National Steel & General Mills v. Official Liquidator

P.N Nag, J. (Rule D.B):— This reference raises an interesting question of law whether summons or application can be moved by the (1) Company, (2) Creditor, (3) member with a view to proposing compromise or arrangement between Company and Creditors and Members under Section 391 of the Companies Act, 1956 (hereinafter referred to as “the Act”) in case the Company is being wound up or can it be filed in such a situation exclusively by the liquidator alone?

In the present case, the summons have been moved by Messrs National Steel & General Mills (I) Limited (hereinafter referred to as “the Company”), under Section 391 of the Act proposing a scheme of arrangement between the Company and its unsecured creditors, and in support of such summons the affidavit of Shri D.B Sharda, erstwhile Director of the Company has been filed. The company has been wound up under the orders of the Court dated 1-8-1988.

The reference has been made to this Bench for the reason that two views have been expressed by this Court, in regard to the maintainability of the application/summons filed by the Company, creditor or member, in case the Company is being wound up under Section 391 of the Act. At this stage it will be relevant to point out that the summons in this case have been moved by the Company, but for the purpose of maintainability of the application/summons, in the case of the Company being wound up, the Company, creditor, member have been placed in the same and equal footing in Section 391 of the Act. There is no dispute, however, before the winding up process begins Company/creditor/member has every right to commence the proceedings under Section 391 of the Act.

Mahinder Narain, J. in the present reference and in CP 42/85 decided on 26-10-1987 (Dr. Prithpal Singh Chhabra v. Eastern Linkers (P) Ltd., has held that in case the Company is being wound up, it is only the Liquidator who can move or compromise and arrangement under Section 391 of the Act and the Company, creditor or member cannot maintain such application/summons. According to the learned Judge, after the Company is ordered to be wound up, the Company members are termed as contributory within the definition of Section 428 of the Act and the members of the Company are termed as such during the life time of the Company only, i.e, before it is wound up and contributors have been given no right to move summons/application under Section 391 of the Act. The relevant portion dealing with the reasoning in support of this proposition which finds place in judgment of 26-10-1987 may be reproduced below:

“These two words “Members” and “Contributory” are not synonymous. The word “Member” in the Companies Act deals with the status of a particular individual, or legal person prior to winding up of the company, and the word “Contributory” deals with the status of an individual, or a legal person after the order of winding up of the company.

The other provisions under which this application has been filed in Section 391 of the Companies Act. Section 391 of the Companies Act is in the Chapter which is prior to the Chapter on winding up. Section 391 postulates making of compromises and arrangements between company and creditors, or any class of them, and between the company and its members, or any class of them Section 391 does not enable any “contributory” to file a petition under Section 391. What it permits to be done is that after a winding up order has been passed, or the liquidator has been appointed, the liquidator is permitted to file the application for such compromise arrangement. In other words, after an order of winding up, a “contributory” is not permitted by Section 391 to file a petition by way of a compromise or arrangement between creditors and the company or the company and its members.”

5. On the other hand, B.N Kripal, J. of this Court in Rajdhani Grains & Jaggery Exchange Ltd. (1983-54 Comp. Cases 166) decided on March 31, 1981(2), while dealing with the question of maintainability of the application of the member of the Company under Section 391 of the Act, after the company is wound up, examined the question whether the member of the company ceases to be a member, as such, or only becomes contributory expressed the view that a member of a company does not cease to be a member merely because a winding up order has been passed and as such, he has every right to maintain such an application. The relevant discussion is reproduced below:

“In order to decide the aforesaid question it is necessary to refer to two other provisions of the Act. Section 41 of the Act defines a member as being a person who is entered in the register of members. A contributory is defined by Section 428 of the Companies Act.

The said section reads as under:

“428. 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 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.”

