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TMI Blog1992 (1) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate Limited filed Company Application No. 1028 of 1991 to direct TSRM Limited to deposit a sum of Rs. 57,39,464 in this court or to direct TSRM Limited to furnish a bank guarantee for the said sum or, in the alternative, to appoint the official liquidator as provisional liquidator to take charge of its assets and affairs and be in charge of the same pending disposal of the main company petition. Company Application No. 2266 of 1991 was filed by TSRM Limited (respondent in Company Application No. 1028 of 1991) to revoke the order of admission in Company Petition No. 69 of 1991 dated August 2, 1991, and direct the same to be dismissed with costs. By consent of both parties, both the Company Applications Nos. 1028 and 2266 of 1991 were taken up for hearing. Sree Aravindh Steel Private Limited will be referred to as the petitioner and TSRM Limited who is the respondent in the main company petition and Company Application No. 1028 of 1991 and the petitioner in Company Application No. 2266 of 1991 will be referred to as the respondent in this order. According to the petitioner, a sum of Rs. 49,62,101 together with interest is outstanding from TSRM Limited towards supply of mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Raghavan then contended to say that TSRM Ltd. (respondent-company) has a larger counter-claim against the petitioner even though it has admitted the claim of the petitioner and that there is substance in the counter-claim of the respondent and that, therefore, the main company petition should be dismissed. Dealing with the facts of the case, Mr. T. Raghavan stated that the debt due to the petitioner as claimed is not in dispute but TSRM Limited is claiming more than the amount claimed by the petitioner and if TSRM Limited succeeds in its contention, then there would be no amount due to the petitioner but, on the other hand, the petitioner itself would owe money to TSRM Limited. Therefore, the question whether the petitioner is due to TSRM Ltd. is a relevant factor to decide whether TSRM Ltd. is bona fide disputing its liability to the petitioner or not. The sum and substance of the contention of the respondent that the petitioner owes money to the respondent can be summarised as follows : Mr. S.B. Shankar was the managing director of TSRM from 1974 up to January 30, 1991. His relatives and associates held 52% of the shares in TSRM. Similarly he and his associates were holding 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S (petitioner). Hence, the petitioner requested the respondent to send the materials mentioned in the said letter. A reading of the board's resolution passed on June 14, 1990, conveys an impression that the said board was giving consent prospectively to a trans-action and not for a transaction which had already taken place and, therefore, the consent accorded by the board is not a reasonable consent which should satisfy the requirement of section 297 of the Act. For this proposition, the decisions reported in : Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343 (Bom) and M. C. Duraiswami v. Sahthi Sugars Ltd. [1980] 50 Comp Cas 154 (Mad) were cited by learned counsel. In Walchandnagar Industries' case [1953] 23 Comp Cas 343 , a Division Bench of the Bombay High Court consisting of Chagla C. J. and Shah J. held as under (headnote) : " 'Consent' implies knowledge of the necessary facts and materials which leads to the consent. Consent cannot be given in the abstract or in vacuo. Consent under section 86F of the Indian Companies Act can only be given in reference to the particular contract which a director intends to enter into. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which the resolution does not comply with the requirement of section 297 of the Act is that the respondent-TSRM Ltd., is bona fide disputing its liability to the petitioner as it has to recover a larger amount from the petitioner and, therefore, the winding-up proceeding initiated by the petitioner is misconceived. He made reference to the copy of the plaint in O. S. No. 480 of 1991 and also to the report of K. B. Subramaniam and Associates. He submitted that TSRM Ltd., the respondent-company had repudiated its liability even at the outset while replying to the demand notice dated June 10, 1991, of the petitioner by letter dated June 29, 1991. He further argued that Dr. Ghatte's Engineering and Metallurgical Company Private Limited report about the valuation of the machineries exchanged is inconclusive as it has taken into consideration only 14 gate passes. Mr. T. Raghavan, relied upon the decisions in Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570 (Mad) and Amalgamated Commercial Traders P. Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456 (SC). He also invited my.attention to the passages from Palmer, 24th edition, page 1366, and Buchley, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 125 (SC) and Shadiram and Sons' case [1978] 48 Comp Cas 570 , 573 (Mad). ( e )The presumption under section 434(1)( a ) would arise only if the company neglects to pay even after demand. Refusal or failure to pay a disputed debt would not constitute neglect within the meaning of section 434(1)( a ). He relied on certain passages in Palmer's Company Law, para 88-06 pages 1366 and 1367, and Buckley on the Companies Acts, volume I, 14th edition, page 534. ( f )A bona fide counter-claim which exceeds the debt due to the petitioning creditor would stand on the same footing as a disputed debt and would be an answer to the petition for winding up. ( g )Genuine cross-claims result in dispute, where a genuine cross-claim overtops the petitioner's claim, winding up cannot be proceeded with. In support of this contention, Mr. T. Raghavan relied on the decision in Bharat Vegetable Products, In re [1952] 22 Comp Cas 62 (Cal) ; Federal Chemical Works Ltd., In re [1964] 34 Comp Cas 963 (All) and Euro Hotel ( Belgravia ) Ltd., In re [1975] 3 All ER 1075, 1078, 1079 (Ch D) which refers to and follows L. H. F. Wools Ltd., In re [1969] 3 All ER 882 ; [1969] 39 Comp Cas 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... videnced by several documents show that this duty was not performed by Mr. Shankar, the managing director. ( s )The respondent company by instituting a civil suit against the managing director and the petitioner herein who is the beneficiary of the transaction even before the winding-up petition was presented has unequivocally avoided the arrangement under which its assets were transferred to the petitioner for a totally inadequate consideration. In reply to the above arguments of Mr. T. Raghavan, Mr. C. Harikrishnan contended as follows : According to him, the matter under consideration of the court is the application for dismissal of the company petition. He relied on the decision in National Conduits P. Ltd. v . S.S. Arora [1967] 37 Comp Cas 786 (SC) which clearly lays down that the question of dismissal of the petition would arise only if such a petition is an abuse of the process of court. There is a statutory presumption under section 434(1) of the Act in favour of the petitioner. Since the indebtedness of the respondent to the petitioner is admitted, there is no question of the petitioner abusing the process of the court in filing the present petition. Thus, Mr. C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct-matter of the company petition. Admittedly, there was no reply. (5)Dr. Ghatte's report was available to the parties on March 4, 1991. Still there was no reply to the petitioner's demand nor was any dispute raised about the validity of the report. (6)A letter dated April 24, 1991, from the Indian Overseas Bank was written to TSRM Ltd. demanding payment of Rs. 49,62,101. By two letters dated May 3, 1991, one written to Indian Overseas Bank and another written to the petitioner, TSRM Ltd., respondent, replied to Indian Overseas Bank that it has a greater claim on the petitioner and, consequently, refused to pay and by the other letter to the petitioner stated that the petitioner owes Rs.78,83,422 odd. By a letter dated May 6, 1991, the respondent claimed payment or alternatively requesting the petitioner to deliver 60.395 mt. of shredded scrap. (7)By further letters dated May 16, 1991, and May 27, 1991, the petitioner demanded the amount again. The respondent stated that the petitioner's contention cannot be accepted. By letter dated June 10, 1991, the petitioner informed TSRM, respondent, that if the amount of Rs. 55,25,686 together with interest at 18% per month is not paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. only. There-fore, the gate passes were irrelevant for the present dispute. (10)Turning to the latter part of the submission of Mp. Raghavan relating to section 297, Mr. Harikrishnan contended that the decision in Walchandnagar Industries Ltd. v. Ratanchand Kliimchand Motishaw [1953] 23 Comp Cas 343 (Bom) was a decision which interpreted the provisions of section 86F of the 1913 Act and that there is considerable difference between the present section 297 and the old section 86F. Further, in the case in Walchandnagar Industries Ltd. v. Ratanchand Kliimchand Motishaw [1953] 23 Comp Cas 343 , there was no consent but, in the present case, there is consent. Therefore, in my view, the decision in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343 is not applicable to the present case. In so far as the case in M. C. Duraiswamy v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154 (Mad) is concerned, it is the contention of Mr. Harikrishnan that the said decision arose in dealing with section 399 of the Act which has nothing to do with the purport and intent of section 297 of the Act. Sections 399 and 297 deal with two different