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The Companies Act, 1956
The Limitation Act, 1963
The Provincial Insolvency Act, 1920
Section 171 in The Companies Act, 1956
Section 168 in The Companies Act, 1956

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Andhra High Court
Reliance Infocomm Ltd., Regd ... vs Sheetal Refineries Pvt. Ltd., ... on 7 September, 2007

THE HON'BLE MR JUSTICE RAMESH RANGANATHAN

Company Petition No. 25 of 2005

07-09-2007

Reliance Infocomm Ltd., Regd Office at E.O.1, Reliance Greens Village Motikhavdi, P.O. Digvijaygram Dist: Jamnagar (Gujarat), Circle office at 3rd Floor, Saboo Towers, Rajbhavan road, Somajiguda, Hyderabad rep, by its Authorised Signatory and another.

Sheetal Refineries Pvt. Ltd., Registered office at Survey No. 342 Gagan Pahad, Ranga Reddy District.

Counsel for the petitioners: Sri Prabhakar Sripada

Standing Counsel for respondents: Sri B. Chandrasen Reddy

:ORDER:

This petition is filed, under Section 433(e), read with sections 434 (1)(a) and 439(1)(b), of the Companies Act, for winding up of the respondent company.

The petitioner, a public limited company incorporated under the Companies Act, 1956 with its registered office at Jamnagar, Gujarat, is engaged in the business of providing telecommunication and internet services in India. The respondent is a private limited company incorporated under the Companies Act, 1956 with its registered office in Ranga Reddy District of Andhra Pradesh. The authorized, issued and paid up capital of the respondent is Rs.2.00 Crores divided into twenty lakh equity shares of Rs.10/- each. The main objects, for which the 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. Petitioner would contend that the respondent had approached them, vide letter dated 27.7.2003, 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 (CAF) No.5900999683 on 28.6.2003 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 28.6.2003. Petitioner would submit that the respondent had surrendered eight hand sets and had subscribed additional thirty RIM phone connections vide CAF No.2803310741, that these RIM hand-sets were also activated and that the respondent, while retaining two RIM hand-sets had later surrendered 28 RIM hand-sets. Petitioner would submit that, despite having extensively availed its services, the respondent had failed to pay the bills issued for such services. Enclosed to the petition are copies of the bills. Petitioner would submit that Rs.10,97,574/-, with interest at 18% per annum till the date of payment/realization, is due and payable to them by the respondent, that they had issued statutory notice dated 15.12.2004 calling upon the respondent to pay the amounts due within a period of three weeks failing which appropriate legal proceedings would be instituted including winding up, that, by letter dated 23.12.2004, the respondent had sent a reply falsely denying its liability to pay the dues, that the respondent had neglected to pay the amount due, that it is unable/deemed to be unable to pay its debts, that it is plainly insolvent and that it is just, equitable and in the public interest that the respondent be wound up by and under the order of Court.

In their counter affidavit the respondent would deny the allegations in the petition including that they are indebted to the petitioner for a sum of Rs.10,97,574/- and that, despite repeated requests and demands, they had neglected to pay their dues. Respondents would submit that, while it had availed 85 RIM phone connections under the "Corporate Scheme", it was the representatives of the petitioner who had made lucrative offers to which they had fallen prey and had agreed to take the phones. Respondent would submit that they had submitted the customer application form, that the mobile handsets were activated by the petitioner, that they had surrendered eight of the 85 phones and that from day one they were requesting the petitioner to limit outgoing calls upto Rs.700/-, to bar outgoing calls if the charges exceeded Rs.700/- and to disconnect STD and ISD facility. According to the respondent, despite their representations on several occasions, the petitioner did not take any steps to bar outgoing calls, they were not sending bills for the said phones, that on being questioned they had assured that they would send the bills and disconnect the phones if the charges exceeded Rs.700/-, and that they had failed to act upon such assurances. Respondent would submit that the representatives of the petitioner had approached them with another lucrative offer of RIM phones under the "Monsoon Hungama Scheme" informing 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 25.3.2003 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 hand-sets, no charges would be levied. While denying that it had retained two of the thirty hand-sets, respondent would contend that these two hand-sets were misplaced by officials of the petitioner, that there was no necessity for them to retain two hand-sets and the very admission that they had surrendered 28 RIM phone connections would itself establish that the thirty RIM 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/-, respondent would submit that the petitioner had failed to send the bills regularly, that a consolidated bunch of bills were sent for the first time in February, 2004 for the period July, 2003 to February, 2004 and that, despite repeated requests, not even a single bill was sent to them. Respondent, while denying that they are liable to pay Rs.10,97,574/- with interest at 18% per annum, would state that they are solvent and financially strong having an annual turnover of Rs.131.00 Crores and a net income of Rs.86,80,000/-, that they are manufacturers of refined oil, that their Memorandum and Articles of Association do not permit either the company or its directors to carry on the business of selling mobile phones on commission basis and that no amount could be paid without the resolution of the Board or the Shareholders of the Company. Respondent would contend that no Memorandum of Understanding could be entered into by a Director of the Company and that any such agreement entered into by the Executive Director, in his independent capacity, would not bind the company as no resolution was passed by the Board or the Shareholders of the Respondent nor was the Executive Director authorized to purchase/use the mobile phones or to enter into an understanding with the petitioner. It is stated that, as on 31.3.2005, the respondent had made profits, after deducting taxes, of Rs.70,78,204/-, that as at present 60 workers are engaged, that the company has never failed to pay either their salaries or the dues of its creditors, that the entire dispute, between the petitioner and the respondent, arose only as a result of mismanagement by officials of the petitioner, that these matters required detailed enquiry and could not be decided in summary proceedings for winding up.

In their rejoinder, Petitioner would contend that the respondent was informed that it was not technically feasible to limit outgoing calls only upto Rs.700/- and, since RIM phones were in the care and custody of the respondent, it was for them to exercise due control over its usage. Petitioner would point out that the respondent had not denied usage of the phones for Rs.10,97,574/- nor had they disputed the genuineness of the bills raised and, though they had contended that their liability was limited only to Rs.700/- per phone per month of usage, the fact remained that they had not even paid a single rupee towards the dues. 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 hand-sets, that there was complete absence of bonafides 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 raised by the petitioner clearly discredited their claim of being financially strong, that their casting aspersions on their own Executive Director showed their malafide intentions in avoiding payment and that their claim for commission contradicted para 2 of Ex.B.16 letter dated 12.04.2004.

