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T.P.S. Lakshmanan and Others Vs. Sree Balraj Paper and Straw Board Mill Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberCompany Petition No. 51 of 1989
Judge
Reported in[1995]82CompCas760(Mad)
ActsCompanies Act, 1956 - Sections 215, 433, 433(3), 434, 434(1) and 439(1)
AppellantT.P.S. Lakshmanan and Others
RespondentSree Balraj Paper and Straw Board Mill Pvt. Ltd.
Appellant AdvocateA.K. Mylswami, Adv.
Respondent AdvocateK.V. Manickavasagan, Adv.
Cases Referred(Ker) and Malhotra Steel Syndicate v. Punjab Chemi
Excerpt:
.....put to great hardship and inconvenience. for reasons best known to pw-1, he has not produced the account books before this court. i am unable to attach any importance to exhibits p-1 to p-5, which were not only not approved by the board of directors as required by law but also the petitioners have been deliberately withholding the original books of account which are admittedly in the custody of pw-1 as could be seen from the petition and the answers given by pw-1 in the course of cross-examination as extracted above, and exhibit r-10. therefore, i am satisfied that the petitioners have failed to prove the debt which is a condition precedent for maintaining the company petition for winding up. i am fully satisfied that the defence taken by the company is bona fide one. manickavasagan,..........investigation and adjudication on the claims made inter se between the so-called creditor and the debtor company. any such investigation which would involve the determination of the quantum and quality of the liability would certainly raise a reasonable presumption that it is a disputed debt. once such a lingering doubt rises in the mind of the company court that the debt is not a sure debt but a debt which could only be ascertained and determined after an investigation into the facts and circumstances of the case, then, unless there are demonstrative mala fides on the part of the company concerned, the company court cannot undertake the examination as to the quantum of the liability or the nature of the indebtedness of the company in question to the claimant in a petition under section.....
Judgment:

A.R. Lakshmanan, J.

1. The above petition has been filed by the petitioners, who are unsettled creditors, under sections 433(e), 434(1)(a) and 439(1)(b) of the Companies Act, 1956, to wind up the respondent/company and to appoint the official liquidator to take charge of the affairs of the company and for other reliefs.

2. The short facts which are relevant are as under :

The respondent is a private limited company incorporated on February 8, 1967, under the provisions of the Companies Act. The registered office of the company is situate at Sowdambal Street, Keelakottai, Chinnalapatti in Madurai district. The main object of the company was to carry on the business of manufacture of various types of paper and paper products. The first petitioner, T. P. S. Lakshmanan, was the managing director of the company till June, 1988. According to him, he has advanced a sum of Rs. 6,75,000 to the company during the period from November 21, 1987, to January 30, 1988, for its business. The above sum is reflected in the day book and the ledger maintained by the company in its usual course of business. Out of the said sum of Rs. 6,75,000, a sum of Rs. 1,50,000 has been paid by the company to the first petitioner on February 3, 1988, leaving the balance of Rs. 5,25,000. The above amount carries interest at the rate of 18 per cent. per annum. Further, petitioners Nos. 1 to 6 have also advanced on various dates between April 1, 1983, and January 30, 1988, a sum of Rs. 5,11,763 as detailed hereunder : (Rs.)T. P. S. Lakshmanan 84,466T. P. S. L. Gnanamani 1,27,620Geethamani 44,699L. Manoharan 1,25,011L. Sethuammal 81,421M. Sakila 48,546-------------Total 5,11,763-------------

The said sum of Rs. 5,11,763 is credited in the books of the Company in favour of the petitioners. The company is liable to pay interest at the rate of 18 per cent. per annum from January 30, 1988, till the date of payment. According to the petitioners, as on January 30, 1988, a sum of Rs. 10,36,763 is due and owing by the company. The petitioners also did not take any steps to recover the said outstandings earlier since L. K. A. Jayaraman, the present director-in-charge of the affairs of the company agreed before the mediators to pay the said sum in the first week of February, 1989, itself. However, he did not make any attempt to pay and settle the said outstandings to the petitioners in spite of repeated requests and reminders. The petitioners further state that as per the mediators' request, the first petitioner is retaining all the account books, records and documents of the company under his custody and as per the understanding, the said L. K. A. Jayaraman has to pay Rs. 10,36,763 to the petitioners and agreed to take delivery of all the account books and records of the company. However, he has failed and neglected to pay and honour his commitments which he has agreed before the mediators. The petitioners issued a notice on March 2, 1989, by registered post with acknowledgment due to the company to its registered office calling upon it to pay a sum of Rs. 10,36,763 together with interest at 18 per cent. per annum till date of payment. The said notice has not been served on the company. The postal authorities have informed the petitioners that in view of the dispute between the directors of the company, the postal authorities are keeping the documents pending. According to the petitioners, the company is heavily involved and its liability exceeds its assets. The company owes to various third parties more than Rs. 17,00,000. The present director in charge of the company is selling away the assets of the company, and if the company is allowed to carry on business, unsecured creditors like the petitioners will be put to great hardship and inconvenience. With these averments, the petitioners have filed the petition for winding up of the respondent-company.

