In Re: Paharpur Cooling Towers Vs. Swadeshi Polytex Limited - Court Judgment

Excerpt:
1. the petitioners collectively holding 28% shares in m/s swadeshi polytex limited ( the company) have filed this petition under sections 397/398 of the companies act, 1956 (the act) alleging acts of oppression and mismanagement in the affairs of the company.2. the facts of the case are that the 2^nd and 3^rd respondents came to be vested with 33.6% shares in the company by an order of the supreme court in 1988. the 2^nd respondent is a subsidiary of the 3^rd respondent. the financial institutions hold 15% shares and the general public, the balance 23.4% shares. the paid up capital is rs. 3.9 crores as against the authorized capital of rs. 25 crores. the main business of the company is the manufacture of polyester staple fibre (psf). even though the company was doing well till 1996-97, the factory of the company remained closed from 21.9.98. presently, it has become a sick company in terms of sica. the total liability of the company is of the order of about rs 25 crores. the board of the company consists of three of the nominees of the petitioners and four of the nominees of the respondents and two nominees of the financial institutions. since the respondents are government companies, the petitioners have been negotiating with the government for purchasing the shares held by the respondents and also for revival of the company on the own. however, the same has not fructified so far, one of the main reasons being the insistence of the government that the petitioners should arrive at a settlement with workers which the petitioners have not been able to do.3. the main grievances of the petitioners in the petition are that the nominee directors of the respondents, being in majority on the board, have been conducting the affairs of the company detrimental to the interest of the company. various subsidiaries of the 3^rd respondent have been purchasing psf from the company at a price much lower that the market price and that these units have not cleared their bills and the outstanding of these units is of the order of over rs. 20 crores.the board is not taking any action to recover the dues in as much as these units belong to the respondents. if the dues are recovered, the financial position of the company could improve. due to inaction of the management, drt recovery proceedings against the company have been decided ex-parte and the assets of the company have been ordered to be auctioned. the chairman of the company being a nominee of the respondents has also been trying to dispose of the valuable assets of the company at prices much lower than what could be obtained for the properties and as a matter of fact, disposal of the properties would upset the revival process. in the same way, even proceedings initiated by the workers for payment of wages were not contested by the management. in a winding up proceedings initiated by a creditor, even though the amount claimed by him is disputed, the company did not contest and as a matter of fact, the board of directors, in spite of the protest by the nominee directors of the petitioners, passed a resolution not to oppose the winding up petition. with these the allegations, the petitioners have sought for various reliefs.4. dr. singhvi, sr. advocate appearing for the petitioners submitted.the majority of directors being the nominees of the respondents are conducting the affairs of the company in breach of their fiduciary duties as directors of the company. these directors are wearing two hats - one as directors of the company and another as employees/directors of the respondent companies. thus, there is a conflict of interest and these directors, forgetting their fundamental duties of trusteeship towards the company, are acting in favour of the respondent companies. this is evident from the fact that the main product of the company - psf - is being sold to these respondent companies at a substantial discount and the dues from the respondent companies and their associates amounting to over rs. 20 crores is not being collected, resulting in a financial crunch. on the proposition that board of directors of a company should owe allegiance only to the company in which they are the directors and should not act on the dictates of another company even if it sis a subsidiary of that company (ferruccio sias v. j. manga ram mukhi - 1994 i clj 345 del.).5. he further submitted: the majority of the board constituting the nominees of the respondent companies has closed down the factory from 30.9.1998 in spite of protests by the nominee directors of the petitioners and now they are interested in getting the company wound up. in respect of a winding up petition filed by a creditor, even though the claims made by the creditor are disputed, the board has decided not to contest the winding up petition notwithstanding the objection raised by the nominee directors of the petitioners. by not contesting the winding up proceedings, the nominee directors of the respondents have paved way for the civil death of the company. this is not withstanding the fact that the petitioners are keen to revive the company by additional investments. such a decision not to contest the winding up proceedings is a gross act of oppression i.e. the petitioners clearly exhibiting that the majority directors have no loyalty to the company.6. further, in an eogm held on 21.2.2002, it was resolved that a report as under section 23 of sick industrial companies (special provisions) act be submitted to bifr in view of erosion of the net worth of the company, but n o reference has so far been made and taking advantage of this, the chairman of the company, being a nominee of the respondents, has started disposing of the properties of the company that too at prices lower than the best prices that could be obtained for these properties.7. he further submitted. the mismanagement of the company is apparent from the fact that the company failed to represent itself before the deputy labour commissioner, ghaziabad in the court proceedings initiated by some of the employees resulting in the authority passing recovery certificates. if the company had contested, it could have brought to the notice of the authority that most of the claims by the employees were invalid and that adjustments have to be made against various advances given to the workers. now the chairman of the company uses these certificates as justification for disposal of the assets of the company. further, on an application made by the state bank of india and bank of india before drt delhi, ex-parte recovery certificates have been issued for about rs. 4.5 crores with 18% interest. only after the ex-parte orders, the company woke up to find that the claim by the banks had been in excess of over rs. 60 lacs and thereafter filed an objection memo before the drt. the drt has authorized the decree holders to sell very valuable properties of the company towards that claim.8. summing up his arguments, dr. singhvi submitted that the conduct of the nominee directors of the respondent companies is burdensome, harsh and oppressive to the petitioners. the petitioners have, time and again, offered to purchase the shares of the respondents with a view to revive the company by additional investments. instead of considering the suggestion of the petitioners, these nominee directors are paving way for destroying the substratum of the company- by closing the company, not opposing the winding up proceedings, not contesting the drt and labour court proceedings and selling the properties of the company. therefore, the board of the company should be superceded and an administrator should be appointed or else the respondents should be directed to sell their shares to the petitioners on an valuation to be made by an independent valuer. it has been held by delhi high court in chander krishan gupta v. pannalal girdhari lal private ltd. (55 cc 702) that if the affairs of the company are conducted in a manner prejudicial to the interest of the company and the majority shareholders, they could be directed to sell their shares to the minority shareholders. in the