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Registrar of Companies Vs. Navjivan Trading Finance Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Petition No. 59 of 1975
Judge
Reported in[1978]48CompCas402(Guj)
ActsCompanies Act, 1956 - Sections 433, 434, 434(1), 439 and 439(5)
AppellantRegistrar of Companies
RespondentNavjivan Trading Finance Pvt. Ltd.
Appellant Advocate K.G. Vakharia, Adv.
Respondent Advocate C.C. Gandhi and; A.C. Gandhi, Advs.
Cases ReferredRegistrar of Companies v. S. P. Sohanmull Golcha P. Ltd.
Excerpt:
company - winding-up - sections 433, 434 and 439 of companies act, 1956 - petition for winding-up of company instituted by registrar under section 433 (e) - company unable to pay its debts - no scope for resurrecting company - winding-up just and equitable in order to prevent further trapping of innocent citizens and to prevent utilization of funds on part of directors for their own benefits - petition for winding-up allowed. - - in view of this state of affairs, after affording due opportunity to the company and taking into consideration the representation made by the company, sanction was accorded as per annexure 'a',on april 18, 1975, and the present petition was instituted on august 8, 1975. it may be stated that during the pendency of the petition, the company placed on record.....thakkar, j.1. there is a time for war and there is a time for peace. there is a time for laughing and there is a time for weeping. there is a time to live and there is a time to die. so also, whilst the court would be keen and quick to strive for evolving a scheme to resurrect a company so that the society does not lose a producing unit, the workers do not lose their source of livelihood, and the state does not lose its revenue, and order winding up of it only as a last desperate measure as a necessary evil, there are times when the court may justly feel that delaying winding up by a single day is a crime for which no atonement is sufficient. these reflections are occasioned by the present petition for winding up of a company (known as navjivan trading finance private ltd.) instituted by.....
Judgment:

Thakkar, J.

1. There is a time for war and there is a time for peace. There is a time for laughing and there is a time for weeping. There is a time to live and there is a time to die. So also, whilst the court would be keen and quick to strive for evolving a scheme to resurrect a company so that the society does not lose a producing unit, the workers do not lose their source of livelihood, and the State does not lose its revenue, and order winding up of it only as a last desperate measure as a necessary evil, there are times when the court may justly feel that delaying winding up by a single day is a crime for which no atonement is sufficient. These reflections are occasioned by the present petition for winding up of a company (known as Navjivan Trading Finance Private Ltd.) instituted by the Registrar of Companies in exercise of powers under section 433(e) of the Companies Act, 1956, as amended by the Companies (Amendment) Act of 1974 (the Companies Act), praying for an order for winding up of the said company by the court under section 433(e) on the ground that the company is unable to pay its debts and under section 433(f) on the ground that it is just and equitable that the company should be wound up.

2. The paid up capital of the company up to 1970 was Rs. 4,500 and thereafter it is Rs. 1,04,500. The main objects of the company for which it has been established as per the memorandum of articles of association are as under :

'(1) To enable people to save money to invest their savings and to help them in securing loans and to inculcate in their minds the ideas of thrift, economy and compulsory savings and to organize and conduct thrift schemes, chit funds and to undertake, carry on and engage in and execute all kinds of financial, commercial, trading and other business, except banking and insurance and to frame such rules and regulations as may be deemed necessary for the proper conduct of such business.

(2) To pay money to the subscribers of the chit funds against such securities as the company may deem proper and sufficient.'

