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TMI Blog1969 (7) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to hereinafter as "the firm") so much so that the accounts of these three concerns were mixed and open to each other as though the three concerns were one. But, subsequently, as a result of differences between the two groups, they decided to part company. Their interests were separated under an award. The corporation came to the share of the Singhanias exclusively. The company and the firm fell in the share of the Guptas. Accounting between the corporation and the other two concerns indicated that the company and Messrs. Behari Lal Ram Chand had certain claims against the corporation which did not clear its accounts. Consequently, two civil suits had to be filed at Kanpur. Suit No. 63 of 1949 was filed by the company against the corporation, and Suit No. 65 of 1949 was filed by the firm against the Corporation, claiming amounts due to them. The suit filed by the company was decreed, after going into accounts, for a sum of Rs. 2,82,734-11-3 with proportionate costs and pendente lite interest at 3 per cent. per annum. Among the pleas taken by the corporation in the suit decreed against it was that the claim was barred by time. The company relied upon an acknowledgment, contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on then filed the winding up petition in this court on August 9, 1967, on a number of grounds including the company's inability to pay its debts. The company denied its inability to pay its debts and made counter-allegations. The following issues arising out of the assertions made by the two sides were framed : (1)Whether the company is liable to be wound up on the ground that it is commercially insolvent for the reasons mentioned in the petition as amended ? (2)Whether the company has suspended its business for a whole year and is liable to be wound up for this reason ? (3)Whether it is otherwise just and equitable to wind up the company ? (4) Whether the petition is mala fide and liable to be dismissed on that ground? Considerable evidence has been placed before the court by both sides through affidavits. At one stage, an application for summoning certain witnesses was also allowed, but, subsequently, after an application for serving a very large number of interrogatories had been partly allowed, so that answers to the interrogatories were also given in the form of affidavits, it was not found necessary to examine witnesses. As already indicated by me, in a detailed order pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the indebtedness existing at the time when the petition is made does not, however, preclude taking all evidence subsequent to filing of a winding up petition. It is a much narrower rule. Even this narrow rule can be easily overcome by a creditor, seeking to rely on fresh indebtedness, by the simple device of filing a fresh petition. That narrow rule is not really attempted to be transgressed by the petitioner here. The broader proposition sought to be built on it, on behalf of the company, to exclude all evidence in support of a petition tendered after the petition is filed or to prevent this court from considering all evidence of facts or events occurring after a petition is filed, which may have a bearing on questions raised, is not well founded. In East Kajoria Collieries case [1965] 35 Comp. Cas. 180 ; 69 CWN 1, the following passage was cited from Buckley on the Companies Acts (13th edition, page 471): "An order will not be made if a sufficient case is not stated on the petition, even if such a case is proved in evidence. The order must be made secundum allegata et probata." After having examined the cases cited in Buckley on the Companies Acts (13th edition), in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iring 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 (b)if execution or other process issued on a decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part ; or (c)if it is proved 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 liabilities of the company." The petitioning creditor, having been met with a refusal to pay after it had served a registered notice on May 11, 1967, demanding payment of the amount declared to be due to it, claims the benefit of the deeming provision under section 434(1)(a) of the Act. Its contention is that, once the statutory fiction or presumption is shown to operate in its favour, it becomes entitled ex debito justitiae to a winding up order (vide Buckley on the Companies Acts, 13th edition, 1957, page 450). It relies, in particular, on a passage in the judgment of Lord Cranworth in Bowes v. Hope M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its discretion, to make arrangements to pay up (see e.g. In re Brighton Hotel Company [1868] 6 Eq. 339 and In re Western of Canada Oil, Lands and Works Company [1873] 17 Eq. 1.). In W.T. Henley's Telegraph Works Co. v. Gorakhpur Electric Supply Co. AIR 1936 All. 840, 845. Iqbal Ahmad J. observed, with regard to this court's discretionary power now found in section 433 of the Act, to wind up a company : "It would thus appear that the company is unable to pay its debts. This fact, however, does not necessarily entitle the petitioner to an order for the winding up of the company, as the discretion to pass such an order, even in the case of the inability of a company to pay its debts, is by section 162 vested in the court." I am unable to take a different view of the power contained in provisions of section 433 of the Act. I, therefore, respectfully dissent from some of the views expressed recently by Vimadalal J. of the Bombay High Court in In re Advent Corporation (P.) Ltd. [1969] 39 Comp. Cas. 463 when admitting a winding up petition. Moreover, on facts, the position of the petitioners appeared equitably strong there. Although the power to wind up is discretionary, it has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Douglas (Griggs) Engineering Ltd. [1962] 1 All. ER 498, Sarkar Estates (P.) Ltd. v. Kusumika Iron Works (P.) Ltd. [1962] 32 Comp. Cas. 575 ; AIR 1961 Cal. 439, and C. Hariprasad v. Amalgamated Commercial Traders (P.) Ltd. [1964] 34 Comp. Cas. 209 ; AIR 1964 Mad. 519. Furthermore, it was submitted that, inasmuch as the company did not choose to even appeal against the order passed on the restitution application, the petitioner's right to an immediate payment could not be said to