http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 3  

CASE NO.: Appeal (civil)  1392 of 2003

PETITIONER: Punjab State Industrial Dev.Corporation Ltd

RESPONDENT: P.N.F.C.Karamchari Sangh & Anr

DATE OF JUDGMENT: 04/04/2006

BENCH: Arun Kumar & R.V. Raveendran

JUDGMENT: JUDGMENT

ARUN KUMAR, J.

       M/s. Punjab National Fertiliser and Chemical Limited (hereinafter  referred to as ’PNFC’) is a Company limited by shares and is registered as a  company under the Companies Act, 1956.  This company was promoted by  the Punjab State Industrial Development Corporation Limited (hereinafter  referred to as ’PSIDC’) and the PSIDC held 46.13% shares in it.  On  recommendation of the BIFR (Board for Industrial & Financial  Reconstruction) under the Sick Industrial Companies (Special Provisions)  Act, 1985, the winding up order was passed qua the PNFC on 27th July,  2001.  In view of its financial difficulties the PNFC stopped paying the  wages to its workers from September, 1999.  The workers were therefore  agitating for payment of their wages.  It appears that they approached the  Chief Minister of the State of Punjab in this behalf.  On a proposal put forth  by the concerned department, the Chief Minister on 25th August, 2001 made  the following note :         "It is not a question of legality or statutory obligation.   It is an issue involving of a large number of employees  who has going without salary. Even legally they are  entitled for their pay and emoluments till the actual date  of winding up.

Considering that there is resource constraint within the  PSIDC, the offer of Finance Department to permit  PSIDC to raise resources  by market borrowing with  State guarantee should be pursued.

Exercise may be done in a time bound manner so that  disbursement of 6 months salary as requested by the  Food & Supplies Minister, is not delayed.  After the  disbursement the matter be reported."

       The workers’ association, that is respondent No.1 filed an application  before the Company Judge in the High Court of Punjab and Haryana under  Rule 9 of the Companies (Court) Rules, 1959 seeking a direction to PNFC  (represented by Official Liquidator) and PSIDC to pay six months salaries to  the employees.  

       In their application, the workers sought relief mainly on the basis of  the said note of the Chief Minister terming it as an order of the Chief  Minister.  On the said application of the workers, the learned Company  Judge passed an order on 16th May, 2002 directing PSIDC to release funds in  terms of the order of Chief Minister dated 25th August, 2001 to the Official  Liquidator within a period who was directed to disburse it to the workmen   after examining the claim of each workman.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 3  

The PSIDC applied for review of the said order of the Company Judge  on the ground that it was not in a sound financial position to make the  payment.  Secondly, the PSIDC denied its liability to pay on the ground that  the workers who were to be paid were not the workers of the PSIDC. Lastly,  it was represented that the interest of the workers was protected because the  workers dues were the first charge on the sale proceeds of assets of the  Company in view of Section 529 A of the Companies Act.  The review  application was dismissed vide order dated 7th June, 2002.  Thereafter, the  appellant filed an appeal against the order of the Company Judge dated 16th  May, 2002 before a Division Bench of the High Court.  The said appeal was  dismissed vide order dated 4th July, 2002 which is subject-matter of the  present appeal. While disposing of the appeal, the High Court rightly observed that  the question for consideration in the appeal was whether the Company Court  had jurisdiction to direct the PSIDC to release funds in terms of the order  passed by the Chief Minister on 25th August, 2001.  However, the appeal  was dismissed on the ground that the Company Court had jurisdiction to  issue such a direction having regard to  Section 446 (2) (d) of the Companies  Act without adverting to the question of liability of the PSIDC in law,  for  making such payment.   There is no dispute that under Section 446 the Company Court can  pass orders in relation to the Company in liquidation.  The real question in  issue in the case was whether the liability with respect to money due from  the Company in liquidation towards its workers could be fastened on an  independent corporation.  The Company Court has chosen to fasten liability  on a third party, i.e., the PSIDC while seized of proceedings with respect to  the Company in liquidation (the PNFC).  Was it legally permissible?           The learned counsel for the appellant submitted that the PSIDC was  formed in the year 1966 as one of the State Financial Institutions for  promoting and developing industries in the State of Punjab.  In its role of  promotion and development of the industries in the State, the PSIDC  promoted more than 100 companies.  The object was to ensure industrial  development in the State.  The PNFC was one of the several companies  promoted by the PSIDC.  As already notified, the PNFC is a separate legal  entity being a Company limited by shares  under the Companies Act.  The  PNFC is not a Government company  while the PSIDC is a wholly owned  undertaking of the Government of Punjab.  Even according to respondents,  PSIDC hel only 46.23% of equity, other public financial institutions held  14.59% and public held the remaining 39.18% .         After drawing our attention to the legal status of the two companies  involved, the learned counsel for the appellant drew our attention to the note  of the Chief Minister of Punjab.  It is submitted with reference to the said  Note that it can neither be said to be an order of the State Government nor  can it has any binding force so far as the PSIDC is concerned.  The  submission of the learned counsel for the appellant is that the note is in the  nature of a suggestion/request by the Chief Minister and the PSIDC has no  legal liability so far as the dues of the PNFC to its workers are concerned.   Both the companies were separate legal entities.  Though  PSIDC might  have been involved in promotion and thereafter in guiding the affairs of the  PNFC,  that is not enough to fasten the liabilities of the PNFC to the PSIDC.         In reply, the learned counsel appearing for the respondent - workers  association, submitted that as the affairs of PNFC are entirely managed and  controlled by the PSIDC, the corporate veil has to be lifted to show that   PSIDC was responsible for the acts of PNFC and liabilities of PNFC and it  was therefore liable for the dues of the workers.  In their application under  Rule 9 of the Companies (Court) Rules the workers have pleaded that the  PSIDC exercised control over financial and administrative affairs of the  PNFC.  It is also submitted that the fact that the PSIDC holds 46.13% shares  in the PNFC shows the financial interest of the PSIDC in the PNFC.  The  officers of the PSIDC are also said to have been posted from time to time in  the PNFC to manage its affairs.  The learned counsel relied on Section 446  of the Companies Act to suggest that a Company Judge has wide powers  with respect to a company in liquidation.  He invited reference  to Sudarsan  Chits (I) Ltd. vs. O. Sukumaran Pillai and Ors. (1984) 4 SCC 657 in  support of this contention.  In our view this judgment does not help the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 3  

