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TMI Blog2008 (3) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... 951 towards processing/ service charges. The business deal consists of subsidiary supplying material and Walnut processing material to required specifications and charge for the same. An amount of Rs. 1,54,755 was paid leaving alleged balance of Rs. 3,26,197. Walnut again issued a legal notice dated September 17, 2001, under section 434 of the Companies Act, 1956 ('the Act'), demanding payment of balance amount with interest at 35 per cent per annum within 21 days. In reply thereto subsidiary company requested Walnut to return balance material. Request for return of unprocessed pulp board was refused claiming lien for non-payment. 2. In May 2002, there was mediation between Walnut and subsidiary company before an advocate of the second respondent. It was agreed that the subsidiary company would pay Walnut after the return of pulp board. The petitioner returned the material on 4-6-2002, but the amount was not paid. In 2003 Walnut issued notice dated 8-4-2003, under section 434 of the Act demanding Rs. 6,51,362 including interest. There was no response. Walnut then contacted senior vice-president (corporate planning) of the holding company. At his instance, general manager (GM) nego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged harassment and charges relating to the issue. They informed Walnut that the amount claimed by the petitioner is disputed that it is not a simple debt and that the allegation that the subsidiary company is not able to pay its debt is not correct. After receiving reply notices, present company petition was filed on 26-11-2004, seeking winding up of the holding company and the subsidiary company. 5. Learned counsel for the petitioner submits that the debt transaction between Walnut and the subsidiary company involves ascertained admitted amount and when once subsidiary company failed to pay the amount within three weeks after the service of notice under section 434(1)(a) of the Act, the subsidiary company is liable to be wound up under section 433(e) of the Act. He has taken this court through correspondence between Walnut and the subsidiary company as well as the annual reports of the subsidiary company for the years 2000-01 to 2003-04 to substantiate the submission that it is admitted liability. Secondly, he submits that directors and employees of subsidiary are also directors and employees of holding company. An amount of Rs. 1.5 crores was extended as a loan by holding co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also placed reliance on quite a few judgments, in support of his contentions. 7. Two questions would arise for consideration : (i) whether the petitioner has made out a case under section 433(e) of the Act for ordering publication of petition ? and (ii) whether the first respondent-holding company is liable to discharge debt of the second respondent-subsidiary company; and if the answer is in the affirmative, whether holding company is also liable to be wound up upon failure of subsidiary company to discharge debt ? In re point (i) : 8. Chapter II of the Act contains provisions for winding up by the court. A company which is entitled to pay a debt exceeding Rs. 500 is liable to be wound up. Reading section 433(e) and section 434(1)(a) of the Act together, if a company, within three weeks after receiving a notice of demand for payment, fails to pay the debt, it is deemed to be entitled to pay its debt. An order of winding up declaring company insolvent amounts to killing a juristic person. Therefore, in all cases of inability to pay debt, the court does not order winding up. The norm is to infuse new life into a company whose life is ebbing out and avoid euthanasia. A company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nut did not return the material and claimed lien over it. Immediately, Walnut sent notice under section 434 of the Act. Brewing of dispute commenced with this. After issue of notice, admittedly, there was unsuccessful mediation and parleys between parties for an agreed settlement in vain. 11. Walnut returned material but still money was not coming. At one stage, Walnut was asked to accept the payment as per subsidiary company's books of account for which Walnut agreed. But matter was not given quietus. At that stage, Walnut having come to know that holding company allegedly took away cash reserves of subsidiary company, got issued notice dated 23-7-2004, to both the respondents. The subsidiary company replied stating that : "Coming to the issue in a nutshell we draw your attention to our letter dated 10-10-2001, which has been acknowledged vide paragraph 4 of your notice. As per the letter and also as per paragraph 8 of your notice the amount due to M/s. Walnut Packagings (P.) Ltd. was stated to be Rs. 2,24,369.40 as on the date, i.e., 10-10-2001. This amount was not disputed by your client and also it is categorically stated in the letter that there is an abnormal delay for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of factors in this case as enumerated herein above, which would certainly have potency of long drawn dispute. It is not a case of acknowledgement or admission of debt by subsidiary company without anything else. 14. In Softsule (P.) Ltd., In re [1977] 47 Comp. Cas. 438, the Bombay High Court