Andhra HC (Pre-Telangana)
G. Siva Ramakrishna And Anr. vs Rusni Distilleries P. Ltd. on 28 January, 2008
Equivalent citations: [2008]143COMPCAS289(AP)
JUDGMENT V.V.S. Rao, J.
1. The company petition is filed under Sections 433(e), 434(1)(a) and (c) and 439(1)(b) of the Companies Act, 1956, seeking for winding up of the respondent, an incorporated entity under the Companies Act, 1956. Its authorised share capital statedly is Rs. 7,50,00,000 divided into 7,50,000 equity shares of Rs. 100 each. It was incorporated with the object of manufacturing ethanol from sweet sorgum, fruits and grains, and marketing ethanol, rectified spirit, extra neutral alchohol, beer and other essences used in liquor and allied industries. The two petitioners allege that the respondent-company is unable to pay its debts to them even after issue of notice under Section 434 of the Companies Act, 1956 and, therefore, requires to be wound up.
2. In support of the case, two petitioners-husband and wife-allege that they lent a sum of Rs. 2,07,96,031 and Rs. 66,70,000 respectively, to the respondent-company. This was admittedly given as an unsecured loan. They had, however, option to convert the unsecured loan into shares of the respondent-company.
3. It is also alleged that the respondent promised to allot 31 per cent, shares to the first petitioner and 10 per cent, shares to the second petitioner. They were also, as alleged, appointed as the executive director and director of the respondent-company, respectively. In addition to the unsecured loan, the petitioners allegedly gave guarantee on behalf of the respondent-company to Syndicate Bank, Sanga Reddy branch, for loan facilities availed by the respondent-company. However, Sri R. Palani Swamy (RPS), managing director, with mala fide intention did not honour the commitment necessitating the petitioners' sending communication, dated July 5, 2006, to Syndicate Bank complaining about his avoiding conduct and informing that their personal guarantee offered will not be available to the respondent. They sought for return of collateral security. Yet, another similar communication, dated August 26, 2006, to Syndicate Bank, in spite of which Syndicate Bank issued demand drafts to RPS. In the meanwhile, RPS sent communication, dated October 20, 2006, requesting the petitioners to surrender books and records of the respondent-company. In the said letter, RPS alleged that the petitioners are facing number of criminal cases involving dishonour of cheques, that they are non-co-operative with the board of directors of the company, that the petitioners shifted all records and removed the name board of the company at the registered office. Apart from this, Syndicate Bank, in response to the petitioners' communications referred to hereinabove sent a reply on October 23, 2006, denying the petitioners' version of collusion between the bank and RPS. Latter issued a notice, dated October 24, 2006, informing about the resolution, dated October 20, 2006, passed by the board of directors of the company under Section 284 of the Companies Act, 1956, removing the petitioners from the directorship and also notifying that an extraordinary general meeting (EOGM) would be held on November 10, 2006, for approval of the resolution of the board of directors.
4. After receiving notice of the extraordinary general meeting under Section 173(2) of the Companies Act, 1956, the petitioners individually sent notices, dated November 10, 2006, purportedly under Section 434 of the Companies Act, 1956. This was replied to by the company on December 5, 2006, denying the petitioners' allegations. Again, the petitioners sent notice on December 29, 2006, which was also replied to on January 23, 2007, denying unsecured loan allegedly given by the petitioners. Therefore, present petition is filed for winding up.
