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TMI Blog2012 (12) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... in to Section 434(1)(a) of the Act, even an unsecured creditor of a company has to demonstrate the unimpeachable quality of its claim in its written demand or a part of such claim in excess of Rs 500/- for the negligence of the company to be established as the final prerequisite before the legal fiction - the presumption of company's inability to pay its debts is cemented. In the absence of a secured creditor establishing the inefficacy or the inadequacy of the security held by it, such creditor cannot demonstrate any negligence on the part of the company which is relevant for the purpose of the provision; and, consequently, no inference may be drawn of the company's inability to pay its debts and the legal fiction does not kick in. 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout demonstrating that the value of its securities is less than its claim or establishing that the securities are inefficacious or spurious. The ancillary issue that arises is as to whether, in the context of the legal fiction under Section 434(1)(a) of the Act, even a creditor which holds adequate security covering the debt due from the company can insist on its petition being admitted and a winding-up order passed thereon; or, the provision only contemplates the admissibility of a claim of a secured creditor as an unsecured creditor to the extent that its claim exceeds the value of its securities. 3. It is an oft-trodden path which needs be negotiated with care and trepidation for high authorities of persuasive and binding value stare down from every nook and cranny. But first, the applicable provisions need to be noticed, since the key lies in the Companies Act itself; as any misplaced sympathy for a company subjected to the vagaries of the 2002 Act - despite the perceived confiscatory nature of that statute or the apparent abuse in the application thereof - can scarcely be an aid for the construction of the parent statute, for such external influence in statutory interpreta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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) and provides, inter alia, that a secured creditor shall be deemed to be a creditor within the meaning of the relevant clause. It, therefore, follows that a secured creditor of a company may apply for winding up the company under Section 433(e) of the Companies Act by citing the company's inability to pay its debts. 6. The operative words of Section 434(1)(a) of the Companies Act for the present purpose may be reduced as follows: "434. Company when deemed unable to pay its debts. - (1) A company shall be deemed to be unable to pay its debts - (a) if a creditor to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;" 7. The consideration in the present proceedings hinges on the exact meaning of the expression "neglected to pay the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is thus that, notwithstanding an unimpeachable claim being established by the petitioning creditor, the company court may refuse to wind up the company if the majority in value of the creditors of the concerned company do not support the prayer or if it is perceived by the company court that the order may not enure to the benefit of the creditors of the company as a whole or other relevant considerations demand that the company not be wound up. 9. Since the company court's regular association with Sections 433, 434 and 439 of the Act has more to do with claims carried by the creditors, the effect of the secured creditors having been accorded the same status as unsecured creditors in Section 439(2) of the Act may understandably result in a first impression that, security or no security, every person claiming to be a creditor of the company sought to be wound up is deserving of the claim to be assessed without apparent reference to the security that it may hold. But Section 439(1) of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such action and the manner in which it is brought about are subject to assessment by court at the behest of a creditor dissatisfied thereby at the admission stage of the creditor's petition. It is the quality of the act of securing the claim or compounding for it that falls for consideration then. 12. That Section 439 of the Act permits a secured creditor to present a petition for winding up a company is beyond question. The circumstances in which a company may be wound up by court are comprehensively listed in Section 433 of the Act. The maintainability of a winding-up petition by a secured creditor cannot be questioned if one or more grounds under Section 433 of the Act are cited in support of the petition. But if a secured creditor seeks to take advantage of the deeming provision of the company's inability to pay its debts in Section 434 of the Act and founds the prayer for winding-up on the first limb of sub-section (1) thereof, the efficacy and the adequacy of the security enjoyed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 respect of the securities that it holds and claims to be - whatever it means - in symbolic possession of the primary immovable property of the company on which its manufacturing facility stands. The petitioner has said in passing that it has not been able to take possession of its securities by reason of the resistance put up by the company or the company's men and agents, but it has not based the present petition on such score. The petitioner has recently obtained an order from this court on a petition under Article 226 of the Constitution of India requiring the appropriate District Magistrate to take effective steps as sought by the petitioner under Section 14 of the Act of 2002. Long after the invocation of the said Act of 2002 in furtherance of the securities that the petitioner holds, it issued a notice on November 19, 2010 demanding payment of a sum of Rs. 17,08,77,776 as at October 31, 2010 "in respect of the Term Loan granted in your favour along with further interests and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CWN 29. 