3. The petition for winding up was resisted by the respondent. The respondent has also filed a detailed counter-affidavit in Company Applications Nos. 279 and 280 of 1989, besides an additional counter-affidavit in the said applications. The respondent has also filed a counter-affidavit in the present application denying all the allegations contained in the petition. According to the respondent, the respondent-company is not aware of the alleged receipt and payment to the petitioners as stated in paragraph 5 of the petition as the first petitioner is wrongfully withholding the books of account, records and other documents of the company. The respondent also denies about the alleged advance amount of Rs. 5,11,763 made by the petitioners. Since the books of account, etc., have been retained by the first petitioner, the accounts of the company could not be finalised. The allegation that the respondent-company is due a sum of Rs. 10.36 lakhs to the petitioners is false and denied. There had been a dispute in relation to the management of the company on account of the mismanagement and the negligent attitude of the first petitioner. It is in those circumstances, the board of directors of the company met on January 7, 1988, and elected L. K. A. Jayaraman as the managing director of the company with effect from February 1, 1988. The allegation made in paragraph 6 in regard to the alleged settlement before the mediators has also been denied as false. The respondent submits that the petitioners have not established their case of inability of the respondent-company to pay its debts. The total turnover of the company for the period ending March 31, 1989, is Rs. 42.62 lakhs and for the period ending March 31, 1990, is Rs. 55.05 lakhs. The company is commercially solvent. The company is a viable one, which has not suffered any disqualification warranting action under section 433 or 434 of the Companies Act. In the circumstances, the respondent prays that the petition may be dismissed with costs.

4. I have heard Mr. A. K. Mylswami on behalf of the petitioners and Mr. Manickavasagan on behalf of the respondent.

5. This is a typical case where the machinery for winding of a company is resorted to by the petitioners under sections 433(e), 434(1)(a) and 439(1)(b) of the Companies Act in total lack of bona fides and with oblique motives and intentions.

6. The first petitioner, who admittedly is spearheading the litigation, was the managing director of the company till June, 1988. It is his specific case in the petition that a sum of Rs. 5,25,000 was advanced by him to the respondent-company during the period between November 21, 1987, and January 30, 1988. There is not even an iota of evidence to substantiate the plea that the aforesaid amount was advanced by the first petitioner to the company for its business. The petitioners in the course of trial have produced exhibit P-7 series in support of their plea. It is seen from exhibit P-7 series that these amounts were given by the first petitioner to the company to acquire the shares of Mr. L. K. A. Jayaraman (RW-1) and not to the company for its business as claimed in the petition. It is the further case of the petitioners that they have advanced on various dates between April 1, 1983, and January 30, 1988, a sum of Rs. 5,11,763. The further case of the petitioners is that the said sum is credited in the books of the company in favour of the petitioners and has been acknowledged and reflected in the company's balance-sheets. As already noticed by me, PW-1, who was the managing director of the company till June, 1988, had stated in the company petition that he was retaining all the account books, records and the documents of the company under his custody as requested by the mediators. This position was admitted by PW-1 in the cross-examination wherein he has stated that the entire books of account for the period from April 1, 1987, to January 31, 1988, were withheld by him. For reasons best known to PW-1, he has not produced the account books before this court. The books of account are the basic documents which should have been produced to substantiate the claims of the petitioners that a sum of Rs. 5,11,763 has been credited in the account books of the company. The petitioners have produced exhibits P-1 to P-5, the copies of the balance-sheets for the years ending March 31, 1983, to March 31, 1987, and exhibit P-6, a letter dated December 21, 1987, given by L. K. A. Jayaraman (RW-1) to the company. In my view, without producing the account books and without placing any records to show that exhibits P-1 to P-5 were approved by the board of directors of the company as required under section 215 of the Companies Act, no reliance can be placed on exhibits P-1 to P-5.

