Mukul Harkisondass Dalal vs Jayesh Ramniklal, Doshi and others

M.L. Pendse, J.—This is an appeal preferred by original defendant No. 2 to challenge the legality of order dated February 6, 1992, passed by the learned single judge on Notice of Motion No. 1802 of 1991 restraining the appellant by an order of injunction from functioning and holding himself out to be the managing director or director of defendant No. 1 - company. The trial judge also issued an injunction against the company from permitting defendant No. 2 to act as managing director or director and defendant No. 2 was further restrained from receiving any salary, perquisites, benefits or privileges from the company as managing director or director. The decision of the trial judge is reported in Jayesh Ramniklal Doshi v. Carbon Corporation Ltd. [1992] MLJ 1316 ; [1993] 76 Comp Cas 748 (Bom). We are unable to agree with the view taken by the learned judge and the impugned order is required to be set aside.

Advance Paints Private Limited instituted Summary Suit No. 2409 of 1985 against the appellant for recovery of Rs. 12,32,397.50 together with interest on the principal amount of Rs. 8,18,785.75 at the rate of 18 per cent. per annum. The decree was passed against the appellant on May 12, 1988. In realisation of the decretal amount, Advance Paints Private Limited filed Insolvency Petition No. 60 of 1988 against the appellant on April 5, 1989. On April 20, 1989, the Insolvency Court passed an order of adjudication but directed that the operation of the order should be deferred till May 5, 1989. The appellant instituted Appeal No. 526 of 1989 before the Division Bench of this court on April 26, 1989. The operation of the order of adjudication was stayed pending admission of the appeal. The appeal was dismissed on June 7, 1989, but the operation of the order was stayed up to July 5, 1989, to enable the appellant to approach the Supreme Court. The appellant filed SLP No. 7938 of 1989, before the Supreme Court on June 28, 1989, and thereupon, the operation of the order was further stayed by this court up to July 11, 1989. The Supreme Court continued the grant of stay order passed by this court. The Supreme Court disposed of the SLP on February 5, 1990, by passing the following order :

"Special leave granted.

We direct that the amount of rupees one lakh deposited with the Prothonotary and Senior Master of the Bombay High Court in Insolvency Suit No. 60 of 1988 be handed over to respondent No. 1, Advance Paints Pvt. Ltd. or to their duly authorised attorney. The balance amount of rupees one lakh and fifty thousand would be paid to respondent No. 1 by September 30, 1990. On this balance amount of Rs. 1,50,000 interest at the rate of 12 per cent. per annum shall be paid from February 1, 1988, to September 30, 1990, or earlier date if the amount is paid. In case of default of payment of the sum of rupees one lakh and fifty thousand and the interest due thereon as aforesaid, respondent No. 1 will be at liberty to initiate and revive the insolvency proceedings against the appellant. In the meantime, the insolvency proceedings shall remain stayed. On payment of the aforesaid money the insolvency proceedings will stand discharged.

With these observations, the civil appeal is disposed of. No order as to costs."

It is not in dispute that the appellant complied with the order and paid the amount with interest within the time specified to Advance Paints Private Limited.

On August 8, 1991, respondent No. 1 who is a shareholder of Carbon Corporation Limited - the first defendant company, instituted a suit on the original side of this court and the reliefs sought were a declaration that the appellant ceased to be the managing director of defendant No. 1 - company and is not entitled to any remuneration, perquisites, benefits and privileges as managing director. A further declaration was sought that the appellant ceased to be the director of the company and is not entitled to any benefits and privileges. The plaintiff claimed that the appellant was adjudicated as an insolvent and the appeal in the High Court ended in dismissal and in accordance with the provisions of sub-section (2) of section 283 of the Companies Act, the adjudication became effective when the appellant failed to file SLP against the order dated June 7, 1989, of the appellate court within a period of seven days from the date of the order. The plaintiff claimed that the order of insolvency stood discharged only on September 30, 1990, by reason of payment by the appellant to the creditor in accordance with the order of the Supreme Court but the order of discharge passed by the Supreme Court does not amount to setting aside the order of adjudication, with the consequence that during the interregnum, i.e., after expiry of seven days from the dismissal of the appeal by the High Court and the final order of the Supreme Court, the appellant should be treated as being an insolvent.

