Canara Bank vs Brunton and Company Engineers Ltd.

K.S. Paripoornan, J.—Canara Bank, Mattancherry, Cochin-2, a creditor of M/s. Brunton and Company (Engineers) Ltd. has filed C.P. No. 11 of 1983 u/s 439 read with Section 433(e) and (f) of the Companies Act, 1956, praying for the winding up of the " company ". The statutory notice u/s 434 was served by registered post at the registered office of the company. Notice was ordered by this court on September 9, 1983, by special messenger. It was returned stating that the company is locked. On September 13, 1983, when the petition came up for hearing, Mr. K. A. Nayar of M/s. Menon and Pai took notice on behatf of the company and took time to file a counter. Thereafter, Mr. K. A. Nayar and others filed vakalath on behalf of the company. When the case came up forbearing on September 20, 1983, and at subsequent stages, it was represented by counsel that negotiations were going on to pay off the creditor bank. The bank has also filed Application No. 218 of 1983 u/s 450 of the Act read with Rule 106 of the Companies (Court) Rules, 1959, for appointing a provisional liquidator to take immediate possession and assume management of the company. Rule 106 of the Companies (Court) Rules, 1959, is as follows:

"106. Appointment of provisional liquidator.--(1) After the admission of a petition for the winding-up of a company by the court, upon the application of a creditor, or a contributory, or of the company, and upon Proof by affidavit of sufficient ground for the appointment of a provisional liquidator, the court, if it thinks fit, and upon such terms as in the opinion of the court shall be just and necessary, may appoint the official liquidator to be provisional liquidator of the company pending final orders on the winding-up petition. Where the company is not the applicant, notice of the application for appointment of provisional liquidator shall be given to the company unless the court, for special reasons to be recorded (in writing), dispenses with the notice.

(2) The order appointing the provisional liquidator shall set out the restrictions and limitations, if any, on his powers imposed by the court. The order shall be in Form No. 49, with such variations as may be necessary. "

The application is supported by an affidavit of the senior manager of the Mattancherry Branch of the bank dated August 29, 1983. M/s. Brunton and Company (Engineers) Ltd. was incorporated on December 2, 1936. It approached* the bank for credit facilities in 1963. Various financial accommodations were granted by the bank from time to time. There was a deposit of title deeds relating to immovable property belonging to the company with the bank on June 15, 1977. Since July, 1982, the company is under lock-out. It will not reopen and start production. There is no responsible officer of the company at its office at Fort Cochin. The office always remains closed. In none of four business places--Vypeen Yard, Palluruthy Yard, Brunton House Property Yard and Registered Office and Engineering Work Shop at Port Cochin-1, no responsible person of the company, except the watch and ward staff, is seen. The company should submit a monthly statement regarding open credit accommodation. After May 31, 1982, no such statement was filed. The amount due to the bank since July, 1982, when the activities of the company came to a standstill, exceeds Rs. 1 crore. The bank sent a statutory notice to the company for the payment of the debts due on July 14, 1983, to its registered office at Fort Cochin-1 by registered post acknowledgment due. This was returned unserved by the postal authorities stating that the company is on strike. The company is not functioning. One of the directors of the company merely sent a communication dated August 19, 1983, requesting for remission of interest. There is no response either from the company or from any one of its directors and not even a statement that the company is in a position to pay off its debts. Books of accounts of the company are not being maintained or audited. No balance-sheet has been prepared since 1981. As on July, 1982, the company had to pay arrears of salary to staff and wages to workers for 4 to 5 months. This forced a situation which resulted in a strike by the workers and the staff. The management did not turn up to open the office since July, 1982. The salary for the subsequent periods is also in arrears. There are huge statutory liabilities by way of arrears of provident fund, employees'' State insurance, Income Tax, property tax, etc., besides the salary and wages aforesaid. The company has also failed to pay electricity charges, telephone charges and water charges due. So, these essential utilities were disconnected by the concerned authorities. Even the watch and ward staff of the company are unpaid. They could not discharge their duties effectively. This situation has led to loss of materials worth lakhs of rupees by way of theft, burglary, etc. Stores and spares have been stolen away and a few of such items recovered by the police are lying in Mattancherry Circle Police Station. The accumulated loss of the company up to the end of December, 1981, stands at Rs 63.27 lakhs. The loss is increasing ever since December 31, 1981, year after year. This was due to the utter indifferent attitude of the management. The company has entered, into certain contracts for some jobs. It has already spent a considerable amount. Out of the realisable sum of Rs. 57.55 lakhs, the amount already spent is Rs. 58.82 lakhs as on May 31, 1982. A further amount of Rs. 30 lakhs is necessary to complete it. The loss on this score is Rs. 31.27 lakhs. This is due to escalation in price. The commitment will outweigh the assets. This again shows the indifferent attitude of the management. The net worth of the company as on December 31, 1981, is negative at Rs. 51.43 lakhs. A boat belonging to the company--MX. Rukmini--costing Rs. 5 lakhs, lies at its mooring in the Vypeen Yard with the engine portion totally sunk in water. This is total negligence and mismanagement of the company. A few movable assets of the company, charged to the bank, were removed from the premises of the company and kept in the open yard of the Sub-Judge''s Court, Mattancherry, as per order in E.P. No. 27 of 1982 in O.S. No. 82 of 1981, Sub Court, Ernakulam. On these and other grounds, it is urged that in spite of the service of statutory notice as on July 14, 1983, and even after lapse of considerable time thereafter, since the company has not paid anything towards the amounts due, it is evident that the company is commercially insolvent and is unable to pay its debts. The substratum of the company is completely destroyed and it is just and equitable to wind up the company. There is no possibility at all of the company recommencing its business or paying off its creditors. If the state of things stated above continued, the assets of the company will be totally destroyed and lost, movable assets of the company are in danger of being pilfered and removed, semi-finished and unfinished goods of the company are deteriorating day by day and all these will cause irreparable injury to the body of creditors. Therefore, the bank prays for the appointment of a provisional liquidator for taking immediate possession and assume the management of the company.

