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 2005

June 5, 2006

Section 537, read with sections 456 and 458 of the Companies Act, 1956 – Winding up - Avoidance of certain attachment, executions, etc. - Whether when proceedings are initiated for winding up of a company, any attachment or sale of assets of said company effected without leave of Court, would be null and void, in terms of section 537 - Held, yes - Company under liquidation became sick and approached BIFR for getting benefit of rehabilitation under section 15 of SICA - BIFR held that company was not likely to make its net worth exceed its accumulated losses within a reasonable time, while meeting all its financial obligations and that company as a result thereof was not likely to become viable in future and, hence, it should be wound up under section 20(1), where on 22-7-1999, concerned High Court passed on winding up order - When matter was pending before BIFR, first respondent - APIDC sought permission of BIFR to seize assets of company, however, said request was rejected that when winding up of company was being considered, corporation could not be granted for taking action under section 29 of SFC Act and they should approach concerned High Court - Though such an order, first respondent seized unit and on 9-2-1998, sale was conducted where sale consideration was received and physical possession was delivered to fifth respondent - Official liquidator filed instant application claiming that action of respondent was in violation not only of order passed by BIFR, but also mandatory provisions of section 537, therefore, sale was void - Whether first respondent, without seeking permission of either appellate authority or High Court, seized assets of company deliberately, violating express order of BIFR as well as provision of SICA and Act, Act of respondent could be considered only as an attempt to overreach specific order of BIFR as well as provisions of Act where there was a specific prohibition against creditors to proceed against assets of company - Held, yes - Whether since, fourth respondent auction purchaser had made huge investments by raising loans from corporations or from financial institutions, it would not be appropriate to interfere with sale that was effected in favour of auction purchaser, though sale was held null and void - Held, yes

Section 529 of the Companies Act, 1956, read with section 29 of the State Financial Corporations, Act, 1951 - Winding up - Application of insolvency rules - Whether powers conferred under section 29 of 1951 Act are restricted by virtue of provisions of section 529 of 1956 Act - Held, yes

FACTS

The company under liquidation became sick and approached the BIFR under section 15 of the SICA for getting benefit of rehabilitation. The BIFR on 20-1-1997 passed an order declaring that the company was not likely to make its net worth exceed its accumulated losses within a reasonable time, while meeting all its financial obligations and that the company as a result thereof was not likely to become viable in future and, hence, it should be wound up under section 20(1). The said opinion was forwarded to the concerned High Court where on 22-7-1999, winding up order was passed. When the matter was pending before the BIFR, the first respondent - APIDC sought permission of the BIFR to seize the assets of the company, however, the said request of the APIDC was rejected holding that when the winding up of the company was being considered, the corporation could not be granted permission for taking action under section 29 of the SFCs Act and they should approach the concerned High Court.

Though such an order was passed, the first respondent seized the unit and subsequent to an advertisement, on 9-2-1998, the sale was conducted where sale consideration was received on 19-8-1998. The physical possession was delivered to the fifth respondent. Even before taking possession of the assets by the respondent, employees union filed an appeal which was dismissed. The applicant - Official Liquidator filed the instant application, claiming that the action of the first respondent was in violation not only of the order passed by the BIFR, but also the mandatory provisions of section 537, therefore, the sale was liable to be set aside. In response, the first respondent submitted that the unit was seized by exercising its powers under section 29 of the SFC Act - In a separate counter, the fourth respondent submitted that it was a bonafide purchaser of the property and invested huge amounts by raising further loans, not only on the buildings but also on the plant and machinery, therefore, the sale effected in its favour might not be interfered with at that stage.

HELD

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

In the instant case, an argument was advanced that since no company petition was presented, therefore, the said provision might not be applicable. The said contention was clearly devoid of merit. Since, a petition for winding up is registered on receipt of the proceedings from the BIFR, therefore, when once proceeding is received by the registry and the same is taken on file, the same has to be construed as presentation of a petition for winding up. If so construed, once proceeding of the BIFR is received, the proceeding for winding up is 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 was pending till it was disposed of on 15-7-1997, and during the pendency of the said appeal, the provisions of sub-section (1) of section 22 of the SICA applies, where there is prohibition from taking any proceedings against the assets of the company. [Para 24]

From the provision of section 22(1) also it is clear that without obtaining necessary consent of the Board or the appellate authority, the APIDC, which was one of the secured creditors was not entitled to proceed against the assets of the company. Therefore, the action of the APIDC was also in contravention of the provisions of the SICA. [Para 25]

When once proceedings are initiated for winding up of a company, any attachment or sale of the assets of the said company effected without the leave of the Court, shall be null and void, in terms of section 537 read with section 441. Therefore, the bar imposed under the provisions of the Act would operate from the inception of the winding up proceedings before the company Court. Further, though it was contended for the APSFC and APIDC that by virtue of section 46B of the SFC Act, the provisions of section 29 of the SFC Act has got an overriding effect over the provisions of any other Act, but the said contention was without any merit in view of the decision of the Apex Court, wherein it was held that the powers conferred under section 29 of the SFC Act are restricted by virtue of the provisions of section 529 read with section 529A of the Companies Act, which provisions were amended by the Amendment Act, 1985, in order to protect the interest of the workmen of the company under liquidation. In fact, even the Apex Court had gone to the extent of holding that even with reference to the proceedings under the Recovery of Debts Act, for recovery of debts due to the financial institutions, are also bound by the provisions of section 529A and the official liquidator is required to be associated with the sale as well as to the distribution of the sale proceeds among the secured creditors, as the official liquidator was representing the workmen who were having a pari passu charge over the assets of the company under liquidation, 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 company without the leave of the Court and the association with the official liquidator, attached to the High Court. [Para 52]

