Delhi High Court

Tata Capital Financial Services ... vs Clutch Auto Ltd. on 12 December, 2013

Author: R.V. Easwar

* IN THE HIGH COURT OF DELHI AT NEW DELHI

                                       Reserved on: 12th November, 2013
%                                   Date of decision: 12th December, 2013

+      CO. PET. No.542/2012

   TATA CAPITAL FINANCIAL SERVICES LTD. ..... Petitioner
                 Through: Mr. Akhil Sibal with Ms. Saloni
                           Chowdhary, Advocates.
                 versus
   CLUTCH AUTO LTD.                         ..... Respondent
                 Through: Mr. Raman Kapur, Sr. Advocate
                           with Mr. Manish Kumar, Mr.
                           Piyush Kaushik, Advocates.
CORAM:
HON'BLE MR. JUSTICE R.V.EASWAR

                               JUDGMENT

R. V. EASWAR, J.:

1. This is a petition filed by the petitioner under section 433(e) of the

Companies Act, 1956 seeking winding up of the respondent-company for

non-payment of the dues of approximately Rs.2.9 crores.

2. The broad facts are that the petitioner financed the respondent-

company which was supplying automobile clutches to various automobile

manufacturers including TATA Motors. The finance was provided

essentially for the purpose of working capital requirements of the

respondent company. The total credit facility extended by the petitioner

was Rs.3.30 crores to be secured by a lien on the stocks, shares, property

and book debts belonging to the respondent-company. The first tranche

of the credit facility amounting to Rs.1,96,95,280/- which was disbursed

on 23.2.2012 became due on 23.3.2012. The second tranche for

Rs.1,32,45,104/- which was disbursed on 6.3.2012 became due on

6.4.2012. Despite several reminders the respondent could not pay back

the amount, compelling the petitioner to serve a "loan recall notice" in

September, 2012. Thereafter, the statutory notice under section 434(1)(a)

of the Act was served on the respondent, calling upon the respondent to

return the amounts with interest at the agreed rates within 21 days, failing

which winding up proceedings were threatened to be taken. There is no

dispute that the notice was served on the respondent-company at its

registered office on 3.10.2012. There was no reply to the statutory notice

and hence the present winding up petition.

3. Initially there were talks for settlement between the parties but then

they failed and on 2.9.2013 this Court passed an order admitting the

company petition but deferred further proceedings such as publication of

citation in the newspapers and appointment of provisional liquidator for a

period of 8 weeks to enable revival of the talks or settlement proposals, at

the initiative of the respondent-company. It was observed by this Court

in the said order that in case nothing happens at the end of the 8 weeks

period, the law will take its own course.

4. The reasons which prompted this Court to admit the company

petition, but defer further proceedings, are given in the order dated

2.9.2013 in the following words:-

"I have considered the matter and I have also examined the audited balance sheet as on 31.3.2012 and the unaudited financial results for the quarter ended 30.6.2013. The sales have fallen drastically. However, considering the fact that the operations are being shifted from Faridabad to Biwadi there seems to be a possibility that the revival attempt may succeed and the company in due course may be able to pay back or meet its liabilities. This is a company which has been supplying automobile clutches to Tata Motors from 1974. Today it appears to be in some difficulty due to labour strikes. Operations have been, no doubt, closed but there is an attempt to revive the same by shifting the factory to another place. The audited and unaudited financial statements, in my opinion, do not present such a dismal picture as on date but this is not to downplay the claim of the learned counsel for the petitioner that it cannot wait for the payment of the dues. Having regard to the aforesaid circumstances, I admit the company petition. However, the further proceedings such as citation in the newspapers and the appointment of provisional liquidator are deferred for a period of 8 weeks from today. This is only to enable the talks or settlement proposals, if any, for which the initiative should be taken by the respondent company. In case nothing happens at the end of 8 week period, the law has to take its own course."

5. When the matter was taken up for further proceedings on

12.11.2013, the learned counsel for the petitioner submitted that no

initiative was taken by the respondent-company for any talks or

settlement proposals and therefore as stated in the order dated 2.9.2013,

the publication of the citation in the newspapers and the appointment of

provisional liquidator should follow.

6. The learned counsel for the respondent while rebutting the

submissions of the learned counsel for the petitioner filed a compilation

and drew my attention to the Techno-Economic Viability Report of the

Restructuring/Rehabilitation Proposal dated December, 2012 prepared by

one Sonalal Datta of Industrial and Management Consultants, Kalkaji,

New Delhi. In particular he drew my attention to the following:

(a) Para 2.5.4 of the report in which the production facilities of the

respondent-company have been stated to be satisfactory and it was opined

by the consultant that considering the all-round increase in prices, the

level of operation ( in value) is achievable subject to availability of orders

and adequate working capital funds. The achievable level of operation

was pegged at Rs.250 crores during the year 2013-2014 and at the level

of Rs.1 crore per day or Rs.300 crores per annum for all the subsequent

years. This is the figure of production/sales.