The company has filed a detailed counter dated September 18, 1983. It is stated that including interest, the amount payable to the bank will come to about Rs. 80 lakhs, which is fully secured by stock-in-trade, work in progress, stores and book debts. The company could not work from July, 1982, onwards because of the strike and disorderly behaviour of the workmen. The company had arranged watch and ward to protect the properties of the management. The number of workers is more than 150. Because of recession in the market and adverse conditions including power-cut, the working capital became sticky. The immovable property of the company as per exhibit R-1 filed along with the counter is estimated at Rs. 193.20 lakhs. By disposing of the load, the bank could be paid off. The company intends to restart its working. It is one of the oldest engineering firms having world-wide reputation. Including the workers under sub-contractors, there are more than 500 persons who are directly and indirectly connected with the company earning their livelihood. The company can repay its loan at the rate of Rs. 10 lakhs in every six months to avoid distress sale. The company is negotiating in that behalf with the bank. The appointment of a provisional liquidator will adversely affect the reputation and goodwill of the company. The company is not insolvent. To show the bona fides of the company, it is prepared to make cash down payment of any reasonable amount that may be fixed by the court. There are some pending contracts. The management does not have any access to the records after July, 1982. If the provisional liquidator is appointed, the guarantees given by the bank will be enforced exposing the directors to personal liability. In view of the strike, it was impossible to calculate and disburse the amount due to the workers and the staff. The company is trying to recommence its work and also to come to a satisfactory arrangement with the bank in regard to discharge of its liabilities. The company can liquidate the liabilities and is not commercially insolvent. So, the application for the appointment of a provisional liquidator deserves to be dismissed.

Since a large number of workers are involved, notice was given to the Advocate-General to ascertain the views of the State Government. In the meanwhile, M/s. Brunton and Company Engineers Ltd. Shipyard Workers'' Union filed Company Application No. 2 of 1984to get themselves impleaded. The petition was allowed on January 3, 1984.

The Cochin Commercial Employees'' Association by affidavit dated March 8, 1984, have supported the winding up.

On behalf of the Government of Kerala, the Additional Secretary, Industries Department, has filed an affidavit dated January 9, 1983, (January 9, 1984?). It is stated therein that the State Government have come to the conclusion not to take over M/s. Brunton and Company (Engineers) Ltd. It has also stated that the management has not hitherto taken steps for reviving the unit. As per the report of the Labour Commissioner dated December 24, 1983, all responsible persons attached to the company had left Cochin and the company is virtually in an abandoned stage.

