1968 (8) TMI 197 - HC - Companies Law

Summary

Issues Involved:
1. Winding-up of the Company
2. Petitioner's Rights as a Secured Creditor
3. Opposition by Creditors and Shareholders
4. Commercial Insolvency of the Company
5. Validity of the Petition and Affidavit Verification
6. Ultra Vires Borrowing by the Company
7. Sanction by the Central Government under Section 18E(1)(c)
8. Disputed Debts and Stay of Proceedings

Detailed Analysis:

1. Winding-up of the Company:
The petitioner, State Bank of India, filed an application under Section 439 of the Companies Act, 1956, for the winding-up of India Electric Works Ltd. The petition is supported by two other creditors, Anwar Ali and Bros, and Steel Distributors, and opposed by several creditors and a shareholder. The petitioner claims the company is hopelessly insolvent and it is just and equitable that the company should be wound up.

2. Petitioner's Rights as a Secured Creditor:
The petitioner argued that a secured creditor is not debarred from presenting a petition for winding-up without giving up its security or valuing the security and proving for the balance, citing cases like Moor v. Anglo-Italian Bank and K. V. O. Refineries Ltd. v. Madras Industrial Investment Corporation Ltd. The court accepted this contention, stating that the rules in bankruptcy do not apply to a winding-up petition presented by a secured creditor.

3. Opposition by Creditors and Shareholders:
Opposing creditors and the shareholder Rohatgi contested the petition on grounds that the petitioner is a secured creditor who has not given up its security and that the Central Government's negligence created the debt burden. They also questioned the validity of the Central Government's sanction under Section 18E(1)(c) of the Industries (Development and Regulation) Act. The court found no merit in these contentions, noting that the company is hopelessly insolvent and the assets are insufficient to satisfy even the secured creditor's claim.

4. Commercial Insolvency of the Company:
The court applied the test of commercial insolvency, as laid down in cases like Davies and Co. Ltd. v. Brunswick (Australia) Ltd. and Re Cine Industries and Recording Co. Ltd., and found that the company was commercially insolvent at the date of the petition for winding-up. There was no reasonable hope that the object of trading at a profit could be attained. Thus, an order for winding-up should be made ex debito justitiae.

5. Validity of the Petition and Affidavit Verification:
The petition was verified by an affidavit affirmed by Samindra Kumar Gupta, Superintendent, Advances Department of the State Bank of India. The court held that the rule requiring verification by a principal officer is not mandatory and that Mr. Gupta, being conversant with the facts, was a suitable person to affirm the petition. The court found no defect in the petition's verification.

6. Ultra Vires Borrowing by the Company:
Mr. Sen argued that the loans given by the petitioner exceeded the limits prescribed by Section 293(1)(d) of the Companies Act and were thus ultra vires. The court rejected this argument, noting that the company had authorized the Board of Directors to borrow sums exceeding the aggregate of the paid-up capital and reserves in an extraordinary general meeting held in 1956. Moreover, the advances made by the State Bank were temporary loans obtained in the ordinary course of business, to which Section 293(1)(d) did not apply.

7. Sanction by the Central Government under Section 18E(1)(c):
The court found that the sanction by the Central Government under Section 18E(1)(c) was valid and that the respondents had not established that it was granted improperly. The court held that the provision for sanction is for the benefit of the Central Government and does not give any right to the shareholders or creditors to challenge the validity of the liquidation proceedings.

8. Disputed Debts and Stay of Proceedings:
The court noted that the company was hopelessly insolvent and that allowing it to continue would only add to its liabilities. The court rejected the respondents' request to stay the proceedings until the determination of the writ petition challenging the validity of the Central Government's sanction, stating that no useful purpose would be served by allowing the company to continue in its present state.

Conclusion:
The court ordered the winding-up of India Electric Works Ltd., but stayed the operation of the order until October 15, 1968, to allow for negotiations with the Central Government. The petitioner and supporting creditors were entitled to add the costs of the application to their claim, while other parties would bear their own costs. Liberty to apply was granted.