3. The petition has been instituted by the Registrar of Companies pursuant to the sanction accorded by the Regional Director of the Company Law Board as per the order dated April 18, 1975 (annexure 'A'). The sanction was accorded under sub-section (5) of section 439 of the Companies Act, after issuance of a show-cause notice to the company and after according it a reasonable opportunity to show cause against the proposed action. The notice to show cause as per annexure 'B' was issued on August 1, 1973. On the ground that the balance-sheet as on December 31, 1971, revealed that against the paid up capital of a paltry sum of Rs. 4,500, there was an accumulated loss of Rs. 9,06,237 as also on the ground that the total realisable assets of the company as on that day were of the order of Rs. 10,13,701, whereas the total liabilities of the company were to the tune of Rs. 19,15,438. The notice also gave intimation to the company of the fact that the Registrar of Companies was of the opinion that the financial condition of the company disclosed that the company was not in a position to pay its debts. It appears that the company made a representation to the Regional Director, Company Law Board, by a communication dated September 19, 1973. The representation was taken into consideration and the Regional Director felt that the financial position of the company required to be assessed in the light of the balance-sheet of the company as on December 31, 1972, which was not filed by the company with the Registrar of Companies (though it was overdue) till the issuance of the earlier notice. The financial position of the company as disclosed by this balance-sheet revealed that the accumulated loss of Rs. 21,20,296 (which included development and deferred revenue expenditure) had not been adjusted and that the realisable assets of the company were of the order of Rs. 22,52,249, whereas the liabilities of the company amounted to Rs. 43,68,045, which indicated that there was further deterioration of the financial position of the company. In view of this state of affairs, after affording due opportunity to the company and taking into consideration the representation made by the company, sanction was accorded as per annexure 'A', on April 18, 1975, and the present petition was instituted on August 8, 1975. It may be stated that during the pendency of the petition, the company placed on record the balance-sheets for the years ended on 31st December, 1973, and 31st December, 1974, as well. The company, however, failed to place on record the balance-sheet for the years ended 31st December, 1975, and 31st December, 1976, though the same have become due and though Mr. C. C. Gandhi, the learned counsel for the company, gave an express undertaking to the court on behalf of the company to file the balance-sheets for the years 1975 and 1976, on or before August 9, 1977. Mr. Gandhi was told that no extension would be granted in my circumstances and that the balance-sheets should be placed on record unfailing on August 9, 1977. Notwithstanding this undertaking given by Mr. Gandhi and notwithstanding the order made by this court on August 1, 1977, the balance-sheets for the years 1975 and 1976 have not yet been placed on record. It may also be stated that on August 23, 1976, D. A. Desai J., before whom the petition came up on that day, directed the Registrar of Companies to launch prosecution against the directors and the managing director for failure to file the balance-sheets within a fortnight from the date of the order. Even so, the directors of the company have committed default and failed to file the balance-sheets notwithstanding the fact that almost an year has elapsed thereafter. A notice shall, therefore, issue to the directors of the company to show cause why action for contempt of court should not be initiated against them for failing to file the balance-sheets for the years 1975 and 1976 notwithstanding the undertaking given by the company through its counsel, Mr. C. C. Gandhi, on August 1, 1977.

4. The present petition will, under the circumstances, have to be disposed of on the footing that the company and its directors are flouting the orders and are deliberately withholding the balance-sheets for the years ended 31st December, 1975, and 31st December, 1976. An adverse inference must also be drawn against the company that if the balance-sheets were produced, they would reveal an ugly position which would support the case of the Registrar of Companies that the company is not in a position to pay its debts and that it is just and equitable to wind up the company.

5. The financial position of the company under the circumstances will have to be assessed on the basis of the balance-sheets for the years 1969 to 1974 which are available and which have been placed on record. For the reasons stated earlier, though the balance-sheets for the years 1975 and 1976 are overdue, the same cannot be taken into account as the company and its directors have deliberately withheld the same from the court. The salient features as revealed from the aforesaid balance-sheets may be gleaned from the following tabular statement :

---------------------------------------------------------------------------------------------1969 1970 1971 1972 1973 1974 ----------------------------------------------------------------------------------------------Rs. Rs. Rs. Rs. Rs. Rs. Liabilities Paid up 3,000 4,500 4,500 4,500 1,04,500 1,04,500 capital Subscription 1,53,095 8,22,235 18,81,287 42,48,571 91,57,886 1,41,70,361 Sundry 5,579 16,569 34,151 1,19,474 2,91,491 1,59,145 liabilities Assets Fixed and 14,454 28,690 49,236 2,87,310 9,18,005 8,56,889 current Loans to Nil 52,785 2,05,675 5,57,402 18,03,023 36,22,251 creditors or their friends Other loans 69,280 4,64,253 7,58,790 14,07,537 20,30,797 26,71,698 Loss and 78,040 3,55,361 9,06,237 21,20,296 48,02,042 72,83,168 expenses Directors' - 36,000 36,000 36,000 36,000 36,000 remuneration Rent for - - - - 32,500 - directors Directors' fees 2,400 2,800 3,400 3,000 - - ------------------------------------------------------------------------------------------------

