2012 (12) TMI 268 - HC - Companies Law

Winding up Petition - Inability to pay Debts - held that - It is not only the factum of indebtedness be affirmatively established, but the quantum thereof needs also to be conclusively demonstrated. The concept of inability of paying the debt cannot be applied in the case where the creditors are fully secured and they have in fact nothing to do with the alleged inability of the company to pay its debts. A secured creditor can always realise his securities to satisfy his debt - mere nonpayment of a money claim is a dispute covered by the arbitration agreement governing the matrix contract on which the money claim is based. There is no dispute as to the claim of the petitioning creditor against the company. The claim is founded on dishonored cheques and even the primary basis of the claim stands admitted. The company did not reply to the statutory notice and has not indicated anything that would make the debt disputed or that would detract from the presumption of the company s inability to pay that arises u/s 434(1)(a) of the Companies Act. The order of injunction subsisting on the guarantors and the undertakings furnished by the guarantors pursuant to the are matters not relevant for assessing the company s inability to pay - petitioning creditor s claim must be quantified, it must be appreciated that the petitioner has quantified its claim both in the statuary notice and in the petition; and it is only the company s assertion that since the value of the properties covered by the Bombay injunction against the company cannot be conveniently made, the quantified claim put forth by the petitioner should be regarded as an unascertained claim. Such argument does not appeal and is rejected - CP No. 560 of 2011 is admitted for the principal sum of Rs.4,07,05,062 together with interest thereon at the agreed rate of 15.50 per cent per annum from the date of adjustment of the sum of Rs.92,54,515 on account of the fixed deposit. If the company pays off the entire amount, inclusive of interest and costs assessed at 3000 GM, within six weeks from date, the petition will remain permanently stayed. In default, the petition will be advertised in The Statesman and Bartamaan newspapers. The advertisements should indicate that the matter will appear before the court on the first available working day after the expiry of four weeks from the date of the advertisements being published.

Issues Involved:
1. Delay in the creditor's winding-up petition.
2. Credit facilities and loan agreements between the petitioner and the company.
3. Dishonored cheques and the company's request to liquidate fixed deposits.
4. Admissions and defenses in the company's affidavit.
5. Arbitral reference and orders from the Bombay High Court.
6. Legal fiction under Section 434(1)(a) of the Companies Act, 1956.
7. Commercial insolvency vs. actual insolvency.
8. The petitioner's right to seek winding-up despite security.
9. Quantification of the creditor's claim.
10. The company's argument for staying the petition pending arbitration.

Detailed Analysis:

1. Delay in the Creditor's Winding-Up Petition:
The court acknowledged that the delay in the creditor's winding-up petition was not due to the parties' fault. The matter was prolonged due to the court's observation regarding the creditor's application for an attachment order before judgment and the subsequent substantial order in favor of the creditor.

2. Credit Facilities and Loan Agreements:
The petitioning creditor, a non-banking financial company, granted credit facilities exceeding Rs. 4 crore to the company based on a sanction letter and a subsequent loan agreement. The agreement included a maximum credit of Rs. 5 crore at an interest rate of 12.50% per annum, with an additional 3% for delayed payments. The loan was partly secured by a fixed deposit of Rs. 75 lakh.

3. Dishonored Cheques and Liquidation of Fixed Deposits:
The creditor disbursed sums in three tranches, but cheques issued by the company were dishonored. The company requested the creditor to liquidate the fixed deposit to adjust the outstanding amount. The creditor adjusted Rs. 92.54 lakh and claimed the balance principal sum of Rs. 4,07,05,062 with interest at 15.50% per annum.

4. Admissions and Defenses in the Company's Affidavit:
The company's affidavit admitted the payments made by the creditor and the dishonored cheques but contended an unwritten arrangement regarding cheque presentation. The company proclaimed that the arbitral reference and orders obtained by the creditor provided substantial security, making the winding-up petition improper.

5. Arbitral Reference and Orders from the Bombay High Court:
The creditor invoked the arbitration clause and obtained orders from the Bombay High Court. The company argued that the present petition was an attempt to extract money or humiliate the company. The court noted the substantial security furnished by the company and guarantors in the Bombay proceedings.

6. Legal Fiction under Section 434(1)(a) of the Companies Act, 1956:
The court discussed the legal fiction under Section 434(1)(a), where a company is deemed unable to pay its debts if it neglects to pay, secure, or compound the sum to the creditor's reasonable satisfaction within three weeks of receiving a demand notice.

7. Commercial Insolvency vs. Actual Insolvency:
The court emphasized that the inability to pay debts implies commercial insolvency, not actual insolvency. The assessment is based on the company's liquid assets to discharge liabilities, not on the company's total assets or net worth.

8. The Petitioner's Right to Seek Winding-Up Despite Security:
The court held that a secured creditor could seek winding-up based on the legal fiction under Section 434(1)(a). The creditor's right to apply for winding-up is not precluded by the existence of security or the value of the security exceeding the claim.

9. Quantification of the Creditor's Claim:
The court rejected the company's argument that the creditor's claim was unquantified. The creditor had quantified its claim in the statutory notice and the petition. The court found no merit in the company's assertion that the value of security furnished in the Bombay proceedings should reduce the quantified claim.

10. The Company's Argument for Staying the Petition Pending Arbitration:
The court dismissed the company's argument to stay the petition pending arbitration. The court noted that the invocation of arbitration does not bar winding-up proceedings. The court emphasized that the arbitration and winding-up petition are not parallel proceedings and can coexist.

Conclusion:
The court admitted the winding-up petition for the principal sum of Rs. 4,07,05,062 with interest. The company was given six weeks to pay the amount, failing which the petition would be advertised. The company's application to dismiss the petition was rejected. The court provided detailed reasoning on various legal principles, including the interpretation of Section 434(1)(a) and the concept of commercial insolvency.

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