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Travancore Rayons Ltd. v. Registrar Of Companies
Structured Summary of the Court Opinion
Factual and Procedural Background
The applicant is Travancore Rayons Ltd., which moved the court under S. 536(2) of the Companies Act seeking leave to create security over its property while three winding-up petitions (C.P. Nos. 15/84, 21/1985 and 2/1986) alleging inability to pay debts are pending. The company was incorporated on 19 July 1945, commenced business in March 1946, and experienced severe labour disruption in 1975 and a major fire in 1976; it had been described as industrially sick in recent years while employing over 1,500 workmen.
A consortium of four All-India financial institutions (IDBI, IFCI, ICICI and IRBI) proposed a rehabilitation loan facility totalling Rs. 511 lakhs, of which a substantial part had already been disbursed and Rs. 225 lakhs remained to be advanced. An earlier loan of Rs. 510 lakhs (advanced on 15-9-1984) had been secured by the company's movable and immovable property and is a secured debt. The financiers required that the company obtain the court’s appropriate leave under S. 536(2) before offering further security because winding-up petitions were pending.
Two of the petitioning creditors opposed the S. 536(2) application (one claiming over Rs. 4 lakhs owed, with Rs. 2,15,000 admitted; another claiming slightly over Rs. 20,000). The petitioner in C.P. No. 2 of 1986 (claiming Rs. 16 lakhs) did not oppose the application. The company is also listed under the Kerala Relief Undertakings (Special Provisions) Act, 1961, which imposes a statutory moratorium affecting recoveries and the timing of any winding-up order.
Legal Issues Presented
- Whether the court has jurisdiction under S. 536(2) of the Companies Act to authorise a disposition of company property (such as creation of a charge) when winding-up petitions are pending but no winding-up order has yet been made.
- If jurisdiction exists, whether leave should be granted in the particular facts of this case to permit Travancore Rayons Ltd. to create security (a charge) in favour of the financiers for the loan facility.
Arguments of the Parties
Applicant / Company
- The company asserted that its application under S. 536(2) was made with utmost good faith and honesty and that creating the proposed charge was necessary and expedient for rehabilitation of the unit.
- The company emphasised that reputable financiers had offered a substantial loan facility (Rs. 511 lakhs) and that a portion of the sanctioned loan had already been received; the remaining facility (Rs. 225 lakhs) required security for the entire sanctioned amount.
- The company highlighted the broader public and employment interest, noting over 1,500 employees and an earnest desire for rehabilitation.
Financiers
- The financiers (IDBI, IFCI, ICICI and IRBI) appeared and indicated they had studied the company’s situation with technical experts and required appropriate court sanction under S. 536(2) because winding-up petitions were pending.
Opposing Petitioners / Creditors
- Two petitioning creditors opposed the application. One (C.P. No. 21/1985) claimed more than Rs. 4 lakhs was due (Rs. 2,15,000 admitted). Another (C.P. No. 15/1984) claimed a little over Rs. 20,000 was due and opposed the application. The petitioners’ opposition was directed at protecting their distributive interests in the event of winding up.
- No material was placed before the court to impugn the company’s honesty or good faith, according to the opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Miles Aircraft Ltd. (1948 Chancery 188) — Vaisey, J. | Held that when only a contingent/pending winding-up petition exists, the court had no jurisdiction to grant the order in advance (i.e., before a winding-up order was made). | The court reviewed this authority as representing a line of English decisions that denied jurisdiction before an actual winding-up order; the judge considered it but did not follow it as binding for the present case. |
| In re A.I. Levy (Holdings) Ltd. (1963 (1) Ch. 9) — Buckley, J. | Held that the court did have jurisdiction to authorise disposition even though no winding-up order had yet been made, and that jurisdiction could be exercised on the facts. | The court relied on and accepted this reasoning as a valid authority supporting jurisdiction to grant leave under the statute during pendency of petitions. |
| Re Burton & Deakin Ltd. (1977 (1) All England Law Reports 631) | Explained the discretionary approach: where directors give reasons an "intelligent and honest man could reasonably hold," the court would normally sanction a disposition, unless there is compelling evidence of likely injury or bad faith. | The court invoked this principle to apply the standard of "intelligent and honest man" when evaluating whether the proposed disposition should be sanctioned despite opposition. |
| Gopal Das v. K.B. Board (Rajasthan High Court, 1972 Tax L.R. 2285) | Held that in the absence of statutory prohibition, the High Court has jurisdiction under S. 536(2) to authorise disposition during the pendency of a winding-up petition where there is a genuine case. | The court cited this decision to support the proposition that S. 536(2) can be applied while winding-up petitions are pending and does not require a prior winding-up order. |