6. The spot light may be turned on what emerges from the aforesaid statement. The statement shows that in 1972, just prior to the issuance of the show-cause notice by the Regional Director, the paid up capital of the company was extremely insignificant inasmuch as it was only of the order of Rs. 4,500. The subscription collected from about 90,000 gullible and unwary members of the public who joined the various schemes introduced by the company in response to its tantalizing advertisements was of the order of about Rs. 42 1/2 lakhs. As against this, the loans to the directors and their friends were of the order of about Rs. 5 1/2 lakhs and the accumulated losses were of the order of about Rs. 21 1/4 lakhs. After issuance of the notice, while the paid up capital increased to about Rs. 1 lakh, the subscription collected from the members of the public jumped up by about Rs. 50 lakhs to Rs. 91 1/2 lakhs. As against the same, the accumulated losses jumped up by about 21 lakhs of rupees to 48 lakhs of rupees and the loans to the directors and their friends jumped up by about 12 1/2 lakhs of rupees to 18 lakhs of rupees. And in the very next year, that is, in 1974, which is the last year for which accounts are available, the collection made from the subscribers rose by about 50 lakhs to 1 1/2 crores of rupees whereas the accumulated losses further jumped up by about Rs. 72 3/4 lakhs and the loans to the directors and their friends increased by 100% in one year and climbed up to 36 1/2 lakhs of rupees from 18 lakhs of rupees. Thus, within a space of two years, collection from about one lakh members of public by way of subscription increased from Rs. 42 lakhs to about Rs. 1.42 crores, that is to say, about one crore more was collected while proceedings were pending before the Regional Director; whereas, during this time, losses jumped up by about 50 lakhs of rupees from 21 lakhs of rupees to 72 3/4 lakhs of rupees. That is to say, from out of the new collections made of about Rs. one crore, 50 lakhs more were shown as losses. In other words, about half the amount collected from the members of the public who subscribed to the various schemes was shown as losses during this period between 1972 and 1974. During this period, the loans to directors and their friends crept up from Rs. 5 1/2 lakhs to Rs. 36 1/2 lakhs, that is to say, the loans rose by about 600%. And these loans were paid from out of the new collection of one crore of rupees made during this period. In other words, out of the newly collected amount of Rs. one crore, about 50 lakhs of rupees were written off as accumulated losses and about 31 lakhs of rupees were paid by the directors to themselves and friends as and by way of loans. As against this, the affidavit sworn by Mr. Uchil, the manager of the company, on March 22, 1976, shows that the liability of the company for repayments will be of the order of Rs. 40 lakhs in 1977, further Rs. 20 lakhs in 1978, and further Rs. 55 lakhs in 1979. It is in the background of these facts that the question will have to be examined as to whether the company deserves to be would up on the aforesaid two grounds, viz., that the company is not in a position to pay its debts and hat it is just and equitable to do so.

7. Pausing here for a moment before entering upon discussion in the context of the financial position of the company as revealed by the aforesaid balance-sheets which are available at present, a glance may be stolen at the profile of the schemes operated by the company as revealed by a pass book placed on record by the company pertaining to one of the schemes promoted by it known as Godavari group in which details pertaining to the group and the rules and conditions on which the scheme has been floated are contained. It shows that the group would consist of not more than 10,000 members, the monthly subscription of each member being Rs. 10 for 60 months continuously. There is a system of lucky draws and gifts which might enable one who is lucky to get gift in cash. Repayments were to commence after 10 lucky draws which would follow on the completion of 60 months, that is to say, it would follow after completion of a period of five years from the commencement of the scheme. It is specifically provided that there would be no refund between 60th and 70th months and that no refund of subscription would be entertained during the currency of the group (clause 6, 15 and 16). In other words, till expiry of six years, no refund would be made and the subscription would not be refunded while the group was current. It also contains a forfeiture clause which reads as under :

'21. Forfeiture clauses. - (a) If a member pays first 10 monthly subscriptions and fails to pay the balance subscriptions (subsequent) he shall not be entitled to claim the subscriptions paid by him. In other words, his subscriptions shall be forfeited.

