TMI Blog1983 (2) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... istrict Budaun, but now the office has shifted to Ambala Road, Saharanpur. The total number of issued and subscribed shares of the company are 26,215 of Rs. 60 each. The company was incorporated in the year 1921 and started manufacturing cotton yarn from 1923 and continued to manufacture cotton yarn till December, 1973. In 1973, the spinning section of the company was burnt out resulting in heavy loss and, ultimately, the mill was closed in May, 1976. The damage caused by the fire was so great that, ultimately, it had to be closed down as stated above. The company also installed a straw board unit in 1965 but the factory could not be started till 1971. This factory is also alleged to have been closed in 1977. The allegation consequently is that both the spinning mill as well as the straw board factory of the company have closed down. Thereafter, steps were taken to sell the straw board unit and on December 6, 1978, a resolution was passed in the extraordinary general meeting of the shareholders authorising Lala Janak Raj who is one of the directors of the company, to take necessary steps for effecting closure and negotiating with the prospective buyers in respect of both the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981. The company had executed a general power of attorney in favour of the petitioner according to which the petitioner was in charge of the day-to-day working of the company and was custodian-in-charge of all the properties and assets of the company. The further allegation is that the petitioner has not yet handed over the charge. He is guilty of misappropriation and embezzlement of the company's funds and he has not yet rendered the accounts of the company. It has further been stated in reply that the present petition has been filed mala fide with the motive of harassing Lala Janak Raj and other directors of the company and the purchaser, M/s G.T. Oil Mills. It has been stated that one of the partners of the G.T. Oil Mills, Shri Kishan Goyal, is a Cabinet Minister in the U.P. and the petitioner has contested the election of MLA against him in the general election held in June, 1980, and that the family of the petitioner and the family of the partners of G.T. Oil Mills are not only political rivals, but also business rivals. The reason given for filing the present petition, according to the respondent, is that the petitioner could not bear this fact that Goyal's family will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undertakings of the company in full or in part and in such manner and terms and conditions, as the board may think fit and expedient. Lala Janak Raj, director of the company, was authorised to take all necessary steps for effecting closure and negotiate with the prospective buyers and put up proposals before the board for its consideration and approval. A copy of the minutes of the meeting dated December 6, 1978, has been filed as annexure '2' to the main petition. In paragraph 4 of the affidavit of K. K. Goyal filed in support of the application, A-21, it has been stated that the applicant, M/s. G. T. Oil Mills, made an offer to the company for the purchase of the straw board unit for a sum of Rs. 16,00,000. This offer was not accepted. M/s. G. T. Oil Mills then again raised the offer to Rs. 18,00,000 and, thereafter, to Rs. 20,00,000 and then to Rs. 23,25,000 between the years 1978 and 1980 and the last offer made by M/s. G. T. Oil Mills was Rs. 24,00,000. In para 5 of the said affidavit, it has been further stated that the company advertised twice in English newspapers having large circulation in regard to the sale of the straw board unit, namely, in the newspapers, Ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner, however, has vehemently urged that this agreement of sale has been entered into after the petitioner filed the petition for winding-up of the company in this court on February 25, 1981, He has accordingly relied upon certain interim orders passed by this court. On February 25, 1981, this court passed an ad interim order after admitting the petition to the effect that the directors are restrained from selling the properties of the company till further orders. Thereafter, on August 12, 1981, an advocate commissioner was appointed by this court to make an inventory of the plants, machinery, stores and other goods of the straw board unit. Since there was difficulty faced by the commissioner in complying with the orders passed by this court on August 12, 1981, certain further directions were issued by this court on August 28, 1981. The said order is quoted below ; "From the commissioner's report, it appears that the inventory could not be prepared on account of the fact that Sri Keshav Krishna Goel, a partner of the firm, which is the prospective purchaser, wanted an endorsement from the commissioner that the order passed on August 12, 1981, operates against the firm