C.A.No.1103 of 2007 was filed by the respondent herein seeking leave of this Court to file an additional counter affidavit. It is stated therein that the respondent could not produce certain documents earlier and it was necessary to state additional facts and place certain additional documents on record. Respondent would contend that they were due Rs.1.59 lakhs towards commission under the Monsoon Hungama Scheme wherein commission of Rs.500/- per phone was to be paid, that the petitioner had issued letter dated 19.11.2003 calling upon the respondent to pay Rs.77,410/- as on that date, that the amount payable was adjusted from the commission payable to the respondent and that the petitioner was still due Rs.1.59 lakhs. It is stated that the documents enclosed would show that the petitioner had to pay commission to the respondent, that the respondent had returned 34 RIM phones to the petitioner, that from June, 2003 the respondent had issued numerous letters to the petitioner to disconnect outgoing facility of the phones used by customers of the respondent, if the monthly consumption exceeded Rs.700/- and, in spite of return of the 34 demo phones in the month of September, 2003, the petitioner had been raising bills till February, 2004. It is stated that the amounts due from M/s Sheetal Infocomm were sought to be clubbed with that of the respondent, that the respondent and M/s Sheetal Infocomm were different entities and, since there were disputed questions of fact, the company petition was liable to be dismissed.

As both the Counsel, for the Petitioner and the Respondent, have relied extensively on these documents, in their submissions made for and against "admission of the company petition", as the genuineness of the documents enclosed to the additional counter affidavit are not in dispute and as the matter is still at the preliminary stage of "hearing on admission", I consider it appropriate to allow C.A.No.1103 of 2007, grant leave to file the additional counter affidavit and take the documents enclosed thereto on record. Sri Prabhakar Sripada, learned counsel for the petitioner, would submit that under CAF No.5900999683 dated 28.6.2003 eighty-five RIM handsets were supplied to the respondent of which eight were returned, that later 30 RIM handsets were supplied vide CAF 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 Ex.B.15 letter dated 15.4.2004 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 such liable to be wound up. Learned counsel would refer to the Statement of Accounts, enclosed as part of the documents annexed to the Company Petition, to contend that a sum of Rs.10,97,574/- was due from the respondent. Learned counsel would refer to the averments in the counter affidavit to submit that the respondent has even attributed motives to its own Executive Director and has come up with baseless contentions of it not being authorized to carry on the business of selling phones on commission basis only to avoid payment. Learned counsel would contend that, since the debt is undisputed, the Court would not act upon the defence of the respondent that, while it is able to pay its debts, it had chosen not to pay the particular debt due to the petitioner. Learned counsel would place reliance on Madhusudan Gordhandas & Co. Vs. Madhu Woollen Industries (P) Ltd.,1 in this regard.

Sri B. Chandrasen Reddy, learned counsel for the respondent, on the other hand, would submit that the petition as filed was liable to be dismissed for suppression of relevant facts and since there is a bonafide dispute, with regards the debt due, the respondent company cannot be said to have "neglected" to make payment. Learned counsel would point out that, while the petitioner was harping on the dues relating to the 77 RIM handsets supplied to the respondent under the "Corporate Scheme", no mention had been made by them with regards the 936 RIM hand-sets sold by the respondent under the "Monsoon Hungama Scheme" whereunder the petitioner was liable to pay the respondent commission at Rs.500/- per hand-set. Learned counsel would submit that the respondent, in its letter dated 18.2.2004, had informed the petitioner that they were liable to pay Rs.4,04,511/- and, even if the respondent is held liable to pay the bills under the "Corporate Scheme" till January, 2004 at Rs.700/- per month per phone, the amount due to be paid to the respondent towards their deposit, and as commission under the "Monsoon Hungama Scheme", was far more than the amount payable by it towards the bills for the RIM handsets under the "Corporate Scheme", and as it is the petitioner which is liable to pay the debt due to them, the respondent cannot be said to have "neglected" to pay or to be unable to pay its debts. Learned counsel would submit that Ex.B.16 letter dated 12.4.2004 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 12.4.2004, 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 in as much as they had combined the commission paid to Sheetal Infocomm and Sheetal Refinery though they had agreed that M/s Sheetal Refineries Private Limited and M/s Sheetal Infocomm were separate entities. Learned Counsel would submit that, in their letter dated 18.2.2004, the respondent had informed the petitioner that they had to pay Rs.700/- per handset per month till December, 2003, that they had asked the petitioner to release their commission, that only D.D. dated 18.9.2003 for Rs.1,70,610/- and Cheque No.642839 dated 4.12.2003 for Rs.88,608/- had been paid to the respondent and that the other three D.Ds, shown in the Accounts Statement as payment towards commission, were not paid to the respondent but were paid to M/s Sheetal Infocom. Learned counsel would further contend that, despite the respondent's repeated insistence that the upper limit of the bills, for the handsets provided under the "Corporate Scheme", be restricted only to Rs.700/- per month, the petitioner continued to charge amounts far in excess thereof every month, and, since the respondent had made it clear to the petitioner in several letters that they would not be liable to pay more than Rs.700/- per month for each handset, they could not be held liable for payment of the excess amounts claimed by the petitioner. Learned counsel would submit that the audited Balance Sheet of the respondent as on 31.3.2007 would show that, as against amounts due by the respondent of Rs.29.88 Crores, it had Assets worth Rs.40.78 Crores, Reserves of Rs.4.21 Crores, and that, as against the turnover of Rs.250 Crores, it had made a profit of Rs.2.25 Crores which would establish that their net worth was sound. Learned counsel would submit that, since there is a bonafide dispute with regards payment of the debt, the company petition is liable to be dismissed. Learned counsel would submit that even assuming that, any amounts were liable to be paid by the respondent, since, admittedly the amounts were due in July, 2004, the petitioner's claim was barred by limitation in August, 2007 when the company petition was heard on "Admission". Learned counsel would place reliance on Madhusudan Gordhandas & Co.1; Hind Overseas Private Ltd., Vs. Raghunath Prasad Jhunjhunwalla2; Pradeshiya Industrial and Investment Corporation of Uttar Pradesh Vs. North India Petrochemicals Limited3; Mediquip Systems (P) Ltd Vs. Proxima Medical System GMBH4; Airwing Private Limited Vs. Viktoria Air Cargo Gmbh Langer Kornweg5; M/s. Excel Embroideries Vs. M/s. Trend Designs Limited6; Kesar Enterprises Ltd. Vs. IDI Limited7; Premlal Birla Vs. Gilt Pack Ltd8; Mysore Sales International Limited, Bangalore Vs. United Breweries Limited, Bangalore9, and Benares Cotton and Silk Mills Ltd Vs. Sulbha Devi Gupta10 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 placed before this Court to buttress their submissions both for and against "Admission and Advertisement of the Company Petition". The importance of pleadings, in summary proceedings for winding up, cannot be overemphasized, for it is well settled that a contention to substantiate which evidence is necessary has to be pleaded and if there is no pleading raising a contention there is no question of substantiating such a non-existing contention by evidence. It is also well settled that allegations which are not pleaded, even if there is evidence in support of it, should not be examined. While the respondent cannot absolve themselves of all blame, it is the petitioner which ought to have bestowed greater attention to its pleadings as it is required to shoulder the burden of establishing, prima facie, that the respondent is unable to pay its debts. While this Court would have been justified in dismissing the Company Petition on the ground that the basic facts, necessary for effective adjudication, have not even been pleaded, lest Justice suffer in the process the Company Petition was heard both on questions of law and on merits. The questions which arise for consideration in the present case are:-

