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Kotak Mahindra Bank Ltd. Versus Eastern Spinning Mills and Industries Ltd.

2013 (2) TMI 842 - CALCUTTA HIGH COURT

A.P.O. Nos. 469 and 470 of 2012 and C.P. No. 493 of 2011 - Dated:- 13-2-2013 - A.K. Banerjee and Shukla Kabir (Sinha), JJ. For Appellant: Anindya Kumar Mitra, Senior Advocate, Debangshu Basak, Deep Nath Roy Chowdhury and Sourav Mukherjee For Respondents: S. N. Mookherjee, Senior Advocate, Ratanko Banerjee and Subhankar Nag JUDGMENT A.K. Banerjee, 1. Short question would involve in these appeals as to whether a secured creditor was within its right to maintain a petition for winding up without gi .....

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kept as security, if sold to pay off the bank dues, would amount to complete closure of the business of the company as without land, building, machinery and other fixtures the company would be left hardly with anything to run its day to day affairs. The company could not pay off the dues of the bank. The bank assigned their claim and/or the right as a secured creditor to M/s. Kotak Mahindra Bank Ltd., who stepped into the shoes of the State Bank of India. Kotak Mahindra Bank initiated recovery .....

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Its networth became negative that compelled them to make a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. The BIFR accepted the reference and declared the company, a sick company within the meaning of section 3(1) (o) of the said Act of 1985. However, at the instance of the Kotak Mahindra Bank, the reference stood resolved without a logical conclusion in view of the provisions of the SARFAESI Act that .....

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ge ultimately dismissed the winding up petition by holding it not maintainable in law (Kotak Mahindra Bank Ltd. v. Eastern Spinning Mills and Industries ltd. [2012] 175 CompCas 71 (Cal)). The principal reason for dismissal would appear from two paragraphs of the judgment and order that are quoted below (page 106) : It is, thus, the inevitable conclusion from the discussion herein that a secured creditor of a company which has not established the inefficacy or the inadequacy of the security held .....

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reditor had crossed that hurdle and had established that a debt was due which was unmatched by any efficacious security, its conduct in advertising the statutory notice prior to instituting this petition is a good ground for exercising the limited discretion available to the company court to refuse to admit a creditor's petition even if the debt were unimpeachably established. 3. Being aggrieved, Kotak filed two appeals, one for dismissal of the winding up and the other for not entertaining .....

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s on September 30, 2003. Mr. Basak would also contend, the company in the said balance-sheet did not take into account the overdue interest that had accrued in the meantime. He also placed the relevant correspondence including the statutory notice of demand. According to him, the notice was never replied to. However, the company sought to rely upon a copy of the reply said to have been served upon the company appearing at page 292 of the paper book. 5. Taking it over from Mr. Basak, the learned .....

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id three sections the right of a creditor to maintain a petition for winding up could not be questioned in the absence of a bona fide dispute being raised by the company. He referred to paragraph 9 of the affidavit-in-opposition appearing at page 275 of the paper book to say, the company admitted their liability towards the State Bank of India that stood assigned in favour of Kotak. The company was itself a sick company as its networth became negative that would clearly prove the commercial inso .....

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d prove his status as a creditor having a claim of more than ₹ 500 the winding up petition would be maintainable. It could be resisted by the company by raising a bona fide dispute that the present company utterly failed. He cited the decision in the case of V. V. Krishna Iyer Sons v. New Era Manufacturing Co. Ltd. reported in [1965] 35 CompCas 410 (Ker) to support his proposition, the balance-sheet would itself prove the commercial insolvency of the company that would maintain the winding .....

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1] 3 SCC 632 : [1972] 42 Comp Cas 125. 6. According to the learned Advocate General, different High Courts including the Calcutta High Court, Madras High Court and the Bombay High Court consistently upheld the right of a secured creditor to maintain a winding up petition. He relied on the following decisions on this issue : (1) [1971] 41 Comp Cas 1063 : AIR 1971 Cal 78 (Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat). (2) [2012] 174 Comp Cas 22 (Cal) (Rajiv Tandon v. Dena Bank). (3) .....

