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Misrilal Dharamchand P. Ltd. Vs. B. Patnaik Mines P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtOrissa High Court
Decided On
Case NumberCompany Act Case No. 1 of 1973
Judge
Reported in[1978]48CompCas494(Orissa)
ActsCompanies Act, 1956 - Sections 433
AppellantMisrilal Dharamchand P. Ltd.
RespondentB. Patnaik Mines P. Ltd.
Appellant AdvocateG.N. Sengupta, Adv.
Respondent AdvocateR. Mohanty, ;S.K. Patnaik and ;R.K. Kar, Advs.
Cases ReferredAmalgamated Commercial Traders P. Ltd. v. Krishnaswami
Excerpt:
.....still failed to satisfy the demands, this application was filed on the 14th of february, 1973. the petitioning company has claimed three amounts to be due to it: i accordingly hold that the petitioning company has failed to establish that interest on the loan of rs. referring to the phrase 'commercial insolvency 'the learned judge further observed that it means that the company is plainly and commercially insolvent, that is to say, that its existing and probable assets are such as to make the court feel satisfied that they would be insufficient to meet the existing liabilities and insolvency is to be presumed when there has been a failure to pay a debt in accordance, with a statutory notice of demand and it may also be proved in other ways. , as the learned judge then was, spoke for the..........ore and manganese, all located within the barbil area of the district of keonjhar. the petitioning creditor company deals in petrol, petroleum products and diesel and has been established at barbil from where the defendant-company had been supplied these materials on credit between august, 1968, and december, 1970, for the purpose of its business. on accounts being taken, on the 31st of july, 1971, the defendant-company acknowledged its liability in writing on this score to the extcntof rs. 60,357.71. on the 3rd of october, 1970, the defendant-company asked for a short-term loan of rs. 75,000 from the petitioning company and vide receipt of the same day, the amount was received from the petitioning company by the defendant-company. as the defendant-company failed/neglected to pay the.....
Judgment:

R.N. Misra, J.

1. This is an unpaid creditor's application for winding up under Section 433(e) of the Companies Act of 1956 (hereinafter referred to as ' the Act ').

2. The defendant-company was incorporated on the 19th of March, 1956, with a share capital of Rs. 15 lakhs divided into 15,000 equity shares ofRs. 100 each and its paid up capital is Rs. 12 lakhs. The company held three mining rights in iron ore and manganese, all located within the Barbil area of the district of Keonjhar. The petitioning creditor company deals in petrol, petroleum products and diesel and has been established at Barbil from where the defendant-company had been supplied these materials on credit between August, 1968, and December, 1970, for the purpose of its business. On accounts being taken, on the 31st of July, 1971, the defendant-company acknowledged its liability in writing on this score to the extcntof Rs. 60,357.71. On the 3rd of October, 1970, the defendant-company asked for a short-term loan of Rs. 75,000 from the petitioning company and vide receipt of the same day, the amount was received from the petitioning company by the defendant-company. As the defendant-company failed/neglected to pay the aforesaid two amounts, notices of demand as provided under Section 434(1)(a) of the Act were issued and when the defendant-company still failed to satisfy the demands, this application was filed on the 14th of February, 1973. The petitioning company has claimed three amounts to be due to it:

Rs.(i)Price of materials supplied 60,357.71(ii)Amount lent and advanced on the 3rd of October, 1970 75,000.00(iii)Interest on Rs. 75,000 at the rate of 6 per cent. per annum from 3rd October, 1970 to the 3rd February, 1973 10,500.00

1,45,857.71

3. It has been alleged by the petitioner that the company has nominal assets save and except the leasehold interest in the mines ; large amounts are due and owing to the Government of Orissa by way of arrears of royalty and other public dues. The company is unable to pay its debts, is on the verge of commercial insolvency and it is, therefore, just and equitable that it be wound up.

4. The defendant-company does not dispute the fact that a sum of Rs. 60,357.71 is due from it on account of supply of materials. In the counter-affidavit the claim on the basis of the loan was generally denied The defendant-company's liability for interest is, however, seriously challenged. The receipt of the notices of demand are also not disputed. It is alleged that the company suffered a set-back in its business activities on account of several factors beyond its control, but it possesses sufficient assets and is capable of paying its debts and the petitioning creditor should not be permitted to take advantage of the adverse circumstanceswhich have befallen the company temporarily so as to get a winding-up order from the court.

5. At the trial, several documents have been exhibited from both sides and while the petitioning company has examined one of its employees in support of the petition, the defendant-company has examined one of its directors and an employee in support of its defence.