1. Is the relevant date for computing the period of limitation, with regards a creditor's petition for winding up, the date of presentation of the petition in Court or the date of hearing of the petition for its "admission and advertisement"?

2. What are the tests to be satisfied for admission and advertisement of a creditor's petition for winding up?

3. Do the facts of the present case justify admission and advertisement of the Company Petition?

LIMITATION:

At the stage of admission in a summary enquiry under Section 433, before deciding as to whether winding up proceedings should be initiated, the Court has to ascertain whether, inter alia, the claim made by the creditor is barred by limitation or whether it is legally enforceable. If the claim made by the creditor is, on the face of it, not one which can be enforced, it is unnecessary to examine whether the claim is genuine and whether the respondent has a bonafide and reasonable defence on merits. The right to apply for winding up under Section 439(b) is a right conferred on the creditor and not on any person, however anxious that person may be, to have the company wound up. It is 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 Vs. Vijaya Productions Pvt. Ltd11).

"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 Court, when the claimant first sends in his claim to the Official Liquidator. The Schedule to the Limitation Act prescribes the period of limitation. The First Division thereunder relates to suits and a suit for recovery of money filed within three years, from the date on which the loan was given or the goods supplied, would be within limitation. The law of limitation is addressed to the commencement of a proceeding and not to its disposal or to the consideration of the subject matter. The test is whether the petitioner/Applicant did all that he was required to do in order to bring the matter before the Court and set it in motion. If he did so, he instituted the suit or made the application within time irrespective of whether any consideration of the merits of the case took place. (Sohanlal Nagermull Vs. Manicklal Seal12). A suit which is within time when filed cannot be barred subsequently. (Thayammal Vs. Rangaswami Reddy13).

The provision in Section 3(2)(a)(iii) would apply only in relation to a suit instituted in the regular Civil Court but previous to the institution of the suit the plaintiff has put in a claim to the official liquidator. The provision does not apply to a claim against an Insolvent Company in liquidation in which case time will run from the date of application for winding up and not of adjudication. (Chalisgaon Shri Lakshmi Narayana Mills Co. Ltd. Vs. Amritlal14). To maintain a petition for winding up, on the ground of inability to pay the debt, the debt must be recoverable, i.e., due and payable and not barred by limitation on the date of the petition. There is nothing in Section 433 to hold that, in order to maintain a petition, the debt must also continue to be recoverable even on the date of the order of winding up. Under Section 434(1)(a), a company is deemed to be unable to pay its debts for non-compliance with the statutory notice to pay the debt due on the date of the notice, and not on the date of the hearing of the petition. The expression "then due", as appearing in Section 434(1), means the debt due at the time of filing of the winding-up petition. Similarly, under Section 441, the effect of the winding-up order is to relate it back to the date of the petition and winding-up proceedings are deemed to commence from the date of the presentation of 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 prejudice. (Modern Dekor Painting Contracts P. Ltd. Vs. Jenson and Nicholson (India) Ltd15, Maharashtra Small Scale Industries Development Corporation Vs. Trawlers Pvt. Ltd16, Diwan Chand Kapoor Vs. New Rialto Cinema (P) Limited17, Indian Turpentine & Rosin Co. Ltd Vs. Pioneer Consolidated Company of India Limited18).

Section 529 of the Companies Act, 1956 provides that, in the winding up of an insolvent company, the same rules as are in force under the law of insolvency with respect to estates of persons adjudged insolvent, shall prevail and be observed with regard to debts provable. Under Section 446(1), on a winding up order being made, no suit or other legal proceeding can be commenced or proceeded with except with the leave of the Court. While Section 446(1) of the Companies Act, 1956 is similar to Section 171 of the Companies Act, 1913, Sections 528 and 529 of the Companies Act, 1956 are in pari-materia with Sections 228 and 229 of the Companies Act, 1913. It is useful, therefore, to read Sections 171, 228 and 229 of the Companies Act, 1913 in juxta-position with Sections 446(1), 528 and 529 of the Companies Act, 1956: Companies Act, 1913

Companies Act, 1956

Section 171:When a winding up order has been made or a provisional liquidator has been appointed no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose.

Section 446(1): When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.

Section 228: 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 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 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 the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section."

Section 529: Application of insolvency rules in winding up of insolvent companies

(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to-

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent:

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge;

(b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of section 529A.

(2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section :

Section 27 of the Provincial Insolvency Act which relates to an order of adjudication and Section 28 to its effect read thus:

Section 27:

Order of adjudication:-

(1) If the Court does not dismiss the petition, it shall make an order of adjudication, and shall specify in such order the period within which the debtor shall apply for his discharge.