Chandrasekharan and Chandrasekhara Menon representing M/s. Brunton and Company (Engineers) Ltd. Shipyard Workers'' Union have supported the winding up in their affidavit filed dated January 7, 1984. Similar is the case with the Cochin Commercial Employees'' Association who have filed an affidavit dated March 8, 1984, supporting the winding up.

At this juncture, it will be important to note that even the notice of the company petition and application sent by this court through a special messenger could not be served on any responsible officer of the company. It was affixed on the outer door of the company, since it was locked. Only subsequently when the matter came up for hearing, the company entered appearance through counsel. It will be seen from the order passed in C. A. No. 257 of 1983 dated October 13, 1983, that the respondent company took the plea that they could not file a counter in C.P. No. 7 of 1983 since all the records are inside the registered office and none of the directors have got even access to the office or the key. The company moved for the appointment of a commissioner by court for getting the records. This resulted in the appointment of an advocate commissioner. The proceedings therein ultimately led to the position whereby the locks had to be broken open and police assistance had also to be given to the advocate commissioner for the said purpose. (Vide further order dated December 23, 1983, in C.R. and C. A, No. 257 of 1983).

I heard counsel for the petitioner in the company petition--the applicant in Application No. 218 of i983 (the bank), Sri. T. R. Govinda Warrier, Sri. K. A. Nayar of M/s. Menon and Pai representing the company, learned Advocate-General and Government Pleader representing the State Government, Mr. M. Ramachandran and Mr. P. V. Abraham, advocates, representing the Cochin Commercial Employees'' Association and Mr. V.I. Joseph, advocate, representing Brunton and Company (Engineers) Ltd. Shipyard Workers'' Union. The matter was posted even after the hearing of the application was over, on a few occasions, as requested by Mr. K. A. Nayar, who submitted that the entire matter will be amicably settled. But, even as late as July 10, 1984, Mr. K. A. Nayar was not able to make any progress in the matter.

The broad facts that emerge on a perusal of the relevant affidavits are as follows : Since July, 1982, the entire working of the company has come to a standstill--whether it is " locked out " as alleged by the bank or " strike " as alleged by the company. Since then no accounts are kept and no statement sent to the bank. The amounts due as on July, 1982, to the bank exceed Rs. 1 crore. None of the responsible officers of the company are available in any one of its four offices or even locally.

Even the balance-sheet is not prepared since 1981. No person has got a key of the registered office of the company. The salary of the workers remained unpaid ever since January--February, 1982. Huge statutory liabilities by way of provident fund, contributions to employees'' State insurance, Income Tax and property tax are due. For non-payment of electricity charges, telephone charges and water charges, essential utilities are cut. These have resulted in loss of property by way of theft and burglary of valuable properties. There is heavy accumulated loss. Even the commitment under various contracts will outweigh the assets. Due to the indifferent and negligent attitude of the management, pending contracts could not be completed, the engine portion of a boat is sunk in water, and movables are removed arid kept in the court-yard of the Sub-Court, Mattancherry, etc. That there is a total paralysis of the working of the company since July, 1982, admits of no doubt. The entire affairs of the company is in a "standstill" position. None of the directors or other officers of the company seem to take any effective step reckoning on the above factors. A perusal of the affidavit filed by the bank in support of the application for the appointment of a provisional liquidator and the counter-affidavit filed by the company will show that the company has no proper or valid defence to offer. Many crucial averments in the bank''s affidavit are not even met or answered. The counter-affidavit filed by the company is vague in many crucial aspects. The company vaguely states in paragraph 9 of the counter that the immovable properties are worth Rs. 193.20 lakhs. Exhibit R-1(a) is only an estimate of the value of the immovable property of the company based on no data. It is merely an assertion. A reading of the various paragraphs of the counter-affidavit shows that the working of the company is at a standstill since July, 1982, and that there is commercial insolvency. The various lapses and state of affairs adverted to above have not been effectively denied or met in the counter-affidavit. It is evident from a perusal of the state of affairs, as could be seen from the above, that it is highly necessary in the interests of all creditors that proper steps should be taken to safeguard the assets and other properties of the company. The prospect of the company being revived or re-commencing its business is too remote. Prima facie I am satisfied that the company is commercially insolvent. The state of affairs adverted to also discloses that substantial properties of the company are in medio, that there is no proper safeguard for the assets, that properties are frittered away and removed by way of theft, burglary, loss, etc., that the liabilities of the company are mounting up, and that there is a total disregard, indifference and carelessness on the part of the various officers and directors of the company who have failed to take proper care about the assets and affairs of the company. Indeed, counsel for the company submitted ever since the matter came up before the court on September 20, 1983, that the company is negotiating for settlement of the liabilities of the bank. This was repeated when Application No. 218 of 1983 was being heard. The matter was adjourned from time to time. Even after the hearing of this application was over as early as January 12, 1984, counsel for the company prayed that the court may hold up passing the order, so as to afford the company some time more to negotiate with the bank or otherwise arrange to pay off the debts. Even after six months, no progress has been made in that direction. Counsel for the company could not even give positive answers when questioned on the above ; on one occasion counsel even submitted that they have no instructions in the matter. I am of the view that the directors and officers of the company are not interested at all in revamping or re-commencing the business, nor are they interested in paying or effectively negotiating with the creditor bank or settle its affairs. I felt that the directors of the company were taking a negative attitude and were really evading the issue. It was due to my anxiety for the innumerable workers, who Will be thrown out of employment, that the matter was adjourned from time to time and the passing of the final orders in this application was kept in abeyance. Now the stage has been reached when it is self-evident that nobody is interested in solving the issue, that there is no genuine attempt to settle the matter, and the company is not in a position to pay off its debts or to commence working. In spite of the pendency of this matter for such a long time, no genuine attempt has been made to show the bona fides of the company either in the matter of payment of any portion of the debt due to the bank or any positive attempt or concrete proposal in the direction of revamping or re-commencing the business. The entire matter is in a "stalemate".

