Back
IN THE HIGH COURT OF BOMBAY
V.M. Tarkunde, J.
Appellants: Seksaria Cotton Mills Ltd.
Vs.
Respondent: A.E. Naik and Ors.
Decided On: 15.03.1965
Counsels:
For Appellant/Petitioner/Plaintiff: R.L. Dalal, Adv.
For Respondents/Defendant: H.D. Banaji, Adv.
COMPANIES ACT - SECTION 391 - SCOPE AND EFFECT - SALES TAX DEPARTMENT AS CREDITOR - MEANING OF CREDITOR IN LIQUIDATION PROCEEDINGS - INTERPRETATION OF SECTION 391 - BINDING EFFECT OF SCHEME OF RECONSTRUCTION ON SALES TAX DEPARTMENT - RIGHT TO RECOVER TAX.
Fact of the Case:
A company undergoing liquidation submitted sales tax returns but no assessment orders were passed. During the winding-up process, the Sales Tax Officer sent notices to the official liquidator for examining the company's books of accounts. A scheme of reconstruction was proposed and sanctioned by the court, binding on all creditors, including the Sales Tax Department. The department later assessed the company for various periods and issued demand notices for the unpaid balance. The company filed a petition challenging the demand notices.
Finding of the Court:
The court held that the Sales Tax Department was a 'creditor' of the company within the meaning of section 391 of the Companies Act, 1956, even though the assessment orders were passed after the sanctioning of the scheme of reconstruction. The word 'creditor' in section 391 was interpreted broadly to include all persons having pecuniary claims against the company, whether actual or contingent. The scheme of reconstruction, sanctioned by the court, was binding on the Sales Tax Department, and it was entitled to recover only 25% of its claim as per the terms of the scheme.
Issues: 1. Whether the Sales Tax Department was a 'creditor' of the company within the meaning of section 391 of the Companies Act, 1956. 2. Whether the scheme of reconstruction sanctioned by the court was binding on the Sales Tax Department. 3. Whether the Sales Tax Department was entitled to recover the full amount of the assessment orders or only 25% of its claim.
Ratio Decidendi: 1. The court interpreted the word 'creditor' in section 391 of the Companies Act, 1956, broadly to include all persons having pecuniary claims against the company, whether actual or contingent. The court relied on the decision in In re Midland Coal, Coke and Iron Co. [1895] 1 Ch. 267, where it was held that the word 'creditor' in the Joint Stock Companies Arrangement Act, 1870 (the predecessor of section 391) was used in the widest sense to include all persons having any pecuniary claims against the company. 2. The court held that the scheme of reconstruction, sanctioned by the court under section 391, was binding on all creditors, including the Sales Tax Department. The court noted that the Sales Tax Department was served with notices of the meetings held to consider the scheme and had an opportunity to object to it. 3. The court held that the Sales Tax Department was entitled to recover only 25% of its claim, as per the terms of the scheme of reconstruction. The court noted that the scheme provided for unsecured creditors (other than employees of the company) to be paid 4 annas in a rupee in full and final settlement of their claims.
Final Decision: The petition was granted, and the demand notices issued by the Sales Tax Department were quashed. The Sales Tax Department was directed to pay the company's costs.
2. The petitioners are a public limited company carrying on the business of manufacturing textiles. They will be referred to hereafter as the company. By 1958 the company had suffered huge losses and incurred large debts. A petition for winding up was filed in this court on 28th April,1958, and on the same day an order to wind up the company was passed. The official liquidator was appointed liquidator of the company. He took possession of all the companys properties and records.
3. Prior to the winding-up order, the company has submitted sales tax returns from time to time for the period between 1952 and 1958, and had also paid the amounts of sales tax that were due according to those returns. No assessment orders were, however, passed by the Sales Tax officer concerned.
4. After the winding-up order, the Sales Tax officer sent a letter, dated 8th August, 1958, to the official liquidator enclosing therewith a number of notices under section 14 of the Bombay Sales Tax Act, 1953, in the course of which he intimated that a sales tax inspector would be sent to the office of the official liquidator to examine the companys books of accounts for the different periods for which returns had been submitted by the company. on 10th September,1958, the Sales Tax Officer wrote another letter to the official liquidator requesting him"to register the claim of the sales tax office for the amount of sales tax due from the above dealer(the company), if it is bound after verifying the account books of the dealer." He added that a specific claim would be submitted as soon as the assessment orders were passed and that the claim of the department should be registered (exhibit `C to the affidavit in rejoinder.)
5. Some time after the winding-up order, the companys textile mills began to be run by the Government of Maharashtra in accordance with the Unemployment Relief Scheme under orders which were passed by this court from time to time. For some reason the outstanding assessment of the company to sales tax was not completed during this period. On 28th August, 1960, some two parties sponsored a scheme of compromise or arrangement for the reconstruction of the company. By an order dated 13th January,1961, this court directed the official liquidator to convene five separate meetings of contributories and different classes of secured, unsecured and preferential creditors. A public notice of these meetings was published in several newspapers, and individual notices were also sent to all creditors. It is not disputed that the sales Tax Officer,"A" Ward, Unit 1, Bombay (the 5th respondent to this petition) was served with one such notice. Meetings of creditors and contributories were accordingly held and the scheme of reconstruction was passed in these meetings either unanimously or by the majority required by section 391 of the Companies Act,1956.
6. The official liquidator then applied to this court for sanctioning the scheme of reconstruction. A public notice of the date of hearing of that petition was published in various newspapers, and individual notices were again served on the companys creditors. It is common ground that such an individual notice was served on the Sales Tax Officer,"A" Ward, unit 1, Bombay(the 5th respondent.) The petition was heard by Mr. Justice Mody on 28th April,1961.At the hearing the proposed scheme of reconstruction was not opposed by anyone on behalf of the Sales tax department. After hearing the parties who had appeared, the learned judge sanctioned the scheme of reconstruction. From the judgment of Mr. Justice Mody as well as from the terms of the scheme itself(exhibit`C to the petition)it appears that the two parties who had sponsored the scheme had offered a guarantee for advancing a certain amount against the issue of debentures in their favour. One of the terms of the scheme was
AI
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
