Delhi High Court
Ranbaxy Laboratories Ltd. vs M.S. Shoes East (I) Ltd. on 13 March, 1997
Equivalent citations: II(1997)BC573, [1998]93COMPCAS296(DELHI), 67(1997)DLT635, 1997(42)DRJ203
Author: S.K. Mahajan
Bench: S.K. Mahajan
JUDGMENT S.K. Mahajan, J.
(1) The respondent - M/s.M.S.Shoes East (I) Limited (hereinafter referred to as "the company") was incorporated under the provisions of the Companies Act, 1956 and has its registered office at 5, N.W.A., Punjabi Bagh Extension, New Delhi. The company had been carrying on the business as manufacturers, purchasers, buyers, sellers, importers, exporters, stockists, distributors and dealers in leather, leather cloth, rubber, thermoplastic, rexine, etc. and all allied products made of the same. The company had also as its objects the work of construction, alteration, maintenance, etc. of moveable and immoveable properties, buildings, offices, etc. The other objects for which the company was established have been set out in its Memorandum of Association.
(2) The company is stated to have won export awards for many years till 1992-93 from the Leather Exports Promotion Council, established by the Government of India. In or about 1994/95 it decided to diversify its operation and enter into new projects including that of integrated hotel project. In order to raise funds for the diversified programme, the company decided to enter the capital market in February, 1995 and published a prospectus for the issue of 1,75,84,800 'Zero' interest unsecured fully convertible debentures of Rs.199.00 each for cash at par aggregating to Rs.349,93,75,200.00 . It appears that for various reasons, which are not relevant for deciding this petition, the company was not able to get the minimum subscription stipulated in the prospectus. Around the same time, in or about January 1995, at request of the company, the petitioner - M/s.Ranbaxy Laboratories Limited, granted a loan of Rs.2,00,00,000.00 to the company by way of inter-corporate deposit. The amount was paid by way of two short-term loans of Rs.1,00,00,000.00 each on interest at the rate of 22 per cent per annum for 90 days and 91 days respectively. Payment of this amount of Rs.2,00,00,000.00 was made by two cheques dated 30th and 31st January, 1995 for Rs.1,00,00,000.00 each. In consideration of the grant of the said inter-corporate deposit of Rs.1,00,00,000.00 each, aggregating Rs.2,00,00,000.00 , on interest at the rate of 22% p.a., the company through its Chairman and Managing Director, Mr.Pavan Sachdeva, executed demand promissory notes dated 30th January and 1st February, 1995 promising to repay on demand after 91 days and 90 days respectively a sum of Rs.1,00,00,000.00 each for value received along with interest. Apart from executing the promissory notes, the company also handed over to the petitioner post-dated cheques for repayment of the loans and interest due thereon. Cheque No.704184 and 704185 both dated 1st May, 1995 were issued for Rs.1,00,00,000.00 and Rs.4,22,340.00 representing the principal amount of loan and interest thereon for the first loan while two cheques being No.675233 and 675234 dated 2nd May, 1995 for Rs.1,00,00,000.00 and Rs.4,17,698.00 were given by the company to the petitioner towards repayment of the second loan along with interest. The said cheques, however, on presentation to the bank were returned unpaid by the bankers of the company. In spite of repeated demands when the aforesaid amount was not paid, a notice dated 3rd June, 1995 was served by the petitioner calling upon the company to pay to the petitioner the aforesaid sum of Rs.2,08,40,038.00 within three weeks of the receipt of the notice failing which it was threatened that the petitioner would file a company petition for winding up of the respondent company. In spite of the receipt of notice by the company, the aforesaid amount was not paid and this is how the present petition was filed by the petitioner for winding up of the company on the ground that the company was unable to pay its debts.
