HATHISING MANUFACTURING COMPANY LTD. Vs. STATE

JUDGEMENT

(1.) ONE Shri Rajendrakumar Maneklal has filed this petition under section 391(1) of the Companies Act, 1956, praying for an order sanctioning the scheme of compromise and arrangement between Hathising . (in liquidation) (hereinafter referred to as 'the company') and its members and creditors.

(2.) THE company was incorporated on 14th July, 1897, under the Indian Companies Act, 1887. At the relevant time, its original authorised capital was Rs. 5,25,000, consisting of 525 equity shares of Rs. 1,000 each. Its issued, subscribed and paid up capital was Rs. 4,45,000 consisting of 445 equity shares of Rs. 1,000 each. Subsequently, by amendment and alteration of the capital clause of the memorandum of association, the issued, subscribed and paid up capital was Rs. 2,22,500. In all, 890 shares each of Rs. 250 fully paid were subscribed. The main object for which the company was incorporated was spinning of cotton yarn. In course of time, it had an installed capacity of 14,000 spindles. The company was registered under the Industries (Development and Regulation) Act, 1951, on 26th October, 1953, under registration certificate bearing No. R/10(a)/509 No. R/23(1)/461. Initially, the company was progressing well, but subsequently in the early fifties it weathered a heavy storm and on 27th of April, 1957, it was forced to close down its business. The Government of India appointed a committee of inspection under the chairmanship of Shri Arvind Mafatlal for technical examination of the spinning unit of the company to ascertain whether it can be restarted. The committee submitted its report on 18th February, 1958; fortunately those then in management and control of the affairs of the company restarted the spinning unit of the company on 28th January, 1958. But it had again to weather a heavy storm and its financial difficulties multiplied with the result that it again closed down its business on 20th October, 1959. Before, however, closing down, the directors then in the management of the company, executed an equitable mortgage on the land, building and machineries in favour of one Shri Rajendrakumar Maneklal and others on 14th July, 1959, to secure repayment of Rs. 12,70,710.71. One Shri Ambalal Mulchand Shah was appointed an Authorised Controller by the Government of India under section 18A of the Industries (Development and Regulation) Act by an order dated 28th July, 1959. The authorised Controller took charge of the spinning unit of the company and restarted it, till again it was closed down on 14th July, 1965. When the Authorised Controller took over in July, 1960, the total accumulated carried forward loss was to the tune of Rs. 36,63,175. In order to find liquid capital for running the mills, the Central Government gave direction under section 18E of the said Act to the Authorised Controller, inter alia, to mortgage the entire assets in favour of the Government of Gujarat, simultaneously conferring upon him powers under sections 18B(2) and 18C. The Authorised Controller borrowed funds from the State Bank of India, possibly on the guarantee of the Government of Gujarat and on this guarantee, the Authorised Controller borrowed Rs. 8,50,000 from the State Bank of India on 26th November, 1961. The amount was to be secured to the State of Gujarat by way of mortgage by hypothecation in accordance with the terms and conditions mentioned in resolution of the Government dated 21st November, 1961. The State of Gujarat as per its resolution dated 24th July, 1963, extended the guarantee to cover a further loan of Rs. 5,00,000 by the State Bank of India against the mortgage of the assets of the company in favour of the State of Gujarat. A third extension was granted on 15th May, 1965, for a further loan of Rs. 3,41,000 on identical terms. Ultimately, the Authorised Controller and possibly the State of Gujarat were exhausted and the company again came to a standstill. But a noticeable event took place before the Authorised Controller finally walked out in that he created regular mortgage for the entire amount of all the assets of the company in favour of the state of Gujarat and after the State of Gujarat was assured that it has become a secured creditor, on the next day, the State of Gujarat as secured creditor filed Company Petition No. 9 of 1965 for winding up the company. The performance first of the private management and then Authorised Controller had led the company on the date of its closure to accumulated loss of Rs. 36,63,175. Then starts the chequered history of litigation keeping this productive unit unproductive and unutilised for a span of nine years with indescribable miseries of unemployed workmen which, to put it mildly, a developing country can ill afford. Whatever that may be, it would be necessary to refer to some of the proceedings which were commenced against the company or some persons who were in management at one or other time. The first shot was fired by the State Government through the Authorised Controller by filing Civil Application No. 308 of 1964 in the City Civil Court at Ahmedabad challenging the creation of the equitable mortgage by the directors in favour of Shri Rajendrakumar Maneklal and others. However, this application was withdrawn in 1970, for an idnentical prayer. After the petition for winding up the company was made, the court appointed the official liquidator as provisional liquidator. The court ultimately made an order on 16th August, 1965, winding up the company and appointed the official liquidator at the liquidator of the company.

(3.) IN 1970, Shri Rajendrakumar Maneklal and one other took out judge's summons for taking misfeasance proceedings against the Authorised Controller, Shri Ambalal Mulchand Shah. A question about the proper stamp on the summons arose and it was finally decided in 1973 and the requisite stamp was affixed. It was numbered as Company Application No. 48 of 1973. Shri Rajendrakumar Maneklal and six others took out judge's summons in Company Application No. 42 of 1971, against the official liquidator for a declaration that the equitable mortgage in favour of the applicant by the company on 14th July, 1959, is valid and legal and for incidental reliefs. The liquidator took out judge's summons in Company Application No. 12 of 1973, for obtaining directions as required by rule 139 of the Companies (Court) Rules, 1959, to exercise powers under section 457 of the Companies Act. This summons was granted on 21st September, 1973. Under the directions given in this summons, the State of Gujarat was called upon to hand over Rs. 34,000 to the liquidator and the amount was paid to the liquidator. This amount represented the cost of protecting the assets of the company for the benefit of the State of Gujarat who claimed to be a secured creditor and who was the petitioning creditor seeking an order for winding up the company. The official liquidator took out judge's summons in Company Application No. 54 of 1973, questioning the validity of the equitable mortgage alleged to have been executed by the directors in favour of Shri Rajendrakumar Maneklal and his companion creditors and there are several other incidental prayers in this summons. The respondents to the summons were Shri Rajendrakumar Maneklal and his companion creditors. They have filed their affidavit -in -reply and the summons is pending. The official liquidator took out another judge's summons in Company Application No. 65 of 1973 against the State of Gujarat and the Registrar of Companies challenging the validity of the three mortgages executed by the Authorised Controller in favour of the State of Gujarat. The State of Gujarat has filed its affidavit -in -reply and the summons is pending.