(2) The Court may, if sufficient cause is shown, extend the period within which the debtor shall apply for his discharge, and in that case shall publish notice of the order in such manner as it thinks fit.

Section 28: Effect of an order of adjudication:-

(1) On the making of an order of adjudication, the insolvent shall aid to utmost of his power in the realization 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 proceedings, 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 possession, 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 which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the Court or Receiver, and the provisions of sub-section (2) shall apply in respect thereof.

(5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure 1908 (5 of 1908) or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree (6) Nothing in this section shall affect the power of any secured creditor to realize or otherwise deal with his security, in the same manner as he would have been entitled to realize or del with it if this section had not been passed. (7) An order of adjudication shall relate back to and take effect from, the date of the presentation of the petition on which it is made.

As they are similarly worded, Sections 28(7) of the Provincial Insolvency Act, 1920, may usefully be read in juxta- position with Section 168 of the Companies Act, 1913 and Section 441(2) of the Companies Act, 1956. Provincial Insolvency Act, 1920

Companies Act, 1913

Companies Act, 1956

Sec.28(7): An order of adjudication shall relate back to and take effect from, the date of the presentation of the petition on which it is made.

Sec.168: A winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up."

Sec. 441(2): In any other case, the winding up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up.

Section 34 of the Provincial Insolvency Act, which relates to debts provable under the Act and Section 78 which relates to limitation read thus:

34. Debts provable under the Act:-

(1) Debts which have been excluded from the schedule on the ground that their value is incapable of being fairly estimated and demands in the nature of unliquidated damages arising otherwise than by reason of a contract or a breach of trust shall not be provable under this Act.

(2) Save as provided by sub-section(1), all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent, or to 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 sections 5 and S.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, which is not time-barred on the date of presentation of the petition for adjudication, can be admitted to proof even though it may become barred on the actual date of adjudication. (Subramania Iyer Vs. Meenakshisundaram Chettiar19; Byramji Bomanji Talati Vs. Official Assignee, Bombay20, Ram Chand Puri Vs. Lahore Enameling & Stamping Co.21). On a conjoint reading of Sections 441(2) with Section 529(1)(a) of the Companies Act, 1956, and as the same rules as are prescribed in the Provincial Insolvency Act, 1920 with regards debts provable shall prevail and be observed in the winding up of an insolvent company, it may not be unreasonable to hold that a claim which is not time barred on the date of presentation of the petition for winding up can be admitted to proof even if it may have become time barred on the date of the order of winding up.

In Benaras Cotton and Silk Mills Ltd10, relied upon by Sri B. Chandrasen Reddy, learned Counsel for the respondent, the question which arose for consideration before a Division Bench of the Allahabad High Court was whether the claim made by a creditor before the Official Liquidator was barred by limitation. The Division Bench, while expressing its approval of the view taken by the Single Judge of the Punjab High Court in Lahore Enameling & Stamping Co. Ltd. Vs. A.K. Bhalla22, and its disapproval of the opinion expressed by the Division bench of the Punjab High Court in Ram Chand Puri21, observed:

"........It is to be noticed at once that his Lordship did not use the expression "winding-up order" in this sentence. Reference may be made to section 162 of the Indian Companies Act, 1913. That section reads as follows: "A winding-up of a company by the court shall be deemed to commerce at the time of the presentation of petition for the winding-up".

It appears to us that Agarwala J. had the provisions of section 168 of the Indian Companies Act in mind. August 1, 1949, was the date when the application for winding-up had been made. There is no provision in the Companies Act which states that the date of the winding-up order would relate back to the date of the making of 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:

"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 favour so that a debt which is not statute-barred at the date of the order can be proved for."

Buckley on the Companies Acts, 13th edition, page 630, section 316 states: "The assets are to be applied in payment of liabilities subsisting at the time of the winding-up order; after the order is made, statutes of limitations do not run.

But, of course, a debt barred at the date of the order cannot be proved, and cannot even in a solvent voluntary liquidation properly be paid unless the contributories consent."

It is, therefore, obvious from the above that the correct position in law is that a debt which is within time at the date of the winding-up order can be proved, but one which has already become time-barred cannot be proved. In other words, a claim which is time-barred cannot be entertained or allowed. It is also clear from the enunciation of law, viz., Halsbury's Laws of England, palmer's Company Law and Buckley on the Companies Acts, as well as decided cases referred to above that the limitation is suspended from the date of the winding- up order. Thus, any amount which is within time at the date of the making of the winding-up order can be entertained and, if proved, may be allowed. In Lahore Enamelling and Stamping Co. Ltd. (1958) 28 Comp Cas 216 (Punj), Tek Chand J. was considering the question whether the principle enunciated under section 168 could be extended to the period of limitation prescribed for filing suits, appeals, etc. Tek Chand J. observed (at p. 221 of 28 Comp. Cas): "The Legislature in its wisdom did not choose to extend the operation of section 171 to all suits and other legal proceedings filed or pending after the date of the winding-up petition....... The terminus a quo for purposes of a statutory bar under section 171 against commencing and continuing legal proceedings dates from the winding-up order. A creditor can take legal proceedings against a company after the petition is presented, and if the petition is dismissed and no winding-up order is made, then the suit or other legal proceedings will go on unhindered by the provisions of the Indian Companies Act." Tek Chand J. observed that "I cannot read in the words 'when a winding-up order has been made' the words 'when a petition for winding-up is made'." He further observed (at p. 222 of 28 Comp Cas):

"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. On a consideration of the 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 the material date for the purposes of section 171 of the Indian Companies Act. We are also of the view that there is no question of relating back the winding-up order to the date of the making of application for winding up......."(emphasis supplied)

In Lahore Enameling & Stamping Co. Ltd.22, the question which arose for consideration before the Punjab High Court was whether the claims submitted by creditors of the company before the Official Liquidator, pursuant to an advertisement issued by him, was barred by limitation. The Single Judge of the Punjab High Court held that, for the purpose of limitation, the material date was the date of the winding up order, that if the claim became time barred, after presentation of the petition for winding up but before passing of the winding up order, the claim would be time barred and the creditor would not be able to avail the benefit of the provisions of Section 171 of the Companies Act, 1913, (Section 446 of the Companies Act, 1956), for extending the period of limitation. The learned Single Judge of the Punjab High Court reiterated this view of his in Simplex Manufacturing Co. (Private) Limited Vs. Hindustan Tools Mfg. Co. Ltd23.

