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TMI Blog2012 (12) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial order in its favour in the subsequent proceedings also weighed with the court at the initial stage of the final hearing. The cobwebs have, hopefully, now been cleared and the matter seen in proper perspective. The petitioning creditor is a non-banking financial company which claims to have granted credit facilities in excess of Rs.4 crore to the company in terms of a sanction letter of September 17, 2009 and the subsequent loan agreement of October 5, 2009. The agreement recognised a maximum credit of Rs.5 crore being granted by the petitioning creditor to the company at an interest of 12.50 per cent per annum with 3 per cent per annum additional interest being payable in case of delayed payment of instalments. The agreement was backed by the personal guarantees executed by two directors of the company and the purpose of the loan was to enable the company to meet its working capital requirements. The loan was partly secured by the company by a pledge of a fixed deposit held in the name of the company in HDFC Bank Limited for a sum of Rs. 75 lakh. The tenure of the loan was extended on September 28, 2010 and in January, 2011 the company requested the petitioning credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the company to the petitioning creditor at the conclusion of the arbitral reference. The company suggests that the present petition is scandalous in that it seeks to extract money from the company or subject the company to the humiliation of the petition being advertised. The company claims that if the petition is received and directed to be advertised, all other creditors of the company who have otherwise not pressed for immediate payment would jump in and cause irreparable prejudice to the company. The petitioner has also relied on a letter of dated July 14, 2011, wherein the company appears to have unequivocally admitted the three lots of payments having been made by the petitioner to the company or to its order. The company has merely glossed over such admission and says that the petitioner forced the company to issue the letter. The company has not denied the receipt of the statutory notice of August 19, 2011 by which the petitioning creditor claimed the principal sum of Rs.4,07,05,062 together with interest thereon at the rate 15.50 per cent per annum. The company did not reply to the statutory notice and the presumption under Section 434(1)(a) of the Companies Act, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l insolvency of a company that has to be assessed in proceedings of this kind and the fact that the company may have blocked assets or investments which are not immediately available to be encashed to liquidate the company's present debts may be of no relevance at all. There is a bit of wild goose chase that appears to have been undertaken in the petitioning creditor's anxiety to disabuse the court of what was perceived to be an impression that the petitioner had exposed the company to double jeopardy in instituting seemingly parallel proceedings for realising its claim and in the petitioning creditor apprehending that its obtaining orders in the Bombay High Court during the pendency of the present petition may weigh heavily with the court to dismiss the petition or adjourn the matter till after the conclusion of the arbitral reference. Though the petitioner has referred to several authoritative judicial pronouncements on matters where the creditors had invoked the jurisdiction on grounds other than what is recognised in Section 434(1)(a) of the Act, the petitioner concedes that its prayer for winding-up is based exclusively on such provision. The petitioner endeavours to demonst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be wound up by court on any ground not included in Section 433 of the Act and no person other than those recognised by Section 439 of the Act, and subject to the qualifications therein, may present a petition for winding up a registered company. Section 434 of the Act is only a deeming provision and how the legal fiction of the inability of a company to pay its debts within the meaning of the expression "unable to pay its debts" in Section 433(e) of the Act arises. At first blush, there appears to be an anomaly in Section 434 of the Act. A deeming provision, in the context of the meaning of a word or a provision in a statute, facilitates the fulfillment of the condition embodied in the relevant word or expression or circumstance in the statute and, generally, sets a lesser test for the inference relevant for the word or the expression or the circumstance to be drawn than the word or the expression or the circumstance may otherwise demand. Section 434(1)(c) of the Act, however, requires the inability of the company to pay its debts to be proved to the satisfaction of the court. It is not usual for a deeming provision, in the context of the meaning of a relevant word or expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y against its assets in ascertaining whether it is unable to pay its debts; the inability has to be determined only with reference to the liabilities of the company. Hence, the inability of a company to pay its debts has been understood