(3) Besides this petition filed by M/s.Ranbaxy Laboratories Limited, there are eleven other petitions filed against the company by various other creditors who have also complied with the requirement of notice under Section 433 of the Companies Act and the amount had not been paid in spite of the receipt of notice by the company. Details of other petitions are :- C.P. No. Name of Petitioner Principal amount Rate of interest 222/96 Dcm Daewoo Ltd. 1,50,00,000.00 22% 2,00,00,000.00 27% 160/96 Goetze (India) Ltd. 1,00,00,000.00 22% 116/96 Escorts Finance & 1,40,00,000.00 23.5% Investment Ltd. 1,00,00,000.00 21% 50,00,000.00 22% 117/96 Escorts Limited 60,00,000.00 23% 3/96 Milestone Finance 50,00,000.00 20.5% & Leasing (P) Ltd. 93/96 Bajaj Auto Ltd. 50,00,000.00 20% 237/95 Parle Exports 1,00,00,000.00 20% 214/96 Concept Communication 2,78,18,272.00 16% LTD. 237/96 Sundaram Finance 2,00,00,000.00 277/96 Neeru Arts 47,63,815.80 146/95 Srf Finance 50,00,000.00 (4) On receipt of notice from this Court to show cause as to why the petition be not admitted, the company has filed its reply. While the company has not denied its liability to pay the amount for non-payment of which the present petitions have been filed, the stand taken by the respondent company is that it is commercially solvent and is able to pay its debts. According to the company, the existing realisable assets of the company are sufficient to meet all liabilities. The respondent is alleged to have assets, market value of which is alleged to be about Rs.200 crores. It is stated in the reply that the loan was taken by the company for its working capital requirements in the usual course of business and the respondent was expecting at that time to raise funds from the capital market to meet its working capital requirements for its hotel projects and the money received through the public and the right issues was also to be used for repaying of short term loans and bridge loans. It is stated that the petitioner was always aware that the loan being paid to the company would have been repaid only from the money received from the public and the right issue which could not be effected due to certain reasons as the minimum subscription stipulated in the prospectus in the public issue could not be legally achieved. It is alleged that the parties had orally agreed that the loan would be rolled over for one year on the same terms and conditions and the company was willing to execute all necessary documents to that effect. It is also stated that the company has about 50,000 shareholders and their interest would be jeopardised and prejudiced if the company is wound up.
(5) On 2nd February, 1996 when the matter came up for hearing before the Court, it was stated by learned counsel for the company that the company was willing to pay the petitioners, however, it would take some time to make payment. The counsel, therefore, prayed for three weeks time to be granted to the company to prepare a scheme of payment indicating the specific amount, period and instalments which they would like to pay to the petitioner. On this statement of counsel for the company, the case was adjourned to 30th April, 1996. On 30th April, 1996 learned counsel for the company had brought a sum of Rs.2,00,000.00 to pay to the petitioner and requested for some more time to file the scheme of repayment. The amount of Rs.2,00,000.00 was not accepted by the petitioner on the ground that the amount was too meager keeping in view the liability of the company to pay the principal amount and interest to the petitioner and other creditors. The Court, therefore, directed the Managing Director of the company to be present in Court on 20th May, 1996. On 20th May, 1996 the Managing Director of the company was not present, however, in his place Ms.Sadhna Sachdeva, the whole-time Director of the company was present. It was stated by her that given some indulgence, the endeavour of the company was to make payment of the entire amount to the petitioner. Learned counsel for the company stated that as per the proposal made by the petitioner itself, the company would start making payment from July 31, 1996 onwards and would continue to make the payment till 30th June, 1997. According to the proposal submitted by the petitioner and agreed to by the company, the total payment of the principal and interest was to be made within a period of 14 months and the first instalment of 1/14th of the amount of the principal plus total interest upto that date was to be paid by 30th April, 1996. Subsequent instalments of 1/14th of the principal amount plus interest on reducing balance was to be paid on the last day of every subsequent month. Ms.Sadhna Sachdeva, the whole-time Director of the company and wife of Mr.Pavan Sachdeva, Managing Director of the company, also filed an affidavit undertaking to pay to the petitioner the payment in terms of the schedule filed in Court by the petitioner. This undertaking was, however, not honoured by the company and not a single penny is stated to have been paid till date to the petitioner. The petitioner has, therefore, filed a contempt petition against Ms.Sadhna Sachdeva for her having deliberately and willfully violated the undertaking given to the Court.
(6) It is, therefore, not in dispute that the amount claimed by the petitioner is due and payable by the company. It was for this reason that I had asked Mr.Mukul Rohtagi, learned Senior Advocate appearing on behalf of the company, to address the Court as to why the petition be not admitted and citation be not issued.
(7) The contention of Mr.Rohtagi is that the remedy under Section 433 of the Companies Act (in short referred to as "the Act") is discretionary and a person has no right to seek an order of winding up against a company. It is contended that the Act confers power on the Court to pass an order of winding up only in appropriate cases. It is submitted that the machinery for winding up should not be allowed to be utilised by the Court merely as a means for realising debts due from the company. Relying upon the judgment reported as Pradeshiya Industrial & Investment Corporation of U.P. Vs.North India PetroChemicals Limited and Another, , it is argued by Mr.Rohtagi that an order under clause (e) of Section 433 being discretionary is, as a general rule, made only when it is shown that the company is commercially insolvent and where there is a chance of the company reviving and is earnestly making an endeavour to pay, the Court should stay the proceedings for a reasonable time and give the company a chance to make payment. The word "may" used in the opening part of the Section, according to him, indicates that even if the company is unable to pay its debts, it is a matter of discretion for the Court as to whether in the circumstances of the case, it would be in the interest of justice to wind up the company. In this regard, he has also relied upon the judgments reported as Aluminium Corporation of India Limited Vs.Lakshmi Rattan Cotton Mills Company Limited, ; Tinsukia Vastra Bhandar Vs.Assam Tea Corporation Limited, (1992)1 Company Law Journal 32 (Gauhati); Rishi Enterprises In Re-(1992)1 Company Law Journal 275 (Gujarat); State Trading Corporation of India Limited Vs.Punjab Tanneries Limited, (1994)2 Company Law Journal 270; Dundappa Shivalingappa Adi Vs.S.G.Motor Transport Company (P) Limited, (1966)36 Company Cases 606 and New Kerala Chits and Trades (P) Limited Vs.Official Liquidator, (1981)51 Company Cases 601 (Kerala).
