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Bengal Luxmi Cotton Mills Ltd. and ors. Vs. Mahaluxmi Cotton Mills Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberA.F.O.O. No. 168 of 1952
Judge
Reported inAIR1955Cal273,58CWN689
ActsCompanies Act, 1913 - Sections 162 and 163
AppellantBengal Luxmi Cotton Mills Ltd. and ors.
RespondentMahaluxmi Cotton Mills Ltd. and ors.
Appellant AdvocateS.M. Bose, ;A.K. Sen and ;E.R. Meyer, Advs. for Creditor
Respondent AdvocateI.P. Mukharjee, ;N. De and ;R. Chaudhury, Advs. for Creditor
Cases ReferredPremraj Dulichand v. Mahaluxmi Cotton Mills Ltd.
Excerpt:
- .....laying down any general law as regards what the winding-up court should or should not do when a-debt is disputed. the question is one of convenience and practice and we have only indicated what, as' a rule the practice ought to be when the dispute is a 'bona fide' one and when it is not so. i desire also to, add that if the dispute regarding the construction of the scheme be decided against the company, the company will still have the liberty to urge that no winding-up order should be made against it on such other grounds as may be open to it. equally, it will be open to the creditors, when the appeal comes up for further hearing, to urge the two remaining grounds on which also they claimed a winding-up order before the learned trial judge.12. for the reasons given above, we direct.....
Judgment:

Chakravartti, C.J.

1. We have heard the learned Advocate-General for the appellants in this appeal at some length and having done so, we are of opinion that the proper course for us to adopt will be to adjourn the hearing of the appeal till after the decision of Suit No. 1225 of 1951, -- 'Premraj Dulichand v. Mahaltixmi Cotton Mills Ltd.', pending on the Original Side.

2. The appeal has arisen in the following way. The four appellants, who are creditors of the respondent-company, applied for a winding-up order against it on the ground that 'the first instalment of their debts, which had already become payable under the provisions of a certain scheme, had not been paid in spite of notices of demand under Section 163, Indian Companies Act. The company's reply was that the debts claimed by the appellants were undoubtedly due to them, but this scheme provided that the debts were to be paid out of the profits and inasmuch as the company had not made sufficient profits since the date of the scheme, the debts had not yet become payable.

To that plea the appellants' rejoinder was that the provision as to payment out of profits was repugnant to other and clearer provisions of the scheme and ought, therefore, to be disregarded.

The learned trial Judge, Banerjee J., accepted the contention of the company and held that the provision as to payment out of profits was an integral part of the scheme which could not be Ignored. Necessarily, he 'Held further that since the company had yet made no sufficient profits, its liability to pay the debts had not yet arisen and therefore the company's failure to pay the first instalment of the appellant's debts could not be a ground for making a winding-up order.

Two other breaches of the scheme were also urged by the appellants as entitling-them to a winding-up order. With respect to them, the learned Judge held that although the breaches alleged had occurred, they were not such as to make it just and equitable for him to make a winding-up order because of them. He accordingly dismissed the petition for winding-up and thereupon the four creditors preferred the present appeal.

3. Before us, the learned Advocate-General repeated the argument that the provision as to payment out of profits was repugnant to the whole tenor of the scheme and inconsistent with certain specific provisions and that, therefore, it ought to be held that the liability to pay had arisen although no profits had been made and that the failure of the company to pay the first instalment of the appellants' debts in compliance with the statutory notice of demand entitled the appellants to a winding-up order. We put it to the learned Advocate General whether this was not a case of a 'bona fide' dispute as to the debts and whether the petition for winding-up should not for that reason be dismissed or, at least, kept pending till the appellants established their claim in a regular suit.

We had in mind a passage in 'Buckley on the Companies Acts' in which the effect of English decisions on the subject has been summarised. The learned Advocate General pointed out that there was no dispute in the present case as to the existence of the debts, but only a dispute as' to the time of payment. He contended that, in such a case, the winding-up Court was entitled to and indeed ought to go into the dispute itself and proceed to dispose of the petition for winding-up according to its finding. In aid of his contention, the learned Advocate-General referred to the decision of the Court of Appeal -- 'In Re Welsh Brick Industries Ltd.', 1946-2 All ER 197 (A).

4. The case cited does not support the whole contention of the learned Advocate-General. As the decision was relied on as having modified the statement of law, as contained in Buckley, it will be convenient to read the statement at the present stage. It runs as follows:

'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 Courtmay decide it on the petition and make the order.'