7. Further, PW-1 in his cross-examination has categorically admitted that the amount is due to him up to the period March 31, 1987. This answer of PW-1 falsifies his case that a sum of Rs. 5,25,000 was advanced by him to the company for its business between November 21, 1987, and January 30, 1988.

8. It is worthwhile to refer to the questions and answers put to PW-1 in the cross-examination, on this aspect of the matter. In the cross-examination of PW-1 recorded on October 25, 1991, he has deposed as follows :

'Q : The alleged amount is due from the company as on the date March 31, 1987, or as on the date of filing of this petition

A : The amount is due to me up to the period of March 31, 1987.

Q : Up to which period the balance-sheet of the company is prepared

A : The balance-sheet was prepared up to the year 1986-87. I have to verify the same.

Q : The period up to which you were managing director is, according to you, June, 1988.

A : I don't remember correctly.

Q : After 1987, there was no balance-sheet prepared in the company.

A : I don't remember correctly.

Q : You are holding the entire books and accounts and other records during the period April 1, 1987, up to the period you were holding the post of the managing director.

A : Yes.

Q : What was the turnover of the company during the period you were not accounting after the date you were the managing director

A : I don't remember.

Q : You must have the books of account.

A : Yes.

Q : Are you able to produce the said account books before court

A : I don't remember. I have to verify.

Q : You have not so far accounted to the company for what you have received towards the turnover of the company up to the date of your removal.

A : I have not shown the turnover since there was dispute and I did not account for the turnover of the company.'

RW-1, K. A. Jayaraman, in his chief examination recorded on December 13, 1991, between 12 noon and 1-25 p.m., has deposed as follows :

'Q : As on the date of filing of this Company Petition No. 51 of 1989, what was the amount due from your company to the petitioners

A : No amount was due to the petitioners as on the date of filing of the company petition.

Q : Has your company prepared balance-sheet

A : No.

Q : Why your company has not prepared the balance-sheet after February 1, 1988

A : Since the first petitioner did not hand over the books of account, the company's auditor could not prepare the balance-sheet after February 1, 1988.'

RW-1 has further deposed at page 5 of his deposition recorded on the same day, as follows :

'Q : What is the hardship and loss to your company caused on account of the non-delivery of the said account books by the first petitioner?

A : Annual accounts could not be completed. Sales tax records could not also be submitted. Central excise returns also could not be submitted. Annual balance-sheet could not be submitted to the Registrar of Companies. Outstanding dues could not also be found out and no loan could be obtained for the development of the company.

Q : If proper accounts are submitted by the first petitioner, then the first petitioner becomes liable to pay

A : The first petitioner has to pay money to the company if proper accounts are submitted.'

RW-1 in his evidence has stated that no amount was due to the petitioners as on the date of filing of the company petition for winding up. Equally, it is not the case of the petitioners that the amounts were due as on the date of the winding up petition. Apart from the above, there is no acceptable evidence to hold that the sum of Rs. 5,11,763 is due from the company to the petitioners. I am unable to attach any importance to exhibits P-1 to P-5, which were not only not approved by the board of directors as required by law but also the petitioners have been deliberately withholding the original books of account which are admittedly in the custody of PW-1 as could be seen from the petition and the answers given by PW-1 in the course of cross-examination as extracted above, and exhibit R-10. Therefore, I am satisfied that the petitioners have failed to prove the debt which is a condition precedent for maintaining the company petition for winding up. I am fully satisfied that the defence taken by the company is bona fide one. It will not be possible for this court to delve deep into the complicated questions of fact which required to be tried elaborately by a competent civil court.

9. Even though the above finding of mine would be sufficient to dismiss the above company petition, yet, I refer to some of the contentions seriously argued by learned counsel for either side.

