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Ambala Bus Syndicate P. Ltd. Vs. Bala Financiers P. Ltd. (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtPunjab and Haryana High Court
Decided On
Case NumberCompany Appeal No. 9 of 1982
Judge
Reported in[1986]59CompCas838(P& H)
ActsCompanies Act, 1956 - Sections 433, 434 and 439
AppellantAmbala Bus Syndicate P. Ltd.
RespondentBala Financiers P. Ltd. (In Liquidation)
Appellant Advocate P.R. Mridul, Senior Adv. and; N.K. Sodhi, Adv.
Respondent Advocate D.N. Awasthy,; B.K. Jhingan and; A.C. Jain, Advs.
Cases ReferredOfu Lynx Ltd. v. Simon Carves India Ltd.
Excerpt:
.....he was removed from the managing directorship of the company. it is well-settled that if a debt is bona fide disputed by a company, the proper remedy for the creditor is not to present an application for its winding up. the reason for a winding-up order is that on its failure to pay a debt after a statutory notice, the presumption arises that the company is insolvent. when there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed. 131):-two rules are well-settled. , in re [1865] 35 beav 204). 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 in re a company [1894] 94 sj 369 ;[1894] 2 ch 349 (ch d)...........'the act'), and its authorised capital is rs. 15 lakhs and paid up capital, rs. 12,13,700. m/s. bala financiers p. ltd. (hereinafter referred to as ' the financiers ') is also registered under the act and is carrying on business as financiers. it is alleged that the financiers are creditors of the company for a sum of rs. 7,49,328.76, inclusive of interest as on march 31, 1980. the total amount recoverable from the company on june 15, 1980, including interest is rs. 7,80,528.76. the financier served a notice dated june 20, 1980, on the company demanding an amount of rs. 7,80,528.76. in reply, the company disputed the amount claimed from it and denied its liability to pay the same. the case of the financiers is that the plea taken by the company is fallacious. it is averred that it was.....
Judgment:

Rajendra Nath Mittal, J.

1. This judgment will dispose of Company Appeals Nos. 9 to 11 of 1982 which contain similar questions of law and fact. The facts in the judgment are being given from C. A. No. 9 of 1982.

2. The Ambala Bus Syndicate (P.) Ltd. (hereinafter referred to as ' the company ') is registered under the Companies Act, 1956 (hereinafter called 'the Act'), and its authorised capital is Rs. 15 lakhs and paid up capital, Rs. 12,13,700. M/s. Bala Financiers P. Ltd. (hereinafter referred to as ' the financiers ') is also registered under the Act and is carrying on business as financiers. It is alleged that the financiers are creditors of the company for a sum of Rs. 7,49,328.76, inclusive of interest as on March 31, 1980. The total amount recoverable from the company on June 15, 1980, including interest is Rs. 7,80,528.76. The financier served a notice dated June 20, 1980, on the company demanding an amount of Rs. 7,80,528.76. In reply, the company disputed the amount claimed from it and denied its liability to pay the same. The case of the financiers is that the plea taken by the company is fallacious. It is averred that it was unable to pay its debt and was liable to be wound up. Consequently, a petition for winding, up was filed under Sections 433, 434 and 439 of the Act.

3. The company contested the petition and controverted the allegations of the financiers. It, inter alia, pleaded that there was a bona fide dispute in respect of the amount claimed and, therefore, the petition was not maintainable. It further pleaded that Harminder Singh Bala was the managing director of the financiers as well as of the company till April 11, 1980, when he was removed from the managing directorship of the company. He had major shareholdings in the financiers and, therefore, he created false liabilities against the company in favour of the financiers by manipulating false entries in the books of the company. The entries on which the financiers are relying, it is alleged, are fictitious and the company cannot be made liable to pay any amount to the financiers on the basis of those entries.

4. In the replication to the written statement, the financiers controverted the allegations of the company and reiterated their stand.

