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TMI Blog1969 (7) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... so jointly controlling a firm known as Firm Behari Lal Ram Chand (referred to hereinafter as "the firm") so much so that the accounts of these three concerns were mixed and open to each other as though the three concerns were one. But, subsequently, as a result of differences between the two groups, they decided to part company. Their interests were separated under an award. The corporation came to the share of the Singhanias exclusively. The company and the firm fell in the share of the Guptas. Accounting between the corporation and the other two concerns indicated that the company and Messrs. Behari Lal Ram Chand had certain claims against the corporation which did not clear its accounts. Consequently, two civil suits had to be filed at Kanpur. Suit No. 63 of 1949 was filed by the company against the corporation, and Suit No. 65 of 1949 was filed by the firm against the Corporation, claiming amounts due to them. The suit filed by the company was decreed, after going into accounts, for a sum of Rs. 2,82,734-11-3 with proportionate costs and pendente lite interest at 3 per cent. per annum. Among the pleas taken by the corporation in the suit decreed against it was that the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged that there was no question of its neglect or failure to pay. The corporation then filed the winding up petition in this court on August 9, 1967, on a number of grounds including the company's inability to pay its debts. The company denied its inability to pay its debts and made counter-allegations. The following issues arising out of the assertions made by the two sides were framed : (1)Whether the company is liable to be wound up on the ground that it is commercially insolvent for the reasons mentioned in the petition as amended ? (2)Whether the company has suspended its business for a whole year and is liable to be wound up for this reason ? (3)Whether it is otherwise just and equitable to wind up the company ? (4) Whether the petition is mala fide and liable to be dismissed on that ground? Considerable evidence has been placed before the court by both sides through affidavits. At one stage, an application for summoning certain witnesses was also allowed, but, subsequently, after an application for serving a very large number of interrogatories had been partly allowed, so that answers to the interrogatories were also given in the form of affidavits, it was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up is deemed to commence from the filing of the petitions. A rule confining evidence of indebtedness to the indebtedness existing at the time when the petition is made does not, however, preclude taking all evidence subsequent to filing of a winding up petition. It is a much narrower rule. Even this narrow rule can be easily overcome by a creditor, seeking to rely on fresh indebtedness, by the simple device of filing a fresh petition. That narrow rule is not really attempted to be transgressed by the petitioner here. The broader proposition sought to be built on it, on behalf of the company, to exclude all evidence in support of a petition tendered after the petition is filed or to prevent this court from considering all evidence of facts or events occurring after a petition is filed, which may have a bearing on questions raised, is not well founded. In East Kajoria Collieries case [1965] 35 Comp. Cas. 180 ; 69 CWN 1, the following passage was cited from Buckley on the Companies Acts (13th edition, page 471): "An order will not be made if a sufficient case is not stated on the petition, even if such a case is proved in evidence. The order must be made secundum allegata et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor ; or ( b )if execution or other process issued on a decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part ; or ( c )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 and prospective liabilities of the company." The petitioning creditor, having been met with a refusal to pay after it had served a registered notice on May 11, 1967, demanding payment of the amount declared to be due to it, claims the benefit of the deeming provision under section 434(1)( a ) of the Act. Its contention is that, once the statutory fiction or presumption is shown to operate in its favour, it becomes entitled ex debito justitiae to a winding up order (vide Buckley on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the required amount is admitted and not paid within the time fixed by statute after a demand by notice, without giving time or opportunity, in the exercise of its discretion, to make arrangements to pay up (see e.g. In re Brighton Hotel Company [1868] 6 Eq. 339 and In re Western of Canada Oil, Lands and Works Company [1873] 17 Eq. 1.). In W.T. Henley's Telegraph Works Co. v. Gorakhpur Electric Supply Co. AIR 1936 All. 840, 845. Iqbal Ahmad J. observed, with regard to this court's discretionary power now found in section 433 of the Act, to wind up a company : "It would thus appear that the company is unable to pay