TMI Blog2012 (12) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... nction subsisting on the guarantors and the undertakings furnished by the guarantors pursuant to the are matters not relevant for assessing the company’s inability to pay - petitioning creditor’s claim must be quantified, it must be appreciated that the petitioner has quantified its claim both in the statuary notice and in the petition; and it is only the company’s assertion that since the value of the properties covered by the Bombay injunction against the company cannot be conveniently made, the quantified claim put forth by the petitioner should be regarded as an unascertained claim. Such argument does not appeal and is rejected - CP No. 560 of 2011 is admitted for the principal sum of Rs.4,07,05,062 together with interest thereon at the agreed rate of 15.50 per cent per annum from the date of adjustment of the sum of Rs.92,54,515 on account of the fixed deposit. If the company pays off the entire amount, inclusive of interest and costs assessed at 3000 GM, within six weeks from date, the petition will remain permanently stayed. In default, the petition will be advertised in “The Statesman” and “Bartamaan” newspapers. The advertisements should indicate that the matter will app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further period of six months to which the petitioning creditor acceded by its letter of January 27, 2011. The petitioning creditor claims to have disbursed the sums of Rs.1,08,38,891, Rs.1,65,83,561 and Rs.2,25,37,125 in three tranches. The payments are said to have been made in February and March, 2011 to creditors of the company on the written instructions of the company. Cheques issued by the company in purported repayment of such sums and the interest thereon were dishonoured upon presentation in June and July, 2011. In July, 2011 the company requested the petitioning creditor to liquidate the fixed deposit and adjust the proceeds therefrom against the amount outstanding from the company to the petitioner. The company has adjusted such sum of Rs.92.54 lakh from the amount disbursed of Rs.4,99,59,577 and claims the balance principal sum of Rs.4,07,05,062 and the interest thereon at the rate of 15.50 per cent per annum. In the company s affidavit-in-opposition to the petition, there is an admission of the payments made by the petitioning creditor to the other creditors of the company on the company s instructions. There is also an admission of the cheques issued by the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resumption that the company seeks to rebut by referring to the pendency of the arbitral proceedings and the order obtained by the petitioning creditor from the Bombay High Court on a petition under Section 9 of the Arbitration and Conciliation Act, 1996. Indeed, the company has filed CA No. 1084 of 2011 seeking dismissal of the creditor s winding-up petition on the ground that there are disputes between the parties and it cannot be said that the company has neglected to pay the sum due or to secure or compound for it to the reasonable satisfaction of the petitioning creditor. After the present petition was filed in or about September, 2011, the petitioning creditor invoked the arbitration clause contained in the agreement of October 5, 2011 and applied to the Bombay High Court under Section 9 of the 1996 Act. It is not necessary to notice the ad interim order of November 22, 2011 since the petition under Section 9 of the 1996 Act has been disposed of by an order of March 12, 2012. The order of the Bombay High Court was effective till June 13, 2012, but pursuant to the liberty granted by the court, the arbitral tribunal has continued the order till the disposal of the reference. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d creditor can seek winding-up of a company by invoking the legal fiction recognised in Section 434 of the Act on grounds other than the one under clause (a) of sub-section (1) thereof. The petitioner argues that even if it enjoyed substantial security and even if the value of the security was in excess of the petitioner s claim, it would not preclude the petitioner from seeking an order for the debtor company being wound up. The issue does not squarely arise in this petition and the petitioner may have been inspired to address the court on the larger issue since this matter has been heard analogously with another creditor s winding-up petition where the right of a secured creditor to seek an order of winding up against a debtor company, relying only on the legal fiction in Section 434(1)(a) of the Act, was involved. Since the judgment in the other matter (Eastern Spinning Mills and Industries Ltd and Kotak Mahindra Bank Ltd) has been delivered immediately prior to this judgment, it is unnecessary to dwell on the larger issue in course of this judgment; but a key aspect of a petitioner s submission has to be noticed here since the creditor in the other matter has not alluded to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require such condition to be complied with as the ordinary meaning of the relevant word or expression would also demand. The anomaly may be resolved by referring to the words it is proved to the satisfaction of the court and understanding such expression to imply to confer a discretion on the court to arrive at a subjective satisfaction obviously on objective and judicially recognised criteria that the company is unable to pay its debts whether or not it actually is unable to pay its debts. It is in the understanding