5. On January 30, 1981, Mr. G.R. Majithia, learned counsel for the financiers, made a statement at the Bar that he did not press for the advertisement and the issues be framed. In view of the statement, the learned single judge framed two issues. Thereafter, a civil miscellaneous application was filed for reframing and recasting the issues which was allowed and four issues were framed. Later, the counsel for the company made a statement on October 16, 1981, that issue No. 3 did not arise and the same be deleted. Accordingly, that issue was deleted. After deletion of issue No. 3, the following issues remained for trial:--

(1) Whether the respondent-company is unable to pay the debt OPP

(2) Whether there is a bona fide dispute between the parties regarding the debt payable by the respondent-company to the petitioner OPD.

(3) Relief.

6. This case was fixed for evidence of the parties. Before the evidence was recorded, another application was filed on behalf of the financiers that the petition be advertised and thereafter the evidence be recorded. The counsel for the company also agreed to it. Therefore, the learned single judge decided the question of advertisement of the petition and came to the conclusion that prima facie a case had been made out by the financiers for ordering advertisement. Consequently, it directed that the petition be advertised in accordance with Rule 34 of the Companies (Court) Rules, 1959 (hereinafter referred to as ' the Rules '). The company has come up in appeal.

7. Mr. Mridul has argued that the debt is bona fide disputed by the company and, therefore, the petition for winding up was liable to be dismissed relegating the financiers to seek their remedy by way of a suit. According to him the learned single judge erroneously held that the debt was not bona fide disputed.

8. We have duly considered the argument of the learned counsel. Before dealing with the factual aspect of the case, it will be appropriate to deal with the legal position. It is well-settled that if a debt is bona fide disputed by a company, the proper remedy for the creditor is not to present an application for its winding up. He can establish his debt in a civil action. In case he moves an application for winding up, that is liable to be dismissed. But if the debt is not boria fide disputed, the company court may decide it in the petition and make an order of winding up. The reason for a winding-up order is that on its failure to pay a debt after a statutory notice, the presumption arises that the company is insolvent. On the other hand, the reason for dismissing the petition for winding up on the ground that the debt is disputed bona fide, is that a solvent company is likely to suffer a great damage if a petition is presented by an unscrupulous creditor whose debt the company is willing to pay if he establishes the same. In the aforesaid view, we are fortified by the observations from Buckley on the Companies Acts, twelfth edition. The following observations at page 452 may be read with advantage :

' 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. 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. Some years ago, 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...Great damage might obviously be done to a solvent company by a winding-up petition presented by an unreasonable creditor, whose debt the company are able and willing to pay if established, but to whom they bona fide believe they are not indebted.'

9. A similar dispute came up before a Division Bench of the Calcutta High Court in Bengal Luxmi Cotton Mills Ltd. v. Mahaluxmi Cotton Mills Ltd., AIR 1955 Cal 273. The learned Chief Justice, who presided over the Bench, after noticing the observations from Buckley on the Companies Acts, held that the basis of making an order of winding up against a company is that it has ceased to be commercially solvent and accordingly it is fit and proper in the interest of the creditors and shareholders not to allow it to function further 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. However, it may also be proved in other ways. It is further observed that the basis of a winding-up order on the ground of a company's inability to pay its debts is, however, always insolvency.