laid down the principles as below : "Firstly, it is well-settled that a winding up petition is not legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. If the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order. Secondly, if the debt is bona fide disputed, there cannot be 'neglect to pay' within the meaning of section 434(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated. Thirdly, a debt about the liability to pay which at the time of the service of the insolvency notice, there is a bona fide dispute, is not 'due' within the meaning of section 434(1)(a) and non-payment of the amount of such a bona fide disputed debt cannot be termed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed the balance-sheet of subsidiary company. In the balance-sheet for 2002-03, an amount of Rs. 2,24,369 is shown to be due to Walnut. Whether such mention in the balance-sheet amounts to acknowledgement of debt. Learned Counsel in his reply arguments placed reliance on a dozen decisions, to contend that showing the amount due in the balance-sheet of the company constitutes acknowledgement of debt as provided under section 18 of the Limitation Act, 1963. It is settled principle that only unqualified acknowledgement of liability, triggers commencement of fresh period of limitation and if the acknowledgement is conditional or subject to some event occurring, the same cannot be unconditional acknowledgement. Whether mentioning of monies owed to small scale industrial undertaking in the balance-sheet amounts to unconditional acknowledgement of debt ? 18. In Smt. Vijayalakshmi v. Hari Hara Ginning and Pressing [2000] 24 SCL 414, a Division Bench of this Court considered the above question. It was held that : "It is a well-established law that for giving an acknowledgement, a person has to be conscious of his act to the knowledge of the other person. Merely showing a debt in a balance- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding company is also liable to discharge alleged debt of subsidiary company. This attitude of Walnut certainly amounts to pressurising debtor to part with the money. Therefore, this court is of considered opinion that this is not a fit case to admit and order publication of petition. In Re Point (ii ) : 21. As per section 3 of the Act, the expression inter alia 'company' means a company formed and registered under the Act. Section 4(1) of the Act contains meanings of "holding company" and "subsidiary", which read as under : "Meaning of 'holding company' and 'subsidiary'.-(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if,- (a )that other controls the composition of its board of directors ; or (b )that other- (i )where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company; (ii )where the first-mentioned company is any other compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual hiding behind the corporation is liable to discharge the obligations ignoring the concept of corporation as a separate entity. Generally, an incorporated company is liable as a juristic person. It is different from its shareholders and directors of the board of company. The acts of malfeasance and misfeasance and acts of misdemeanour by the shareholders and directors of a corporation (company), do not bind the company as such. However, so as to apply law to ascertain facts, judicial process can ignore juristic personality of the company and haul-up the directors and in certain cases even shareholders to discharge the legal obligations. When the corporate veil is lifted/pierced, it only means that the court is assuming that the corporate entity of a concern is a sham to perpetuate the fraud, to avoid liability, to avoid effect of statute and to avoid obligations under an agreement. But enter a caveat; almost always the incorporated company cannot be equated into shareholders/directors and it is only occasionally the corporate veil of the company is pierced 'in order to find out the substance only where it is permitted by the statute or in exceptional cases of fraud'." [E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t companies of the group has to be respected'. . . The rule in Salomon v. Salomon & Co. Ltd. [1897] AC 22 (HL) thus prevails; . . . . . . That is particularly so when the creditors of the holding company are different from those of the subsidiary, as will normally be the case. However, the holding company is liable for a debt of the subsidiary if it has guaranteed that debt or if it can be established, as a matter of fact, that the subsidiary has acted in a particular transaction as an agent of the holding company or that there has been an abuse of the corporate form." (p. 362) [Emphasis supplied] 27. After referring to the other decisions on the subject, Krishi Foundry Employees Union's case (supra), did not accept the plea of workmen of subsidiary that holding company is liable for their dues. The relevant observations are as under : "In company law, separate legal entity of incorporated body has to be maintained for reasons more than one. Nonetheless, the lifting of corporate veil or piercing the corporate veil is permissible if public interest requires. This is also subject to considerations of permissibility as per the statute. If the company uses other concerns, a firm, soc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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