TMI Blog2007 (9) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent was incorporated, is to manufacture, refine and carry on the business of marketing of oils, etc. According to the petitioner, the respondent is indebted to it for a sum of Rs. 10,97,574, that, despite its repeated requests and demands, the respondent had failed and neglected to pay its dues and as such is unable to pay its debts and is, therefore, liable to be wound up. The petitioner would contend that the respondent had approached them, vide letter dated July 27, 2003, to provide 85 Reliance India Mobile (RIM) phone connections under the "Corporate Scheme" for its use, that it had filled up the requisite customer application form C.A.F. No. 5900999683 on June 28, 2003, and that, on the basis of the application, 85 RIM handsets were duly allotted, activated and delivered to the respondent vide delivery challan No. 46592 dated June 28, 2003. The petitioner would submit that the respondent had surrendered eight handsets and had subscribed additional thirty RIM phone connections vide C.A.F. No. 2803310741, that these RIM handsets were also activated and that the respondent, while retaining two RIM handsets had later surrendered 28 RIM handsets. The petitioner would submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming that the phones could be sold to customers buying edible oil tins from various outlets of the respondent in the twin cities, that they would pay commission to the respondent on these connections, that negotiations took place and ultimately a memorandum of understanding dated March 25, 2003, was executed between the petitioner and the respondent under which it was agreed that the petitioner would also provide 30 handsets for promoting the sales of RIM phones, that these phones would be provided exclusively to those representatives who were engaged in the promotional campaign and that, for these 30 handsets, no charges would be levied. While denying that it had retained two of the thirty handsets, respondent would contend that these two handsets were misplaced by the officials of the petitioner, that there was no necessity for them to retain two handsets and the very admission that they had surrendered 28 RIM phone connections would itself establish that the thirty RIM phone connections were given exclusively for the promotional campaign under the "Monsoon Hungama Scheme". While denying the allegation that it had neglected to pay the alleged outstanding dues of Rs. 10,97,574, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not even paid a single rupee towards the dues. The petitioner would submit that they were sending bills periodically, that the facility to view the bills was also provided free of cost on each of the mobile phones, that the respondent could have approached any of the Reliance Web World outlets to find out the dues payable by them, that clause 5(ii) of the Customer Application Form required the respondents to enquire about the bills, that the memorandum of understanding showed that the respondent had approached the petitioner for providing them handsets under the "Monsoon Hungama Scheme" for sales promotion activities, that the statement of the respondent that no charges could be levied for the thirty handsets was false since the petitioner had not held out any such promise, that only calls made from these 30 RIM phones to other RIM phones were free and that calls to other phones were chargeable, that it was false to allege that the officials of the petitioner had misplaced two handsets, that there was complete absence of bona fides on the part of the respondent who had not denied usage of the RIM phones, that non-payment of even a single rupee towards the legitimate bills raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Sripada, learned counsel for the petitioner, would submit that under C.A.F, No. 5900999683 dated June 28, 2003, eighty five RIM handsets were supplied to the respondent of which eight were returned, that later 30 RIM handsets were supplied vide C.A.F. No. 2803310741 of which 28 were returned, that, even if the respondent's contention that the dues in respect of the first block of 77 phones should be limited only to Rs.700 per phone per month were to be accepted, since the respondent had not paid even a single rupee the entire amount was due from them to the petitioner. Learned counsel would refer to exhibit B. 15 letter dated April 15, 2004, to contend that the respondent was due a sum of Rs. 3.57 lakhs till December, 2003, as the fact of RIM phones being supplied and activated is not in dispute the respondents were liable to pay the monthly bills due and, since the admitted liability is far in excess of Rs. 500, (the minimum amount stipulated under section 434(1)( a ) of the Companies Act), and they had neglected to pay the amount due despite notice being issued calling upon them to make payment within 3 weeks, the respondent must be deemed to be unable to pay its debts and as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bit B. 16 letter dated April 12, 2004, would show that the respondent had only agreed to make payment till January, 2004 and thereafter to depute its personnel, along with two representatives of the petitioner, to collect dues of February and March, 2004, from each of the individual dealers of the respondent to whom RIM handsets had been supplied by the petitioner under