be disputed at all. Hence, reliance was placed on the following passage in Palmer's Company Law, 20th edition, 1959, at page 677 : "Where the debt is undisputed, it is futile for the company to say, 'we are able to pay our debts, but we do not choose to pay this particular debt.' The court will not listen to such a defence." It was urged that such a stand was, in itself, inequitable. Equity and justice as well as sound commercial ethics, it was submitted, demand that obligations to pay in praesenti should be met. It was pointed out that even a temporary use of a large sum of money of over four lakhs had considerable value for a manufacturing business concern. On the other hand, learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questioning the validity of the decree as there seemed to be to S. K. Dutta J. in Steel Equipment and Construction Co.'s case [1968] 38 Comp. Cas. 82. But, a debt simpliciter, which is not supported by a judgment to evidence it, has to be proved by other evidence. The difference lies not in the principle applicable but in the type of evidence produced to prove a debt and its effect. Learned counsel for the petitioner tried to confine the applicability of the principle of bona fide dispute, in cases of decretal debts, to cases where the decree was shown to have been passed either without jurisdiction or could be strongly suspected of being collusive or obtained fraudulently so that it could be null and void. Learned counsel for the petitioner contended that, in other cases, the existence of a decree for money, which has not been set aside, followed by a failure to pay within time after a statutory notice, was enough to give rise to the fiction or presumption laid down by section 434(1) of the Act. I do not consider such a clear-cut or simple ground of distinction to be justified. The presumption that a judgment and decree are correct no doubt remains until they are set aside. But, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that even where there is an appeal involving substantial grounds for challenging a judgment under appeal, the judgment-debtor must necessarily be held to have neglected to discharge his duty to pay, unless a stay order is granted by the appellate court, seems to me to be too wide. A stay order from the appellate court would certainly establish that there was no neglect and, therefore, inability to pay, within the meaning of section 434(1)(a) of the Act, could not be presumed. But, where a bona fide dispute about the liability to pay is satisfactorily shown by an appellant, inability to pay could not be presumed simply because the judgment-debtor has failed or refused to pay in response to the statutory notice of the creditor under section 434(1)(a). It may, however, still be presumed under section 434(1)(b) when a process issued, in the course of execution, is shown to have been returned unsatisfied. A stay order is only indispensable in cases falling under section 434(1)(b) of the Act because here the plea of a bona fide dispute is of no avail and is irrelevant. In the instant case, the petitioner could only file and did file a restitution application under section 141, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deeming provisions of section 434(1) of the Act, in the case of a restitution order, is to proceed with the execution, to take further appropriate steps for executing the restitution order, and to show that these have not resulted in full satisfaction of the decree. Such steps include, it has to be remembered, even appointment of a receiver in a suitable case, as provided in section 51, Civil Procedure Code. A Division Bench of this court has held in Raghunath Prasad Tandon v. Budaun Electric Supply Co. Ltd. AIR 1949 All. 112 that a receiver of a company can be appointed under the Civil Procedure Code. Even if the submission that no property of the company was available against which execution could be levied, as all its assets are already hypothecated, were correct, section 434(1)(b) could not apply until the conditions laid down there are shown to have been fulfilled. The petitioner has, however, submitted that it has also proved, as required by section 434(1)(c), that the company is actually insolvent. It is a little difficult to understand how a deeming provision or a legal fiction could be said to apply to a state of actual proof of insolvency until one looks at the corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been considered above. Paragraph 22 sets out a number of debts of the company only in order to prove "that the company is not commercially solvent." Paragraphs 25 to 48 deal with alleged mismanagement, fraudulent acts of the directors, closure of the mills due to its alleged financially precarious position, and the condition of its machinery which was said to be outmoded and incapable of producing goods in such a way as to yield profits. In the last paragraph 49 of the petition it is only asserted that it is just and equitable for the company to be wound up as the company is "commercially insolvent and unable to pay its debts". A great deal of attention has been paid by the petitioner to the total liabilities of the company but only some assets are mentioned incidentally when dealing with the alleged outmoded machinery of the company. An amendment application, filed on August 21, 1967, and allowed on October 24, 1967, sought only to introduce more facts relating to the liabilities of the company and alleged acts of fraud and breach of trust by its office-bearers. Even the very detailed interrogatories, consisting of 94 questions, some of which were ordered to be answered by the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scattered, parties filed affidavits, under orders of this court, about their respective stands on this specific question. According to the petitioner's affidavit, current liabilities add up to Rs. 1,70,30,960 whereas current assets are estimated at Rs. 1,08,79,040 only. It disputes, without being able to disprove, the correctness of some of the items shown by the company among current assets and alleges that the current liabilities have been increasing. On the other hand, according to the company, current liabilities add up to Rs. 1,37,89,561 and current assets are shown at Rs. 1,97,69,497. Included in the current liabilities is a debt of Rs. 74,72,117 to the State Bank, the principal creditor, for the payment of which goods in stock, valued