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Home Articles Corporate Laws / Banking / SEBI Mr.M. GOVINDARAJAN
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January 13, 2010
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Unable to pay debts is one of the grounds that a company may be wound up as per clause (e) of Section 433 of the Companies Act, 1956.  Sec. 434 of the Companies Act, 1956 provides that a company shall be deemed to be unable to pay its debits-

         if a creditor, by assignment or otherwise, to whom the company is indebted in a sum of Rs.500/- then  due, has served on the company, by causing it 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;

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

         if it is proved to the satisfaction of the court that the company is unable to pay its debits, and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.

The demand shall be deemed to have been duly given under the hand of the creditor it is signed by any agent or legal adviser duly authorized on his behalf, or in a case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.

Some case laws are discussed in this article n relation to the inability of the company to pay its dues which leads to winding up.


1. J.C. Engineer (P) Ltd., V.  Kay Iron Works (P) Ltd., and another (2009) 93 CLA (Snr.) 1 (P&H)

Where the amount claimed by the petitioner, as not an admitted amount, and the respondent is running a solvent unit, it cannot be concluded that the respondent is unable to pay its debt and no order for winding up could be passed.

2. Priyaraj Electronics Ltd., V. Motorola India (P) Ltd., - (2009) 93 CLA (Snr.) 1 (P&H)

When a sum is due it cannot be said to be 'debt'. The expression 'sum due' as referred to in Sec. 434 (1) (a) must mean what has fructified and cannot merely be a contingent liability or deferred payment. If the liability has not fructified within 21 days from the date of service of statutory notice it cannot be said to be a 'debt' which company is unable to pay in order that the court could find a justification for winding up the company. Therefore the justification for applying for winding up the company will have to be seen whether the debt has become payable on the date when the statutory notice was issued or any time after receipt within twenty one days from the date of demand.

3. Windson International V. HM Electricals (P) Ltd., - (2009) 93 CLA (Snr.) 2 (Ori)

The machinery for winding up of a company cannot be allowed to be utilized merely as a means for realizing debts due from a company and if the debt is bona fide dispute and the defence is a substantial one, the court will not wind up the company.

4. Harmony Multimedia (P) Ltd., V. Parag Paints (P) Ltd., - (2009) 93 CLA (Snr.) 3 (Guj)

Where the net worth of the company is not sufficient to take care of its liabilities, the financial crunch sustained or suffered by the company cannot be said to be of temporary nature and the company has failed to discharge its liabilities, the petition for winding up which is liable to be admitted.

5. M.K. Mahajan and another V. Indo Rolland Industries (P) Ltd., - (2009) 93 CLA (Snr.) 3 (Del)

Where there is a bona fide debt outstanding and payable by the respondent company and the debt has not been discharged despite service of a statutory notice upon the respondent company, the ingredients of Sec. 433(e) stand made out for winding up the company.

6. Unaiz Ahamed V. Whitcome V. Shaftsbury Garments (P) Ltd., - (2009) 90 CLA (Snr.) 1 (Mad)

Once the company court comes to the conclusion that the dispute is bona fide, it has to reject the petition directing the parties to work out their remedy before the civil court. Thus, where there was a claim by the company even before the statutory notice sent by the petitioner, it cannot be said that the dispute raised by the respondent company is mala fide and as such the petition deserves to be dismissed.

7. Pankaj Aluminium, Industries (P) Ltd., V. Pankaj Extrusions Ltd., - (2009) 92 CLA (Snr.) Guj. 1

Where the claim made by the petitioner are covered by arbitration/family settlement, the winding up petition for such claims is not maintainable as defence taken by the respondent is bona fide and the claims are required to be proved before the competent forum.

8. India Alloys Industries Ltd., V. Assotech Contracts (India) Ltd., - (2009) 92 CLA (Snr.) Del. 1

An action to recover debt and petition for winding up are two wholly and independent remedies. Therefore, mere filing of the suit by the petitioner in order to protect right its by way of abundant caution would not prohibit filing of the petition for winding up or preclude the petitioner from maintaining the same.

9. Anupama Wine Distributors V. Tilaknagar Industries Ltd., - (2009) 92 CLA (Snr.) (Bom.) 1

The submission that the petitioner had earlier filed a suit to recover the debt which itself would establish that there were bona fide dispute between the parties was not tenable. Merely because a party first files a suit against the company does not warrant an inference that there is admission on the part of such party that there are bona fide disputes between the company and itself.

10. Baywest Power & Energy (P) Ltd., V. Zipro International Ltd., - (2009) 92 CLA (Snr.) Kar 2

The requirement of issuing a statutory notice as per Sec. 434(a)(1) would be satisfied once notice is received by an employee of the company at its registered office. It is not the concern of a person sending the notice as to who is to receive it at its company's office.


By: Mr.M. GOVINDARAJAN - January 13, 2010



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