same manner, since the respondent companies, even though in majority are not interested in revival of the company, they should be directed to sell their shares to the petitioners who are interested in reviving the company.9. shri chadha, chairman of the company appearing in person submitted.the nominee directors of the petitioners have been on the board for a very long time and they were actively participating in the affairs of the company and as such they are fully aware of the situation prevailing in the company. it is incorrect to allege that the subsidiaries of ntc owe more than rs. 20 crores to the company. as is evident from annexure - 'c' to the petition, the amount due from ntc subsidiary corporation is only about rs. 20 lacs. in addition, the ntc subsidiaries have to pay interest on t he delayed payments and dues, but the same could not be recovered due to non reconciliation of accounts. however, as against an outstanding of a about rs. 75 lacs towards principal, an amount of about rs. 55 lacs was paid between september, 2000 to april, 2001 to meet the liabilities towards wages etc. therefore, it is wrong to say that ntc subsidiaries owe substantial amount to the company. as far as substantial discount on psf supplied to ntc companies is concerned, the same was a commercial decision taken on only one occasion for the supplies made during the period from april to june, 1989 and the rate was the same at which ntc subsidiaries were purchasing psf from other suppliers. therefore, the allegation that the nominee directors of the company are favouring ntc subsidiaries is base less. as far as the decision not to contest the winding up proceedings is concerned, the board considered this matter in a board meeting held on 30.6.2000. the board considered the fact that the company had no funds and that raising of funds by sale of properties is also not possible due to the proceedings before drt and allahabad high court and as as such the board should not oppose the winding up proceedings as suggested by the idbi nominee. therefore, it is wrong to contend that the ntc nominees alone had decided not to oppose the winding up proceedings. such a decision had to be taken in view of the dire financial position of the company. as far as the desire of the petitioners to revive the company on their own is concerned, the respondents were willing to sell their shares to the petitioners subject to the condition that the petitioners should reach an agreement with the workers. therefore, with the view to assist the petitioners in this regard, the board authorized the nominee directors of the petitioners to have a dialogue with the workers but they could not reach an agreement. in regard to the drt proceedings, the company has already filed an appeal against the order of the drt. as far as reference to bifr is concerned, the company has already field form- 'c' under section 26 of sica. in regard to the allegation relating to sale of properties, the company has no option but to do so for clearing workers liabilities and the properties are proposed to be sold on most competitive basis.10. summing up his arguments, shri chadha submitted that the running of the company has become unviable and therefore, the factory had to be closed. the reasons for closure are that the cost of production is much higher than the market prices as the technology used by the company is outdated, marketing difficulties, lack of adequate infrastructure, shortage of raw materials, non availability of required funds etc.while the respondent companies have no objection in selling their shares to the petitioners, but the respondent companies being government entities are very much concerned with the welfare of the workers. unless and until the petitioners reach an amicable settlement with the workers, the respondent companies and cannot sell their shares to the petitioners. such a pre condition is absolutely necessary as failing such a settlement, the petitioners, in view of the non viability of the company, are likely to strip the valuable assets of the company which would be detrimental to the interest of the workers.he also pointed out that the total liability of the company as on date is over rs. 25 crores. accordingly, he submitted that the petition should be dismissed and the interim order restraining the company from selling its assets should be vacated.11. some representatives of the swadeshi polytex limited employees welfare sang appearing before us explained the plight of the workers after the factory was closed. according to them, quite a few of the workers died in poverty and many of them are without basic necessities of life. they also complained about the conduct of the directors nominated by the petitioners to state that they were acting against the workers while ntc directors have been trying to help the workers to the maximum possible extent. according to them, handing over the company to the petitioners' group would not be in the interest of the workers.12. we have considered the pleadings and arguments of the counsel. the main thrust of the arguments of the petitioners is that the nominee directors of the respondents, in breach of their fiduciary duties, are favouring ntc subsidiaries and thus are acting against the interest of the company. they have cited the case of discount offered to ntc subsidiaries and also non recoveries of dues from them. in regard to discounts, only one solitary instance has been cited. it is a sale of psf during the period april to june, 1989. in this regard, we have seen a copy of note recorded by the then chairman of the company (a nominee of ntc) at page===== wherein, in respect of the demand of ntc to charge rs. 76 per kg. as against the contract price of rs. 79.75 kg. for 335 tonnes supplied during the month of june, 1989, he has authorized charging of rs. 76 per kg. for 117 tonnes. from the note we find that the chairman had taken a commercial decision based on the fact that the prevailing market rate of psf as could be obtained from other suppliers was rs. 76 per kg and that too he allowed this price only for 117 tonnes and not on the entire supply of 335 tonnes. thus we do not find any element of favouring ntc subsidiaries. further from a solitary instance of a commercial decision which took place over a decade back, we cannot come to the conclusion that the nominee directors of the respondents are favouring their own subsidiaries by grant of uncalled for rebate. another instance of favouritism allegedly shown to the subsidiaries of ntc is that the nominee directors of the respondents have not taken any action to recover dues of over rs. 20 crores. on this allegation, the petitioners have relied on annexure- 'c' of the petition wherein there is a letter from ntc dated 25.2.2001 indicating that an amount of rs. 20.42 lacs was payable by ntc subsidiaries corporation to the company. the statement attached therewith indicates that the interest on the outstanding as on 16.4.2001 was of the order of rs. 2.89 crores. in this letter, there is also a request for waiver of interest on dues payable by ntc subsidiary corporation. therefore, we are not in a position to understand how the petitioners allege that an amount of over rs. 20 crores is recoverable from ntc subsidiaries.anyhow, since the principal amount due is only rs. 20 lacs, the company should take steps to recover the same at the earliest and in regard to waiver of interest, the board should consider the financial position of the company while taking a decision on the same keeping in mind their fiduciary duties to the company.13. the next allegation of the petitioners is that by not contesting the winding up proceedings in spite of protest by the nominee directors of the petitioners, the nominee directors of the respondents have paved the way for civil death of the company and this, according to the petitioners, is a severe act of oppression as well as mismanagement.according to them, the amount claimed by the creditors who have filed the winding up petition is disputed and as such t he petition should have been contented. however, we find from the minutes of the meeting on 30^th june, 2000, that the