Gujarat Small Industries Corporation Ltd. vs Borsad Urban Co-operative Credit Society Ltd. and Another

K.A. Puj, J.—The petitioner, Gujarat Small Industries Corporation Ltd., has filed this petition u/s 433 of the Companies Act, 1956, for

winding up of the petitioner-company and for appointment of the official liquidator attached to this Court as the liquidator of the company with all

powers under the Act.

This petition was admitted on September 15, 2006 and the notice of hearing of the petition was directed to be advertised in The Times of India

(English daily), Ahmedabad edition, and Gujarat Samachar (Gujarati daily), Ahmedabad edition, to be published on or before September 22,

2006. The publication of the notice of this petition in the Government Gazette was dispensed with.

Pursuant to this, advertisement was published in the newspapers as : directed by this Court and affidavit to this effect alongwith the newspapers''

clippings are produced on the record of this case.

During the pendency of this petition Company Application No. 577 of -2006 is filed by Borsad Urban Co-operative Credit Society Ltd., for

joining as party respondent in the Company Petition No. 146 of 2006 on the ground that the said society is one of the secured creditors. The court

has disposed of the said application vide its order dated November 6, 2006, permitting the said applicant to be joined as a party respondent.

On September 24, 2007, this Court has passed an order for the purpose of considering a larger question. Before the final order of winding up is

passed, the court has observed in its order dated September 24, 2007, that whether the company, which is promoted and fully controlled by the

Government and has become instrumental for implementation of the policy of the Government, can just be ordered to be wound up merely

because it is running into losses or has inability to pay its debts or is unable to discharge its obligation towards creditors? For the purpose of

examination of this aspect the court has called for the details regarding the policy of the Government, by which company was ordered to be floated

and various policies of the Government from time to time on the basis of which any financial losses or less consideration is received by the

company and the decision of the Government communicated to the company from time to time so far as it may have financial repercussions upon

the functioning of the company. The court further observed that if on account of misfeasance by the directors of the company financial condition is

deteriorated, the incidental aspects may be required to be considered is whether it was by way of implementation of the policy of the State

Government or the board of directors itself. The court was, therefore, of the view that the presence of the State Government may also be required

before concluding on the aspects as to whether the present proceedings are initiated for winding up for bona fide purpose or just to avoid the

financial responsibility or accountability of the company. The court further observed that even if the proceedings are considered for bona fide

purpose, then also the question may be required to be considered for the genuineness of the ground alleged for winding up. The court, therefore,

directed to join the State of Gujarat to be served through the Secretary, Industries and Mines Department as party respondent.

The court, thereafter, passed further order on April 10, 2008, directing the petitioner to place on record the list of persons who are in the

management and/or who are members of the board of directors after August 16, 1999, till this date. The petitioner-Corporation was further

directed to furnish list of debtors, from whom the recovery could not be enforced by the petitioner-Corporation. While furnishing this list of debtors

the details regarding the names and addresses of the outstanding amount and proceedings, if any, taken against them should also be placed on

record. The court further directed to place on record the details as to whether any action is taken by the State Government against any of the

officers of the Corporation for non-recovery of the amount in question.

In response to the direction issued to the State Government Mr. Parikh, learned Asst. Government Pleader appeared and submitted that earlier

petition being Special Civil Application No. 9532 of 1998 was filed by the present petitioner wherein this Court directed the State Government to

appoint a fact finding committee/high power committee consisting of the concerned IAS officers to inquire into and find out the cause which led to

wind up Gujarat Small Industries Corporation Ltd., and to submit the report before this Court. He has further submitted that accordingly, the State

Government had appointed the High Power Committee by Government resolution dated April 28, 2006. He has further submitted that the General

Administration Department of the Government of Gujarat had conducted a preliminary inquiry based on the Accountant General''s report and also

individual special report conducted by M/s. Manubhai and Co., chartered accountant, on the instructions of GSIC at the relevant time. The State

Government was, therefore, directed to produce the report of the fact finding committee, report of the Accountant General and the report of the

chartered accountant on the record of this petition along with the affidavit of the concerned officer. The State Government was also directed to

show cause as to why the amount invested by the co-operative banks and other investors on the basis of the assurance given by the State

Government should not be directed to be repaid by the State Government.