| Kamani Metallic Oxides Ltd. v. Kamani Tess Ltd. (Bombay High Court, 1983 Tex L.R. 2459) | Interpreted "in the case of winding up" to mean "during winding up proceedings" and held that the court can authorise disposition under S. 536(2) even before a winding-up order is passed. | The court relied on this interpretation to reinforce its conclusion that S. 536(2) jurisdiction extends to the pendency of winding-up proceedings and does not require an antecedent winding-up order. |
| Referred English authorities (Garden v. The Albert Palace Association; In re Douglas Griggs Engineering Ltd.; approvals by Slade, J.) | Prior English decisions reflecting differing views on jurisdiction under equivalent English provisions and later approvals of the jurisdictional view. | The court considered these authorities in framing the scope of discretion under S. 536(2), and noted later English approval for the jurisdictional line that permits orders before a formal winding-up order. |
Court's Reasoning and Analysis
The court began by examining the wording, ambit and scope of S. 536(2), which makes dispositions of company property after the commencement of winding up void "unless the Court otherwise orders." A primary legal question was whether that power to "otherwise order" is exercisable before an actual winding-up order is made, while only petitions are pending.
The court compared the Indian provision to the analogous English provision and reviewed the two contrasting strands of English authority. It acknowledged Vaisey J.'s decision in In re Miles Aircraft Ltd. denying jurisdiction prior to a winding-up order, but also considered later authorities (notably Buckley J. in In re A.I. Levy and approvals such as Re Burton & Deakin) that recognised jurisdiction to grant leave during pendency. The court cited decisions from Indian High Courts (Rajasthan and Bombay) that had concluded S. 536(2) could be exercised during winding-up proceedings before a winding-up order.
On the scope of the statutory power, the court interpreted S. 536(2) as primarily aimed at preventing malapropos or objectionable dissipation of assets that would prejudice creditors on winding up, while preserving a judicial discretion to validate genuine, bona fide transactions that are in the interests of the company and its creditors. The phrase "unless the Court otherwise orders" was read as a legislative indication that the court must scrutinise each case on its facts, with special attention to good faith and honest intention.
Applying these principles to the facts, the court considered the competing interests: the opposing creditors would not obtain immediate advantage from dismissal because the Kerala Relief Undertakings Act imposes a moratorium preventing immediate recovery; by contrast, granting the requested leave could enable substantial financing that might rehabilitate the company, preserve employment and ultimately improve the position of creditors. The court found persuasive the financiers' participation, their technical study of the company and the company's stated intent to revive operations. The court noted the absence of material undermining the company's honesty or good faith.
The court therefore concluded that the discretionary power under S. 536(2) extends to the pendency of winding-up petitions, and that on the particular facts — reputable financiers, a realistic rehabilitation plan, statutory moratorium delaying any immediate winding up, and no evidence of bad faith — the reasons advanced were such that "an intelligent and honest man could reasonably hold" them. Accordingly, the court should normally sanction the disposition despite opposition.
Holding and Implications
APPLICATION ALLOWED.
Direct effect: The court allowed the Travancore Rayons Ltd. to create a charge of Rs. 511 lakhs over the movable properties of the company in favour of the four financiers (IDBI, ICICI, IFCI and IRBI). The order granted the specific relief sought under S. 536(2).
Broader implications (as explained in the opinion): The decision affirms that the court may, in appropriate cases, exercise its discretion under S. 536(2) to authorise dispositions of company property while winding-up petitions are pending (i.e., during winding-up proceedings), where the transaction is bona fide, in the interests of the company and creditors, and where reasons proffered are such that an "intelligent and honest man could reasonably hold" them. The court emphasised the statutory balance between preventing prejudicial dissipation of assets and permitting genuine transactions aimed at rehabilitation.
1. The Travancore Rsyors Ltd. is the applicant. The application came up before this court under S. 536(2) of the Companies Act. This Section provides that in a winding up any disposition of property of a company may after the commencement of the winding up, shall unless the court otherwise orders, be void. Three winding up petitions are pending against applicant company. They are C.P.N s. 15/84, 21/1985 and 2/1986. All these petitions for winding up the company are on the ground that the company is unable to pay its debts.
