Punjab-Haryana High Court
Punjab Ceramics Ltd. vs Punjab State Industrial Development ... on 2 June, 1989
Equivalent citations: (1990)97PLR526
JUDGMENT Amarjeet Chaudhary, J.
1. This company appeal is directed against the judgment dated May 6, 1988, of the company judge who had ordered the winding up of the appellant company.
2. Towards the end of 1975, the Punjab State Industrial Development Corporation (hereinafter referred to as "the PSIDC") got a letter of intent from the Government of India for establishing a project in the State of Punjab for manufacturing 5,500 M. T. per annum of high tension porcelain insulators. For implementation and operation of this project, it approached the Continental Construction (Pvt) Ltd. (hereinafter called "the CCL"). For this purpose, the parties entered into an agreement on June 6, 1977, whereby they agreed to incorporate a new company for carrying out this business. The share capital of the company was to be one crore rupees, divided into 8 lakhs equity shares of Rs. 10 each and twenty thousand preference shares of Rs. 100 each. The holding of PSIDC was to be 26 per cent, and that of CCL 25 per cent, of the total issued equity share so that the voting powers between the parties and others should be : PSIDC not less than 26 per cent. ; CCL not more than 25 per cent, and public including financial institutions 49 per cent. The balance capital requirement of the company was to be arranged by the board of directors of the company through loans. It was further agreed that the board of the company shall consist of not less than three and not more than twelve directors including ex officio directors and debenture directors, if any. The PSIDC was given the right to nominate the chairman of the company so long as it held not less than 26 per cent, of the subscribed equity capital of the company and this nomination had to be out of the directors of the company nominated by it. Clause 13 of the agreement is pertinently relevant which reads :
"The parties hereto undertake to accept and abide by the conditions, if any, that may be imposed by the Central/State financial institutions and/or bank(s) while providing/agreeing to provide medium and/or long term finance to the COMPANY for the implementation of the PROJECT and SUCH conditions shall be deemed to form an integral part of this agreement and shall bind the parties as though herein specifically embodied."
3. Subsequently, the company approached various financial institutions for financial assistance including the Industrial Finance Corporation of India (hereinafter called "the IFCI"). By its letter dated May 14, 1979, IFCI informed that it is agreeable, in principle, to provide loan facilities subject to special terms and conditions besides its usual terms and conditions applicable to grant of financial assistance. Para 1 sets out TERMS AND CONDITIONS COMMON TO ALL FACILITIES. Sub-para A sets out "Special conditions" while sub-para B sets out the other common conditions, clause 6 of which reads "PSIDC and CCL to give certain undertakings" which reads :
"PSIDC and CCL shall give an undertaking to the IFCI for making arrangements satisfactory to the IFCI for meeting the shortfall, if any, in the resources of the PCL for completing the project and/or for working capital. The funds brought in to meet the shortfall in the resources of the PCL shall be in such form and manner and on such terms as may be required by the IFCI and shall not involve any charge or lien on or other interest in the assets of the PCL."
4. Pursuant to the aforesaid requirement, both PSIDC and CCL gave undertakings to IFCI on May 22, 1980, and May 27, 1980, respectively, in the self-same language. The relevant portion of the undertaking reads :
"One of the conditions stipulated by the Industrial Finance Corporation of India (hereinafter referred to as "the corporation") provides that the Punjab State Industrial Development Corporation Ltd. shall give an undertaking to the corporation that they will make arrangements acceptable to the corporation for meeting the shortfall, if any, in the resources of the borrower for completing the project and/or for working capital. In pursuance of the aforesaid condition stipulated by you, we, the Punjab State Industrial Development Corporation Ltd., hereby agree and undertake to provide additional funds for meeting the shortfall, if any, in the resources of the borrower for completing the project and/or for working capital,"
5. These undertakings get included in the agreement dated June 6, 1977, by virtue of Clause 13 thereof. In this backdrop, on February 10, 1982, the director (technical) wrote to the PSIDC seeking assistance of a bridging loan of Rs. 40 lakhs as the project was at the stage of completion. The PSIDC conceded this request and an agreement between PSIDC and PCL was entered into on February 17, 1982. In this agreement, it was provided that the loan was repayable before June 30, 1982, or earlier, forthwith the payment being made by the PSIDC on any time. It was further specifically provided that the PCL shall utilise the proceeds of the bridging loan for acquiring/creating block assets towards the implementation of its project envisaging setting up of a ceramics insulators manufacturing unit at Dabwali Road, Bha-tinda, Tehsil and District Bhatinda. From the balance-sheet for the year 1984, it appears that as on June 30, 1984, there was an overrun of Rs. 1,81,52,000. For meeting this overrun, the company appears to have utilised the bridge loan of Rs. 40 lakhs advanced by PSIDC and Rs. 1,05,60,000 for the CCL.