6. On the pleadings of the parties, two issues arise for determination :

(1) Whether the demands raised by the petitioning company in respect of the debts are correct

(2) Is the defendant-company liable to be wound up

Issue No. 1.

6. In paragraph 8 of the petition, claim was laid in regard to Rs. 60,357.71 representing the price of supply of petroleum and petroleum products. In paragraph 2 of the counter-affidavit, this claim has been admitted. In paragraph 10 of the petition, claim was laid regarding the short-term loan of Rs. 75,000 repayable with interest. In paragraph 2 of the counter-affidavit, this claim was denied, but before the hearing began, it has been clarified that there is no dispute in respect of the loan, but no interest on the loan amount is payable. The dispute, therefore, is with regard to payability of interest on the amount of loan.

7. Exhibit 1 is the receipt for Rs. 75,000 granted by the defendant-company through its accountant on the 3rd October, 1970. P.W. 1 has proved this receipt in accordance with law. That Raha was in charge of the defendant-company's branch at Calcutta has been admitted by D.W. 1, a director of the company. D.E. 1 has not disputed the receipt of Rs. 75,000.

8. Exhibit 1, the receipt, makes no reference to payment of interest, nor is there any document to support the claim of interest. P.W. 1, the solitary witness on the petitioner's side, speaking about the payability of interest has stated :

Though not mentioned in exhibit 1, there was a verbal agreement that the opposite party-company would pay interest at the rate of 6 per cent, on this amount. In cross-examination the witness has stated :

The petitioner-company is not a money-lending or an investing company. The transaction relating to Rs. 75,000 under exhibit 1 took place in the Calcutta office of the petitioner-company. The loan under exhibit 1 was not a friendly loan but a commercial loan. Exhibit 1 does not say that money is repayable on demand. ' On account ' used in exhibit 1 only refers to the commercial practice.

9. Members of the family of Sri Misrilal Jain, a mine owner and businessman of repute, who are constituents of the petitioning company, own shares inthe defendant-company. There has been a series of business dealings between the two companies. In these circumstances, in the absence of clear proof that the interest was stipulated to be paid or had been agreed to be paid, it cannot be found that the claim of interest has been established on the solitary statement of P.W. 1. On the other hand, the defence plea that it was a temporary accommodation--a friendly help--is more probable. I accordingly hold that the petitioning company has failed to establish that interest on the loan of Rs. 75,000 was payable. Issue No. 2

10. As already noticed, the petitioning company's claim in respect of Rs. 60,357.71 was never, and Rs. 75,000 is no more, in dispute. The claim in regard to the price of supplies has been outstanding from 1970 while the loan of Rs. 75,000 was taken on the 3rd October, 1970, and also remains unpaid in spite of notice. The receipt of notices of demand issued in terms of Section 434(1)(a) of the Act has not been disputed. The office copies of the notices (exhibits 4 and 4/1) as also the postal acknowledgments (exhibit 5 series) have also been duly exhibited on the petitioner's side. The defendant-company never sent any reply to these notices. It is conceded that payments have not been made of these amounts in spite of the fact that such payments are due.

11. Section 433 of the Act, as far as material, provides:

'A company may be wound up by the court,--... (e) if the company is unable to pay its debts :--...'

12. Under Section 434, a company is deemed to be unable to pay its debts when the creditor to whom the company is indebted in a sum exceeding Rs. 500 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 sum 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. This application has been made on the 14th February, 1973, long after the expiry of three weeks after service of the notices of demand. While the demand for interest was not just and proper, demand for the bulk of the amount was in regard to loans legally due and there can be no doubt that the defendant-company has been unable to pay its debts in terms of the statutory provision.

13. The point to decide is : Is the defendant-company to be wound up for being unable to pay its debts Undoubtedly, the power to be exercised under Section 433 of the Act is a discretionany one and it is competent for the court in consideration of the circumstances in a given case to refuse to pass an order of winding up even if the defendant-company is unable to pay its debts. It is equally open to the court in its discretion to make aconditional order.

14. It is appropriate that at this stage reference is made to precedents. At page 742 of Palmer's Company Law, 21st edition, referring to the corresponding provision in Section 223 of the English Act, it has been stated :

' The court is invested with a wide jurisdiction in the interests of commercial morality ;.....'