2. In the application the company submits that the company was registered under the Companies Act, 1913 with its registered office at Rayonpuram, Perumbavoor, Kerala State. The company was incorporated on the 19th day of July 1945 and it commenced its business in March 1946. It was carrying on its business profitably during its early years. In 1975 there was an unprecedented strike by the workers lasting for about six months and there was also a devastating fire in the factory is 1976 in which large quantity of raw materials gutted. After this unfortunate event the company was industrially sick for the past five years, though it was employing over 1500 workmen. A mode of rehabilitation was earnesly desired by the company. For this purpose a consortium of four All-India Financial Institutions consisting of IDBI, IFCI, ICICI and IRBI met and discussed ways and means of rehabilitating the unit. I am told that the financial consortium ultimately exoressed its preparednesa to advance a loan of Rs. 511 lakhs. ln fact, out of this sanctioned loan a substantial part of the leas has already been received by the company and She balance sanctioned loan amount is only Rs. 225 lakhs. I may also incidentally refer to an earlier loan granted by the above financiers to the company. As early as on 15-9-1984 this company was given Rs. 510 lakhs by the financiers. Of course, for this 510 lakhs of rupees the financiers obtained both movable and immovable properties of the company as security. To say is plainly the loan amount of Rs. 510 lakhs greeted on 15-9-1984 is a secured debt.
3. Nov the company wants the remaining amounts of the 2nd loan sanctioned, namely Rs. 225 lakhs. When the company approached the financiers for the said loan the financiers insisted that they must be given security not only for Rs. 225/—lakhs but also for the entire amount of Rs. 511 lakhs. Since the winding up petitions are pending before this court, the financiers also insisted that before offering movable and immovable properties as security, the company should obtain appropriate leave and sanction from this court under S. 536(2) of the Companies Act. This situation necessitated the company approaching before this court with the petition under S. 536(2) of the Companies Act. As I said earlier the leave was sought under S. 536(2) of the Act since three company petitions for winding up the company are pending. These petitions have proceeded any length to reach the finale. They are in the first stage. The petitioners in two of the petitions are opposing the application filed by the company under S. 536(2). The petitioner in C.P No. 21/1985 submits that an amount of more than Rs. 4 lakhs is due from the company and that out of the said amount Rs. 2,15,000/- is supposed to be an admitted amount. The petitioner in C.P Na. 15 of 1984 also submits that a little more then Rs. 20,000/- is due from the company to the petitioner. This petitioner also seriously opposes the application under S. 536(2) of the Companies Act. Of course, the petitioner in C.P No. 2 of 1986 who claimed that they have to get as amount of Rs. 16 lakhs have not chosen to oppose this petition.
4. The company in question is one of the companies included in the notification under the Kerala Relief Undertakings (Special Provisions) Act, 1961. The consequential affect of enlisting the company within such a notification is really in effect a declaration of morotorium a hold up regarding the repayment of debts by the company. So long as the notification continues with respect to this company this court may not order the winding up of the company. All recoveries in regard to the liabilities of the company are statutorily suspended.
5. Counsel far the petitioner submitted before me that the application is made with ulmost good faith and honesty and that there are adequate and sufficient reasons and persuasive circumstances for this court to exercise the power under S. 536(2) of the Companies Act in favour of the company. I feel that it is now apposite to quote S. 536(2) of the Companies Act.
“536(1)………(2) In the case of winding up by or subject to the supervision of the Court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding-up, shall, unless the Court otherwise orders, be void.”
6. Before considering the merits of the case, I must be fully Informed of my power under S. 536(2). I must know the real width, ambit, content and scope of the said provision. What is the power encapsuled in the said Section. A serious incidental question is a So whether it is open to me to make en order granting leave for the disposition by the company of its assets as sought for at the present stage when no order has been made in the winding up proceedings which is still pending. This secondary question is raised on the wording of S. 536(2). This doubt is not a new one. It is created on the linge and formulation of the Section to wit “is the case of winding-up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the company………shall unless the court otherwise orders be void.” Whether the power under S. 536(2) is exercisable only when actual winding up order is passed and only then the court can examine whether the creation of a security on immovable property is justified or valid since it is done when winding-up petition/petitions is/are pending. Though this is a point of difficulty, I feel that there is no great ado to answer this question the provision in the Indian Companies Act is almost identical with the provisions in the English Companies Act. In English Law two poles of judicial opinion existed, but now it is settled. As early as in 1948 a direct question came up for consideration before Vaisey, J. regarding the jurisdiction of the company court to exercise the-power to grant leave for disposition far a company against which winding up petitions pending in In re Miles Aircraft Ltd. (1948 Chancery 188). Wen the petitioning creditors opposed the making of the order Vaisey, J. after saying that the question raked before him was whether ha had jurisdiction in those circumstances to make the order, read S. 173 of the Act of 1929 sad S. 153 of the Act of 1862, and said: “In any judgment, the object of the section both in its original form and in its present form was that if a winding up order is made, any transaction which has been entered into since the commencement of the winding up-which, of course in the present case if the winding up order is made is the date of she presentation of the petition—is subject to review by the liquidator… All that we have now is a contingent future possible winding up, sad I do not think the section is so framed as to give me jurisdiction to adjudicate on this matter, so to speak. in advance. I must, therefore dismiss this summone with costs.”