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Canfin Homes Ltd. v. Lloyds Steel Industries Ltd. reported in [2001] 106 Comp Cas 52 (Bom). 8. Per contra, Mr. Subhankar Nag, learned counsel appearing for the company raised the issue of parallel proceeding. According to Mr. Nag, the secured creditor could opt for winding up proceeding once they would give up their right to proceed with the other proceedings under the SARFAESI Act. 9. He also referred to the proceeding before the Debts Recover)' Tribunal that was initiated by the State Bank .....

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RFAESI Act. The winding up petition was thus rightly not admitted. 10. Taking it over from Mr. Nag, Mr. Ratnanko Banerjee, learned counsel also appearing for the company contended, winding up being a discretionary remedy the learned company judge must take into account all aspects surrounding the said proceeding. According to him, the petition for winding up was nothing but a mala fide attempt to malign the company. He referred to the advertisement published in the newspaper. He referred to the .....

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t an attempt to put pressure upon the company to accede to the unreasonable demand of the respondent. According to him, the claim was a disputed one. He was however unable to highlight the dispute on its merits. He would contend, winding up petition was not maintainable by a secured creditor. In this regard he cited the apex court decision in the case of National Conduits P. Ltd. v. S. S. Arora reported in [1967] 37 Comp Cas 786 : [1968] 1 SCR 430. He lastly contended, once the appellant initiat .....

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did not have any interest in the company, it was not entitled to maintain the petition. He referred to decision in the case of Davco Products Ltd. v. Rameswarlal Sadhani reported in AIR 1954 Cal 195. 12. Distinguishing the decision in the case of Sri Shanmugar Mills Ltd. v. S. K. Dharmaraja Nadar [1969] 39 Comp Cas 297 : AIR 1970 Mad 203 cited by the learned Advocate General, he referred to paragraph 3 of the report to say, land, machinery and other assets should be taken note of as security. Ac .....

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ed to urge the issue of the commercial insolvency at the appellate stage. In this regard he referred to section 114 of the Indian Evidence Act, 1872. He also relied upon the decision in the case of State of Maharashtra v. Ramdas Shrinivas Nayak reported in AIR 1982 SC 1249 to support his contention, the points not urged before the learned single judge could not be raised at the appellate stage. He referred to the pleadings to show, no pleadings as to insolvency were made. He referred to two Calc .....

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He distinguished the other five decisions as follows : (1) [1971] 41 Comp Cas 1063 : AIR 1971 Cal 78 (Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat). (2) [1985] 58 Comp Cas 174 (Bom) (Bharat Overseas Bank Ltd. v. Shree Arcee Steels P. Ltd.). (3) ILR 1987 Karn 2673 (Hegde and Golay Ltd. v. State Bank of India). (4) [1954] 24 Comp Cas 249 : AIR 1955 Mad 582 (Karnatak Vegetable Oils and Refineries Ltd. v. Madras Industrial Investment Corporation Ltd.). (5) [2001] 106 Comp Cas 52 (Bom) .....

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ng Corporation of India Ltd. v. Punjab Tanneries Ltd. reported in [1989] 66 Comp Cas 634 (P & H) and in the case of Manipal Finance Corporation Ltd. v. CRC Carrier Ltd. reported in [2001] 107 Comp Cas 288 (Bom) and in the case of Cambrian Mining Co., In re reported in [1881] WN 125, to support his contentions. 16. Mr. Mookherjee summed up his argument by contending as follows (i) In view of the provisions of section 13(1) and (4) of the SARFAESI Act, the winding up petition would not be main .....

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prove insufficiency of security. (iv) Reliance on the balance-sheet as an annexure in absence of appropriate pleading would not help the creditor to take the plea of commercial insolvency. (v) Admission of winding up is a discretionary remedy. The learned judge, considering all aspects including the mala fide conduct of the appellant who came with unclean hand, very rightly rejected the winding up petition that would deserve no interference by this court. 17. While giving reply, the learned Advo .....

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dmit the winding up petition. The learned Advocate General relied on the report of the official liquidator that would show, the total area mentioned in the appropriate deed of conveyance would not match the physical verification. The land was found short by the official liquidator. He also referred to the order of the court of appeal that dismissed an attempt to challenge the order for inventor)' dated September 19, 2011. 18. Commenting on the argument raised by the company on the statutory .....

