TMI Blog1997 (9) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... schedulement by way of seven instalments, of which six instalments for Rs. 2.50 crores each were payable by 25-11-1997 and the final instalment of Rs. 19.90 lakhs (on account of interest) too was payable on 25-11-1996. However, respondent company defaulted in making the payment and the very first cheque paid for instalment was not honoured under the instructions of respondent com- pany for stopping the payment thereof. The petitioner vide its notice dated 6-2-1997 served on the company in terms of section 434 made a demand for the payment of outstanding, which was duly received by the respon- dent company and replied thereto vide its letter dated 26-2-1997. The amount of indebtedness was not disputed. But on account of financial difficulty, as arising out of delayed disbursement of release of promised finance by the other financial institutions, six months time was sought for repayment of the loan. It was also pointed out in the reply letter that the entire debt of Rs. 30.00 cr had been secured by creation of a charge on immovable property of the company worth Rs. 55.00 crores and even after paying Rs. 15.00 crores, the entire security continues to be available for the discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure their loans as per the proposal, provided checks and balances are put to ensure commitment for which certain proposals made by the company through its representative Mr. Sushil Handa were noticed. A sub committee of the lenders, was formed to further discuss the proposal in detail. 4. The learned counsel for the petitioner in the first instance submitted that petitioner having made out a case under section 433(1)( e ) read with section 434, he is entitled to an order for winding up ex debito justitiae by raising presumption under section 434 that the company is unable to pay its debts, and it is entitled to order admitting the petition. This is not a stage at which the court should consider whether a winding up order can be made or not as that can only arise after petition has been admitted and public notice whereof is advertised inviting objections. It is only if an objection to the winding up sought by the petitioner is raised from any quarters that the question of exercising discretion whether to order winding up or not would arise for consideration. 5. On first principles, I am unable to agree with this submission. It is not in dispute and perhaps cannot be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case, it would be in the interest of justice to wind up the company. This is also manifest from section 443 which leaves in discretion of the court to make any one of order, envisaged therein. Section 443 also envisages relevant consider- ation in which winding up order may not be considered just and equitable. 8. In the matter of the petition for winding up on the ground that the company is unable to pay its debt, the Court has to bear in mind that winding up petition is not an alternative to the ordinary procedure for realisation of the debts due from the company, and the mechanism of winding up process is not to be used as a pressure tactic for enforcing realisation. For that the appropriate remedy is to seek enforcement under the ordinary law through remedies provided there. At the same time, proceeding with the remedy for realisation of his debt, a creditor is not precluded from seeking remedy under the Act as well by asking for the winding up of the company and realisation of all the assets of the company for the due discharge of all its liabilities. The object of the winding up petition being entirely different, the remedy provided under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich, leaving out immaterial words, provides: "The Court may have regard to the wishes of the creditors as proved to it by any sufficient evidence." The discretion is permissive and not mandatory, and is in terms complete and unfettered. However, it is a discretion which must be exercised judicially." 9. The Supreme Court in Madhusudan Gordhandas Co. v. Madhu Woollen Industries (P.) Ltd. AIR 1971 SC 2600 while dealing with said question opined as under: "Another rule which the Court follows is that if there is opposition to the making of the winding up order by the creditors the Court will consider their wishes and may decline to make the winding up order...." (p. 2605) In doing so the court referred to Palmer's Company Law with approval: "This right to winding up order is however qualified by another rule viz. that court will regard the wishes of the majority in value of the creditors and if for some good reason, they object to a winding up order the court in its discretion may refuse the order." The court also approved ratio in P J Macrae Ltd's case ( supra ) and held: "It is also well settled that a winding up order shall not be made on a creditor's petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation where on principle if the order would not benefit the petitioner nor the company creditors generally. The learned counsel for the petitioner does not dispute that all these questions become germane if after admission the court is consider- ing whether to pass a winding up order or not. When, grounds on which a winding up order can be refused while considering the petition after admission appears to exist from the material already before the court, in my opinion, it would be a sound exercise of discretion not to admit the petition. I am fortified in my aforesaid conclusion by a decision of this Court in Rishi Enterprises, In re. [1992] 73 Comp. Cas. 271. The court after consid-ering the fact that the company which is a running concern employing about 500 employees who are paid their wages regularly and is engaged in the business having turn over of crores of rupees every year cannot be brought to a halt on the basis of petitions of winding up under section 433(1)( e ), merely because of the momentary financial difficulty. Relying on the principle enunciated in Madhusudan Gordhandas Co. 