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TMI Blog1968 (3) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor of the company in a sum of Rs. 43,548.96 as on 30th October, 1957. He had supplied cotton to the company and had not been paid therefor. The petition for winding-up was filed on 15th November, 1957. The ground stated in the petition for the winding-up was that the company was unable to pay its debts within the meaning of section 433( e ) of the Companies Act, 1956. Section 434 says that a company shall be deemed to be unable to pay its debts under three contingencies numbered as ( a ), ( b ) and ( c ). Clause ( a ) deals with a case where a creditor makes a demand and the company for three weeks thereafter neglects to pay the sum. The creditor did not give any notice and did not invoke this clause. Clause ( b ) deals with a case where execution is returned unsatisfied in whole or in part. That also does not apply. It was clause ( c ) that was invoked, and which was applied by the learned judge. That says that a company shall be deemed to be unable to pay its debts, if it is proved to the satisfaction of the court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the Court shall take into account the contingent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears cannot be accepted as the deposit could not be so adjusted unless contract for the supply of electrical energy is terminated. In that event the mills would have to stop working. Mr. Mohan Kumaramangalam, the learned advocate for the company, contended that when the assets of the company on the date of the presentation of the petition are compared with the liabilities of the company, the former would exceed the latter and, therefore, the company should not be held to be commercially insolvent. In making that submission the learned counsel included the value of the machinery and building. The test of inability to pay the debt under section 434(l)( c ) is not whether the company, if it converts all its assets into cash, could be able to discharge its debts, but whether in a commercial sense the existing liabilities could be paid by the company while it is running as a company. It cannot be said that if the machinery and the building had to be realised for the purpose of paying the existing debts the company could run its business. If such assets are excluded the other assets which amount to about rupees three lakhs (vide market value adopted in the counter affidavit) would hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy sanctioned an additional spindlage of 5,000. Clauses 14, 15 and 17 may be usefully quoted: "14. Sri Jaya Jothi Co. is to hold a charge over the company's properties and assets in respect of the amounts due to it by the company but the charge shall take effect only after the payment in full to the creditors is completed. 15. The official liquidator is not to sell the mills and other properties of the company so long as no default occurs on the part of Sri Jaya Jothi Co. in the discharge of its obligations under the foregoing provisions. 17. The winding-up is to be stayed permanently on payment in full to the creditors by the official liquidator and on a report to that effect being filed in this honourable court". In pursuance of the compromise, Jaya Jothi Co. advanced amounts from time to time and it may be taken that as on 31st December, 1967, all the original creditors of the company had been paid off and the lessees had also provided the official liquidator with the funds necessary to meet the liabilities of the income-tax department. The details may be gathered from the reports of the official liquidator, one dated 11th January, 1968, in C.M.P. No. 14730 of 1967 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liabilities would amount to about Rs. 96,000 a year (the principal liability being Rs. 65,000 due as interest to the lessees on their advances), showing a net loss of about Rs. 10,000 a year. At that rate even the interest due to the lessees could not be paid completely and would be mounting up and there could be no hope of the company repaying the debt of Rs. 11,75,000 due to the lessees. Now, the lease in favour of Jaya Jothi Co. commenced on 12th June, 1960 (vide order dated 21st June, 1960), and though the lessees were entitled to continue as lessees for ten years from 12th June, 1960, the lessees stated in their affidavit that they were willing to forgo their right to run the mills for the remaining period of three and a half years and surrender possession of the mills on condition that the entire amount due to them was paid. They stated that they were incurring only loss by running the mills. They further stated that the assets of the company, worth over rupees ten lakhs in 1959, would not be worth more than rupees five lakhs when they filed the affidavit, because of depreciation. They, therefore, prayed, firstly, for a declaration of their charge (C.M.P. No. 1197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitute a committee of nine members consisting of Mohamed Hussain, advocate, as president and one Arumugam and others as members. They were to take charge of the company and run it. The committee was authorised to collect funds for meeting the expenses for carrying on the management. The rights of Jaya Jothi Co. should, however, be left intact till their dues were paid off. Arumugham, one of the members of the committee appointed, filed C.M.P. No. 8713 of 1967 with a prayer to set aside the order of winding-up. We considered C.M.P. No. 11974 of 1966 and C.M.P. No. 8713 of 1967 on 4th August, 1967, and passed an order pointing out, in the first place, that the meeting convened on 4th June, 1967, was not quite in accordance with the statutory provisions and that a further meeting should be convened. We also pointed out that the resolution passed on 4th June, 1967, could not deserve the name of a scheme which could be considered by the court before possession was handed over to the shareholders. We invited schemes for the reconstruction of the company under sections 391 and 392 of the Act. Notification was accordingly made in the dailies and otherwise and Arumugam has filed C.M.