situations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits it had derived in the exchange. The provisions of sections 64 and 66 of the Contract Act were relied on. TSRM Ltd., now wants only the difference of the alleged value of its own machineries without saying anything about the machineries got from the petitioner. This conduct on the part of TSRM Ltd., in my view, only belies the contention under section 297 of the Act. (13)Looking from all angles, the arguments of Mr. T. Raghavan relating to section 297 of the Act in my view are not justified. It may also be seen that the contention of TSRM Ltd. in this regard at the time of hearing had not been raised in the form submitted, in the pleadings of TSRM Ltd. before this court. (14)Dealing with the contentions that TSRM's dispute is bona fide, Mr. C. Harikrishnan, counsel for the, petitioner, replied that nothing special could be inferred from the filing of the suit. If filing of a suit can be considered bona fide, every company can just file a suit on unsustainable contentions and with that they can prevent valid winding up proceedings. Counsel particularly emphasised the fact that a mere reading of the plaint would itself establish that TSRM Ltd. is not acting bona fide. I fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Filing of the petition under Order II, rule 2, Civil Procedure Code, itself in my view makes the claim of TSRM Ltd. a speculative one. (16)Dealing with the contention that Dr. Ghatte's report was inconclusive, Mr. C. Harikrishnan replied that there is no basis for such a contention. Counsel took me through the said report and argued that the report was not based on any gate passes and was prepared only on the personal inspection by Mr. Vade along with the geneal manager of TSRM of the machineries exchanged. The contention that Dr. Ghatte's report was based on 14 gate passes is an afterthought. The said report was available to the new management even as early as March, 1991. No such contention was ever put forward by TSRM Ltd. up to the filing of the counter in the present proceedings. TSRM was only contending that, in compiling the report, the representative of the new management was not associated. (17)Counsel for the petitioner submitted that K. B. Subramanian's report is very vague and unacceptable and appears to be one got up for the occasion. Though the report was said to have been given on April 26, 1991, a copy of the said report was not filed along with the suit nor e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdhandas and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125 (SC). In reply to the above arguments, Mr. T. Raghavan said that, in all cases raising a plea of bona fide dispute, it is not necessary that the debt due to the petitioner should alone be the only factor. The expression "omitted to pay" in section 434(1) is not a mere omission to pay but one "neglected to pay". Neglect to pay cannot arise when the liability is under dispute. A particular debt may be admitted by the company but if the creditor owes the company on some other transaction, there would be no neglect to pay by the company. A valid counter-claim can also be construed as one falling under disputed liability. In support of his contention, he read passages from Palmer on Company Law and proceeded to cite the following decisions : ( i ) Virendrasingh Bhandari v. Nandlal Bhandari and Sons Pvt Ltd. [1979] 49 Comp Cas 532 (MP) ; ( ii ) London, Hamburg and Continental Exchange Bank, In re [1866] LR 2 Eq 231 ; ( iii ) Euro Hotel ( Belgravia ) Ltd., In re [1975] 3 All ER 1075 (Ch D) ; ( iv ) Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570 (Mad) ; ( v ) L. H. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aware of the suit at the time when the company petition was moved on August 2, 1991. Mr. Raghavan also filed a xerox copy of a document dated June 11, 1990, said to have been written by Sri Srinivasan, financial manager of TSRM Ltd. along with an affidavit of one Mr. S. Kannan, works accountant, to the effect that he is acquainted with the handwriting of Srinivasan and that the original is not available. Mr. Raghavan, on the basis of the documents, contended that the former managing director of TSRM Ltd., viz., Mr. S. B. Shankar and the said financial manager were hand in glove and have brought about a fraudulent transaction of exchange to benefit the petitioner. In the words of Mr. Raghavan, the members of the earlier board were all people accustomed to act in accordance with the directions of Mr. S. B. Shankar as he was still the deciding mind in respect of TSRM Ltd. by virtue of his holdings in TSRM Ltd. With the aforesaid submissions, learned counsel wanted me to allow the application for revoking the admission of the company petition. In view of the new points raised in reply, Mr. C. Harikrishnan was permitted to reply to the same. Mr. C. Harikrishnan said that he woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution