Recall of a winding up order

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Dear Editor,

I would like to highlight for your readers the recent judgment of Karnataka High Court pertaining to the recall of the winding up of a company under section 466 of the Companies Act, 1956. Dr Justice Vineet Kothari pronounced a rather unusual verdict following an application by the government of Karnataka to recall the winding up of a public company, namely, NGEF (New Government Electrical Factory) in Bengaluru, on the ground that there were surplus assets after its liabilities were settled.

In the judgment, it was observed that there is no specific provision in the Companies Act, 1956, for recalling a winding up order but at the same time, there is no prohibition either. It depends upon the facts and circumstances of each case and the revival of the company which was ordered to be wound up was not only not prohibited but deserved to be encouraged in appropriate cases, either by recall of the winding up order or even by permanently staying or freezing the order.

The purpose of enacting rules 6 and 9 of the Companies (Court) Rules, 1959, was to give vast, inherent and residuary powers to the company court, in the absence of any specific prohibition in the act itself, to pass appropriate orders and to address the situations and facts arising before it from time to time.

The Karnataka government held 90.28% of NGEF’s shareholding and the only other shareholder was a German company. An order of winding up was passed against NGEF on 3 August 2004 and all the secured and unsecured creditors had been fully paid to their satisfaction, barring the claim of a minuscule few of the erstwhile workmen to enhanced salary and wages, whose writ petitions were pending in the court. The major asset of the company was about 221 acres of land situated in a prime location of the city, of which 119.7 acres remained in the custody of the official liquidator attached to the court. Under the provisions of section 466 of the 1956 act, read with rules 6 and 9 of the 1959 rules, the state government sought the recall of the winding up order contending that the remaining 119.7 acres would be utilized for public purposes.

The judgment held that if, during the process of winding up, the sale of some assets was enough to pay off all the secured and unsecured liabilities, and the company was still left with surplus assets, it could certainly apply to the court for staying the winding up process permanently or for recall of the winding up order and revival of the company. There was no prohibition or restraint on the company court to recall the winding up order if the facts and circumstances requiring such a recall were established by any of the applicants, be it official liquidator or a creditor or a contributory or a shareholder.

The revival of the company did not necessarily mean revival and restoration of the usual manufacturing or the business activity. It was a broader term that included the utilization of its assets including vacant land. Section 466 of the act provided a platform to the company court to not only permanently or temporarily suspend the winding up process but to permit the company to revive its running business or utilize assets which were free from the charge of its creditors and workers liability, or were likely to be free from its charge soon, if the company had made adequate arrangements for it.

The court said that the government land which was in the custody of the official liquidator, if not properly safeguarded, may lead to encroachments by unauthorized people, further engulfing the government and the public authorities in a chain of litigations. Therefore, there was no valid objection or impediment under the provisions of the 1956 act to such revival of the company and restoring its assets to its management by staying the winding up process permanently, subject to compliance with the solemn undertaking given by the state before the court.

The state government made an undertaking to utilize the 119.7 acres only for public purposes and agreed that the remaining workmen whose claims were still pending could approach either the nodal agency, or upon transfer of assets to the management of the company by the official liquidator, the duly constituted board of directors of the company.

A reader
Bengaluru