7. The matter again came up before Buckley, J. in In re A.I Levy (Holdings) Ltd. (1963 (1) Cn. 9) Considering Case and other cases including the decisions of Chitty, J. and Pennycuick, J. in Garden v. The Albert Palace Association and In re Douglas Griggs Engineering Ltd. Buckley J. said “I think I am bound to look at Vaisey J's decision in the Miles Aircraft case with considerable care to see whether it is in fact an authority which I ought to feel myself bound to follow to the conclusion that I have no jurisdiction to make she order asked for in the present case.”
8. An elaborate consideration is made by Buckley, J on this question and finally said “In these circumstances, with the great respect to Vaisey, J., from whose view as to jurisdiction I think I am, in the circumstances, at liberty to differ, I bold that I have jurisdiction and that on the facts of this case I should exercise my jurisdiction hers and now, notwithstanding that no winding-up order has yet been made.”
9. This decision has been approved by Slade, J. in Re Burton & Deakln Ltd. (977) All England Law Reports 631).
10. Is my view the animus of the sub-section is to forbid malapropos and objectionable disposition or dissipations of property which would ultimately fall to a low ebb or tail off the assets otherwise available for distribution among the creditors of the company in the event of winding up. Bui the Section leaves a reserve power of discretion to justify and uphold all genuine sad proper transactions, exercising a sound discretion normally validating transactions which are benign and honest; transactions which have been done in the best interest of the company and in the ordinary course of company's business. The legislative latent is plainly manifested by the use of the select expression “unless the court otherwise orders” which mandates silently but elequently a duty on she Judge to examine each case on its pecularities, facts and circumstances, special bearing being had to the question of good faith and honest intention aimed at the best interest of the company. The omission to indicate any special guiding principles in the matter of discretion to be exercised by the court, makes it clear that it is not left entirely at large, but controlled only by the general principles which apply to every kind of judicial discretion. In Re Burton & Deakin Ltd. (1977 (1) All England Law Reports 631) the Court of Chancery Division observed:
“If, on an application under S. 227 relating to a solvent company, its directors placed before the court evidence that they considered that a particular deposition falling within their powers was necessary or expedient in the interests of the company, and if the court considered that the reasons given were such as an intelligent and honest man could reasonably hold, the court would normally sanction the disposition notwithstanding the opposition of a contributory, unless the contributory had adduced compelling evidence which proved that the disposition is likely to injure the company. The court would cot, except in the case of proven had faith or other exceptional circumstances, interfere with the discretion conferred on the directors by a company's article of association at the instance of a contributory, even if a winding-up petition had been presented.”
11. The Special Bench of the Rajasthan High Court considered the question in Gopal Das v. K.B Board (1972 Tax L.R 2285). The court held thus:—
“In the absence of any prohibition in the law, there is no reason why the Court should be precluded from examining the property of a proposed disposition during the pendency of a winding up petition if the company has a genuine cane requiring early consideration. The High Court has therefore jurisdiction under S. 536(2) to authorise a disposition of a Company's property during the pendency of a winding-up petition notwithstanding that a winding-up order has not been made.”
12. The same conclusion has been reached by the Bombay High Court in the decision report in Kamani Metallic Oxides Ltd. v. Kamani Tues Ltd. (1983 Tex L.R 2459). Though the conclusion was identical with the conclusion of the Rajasthan High Court, the reasoning was slightly different. This is clear from the following observation:
“Expression “In the case of winding up” means “during winding up proceedings” and not “after winding up order is passed, or “upon passing such order”—Hence, Court can authorise disposition of the company's assets under S. 536(2) even before winding up order is passed.”