and interpreted as the company's commercial insolvency rather than its actual insolvency. But the relevant expression in Section 434(1)(c) of the Act does not altogether preclude the court from assessing the company's ability to pay its debts upon the concerned company asserting and establishing the availability of worthwhile assets that may be efficaciously and immediately liquidated to meet the liabilities of the company. But the statutory manner of determination of a company's inability to pay its debts, pointedly, does not make any reference to the assets of the company since, ordinarily, the assets would be deployed in the company's business activities and would not be available for being liquidated for the purpose of discharging the company's debts. A company could be the owner of vast tracts of land on which its manufacturing facility stands, but neither the book value nor the market value of the land may of any relevance in considering whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision as contained in the English Act of 1862, the leading cases where such provision was made the basis for creditors' petitions for winding up the relevant company are Globe Steel Co. (20 Eq. 337); Yate Collieries Co. [W.N. (1883) 171]; Flagstaff Mining Co. (20 Eq. 268) and Pavy's Fabric Co. (24 WR 91). In Globe Steel Co., which has been placed by the petitioner here and is referred to in greater detail hereafter, a bill of exchange accepted for payment by the company was dishonoured; and it was held to be sufficient proof of the insolvency of the company. In Flagstaff Mining Co. and Yate Collieries Co. it was held that if the company had given notice to a judgment-creditor that it had no assets on which the judgment creditor could levy execution, it was sufficient proof of the company's inability to pay its debts and the judgment-creditor need not actually proceed to execute the decree before he can petition for winding up the company. In Pavy's Fabric Co. the view taken was that if the company admitted insolvency, a shareholder could not prevent the winding-up order on the petition of a creditor by offering to pay the petitioner's debt. In another decision of the same vinta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved to the satisfaction of the Court that the company is unable to pay its debts. The only question for me to decide is this, whether this is proved to my satisfaction. It appears that the Petitioners sold goods to the company, and took in part payment a bill, which was dishonoured, and continues unpaid. That is proof which ought to satisfy me, and which does satisfy me, that the company is unable to pay its debts. It was argued that the Petitioners are not entitled to their order because of the omission to serve the statutory notice demanding payment; but I think their omission to do so has no bearing on the question. In re Catholic Publishing and Bookselling Company (1) was a different case. Two points were raised in it, first, whether the Petitioners were creditors of the company at all; and, secondly, whether at the time the petition was presented the company was in such a position as to make a winding-up order proper; and the Lords Justices decided upon the evidence that the company was not unable to pay its debts within the meaning of sect. 80. I make the usual winding-up order." In Globe Steel Co. the court held that the dictum in Catholic Publishing and Book Selling Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjective satisfaction that the company concerned was unable to pay its debts, an inference must necessarily be drawn that the objective criterion was the presumption in law that an accepted bill of exchange had to be discharged by payment unless legally established grounds were cited to rebut the presumption; and such grounds were not urged by the company in that case. The petitioner has relied on passages from authoritative texts on company law published in more recent times to jump to some contemporary decisions following the dictum in Globe Steel Co. Palmer's Company Law (25th Ed, 1992) has been relied on for a passage at paragraph 14.312 thereof that instructs that "a debenture holder to whom a company is indebted in a sum presently payable can demand payment, and, if default is made, can petition for the winding up of the company, and this whether he is the registered holder of the security, or the holder of a security to bearer ... (and the) mere fact that he has obtained the appointment of a receiver does not preclude him from applying for a winding-up order." Buckley on The Companies Act (14th Ed., 1981) has been carried for a passage at page 534 of Volume 1 on the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plaintiff under the provisions of Section 517(1)(e) and (f) of the English Companies Act, 1985 and obtained an initial injunction which was vacated by the judgment cited. The court's approach to the assessment is captured in the following two paragraphs from page 117 of the report. "The question arises: what should the court do with a threat to present a petition against a company which the court instinctively considers must be solvent, and as to which there is now evidence before the court that it was solvent to a major degree on 31 December 1984? The point as to possible abuse of