2012 (8) TMI 444 - HC - Companies Law

Winding up Held that - If the company refuses to pay, without good reason, it should not be able to avoid the statutory demand by proving at the statutory demand stage, that it is solvent. In other words, commercial solvency can be seen as relevant as to whether there was a dispute as to the debt, not as a ground in itself, that means it cannot be characterised as a stand alone ground - IBA Health (I) (P.) Ltd. (2010 (9) TMI 229 - SUPREME COURT OF INDIA). Once the legal fiction under section 434(1)(a) of the Act operates, and there is no bona fide dispute regarding the debt due, the necessary consequence is that the respondent-company must be deemed to be unable to pay its debt necessitating - winding up petition admitted.

Issues Involved:

1. Petition for winding up under Section 433(e) and (f) read with Section 439 of the Companies Act, 1956.
2. Trade Finance Facility and subsequent amendments.
3. Non-payment of dues and dishonor of cheques.
4. Statutory notice and respondent's reply.
5. Respondent's financial difficulties and liquidity issues.
6. Dispute over whether the amount owed is a "debt."
7. Applicability of Sections 433 and 434 of the Companies Act.
8. Bona fide dispute regarding the debt.
9. Legal fiction under Section 434(1)(a) of the Act.
10. Admission of company petition and advertisement of admission.

Detailed Analysis:

1. Petition for winding up under Section 433(e) and (f) read with Section 439 of the Companies Act, 1956:

The petitioner filed a petition seeking the winding up of the respondent-company under Section 433(e) and (f) read with Section 439 of the Companies Act, 1956, and Rule 95 of the Companies (Court) Rules, 1959.

2. Trade Finance Facility and subsequent amendments:

The petitioner, a subsidiary of the State Bank of India, provided the respondent-company a Trade Finance Facility, initially sanctioned on December 21, 2006, for Rs. 5 crores. The terms were accepted by the respondent-company's board of directors. The facility was revised and realigned multiple times, with the final sanction letter dated November 26, 2010, reducing the limit to Rs. 25 crores.

3. Non-payment of dues and dishonor of cheques:

Despite the reduction in the facility, the respondent-company failed to make the due payments. Cheques issued by the respondent-company were dishonored, leading the petitioner to file a complaint under Section 142 read with Section 138 of the Negotiable Instruments Act, 1881.

4. Statutory notice and respondent's reply:

A statutory notice was issued by the petitioner on May 26, 2011, demanding payment of Rs. 27,10,23,233.15 with further interest at 18% per annum. The respondent-company replied, acknowledging the debt but attributing non-payment to liquidity issues and ongoing negotiations.

5. Respondent's financial difficulties and liquidity issues:

The respondent-company admitted to financial difficulties due to non-finalization of issues with the Andaman and Nicobar administration, leading to a cash flow gap of Rs. 45 crores. They claimed to have been in talks with the petitioner for a settlement and had proposed securitization of the term loan.

6. Dispute over whether the amount owed is a "debt":

The respondent argued that the amount owed was not a "debt" but a loan acquired under reverse and silent factoring facilities. They contended that all receivables were routed through the petitioner, and thus, the amount could not be classified as a debt under Section 433 of the Act.

7. Applicability of Sections 433 and 434 of the Companies Act:

The court noted that Section 433(e) empowers the court to direct winding up if a company is unable to pay its debts. Section 434 creates a legal fiction, deeming a company unable to pay its debts if certain conditions are met, including neglecting to pay a demanded sum within three weeks.

8. Bona fide dispute regarding the debt:

The court examined whether the respondent's dispute over the debt was bona fide. It concluded that the respondent's arguments were not substantial and genuine but were merely a cover for their inability to pay the debt.

9. Legal fiction under Section 434(1)(a) of the Act:

The court found that the conditions under Section 434(1)(a) were satisfied. The respondent-company had neglected to pay the sum demanded within three weeks of the statutory notice, leading to the legal fiction that the company was unable to pay its debts.

10. Admission of company petition and advertisement of admission:

The court admitted the company petition for winding up. It directed that the admission of the petition be advertised in specified newspapers within 21 days and listed the matter for filing proof of publication after four weeks.

Conclusion:

The court admitted the winding up petition, concluding that the respondent-company was unable to pay its debts as per the legal fiction under Section 434(1)(a) of the Companies Act. The respondent's arguments were deemed unsubstantial, and the court ordered the advertisement of the petition's admission.

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