15. In In re Great Western (Forest of Dean) Coal Consumers' Company [1882] 21 LR Ch D 769 (Ch D), the court found it appropriate to deal with the adverse circumstances in which the defendant-company had been placed on account of depressed conditions of the coal trade in England. In In re Greenwood and Co. [1900] 2 QB 306 (QB) winding up was refused when it was found that a particular creditor was anxious to bring about statutory liquidation with a view to recovering some money due to it. In In re Tweeds Garages Ltd. [1962] 1 All ER 121 ; 32 Comp Cas 795 (Ch D), Plowman J. laid down that where there was no doubt that the petitioners were creditors for a sum which would otherwise entitle them to a winding-up order, a dispute as to the precise amount owed was not a sufficient answer to the petition and, therefore, directed the debtor-company to be woundup. In Mann v. Goldstein [1968] 2 All ER 769 ; [1969] 39 Comp Cas 353 (Ch D), the principle laid down in the aforesaid case was approved.

16. In the case of State of Andhra Pradesh v. Hyderabad Vegetable Products Co. [1962] 32 Comp Cas 64 (AP), the learned company judge referred to the principle of commercial insolvency as the foundation for making of an order of winding up at the instance of the unpaid creditor. The basis of an order for winding up of a company is that the company has ceased to be commercially solvent and, therefore, it is fit and proper in the interest of the creditors and shareholders not to allow it to function as a company was indicated as the guideline. Referring to the phrase ' commercial insolvency ', the learned judge further observed that it means that the company is plainly and commercially insolvent, that is to say, that its existing and probable assets are such as to make the court feel satisfied that they would be insufficient to meet the existing liabilities and insolvency is to be presumed when there has been a failure to pay a debt in accordance, with a statutory notice of demand and it may also be proved in other ways. In this case, the main debt (sic) disputed though dispute regarding certain smaller amounts had been raised. The court observed that where the substantial part of the debt was due and owing by the company to the petitioning creditor, an order of winding up was justified. In the case of Hariprasad v. Amalgamated Commercial Traders P. Ltd. [1964] 34 Comp Cas 209 (Mad), a Bench of the court stated that where a creditor's petition for winding up is contested by the company on the ground that no debt is due to him (creditor), the court should ordinarilyinvestigate the question and if it finds that the defence is a substantial one, it has a discretion to direct the creditor to establish his claim in an independent action. It has also an equal discretion to decide the dispute particularly in cases where the defence to the claim is insubstantial and once it is proved that the debt is due to the petitioning creditor, it should proceed with the winding-up petition.

17. In the case of V.V. Krishna. Iyer Sons v. New Era Mfg. Co. Ltd. [1965] 35 Comp Cas 410 (Ker), the learned company judge has indicated that in an application to wind up a company on the ground of its insolvency, the fixed assets and the plant and machinery, which are necessary for carrying on the business of the company, cannot be ignored. The question to be considered is whether the company is able to meet its current demands and whether its existing and probable assets would suffice to meet future demands. That, if all the demands were forthwith made upon it, it would be able to meet the demands only by mortgaging or selling its capital assets, perhaps closing down, does not mean that it is insolvent. Reliance had been placed on some decisions of different High Courts.

18. In the case of Amalgamated Commercial Traders P. Ltd. v. Krishnaswami [1965] 35 Comp Cas 456, the Supreme Court dealt with a case where dividends declared by the company had not been paid and the shareholders as creditors in respect of the dividends due sued for winding up. Sikri J., as the learned judge then was, spoke for the court, thus (pages 463, 464) :

' It is well settled that 'a winding-up petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the company. A petition presented ostensibly for a winding-up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the court. At one time petitions founded on disputed debt were directed to stand over till the debt was established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order.' (Vide Buckley on the Companies Acts, 13th edition, page 451).

We are satisfied that the debt in respect of which notice was given under Section 434 was bona fide disputed by the appellant-company. The appellant-company had received legal advice and it had acted on it. On the facts it seems to us clear that the appellant-company did not dispute the debt in order to hide its inability to pay debts..... If the debtwas bona fide disputed, as we hold it was, there cannot be ' neglect to pay ' within Section 434(1)(a) of the Companies Act. '

19. From a discussion of these precedents, the following principles can be culled out :

(i) The court's jurisdiction under Section 433(e) of the Act is discretionary;

(ii) An order of winding-up is made only when it is shown that the company is commercially insolvent and it is not just and proper to allow such an insolvent company to be in existence in the broader interests of commercial morality ;

(iii) A company may have liabilities more than its assets, but still may have, in particular circumstances, the capacity to meet the demands from its creditors; and

(iv) On an application to wind up a company on the ground that it cannot meet its debts, what has to be ascertained is not whether the company, if it converted all its assets into cash, would be able to discharge its debts but whether in a commercial sense the company is solvent.