To my mind the term “contributory” and “member” are not interchangeable. By virtue of Section 428 of the Act every member would become a contributory. The converse, however, is not true. Though a member of a company, even of fully paid up shares, would become a contributory by virtue of Section 428 on his death his legal representatives, by virtue of Section 430, would be regarded as contributories. The said legal representatives, however, would not be regarded as members unless and until their names are put in the register of members. No provision of the Act has been shown to me wherein it is provided that a member shall cease to be a member after the winding-up order has been passed. After the passing of the winding-up order the register of members would come into the custody of the official liquidator. The names entered in the register of members are, however, not erased therefrom. In fact under Section 467 of the Companies Act the court has been given the power, while settling the list of contributories, to rectify the register of members where it is so required, in pursuance of the Act. This obviously means that even after the winding up order has been passed, the register of members continues to exist. If this be so, any person whose name is entered in the register of members shall by virtue of Section 41, be regarded as a member thereof … As already observed a member would still be a member of the company, notwithstanding the winding-up order having been passed, and even under the different provisions of the companies act a reference is made to members even though a winding-up order has been passed. (See Sections 469(2) and 511).”

6. Shri P.C Khanna who appeared for the Company vehemently argued that in case of company being wound up the liquidator is an additional and not exclusive person who could make an application under Section 391 of the Act for the proposal of a scheme. The interest that entitled the company member or creditor to make an application in the case of going concern subsists even after an order for winding up is made to sustain a similar application even at that stage. Further, it was submitted that in case merely the company is being wound up or has been wound up, a member of the Company does not cease to be a member, and as such he has every right to move under Section 391 of the Act. He has cited various authorities in support of his submissions with which we respectfully agree and we endorse the views expressed therein which would be discussed and referred to hereinafter. However, before that in order to appreciate the submissions and law on the subject, it would be appropriate to reproduce the relevant portion of Section 391 of the Act:

“390. (1) Where a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them;

the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is behind wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under Section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company:

Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under Sections 235 to 251, and the like.

(3) * * *”

In re.: Travancore National and Quilon Bank Ltd. (AIR 1939 Mad 318)(3) while interpreting Section 153 of the Companies Act, 1913 which is pari materia to section 391 of the present act, the Madras High Court held as under:

“The Section was intended to confer rights both on the company and on the creditors and members of the company. When it is a going concern the object will be to avert a winding-up. Even after an order for winding up is made, an application can be made to cancel a winding up by the sanction of a scheme and allow the company to resume its normal business. The creditors and members are the persons vitally interested in the life of a company and are the best Judges of their interests. It could not have been therefore the intention of the Legislature to deprive the creditors of the right once an order for winding up is made and place them at the mercy of the liquidator who may or may not choose to move in the matter. All that is intended by the Section is that the liquidators should also have the right to make the application. At any rate, this is the view taken by Palmer on the corresponding section of the english act. In his book on winding up, he observes thus at p. 899:

‘A proposal for an arrangement or compromise is not confined to the company or its liquidator if any. It is open to any creditor or member to take the initiative. The Act expressly provides that the Court may on the application, in a summary way of the company, or of any creditor or member of the company, or in the case of a company being would up; of the liquidator, order a meeting.’

I think the same view must be adopted in the interpretation of the Indian Act and I have therefore no hesitation in holding that even after an order for winding up, a creditor or member can move the Court under Section 153 of the Act.”

In A.M Muhammed Abdulla Tharaganar v. Official Liquidator, Care Comorin General Traffic Co. Ltd., (1953-23 Comp Cases 161)(4) this question again was considered by the Travancore-Cochin High Court where the aforesaid judgment of the Madras High Court in Travancore National and Quilon Bank Ltd. (AIR 1939 Mad 318) was followed and it was held:

“In the case of a company being wound up the liquidator is an additional and not an exclusive person who could make an application under Section 153 of the Indian Companies Act for the proposal of a scheme. The interest that entitled the company, member or creditor to make the application in the case of a going concern subsists even after an order for winding up is made to sustain a similar application at that stage.”

7. While considering the scope of Section 391 of the Act, the Calcutta High Court in Rajendra Prasad Agarwalla v. Official Liquidator, (1978-48 Comp Cas 476)(5) expressed the same view and endorsed the view of the Madras High Court referred to hereinbefore.

8. This matter again came up for consideration before the Bombay High Court in Vasant Investment Corpn. Ltd., (1982-52 Comp Cas 139)(6) where the Court took the same view and held as under:

“When a company is being wound up a liquidator is an additional person who enjoys a right to make an application under this section. The rights of the creditors or the members of the company to make an application are not taken away when a company goes into liquidation. The section does not say that when a company is being wound up the liquidator alone will have a right to apply. In this connection, a reference may be made to Rules 67 to 69 framed under the Companies (Court) Rules, 1959. Rule 68 provides for service of the summons on the liquidator in cases where the company is being wound up. This can take place only in a case where a liquidator is not an applicant the rules therefore, contemplates a case where a person other than the liquidator is an applicant under Section 391 in respect of a company under winding up.”

