11 July 2025 Corporate Law >> Business & Commercial Law  

The High Court has recently delivered a significant order highlighting systemic irregularities and legal breaches in the appointment and continued employment of staff by the Official Liquidator. This ruling, which came in the context of an application to appoint a "peon (MTS)" for the liquidation of M/s Mahadeo Land Developers Private Limited, has far-reaching implications for the administration of company liquidations and the use of public funds.

The case exposes a long-standing practice where the Official Liquidator's office has engaged special or additional staff, often for years, by obtaining court approval in a manner the court now describes as "strategic." The core of the issue lies in the misapplication of Rules 308 and 309 of the Companies (Court) Rules, 1959.

The Spirit of the Law vs. The Letter of Practice:

Rule 308 permits the Official Liquidator to hire special or additional staff only when it's "necessary" for a specific liquidation. This implies a temporary arrangement tied to a particular company's winding-up process. However, the court found that these appointments were not based on genuine necessity but were used to augment the Official Liquidator's administrative office, often to fill backlogs or vacant positions.

The High Court's order details how appointments, initially sanctioned for one liquidation, were then extended to "all pending liquidations" through blanket orders. This practice allowed staff to continue their employment for decades, even when little to no progress was made in the very liquidations they were purportedly hired to handle. The court cited a case where a liquidation that began in 1960 was only completed recently, illustrating the stagnation and delay that have become the norm.

The judgment also referenced the Supreme Court's ruling in Official Liquidator Vs. Dayanand and ors., which explicitly stated that company-paid staff are temporary and have no right to regularization. The High Court's findings reveal that this principle has been disregarded, with these employees being treated on par with permanent government staff and receiving benefits like medical bill reimbursement and LTC.

Misuse of Funds and the Creation of "Common Pool Funds"

A particularly egregious finding of the court is the creation and use of "Common Pool Funds." The court notes that this fund was established to pay the salaries of company-paid staff and cover other office expenses. The practice is in direct violation of Section 555 of the Companies Act, 1956, which mandates that any unpaid money from a liquidation must be deposited into the "Companies Liquidation Account" with the Reserve Bank of India.

The court highlights how the Official Liquidator used this fund, which currently holds about Rs. 10 Crores at the Nagpur office, to continue an illegal practice under the guise of court approval. This was done even as the Ministry of Corporate Affairs denied any connection to or recognition of such a fund. The court's order makes it clear that the creation of this fund was a deliberate workaround to avoid the statutory requirements of the law.

A Call for Accountability and Corrective Action:

In light of these findings, the High Court has taken a firm stand. It has ordered that if the services of company-paid staff continue from August 2025, their salaries and expenses will be borne by the Official Liquidator's office itself, not from the common pool funds. Furthermore, it has mandated that the entire amount in the common pool fund be deposited into the Companies Liquidation Account within 14 working days, in compliance with Section 555.

The court has also directed the Under Secretary, Ministry of Corporate Affairs, to consider the absorption or regularization of these long-serving employees and to take "corrective steps" to discontinue the use of the common pool fund and the ad-hoc appointment of special/additional staff.

This ruling serves as a powerful reminder of the judiciary's role in ensuring statutory compliance and holding public officials accountable. It addresses the systematic failures within the Official Liquidator's office and demands a return to the foundational principles of the Companies Act and its related rules. The outcome of the Ministry's response will determine whether these judicial directives lead to meaningful reform or if the "strategic" irregularities will continue.