10. The matter has also been authoritatively decided by their Lordships of the Supreme Court in Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami [1965] 35 Comp Cas 456 and Madhusudan Gordhanand Co. v. Madhu Woollen Industries Private Ltd, [1972] 42 Comp Cas 125 (SC). In Amalgamated Commercial Traders' case [1965] 35 Comp Cas 456 (SC), the appellant-company was the sole selling agent of two other companies. In its general meeting held on December 30, 1959, the shareholders resolved that a dividend of Rs. 100 per share be paid to the shareholders and the payments be made when the commission due from those two companies was realised. In 1960, two shareholders demanded payment of the dividend. One of them also gave a statutory notice under section 434 of the Act. The company did not make any payment and ultimately after taking legal advice sent a circular letter to all its shareholders that the resolution dated December 30, 1959, was not a declaration of dividend and thus no liability to pay any dividend arose thereunder. The creditor, who had served a notice under section 434, presented a petition to the High Court for winding up the company. The High Court passed an order for its winding up. On appeal, the Supreme Court reversed the order after noticing the above-quoted observations from Buckley on the Companies Acts. S.M. Sikri J., while speaking for the Bench, further observed that if a debt was bona fide disputed, there could not be neglect to pay within the meaning of Section 434(1)(a). If there was no neglect, the deeming provision did not come into play and the ground for winding up, namely, that the company was unable to pay its debts, was not substantiated. Similar view was taken in Madhusudan Gordhandas's case [1972] 42 Comp Cas 125 (SC), A.N. Ray J., as he then was, observed thus (p. 131):--

' 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. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. (See London and Paris Banking Corporation, In re [1874] LR 19 Eq Cas 444). Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company when the company contended that the work had not been done properly was not allowed. (See Brighton Club and Norfolk Hotel Co. Ltd., In re [1865] 35 Beav 204).

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 In re A Company [1894] 94 SJ 369 ; [1894] 2 Ch 349 (Ch D). 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 Tweeds Garages Ltd., In re [1962] Ch 406; [1962] 32 Comp Cas 795 (Ch D)). 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.'

11. Mr. Mridul also referred to two English cases, namely, Mann v. Gold-stein [1968] 2 All ER 769 (Ch D) and In re Lympne Investments Ltd. [1972] 2 All ER 385 (Ch D). It was observed in Mann's case [1968] 2 All ER 769 (Ch D), that when the debt is disputed by the company on some substantial ground and the company is solvent, the court will restrain the prosecution of a petition to wind up the company. Similar is the ratio in In re Lympne Investments Ltd. [1972] 2 All ER 385 (Ch D).

12. Now, it is to be seen whether the company is bona fide disputing the debt of the financiers. It is not disputed that Harminder Singh Bala was the managing director of the financiers and the company. The entries in the books of account of the company on which reliance is placed by the financiers were made during the period when Mr. Bala was its managing director. He was removed from the managing directorship on April 11, 1980, and immediately thereafter in May, 1980, a sub-committee of three directors was constituted to go into the accounts of the company. The sub-committee, after partially going into the account books, came to the conclusion that several entries in the account books of the company had been manipulated. It specifically referred to an entry of Rs. 3,30,000 which is the subject-matter of the present dispute. The matter has been dealt with in the written statement as follows :