Pursuant to the order dated April 30, 2008, an affidavit is filed by Smt. Reenaben S. Wagh, Under Secretary, Industries and Mines

Department, Sachivalay, Gandhinagar. It is stated therein that on behalf of the petitioner-Corporation an affidavit is filed before the court on April

21, 2008, in connection with the actions taken by the Corporation against the officers of the Corporation for non-recovery of dues of the

petitioner. Alongwith the said affidavit, report of the facts finding committee and the report of C.A.G. as well as special audit report by M/s.

Manubhai and Co., chartered accountants, were placed on the record of this petition. It was further submitted that inquiry was made against three

full time managing directors of GSIC between the period 1993 and 1997 wherein major defaults/irregularities were suspected. Names of these

managing directors and their respective period of holding the position of the managing director of GSIC were given in the said affidavit. It is further

submitted that the preliminary inquiry was made in 2004 by General Administration Department. On the basis of the preliminary inquiry State

Government has initiated Departmental inquiries against these officers and they were charge sheeted by G.A.D. on June 10, 2005. Considering the

defence statements of these officials, Government ordered inquiring authority on December 22, 2005 and inquiry report from the inquiring authority

is awaited.

With regard to the explanation called for by the court in its order dated April 30, 2008, regarding liability of the State Government towards

cooperative banks and other investors it is submitted that Special Civil Application No. 7573 of 1999 was filed by Marketyard Commercial Co-

operative Bank Ltd., and other twenty Special Civil Applications of similar nature (i.e., Special Civil Application Nos. 9712 of 1999, 8794 of

1999, 8421 of 1999, 8667 of 1999, 8666 of 1999, 10966 of 2000, 10349 of 2000, 9878 of 2000. 8066 of 2000, 9222 of 2000, 9150 of 2000,

9874 of 2000, 7378 of 2000, 13430 of 2003, 9971 of 2003, 9345 of 2004, 11314 of 2000, 8017 of 1999 and 12470 of 2004) in connection

with non-payment of unsecured bonds issued by GSIC. This Court under order and judgment dated October 5, 2005, has stated that it has been

made clear by the hon''ble Supreme Court that it cannot be said in all the cases that Government is responsible for the acts and deeds of the

Government company. All that depends upon the facts and circumstances of each case. Looking to the facts and circumstances of the present case

the nature of transaction which is based upon non redemption of ""unsecured, non-convertible bonds in the nature of promissory notes"", the

aforesaid petitions are not entertained by this Court, as there is no liability vested in the Government or there is no legal duty vested in the

Government for redemption of those ""unsecured, non-convertible bonds"". It is further submitted in the said affidavit that this judgment dated

October 5, 2005, of this Court is challenged in L.P.A. No. 1716 of 2005 by Marketyard Commercial Co-operative Bank Ltd., and in other

LPAs of similar nature. These LPAs are pending before this Court.

In the above background of the matter, the present petition is taken up for final disposal.

Mr. A.C. Gandhi, learned advocate appearing for the petitioner submitted that the petitioner-company although was incorporated to carry on

business serving small scale industries of the State of Gujarat, it has been incurring considerable losses for the last 10 consecutive years and the

accumulated loss as on March 31, 2006, has gone to Rs. 70.54 crores thereby the entire paid-up capital of the company has been wiped out. He

has further submitted that looking to the financial position, reducing business of the petitioner-company and based on the report of M/s. Price

Waterhouse, chartered accountants, appointed by the State Government, the State Government vide order dated August 4, 1999, decided to

close the business activities of the petitioner-company. Pursuant to the orders of the State Government, the State Government vide order dated

June 9, 1999, conveyed the decision for implementing the Voluntary Retirement Scheme (VRS). The petitioner had issued circular inviting

application from its employees for voluntary retirement on or before August 16, 1999, in response to which all employees/officers except 7 opted

for voluntary retirement. Thereafter, one more chance was given for voluntary retirement scheme to the remaining 7 employees to apply for VRS.

In response to which 2 employees opted for VRS. Accordingly, GSIC paid Rs. 11,74,45,499 against VRS and out of this, Rs. 10,64,27,741 was

paid by the State Government as secured loan. The GSIC has relieved 321 employees under VRS till date of this petition. Now only 5

employees/officers are working on regular basis. The board of directors have considered to introduce VRS for them. Necessary due procedure is

initiated in this regard. The petitioner-company has yet to make payment of Rs. 14,05,37,120 including interest as on March 31, 2006, to the

State Government which through State Renewal Fund, provided funds for VRS as secured loan.

