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Asian Bearings & Tools Corporation v. Coastal Chemicals Ltd., Visakhapatnam .
Analytical Summary of the Opinion
Factual and Procedural Background
This Company petition was filed under Section 433(e) and (f) read with Section 439(1)(b) of the Companies Act, 1956. The respondent is a public limited company with its registered office at Visakhapatnam. The respondent had authorised share capital and principal objects described in its Memorandum of Association. The petitioner supplied bearings to the respondent; the last order was dated 14-5-1993 and there was a running account between the parties. As on 31-3-1993 the respondent-company confirmed a balance of Rs. 1,82,856.61 paise which remained unpaid. The petitioner issued statutory notices under Sections 433, 434 and 439 of the Companies Act; there was no response, and the petitioner filed the present company application seeking winding up of the respondent-company.
During inquiry, learned counsel for the respondent admitted that a sum of Rs. 54,069.02 had been paid to the petitioner as per the respondent's books (paragraph 2). In the respondent's counter-affidavit it was stated that only Rs. 54,609.62 was liable and that this had been paid (paragraph 3). The respondent also relied on Section 22(1) of the Sick Industries (Special Provisions) Act, 1985 (the "Act") and asserted that by an order dated 27-8-1991 the Board for Industrial and Financial Reconstruction (BIFR) had declared the respondent company a sick industry and that the matter remained pending before the BIFR. A hearing before the BIFR was indicated as having been held on 6-9-1995 and a revised draft rehabilitation scheme had been issued.
The company petition was filed in April 1995 while BIFR proceedings had been initiated in 1991. The Court considered whether the petition was maintainable in view of Section 22 of the Sick Industries Act and, after analysis, dismissed the petition. There was no order as to costs. The Court noted that the petitioner could seek the consent/approval of the Board and proceed thereafter.
Legal Issues Presented
- Whether the company winding-up application can be entertained or is maintainable in view of Section 22(1) of the Sick Industries (Special Provisions) Act, 1985, when proceedings before the BIFR are pending.
- How the phrases "shall lie" and "be proceeded with further" in Section 22(1) of the Act should be interpreted—i.e., whether Section 22(1) creates a pre-initiation bar to filing or a suspension/abeyance of pending proceedings (or both).
- Whether a creditor's lack of knowledge about pending BIFR proceedings affects the applicability of the bar under Section 22(1) of the Act.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended that the pendency of proceedings before the BIFR was made known to it only after the winding-up application was filed and therefore the petitioner was entitled to continue the winding-up proceedings despite the BIFR reference (paragraph 8).
- The petitioner maintained that additional amounts were due beyond the sums which the respondent asserted had been paid (paragraph 2).
Respondent's Arguments
- The respondent's counter-affidavit stated that, according to its records, a sum of Rs. 54,609.62 was liable and that this amount had been paid; consequently, the petition should be dismissed (paragraph 3).
- The respondent argued that a winding-up petition was not maintainable because Section 22(1) of the Sick Industries Act barred such proceedings while inquiries, scheme-preparation, scheme-implementation or related appeals before the BIFR were pending; the respondent relied on the fact that BIFR had declared the company sick on 27-8-1991 and that matters were pending (paragraph 3).
- During inquiry, counsel for the respondent admitted a payment to the petitioner of Rs. 54,069.02 according to the respondent's books (paragraph 2).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Grampanchayat v. Shree Vallabh Glass Works Ltd., AIR 1990 SC 1017 | Interprets Section 22(1) of the Sick Industries Act to mean that, upon steps taken by the Board under Sections 16 and 17, proceedings for execution, distress or the like against company property are automatically suspended and may proceed only with the consent of the Board; creditors must approach the Board for permission to proceed. | The Court relied on this authority to support the view that Section 22(1) results in automatic suspension of certain recovery or execution proceedings once the Board acts, and that creditors' remedies may be postponed or extinguished if the Board withholds approval (paragraph 4 and discussion in paragraph 4). |
| Ramniklal & Co. v. Wallace Flour Mills Co. Ltd., AIR 1992 Bom 207 | Holds that winding-up petitions are required to be kept in abeyance (suspended) pending BIFR enquiry or scheme preparation/implementation rather than necessarily abating or being dismissed; proceedings may continue with the consent of the Board or Appellate Authority. | The Court cited and applied this reasoning to explain that Section 22 is to be read as creating a suspension/abeyance in many cases and that pending winding-up petitions need not abate if BIFR consent is obtainable (paragraphs 9-10, reference at paragraph 9-10). |
| Tax Trade Limited, London v. Andhra Cotton Mills Ltd., Proddutur, 1989 (1) APLJ (SN) 16 | States that once a reference is registered under the Act, Section 22 becomes applicable and the jurisdiction of the court under the Companies Act is excluded by implication; the Board has wide powers and petitioners can approach the Board for relief; until Board acts under Section 22(3) there is no restraint on the company alienating property. | The Court used this authority to reinforce that registration of a reference engages Section 22, restricting court jurisdiction and signalling that petitioners should seek relief from the Board; it supports the conclusion that winding-up proceedings cannot proceed during BIFR consideration (paragraph 11-12). |
Court's Reasoning and Analysis
The Court began by identifying Section 22(1) of the Sick Industries (Special Provisions) Act, 1985 and quoting its operative language that, where certain matters before the BIFR are pending, "no proceeding for the winding up of the industrial company ... shall lie or be proceeded with further, except with the consent of the Board, or, as the case may be, the Appellate Authority" (paragraphs 3–7).