The judgment relied upon by the auction purchaser, no doubt showed that under the provisions of the Provincial Insolvency Act, the rights of the purchaser of the property of the insolvent, during the pendency of the insolvency proceedings, are protected, provided the purchaser is a bonafide purchaser for consideration, without notice of the pendency of the proceedings. But the said proposition of law might not help either to the auction purchaser or the other respondents. As admittedly, no such provision was incorporate either under section 537 or under section 441 of the Act, protecting the interest of the parties. [Para 53]

The company case was pending before the High Court, the moment the proceedings of the BIFR were communicated to the registry of the High Court for consideration to pass an order for winding up, which was received on 12-2-1997. Therefore, the moment the proceedings of the BIFR were received by the registry, it should be presumed that the proceedings were pending before the High Court. Therefore, the provisions of section 537 were applicable. Since the APIDC had seized the assets of the company on 15-2-1997, and effected the sale on 9-2-1998, and received the sale consideration on 19-8-1998, and delivered the possession of the property on 20-8-1998, and all those acts had taken place only during pendency of proceedings for winding up. [Para 54]

In addition, against the order of the BIFR dated 20-1-1997, an appeal was filed 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 provisions of section 22(1) of the SICA, there was a clear prohibition from proceeding against the assets of the company, except with the consent of the Board or the appellate authority, as the case might be. Admittedly, the APIDC, which took the assets of the company, had approached the BIFR when it had come to the conclusion to pass an order, referring the matter to the High Court for being wound up. At the stage, the APIDC requested for an order to seize the assets of the company for realization of its debt due. A specific order was passed by the BIFR, as already referred to, 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 or the High Court, seized the assets of the company deliberately, violating the express order of the BIFR, as well as the provisions of the SICA and the Act. The Act of APIDC can be considered only as an attempt to overreach the specific order of the BIFR as well as the provisions of both the Acts where there was a specific prohibition against the creditors to proceed against the assets of the company. [Para 55]

In spite of such specific declaration, which was made with reference to the State financial corporation, which was also in fact, associated with APIDC not only in effecting the sale, but also in getting the distribution of the assets of the company, had proceeded in utter disregard of the law declared by the High Court, prohibiting the institutions exercising its powers under section 29 from proceeding against the assets of the company under liquidation. The said act is again a deliberate attempt on the part of the APSFC also to overreach the assets of the company, thereby trying to deprive the rights of the workmen, even though they had got a pari passu charge over the assets of the company under liquidation. In view of the above innumerable restrictions against the APIDC from proceeding against the assets of the company, the sale effected by the APIDC had to be declared as null and void and the sale was accordingly, liable to be set aside. [Para 56]

Coming to the claim of the purchaser, it was claimed by the purchaser that it was bona fide purchaser for valuable consideration, without notice of the pendency of the proceedings. No doubt, the auction purchaser participated in the auction, in response to the notice published by the APIDC, and gave its offer for a sum of Rs. 109 lakhs, which was considered as highest and the same was accepted and delivery of the assets of the company was effected as early as on 20-8-1998. The application itself by the official liquidator was filed only in the year 2005. There was no proper explanation why the official liquidator did not move the High Court immediately after the sale or atleast within a reasonable time. It was not as if the official liquidator had no notice of the sale that was effected by the APIDC. Since a writ petition was filed against the sale, where the official liquidator was also impleaded as a party respondent, the said writ petition was filed in the year 1999 itself. [Para 57]

Apart from that, it was claimed by the auction purchaser that after the purchase, the auction purchaser had invested huge amounts by raising further loans, not only on the buildings but also on the plant and machinery, therefore, it was claimed that the sale effected in its favour might 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 was served on the auction purchaser as to the pendency of the proceedings, but no material was brought on record, showing that any notice was served on the auction purchaser at the time of auction, bringing to its notice about the pendency of the winding up proceedings or even the pendency of the appeal before the AAIFR. In the absence of any such notice, there was no other evidence to infer that the auction purchaser had the notice of the pendency of the winding up proceedings before the High Court. Had the official liquidator approached the High Court immediately after the sale, even though the auction purchaser had no notice of the pendency of the proceedings, the sale ought to have set aside, in view of the declaration that the said sale was void. But now at that length of time, further in view of the claim made by the auction purchaser that it had made huge investments by raising loans from the corporations or from the financial institutions, it might not be appropriate to set aside the sale and dispossess the auction purchaser. [Para 59]

In view of above, it was declined to interfere with the sale that was effected in favour of the auction purchaser, though it was held that the sale was null and void. But, however, in view of the above circumstances, the APIDC was directed to deposit the entire sale proceeds together with interest at 9 per cent per annum with the official liquidator. [Para 60]

Thus, the application was to be disposed of. [Para 62]