10. According to Mr. K. V. Manickavasagan, learned counsel for the respondent, the mandatory requirements of section 434(1)(a) of the Companies Act have not been satisfied because the petitioners have not proved that they issued statutory notice as per the requirement of the above provision of law. It is necessary for me to refer to the petition where the petitioners have said that the winding up is asked for under sections 433(e), 434(1)(a) and 439(1)(e) of the Companies Act. Excepting the statement in the petition that the statutory notice under section 434 of the Companies Act sent by the petitioners through their counsel on March 2, 1989, has been returned, no effort has been made by the petitioners to substantiate the same. In this connection, I refer to exhibits R-21 and R-22. Both the aforesaid exhibits are communications dated July 29, 1988, and October 28, 1988, of the Superintendent of Post Offices, Dindigul division, and they pertain to the delivery of postal articles to the company. Under the aforesaid exhibits RW-1 was informed that he must get necessary directions from the court to receive the postal articles addressed to the company. It is also mentioned that without the production of orders from a competent court of law within the time stipulated therein, the postal articles kept under deposit at Chinnalapatti post office would be returned to the senders. Therefore, it is clear from the above exhibits that the postal articles addressed to the company were in fact not delivered to the company at all. Nothing prevented the petitioners from producing the returned statutory notice claimed to have been sent on March 2, 1989, to the company. Though the company petition refers to the original notice dated March 2, 1989, as having been filed along with the petition, in fact, no such document has been filed or marked in court during trial. Confronted with this situation, Mr. A. K. Mylswami, learned counsel for the petitioners, made a faint attempt to sustain his case under section 434(1)(c) of the Companies Act. I am unable to accept this plea put forward at the time of hearing for more than one reason. First of all, specific reference is made only to section 434(1)(a) of the Companies Act, and no reference has been made to section 434(1)(c) of the Companies Act at all in the company petition.

11. Section 434 of the Companies Act as a whole is the section which creates a fiction with regard to the inability of the company to pay its debts. Unless the conditions precedent for invoking the legal fiction created under the said section are satisfied, the fictional inability would not arise. Therefore, there is no scope for invoking the provisions of sub-clause (c) of sub-section (1) of section 434 of the Companies Act.

12. I have already found that the petitioners have not placed materials to substantiate their claim under section 434(1)(a) of the companies Act. Notwithstanding the fact that the petitioners are unable to invoke the theory of fictional inability, yet it is open to them to prove by evidence that the company is unable to pay its debts. This is the view taken by me in the case of Viswanathan (B.) v. Seshasayee Paper and Boards Ltd. : (1992)IMLJ232 Unless the petitioners establish that the company is commercially insolvent and the substratum of the company has totally disappeared, it is not possible to wind up a company on the ground of its inability to pay its debts. I must observe that the petitioners have not placed evidence to show that the company has become commercially insolvent. On the contrary, the company has produced exhibits R-31 to R-34, which show that the financial results of the company have resulted in a net profit. RW-1 in his evidence has stated that after February 1, 1988, huge amounts to the tune of Rs. 13 lakhs have been paid by way of excise duties. This is also substantiated by exhibit R-15. The company has purchased machinery for about Rs. 12 lakhs towards the expansion programme as could be seen from exhibit R-29 series. The company has also spent for construction of additional buildings as evidenced by exhibit R-28 series. The company has not availed of any loan from the bank. According to RW-1, the turnover of the company would cross Rs. 1 crore resulting in more profit in future. The total creditors are for about Rs. 4.50 lakhs and so far no creditor has demanded any payment from the company. These facts, in my view, would show that the company is doing well and is moving towards progress and growth. Therefore, I find that the petitioners have not proved that the company is unable to pay its debts as envisaged under section 433(e) of the Companies Act.

13. Before taking leave of this case, I must refer to another significant fact that the first petitioner was the managing director of the company till June, 1988, as stated in the petition. Though the respondent claims that there is a conflicting version on the part of the petitioners with regard to the date when the first petitioner ceased to be the managing director of the company, there is also civil litigation pending between the parties before other forums as could be seen from exhibits R-23 to R-25. Thus, there appears to be a fight between PW-1 and RW-1 for power to control the company. It passes my comprehension as to why PW-1, who was the ex managing director of the company, should file a petition for winding up of the company which was managed by him till 1988.

14. I am unable to exercise my discretion in favour of the petitioners and there are strong reasons indicated by me earlier to exercise the discretion in favour of the respondent. The Supreme Court in the case of Amalgamated Commercial Traders Pvt. Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456, has clearly laid down that an order of winding up will not be made where a debt is bona fide disputed by the company and the court is satisfied with the company's defence. It is well settled that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances, may be stigmatised as a scandalous abuse of the process of the court. If a debt is bona fide disputed, there cannot be 'neglect to pay' within the meaning of section 434(1)(a) of the Companies Act, 1956 : If there is no neglect, the deeming provision does not come into play, and the ground of winding up, namely, that the company is unable to pay its debts, is not substantiated. Subsequently, in Bhalchandra Dharmajee Makaji v. Alcock, Ashdown and Co. Ltd. [1972] 42 Comp Cas 190, the Bombay High Court reiterated its earlier view and has laid down in categorical terms that, if the debt is bona fide disputed and if the defence is a substantial one, the court will not wind up the company.

