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TMI Blog2012 (11) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond question that most rules of insolvency apply in the assessment of the entitlement of the creditors of a company in liquidation. But that is of no relevance in the present case. The company has not been wound up; indeed, we are two steps removed from such a situation since the present assessment is as to whether this petition made by a secured creditor, relying exclusively on Section 434(1)(a) for the court to presume the inability of the company to pay its debts, should be admitted for being advertised in the absence of the petitioning creditor having asserted or established the inefficacy or the inadequacy of the securities that it enjoys. The rules in insolvency were to apply to companies which had been wound up in the event the value of the assets of the company was insufficient to meet the claims of its creditors, but such rule applied only to cases of winding-up on the ground of insolvency. It is beyond question that most rules of insolvency apply in the assessment of the entitlement of the creditors of a company in liquidation. But that is of no relevance in the present case. The company has not been wound up, indeed, we are two steps removed from such a situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lds. The legal issue has arisen in the context of the petitioning creditor having proceeded against the securities it holds under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a consequence, some age-old principles which have come to be accepted as axiomatic have also been called into question. The petitioning creditor has previously invoked the said Act of 2002 and has thereby not only evinced an interest to not give up the securities that it holds, but has actually enforced its claim against the securities. The question that arises upon such conduct of the petitioning creditor of proceeding against both the securities held by it and seeking to have the company wound up - relates not so much to the double jeopardy faced by the company as it pertains to the propriety of a secured creditor seeking to have a company wound up only on the basis of the legal fiction of the company s inability to pay its debts under Section 434(1)(a) of the Companies Act, 1956 without demonstrating that the value of its securities is less than its claim or establishing that the securities are inefficacious or spurious. The ancillary issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny may be wound up not only because of its inability to pay its debts or it being perceived to be just and equitable for the company to be wound up, but also on the sundry other little-used limbs of that section. As to when a company is deemed to be unable to pay its debts the statutory presumption is defined in Section 434 of the Act. Again, it is the first clause of Section 434(1) of the Act that is more often pressed into service before the company court than the two other. It is also such first clause which is exclusively relevant for the present purpose as the petitioning creditor here relies thereon for the court to draw an inference in these proceedings of the inability of the company to pay its debts. Section 439 of the Act exhaustively enumerates the classes of persons who may carry a petition for winding up a company. Section 439(1)(b) of the Act contemplates a winding-up petition to be presented by any creditor or creditors of the concerned company, including any contingent or prospective creditor or creditors. The other clauses of Section 439(1) of the Act are not relevant in the present context. Section 439(2) of the Act pertains to clause (b) of sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find express mention in Section 529 thereof, which is a provision that applies after a company has been wound up, and the rules relating to insolvency apply only to a company in liquidation to ascertain the inter se entitlement as between the creditors of a company in liquidation and such rules are otherwise of no relevance prior to a company being wound up. As a digression, it may be of some relevance that the provisions relating to the liquidation of a company have been carved out of the English statute and placed in another that deals exclusively with matters relating to insolvency. The original English Companies Act as modified over time is, of course, the one on which the Indian Companies Acts have been fashioned. While on the provisions of the Companies Act, it may be remembered that Section 447 of the Companies Act mandates that an order for winding up a company operates in favour of all creditors and all contributories of the company as if it has been made on a joint petition of a creditor and of a contributory. That would imply, as suggested by the company here, than an order for winding up a company has to be for the benefit of its body of creditors as a whole and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a creditor s petition for winding up a company on its deemed inability to pay its debts founded on Section 434(1)(a) of the Act may not be instituted prior to the expiry of three weeks from the date of the receipt of the written demand referred to therein by the company. Upon a company being served a written demand under Section 434(1)(a) of the Act, there are at least four options available to it: it may pay off the sum demanded or such of it as it deems to be due; or, it may secure the entirety or such part of the claim as it deems to be due in such manner as it may choose; or, it may compound for the sum demanded or such part of it as it deems to be due in such manner as it may choose; or, it may disregard the notice and pay no heed to it. If the company pays off the sum demanded in the written demand of the creditor: that is the end of the matter. If it does not pay the full amount demanded or does not pay at all, the extent to which it pays or does not is called into question before the company court upon a petition being carried by the creditor for winding up the company. If the company secures the claim or a part