(See 'Buckley on the Companies Acts', Twelfth Ed., P. 452).

5. In the case cited the passage was quoted from the 11th Ed. of Buckley, pp. 356, 357 and in quoting it, the learned Master of the Rolls observed that the law and practice in regard to such matters had been stated in the passage 'with sufficient accuracy.'

6. In order to appreciate the passage correctly, it may be useful to recall what the position is as to making a winding-up order against a company on the ground of its inability to pay its debts. The basis of such an order is that the company has ceased to be commerically solvent and, accordingly, it is fit and proper in the interest of the creditors and share-holders 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, but it may also be proved in other ways. The basis of a winding-up order on the ground, of a company's inability to pay its debts is, however, always insolvency.

7. Read in the light of that principle, the true meaning of Buckley's summary of the English decisions appears to me to be this : When a company has failed to pay a debt, but it appears that the failure occurred, not because the company was unable to pay, but because it disputed the liability on a substantial ground and there is nothing to show that if the dispute is decided against the company, it will not or will be unable to pay the debt, there is no present proof of insolvency and therefore no sufficient basis for making a winding-up order. In such a case, the winding-up Court will only see if the grounds on which the liability is disputed are substantial and if the dispute is in that sense 'bona fide'. If it finds the issue in favour of the company, it will ordinarily not proceed further and decide the dispute itself and determine whether or not a debt exists and has become payable.

In such a case, the Court will either dismiss the petition for winding-up or keep it pending till the creditor has established his claim in a regular action. The principle on which the Court will forbear from deciding the dispute and making a winding-up order in case it decides it against the company, is that winding-up proceedings are not intended to be exploited as a normal alternative to the ordinary mode of debt-realisation and that it is more' convenient that claims should be investigated and decided in a regular action.

8. According to the learned Advocate-General, in the case cited by him it was held that the winding-up Court would not only consider whether the dispute was 'bone fide', but would also decide the dispute itself, at least in a case where the only contention of the company was that it was entitled to refuse payment until some future date. I do not think that the case goes to the length contended for.

The facts of the case were that a creditor Issued a writ in the King's Bench Division for the recovery of certain sums advanced by him to a company and thereafter, on a summons for a summary judgment, the Court made an order under Order 14, Rules of the Supreme Court, giving the company an unconditional leave to defend. 'Some two months afterwards, the creditor presented a petition in a Country Court for a winding-up order. The Company's defence was that the creditor was under an obligation to make advances up to the limit of 5,000, which he had not yet done, and that under an agreement with the creditor, the company's obligation to, repay was to be deferred till after she had completed the advances and the company had acquired certain properties and become self-sufficient.

It was urged before the County Court Judge that since the King's Bench Divisidn had given the company unconditional leave to defend, it must have done so in the view that it had a substantial defence and, therefore, the case ought to be treated as one where there was a 'bona fide' dispute about debt and where no winding-up order ought to be made. The County Court Judge overruled that contention, went into the- evidence, found that a debt existed and proceeded to make a winding-up order. The company then preferred an appeal which, being an appeal from a County Court, was confined to matter of law.

The grounds urged before the Court of Appeal were, first, that the County Court Judge should have accepted the unconditional leave to defend granted by the King's Bench Division as conclusive proof that there was a 'bona fide' dispute about the debt and should have refused to make a winding-up order and, secondly, that the evidence before the County Court Judge was such that in law he could not hold as he had done. The Court of Appeal held that an order, giving unconditional leave to defend, could be made on grounds which fell short of a substantial ground, of defence and accordingly such an order did, not necessarily imply that the debt was disputed on a substantial ground.

Lord Greene, M. R., who delivered the leading judgment, pointed out that besides making a bare reference to the order for unconditional leave made by the King's Bench Division the company had placed no materials whatever before the County Court Judge as to the facts on which the order had been made. He accordingly held that it was competent to the County Judge to consider the Issue as to whether there was a substantial defence and to examine the question of whether or not a debt was owing. 'On the evidence in the case it was held by the learned Master of the Rolls, with reference to the second contention of the company, that the County Court Judge could not have come in law to any different conclusion in view of the materials which he had before him. Morton L. J. delivered a separate but concurring Judgment and Tucker L. J. agreed.