The Court analyzed the wording and concluded that Section 22(1) has two limbs:
- “Shall lie” — interpreted to refer to the pre-initiation stage (i.e., in situations where the matters listed in Section 22(1) are already pending before the Board, an application for winding up shall not lie unless the consent of the Board is obtained); and
- “Be proceeded with” — referring to the post-initiation or ongoing proceedings (i.e., if winding-up or execution proceedings are already pending when the Board takes action, those proceedings shall be suspended and cannot be proceeded with further except with the Board's consent).
The Court reviewed and applied the authorities cited (Grampanchayat, Ramniklal, Tax Trade) to explain that Section 22 creates an initial bar in certain circumstances and a suspension/abeyance in others. The Court emphasized that when matters enumerated under Section 22(1) are pending before the BIFR, a winding-up application "shall not lie" without the Board's consent; when proceedings are already pending they "shall not be proceeded with" further without consent (paragraphs 8–10, 13–20).
Applying these principles to the facts, the Court observed that BIFR had admitted the reference in 1991 and that rehabilitation matters (a revised draft rehabilitation scheme) were under consideration. The petition in question was filed in April 1995, i.e., after the proceedings had been initiated before BIFR (paragraph 21). Therefore, the Court concluded that the petition was not maintainable because the statutory bar under Section 22(1) applied (paragraphs 20–22).
The Court expressly rejected the petitioner's contention that its lack of knowledge of the BIFR proceedings mattered; the Court held that the creditor's knowledge is immaterial once the Board has taken the matter (paragraph 14).
The Court also noted and relied upon sub-section (5) of Section 22 — which excludes from computation of limitation the period during which a remedy remains suspended under Section 22 — as protective of the petitioner's interests regarding limitation (paragraph 11 and paragraph 23).
Holding and Implications
Holding: The Court held that the Company Petition filed by the petitioner is DISMISSED as not maintainable in view of the bar contained under Section 22(1) of the Sick Industries (Special Provisions) Act, 1985 (paragraphs 21–22). The order records: "Petition dismissed." There shall be no order as to costs (paragraph 24).
Implications:
- Direct effect on the parties: The petition for winding up is dismissed and the petitioner cannot proceed in this Court with winding-up proceedings while the BIFR proceedings remain pending and without the Board's consent (paragraphs 21–22, 24).
- Limitation protection: The petitioner’s limitation period is protected by sub-section (5) of Section 22, which excludes the suspension period from computation of limitation (paragraphs 11 and 23).
- Future option preserved: The dismissal does not preclude the petitioner from seeking permission or approval of the Board and initiating winding-up proceedings thereafter if the Board allows (paragraph 24).
- No broader novel precedent: The Court applied and followed existing authorities and statutory text; the decision is an application of Section 22 to the facts rather than the statement of a new legal principle (inferred from the Court's reliance on prior decisions and statute as set out in the opinion).
Where the opinion did not provide additional factual detail or argument, the summary has adhered strictly to the material contained in the provided opinion and has not introduced any external information.
1. This Company petition is filed under Section 433(e) and (f) read with Section 439(I)(b) of the Companies Act, 1956. As per the averments made in the petition, the respondent is a Public Limited Company having its Registered Office at Visakhapatnam, with authorised share capital of Rs. 50,00 Lakhs, divided into 40000 equity shares of Rs. 100-00 each and 10000 of 12% redeemable/cumulative/preference shares of Rs. 100 each. The main objects of the company are to take over, promote, establish etc., any business of preparation and sale of alum and its products and other by-products as contended in the Memorandum of Association. The petitioner supplied bearings as per the requirement of the Respondent-Company and the last order was on 14-5-1993. There is running account in respect of the transactions between the petitioner and the respondent companies. As on 31-3-1993, the respondent-company confirmed the balance of Rs. 1,82,856.61 ps. However, still the balance has to be paid. Since the balance was not paid by the Respondent-Company, statutory notice under Sections 433, 434 and 439 of Companies Act was issued and there was no response from the respondent-Company. As there was no response, having admitted the liability, the petitioner was compelled to file the present company application seeking winding up of the Company.