(b) Para 2.5.5 of the report in which restructuring of the loans and

infusion of adequate working capital into the system was recommended.

These may come from not only the banking system, but also from the

promoters. It was recommended that the management may try to bring

back the morale of the employees so that the projected level of operation

is achieved.

respondent and Navistar, USA, a leading commercial vehicle

manufacturer have been traced. It was noted that for certain reasons

Navistar did not pick up the materials after June/July, 2011 and the stock

transferred to their research and development division resulted in

substantial blockage of funds. These stocks were valued at Rs.28 crores.

The report further refers to the filing of a suit in November, 2012 by the

respondent against the US company in the US Court. It is stated that the

respondent is hopeful of getting a favour verdict or an out of Court

settlement.

(d) Para 4.2.4 where it is observed that the future projection for 9½

years (FY 2013 to FY 2022) shows that the company should turn around

within the next one year and perform quite satisfactorily. This

observation is based on the projected figures given in para 4.2.3.

7. The learned counsel for the respondent also drew my attention to

the following in the compilation:

(a) Letter dated 29th April, 2012 written by Rajasthan State Industrial

Development and Investment Corporation Ltd., an undertaking of the

Government of Rajasthan, to the respondent wherein the said corporation

agreed to the request of the respondent for creation of a second charge in

favour of the consortium of banks led by State Bank of Travancore, New

Delhi over the fixed assets of the company in its unit at Kahrani,

Bhiwadi.

(b) Letter dated 28.3.2013 written by Deutsche Investitions confirming

the re-structuring package of the working capital lenders which was

sanctioned by the consortium of banks for shifting the manufacturing

facilities of the respondent-company from Faridabad to Bhiwadi.

recorded that the working capital lenders advised the respondent-

company that the request to the working capital lenders for release of

enhanced working capital limits sanctioned in the restructuring package

will be examined in August, 2013, at the time of appointment of second

installment to the labour based on the status of shifting raw material to

Bhiwadi. Attention was also drawn to the decision taken in the meeting

that no legal or DRT action is presently being contemplated by the

lenders "as the company is showing signs of improving level of

operations. Banks agreed not to take coercive action and give a fair

opportunity to the company to perform after such long-drawn labour

problems". It was decided to have another meeting of the consortium

banks in the middle of August, 2013 at Bhiwadi plant. Two of the

lenders i.e. RIICO and DEG agreed to consider rescheduling of the

outstanding loans in September, 2013 when a clear position about the

operation of the respondent-company is available and to maintain parity

with banks regarding payment of due interest.

8. The learned counsel for the respondent-company also drew my

attention to the valuation of the property of the respondent-company in

Ahmedabad at Rs.450 lakhs. It is submitted that this property was

offered to the petitioner as security for the outstanding amount, but the

offer was rejected by the petitioner. It is further submitted that for the

time being the property at Ahmedabad can be retained as security by the

petitioner and if the amount which is outstanding is not paid to the

petitioner by 31.3.2014, the respondent was agreeable to the property

being sold in realisation of the arrears. It was also claimed that by

30.11.2013, the consortium of banks had agreed to pump in a sum of

Rs.7.74 crores as working capital into the respondent-company. The

learned counsel further contended that all other creditors of the

respondent-company are extending their co-operation and it is only the

petitioner who is insisting that the respondent-company should be wound

up. This position adopted by the petitioner, according to the learned

counsel for the respondent, is opposed to the well-settled principles

regarding winding up of a company. It is pointed out that winding up of a

company should be the last resort and should be resorted to only when all

attempts of revival of the company have failed.

