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State of Andhra Pradesh Vs. Hyderabad Vegetable Products Co. Ltd., Hyderabad - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAndhra Pradesh High Court
Decided On
Case NumberCompany Petition No. 1 of 1960
Judge
Reported inAIR1963AP243; [1962]32CompCas64(AP)
ActsCompanies Act, 1956 - Sections 433 and 434
AppellantState of Andhra Pradesh
RespondentHyderabad Vegetable Products Co. Ltd., Hyderabad
Appellant AdvocateV.K. Vaidya, ;L.P. Sahgal, ;M. Ramamohan Rao and ;M.P. Ugle, Advs.
Respondent AdvocateT. Ananta Babu, ;K. Chalapathirao and ;G. Ramanujulu Naidu, Advs.
DispositionPetition allowed
Excerpt:
company - winding up - sections 433, 433 (e), 434 and 439 of companies act, 1956 - company did not achieve targets for which it was formed - if allowed to run will incur losses - company did no business for more than a year - company's inability to pay debts - company wound up on ground of commercial insolvency - held, company liable to be wound up under section 433 of act - court upheld winding up of company. - - or (b) if execution or other process issued on a decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; when there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed but it may also be proved in other ways. where the court is satisfied that a debt upon which.....ordersatyanarayana raju, j.1. this is a petition, under section 439 of the companies act (act 1 of 1956) by the state of andhra pradesh, represented by the secretary to government, industries (industrial fund) department, to wind up the hyderabad vegetable products co., limited (hereinafter referred to as 'the company').2. the petition was presented on january, 4, 1960. it was adjourned for about nine months at the request of the learned counsel for the respondent for the purpose of enabling the company to find monies to satisfy its creditors or to compound with them, but nothing tangible having emerged during the interval, i am left with no alternative but to dispose of the petition on its merits.3. in order to appreciate the matters arising for decision, it is necessary to give a short.....
Judgment:
ORDER

Satyanarayana Raju, J.

1. This is a petition, under Section 439 of the Companies Act (Act 1 of 1956) by the State of Andhra Pradesh, represented by the Secretary to Government, Industries (Industrial Fund) Department, to Wind up the Hyderabad Vegetable Products Co., Limited (hereinafter referred to as 'the company').

2. The petition was presented on January, 4, 1960. It was adjourned for about nine months at the request of the learned counsel for the respondent for the purpose of enabling the Company to find monies to satisfy its creditors or to compound with them, but nothing tangible having emerged during the interval, I am left With no alternative but to dispose of the petition on its merits.

3. In order to appreciate the matters arising for decision, it is necessary to give a short history of the Company. The Company was incorporated as a public limited Company under the Hyderabad Companies Act (Act IV of 1320 Fasli) on the 3rd day of Shehrewar, 1348 Fasli (corresponding to 10th July, 1939). The situation of its registered office is at Hyderabad. The authorised capital of the Company is Rs. 25,00,000/- divided into 2,20,000 ordinary shares of Rs. 10/- each and 3,000 six per-cent cumulative preference shares of Rs. 100/- each. The issued capital is Rs. 24,50,000/- and the subscribed capital is Rs. 24,40,120/- made up of 2,14,012 ordinary shares of Rs. 10/- each and 3,000 six per cent cumulative preference shares of Rs. 100/- each. Out of this amount, a sum of Rs. 3,754/- represents calls unpaid. The objects clause of the memorandum of association sets out a multitude of objects. The main objects, however, are to estabIish a factory or factories in and around Hyderabad or elsewhere in India for manufacturing vegetable products and artificial ghee and as ancillary thereto to establish an oil mill or mills. On the date of the incorporation of the Company, Messrs. Sheik Imam and Sons were appointed its Managing Agents for a period of twenty years.

4. On November 1, 1947, the Company borrowed on the security of its assets, including its land, buildings and machinery, a sum of Rs. 10,00,000/- from the erstwhile Government of Hyderabad for the purpose of acquiring five oil expellers and for completing the vegetable product plant. The company executed a deed of mortgage agreeing to repay the said amount with interest at 4 per cent per annum. The deed provides that the principal of the loan should be repaid in annual instalments of Rs. 2,00,000/- each and the interest in half-yearly instalments, the payment to begin from October, 1950.

