In Re: Lkp Merchant Financing Ltd. vs Unknown
2002 Latest Caselaw 1083 Bom

JUDGMENT

R.J. Kochar, J.

1. The petitioner has prayed for winding-up of the respondent company under Section 439 read with Sections 433 and 434 of the Companies Act, 1956 and for appointment of Official Liquidator as provided thereunder. The petitioner company has sought for the aforesaid directions alleging failure on the part of the company to pay its alleged debt to the petitioner to the tune of Rs. 52,22,114.

2. From the averments in the petition, it appears that the petitioner-company had deposited a sum of Rs. 5 crores with the respondent-company in the portfolio management scheme. The petitioner-company had also paid a sum of Rs. 5 lakhs towards service charges. It is an admitted position that the respondent-company refunded a sum of Rs. 2 crores and requested the petitioners to continue the said portfolio deposit in respect of the balance amount of Rs. 3 crores for a further period of one year. The said relationship between the two began in February 1993 and the refund of Rs. 2 crores was made in April 1994. On 19-5-1994, the respondent-company paid to the petitioners a sum of Rs. 22 lakhs towards part payment of the income/returns accrued on the funds deployed. It further appears that the respondent-company had confirmed on 30-6-1994 and 31-8-1994 that there was a balance sum of Rs. 3 crores lying as deposit under the scheme, it further appears that on 3-10-1994, the respondent-company paid to the petitioners a sum of Rs. 51,50,351 towards part payment of the income/returns accrued on the funds deployed, it is the case of the petitioner-company that by a letter dated 8-10-1994, the respondent-company had informed the petitioners that the company had worked out the returns on the sum of Rs. 5 crores accrued in favour of the petitioners for the year 1993-94 being sum of Rs. 88,22,465. On 16-3-1995, the balance sum of Rs. 3 crores was refunded by the respondent-company. It is the case of the petitioner-company that along with the said sum of Rs. 3 crores, the company did not pay to the petitioners, the return/ income accrued therein. According to the petitioner-company, however, after repeated requests and several reminders, the company made a payment of Rs. 4.5 lakhs on or about 30-5-1997 and another sum of Rs. 2,61,918 on or about 19-6-1998 and finally a sum of Rs. 10 lakhs was paid by the respondent-company on 4-5-1999. According to the petitioner-company it was towards the part payment and it claimed that still a sum of Rs. 50,22,114 was due and payable by the respondent-company to the petitioners. The petitioners have further averred that they had issued a statutory notice through their advocates under Sections 433 and 434 of the Companies Act calling upon the company to pay the aforesaid balance amount within a period of 21 days but the company had failed and neglected to make payment in accordance with the said notice and, therefore, the petitioners are constrained to file the present petition seeking to wind up the respondent-company.

3. In reply, the respondent-company has filed an affidavit to oppose the admission of the petition. On 3-9-2002, a so-called further affidavit in support of the company petition has been filed. The respondent-company has also filed a further affidavit on 25-9-2002. According to the respondent-company, there is nothing due and payable as any debt or as any liability towards the petitioner-company. It is also contended that the alleged claim of the petitioners is totally time-barred and not enforceable. The respondent-company has also pointed out that the claim was not an ascertained debt and was based on speculative claim in respect of the income or return on the amounts invested in the share market by the respondent-company on behalf of the petitioners. It is contended that the claim for the next year cannot be the basis of the approximate returns of the previous years. The respondents have set out in the affidavits that out of Rs. 5 crores, an amount of Rs. 2 crores was refunded and thereafter, a balance of Rs. 3 crores was also refunded. The claim of the petitioners on the returns accrued on the fund of Rs. 3 crores for the year 1993-94 was paid in the year 1995. The company has set out the schedule of payment of amount of Rs. 90,62,269 in para 4 of their affidavit dated 25-9-2002.

4. I have heard both the learned counsel for their parties at length, Shri Sakseria for the petitioner submitted that the debt is an ascertained and admitted sum and since the company has failed and neglected to pay its debts, and has lost its substratum it deserves to be wound-up under Section 488(e) and (f) read with Section 434(1)(a) of the Companies Act, 1956. He has also submitted that the company has incurred net loss to the tune of Rs. 36.10 crores and that its liabilities have far exceeded its assets. He pointed out that its total loans during the financial year 2001-2002 are Rs. 86 crores as against the total net assets and investments (Rs. 9.5 + Rs. 16 crores) are Rs. 25.5 crores only. He further submitted that its financial position is worsening day-by-day as every year there are net losses in addition to the accumulated losses, he has, therefore, urged that the company has not only failed and neglected to pay the debt of the petitioner but has also lost its substratum and its net worth has eroded to an irretrievable extent and, therefore, according to him it would be just and equitable to order winding-up of the company in the interest of the general public, creditors and investors. He has relied on the following decisions in support of his submissions :--

