1998 (7) TMI 565 - HC - Companies Law

Summary

Issues Involved:
1. Revocation of admission of the winding up petition.
2. Stay of further proceedings till the disposal of the application under rule 96 read with rule 9 of the Companies (Court) Rules, 1959.
3. Allegations of mismanagement and financial distress.
4. Prima facie case for winding up.
5. Advertisement of the winding up petition.

Issue-wise Detailed Analysis:

1. Revocation of Admission of the Winding Up Petition:
The respondent-company filed an application to revoke the admission of the winding up petition filed by the shareholders under sections 433(e), 433(f), and 439(1)(c) of the Companies Act. The company argued that the allegations of mismanagement and financial distress were false and made with malicious intent. They contended that the substratum of the company was not lost, and the purpose for which the company was incorporated had not ceased to exist. The company further argued that the first respondent had mismanaged the company, leading to its financial difficulties, and that the current management was making efforts to rectify the situation.

2. Stay of Further Proceedings:
The respondent-company sought to stay all further proceedings until the application under rule 96 read with rule 9 of the Companies (Court) Rules, 1959, was disposed of. They argued that the order for advertisement issued by the court at the admission stage was against the law and caused great hardship to the company, which was a going concern. They contended that the court should have given notice to the company before ordering the advertisement and that the order of admission should be revoked and the petition dismissed in limine.

3. Allegations of Mismanagement and Financial Distress:
The shareholders alleged that the company was in financial distress, with debts amounting to Rs. 6 crores against assets of Rs. 1.5 crores. They claimed that the current managing director was engaged in distress sales and appropriating the proceeds for personal gain. The company, on the other hand, argued that the financial difficulties were due to the mismanagement by the first respondent and that the current management was attempting to rectify the situation by paying off debts and revamping the business.

4. Prima Facie Case for Winding Up:
The court examined whether a prima facie case for winding up was made out by the shareholders. It was noted that the shareholders had filed a detailed counter-affidavit opposing the application, arguing that the company had reached a point of no return and could not carry on its business without adding to the already accumulated debts. The court found that there were sufficient materials to establish a prima facie case for winding up, including the fact that various suits and criminal proceedings were pending against the company for recovery of debts.

5. Advertisement of the Winding Up Petition:
The court discussed the provisions of rule 96 and rule 24 of the Companies (Court) Rules, which deal with the admission of petitions and directions as to advertisements. It was noted that the court has the discretion to order simultaneous notice and publication at the admission stage if a prima facie case is made out. The court found that the respondents had made out a prima facie case for winding up and that the order for advertisement was justified. The court also noted that after the advertisement, affidavits were filed by 21 creditors, with 17 opposing the winding up and 4 supporting it.

Conclusion:
The court dismissed the application filed by the respondent-company to revoke the admission of the winding up petition and stay further proceedings. It found that the shareholders had established a prima facie case for winding up and that the order for advertisement was justified. The court held that the company could urge its contentions against the winding up order in the company petition.