BACHHARAJ FACTORIES LTD Vs. HIRJEE MILLS LTD

JUDGEMENT

(1.) THIS is a petition, resented by the petitioners who are creditors in the sense that they are debenture holders to the extent of Rs. 8,00,000 in the company, namely Hirjee Mills Ltd. and they are asking for an order that the Hirjee Mills Ltd. be wound up under the provisions of the Indian Companies Act and they are asking also for the appointment of the court liquidator.

(2.) BEFORE I go to the details set out in the petition and in the affidavit I may make certain preliminary observations. The first is that in fact the petitioners are not the only secured creditors and there are other debenture holders who have not come before the court and made any submissions either way nor have the Bank of Baroda Ltd. who are mortgagees and the first mortgagees come before this court to make any submissions on this petition. The petitioners are supported by two very small creditors, one to the extent of Rs. 1,400 odd and another to the extent of Rs. 700 odd. On the other hand this petition is opposed by the company as well as by four Bhadanis who are depositors to the extent of Rs. 26,00,000 and there is another party Devnarain Shivnarain who is a creditor to the extent of Rs. 5,00,000 holding debentures to the tune of Rs. 3,00,000 out of the sum of Rs. 5,00,000. There are over a hundred unsecured creditors who are also opposing this petition whose debts amount to Rs. 30,00,000. The only shareholders are 16 shareholders represented by Mr. K. K. Desai. These shareholders have come to this court at the eleventh hour and presented their affidavit only at this hearing. They oppose the petition on an altogether different ground. According to these shareholders they propose to challenge the validity of the debentures in favour of the petitioners on the ground that these debentures were issued for a consideration which is not valid in law namely in connection with certain forward contracts entered into by the mills which forward contracts were illegal under the several notifications issued at the relevant time. I may say that as far as the merits of the petition are concerned and the affidavits in reply I do not propose to take this application of Mr. Desai into consideration. According to Mr. Desai his clients propose to file a suit at an early date for a declaration that these debentures are invalid in law. I shall only incidentally refer to this when I come to my conclusion on the arguments advanced on the merits of the petition. Incidentally I may also state before. I go to the merits that in fact some of the debenture trustees have filed a suit on behalf of all the debenture holders and in that suit a receiver was appointed by the court. That was on a notice of motion when an order was made by my brother Mr. Justice Shah appointing the court receiver receiver. The respondents, the Bank of Baroda Ltd. who are the first mortgagees in that suit, preferred an appeal against that order and that order was vacated by the court of appeal on September 27, 1954, the court observing that the receiver has been appointed by the court at the instance of the second mortgagees and the appointment of the receiver by the court in the suit by the second mortgagees cannot possibly be used to prejudice the right of the first mortgagees to enter into possession under the terms of their own mortgage. In these circumstances on that footing the order appointing receiver was vacated and the receiver was ordered to hand over the property to the first mortgagees, the Bank of Baroda, but that was done on certain terms and conditions against the Bank of Baroda as set out in the order namely payment of insurance, payment of taxes, keeping the mills in proper state of repairs and in working order, employing a skeleton staff in working the mills and that they will not work the mills themselves or lease the mills to any one else without the previous sanction and application to the court. In other words the mortgagees are now holding this property subject to the directions of the court.

(3.) HAVING indicated about the surrounding circumstances and the nature of the opposition I will now proceed to consider the basis on which the petition is presented. According to the petitioners in fact a prior application was made for winding up of this very company and in that petition No. 1 of 1953 a scheme for re-organization of the company was put forward, that scheme was sanctioned by the court on May 13 and that at that time the claim of the petitioners was to the extent of nearly Rs. 14,00,000 which was scaled down to Rs. 8,10,000, that pursuant to that scheme debentures were issued to the creditors, but that on account of financial difficulties the company closed down the mills on February 10, 1954, and that the mills have ceased working ever since then and that charges are being incurred namely a bill has to be met every month to the tune of Rs. 4,00,000 for wages and salaries. In these circumstances they say that the debentures fell due on March 1, 1954, and the company having neglected to redeem the debentures and failed to pay any interest thereon, the trustees filed a suit on March 26, 1954, which was filed for administering and selling the mortgaged premises under the direction of the court. The petitioners state in para 18 that the creditors's total is the tune of Rs. 1,41,50,000 whereas the value of the property and assets of the company is much less than that figure and that the company's liability to pay interest comes to about Rs. 50,000 a month. In these circumstances it is alleged that the company is unable to pay its debts and the company is in insolvent circumstances and therefore an order for winding up should be made. This is the whole of the petition. A very lengthly affidavit has been filed on behalf of the company. The petitioning creditors are Bachharaj Factories Ltd. There is another company called Bachharaj and Company Ltd. and they were the guarantors and financiers of this company. There is also a third company called Baroda Industries Ltd. It is alleged that all these companies have common directors and in any event one Fatechand Jhunjhunwala is a director in all these three companies. It is alleged that in fact Bachharaj and Co. Ltd. have with ulterior motives inspired this petition through their sister concern Bachharaj Factories Ltd. and it is alleged that in the course of their conduct as guarantors of these funds and having power to operate upon the account of the company a certain deadlock was deliberately brought about by Bachharaj and Co. , Ltd. , which I shall refer to in detail whereby the company was deliberately brought to this condition, the sole object being ultimately to acquire these mills at an auction sale at a rock-bottom price. I may say at once that this allegation has been clearly denied in the affidavit in rejoinder made on behalf of the petitioners. The gravamen of the charge is as follows : It is said that during the time when the company was attempted to be reconstructed under a scheme itself shows that the company was to enter into finance borrowings through Bachharaj and Company whereby capital to the extent of Rs. 30,00,000 would be borrowed which would be utilised for the purpose of reinstating the company, the object being to repay this loan through the profits of this mills spread over five years. It is alleged that in breach of this clear recital in the scheme itself which is annexed to the affidavit Bachharaj and Company borrowed from the Bank of Baroda a sum of Rs. 27,00,000 on the mortgage of all the assets of the company and contrary to the scheme the mortgage was only for the limited period of one year with a further proviso in certain circumstances the loan under this mortgage could be recalled at an earlier date. The suggestion clearly is that this was deliberately done to cripple the company and to set at naught the scheme under which the company would have revived. It is further alleged that the nomination of directors by Bachharaj and Company and the other debenture holders was such that it was a packed body giving a clear majority to Bachharaj and Company through its different allied concerns whereby they would have complete control over the future of the company. It is further alleged that in pursuance of this scheme at a certain stage Bachharaj and Company induced the directors to repay the amount of Rs. 1,00,000 to the allied company Baroda Industries Ltd. under the representation that if that loan was repaid first they would put their signature on the cheques of drawings to be made by the company, that having received one lakh of rupees which was paid to the allied concern the directors of Bachharaj and Company point blank refused to sign the cheques which had to be signed both by the director of the company as well as by the director of Bachharaj and Company the financers jointly; that having refused to sign these cheques the company was brought to its kness in February 1954 and in the absence of any accommodation for carrying on their normal work from month to month the company was thereby brought to this position.