Further, the Court held:

“A handing over of share certificate as mentioned in Form No. 141 can never constitute such a surrender; under Section 41(2) every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. Hence, every person who has agreed to be a member and whose name appears in the register of members, is a member, section 150(1)(a) to (d) reads as follows:—

‘150 Register of member.—(1) Every company shall keep in one or more books a register of its members, and enter therein the following particulars:—

(a) the name and address, and the occupation, if any, of each member;

(b) in the case of a company having a share capital, the shares held by each members, distinguishing each share by its number, and the amount paid or agreed to be considered as paid on those shares;

(c) the date at which each person was entered in the register as a member; and

(d) the date at which any person ceased to be a member….’

The applicants have not ceased to be members by surrendering their shares or in any other way. Their names continue on the register of members. Under Section 536(3) any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, requires the sanction of the court. This section goes to show that members do not cease to be members on a company being wound up nor do they cease to be members on receiving a return of capital. In the present case, the applicants were the shareholders of the company, now in liquidation, and they are in the list of contributories. They are members of the company as defined under Section 41 of the Companies Act and they have not ceased to be such members by virtue of any surrender of shares because handing over the share certificate to the official liquidator does not amount to a surrender of shares to the company. In fact, even after the share certificates are handed over to the liquidator, transfers have taken place with the permission of the court. This could never have happened if the contributory had ceased to be a member of the company in liquidation.

In Sonajuli Tea and Industries Ltd. (in liquidation) (1981-Tax LR NOC 108-Cal)(7) it has also been held by Calcutta High Court while interpreting Section 391 of the Act:

“It is now well settled that an application can be made by a creditor or a contributory after the company is wound up apart from liquidator for a scheme but the effect of Section 391 read with Section 446 is that such a scheme must cover all the creditors, both secured and unsecured and contributories of the company (in liquidation). Therefore, no order under Section 391(1) of the Act, can be directed for considering a proposed scheme of the unsecured creditors only.”

9. This question has again been considered by the Madras High Court in N.A.P Alagiriraja and Co. v. N. Guruswamy, (1987 Tax LR 1756)(8) and after having examined Rules 67 and 68 framed under the Companies (Court) Rules, 1959 has observed:

“On a prima facie reading of these rules, it does appear that the rule contemplate an application by a creditor or a member of the company even when the company is being wound-up….”.

In fact, this view is based on the same reasoning as given in the aforementioned case of the Bombay High Court.

10. The consensus view of the various High Courts, therefore emerges is that the liquidator is the additional person and not the exclusive person who can move an application under Section 391 of the Act.

11. In addition to the above, if such an interpretation is not given to Section 391, this will lead to manifest absurdity. Section 391(2) of the Act refers to the persons who would be bound by the compromise/arrangement if agreed to in the meeting called for of the creditors/members and sanctioned by the Court. The persons on whom such a compromise/arrangement would be binding are referred to as creditors, member or company or in the case of a company which is wound up, on the liquidator and contributories of the company. In case, liquidator is interpreted to mean not as an additional person to move the application under Section 391 of the Act, on the application of the same rule of interpretation, the compromise arrangement arrived at by the creditor/members and sanctioned by the Court cannot bind the creditors and would exclude them from such a compromise as in case of a company being wound up, this will be binding on the liquidator or contributories only which can never be the intention of the legislature.

12. Furthermore under Section 446(2)(c) of the Act the Court which is winding up the company notwithstanding anything contained in other law for the time being in force has been given jurisdiction to entertain and dispose of any application made under Section 391 of the Act by or in respect of the company. In case of liquidation of the company, in case the liquidator exclusively is interpreted to mean to have a right to move under Section 391 of the Act, and that Company is not to have such a right, there would be direct conflict between Sections 391(1) and 446(2)(c) of the Act which would not be in consonance of the principle of harmonies interpretation of statutes. Therefore, the only rational interpretation, which can be put is that in case the company is wound up, liquidator is the additional person who can move the application under Section 391 of the Act apart from members, creditors and the company.

