TMI Blog1994 (8) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondent-company on the ground that the company is unable to pay its debts as envisaged by section 433( e ) of the Companies Act, 1956. In O.S.A. No. 19 of 1993, also these procedural questions squarely arise for our consideration. Therefore, they were all heard together and are being disposed of by this common judgment. The common questions pertain to the procedure to be followed by the learned company judge before admitting and ordering advertisement of such petition. When such company petitions are filed, whether they could be straightaway admitted and ordered to be advertised by the learned company judge or whether the learned company judge is required to follow some procedure by way of holding a summary enquiry about the right of the petitioner to move the petition and the nature of the order to be passed in such an enquiry or hearing are the main questions posed for our consideration. As the aforesaid questions are referred in the company petitions and as they also arise in O.S.A. No. 19 of 1993, we shall first deal with these procedural questions before adverting to the merits of O.S.A. No. 19 of 1993, the fate of which will depend upon our decision on these referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due from the company to the petitioning creditor, that it is not barred by time, that the company is unable to pay this debt and is also commercially insolvent, i.e. , its assets cannot meet the liability of paying this debt and all other existing debts of the company. That if these findings on preliminary issues are reached and the winding-up petition is admitted and advertised then at the stage of trial after hearing the other creditors or shareholders, who may like to support or oppose the company petition pursuant to the advertisement and also after hearing the workers, if any, the company judge may ultimately decide whether the company is liable to be wound up by passing an order of winding up or whether the petition is liable to be dismissed on any appropriate ground and at that stage, proper orders under section 443 can be passed by the company judge. But at the stage of admission and advertisement of the petition, at least a summary inquiry of the aforesaid nature has to be held by the company judge in cases of companies which are going concerns. Otherwise, even admission and advertisement of such petitions would have a very grave and pernicious effect on the company's rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous decisions, the latest being Pradeshiya Industrial and Investment Corporation of U.P. v. North India Petro Chemical Ltd. [1994] 79 Comp. Cas. 835, a preliminary enquiry at least for a company which is a going concern, can be held after hearing the company sought to be wound up under section 433( e ). But that would be only a summary enquiry of prima facie nature and the findings reached therein can be in connection with only two questions, namely, whether the petitioning creditor is a creditor of the company for a fixed amount ascertained or substantially ascertained, whether that debt is within limitation and whether the company's defence in this connection is not valid or is a mere moonshine. That if the case falls under section 434(1)( a ) or ( b ) the company court can also presume by way of a rebuttable presumption that the company is unable to pay its debts. But thereafter, the company petition can be admitted and advertised. The question of commercial insolvency of the company need not be examined at this stage. To that extent, Mr. Jayaram agreed with the submission of learned counsel Sri Raghavan. Mr. Jayaram further submitted that the company petition under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the aforesaid two questions are reached, prima facie, the company judge will have to hear not only the petitioning creditor but also the company who has received the notice prior to admission and advertisement. These findings prima facie are in the nature of findings reached by the civil court about a prima facie case and the balance of convenience at the stage of granting of interim injunction in a suit and such prima facie findings can be reconsidered at the stage of trial on proper evidence being led by both the parties. Similarly, in the company petition also, the same situation would emerge. Mr. Jayaram, however, submitted agreeing with Mr. Holla for the appellant-company in O.S.A. No. 19 of 1993 that if it is a defunct company which has closed its shutters there will be no harm in admitting the petition and even advertising it prior to the issuance of notice to the company and in such a case even such preliminary summary enquiry after hearing the company may not be necessary. But, in all the other cases, he agreed that at the pre-admission advertisement stage, an enquiry of summary nature has to be held of course subject to the limit of enquiry, which he canvassed for. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t VII deals with modes of winding-up. Sub-section (1)( a ) of the said section deals with winding-up of a company by the court. We are concerned with that mode of winding-up. Chapter II deals with winding-up by the court. The first section therein is section 433 which deals with cases in which a company may be wound up by the court. It states, a company may be wound up by the court as per clause ( e ) if the company is unable to pay its debts. Then follows section 434(1) which, deals with situations where the company will be deemed to be unable to pay its debts. Therefore, there is a direct linkage of section 434(1)( a ) to ( c ) with the company petition for the winding up of a company by the court on the ground mentioned in section 433( e ), i.e. , that the company is unable to pay its debts. The deeming fiction regarding inability of the company to pay its debts is said to arise under the three circumstances mentioned in section 434(1)( a ), ( b ) and ( c ). As this section is relevant for our purpose, it will be useful to extract it in extenso at this stage. It reads as under : "434.