5. On September 1, 1948, the Company borrowed a further sum of Rs. 5,00,000/- from Government for the purpose of providing working capital and paying for raw materials, fuel, chemicals etc. and executed a second deed of mortgage in favour of the erstwhile Government of Hyderabad. It was stipulated in the deed that the sum should be repaid in annual instalments or Rs. 1,00,000/ and the interest accrued in half-yearly instalments, commencing from October, 1950. The construction of the factory was completed in or about the year 1949. In the year 1951, as a result of certain proposals made by the petitioner to the Company it was agreed that the managing agency should be transferred to Messrs. Sabu Khan and Sons, with the approval of the Board of Directors subject to the condition that the new Managing Agents should be responsible for providing the capital and to bring the factor into production. The other terms of the agreement are the subject-matter of controversy and will be referred to later. It would appear that the general body of the Company accepted this arrangement by a resolution dated September 30, 1951. Messrs. Sheik Imam and Sons relinquished their managing agency on that date.

6. While so, the Part B States (Laws) Act (III of 1951) was enacted. The Act extended the operation of the Indian Companies Act to companies registered in Part B States before the commencement of the Act. It is therein provided that a company registered under any law corresponding to the Companies Act in force in a Part B State Immediately before the commencement of the Act shall be deemed, for the purposes of the Act, to be a company incorporated and registered under the Act. By reason of the extension of the provisions of the Indian Companies Act, it became necessary for the Company to secure the approval of the Government of India for the transfer of the managing agency to Messrs. Babu Khan and Sons. The necessary approval of the Government of India has not, however, been obtained. The result is that a Board, consisting of seven directors, has since been managing the Company. It is stated that Shri A. K. Babu Khan and the members of his family own shares of the value of eight to ten lakhs of rupees and that the Company is also indebted to his family in a sum of about 15 to 16 lakhs of rupees. He is con-testing this petition in his capacity as shareholder and also as creditor of the Company.

7. The petitioner has averred that a total sum of Rupees 20,97,534-27 Np. made up of Rs. 15,00,000/- towards the principal of the two loans evidenced by the two deeds of mortgage, and Rs. 5,97,534-27 Np. towards interest, is due by the Company to the petitioner. On June 7, 1958, the petitioner made a demand on the company by means of a registered notice. On September 17, 1958, the Company sent its reply contending inter alia that the petitioner had given up a sum of three lakhs of rupees under the arrangement of 1951 and that further sum of three lakhs of rupees had been converted into shareholding in the company pursuant to the directions of the petitioner. On December, 9, 1958, the petitioner sent a fresh notice to the Company wherein it was stated that the agreement of 1951 was subject to certain conditions, none of which had been fulfilled. The company sent a further reply on January 2, 1959, reiterating its earlier stand.

8. The grounds on which the petition for Winding up is based are the following.-

(1) That the company is unable to pay its debts;

(2) that the Company has suspended its business for more than a year; and

(3) that it is just and equitable that the Company should be compulsorily wound up.

9. Now the substantial question is whether the petitioner is entitled to invoke the jurisdiction of this Court for a winding-up order. Under Section 439 a petition for winding up can be presented (a) by the Company; or (b) by any creditor or creditors, including any contingent or prospective creditor or creditors; (c) by any contributory or contributories; or (d) by all or any of the parties specified in clauses (a), (b) and (c), whether together or separately; or (e) by the Registrar; or (f) in a case falling under Section 243 by any person authorised by the Central Government in that behalf.

10. The fact that the petitioner is a creditor of the Company does not admit of any controversy. The term 'creditor' is not limited to one to whom a debt is due at the date of the petition and who can demand immediate payment. Every person having a pecuniary claim against the Company, whether actual or contingent, is a creditor and indisputably the petitioner satisfies this definition. It follows that the petition for winding up has been presented by a 'person' competent to file the same under S. 439 of the Companies Act.