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to advance the huge amount which would be required, say, rupees ten lakhs, so long as the winding-up order stands, and that is why he wants the winding-up order to be cancelled or at least to be permanently stayed, within the meaning of section 466. He urges that the proposals put forward in C.M.P. Nos. 14419 and 14420 of 1967 should be sufficient to satisfy the court before passing the order setting aside the winding-up order or permanently staying the winding-up order. The official liquidator has filed his report, dated 11th January, 1968, in reply to C.M.P. No. 14730 of 1967. We directed him to file a reply with reference to C.M.P. Nos. 14419 and 14420 of 1967, giving us a rough idea of the current income and expenditure position of the company. The official liquidator accordingly filed his report dated 18th Janurry, 1968. We have passed orders in C.M.P. Nos. 11974 of 1966 and 14730 of 1967 declaring the charge in favour of Jaya Jothi Co. for the advances made by them (amounting roughly to Rs. 11,75,000) with interest on Rs. 8,66,600.96 at 7 less any amount adjusted or paid. The report dated 18th January, 1968, shows that the annual income of the company at present is Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal creditors there would be an automatic stay of the winding up. This brings us to a consideration of C.M.P. Nos. 14419 and 14420 of 1967. No doubt, the affidavits therein contemplate a cancellation of the winding up order, but we are prepared to treat them as applications under section 466 for a permanent stay of the winding up order. We are not, however, prepared to stay the winding up order permanently or for a limited period, merely on the proposals put forward in those applications. The proposals are that the winding up order should be stayed and the shareholders should be permitted to raise money from third parties, pay off Jaya Jothi and Company and run the mills themselves. No affidavit has been filed from any third party who would be prepared to advance moneys to the shareholders without taking charge of the mills themselves even if the winding up order is stayed. We shall, however, assume, for the sake of argument, that there are third parties who would be willing to advance moneys to the shareholders if the winding up order is stayed, but obviously the rate of interest they would demand will be 12 per cent. or more, probably 18 per cent. We shall not be justified in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer has reported that the shareholders are not willing to advance any amount or take any shares. Sri Ramamurthi Iyer strongly urges that by sanctioning the proposals in C.M.P. Nos. 14419 and 14420 of 1967 as they stand, the rights of Jaya Jothi Co. are in no way prejudiced, and asks, for whose benefit the winding up order is to be continued ? That is not at all the proper approach in a case of this kind. The court cannot hand over a commercially insolvent company to the shareholders and let the shareholders loose upon the market, free to raise loans. The court owes a duty to the public in such a matter. This is the principle which has been laid down in the cases decided so far. The cases have been collected in Buckley's commentary on the Companies Acts of England, under section 256 of the Companies Act, 1948, page 533 of the thirteenth edition, 1957, and in Halsbury's Laws of England, in paragraphs 1397 and 1398, volume 6, and in Palmer's Company Precedents, Part II, Chapter 12. The cases lay down that the considerations which should govern the court in an application for stay of the winding up order are precisely the considerations which would govern the court when it is asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court will still consider whether what they have agreed to is for the benefit of the creditors as a whole. The court has gone still further, and I think rightly so, and has said that under the present Bankruptcy Act it will consider not only whether what is proposed is for the benefit of the creditors, but also whether it is conducive or detrimental to commercial morality and to the interests of the public at large ; and they will take into consideration the position of the bankrupt with regard to his creditors and see whether what is proposed will not place his future creditors, who must come into existence immediately, in a position of imminent danger. The court has said this before, and I adhere to it now". Fry L.J. observed (at page 641): "We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country". The above decision was followed in In re Flatau [1893] 2 Q.B. 219. In In re Izod [1898] 1 QB 241 the above decisions were explained. It was stated that the above decisions did not mean that the receiving order could be rescinded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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