6. In July, 1984, PSIDC sold all its equity holding in PCL to CCL. No demand for repayment of the loan either by the end of June, 1982, or later appears to have been made. As a matter of fact, by its letter dated November 13/14, 1985, PSIDC requested CCL, not PCL, to repay the amount of Rs. 40 lakhs with interest, in reply to which CCL denied its liability. Subsequently, on December 27, 1985, PCL itself wrote to the PSIDC that, out of the total overrun of Rs. 1,81,52,000, the liability of CCL was 49 per cent, and that of the PSIDC was 51 per cent, which came to Rs. 92,53,960. Accordingly, PCL demanded that after adjusting Rs. 40 lakhs, PSIDC should reimburse it for the balance of Rs. 52,53,960.
7. In these circumstances, on July 14, 1986, PSIDC served a notice on PCL purporting to be under Section 433 and Section 434 read with Section 439 of the Companies Act, 1956, on the ground of admitted liability of Rs. 40 lakhs through Shri Vinod Sharma, advocate. The claim was contested by PCL by a reply to the aforesaid notice through the letter of its counsel, Shri J.C. Malhotra, advocate, dated August 20, 1986. From these communications, it is evident that PCL has been claiming the adjustment of Rs. 40 lakhs against the overrun and demanding reimbursement of the balance from the outset. This position appears to have been made clear in the balance-sheet of the company for the year 1986 dated April 7, 1987.
8. Section 433 provides that a company may be wound up by the court, if, inter alia, it is "unable to pay its debts". Section 434 lays down the circumstances in which a company may be deemed to be unable to pay its debts while Section 439 catalogues the persons who can present a petition for winding up of a company. Section 433 has been interpreted by the Supreme Court as well as various High Courts. It is sufficient here to refer to two landmark decisions of the Supreme Court which cover the entire gamut of law on the subject.
9. In Amalgamated Commercial Traders Pvt. Ltd. v. Krishnaswami [1965] 35 Comp Cas 456, 463 (SC), speaking for the court, Sikri J. said "a winding-up petition is not a legitimate means of seeking to enforce payment of the 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" Then, in Madhusudhan Gord-handas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125, 131 (SC), where, speaking for the court, Ray J. said : "Two rules are well-settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company . . . The principles on which the court acts are -- firstly, that the defence of the company is in good faith and one of substance ; secondly; the defence is likely to succeed in point of law ; and, thirdly, the company adduces prima facie proof of the facts on which the defence depends."
10. Relying on these dicta of the Supreme Court, Mr. O.P. Malhotra, senior advocate and learned counsel for the appellant company, has submitted that it is true that PCL borrowed Rs. 40 lakhs from PSIDC, but in view of the counter-claim of the company, there is no admitted liability which could form the basis of the winding up petition. As a matter of fact, he says, PSIDC still owes Rs. 52,53,960 to PCL. This has been the persistent stand of PCL from the very outset. PSIDC never claimed repayment of the bridge loan but when specifically asked by PCL by its letter of December 27, 1985, to reimburse the balance of Rs. 52,53,960 with a view to coerce it, PSIDC has moved the petition for winding it up. In reply to the legal notice, PCL has reiterated this position. In these circumstances, counsel contends that it is not for the company court to decide the disputed questions of fact. He further submits that this defence is likely to succeed in point of law on relevant facts being placed before a court of civil jurisdiction. It is, therefore, not a case where the company can perfunctorily dispose of the dispute. Therefore, the learned company judge has gravely erred in holding that the defence of the PCL is not bona fide and is not sustainable on a point of law. The gravamen of his submission is that the learned company judge, in this connection, has not taken into account Clause 13 of the agreement dated June 6, 1977, and the undertaking given by PSIDC and CCL to the IFCI on May 22, 1980, and May 27, 1980, respectively. And it these documents had been taken into account, the conclusion that the defence of the appellant company was bona fide and one of substance which was likely to succeed on a point of law, was inescapable. Counsel further submitted that the learned company judge ought to have spelt out an improper motive on the part of the PSIDC as it had presented the petition to coerce PCL to satisfy the contested claim. He has drawn our attention to a recent decision of this court in Ambala Bus Syndicate Pvt. Ltd. v. Bala Financiers Pvt. Ltd. [1986] 59 Comp Cas 838, at pages 841 and 842, where a Division Bench of this court held :
"It is well-settled that if a debt is bona fide disputed by a company," the proper remedy for the creditor is not to present an application for its winding up. He can establish his debt in a civil action. In case he moves an application for winding up, that is liable to be dismissed.... The reason for dismissing the petition for winding up on the ground that the debt is disputed bona fide, is that a solvent company is likely to suffer great damage if a petition is presented by an unscrupulous creditor whose debt the company is willing to pay if he establishes the same."