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eneral would contend, notice was initially given at the registered office of the company by registered post with acknowledgment due. The acknowledgment due card did not come back compelling the appellant to publish the said notice. The extract of the notice was published. Hence, the plea of mala fide conduct would be of no consequence. He also referred to the pleadings to show that no reply was ever received by the appellant. Distinguishing the decision in the case of National Conduits P. Ltd. v .....

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d to the judgment and the order impugned to say, the plea of commercial insolvency was duly taken as would be appearing from the judgment and order impugned. In this regard he referred to pages 403 and 430 of paper book. He also referred to page 427 wherein the learned judge considered decision in the case of Bukhtiarpur Bihar Light Railway Co. Ltd. v. Union of India reported in [1954] 24 Comp Cas 507 : AIR 1954 Cal 499. 20. Distinguishing the decision in the case of Bengal Flying Club Ltd., In .....

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e of Manipal Finance Corporation Ltd. v. CRC Carrier Ltd. [2001] 107 Comp Cas 288 (Bom) claim was disputed. The court termed the debt as "doubtful". In the present case learned judge never expressed any doubt with regard to the claim of the appellant. In the case of Cambrian Mining Co., In re [1881] WN 125, the court exercised discretion, no law was decided. In the case of State Trading Corporation of India Ltd. v. Punjab Tanneries Ltd. [1989] 66 Comp Cas 634 (P & H), it was not cl .....

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so on inability to pay. The learned Advocate General also demonstrated the pleading in this regard. Hence even if the notice of demand was not sufficient to maintain the winding up petition the plea of commercial insolvency would fill in the gap or short comings, if any. 23. In the SARFAESI Act they would be in deemed symbolic possession of asset once they invoked the provisions of the said Act by serving the notice of demand. They could not take physical position because of the resistance that .....

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would depend upon the notice to be served under section 434(1) (a) that would permit the creditor to claim deemed insolvency as a fiction. However, that would not take away the creditor's right to claim, the company is also commercially insolvent or otherwise unable to pay its debt. If we give a close look to section 433(e) and (f) we would find, the company may be wound up if it is unable to pay its debt and the court is of the opinion, it is just and equitable that it should be wound up: .....

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as per sub-section (2). From the analysis as above, we would find as follows : (i) A creditor could maintain the winding up petition. (ii) A secured creditor is also creditor to maintain winding up petition. (iii) A creditor should have the claim for ₹ 500 and above. (iv) He would serve the notice of demand, that demand, if unattended and/or unsatisfied, would permit the creditor to claim deemed insolvency. (v) The creditor would maintain the winding up petition on the ground of inability .....

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by, if the creditor has an admitted claim it must be paid, in default that could only be resisted by raising a bona fide dispute. In the present case, the creditor could prove that it had a claim. The learned judge observed that there was little dispute that too, with regard to interest, the relevant observation as appearing in page 463 is as follows : It is beyond dispute that the original creditor had granted substantial credit facilities to the company. Despite the company's proclamation .....

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ssue of deemed insolvency as per the notice. The learned judge, observed, in our view erroneously : "since the present assessment is as to whether this petition made by a secured creditor, relying exclusively on section 434(1)(a) of the Act for the court to presume the inability of the company to pay its debts, should he admitted for being advertised in the absence of the petitioning-creditor having asserted or established the inefficacy or the inadequacy of the securities that it enjoys&qu .....

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e of such fiction. In our view, his Lordship erred in holding, the petitioner maintained the petition exclusively under this provision. There were enough material to hold, the company was commercially insolvent. We asked Mr. Mookherjee in vain, how he would propose to clear off the dues. He was unable to give any suitable reply. The entire fixed assets were mortgaged. The company did not have sufficient funds to pay off the dues. The balance-sheet would clearly demonstrate such insolvency. Even .....

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spute the same. Even if the company has means to pay and does not pay without any reasonable cause it would be liable to be wound up. However, this question may not be relevant here as the record shows, the company was involved in circumstances due to its precarious financial condition. In our view, his Lordship should have admitted the winding up petition and directed advertisement of notice making the said proceeding a representative action. 29. Emphasis was placed on the advertisement of noti .....

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