of it, or compounds for it, the reasonableness of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a secured creditor relies on the presumption of the company s inability to pay its debts under the second or third clauses of Section 434(1) of the Act, the efficacy or the adequacy of the security that it holds is of no relevance. Indeed, if a secured creditor invokes Section 433(e) of the Act and is able to establish the inability of the company to pay its debts without taking recourse to the legal fiction in Section 434 of the Act, the efficacy or the adequacy of the security that it holds is, again, of no consequence. Before referring to the authorities on such aspect of the matter, the essential facts pertaining to this case need to be recorded. The petitioning creditor is an assignee of the original creditor of the company. It is beyond dispute that the original creditor had granted substantial credit facilities to the company. Despite the company s proclamation to the contrary, it is evident that the petitioner is a creditor of the company, as the amount due and owing from the company to the original creditor and the securities furnished by the company to the original creditor have all been assigned to the petitioner. The petitioner has invoked the said Act of 2002 in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o suggests that the limited discretion available to the court to not admit the petition should also be exercised in this case since the petitioning creditor has pursued its securities under the 2002 Act and it would be inequitable to admit the petition without the petitioning creditor being required to demonstrate a residual claim after exhausting its remedies against the securities. Though the Companies Act, 1956 and the rules framed thereunder do not specifically require a creditor s winding-up petition, or any other winding-up petition for that matter, to be heard by the court in two stages, a practice has developed in this court for a creditor s petition being heard first as to whether it should be admitted and, if admitted and advertised, then to progress to the next stage for an assessment as to whether the company should be wound up. The rationale for such practice is explained with exemplary lucidity in the judgment reported at 56 CWN 29 (In re: Bharat Vegetable Products Ltd). The practice in this court is that upon a creditor bringing a petition for winding up a company on the ground of its inability to pay its debt to the creditor, the court directs a copy of the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court finds a debt due to the petitioner, the company is permitted to pay off the amount adjudged to be due by the order of admission on such conditions as the court, in its discretion, may impose. It is only in default of the company availing of such opportunity that advertisements are directed to be issued. Such practice is also supported by the judicial recognition that considerable prejudice is occasioned to a company upon a winding-up petition in respect of such company being advertised. The stigma and prejudice following the advertisement of a creditor s winding-up petition have been noticed in a judgment reported at (1968) 1 SCR 430 (National Conduits (P) Ltd v. S.S. Arora). The company contends, on the strength of the dictum in Bharat Vegetable that the court has adequate power to stop the abuse of its process, that there is discretion to be exercised by the court even at the stage of admission of a creditor s winding-up petition notwithstanding the debt having been established. The company submits that the order of admission of a creditor s petition is a judicial order and the company court is not robbed of the element of discretion that is ordinarily available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he court considered a secured creditor s winding-up petition at the post-advertisement stage. The court noticed, at paragraph 4 of the report, that there was agreement all around that the company was hopelessly insolvent and that unless the company was taken over by the government it would not remain afloat. At paragraph 11 of the report, an argument made on behalf of a creditor opposing the winding-up was noticed: that if a secured creditor is to continue the winding-up proceedings, such creditor has to give up the security or prove for the balance after valuing the security and setting it off against its claim. The court did not accept such argument on the ground that the company was utterly insolvent and its assets were not sufficient even to satisfy the claim of the secured creditor. The company was directed to be wound up. A Single Bench judgment of this court reported AIR 1971 Cal 78 (Calcutta Safe Deposit Co. Ltd v. Ranjit Mathuradas Sampat) has been placed at great length by both parties. In that case, the Karnatak Vegetable Oils decision was noticed, but it was distinguished on the ground that the Madras judgment was rendered under the 1913 Act which did not carry any pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. In the context of Section 434(1)(a) of the Act, which is the focus of the present matter, a petitioning creditor would ordinarily be entitled to the petition being admitted if it can demonstrate that after the receipt of the statutory demand by the company it had neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor . It would defy reason for the clause to be interpreted as requiring a company to honour the demand or secure it or compound for it even if efficacious security well in excess of the value of the claim had already been furnished to the creditor. The provision does not mandate the payment demanded to be made, or the claim to be secured or compounded for, irrespective of whether there is adequate, efficacious security furnished earlier to cover the claim. Say, a creditor holds impeccable security by way of government bonds of value in excess of its claim furnished by a debtor company where the bonds are capable of being encashed whenever presented. It would then not require the company to furnish any more security after the receipt of the statutory