'......In the capacity of the managing director of the company, Shri Harminder Singh Bala adopted a clever device to enrich himself at the cost of the respondent-company. The modus operandi was that fictitious expenses were shown in the books of the respondent-company and which were paid by drawing funds either from the petitioner-company or from the Mohali Transport Co. (P.) Ltd. or from Messrs. Bachan Motor Financiers Pvt. Ltd. or from Roopnagar Credit and Investment Pvt. Ltd. The methods adopted for inflating the liability of the company were unique and one of them is where Mohali Transport Co. (P.) Ltd. advanced an alleged loan of Rs. 3,30,000 to the respondent-company. The said sum does not find its mention in the cashier's cash book of the respondent-company. At the instance of Shri Harminder Singh Bala, the then managing director, a credit entry in the name of Mohali Transport Co. (P.) Ltd. was made in the books of the respondent-company on February 14, 1980, for a sum of Rs. 3,30,000 and this amount was further divided into equal instalments of Rs. 1,10,000 each and was debited in the accounts of petitioner-companies, i.e., Messrs. Bala Financiers, Bachan Motor Financiers and Roopnagar Credit and Investment Pvt. Ltd. The entry had been made to create the indebtedness against the respondent-company so as to enrich himself with the illegal money to be made or made by Shri Harminder Singh Bala, the then managing director, who was controlling the day-to-day business of the respondent-company. The three companies, i.e., Bala Financiers Pvt. Ltd., Bachan Motor Financiers and Roopnagar Credit and Investment Pvt. Ltd., each credited an amount of Rs. 1,10,000 in favour of the respondent-company. All these three companies including the petitioner company showed the amount of Rs. 1,10,000 having been paid to Mohali Transport Co. (P) Ltd. and the Mohali Transport Co. P. Ltd. credited this entry in favour of all the three companies. In a nutshell, the liability was created upon the respondent company by making only book entries in all the abovesaid companies with the intention to create the liabilities and bifurcated the same in favour of the companies which were and which are being controlled by the family of Shri Harminder Singh Bala including his brother, Shri Bhupinder Singh Bala, and his father, Shri Gur-saran Singh Bala. The then managing director, Shri Harminder Singh Bala, did not disclose his interest in all the four companies, i.e., Mohali Transport Co. (P) Ltd., Bala Financiers, Bachan Motor Financiers Pvt. Ltd. and Roopnagar Credit and Investment Pvt. Ltd., during the meeting of the board of directors of the respondent company where the benefits were being given to all the above-said four companies and which is violative of the provisions of the Companies Act, 1956, and Shri Harminder Singh Bala stood removed automatically and thus all the illegal and fictitious acts committed by Shri Harminder Singh Bala do not bind the respondent company.'

13. The above plea is based on the report of the sub-committee. It is not disputed that the claim is being made by the financiers on the basis of entries in the books of account and the balance-sheet. Subsequently, in a meeting of the board of directors, the report of the sub-committee was accepted. In the annual general meeting, when the balance-sheet was presented, a note was given that the debts created during the time of Harminder Singh Bala which were disputed, were being investigated. The financiers filed a replication to the written statement wherein they specifically admitted that no cash payments were made to the company, but only the liabilities were shifted (see page 167 of the paper-book). It is also relevant to mention that the said entries do not find place in the general cash book of the company.

14. Harminder Singh Bala was removed from the managing directorship of the company on April 11, 1980, by an unanimous resolution of the board of directors on the ground that he had misdirected himself and had exploited the fiduciary relationship between himself and the company and had created liabilities on it in favour of the other companies in which he, his brother, Bhupinder Singh Bala, his father, Gursaran Singh Bala, and his wife and children had major shareholdings. After he was removed, he served a notice under Section 434 of the Act on the company claiming an amount of Rs. 7,80,528.76. No details were given in the notice as to how the liability of the company was created. The only ground given was that the total amount of Rs. 7,49,328.76 had been confirmed by the company. The certificate of the company is annexure ' A ' which does not bear any date. It is signed by the accountant of the company. The company has denied the confirmation. The date of the alleged confirmation of the balance of Rs. 749,328.76 should be after March 31, 1980, because the amount represents the balance as on the said date. The issuance of the certificate after the said date is highly doubtful. The reasons are that the company was closed on March 29, 1980, and did not start re-functioning till April 13, 1980. During this period, Harminder Singh Bala was removed from the managing directorship on April 11, 1980. The disputes between the parties had started earlier and existed at the time when the company was closed. Because of the disputes, a sub-committee was constituted shortly after the removal of Harminder Singh Bala, to go into the accounts and other affairs of the company during his stewardship. It, after doing so, came to the conclusion that various entries in the account books had been manipulated by Harminder Singh Bala for his benefit. It may be highlighted that the certificate does not bear any date. In the circumstances, it cannot be believed that the company confirmed the accounts on or after March 31, 1981.