The circumstances in which a provisional liquidator may be appointed have been lucidly stated in Palmer''s Company Law, volume I, 1982 edition, at page 1143. It is said therein as follows:

" If the company makes, consents to, or is shown not to oppose, the application, the appointment is almost a matter of course when it is asked that the official receiver be appointed. The early cases seem to show that the appointment will only be made where the company consents or the petition is unopposed. However where the company opposes or does not appear the order may now be made if there are special circumstances such as danger to the assets or obvious insolvency or the company has admitted that it has no defence to the petition. This is not an exhaustive list of examples."

Pennington''s Company Law, fourth edition, at page 697, states :

"The purpose of making the appointment is to preserve the company''s assets and to prevent the directors from dissipating them before a winding up order can be made. It has been said that a provisional liquidator will only be appointed if the company is the petitioner or if it consents to the appointment, or if the company is clearly insolvent, or if it is obvious to the court that a winding up order will be made. These dicta show the court''s reluctance to pre-judge the issue between the petitioner and the company by appointing a provisional liquidator before the hearing of the petition, but it has also been held that the court''s power to appoint a provisional liquidator is not limited to such cases, and may be exercised if there is an interest of the public to be protected, for example, when the company is an insurance company on whose continued solvency the effectiveness of policies issued by it depends,..."

u/s 450 of the Act read with Rule 106 of the Companies (Court) Rules, the court, if it thinks fit, may appoint the official liquidator to be the provisional liquidator of the company. There should be " prima facie " sufficient ground for the appointment, that shall be proved by an affidavit. In this case, the winding up petition is by a creditor to whom large amounts of nearly a crore of rupees are due from the company. The statutory notice was duly served. There was no response. Even after the filing of the petition, though it was stated that the company is negotiating with the bank, there was no genuine attempt in that regard. The financial position of the company is very dark. Besides default in the payment to the creditor-bank, there is default in the payment of wages to the staff and workers, electricity dues, water charges, telephone charges, provident fund, employees'' life insurance, Income Tax, property tax, etc. The company had ceased to function more than two years ago. The company is not functioning since July, 1982. Prima facie, the company is shown to be " insolvent". It is absolutely necessary to preserve its assets. Effective steps in that regard are necessary. The properties are being frittered away by way of theft, burglary, etc. This petition being by a creditor, where it has asserted that the company is unable to pay its debts in spite of statutory notice and no valid defence has been shown, there is every possibility of a winding up order being passed. The company is commercially insolvent. No balance-sheet has been prepared since 1981. No dividend or interest has been paid and indeed no business is done since July, 1982. There is serious trouble between the company and its employees. It still continues. The state of affairs only point out that the company cannot go on. In order to preserve the assets and other properties of the company, to bring to a close the " stalemate " and " uncertainty " in the affairs of this company and also in " public interest", it is highly necessary to pass "positive and effective" orders.

