2009 (4) TMI 447 - HC - Companies Law

Winding up - Circumstances in which a company may be wound up - Held that - As the company is unable to pay its debts and the affairs of the company cannot be carried on. The company is required to be wound up and ordered accordingly. The notice of the order of winding up shall be filed with the Registrar of Companies and also communicated to the Official Liquidator attached to this Court. The advertisement of factum of winding up shall also be made within 14 days from the making of the order in The Tribune (Chandigarh-Delhi Edition) and in Dainik Bhaskar-Hindi as well Official Gazette of Punjab Government.

Issues Involved:
1. Liability of the company wholly admitted.
2. Statutory notice and plea of financial stringency by the company.
3. Company's inability to pay comprehensively admitted and reiterated.
4. Payment of a portion of admitted liability on interim directions of Court.
5. Twin objections by the company.
6. Amplitude of powers of a duly constituted agent.
7. Inability to pay debt, the only statutory test.
8. Seemingly healthy balance sheet, not the test.
9. When liability is admitted and company is unable to pay, winding up and not a suit is the appropriate remedy.

Detailed Analysis:

I. Liability of the company wholly admitted:
The petition for winding up was filed by a creditor due to the respondent-company's failure to pay an admitted debt. The petitioner initially described itself as a company but later amended it to a proprietorship based in Los Angeles, represented by a constituted attorney, Mr. S.K. Verma. The respondent-company admitted the debt in a letter dated 10-4-1997, expressing hope to pay by the end of the next quarter.

II. Statutory notice and plea of financial stringency by the company:
A statutory notice was issued on 2-3-1998, demanding payment of US $91,702.72. The respondent-company did not deny the debt but cited financial difficulties, proposing to clear the payment in installments starting from 31-3-1998.

III. Company's inability to pay comprehensively admitted and reiterated:
The respondent-company later raised issues about the quality of goods supplied and referred to a concession by the petitioner to discount the bills by US $45,000. Despite this, the respondent-company reiterated its financial difficulties and inability to make payments promptly.

IV. Payment of a portion of admitted liability on interim directions of Court:
The Court directed the respondent-company to pay Rs. 5 lakhs to the petitioner, which was eventually paid on 22-1-2007. The respondent-company protested, arguing that the petitioner represents the general body of creditors and should not retain the payment.

V. Twin objections by the company:
The respondent-company argued that the petition was not maintainable as it was filed by a power of attorney not specifically authorized to present a winding-up petition. Additionally, they claimed that their unaudited financial statements showed profitability, indicating they were not commercially insolvent.

VI. Amplitude of powers of a duly constituted agent:
The Court examined the power of attorney, which authorized Mr. S.K. Verma to "file and fight the cases on behalf of Sound Fibre in Indian Courts." The Court held that this authorization was broad enough to include filing a winding-up petition. The Court rejected the respondent's reliance on previous judgments that required specific authorization for winding-up petitions, finding the power of attorney sufficiently comprehensive.

VII. Inability to pay debt, the only statutory test:
The Court dismissed the respondent's argument that profitability in unaudited statements negated the need for winding up. The statutory presumption under section 434 of the Companies Act was invoked, deeming the company unable to pay its debts after neglecting to pay the sum demanded in the statutory notice.

VIII. Seemingly healthy balance sheet, not the test:
The Court emphasized that a company's profitability on paper does not preclude winding up if it cannot pay its debts. The Court noted recent corporate frauds as a caution against taking financial statements at face value. The respondent's inability to pay an admitted debt despite financial statements showing profit was a clear indicator of financial distress.

IX. When liability is admitted and company is unable to pay, winding up and not a suit is the appropriate remedy:
The Court rejected the argument that a civil suit was the appropriate remedy, noting that the respondent had admitted the debt and its inability to pay. The Court held that winding up was the suitable course of action when a company fails to honor its financial obligations.

Conclusion:
The Court concluded that the company was unable to pay its debts and ordered its winding up. The order was to be filed with the Registrar of Companies and communicated to the Official Liquidator. The winding-up notice was to be advertised in specified newspapers and the Official Gazette of Punjab Government.

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