Karnataka High Court
Karnataka Leasing And Commercial ... vs Smt. Lalitha Holla on 4 February, 1993
Equivalent citations: [1998]93COMPCAS433(KAR)
JUDGMENT K. Shivashankar Bhat, J.
1. This appeal is by the company and its managing director against which an order was made by the learned company judge to issue advertisement of the company petition for winding up. The petition was admitted earlier on August 28, 1992.
2. The proceedings were started on June 18, 1992, on which date notice regarding admission was ordered. On the same day, the learned company judge also restrained the respondents from alienating any assets of the company.
3. The petition was filed for winding up under section 433(e) and (f) of the Companies Act, mainly asserting that the company is unable to pay its debts to the creditors. In the petition it is averred that there are several depositors who deposited amounts in the company and some of the depositors were due for refund on maturity. But, the company has failed to pay the same to the depositors. The petition was filed by two different petitioners. The petition further states that several cheques issued by the company pertaining to refund of deposits were not encashed, because the company had no requisite funds in the bank. The petition also points out that there are more than 3,500 unsecured creditors who have deposited their hard earned money in the company and that the company had borrowed more than Rs. 4.50 crores. Along with the company petition, a few documents were filed including the proceedings of the company's board meeting held on February 28, 1992. In these proceedings itself, there is a statement that the financial position of the company is in a very bad condition and that the company could not realise good prices by sale of the properties and the company was not able to collect loans lent by the company and, therefore, the hoard resolved to move the High Court for winding up the company. There is also no dispute that one of the directors filed Company Petition No. 31 of 1992 seeking winding up of the company. In support of the said petition, the said director filed his affidavit pointing out the financial predicament of the company and sought the winding up of the company.
4. In the present proceedings, the notice was ordered on June 18, 1992, and it seems that objections were filed by the fifth respondent on August 14, 1992. On the said date, learned counsel for the company sought a short time to come up with a concrete proposal regarding the settlement of the claims. On August 28, 1992, the petition was admitted. The order sheet reads as follows :
"KJSJ : 28-8-1992 Admitted.
Call these cases on 2.30 p.m. KJSJ : 28-8-1992 Heard.
Company application is moved by the petitioner. Respondent's counsel appeared and opposed it. However, he submitted that he would give the concrete proposal to settle the matter within a week. If some time is granted to him till Friday, he will file a concrete proposal for settlement of all the claims. Respondents and counsel Mr. Vedavyasachar has given an undertaking that no rent will be collected till Friday.
Post these cases along with Co. P. No. 104 of 1992 on Friday, the 4th September, 1992, for further order."
5. On September 22, 1992, the learned company judge ordered that the rents payable by the tenants shall be deposited in this court in the interest of the creditors. It is unnecessary to refer to the order made on October 21, 1992. On November 16, 1992, the order under appeal was made. The learned company judge observed that there is sufficient prima facie case to issue advertisement. His order reads as follows :
"SRBJ : 16-11-1992 There is sufficient prima facie case to issue advertisement. Whatever objections respondents may have they shall raise all such objections after the advertisement is issued.
The first petitioner shall take out such advertisement in one issue of Deccan Herald and Indian Express and other petitioners may join the proceedings as creditors later.
The first petitioner shall take out such advertisement on or before November 30, 1992, fixing the date of hearing as December 15, 1992."
6. Mr. Raghavan, learned counsel for the appellants, question the correctness of the above order firstly on the ground that it is a non-speaking order; secondly it was contended that an order directing advertisement of the petition for winding up is a discretionary order and the circumstances of the case did not justify making such an order in the instant case. Learned counsel further contended that at least the learned company judge should have granted some time and postponed the advertisement in spite of the fact that the case calls for an advertisement of the petition.
7. Mr. Raghavan referred to the decision of the Supreme Court in Vasudeo Vishwanath Saraf v. New Education Institute, , wherein the Supreme Court pointed out the need to make a speaking order when the said order is liable to be tested in appeal. We have no doubt about the need to have a speaking order as and when an order is likely to be appealed from. But the nature of the order to be made depends upon the admitted facts before the court. An order directing advertisement admittedly is liable to be appealed from to a Division Bench of this court and, therefore, the requirement of a speaking order as contended by Mr. Raghavan certainly exists. But, we are not impressed by the contention of the learned counsel that the order is liable to be set at naught only on the ground that the above order does not satisfy the test of a speaking order having regard to the admitted position as revealed from the records of the case read in the light of the entire order sheet. The nature of the order which should speak for itself depends upon the subject matter involved. The question is whether the company petition should be advertised. The order, therefore, necessarily should indicate why the advertisement should be ordered. It is fairly settled that a petition for winding up could be advertised if a prima facie case is made out by the petitioner.
8. In the instant case, the balance-sheet of the company has been produced which itself indicates that the company is in strained circumstances. Further, the order sheet reveals that the company made an attempt to file a concrete proposal to clear the claims of the petitioners and sufficient time was granted by the court. Under these circumstances, it cannot be said that the learned company judge erred in not writing an elaborate order.
9. We have already referred to the company petition filed by one of the directors and the affidavit filed by the said director in support of the said petition. According to learned counsel for the company, the assets of the company are more than Rs. 15.25 crores while the liabilities will be about Rs. 10 crores. This is the assertion made in the statement of objection filed by the company before the learned company judge. In the very nature of things, the valuation of the assets is only an estimate while the figure pertaining to the liability must have been revealed from the books of the company. The petitioners' assertions that the amounts matured have not been refunded and the cheques have bounced have also not been disputed by the company.
