Public Interest and Commercial Morality Must Guide Stay of Winding-Up Proceedings Under Section 466 of the Companies Act: Bombay High Court

Bombay High Court quashed the orders of the Company Court that had stayed the winding-up proceedings of Swadeshi Mills Company Ltd. The High Court emphasized that discretionary powers under Section 466 of the Companies Act, 1956, must be exercised judiciously, guided by public interest, commercial morality, and bona fide revival of the company, rather than for private gain. The Court directed the revival of the winding-up proceedings and ordered the Official Liquidator to resume control of the company’s affairs and assets.

“Discretion Under Section 466 Cannot Be Exercised Arbitrarily; Public Interest and Revival Must Be Bona Fide”: High Court

Bombay High Court set aside orders passed by the Company Court that had stayed the winding-up of Swadeshi Mills under Section 466 of the Companies Act, 1956. The Company Court’s orders—dated October 9, 2023, and December 21, 2022—had failed to consider binding precedents and material findings of bad faith against the respondents. The High Court reinstated the winding-up proceedings and directed the Official Liquidator to re-take charge of the company and its properties.
The High Court observed that the earlier orders of 2011, 2013, and 2016—categorically rejecting similar applications to stay the winding-up—found that the respondents were not genuinely interested in reviving the company but instead sought to acquire its immovable properties for real estate exploitation. These findings, the Court held, remained valid, as no exceptional circumstances or material changes were demonstrated to justify revisiting the issue.
Swadeshi Mills, a textile company, was declared a “sick company” under the Sick Industrial Companies (Special Provisions) Act, 1985, by the Board for Industrial and Financial Reconstruction (BIFR). In 2002, the Bombay High Court ordered its winding-up and appointed an Official Liquidator to manage its assets.
In 2011, the first and third respondents—companies within the Shapoorji Pallonji Group—filed an application under Section 466 to stay the winding-up, proposing to revive the company. The Company Court dismissed this application, finding that the respondents’ intent was not bona fide and was aimed at acquiring the company’s valuable immovable properties. The Court stated:
“The applicants’ true motive was to exploit the company’s lands for real estate development rather than revive the business. Such attempts to bypass a public auction process cannot be permitted.”
The Appeal Court upheld this decision in 2013, calling the findings of the Company Court “the only correct view based on the facts and circumstances of the case.” A Special Leave Petition was dismissed by the Supreme Court in 2016.
In 2022, the first respondent filed a fresh application under Section 466, citing settlements with workers and creditors as grounds for staying the winding-up. On October 9, 2023, the Company Court permanently stayed the winding-up and handed over control of the company to the first and third respondents. This appeal was filed by shareholders of Swadeshi Mills, challenging these orders.

Failure to Consider Binding Precedents
The High Court strongly criticized the Company Court for ignoring binding precedents, including its own detailed order of 2011, the Appeal Court’s judgment of 2013, and the Supreme Court’s 2016 dismissal of the respondents’ challenge. The Court observed:
“The earlier judgments recorded categorical findings of bad faith, stating that the respondents sought to acquire the company’s immovable properties through a backdoor method while bypassing a free, fair, and transparent auction process. These findings were not displaced, nor were they even addressed in the impugned orders.”
The Court noted that the respondents failed to annex copies of these binding orders in their fresh application, likely preventing the Company Court from appreciating their significance.
Principles Governing Section 466 Ignored
The High Court referred to established legal principles governing the exercise of discretion under Section 466, which were laid down in Neelkantha Kolay v. Official Liquidator and other cases. It emphasized:
1.    The application must demonstrate bona fide intent to revive the company.
2.    Public interest and commercial morality must be guiding considerations.
3.    The stay must aim to facilitate revival of the business, not merely serve the financial interests of select stakeholders.
Citing these principles, the Court held:
“The impugned orders failed to consider whether the stay would promote public interest, ensure commercial morality, or genuinely revive the company’s business. Mere settlement of creditors or workers cannot justify a stay of winding-up proceedings.”
Findings of Bad Faith Against the Respondents
The Court reiterated the earlier findings that the respondents—companies within the Shapoorji Pallonji Group—were not genuinely interested in reviving Swadeshi Mills’ business. Instead, their objective was to exploit the company’s prime immovable properties for real estate development. The Court stated:
“The respondents’ attempt to take control of the company’s assets without public auction remains an act of bad faith. The intent to acquire prime lands at a throwaway price is evident, and such conduct cannot be shielded by discretionary powers under Section 466.”
Duty of Disclosure and Procedural Irregularities
The Court criticized the respondents for failing to disclose the 2011, 2013, and 2016 judgments in their fresh application. This omission, it noted, likely misled the Company Court into granting the stay. The Court further observed:
“In matters of winding up, full disclosure of material facts and earlier orders is a mandatory duty of the applicant, particularly when seeking discretionary relief under Section 466.”

The High Court quashed the impugned orders dated October 9, 2023, and December 21, 2022, thereby reviving the winding-up proceedings of Swadeshi Mills. It directed the Official Liquidator to immediately re-assume control over the company’s affairs and assets. Further, the respondents were restrained from dealing with the company’s properties without prior court approval.
The Court granted the respondents liberty to file a fresh application under Section 466, provided they make full disclosures, including all relevant judgments and findings of bad faith.

This judgment underscores the importance of public interest, commercial morality, and bona fide revival in the exercise of discretion under Section 466 of the Companies Act. The Bombay High Court’s decision ensures that winding-up proceedings cannot be stayed to serve private profiteering motives or to bypass transparent processes like public auctions. It reinforces that courts must scrutinize such applications strictly and demand full compliance with established legal principles.
 

Date of Decision: January 22, 2025