11. The contention raised on behalf of the respondent may be summarised as follows:- There was en agreement between the petitioner and the Company, the terms of which are embodied in a letter dated March 8, 1951, addressed by the Secretary, Industrial Trust Fund, to the Company whereunder the petitioner agreed to give up Rs. 3,00,000/- out of the amount due by them and to convert Rs. 2,00,000/- out of their loan into shares of the Company at par. Subsequently, the Minister for Finance agreed to purchase shares to the extent of Rs. 3,00,000/- instead of Rs. 2,00,000/-. These terms were duly accepted by a resolution passed by the Directors of the Company on July 20, 1951, and they were subsequently ratified by the general body of the Company on September 30, 1951. Appropriate entries were made in the accounts of the Company in accordance with the agreement. Contrary to those terms, the petitioner has demanded the payment of the entire amount of the two loans and the interest which accrued thereon. Under the circumstances, there is a genuine dispute about the quantum of the debt and its non-payment by the Company does not constitute 'inability to pay'. The present market value of the assets of the Company would be not less than 60 lakhs of rupees, whereas its present liabilities are far less. While it is not denied that the factory of the Company has not been working, It is stated that the Company has not suspended its business.

12. In a further counter-affidavit filed on behalf of the respondent a plea was taken that the Industrial Trust Fund is an independent legal entity distinct from Government and that the debt is barred by limitation. Here it may be stated that this plea is untenable for the simple reason that the Company was throughout dealing with the Trust Fund as a Department of the Government.

13. Now, the first of the questions on which the petition is rested is the Company's inability to pay its debts. Section 434 of the Companies Act provides that a Company shall be deemed to be unable to pay its debts--

'(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the Company by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the Company to pay the sums so due and the Company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or

(b) if execution or other process issued on a decree or order of any Court in favour of a creditor of the Company is returned unsatisfied in whole or in part; or

(c) if it is proved to the satisfaction of the Court that the Company is unable to pay its debts, and in determining whether a Company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the Company.'

14. The requirements mentioned in clauses (a) and (b) are instances of the Company being unable to meet current demands made upon it. Clause (c) however recognises, and in conjunction with S. 433, expressly authorises, a winding up in the case of another kind of inability, that is to say, if the existing and probable assets will be insufficient to meet the liabilities, taking into account not only the liabilities presently due but also those which are contingent and prospective.

15. The basis of an order for winding up of a Company is that the Company has ceased to be commercially solvent and it is therefore fit and proper in the interests of the creditors and share-holders not to allow it to function as a company. When there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed but it may also be proved in other ways. The basis of a winding-up order on the ground of a company's inability to pay its debts however, is always insolvency.

16. For the purpose of bringing the case within Clause (a) of sub-section (1) of Section 434, it is averred that the petitioner had, in fact, made the statutory demand for the repayment of its debt and that the Company had for three weeks thereafter, neglected to pay the same or to secure or compound the debt to the reasonable satisfaction of the petitioner. It is however, argued by the learned counsel on behalf of the Company that under the terms of the agreement arrived at between the petitioner and the Company in March, 1951, the Government agreed to 'write off' Rs. 3,00,000/- out of the loan amounts and to convert a further sum of Rs. 3,00,000/- into shares, but that the notice relied upon by the petitioner demanded the repayment of the entirety of the debt and that, therefore, the requirements of Clause (a) of Sub-section (1) of Section 434 have not been complied with.

17. The facts necessary for appreciating this contention may be briefly stated. The communication, dated March, 8, 1951, (Ex. R-1) from the Secretary, Industrial Trust Fund, to Sri A. K. Babu Khan, Director of the Company sets out the terms of the agreement. The material portion of this communication reads as follows:

'3. As a result of these discussions, it was decided to write down the capital of the Company in the following manner:

(i) shares to be written by 50 per cent,

(ii) I. G. Rs. 4 lakhs of the Managing Agents' loan to be written off.

(iii) I. G. Rs. 3 lakhs of the l.T.F. loan to be written off.

(iv) The l.T.F. to convert I. G. Rs. 2 lakhs of its loan into shares as par after the capital is written down.

(v) The l.T.F. to be entitled to nominate two Directors on the Board of Directors of the Company (including the one Director which they already have.).

(vi) The Managing Agency be transferred to M/s. Babu Khan and Sons with the approval of the Board of Directors and subject to the understanding that the new Managing Agents will be responsible far providing capital for bringing this factory into production and working it.