demand to ward off the presumption under Section 434(1)(a) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice under Section 434(1)(a) of the Act was issued by the creditor, followed by a second petition which was withdrawn with liberty to file afresh. Another notice was thereafter issued under Section 434(1)(a) of the Act but no action was taken on the same. A subsequent statutory demand ensued and a petition was filed thereon which was directed to be served on the company. The company then applied for dismissal of the winding-up petition and it was the rejection of the company s application that resulted in the appeal. The appellate court recorded two principal arguments put forth by the company: that the petitioning creditor was a secured creditor and was not competent to apply for winding up the company unless he satisfied the court that the security was insufficient to cover his debt; and, the claim of the creditor was barred by limitation and not enforceable in law. The argument of the appellate company on the first point was noticed and rejected in the following paragraph at page 560 of the report: Mr. P.K. Sen appearing on behalf of the appellant submitted before us that an application for winding up by the secured creditor is not maintainable. It is now too late to argue t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrating the inefficacy or inadequacy of its security. Judicial discipline mandates that a previous decision of a superior forum in the hierarchy of our court structure is binding on an inferior forum and cannot be questioned. Even a previous view on an identical legal issue expressed by a bench of coordinate strength is binding unless it is discovered to be per incuriam or no longer good law by reason of either a change in the law or on the basis of a contrary view being expressed on the identical issue by a superior court. The doctrine of stare decisis is the basis of common law and, on the history of the doctrine and its applicability, the majority judges on a Constitution Bench had this to say in the judgment reported at (1981) 2 SCC 362 (Waman Rao v. Union of India): 36. The doctrine of stare decisis is the basis of common law. It originated in England and was used in the colonies as the basis of their judicial decisions. According to Dias (R.W.M. Dias: Jurisprudence (4th Ed., 1976), at page 166), the genesis of the rule may be sought in factors peculiar to English legal history, amongst which may be singled out the absence of a Code. The Normans forbore to impose a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1) (1914) 18 CLR 54, per Griffith CJ at page 58). The learned Author then refers to two cases of our Supreme Court in which the importance of adherence to precedents was stressed. Jagannadhadas, J. said in the Bengal Immunity case (Bengal Immunity Co. Ltd v. State of Bihar; (1955) 2 SCR 603) that the finality of the decisions of the Supreme Court, which is the Court of last resort, will be greatly weakened and much mischief done if we treat our own judgments, even though recent, as open to reconsideration. B.P. Sinha, J. said in the same case that if the Supreme Court were to review its own previous decisions simply on the ground that another view was possible, the litigant public may be encouraged to think that it is always worthwhile taking a chance with the highest Court of the land. In IT0 v.T.S.D. Nadar [(1968) 2 SCR 33] Hegde, J. said in his dissenting judgment that the Supreme Court should not overrule its decisions except under compelling circumstances. It is only when the court is fully convinced that public interest of a substantial character would be jeopardised by a previous decision, that the court should overrule that decision. Reconsideration of the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel in order that the point of substance might be decided. He went on to say that the point had to be decided by the earlier court before it could make the order which it did; nevertheless, since it was decided without argument, without reference to the crucial words of the rule, and without any citation of authority , it was not binding and would not be followed. In the Supreme Court judgment reported at (2005) 2 SCC 286 (Deb Narayan Shyam v. State of W.B.), where the above passage has been quoted at paragraph 18 of the report, the court recognised that the rule that a precedent sub silentio robs the precedent of its binding value dates back to 1661 when counsel urged before Twisden, J: An hundred precedents sub silentio are not material and the Judge agreed that (p)recedents sub silentio and without argument are of no moment. In the oft-quoted judgment reported (1991) 4 SCC 139 (State of U.P. v. Synthetics and Chemicals Ltd) on the jurisprudence as to binding precedents, the Supreme Court had this to say at paragraphs 40 and 41 of the report. 40. Incuria literally means carelessness . In practice per incuriam appears to mean per ignoratium. English courts have d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusions but in regard to its ratio and the principles, laid down therein . Any declaration or conclusion arrived without application of mind or preceded without any reason cannot be deemed to be declaration of law or authority of a general nature binding as a precedent. Restraint in dissenting or overruling is for sake of stability and uniformity but rigidity beyond reasonable limits is inimical to the growth of law. In another judgment reported at (2000) 5 SCC 488 (Arnit Das v. State of Bihar), the court held that the rule of sub silentio applies when a particular point of law was not consciously determined. Paragraph 20 of the report is of relevance: 20. A decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. That which has escaped in the judgment is not the ratio decidendi. This is the rule of sub silentio, in the technical sense when a particular point of law was not consciously determined. It is in such context that the authoritative value of the Division Bench judgment in Techno Metal India (P.) Ltd has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor prosecuting a