(i) Indana Spices and Food Industries Ltd. v. Indian Charge Chrome Ltd. [1997] 89 Comp. Cas. 570 (Delhi)

(ii) In re, Indian Companies Act, In re, Bombay Cotton Mfg. Co.Ltd., In re, Ratilal Karsondas 1909 September 25 BLR XI 1302

(iii) M. V. Paulose v. City Plospital (P.) Ltd. [1992] 73 Comp. Cas. 362 (Ker.).

5. Shri Tulzapurkar the learned Counsel for the Company put up a very strong opposition for admission of the petition as according to him there was no debt established and payable by his client and, therefore, the petition deserves to be dismissed at this stage itself. He submitted that there was absolutely no case made out under Section 488(e) and hence consequently the petitioners do not have locus to pray for winding-up of the Company under Section 433(f) on the 'just and equitable' ground. According to the learned counsel, a petition under Section 433(f) can be maintained by a creditor who succeeds to establish his debt and the failure to pay the same by the company. Shri Tulzapurkar also submitted that the said provision must be read with Section 443(2) of the Act and the petition must be dismissed if the petitioner can reasonably pursue an alternative remedy available. He further pointed out from the record that the company had fully refunded the whole amount of deposit of Rs. 5 crores and the entire amount of accrued returns/income which was never an ascertained or a definite amount as it was wholly dependent on the fluctuation of the share market from time to time. He also submitted that the last admitted payment as part of the income on the balance amount of the deposit of Rs. 3 crores was fully paid and there was nothing due and payably to the petitioner. Shri Tulzapurkar further submitted that after receipt of Rs. 2 crores and leaving the balance of Rs. 3 crores as deposit it was not reasonable and proper to construe that the company had agreed to pay returns on the original or initial investment amount of Rs. 6 crores. He has relied of the following decisions :--

(i) Rishi Enterprises, Inre [1992] 73 Comp. Cas. 271 (Guj.)

(ii) G. Loganayaki v. Moolangudi Chit Funds (P.) Ltd. [1979] 49 Comp. Cas. 644 (Mad.).

6. Prima facie, I am satisfied that the company has paid the whole amount of returns on the initial deposit of Rs. 5 crores as also on the balance of Rs. 3 crores. From the very nature of the investment in the share market, there cannot be a fixed or determined amount of profit or return on the investment as it would depend upon the fluctuations in the share prices. It is totally unreasonable to construe the letters written by the company in the normal course of the business as a statute and to tie down the company on the basis of language loosely written by the writer. It is unthinkable and unreasonable to construe that the company had agreed in its two letters dated 8-10-1994 that it would pay the return on the basis of Rs. 5 crores though it had the balance of deposit of Rs. 3 crores. If in fact there was such an agreement both the parties would have to adduce oral/ documentary evidence. The Company Court cannot enter into such a controversy to determine the amount of debt when the petitioner has failed to establish the amount of debt payable by the company. According to the company it has paid the whole amount of the returns accrued on the amount of Rs. 5 crores and thereafter on the balance of Rs. 3 crores proportionately and has nothing to pay. The dispute raised by the company is bona fide and substantial. According to it and admittedly the whole amount of Rs. 5 crores is refunded and that the whole amount of income accrued on such deposits has been paid. It has given full account of such payment. Admittedly, there was a running account between the parties and receipts and payments are correctly reflected. If there is any mistake or discrepancy in the accounts maintained by the company, the petitioner has to seek proper accounts in proper proceedings and not before the Company Court. The petitioner has not established its alleged claim of debt of Rs. 52,61,918 which has been bona fide disputed by the company by showing payments from the accounts. As the company has totally denied the debt and has positively asserted full payments, the petitioner cannot seek by a roving or fishing enquiry in these proceedings by calling upon the company to furnish the so-called accounts and so-called details of the returns. Even those details have been furnished to establish full payment of the income accrued on the deposits from time to time. The Company Court cannot be called upon to probe any deeper to grope in darkness as to find out the exact amount of the debt payable by the company. When the petition fails to establish its debt, it cannot say that in any case it will be more than Rs. 500 as contemplated under Section 433 of the Act.