13. On the question, whether member ceases to be a member and become contributory only after liquidation of the company, we again adopt the reasoning and the view of Justice B.N Kirpal in Rajdhani Grains & Jaggery Exchange Ltd. (1983-54 Comp Cases 166) and the view of the Bombay High Court in Vasant Investment Corporation Ltd. (1982-52 Comp Cases 139) and hold that merely company has been wound up, the member does not cease to be the member of the company so long as requirements under Section 41 read with Section 150 of the Act continue to be complied with and until he ceases to be a member in accordance with the provisions of the Act, as such, member has every right to move under Section 391 of the Act.

14. Merely on winding up of the company the member does not seem to be a member of the company also finds support from the observations of the Supreme Court in Balkrishan Gupta v. Swadeshi Polytex Ltd., (1985-58 Comp Cas as 563)(9). In this case, the Supreme Court while discussing the voting rights of the members of the company examined and laid down, as to who can be the member of the company. The relevant discussion is reproduced below:

“Section 150 of the Act require every company to keep a register of members containing the name, address and the occupation, if any, of each member and other particulars mentioned therein. Section 153 of the Act provides that no notice of any trust, express, implied or constructive, shall be entered on the register of member. Section 153B of the Act, however, provides that notwithstanding anything contained in Section 153, where any shares in a company are held in trust by any person, he (the trustee) shall within such time and in such form a may be prescribed make a declaration to the public trustee appointed under Section 153A of the Act in accordance with and subject to the rest of the provisions of section 153b of the Act.

It is clear from the relevant provisions of the Act which are referred to hereafter that a member can participate and exercise his vote at a meeting of a company in accordance with the Act and the article of association of the company. Section 41 of the Act defines the expression “member” of a company. The subscribers to the memorandum of association of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members. A subscriber to the memorandum is liable as the holder of shares which he has undertaken to subscribe for. Any other person who agrees to become a member of a company and whose name is entered in the register of members shall be a member of the company. In his case, the two conditions, namely, that there is an agreement to become a member and that his name is entered in the register of members of the company are cumulative. Both the conditions have to be satisfied to enable him to exercise the rights of a member.”

15. It was emphasised that so long as the name of the member continues to be on the register of members and until he ceases to be a member in accordance with the provisions of the Act, he continues to be a member. Even the bankrupt is held to be a member of the company so long as his name is on the register.

16. No provision has been shown to us in the Act under which after the company is wound up the name of the member stands erased from the register of members and he ceases to be a member. On this ground also a member can make the application under Section 391 of the Act even if the company is being wound up.

17. Counsel for the liquidator vehemently argued that literal construction of Section 391 clearly shows that in case the company is being wound up there is the liquidator alone who can file an application for compromise or arrangement with the creditors or the members. It also finds support from Section 457(1)(a) of the Act that the liquidator has been given a power with the sanction of the Court to institute or defend any suit, prosecution or other legal proceedings on behalf of the company. In this connection he relied on the observations of Supreme Court in M/s Great Indian Motor Works Ltd. v. Their Employees, AIR 1959 SC 1186(10):

“Under the provisions of the Indian Companies Act, the affairs of the company under liquidation, are placed in charge of the Official Liquidator, and under Section 457, it is only the Liquidator who is authorized with the sanction of the Court, to institute any suit or other legal proceedings in the name and on behalf of the company.”

18. There does not seem to be much substance in this argument. As already discussed above, the liquidator is an additional person who can make an application under Section 391 of the Act for compromise or settlement of the scheme and under Section 457 of the Act the liquidator has been given a general power in the company being wound up with the sanction of the Court to institute or defend any suit, prosecution, or other legal proceedings and as such there is no inconsistency between the two provisions. Further this general power has been conferred on the liquidator with the sanction of the Court only. This does not take away the special power of the member, creditor and the company to move the Court for compromise/arrangement under Section 391 of the Act without sanction of the Court as general power cannot take away and prevail over the special power.

19. In the light of the above discussion the reference is answered in the following terms:

In case the Company is being wound up, liquidator is an additional person who can frame a scheme for compromise or arrangement in respect of the company and move the Court under Section 391 of the Act. The company, creditor and member of the company are also entitled to make the necessary application into the Court under the aforesaid Section in such a situation.

20. The reference is answered accordingly.

C.P.H Ordered accordingly