13. The obvious purpose of the petitioner-company in approaching this court perhaps is to avoid future challenge of the security offered. If a security is offered and if the same is accepted as a time when winding-up petition or petitions were pending, in the event of winding-up, the Liquidator has got the power to challenge the correctress or the goruineress of the security. The leader wants to avoid this contingency before it decides to greet she lean. The borrower is in need of the Iran for the best interest of the company. This heteromorphic position can pass-muster only if a previous section is obtained by the company under S. 536(2) of the Companies Act. If I decline to grant sanction on a narrow interpretation of the Section that I can exercise the power under S. 536(2) only in the event of Order of winding up, in certain genuine cases where disposition should be necessary in the best interest of the creditors of the company it will be made impossible. I do not think that such an interpretation is intended by the legislature and the court should not limit the scope of the section to that extent. So, necessarily the company court should possess jurisdiction and protect if such transactions are genuine and bona fide and for the purpose of promoting the interest of the company. When I say it is for the purpose of promoting the interest of the company, I am bound to remember realistically the interest of the creditors and particularly the interest of the creditors who have come up before me with the winding up petitions.
14. Now I turn to consider the facts which are highlighted by the company for the relief and the facts placed before me by the respondents who opposed the petition. I first consider the possible and potential advantages of the creditors who are opposing this petition. Certainly, they want this petition should be dismissed. In case, I dismiss the petition, I put to myself a question with two points what immediate or mediate benefit or advantage the creditors are obtaining. Certainly no immediate advantage. By dismissing this petition no progress will be made in the matter of winding up. No immediate payment of the alleged debts can be ordered by this court. This is prevented by a statutory stay under the Relief Undertaking Act. The only advantage that can be envisaged is an advantage of a potential nature. In the event of passing en order of winding up the creditors’ distributive share in the assets of the company will be affected, if the Scan amount received wish sanction of this court from the financiers are net utilised for reviving the company or augmenting the assets of the company. Certainly, this is so because an additional secured debtor is emerging in the fray of creditors. Now, I turn to consider the reverse side of the picture namely if I grant sanction what would be the effect. First and foremost of my concern in this aspect is to examine the honesty and good faith spotlighted in the petition on which the reliefs in the petition are founded. If the request of the company is allowed and leave for disposition is granted certainly there is a wells grounded hope of reviving or rehabilitating the company end if the company succeeds the company may be in a position to pay all its debts including the debts of the respondents who ere opposing this petition.
15. I have to decide this question on the materials available before me, facts disclosed and the circumstances developed in the case. One luminating fact which is relevant and pertinent is that very renowned and well established financiers have offered to grant considerably large amount as loan to the company. This is cot disputed and the financiers have appeared before me. They told me that they have studied the situation of the company carefully and scientifically with the help of their technical experts. This is one of the circumstances which very much persuades me to grant the relief sought for. Again, it is also plain and clear that this company has been included in the notification under the Kerala Relief Undertakings (Special Provisions) Act, 1961. So this circumstances leads to a fact of secondary importance in assessing the merits of the respective cases that it is not possible for this court to pass an order of winding up immediately or atleast within a reasonable time.
16. No material substantial in character has been placed before me to consider seriously the honesty and good faith of the company. The company is not biding the fact that it is in financial difficulty and that has been placed before this court as an open book. But the company tells me that if is attempting to revive and rehabilitate the company where over 1500 employees are working. Now I turn to the firal question. I can say definitely that no limits are placet by the Section on the court's discretion to grant or refuse an application under S. 227 (here S. 536(2)) and such a discretion will of course to be exercised in every instance having regard to the particular circumstances of the particular case (vide 1977 (1) All England Law Reports 631 at page 637). Certainly if I refuse sanction, at will be a great set back to the honest and genuine attempt of the company to rehabilitate. I do not think that this court should hold back the company making an attempt to rehabilitate it. I feel that the leave for disposition sought for is necessary and expedient in the interest of the company and I hold that the reasons given are such that an intelligent and honest man could reasonably hold, the court will normally sanction the disposition, notwithstanding the opposition.
17. In the result I would allow the petition. I permit the applicant company the Travancore Rayons Ltd., Rayaopuram, Perumbavoor to create a charge for Rs. 511 lakhs over the movable properties of the company in favour of IDBI, ICICI, IFCI and IRBI.
18. Allowed.
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