company secretary had informed the board that the amount claimed was approximately correct. we do not have the details of the amount claimed by the creditor who has filed the winding up petition to ascertain as to whether with the financial position of the company, the claims could have been settled. if the amount had been small and payable, the board of directors could not and should not have taken the decision not to contest the winding up proceedings. from the minutes of the board meeting, we find that it is shri harish chandra, a representative of idbi who had suggested that it would not be appropriate for the company to oppose the winding up proceeding with which the majority had agreed. while taking the decision, the board had considered other pending proceedings before drt and allahabad high court and formed an opinion that the company did not have sufficient funds to meet its liabilities. even though, a nominee director of the petitioners had protested against the proposal, which he conveyed through a letter dated 30.6.2000(annexure d), we do not find any remedial measure suggested in that letter. under the circumstances, the only issue for our consideration is whether the board could have taken this decision when the petitioners had already expressed, as early as in november, 1999 their desire to revive the company after purchasing the shares of the respondents. this aspect will be considered later.14. as far as the allegations relating to the drt and the labour court proceedings which resulted in these authorities passing ex-parte orders, we find substance. by note contesting the drt proceedings, even according to the company, the drt has passed decree for an excess amount of rs. 60 lacs which could have been avoided if the company had contested the same. likewise, in respect of the proceedings before the labour commissioner also, if the contention of the petitioners that the labour commissioner had no jurisdiction or that he had passed orders against the provisions of law, the company should have contested these proceedings. in the reply filed by the company, nothing has been placed as to why these proceedings were not contested. since we find that the company has already filed an appeal before the drt, it should pursue the same vigorously and suitable action regarding the order of labour commissioner should be taken.15. in so far as the closure of the factory is concerned, we find that the factory remained closed from september, 1998. there is nothing on record to show that during the intervening period of over 3 years, the petitioners having 3 representatives on the board did something to revive the company. the chairman of the company has justified the closure of the factory on various grounds as elaborated as a part of his arguments and none of the grounds has been countered by the petitioners. further, the petitioners are not justified in taking up this issue of closure of the factory after over 3 years alleging that the same is mismanagement especially when they have 3 directors on the board and have been participating in the board meetings.16. yet another allegation of the petitioners is that the chairman of the company is disposing of the assets of the company. as a matter of fact, on an application made by the petitioners, by an order dated 22.11.2001, we restrained the board of directors from implementing the decision to dispose of the assets of the company. the complaint of the petitioners in this regard is two fold. one is that the sale of the assets would prejudicially affect the revival process and the second is that the assets are being sold at much lower price than the best price that could be obtained. we find that the company has proposed to sell a flat at peddar road and a flat at bajaj bhavan, mumbai and the purpose for sale of these properties is to clear the workmen dues. it is not uncommon for a company to sell its idle/non performing assets in case of financial difficulties. as a mater of fact, we find from annexure-h-a letter written by shri gaurav swarup a director of the 1st petitioner to the minister of textiles-that even at the time of revival, non performing assets like properties in mumbai would have to be sold to clear accumulated liabilities, workers dues etc. therefore, since the purpose of the sale of these non performing assets is for clearing the liabilities, we do not think that the disposal of these assets would be against the interest of the company or the revival process. as far as the apprehension of the petitioners that these assets are likely to be sold at lower than the best prices is concerned, to ensure transparency in sale of these assets, we direct that before disposal of any asset, the matter should be considered in a board meeting.17. having given our finding, the question of reliefs to be granted arises. they prayer of the petitioners for appointment of an administrator would not in any way pave way for revival of the company.the admitted position is that the factory of the company is closed and that it has become a sick company and that substantial liabilities are outstanding. therefore to revive the company substantial infusion of funds would be necessary, which could be done by those holding substantial shares. admittedly, the respondent companies being the holders of the largest bloc of shares of about 34% are not interested in revival of the company obviously for want of funds and as a matter of fact, they support winding up for the company. as rightly pointed out by dr singhvi, winding up of the company would be prejudicial to the interest of the company, its workers and the members. when the petitioners holding 28% shares are interested to revive the company, which would be in the interest of all concerned it is but appropriate that they be given a chance to do so. for doing so, they would like to acquire the shares held by the respondents, so that the petitioners become majority shareholders. from the correspondence that the petitioners had with the government of india in this regard, we find that the respondents are not averse to selling shares. however, they desire that the petitioners should reach a settlement with workers. we find substance in this stand of the respondents. since the respondent companies are government companies, it is but natural that the would like to protect the interest of the workers as it has happened in all cases of disinvestments by the government. even though dr singhvi contended that in a proceeding under section 397/98, there is no need to consider the arguments of the workers, yet, in the present case, the company remains closed and the dues to the workers have become substantial. no smooth revival is possible without an agreement with the workers. therefore, we are of the view that the petitioners should come to a settlement with the workers within a period of 3 months and place the agreement before the board of directors. once the petitioners come to a settlement with the workers, the respondent companies should disinvest their shares in favour of the petitioners on a valuation to be made by an independent valuer acceptable to both the parties.18. with the above directions, we dispose of the petition. for the period of next 3 months, we restrain the company from disposing of any of the performing assets of the company as it would affect the proposal of revival in case of the petitioners are in a position to arrive at a settlement with the workers. however, such a (sic) a restraint order would not apply for sale of non performing assets,like the flats in mumbai etc as the proceeds would go to liquidate the liabilities of the company. yet, to ensure that the company gets the right price for these properties, the board's approval should be obtained regarding the consideration at which these properties are to be sold and the manner of utilization of the proceeds. out of the proceeds received, the board should also consider clearing the admitted dues of the creditor who has filed the winding up petition so that those proceedings do not stand in the way of revival of the company.19. the petition is disposed of the above terms. all interim orders are vacated.