2. During the course of the inquiry, it was admitted by the learned counsel for the Respondent that a sum of Rs. 54,069.02 was paid to the petitioner, as, according to their books of accounts, that was the amount, which is liable to be paid to them. However, the petitioner insisted that some more amount is due and, therefore, it intends to proceed with the company application for winding up of the Respondent-Company.
3. Counter-affidavit was filed on behalf of the Respondent stating that as per their records only a sum of Rs. 54,609.62 was liable to be paid and since the same has been paid, the petition is liable to be dismissed. It is further stated that petition for winding up of a company is not maintainable in view of the provisions contained under Section 22(1) of the Sick Industries Company (Special Provisions) Act, 1985. By an order dated 27-8-1991 the Board for Industrial and Financial Reconstruction (BIFR) New Delhi, declared the Respondent company as sick industry and the matter is still pending before the BIFR. It is further submitted that hearing was held on 6-9-1995 and a revised draft rehabilitation scheme was issued. Therefore, the application is liable to be dismissed.
4. Before considering the merits of the case, it is now to be decided, whether the application has to be entertained in view of the provisions of Section 22 of the Sick Industries Company (Special Provisions) Act, 1985, for short “the Act”. For the purpose of appreciation of the case, it is necessary to refer to Section 22 of the Act, which is extracted below:
Section 22 — Suspension of Legal Proceedings, contracts etc.
(1) Where in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation of consideration or a sanctioned is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding any thing contained in the Companies Act, 1956, or any other law or the memorandum and articles of association of the Industrial Company or any other instrument having effect under the said Act or other law, no proceeding for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a Receiver in respect thereof shall lie or be proceeded with further, except with the consent of the Board, or, as the case, may be, the Appellate Authority.
22(2) to (4) xxxxxxxxxxxxxx
22(5) — In computing the period of limitation for the enforcement of any right, privilege obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded.”
A reading of the aforesaid provision — “shall lie or be proceeded with further, except with the consent of the Board, or, as the case may be, the Appellate Authority”, connotes that an application shall not lie in certain cases and cannot be proceeded with in certain other circumstances. The words “shall not be proceeded with” apply only when an application for winding up is already pending. This limb of the section has been interpreted by the Supreme Court in The Grampanchayat v. Shree Vallabh Glass Works Ltd., AIR 1990 SC 1017. In the said case, The Grampanchayat sought to recover Property Tax under Section 129 of Bombay Village Panchayat Act. The company took an objection that in view of Section 22(1) of the Act, the recovery is without jurisdiction and the application shall not lie, except with the consent of the Board (BIFR) established under the Act. The Supreme Court observed that in the light of the steps taken by the Board under Sections 16 and 17 of the Act, no proceedings for execution, distress or the like proceedings against any of the properties of the Company shall lie or be proceeded, further, except with the consent of the Board. Indeed, there would be automatic suspension of such proceedings against the Company's properties. As soon as inquiry under Section 16 is ordered by the Board, various proceedings set out under sub-section (1) of Section 22 of the Act would be deemed to have been suspended. The Supreme Court further held that it may be against the principles of equity, if the creditors are not allowed to recover the dues from the company. But such creditors may approach the Board for permission to proceed against the Company for recovery of their dues/outstandings/overdues or arrears by whatever name it is called. The Board at its discretion may accord its approval for proceedings against the company. If the approval is not granted, the remedy is extinguished. It is only postponed, sub-section (5) of Section 22 provides for exclusion of the period during which the remedy is suspended while computing the period of limitation for recovering the dues, and thus, upheld the order of the High Court quashing recovery proceedings against the properties of the Company.