o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thereafter, on September 7, 1981, and September 10, 1981, further orders were passed by this court clarifying the earlier orders in regard to the making of the inventory of the straw board unit. From the mere fact that certain interim orders were passed, it cannot be said that the agreement of sale executed by the company in favour of M/s G. T. Oil Mills on January 20, 1981, was not executed. No evidence has been placed before this court to show as to why the agreement could not have been executed on January 20, 1981. There is only an averment in paragraph 11 of the affidavit of Ram Autar to the effect that it is incorrect to say that the same was executed on January 20, 1981. If it is so, why the registration was delayed till March 2, 1981 ? This by itself does not substantiate the fact that the agreement was not executed at all on January 20, 1981. I am of the opinion that in the normal course, after a purchaser pays a heavy amount, namely, Rs. 4,00,000, the agreement must have been executed by the company in favour of M/s G.T. Oil Mills. In the circumstances, I do not find any illegality in the agreement, which was executed on January 20, 1981, in the normal course of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up. Admittedly, the petitioner is a holder of 76 fully paid-up shares. In the circumstances, the petition is clearly maintainable. I, accordingly, hold that the petition is maintainable. Issues Nos. 2, 4 and 6: In order to record a finding on these issues, it is necessary first to examine the scope and effect of section 433( e ) of the Companies Act. Section 433 enumerates the circumstances in which the company may be wound up. It provides as under : "A company may be wound up by the court, ........................ ( e )if the company is unable to pay its debts. " The word "may" used in the opening part of the section clearly indicates that even if the company is unable to pay its debts, it is a matter of discretion of the court whether, in the circumstances of the case, it would be in the interest of justice to wind up the company. In Aluminium Corporation of India Ltd. v. Lakshmi Ratan Cotton Mills Co. Ltd. [1970] 40 Comp. Cas. 259 (All.), Hon M. H. Beg J. (as he then was), after analysing section 433 of the Companies Act, laid down the following principle of law (at page 267): "Although the power to wind up is discretionary, it has to be exercised judicially. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." In clause ( a ) above, if a creditor has served on a company, a demand requiring the company to pay a sum so due and the company has neglected to pay the sum, then it would be deemed that the company is unable to pay its debts. Clause ( b ) provides that 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, it shall be deemed that the company is unable to pay its debts. Clause ( c ) further provides that if a court is satisfied that the company is unable to pay its debts, then also the company will be deemed to be unable to pay its debts. All the three clauses, mentioned above, are disjunctive, and if the petitioner is able to establish the circumstances mentioned in either clause ( a ) or ( b ) or ( c ), it would be deemed that the company is unable to pay its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to you letter No. 105/U dated January 22, 1981. The facts stated in my letter dated January 15, 1981, in reply to your letter No. 26-U were correct and are reiterated. It is correct that I was the custodian of all the records till I was the secretary and will continue to be so till the charge is not taken over from me and, as such, files and records should not be removed without my knowledge or permission or by an unauthorised person. Kindly depute somebody to take over the charge of all the files, records, etc ., against valid receipt. It is false and baseless that Ram Prasad refused to show the files and other documents to your representative. It is false, baseless and malicious propaganda that I have sold any shosham trees or got the Rakhi removed. The number from 200 has come down to 50 now of Rakhi Trucks. Kindly stop from making such baseless insinuations. So far as a piece of Plot No. 795 measuring 10 biswas 3 biswansi pukta is concerned, it does not belong to the Prem Spg Wvg Mills Co. Ltd. which can be verified from your records. The sale deed in the name of my father was executed and registered on February 3, 1951, and a copy can be had from the office of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... January 30, 1981, was received, but that contained very highly exaggerated figure and the alleged claim of dues was based on vague demands and the same was disputed by the company. The petitioner made a false claim without rendering any account. He did not even render any account after resignation from the post of secretary/manager. The accounts could not be ascertained, as the petitioner has not yet cared to give charge of the account books, other