9. In his rejoinder, the learned counsel for the petitioner fairly agreed

with the statement of law that the Company Court will not be in a hurry

to wind up the company and will adopt such a course only as a last resort,

but submitted the following points for consideration:

(a) the respondent did not place the above facts before the

commencement of the hearing;

(b) the filing of the compilation was a surprise; in any case there is no

affidavit in support of the compilation;

as shown by its conduct, and it has not come clean in the proceedings

before this Court;

(d) though the respondent has brought to the notice of this Court and

relied upon the minutes of the lenders' meeting held on 11.7.2013, there

is no information supplied to the Court as to what were the developments

in the month of August, 2013 when the request for enhanced working

capital limits was supposed to be examined by the working capital

lenders. There is also no information placed before the Court as to what

happened in September, 2013 when RIICO and DEG were supposed to

consider the rescheduling of the outstanding loans;

(e) the e-mail dated 5.11.2013 sent by State Bank of Travencore to all

the members of consortium of banks was only a request to the banks to

provide the details of the interest outstanding as on 31.3.2013 and for the

period April to October, 2013 in order to enable consideration of the

request of the respondent-company for reworking of the restructuring

package. It only shows that the respondent was not able to meet the

conditions imposed for consideration of the restructuring package and

nothing more;

(f) the respondent-company has also not informed the Court as to the

progress made pursuant to the letter dated 28.3.2013 written by Deutsche

Investitions in connection with the implementation of the restructuring

package. There were several conditions for the implementation and no

information has been placed by the respondent-company before this

Court as to whether those conditions have been met or not; and

(g) if the respondent-company is really serious in paying off the debt

due to the petitioner, it can sell the property at Ahmedabad which is

valued at Rs.450 lakhs and pay the amount due to the petitioner.

10. I have carefully considered the facts of the case in the light of the

rival submissions. By order dated 2.9.2013, the winding up petition was

admitted, but further proceedings such as citation in the newspapers and

the appointment of provisional liquidator were deferred for a period of 8

weeks. It was stated in the order that this was "only to enable the talks or

settlement proposals, if any, for which the initiative should be taken by

the respondent-company. In case nothing happens at the end of 8 week

period, the law has to take its own course". It is nobody's case that the

respondent-company initiated any talks or settlement proposals at any

time after the passing of the aforesaid order and before the winding up

petition was taken up for hearing on 12.11.2013. In these circumstances,

the question to be considered is whether the petition should be advertised

and/or a provisional liquidator has to be appointed.

11. Before the winding up petition can be placed for hearing (after

admission) before the Company Court, the petition has to be advertised in

terms of Rule 24 of the Company Court Rules, 1959. A Division Bench

of this Court, in Lt. Col. R K Saxena Vs. Imperial Forestry Corporation

Ltd. (2001) 107 Company Cases 401 held that the requirement that the

petition must be advertised cannot dispensed with by the company judge,

but it is open to him to exercise his discretion in respect of the time limit

for advertisement. According to the Division Bench, the discretion was

relatable only to that part of the rule which says "be advertised not less

than 14 days before the date fixed for hearing". The Division Bench

further held that there is no scope for exercising the inherent jurisdiction

of dispensing with the requirement that the petition must be advertised. It

is true that in National Conduits (P) Ltd. Vs. Arora AIR 1968 SC 279

Supreme Court held that the Company Court has the power to entertain

an application from the company that the petition be not advertised in the

interest of justice or to prevent abuse of the process of the Court.

However, there is no such application filed by the company in the present

case. It is common knowledge that admission of a winding up petition

and advertisement thereof involve serious consequences to the company,

its members and shareholders. The interest of the company and the

shareholders, members and creditors as a whole is one of the

considerations that will have to weigh with the Company Court. Rule 96

of the Company Court Rules which appears in Part III titled "winding-

up" states that upon filing of a winding up petition it shall be posted

before the Judge in chambers for admission of the petition and fixing a

date for the hearing thereof, "and for directions as to the advertisement to

be published". This rule however applies only where the winding up

petition is yet to be admitted. When once the winding up petition is

admitted, the proceedings as to advertisement of the petition are governed

by Rule 24. The Madras High Court however appears to have taken the

view that advertising the petition immediately on the admission of the

same would result in a serious loss and injury to the company and would

be contrary to the plain terms of Rule 96 [NEPC Micon Ltd. Vs.

Hindustan Thomson Associates Ltd. (1999) 95 Company Cases 532].

12. The remedy under section 433(e) is not a matter of right; it only

enables and empowers the Company Court to pass an order of winding up

in an appropriate case. The Court is not bound to order winding up. The

inability on the part of the company to pay the debt may arise for a

variety of reasons and the Court is obliged to consider whether it is the

outcome of any deliberate or designed action, or mere temporary shock

and effect of economy upon the market. In a given case, it may happen

that a company may become unable to pay its debts for a while but that

by itself is not a criterion to wind up the company. The Company Court

is under a duty to consider the financial status, strength and substratum of

the company in an overall context and should be able to distinguish

between a temporary cash crunch and a state of affairs which clearly

indicates that the company has fallen sick without any hopes of revival.