(b) Member paying 1 to 20 monthly subscriptions and failing to pay the balance subscriptions shall be entitled to claim 40% of the subscribed amount paid by him after the expiry of 70 months.

(c) Member paying 1 to 30 monthly subscriptions and failing to pay the balance subscriptions shall be entitled to claim 50% of the subscribed amount paid by him after the expiry of 70 months.

(d) Member paying 1 to 40 monthly subscriptions and failing to pay the balance subscriptions shall be entitled to claim 60% of the subscribed amount paid by him after the expiry of 70 months.

(e) Member paying 1 to 50 monthly subscriptions and failing to pay the balance subscriptions shall be entitled to claim 70% of the subscribed amount paid by him after the expiry of 70 months.

(f) Member paying 1 to 59 monthly subscriptions and failing to pay the balance subscriptions shall be entitled to claim 80% of the subscribed amount paid by him after the expiry of 70 months.'

8. It will be seen that apart from the members who might be lucky to win a gift by chance, the subscribers would be entitled to repayment till expiry of at least six years, and that too, if they are able to escape the drastic forfeiture clause embodied in clause 21. The subscribers would, therefore, not be able to make recourse to legal machinery to claim repayment before expiry of six years from the date of commencement of the scheme and that too provided they have not been ensnared by the booby trap laid in the forfeiture clause. So also, they would not be in a position to seek protection from the court of law even if the funds collected by the company were being mismanaged. It must also be realised that the members joining the scheme would be persons of very limited financial resources who would be contributing Rs. 10 per month from their hard earned savings or borrowings, as the case may be. It is in the background of these facts that the financial condition of the company will have to be assessed from the standpoint of its ability to pay its debts.