5. After receiving notices, RPS filed counter affidavit on August 1, 2007 (USR No. 1157 of 2007) and additional counter on October 9, 2007, (USR No. 1716 of 2007). The counter allegations are as follows. The respondent-company had registered office at No. 383, HIG, BHEL, Ramachandrapuram, Hyderabad. At the request of the first petitioner, it was shifted to the first petitioner's premises bearing No. 6-3-540/9/A, Panjagutta, Hyderabad. This was done in good faith as the first petitioner was inducted as executive director of the respondent-company. The allegation that the petitioners gave unsecured loans and they are unsecured creditors is denied. The amounts allegedly paid were towards the share application money. The amounts are cooked up amounts and they are not true. The unsecured debt is not clubbed with share capital in the balance-sheet. The petitioners are trying to mislead the court by calling themselves as unsecured creditors by invoking Section 433 of the Companies Act, 1956. The contention that the petitioners gave unsecured loans is belied by their own documents including the letter addressed by them to Syndicate Bank, Sanga Reddy branch. As per the report of the statutory auditors, dated March 31, 2005, the respondent-company did not take or grant any secured/unsecured loans from companies or individuals during the financial year 2004-05. As per the record and certificate issued by Syndicate Bank (secured creditor), the first petitioner brought an amount of Rs. 88,00,000 on three different dates and diverted these payments to M/s. Special Tech Equipment P. Ltd. (STEP) though RPS did not purchase anything from them. The operation was carried out meticulously and those amounts diverted to the said company were included in the account, so that on paper it would show the same as "share application money", not even a single rupee remains with the respondent-company. The diversion of funds by the first petitioner amounts to criminal breach of trust and the respondent reserves its right to take appropriate action. The managing director, Palani Swamy has no mala fide intention. As per original understanding amongst the investors who contributed by way of share application money, shares were allotted on March 30, 2007, in the board meeting held on that day duly filing necessary returns with the Registrar of Companies. The board of directors also noted that the amounts received from the petitioners would be refunded after settling certain issues involving litigation. The respondent elaborately made allegations with instances to show that the petition is not bona fide and the petitioners, without furnishing correct information, filed the present company petition.
6. Opposing advertisement of petition as mandated by Rule 99 of the Rules, the following averments and allegation's are made in the additional counter affidavit. The company petition is liable to be dismissed for non-compliance with the requirement of serving notice under Section 434 of the Companies Act, 1956. The notices based on which the petition is filed are fabricated and antedated for invoking jurisdiction of this Court and therefore, the company petition is mala fide. The petitioners suppressed the issue of notice dated December 28, 2006 and reply thereto given by RPS. The petitioners are trying to take over the respondent-company. One Srinadh Reddy is telephoning from cell phone No. 9866175552 to the directors of the company claiming that the petitioners allegedly sold their shares in the respondent-company and that he wanted to take over the company. A legal notice, dated September 27, 2007, was issued to the petitioners to confirm factual position and take appropriate action, in vain. The counter further states that the petitioners were never shareholders of the respondent-company. They resorted to financial embezzlement. They did not furnish proper accounts about the amounts brought in as "share application money" and the details of amounts diverted by the petitioners. As there is an embargo imposed by the Income-tax Department, the respondent-company is not in a position to refund the share application money.
7. Learned Counsel for the petitioners relies on Babu Ram v. Krishna Bharadivaj Cold Stores Mills Co. [1965] 2 CLJ 215 and John Paterson and Co. (India) Ltd. v. Promod Kumar Jalan [1983] 53 Comp Cas 255 (Cal), and submits that the share application money is in the nature of debt of the company, and, therefore, the petitioners being creditors can maintain the company petition. He also submits that when admittedly shares were not allotted to the petitioners, the petitioners now are entitled for refund of paid money. The respondent-company failed to discharge debt and it is liable to be wound up. Per contra, learned Counsel for the respondent submits that a person who applies for the shares, whether he is a director or an outsider cannot be treated as a creditor. Share application money cannot be equated to debenture amount, and, therefore, the company petition would not lie when the applicant for shares seeks winding up. He secondly submits that whether the petitioners paid the amount towards share application money is itself in dispute. The petitioners diverted funds for unauthorised payments and, therefore, unless the account is settled, they cannot claim refund of the amount. According to learned Counsel, the petitioners have taken inconsistent stand with regard to the nature of the contribution allegedly made by them and in any event as the board of directors passed resolution to refund the amount, if any, to the petitioners after settlement of the account, company petition would not lie. He also submits that the books of account are kept by the first petitioner and unless and until they are given to the respondent-company, he cannot claim that the company owes any money to them.