at Rs. 1,18,32,496 shown among current assets, are pledged. As these were pledged, their value, to the full extent, should be, according to the corporation, deducted from the company's current assets. There is incontestable evidence on record, in the form of certificates from the State Bank, that this liability has been reduced from nearly Rs. 75 lakhs to about Rs. 10 lakhs only in April, 1969. The resulting enormous excess in the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to agree with the submission on behalf of the company that the application by the association seems inspired by improper motives and could be instigated by some other party. In any case, the association has not established its locus standi as a creditor. It has not even stated that it is a creditor as no sum from the company is due to the association itself. Although the existence of several large amounts among the current liabilities of the company, which it has not yet met, may indicate the inability of the company to satisfy its liabilities as they arise, yet, it is quite clear that the company has been able to liquidate large amounts of debts and to pay up every creditor, with an undisputed claim, who has come forward to support this petition. This shows that the company can pay its creditors when pressed even though it may be in financial difficulties. Its last balance-sheet does contain suspicious features such as the entry of Rs. 2,71,288 shown as cash in hand when the balance shown in current accounts in scheduled banks is only Rs. 11,483. The fact that the company can liquidate large outstanding debts, in spite of these modest cash reserves when compared with its large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a winding up order should not be made on the ground of closure for over an year where there is sufficient explanation for the closure and a reasonable prospect of re-starting and earning profits. In the instant case, the company seems to have an adequate explanation on the ground of a depression in the cotton manufacturing industry and labour trouble which the company had to face. The mills are said to be working and the company making profits. Therefore, this could not be said to be a sufficient ground for a winding up order now. Coming to the third issue relating to the question whether it is just and equitable, apart from commercial insolvency and suspension of business for more than a year, that the company should be wound up, the provisions of section 433(2) have to be borne in mind. It is laid down there : "Where a petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy." One of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground for a winding up order (In re Haven Gold Mining Co. [1882] 20 Ch. D. 151. Again, mismanagement or misapplication of funds by directors, for which other remedies are available, will not ordinarily be a ground for a winding up order unless it has produced insolvency (In re Anglo-Egyptian Navigation Co. [1869] L.R. 8 Eq. 660). In Rajahmundry Electric Supply Corporation Ltd. case [1956] 26 Comp. Cas. 91 ; AIR 1956 SC 213, it was held by the Supreme Court that the fact that the directors had misappropriated the funds of the company may not be sufficient to make it just or equitable to wind up the company. Further details of the alleged mismanagement and dishonesty of the Gupta group, which is said to be thoroughly unreliable, given by the petitioner are: (1)Transfer of personal properties to the company without executing a proper conveyance and in order to "fritter away" the funds of the company : On behalf of the company, it was explained that, as disputes are still pending about these properties, a deed could not be executed for the sale of the properties of the Gupta family to the company. But, it is asserted that it is an advantageous transaction from which the company bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade look like attempts at mudslinging in the hope that some of it would stick. The equities which the petitioner can properly invoke as a creditor must relate to the interests of the creditors which a petitioning creditor represents in a winding up proceeding. The test in such a case should be : Will the interests of the creditors be better served by a winding up order ? If the debts of the creditors can be liquidated more easily by taking proceedings other than those for the liquidation of the company itself, I do not think that a winding up order could be said to be absolutely necessary. The question of insolvency was raised again under the just and equitable clause. I do not think that this can be done when there is a separate provision in section 434(1)(c) of the Act for it now. Even if it could be considered here, I have already dealt with both types of alleged insolvency. Learned counsel for the company has rightly contended that only commercial insolvency was, according to paragraph 49 of the petition itself, the real ground of the claim for a winding up order even under the just and equitable clause. The last issue arising out of allegations of mala fides made by the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling that the petition be dismissed if acceptable security for the amount due was forthcoming. At first, the petitioner's counsel suggested that proper security was a bank guarantee, but, afterwards, seemed willing to accept other security of any suitable property free from any prior charge. The security of some shares offered by the company was unacceptable to the petitioner. The parties, therefore, prayed that the question of adequate security may be decided by the court. I do not, however, think that winding up proceedings should be used in such a case, as a means of merely obtaining indirectly an order which has the effect of stay of execution of a decree on furnishing security. Such an order can be more appropriately sought from the court in which an appeal against the decree to be executed is still pending. If the petitioner's debt, about which I have found that a bona fide dispute exists between the parties, was the only claim against the company, I may have followed the line indicated by a recent English case (not cited by the parties), Mann v. Goldstein [1969] 39 Comp. Cas. 353. There, it was held that to invoke the winding up jurisdiction, after it had become clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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