its debts. This fact, however, does not necessarily entitle the petitioner to an order for the winding up of the company, as the discretion to pass such an order, even in the case of the inability of a company to pay its debts, is by section 162 vested in the court." I am unable to take a different view of the power contained in provisions of section 433 of the Act. I, therefore, respectfully dissent from some of the views expressed recently by Vimadalal J. of the Bombay High Court in In re Advent Corporation ( P. ) Ltd. [1969] 39 Comp. Cas. 463 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready adjudicated upon to prove inability of the company to meet its obligations. The authorities relied upon were : In re Amalgamated Properties of Rhodesia Ltd. [1913] [1917] 2 Ch. 115 , In re Douglas (Griggs) Engineering Ltd. [1962] 1 All. ER 498, Sarkar Estates (P.) Ltd. v. Kusumika Iron Works (P.) Ltd. [1962] 32 Comp. Cas. 575 ; AIR 1961 Cal. 439 , and C. Hariprasad v. Amalgamated Commercial Traders (P.) Ltd. [1964] 34 Comp. Cas. 209 ; AIR 1964 Mad. 519. Furthermore, it was submitted that, inasmuch as the company did not choose to even appeal against the order passed on the restitution application, the petitioner's right to an immediate payment could not be said to be disputed at all. Hence, reliance was placed on the following passage in Palmer's Company Law, 20th edition, 1959, at page 677 : "Where the debt is undisputed, it is futile for the company to say, 'we are able to pay our debts, but we do not choose to pay this particular debt.' The court will not listen to such a defence." It was urged that such a stand was, in itself, inequitable. Equity and justice as well as sound commercial ethics, it was submitted, demand that obligations to pay in prae ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decretal debt as well. The only difference is that the decree against the alleged debtor raises a strong presumption, as held by S.K. Dutta J., that a genuine debt exists. The presumption can, however, be repelled where there are substantial grounds for questioning the validity of the decree as there seemed to be to S. K. Dutta J. in Steel Equipment and Construction Co.'s case [1968] 38 Comp. Cas. 82. But, a debt simpliciter, which is not supported by a judgment to evidence it, has to be proved by other evidence. The difference lies not in the principle applicable but in the type of evidence produced to prove a debt and its effect. Learned counsel for the petitioner tried to confine the applicability of the principle of bona fide dispute, in cases of decretal debts, to cases where the decree was shown to have been passed either without jurisdiction or could be strongly suspected of being collusive or obtained fraudulently so that it could be null and void. Learned counsel for the petitioner contended that, in other cases, the existence of a decree for money, which has not been set aside, followed by a failure to pay within time after a statutory notice, was enough to give r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's liability to repay the amount which was initially decreed by the trial court. I could come to this conclusion only after going through the judgments of the trial court and of this court and the grounds of a proposed appeal on the facts of this particular case. The proposition that even where there is an appeal involving substantial grounds for challenging a judgment under appeal, the judgment-debtor must necessarily be held to have neglected to discharge his duty to pay, unless a stay order is granted by the appellate court, seems to me to be too wide. A stay order from the appellate court would certainly establish that there was no neglect and, therefore, inability to pay, within the meaning of section 434(1)( a ) of the Act, could not be presumed. But, where a bona fide dispute about the liability to pay is satisfactorily shown by an appellant, inability to pay could not be presumed simply because the judgment-debtor has failed or refused to pay in response to the statutory notice of the creditor under section 434(1)( a ). It may, however, still be presumed under section 434(1)( b ) when a process issued, in the course of execution, is shown to have been returned unsatisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t compelling equities can arise in favour of the petitioner unless further steps to execute the restitution order are shown to have been taken unsuccessfully. The better view seems to be that, as a restitution order is a step in the course of execution, the particular mode contemplated by law for obtaining the benefit of the deeming provisions of section 434(1) of the Act, in the case of a restitution order, is to proceed with the execution, to take further appropriate steps for executing the restitution order, and to show that these have not resulted in full satisfaction of the decree. Such steps include, it has to be remembered, even appointment of a receiver in a suitable case, as provided in section 51, Civil Procedure Code. A Division Bench of this court has held in Raghunath Prasad Tandon v. Budaun Electric Supply Co. Ltd. AIR 1949 All. 