8. The submissions of learned Counsel for the petitioners and learned Counsel for the respondent broadly can be considered under two different heads. First, is the question whether a company petition under Section 433 of the Companies Act, 1956, for winding up of the company would lie at the instance of a person who says that he paid share application money for allotment of equity shares. Secondly, whether in the facts and circumstances of this case, the petitioners have prima facie demonstrated that the company petition has to be advertised under Rule 99 of the Companies (Court) Rules, 1959, as a step for further adjudication of the case for winding up. If, on the first question, the submission of the respondent is to be countenanced, the question of examining other aspect may not arise.
9. Part VII of the Companies Act deals with winding up of a company. It contains Sections 425 to 560 conveniently spread over under Chapters I to VI. Chapter II deals with winding up by the court. Sections 433 and 434 of the Companies Act are under sub-heading "circumstances in which company may be wound up by court". Section 433 of the Companies Act, 1956, enumerates "Circumstances in which company may be wound up by court" and Section 434 of the Companies Act, 1956, creates fiction as to when a company is deemed unable to pay its debts. A reading of these two would show that unless it is shown that the company is unable to pay "its debts" to a creditor, mere compliance with Section 434(1)(a) of the Companies Act, 1956, would not enable winding up of the company. Section 439 of the Companies Act appears under the sub-heading "Petition for winding up" is very important provision. It enumerates public authorities and other persons (creditors and others), who alone are entitled to present a petition for winding up. Sub-sections (1), (2), (3), (4) and (8) of Section 439 of the Companies Act, 1956, are relevant for the purpose of this case. They read as under:
439. Provisions as to applications for winding up.-(1) An application to the court for the winding up of a company shall be by petition presented, subject to the provisions of this section,-
(a) by the company ; or
(b) by any creditor or creditors, including any contingent or prospective creditor or creditors ; or
(c) by any contributory or contributories ; or
(d) by all or any of the parties specified in clauses (a), (b) and (c), whether together or separately ; or
(e) by the Registrar ; or
(f) in a case falling under Section 243, by any person authorised by the Central Government in that behalf.
(2) A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of Clause (b) of Sub-section (1).
(3) A contributory shall be entitled to present a petition for winding up a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all, or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities.
(4) A contributory shall not be entitled to present a petition for winding up a company unless-
(a) either the number of members is reduced, in the case of a public company, below seven, and, in the case of a private company, below two ; or
(b) the shares in respect of which he is a contributory, or some of them, either were originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up, or have devolved on him through the death of a former holder.
(8) Before a petition for winding up a company presented by a contingent or prospective creditor is admitted, the leave of the court shall be obtained for the admission of the petition and such leave shall not be granted-
(a) unless, in the opinion of the court, there is a prima facie case for winding up the company ; and
(b) until such security for costs has been given as the court thinks reasonable.
10. Clauses (a) to (f) of Sub-section (1) of Section 439 of the Companies Act, as above, enumerates person or persons who are entitled to present company petition for winding up. "Creditor" is one such category. But, the term "creditor" unlike some other terms used therein is not defined in the Companies Act or the Rules. Though Section 434(1) (a) of the Companies Act contemplates a notice being delivered to the company by creditor before filing winding up petition, Section 433 (e) does not refer to any creditor. It only says that a company may be wound up if the company is unable to pay its debts. It only means that if a company is unable to pay its debt to a creditor. A reading of Sections 433(e), 434(1)(a) and 439(b) of the Companies Act would show that "a creditor to whom the company is unable to pay the debt" is alone entitled to present a petition. The next category is the company, which can present winding up petition under Section 434(1) (a) of the Companies Act. This means the creditor need not be a natural person and even a juristic person like company can present a petition for winding up of another company. Section 428 of the Companies Act defines "contributory" means every person liable to contribute to the assets of the company in the event of its being wound up and includes the holder of any shares which are fully paid-up. The right of a contributory to present a petition for winding up is regulated by Sub-section (4) of Section 439 of the Companies Act. It, inter alia, provides that unless number of members of the company is reduced below seven (for a public company) and below two (for a private company), petition cannot be presented by contributory.