High sales and turnover are not necessarily an indication of cash surplus,

if the liabilities of the company are also on the high side. It must be

remembered by the Company Court that the effect of winding up is to put

an end to the company which may lead to loss of jobs and loss of

production which in turn may affect the larger interest of the company

and the society in general. At the same time the inability to pay the debt

in terms of section 433(e) read with section 434(1)(a) would raise a

presumption, which is rebuttable, on the basis of material and evidence

adduced by the company. The adequacy or sufficiency of such material

or evidence would depend on the facts and circumstances of each case.

This is the gist of the observations of the Gujarat High Court in TATA

Iron and Steel Company Vs. Micro Forge (India) Ltd. (2001) 104

Company Cases 533.

13. In the light of the aforesaid observations I proceed to examine the

material adduced before me by the respondent. In the order passed by me

on 2.9.2013, it was noticed from the balance sheet as on 31.3.2012 and

the unaudited financial results for the quarter ended 30.6.2013 that the

sales of the company had fallen drastically. It was however observed by

me that this could be due to the shifting of the operations, compelled by

labour trouble, from Faridabad to Bhiwadi. The company has been

supplying automobile clutches to TATA Motors since 1974.

Sympathising with the respondent-company on account of the situation in

which it was placed because of labour trouble and noticing the revival

attempts by shifting the factory to Bhiwadi, I had observed that in this

background the audited and unaudited financial statements did not

present such a dismal picture as on date; at the same time I observed that

the petitioner cannot wait forever for the payment of the dues. In order to

enable talks between the parties and to facilitate any settlement proposals,

I deferred the appointment of the provisional liquidator and the

publication of the citation in the newspapers and the gazette for a period

of 8 weeks, making it clear at the same time that the initiative for the talks

should come from the respondent-company. It would appear that nothing

worthwhile has taken place after the aforesaid order the till the hearing of

this petition on 12.11.2013. It is true that in the compilation filed by the

learned counsel for the respondent on 12.11.2013, there is reference to

some correspondence between the company and the State Bank of

Travancore, which is the lead bank in the consortium of banks, and

between the company and Deutsche Investitions in connection with

certain loan agreements. However, apart from the reference to the

minutes of the lenders' meeting held on 11.7.2013, no further information

was forthcoming as regards the developments in the month of August,

2013. It may be recalled that in the lender's meeting held on 11.7.2013 at

the conference hall of the Karol Bagh branch of State Bank of

Travancore, the agenda was, interalia, to discuss the current performance

of the company and the current status of transfer of raw material and

other machines to Bhiwadi. As regards the current performance of the

company, the Chairman and Managing Director of the company informed

the lead bank that -

(a) an agreement has been signed with the labourers for settlement of the

issues of pending remuneration;

(b) the lenders were informed that once the company started payment in

terms of the agreement, the labourers will not impede the transportation

of the plant and machinery from Faridabad to Bhiwadi;

of about Rs.15 crore towards sales tax which was to be paid in

instalments;

(d) the dues towards excise duty amounted to Rs.3 crore plus interest

which was to be cleared by March, 2014;

(e) on account of acquisition of 3,000 sq.m and the proposal to put up the

metro station adjacent to the factory, the commercial value of the land

would increase manifold.

Pointing out these circumstances, the Chairman and Managing Director

of the company had requested the lenders for working capital mainly to

arrange for the settlement of the workers, arrangement for transport of the

raw materials and machinery and to increase the level of operations at

Bhiwadi from Rs.10 lakhs per day to Rs.80 lakhs per day in the coming

three months.

14. The minutes also record the fact that the AGM of the State Bank of

India had observed in the meeting that the settlement with the workers

itself would a big step to start with and once the company shifts the

inventory to Bhiwadi and starts producing clutches of the value of Rs.80

lakhs per day, the much needed liquidity will start. He recommended that

the State Bank of Travancore, State Bank of India and Canara Bank

which had sanctioned enhanced working capital limits under the

restructuring package should consider releasing it for payment of the first

instalment to labour. This suggestion was accepted and the banks agreed

that they would approach their respective sanctioning authorities for

release of these funds and in the meanwhile, the company should arrange

funds to meet the timeline of payment and start shifting the inventory to

Bhiwadi. The banks agreed that they will release the working capital as

soon as they got the approval.