9. Now, the position as on December 31, 1974, shows that the admitted debts of the company are of the order of about Rs. 1.41 crores. As against that, the realisable assets consist mainly of Rs. 36.22 lakhs due from the directors and their friends and Rs. 26.71 lakhs due from others apart from the fixed assets valued at Rs. 8.56 lakhs. We do not know how much can be realised from the directors and their friends. They obligingly and without scruples lent to themselves Rs. 36.22 lakhs out of the collections made from a large number of small subscribers of the order of about Rs. 1.41 crores. We also do not know how much can be recovered from other debtors. From out of the amount of Rs. 26.71 lakhs, assuming that every pie can be recovered, there is at the highest a possibility of recovering Rs. 62.93 lakhs as against the debt burden of Rs. 1.41 crores. Even if the fixed assets of Rs. 8.56 lakhs are taken at their book value considering the same to be its realisable value, it would only mean that the total realisable assets are of the order of about Rs. 71 1/2 lakhs as against the debt burden of Rs. 1 1/2 crores. There is a shortfall of about 50%, that is to say, of the tall order of about Rs. 70 lakhs which is mercilessly reflected in the figure of accumulated losses shown at Rs. 72.83 lakhs. From where is the company to recover a large sum of Rs. 72.83 lakhs At present, it is working at loss every year. In 1972, there was a loss of Rs. 12 lakhs, in 1973, there was a loss of Rs. 21 lakhs and in 1974, there was a loss of Rs. 24 lakhs as is disclosed by the figures of accumulated losses for the relevant years. If the progress of the company continues at this rate, even the remaining amount will be wiped out within a very near future. In fact, it may well have been wiped out by now, for we do not know what is the position as per the balance-sheets for the years ended 31st December, 1975, and 31st December, 1976, and what is the latest position to-day, i.e., on August 17, 1977. For aught we know, the position must have deteriorated very much during this period or else the company would not have deliberately withheld the balance-sheet at the risk of exposing itself to an action for contempt of court and at the risk of adverse inference being drawn for its failure to do so. It is surprising that neither the company nor its directors have considered it fair or proper to place on record the reasons for their inability to submit the balance-sheets for the last years notwithstanding the undertaking given through their learned counsel and notwithstanding the peremptory orders of the court directing them to do so. That the directors would be prosecuted is a matter of poor solace for this critical time has been brazenly utilised by the directors to pay to themselves the amount collected from about one lakh petty contributors by way of what they unabashedly and without qualms call loans (at what rate of interest and against what security, we do not know). The amount so paid to themselves by the directors forms almost 30% of the debt burden. And almost the entire liability of the order of about Rs. 31 lakhs in this dubious manner has been created during the pendency of the proceedings before the Regional Director of the Company Law Board. We also do not know whether the directors and their friends have helped themselves further more during the pendency of the petition in this High Court wherein they have obtained a number of adjournments and have given an undertaking and an assurance to the court through their learned counsel to produce the balance-sheets which they never meant to honour. One might be tempted to remark that the prosecutions launched against the directors could do little good, for usually the directors plead guilty and not infrequently the court without realising the implications treats the offence as, what is nonchalantly called a technical offence, resulting in a petty fine which makes a mockery of more than 90,000 victims of what appears to be a big fraud. Be that as it may, so far as the present discussion is concerned, there is no escape from the conclusion that half the amount collected from the petty contributors, viz., about Rs. 72 lakhs, has already been lost and all the realisable assets, about 1/3rd of the debt burden, is in the hands of the directors and their friends. It is too much to expect the directors to make recovery from themselves and their friends in order to pay the petty contributors as and when the amount becomes due and payable to them assuming that by that time, the drastic forfeiture provision has not been applied in order to deprive the petty subscribers of the amount already paid by them. And, as stated earlier, even as per the affidavit filed by the manager of the company on its own behalf, Rs. 40 lakhs becomes repayable in 1977, that is to say, in this very year; whereas further Rs. 20 lakhs and Rs. 55 lakhs will become repayable in 1978 and 1979 respectively. The question then is, is the company in a position to pay its debts The present assets are not sufficient to cover every one-half of the debt burden. Out of the present assets, about one-half which represents a large amount of Rs. 31 lakhs is due from the directors themselves which the directors are not interested in collecting from themselves. And so far as the current earnings are concerned, the past experience shows that every year, there is loss of not less than Rs. 20 lakhs. In the face of these facts, even the learned counsel for the company did not have the courage to argue that the company is in a position to pay its debts. The facts speak for themselves so eloquently that no further discussion is called for and it is unnecessary to demonstrate any further that the company is in such a precarious condition and the financial condition is so very ugly that there is no possibility whatsoever of the company ever being in a position to pay its debts. It is not in a position to-day and, even in future, it is not likely to be in a position to discharge the debt burden. In fact, the deficit will go on increasing and for aught we know, more innocent persons would be trapped meanwhile. The contributors from whom collections are made are persons with extremely limited financial means and are petty subscribers,who cannot possibly afford to take recourse to legal proceedings. It would be cheaper for them to abandon their claims than to make recourse to legal proceedings and incur expenses for court-fees and advocates' fees, apart from the inconvenience involved therein. In the facts and circumstances, there is no escape from the conclusion that the company is not in a position to pay its debts. However, the learned counsel for the company has argued that a petition for winding up is not maintainable till it is established positively that there is some debt in existence in present which the company is shown to have failed to repay. In order to comprehend the argument in its true perspective it is essential to examine the analogy of the relevant provisions contained in section 433(e) and section 434 which may be quoted :

'433. A company may be wound up by the court - ....

(e) if the company is unable to pay its debts.'

'434. (1) 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 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;

(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.

(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.'

10. Now the court is empowered to wind up a company under section 433(e) if the company is unable to pay its debts. But then what exactly is the import of the expression 'unable to pay its debts' and what are the tests to determine the issue The Legislature for obvious reasons considered it desirable to make it explicit by enacting section 434 so that there remained no scope for vagueness on such a vital issue. This end is achieved by making a two-fold formulation, namely :

(1) By making a provision for raising a statutory presumption in certain cases where upon the proof of the existence of facts and circumstances specified by the legislature the company shall be deemed to be unable to pay its debts without anything more; and

(2) By making a clarification as to what factors should be taken into account for reaching the conclusion that the company is in fact unable to pay its debts.