After the institution of the suit, the plaintiff took out Notice of Motion No. 1802 of 1991 seeking interim relief of injunction restraining the appellant from holding himself out or performing any act, function or duty as director or managing director and also from receiving any salary, perquisites, benefits or privileges from the company in that capacity. The motion was resisted by the appellant by pointing out that the order of adjudication stands wiped out in view of the decision of the Supreme Court and the claim of the plaintiff that during the interregnum the appellant was insolvent cannot be accepted. The appellant also pointed out that the reliance upon the provisions of sub-section (2) of section 283 of the Act is totally inappropriate. The trial judge by the impugned order accepted the contention of the appellant that the provisions of sub-section (2) of section 283 of the Act are not attracted but proceeded to grant injunction as sought for on the ground that the order of the Supreme Court does not wipe out the effect of adjudication but merely discharges the appellant as insolvent as contemplated u/s 38 of the Presidency Towns Insolvency Act, 1909. The order of the trial judge is under challenge.

Shri Makhija, learned counsel appearing on behalf of the appellant, submitted that the trial judge has completely missed the point and had proceeded on a wrong assumption that the order passed by the Supreme Court is one of discharge as contemplated u/s 38 of the Presidency Towns Insolvency Act. Learned counsel urged that the trial judge was carried away by the use of expression "discharge" in the order of the Supreme Court overlooking that the expression was not used as understood u/s 38 but as meaning setting aside the order of insolvency. Shri Makhija pointed out that the Supreme Court observed that on payment of money by the appellant to the creditor, the insolvency proceedings stand discharged. The use of the expression "insolvency proceedings" as distinguished from the expression "insolvent" has gone unnoticed, says Shri Makhija, by the trial judge. We find considerable merit in the submission of learned counsel. The plain reading of the order of the Supreme Court leaves no manner of doubt that the following sentence was clearly misunderstood by the learned trial judge :

"On payment of the aforesaid money, the insolvency proceedings will stand discharged."

It is obvious that the Supreme Court provided that the order of adjudication passed by the trial judge and confirmed by the appeal court will stand set aside on payment of the amount as directed by the Supreme Court. The Supreme Court was not contemplating passing an order of discharge as prescribed u/s 38 of the Act. Sub-section (1) of section 38 of the Act provides that the insolvent may, at any time after the order of adjudication, apply to the court for an order of discharge, and then provides the manner of hearing of such application. Sub-section (2) confers power upon the court to pass an absolute order of discharge or a conditional order of discharge after taking into consideration the report of the official assignee as to the insolvent''s conduct and affairs. It is not even the claim of the original plaintiff that the official assignee has made any report or the Supreme Court was passing the order of discharge of the insolvent on such report. The trial judge, with respect, has misread the order of the Supreme Court and proceeded to observe that as the order of adjudication was not found to be illegal or erroneous by the Supreme Court, the order of discharge passed by the Supreme Court must be one as contemplated u/s 38 of the Act. The trial judge, with respect, has misconstrued the order passed by the Supreme Court and proceeded to grant injunction on the basis that the appellant was adjudicated as insolvent. The reference to the provisions of section 267 of the Companies Act to hold against the appellant is clearly erroneous.

Section 267 of the Companies Act, inter alia, provides that certain persons should not be appointed as managing directors or whole time directors and includes a person who has been a discharged insolvent or has at any time been adjudged as insolvent. The trial judge felt that the appellant should be treated as being adjudged "insolvent" during the interregnum between the order of the appellate court and the order of the Supreme Court. In our judgment, the reasoning and the conclusion is entirely erroneous and grant of injunction was uncalled for. The result of the finding of the trial judge is that although the insolvency proceedings are set aside, the appellant will be treated as being adjudged insolvent for his entire life. It is impossible to put such a construction on the order of the Supreme Court as it would lead to unusual results. In our judgment, the impugned order cannot be sustained and the grant of injunction was inappropriate.

Accordingly, the appeal is allowed and the order dated February 6, 1992, passed by the learned single judge on Notice of Motion No. 1802 of 1991 is set aside and the motion stands dismissed. In the circumstances of the case, there will be no order as to costs.