1968 (3) TMI 82 - HC - Companies Law

Winding up - Company when deemed unable to pay its debts and Power of tribunal to stay winding-up

Issues Involved:
1. Winding-up of the appellant company.
2. Inability to pay debts under Section 433(e) and 434(1)(c) of the Companies Act, 1956.
3. Arguments for and against the commercial insolvency of the company.
4. Subsequent events and financial arrangements post-winding-up order.
5. Application for stay of the winding-up order under Section 466 of the Companies Act.

Detailed Analysis:

1. Winding-up of the Appellant Company:
The appeal was filed against the order dated 30th April 1959, directing the winding-up of the appellant company, Sri Shanmugar Mills Ltd. The company was incorporated in 1945 with a share capital of rupees twenty-five lakhs, of which rupees eight lakhs and odd worth of shares were subscribed and paid up. The primary business was to buy cotton and spin it into yarn. The winding-up petition was filed by a creditor, Dharmaraj Nadar, for an unpaid sum of Rs. 43,548.96. The ground for winding-up was the company's inability to pay its debts within the meaning of Section 433(e) of the Companies Act, 1956.

2. Inability to Pay Debts under Section 433(e) and 434(1)(c) of the Companies Act, 1956:
The petition invoked Section 434(1)(c), which states that a company is deemed unable to pay its debts if it is proved to the court's satisfaction that the company cannot pay its debts, considering contingent and prospective liabilities. The learned judge determined that the company's total liabilities on 31st October 1957 amounted to Rs. 8,72,414, while the book value of assets was Rs. 10,79,130. However, the judge concluded that the nature of the assets (mainly machinery and buildings) meant they were not presently realizable without ceasing the company's operations. Thus, the company was unable to pay its debts in a commercial sense.

3. Arguments for and Against the Commercial Insolvency of the Company:
The appellant's counsel argued that the company's assets exceeded its liabilities, hence it should not be deemed commercially insolvent. However, the court held that commercial insolvency is determined by the company's ability to pay its current liabilities while continuing operations, not by liquidating all assets. The court noted that the company could not meet its present demands without selling essential assets, making it commercially insolvent.

4. Subsequent Events and Financial Arrangements Post-Winding-up Order:
After the winding-up order, the official liquidator took charge, and a partnership, Sri Jaya Jothi & Co., advanced funds to pay off creditors in exchange for a lease to operate the mills. This arrangement was formalized in a compromise approved by the court. By 31st December 1967, all original creditors were paid off, and the lessees provided funds to meet income-tax liabilities. The lessees filed applications for a declaration of charge for the amounts advanced, amounting to Rs. 8,66,203.46 with interest, and indicated willingness to relinquish the lease if repaid.

5. Application for Stay of the Winding-up Order under Section 466 of the Companies Act:
The appellant's counsel argued that the company could now command credit and should not be deemed commercially insolvent. Additionally, the compromise's clause (17) was cited, suggesting the winding-up should be stayed permanently as all original creditors were paid. The court considered further facts, including the lessees' losses and the company's inability to cover interest payments from current income, concluding that the company remained unable to pay its debts. The court dismissed the appeal, stating that the proposals for staying the winding-up were insufficient and that any future application under Section 466 should be made to the company judge with a proper reconstruction scheme.

Conclusion:
The court dismissed the appeal and related applications, emphasizing that the company remained commercially insolvent and that any future attempts to stay the winding-up order must be supported by a viable reconstruction scheme. The costs of the appellant were ordered to be paid from the company's funds.

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