15. In Loganayaki. (G.) v. Moolangudi Chit Funds Pvt. Ltd. [1979] 49 Comp Cas 644, it has been held by the Madras High Court (Ramaprasada Rao J., as he then was) as follows (headnote) :

'It is fundamental that, in order to sustain a case for winding up of an incorporated company on the ground that it is unable to pay its debts, the debt which is the substratum of the action either under section 433(e) on its own or under section 433(e) read with section 434(1)(a) of the Act is not a disputed debt or a debt which could be found after an investigation and adjudication on the claims made inter se between the so-called creditor and the debtor company. Any such investigation which would involve the determination of the quantum and quality of the liability would certainly raise a reasonable presumption that it is a disputed debt. Once such a lingering doubt rises in the mind of the company court that the debt is not a sure debt but a debt which could only be ascertained and determined after an investigation into the facts and circumstances of the case, then, unless there are demonstrative mala fides on the part of the company concerned, the company court cannot undertake the examination as to the quantum of the liability or the nature of the indebtedness of the company in question to the claimant in a petition under section 433(e) of the Act.'

16. A similar view has been taken by the Karnataka High Court in Kamadenu Enterprises v. Vivek Textile Mills Pvt. Ltd. [1984] 55 Comp Cas 68, which is as follows (headnote) :

'The jurisdiction of the court under section 433 of the Companies Act, 1956, is not that of a court which is essentially meant for settling money disputes between parties, but is to subserve the object of winding up of companies which have not paid their debts or which are unable to pay their debts. Therefore, the first pre-requisite must be to establish prima facie a debt against the respondent. But when a claim or debt is disputed, the proper forum for that is a civil court. Where, therefore, admittedly, there was a genuine dispute as to the liability of the respondent-company to pay the difference between what has been admitted and what has been claimed, it would not be proper to decide the case in the summary proceedings under section 433.'

17. Learned counsel for the parties invited my attention to the following authorities. Learned counsel for the petitioners cited the decisions in Steel Equipment and Construction Co. Pvt. Ltd., In re , Bharatpur Oil Mills Pvt. Ltd., In re . Raja of Vizianagaram v. Official Liquidator, Vizianagaram. Mining Co. Ltd. [1952] 22 Comp Cas 1 (Mad), State Bank of India v. Hegde and Golay Ltd. , Siddhartha Apparels Pvt. Ltd., In re , Darjeeling Bank Ltd., In re [1949] 19 Comp Cas 1 (Cal), Tripura Administration v. Tripura State Bank Ltd. [1960] 30 Comp Cas 324 (JCC Tripura), Viswanathan (B.) v. Seshasayee Paper and Boards Ltd. : (1992)IMLJ232 , Amalgamated Commercial Traders Co. v. Madhu Woolen Industries Pvt. Ltd. : [1972]2SCR201 , United Western Bank Ltd., In re and Maruti Ltd. v. M. H. Tractor and Automobiles corporation . On the other hand, learned counsel for the respondent cited the following decision in Viswanathan (B) v. Seshasyee Paper and Boards Ltd. [1922] 73 Comp Cas 136 (Mad), Amalgamated Commercial Traders Pvt. Ltd. v. A. C. K. Krishnaswami , Madhusudan Gordhandas and Co. v. Madhu Woolen Industries Pvt. Ltd. : [1972]2SCR201 , Ultimate Advertising and Marketing v. G. B. Laboratories Ltd. : 1998(2)AWC1314 , Krishnaswami (A. C. K.) v. Stressed Concrete Constructions Pvt. Ltd. [1964] 34 Comp Cas 6 (Mad), Chandra (C. R.) (Mrs.) v. Tirupati Cotton Mills Ltd. , Registrar of companies, Punjab v. Ajanta Lucky Scheme and Investment Co. Pvt. Ltd. [1973] 43 Comp Cas 314 (Punj.), Suresh Shenoy v. Cochin Stock Exchange Ltd. [1989] 65 Com Cas 240 (Ker) and Malhotra Steel Syndicate v. Punjab Chemi-Plants Ltd. . However, having regard to the view taken by me, it is unnecessary to refer to these decision and deal with each one of them separately.

18. Having regard to the above uncontroverted facts, it would not in any event be in the interest of justice or public interest to wind up the respondent-company. In the result, the company petition will stand dismissed. However, I say no costs.


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