10. In these circumstances, we are not impressed by the first contention advanced by Mr. Raghavan.
11. The appeal is against the order directing advertisement of the petition. At this stage an in-depth examination of the merits of the case is not called for. If a prima facie case for winding up is made, normally, a creditor is entitled to an order of winding up under section 433(e) of the Companies Act, subject to other considerations governing the exercise of the discretion. But those considerations are relevant at the time of considering the making of the final order. Even there, the test applied by the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woolen Industries Private Ltd., , it is observed thus (at pages 131-32 of 42 Comp Cas) :
"Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (see A Company, In re [1894] 94 SJ 369; [1894] 2 Ch 349 (Ch D)). Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely (see Tweeds Garages Ltd., In re [1962] Ch 406; [1962] 32 Comp Cas 795 (Ch D)). The principles on which the court acts are first 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.
Another rule which the court follows is that if there is opposition to the making of the winding up order by the creditors the court will consider their wishes and may decline to make the winding up order. Under section 557 of the Companies Act, 1956, in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer's Company Law, twenty-first edition, page 742, as follows :
This right to a winding up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they object to a winding up order, the court in its discretion may refuse the order'.
The wishes of the creditors will however be tested by the court on the grounds as to whether the case of the persons opposing the winding up is reasonable; secondly, whether there are matters which should be inquired into and investigated if a winding up order is made. It is also well settled that a winding up order will not be made on a creditor's petition if it would not benefit him or the company's creditors generally. The grounds furnished by the creditors opposing the winding up will have an important bearing on the reasonableness of the case (see P. and J. Macrae Ltd., In re [1961] 1 All ER 302; [1961] 31 Comp Cas 424 (CA))."
12. Even if the company has assets, all the assets are not considered as relevant while examining the question of its capacity to pay the debts. The capacity to pay debts is tested in the commercial sense and not theoretically.
13. In Sri Shanmugar Mills Ltd. v. S. K. Dharmaraja Nadar , the Madras High Court observed, at page 205, thus (at page 299 of 39 Comp Cas) :
"'The test of inability to pay the debt under section 434(1)(c) is not whether the company, if it converts all its assets into cash, could be able to discharge its debts, but whether in a commercial sense the existing liabilities could be paid by the company while it is running as a company. It cannot be said that if the machinery and the building had to be realised for the purpose of paying the existing debts the company could run its business. If such assets are excluded the other assets which amount to about rupees three lakhs (vide market value adopted in the counter-affidavit) would hardly be sufficient to meet the demands.' The learned judge proceeded to point nut that on March 5, 1959, the position was even worse.
We are of the opinion that the learned judge was right in taking into account the position as on October 31, 1957, and that the reasoning on which he ordered the winding up is correct. The essence of the reasoning is that the debts of the company could not be paid without selling its machinery and building and, if the machinery and the building were to be sold, the mills could not run and the company would necessarily have to be wound up. The correctness of this reasoning cannot be questioned and has not been questioned before us by Sri V. Balasubrahmanyan, learned counsel for the appellant."
14. Advertisement of a petition for winding up, no doubt, is not ordered as a matter of course, because, its effect is drastic on the company's business reputation and the interest of the shareholders.
15. But, when a prima facie case is made out to attract the principle governing the winding up at the instance of a creditor under section 433(e), refusal of such an order would be denying the statutory remedy provided to the creditors of the company. Therefore, the court affords adequate opportunity to the company of being heard, before considering whether advertisement should be ordered. The undisputed facts of this case, prima facie lead to the conclusion that the company is not commercially capable of solving its indebtedness.
16. May be, after advertisement, and after hearing all the concerned persons, different considerations may weigh with the court not to order winding up; but it is too premature for the court at this stage to hold that facts relevant to such considerations exist in favour of the company.
17. Mr. Raghavan, relied on two decisions - one of the Punjab and Haryana High Court in Surindra Packers v. Punjab Land Development and Reclamation Corporation Ltd. [1989] 66 Comp Cas 883 and another of the Bombay High Court in Dubai Dry Docks Co. Ltd. v. Hede Navigation Ltd. [1988] 64 Comp Cas 1, to contend that even if advertisement is to be ordered the court should have postponed the actual advertisement.
18. The company court certainly has the power to postpone giving effect to the order directing advertisement. In the instant case, the company has valuable immovable properties at Bangalore and Mysore; the rental income is ordered to be deposited in the court; alienation is barred without leave of the court; therefore, there is no immediate danger to the assets of the company to the detriment of the interests of the creditors. There is no reason as to why the company should not be allowed to raise funds either by selling or entering into any arrangement (subject to the orders of the court) to clear the claims of the petitioners. The company petition is pending since June, 1992. Mr. Raghavan, seeks six months' time for this purpose and seeks postponement of the advertisement.
19. Mr. A. G. Holla pointed out that the directors are also primarily indebted to the company and at least amounts should be paid by them into the court before seeking any indulgence in the matter of advertisement.
20. Having considered the matter in great depth, we are of the view that, the interest of all the parties would be served by upholding the order of the learned company judge, subject to the condition that the actual advertisement shall be effected during the first week of July, 1993, fixing the date of hearing as July 26, 1993.
21. The appeal is accordingly dismissed, subject to the postponement of the advertisement as stated above. For any other working arrangement, etc., parties are at liberty to move the learned company judge.