TMI Blog1977 (8) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... powers under section 433( e ) of the Companies Act, 1956, as amended by the Companies (Amendment) Act of 1974 (the Companies Act), praying for an order for winding up of the said company by the court under section 433( e ) on the ground that the company is unable to pay its debts and under section 433( f ) on the ground that it is just and equitable that the company should be wound up. The paid up capital of the company up to 1970 was Rs. 4,500 and thereafter it is Rs. 1,04,500. The main objects of the company for which it has been established as per the memorandum of articles of association are as under : "(1)To enable people to save money to invest their savings and to help them in securing loans and to inculcate in their minds the ideas of thrift, economy and compulsory savings and to organize and conduct thrift schemes, chit funds and to undertake, carry on and engage in and execute all kinds of financial, commercial, trading and other business, except banking and insurance and to frame such rules and regulations as may be deemed necessary for the proper conduct of such business. (2)To pay money to the subscribers of the chit funds against such securities as the company m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petition, the company placed on record the balance-sheets for the years ended on 31st December, 1973, and 31st December, 1974, as well. The company, however, failed to place on record the balance-sheet for the years ended 31st December, 1975, and 31st December, 1976, though the same have become due and though Mr. C.C. Gandhi, the learned counsel for the company, gave an express undertaking to the court on behalf of the company to file the balance-sheets for the years 1975 and 1976, on or before August 9, 1977. Mr. Gandhi was told that no extension would be granted in any circumstances and that the balance-sheets should be placed on record unfailing on August 9, 1977. Notwithstanding this undertaking given by Mr. Gandhi and notwithstanding the order made by this court on August 1, 1977, the balance-sheets for the years 1975 and 1976 have not yet been placed on record. It may also be stated that on August 23, 1976, D.A. Desai J., before whom the petition came up on that day, directed the Registrar of Companies to launch prosecution against the directors and the managing director for failure to file the balance-sheets within a fortnight from the date of the order. Even so, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil 52,785 2,05,675 5,57,402 18,03,023 36,22,251 Other loans 69,280 4,64,253 7,58,790 14,07,537 20,30,797 26,71,698 Loss and expenses 78,010 3,55,361 9,06,237 21,20,296 48,02,042 72,83,168 Directors' remuneration 36,000 36,000 36,000 36,000 36,000 Rent for directors __ 32,500 __ Directors' fees 2,400 2,800 3,400 3,000 The spot light may be turned on what emerges from the aforesaid statement. The statement shows that in 1972, just prior to the issuance of the show-cause notice by the Regional Director, the paid up capital of the company was extremely insignificant inasmuch as it was only of the order of Rs. 4,500. The subscription collected from about 90,000 gullible and unwary members of the public who joined the various schemes introduced by the company in response to its tantalizing advertisements was of the order of about Rs. 42 lakhs. As against this, the loans to the directors and their friends we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts that the question will have to be examined as to whether the company deserves to be wound up on the aforesaid two grounds, viz ., that the company is not in a position to pay its debts and that it is just and equitable to do so. Pausing here for a moment before entering upon discussion in the context of the financial position of the company as revealed by the aforesaid balance-sheets which are available at present, a glance may be stolen at the profile of the schemes operated by the company as revealed by a pass book placed on record by the company pertaining to one of the schemes promoted by it known as Godavari group in which details pertaining to the group and the rules and conditions on which the scheme has been floated are contained. It shows that the group would consist of not more than 10,000 members, the monthly subscription of each member being Rs. 10 for 60 months continuously. There is a system of lucky draws and gifts which might enable one who is lucky to get gift in cash. Repayments were to commence after 10 lucky draws which would follow on the completion of 60 months, that is to say, it would follow after completion of a period of five years from the commenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me would be persons of very limited financial resources who would be contributing Rs. 10 per month from their hard earned savings or borrowings, as the case may be. It is in the background of these facts that the financial condition of the company will have to be assessed from the standpoint of its ability to pay its debts. Now, the position as on December 31, 1974, shows that the admitted debts of the company are of the order of about Rs. 1.41 crores. As against that, the realisable assets consist mainly of Rs. 36.22 lakhs due from the directors and their friends and Rs. 26.71 lakhs due from others apart from the fixed assets valued at Rs. 8.56 lakhs. We do not know how much can be realised from the directors and their friends. They obligingly and without scruples lent to themselves Rs. 36.22 lakhs out of the collections made from a large number of small subscribers of the order of about Rs. 1.41 crores. We also do not know how much can be recovered from other debtors. From out of the amount of Rs. 26.71 lakhs, assuming that every pie can be recovered, there is at the highest a possibility of recovering Rs. 6293 lakhs as against the debt burden of Rs. 1.41 crores. Even if the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd . We also do not know whether the directors and their friends have helped themselves further more during the pendency of the petition in this High Court wherein they have obtained a number of adjournments and have given an undertaking and an assurance to the court through their learned counsel to produce the balance-sheets which they never meant to honour. One might be tempted to remark that the prosecutions launched against the directors could do little good, for usually the directors plead guilty and not infrequently the court without realising the implications treats the offence as, what is nonchalantly called a technical offence, resulting in a petty fine which makes a mockery of more than 90,000 victims of what appears to be a big fraud. Be that as it may, so far as the present discussion is concerned, there is no escape from the conclusion that half the amount collected from the petty contributors, viz ., about Rs. 72 lakhs, has already been lost and all the realisable assets, about 1/3rd of the debt burden, is in the hands of the directors and their friends. It is too