's case ( supra ) referred to above, it adhered to the principle that it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfied that company is unable to meet the current liabilities in commer-cial sense which include debt due to petitioner as well as other debts. But the presumption is rebuttable one. Presumption may be stood rebutted on existing material. What evidence is sufficient, depends on facts and circumstances of the case. In Airwings (P.) Ltd v. Viktoria Air Cargo Gmbh [1995] 1 CLJ 233, a Bench decision of Karnataka High Court, on which reliance has been placed by the learned counsel for the petitioner as well, for the purpose of seeking admission of this petition, had made clear distinction between a company which has become defunct and has closed its activities since some time and its commercial manufacturing activities have come to a grinding halt on the one hand and the company which is still a going concern and whose commercial cum manufacturing activities having not been suspended or are only temporarily suspended and it is employing a large number of workmen. In the latter case, the court formulated certain guidelines to be pursued before a petition is admitted or not admitted, while commending for holding a summary enquiry for reaching prima facie findings to various ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping in view such a deeming fiction arising under section 434(1)( c ), the court may admit and advertise the petition." It may be clarified that this is not to say that the condition of section 434(1)( a ) as section 434(1)( c ) are to exist simultaneously for raising presumption about company's inability to pay debts. Even in case pre-sumption under section 434(1)( c ) is raised, order of winding up is not as a matter of course. Before that court has to consider whether in such case winding up order should prima facie follow. It is for that enquiry germane to consider the question whether company can be said to be plainly commercially insolvent, whether winding up order would benefit the petitioner or creditors generally, whether it will be advancing the public policy keeping in view commercial morality to order winding up. Whether it will be just and equitable to all interests to order winding up ? 14. The course for admitting and advertising the petition is commended in the circumstances if and only if the Court had a tentative prima facie finding about commercial insolvency of the respondent company in the case of a company which has not become defunct company whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company had increased from worth Rs. 8.99 crores in 1988- 89 to Rs. 71.36 crores in 1992-93. The turnover of the company had risen from Rs. 6.17 cr in 1989-90 to Rs. 46.02 cr in 1992-93 resulting in rise of profit from Rs. 71.00 lakhs to Rs. 9.02 cr. This is the reflection of pre-amalgamation economic growth. 18. The financial position of the company since 1994 have been considered by the body of secured creditors of the company while considering the restructuring proposal for the company to put it back on healthy course from the position in which it is finding it now. The confidential note prepared by ICICI - one of the secured creditors of the company - to the tune of Rs. 100.00 cr and considered by the body of secured creditors in its meeting held on 21-8-1997 in which the petitioner too had participated and that report and minutes have been produced by petitioner bank. The comparative chart of the financial state of affairs of the company after amalgamation since the year ending 31-3-1994 until year ending 30-6-1997 (the year ending date being changed from March to June in 1996) discloses that gross sales had increased from 102.38 cr. in the year ending 1994 to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice as he then was that 'company is unable to pay the said debt and its all other debts' amounting to commercial insolvency for making an order under section 433. 21. In this connection it would be apposite to allude the position obtaining in England as per the Palmer's Company Law. A winding-up petition to the High Court is presented at the office of the Registrar of the Companies Court, who appoints the time and place at which the petition is to be heard. After a petition has been presented, the petitioner or his solicitor must, on a day to be appointed by the Registrar, not less than five days before the day appointed for the hearing of the petition, file a certificate of compli-ance with the rules relating to service and advertisement of the petition. The law has been stated to be that unless the court otherwise directs, every petition is to be advertised in the Gazette not less than seven clear days (excluding Saturdays, Sundays and public holidays) after it has been served on the company and not less than seven clear days before the day fixed for the hearing. The difference in procedure has to be noticed that petition is required to be served on the company and adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may dismiss it with or without costs, may adjourn the hearing conditionally or unconditionally and may make an interim order or any other order that it deems just [S. 125(1) of the Insolvency Act]. But the court will not as a rule order a petition to stand