the "Corporate Scheme" and, only if these bills were not paid, was the respondent required to make good the dues. Learned counsel would submit that though the petitioner had agreed, in its letter dated April 12, 2004, that its' personnel, along with the team of the respondent, would fill up the transfer of ownership forms of the dealers, while collecting the February and March, 2004 dues, they had made no efforts to approach the dealers for collection of February or March, 2004, dues or to transfer ownership and that, in any event, the respondent cannot be said to be due any amount towards these RIM handsets under the "Corporate Scheme" from April, 2004 onwards. Learned counsel would submit that the accounts statement, relied upon by the petitioner, was erroneous inasmuch as they had combined the commission paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial and Investment Corporation of Uttar Pradesh v. North India Petro Chemicals Ltd. [1994] 79 Comp Cas 835 (SC) ; [1994] 3 SCC 348, Mediqup Systems P. Ltd. v. Proximo Medical System GmbH [2005] 124 Comp Cas 473 (SC) ; [2005] 7 SCC 42, Airwings P. Ltd. v. Viktoria Air Cargo GmbH [1995] 84 Comp Cas 688 (Kar.) ; AIR 1995 Kar. 69, Excel Embroideries v. Trend Designs Ltd., AIR 1997 Ker. 329, Kesar Enterprises Ltd. v. IDI Ltd. [2002] 112 Comp Cas 174 (Bom.), Premlal Birla v. Gilt Pack Ltd. [2004] 121 Comp. Cas. 802 (MP), Mysore Sales International Ltd. v. United Breweries Ltd. [2005] 6 Kar. LJ 615 ; [2006] 133 Comp. Cas. 190 (Kar.) and Benares Cotton and Silk Mills Ltd. v. Sulbha Devi Gupta [1986] 60 Comp. Cas. 639 (All.) in this regard. Importance of pleadings : It is a matter of serious concern that very little attention is paid to pleadings. Both the petition and the counter-affidavit are bereft of even the basic facts necessary for effective adjudication of the questions raised. Both Sri Prabhakar Sripada, learned counsel for the petitioner, and Sri B. Chandrasen Reddy, learned counsel for the respondent, have relied extensively on the documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the duty of the court to dismiss claims made beyond the prescribed period of limitation, as provided in section 3 of the Limitation Act. If on the basis of the case set up, and the documents relied upon by the petitioner, the claim is barred, either in whole or in part, to the extent such claim is barred by time the court is not required to adjudicate on merits. Vijayalakshmi Art Productions v. Vijaya Productions P. Ltd. [1997] 88 Comp. Cas. 353 (Mad.). "The period of limitation" has been defined under section 2( j ) of the Limitation Act, 1963, to mean the period of limitation prescribed, for any suit, appeal or application by the Schedule, and "prescribed period" has been defined to mean the period of limitation computed in accordance with the provisions of the Limitation Act. Under section 3(1), subject to the provisions contained in sections 4 to 24, every suit instituted, appeal preferred and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence. Under section 3(2)( a )( iii ), for purposes of the Limitation Act, a suit is instituted, in the case of a claim against a company which is being wound up by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petition. The question whether the debt is barred by limitation or not would be of relevance only on the date of the petition and not thereafter. Under section 447, a winding up petition operates in favour of all the creditors and contributories of the company as if it had been made on their joint petition. A petition does not cease to be maintainable thereafter, merely because the debt of the creditor which was within limitation on the date of filing the petition, is time-barred subsequently at the date of the hearing. If that were so, section 447 would be rendered nugatory for, by the time the petition comes up for hearing, the debt would, more often than not, be barred by limitation. There is nothing in the Companies Act to hold that a petition for winding up, which was properly maintainable when filed, ceased to be so maintainable if, at the date of the order, the debt on which the petition was based was barred by limitation. If a petition, which was maintainable on the date of its filing, is held to be not maintainable because the debt is barred by limitation on the date of the hearing, over which the creditor has no control, it would, for no fault of his, work to his prej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or claims as may be subject to any contingency or for some other reason do not bear a certain value. section 528 : In every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency, or may sound only in damages, or for some other reason may not bear a certain value. section 229 : In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the making of an order of adjudication, the insolvent shall aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among the creditors. (2) On the making of an order of adjudication, the whole of the property of the insolvent shall vest in the court or in a receiver as hereinafter provided, and shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable under this Act, shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding, except with the leave of the court and on such terms as the court may impose. (3) For the purposes of sub-section (2), all goods being at the date of the