records and files of the company. The claim of the petitioner has not been adjudicated upon. It is also not disputed that the petitioner was secretary/manager of the company since 1969 up to January 16, 1981, for almost 12 years and the allegations have been made by the company against the petitioner in regard to the fact that he has not given charge and other account books, etc . In the circumstances, in my opinion, the amount claimed by the petitioner was bona fide disputed by the company and, as such, it cannot be held on the basis of the demand made by the petitioner that the company has neglected to pay the amount claimed by the petitioner and that the company should be deemed to be unable to pay its debts under section 433( c ) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the counter-affidavit, it is clear that the liabilities enumerated in para. 12 of the petition have been disputed bona fide by the company and, therefore, the company cannot be held to be unable to pay its debts on the basis of debts which are bona fide disputed by the company. In the circumstances, in my opinion, it cannot be held that the company is unable to pay its debts under section 433( c ) of the Companies Act. The question now which has to be considered is whether the company is commercially insolvent. As I have already stated above, a company can be said to be commercially insolvent, if the company is not in a position to meet its current liabilities even though it may have a very valuable asset not presently realisable. A company shall be called commercially insolvent, if it is unable to pay its debts or liabilities as they arise in the ordinary course of business. If a company has a number of undertakings and if it decides to sell away one of its units as a matter of commercial exigency in order to save the company from further loss, it cannot be said that the company has become commercially insolvent. The petitioner has relied upon the balance-sheets for the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in Schedule "C" is also added which is about Rs. 5 lakhs, then the total liability comes to Rs. 17,50,000. I have already held above that the sale in favour of G.T. Oil Mills is valid and four lakhs of rupees have already been received from G.T. Oil Mills as advance and the balance recoverable is Rs. 20 lakhs. If these Rs. 20 lakhs are received from G.T. Oil Mills, then the entire current liability as well as loan can be met by the said amount. In the circumstances, it cannot be said while perusing the balance-sheet for the year ending March 31, 1980, that the company is unable to pay its debts. The balance-sheet for the year ending March 31, 1981, shows the current assets to be Rs. 4,57,934. The current liability and provisions shown in schedule "G" are to the extent of Rs. 11,38,340. In the sum of Rs. 11,38,340, four lakhs of rupees have been added as a liability in respect of the sale of the straw board unit. This cannot possibly be treated to be a liability in the sense it is used in section 434(1)( c ) of the Act. In the circumstances, the total liability under schedule "G" is Rs. 7,38,340. Considering the assets and liabilities in schedules "F" and "G", the total liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and bank balance 38,969 ( iii ) Advances recoverable in cash 1,13,484 ( iv ) Security deposit 25,130 Total of this comes to 3,87,611 In paragraph 3 of the supplementary affidavit of J. P. Sharma (A-50), it has been stated that the liability of Rs. 65,000 shown in the balance-sheet in respect of the coal/sundry amount has been discharged. This amount has consequently to be deducted from the liabilities. In paragraph 6 of this supplementary affidavit, it has been further stated that a sum of Rs. 1,50,000 has to be received as refund from the electricity department. This consequently has to be added as an asset of the company. Deducting Rs. 65,000 and adding Rs. 1,50,000 mentioned above, the total liabilities of the company would come to Rs. 11,97,389. This figure has been arrived at as follows : Rs. Total liabilities according to Schedule "G" about 18,00,000 minus 65,000 comes to 17,35,000 If from this amount, Rs. 3,87,611 being the total liquid assets of the company is deducted, it comes to Rs. 13,47,389. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insolvent" means that the assets of the company are such and its existing liabilities are such as to make it reasonably certain that the existing and probable assets would be insufficient to meet the existing liabilities. There is no dispute to this proposition; but on the facts of the present case, I have already held above that the company is in a position to meet the existing liabilities ; in the circumstances, this case is also clearly distinguishable on its own facts. In Bengal Luxmi Cotton Mills Ltd. v. Mahaluxmi Cotton Mills Ltd., AIR 1955 Cal 273, reliance has been placed by the learned counsel on the principle enunciated in this case to the effect that if the company has to sell its capital assets in order to pay its debts, it cannot ordinarily be said to be commercially solvent unless the assets are surplus assets. In this case, it has not been laid down that in every case where the company has to sell away its capital assets, it must be held that the company is commercially insolvent. The expression used by the court is "ordinarily". Therefore, the question whether a company when it sells its capital assets can be called commercially insolvent or not, depends upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent. Here, no valid notice was served on the company as required by section 434(1)( a ) of the Act and I have already found after examining the balance-sheets that the company cannot be said to be commercially insolvent. In the circumstances, this case also is of no assistance to the petitioner. In view of the above, I find that the notice given by the petitioner is invalid in law under section 434 of the Companies Act, though the petition would be maintainable in spite of the invalidity of the notice. I further find that the company is in a position to pay its debts and that it is not commercially insolvent. Issues Nos. 2, 4 and 6 are decided accordingly. Issues Nos. 3, 5 and 7 : I am considering these issues together, as they are interconnected and the question whether the company has lost its substratum is the content of the just and equitable clause mentioned in section 433( f ) of the Act. Under clause ( c ) of section 433 of the Companies Act, (if a company) does not commence its business within a year from its incorporation or suspends its business for the whole year, then a discretion has been given to the court in such a case to wind up the company. Even if the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red. 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." It is in the light of the above principles as well as facts and circumstances of this case that the question arising out of these issues have to be decided. It is admitted by the parties that both the spinning mills and straw board units have been closed. In fact, on the night December 23, 1973, a fire broke out in the mills resulting in a serious loss to the spinning mills. The entire machinery of the spinning mill was burnt out. From the directors' report for the year ending March 31, 1977, mentioned in the balance-sheet for the year ending Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c uses." There is one other clause which is relevant, that is, clause (e), which is also quoted below : "( e )To carry on all or any of the following businesses, namely, cotton spinners and doublers, flax, hemp and jute spinners, linen manufacturers, flax, hemp, jute and wool merchants, wool combers, worsted spinners, woollen spinners, yarn merchants, assorted stuff manufacturers, bleachers and dyers, and makers of vitriol bleaching and dyeing materials and to purchase, comb, prepare, spin, dye and deal in flax, hemp, jute, wool, cotton, silk and other fibrous substances and to weave or otherwise manufacture, buy and sell and deal in yarn, linen, cloth and other goods and fabrics, whether textiles felted, netted or looped and to supply power." I am leaving aside the other clauses which the counsel for the parties interpreted differently. From the light of the above clauses, it is clear that sub-clause ( a )(1) contemplated the starting of a straw board unit, but clearly the objects mentioned in sub-clause ( a )(2) and ( e ) quoted above have yet not been explored by the company. In the circumstances, it cannot be said that after the closure of the spinning mill and the straw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the opinion that it is not just and equitable that the company should be wound up and an opportunity should be given to the company to commence its business, particularly when efforts are being made for revitalising the company in the interest of shareholders, and when admittedly, the majority shareholders are against the winding-up of the company. I accordingly hold that the company is not liable to be wound up under section 433( c ) of the Companies Act. The company has not lost its substratum and that it is not just and equitable that the company be wound up. All the three issues are decided accordingly. Issue No. 9 : I have already stated in the earlier part of the judgment that the petitioner, Paramjit Lal Badhwar, was the secretary-cum-manager of the company since 1969 up to January 16, 1981. The petitioner was the secretary when the spinning mills were destroyed by fire in December, 1973. The petitioner was also the secretary when on December 6, 1978, a decision was taken to sell both the units. Throughout the period when the company was suffering loss, efforts are being made to solve the company's financial crises as is clear from the directors' report mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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