(1) A company shall be deemed to be unable to pay its debts ( a )if a creditor, by assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented by a contingent or prospective creditor is admitted, the leave of the court shall be obtained for the admission of the petition and such leave shall not be granted ( a )unless, in the opinion of the court, there is a prima facie case for winding-up the company; and ( b )until such security for costs has been given as the court thinks reasonable." We will deal with this provision at the appropriate time, when we shall consider the effect of this provision on the pre-admission and advertisement procedure sought to be advocated by the respective parties for being followed by the winding up court, especially in the light of the question whether in this summary enquiry, there should be prima facie findings or final findings. Section 443 is the next section which is relevant for our present purpose. It deals with the powers of the court on hearing the petitions. Section 443(1) deals with the powers of the court at the stage of hearing of winding-up petitions as it lays down that the court may ( a ) dismiss, ( b ) adjourn the hearing conditionally or unconditionally, or ( c ) make any interim order that it thinks fit, or ( d ) make an order for winding up the company with o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted, or, where the leave has been granted subject to any conditions precedent to the admission of the petition, unless such conditions have been satisfied. On a conjoint reading of section 438 and rule 97 it was submitted that a petition by a contingent and prospective creditor will require prior to its admission and advertisement an enquiry into the prima facie case for winding up the company and that by contrast such being not the requirement of rule 96, it must be held that no such enquiry is contemplated prior to the admission and advertisement of petition by a creditor as such. Rule 99 deals with advertisement of the petition. Such petition shall be advertised within the time and in the manner provided by rule 24 of the Rules. The advertisement shall be made in Form No. 48. Rule 24 of the Rules deals with the mode of advertisement and provides that where a petition is required to be advertised, it shall, unless the judge otherwise orders, or these Rules otherwise provide, be advertised not less than fourteen days before the date fixed for hearing, in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the winding up petition. Where the company is not the applicant, notice of the application for appointment of a provisional liquidator shall be given to the company unless the court, for special reasons to be recorded in writing, dispenses with the notice. That shows that after a winding-up petition is filed the question of appointment of a provisional liquidator would arise after a formal order on admission is passed. Such an order normally would not be passed without hearing the company. Relying on this provision, it was submitted by learned counsel for the petitioning creditors that wherever the company is to be heard before making any order an express provision is found in the Act and the Rules. But at the stage of admission of a company petition, no such express provisions are made. To that extent, they are right. However, as we will presently see, by a series of decisions of the Supreme Court, the Act and the Rules have been so read as to imply in appropriate cases a notice and hearing to the company even prior to the admission and advertisement of the petition. Section 446 provides that where a winding up order has been made or the official liquidator has been appointed pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ). However, it examined the scheme of the Act and the Rules in connection with the procedure about hearing the company before admitting and advertising the petition. In that case, the learned single judge of the company court had issued notice to the company. But it was not clear whether the notice was to show cause why the petition should not be admitted or by the order on the petition it was admitted and then notice was issued prior to advertisement. However, the fact remained that the company showed cause and requested the court to take the petition off the file and dismiss the same. The petition in the meantime was not advertised. After hearing the company, the learned single judge took the view that it was not a fit case for advertising the petition and dismissed the petition. In appeal against the said order, a Division Bench of the High Court held that once a petition is admitted, the court is bound to advertise the petition. It is that order which was challenged before the Supreme Court. In the light of the provisions of the Act and the Rules, the Supreme Court, speaking through Shah J., made the following pertinent observations (at page 788 of 37 Comp Cas): "When a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s bound to suffer serious loss and injury. The aforesaid decision, therefore, squarely lays down three types of procedures which the company court can follow when a winding up petition is moved under section 433 of the Act : ( i )before even admitting the petition, a show-cause notice can be issued to the company; ( ii )may admit the petition, fix the date for hearing and issue notice to the company before giving direction about advertisement; and ( iii )petition may be admitted, date of hearing may be fixed and also petition may be directed to be advertised and all these exercises can be undertaken without issuing notice to the company. It becomes at once clear, therefore, that though nowhere in the rules or the Act it is provided that notice to show cause to the company can be issued prior to admission and advertisement, the Supreme Court by judicial interpretation of the relevant schemes of the Act and the Rules, has taken the aforesaid view which has held the field throughout till date. But the moot question is under what circumstances, the last course can be adopted by the company court, namely, after hearing the petitioning creditor, the company court can order admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a