11. Our attention was drawn to a decision of the British Court of Appeal in L.H.F. Wools Ltd., In re [1969] 39 Comp Cas 934 at page 935 (head-note), where it has been held that "the judge had erred in the exercise of his discretion in not giving sufficient weight to the modern practice that where a company had a genuine and serious cross-claim against the petitioner which it had not been reasonably able to litigate, the petition should usually be dismissed." He concluded with the decision of the Karnataka High Court holding that Section 433 is not meant for settling money disputes between parties and when a claim or debt is disputed, the proper forum for that is the civil court and it would not be proper to decide the same in the summary proceedings under Section 433.
12. On the other hand, Mr. Vinod Sharma, advocate and learned counsel for PSIDC, has laid greater stress on the language of the bridge loan dated February 17, 1982, and he has also referred us to the balance-sheets to establish that the liability is admitted.
13. We have given our careful consideration to the rival contentions of learned counsel for both the sides and also the judgment of the learned company judge. We find that the learned company judge has not taken into consideration the provisions of clause 13 of the agreement between PSIDC and CCL dated June 6, 1977, by virtue of which the undertakings given by PSIDC and CCL to the Industrial Finance Corporation of India on May 22, 1980, and May 27, 1980, respectively, became an integral part of that agreement The learned company judge has further also lost sight of the letters of PSIDC to CCL dated November 13/14, 1985, and the letter of CCL to PSIDG dated November 30, 1985, and the letter from PCL to PSIDC dated November 27, 1985. He has also not referred to the case set up by the CCL in reply to the legal notice. The balance-sheet for the year 1984 signed by the directors on March 23, 1985, reflects a short-term loan of Rs. 40 lakhs from PSIDC and a similar loan of Rs. 1,05,60,000 from CCL. But, on November 13/14, 1985, PSIDC demanded the payment of Rs. 40 lakhs with interest from CCL and not from PCL which was refuted by CCL. By its letter dated December 27, 1985, PCL candidly claimed reimbursement of Rs. 52,53,960 being the balance of the share of the overrun of PSIDC amounting to Rs. 92,53,960 after adjusting the bridge loan of Rs. 40 lakhs. Instead of settling the matter with PCL, after a lapse of about nine months, PSIDC served a notice purporting to be under Section 434 of the Companies Act through its counsel, Shri Vinod Sharma, advocate, which was controverted by the PCL, through the letter of its counsel, Shri J. C. Malhotra, dated August 20, 1986, reiterating its claim of adjustment of Rs. 40 lakhs and reimbursement of Rs. 52,53,960 from PSIDC. This position was reflected in the balance-sheet of the PCL for the year 1986, signed on April 7, 1987. These vital facts do not appear to have been taken into account by the learned company judge in holding that till March 23, 1986, the company did not dispute its liability to repay the loan. Though the amount was adjusted in the balance-sheet for the year 1986, after receipt of the statutory notice, the case was set up by PCL as early as December, 1985. In any case, these are triable issues which the company court, in its summary jurisdiction, is not competent to try. All that it has to see is whether the company sought to be wound up has set up a bona fide case of substance which is likely to succeed in point of law by adducing prima facie proof of the facts on which its defence depends. The observations of the learned company judge that there is no agreement between PSIDC and CCL that, in the event the overall cost of the project rising, the PSIDC will meet-the overall cost to the extent of its 51 per cent, share, and in the absence of such agreement, PSIDC is not liable to share the overrun cost are not warranted in the face of clause 13 of the agreement dated June 6, 1977, and the undertaking given by the promoters of the company to the Industrial Finance Corporation of India. In any case, even this dispute involves triable issues to be determined by a civil court on relevant evidence being adduced. For resisting the winding up petition under Section 433, in our opinion, the company has clearly set up a bona fide case by producing prima facie evidence of its defence. In the circumstances, we hold that the company judge was in error in perfunctorily ordering the winding up of the company. In our opinion, the act of the PSIDC in presenting the winding up petition smacks of mala fides as, in the face of the serious contest by the PCL, instead of filing a suit in a civil court, the petition for winding up the company has been filed to pressurize for enforcing payment. We, therefore, hold that there is no valid case for winding up the company and set aside the impugned judgment and allow the appeal with no order as to costs.