1984 (4) TMI 215 - HC - Companies Law

Company when deemed unable to pay its debts, Cost and expenses payable out of assets in a winding-up by Court

Issues Involved:
1. Liability of the respondent company to pay the debt.
2. Admissibility and enforceability of interest on the principal amount.
3. Respondent company's financial condition and inability to pay debts.
4. Justification for winding up the respondent company under section 433(e) and (f) of the Companies Act, 1956.
5. Alternative remedies available to the petitioners.

Detailed Analysis:

1. Liability of the Respondent Company to Pay the Debt:
The petitioners sold and delivered goods worth Rs. 1,77,425.84 to the respondent company, which admitted the liability but failed to pay. The petitioners obtained a decree from the Madras High Court for Rs. 2,90,723.59, including interest, which the respondent company did not contest. The respondent company's affidavit acknowledged the debt but contested the interest liability.

2. Admissibility and Enforceability of Interest on the Principal Amount:
The respondent company contended that it was only liable to pay the principal amount and not the interest, as there was no contractual agreement for interest payment. Despite this, the decree from the Madras High Court included interest, making the total claim Rs. 2,90,723.59. The court noted that while the liability to pay interest was disputed, the principal liability was not.

3. Respondent Company's Financial Condition and Inability to Pay Debts:
The respondent company cited financial difficulties, such as high raw material costs and capital procurement issues, leading to its inability to pay the debt. The company was on the verge of closure, and the State Government intervened by reconstituting its board of directors. Despite these efforts, the financial condition did not improve significantly. The court found that the company was commercially insolvent and unable to meet its current demands.

4. Justification for Winding Up the Respondent Company under Section 433(e) and (f) of the Companies Act, 1956:
The petitioners argued that the respondent company's inability to pay the debt justified winding up under section 433(e) of the Act. The court agreed, noting that the company's neglect to pay the debt was prima facie evidence of its inability to pay. The respondent company's efforts at reconstruction were deemed insufficient to meet its liabilities. The court also considered the lack of opposition from other creditors and the workers, concluding that winding up was justified.

5. Alternative Remedies Available to the Petitioners:
The respondent company argued that the petitioners had an alternative remedy of executing the decree. However, the court held that the existence of an alternative remedy did not preclude the petitioners from seeking a winding-up order. The court cited precedents indicating that a winding-up petition could be admitted even if the decree had not been executed, provided the company was unable to pay its debts.

Conclusion:
The court concluded that the respondent company was unable to pay its debts and was in a state of commercial insolvency. Despite the respondent company's arguments and efforts at financial reconstruction, the court found no justification for refusing the winding-up order. Consequently, the court ordered the winding up of the respondent company, M/s. Everest Cycles Ltd., under the provisions of the Companies Act, 1956, and the Companies (Court) Rules, 1959. The parties were directed to bear their own costs.

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