(vii) The l.T.F. will have no objection to M/s. Babu Khan and Sons being permitted to take any after acceptable person as a partner in the Managing Agency.

(viii) Any capital expenditure over Rs. 1 lakh to be incurred only after the approval of the Government in the Commerce and Industries department.

(4) It will be appreciated that the I.T.F. holds the first and Snd mortgage for the loans of I. G. Rs. 10 lakhs and I. G. Rs. 5 lakhs respectively and these loans are fully secured. They have however agreed to write off I. G. Rs. 3 lakhs of their loan and to purchase shares to the extent of I. G. Rs. 2 lakhs out of balance of the loan merely with a view to assist the company in its present difficulties. They also expect that they should be given the option to further convert 4 lakhs of the loans into shares if and when they so desire.'

18. As a result of further representation made by the Directors of the Company, It is stated that the Government agreed to purchase shares of the value of Rs. 3,00,000/- instead of 2 lakhs. But there is nothing in writing to prove this modification in the terms of the agreement. The Board of Directors accepted the terms offered by the Government in a resolution passed by them on July 20, 1951. The general body meeting of the Company held on September 39, 1951, duly passed a special resolution accepting the terms offered by the Government in their communication dated March 8, 1951. In their letter, dated September 18, 1952, the Company intimated the Secretary that 6,000 ordinary shares of Rs. 5/- each were allotted to Government. On December 29, 1951, the Secretary, Industrial Trust Fund wrote to the Company as follows:

'I request you to please let me knew within a fort-night if arrangements to bring the Company into production by the end of this December have been completed, as otherwise, I am afraid, the Government will be constrained to withdraw its offer as communicated to you in this Office No. ITF/742 dated 8th March, 1951, and to initiate other arrangements.'

19. At the meeting of the Board of Directors held on December 21, 1951, the Managing Agents of the Company assured the Board that they would expedite the restarting of the mill by the second or third week of January, 1952. Shri A. K. Babu Khan wrote to the Secretary, Industrial Trust Fund (vide Ex. R-8) that a special resolution was passed by the general body meeting for reduction of the share capital by 50 per cent subject to confirmation thereof as required by the statue and that 'the matter regarding the confirmation of the reduction by the High Court was being pursued.' Regarding the transfer of the managing agency of the Company to Messrs. Babukhan and Sons, it was stated that an application has been made to the Central Government for approval and that the Central Government replied saying that the transfer would be approved subject to certain terms of the Managing Agency agreement and certain Articles of Association of the Company being modified. Ex. R-8 also states that pursuant to the instructions given by the Central Government, necessary amendments had been made and were being put up before the general body meeting while drafts of the Managing Agency Agreement and Amendments to the relevant Articles of Association of the Company were being sent to the Central Government for approval.

20. On September, 25, 1952, the Secretary, Industrial Trust Fund, wrote to the Company requesting information as to whether 'all the conditions stipulated in this office letter No. ITF/742 dated the 8th March 1951 have been implemented in toto.' This was followed by another letter dated October 30, 1952, by the Secretary to the Company (Ex. R-9) stating inter alia that the Industrial Trust Fund Board agreed to write off Rs. 3,00,000/- and to purchase ordinary shares of the value of Rs. 2,00,000/- subject to the conditions stipulated, viz., that the new Managing Agents would Be responsible for providing capital to bring up the Company into production. Ex. R-9 pointed out that 'the fundamental point of bringing the factory into production' had not been referred to in the letter of the Company. Ex. R-9 also regretted that the factory had been closed down since August 26, 1952. In his reply dated December 22, 1952, (Ex. R-11), Shri A. K. Babu Khan, purporting to write on behalf of the Managing Agents, intimated the Secretary that they had come to the conclusion that a minimum loan of Rs. 4 1/2 to 5 lakhs would be required for 'the satisfactory and undisturbed working of the factory.' The letter contains a request to the Secretary to grant the loan at a very early date to enable the Managing Agents to reopen the factory. Under Ex. R-12 dated 19th March, 1953, the Secretary wrote to the Managing Agents that the Trustees of the Industrial Trust Fund had sanctioned a loan of Rs. 5 lakhs on the security of a legal mortgage and subject to certain terms and conditions.

