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Icici Ltd. v. Ahmedabad Manufacturing & Calico Printing Co. Ltd. And Another
Factual and Procedural Background
The appellant advanced a series of unsecured loans to the respondent-company between 23 February 1976 and 10 July 1986. On 10 July 1986 an unsecured creditor filed a winding-up petition against the company. Despite the pending winding-up proceedings, the appellant sanctioned two additional loans on 1 October 1986 and 19 January 1988.
In 1990, both the company and the appellant filed an application under Section 536(2) of the Companies Act, 1956 seeking judicial leave to authorise dispositions of the company’s assets that might be required to secure all loans advanced since 1976. A learned Single Judge of the High Court granted leave only for the post-10 July 1986 loans and refused leave for the earlier loans.
The appellant appealed. A Division Bench dismissed the appeal, agreeing that leave should not be granted for the earlier loans and, on its own motion, also set aside the Single Judge’s grant of leave for the post-10 July 1986 loans—even though no cross-appeal had been filed on that aspect.
During the pendency of these proceedings, the company was declared sick under the Sick Industrial Companies (Special Provisions) Act. Rehabilitation efforts failed; the company was ultimately ordered to be wound up, its assets were sold by the Official Liquidator, and the sale proceeds are presently held by the Official Liquidator.
Legal Issues Presented
- Whether leave under Section 536(2) of the Companies Act, 1956 should be granted to validate dispositions of the company’s assets securing loans advanced before 10 July 1986 (i.e., prior to the commencement of winding-up proceedings).
- Whether the High Court’s Division Bench exceeded its jurisdiction in setting aside the Single Judge’s order granting leave for loans advanced after 10 July 1986, in the absence of any appeal challenging that portion of the order.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court first noted the practical impossibility of granting the appellant’s request—creation of a first charge over assets that have already been sold by the Official Liquidator. It then examined the statutory purpose of Section 536(2), emphasising that leave may be granted only when a disposition benefits the company in liquidation or its body of creditors as a whole.
With respect to the loans made prior to 10 July 1986, the Court found:
- The appellant had offered no satisfactory explanation for advancing unsecured loans over a decade without security, and sought to obtain security only in 1990—“15 to 17 years” after the original transactions.
- Granting leave at this late stage would merely elevate the appellant from unsecured to secured status, conferring no benefit on the company’s general creditors and failing to preserve the company’s assets or business.
- Accordingly, the Division Bench correctly refused leave for pre-10 July 1986 loans.
Turning to the loans advanced after 10 July 1986, the Court held that the Division Bench had no jurisdiction to set aside the Single Judge’s favourable order because no appeal or cross-appeal addressed that part of the decision. The appellant should not be placed in a worse position for having filed the appeal. Thus, the Court restored the Single Judge’s grant of leave for the post-10 July 1986 loans.
Holding and Implications
PARTIALLY ALLOWED: The appeal is allowed to the limited extent that the Single Judge’s order granting leave under Section 536(2) for loans advanced after 10 July 1986 is reinstated. The refusal to grant leave for loans advanced before that date stands affirmed.
Implications: The Official Liquidator is directed to take consequential action in light of this ruling. The judgment affects only the relative rights of the appellant and other creditors in the existing liquidation; it sets no new legal precedent of broader application.
Order
1. The appellant had advanced loans to the respondent Company between 23-2-1976 till 10-7-1986. On 10-7-1986 an application for winding up was filed against the respondent by an unsecured creditor. Subsequent to this on 1-10-1986 and 19-1-1988, the appellant sanctioned two further loans to the Company. In 1990 the Company as well as the appellant made an application under Section 536(2) of the Companies Act, 1956 for allowing the disposition of the Company's properties “which may have to take place” as a consequence of the loans advanced by the appellant to the Company from 1976. The learned Single Judge allowed the application in part by granting leave to dispositions by the Company of its assets under Section 536(2) in respect of those loans which were made subsequent to the commencement of the winding up of the respondent Company, namely, 10-7-1986, but refusing such leave in respect of the prior transactions.
2. The appeal preferred by the appellant was dismissed by the Division Bench by holding that leave under Section 536(2) should normally be granted if the dispositions were necessary for the purpose of obtaining funds for the Company or otherwise in the interest of the Company which was being wound up. It was also held that permitting the Company to dispose of all its assets to a particular creditor would affect the claims of all creditors of the Company and that before any such order is passed publicity should be given to the application so that all creditors could file their objections to the application under Section 536(2), if they wanted to do. It was also found that the application under Section 536(2), was moved only on 30-11-1990. It was noted that no details have been given regarding those transactions which had taken place prior to 10-7-1986. This was sought to be rectified only subsequently by giving details of the earlier loans. The High Court held that what the appellant 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 Court therefore refused to interfere with the order of the learned Single Judge. However, the Court went further and set aside the decision of the learned Single Judge insofar as it pertained to the post-10-7-1986 loans, although no appeal had been preferred therefrom.
3. It is not in dispute that during the pendency of the proceedings the Company was referred to the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act. The efforts to revive the Company were unsuccessful both before BIFR as well as AAIFR. The Company was accordingly ultimately wound up. Its assets have been sold by the Official Liquidator and the sale proceeds are at present held by the Official Liquidator. These subsequent developments have been noted by this Court by orders passed in this appeal from time to time.
4. The appellant's prayer under Section 536(2) was to allow the Company to execute documents creating a first charge over the Company's properties in favour of the appellants. The Company's properties as of today are not properties belonging to the Company. Apart from it being a practical impossibility to allow the appellant's prayer at this stage, we are of the view that the Division Bench did not err in rejecting the application of the appellant at least insofar as it pertained to the loan transactions prior to 10-7-1986. There is no explanation forthcoming from the appellant as to how these advances were made for over a period of 10 years without obtaining any security. The appellant ultimately sought to create securities in respect of these transactions only in 1990. 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. It cannot be said that the securing of old debts due to one creditor of the respondent by creating of a mortgage ex post facto would in any way either enure towards the preservation of the Company's assets or its business or enure to the benefit of its other creditors.
5. However, we are of the view that the High Court erred in setting aside the learned Single Judge's order even in respect of the post-10-7-1986 loans on the simple ground that this was beyond the scope of the appellant's appeal. The appellant could not be in a worse position by having preferred the appeal from the order of the learned Single Judge. The appeal is accordingly partially allowed to the extent stated without any order as to costs. This order may be communicated to the Official Liquidator for such consequential action as may be necessary.
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