20. In the counter-affidavit of the defendant-company a set of circumstances adversely affecting the company's business have been catalogued. That there has been a recession in the mining business particularly with reference to iron ore is not seriously disputed. It has been stated that the company had to close down its business on account of labour unrest and was obliged to sell away some of its machineries. It is in evidence that a considerable quantity of iron ore was lying at the pit mouth and at the rail head. Even some manganese ore is said to be awaiting disposal. On. account of non-availability of wagons, it has been stated that disposal had not been possible. D.W. 1, a director of the defendant-company, has stated that sincere steps have been taken for revival of the commercial activities of the company during the pendency of this application. D.W. 2 has been put in charge of the business. In the meantime, a small quantity of iron ore has been disposed of. Negotiation for further disposal is in progress. Enquiries have been received and rates have been quoted to different parties. It is stated that the Indian Bank with whom the stock-in-hand had been pledged has been paid a sum of Rs. 3,36,000 (exhibit J) and working arrangement after release of the stock has been made (exhibit J-1). A sum of Rs. 36,000 is said to have been paid towards employees' provident fund account, but in the absence of proof of payment, this assertion cannot be accepted. The surface and dead rent owing to the State Government to the tune of about one lakh rupees has been paid (exhibit B series). The royalty dues of the State Government have been adjusted (exhibits F and G series) and a working position has been reached. The claim for renewal of the mining rights in respect of two leases is under consideration of the State Government and could not be secured earlier on account of non-payment of the arrear dues. It is also alleged that a sum of Rs. 38,000has been paid by way of bonus (exhibit C series) as per a tripartite settlement so as to bring about an end to the labour dispute. A sum of about Rs. 15,000 is also stated to have been paid to the Certificate Officer for lifting the attachment (exhibit A).

21. D.W. 1, a director of the defendant-company, has also stated that negotiations have been completed with the banker of the company for credit facilities. The stock is said to be to the tune of Rs. twenty-two lakhs at the prevailing market rate though at cost price it had been valued between Rs. 8 and 9 lakhs in the balance-sheet (exhibit 6). It is argued on behalf of the defendant-company that the company is able to revive its activities in an effective and real way and, within a reasonable time, it would be able to trade again as a prosperous mining company and there is no justification to put an end to it by making a winding-up order. Mr. Mohanty for the defendant-company has also explained that the company will be able to dispose of the stock-in-hand once its activities are revived and within a period of six months to one year after the pressing outstandings are cleared and the fetters put by the outside agencies are withdrawn, the company would certainly clear the dues of the petitioner. It is with that end in view, the management of the defendant-company has been out to clear those dues of others first with a view to reviving the business. That the defendant-company had closed down its business operations under very adverse circumstances and is struggling to gather up . with a view to running its business activities with full vigour appear to have been established by evidence. It is true that for some time the company had to fight against several odds from different sources and, therefore, was obliged to close down its activities. That seems to have mainly been responsible for the delay in payment of the petitioning company's dues.

22. While these are the special features to be taken note of, I cannot lose sight of the fact that the defendant-company has not been able to satisfy the demands of the creditor for many years, and definitely for more than two years after statutory demand. There is considerable dispute as to whether the assets of the defendant-company exceed its liabilities or, otherwise said, the defendant-company is on the verge of insolvency. I do not think a detailed examination of this aspect of the dispute need be undertaken. The outstanding feature that even during the one and half years that this application has been pending in court, the defendant has not been able to offer to pay up the amount offers sufficient basis to hold that the defendant-company is not able to pay up the dues of the creditor.

23. The application of the petitioning company is not a mala fide one. Admittedly, a huge amount is due to the petitioning company for more than three years now. It is true that the defendant-company has admittedthat the amounts are due except so far as the claim of interest is concerned. Merely because the company was not in a situation does not mean that the petitioner should not be paid its dues and even when the company is in default, an order for winding up is not to be made. On the other hand, I think it appropriate to direct the winding up of the company but to stay its enforcement for a period of six months from to-day in order to enable the defendant-company which as already indicated, is reviving itself from a bad fall, to pay up the dues of the petitioning-company. I have not come across a case where such a long period has been given, but in the peculiar facts of the case, I think it appropriate and in the interest of justice to grant such a long time to enable the defendant-company to pay up its dues. In doing so, I have kept the creditors' interest in view. I have not lost sight of the fact that constituents of the petitioning company are also shareholders of the defendant-company and in their own interest liquidation of the defendant-company, if it is really capable of reviving and running its business, would not be beneficial and I have taken into account the sincerity of the defendant-company and its directors in reviving the business activities by fighting against all odds. If the debts are not satisfied within the time indicated, the winding-up proceeding shall proceed in accordance with law on the application of the petitioning creditor. In the peculiar facts of the case, I direct parties to bear their own costs of this proceeding.


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