9911796707
TMI Blog1983 (6) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of interest as on March 31, 1980. The total amount recoverable from the company on June 15, 1980, including interest is Rs. 7,80,528.76. The financier served a notice dated June 20, 1980, on the company demanding an amount of Rs. 7,80,528.76. In reply, the company disputed the amount claimed from it and denied its liability to pay the same. The case of the financiers is that the plea taken by the company is fallacious. It is averred that it was unable to pay its debt and was liable to be wound up. Consequently, a petition for winding up was filed under sections 433, 434 and 439 of the Act. The company contested the petition and controverted the allegations of the financiers. It, inter alia, pleaded that there was a bona fide dispute in respect of the amount claimed and, therefore, the petition was not maintainable. It further pleaded that Harminder Singh Bala was the managing director of the financiers as well as of the company till April 11, 1980, when he was removed from the managing directorship of the company. He had major shareholdings in the financiers and, therefore, he created false liabilities against the company in favour of the financiers by manipulating false entrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, the proper remedy for the creditor is not to present an application for its winding up. He can establish his debt in a civil action. In case he moves an application for winding up, that is liable to be dismissed. But if the debt is not bona fide disputed, the company court may decide it in the petition and make an order of winding up. The reason for a winding-up order is that on its failure to pay a debt after a statutory notice, the presumption arises that the company is insolvent. On the other hand, the reason for dismissing the petition for winding up on the ground that the debt is disputed bona fide, is that a solvent company is likely to suffer a great damage if a petition is presented by an unscrupulous creditor whose debt the company is willing to pay if he establishes the same. In the aforesaid view, we are fortified by the observations from Buckley on the Companies Acts, twelfth edition. The following observations at page 452 may be read with advantage: "A winding-up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition presented ostensibly for a winding-up order but really to exercise pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve a statutory notice under section 434 of the Act. The company did not make any payment and ultimately after taking legal advice sent a circular letter to all its shareholders that the resolution dated December 30, 1959, was not a declaration of dividend and thus no liability to pay any dividend arose thereunder. The creditor, who had served a notice under section 434, presented a petition to the High Court for winding up the company. The High Court passed an order for its winding up. On appeal, the Supreme Court reversed the order after noticing the above-quoted observations from Buckley on the Companies Acts. S. M. Sikri J., while speaking for the Bench, further observed that if a debt was bona fide disputed, there could not be neglect to pay within the meaning of section 434(1)(a). If there was no neglect, the deeming provision did not come into play and the ground for winding up, namely, that the company was unable to pay its debts, was not substantiated. Similar view was taken in Madhusudan Gordhandas's case [1972] 42 Comp. Cas. 125 (SC), A. N. Ray J., as he then was, observed thus (p. 131):-- "Two rules are well-settled. First, if the debt is bona fide disputed and the defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1980, and immediately thereafter in May, 1980, a sub-committee of three directors was constituted to go into the accounts of the company. The sub-committee, after partially going into the account books, came to the conclusion that several entries in the account books of the company had been manipulated. It specifically referred to an entry of Rs. 3,30,000 which is the subject-matter of the present dispute. The matter has been dealt with in the written statement as follows : ".......In the capacity of the managing director of the company, Shri Harminder Singh Bala adopted a clever device to enrich himself at the cost of the respondent-company. The modus operandi was that fictitious expenses were shown in the books of the respondent-company and which were paid by drawing funds either from the petitioner-company or from the Mohali Transport Co. (P.) Ltd. or from Messrs. Bachan Motor Financiers Pvt. Ltd. or from Roopnagar Credit and Investment Pvt. Ltd. The methods adopted for inflating the liability of the company were unique and one of them is where Mohali Transport Co. (P.) Ltd. advanced an alleged loan of Rs. 3,30,000 to the respondent-company. The said sum does not find its me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he financiers on the basis of entries in the books of account and the balance-sheet. Subsequently, in a meeting of the board of directors, the report of the sub-committee was accepted. In the annual general meeting, when the balance-sheet was presented, a note was given that the debts created during the time of Harminder Singh Bala which were disputed, were being investigated. The financiers filed a replication to the written statement wherein they specifically admitted that no cash payments were made to the company, but only the liabilities were shifted (see page 167 of the paper-book). It is also relevant to mention that the said entries do not find place in the general cash book of the company. Harminder Singh Bala was removed from the managing directorship of the company on April 11, 1980, by an unanimous resolution of the board of directors on the ground that he had misdirected himself and had exploited the fiduciary relationship between himself and the company and had created liabilities on it in favour of the other companies in which he, his brother, Bhupinder Singh Bala, his father, Gursaran Singh Bala, and his wife and children had major shareholdings. After he was remove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the claim, at one time. It is also evident from the aforesaid circumstance that the company is disputing some other entries in the account books seriously and prima facie for valid reasons. It has been held in Lodge v. Prichard [1853] De GM & G 906 that, prima facie, the books of the partnership are evidence among all the partners, for them all and against them all, owing to the agency which pervaded all the partnership transactions. If one partner succeeded in establishing a case of fraud, that would form a ground for an exception from the general rule and there is nothing in the rule to exclude an allegation of a mistaken or erroneous omission or insertion. There was a criminal complaint lodged by Birender Singh Bala, managing director of the respondent, against Harminder Singh Bala, under sections 406, 409, 379 and 380, IPC, on the ground that after the latter's removal from managing directorship, it was discovered that several buses, which were owned by the company, had been illegally removed by him. He had also removed some other property of the company. In consequence whereof, the police authorities recovered seven buses, two engines and some furniture from his custody ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence Act in support of his contention. We have given due consideration to the argument. Section 21 contains two propositions : firstly, admissions are relevant and may be proved against the person who makes them and, secondly, generally these cannot be proved on behalf of the persons making them. There are, however, certain circumstances in which an admission may be proved by and on behalf of the person making it. Section 34 is an exception to the general rule laid down in section 21 and it deals with the relevancy of books of account. They are relevant whenever they refer to a matter into which the court has to enquire. However, they alone are not sufficient to charge a person with liability. Adverting to the facts of the case, the entries in account books of the company cannot strictly be called admissions by Harminder Singh Bala in his own favour for the reason that the company was not his individual concern but it was a different legal entity. However, the fact that he was the managing director cannot also be lost sight of as he had substantial powers of management. The value of the entries in the books shall have to be determined by the court after recording evidence and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the petition was not liable to be dismissed in limine. In my view, the learned counsel cannot derive any benefit from the aforesaid cases. The observations in Lahore Enamelling and Stamping Co.'s case [1958] 28 Comp. Cas. 216 (Punj.), on which reliance has been placed by Mr. Awasthy, are that the debts due to the creditors not mentioned by name but included in the item relating to "loans" or as due to "sundry creditors" mentioned in the balance-sheet amount to an acknowledgment within the provisions of section 19 of the Limitation Act, so as to extend the period of limitation with effect from the date of the signing of the acknowledgment. There is no dispute about the proposition of law. However, in this case, as already discussed, a bona fide dispute has been raised by the company regarding the entries in its account books on which reliance has been placed by Mr. Awasthy. In this situation, the observations are of no assistance to him. Before parting with the judgment, another contention of Mr. Mridul may be noticed. It is, that in case the court has some doubt whether the disputes raised by the debtor company are bona fide or not and it is unable to come to a definite co ..... 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