In Ram Chand Puri21 a Division Bench of Punjab High Court, in an appeal against the order passed in Lahore Enameling & Stamping Co. Ltd22, while expressing its approval of the view expressed by a Single Judge of the Allahabad High Court, in Jwala Prasad Vs. Jwala Bank Ltd24, observed : "......Where, therefore, there is nothing in the Companies Act which is repugnant to considerations of limitation etc. relating to debts recoverable under the insolvency law, the provisions of the Provincial Insolvency Act or the Presidency Towns Insolvency Act, as the case may happen to be, may with advantage apply to the case which is being considered under the Companies Act. Section 168 of the Companies Act provides:

"A winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up." This is analogous to the provisions of section 28(7) of the Provincial Insolvency Act which are in the 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 that if the order of winding up is going to be made, it would be so much waste of time and money on his part to pursue a remedy in a civil court. The financial state of the company may be such that it may be inadvisable to pursue the ordinary remedy in a court of law and he may well decide to await the decision of the company court and take his chance on receiving a portion of the dividends which would be paid out to creditors. Simply because there is no specific embargo on the filing of the civil suit after the winding up petition is presented, it does not mean that he is compelled to pursue that remedy. The company law specifically provides that once the winding up order is made, no further proceedings or suits can be filed without the leave of the court, and because the winding up order dates back to the day when the winding up petition was filed, it can be argue quite logically that a creditor is entitled to await the final issue in the matter instead of hurrying to a court and risking his money and time in pursuing an elusive remedy. The remedy is, no doubt, elusive because if the order is made, he cannot proceed further with that remedy, and if during the pendency of the winding up petition he obtains a decree, he cannot stand in any better circumstances. His position is no better than it was before and that being so, there does not seem to be anything anomalous in the limitation being extended in such a way that the creditor can prove his claim if he can show that his debt was not barred on the day the application for winding up was made. It seems to me that there is a close analogy between the insolvency law and the law under the Companies Act by virtue of the provisions of section 229 of the Companies Act, and since in a large number of cases courts have held that under the insolvency law a debt, which is provable on the ate of the filing of the application for insolvency, is to be deemed a provable debt within the meaning of section 34(2), it must be held that the same rule would apply to cases under the Companies Act, and, that being so, I would hold that the debt of the appellant is provable and not barred by limitation....."

Curiously, while the Division Bench of the Punjab High Court in Ramchand Puri21 expressed its approval of the opinion of the Single Judge of the Allahabad High Court in Jwala Prasad24 and differed with the opinion of the Single Judge of the Punjab High Court in Lahore Enameling & Stamping Co. Ltd22 the Division Bench of the Allahabad High Court in Benares Cotton & Silk Mills Ltd10 concurred with the opinion of the Single Judge of the Punjab High Court, in Lahore Enameling & Stamping Co. Ltd22, explained the observations made by the Single Judge of the Allahabad High Court in Jwala Prasad24 and expressed its disapproval of the opinion expressed by the Division Bench of the Punjab High Court in Ramchand Puri21.

In S. Abdul Muthalibu Vs K.M. Mohammed Abdul Khader25, 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 sum of Rs.375/- on 12.1.1952 and a further sum of Rs.50/- on 1.3.1952. The application for winding up was presented on 22.11.1954 and the Company was ordered to be wound up on 14.10.1955. Reckoning the period of 3 years, from the date of the debt, the claim was barred by limitation on 14.10.1955 but not on 22.11.1954. The creditor filed the claim on 26.3.1956. The Division Bench observed:

"........a suit can be filed even when a winding up order has been made if leave of the court is obtained. In such a case, if a creditor institutes the suit after getting such leave, he can avail himself of the benefit of the Explanation to section 3 of the Limitation Act. The two exceptions to the normal rule of limitation when a suit is instituted, which have been enacted in the Explanation to section 3, are meant in favour of the plaintiff and not to his detriment. We may also observe that a company court should remember that before referring a creditor to a suit in a complicated matter, the creditor can only have the benefit of the Explanation to section 3 of the Limitation Act but not the benefit of the statutory provisions in sections 168, 228 and 229 of the Companies Act, 1913, which he would be having if his claim is decided in the company court itself. In other words, it may happen that the date on which the creditor sends in the claim is beyond the period of three years from the date of the debt, and if the creditor is relegated to a suit, the suit would be time- barred, but it may not be time-barred if the claim is investigated in the company court itself, on account of the fact that the presentation of the petition for winding up was within three years from the date of the debt. In this view, therefore, there is no conflict between the view which we are taking under the provisions of the Companies Act read with the provisions of the Provincial Insolvency Act and the Explanation to section 3 of the Limitation Act relied on by the learned counsel for the respondent.

We have so far indicated that the view we have taken is what naturally follows if full effect is to be given to the principle of retrospective operation contained in section 168 of the companies Act which is in absolute terms and is not qualified by any exception. We may point out that this view is also what convenience and commonsense would 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 obviously file a suit in time. But there is no reason why in a case where the winding up order is made, the creditor should not be allowed to wait and should be forced to file a suit wasting money. In fact it may happen that even if he files and obtains a decree he may not be able to execute it in view of the terms of section 171 of the Companies Act, 1913 (section 446). It is needless to add that the creditor cannot file any claim in the winding up proceedings till after the winding up order is made and if retrospective effect is not given to the claim the usefulness of the winding up proceedings would be considerably lost. These aspects of the matter have also been pointed out in Byramji Bomanji Talati v. Official Assignee, Bombay (AIR 1936 Bomb. 130) ( a case under the Provincial Insolvency Act), and the decision of the Punjab High Court in Ram Chand Puri v. Lahore Enamelling & Stamping Co. (1960) 30 Com. Cas. 515). The decision of the High Court is in fact a direct decision on the question which we are considering, and the learned judges took the same view as we are taking, but no reference is made therein to the Explanation to section 3 of the Limitation Act........"