defunct company would suffer any more nor the petitioning creditor will be put to extra burden as the gamut of advertisement has to be undertaken by him in all cases where he wants final relief from the court about compulsory winding-up of the company. This procedure will get expedited in such circumstances. We are then left with the other two types of situation contemplated by the aforesaid decision of the Supreme Court wherein the court can admit the petition and then, before advertising the petition, may hear the company or may defer admission and advertisement till the company is heard on notice. In our view, such a situation will arise for consideration where, on a reading of the company petition and looking at the materials supplied by the petitioning creditor or any further material that the court requires and which is supplied by the petitioning creditor, the court finds that the respondent company which is sought to be wound up under section 433( e ) is running its business and commercial manufacturing activities, it has employed number of workmen or that it might have temporary reverses or set-backs by way of temporary suspension of such a business activity, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts on which the defence depends." In para 22 of the report, the Supreme Court observed that under section 557 of the Act in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered though perhaps the court may attach greater weight to the views of the creditors. In para 23, it is observed, that the claims of the appellants were disputed in fact and in law. The company had given prima facie evidence that the appellants are not entitled to any claim for erection work, as there was no transaction between the company and the appellants or those persons in whose names the appellants claimed the amounts. The company had raised the defence of lack of privity. The company had raised the defence of limitation. Under those circumstances, the High Court was correct in refusing the order of winding up. Now, it is true that the aforesaid decision was not dealing with the procedure to be followed even prior to admission or advertisement of the petition. But the fact remains that, even at the stage of trial of the petition, if the company has prima facie shown that its defence was a valid one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. We respectfully concur with the aforesaid reasoning adopted by the Division Bench about the procedure to be followed by the company court before ordering advertisement and the nature of the findings which the court should reach before advertising such company petitions under section 433(e) of the Act. We may now refer to a later decision of the Supreme Court in Hind Overseas Private Ltd. v. Raghunath Pra ad Jhunjhunwalla [1976] 46 Comp. Cas. 91; AIR 1976 SC 565. In that case, a company petition for winding up of the company under section 433( f ) of the Act was moved before the Calcutta High Court. At the admission stage, it appeared that notice was issued to the company as in para 12 of the report; it is observed there were allegations in the winding up petition which came up for admission before the learned company judge. There was a counter-affidavit filed by V.D.J. in opposing the prayers. After considering the defence of the company, the learned judge, instead of admitting the same, dismissed the petition. The Division Bench in appeal reversed the decision. It is that order of the Division Bench which was carried in appeal before the Supreme Court. While all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editor for enabling the court to take any action by way of admission and advertisement of the petition. And that has to be done after hearing the company, as in the case before the Supreme Court as noted earlier, the company was present before the company court at the admission stage pursuant to the notice issued and it is the company's defence which ultimately weighed with the Supreme Court in dismissing the company petition instead of admitting and advertising it. (emphasis supplied) The latest judgment of the Supreme Court to which our attention was invited by learned counsel for the parties is rendered in the case of Pradeshiya Industrial and Investment Corporation of U.P. v. North India Petro Chemical Ltd. [1994] 79 Comp. Cas. 835; JT 1994 (1) SC 579. In that case, the Supreme Court was concerned with a winding up petition under section 433( e ). In that case, the first respondent before the Supreme Court had issued notice under section 434 to the appellant: company. Under a promoters' agreement, a sum of Rs. 72.50 lakhs was payable by the company to the promoter, the petitioning creditor. On that ground it was alleged that the appellant-company was indebted in a sum of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comp. Cas. 125 and then the following pertinent observations were made in paragraph 32, "it is beyond dispute that the machinery for winding-up will not be allowed to be utilised merely as a means for realising its debts due from a company." In para 33 reasons are given by the Supreme Court for not approving the order of the High Court admitting the petition. It was noted by the Supreme Court that the petitioning creditor was not a creditor. The appellant was not a debtor because it was a financial institution for an amount which is agreed to be subscribed. Neither the learned single judge nor the Division Bench had decided this important question whether there is a debt and the company has either neglected or was unable to pay. It was also observed that there was no definiteness of the debt as the matter was pending adjudication in arbitration. In view of all these, there was prima facie dispute as to the debt and then followed the observations in sub-para (5) of para 33 as under (at page 845 of 79 Comp Cas): "The defence raised is a substantial one and not mere moonshine. We find it difficult to appreciate the reasoning of the learned single judge when he holds that there are a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such financial doldrums, it was not a fit case for admission of the winding up