21. It is not necessary to refer to the intermediate correspondence that passed between the Government and the Managing Agents of the Company. It is sufficient to refer to Ex. R-21 dated August 5, 1954, from the Assistant Secretary to the Government, to the Managing Agents stating that till such time as the entire proposals of the Department for restarting the factory were implemented, the loan advanced by the Industrial Trust Fund should not be reduced. The letter also pointed out that the Industrial Trust Fund had agreed to convert the loan into shares only to the extent of two lakhs and that too after the High Court's approval to the reduction of capital was obtained and till then no adjustment should be made on this account.

22. At this stage it will be convenient to refer to the notice of demand made by the Advocate for the petitioner. Ex. R-23 dated 7th June, 1958. This notice called Upon the Company to pay the sum of 15 lakhs of rupees borrowed under the two mortgaged deeds executed by the Company in favour of Government with interest. The notice stated that if the said amount was not paid within three months from the date of the receipt of the notice, the Government would enter into possession of the properties mortgaged and would sell the same without the intervention of the Court. On September 17, 1958, the Company sent Ex. R-24 to the petitioner's advocate, stating inter alia that a sum of 3 lakhs of rupees had been given up by the petitioner in 1951, that a further sum of three lakhs of rupees had been agreed to be converted into shareholdings in the Company and that a sum of 9 lakhs of rupees only, with interest thereon, was due to the Industrial Fund. On December 9, 1958, the Advocate for the petitioner again wrote to the Company that the offer to give up Rs. 3 lakhs from the loan amount and to convert Rs. 2 lakhs of the balance into shares was subject to the condition that the capital of the Company should be reduced by 50 per cent and the factory brought into production and worked continuously, and that as none of the conditions had been fulfilled by the Company, the question of reducing the loan amount by Rs. 3 lakhs and conversion of Rs. 2 lakhs into shares did not arise. The notice reiterated the demand for the payment of Rs. 15,00,000/- with interest at the rate of 4 per cent.

23. On January 2, 1959, the Advocate for the Company wrote to the petitioner's Advocate stating inter alia that the Company did not admit that the amount payable by them to the Industrial Trust Fund was Rs. 15,00,000/- plus interest. Ex. R-27 promised a detailed reply later.

24. It is argued by Sri Ananta Babu, learned counsel for the respondent, that the demand made by the petitioner on the company for the payment of the entirety of the amounts due under the two mortgage deeds, with interest thereon, constitutes a repudiation of the agreement embodied in the letter of the Government dated March 8, 1951, (Ex. R-1) and what the Government would be entitled to recover from the Company is only Rupees 9,00,000/- and the interest thereon and not the entirety of the amount. It is stated that there is a bona fide dispute with regard to a substantial part of the debt and that, therefore, non-compliance with the statutory notice of demand would not enitle the petitioner to seek a winding up order.

25. On behalf of the petitioner it is contended that the offer made by the Government in their letter, dated March 8, 1951, was subject to the fulfilment of the conditions mentioned therein. It is stated for the petitioner that one of the conditions stipulated in the agreement is that the capital of the Company should be reduced by 50 per cent; that though the general body of the Company passed a resolution of September 30, 1951 reducing the capital by 50 per cent, the special resolution has to be sanctioned by the High Court, and it is common ground that the sanction of the High Court for the reduction of the capital has not yet been obtained. R.W. 2 stated that he had instructed an advocate to file the necessary application for obtaining the sanction of the High Court but that for some reason or other, the advocate had not done so. It is stated that an application for reduction has recently been filed.