of such expression and the element of subjectivity on the court s part involved therein that may be a key to some of the decisions cited on behalf of the petitioner. It is not difficult to gauge why courts have over the years regarded the expression unable to pay its debts that appears in the relevant provisions relating to winding-up of companies by the court to imply commercial insolvency. There is a clue to such understanding in Section 434(1)(c) of the Act which, in one form or the other, has adorned both the English and the Indian statutes for more than a century and a half. While Section 433(e) of the Act when it refers to a company being unable to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to pay its debts since the business of the company would have to be stopped if the land were to be sold in discharge of the company s debts. The inference of commercial insolvency is based on facts; the manner in which such inference is arrived at will depend on the facts asserted by the parties; and, the basis for asserting a company s commercial insolvency must be there in the creditor s winding-up petition itself. The expression unable to pay its debts in Section 433(e) of the Act should not mean anything vastly different from how that expression is understood to imply in Section 434(1)(c) of the Act. In either case, the expression would mean that the company did not have liquid assets to discharge its liabilities as at the date of consideration. It may be accepted that even if a company had assets by way of blocked investments or immovable properties, those may not be taken into account to assess whether it was in a position to pay its immediate debts, but the expression requires the company s inability to pay its debts to be established and it connotes debts generally and not the petitioning creditor s debt in particular. It follows that the failure or negligence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Ch. D. 108), the facts were not regarded to amounting to sufficient proof of insolvency under the relevant provision. A meeting was called in that case by the principal directors of the company, stating that the company was carrying on business at a loss and was short of working capital and in need of credit. This did not satisfy the court that the company was unable to pay its debts. In two other matters dating back to the same time, it was held that a bare statement of a director that the company was unable to pay its debts was not enough to meet the satisfaction of the court (2nd Jur. N. S. 94); and, to prove the insolvency of the company, the court would not order it to produce documents (European Assurance Society [18WR 9]). The first case carried by the petitioner on such aspect is the judgment in Globe Steel Co. Trade creditors of a company applied for an order of winding-up on the ground that they had sold and delivered goods to the company, and had taken in part payment of a bill of exchange for 1150, at three months date, drawn by the petitioners and accepted by the company which was dishonoured upon it falling due. The creditors claimed that the company had neglect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary to see the judgment in Catholic Publishing and Book Selling Company (also reported at 46 ER 319) where an order winding up a company was reversed upon it being found that the period of twenty-one days from the date of the receipt of the written demand had not elapsed before the petition was presented. The petitioning creditors claimed on account of price of goods sold and delivered. They alleged that the goods had been supplied to a person who acted as the manager of the company and the company asserted that the supply was to the manager on his own credit and even if the company may have used the goods, which was also in dispute, the company was liable to the manager for so much of the goods as had been used by the company. The company paid for subsequent supplies but disputed its liability in respect of the subject consignment. On July 6, 1883, the petitioner served a statuary demand on the company and presented the winding-up petition on July 9, 1863. The trial court considered it not established in evidence that the company was unable to pay its debts, but made an order for winding up the company in the event the debt was not paid on or before a date fixed by the trial cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as envisaged in the equivalent provision in the English Act of 1948 which is in pari materia with Section 434(1)(c) of the Indian Act of 1956 to the effect that the test in assessing commercial insolvency of a company is whether it is unable to meet the current demands upon it (and) it is useless to say that if its assets are realised there will be ample to pay twenty shillings in the pound: that is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realizable; but although this be so, yet if it have no assets available to meet its current liabilities it is commercially insolvent and may be wound up. There is a further comment in the passage that a secured creditor may present a winding-up petition and he does not by presenting one elect to give up his security or in any way lose his right to it. Pennington s Company Law (5th Ed., 1985) has been cited for the recognition therein that under the English statute a creditor of a company may petition for a winding up order whatever the amount of his debt, whether it is immediately payable or is payable at a future time or on the fulfillment of a conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an impossible allegation. I have been convinced in argument that that approach is wrong. In my view the statutory demand itself is something of a red herring. It is, maybe, an unfortunate red herring because it demands 1,581.83 without quantifying how that figure is arrived at, but that figure is not, it is put forward, an undisputed amount due 1,154 is the undisputed amount and the form of the statutory notice is less than normal to satisfy what is now section 518 (1)(a) of the new Companies Act 1985. As I have said, I believe that the reference to section 518(1)(a) in the statutory demand is a red herring, because, as it was put to me, in my view rightly, there is equally appositely, 518(1)(e), If it is proved to the satisfaction of a court that a company is unable to pay its debts. There are two features of that judgment that require special mention. The first is the reference therein to Section 518(1)(e) of the English Companies Act, 1985 which is discussed later in this judgment. The second aspect is that a suit for the same relief cannot be lodged in any Indian court by reason of Section 41(b) of the Specific Relief Act, 1963 as no civil court entitled to receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of the presentation of the petition; thus, if the creditor takes the course of serving a statutory demand, it would be giving the company an extra three weeks grace in which such assets as the company may have may be dissipated in attempting to keep an insolvent business afloat, or may be absorbed into the security of a debenture holder bank. So there are practical reasons for not allowing extra time, particularly where commercial conditions and competition require promptness in the payment of companies debts so that the creditor companies can manage their own cash flow and keep their own costs down. The short answer to the judge s view is two fold. They run together. The first limb is that if a debt is due and an invoice sent and the debt is not disputed, then the failure of the debtor company to pay the debt is itself evidence of inability to pay. That appears from the judgment of Harman J in Cornhill Insurance plc v Improvement Services Ltd [1986] BCLC 26, [1986] 1 WLR 114. (page 219) Therefore it was necessary to consider whether there was indeed a substantial ground of defence and the judge had found that there was not. Therefore the position was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained judgment against the company and was regarded by the court as a judgment-creditor of the company. The court noticed that the creditor in that case had exhausted all his remedies except a winding up petition without obtaining payment of its debts. It is not clear from the judgment as to whether the second limb of Section 80 of the 1862 Act was applied or the reasoning therein was founded on the fourth limb. It cannot be missed that the judgment creditor had taken out a summons for the sale of the tramways and other properties and effects comprised in the company s undertaking and the hearing on such summons was directed to stand over pending the petition under the Companies Act. If the inability of the company in that case was inferred on the basis of the second limb, the reasoning is inapposite in the present context. If the basis for the order was the fourth limb of the relevant provision, it boiled down to a question of fact. In the case of Anglo-Italian Bank, reported at [(1879) 10 Ch D 681)], the decision was rendered on a motion for a declaration in a suit by debenture holders of a company which have been wound up against another creditor of the company in liquida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particularly on the several English authorities that have been cited in the larger context of the circumstances in which the legal fiction of a company s inability to pay its debts would arise, the authorities that are based on the English statutes carrying a dissimilar provision in the comparable Section would not apply in India, just as any Indian judgment based on Section 129(c) of the Indian Companies Act, 1882 would be of no relevance in a matter where Section 434(1)(c) of the 1956 Act comes into play. The petitioner has emphasised, by referring to the judgments reported at 106 Comp Cas 52 (Canfin Homes Ltd v. Lloyds Steel Industries Ltd) and 156 Comp Cas 108 (Cavendish Shipping Ltd v. Polaris Marine Management Pvt. Ltd), that a secured creditor of a company is under no disability in applying for the company being wound up on its inability to pay its debts merely because it enjoys security; and a creditor may seek a company to be wound up without seeking recourse to the deeming provision under Section 434 of the Act. A judgment reported at ILR 1987 Kant 2673 (Hedge Golay Ltd v. State Bank of India) has been placed for the proposition that a secured creditor can maintain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the definition of a sick industrial company under Section 2(1)(o) of the 1985 Act is such industrial company whose accumulated losses at the end of any financial year is greater than or equal to its entire net worth. The sickness of an industrial company under the said Act of 1985 is a much worse financial position of the company than its commercial insolvency. It is for such reason that a sick industrial company enjoys a protection, under Section 22(1) of the 1985 Act, against, inter alia, creditors winding-up petitions against it. The company says that the petitioner s claim is not