11. The first dimension of the matter is taken care of in clause (a) and clause (b) of section 434(1). If the tests reflected in clauses (a) and (b) are satisfied it will be deemed or presumed that the company is unable to pay its debts without having to enter upon a financial analysis of the affairs of the company. The company will not be heard to say that it is able to pay its debts if in respect of an undisputed debt it neglects to make payment within the prescribed time notwithstanding the service of the notice in the prescribed manner as contemplated by section 434(1)(a). Of course, the legislature has added a rider to protect the company lest the said provision should be deployed by a creditor for exerting coercive pressure on a company. There was no intention to place a company in its capacity as a debtor at a disadvantage vis-a-vis the creditor merely because it was incorporated under the Indian Companies Act. That is why the legislature provided in its wisdom that the company would be deemed or presumed to be unable to pay its debts only if it neglected (not merely failed for one reason or other but wilfully neglected) to secure or compound for it to the 'reasonable' (not any demand : only reasonable demand) satisfaction of the creditor. In other words, when the company is in fact indebted to a creditor and there is no bona fide or genuine dispute as regards the existence of the debt the company is expected, (1) to either actually pay, or (2) to offer to secure or compound the debt in such a manner that a reasonable creditor not out to harass or pressurise or coerce the company would be satisfied. If there is a deliberate or wilful neglect on the part of the company and the company makes a default only the deeming provision contained in clause (a) will come into operation. So also if the debt is already adjudicated upon by a court of law and, notwithstanding the order of the court the decree remains unexecuted in full or in the part, clause (b) will be attracted and it will be deemed or presumed that the company is unable to pay its debts, for, in that event, there can be no just excuse for the default.

12. Having formulated the tests for raising the presumption, the legislature has proceeded to deal with the second dimension of the matter, namely, as to how and by taking what factors into account the conclusion that the company is unable to pay its debts is to be reached. The legislature had the provision of the anticipated difficulties and with the foresight in its command the legislature was apparently anxious to make suitable provisions. The legislature ostensibly could foresee that a company may accept term deposits repayable, say after 5 years, and in the very next year it may incur large losses or deliberately fritter away its own resources or divert the name to the pockets of the directors and their relatives or friends. One would then be confronted with a situation where the company may have no assets whatever and yet at the material time the debts would not have become payable, the stipulated period of 5 years not having expired. The company can in that event brazenly say : yes, today we are not possessed of any assets and are not likely to come in possession of any assets in the foreseeable future but then the debt will become due only after 5 years and hence it cannot be said that we are not in a position to pay our debts. You can say so only 'after' 5 years though it is very much true even today. In order to foreclose and eschew such an argument, the legislature has made it abundantly clear by clause (c) of section 434(1) that in determining the question whether a company is unable to pay its debts 'the court shall take into account the contingent and prospective liabilities of the company'. If not only actual assets but also realizable and potential assets have to be taken into reckoning, so along, on the same principle, present as also contingent, prospective and potential liabilities have to be entered in the equation. The principle, therefore, is designedly formulated and no room is left for equivocation on the point. In the face of the explicit language of clause (c) how can it with reason be contended otherwise The deeming provisions contained in clause (a) and clause (b) have a different perspective and stand on altogether a different platform. Clause (c) is independent and unlinked with clauses (a) and (b) and is erected on its own separate foundation. In interpreting clause (c) it is not permissible to invite confusion by injecting the concept of an unsatisfied creditor whose debt in praesenti remains unsatisfied which may be necessary in the context of clauses (a) and (b) and to engraft it as a limitation of the powers of the court so as to operate as a condition precedent to the exercise of the power. It is, therefore, not possible to uphold the argument of the counsel for the company that it must be positively established that there is some debt in existence in praesenti which the company has failed or neglected to pay. Counsel seeks support from a decision of this court rendered by B. K. Mehta J. in Company Petition No. 60 of 1975 decided on April 12, 1977 [Registrar of Companies v. Kavita Benefit Pvt. Ltd. [1978] 48 Comp Cas 231 (Guj)]. In view of the provisions contained in section 434(1)(c) which expressly provides that contingent and prospective liabilities shall be taken into account in order to find out whether the company is unable to pay its debts at the point of time when the question regarding winding up arises, it is futile to contend that there must be positive evidence to show that there are in existence creditors whose debts have become due in praesenti and whose claims remain unsatisfied. I am unable to accede to the argument urged on behalf of the company that such a proposition has been laid down by B. K. Mehta J. in the said company petition. After discussing relevant provisions and decisions cited at the bar the learned judge recorded a finding of fact (which forms the real basis of the decision) in that particular case that the court was not satisfied that the company was not in a position to pay its debts. The proposition canvassed by counsel for the company does not flow from the said decision. Counsel for the Registrar has on the other hand called my attention to Registrar of Companies v. S. P. Sohanmull Golcha P. Ltd. [1972] 42 Comp Cas 386 (Raj) in support of the proposition that if existing and probable assets of the company are insufficient to meet the liabilities including contingent and prospective liabilities, the company should be wound up. The said decision thus supports the proposition canvassed on behalf of the Registrar. In my opinion, therefore, there is no legal bar to passing of an order for winding up of the company as prayed for by the Registrar of Companies, in view of the finding recorded by me earlier on an assessment of the financial position of the company as per the latest balance-sheets made available by the company and taking into account the overall financial position that the company is not in a position to pay its debts.