Mr. Gandhi has further submitted that various financial institutions and subscribers to the bonds issued by the petitioner-company filed cases

for repayment of their loan/bonds before DRT/city civil court. Many of the bondholders had gone to this Court. In the meantime, DRT and city

civil court have passed decrees against the petitioner for the repayment of loans/bonds and the total amount of which exceeds Rs. 50 crores. He

has further submitted that the petitioner has liability of about Rs. 109 crores as on March 31, 2006 and the same does not include the amount of

Rs. 66 crores due on account of interest and others. As against this there are total debtors, loans, and advances of Rs. 65 crores approximately

and all the amounts are very old and shown as doubtful debts. The recovery from old outstanding is negligible and in no way sufficient to make

payment to its creditors.

Mr. Gandhi further submitted that the petitioner-company had fixed assets consisting of land and building and as per the valuation by the

Government approved valuer, the value of such land and building is Rs. 6 crores approximately as on March 31, 2006. The said immovable

properties consisting of land and building have been attached by the Sales Tax Department of the State of Gujarat against their demands by the

order dated July 5, 2003 and the petitioner is the only caretaker of these properties. It is further submitted that the petitioner-company has been

issued orders from the Sales Tax Department raising demands for an amount of Rs. 130 crores for various old assessments. In addition to this,

Income Tax Department has issued demand of Rs. 1.26 crores and demand of Rs. 38 lakhs is issued by the Central excise Department. All the

matters are pending before the appropriate authority in appeal. Considering all these facts, the business activities of the petitioner-company were

discontinued since 1999, debtors, loans and advances were doubtful and there was no reason to believe that the petitioner-company shall be able

to make payment to its various creditors. He has, therefore, submitted that a special resolution of the company was duly passed in accordance with

Section 189 of the Companies Act, 1956, at its extraordinary general meeting held on August 8, 2006, after due notice as provided in the Act, and

it has been decided to wind up the petitioner-company u/s 433 (a), (e) and (f) read with Section 439 of the Companies Act, 1956.

Mr. Gandhi further submitted that the substratum of the company is gone and the petitioner-company is unable to pay its debts. Under the

circumstances it is just and equitable that the petitioner-company be wound up by this Court.

The petition was opposed by Mr. V.M. Pancholi, Mr. R.S. Sanjanwala, Mr. D.C. Sejpal and Mr. Ashim Desai, learned advocates appearing

for the co-operative credit society. They have filed their respective affidavits.

Considering the submissions made by the learned advocates and after going through the affidavits and counter affidavits filed before the court

and also after considering various reports and documents filed by the parties, the court is of the view that the petitioner-company is required to be

wound up. There is a huge liability which the petitioner-company is not in a position to discharge. The financial substratum of the company is gone

down. The business activities of the company have been discontinued since 1999 and almost all employees have been relieved under the scheme of

voluntary retirement. There are several orders and decrees passed by the DRT/city civil court against the petitioner-company. In this view of the

matter, no useful purpose will be served to allow the company to remain in existence.

So far as inquiry conducted by this Court during the pendency of this petition is concerned, enough materials have come on record that

necessary proceedings have been initiated by the State Government and even otherwise once winding up order is passed the official liquidator may

be put in charge of the affairs of the company and he will have powers under the Companies Act to initiate proceedings against the erring officials.

As far as issuance of direction to the State Government to repay the amount to the bondholders is concerned, the issue is already concluded by the

decision of this Court as referred to above, against which LP As are pending before a Division Bench of this Court and hence no separate

directions are required to be issued in the present petition. The official liquidator, however, shall remain in touch with this proceeding and pursue

the same so as to book the real culprit.

Subject to the aforesaid observations and directions this petition is accordingly disposed of. Official liquidator attached to this Court is hereby

appointed as liquidator of the company and is directed to exercise all powers conferred on him in the Act. He will take charge of the assets of the

company and issue necessary notices for compliance of the provision u/s 454 of the Companies Act, 1956, for filing statement of affairs of the

company. A compliance report be filed before the court within a period of three months from today.

This petition is accordingly disposed of.