The Judgments referred to hereinabove relate to claims made by creditors before the official liquidator, pursuant to an advertisement issued inviting claims, after an order of winding up was passed. Can a distinction be drawn between a Creditor who has filed a petition for winding up and other creditors who have come in later either to support or oppose such a petition or those who prefer claims before the liquidator?

To quote Mervyn Davies, J in Re Karnos Property Co Ltd26:

".......Looking at those enactments it is plain that a petition in the Companies Court is an 'action' within s.2(1). One then asks whether it is an action 'to recover any sum'. One may say that a petition is an 'action' seeking not to recover a sum but to secure the winding up of a company. Certainly the petition seeks a winding-up order; but as well the petitioner (who is a creditor: see, the North Bucks case (1939) 2 All ER 549, (139) Ch 690) also seeks recovery of his money or such part of it as may become his by virtue of a dividend. A creditor petitioner does not petition for the satisfaction of seeing the demise of his company 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 case (1953) 2 All ER 1296, (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 Cases of Taffs Well Ltd Ch. 17927 Paul Baker, 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 process and would include a creditors petition to wind up a company, as was held by Mervyn Davies J. in "In re Karnos Property Co. Ltd. (1989) B.C.L.C. 340". Accordingly, as from the date of the presentation of the petition, the petitioning creditor has brought an action founded on the debt owed to him and stopped time running against him. Mr. Phillips submitted that the presentation of the petition was the initiation of a class remedy on behalf of all the creditors whose rights are thus suspended until the order is made which quantifies their rights. He thus argues that time stops running against all the other creditors as from the date of the petition. I am quite unable to accept this view of the presentation of a petition. In my judgment, the petitioning creditor does not bring an action on behalf of all the other creditors of a company known as unknown so as to stop time running against them. Indeed, some of them may be owed debts not then due and so could not bring actions at that point. Against them, time has not started to run. A petitioning creditor does not petition for the general good but rather in the hope of recovering his own debt or part of it. As Mr. Mortimore pointed out in his reply, it would be strange if, by presenting a petition, a petitioner must be considered as saving creditors whose time was about to run out, and thus contrary to his own interest increase the number of claims to the fund. Finally, the right of creditors to come in and support or oppose the petition is inconsistent with the idea of a class action, for why should that be necessary if the petition is being presented on their behalf?....." (emphasis supplied).

A petitioning creditor files a petition for winding up not for the mere satisfaction of seeing the demise of the company from which a debt is due to him but with a view to recover the debt or atleast a part thereof by way of dividend after the Company is wound up, in effect for recovery of the debt due to him. While the machinery for winding up will not be allowed to be used merely as a means for realizing a debt due, it cannot be lost sight of that the petitioning creditor would, nonetheless, be entitled, subject to satisfaction of the claims of the secured creditors, the workmen, other debts in priority etc, and along with other unsecured creditors, for payment of dividend, from the remaining assets 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 bonafide proceedings. (Ramchand Puri21). In this context reference can usefully be made to Section 78(2) of the Provincial Insolvency Act, 1920, as the rules prescribed therein apply equally to winding up proceedings.

It is evident that, on the date of presentation of the company petition, the debt allegedly due to the petitioning creditor is within the prescribed period of limitation. The contention that in August, 2007, when the Company Petition was heard on admission and advertisement, the claim of the petitioning creditor was barred by limitation does not merit acceptance as the relevant date, to determine whether or not the claim of the petitioning creditor is barred by limitation, is the date of presentation of the petition for winding up and not the date of hearing. The contention of Sri B. Chandrasen Reddy, learned Counsel for the respondent, that a claim barred by limitation on the date of hearing would necessitate dismissal of the Company Petition must, therefore, be rejected.

FACTORS TO BE CONSIDERED IN DETERMINING WHETHER OR NOT A COMPANY PETITION SHOULD BE ADMITTED AND ADVERTISED:

A winding up petition, praying for the economic death of a running and live commercial organization, is an extreme remedy to be resorted to sparingly. (Kesar Enterprises Ltd7). The mere fact that the company is unable, as at present, to pay its debt does not justify its being wound up as the discretion to pass such an order, even in the case of inability of the Company to pay its debts is, by section 433, vested in the Court and that discretion has to be exercised judiciously. (Jugalkishore Benarsidas Vs. South India Saw Mills (P) Ltd.28). A petition for winding up is not a remedy which can be resorted to as of right. The Company Court is not bound to entertain a petition for winding up nor is it bound to order winding up even if a case to that effect on facts is made out. As winding up of a company puts an end to all its activities for all time to come in future the Court is under a legal obligation to ensure that no running company is wound up merely for one or two defaults. In other words, efforts must be made to save the company from being wound up. Ordinarily, the remedy for recovery of the debt due is in filing a civil suit and on establishing the 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 Birla8). 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. Petitions for winding up ought not to be entertained unless a very strong prima facie case is made out on facts. (Mysore Sales International Limited, Bangalore Vs. United Breweries Limited, Bangalore29).

A debt under Section 433(e) must be a determined or a definite sum of money payable immediately or at a future date. The words "unable to pay its dues" in Section 433(e) should be taken in the commercial sense, in that, it is unable to meet its current demands i.e., it is plainly and commercially insolvent - that is to say, its assets are such and its existing liabilities are such as to make it reasonably certain - as to make the Court feel satisfied - that the existing and provable assets would be insufficient to meet the existing liabilities. (Pradeshiya Industrial and Investment Corporation of Uttar Pradesh Vs. North India Petrochemicals Limited30). The language of the Section "is unable to pay its debts" means that the Company is commercially insolvent. In other words, the Company has no wherewithall to meet its commercial liabilities. (M/s. Excel Embroideries6). The machinery for winding up will not be allowed to be utilised merely as a means for realising the debts due from a company. (P.G. Bhatia & Co. Vs. Softsule Private Ltd31, State Trading Corporation of India Ltd. Vs. Punjab Tanneries Ltd32; Kanchanaganga Chemical Industries Vs. Mysosre Chipboards Ltd33; Pradeshiya Industrial and Investment Corporation of Uttar Pradesh3; Mediquip Systems (P) Ltd Vs. Proxima Medical System4).