16. 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 petition to be served on the company and then, upon the company's stand on merits coming on record, decides on affidavits as to whether the petition should progress to advertisements. The creditor's winding-up petition does not automatically proceed to be advertised in the usual course in this court for the matter to be straightaway heard in a representative capacity. At the pre-admission stage, as per the practice followed in this court, only the petitioning creditor and the company are heard on the merits of the claim and a decision taken whether the petition should be advertised or not. Such order is appellable. 17. There is good reason for such procedure to be adopted by this court as noticed in the Bharat Vegetable Products Ltd. (supra) judgment and in the more recent Division Bench judgment reported at SRC Steel (P) Ltd v. Bharat Industrial Corpn. Ltd. [2005] 4 CHN 343 and another unreported Division Bench decision delivered on September 14, 2004 in T. No. 308 of 2004 Dha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twithstanding 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 case of every judicial order. The company has criticised the judgments reported at JMD Medicare Ltd v. Siemens Aktiengasellschaft [2007] 2 CHN 75 and Raghunath Exports Ltd v. Parekh Marine Agencies (P.) Ltd. [2008] 83 SCL 68 (Cal.) for the observations therein that may imply that upon a creditor establishing the debt due from the company, such creditor is ex debito justitiae entitled to the petition being admitted without any other consideration. Indeed, the judgments are deserving of the criticism and the legal position may have been better explained in an unreported judgment of June 26, 2012 rendered in CP No. 382 of 2001 (Ashok Kumar Deora Baljit Securities Ltd.) where it has also been observed that the finality of a finding arrived at the admission stage of the debt due to the petitioning creditor, can, in some cases, be undone at the post-advertisement stage. It is beyond question that the company court is vested with a discretion at both st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cal. 78 has been placed at great length by both parties. In that case, the Karnatak Vegetable Oils Refineries Ltd.'s case (supra) 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 provision similar to Section 439(2) of the 1956 Act. With due respect, Section 439(2) of the 1956 Act appears to be clarificatory in nature in its reference to the expression "creditor or creditors" in Section 439(1)(b) thereof being applicable to a secured creditor of a company. It was not as if the law as it stood prior to Section 439(2) being incorporated therein precluded secured creditors from presenting petitions for winding up a company. Be that as it may; it is, however, paragraph 31 of the report in the Calcutta Safe Deposit Co, Ltd.'s case (supra) that the petitioner here cites as a complete answer to the legal issue that has arisen in the present case: "31. Mr. Mitter argued that if the sum so due is already secured does this sub-section require further security within the period of the said three weeks? He contends that it cannot be the intention of the legislature to get a further security from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue 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 Act. Equally, in such a case, the court would not presume the company's inability to pay its debts if the petitioning creditor is found to hold adequate, efficacious security to satisfy its claim, even if the company did nothing after receipt of the statutory demand. The security that is envisaged in the relevant expression in Section 434(1)(a) of the Act is not only the security which is furnished after the receipt of the statutory demand, but would also include the security already held by the creditor. Even the Calcutta Safe Deposit Co. Ltd. (supra) judgment recognised such feature in the words "or that his security is intact" in the concluding part of the penultimate sentence of the passage extracted above. 24. A Division Bench judgment of this court reported at Techno Metal India (P.) Ltd v. Prem Nath Anand [1973] 43 Comp. Cas. 556 has been placed for its acceptance of the ratio in Calcut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. 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 that a secured creditor cannot successfully prosecute an application for winding up, especially in view of sub-section (2) of section 439 of the Companies Act, 1956, a provision which was lacking in the Indian Companies Act of 1913. Apart from the fact that for the purpose of winding up, the term "creditor" includes a secured creditor, there are judicial precedents established in cases decided under the earlier Act where it was held that a secured creditor is fully competent to make such an application. In this connection, reference may be made to the case of Karnatak Vegetable Oils and Refineries Ltd v. Madras Industrial Investment Corporation Ltd. Reference may also be made to two decisions of learned single judges of our court In the matter of India Electric Works Ltd. and Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat. These