1999 (9) TMI 768 - HC - Companies Law

Issues Involved:
1. Agreement and financial arrangement between the petitioner and respondent.
2. Dishonour of the post-dated cheque provided by the respondent.
3. Respondent's contention regarding the nature of the transaction.
4. Adequacy of security provided by the respondent.
5. Impact of criminal proceedings on the winding-up petition.
6. Respondent's inability to pay its debt.

Detailed Analysis:

1. Agreement and Financial Arrangement:
The petitioner, Banaras Beads Ltd., entered into an agreement with the respondent, Shrishti Carriers Pvt. Ltd., on May 17, 1995. According to the agreement, the petitioner agreed to make available the required funds to the respondent for the subscription to the rights issue of 12% fully convertible debentures (FCDs) of Shrishti Videocorp Ltd. The respondent agreed to repay the petitioner within 180 days. The agreement detailed the financial arrangement and the responsibilities of both parties, including the provision of a post-dated cheque as security.

2. Dishonour of the Post-Dated Cheque:
The respondent provided a post-dated cheque for Rs. 1 crore to the petitioner, which was dishonoured twice by the bank due to "insufficiency of funds." The petitioner notified the respondent of the dishonour, but the respondent expressed its inability to pay the dues. Despite partial payments of Rs. 20 lakhs and Rs. 5 lakhs, the respondent failed to clear the remaining amount.

3. Respondent's Contention Regarding the Nature of the Transaction:
The respondent argued that the petitioner had invested the amount in purchasing the FCDs as an investment and not as a debt. The court, however, found that the petitioner acted as an agent for the respondent, purchasing the FCDs on behalf of the respondent. The agreement explicitly stated that the petitioner was to invest in the account of the respondent, making the respondent the beneficial owner of the FCDs. The transaction was thus considered a loan, and the respondent was obligated to repay the amount within 180 days.

4. Adequacy of Security Provided by the Respondent:
The respondent claimed that adequate security was provided in the form of shares. However, the petitioner argued that the shares were not valid for transfer due to outdated transfer deeds and their low market value. The court noted that the shares were held by the petitioner as an agent for the respondent and that the petitioner had consistently offered to transfer the shares upon payment of the dues. The court also referenced a precedent allowing a debtor to refuse to release security until the entire loan is repaid.

5. Impact of Criminal Proceedings on the Winding-Up Petition:
The respondent contended that the criminal proceedings initiated by the petitioner under section 138 of the Negotiable Instruments Act and section 420 of the Indian Penal Code rendered the winding-up petition inadmissible. The court dismissed this argument, stating that criminal proceedings against the director of the respondent-company did not preclude the winding-up petition. The court cited a precedent affirming that criminal and civil proceedings could proceed simultaneously.

6. Respondent's Inability to Pay Its Debt:
The court examined the respondent's financial condition and found clear evidence of its inability to pay the debt. The respondent admitted to facing financial difficulties due to market conditions and a lack of funds. The court concluded that the respondent's failure to repay the debt constituted an inability to pay, warranting the admission of the winding-up petition.

Conclusion:
The court ruled in favor of the petitioner, admitting the winding-up petition and ordering it to be advertised under rule 24 of the Companies (Court) Rules, 1959. The petitioner was instructed to take steps for the advertisement within three weeks.

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