A winding-up petition is not a legitimate means of seeking to enforce payment of a debt which is bonafide disputed by the company. If the debt is bonafide disputed, there cannot be "neglect to pay" within the meaning of Section 434(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and winding up on the ground that the company is unable to pay its debts is not substantiated. A debt the liability to pay which, at the time of service of the insolvency notice, there is a bona fide dispute, is not "due" within the meaning of Section 434(1)(a) and non-payment of such a bonafide disputed 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 & Co.30; Mediquip Systems (P) Ltd4). 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 exits. (In re Federal Chemical Works Ltd34, Kanchanaganga Chemical Industries33).

In Madhusudan Gordhandas & Co.1, the Supreme Court observed: ".......Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company........."

"...........Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. see Re. A Company. 4 Where however there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely See Re Tweeds Garages Ltd . 5 The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends...... (emphasis supplied)

The petitioner is not entitled ex debito justitiae to an order of winding-up on the mere plea that the debt was not paid. A petition presented ostensibly for a winding-up order but really to exert pressure will be dismissed and, under circumstances, may be stigmatized as a scandalous abuse of the process of court. (Amalgamated Commercial Traders (P) Ltd. Vs. A.C.K. Krishnaswami35; Buckley on the Companies Act, 13th edition, page 451).

Where there are serious disputes between the parties on each essential fact which necessitates a trial in appropriate civil proceedings, and the defence raised by the company is genuine and bonafide, a petition for winding-up is not the remedy. (Ram Kishan Vs. Kanwar Papers Private Ltd.36). One of the considerations to determine inability of a company to pay its debts is whether the company is commercially insolvent and unable to meet its liabilities as and when they accrue. (P.G. Bhatia & Co.31). That it is commercially solvent means that the company should be in a position to meet its liabilities as and when they arise. (Mediquip Systems (P) Ltd4).

No hard and fast rule can be laid down in inquiring into the question of a bonafide dispute with regard to any debt. Whether there is a bona fide dispute or not will necessarily depend on the facts and circumstances of each particular case. (P.G. Bhatia & Co.31).

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 Private Ltd.,2).

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 of the evidence placed before the court at the stage of the admission. It is for the limited purpose of arriving at a conclusion whether a bonafide, serious and substantial dispute arises or not, that the Court examines the matter. The Court looks out for a prima facie case. If a petitioner makes out a prima facie case, then the Court would exercise its discretion. The remedy afforded is an equitable one. (P.G. Bhatia & Co.31). A prima facie case does not mean a case proved to the hilt but a case which can be said to be established if the evidence which is led in support of the same were believed. While determining whether a prima facie case had been made out the relevant consideration is whether, on the evidence led, it was possible to arrive at the conclusion in question and not whether that was the only conclusion which could be arrived at on that evidence. (Martin Burn Ltd. Vs. R.N. Banerjee37).

In appropriate cases the Company Judge may, before a petition is admitted and advertised, hold a summary enquiry to ascertain whether a prima facie case is made out by the petitioning creditor. At the stage of summary enquiry the Court is called upon to satisfy itself that it is a case for admission and advertisement and nothing more. For arriving at that conclusion the Court would find out, prima facie, whether any fixed or ascertained amount of debt is due by the Company to the petitioning-creditor, whether the debt is within limitation, whether the defence put forward by the Company, for not paying the debt to the petitioning-creditor, is valid or a mere moonshine and whether the Company appears to be commercially insolvent, meaning thereby that it is unable to pay all its debts and not necessarily the debts of the petitioning-creditor alone. As the Company petition, once admitted, is in the nature of a class litigation the petitioning-creditor has to allege that the Company is unable to pay its debts meaning thereby that it is commercially insolvent. Under Section 434 (1) (a), if the petitioning creditor can show that he has given a statutory notice for recovering a sum of Rs. 500 and more and the company has failed to comply with the notice during the statutory period indicated therein, a rebuttable presumption would arise in favour of the petitioning creditor that the company 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 bonafide 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 S. 434 (1) (a) or (b) as the case may be, or

(v) Whether, from the material on record, the Court is prima facie satisfied that the Company is commercially insolvent as contemplated under S. 434 (1) (c ).

The Company Court ought to examine the material placed before it by the petitioning-creditor and further evidence, if any, which the Company Court may require the petitioning-Creditor to furnish. The Company Court must also examine the evidence placed before it by the respondent-Company at the stage of admission. The Balance Sheet of the company is one such document which may be kept in view. On assessment of the evidence, let in by the petitioning-creditor and the contesting Company, if the Company Court comes to the conclusion that the Company, prima facie, appears to be commercially insolvent, a rebuttable presumption would arise under S. 434 (1) (c) that the Company is unable to pay its debts and then admission and advertisement may follow. (Airwing Private Limited5).

DO THE FACTS OF THE PRESENT CASE JUSTIFY ADMISSION AND ADVERTISEMENT OF THE COMPANY PETITION:

Are the aforesaid tests, for admission and advertisement of a company petition, satisfied in the case on hand?

It is not in dispute that, from out of the 85 RIM hand-sets delivered by the petitioner to the respondent under the "Corporate Scheme", eight were returned and the claim of the petitioner is for non-payment of the bills for the remaining 77 RIM hand-sets for the thirteen month period from June, 2003 to July, 2004. It is also not in dispute that the respondent had distributed these 77 RIM handsets to its dealers. The respondent, in Ex.B-13 letter dated 18.02.2004, requested the petitioner to disconnect these RIM hand-set connections if the monthly bill of each phone exceeded Rs.700/-. It is the case of the respondent, as stated in their letter in Ex.B-13 dated 18.02.2004, that the matter was discussed by its Director with the representatives of the petitioner and that the latter had agreed to transfer these phone connections in the individual names of the dealers, that the respondent would pay only Rs.700/- per RIM phone connection per month upto 31st December, 2003 and that M/s. Sheetal Refineries Private Limited and M/s. Sheetal Infocom were separate entities. In their letter, in Ex.B14 dated 08.03.2004, the respondent informed the petitioner that two representatives of the petitioner, (their names and mobile numbers are also mentioned), had come to their office on 14.02.2004, 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 15.04.2004 the respondent, while informing that they were responsible only for payment of the monthly bill upto Rs.700/-, and that the petitioner had orally committed, during telephonic discussions, that if payment was made towards the RIM phone dues upto 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 12th April, 2004 the petitioner informed the respondent that they had agreed to make payment till January, 2004 and that, in case any of 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 dues and sought the respondent's wholehearted cooperation in the matter.