were cases decided under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 an alien code on a half-conquered realm, but sought instead to win as much widespread confidence as possible in their administration of law, by the application of near uniform rules. The older the decision, the greater its authority and the more truly was it accepted as stating the correct law. As the gulf of time widened, says Dias, judges became increasingly reluctant to challenge old decisions. The learned Author cites the example of Bracton and Coke who always preferred older authorities. In fact, Bracton had compiled a notebook of some two thousand cases as material for his treatise and employed some five hundred of them. "37. The principle of stare decisis is also firmly rooted in American jurisprudence. It is regarded as a rule of policy which promotes predictability, certainty, uniformity and stability. The legal system, it is said, sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 decisions, according to the learned Judge, should be confined to questions of great public importance. Legal problems should not be treated as mere subjects for mental exercise. An earlier decision may therefore he overruled only if the court comes to the conclusion that it is manifestly wrong, not upon a mere suggestion that if the matter were res integra, the members of the later court may arrive at a different conclusion." 27. There is, equally, a rule that a precedent sub silentio is not authoritative. The rule recognises that it is only the legal principle "deducible from the application of law to the facts and circumstances of a case which constitutes its ratio decidendi and not some conclusion based upon facts which may appear to be similar" [See Regional Manager v. Pawan Kumar Dubey [1976] 3 SCC 334, at paragraph 7]. The Supreme Court has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uoted judgment reported State of U.P. v. Synthetics Chemicals Ltd. [1991] 4 SCC 139 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 developed this principle in relaxation of the rule of stare decisis. The 'quotable in law' is avoided and ignored if it is rendered, 'in ignoratium of a statute or other binding authority'. (Young v. Bristol Aeroplane Co. Ltd.; [[1944] 2 All ER 293]. Same has been accepted, approved and adopted by this Court while interpreting Article 141 of the Constitution which embodies the doctrine of precedents as a matter of law. In Jaisri Sahu v. Rajdewan Dubey; [[1962] 2 SCR 558] this Court while pointing out the procedure to be followed when conflicting decisions are placed before a bench extracted a passage from Halsbury's Laws of England incorporating one of the exceptions when the decision of an appellate court is not binding. "41. Does this principle extend and apply to a conclusion of law, which was neither raised nor preceded by any consideration. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated 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. " 30. It is in such context that the authoritative value of the Division Bench judgment in Techno Metal India (P.) Ltd. (supra) has to be assessed. There is no doubt that the petitioning creditor's claim in that case was based on a statutory demand. The Companies Act speaks of a written demand to be made by a creditor only in Section 434(1)(a) thereof. The point was urged that a petition for winding-up by a secured creditor was not maintainable and the court answered the argument by holding that "we cannot accept the proposition that the respondent being a secured creditor is not entitled to apply for winding up unless he abandons his security or satisfies the court as to its inadequacy." The Division Bench referred only to Section 439(2) of the Act to render its conclusion on such legal question, but did not deem it necessary to consider Section 434(1)(a) of the Act to assess whether in the absence of a secured creditor establishing the inefficacy or inadequacy of its secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor 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 winding-up only in the matter of proof of debts after the order of winding-up was made. The court referred to Section 439(2) of the Act; to a passage from Palmer's Company Law discussing the rights of debenture-holders to petition for the winding-up of the company; to Pennington's Company Law for the view therein that a secured creditor need not value his security to be entitled to apply for winding-up; to Buckley on Companies Act for a passage therein that no rule from the bankruptcy law is incorporated in the winding-up jurisdiction requiring a secured creditor to value his security; to Halsbury's Law of England for the same proposition; and, to the Moor v. Anglo-Italian Bank [1879] 10 ChD 681 for the pronouncement that a secured creditor is entitled as much as an unsecured creditor to obtain an order of winding-up. The first legal issue in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 debts, the petition cannot be admitted. Since the very rationale to adopt the two-stage procedure is primarily to ensure that a company suffers the prejudice of a creditor's winding-up petition against it being advertised only after the indisputable character of the debt claimed by the petitioning creditor is established and the company is afforded a chance to pay it off, postponing the adjudication as to the quality of the petitioning creditor's claim to the post-advertisement stage would be anathema to the established practice. It then follows that if the efficacy or the adequacy of the security of a secured creditor has to be assessed before the presumption under Section 434(1)(a) kicks in, such assessment cannot be postponed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, cannot be construed to mean that when he files a petition for winding up, a secured creditor must relinquish his security. In the present case, the petitioner has filed a suit in this court and made it clear, therefore, that he seeks to enforce the security. When the stage of proving its of debt does arise, the petitioner would necessarily have to prove for the balance of the debt which is due and owing to it after the security in respect of which the petitioner is a secured creditor is realised." 