13. It is no doubt true that the modern trend as etched by a number of pioneering decisions rendered by D. A. Desai J. of this High Court (no wonder tens of thousands of workers with gratitude filed eyes feel beholden to him for it) is against winding up of a company so long as it is possible to resurrect the company. Winding up is the last thing that the court would do and not the first thing that the court would do having regard to its impact and consequences, for winding up of a company would result in, (1) closing down of a unit which produces some goods or provides some services; (2) it would throw out of employment numerous persons and resultin grave hardship to the members of families of such employees; (3) loss of revenue to the State by way of collection that the State could hope to make on account of customs or excise duties, sales tax, income-tax, etc; (4) scarcity of goods and in diminishing of employment opportunities. The court would not, therefore, be too keen or too anxious to wind up a company by an order of court only on the ground that the company is unable to pay its debts. In fact, it would be a blow to do so, so long as there is any possibility of resurrecting the company. It would not be right to say that creditors can insist on winding up of the company by court as a matter of right if the position of the company is such that it would be unable to pay its debts to them even if the company can be resurrected. When the persons to whom the company becomes indebted enter into dealings with the company, they do so because they hope to make profits out of the transactions with the company in the usual course of business. It is an incidental risk and an occupational hazard for the persons who enter into such dealings which they undertake in order to earn profits. In fact, it is possible that in the course of their dealings for several years, they would have made huge profits out of the transactions entered into with the company. It would not, therefore, be right to wind up the company merely because the company is unable to pay its debts so long as it can be resurrected by a scheme or arrangement. But in a case like the present, where the company is not producing or manufacturing any goods and is not rendering any service useful to the society, where the whole purpose of its existence appears to be to provide the directors with an opportunity to enrich themselves at the cost of petty subscribers who in the hope of getting some prizes or rewards and better returns on their hard earned savings (sometimes they may even resort to borrowing in the hope of getting rich quickly) become contributories to various schemes floated by the company, the matter stands on a different footing. In a case like the present where the main activity of the company consists in tempting and roping in innocent persons in the scheme by publishing tantalizing advertisements, greater harm would ensue by refusing to pass an order of winding up than by passing an order of winding up. In fact, to wind up such company would be an act of social service, for, thereby, several innocent persons would be saved from being trapped by a company of this nature. Alas, as discussed earlier, the time taken in affording reasonable opportunity to the company in obeisance to the principles of natural justice has been utilised by the company to collect lakhs of rupees from the innocent subscribers merely in order to enrich the directors in an unjust fashion. Under the circumstances, there is no scope for hesitation or reluctance in winding up the company which the court ordinarily feels when dealing with some manufacturing unit.