5. A single Judge of Bombay High Court in Ramniklal & Co. v. Wallace Flour Mills Co. Ltd., AIR 1992 Bom 207, has elaborately considered this issue and held (Para 12)
“It is clear from the provisions of the Act that a winding up petition is required to be kept merely in abeyance pending the enquiry under Section 16 or framing of the scheme under the Act or pending the implementation of the scheme framed thereunder. The marginal note to Section 22 of the Act provides an indication that the proceedings in question are merely required to be suspended. The operative part of Section 22(1) of the Act provides that the winding up proceedings may continue with the consent of the Board or the consent of the Appellate Authority. If the proceedings can continue with the consent of the Board or consent of the Appellate Authority or in the event of the conditions precedent prescribed under Section 22(1) of the Act ceasing to exist, there is no reason as to why the pending winding up petitions must necessarily abate or must necessarily be dismissed. Section 31 of the Act provides that certain pending proceedings shall not abate where the receiver or the official liquidator was already appointed before the commencement of the Act. The Section cannot be reasonably pressed into service for the purpose of making a submission to the effect that in all other cases the proceedings abate when the operative part of Section 22 of the Act can be reasonably interpreted to mean that the winding up proceedings are merely required to be suspended and kept in abeyance and are not required to be dismissed and they do not abate”.
6. A learned single Judge of this court in Tax Trade Limited, London v. Andhra Cotton Mills Ltd. Proddutur 1989 (1) APLJ (SN) 16 held that
“When once it is shown that a reference is registered under the Act, Section 22 become applicable and consequently the jurisdiction of the Court under Companies Act is excluded by implication. The Board is given wide powers and the petitioners can certainly approach the Board for relief during this stage. Till the Board passes an order under Section 22(3), there is no restrain against the Companies in alienating their properties, and probably the petitioners may be able to move the Board if considered necessary. The language of Section 22(1) and that of Section 31 indicate that such winding up proceedings shall not be proceeded further. Apart from the difference in language of Section 22(1) and Section 31 it is also open to the petitioners to seek and get consent of the Board to continue any winding up proceedings.”
7. In the instant case, argument was advanced by the learned counsel for the Respondent that when the proceedings before the BIFR are pending, the application for winding up does not lie. But, however, he further submits that when the winding up proceedings are in progress and if the Company is declared sick under the provisions of the Act, by the BIFR, the pending proceedings shall not be proceeded with. Therefore, this section has got two limbs. As far as the later limb of the section is, as to whether the proceedings can be proceeded with, when the matter was admitted by the BIFR, it is now made clear that they stand suspended until the proceedings are cleared by the BIFR. But, however, in the former case, it is sought to be contended that the application itself does not lie.
8. The learned counsel for the petitioner submits that pendency of the proceedings before the BIFR was only made known to the petitioner, when winding up application has been filed, and therefore, it is entitled to continue the proceedings dehors pendency of the proceedings before the BIFR. I am afraid, I cannot accept this contention. The knowledge of the petitioner has nothing to do with the pendency of the proceedings before the Board. Once the proceedings are seized of by the Board the bar gets automatically attracted. It is immaterial whether the creditor has knowledge or not.
9. A proper analysis of Section 22 connotes that in the following circumstances the application for winding up either do not lie or cannot be proceeded with same with the concurrence of BIFR or appellate authority as the case may be:
(a) enquiry under Section 16 is pending,
(b) Any scheme referred to under Section 17 is under preparation or consideration,
(c) When sanctioned scheme is under implementation.
(d) When an appeal under Section 25 is pending.
The words “shall lie” and “be proceeded with” are required to be interpreted, “shall lie” obviously refer to the pre-initiation stage and “be proceeded with” refers to post initiation period. Therefore if the matters relating to be covered by Clauses (a) to (d) supra are pending before the BIFR no application for winding up shall lie in respect of industrial company unless the consent of BIFR is obtained. Thus there is initial bar itself for filing any application. But the situation is different when the application for winding up, or distress like situations are already pending when the BIFR admits the references. In such situation, the pendency applications/proceedings shall not be proceeded further same with the consent of BIFR.
10. Admittedly, in the instant case, the matter was admitted by the BIFR in 1991 and the matter relating to revised rehabilitation scheme are under consideration by BIFR. The application for winding up has been filed in April, 1995. In such a situation, the application has to be held as not maintainable.
Thus, I find that the application, as filed by the petitioner in 1995, which is after the proceedings were initiated before the BIFR and during the pendency of the proceedings is not maintainable and no application for winding up lies before this Court. Under these circumstances, I have to necessarily hold that the application does not lie in view of the bar contained under Section 22(1) of the Act.
11. However, the interest of the Petitioner has been amply protected by sub-section (5) of Section 22, wherein the limitation prescribed for under the relevant statute shall be deemed to be extended till the bar under Section 22 of the Act is cleared.
12. Accordingly, the Company Petition is dismissed. There shall be no order as to costs. However, this order does not preclude the petitioner from obtaining permission/approval of the Board and initiate proceedings for winding up of the Respondent Company.
Petition dismissed.
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