26. The second of the conditions stipulated in the agreement was that the Managing Agency should be transferred to Messrs. Babu Khan and Sons. Here again it would appear that the requisite sanction from the Government of India has not so far been obtained for the transfer of the managing agency. It is, therefore, contended that some at least of the important conditions which, according to the petitioner, require to be fulfilled before the terms of the agreement could he given effect to, have not been complied with and that, therefore, the entirety of the debt represented by the two mortgages is payable by the Company. As lending support to their contention that the agreement of 1951 was not unconditional, the learned counsel for the petitioner relied on the following portion of the resolution passed by the shareholders on September 30, 1951:

'(b) That in view of the offer made by the Hyderabad Government Industrial Trust Fund and the Managing Agents of the Company agreeing to waive their claims in respect of the loans advanced by them to the Company I. G. Rs. 3 lakhs and I. G. Rs. 4 lakhs respectively on 'condition' that the value of ordinary shares is reduced by 50 per cent and sanctioned by the Members by the Special suitable resolution the present paid up share capital of the Company amounting to I. G. Rs. 21,40,120/- comprising of 2,14,012 shares upon each of which I.G. Rs. 10/- has been called up and paid up and due to be paid up, shall be reduced to I. G. Rs. 10,70,080/- by writing off the paid-up value of the said scares by 50 per cent and that I. G. Rs. 5/- shall be the amount payable on each ordinary share to be subscribed to the remaining ordinary issued Share capital subject to confirmation thereof as required by legal statutes.' (Italics (here in ' ') mine),

27. Sri Anantha Babu, learned counsel for the respondent, has however stated that this question as to the quantum of the debt need not be finally decided in his proceeding and that what all he desires to press upon this Court is to show that there is a 'bona fide' dispute with regard to a portion of the debt and it is not therefore open to the petitioner to rely upon the default of the Company in paying the debt, as a ground for winding up.

28. It is true that a winding-up petition is not a legitimate means of seeking to enforce payment of a debt which is 'bona fide' disputed by the Company. Where the Court is satisfied that a debt upon which a petition to wind up is founded, is a hotly contested debt and doubtful, then the Court should not make a winding up order based upon such a debt. It may be here stated that with regard to the sum of Rs. 9,00,000/- and the interest accrued thereon, the liability is admitted by the Company. In Ex. R-51, which is the Company's fourteenth annual report and-statement of account for the period ending December 31, 1954, under the heading 'loans', it is stated thus:

'(b) Industrial Trust Fund, Government of Hyderabad, Hyderabad-Deccan.

As against the above, the Industrial Trust Fund holds a first and second charge on the Machinery and Buildings etc., more particularly specified in the schedules attached ID the two indentures. .... Rs. A. P.(as per contra) 9,00,000 0 0interest accrued on the aboveloan of the I.T.F. loan. 2,37,236 12 5'.

29. In Ex. P-5, the fifteenth annual report and statement of accounts, for the years ending 31st December, 1955 and 31st December, 1956, a sum of Rs. 9,00,000/- is shown as a secured loan to the Industrial Trust Fund. In the statement of accounts it is similarly shown that there is a secured loan of Rs. 9,00,000/- in favour of the industrial Trust Fund.

30. Ex. R-42 is the sixteenth annual report and statement of accounts for the year ending 31st December, 1957 and 31st December, 1958. Under the heading 'secured loans' is shown a sum of Rs. 9,00,000/- in favour of the Industrial Trust Fund, both during the year 1957 and 1958. There is, therefore, no dispute that the Company owes a sum of Rs. 9,00,000/- towards principal on the mortgages dated 1st November 1947 and 1st September, 1948.

31. It has been argued on behalf of the Company that there is a 'bona fide' dispute with regard to the indebted-ness of the Company to the petitioner and that the presentation of the winding up petition is an abuse of the processof the Court, and that in this case the Company 'has not neglected to pay the amount demanded' within the meaning of Section 434 of the Indian Companies Act. Reliance has been placed upon the decision of a Division Bench of the Calcutta Nigh Court, consisting of Sander son, C. J. and Woodroffe, J. in The Company v. Sir Rameshwar Singh, 23 Cal WN 844 : (AIR 1920 Cal 1004). There, the learned Judges, after referring to the judgment of Sir G. Jessel, M. K., in London and Paris Banking Corporation, In re, (1875) 19 Eq. 444 at p. 446, held that negligence in paying a debt on demand is omitting to pay without reasonable excuse and that mere omission by itself does not amount to negligence. In the above case the Company alleged that there was a 'bona fide' dispute and that they were willing to pay what was found due on a taking of the accounts. Now, in this case, as I have already pointed out, learned counsel for the respondent has invited me not to decide finally about the quantum of the debt. Therefore, the only question is whether, on the materials placed before this Court, there is ground for supposing that there is a 'bona fide' dispute as to a substantial part of the debt on which the winding up petition is based. On the statement of accounts above mentioned, I find no difficulty in reaching the conclusion that far from there being a 'bona fide' dispute as to a substantial part of the debt, there is an admission that a substantial part is due and owing by the Company to the petitioner. Whatever may be said with regard to the balance of the amount, the Company admits its liability to the petitioner to the extent of Rs. 9,00,000/- out of 15 lakhs. That being the position, I am unable to hold that there is a 'bona fide' dispute with regard to a substantial portion of the debt.