I hold that the facts disclose "special circumstances" pointing to danger to the assets of the company and also " patent insolvency ". It is absolutely necessary to preserve the assets of the company. In the circumstances, I hereby appoint the official liquidator as the provisional liquidator of M/s. Brunton and Company (Engineers) Ltd. u/s 450 of the Companies Act.

Mr. K. A. Nayar, counsel for the company, while opposing the petition, brought to my notice the decision in Virendrasingh Bhandari v. Nandlal Bhandan and Sons P. Lid. [1970] 49 Comp Cas 532 (MP). Counsel placed reliance on the oft-quoted passage of Lord Romilly in London, Hamburg and Continental Exchange Bank, In re : Emmerson''s case [1866] LR 2 Eq. 231, seen at page 543 of the reports. I should say that the observations of Lord Romilly as well as the decision in Virendra Singh Bhandari and Others Vs. Nandlal Bhandari and Sons P. Ltd., are distinguishable. As could be seen from Vadilal Laldas Patel, In re AIR 1949 Mad 107 at page 108, Lord Romilly M.R. himself stated Railway Finance Co., In re [1866] 14 LT 507 ; 14 WR 754 that if it appears that the company cannot go on, a provisional liquidator can be appointed. In the decision in Virendra Singh Bhandari and Others Vs. Nandlal Bhandari and Sons P. Ltd., the application was by a contributory and the company was still functioning and carrying on its business and the appointment of a provisional liquidator would have stopped the carrying on of the business. Those are distinguishing factors which have been adverted to and highlighted in the said decision. A. P. Sen J. in Virendra Singh Bhandari and Others Vs. Nandlal Bhandari and Sons P. Ltd., at page 543 held :

" ......I am now concerned with......the application for the appointment of a provisional liquidator. Such an application is not ordinarily allowed except on the petition of a creditor who has been unable to obtain payment of his money, or unless the company asks for or agrees to the appointment."

In this case, the application for appointment of a provisional liquidator is by a creditor, and the affairs of the company have come to a standstill. It has stopped its business since July, 1982 (for two years). This is not a case where the petition is by a contributory or the company is carrying on its business as in Virendra Singh Bhandari and Others Vs. Nandlal Bhandari and Sons P. Ltd., So, the said decision is distinguishable.

In the result, Application No. 218 of 1983 is allowed. I hereby appoint the official liquidator attached to this court as the provisional liquidator of M/s. Brunton and Company (Engineers) Ltd., Cochin-1. He will take immediate charge of all the properties and effects of the company and assume the management of M/s. Brunton and Company (Engineers) Ltd., 4/J71, Ballard Road, Cochin-1. He will take all steps that are necessary to bring all the assets and properties of the company to his effective possession and manage them. For taking possession and management of the company and its assets and properties, if the official liquidator, who is hereby appointed as provisional liquidator, requires police aid or help, he shall forthwith contact the District Collector, Ernakulam, or the Commissioner of Police, Ernakulam, and/or other police officials in connection therewith. I am sure that the District Collector, Ernakulam, the Commissioner of Police, Ernakulam, and other police officials, whosoever is contacted in that behalf by the official liquidator, will extend all aid and help for a proper and peaceful taking possession of and for assuming and continuing the management of M/s. Brunton and Company (Engineers) Ltd., Fort Cochin-1.

A carbon copy of this order will be served immediately on the official liquidator for necessary compliance. The Registrar will forward a carbon copy of this order to the District Collector, Ernakulam, for necessary action on the lines indicated in para 14 above.

The applicant, Canara Bank, Mattancherry, Cochin-2, will place at the disposal of the provisional liquidator, a sum of Rs. 1,00,000 (rupees one lakh), now, on account, for the expenses to be incurred by the provisional liquidator in the matter. The bank can also claim this amount as a first charge against the properties of the company.