2013 (9) TMI 825 - HC - Companies Law

Winding up of company - Company deemed unable to pay its debts - appointment of administrator - Held that - A proceeding for winding up, it is well settled, is not a proceeding for the recovery of outstanding dues. Nor for that matter, can the remedy of a Petition for winding up be utilized to pressurise a company which is commercially solvent to pay a debt which is bona fide disputed. In the present case, there is no dispute about the debt due and payable by the Appellant to the Respondent. The company in the present case is unable to pay. The conduct of the Appellant in failing to utilise any part of the sale consideration from the sale of the MSD Division to repay the bond holders despite a solemn assurance to the shareholders, to the Stock Exchange and even despite a statement on affidavit to the City Civil Court shows a complete absence of bona fides. The fact that the Respondent has instituted a suit for recovery cannot displace the maintainability of a petition for winding up. In a petition for winding up, the issue that falls for consideration is as to whether the Company is unable to pay its debts - material on record would indicate that the Company is unable to pay its debts. The Learned Single Judge has noted that on 17 June 2013, the Company made a settlement proposal for payment to be made to the FCCB bond holders over a three year period in certain proceedings which were pending before the Securities Appellate Tribunal in appeal against an order passed by SEBI. On 4 July 2013, the Company Petition for winding up was fixed for hearing on 26 July 2013. In order to forestall the hearing of the Company Petition, the Appellant made an announcement on the website of the Bombay Stock Exchange to the effect that the Board of Directors had decided to make a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 as the accumulated losses had exceeded the net worth of the Company as per the audited financial results on 30 June 2013. On 19 July 2013, the Company made a corporate announcement on the BSE website of its audited financial results for a period of nine months ending on 30 June 2013. On 19 July 2013, a reference was filed before the BIFR which was announced on 25 July 2013 in a corporate statement on the website. On 26 July 2013, the hearing of the Company Petition for winding up was fixed on 29 July 2013, when the Court was informed that a reference has been filed before the BIFR. This Court has been informed during the course of the hearing of the appeal that the reference was found not to be maintainable on 12 August 2013 - Learned Single Judge has provided adequate safeguards by directing that the administrator will ensure that the day to day functioning of the Company is not hampered. The appointment of the administrator has been made, in these circumstances, with a view to safeguard the interests of the shareholders, creditors and the workers. Mr. R.A. Dada, Learned Senior Counsel for workers submitted that forty per cent of the turnover is paid towards the salaries of the employees and many of the employees were engaged in both software and hardware business. As the Learned Single Judge noted, having regard to the track record of the promoters/directors, it was necessary in the interests of employees themselves that an administrator should be appointed in the absence of which, in all likelihood, the business and assets would be wasted and the business would be brought to a standstill. The Learned Company Judge has acted within jurisdiction in issuing this direction - Decided against petitioner.

Issues Involved:
1. Maintainability of the winding-up petition.
2. Provisions of Clause 24 of the Trust Deed.
3. Right to maintain a winding-up petition based on due debt.
4. Court's power to appoint an administrator.
5. Commercial viability and impact of appointing an administrator.
6. Allegations of siphoning of funds by the promoters.

Detailed Analysis:

1. Maintainability of the Winding-up Petition:
The Appellant contended that the winding-up petition was not maintainable as the trusteeship of the Respondent had been terminated and a suit for recovery was already instituted. However, the court noted that the Respondent, as a trustee, is deemed to be a creditor under Section 439(1)(b) of the Companies Act, 1956, and thus, the petition was maintainable.

2. Provisions of Clause 24 of the Trust Deed:
Clause 24 of the Trust Deed allows the trustee to enforce repayment of the bonds and other provisions of the Trust Deed upon the bonds becoming due. It was argued that the petition for winding-up should not have been entertained due to Clause 24. The court clarified that Clause 24 does not preclude the trustee from instituting a winding-up proceeding, and the trustee is empowered to act on behalf of the bondholders.

3. Right to Maintain a Winding-up Petition Based on Due Debt:
The court emphasized that there was no dispute about the liability under the Foreign Currency Convertible Bonds (FCCBs), which remained unpaid. The court found that the company's failure to pay the due amount and its conduct demonstrated an inability to pay its debts, justifying the winding-up petition. The Supreme Court's decision in IBA Health (India) Pvt. Ltd. vs. Info-Drive System SDN. BHD was cited to support that if a debt is undisputedly owing, it should be paid.

4. Court's Power to Appoint an Administrator:
The Appellant argued that the court had no power to appoint an administrator and that the appointment would impede business operations. The court found that the appointment was justified to safeguard the interests of shareholders, creditors, and workers. The court provided safeguards to ensure that the day-to-day functioning of the company was not hampered.

5. Commercial Viability and Impact of Appointing an Administrator:
The court noted that the company was commercially viable with a turnover of Rs. 66 crores and had paid its taxes and creditors, except the Respondent. However, the court concluded that the appointment of an administrator was necessary to prevent further siphoning of funds and to protect the company's assets and business operations.

6. Allegations of Siphoning of Funds by the Promoters:
The court observed that the promoters had not utilized any part of the sale consideration from the MSD Division to repay the bondholders despite assurances to shareholders, the Stock Exchange, and a statement on affidavit to the City Civil Court. The court found the conduct of the promoters to be lacking in bona fides, justifying the appointment of an administrator to oversee the company's affairs.

Conclusion:
The appeal was dismissed, and the court upheld the appointment of an administrator to safeguard the interests of the company's stakeholders. The request for a stay of the judgment was denied, but the issuance of an advertisement of the admission of the Petition was stayed for four weeks, allowing the administrator to hold a preliminary meeting.

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