15. It further appears from the entries in the account books that an amount of Rs. 62,000 alleged to be incurred by Harminder Singh Bala on travelling during the year 1979-80 was debited to the company on February 7, 1980. The sub-committee, while scrutinizing the bills, found that these were prepared on one day. In the bills, he claimed taxi fare from the company for paying many visits to Delhi. However, the purpose of the visits was not given. He also claimed expenses on refreshment and stay at Delhi, but no bills were attached with his claim. Thus, the bills are ample proof that Harminder Singh Bala was trying to get the maximum benefit from the company by manipulating the accounts. It could not be expected from the managing director that he would withdraw a large amount of Rs. 62,000 as travelling expenses without submitting the cash memos in support of the claim, at one time. It is also evident from the aforesaid circumstance that the company is disputing some other entries in the account books seriously and prima facie for valid reasons. It has been held in Lodge v. Prichard [1853] De GM & G 906 that, prima facie, the books of the partnership are evidence among all the partners, for them all and against them all, owing to the agency which pervaded all the partnership transactions. If one partner succeeded in establishing a case of fraud, that would form a ground for an exception from the general rule and there is nothing in the rule to exclude an allegation of a mistaken or erroneous omission or insertion.

16. There was a criminal complaint lodged by Birender Singh Bala, managing director of the respondent, against Harminder Singh Bala, under Sections 406, 409, 379 and 380, IPC, on the ground that after the latter's removal from managing directorship, it was discovered that several buses, which were owned by the company, had been illegally removed by him. He had also removed some other property of the company. In consequence whereof, the police authorities recovered seven buses, two engines and some furniture from his custody. These goods were released on Sapurdari to the company under the order of the High Court. Thus, it is evident that the relations between Harminder Siugh Bala and the other directors had become very strained. From the aforesaid circumstances, it is clear that there is a bona fide dispute regarding the debt and prima facie the defence is a substantial one. The company has further furnished the prima facie proof of the facts on which the defence depends. It is well-settled that the court need not go into the matter as to whether the defence on the question of fact will ultimately succeed or not. It has also not been shown to us that the defence is not likely to succeed on the point of law.

17. There is another angle from which the matter may be examined. It is, if the court comes to a finding that the defence is a camouflage to cover the insolvency of the company, the defence may be rejected and the court may proceed with the proceedings of winding up. In the present case, the learned single judge did not record any such finding. Further, it is noteworthy that the company even made an application that it was willing to furnish security of its immovable properties to the tune of Rs. 20 lakhs to protect the interest of the alleged creditors. This also supports the stand of the company that the defence is not a camouflage to cover its insolvency.

18. Mr. Mridul has further argued that the learned single judge did not properly appreciate the law and erroneously held that the company should have got established in a court of law that no amount was due from it to the financiers but no effort was made by it in that regard. There is substance in this submission of the learned counsel too. It is for a creditor to show that some amount is due to him from the debtor and not vice versa. Therefore, we are of the opinion that the company could not be expected to establish that no amount was due from it to the financiers. If the company did not take action, no adverse inference can be drawn against it.

19. Mr. Mridul has next submitted that the entries in the account books of the company, on which reliance is being placed by the financiers, are not enough to charge the company with a liability. According to him, they, in fact, are the admissions by Harminder Singh Bala in his own favour and he cannot derive any benefit from them. He made a reference to Sections 21 and 34 of the Evidence Act in support of his contention.

20. We have given due consideration to the argument. Section 21 contains two propositions : firstly, admissions are relevant and may be proved against the person who makes them and, secondly, generally these cannot be proved on behalf of the persons making them. There are, however, certain circumstances in which an admission may be proved by and on behalf of the person making it. Section 34 is an exception to the general rule laid down in Section 21 and it deals with the relevancy of books of account. They are relevant whenever they refer to a matter into which the court has to enquire. However, they alone are not sufficient to charge a person with liability. Adverting to the facts of the case, the entries in account books of the company cannot strictly be called admissions by Harminder Singh Bala in his own favour for the reason that the company was not his individual concern but it was a different legal entity. However, the fact that he was the managing director cannot also be lost sight of as he had substantial powers of management. The value of the entries in the books shall have to be determined by the court after recording evidence and considering the circumstances in which they were made. It is, therefore, not possible for us to accept the argument.

