2015 (7) TMI 578 - HC - Companies Law

Winding up of company - Inability to pay debts - Held that - it cannot be determined by the company court that the company sought to be wound-up is unable to pay its debts within the meaning of clause (e) of section 433 of the Act unless it is heard at the admission stage. This is fortified by the use of the word may - denoting a discretion vested in the court - in the opening part of the section, as contrasted with the use of the word shall in the proviso to clause (h) which does not confer any discretion on the court where the winding-up petition is presented by the Government (Central or State) on the ground that the company has acted against the interests of the sovereignty and integrity of the country, security of the State, public order etc. There seems to be a clear line of difference between cases where there are substantial arguable issues in favour of the company sought to be wound-up even on the question whether the debt is due and cases where the merits of the revival scheme are projected as a defence and an appeal is made to the conscience of the company court to exercise the discretion not to order winding-up. Pradeshiya Industrial and Investment Corporation of UP (1994 (2) TMI 267 - SUPREME COURT OF INDIA) decided by the Supreme Court is a case which exemplifies the first category. There, there were certain questions of law raised in defence of the plea against the winding-up under section 433(e) that the promoters‟ agreement was cancelled, which aspect was not taken note of by the company court, that the appellant before the court which was sought to be wound-up was not a debtor at all as it was a financial institution which aspect was also not considered and that the claim was the subject matter of arbitration proceedings, which had also been overlooked by the company court. It was in these circumstances that the Supreme Court held that the defence of the company was a substantial one and not mere moonshine . In fairness to the petitioner, it must be said that it was stated on its behalf that the effectiveness of the CDR Scheme and its impact on the ability of the respondent-company to repay its debts is a matter that can be examined in detail once the petition is admitted. The right of the respondent-company to argue, at that time in the course of the second motion proceedings, on the basis of the Scheme and the financial ability obtaining at that time was not disputed. In these circumstances, the winding-up petition is admitted. - Decided in favour of Appellant.

Summary

Issues Involved:
1. Entitlement of the respondent-company to be heard at the admission stage of the company petition.
2. Impact of the Corporate Debt Restructuring (CDR) Scheme on the admission of the winding-up petition.
3. Discretion of the court in ordering winding-up.
4. Rights of the workmen to be heard in the winding-up proceedings.

Detailed Analysis:

1. Entitlement of the Respondent-Company to be Heard at the Admission Stage:
The court addressed whether the respondent-company should be heard at the admission stage of the winding-up petition. It was noted that the respondent-company had already been heard before the initial order of restraint was passed on 13-12-2012. The court emphasized that the determination of whether a company is "unable to pay its debts" under section 433(e) of the Companies Act, 1956, necessitates hearing the company at the admission stage. This view is supported by the discretionary nature of the court's power under section 433, as indicated by the use of the word "may." The court referenced the judgment in Bipla Chemical Industries, which supports the idea that a company should be heard at the admission stage.

2. Impact of the CDR Scheme on the Admission of the Winding-Up Petition:
The court considered whether the existence of a CDR Scheme should prevent the admission of the winding-up petition. It was argued by the respondent-company that the CDR Scheme, which involved a substantial infusion of funds and a moratorium on dues, should be given a chance to succeed. However, the court noted that at the admission stage, it is difficult to evaluate the prospects of the company's revival under the CDR Scheme. The court cited the judgment in Bipla Chemical Industries, which differentiates between the admission stage and the later stage when all facts are considered for deciding the best order. The court found that the CDR Scheme, while indicating efforts to revive the company, did not provide sufficient grounds to refuse the admission of the winding-up petition at this stage.

3. Discretion of the Court in Ordering Winding-Up:
The court discussed the discretionary nature of ordering a winding-up under section 433 of the Act. It was highlighted that even after the admission of the petition, the company could present reasons against winding-up. The court referenced judgments, including Pradeshiya Industrial and Investment Corporation of UP and Madhusudan Gordhandas & Co, which outline circumstances where winding-up may not be ordered, such as when the defense to the debt claim is substantial or where creditors oppose the winding-up. However, the court found that the current case did not present substantial arguable issues against the debt claim, and the CDR Scheme did not provide a clear basis to exercise discretion against winding-up at the admission stage.

4. Rights of the Workmen to be Heard in the Winding-Up Proceedings:
The court addressed the application filed by the workmen for impleadment in the company petition. Citing the Constitution Bench judgment in National Textile Workers' Union vs P.R. Ramakrishnan, the court affirmed that workmen have the right to be heard both before and after the admission of the winding-up petition. The court acknowledged the potential adverse impact on the workmen if a winding-up order is made but emphasized that this consideration does not preclude the admission of the petition. The application for impleadment of the workmen was allowed, ensuring their right to participate in the proceedings.

Conclusion:
The winding-up petition was admitted, and the workmen were impleaded in the petition. The official liquidator was appointed as the provisional liquidator, with a directive to take charge of the company's assets. However, the order appointing the provisional liquidator was kept in abeyance for eight weeks to allow for potential modification of the CDR Scheme to include the bond-holders. During this period, the petitioner was restricted from publicizing the order. The court kept the window for discussions open, encouraging efforts to resolve the issues amicably.