7. Since the petitioner has failed to establish the debt under Section 433(e) it cannot invoke Section 433(f) to seek the winding-up orders. If it has such a case it can approach the appropriate forum to seek proper relief. The petitioner at the outset must succeed to establish its debt under Section 433(e) and thereafter, to plead for the relief under Section 433(f) on the "just and equitable ground". The proceedings under Section 439 read with Sections 433 and 434 are not of public interest litigation nature. The petitioner must establish its/his locus to initiate these proceedings. The petitioner must establish its debt and must also cross the hurdles under Section 443(2) of the Act. In the present case the petitioner has failed on both the counts. A running company employing more than 300 employees having annual turnover of lacs of rupees cannot be ordered to be woundup. Even admission of such petition would cause damage to it. I find full support in my view from the judgment of the Madras High Court in the case of G. Loganayaki (supra) on as under :--

"... In any event, it is said that the claim is not only premature but the debt is also disputed and if at all the debt is refundable, it could only be after a full and complete investigation into the rights and obligations of the parties, as reflected in the chit fund agreement, and, in that view, the company court cannot maintain this petition and adjudicate on that main issue which is the f oundational issue for further exercise of the jurisdiction to wind-up a company incorporated under the Act.

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 arises 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 is 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." (p. 648)

It would further be beneficial to quote the observations from the judgment in the case of Rishi Enterprises (supra) of Gujarat High Court:--

In my view, there is no such absolute law. The section itself confers judicial discretion upon the courts. In the present case, it seems that the intention of the petitioners in insisting on admission of these matters is only to coerce the company and extract from it immediately by any means the amount which is payable to the petitioners. There is no such law that a company which is a running company employing about 500 employees who are paid their wages regularly and which is having a business of crores of rupees every year should be brought to a grinding halt by admitting these petitions merely because it is in some financial difficulty at the moment. On the contrary even in those cases where the company is closed, it has been laid down that it is the duty of the court to welcome revival rather than affirm the death of the company. It has been also held that it would not be right to say that creditors can insist on winding up of the company by the 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. The petitioning creditor cannot be permitted to insist on his pound of flesh from the company which may be a death blow to the company only on the ground that for a temporary period a running company is not in a position to pay the debt. This would be clear from the following decisions of this Court.

In the case of New Swadeshi Mills of Ahmedabad Ltd. v. Dye Chem Corporation [1986] 59 Comp. Cas. 183, a Division Bench of this Court has held as under (at page 186) :

"It is the case of the creditors that the company is unable to pay its debts and that it is just and equitable that the company should be wound up. The circumstances call for no proof of inability on the part of the company to pay its debts as such inability is self-evident on the admitted facts. There arc huge debts, secured as well as unsecured, which, as a matters stand, are far beyond the means of the company to meet. Even so, a court will exercise a sound discretion in deciding whether to wind up a company or not and in doing so consider many relevant factors, it may be that despite the inability to pay its debts, a company has still prospects of coming back to life and if the court is told of any specific proposal, which in the opinion of the court is likely to materialise the court will be inclined to give a chance to resurrect the company. It should be the policy of the court to attempt to revive though at the moment the company may not be solvent and may not be able to meet its obligations to is creditors. But this should be only if it is shown that there is reasonable prospect for resurrection and survival. It may be easy for a court when once it is shown that the company is unable to pay its debts to bury it deep, and distribute whatever is available as distributable surplus. But it is the duty of the court to welcome revival rather than affirm the death of the company and for that purpose the court is called upon to make a discreet exercise."

Similarly, in the case of Navjivan Trading Finance (P.) Ltd., In re [1978] 48 Comp. Cas. 402, this court has held as under (at page 415) :-

It is not 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 filled 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, (I) closing down of a unit which produce some goods or provide some services; (2) it would throw out of employment numerous persons and result in 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 a company by the 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 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." (p. 272)

8. The decision in the case of Bombay Cotton Mfg. Co. (supra) relied on by Shri Sakscria has neither relevance nor application to the present case where the company has bona fide disputed the alleged debt on the solid foundations. Similarly, the judgment of the Kerala High Court in the case of M. V. Paulose (supra) does not assist the petitioner as in that case debt was admitted but dispute was in respect of payment made to the company or to its director personally. The facts are different in our matter. Even the third judgment of the Delhi High Court (supra) will not help the learned Counsel as in that case the plea of limitation that the debt was time-barred was viewed as not bona fide. The debt was admitted by the company but it was pleaded that there was sufficient security therefor. In our case the debt is not admitted but is bona fide disputed.

9. In the aforesaid circumstances, there is no substance in the petition and hence it is dismissed with no orders as to costs.