TMI Blog2012 (12) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 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. - CA NO. 1084 OF 2011, CP NO. 560 OF 2011 - - - Dated:- 12-10-2012 - SANJIB BANERJEE, J. Tilak Bose, Ratnanko Banerji, Ms. Manju Bhuteria and Ms. Shrayashee Saha for the Petitioner. Abhrajit Mitra, Jishnu Chowdhury and Ms. Rajashree Kajaria for the Company. JUDGMENT 1. The parties are not to blame for this creditor's winding-up petition having lingered for an unnecessary length of time and there being a more protracted hearing than is ordinarily called for in a matter of this kind. It was only an observation of the court that led to a relatively innocuous matter being blown out of proportion upon the court considering it to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal sum of Rs.4,07,05,062 and the interest thereon at the rate of 15.50 per cent per annum. 4. 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 company being dishonoured on presentation, though the company has contended, in an apparent show of desperation on its part, that there was some unwritten arrangement between the parties that the cheques would not be presented without prior intimation to the company. The company has also alleged that the presentation of the cheques by the petitioning creditor was "incorrect and illegal" but it has, understandably, not been able to elaborate on such assertion. There is, indeed, no shred of defence to the claim of the petitioning creditor indicated in the company's affidavit. The company, however, proclaims that since there is an arbitral reference which is pending and since the petitioning creditor has obtained orders in respect of properties belonging to both the company and its guarantor-directors, the present unabashed attempt by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary 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. The company refers to the affidavits filed by the guarantor-directors before the Bombay High Court and says that there is substantial security furnished by the company and the guarantors which would make the continuation of the present petition inequitable. The petitioning creditor has, however, referred to the balance-sheet of the company for the year ended March 31, 2011 and, in particular, to Schedule III to the said balance-sheet to demonstrate that the company's immovable properties in respect of its two units in West Bengal and in Odisha have been mortgaged to banks and other financial institutions, its moveable assets are hypothecated to such banks and financial institutions and its current assets are also hypothecated. The petitioner says that the company is unable to pay its debts in the sense that its present liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 same. 8. The petitioner says that high authorities have held that the legal fiction contained in Section 434 of the Act is only a red herring. The petitioner suggests that nothing in the Act, or in the comparable English Acts which contained similar provisions as Sections 433, 434 and 439 of the Indian Act of 1956, precludes a creditor from applying for winding up a company on the ground of its inability to pay its debts even if the claim of the creditor does not exceed Rs. 500 (in England, 50 at one time and 750 now) and even without serving a written demand at the registered office of the company affording the company an opportunity to pay off or secure or compound for the claim within a period of three weeks from the date of receipt thereof. The petitioner is right and there can be no argument on such score. Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions 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 pay its debts may appear to imply actual insolvency and not merely commercial insolvency and there may be myriad ways of establishing the inability of a company to pay its debts other than the company's admission thereof, the legal fiction envisaged in Section 434(1)(c) of the Act is established upon it being proved to the satisfaction of the court that the company is unable to pay its debts. The statutory history of such clause would reveal that in the earlier times the matter was left completely to the court as to how it would be satisfied that a company was unable to pay its debts; but for the most part in the last hundred and fifty years, the law-makers imposed a condition as to how the satisfaction of the court on a company's inability to pay its debts could be arrived at. Significantly, the expression "and, in determining whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments 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 a company to pay an indisputable debt may be regarded in a case to be symptomatic of the company's inability to pay its debts for the subjective assessment of the court to be made as to the general inability of a company to pay its debts based on its inability to pay the petitioning creditor's debt. Section 434(1)(c) of the 1956 Act is a verbatim reproduction of Section 163(iii) of the Indian Companies Act, 1913. But the comparable provision was once quite different in its wording and, consequently, in its import. The English Companies Act of 1862 contained the relevant provision in Section 80(4) thereof: "80. A company under this Act shall be deemed unable to pay its debts, 1, 2 and 3** ** ** 4. Whenever it is proved to the satisfaction of the court that the company is unable to pay its debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The first case carried by the petitioner on such aspect is the judgment in Globe Steel Co. (supra) 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 neglected to pay the amount due under the bill of exchange, together with interest and incidental costs, despite their repeated demands. The company asserted in defence that since no demand in writing under Section 80(1) of the 1862 Act (which corresponds to Section 434(1)(a) of the Indian Act of 1956) had been made and the debt was disputed, no winding-up order could be made. It is necessary to see the entirety of the short judgment to appreciate its purport: "That case appears to me to be rather in the Petitioners' favour. I have no hesitation in saying that sub-sect. I has no application to sub-sect. 4. A company may be wound up by the Court whenever it is unable to pay its debts; and by sect. 80 a company is to be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 court. In the appeal, the company contended that the provision could not be used as a means for enforcing payment of a disputed debt which ought to be sued for at law. The appellate court held that "in order to give the Court jurisdiction to make the (winding-up) order it must, I think, be shewn that the inability to pay debts existed at the time when the petition was presented." 15. The dictum in Globe Steel Co. (supra) has necessarily to be seen not in the context of a claim for price of goods sold and delivered, but as a claim on an accepted bill of exchange dishonoured on presentation on the due date. The subjective satisfaction of the court, as to the inability of the company to pay its debts, in Globe Steel C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 contingency, and whether it is secured or unsecured." The petitioner has cited the judgment in Tweeds Garages Ltd. [1962] Ch D 406 to assert that commercial insolvency of a company may arise and may be demonstrated even if the company has substantial assets. The latest edition of Halsbury's Laws of England (5th Ed., 2011) has been brought and paragraphs 394 and 400 cited from Volume 16 thereof for the propositions that a company's inability to pay its debts may be shown in other ways than by proof of non-compliance with the statutory demand; and, the quantum of debt is not specified in the statute except in the case of a statutory demand. 