much to expect the directors to make recovery from themselves and their friends in order to pay the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence in present which the company is shown to have failed to repay. In order to comprehend the argument in its true perspective it is essential to examine the analogy of the relevant provisions contained in section 433( e ) and section 434 which may be quoted : "433. A company may be wound up by the court .......... ( e ) if the company is unable to pay its debts". "434. (1) A company shall be deemed to be unable to pay its debts ( a )if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees 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 there after neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; ( 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to be unable to pay its debts only if it neglected (not merely failed for one reason or other but wilfully neglected) to secure or compound for it to the "reasonable" (not any demand : only reasonable demand) satisfaction of the creditor. In other words, when the company is in fact indebted to a creditor and there is no bona fide or genuine dispute as regards the existence of the debt the company is expected, (1) to either actually pay, or (2) to offer to secure or compound the debt in such a manner that a reasonable creditor not out to harass or pressurise or coerce the company would be satisfied. If there is a deliberate or wilful neglect on the part of the company and the company makes a default only the deeming provision contained in clause ( a ) will come into operation. So also if the debt is already adjudicated upon by a court of law and, notwithstanding the order of the court the decree remains unexecuted in full or in part, clause ( b ) will be attracted and it will be deemed or presumed that the company is unable to pay its debts, for, in that event, there can be no just excuse for the default. Having formulated the tests for raising the presumption, the legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esenti remains unsatisfied. Which may be necessary in the context of clauses ( a ) and ( b ) and to engraft it as a limitation on the powers of the court so as to operate as a condition precedent to the exercise of the power. It is, therefore, not possible to uphold the argument of the counsel for the company that it must be positively established that there is some debt in existence in praesenti which the company has failed or neglected to pay. Counsel seeks support from a decision of this court rendered by B.K. Mehta J. in Company Petition No. 60 of 1975 decided on April 12, 1977 [ Registrar of Companies v. Kavita Benefit Pvt. Ltd. [1978] 48 Comp. Cas. 231 (Guj.)]. In view of the provisions contained in section 434(1)( c ) which expressly provides that contingent and prospective liabilities shall be taken into account in order to find out whether the company is unable to pay its debts at the point of time when the question regarding winding up arises, it is futile to contend that there must be positive evidence to show that there are in existence creditors whose debts have become due in praesenti and whose claims remain unsatisfied. I am unable to accede to the argument urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f court only on the ground that the company is unable to pay its debts. In fact, it would be a blow to do so, so long as there is any possibility of resurrecting the company. It would not be right to say that creditors can insist on winding up of the company by court as a matter of right if the position of the company is such that it would be unable to pay its debts to them even if the company can be resurrected. When the persons to whom the company becomes indebted enter into dealings with the company, they do so because they hope to make profits out of the transactions with the company in the usual course of business. It is an incidental risk and an occupational hazard for the persons who enter into such dealings which they undertake in order to earn profits. In fact, it is possible that in the course of their dealings for several years, they would have made huge profits out of the transactions entered into with the company. It would not, therefore, be right to wind up the company merely because the company is unable to pay its debts so long as it can be resurrected by a scheme or arrangement. But in a case like the present, where the company is not producing or manufacturing any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld assertion made in the affidavit. The same criticism applies to the statement contained in the affidavit sworn by the manager of the company on March 22, 1976. Similarly, the affidavit sworn by the managing director on July 15, 1976, also can render little assistance to the company. All that the managing director has done is to express his hope that by indulging in some activities, the company might be in a position to earn several lakhs of rupees. As discussed earlier, the financial position of the company is in extremely bad shape. As against this, there are only expressions of hope and wishful thinking contained in the affidavit of the managing director which cannot be of any solace to the small contributors to whom the amounts are due (the debt burden is of the order of more than 1.41 crores of rupees). It may also be stated that the managing director of the company in the aforesaid affidavit, prayed for four weeks' time in order to place on record the figures relating to the latest financial position. It was stated as under in paragraph 4: "I am praying for four weeks' time in order to complete the said assignment. This honourable court will be pleased to see that I have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anxiety anxiety that the moral of this episode is not lost on the authorities who have miserably failed to protect the poor from being robbed even after the deplorable state of affairs pertaining to this company came to light. Could the misfortune not have been averted ? What should be done to ensure that what has happened in the past is not re-enacted in the future ? Could the sanction to institute the petition not have been granted earlier ? Could a provisional liquidator not have been appointed ? Could the financial position of the company not have been exposed to the eyes of the poor public in order to warn them of the booby trap ? And to foreclose a repeat performance of the Robinhood drama in reverse (here the poor are robbed to pay to the rich) can it not be ensured that no company which has not obtained a certificate of solvency (to be procured within 3 or 6 months of the close of every accounting year) from the company law authorities or the Reserve Bank authorities is permitted to issue advertisements inviting the public to join the scheme and from collecting subscriptions, contributions or deposits ? The exercise is worth undertaking if the endeavour to protect the commo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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