Judgment:
1. The petitioners collectively holding 28% shares in M/S Swadeshi Polytex Limited ( the company) have filed this petition under Sections 397/398 of the Companies Act, 1956 (the Act) alleging acts of oppression and mismanagement in the affairs of the company.

2. The facts of the case are that the 2^nd and 3^rd respondents came to be vested with 33.6% shares in the company by an order of the Supreme Court in 1988. The 2^nd respondent is a subsidiary of the 3^rd respondent. The financial institutions hold 15% shares and the general public, the balance 23.4% shares. The paid up capital is Rs. 3.9 crores as against the authorized capital of Rs. 25 crores. The main business of the company is the manufacture of polyester staple fibre (PSF). Even though the company was doing well till 1996-97, the factory of the company remained closed from 21.9.98. Presently, it has become a sick company in terms of SICA. The total liability of the company is of the order of about Rs 25 crores. The Board of the company consists of three of the nominees of the petitioners and four of the nominees of the respondents and two nominees of the financial institutions. Since the respondents are Government companies, the petitioners have been negotiating with the Government for purchasing the shares held by the respondents and also for revival of the company on the own. However, the same has not fructified so far, one of the main reasons being the insistence of the Government that the petitioners should arrive at a settlement with workers which the petitioners have not been able to do.

