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TMI Blog1977 (8) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 433(e) of the Companies Act, 1956, as amended by the Companies (Amendment) Act of 1974 (the Companies Act), praying for an order for winding up of the said company by the court under section 433(e) on the ground that the company is unable to pay its debts and under section 433(f) on the ground that it is just and equitable that the company should be wound up. The paid up capital of the company up to 1970 was Rs. 4,500 and thereafter it is Rs. 1,04,500. The main objects of the company for which it has been established as per the memorandum of articles of association are as under : "(1)To enable people to save money to invest their savings and to help them in securing loans and to inculcate in their minds the ideas of thrift, economy and compulsory savings and to organize and conduct thrift schemes, chit funds and to undertake, carry on and engage in and execute all kinds of financial, commercial, trading and other business, except banking and insurance and to frame such rules and regulations as may be deemed necessary for the proper conduct of such business. (2)To pay money to the subscribers of the chit funds against such securities as the company may deem proper and suffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny placed on record the balance-sheets for the years ended on 31st December, 1973, and 31st December, 1974, as well. The company, however, failed to place on record the balance-sheet for the years ended 31st December, 1975, and 31st December, 1976, though the same have become due and though Mr. C.C. Gandhi, the learned counsel for the company, gave an express undertaking to the court on behalf of the company to file the balance-sheets for the years 1975 and 1976, on or before August 9, 1977. Mr. Gandhi was told that no extension would be granted in any circumstances and that the balance-sheets should be placed on record unfailing on August 9, 1977. Notwithstanding this undertaking given by Mr. Gandhi and notwithstanding the order made by this court on August 1, 1977, the balance-sheets for the years 1975 and 1976 have not yet been placed on record. It may also be stated that on August 23, 1976, D.A. Desai J., before whom the petition came up on that day, directed the Registrar of Companies to launch prosecution against the directors and the managing director for failure to file the balance-sheets within a fortnight from the date of the order. Even so, the directors of the company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for directors - __ - - 32,500 __ Directors' fees 2,400 2,800 3,400 3,000 - - The spot light may be turned on what emerges from the aforesaid statement. The statement shows that in 1972, just prior to the issuance of the show-cause notice by the Regional Director, the paid up capital of the company was extremely insignificant inasmuch as it was only of the order of Rs. 4,500. The subscription collected from about 90,000 gullible and unwary members of the public who joined the various schemes introduced by the company in response to its tantalizing advertisements was of the order of about Rs. 42½ lakhs. As against this, the loans to the directors and their friends were of the order of about Rs. 5½ lakhs and the accumulated losses were of the order of about Rs. 21¼ lakhs. After issuance of the notice, while the paid up capital increased to about Rs. 1 lakh, the subscription collected from the members of the public jumped up by about Rs. 50 lakhs to Rs. 91½ lakhs. As against the same, the accumulated losses jumped up by about 21 lakhs of rupees to 48 lakhs of rupees and the loans to the directors and their friends jumped up by about 12& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance may be stolen at the profile of the schemes operated by the company as revealed by a pass book placed on record by the company pertaining to one of the schemes promoted by it known as Godavari group in which details pertaining to the group and the rules and conditions on which the scheme has been floated are contained. It shows that the group would consist of not more than 10,000 members, the monthly subscription of each member being Rs. 10 for 60 months continuously. There is a system of lucky draws and gifts which might enable one who is lucky to get gift in cash. Repayments were to commence after 10 lucky draws which would follow on the completion of 60 months, that is to say, it would follow after completion of a period of five years from the commencement of the scheme. It is specifically provided that there would be no refund between 60th and 70th months and that no refund of subscription would be entertained during the currency of the group (clauses 6,15 and 16). In other words, till expiry of six years, no refund would be made and the subscription would not be refunded while the group was current. It also contains a forfeiture clause which reads as under: "21.Forfeitur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. As against that, the realisable assets consist mainly of Rs. 36.22 lakhs due from the directors and their friends and Rs. 26.71 lakhs due from others apart from the fixed assets valued at Rs. 8.56 lakhs. We do not know how much can be realised from the directors and their friends. They obligingly and without scruples lent to themselves Rs. 36.22 lakhs out of the collections made from a large number of small subscribers of the order of about Rs. 1.41 crores. We also do not know how much can be recovered from other debtors. From out of the amount of Rs. 26.71 lakhs, assuming that every pie can be recovered, there is at the highest a possibility of recovering Rs. 6293 lakhs as against the debt burden of Rs. 1.41 crores. Even if the fixed assets of Rs. 8.56 lakhs are taken at their book value considering the same to be its realisable value, it would only mean that the total realisable assets are of the order of about Rs. 71½ lakhs as against the-debt burden of Rs. 1½ crores. There is a shortfall of about 50%, that is to say, of the tall order of about Rs. 70 lakhs which is mercilessly reflected in the figure of accumulated losses shown at Rs. 72.83 lakhs. From where i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s could do little good, for usually the directors plead guilty and not infrequently the court without realising the implications treats the offence