TMI Blog1961 (1) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... arising for decision, it is necessary to give a short history of the company. The company was incorporated as a public limited company under the Hyderabad Companies Act (IV of 1320F) on the 3rd day of Shehrewar, 1348F (corresponding to July 10, 1939). The situation of its registered office is at Hyderabad. The authorised capital of the company is Rs. 25,00,000 divided into 2,20,000 ordinary shares of Rs. 10 each, and 3,000 six per cent, cumulative perference shares of Rs. 100 each. The issued capital is Rs. 24,50,000 and the subscribed capital is Rs. 24,40,120 made up of 2,14,012 ordinary shares of Rs. 10 each and 3,000 six per cent, cumulative preference shares of Rs. 100 each. Out of this amount, a sum of Rs. 3,754 represents calls unpaid. The objects clause of the memorandum of association sets out a multitude of objects. The main objects, however, are to establish a factory or factories in and around Hyderabad or elsewhere in India for manufacturing Vegetable products and artificial ghee and as ancillary thereto to establish an oil mill or mills. On the date of the incorporation of the company Messrs. Sheik Imam and Sons were appointed its managing agents for a period of twenty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the approval of the Government of India for the transfer of the managing agency to Messrs. Babu Khan Sons. The necessary approval of the Government of India has not, however, been obtained. The result is that a board, consisting of seven directors, has since been managing the company, it is stated that Shri A.K. Babu Khan and the members of his family own shares of the value of eight to ten lakhs of rupees and that the company is also indebted to his family in a sum of about 15 to 16 lakhs of rupees. He is contesting this petition in his capacity as shareholder and also as creditor of the company. The petitioner has averred that a total sum of Rs. 20,97,534-27 nP., made up of Rs. 15,00,000 towards the principal of the loans evidenced by the two deeds of mortgage, and Rs. 5,97,534-27 nP., towards interest, is due by the company to the petitioner. On June 7, 1958, the petitioner made a demand on the company by means of a registered notice. On September 17, 1958, the company sent its reply contending inter alia that the petitioner had given up a sum of three lakhs of rupees under the arrangement of 1951 and that a further sum of three lakhs of rupees had been converted into shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the directors of the company on July 20, 1951, and they were subsequently ratified by the general body of the company on September 30, 1951. Appropriate entries were made in the accounts of the company in accordance with the agreement. Contrary to those terms, the petitioner has demanded the payment of the entire amount of the two loans and the interest which accrued thereon. Under the circumstances, there is a genuine dispute about the quantum of the debt and its nonpayment by the company does not constitute "inability to pay". The present market value of the assets of the company would be not less than 60 lakhs of rupees, whereas its present liabilities are far less. While it is not denied that the factory of the company has not been working, it is stated that the company has not suspended its business. In a further counter-affidavit filed on behalf of the respondent, a plea was taken that the Industrial Trust Fund is an independent legal entity distinct from Government and that the debt is barred by limitation. Here it may be stated that this plea is untenable for the simple reason that the company was throughout dealing with the Trust Fund as a Department of the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay the sum or to secure or compound the debt to the reasonable satisfaction of the petitioner. It is, however, argued by the learned counsel on behalf of the company that under the terms of the agreement arrived at between the petitioner and the company in March, 1951, the Government agreed to "write off" Rs. 3,00,000 out of the loan amounts and to convert a further sum of Rs. 3,00,000 into shares, but that the notice relied upon by the petitioner demanded the repayment of the entirety of the debt and that, therefore, the requirements of clause ( a ) of sub-section (1) of section 434 have not been complied with. The facts necessary for appreciating this contention may be briefly stated. The communication, dated March 8, 1951 (exhibit R-1) from the Secretary, Industrial Trust Fund, to Sri A.K. Babu Khan, director of company, sets out the terms of the agreement. The material portion of this communication reads as follows : "3. As a result of these discussions, it was decided to write down the capital of the company in the following manner : ( i )Shares to be written by 50%. ( ii )I.G. Rs. 3 lakhs of the managing agents loan to be written off. ( iii )I.G. Rs. 3 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed, as otherwise, I am afraid, the Government will be constrained to withdraw its offer as communicated to you in this Office No. ITF/742 dated 8th March, 1951, and to initiate other arrangements." At the meeting of the board of directors held on December 21, 1951, the managing agents of the company assured the board that they would expedite the re-starting of the mill by the second or third week of January, 1952. On October 4, 1952, Shri A.K. Babu Khan wrote to the Secretary, Industrial Trust Fund (vide exhibit R-8) that a special resolution was passed by the general body meeting for reduction of the share capital by 50% subject to confirmation thereof as required by the statute and that "the matter regarding the confirmation of the reduction by the High Court was being pursued". Regarding the transfer of the managing agency of the company to Messrs. Babu Khan Sons, it was stated that an application had been made to the Central Government for approval and that the Central Government replied saying that the transfer would be approved subject to certain terms of the managing agency agreement and certain articles of association of the company being modified. Exhibit R-8 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter also pointed out that the Industrial Trust Fund had agreed to convert the loan into shares only to the extent of two lakhs and that too after the High Court's approval to the reduction of capital was obtained and till then no adjustment should be made on this account. At this stage it will be convenient to refer to the notice of demand made by the advocate for the petitioner, exhibit R-23, dated 7th June, 1958. This notice called upon the company to pay the sum of 15 lakhs of rupees borrowed under the two mortgage deeds executed by the company in favour of Government with interest. The notice stated that if the