CIRCUMSTANCES IN WHICH A COMPANY MAY BE WOUND UP - A DISCUSSION WITH REFERENCE TO DECIDED CASE LAWS

[Mr. M. GOVINDARAJAN]

            Unable to pay debts by the companies is one of the reasons for which a company may be wound up under Sec. 433(e) of the Companies Act, 1956 ('Act' for short). The Supreme Court in 'Pradeshiya Industrial and Investment Corporation of UP V. North India Petro Chemical Limited' (1994) 79 Comp. cas.835 held that a company can be wound up under Sec. 433 (e) if the company is unable to pay its debts, that means-

There must be a debt; and

The company must be unable to pay the same.

The Supreme Court in this case further observed that Sec. 433 (e) is discretionary and a debt under the section must be determined or a definite sum of money payable immediately or at a future date.

            Sec.434 of the Act provides that a company shall be deemed to be unable to pay its debts-

If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company by  causing to be delivered at its registered office by registered post or otherwise 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; or

If execution or other process issued on a decree or order of any court in favor of a creditor of the company is returned unsatisfied in whole or in part; or

If it is provide to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liability of the company.

In 'Madhusudan Gordhard & Co., V. Madhu Woollen Industries (P) Ltd.,' - (1972) 42 Comp. cas. 125, the Supreme Court held that the debit is bona fide disputed and the defence is a substantial one the court will not wind up the company.  Where the debit is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed, the Court will make a winding up order without requiring the creditor to quantify the debt precisely. The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly the defence is likely to succeed in point of law, and thirdly, the company adduces prima facie proof of the facts on which the defence depends.

            In the case of Amalgamated Commercial Traders (P) Ltd., V. A.C.K. Krishnaswami (1965) 35 comp. case. 456, the Supreme Court held that a winding up petition is not a legitimate means of seeking to enforce payment of a debt, which is bona fide disputed by the company. A petition presented ostensibly for a winding up order, but really to exercise pressure will be dismissed and in the circumstances may be stigmatized as a scandalous abuse of process of the court.

            In 'Gujarat Industrial Investment Corporation Ltd., V. SterlingHoliday Resorts (India) Ltd., - (2009) 91 SCL 253 (Mad) the respondent company is running smoothly and earning profit. Its sale had gone up bas back as in the year 2005 to the tune of Rs.44.18 crores. Though a number of suits, etc., were preferred by other financial institutions, except the appellant corporation, the company was in a position to make settlement with all the creditors and paid back its liability. It is not in dispute that the corporation has already preferred a suit against the company and its directors and prayed for a judgment and decree with interest. In view of the interim order the company ahs already deposited a sum of Rs.7.50 crores, almost the amount claimed in the suit with interest. It has not been disputed that apart from 8,39,800 equity shares of Rs.10/- each pledged under an unattested document along with a blank transfer deed in favour of the corporation and another 17,53,000 shares of the company were pledged in favor of the corporation. The court held that there is a genuine dispute of interest, particularly with regard to pendent elite interest, which has to be determined in the suit. Even before this Court the company gave a better offer in favor of the appellant corporation to settle the dispute, but the corporation did not choose to accept the same. It will be evident that the company is in a position to pay the debts and whatever amount not agreed upon is a disputed amount between the parties. The court upheld the order dismissing the petition for winding up as was preferred by the appellant being not maintainable.

             In 'California Pacific Trading Corporation V. Kitply Industries Limited' - (2009) 91 SCL 258 (Gau) the petitioner claimed its dues against the respondent company under a decree. The District Court, USA passed a decree in favor of the petitioner for a certain sum. The petitioner instead of taking steps for execution of the decree filed winding up petitioner against the respondent company. The respondent resisted the case since the petitioner had not taken steps for execution of the decree, the winding up petition was an attempt to recover the money under decree, and therefore was not maintainable.  Further it was also contended that US Court had not jurisdiction to pass the decree and that decree had not been passed on consideration of the merits of the case.  The Court held that the order of the US Court clearly shows that the claim of the petitioner was not decreed merely on the failure of the defendant to offer its defence. The evidence and materials adduced by the petitioner were duly considered and it is only thereafter that the decree was passed. The submission of the respondent with regard to the applicability of the deeming provision contained in Sec. 434(1) in case of a debt under a decree has to be addressed. The punctuations contained in Sec. 434(1), particularly after each sub-clauses i.e., (a), (b) and (c) and the use of a semicolon at the end of sub clause (a) and before beginning of sub clause (b), in the considered of the court, would, sufficiently indicate that all the three sub clauses are in the alternative and upon existence of any one of the same, a company can be deemed to be unable to pay its debts. Sec. 434(1)(b), therefore, contemplates a situation of an unsuccessful attempt at execution of a decree. However the said sub clause cannot be understood to be indicative of any mandatory requirement to put the decree to execution before a company can be deemed to be unable to pay its debts arising from such a decree.  For the aforesaid reasons, the company petition for winding up has to succeed. But the Court directed that the order for winding up of the respondent company should follow only after its failure to pay the amount due to the petitioner within a period of three months or in accordance with such installment plans as may be agreed upon by and between the parties.

            In 'IND Bank Merchant Banking Services Ltd., V. Orient Resorts (India) Ltd.,' - (2009) 91 SCL 302 (Guj) the petitioner bank had advanced finance to respondent company under a hire purchase agreement. The petitioner filed winding up petition against the respondent on the ground that it failed to pay certain amount due under said agreement despite statutory notice. The respondent contended that if some time was granted and interest was waived and some lesser amount was accepted, it was ready and willing to make payment in installments. The Court held that once hire purchase agreement was executed and respondent company had taken finance, it was not open for respondent company to submit that it would pay a lesser amount and that too without any interest.  Since respondent company failed to make payment when opportunity was given to it to make some payment to show its bona fides, respondent company had lost its financial substratum and was not in a position to pay its debts to creditors inclusive of petitioners and therefore, it was to be ordered to be wound up.

            In 'Thirukumara Trading Agency V. Sleek Textiles Industries Ltd.,' - (2009) 91 SCL 308 (MA) the petitioner company filed winding up petition against respondent company on the ground that it failed to pay a part of amount towards supply of goods made by petitioner. The respondent contended that there was bona fide dispute with regard to amount payable by respondents as goods supplied by petitioner were not confining to the standard specified and after negotiation liability was reduced. The court held that since respondent company had disputed debt with documents to support, discretion in favor of the petitioner for winding up of respondent company could not be exercised.

            From the above said discussion it is very clear that an order under Sec. 433(e) is a discretionary one and the machinery for winding up should be allowed to be utilized as a means for realizing debts due from the company and if that debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company.