as, what is nonchalantly called a technical offence, resulting in a petty fine which makes a mockery of more than 90,000 victims of what appears to be a big fraud. Be that as it may, so far as the present discussion is concerned, there is no escape from the conclusion that half the amount collected from the petty contributors, viz., about Rs. 72 lakhs, has already been lost and all the realisable assets, about 1/3rd of the debt burden, is in the hands of the directors and their friends. It is too much to expect the directors to make recovery from themselves and their friends in order to pay the petty contributors as and when the amount becomes due and payable to them assuming that by that time, the drastic forfeiture provision has not been applied in order to deprive the petty subscribers of the amount already paid by them. And, as stated earlier, even as per the affidavit filed by the manager of the company on its own behalf, Rs. 40 lakhs becomes repayable in 1977, that is to say, in this very year ; whereas further Rs. 20 lakhs and Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the 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 there after neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; (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. (2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm". Now the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such a manner that a reasonable creditor not out to harass or pressurise or coerce the company would be satisfied. If there is a deliberate or wilful neglect on the part of the company and the company makes a default only the deeming provision contained in clause (a) will come into operation. So also if the debt is already adjudicated upon by a court of law and, notwithstanding the order of the court the decree remains unexecuted in full or in part, clause (b) will be attracted and it will be deemed or presumed that the company is unable to pay its debts, for, in that event, there can be no just excuse for the default. Having formulated the tests for raising the presumption, the legislature has proceeded to deal with the second dimension of the matter, namely, as to how and by taking what factors into account the conclusion that the company is unable to pay its debts is to be reached. The legislature had the provision of the anticipated difficulties and with the foresight in its command the legislature was apparently anxious to make suitable provisions. The legislature ostensibly could foresee that a company may accept term deposits repayable, say after 5 years, and in the ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta J. in Company Petition No. 60 of 1975 decided on April 12, 1977 [Registrar of Companies v. Kavita Benefit Pvt. Ltd. [1978] 48 Comp. Cas. 231 (Guj.)]. In view of the provisions contained in section 434(1)(c) which expressly provides that contingent and prospective liabilities shall be taken into account in order to find out whether the company is unable to pay its debts at the point of time when the question regarding winding up arises, it is futile to contend that there must be positive evidence to show that there are in existence creditors whose debts have become due in praesenti and whose claims remain unsatisfied. I am unable to accede to the argument urged on behalf of the company that such a proposition has been laid down by B.K. Mehta J. in the said company petition. After discussing relevant provisions and decisions cited at the bar, the learned judge recorded a finding of fact (which forms the real basis of the decision) in that particular case that the court was not satisfied that the company was not in a position to pay its debts. The proposition canvassed by counsel for the company does not flow from the said decision. Counsel for the Registrar has on the other hand c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make profits out of the transactions with the company in the usual course of business. It is an incidental risk and an occupational hazard for the persons who enter into such dealings which they undertake in order to earn profits. In fact, it is possible that in the course of their dealings for several years, they would have made huge profits out of the transactions entered into with the company. It would not, therefore, be right to wind up the company merely because the company is unable to pay its debts so long as it can be resurrected by a scheme or arrangement. But in a case like the present, where the company is not producing or manufacturing any goods and is not rendering any service useful to the society, where the whole purpose of its existence appears to be to provide the directors with an opportunity to enrich themselves at the cost of petty subscribers who in the hope of getting some prizes or rewards and better returns on their hard earned savings (sometimes they may even resort to borrowing in the hope of getting rich quickly) become contributories to various schemes floated by the company, the matter stands on a different footing. In a case like the present where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As against this, there are only expressions of hope and wishful thinking contained in the affidavit of the managing director which cannot be of any solace to the small contributors to whom the amounts are due (the debt burden is of the order of more than 1.41 crores of rupees). It may also be stated that the managing director of the company in the aforesaid affidavit, prayed for four weeks' time in order to place on record the figures relating to the latest financial position. It was stated as under in paragraph 4: "I am praying for four weeks' time in order to complete the said assignment. This honourable court will be pleased to see that I have not spared any efforts in seeing that the directions of this honourable court are complied with and the delay is not due to any fault on my part as I am totally dependent on the auditors for the preparation of the said figures". Notwithstanding this undertaking, the managing director has failed to fulfil the promise and to comply with the order of the court. It is, therefore, directed that a notice shall issue to the said managing director (Mr. Pravin Kumar Salian) to show cause why action for contempt of court should not be initiated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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