3. The main grievances of the petitioners in the petition are that the nominee directors of the respondents, being in majority on the Board, have been conducting the affairs of the company detrimental to the interest of the company. Various subsidiaries of the 3^rd respondent have been purchasing PSF from the company at a price much lower that the market price and that these units have not cleared their bills and the outstanding of these units is of the order of over Rs. 20 crores.

The Board is not taking any action to recover the dues in as much as these units belong to the respondents. If the dues are recovered, the financial position of the company could improve. Due to inaction of the management, DRT recovery proceedings against the company have been decided ex-parte and the assets of the company have been ordered to be auctioned. The Chairman of the company being a nominee of the respondents has also been trying to dispose of the valuable assets of the company at prices much lower than what could be obtained for the properties and as a matter of fact, disposal of the properties would upset the revival process. In the same way, even proceedings initiated by the workers for payment of wages were not contested by the management. In a winding up proceedings initiated by a creditor, even though the amount claimed by him is disputed, the company did not contest and as a matter of fact, the Board of Directors, in spite of the protest by the nominee directors of the petitioners, passed a resolution not to oppose the winding up petition. With these the allegations, the petitioners have sought for various reliefs.

4. Dr. Singhvi, Sr. Advocate appearing for the petitioners submitted.

The majority of directors being the nominees of the respondents are conducting the affairs of the company in breach of their fiduciary duties as directors of the company. These directors are wearing two hats - one as directors of the company and another as employees/directors of the respondent companies. Thus, there is a conflict of interest and these directors, forgetting their fundamental duties of trusteeship towards the company, are acting in favour of the respondent companies. This is evident from the fact that the main product of the company - PSF - is being sold to these respondent companies at a substantial discount and the dues from the respondent companies and their associates amounting to over Rs. 20 crores is not being collected, resulting in a financial crunch. On the proposition that Board of Directors of a company should owe allegiance only to the company in which they are the directors and should not act on the dictates of another company even if it sis a subsidiary of that company (Ferruccio Sias v. J. Manga Ram Mukhi - 1994 I CLJ 345 Del.).

5. He further submitted: The majority of the Board constituting the nominees of the respondent companies has closed down the factory from 30.9.1998 in spite of protests by the nominee directors of the petitioners and now they are interested in getting the company wound up. In respect of a winding up petition filed by a creditor, even though the claims made by the creditor are disputed, the Board has decided not to contest the winding up petition notwithstanding the objection raised by the nominee directors of the petitioners. By not contesting the winding up proceedings, the nominee directors of the respondents have paved way for the civil death of the company. This is not withstanding the fact that the petitioners are keen to revive the company by additional investments. Such a decision not to contest the winding up proceedings is a gross act of oppression i.e. the petitioners clearly exhibiting that the majority directors have no loyalty to the company.

6. Further, in an EOGM held on 21.2.2002, it was resolved that a report as under Section 23 of Sick Industrial Companies (Special Provisions) Act be submitted to BIFR in view of erosion of the net worth of the company, but n o reference has so far been made and taking advantage of this, the Chairman of the company, being a nominee of the respondents, has started disposing of the properties of the company that too at prices lower than the best prices that could be obtained for these properties.

7. He further submitted. The mismanagement of the company is apparent from the fact that the company failed to represent itself before the Deputy Labour Commissioner, Ghaziabad in the court proceedings initiated by some of the employees resulting in the authority passing recovery certificates. If the company had contested, it could have brought to the notice of the authority that most of the claims by the employees were invalid and that adjustments have to be made against various advances given to the workers. Now the Chairman of the company uses these certificates as justification for disposal of the assets of the company. Further, on an application made by the State Bank of India and Bank of India before DRT Delhi, ex-parte recovery certificates have been issued for about Rs. 4.5 crores with 18% interest. Only after the ex-parte orders, the company woke up to find that the claim by the banks had been in excess of over Rs. 60 lacs and thereafter filed an objection memo before the DRT. The DRT has authorized the decree holders to sell very valuable properties of the company towards that claim.

