2012 (12) TMI 308 - HC - Companies Law

Admissibility of Winding up petition by Secured creditors - neglected to pay the sum due - held that - Petitioner has evinced a clear intention to enforce the security by filing a suit in this court for the recovery of its dues and the enforcement of its securities. There can be no doubt about the proposition that the object of a petition for winding up is to realise the property of the company for distribution to all the creditors in accordance with the applicable rules. In the present case, petitioner has filed a suit in this court and made it clear, therefore, that he seeks to enforce the security. When the stage of proving its of debt does arise, the petitioner would necessarily have to prove for the balance of the debt which is due and owing to it after the security in respect of which the petitioner is a secured creditor is realised.creditors petitions are the most common petitions for winding up companies and most creditors prefer the short-cut of the legal fiction to establish the concerned company s inability to pay its debts. Apart from meeting the other preconditions built in to Section 434(1)(a) of the Act, even an unsecured creditor of a company has to demonstrate the unimpeachable quality of its claim in its written demand or a part of such claim in excess of Rs 500/- for the negligence of the company to be established as the final prerequisite before the legal fiction - the presumption of company s inability to pay its debts is cemented. In the absence of a secured creditor establishing the inefficacy or the inadequacy of the security held by it, such creditor cannot demonstrate any negligence on the part of the company which is relevant for the purpose of the provision; and, consequently, no inference may be drawn of the company s inability to pay its debts and the legal fiction does not kick in. Since the petitioning creditor here has neither averred nor otherwise established that the security that it enjoys is inefficacious or inadequate to meet its claim against the company, the petition cannot be admitted - In any event, even if the petitioning creditor had crossed that hurdle and had established that a debt was due which was unmatched by any efficacious security, its conduct in advertising the statutory notice prior to instituting this petition is a good ground for exercising the limited discretion available to the company court to refuse to admit a creditor s petition even if the debt were unimpeachably established - liberty to the petitioner to launch fresh winding-up proceedings upon exhausting its remedies against the securities that it enjoys. As a consequence, application under Sec 450 of the Companies Act, is dismissed. The interim order subsisting on such application is vacated with immediate effect and the official liquidator is discharged as the provisional liquidator of the company.

Summary

Issues Involved:
1. Rights of secured creditors versus unsecured creditors in winding-up petitions.
2. Interpretation and application of Section 434(1)(a) of the Companies Act, 1956.
3. Discretion of the company judge under Section 433 of the Companies Act.
4. Procedural aspects of admitting a creditor's winding-up petition.
5. The impact of a secured creditor's conduct on the admissibility of the winding-up petition.

Detailed Analysis:

1. Rights of Secured Creditors Versus Unsecured Creditors in Winding-Up Petitions:
The primary issue revolves around whether a secured creditor of a registered company enjoys equal rights as an unsecured creditor to have its winding-up petition admitted without demonstrating that the value of its securities is less than its claim. The court emphasized that a secured creditor must demonstrate that the security it holds is either inefficacious or inadequate to meet its claim. This is crucial because the statutory presumption under Section 434(1)(a) of the Companies Act, 1956, hinges on the company's inability to pay its debts, which must be established by the creditor.

2. Interpretation and Application of Section 434(1)(a) of the Companies Act, 1956:
Section 434(1)(a) states that a company is deemed unable to pay its debts if it neglects to pay, secure, or compound for the debt to the reasonable satisfaction of the creditor after a three-week notice. The court clarified that the provision requires a creditor to demonstrate the inefficacy or inadequacy of the security held. The statutory presumption of the company's inability to pay its debts cannot be invoked by a secured creditor without establishing that the security is insufficient or ineffective.

3. Discretion of the Company Judge Under Section 433 of the Companies Act:
Section 433 confers discretion on the company judge to decide whether or not to wind up a company, even if one or more grounds for winding up are established. The court noted that this discretion is not absolute and must be exercised based on judicial principles. The judge's discretion is particularly relevant when considering the impact of the secured creditor's conduct and the adequacy of the security held by the creditor.

4. Procedural Aspects of Admitting a Creditor's Winding-Up Petition:
The court highlighted the two-stage process followed in admitting a creditor's winding-up petition. Initially, the court assesses whether the petition should be admitted and advertised. The creditor must demonstrate an indisputable debt and the inadequacy of the security held. If the debt is bona fide disputed, the court may stay the petition and direct the creditor to pursue a regular action. The court emphasized that the efficacy and adequacy of the security must be assessed at the admission stage, not postponed to the post-advertisement stage.

5. The Impact of a Secured Creditor's Conduct on the Admissibility of the Winding-Up Petition:
The court considered the conduct of the petitioning creditor, particularly its actions in advertising the statutory notice before filing the petition. The court held that such conduct could influence the exercise of discretion in admitting the petition. In this case, the petitioning creditor's failure to establish the inadequacy or inefficacy of its security, combined with its premature advertisement of the notice, justified the court's decision to refuse admission of the petition.

Conclusion:
The judgment concluded that a secured creditor must establish the inefficacy or inadequacy of its security to invoke the statutory presumption of a company's inability to pay its debts under Section 434(1)(a) of the Companies Act, 1956. The court permanently stayed the winding-up petition, granting the petitioner liberty to initiate fresh proceedings after exhausting remedies against the securities held. The judgment underscores the importance of adhering to statutory requirements and judicial principles in winding-up proceedings.