17. In support of the commentary that a court may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(e), "If it is proved to the satisfaction of a court that a company is unable to pay its debts." 18. 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 a suit - including High Courts exercising original jurisdiction - can restrain a defendant from instituting or prosecuting any proceedings in a court not subordinate to that court from which the injunction is sought; and, a winding-up petition can only be filed before a High Court and no High Court is subordinate to any other High Court. The Supreme Court has recognised such position in the judgment reported at Cotton Corpn. of India Ltd. v. United Industrial Bank Ltd. [1983] 4 SCC 625 where it held that no court has jurisdiction, either under Section 41(b) of the Specific Relief Act or under Section 151 of the Code of Civil Procedure, 1908, to grant temporary or perpetual injunction restraini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company had not paid a debt as it fell due and had no substantial ground for opposing it. Therefore there was evidence of insolvency." (page 220) 20. There is a history to the provision on which the judgments in Cornhill Insurance plc and Taylors Industrial Flooring Ltd.'s cases (supra) hinged that has not been noticed by the parties herein. What is now clause (c) in Section 434(1) of the 1956 Act was clause (iii) in Section 163 of the Indian Companies Act, 1913. Such provision in the 1913 Act mirrored the equivalent provision in the Companies (Consolidation) Act, 1908 of England which was the corresponding statute in force in England prior to the Indian Act of 1913 coming into effect and the Indian statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. In the case of Anglo-Italian Bank [(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 liquidation. The court was called upon to examine the Judicature Act, 1875 and held that the rules in insolvency were to apply to companies wound up under the 1862 and 1867 Acts in the event the assets of the company were insufficient; and such rule applied not to the cases of all company's wound up but only to cases of winding-up on the ground of insolvency. Neither the question that arose in that case nor the proceedings in which the question arose can be of any relevance in the present case. 24. Before referring to the judgments of Indian courts referred to by the petitioner in support of its contention that the right of a secured creditor to carry a petition for winding up a company is unfettered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ris Marine Management (P.) Ltd. [2010] 156 Comp Cas 108/98 SCL 99 (Bom.), 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 (Hedge Golay Ltd v. State Bank of India ILR 1987 Kant 2673) has been placed for the proposition that a secured creditor can maintain a winding-up petition without either giving up its security or valuing it. Such legal position is unquestionable as Section 439(2) of the Act permits a secured creditor to present a petition for winding-up, but the question need not be gone into in this case since the petition was instituted by this petitioner as an unsecured creditor and it does not appear that the company has been able to secure the claim of the petitioner in course of the undertaking that the company has furnished or the injunction that it has suffered in the Bombay proceedings. For similar reasons, the judgments in Techno Metal India (P.) Ltd v. Prem Nath Anand [1973] 43 Comp Cas 556 (Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 Juneja Chemical Industries (P.) Ltd. v. Alam Tannery (P) Ltd. [2007] 140 Comp Cas 833/[2009] 94 SCL 270 (Cal.) for the observation in paragraph 10 of the report that in receiving a winding up petition, "not only should the factum of indebtedness be affirmatively established, but the quantum thereof needs also to be conclusively demonstrated." Another judgment reported at Siddharth Automobiles Ltd., In re [2008] 82 SCL 277 (Cal.) has been relied upon by the company for the same proposition. The Supreme Court judgment in (Mediqup Systems (P.) Ltd v. Proxima Medical System GmbH [2005] 59 SCL 255 and a judgment of this court reported at (SKF South East Asia and Pacific Pte Ltd v. Hi-tech Bearing (P.) Ltd. [2008] 144 Comp Cas 419/[200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout 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 company's ability to pay or secure or compound for the same. If a debt is discharged by causing a third party to liquidate the claim, there is no claim to be carried forward for the court to assess the possible commercial insolvency of the company. But if security were caused to be furnished by another, it would not be unreasonable for the petitioner to insist that such fact is not to be taken into account to assess the commercial insolvency of the company. In this case, it does not even appear that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 winding-up proceedings, the initiation of an arbitral reference in respect of a claim which is made the subject-matter of a creditor's winding-up petition will not operate as a bar on the winding-up proceedings. Indeed, a regular action in furtherance of the claim, particularly when it is instituted, as in this case, after filing a creditor's petition founded on the same claim, and a creditor's winding-up petition on the same claim have never been regarded as parallel proceedings. At times, particularly in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 33. As to the definition of security, the company relies on Stroud's Judicial Dictionary (7th Ed., 2006). A judgment (Standard Chartered Bank v. M.S. Handa [1994] 55 DLT 674) is cited on the question whether a third party can furnish security in a suit. Two decisions reported at (Kalianna Kounder v. Marappa Kounder [1993] 2 MLJ 33) and (Temperance Loan Fund Ltd v. Rose (1932) 2 KB 522 have also been referred to, in the same breath, by the company for the proposition that security furnished by a third party can be accepted as security in lieu of an order of attachment before judgment. The decisions appear not to have any bearing on the present discussion for the same reasons as indicated in declining to accept the dictum in CRC Carrier Ltd. (supra). The decision in Raman Tech. Process Engg. Co. v. Solanki Traders [[2008] 2 SCC 302] for the proposition that a secured creditor becomes an unsecured creditor by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision reported at Byblos Bank SAL v. Al-Khudhairy [1987] BCLC 232, 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. 36. 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 basis of the claim stands admitted. The company did not reply to the statutory notice and has not indicated anything that would make the debt disputed or that would detract from the presumption of the company's inability to pay that arises under Section 434(1)(a) of the Companies Act. That the company has suffered an injunction in the Bombay High Court is of no consequence since the company cannot demonstrate that the injunction amounts to a security of value equal to or in excess of the petitioner's unimpeachabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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