112 that a receiver of a company can be appointed under the Civil Procedure Code. Even if the submission that no property of the company was available against which execution could be levied, as all its assets are already hypothecated, were correct, section 434(1)( b ) could not apply until the conditions laid down there are shown to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner has based its case of insolvency of the company in its petition on alleged commercial insolvency only. The case of complete insolvency, as explained above, has not been taken anywhere in the petition. The first 21 paragraphs of the petition are concerned with facts relating to the particular debt of Rs. 4,11,454 of the petitioner which has been considered above. Paragraph 22 sets out a number of debts of the company only in order to prove "that the company is not commercially solvent." Paragraphs 25 to 48 deal with alleged mismanagement, fraudulent acts of the directors, closure of the mills due to its alleged financially precarious position, and the condition of its machinery which was said to be outmoded and incapable of producing goods in such a way as to yield profits. In the last paragraph 49 of the petition it is only asserted that it is just and equitable for the company to be wound up as the company is "commercially insolvent and unable to pay its debts". A great deal of attention has been paid by the petitioner to the total liabilities of the company but only some assets are mentioned incidentally when dealing with the alleged outmoded machinery of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst bank advances although they exceed in value, by far, those advances, it was urged that this excess should still be treated as current assets which could counter-balance the remaining current liabilities. As there was considerable controversy on what was to be included or excluded from current liabilities and assets and the evidence of these was rather scattered, parties filed affidavits, under orders of this court, about their respective stands on this specific question. According to the petitioner's affidavit, current liabilities add up to Rs. 1,70,30,960 whereas current assets are estimated at Rs. 1,08,79,040 only. It disputes, without being able to disprove, the correctness of some of the items shown by the company among current assets and alleges that the current liabilities have been increasing. On the other hand, according to the company, current liabilities add up to Rs. 1,37,89,561 and current assets are shown at Rs. 1,97,69,497. Included in the current liabilities is a debt of Rs. 74,72,117 to the State Bank, the principal creditor, for the payment of which goods in stock, valued at Rs. 1,18,32,496 shown among current assets, are pledged. As these were pledged, their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. Moreover, the nature of the allegations made by the association against members of the Gupta family personally so closely resemble the nature of and even the language of the petitioner's allegations against the Guptas, in an evident spirit of unnecessary hostility and acrimony, that the motives of this alleged interested party seem questionable. I am inclined to agree with the submission on behalf of the company that the application by the association seems inspired by improper motives and could be instigated by some other party. In any case, the association has not established its locus standi as a creditor. It has not even stated that it is a creditor as no sum from the company is due to the association itself. Although the existence of several large amounts among the current liabilities of the company, which it has not yet met, may indicate the inability of the company to satisfy its liabilities as they arise, yet, it is quite clear that the company has been able to liquidate large amounts of debts and to pay up every creditor, with an undisputed claim, who has come forward to support this petition. This shows that the company can pay its creditors when pressed even th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s forty lakhs to the company, it indicated that the company was in a position to operate the mills. And, it is asserted that the mills are now working. It has been held in O. P. Basra v. Kaithal Cotton General Mills Co. Ltd. [1961] 31 Comp. Cas. 461 ; AIR 1962 Punj. 151 and Malabar I. S. Works v. Registrar of Companies [1963] 33 Comp. Cas. 886 ; AIR 1965 Ker. 35, that a winding up order should not be made on the ground of closure for over an year where there is sufficient explanation for the closure and a reasonable prospect of re-starting and earning profits. In the instant case, the company seems to have an adequate explanation on the ground of a depression in the cotton manufacturing industry and labour trouble which the company had to face. The mills are said to be working and the company making profits. Therefore, this could not be said to be a sufficient ground for a winding up order now. Coming to the third issue relating to the question whether it is just and equitable, apart from commercial insolvency and suspension of business for more than