8. Summing up his arguments, Dr. Singhvi submitted that the conduct of the nominee directors of the respondent companies is burdensome, harsh and oppressive to the petitioners. The petitioners have, time and again, offered to purchase the shares of the respondents with a view to revive the company by additional investments. Instead of considering the suggestion of the petitioners, these nominee directors are paving way for destroying the substratum of the company- by closing the company, not opposing the winding up proceedings, not contesting the DRT and Labour Court proceedings and selling the properties of the company. Therefore, the Board of the company should be superceded and an administrator should be appointed or else the respondents should be directed to sell their shares to the petitioners on an valuation to be made by an independent valuer. It has been held by Delhi High Court in Chander Krishan Gupta v. Pannalal Girdhari Lal Private Ltd. (55 CC 702) that if the affairs of the company are conducted in a manner prejudicial to the interest of the company and the majority shareholders, they could be directed to sell their shares to the minority shareholders. In the same manner, since the respondent companies, even though in majority are not interested in revival of the company, they should be directed to sell their shares to the petitioners who are interested in reviving the company.

9. Shri Chadha, Chairman of the company appearing in person submitted.

The nominee directors of the petitioners have been on the Board for a very long time and they were actively participating in the affairs of the company and as such they are fully aware of the situation prevailing in the company. It is incorrect to allege that the subsidiaries of NTC owe more than Rs. 20 crores to the company. As is evident from Annexure - 'C' to the petition, the amount due from NTC subsidiary corporation is only about Rs. 20 lacs. In addition, the NTC subsidiaries have to pay interest on t he delayed payments and dues, but the same could not be recovered due to non reconciliation of accounts. However, as against an outstanding of a about Rs. 75 lacs towards principal, an amount of about Rs. 55 lacs was paid between September, 2000 to April, 2001 to meet the liabilities towards wages etc. Therefore, it is wrong to say that NTC subsidiaries owe substantial amount to the company. As far as substantial discount on PSF supplied to NTC companies is concerned, the same was a commercial decision taken on only one occasion for the supplies made during the period from April to June, 1989 and the rate was the same at which NTC subsidiaries were purchasing PSF from other suppliers. Therefore, the allegation that the nominee directors of the company are favouring NTC subsidiaries is base less. As far as the decision not to contest the winding up proceedings is concerned, the Board considered this matter in a Board Meeting held on 30.6.2000. The Board considered the fact that the company had no funds and that raising of funds by sale of properties is also not possible due to the proceedings before DRT and Allahabad High Court and as as such the Board should not oppose the winding up proceedings as suggested by the IDBI nominee. Therefore, it is wrong to contend that the NTC nominees alone had decided not to oppose the winding up proceedings. Such a decision had to be taken in view of the dire financial position of the company. As far as the desire of the petitioners to revive the company on their own is concerned, the respondents were willing to sell their shares to the petitioners subject to the condition that the petitioners should reach an agreement with the workers. Therefore, with the view to assist the petitioners in this regard, the Board authorized the nominee directors of the petitioners to have a dialogue with the workers but they could not reach an agreement. In regard to the DRT proceedings, the company has already filed an appeal against the order of the DRT. As far as reference to BIFR is concerned, the company has already field Form- 'C' under Section 26 of SICA. In regard to the allegation relating to sale of properties, the company has no option but to do so for clearing workers liabilities and the properties are proposed to be sold on most competitive basis.

10. Summing up his arguments, Shri Chadha submitted that the running of the company has become unviable and therefore, the factory had to be closed. The reasons for closure are that the cost of production is much higher than the market prices as the technology used by the company is outdated, marketing difficulties, lack of adequate infrastructure, shortage of raw materials, non availability of required funds etc.

While the respondent companies have no objection in selling their shares to the petitioners, but the respondent companies being Government entities are very much concerned with the welfare of the workers. Unless and until the petitioners reach an amicable settlement with the workers, the respondent companies and cannot sell their shares to the petitioners. Such a pre condition is absolutely necessary as failing such a settlement, the petitioners, in view of the non viability of the company, are likely to strip the valuable assets of the company which would be detrimental to the interest of the workers.