petition against such a company under section 433( e ) of the Act. It must, therefore, be held that such consideration at the admission stage of the petition is not only not foreign to the scope of such enquiry but also, it is a part and parcel of such enquiry as authoritatively ruled by the Supreme Court in this decision. Now it is time for us to refer to certain decisions of this court which were pressed in service by learned counsel for contesting parties. In the case of Hegde and Golay Ltd. v. State Bank of India [1987] ILR 3 Kar 2673, the Division Bench of this court was concerned with the question whether the order for winding-up of the company on the ground that the company was unable to pay its debts under section 433( e ) was justified or not and even otherwise it was just and equitable that the company be wound up. While deciding that question, it was observed by the Division Bench that pendency of a civil suit is not a bar to the maintainability of such winding-up petition. The said Division Bench was not concerned with the situation with which we are concerned. That decision is, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the phrase "commercial insolvency and inability to pay its debts"(at pp. 767 and 769 of 83 Comp Cas): "When a company is sought to be wound up because the company is unable to pay its debts, the cause of action arises as and when the company's commercial insolvency is disclosed or it is realised that the company is commercially insolvent or it is unable to pay its debts. This cause of action can be taken advantage of by any one of the creditors or the entire body of creditors. The Act itself recognises the right of any creditor or creditors to invoke the jurisdiction of the court seeking the winding up of a company by a single petition. A company petition is more in the nature of a class interest litigation and not in the nature of a litigation between an individual and the company." There is no doubt on this settled legal position. However, the question before us is which type of findings on vital issues, when a company petition under section 433( e ) is moved, can be adopted for admission and advertisement of the petition and for answering these questions, in our view, there is enough guidance emanating from the aforesaid decision of the Supreme Court. We may now briefly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings at the pre-admission and advertisement stage would be binding for all times to come at the subsequent stages of trial on the petitioning creditor as well as the company. They submit that such findings would be like findings on a prima facie case under Order 39, rules 1 and 2 of the Civil Procedure Code, and about the balance of convenience to be rendered at the interim relief stage in a suit. We find considerable substance in these contentions canvassed by learned counsel for the petitioning creditors. It is difficult to accept the extreme contention of Sri Holla to the effect that if any finding is reached in a summary enquiry prior to admission and advertisement of the petition after hearing the petitioning creditor on the one side and the company on notice on the other hand, the finding reached will be binding on both the parties for all times to come during the subsequent stages of the winding-up petition. By their very nature, those findings would be reached in a summary manner. At that stage other creditors and contributors would be absent. But even that apart, these findings are reached to find out a prima facie case for admission and advertisement. They are not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facie for taking further action in such class litigation cannot be held to be binding to such an extent on the main contestants as would foreclose them at the stage of trial of such class litigation from putting forward their respective cases finally on all these aspects. It must, therefore, be held that at the stage of summary enquiry which the company court may hold prior to admission and advertisement of the company petition by hearing the petitioner and the respondent-company at the notice stage, the court is called upon to satisfy itself that it is a case for admission and advertisement and nothing more. For arriving at that conclusion the court necessarily will have to prima facie find out whether any fixed amount of debt or ascertained amount of debt is due by the company to the petitioning creditor, whether the debt is within limitation and whether the defence put forward by the company for not paying the debt to the petitioning creditor is a valid one or is mere moonshine and also to find out whether the company appears to be commercially insolvent. Meaning thereby, it is unable to pay all its debts and not necessarily the debts of the petitioning creditor alone. So far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, be held that even this aspect also has to be prima facie considered by the learned company judge before deciding to admit and advertise the petition. This leaves out one contention submitted for our consideration by learned counsel for the petitioning creditors. Mr. Jayaram and the other learned counsel toeing his line, submitted that wherever a prima facie enquiry is contemplated in this connection, it is expressly provided for by the Legislature as found in section 439, subsection (8) read with rule 97 of the Rules, that in the case of a petition moved by a contingent creditor of the company for winding-up of the company, the court has to consider whether leave should be granted for admission of the petition which would necessarily imply pre-advertisement consideration and the court has to consider whether there is a prima facie case for winding up the company. It is also true that neither under section 433 nor under rule 96 is there a similar provision in the case of winding-up petitions moved by petitioning creditors who allege to be existing creditors. But in our view, that would make no difference as in the case of contingent creditor, he could not even maintain the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 433( e ) of the Companies Act against a company which is