a year, that the company should be wound up, the provisions of section 433(2) have to be borne in mind. It is laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debentureholders ; and (8) right given by provisions of the articles. Cases considered under each head show that proved facts of the case must establish, that a sufficiently grave situation exists to warrant a winding up order which is an extreme measure. Thus, we find that a fraud not connected with the formation or promotion of a company but against third parties would not ordinarily provide a ground for a winding up order (In re Haven Gold Mining Co. [1882] 20 Ch. D. 151. Again, mismanagement or misapplication of funds by directors, for which other remedies are available, will not ordinarily be a ground for a winding up order unless it has produced insolvency ( In re Anglo-Egyptian Navigation Co. [1869] L.R. 8 Eq. 660). In Rajahmundry Electric Supply Corporation Ltd. case [1956] 26 Comp. Cas. 91 ; AIR 1956 SC 213, it was held by the Supreme Court that the fact that the directors had misappropriated the funds of the company may not be sufficient to make it just or equitable to wind up the company. Further details of the alleged mismanagement and dishonesty of the Gupta group, which is said to be thoroughly unreliable, given by the petitioner are: (1)Transfer of perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 to the company : In reply, the company asserts that the transactions were within the purview of the authorised objects of the company and it was contended that losses are part of the ordinary risks and incidents of business. None of the above-mentioned grounds, taken either separately or together, appear to me to make a winding up order imperative in the interests of the creditors. Several of the allegations made look like attempts at mudslinging in the hope that some of it would stick. The equities which the petitioner can properly invoke as a creditor must relate to the interests of the creditors which a petitioning creditor represents in a winding up proceeding. The test in such a case should be : Will the interests of the creditors be better served by a winding up order ? If the debts of the creditors can be liquidated more easily by taking proceedings other than those for the liquidation of the company itself, I do not think that a winding up order could be said to be absolutely necessary. The question of insolvency was raised again under the just and equitable clause. I do not think that this can be done when there is a separate provision in section 434(1)( c ) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company originally but turned into a creditor only due to the setting aside of a decree against the debtor solely on the ground of a bar of limitation operating against the company, when the correctness of the decree of the appellate court was questioned on substantial grounds in another pending appeal, by submitting that all he wanted was adequate security for the payment of the debt. Apparently, the petitioner was willing that the petition be dismissed if acceptable security for the amount due was forthcoming. At first, the petitioner's counsel suggested that proper security was a bank guarantee, but, afterwards, seemed willing to accept other security of any suitable property free from any prior charge. The security of some shares offered by the company was unacceptable to the petitioner. The parties, therefore, prayed that the question of adequate security may be decided by the court. I do not, however, think that winding up proceedings should be used in such a case, as a means of merely obtaining indirectly an order which has the effect of stay of execution of a decree on furnishing security. Such an order can be more appropriately sought from the court in which an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period, the petitioner will become entitled to equitable execution. On the other hand, if the company is able to obtain a stay order from the Supreme Court within this period of one year, staying the operation or the execution of the restitution order, the company will be in a position to urge that, there being no neglect on its part in discharging the particular obligation to pay the petitioner, this petition be dismissed. In this period, the company or the petitioner or some other creditor or creditors can also take appropriate steps, if so advised, to hold a meeting of the creditors as contemplated by section 391 of the Act or otherwise to protect their interests if this is necessary under the provisions of the Act. The result is that, in exercise of the powers of this court under section 443(1)( b ) of the Act, I postpone the final decision on this petition for one year on condition that the parties will take such steps to assert their claims within this period as to establish a clear balance of equities either in favour of or against a winding up order. An order as to costs of this petition will also be passed after one year from today when the petition will be listed for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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