presentation of the petition on which the order is made, in the pos session, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof, shall be deemed to be the property of the insolvent. (4) All property whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable under this Act. Section 78 : Limitation. (1) The provisions of section 5 and section 12 of the Indian Limitation Act, 1908, shall apply to appeals and applications under this Act and for the purpose of the said section 12, a decision under section shall be deemed to be a decree. (2) Where an order of adjudication has been annulled under this Act in computing the period of limitation prescribed for any suit or application for the execution of a decree (other than a suit or application in respect of which the leave of the court was obtained under sub-section (2) of section 28) which might have been brought or made but for the making of an order of adjudication under this Act, the period from the date of the order of adjudication to the date of the order of annulment shall be excluded: Provided that nothing in this section shall apply to a suit or application in respect of a debt provable but not proved under this Act. Section 28(7) read with section 34(2) of the Provincial Insolvency Act, 1920, provides that a claim, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application for winding up. Consequently, the court could not have taken the view that the winding up order when passed would take effect from the date of the making of the winding up petition. There is nothing in the Act which indicates that the right of a claimant against a company is suspended from the date of the presentation of the winding up petition. A creditor has a right to proceed to recover his debt from the company even when his winding up petition is pending and no final order has been passed thereon. Consequently, to suspend the operation of limitation even before the winding up order was passed was not contemplated at all. Reference may be made to Palmer's Company Law, volume I, page 1166, paragraph 85.53 reads (page 645 of 60 Comp. Cas.) : "A statute-barred debt does not constitute a 'liability' of the company for the purposes of winding up. The liquidator in a compulsory winding up or an insolvent voluntary winding up is under a duty to reject the proof of a statute-barred debt ; in a solvent voluntary winding up, he must do so likewise unless the contributories consent... A winding up order stops the period of limitation from running in the company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "The principle governing limitation as embodied in section 9 of the Indian Limitation Act is that when once limitation has commenced to run it will continue to do so unless it is stopped by virtue of any express statutory provisions." Tek Chand J. held (at p. 226 of 28 Comp. Cas.) : "The doctrine of relation back is restricted in scope and cannot be extended for all purposes. In particular, it will not be correct to extend it so as to interfere with the law of limitation and especially with the rule embodied in section 9 of the Indian Limitation Act. Moreover, if the scope of the doctrine of relation back is widened that will introduce considerable uncertainty regarding the termination of the period of limitation." With respect, we entirely agree with the view expressed by Tek Chand J. (page 648 of 60 Comp Cas) : "On a consideration of the law and the various decisions cited above, we are of the opinion that the material date for the purposes of computing the limitation is the date of passing of the order on the winding up petition, which is commonly known as winding up order. We are further of the view that the date of making of the application for winding up is not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following terms : '. . . An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if made on the joint petition of a creditor and of a contributory.' The implication of this section is that even though a certain creditor was not a party to the petition for winding up, he would be deemed to be a party to the proceedings. He, therefore, enjoys all the benefits and suffers all the liabilities of a party. Under the insolvency law and also under the Companies Act the order of adjudication or the order of winding up is an extraneous circumstance which affects the question of limitation. Under both laws the final order dates back to the filing of the original petition. This is not a legal fiction but the result of a specific provision of law and must be given full effect to. There is nothing extraordinary or questionable in the fact that limitation is extended by virtue of section 28(7) in the case of insolvency law and section 168 in the case of company law. The creditor may well take the risk to pursue his remedy in a civil court or wait for the decision of the winding up proceedings. He may well say to himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ahabad High Court in Jwala Prasad v. Jwala Bank Ltd. [1957] 27 Comp Cas 310 and differed with the opinion of the single judge of the Punjab High Court in Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla [1958] 28 Comp Cas 216 the Division Bench of the Allahabad High Court in Benares Cotton and Silk Mills ltd. v. Sulbha Devi Gupta [1986] 60 Comp Cas 639, concurred with the opinion of the single judge of the Punjab High