37. A judgment of the Madras High Court reported at Canara Bank v. Official Liquidator [1991] 70 Comp Cas 295 has been placed where a secured creditor applied for leave under Section 446 of the Act to pursue a suit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision envisages. 39. A further Bombay High Court judgment reported at Cavendish Shipping Ltd. v. Polaris Marine Management (P.) Ltd [2010] 98 SCL 99 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 Section 434(1)(a) had been served on the company. On such count, the court held that a creditor's petition was maintainable even without the statutory notice as contemplated in Section 434(1)(a) of the Act. 40. The final authority that the petitioner has brought is the case of Anglo-Italian Bank (supra). That judgment was on a motion for a declaration in a suit by some debenture-holders of the company which had been wound up against another creditor of the company in liquidation. The court examined the Judicature Act, 1875 and held that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor 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 adopted by the court reveals that it endorsed the view that the remedy against the security should first be exhausted before a secured creditor is allowed to pursue a creditor's winding-up petition. 43. A widely-followed judgment of this court reported at Bukhtiarpur Bihar Light Railway Co. Ltd. v. Union of India AIR 1954 Cal 499 has been placed by the company for the recognition therein of the inescapable necessity to ensure the strict compliance with all the conditions of a deeming provision, if the legal fiction thereunder is sought to be established. In that case, the statutory notice was addressed by the creditor to an office of the company other than its registered office. Despite the company not urging such ground, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hered to before the legal fiction thereunder can be seen to operate. The judgment is of immense relevance in the present discussion. 45. A judgment reported of Hariprasad v. Amalgamated Commercial Traders (P.) Co. Ltd AIR 1964 Mad. 519 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 Bihar Light Railway Co. Ltd. (supra) to see the rule as to a deeming provision and its corollary. Just as it is imperative that the fulfillment of all conditions in a deeming provision must be ensured for such provision to be made applicable to a particular case, once a deeming provision becomes applicable the legal fiction therein operates even if in reality such situation may not be there. For example, if a solvent company overlooks or disregards a statutory notice of demand in respect of an indisputable debt and the creditor brings a petition for winding-up such company, it would not do then for the company to demonstrate its commercial solvency to resist the admission of the creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 debts, irrespective of whether such creditor enjoys any security and regardless of the quantum of the debt of such creditor; provided the satisfaction of the court is established in the manner prescribed in clause (c) of Section 434(1) of the Act, which is also a stand-alone provision for the statutory presumption. 47. But if a creditor were to invoke the statutory presumption based only on Section 434(1)(a) of the Act, all the conditions therein have to be met before the inference of the company's inability to pay its debts may be drawn thereunder. That is the cardinal principle of interpreting and applying a deeming provision; and requires no judicial authority to be cited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company court is obliged to undertake upon a secured creditor invoking the legal fiction of the company's inability to pay its debts under Section 434(1)(a) of the Act is guided by the expression "neglected to secure it to the reasonable satisfaction of the creditor" in the relevant provision. Such exercise by the court will necessarily involve a reference to the efficacy and the adequacy of the security, whether such security has been furnished by the company before or after the receipt of the written demand from the secured creditor. In any event, even a doubt in either case would deter the company court for presuming the company's inability to pay its debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 limb of Section 433 of the Act. Section 439 of the Act throws no light on the manner, mode or extent of the compliance with the preconditions of the deeming provision in Section 434 of the Act before the legal fiction thereunder can be seen to operate. Indeed, Section 434 of the Act is not integral to the scheme of winding up a company by the court and is merely a non-exclusive route for establishing only one of the many grounds available under Section 433 of the Act. It is only in practice that Section 434 is magnified in its relevance because creditors' petitions are the most common petitions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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