15. The representatives from the other lenders (non-banks) i.e. RIICO

and DEG who were also present in the meeting took note of the decision

of the working capital lenders (the banks) and would appear to have

appreciated the same. At this juncture the Chairman and Managing

Director of the company requested the banks to release the enhanced

working capital limits as per the restructuring package. The working

capital lenders however advised the company that this request will be

examined in August, 2013, at the time of payment of the second

instalment to the labour based on the status of shifting of the raw material

to Bhiwadi and after evaluating the status of the level of operations at

Bhiwadi. There is no information placed by the company before me as to

what happened in August, 2013 - whether the second instalment was paid

to the labour and whether the request to the banks for release of enhanced

working capital limits was examined by them, and if so, what was their

response.

16. Another important decision taken in the meeting of the lenders was

that no legal or debt-recovery action was presently being contemplated by

the lenders "as the company is showing signs of meeting level of

operations. Banks agreed not to take coercive action and give a fair

opportunity to the company to perform after such long drawn labour

problems".

17. The minutes also record that the non-bank lenders i.e. RIICO and

DEG agreed to consider rescheduling of the outstanding loans during

September, 2013 when a clear position about operations would be

available and maintain parity with the banks regarding payment of due

interest. No information was placed before me as to the developments in

September, 2013.

18. The only development after the last order, which was brought to

my notice, was the e-mail sent by State Bank of Travancore to the other

banks which were members of the consortium on the subject "rework of

the existing restructuring package". It merely states that the company's

request for reworking the restructuring package due to delay in

implementation of the package by the lenders is to be considered and

therefore the banks may provide the details of the outstanding interest as

on 31.3.2013 and 31.10.2013, due from the company.

19. The position therefore remains more or less the same as it remained

in September, 2013 when the order for admission was passed by this

Court.

20. The other alternative submission of the learned counsel for the

respondent-company was that the company owned industrial sheds with

plant and machinery at Ahmedabad which was valued at Rs.450 lakhs

and the same can be given as security to the petitioner and if the

respondent is unable to clear the amount due to the petitioner by the end

of March, 2014, the petitioner can realise the property and appropriate the

proceeds in satisfaction of the debt.

21. From what has been stated above it appears to me, in the absence

of any information placed by the company as to the developments, if any,

which took place in August and September, 2013 pursuant to the

decisions taken in the meeting held on 11.7.2013, that there are problems

and impediments which continue to delay the process of revival and the

shifting of the plant to Bhiwadi and in settling the dues of the labourers at

Faridabad. No details or documents are placed before me to show that

the labourers are being paid in terms of the settlement agreement entered

into with them and there is no material brought on record to show the

progress in the shifting of the plant to Bhiwadi. In these circumstances,

the reliance placed on the techno-economic viability report prepared by

Sonalal Dutta in December 2012 and the developments which took place

prior to August, 2013 do not take the case of the respondent any further.

More significantly, the respondent-company did not take the initiative to

have talks or make settlement proposals to the petitioner despite the order

dated 2.9.2013 making a clear reference to the same and making it the

main ground for deferring the proceedings for a period of 8 weeks. The

amount payable to the petitioner is outstanding for quite some time. No

initiative appears to have been taken by the respondent-company even

after the passing of the order by this Court on 2.9.2013. I am therefore

left with no other option but to direct publication of the citation in the

Delhi Gazette, Times of India (English) and Navbharat Times (Hindi)

that the winding up petition against the respondent-company has been

admitted.

22. However, I cannot also lose sight of the fact that publication of the citation that the winding up petition against the company has been admitted is likely to have an adverse impact in the restructuring proposals/proceedings which are under consideration by the consortium of banks and on the labourers who are awaiting settlement, having assured the company that they will not hamper the process of shifting the factory to Bhiwadi. It is significant to note that the banks took a decision not to take any legal steps or action in the Debt Recovery Tribunal against the company as the company is showing signs of meeting the

level of operations. Though there is no information as to what happened in August and September, 2013 about the progress of the restructuring proposal, there is also no information to the effect that the restructuring proposal has been terminated or dropped. If the proposals are still under consideration and for some reason or other have merely been deferred to a future date beyond September, 2013 and are still alive, an immediate advertisement of the admission of the petition would cause damage to the prospects of the company vis-a-vis the restructuring package. On the facts of the present case and by virtue of the powers vested in me under Rule 9 of the Company Court Rules, 1959, I am of the view that it would be appropriate to advertise the admission of the winding up petition in the Delhi Gazette and the newspapers mentioned above on 14th February, 2014, making it clear in the advertisement that a provisional liquidator is yet to be appointed.

23. I have consciously deferred the appointment of a provisional

liquidator. This will be taken up for consideration, if necessary and if the

situation so demands, on the next date of hearing.

24. List on 5th March, 2014.

(R.V. EASWAR) JUDGE DECEMBER 12, 2013 vld