TMI Blog1971 (10) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... divided into 1,103 equity shares of Rs. 500 each. The three Katakia brothers had three shares in the company. The other 1,100 shares were owned by N.C. Shah and other members described as the group of Bombay Traders. Prior to the incorporation of the company there was an agreement between the Bombay Traders and the appellants in the month of May, 1965. The Bombay Traders consisted of two groups known as the Nandkishore and the Valia groups. The Bombay Traders was floating a new company for the purpose of running a shoddy wool plant. The Bombay Traders agreed to pay about Rs. 6,00,000 to the appellants for acquisition of machinery and installation charges thereof. The appellants had imported some machinery and were in the process of importing some more. The agreement provided that the erection expenses of the machinery would be treated as a loan to the new company. Another part of the agreement was that the machinery was to be erected in portions of a shed in the compound of Ravi Industries Private Ltd. The company was to pay Rs. 3,100 as the monthly rent of the portion of the shed occupied by them. The amount which the Bombay Traders would advance as loan to the company was agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The other allegations of the appellants were these. The company incurred losses up to March 31, 1969, for the sum of Rs. 6,21,177.53 and thereafter incurred further losses. The company stopped functioning since about the month of September, 1969. The company is indebted to a director and the firms of M/s Nandkishore Co. and M/s Bhupendra Co. in which some of the directors of the company are interested. The indebtedness of the company to the creditors including the appellants' claim as shown by the company at the figure of Rs. 72,55601 is for the sum of Rs. 9,56,829.47. The liability of the company including the share capital amounted to Rs. 14,98,923.33. The liability excluding the share capital of the company is Rs. 9,56,829.47 and the assets of the company on the valuation put by the company on the balance sheet amounts to Rs. 8,81,171.96. The value of the current and liquid assets is about Rs. 2,74,247.38. The appellants on these allegations alleged that even after the proposed sale of the machinery at Rs. 4,50,000 the company would not be in a position to discharge the indebtedness of the company. The proposed sale of machinery for the sum of Rs. 4,50,000 was at an und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aims either by those persons or by the appellants. The alleged claims for interest and commission were therefore equally baseless according to the defence of the company. The second claim for compensation was denied on the grounds that the appellants were not entitled to any compensation for use of the portion of the shed and the alleged claim was barred by limitation. As to the claim for compensation the company relied on the resolution of the board of directors at which the Katakia brothers were present as directors. The board resolved confirmation of the arrangement with M/s Ravi Industries for use of the premises for the running of the industry at their shed at a monthly rent of Rs. 4,250. Prima facie the resolution repelled any claim for compensation or interest on compensation. With regard to the claim of invoices the High Court held that the first invoice for Rs. 34,600 was paid by the company to the appellants. The receipt for such payment was produced before the learned trial judge. The appellants also admitted the same. As to the other two invoices for Rs. 14,650 and for Rs. 36,000 the amounts appeared in the company's books. According to the company the claim of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l position. The resolution of the company declaring a dividend made the payment of the dividend contingent on the receipt of the commission from two sugar mills. The commission was not received till the month of May, 1960. The resolution was in the month of December, 1959. Under section 207 of the Companies Act a company was required to pay a dividend which had been declared within three months from the date of the declaration. A company cannot declare a dividend payable beyond three months. This court held that the nonpayment of dividend was bona fide disputed by the company. It was not a dispute "to hide" its inability to pay the debts. Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. (See In re London and Paris Banking Corporation [1874] LR 19 Eq. 444). Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding-up will have an important bearing on the reasonableness of the case. (See In re P. . J. Macrae Ltd. [1961] 1 All. ER 302 ; 31 Comp. Cas. 424 (CA)). In the present case the claims of the appellants are disputed in fact and in law. The company has given prima facie evidence that the appellants are not entitled to any claim for erection work, because there was no transaction between the company and the appellants or those persons in whose names the appellants claimed the amounts. The company has raised the defence of lack of privity. The company has raised the defence of limitation. As to the appellants' claim for compensation for use of shed the company denies any privity between the company and the appellants. The company has proved the resolution of the company that the company will pay rent to Ravi Industries for the use of the shed. As to the three claims of the appellants for invoices one is proved by the company to be utterly unmeritorious. The company produced a receipt granted by the appellants for the invoice amount. The falsehood of the appellants' claim has been exposed. The company however stated that the indebtedness is for the sum of Rs. 14,850 and the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers are within the province of the management of the company. Where the shareholders have approved of the sale it cannot be said that the transaction is unauthorised or improvident according to the wishes of the shareholders. It will appear from the judgment of the High Court that the creditors for the sum of Rs. 7,50,000 supported the company and resisted the appellants' application for winding up. There was some controversy as to whether all the creditors appeared or not. At the hearing of this appeal the company gave a list of the creditors and notices were issued to the creditors. Apart from the appellants, two other creditors who supported the appellants were Ravi Industries Ltd. whose name appears as one of the creditors as on August 2, 1971, in the list of creditors furnished by the company and K. S. Patel Co. with a claim for Rs. 44,477.56 though their name does not appear in the list. Among the creditors who supported the company the largest amount was represented by Nandkishore and Company with a claim for Rs. 4,95,999. The two creditors who supported the claim of the appellants in regard to the prayer for winding up were Ravi Industries Ltd. with a claim for Rs. 2,97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants contended that the shortfall in the assets of the company by about Rs. 2,50,000 after the sale of the machinery would indicate first that the substratum of the company was gone and, secondly, that the company was insolvent. An allegation that the substratum of the company is gone is to be alleged and proved as a fact. The sale of the machinery was alleged in the petition for winding up to indicate that the substratum of the company had disappeared. It was also said that there was no possibility of the company doing business at a profit. In determining whether or not the substratum of the company has gone, the objects of the company and the case of the company on that question will have to be looked into. In the present case the company alleged that with the proceeds of sale the company intended to enter into some other profitable business. The mere fact that the company has suffered trading losses will not destroy its substratum unless there is no reasonable prospect of it ever making a profit in the future, and the court is reluctant to hold that it has no such prospect. (See In re Suburban Hotel Co. [1867] 2 Ch. App. 737 and Davis Co. v. Brunswick (Australia) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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