11. The term "creditor" means a creditor to whom money is owed by the company whether he can claim immediate payment of "debt" or whether he has right to demand payment is deferred by an agreement with a company to future date (see "Guide to the Companies Act" by A. Ramaiya, Sixteenth edition, 1998, Part II). A person who has a pecuniary claim against the company, Central Government, State Government, municipal authority to whom tax is due, a receiver of the creditors' properties, a guarantor of the company's debt and a holder of bearer debenture have been held by the courts to be creditors. A person who has become bound by a scheme sanctioned under Sections 391 to 395 of the Companies Act has been held as incompetent to file a petition for winding up. Similarly, unless shares in respect of which a person is contributory holds shares for at least six months during the eighteen months before the commencement of winding up, a petition cannot be presented. Sub-section (8) of Section 439 of the Companies Act provides important guidelines to the court. It is to the effect that unless in the opinion of the court there is a prima facie case for winding up of a company, leave cannot be granted. Section 440(1)(a) of the Companies Act confers absolute power on the court to authorise any person to present a company petition where a company is being wound up voluntarily, if it comes to the conclusion that voluntary winding up cannot be continued without prejudice to the creditors or contributories.
In Words and Phrases, the terms "credit" and "creditor" are defined as below:
'Credit' is a debt due in consequence of a contract of hire or borrowing of money, and, according to business usage, connotes no more than a chose in action. Generally, the word means a sum credited on the books of a company to a person who appears to be entitled to it, and ordinarily a debtor-creditor relation is required.
A person having a claim for damages growing out of a personal wrong or tort is a 'creditor' of the tort-feasor within the meaning of the statute of frauds.
'Creditor' as used in statute concerning liability of corporate director who unlawfully authorises withdrawal or distribution of corporate assets among the shareholders includes one in whose favour obligation exists, by reason of which he is, or may become, entitled to payment of money.
A stockholder is not a 'creditor' of his corporation. Preferred stockholder is not a 'creditor' of the company. The owners of preferred stock in a corporation are 'stockholders', and not 'creditors'. Stockholders are not 'creditors' of a corporation as the term is generally used, but are simply owners of shares or proprietary interests in corporation.
12. Thus, only such of those persons who have jural relationship with the company, either by reason of a concluded contract or quasi contract alone can present a petition for winding up. Every person who has paid or given money to a company otherwise than under any concluded contract cannot present a petition. A shareholder is the owner of the company. His relationship with the company is a contract or agreement for carrying on business of the company, share profits and be liable to a limited extent when contingencies arise. Similarly, a debenture holder has a jural relationship. Pursuant to an invitation to issue debentures, a person is given debentures entitled to certain rights either for payment of interest or for conversion of debentures into other securities at a later date. But, an applicant for debentures who made an application pursuant to an invitation of the company and who is not yet allotted debentures, cannot be treated as creditor.