petition for winding up the company without either giving up its security or valuing it. Such legal issue was the first of several questions noticed at paragraph 11 of the report. The argument in that case was founded on the general rules as to insolvency and the similar provisions in the two statutes on insolvency in this country (Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920) that obliges a secured creditor to either state in his petition that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent or give an estimate of the value of his security for such secured creditor to be admitted as a petitioning creditor to the extent of the balance of the debt. The rule in insolvency is that if the secured creditor does not relinquish his security, the value of his debt is only so much by which it exceeds the value of his security; as if he were an unsecured creditor for such difference. The court noticed the further argument that the law was the same both in bankruptcy and in winding-up but opined that the rules in insolvency were attracted to windingup only in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion reflected in the first sentence of the passage was based on Section 439(2) of the Act and on the Madras and Calcutta judgments, including the one in India Electric Works Ltd (supra). The second sentence in the passage from the Bombay judgment quoted above, in all humility, does not appear to be the correct position in law. In the two-tier procedure that is followed in this court and also appears to be in vogue in the Bombay High Court, as to whether a debt is due or not is invariably decided, almost conclusively, at the admission stage of a creditor s winding-up petition and the finality thereof can only be dislodged in rare cases as noticed in SRC Steel (P) Ltd and Baljit Securities Ltd. It is also elementary to the two-tier procedure that unless the debt is established and the petition admitted, the other considerations for example, the wishes of the majority creditors of the company in the exercise of the discretion to wind up the company do not come into play. If the ascertainment of the indisputable character of the creditor s claim is not completed at the first stage of a secured creditor s winding-up petition on the ground of the company s inability to pay its d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closure of whether the security is or is not sufficient to meet the dues of the petitioner; Again, the court referred to Section 439(2) of the Act and to several of the judicial precedents on such aspect referred to in the present judgment and, after the considering divers provisions of the statute as Sections 441, 444, 446, 447, 448, 466, 467, 528 and 529 of the Act and referring to the concept of a secured creditor being outside the winding-up , expressed the following view at page 63 of the report: In the present case, the petitioner has evinced a clear intention to enforce the security by filing a suit in this court for the recovery of its dues and the enforcement of its securities. There can be no doubt about the proposition that the object of a petition for winding up is to realise the property of the company for distribution to all the creditors in accordance with the applicable rules. This has been laid down by a Division Bench of this court in Harinagar Sugar Mills v. M. W. Pradhan [1967] BLR 294. A secured creditor who seeks to prove the whole of his debt in the course of the winding up proceedings is necessarily required to relinquish the security. That however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay its debts or present a winding-up petition on such score. A secured creditor of a company has the legislative mandate to present a winding-up petition on the several grounds recognised in Section 433 of the Act, including on the basis of the company s inability to pay its debts. The issue here is whether a secured creditor, which founds its petition only on Section 434(1)(a) of the Act to raise the presumption of the company s inability to pay its debts, would be able to establish the legal fiction without demonstrating the inefficacy or inadequacy of its security that the expression neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor in the relevant provision envisages. A further Bombay High Court judgment reported at 156 Comp Cas 108 (Cavendish Shipping Limited v. Polaris Marine Management Pvt. Ltd ) has been cited, where Section 439(4)(b) of the Act was in issue on a winding-up petition carried by a person claiming to be a contributory of the company. The petitioner also claimed to be a creditor of the company, but the maintainability of the petition on such basis was questioned on the ground that no notice under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that would have amounted to all the assets of the company being sold, which is exactly what would happen if the company were to be wound up. The company has referred to an old English judgment reported at 1881 WN 125 (In re: Cambrian Mining Company). A shareholder, who was also a creditor of the company where the debt was secured by mortgage, gave notice of his intention to exercise the power of sale contained in the mortgage deed and also presented a petition for winding up the company. The company moved for an injunction to restrain the creditor from exercising his power of sale until the hearing of the petition for winding-up. An interim injunction was granted, holding that it was inconvenient and unjust that the creditor should be allowed to exercise the power of sale till his petition for winding-up came on for hearing. When the winding-up petition was taken up, it was ordered to stand over sine die, upon the company admitting the mortgage and certain shareholders of the company undertaking to pay off the creditor and take a transfer of his mortgage. Though the decision does not expressly lay down any legal principle, the company here suggests that the course of action a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The judgment in Bukhtiarpur Bihar Light Railway Co. Ltd instructs that the court must be strict in assessing