The petitioner's claim for payment of dues towards the phone bills for thirteen months from June, 2003 till July, 2004 is disputed and it is contended that the respondents are liable to make payment at Rs.700/- per telephone per month only for eight months from June, 2003 till January, 2004. The Accounts Statement, relied upon by the petitioner, indicates that Rs. 10,97,574/- is due from the respondent. While the said Accounts Statement shows that the commission paid by the petitioner is Rs.4,32,333/-, it is contended on behalf of the respondents that only two demand drafts for Rs.1,70,610/- and Rs.88,608/- i.e., Rs.2,59,228/- was paid to them as commission and that payments under the other three demand drafts was made to M/s. Sheetal Infocom, another company and a distinct legal entity. The Accounts Statement merely gives the break up of the commission paid of Rs.4,32,333/-, in terms of the D.D. numbers and the amount paid under each demand draft. It, however, does not reveal as to what was the extent of commission paid to the respondent and the commission paid to M/s. Sheetal Infocom. The said Accounts Statement indicates that the commission payable to the respondent is only Rs.3,77,300/- which, according to the respondent, is far less than the commission payable, under the "Monsoon Hungama Scheme", for the 936 RIM handsets sold by them at Rs.500/- per phone. The Accounts Statement reveals that the petitioner had received Rs.10,02,000/- as advance from the respondent. Respondent disputes the petitioner's claim of Rs.17,500/- towards the cost of the handsets lost by the respondent, contending that these handsets were lost not by them but by the representatives of the petitioner. Reliance is placed, on behalf of the respondents, on their letter dated 18.02.2004 to contend that it is the petitioner which is due Rs.4,04,511/- to them.

The evidence on record indicates, prima facie, that both the petitioner and the respondents were required to make collective efforts to recover payment, towards the bills for February and March, 2004, from the dealers of the respondent and that the ownership of the RIM handsets, under the "Monsoon Hungama Scheme", had to be transferred in the individual names of the dealers of the respondent. There is no evidence placed by the petitioner, 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 bonafide. 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 MOU, 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 customer staying on the RIM network and paying two billing cycles and Rs.200/- on the customer staying on the RIM network and paying three billing cycles. Whether the customers, to whom the RIM handsets were delivered, continued to stay on in the RIM network for three months is not discernible from the evidence on record. While it is not for this Court, in summary proceedings for winding up, to adjudicate on the merits in issue, the correspondence referred to hereinabove indicates that the respondent's defence, to the petitioner's claim, is bonafide and not a moonshine. The audited Balance Sheet of the respondent, for the year ending 31st March, 2007, would show that its Reserves as on that date exceeded Rs. 4.21 crores, its net current assets exceeded Rs. 21 crores and that its profits before tax for the year ending 31.03.2007 was approximately Rs. 2.26 crores. The Balance Sheet of the respondent does not, prima facie, show that it is unable to pay its debts in the sense that it is commercially insolvent or that it is unable to meet its debts as and when they accrue. On the evidence placed, there is no reason to believe that the debt, if established, would not be paid by the respondent.

While the petitioner's claim is not time-barred, the claim and counter-claim would indicate that there is a bonafide dispute as to whether it is the petitioner to whom a debt is due from the respondent or the converse. The defence of the respondent, of its not being liable to pay the petitioner's claim, is bonafide and not a moonshine. From the material on record it cannot be presumed that the respondent is either unable to pay its debts or that it is commercially insolvent.

Since the Company Court would not exercise its discretion to admit a petition for winding up if it is satisfied that the debt is bonafide disputed, and the defence of the respondent is not a moonshine, and as the remedy to recover debt, allegedly due, is by way of a suit before the competent Civil Court and not in summary proceeding for Winding Up, the present case is not one which would justify the petition for Winding Up being admitted or advertised. It is, however, made clear that the observations made hereinabove do not touch upon the merits of the dispute and, on recourse to the remedy of a suit for recovery of the amounts allegedly due, the Civil Court shall adjudicate the claim without being influenced by any observations made in this order on merits. The Company Petition is, accordingly, dismissed.

?1 (1971) 3 SCC 632

2 AIR 1971 SC 565

3 1994(3) SCC 348

4 (2005)7 SCC 42

5 AIR 1995 Karnataka 69

6 AIR 1997 Kerala 329

7 Vol. 112 (2002) CC 174 (Bombay High Court)

8 Vol. 121 (2004) CC 802 (Madhya Pradesh High Court)

9 2005(6) Karnataka Law Journal 615 (DB)

10 Vol. 60 (1986) CC 639 (Allahabad HC DB)

11 (1997) Vol. 88 CC 353 (Madras)

12 AIR 1954 Cal.352

13 AIR 1956 Mad.15

14 AIR 1964 Bom.76

15 (1985) 58 CC 255

16 (1980) 50 Comp. Cas 674

17 (1987) 62 CC 810

18 (1988) 64 CC 169; (Delhi H.C)

19 AIR 1937 Mad. 577

20 AIR 1936 Bomb. 130

21 (1960) 30 Com. Cas. 515 (Punjab H.C. D.B)

22 (1958) 28 Comp.Cases 216 (Punjab H.C)

23 1960 (Vol.30) C.C.251

24 (1957) 27 CC 310

25 (1962) 32 Comp Cas 1102

26 (1989) BCLC 340 (Chancery Division)

27 (1992 Law Reports Chancery Division)

28 (1975) 45 Comp. Cas.273 (Kerala High Court)

29 2005(6) Karnataka Law Journal 615 (DB)

30 1994(3) SCC 348

31 1977 Vol. 47 CC 438

32 (1989)66 Comp.Cas 634 (P&H)

33 (1998) Vol. 91 CC 646

34 1964 (34) CC 963 (Allahabad)

35 (1965) 35 Comp.Cas 456 (SC)

36 (1990) 69 Comp. Cas 209 (HP)

37 AIR 1958 SC 79