He also pointed out that the total liability of the company as on date is over Rs. 25 crores. Accordingly, he submitted that the petition should be dismissed and the interim order restraining the company from selling its assets should be vacated.

11. Some representatives of the swadeshi Polytex Limited Employees Welfare Sang appearing before us explained the plight of the workers after the factory was closed. According to them, quite a few of the workers died in poverty and many of them are without basic necessities of life. They also complained about the conduct of the directors nominated by the petitioners to state that they were acting against the workers while NTC directors have been trying to help the workers to the maximum possible extent. According to them, handing over the company to the petitioners' group would not be in the interest of the workers.

12. We have considered the pleadings and arguments of the counsel. The main thrust of the arguments of the petitioners is that the nominee directors of the respondents, in breach of their fiduciary duties, are favouring NTC subsidiaries and thus are acting against the interest of the company. They have cited the case of discount offered to NTC subsidiaries and also non recoveries of dues from them. In regard to discounts, only one solitary instance has been cited. It is a sale of PSF during the period April to June, 1989. In this regard, we have seen a copy of note recorded by the then Chairman of the company (a nominee of NTC) at page===== wherein, in respect of the demand of NTC to charge Rs. 76 per Kg. as against the contract price of Rs. 79.75 Kg. for 335 tonnes supplied during the month of June, 1989, he has authorized charging of Rs. 76 per kg. for 117 tonnes. From the note we find that the Chairman had taken a commercial decision based on the fact that the prevailing market rate of PSF as could be obtained from other suppliers was Rs. 76 per Kg and that too he allowed this price only for 117 tonnes and not on the entire supply of 335 tonnes. Thus we do not find any element of favouring NTC subsidiaries. Further from a solitary instance of a commercial decision which took place over a decade back, we cannot come to the conclusion that the nominee directors of the respondents are favouring their own subsidiaries by grant of uncalled for rebate. Another instance of favouritism allegedly shown to the subsidiaries of NTC is that the nominee directors of the respondents have not taken any action to recover dues of over Rs. 20 crores. On this allegation, the petitioners have relied on Annexure- 'C' of the petition wherein there is a letter from NTC dated 25.2.2001 indicating that an amount of Rs. 20.42 lacs was payable by NTC Subsidiaries Corporation to the company. The statement attached therewith indicates that the interest on the outstanding as on 16.4.2001 was of the order of Rs. 2.89 crores. In this letter, there is also a request for waiver of interest on dues payable by NTC Subsidiary Corporation. Therefore, we are not in a position to understand how the petitioners allege that an amount of over Rs. 20 crores is recoverable from NTC Subsidiaries.

Anyhow, since the principal amount due is only Rs. 20 lacs, the company should take steps to recover the same at the earliest and in regard to waiver of interest, the Board should consider the financial position of the company while taking a decision on the same keeping in mind their fiduciary duties to the company.

13. The next allegation of the petitioners is that by not contesting the winding up proceedings in spite of protest by the nominee directors of the petitioners, the nominee directors of the respondents have paved the way for civil death of the company and this, according to the petitioners, is a severe act of oppression as well as mismanagement.

According to them, the amount claimed by the creditors who have filed the winding up petition is disputed and as such t he petition should have been contented. However, we find from the minutes of the meeting on 30^th June, 2000, that the Company Secretary had informed the Board that the amount claimed was approximately correct. We do not have the details of the amount claimed by the creditor who has filed the winding up petition to ascertain as to whether with the financial position of the company, the claims could have been settled. If the amount had been small and payable, the Board of Directors could not and should not have taken the decision not to contest the winding up proceedings. From the minutes of the Board Meeting, we find that it is Shri Harish Chandra, a representative of IDBI who had suggested that it would not be appropriate for the company to oppose the winding up proceeding with which the majority had agreed. While taking the decision, the Board had considered other pending proceedings before DRT and Allahabad High Court and formed an opinion that the company did not have sufficient funds to meet its liabilities. Even though, a nominee director of the petitioners had protested against the proposal, which he conveyed through a letter dated 30.6.2000(Annexure D), we do not find any remedial measure suggested in that letter. Under the circumstances, the only issue for our consideration is whether the Board could have taken this decision when the petitioners had already expressed, as early as in November, 1999 their desire to revive the company after purchasing the shares of the respondents. This aspect will be considered later.

14. As far as the allegations relating to the DRT and the Labour Court proceedings which resulted in these authorities passing ex-parte orders, we find substance. By note contesting the DRT proceedings, even according to the company, the DRT has passed decree for an excess amount of Rs. 60 lacs which could have been avoided if the company had contested the same. Likewise, in respect of the proceedings before the Labour Commissioner also, if the contention of the petitioners that the Labour Commissioner had no jurisdiction or that he had passed orders against the provisions of law, the company should have contested these proceedings. In the reply filed by the company, nothing has been placed as to why these proceedings were not contested. Since we find that the company has already filed an appeal before the DRT, it should pursue the same vigorously and suitable action regarding the order of Labour Commissioner should be taken.