Court, in Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla [1958] 28 Comp Cas 216, explained the observations made by the single judge of the Allahabad High Court in Jwala Prasad v. Jwala Bank ltd. [1957] 27 Comp Cas 310 and expressed its disapproval of the opinion expressed by the Division Bench of the Punjab High Court in Ram Chand Puri v. Lahore Enamelling and Stamping Co. ltd. [1960] 30 Comp Cas 515. In S. Abdul Muthalibu v. K.M. Mohammed Abdul Khader [1962] 32 Comp Cas 1102 (Mad.), the question which arose for consideration, before the Division Bench of the Madras High Court, was whether a claim put in by a creditor, before the liquidator in winding up proceedings, was barred by limitation. The creditor had advanced a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dictate. The facts of the present case itself can be taken to illustrate our point. Here the creditor, the appellant, knew that the application for winding up was presented on November 22, 1954, and he might have entertained a reasonable belief that in the normal course the company would be wound up. But naturally it takes some time for the court to order the winding up. The view pressed upon us by the respondent which is contrary to the view we are inclined to take, would demand that in order to save limitation the appellant should have instituted a suit before January 12, 1955, (three years from the date of the first debt), though it would normally be merely waste of money. On the other hand the view which we are taking would permit him to wait without instituting a suit and avail himself of the distribution of the dividends in due course, which is all that he could reasonably hope to get. Of course it may turn out in some cases that the petition for winding up was frivolous and is eventually dismissed. In such a case the benefit of advancing the date of the claim to the date of presentation of the petition for winding up will not be available. In such a case the creditor must o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny debtor but rather in the hope of recovering part at any rate of his debt by way of dividend. A petition therefore, in my view, seeks to recover a sum. I am fortified in this view in that the China v. Harrow Urban District Council [1953] 2 All ER 1296 (QBD) ; [1954] 1 QB 178, regarded proceedings for a distress warrants as being proceedings for the recovery of a sum; despite the fact that the issue of a warrant does not result in a judgment for a sum of money . . ." (emphasis supplied) In re case of Taffs Well Ltd. [1992] Law Reports 179 (Ch. D), J opined : " . . .I now return to the issue : whether time ceases to run on the presentation of the petition or the making of the winding up order. I start by looking at the Limitation Act 1980. The purpose of the Act is to provide time limits for the bringing of actions of various classes. The class here is that of actions founded on simple contract. Actions, so founded are not to be brought after expiration of six years from the date on which the cause of action accrued : section 5. 'Action' is defined in section 38(1) to include : 'any proceeding in a court of law. . .'.In this context it must mean any form of initiating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company being wound up, in satisfaction of atleast a part of his debt. Section 2( b ) of the Limitation Act defines "application" to include a petition and under section 3 an application made, only after the prescribed period, is required to be dismissed as time-barred. Since the period prescribed for an application/petition for recovery of the amounts due is three years, if the petition for winding up is filed within three years from the date on which the debt is due it must be held to have been made within limitation. As the petitioning-creditor has brought an action for recovery of the debt owed to him, within the period of limitation as on the date of presentation of a petition for winding up, time would stop running against him thereafter in computing the period of limitation. Even in the event of the winding up petition being dismissed by the company court, or in appeal, the position of the petitioning-creditor may be different from other creditors who later joined as parties to the winding up proceedings having regard to the provisions of section 14 of the Limitation Act which saves the time spent in the prosecution of bona fide proceedings. Ram Chand Puri v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debt. This court cannot convert proceedings of winding up into proceedings like a civil suit to decide whether the respondent-company is liable to pay the sum allegedly due and/or if so on what basis. Premlal Birla v. Gilt Pack Ltd. [2004] 121 Comp Cas 802 (MP). If there is no reason to believe that the debt, if established, would not be paid the petition ought to be dismissed. Merely because the respondent is a company under the Companies Act that, by itself, does not confer any right on a person dealing with the company to apply for its winding up on the ground of non-payment of certain dues. The object and scope of winding up of a company under the Companies Act is entirely different. It cannot be confined to the claim of the petitioner alone but has to be viewed, judged and tested in its entirety, including the petitioner's claim, the defence taken by the company in relation to the claim in question, the