14. There is no scope for resurrecting the company by evolving any scheme for running the company from the standpoint of the business in which it is presently engaged. The considerations which usually deter the court from passing a winding-up order are of no avail in the case of a company of the present nature. It may be stated that in the affidavit sworn by one of the directors of the company on October 13, 1975, a statement is made to the effect that pursuant to the order passed by the High Court of Bombay, 25% of the monthly collections had been deposited in the bank for the protection of all the participants of the scheme. However, no evidence has been forthcoming and there is no manner of finding out whether or not the statement made in the affidavit shows the true position as the company has deliberately withheld the balance-sheets for the years ended 31st December, 1975, and 31st December, 1976, and has failed to produce any material in support of the bald assertion made in the affidavit. The same criticism applies to the statement contained in the affidavit sworn by the manager of the company on March 22, 1976. Similarly, the affidavit sworn by the managing director on July 15, 1976, also can render little assistance to the company. All that the managing director has done is to express his hope that by indulging in some activities, the company might be in a position to earn several lakhs of rupees. As discussed earlier, the financial position of the company is in extremely bad shape. As against this, there are only expressions of hope and wishful thinking contained in the affidavit of the managing director which cannot be of any solace to the small contributors to whom the amounts are due (the debt burden is of the order of more than 1.41 crores of rupees). It may also be stated that the managing director of the company in the aforesaid affidavit, prayed for four weeks' time in order to place on record the figures relating to the latest financial position. It was stated as under in paragraph 4 :

'I am praying for four weeks' time in order to complete the said assignment. This honourable court will be pleased to see that I have not spared any efforts in seeing that the directions of this honourable court are complied with and the delay is not due to any fault on my part as I am totally dependent on the auditors for the preparation of the said figures.' Notwithstanding this undertaking, the managing director has failed to fulfil the promise and to comply with the order of the court. It is, therefore, directed that a notice shall issue to the said managing director (Mr. Pravin Kumar Salian) to show cause why action for contempt of court should not be initiated against him for obtaining time from the court under a false pretext with an ulterior motive with a view to take advantage of the time to the detriment of the depositors and for securing unjust advantage for himself and thereby impeding the course of justice.

15. In the result, the petition must be allowed with costs. The company, viz., Navjivan Trading Finance Private Ltd., shall be wound up on the ground that it is unable to pay its debts under section 433(e)of the Companies Act. In the view that I am taking, it is not necessary to consider whether this is a fit case for winding up also on the ground that it is just and equitable to do so within the meaning of section 433(f), though, obviously, it would be just and equitable to do so to prevent further trapping of innocent citizens and to prevent utilisation of the funds on the part of the directors for their own benefit. It is, therefore, ordered that the company shall be wound up under section 433(e) and that the order of winding up shall be communicated to the official liquidator and Registrar as enjoined by section 434 of the ``Act. The official liquidator is appointed liquidator of the company and is directed to proceed to take charge of all the assets of the company and proceed to take such steps as may be called for by circumstances of the case in order to recover the debts due from the directors and their friends and from other debtors with expedition and to take such other steps as are necessary in order to protect the assets and interests of the company. The official liquidator shall act forthwith without loss of a minute's time as the circumstances call for urgent and immediate action. Advocates' fees are quantified at Rs. 1,250. Costs of the petition to come out of the assets of the company.

16. The curtain cannot be dropped without expressing a word or two of anxiety - anxiety that the moral of this episode is not lost on the authorities who have miserably failed to protect the poor from being robbed even after the deplorable state of affairs pertaining to this company came to light. Could the misfortune not have averted What should be done to ensure that what has happened in the past is not re-enacted in the future Could the sanction to institute the petition not have been granted earlier Could a provisional liquidator not have been appointed Could the financial position of the company not have been exposed to the eyes of the poor public in order to warn them of the body trap And to foreclose a repeat performance of the Robinhood drama in reverse (here the poor are robbed to pay to the rich) can it not be ensured that no company which has not obtained a certificate of solvency (to be procured within 3 to 6 months of the close of every accounting year) from the company law authorities or the Reserve Bank authorities is permitted to issue advertisements inviting the public to join the scheme and from collecting subscription contributions or deposits The exercise is worth undertaking if the endeavour to protect the common man (if not to improve his lot) is not to be drowned in the tears shed for the miseries of the rich.


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