respondent.  Under Section 446 the powers of the Company Judge qua a  Company under liquidation may be wide, but that does not empower the  Company Judge to pass an order making a distinct and separate corporation,  a third party, liable for the liabilities of the Company in liquidation.   This  aspect unfortunately has not been adverted to either by the learned Company  Judge or by the Division Bench of the High Court.         Reliance was placed on the so called order of the Chief Minister  permitting the PSIDC to raise funds in order to meet the liability of the  PNFC towards salary of its workers for at least six months.  We have  carefully perused the note of the Chief Minister dated 25th August, 2001.    The said note cannot be said to be an order of the State Government and  therefore is not binding on the PSIDC.  The orders of the State Government  are issued in a prescribed manner and the note dated 25th August, 2001  cannot be treated as one. The learned counsel for the respondent also brought to our notice  Article 135 of the Memorandum and Articles of Association of the PSIDC  under which the State Government can issue directives to the PSIDC.   Article 135 is reproduced as under:         "Notwithstanding anything contained in any of the  Articles, the Government may from time to time; issue  such directives as they may consider necessary in  matters of broad policy and in like manner may vary  and annul any such directive.  The company shall give  immediate effect to directives so issued.

        Reliance on Article 135 is misplaced in the present case because the  note of the Chief Minister cannot be said to be a directive of the State  Government nor it is in relation to broad policy of the Company.  Article  135 does not help the respondent.

       While contending that the veil has to be lifted, the learned counsel  relied on Calcutta Chromotype Ltd. vs. Collector of Central Excise,  Calcutta   AIR 1988 SC 1631.  This was a case of alleged evasion of excise  duty by a manufacturer selling its manufactured products  through a sole  selling distributor, who sold the goods in market at a higher price.  The idea  was to show a lesser price of manufacture in order to save central excise  duty.  The manufacturing company as well as the business of the sole selling  agent though shown as independent, were owned by the members of the  same family.  In such a case the focus is from a different angle and the issue  is different.  In the present case there is no evasion of any tax.  Here the  issue is when there are two independently legal entities can  an order be  passed that one company will be liable for the dues of the other to a third  party.  Can a Company Court pass such a direction without consideration of  the question of legal liability of the company sought to be made liable?         As a result of the above discussion we hold that the PSIDC could not  be made liable for the dues owed by the PNFC to its workers.  The appeal is  accordingly allowed.  The orders of the Company Court as well as of the  Division Bench of the High Court which are under challenge in this appeal  are set aside.  No costs.          Though we have found as a matter of law that the PSIDC could not be  made liable for the dues owed by the PNFC to its workers, we notice that the  then Chief Minister had taken a sympathetic view in the matter while  appending his note dated 25th August, 2001.  In view of the fact that the case  relates to the dues of the workers the State Government may sympathetically  consider whether it can provide some relief to the workers.