a going concern, the company court, in a summary enquiry after hearing the petitioning creditor and the company on notice, will have to arrive at prima facie findings on the following aspects: ( i )Whether the petitioning creditor is a creditor to whom the company owes an ascertained sum of money or substantially ascertained sum of money. ( ii )Whether the said debt is within limitation. ( iii )Whether the defence of the company is valid or bona fide or whether it is a mere moonshine. The aforesaid three points will have a direct bearing on the competence of the petitioning-creditor to maintain such a petition. ( iv )Whether from the material on record at this stage, a presumption arises that the company is unable to pay its debts as contemplated under section 434(1)( a ) or ( b ), as the case may be; or ( v )Whether from the material on record the court is prima facie satisfied that the company is commercially insolvent as contemplated under section 434(1)( c ). In this connection, we may note one submission of Mr. Jayaram for the petitioning creditor. He submitted that if the latter aspect is to be kept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the court to straightaway admit and issue advertisement of the company petition. Even there may be material led by the petitioning creditor from which such a presumption may arise as per section 434(1)( a ) or ( b ), in all such cases the petition could be admitted and advertised even without issuing notice to such company. In such a case, no harm to the company will ensue because the company is already defunct as discussed in the earlier part of this judgment. Our answer to the aforesaid first question will therefore, be, as indicated hereinabove. Question No. 2. That takes us to the second question as to the nature of the order to be passed by the learned judge while admitting and advertising the company petition after holding such a summary enquiry on the relevant aspects, as detailed by us hereinabove. As the enquiry is a summary enquiry it has to be held in the case of a defunct company after hearing only the petitioning creditor and looking at his evidence and in the case of a going concern sought to be wound up after hearing the company considering its objections and the evidence offered by it at that stage and as the findings to be reached are only prima facie findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the situation of doldrums in which the respondent-company is found, the court may admit the petition and order advertisement of the petition even before issuance of notice to the company. II.When a winding-up petition is filed seeking the winding-up of the company under section 433( e ) of the Act and from the material available from the petition and any other additional material which the court may require the petitioning creditor to furnish if it is found that the respondent-company is a going concern and its commercial-cum-manufacturing activities are not suspended or are only temporarily suspended and it is employing a number of workmen, then before admitting and advertising the petition, the following procedure is required to be adopted by the court: ( a )The court may hold a summary enquiry, after issuing notice to the respondent-company, giving it an opportunity to file its objections to the proposal for winding-up, for ascertaining the following facts and for arriving at prima facie findings thereon; ( i )whether any debt is due from the respondent company to the petitioning creditor; if yes, what is the amount of such debt? ( ii )whether the said debt due t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visaged by section 434(1)( a ) and/or section 434(1)( b ) of the Act. If such a deeming fiction is found to arise in the light of the evidence available on record during such preliminary enquiry, then in the light of the tentative findings reached by the court on issues ( a )( i ) and ( a )( ii ) and also keeping in view such a deeming fiction that may have arisen on record for arriving at a prima facie finding on point No. ( a )( iii ) the court may admit the petition and direct the issuance of advertisement of the company petition. ( d )However, for arriving at a prima facie finding on point No. ( a )( iii ), if it is found to be a case where there is no evidence at the stage of such preliminary enquiry about raising of deemed fiction under section 434(1)( a ) and or ( b ), then the court may also enquire, of course prima facie, as to whether there is scope for raising the deeming fiction as contemplated under section 434(1)( c ). For that purpose the court may look into the evidence led on record by the petitioning creditor as well as by the company and try to assess in a summary way as to whether the company is prima facie shown to be commercially insolvent- as contemplat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an agreement was entered into between the petitioning creditor and the respondent-company for appointment of the petitioning creditor as consolidator and break bulk agent for the purpose of imports and exports of the air cargo in their respective countries on September 10, 1987. Transactions between the petitioner and the respondent took place between September 10, 1987, to the end of June, 1990, by sending air and sea freight on pre-paid basis. In paragraph 2 of the order, the learned judge has no the allegations in the petition. In para 3, as usual notice was ordered regarding admission and advertisement. Thereafter, the respondent has filed statement of objections. Then follows para 4 which is only the material paragraph indicating reasons which weighed with the learned judge. The learned judge has perused all the said objections and correspondence and the respondent's dispute regarding the claim of the petitioner for payment as demanded long after the transaction came to an end in June, 1990. The learned judge has further observed that the matter needs investigation. It cannot be said that there is no case for admission or advertisement of the petition in the light of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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