over for a lengthy period : It would not be just to the company. In all matters relating to the winding up, and winding up includes the petition, the court may have regard to the wishes of creditors and contributories, and may, if expedient, direct meetings to be summoned to ascertain such wishes (I.A., S. 195). If the company is solvent, the wishes of contributories, as the persons chiefly interested in the assets, carry most weight; if the company is insolvent, the wishes of creditors. The element of public policy in regard to commercial morality has likewise to be taken into consideration when the propriety of a winding- up order is examined." The above passage from Palmer suggest that where immediate winding up is not warranted it would be equally unsound to allow it to stand over for long duration as it acts at cross purpose for which winding up is not considered advisable. It also brings into consideration the elem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y left to discretion of the court to dismiss the petition or adjourn hearing condi-tionally or make any interim order or order winding up. Sub-section (2) also leaves no room of doubt that while considering whether it is just and equitable to winding the company it is relevant to consider whether the petitioner has other alternative remedy and whether petitioner is acting unreasonably in seeking winding up instead of pursuing that other remedy. Section 557 envisages that in all matters relating to winding up of a company the court may have regard to wishes of creditors or contributories of the company as proved before it by any sufficient evidence. In this connection Mr. Thakore's contention that for ascertaining credi- tors' wishes it is necessary to admit the petition, invite views of creditors or convene the meeting is not well founded. Convening the meeting of creditors is only one mode of knowing their wishes. But it is equally possible for the court to be satisfied about creditors wishes on the evidence available on record. It is only when the court apart from material on record desires to convene the meeting of creditors and contributions, it has necessary statutory sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nders, majority of the lenders were agreeable to restructure their loans as per the proposal, provided adequate checks balances were put in place to ensure commitment of the promoters. It was strongly felt, he added, that in view of various uncertainties regarding equity infusion and future performance of the company, the promoters should back their commitment towards the project by executing a tangible and legally binding instrument in favour of lenders such as pledge of shares." 23. With the company there is at stake livelihood of about 3500 people who are employed with it. 24. In the circumstances when there is unimpeachable evidence of secured conditions having a faith in bank strength and capability of the company to survive the present crisis with a little patience on the part of those who have a demand to make against the company, the continuing threat of company on the fringe of being wound up is to cause fear psycho in the market and an aura of suspicion and uncertainty in the mind of those who are otherwise willing to deal with the company commercially. Aiding creation of such an atmosphere in the case like present one will ensure for the benefit of those who seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act, 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...." (p. 416) The principle found its echo in pronouncement of a Division Bench of this Court in New Swadeshi Mills of Ahmedabad Ltd v. Dye Chem Corpn. [1986] 59 Comp. Cas. 183. That was a case where company was heavily indebted and inability to pay its debt was self-evident. The company had apparently gone commercially insolvent. Yet as a matter of policy the court said: "... Even so a court will exercise as sound discretion in deciding whether to wind up a company or not and in doing so consider many relevant factors. It may be that despite the inability to pay its debts a company has still prospects of coming back to life.... the court will be inclined to give a chance to resurrect the company. It should be the policy of the court to attempt to revive though at the moment the company may not be solvent and may not be able to meet its obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up order. 27. The Supreme Court in PICUP's case ( supra ) deprecated the admission of winding up petition merely on the finding that the petition raising arguable issue by so holding: "We find it difficult to appreciate the reasoning of learned Single Judge when he holds that there are arguable issues and therefore the winding up petition has to be admitted. On this aspect the courts below failed to note that the admission of the winding up petition is fraught with serious consequence as far as appellant is concerned." This clearly indicates that unless the court is prima facie satisfied that on the existing material before an order of winding up is justified, no order of admission of a winding petition ought to be made. In Airwings (P.) Ltd's case ( supra ) the Karnataka High Court observed noticing the aforesaid decision in PICUP's case ( supra ): "The latest decision of the Supreme Court puts the controversy beyond any pale of doubt that in case of company which is a going concern and which is actually functioning even an order of admission of a company petition under section 433( e ) may prove disastrous even leaving aside the advertisement order w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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