21. Mr. Awasthy, learned counsel for the financiers, has vehemently argued that the order of the learned single judge, though laconic, can be supported on other grounds. It cannot be said that the defence is bona fide when the credit entries in the account books of the company in favour of the financiers exist and these entries are reflected in the balance-sheet of the company. He further argues that the issues have been framed in the case and the matter will be gone into, in detail, after recording the evidence. He mainly places reliance on Premier Vegetable Products Ltd. v. United Asian Bank, Malaysia [i980] 50 Comp Cas 680 (Raj), Ram Bahadur Thakur and Co. v. Sabu Jain Ltd. [1981] 51 Comp Cas 301 (Delhi) and Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla [1958] 28 Comp Cas 216 (Punj).

22. We have duly considered the argument but regret our inability to accept the same. It is well-settled that winding up is not a device for claiming disputed debts. In case the debts are disputed bona fide, the same can be established in a civil court. The mere fact that issues have been framed is not enough to allow a creditor to continue the petition against its debtor company if it has been shown that the defence is a bona fide one. It is true that there are entries in the account books of the company in favour of the financiers which are also reflected in the balance-sheet but they are not sufficient in the facts and circumstances of this case to hold that the debt is not bona fide disputed. The matter has been dealt with in some detail above.

23. In Premier Vegetable Products Ltd.'s case [1980] 50 Comp Cas 680 (Raj), a Division Bench of the Rajasthan High Court followed Madhusudan Gordhandas and Co.'s case [1972] 42 Comp Cas 125 (SC). After taking into consideration the facts and circumstances of the case, the Bench came to the conclusion that the dispute about the debt along with interest was not bona fide and prima facie there appeared to be no substance in the defence. In Ram Bahadur Thakur and Company's case [1981] 51 Comp Cas 301 (Delhi), the learned judge held that the petition was at the stage of admission and he had not been able to spell out any specific or concrete pleas in defence. Consequently, the learned judge came to the conclusion that the petition was not liable to be dismissed in limine. In my view, the learned counsel cannot derive any benefit from the aforesaid cases. The observations in Lahore Enamelling and Stamping Co.'s case [1958] 28 Comp Cas 216 (Punj), on which reliance has been placed by Mr. Awasthy, are that the debts due to the creditors not mentioned by name but included in the item relating to 'loans' or as due to 'sundry creditors' mentioned in the balance-sheet amount to an acknowledgment within the provisions of Section 19 of the Limitation Act, so as to extend the period of limitation with effect from the date of the signing of the acknowledgment. There is no dispute about the proposition of law. However, in this case, as already discussed, a bona fide dispute has been raised by the company regarding the entries in its account books on which reliance has been placed by Mr. Awasthy. In this situation, the observations are of no assistance to him.

24. Before parting with the judgment, another contention of Mr. Mridul may be noticed. It is, that in case the court has some doubt whether the disputes raised by the debtor company are bona fide or not and it is unable to come to a definite conclusion, the court may stay the winding-up proceedings and ask the creditor to seek his remedy in a civil court and direct the debtor company to furnish security to prove its bona fide and solvency. To fortify his argument, he refers to Ofu Lynx Ltd. v. Simon Carves India Ltd. [1971] 41 Comp Cas 174 (Cal).

25. There is also no dispute about the said proposition. It is not necessary to deal with the matter as we have already held that the dispute raised by the company is a bona fide one, and consequently the petition for winding up is not maintainable.

26. For the aforesaid reasons, we accept the appeals, set aside the order of the learned single judge and dismiss the petition for winding up of the financiers. In view of the facts and circumstances of the case, we make no order as to costs.

S.S. Sandhawalia, C.J.

I agree.


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