quantified. Several judgments have been cited for the proposition that the claim of a creditor has to be quantified before the petition is admitted. The argument is founded not so much on the actual lack of quantification of the creditor s claim in the present proceedings, but on the company s assertion that the quantum of claim in the petition has to be read down by the value of the security furnished in the Bombay proceedings. The company refers to a judgment reported at 140 Comp Cas 833 (Juneja Chemical Industrial (P.) Ltd v. Alam Tannery (P) Ltd) for the observation in paragraph 10 of the repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be more than the claim of the petitioner herein. The company relies on the dictum in CRC Carrier Ltd to suggest that a creditor cannot be heard to say that it would not take into account the security furnished by the guarantors to the transaction in making a claim against a principal debtor company. The dictum in CRC Carrier Ltd does not appeal and cannot be regarded as good law. For one, the observation in the relevant paragraph is made without reference to Section 434(1)(a) of the Companies Act and without reference to the cardinal principle recognised in Section 128 of the Contract Act, 1872. Section 434 (1)(a) of the Companies Act, in its material part, provides for the legal fiction of the company s inability to pay its debts being established if, after the receipt by the company of the creditor s notice of demand at its registered office for a claim in excess of Rs.500/-, the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor. The commercial insolvency of a company is not assessed on the basis of the company s ability to cause others to secure the claim of the creditor, but on the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since the invocation of an arbitration agreement is the recognition of the existence of a dispute, the petitioner s invocation of the arbitration agreement and the initiation of the arbitral reference would militate against its assertion in the present proceedings that there is no dispute as to the debt due from the company to the petitioner. The company has referred to a judgment reported at (1988) 2 SCC 338 [Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority] for the proposition that in order to initiate an arbitral reference it is necessary that there should be an arbitration agreement and that there is a dispute between the parties to the arbitration agreement which is covered thereby. The point has been unnecessarily laboured over. For one, the scope of an arbitral reference is altogether different from the scope of a creditor s winding-up petition even though the claim in money in both actions may be founded on the same cause. The legal issue is all too settled to be reopened. Just as the institution of a suit by a petitioning creditor, whether before or after the launching of a creditor s petition founded on the same claim, would have little impact on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the inability of a company to pay its debts upon the company failing to pay or to secure or compound for the debt to the reasonable satisfaction of the creditor. The company has referred to a celebrated judgment reported at AIR 1955 Mad 582 (Karnatak Vegetable Oils and Refineries Ltd v. Madras Industrial Corporation Ltd) to suggest that what weighed with the Division Bench of the Madras High Court of that case was that the creditor had ample security for its debt and there was no averment that its security was insufficient. But even though the judgment recognised the argument made on behalf of the company that the creditor had ample security for its debt, the decision was based more on the wishes of the majority creditors of the company who did not support the order of winding-up. As to the definition of security, the company relies on Stroud s Judicial Dictionary (7th Ed., 2006). A judgment reported at 55 (1994) DLT 674 (Standard Chartered Bank v. M.S. Handa) is cited on the question whether a third party can furnish security in a suit. Two decisions reported at (1993) 2 MLJ 33 (Kalianna Kounder v. Marappa Kounder) and (1932) 2 KB 522 (Temperance Loan Fund Ltd v. Rose) have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company was a bona fide defence, in the nature of confession and avoidance, in the winding-up petition. Three other judgments have been cited by the parties. In the decision reported at (2008) 2 All ER 987 (In re: Cheyne Finance Ltd), the change in the English Act in the equivalent provision as Section 434(1)(c) of the Indian statue in the English Act has been noticed. In the judgment reported at (1986) BCLC 261 (In re: A Company), the claim of a contingent creditor of the company was considered. In the decision reported at (1987) BCLC 232 (Byblos Bank SAL v. Al- Khudhairy), it was held that in deciding whether a company was unable to pay its debts within the meaning of Section 223 of the English Act of 1948, it was improper to take into account any hope or expectation that the company would obtain assets in the future where there was no immediate right to the assets. These decisions have been referred to in the larger context of the argument in this and the connected matter and are not relevant for the present purpose. There is no dispute as to the claim of the petitioning creditor against the company. The claim is founded on dishonored cheques and even the primary ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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