financial position of the company, its viability, commercial sustainability in the market, etc., whether or not the debt is admitted by the respondent. The petitions for winding up ought not to be entertained unless a very strong prima facie case is made out on fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted debt cannot be termed as "neglect to pay" so as to incur liability under section 433( e ) read with section 434(1)( a ) of the Companies Act, 1956 (P.G. Bhatia and Co. v. Softsule P. Ltd. [1977] 47 Comp Cas 438 (Bom.) and Mediqup Systems P. Ltd. v. Proxima Medical System GmbH [2005] 124 Comp Cas 473 (SC)). A proper demand, made in accordance with the provisions of section 434(1)( a ), only gives the benefit of the presumption that arises under it. To raise the presumption of inability to pay, it is not enough merely to show that the company has omitted to pay the debt despite service of the statutory notice, it must further be shown that the company "neglected to pay", i.e., omitted to pay without reasonable cause and that a condition of insolvency in the commercial sense exists. ( Federal Chemical Works Ltd., In re [1964] 34 Comp Cas 963 (All.) and Kanchanaganga Chemical Industries v. Mysore Chipboards Ltd. [1998] 91 Comp Cas 646 (Kar.)). In Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. [1971] 3 SCC 632 ; [1972] 42 Comp. Cas. 125 , the Supreme Court observed (page 131) : "Two rules are well-settled. First, if the debt is bona f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a bona fide dispute or not will necessarily depend on the facts and circumstances of each particular case. ( P.G. Bhatia and Co. v. Softsule P. Ltd. [1977] 47 Comp Cas 438 (Bom.)). In an application for winding up allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole, apart from those of other interests, have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition. (Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC) ; AIR 1976 SC 565). While a detailed inquiry at the preliminary stage of admission should be avoided, courts should nonetheless consider the dispute raised by the company. This can be achieved on assessment and appreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is unable to pay its debts. In cases where no such presumption arises then, of necessity, the court has to consider whether any such presumption arises under section 434(1)( c ) and satisfy itself that, prima facie, the company is unable to pay its debt as its assets are insufficient to meet all its liabilities, actual and contingent. Before admitting and advertising a petition for winding up, under section 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, should record its prima facie findings on : ( 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 and bona fide or whether it is a mere moonshine. ( iv ) Whether, from the material on record, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner, (their names and mobile numbers are also mentioned), had come to their office on February 14, 2004, had worked with their representatives and had collected more than 20 forms for transfer of ownership of the mobile phones in favour of the dealers of the respondent. Again, in their letter dated April 15, 2004, the respondent, while informing that they were responsible only for payment of the monthly bill up to Rs. 700, and that the petitioner had orally committed, during telephonic discussions, that if the payment was made towards the RIM phone dues up to December, 2003, they would release the commission payment, requested the petitioner to correct their bills and send it back to them. In their letter dated April 12, 2004, the petitioner informed the respondent that they had agreed to make payment till January, 2004 and that, in case any of the dealers did not agree to pay the dues of February and March, 2004, the respondent would make good the payment. The petitioner agreed that its personnel, along with the representatives of the respondent, would simultaneously fill up the transfer of ownership forms for these dealers while collecting the February and March, 2004 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on whom the burden lies to prima facie establish that the respondent is liable to pay the debt, to show that any efforts were made either to transfer ownership of the RIM handsets to the dealers or to collect the amounts due from them. It cannot, therefore, be said that the defence of the respondent that the petitioner was required to collect the amounts due from April, 2007 onwards only from the concerned dealers and that they are not liable for payment of dues towards these RIM handsets from February to July, 2004, is not bona fide . The material evidence on record prima facie indicates that, while the petitioner has been claiming dues towards bills of the 77 RIM handsets supplied by them to the respondent under the "Corporate Scheme", the respondent has been claiming payment of commission for the RIM handsets sold by them under the "Monsoon Hungama Scheme". The memorandum of understanding a copy of which has been filed by the respondent, would indicate that the petitioner is liable to pay commission at Rs. 500 per RIM phone sold by the respondent to its dealers, i.e., Rs. 150 in the month following the month in which delivery of the handset was effected, Rs. 150 on the c ..... 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