1965 (1) TMI 16 - SC - Companies Law

Whether High Court of Madras was correct in directing the winding up of the appellant the Amalgamated Commercial Traders Private Limited? We are satisfied that the debt in respect of which notice was given under section 434 was bona fide disputed by the appellant-company. The appellant-company had received legal advice and it had acted on it. On the facts it seems to us clear that the appellant-company did not dispute the debt in order to hide its inability to pay debts. Further we are satisfied that the question whether the declaration of dividend dated December 30 1959 is valid or not raises a substantial question as to the interpretation of Section 207 of the Companies Act. Further whether the declaration dated December 30 1959 is severable or not is also a substantial question. We do not propose to decide whether the declaration of dividend was valid or not or whether it was severable or not because in these proceedings we ware only concerned with the question whether the debt was bona fide disputed by the company on substantial grounds. If the debt was bona fide disputed as we hold it was there cannot be neglect to pay within section 434(1)(a ) of the Companies Act. If there is no neglect the deeming provision does not come into play and the ground of winding up namely that the company is unable to pay its debts is not substantiated. Appeal allowed.

Issues Involved:
1. Whether Hariprasad is a creditor within sections 434 and 439 of the Companies Act.
2. Whether non-payment of the dividend was due to the default of Hariprasad, disentitling him from filing a petition under section 439.
3. Whether the petition was an abuse of the process of court aimed at making the appellant-company give up its pleas regarding the invalidity of the resolution dated December 30, 1959.
4. Whether the High Court should have ascertained the wishes of the other creditors and contributories.
5. Whether section 433, read with section 434, gives the court discretion to wind up a company or not, and whether the Division Bench should have ordered the winding up of the appellant-company.
6. Whether the debt was bona fide disputed by the appellant-company, and whether substantial questions about the invalidity of the resolution dated December 30, 1959, existed.

Issue-wise Detailed Analysis:

1. Creditor Status of Hariprasad:
The appellant argued that Hariprasad was not a creditor within the meaning of sections 434 and 439 of the Companies Act and thus not entitled to file a winding-up petition. The court, however, found that Hariprasad and other supporting creditors were indeed creditors of the company, entitling them to sustain the petition for winding up.

2. Non-payment Due to Hariprasad's Default:
The appellant contended that the non-payment of the dividend was due to Hariprasad's default when he was a director, thus disentitling him from filing a petition. The court did not find merit in this argument, holding that Krishnaswami and Hariprasad were not estopped from claiming what was due to them in their individual capacity.

3. Abuse of Process:
The appellant claimed that the petition was an abuse of the court process, intended to force the company to abandon its stance on the invalidity of the December 30, 1959, resolution. The court did not address this issue in detail as it found substantial grounds to dismiss the petition based on other considerations.

4. Wishes of Other Creditors and Contributories:
The appellant argued that the High Court should have ascertained the wishes of other creditors and contributories. The court did not find this necessary given the resolution of the primary issue regarding the bona fide dispute of the debt.

5. Discretion Under Section 433 and 434:
The appellant argued that section 433, read with section 434, gives the court discretion to wind up a company or not, and that the Division Bench should not have ordered the winding up. The court emphasized that a winding-up petition is not a legitimate means to enforce a debt that is bona fide disputed. The court found that the debt was bona fide disputed by the appellant-company, which had acted on legal advice.

6. Bona Fide Dispute of Debt:
The court found that the debt in respect of which notice was given under section 434 was bona fide disputed by the appellant-company. The company had received legal advice that the resolution of December 30, 1959, declaring a dividend contingent on the receipt of commission was invalid. The court held that this constituted a substantial ground for dispute, and thus, there was no "neglect to pay" within the meaning of section 434(1)(a) of the Companies Act. Consequently, the ground for winding up on the basis of the company's inability to pay its debts was not substantiated.

Conclusion:
The appeals were allowed, the judgment and order of the Division Bench were set aside, and the petition was dismissed. The court found that the debt was bona fide disputed by the appellant-company on substantial grounds, negating the claim of neglect to pay under section 434(1)(a) of the Companies Act. There was no order as to costs.

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