9. The case, to my mind, is no authority for the proposition that even after the winding-up Court has found a 'dispute to be 'bona fide', it can or ought to proceed to decide the dispute for itself and make or not make a winding-up order according as it found a debt, due and payable, to exist or not to exist. The case only decides that the winding-up Court can decide whether the dispute set up by the company is based on a substantial ground and therefore bona fide and that if it finds that there is no valid basis for a dispute, it can then decide the so-called dispute for itself and if it finds that a debt exists, it can make a winding-up order.

It will be remembered that unconditional leave was held by the Court of Appeal as not showing conclusively that there was a substantial ground of defence. The County Court Judge had, therefore, to find, first, whether 'there was a substantial ground and whether the dispute raised by the company was a 'bona fide dispute. He found that issue hot in favour of the company but against it, and it was only thereafter that he proceeded to consider for himself if a debt existed and to make a winding-up order when he found that a debt did exist. It is not as if he found that there was a bona fide dispute and yet proceeded to decide the dispute himself and make a winding-up order. The decision upholding the County Court Judge does not therefore indicate that the Court' of Appeal intended to modify in any way the rule of practice as summarised in Buckley.

10. In the present case, there can be no question that the scheme presents a substantial problem of construction and, accordingly, it can by no means be said that the dispute raised by the company rests on a ground which is plainly unsubstantial. It does not appear to me to be material, at any rate in the -facts of the .present case, that the dispute is not as to the existence of a debt, but only as to its immediate payability. If the debts are not immediately payable, the omission or failure to pay them cannot entail a winding-up order because there being yet no debts to pay, the question of ability or inability to pay does not really arise.

Indeed, it seems to me that where there is evidence that if the dispute about the debt is decided against the company, it will be paid, the fact that the dispute is only as regards the time of payment is all the greater reason why the winding-up court should not proceed to decide the dispute, because no issue of insolvency is involved. Reverting to the facts of the present case, it is clear that there being a 'bona fide' dispute as to the maturity of the appellant's claim and as to the company's liability for immediate payment, no winding-up order can be made till the dispute is decided and till it is established that the company's reading of the scheme was wrong and that being liable thereunder to pay the first Instalment of the debts immediately, it failed to pay. In those circumstances, if we were to follow what Buckley refers to as the modern practice in England, we would have to dismiss the appeal straightaway and uphold the learned trial Judge's order, disallowing the petition for winding-up.

There Is, however, one circumstance in the case for which we think we ought to desist' from adopting that course. Admittedly, the company has made no profits since the date of the scheme, sufficient to pay all its debts and, therefore, if it be found that the scheme requires the company to pay the first instalment of its debts immediately, it can do so, if at all, only by sell-Ing its capital assets. A company which has to sell its capital assets in order to pay its debts cannot ordinarily be said to be commercially solvent, unless -the assets are surplus assets, which has not been shown to be the case here. The present case, therefore, is not one where it can be said that there is evidence that if the dispute is decided against the company, it will or will be in a position to pay the debts immediately.

On the other hand,' for reasons I have explained, there cannot be a winding-up order merely on the basis that if there had been debts immediately payable the company would be unable to pay them. In view of such being the position, we think that we should not dismiss the appeal straightaway at this stage, but should keep it pending till the appellants or some other creditor obtains a decision in a regular suit. We feel all the more inclined to adopt that course, because we are informed that a suit has already been, brought on the Original Side for a construction of the scheme and is awaiting decision. In our opinion, the dispute can be more conveniently decided in the suit already brought and the winding-up Court ought not to undertake the task of; construction.

11. I desire to make it clear that we are not laying down any general law as regards what the winding-up Court should or should not do when a-debt is disputed. The question is one of convenience and practice and we have only indicated what, as' a rule the practice ought to be when the dispute is a 'bona fide' one and when it is not so. I desire also to, add that if the dispute regarding the construction of the scheme be decided against the company, the company will still have the liberty to urge that no winding-up order should be made against it on such other grounds as may be open to it. Equally, it will be open to the creditors, when the appeal comes up for further hearing, to urge the two remaining grounds on which also they claimed a winding-up order before the learned trial Judge.

12. For the reasons given above, we direct that the further hearing of the appeal do stand adjourned till after the decision of Suit No. 1225 of 1951 'Premraj Dulichand v. Mahaluxmi Cotton Mills Ltd.', pending on the Original Side of this Court.

S.R. Das Gupta, J.

13. I agree.


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