13. In John Paterson and Co. (India) Ltd. v. Promod Kumar Jalan [1983] 53 Comp Cas 255 (Cal), Promod Kumar Jalan paid a sum of Rs. 1,70,000 to the company repayable on demand at 18 per cent, per annum. The amount was not paid. John Paterson and Co. denied receipt of payment. Subsequently, they admitted that the amount was received in respect of 170 debentures of Rs. 1,000 each. Initially, company petition was directed to be advertised. John Paterson and Co., moved an application for stay, inter alia, contending that the amount was received towards payment of debentures and that debentures were issued to Jalan and therefore, the company petition would not lie. The Calcutta High Court came to the conclusion that there is a dispute as to whether the company issued debentures or not, but found that even if the debentures were issued, the company did not pay interest on debentures and, therefore, they are unable to pay the debt and accordingly refused stay and confirmed advertisement of petition for winding up. The relevant observations made therein are below (page 268):
Assuming the alternative case which the company has made out that the said amount was paid for the issue of 170 debentures of Rs. 1,000 each in the company to the petitioning creditor, which case, the petitioner could have made, had he known about the fact of the alleged conversion of the said loan and the application and the blank letters form in which the application for debenture and that the debentures were in fact issued to the petitioning creditor. The company has not paid the interest payable on the debentures under the terms of the said debenture bond and an amount of Rs. 44,000 and odd has admittedly become payable to the petitioning creditor. The company took time to pay the same, but admittedly, declined to do so. Therefore, on the company's own admission, the company is unable to pay its debt.
14. In the present case, two petitioners claim that they gave the amount as an unsecured loan. They also took a stand that the amount was paid for allotment of shares. If it is given as unsecured loan, the only proof produced before this Court is the bank's statement and the two letters addressed by them to the Syndicate Bank. They themselves would not prima facie show that they are creditors. It is the submission of the respondent-company that an amount of about Rs. 88,00,000 which they brought into the company was paid by the first petitioner unauthorisedly to third parties, that proper account was not shown in spite of request and that whatever be the reason the company passed a resolution to refund the money. If the petitioners had given unsecured loan, which is not prima facie established, they cannot maintain the petition. If the amount is given as application money for allotment of shares as alleged by them, still they cannot be treated as creditors.
15. Every person who gives money to the company cannot be treated as creditor unless such person is treated as "creditor to whom the company owes debt under contract". An applicant for shares can never be treated as creditor of the company. Payment of money by a person for shares is governed by the prospectus which is the invitation of the company to subscribe. Unless and until the application for allotment of shares is accepted and shares are allotted, a person cannot be in any jural relationship. Even when the money paid with an application for shares is never treated as a debt of the company nor applicants are treated as creditors. The money is treated as share application money and returned when the shares are not fully allotted or partly allotted. Therefore, the applicant is only entitled for refund of money. He cannot be given locus as creditor to file a petition under Section 433(e) and 434(1)(a) read with Section 439(1)(b) of Companies Act, 1956.
16. In this case, the respondent has raised a bona fide dispute with regard to the payment of money by petitioners as alleged, with regard to their allegation that money was given as share application money as unsecured creditors and with regard to utilisation of amounts by the petitioners. It is a bona fide dispute regarding the alleged debt. The petitioners, therefore, cannot be said to have proved prima facie case for admitting the winding up petition.
17. According to learned Counsel for the respondent, an ascertained and undisputed debt is only criterion for exercising jurisdiction under Section 433(e) of the Companies Act. The law is well-settled that a winding up petition is not a ground to enforce payment of a disputed debt when the respondent bona fide demurs the debt, (see Bombay Glass Blowing Industries v. Bio Vaccines P. Ltd. , Kesar Enterprises Ltd. v. IDI Ltd. [2002] 112 Comp Cas 174 (Bom), NATL Technologies Ltd. v. Vijay Industries and Mediqup Systems P. Ltd. v. Proxima Medical System GmbH .
18. In Mediqup Systems P. Ltd. v. Proxima Medical System GmbH , after referring to Tube Investments of India Ltd. v. Rim and Accessories P. Ltd. [1990] 3 Comp LJ 322 (Mad), the Supreme Court laid down the rule for disposal of winding up petitions and opposed on the ground of disputed claim. The same is as follows (page 483):
The rules as regards the disposal of winding up petition based on disputed claims are thus stated by this Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. . This Court has held that 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:
(i) that the defence of the company is in good faith and one of substance ;
(ii) the defence is likely to succeed in point of law ; and
(iii) the company adduces prima facie proof of the facts on which the defence depends.
19. In view of the above brief reasons, this Court is not inclined to admit the company petition. The company petition is accordingly dismissed. No costs.