15. In so far as the closure of the factory is concerned, we find that the factory remained closed from September, 1998. There is nothing on record to show that during the intervening period of over 3 years, the petitioners having 3 representatives on the Board did something to revive the company. The Chairman of the company has justified the closure of the factory on various grounds as elaborated as a part of his arguments and none of the grounds has been countered by the petitioners. Further, the petitioners are not justified in taking up this issue of closure of the factory after over 3 years alleging that the same is mismanagement especially when they have 3 directors on the Board and have been participating in the Board meetings.

16. Yet another allegation of the petitioners is that the Chairman of the company is disposing of the assets of the company. as a matter of fact, on an application made by the petitioners, by an order dated 22.11.2001, we restrained the Board of Directors from implementing the decision to dispose of the assets of the company. The complaint of the petitioners in this regard is two fold. One is that the sale of the assets would prejudicially affect the revival process and the second is that the assets are being sold at much lower price than the best price that could be obtained. We find that the company has proposed to sell a flat at Peddar Road and a flat at Bajaj Bhavan, Mumbai and the purpose for sale of these properties is to clear the workmen dues. It is not uncommon for a company to sell its idle/non performing assets in case of financial difficulties. As a mater of fact, we find from Annexure-H-a letter written by Shri Gaurav Swarup a director of the 1st petitioner to the Minister of Textiles-that even at the time of revival, non performing assets like properties in Mumbai would have to be sold to clear accumulated liabilities, workers dues etc. Therefore, since the purpose of the sale of these non performing assets is for clearing the liabilities, we do not think that the disposal of these assets would be against the interest of the company or the revival process. As far as the apprehension of the petitioners that these assets are likely to be sold at lower than the best prices is concerned, to ensure transparency in sale of these assets, we direct that before disposal of any asset, the matter should be considered in a Board Meeting.

17. Having given our finding, the question of reliefs to be granted arises. They prayer of the petitioners for appointment of an administrator would not in any way pave way for revival of the company.

The admitted position is that the factory of the company is closed and that it has become a sick company and that substantial liabilities are outstanding. Therefore to revive the company substantial infusion of funds would be necessary, which could be done by those holding substantial shares. Admittedly, the respondent companies being the holders of the largest bloc of shares of about 34% are not interested in revival of the company obviously for want of funds and as a matter of fact, they support winding up for the company. As rightly pointed out by Dr Singhvi, winding up of the company would be prejudicial to the interest of the company, its workers and the members. When the petitioners holding 28% shares are interested to revive the company, which would be in the interest of all concerned it is but appropriate that they be given a chance to do so. For doing so, they would like to acquire the shares held by the respondents, so that the petitioners become majority shareholders. From the correspondence that the petitioners had with the Government of India in this regard, we find that the respondents are not averse to selling shares. However, they desire that the petitioners should reach a settlement with workers. We find substance in this stand of the respondents. Since the respondent companies are Government companies, it is but natural that the would like to protect the interest of the workers as it has happened in all cases of disinvestments by the Government. Even though Dr Singhvi contended that in a proceeding under Section 397/98, there is no need to consider the arguments of the workers, yet, in the present case, the company remains closed and the dues to the workers have become substantial. No smooth revival is possible without an agreement with the workers. Therefore, we are of the view that the petitioners should come to a settlement with the workers within a period of 3 months and place the agreement before the Board of Directors. Once the petitioners come to a settlement with the workers, the respondent companies should disinvest their shares in favour of the petitioners on a valuation to be made by an independent valuer acceptable to both the parties.

18. With the above directions, we dispose of the petition. For the period of next 3 months, we restrain the company from disposing of any of the performing assets of the company as it would affect the proposal of revival in case of the petitioners are in a position to arrive at a settlement with the workers. However, such a (sic) a restraint order would not apply for sale of non performing assets,like the flats in Mumbai etc as the proceeds would go to liquidate the liabilities of the company. Yet, to ensure that the company gets the right price for these properties, the Board's approval should be obtained regarding the consideration at which these properties are to be sold and the manner of utilization of the proceeds. Out of the proceeds received, the Board should also consider clearing the admitted dues of the creditor who has filed the winding up petition so that those proceedings do not stand in the way of revival of the company.

19. The petition is disposed of the above terms. All interim orders are vacated.