process which particularly concerned me was that every winding up petition must contain an averment that the company is insolvent and is unable to pay its debts, and the affidavit in support, sworn either by the petitioner or by his solicitor under the winding up rules, must aver that the statements in the petition are true. Thus it would have been necessary for someone to go on oath that he genuinely believed the plaintiff to be insolvent, and I for a considerable time was much concerned that that was an impossible allegation for anyone conscientiously to make. It seems to me that it could well be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative limbs that were cited in support of the petition for winding up the company were that the company was unable to pay its debts and that the court should form an opinion that it was just and equitable that the company should be wound up. It is evident that the Court of Appeal relied on Section 123(1)(e) of the English Insolvency Act, 1986 which reflected Section 518(1)(e) of the English Companies Act, 1985 ["if it is proved to the satisfaction of the court that the company is unable to pay its debt as they fall due (and, in determining that question, the court shall take into account the company's contingent and prospective liabilities)."] The following passages from pages 219 and 220 of the report are relevant: "There is no requirement that a creditor must serve a statutory demand. The practice for a long time has been that the vast majority of creditors who seek to petition for the winding up of companies do not serve statutory demands. The practical reason for that is that if a statutory demand is served, three weeks have to pass until a winding-up petition can be presented. If, after the petition has been presented, a winding-up order is made, the winding up is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the relevant clause, the additional factors which the court had to take into account to satisfy itself that the company was unable to pay its debts. That made a world of difference to the provision. In the English Act of 1985, as enacted, the same provision continued in Section 518 which set the parameters for the legal fiction of a company's inability to pay its debts; but the guide to the court on how to determine the company's inability to pay its debts was marked in parenthesis in clause (e) of its first subsection. However, upon the matters pertaining to insolvency being consolidated in the English Insolvency Act, 1986, what was originally contained in Section 130(iv) of the English Act of 1908 and continued in Section 223(d) of the English Act of 1948, was split into two as reflected in paragraph 394 of Halsbury's Laws of English (5 Ed., 2011) in Volume 16 thereof. Upon the Insolvency Act of 1986 coming into force in England one part of the original clause is now reflected in Section 123(1)(e) thereof and the other in Section 123(2) of that Act. In the judgment reported at (1892) 2 Ch D 362 (In Re: Borough of Portsmouth Tramways Company, the creditor was a debenture- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the English practice and authorities in such arena. But there is a danger in following English law and English judgments on legal principles that have been recognised in the statutes in this country. Ordinarily, a principle in company law or an expression that is duplicated in the Indian and English statutes may be seen or interpreted in the light of the English authorities on the point, since the body of Indian company law is based on the English law on such aspect. But it must never be lost sight of that statutory interpretation in this country is based on the constitutional jurisprudence of this land, the interplay between several statutes in this country which may not be the same case in England and the minor inflections in the other provisions of a similar statute which might throw a different light on the interpretation of a similar expression in the Indian statute than how it is seen under the English statute. Every statute in this country and all words contained therein take colour from the Constitution of India and it is possible that similar words or expressions in two comparable Acts in England and in India are variously interpreted. Moving away from the general an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets and submits that since no other creditor of the company has applied for winding up, the court should not assume that the company's assets are not enough to meet its liabilities. The company contends that in assessing whether a company is solvent or not, its net worth ought to be taken into consideration and refers to the emphasis on net worth in the Sick Industrial Companies (Special Provision) Act, 1985 and the regulations made by the Securities and Exchange Board of India relating to initial public offers of listed companies and the regulations framed under the Foreign Exchange Management Act, 1999 in such regard. With respect, the argument does not appeal. The special purpose of the regulations under the Act of 1999 and those issued by SEBI requires net worth of a company to be taken into account. The concept of net worth is foreign to what the court is required to consider on a creditor's winding-up petition where the court only