1962 (5) TMI 28 - HC - Companies Law

Summary

Issues Involved:
1. Whether the petitioning creditor's claim for repayment of deposits is valid.
2. Whether the company is "unable to pay its debts" under Section 433(e) of the Companies Act.
3. Whether the company's dispute of the debt is bona fide.
4. Whether the company's financial status indicates commercial insolvency.

Detailed Analysis:

1. Validity of the Petitioning Creditor's Claim:
The petitioning creditor joined the company's services in January 1957 and made two deposits: Rs. 1000/- as a security deposit and Rs. 10,700/- as a deposit carrying 8% interest, refundable after 1.5 years. The company acknowledged these payments through written receipts. Despite multiple demands for repayment, including letters on 18th June 1958, 5th June 1959, 20th/22nd April 1960, and 22nd June 1960, the company failed to repay the full amount. The company paid only Rs. 3000/- in three installments. The petitioning creditor served a notice under Section 434 of the Companies Act on 9th August 1960, demanding payment of Rs. 11,733.90 nP with interest. The company responded on 15th November 1960, citing suspicions of fraudulent entries by past management and ongoing scrutiny of accounts, thus disputing the liability.

2. Inability to Pay Debts under Section 433(e):
Section 433(e) of the Companies Act allows winding up if a company is "unable to pay its debts." Section 434(1)(a) presumes a company is unable to pay its debts if it neglects to pay a debt exceeding Rs. 500/- for three weeks after a demand. The petitioning creditor's claim was not paid despite repeated demands and a statutory notice, indicating the company's inability to pay its debts. The court emphasized that "unable" implies insolvency, not unwillingness.

3. Bona Fide Dispute of Debt:
The company argued that the debt was disputed due to a counterclaim against the petitioning creditor, alleging fraudulent entries by past management. However, the court found no substantial evidence supporting this counterclaim. The court noted that the company's letters dated 13th and 17th September 1960 virtually admitted the debt, undermining the bona fide nature of the dispute. The court concluded that the company's dispute was not genuine but a tactic to delay payment.

4. Commercial Insolvency:
The court examined the company's balance sheets and profit and loss accounts for the years ending 30th June 1957, 1958, and 1959, revealing significant losses and financial instability. The company suffered losses of Rs. 30,550.15 nP in 1957 and Rs. 1,75,182.71 nP in 1958. The court concluded that the company was commercially insolvent, unable to meet its current liabilities with its assets.

Conclusion:
The court upheld the dismissal of the company's application to stay the winding-up proceedings, finding the petitioning creditor's claim valid and the company's dispute not bona fide. The company's financial statements indicated commercial insolvency, justifying the winding-up order. The appeal was dismissed with costs, affirming the lower court's decision.