of June 14, 1990, in view of section 300 of the Act. The latest decision of the Division Bench in Hackbridge Hewittic and Easun Ltd. v. G. E. C. Distribution Transformers Ltd. [1991] 2 LW 361 was cited in answer to Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL). Dealing with the document dated June 11, 1990, alleged to have been written by Srinivasan, Mr. C. Harikrishnan said that, in the absence of an explanation as to what happened to the original, the respondent, TSRM Ltd., would not be justified in producing the xerox copy of the document. Secondly, TSRM Ltd. has not pleaded anywhere about the existence of this document. Thirdly, it was not stated by anybody on behalf of TSRM Ltd. as to when this document was discovered. Fourthly, it is highly artificial to contend that where a confidential document was written by a loyal employee suggesting that the document should be destroyed after reading, a xerox copy was made and conveniently kept for the new management to discover. Fifthly, Mr. Srinivasan continued in the employment of TSRM Ltd. even after the new management took over and he could have been made to write such a docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f TSRM Ltd. are put forward. The petitioner also submitted that it is paying interest at 18 per cent, to the Indian Overseas Bank which has been increased to 24 per cent. The dues to TSRM Ltd. on the transaction is now increased to Rs. 61,00,000 (rupees sixty-one lakhs only). Every day the liability is going on increasing. Concluding, Mr. C. Harikrishnan said that if, for any reason, the court feels that the advertisement should be deferred for the present, then it can be done only on terms. For this proposition, he relied upon the decision in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125 (SC) and the unreported decision of Shanmugham J. in C. P. No. 92 of 1984 in which it was clearly decided that the company cannot make use of the admitted amount and get away. TSRM Ltd. should be directed to deposit the amount due as on date with interest in the account of the petitioner with Indian Overseas Bank, Abishekapuram, Trichy. Mr. C. Harikrishnan also stated that the petitioner can even ask its bankers, Indian Overseas Bank, to give a letter of undertaking that, in the event of TSRM Ltd. succeeding in the suit, the bank would pay wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition. No decision has been cited at the Bar to show that these aspects can be gone into by a company court even at the threshold before hearing the main winding up petition. The cases referred to by Mr. T. Raghavan, learned senior counsel, are all cases where the question of the counter-claim and its bona fide nature has been considered at the time of final hearing of the winding up petition. It is not open to the respondent to ask for revocation of the order of admission because when notice was ordered on August 2,1991, after admitting the winding up petition, this court was fully satisfied that the debt claimed by the petitioner was bona fide. Even now, there is no dispute about the debt of the respondent-company to the petitioner to the tune of Rs. 45,12,420.23. Hence, it is not open to the respondent to ask for revocation of admission, when there is no dispute about the debt claimed in the company petition. The bona fide nature of the counter-claim raised by the respondent cannot be decided at this stage. Strong reliance was placed on the judgments in National Conduits P. Ltd. v. S.S. Arora [1967] 37 Comp Cas 786 (SC) and George v. Athimattam Rubber Co. Ltd. [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. For the year ending March 31, 1991, the company has made a profit of Rs. 236.02 lakhs before providing for taxes. It has secured loans from nationalised banks and from financial insti tutions. The paid-up capital of the company is to the tune of Rs. 55.50 lakhs. Its monthly salary and wage bill is to the tune of Rs. 138.61 lakhs. The respondent employs more than 550 workers. In both public interest and the interest of the companies, both the petitioner and the respondent do not warrant the appointment of a provisional liquidator pending disposal of the main company petition. Serious and irreversible damage would be caused to the respondent-company, if their prayer for appointment of a provisional liquidator is acceded to. It will not be just, equitable or proper to appoint a provisional liquidator at this stage. Therefore, Company Application No. 1028 of 1991 is also dismissed. No costs. In view of my specific findings above that the issues raised by the respondent have to be decided at the time of final hearing of the main company petition for winding up, I fix April 9,1992, for hearing of the company petition and direct advertisement of the petition in News today (English ..... X X X X Extracts X X X X X X X X Extracts X X X X
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