said amount was not paid within three months from the date of the receipt of the notice, the Government would enter into possession of the properties mortgaged and would sell the same without the intervention of the court. On September 17, 1958, the company sent exhibit R-24 to the petitioner's advocate, stating inter alia that a sum of 3 lakhs of rupees had been given up by the petitioner in 1951, that a further sum of three lakhs of rupees had been agreed to be converted into shareholdings in the company and that to the Industrial Fund. On December 9, 1958, the adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated that an application for reduction has recently been filed. The second of the conditions stipulated in the agreement was that the managing agency should be transferred to Messrs. Babu Khan and Sons. Here again it would appear that the requisite sanction from the Government of India has not so far been obtained for the transfer of the managing agency. It is, therefore, contended that some at least of the important conditions which according to the petitioner require to be fulfilled before the terms of the agreement could be given effect to, have not been complied with and that, therefore, the entirety of the debt represented by the two mortgages is payable by the company. As lending support to their contention that the agreement of 1951 was not unconditional, the learned counsel for the petitioner relied on the following portion of the resolution passed by the shareholders on September 30, 1951: "( b ) That in view of the order made by the Hyderabad Government Industrial Trust Fund and the managing agents of the company agreeing to waive their claims in respect of the loans advanced by them to the company I.G. 3 lakhs and I.G. 4 lakhs respectively on condition that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts for the years ending 31st December, 1955, and 31st December, 1956, a sum of Rs. 9,00,000 is shown as a secured loan to the Industrial Trust Fund. In the statement of accounts it is similarly shown that there is a secured loan of Rs. 9,00,000 in favour of the Industrial Trust Fund. Exhibit R-42 is the sixteenth annual report and statement of accounts for the year ending 31st December, 1957, and 31st December, 1958. Under the heading "secured loans" is shown a sum of Rs. 9,00,000 in favour of the Industrial Trust Fund, both during the years 1957 and 1958. There is, therefore, no dispute that the company owes a sum of Rs. 9,00,000 towards principal on the mortgages dated 1st November, 1947, and 1st September, 1948. It has been argued on behalf of the company that there is a bona fide dispute with regard to the indebtedness of the company to the petitioner and that the presentation of the winding up petition is an abuse of the process of the court, and that in this case the company "has not neglected to pay the amount demanded" within the meaning of section 434 of the Indian Companies Act. Reliance has been placed upon the decision of a Division Bench of the Calcutta High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are sufficient to meet the current liabilities. The evidence of R. W. 3 is vague and indefinite and does not carry conviction. The annual reports of the board of directors with statements of accounts duly audited by the auditors furnish incontrovertible evidence as to the exact financial position of the company, and at this stage may be mentioned the salient facts which emerge from the balance-sheets. It is not necessary to refer to the details mentioned in the anterior reports, and it will be convenient to take the figures furnished by exhibit R-42, the sixteenth annual report and statement of accounts for the years ending 31st December, 1957, and 31st December, 1958. This report contains an over-all picture of the financial position of the company. It is therein stated as follows : "As per the annexed trading and profit and loss accounts for the two years ending 3rst December, 1957, and 31st December, 1958, the net losses incurred after writing off bad debts in the year 1957 and depreciation in both the years are Rs. 1,83,711-5-3 and Rs. 1,71,363-5-9 respectively. As per the last balance-sheet at 31st December, 1956, the total loss that was carried forward was Rs. 16,86,641 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second of the grounds on which the petition is rested is that the company has suspended its business for more than a year. From the material evidence on record, the following undisputed facts emerge : The construction of the factory was completed in 1949. It remained closed between June, 1950, and November, 1951. It reopened in November, 1951, but was again closed from August 26, 1952, and during the last eight years, there has been a total closure of the factory. R.W. 1 himself admitted that the factory suspended its working from August 26, 1952. The only activity of the company subsequently was to dispose of some old stock. Exhibit R-42 the balance-sheet ending 31st December, 1958, shows no receipts even on account of the disposal of old stocks. Undoubtedly, therefore, the company has ceased production for about eight years. It stated that the closure of the factory was due to labour trouble. This may or may not be so. The fact, however, remains that the factory has been closed, and this is clearly a ground which would justify the making of a winding up order under section 439 of the Companies Act. The last of the grounds is that it is just and equitable to wind up the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on all sorts of views as to the state of world trade, the confidence of the public, the price at which articles can be sold a matter which depends very largely upon the number of such sales and an infinity of other considerations .......... It is not the function of a court to determine such a matter on its own views as to probable success or failure, but to form the best opinion it can upon the evidence given by persons with a practical knowledge of the trade in question and the local conditions where these affect the matter." As a result of the foregoing discussion, I hold that the company is unable to pay its debts ; that it has suspended its business for more than a year and that it is just and equitable to wind up the company. It is, therefore, ordered that the company be wound up under the provisions of the Companies Act, 1956. The official liquidator will forthwith take charge of all the property and effects of the company and cause a sealed copy of this order to be served on the company by pre-paid registered post. The petitioner shall advertise within fourteen days from this date a notice in the prescribed form of the making of this order in one issue each of the Deccan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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