32. Now the question is whether this Company is commercially solvent. The expression 'commercially insolvent' has been defined by Sir Willian James, V. C., in European Life Assurance Society, In re, (1869) 9 Eq. 122 at p. 128, to mean:

'Not in any technical sense but, plainly and commercially insolvent -- that is to say, that 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 probable assets would be insufficient to meet the existing liabilities.'

33. The respondent has adduced oral evidence with regard to the potentialities of the Company. It has been attempted on behalf of the Company to show by the evidence of R.W. 3 that the existing assets of the Company have appreciated in value by reason of the present market conditions, and to be shown that the current assets are sufficient to meet the current liabilities. The evidence of R.W. 2 is vague and indefinite and does not carry conviction. (The annual reports of the Board of Directors with statements of accounts duly audited by the Auditors furnish incontrovertible evidence as to the exact financial position of the Company, and at this stage may be mentioned the salient facts which emerge from the balance sheets. It is not necessary to refer to the details mentioned in the anterior reports, and it will be convenient to take the figures furnished by Ex. R42, the sixteenth annual report and statement of accounts for the years ending 31st December, 1947 and 31st December, 1958. This report contains an overall picture of the financial position of the Company. It is therein stated as follows:

'As per the annexed Trading and Profit and Loss Accounts for the two years ending 31st December, 1357 and 31st December, 1958 the net losses incurred after writing off bad debts in the year 1957 and depreciation in both the years are Rs. 1,83,711-5-3 and Rs. 1,71,363-5-9 respectively.

As per the last balance sheet at 31st December, 1956, the total loss that was carried forward was Rs. 16,86,641-15-1 which together with the net losses of Rs. 1,83,711-5-3 and Rs. 1,71,363-5-9 incurred during the year ended 31st December, 1957 and 31st December, 1953 respectively bring the total loss to Rs. 20,41,716-10-1 representing 50 per cent of the ordinary paid-up capital to be written off on confirmation of the reduction in capital by the High Court.'

34. It is suggested by R.W. 2 that the Company would be able to pay off its debts within a period of ten years. He estimated that a sum of Rs. 10,00,000/- would be necessary (or running the factory. He suggested that if Government would give up its first charge and some other Bank or corporation would advance that amount, it would be possible to restart the factory. He is positive that he is not presently in a position to advance any money. His answer in this regard is highly revealing; 'Nobody is ready to advance this 10 lakhs to the Company to restart it.' On this evidence it is clear that no financier is willing to come forward to salvage the Company. The Government is not willing to do so. R.W. 2 himself, except suggesting certain vague possibilities, based on very optimistic expectations about the future potentialities of the Company, is himself unable to put forward any concrete proposal for resuscitating the Company. The fact that huge losses of over Rs. 20,00,000 have been incurred by the Company is not in dispute. In Ex. R-47, dated 4-10-1960, it was stated that a sum of Rs. 10,00,000/- might be advanced as a loan by the Industrial Development Corporation to revive the concern. In Ex. R-30 dated July 14, 1959, Shri Sirajuddin Babu Khan, Director of the Company, wrote as follows:

'We therefore humbly submit that you may help us put through this lease and salvage the Hyderabad Vegetable Product Co., Ltd., from its present unenviable plight. We, may be permitted to reiterate that this appears to be the only way of keeping the Company going. 'The only alternative will be in the circumstances to put the Company into liquidation with resultant loss to creditors as well as shareholders.' This course of action the Directors feel will be unwise.'