whether all the conditions laid down in Section 163(1)(i) of the Indian Companies Act, 1913 (Section 434(1)(a) of the Companies Act, 1956 carries the same provision in the successor statute) have all been complied with before the inference of the inability of the company to pay its debts based on the legal fiction therein is drawn. The judgment is the specific recognition, in the context of the identical provision in the predecessor statute as Section 434(1)(a) of the current Act, of the general principle that a deeming provision must be strictly construed and all conditions therein must have been adhered to before the legal fiction thereunder can be seen to operate. The judgment is of immense relevance in the present discussion. A judgment reported of AIR 1964 Mad 519 (Hariprasad v. AC Traders (P) Co. Ltd) has been placed for the proposition that even a commercially solvent company may be wound up if the legal fiction under Section 434 of the Act arises. Such decision is of no real relevance in the present case, except to contrast it against the dictum in Bukhtiarpur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave of court being obtained by certain creditors in certain cases as mandated in Section 439(8) of the Act. Any creditor of a company permitted by Section 439 of the Act to present a petition can come under any limb of Section 433 of the Act except under the second clause. Any creditor of a company may apply for winding up the company for the company s inability to pay its debts without taking recourse to Section 434 of the Act. It is not mandatory for the inability of the company to pay its debts to be demonstrated only by dint of the legal fiction in Section 434 of the Act. It is also not obligatory for any creditor of a company seeking to have the company wound up to give prior notice of its claim to the company. A judgment creditor of a company need not issue any prior notice and be none the worse for it as its status as an unpaid judgment-creditor, if established, would be enough for the legal fiction of the company s inability to pay its debts to arise; since clause (b) of Section 434(1) of the Act is a stand-alone condition for the statutory presumption. Similarly, any creditor of a company can prove to the satisfaction of the court that the company is unable to pay its debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the company to pay its debts. The relevant assessment cannot be made if the inefficacy or inadequacy of the security is not asserted. Even if such assertion is made, unless either the inefficacy or the inadequacy of the security is established, the inability of the company to pay its debts would not have been made out. If the security is found to be efficacious but the inadequacy of the security qua the indisputable quantum of the debt is established, the company court, while admitting the petition, will only require the company to adequately secure the same or pay off the shortfall for the advertisement of the petition to be warded off by the company. Just as only an indisputable debt even in the case of an unsecured creditor would give rise to the statutory presumption of its inability to pay its debts upon the company s negligence to discharge the indisputable debt, in the case of a secured creditor whose claim is not met by the company despite receipt of the statutory notice, the negligence on the company s part for the legal fiction of its inability to pay its debts would not arise if the security if efficacious and it is adequate. The nature of the assessment that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition to wind up the company is curbed only by the expression subject to the provisions of this section in the opening words of Section 439(1) of the Act. By virtue of Section 439(7) of the Act, inter alia, no creditor of a company may present a petition for winding up the company only by dint of its status as a creditor. Section 439(8) of the Act qualifies the right of a contingent or prospective creditor of a company to present a petition to wind up the company. Thus, any class of persons enumerated in Section 439(1) of the Act may invoke any ground of Section 433 of the Act to present a petition to wind up a company, provided Section 439 of the Act does not prevent it or does not make in subject to any condition precedent. So much as to the maintainability of a petition for winding up a company; but that has nothing to do with the admissibility of a winding-up petition that is eminently maintainable, particularly when admission connotes the successful journey of the petition upon the conclusion of a judicial exercise that attaches a degree of finality to several of the features considered. Section 439 of the Act governs who may petition for winding up a company under what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, will not qualify either to be admitted or for any order of winding-up to be passed thereon. Since the petitioning creditor here has neither averred nor otherwise established that the security that it enjoys is inefficacious or inadequate to meet its claim against the company, the petition cannot be admitted. In any event, even if the petitioning creditor had crossed that hurdle and had established that a debt was due which was unmatched by any efficacious security, its conduct in advertising the statutory notice prior to instituting this petition is a good ground for exercising the limited discretion available to the company court to refuse to admit a creditor s petition even if the debt were unimpeachably established. CP No. 493 of 2011 is permanently stayed with liberty to the petitioner to launch fresh winding-up proceedings upon exhausting its remedies against the securities that it enjoys. As a consequence, CA No. 856 of 2011, which is an application under Section 450 of the Companies Act, is dismissed. The interim order subsisting on such application is vacated with immediate effect and the official liquidator is discharged as the provisional liquidator of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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