the properties of the Directors of the judgment debtor is, therefore, made out. There is not merit in the application, the same is dismissed.

RAJIV SAHAI ENDLAW (JUDGE)