35. Undoubtedly, the Company, as shown in Ex. R-42 has only a sum of Rs. 351-3-3 in current account with Banks while the cash on hand is Rs. 163-6-10. It would be extremely difficult to say that in the present condition the Company is solvent.

36. The second of the grounds on which the petitionis rested is that the Company has suspended its businessfor more than a year.

37. From the material evidence on record, the following undisputed facts emerge: The construction of the factory was completed in 1949. It remained closed between June 1950 and November 1951. It reopened In November 1951 but was again closed from August 2S, 1952, and during the last eight years, there has been a total closure of the factory. R.W. 1 himself admitted that the factory suspended its working from August 26, 1952. The only activity of the Company subsequently was to dispose of some old Stock. Ex. R-42, the balance sheet ending 31st December, 1958, shows no receipts even on account of the disposal of old stocks. Undoubtedly, therefore, the Company has ceased production for about eight years. It is stated that the closure of the factory was due to labour trouble. This may or may not be so. The tact however remains that the factory has been closed, and this is clearly a ground which would justify the making of a winding-up order under Section 439 of the Companies Act.

38. The last of the grounds is that it is just and equitable to wind up the Company. When one looks at the balance sheets and the accounts of the Company from time to time, the conclusion becomes irresistible trial the Company has been incurring very heavy losses from year to year. On the facts disclosed, it must be held it is impossible to carry on the business of the Company except at a loss, which means that there is no reasonable hope that the object of trading at a profit could be realised. The further fact is that the existing and the possible assets are insufficient to meet the existing and probable liabilities. A creditor of the Company, namely, Messrs. Badruka Kapadia & Co., obtained a decree against the Company and attached its assets on June 25, 1959, in E. P. No. 34 of 1959, pending before the Addl. Chief Judge, City Civil Court, Hyderabad. There does not seem to be the slightest possibility of the business of the Company being resumed under the present condition. Ex. R-42 itself discloses that the cash on hand and with the Bankers together is Rs. 514-10-1. The fact that the Company is to-day left with this insignificant balance, furnishes clinching evidence of its commercial Insolvency.

39. It has been argued by Sri Anantha Babu that the Court would not be Justified in making a winding-up order so long as the Company has a chance of being rehabilitated. That is indeed what R.Ws. 1 and 2 have stated. In a winding-up petition, the decisive question must be whether on the date of the petition, there was any reasonable hope that the object of trading at a profit, with which the Company was formed, could be realised. On the material placed before me, the only conclusion possible is that the object for which the Company was incorporated has substantially failed, that it is impossible to carry on the business of the Company except at a loss and that the existing and probable assets are insufficient to meet the existing liabilities. As for the argument based on future possibilities, I need only extract the observations of their Lordships of the Privy Council in Davis and Co. Ltd. v. Brunswick (Australia) Ltd., AIR 1936 PC 114 at pp. 121 and 122 which are apposite in the present context :-

'There is obviously a great difference between a question of positive fact, such as the pecuniary position of a trading company at a particular date, and a question of the prospects of such a company in the future, a matter which must depend on all sorts of views as to the state of world trade, the confidence of the public, the price at which articles can be sold -- a matter which depends very largely upon the number of such sales -- and an infinity of other considerations. . . . .It is not the function of a Court to determine such a matter on its own views as to probable success or failure, but to form the best opinion it can upon the evidence given by persons with a practical knowledge of the trade in question and the local conditions where these affect the matter.'

As a result of the foregoing discussion, I hold that the Company is unable to pay its debts; that it has suspended its business for more than a year and that it is just and equitable to wind up the Company. It is, therefore, ordered that the Company be wound up under the provisions of the Companies Act, 1955. The Official Liquidator will forthwith take charge of all the property and effects of the company and cause a sealed copy of this Order to be served on the Company by pre-paid registeredpost. The petitioner shall advertise within fourteen days.from this date a notice in the prescribed form of the making of this order in one issue each of the Deccan Chronicle,and Urdu Milap. The petitioner shall serve a certified,copy of this order on the Registrar of Companies not laterthan one month from this date. The costs of the petition shall be taxed and paid out of the assets of theCompany.


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