seeks to assess whether the company is commercially insolvent. In the 1985 Act that the company has referred to, the principle of net worth is applied for the purpose of ascertaining the sickness or the potential sickness of an industrial compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and they cannot be allowed to take recourse to this extreme remedy for their doubtful debt which is yet to be crystallised. It is not the case of the petitioners that there are many other creditors who are knocking at the doors of the company and that the liabilities of the respondent-company have exceeded its assets and that it has lost its' substratum so that the company should be permanently extinguished from its existence. The petitioners are trying to force the respondent-company to surrender to the petitioner in spite of being fully secured under the personal guarantees of three guarantors and having security of a flat which would be worth of Rs. 1,50,00,000 as submitted by Shri Par-mar. The concept of inability of paying the debt cannot be applied in the case where the creditors are fully secured and they have in fact nothing to do with the alleged inability of the company to pay its debts. A secured creditor can always realise his securities to satisfy his debt. He cannot say that the debtor is unable to pay the debt." The company in this case says that the combined value of the securities furnished by the company and its director-guarantors in the Bombay proceedings wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim against the principal debtor and not against the guarantors. Indeed, the petitioner here has sought an order of winding up against the company on the company's failure to liquidate the petitioner's claim or to secure or compound for it to the reasonable satisfaction of the petitioner. The assessment of the company's inability to pay will, in such circumstances, not be judged by the security furnished or forced to be furnished by the guarantors who are the directors of the company. At a more fundamental level, it must be remembered that a petitioner does not seek a decree against a company on a creditor's winding-up petition. That a practice has evolved under which the court while admitting a creditor's petition permits the company to pay off the sum assessed to be due in course of the order of admission, is only to afford the company a chance to ward off the advertisement of the petition and the consequential loss of reputation and financial credibility of the company. The company says that the court should exercise it discretion in not admitting the petition and by directing the petition to stand over till the arbitral reference between the parties is concluded. It argues t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pected of the creditor to allow limitation to set in and not launch a regular action in pursuance of the same money claim. The institution of a suit or an arbitral reference, in such a situation, makes no difference since the arbitral reference has per force to be initiated in place of a suit if the matrix contract on which the money claim is based is governed by an arbitration agreement. In any event, the mere nonpayment of a money claim is a dispute covered by the arbitration agreement governing the matrix contract on which the money claim is based. The word "dispute" used in the Supreme Court judgment must be understood in such light and not implying a dispute in the sense of there being a doubt as to the validity of the money claim. It is only a doubt as to the validity of the money claim which is relevant for the purpose of assessing the negligence of the company in failing to pay or to secure or to compound for a claim in the relevant expression in Section 434 (1)(a) of the Act; and the mere failure to pay which may be regarded as a dispute under the arbitration agreement for entitling a party thereto to invoke the same is not the same dispute that is relevant in assessing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed in the two sets of proceedings are completely different. In an action for enforcing a money claim simpliciter, the forum - be it a regular civil court or an arbitral tribunal or any other judicial or quasi-judicial body - would have no authority to entertain a prayer for winding-up the company. Similarly, in a creditor's winding-up petition, no relief can be claimed in the nature of a money decree even though a creditor's winding-up petition is regarded an equitable mode of executing a money claim. An oft-cited Division Bench judgment of this court reported at (2005) 4 CHN 343 (SRC Steel (P) Ltd v. Bharat Industrial Corporation Ltd) has been cited in the same context, but the court recognised, at paragraph 17 of the report, that "there is no bar either in the Companies Act or in the general body of our Civil Code governing and regulating suits in Courts, that a person is put to a strict choice, Whether to pursue the remedy by way of a winding up petition or to pursue the remedy for recovery of its debt by way of a suit." That is the ratio in SRC Steel, though on the facts of that case the court found that the counter-claim delivered in the petitioning creditor's suit by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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