(8) According to Mr.Rohtagi, out of the twelve petitions which have been filed against the company, the company has already settled with three petitioners, namely, Concept Communication Limited; Sundram Finance and Neeru Arts and these three petitioners are, therefore, not pressing their petition. Besides the three petitioners before the Court, the company is also stated to have settled its dispute with Onlooker Press and Reliance Agency. While the total principal amount due to all the petitioners from the company was more than Rs.17 crores, the company is stated to have settled its disputes with the creditors to whom the company owed a sum of about Rs.5.88 crores. The contention of the company is that the public issue of the company was entirely underwritten by the under writers through the Delhi Stock Exchange and Security Exchange Board of India (SEBI) and on the failure of the public issue the company is entitled to receive approximately a sum of Rs.350 crores from the under writers for which arbitration proceedings have already been filed before the Delhi Stock Exchange. It is also the contention of the company that on account of the failure of Sbi Caps, the lead manager to the public issue, to fulfilll its obligations under the Merchant Bankers Rules and Regulations and Sebi guidelines, the company is entitled to receive a compensation of more than Rs.550 crores from the lead managers and its claim for that amount is being investigated by the Mrtp Commission. The company is stated to have a number of prestigious diversified projects in hand and allegedly owns existing assets of Rs.200 crores which are alleged to be sufficient to meet the claims against the company. One of the properties allegedly owned by the company is the land purchased from Hudco for its hotel project. A sum of Rs.69 crores was deposited by the company with Hudco towards part payment of the price of the land. The said property, however, is in dispute inasmuch as Hudco has cancelled the allotment due to the respondent company having not paid the balance instalments payable in accordance with the agreement between the parties. An affidavit was filed by the company on 11th February, 1997 stating inter alia that the financial institutions/banks have indicated that they were willing to support the company and an institutional meeting is alleged to have taken place between the financial institutions and Hudco where it was allegedly decided to pay the balance consideration for the Hudco property. Reliance for this is being placed upon a newspaper report published in The Hindustan Times dated 24th January, 1997. The said property was allotted to the company by Hudco for approximately a sum of Rs.178.88 crores and the present value of the property is stated to be approximately Rs.300 crores. Relying upon these Mr.Rohtagi submits that the company is not financially insolvent and this Court should, therefore, exercise discretion in favour of the company and stay the proceedings for the time being so as to give the company some time to repay the amount being claimed by the petitioners.
(9) It is the contention of the petitioners that if a company fails to comply with the notice given to it under Section 434(1)(a) of the Companies Act for payment of a debt, the Court has no discretion to refuse to make a winding up order. Reliance is placed upon a judgment of the Bombay High Court in Focus Advertising Private Limited, in Re, (1974)44 Company Cases 567, wherein it was held that once there was non- compliance with a statutory notice given by a creditor under Section 434(1) of the Companies Act, 1956 demanding payment of a debt owing by the company and the Court is satisfied that there is no bonafide dispute in regard to the petitioners debt, the creditor is entitled to a winding up order ex debito justiciae, and the Court will not listen to a defense on the part of the company that it was not commercially insolvent or that its financial position is not such as to be unable to pay its debts. The right to winding up order, however, is qualified by another rule, namely, 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. It is, therefore, the submission that once there is a compliance of Section 434(1)(a) and the Company in spite of notice having been received by it, has failed to pay the amount due from it to the creditor, the Court must pass the winding up order. In any case, it is the contention of the petitioners that at this stage the Court is only forming a prima facie view whether the company is unable to pay its debts and the question of winding up of the company will come only after the citation is published. This, according to the petitioner, is not the stage for the Court to go into all these questions and once it is proved to the satisfaction of the Court that the amount is due to the petitioners and the respondent has not paid the same in spite of receipt of notice, the petition should be admitted and citation be published.
(10) It is also the contention of the petitioners that question of a company being commercially insolvent will not be considered by the Court when the petition is under Section 433(1)(a) of the Companies Act. Moreover to determine the commercial insolvency of the company what is to be seen is whether the company is in a position to pay its anticipated debts on demand having been made by the creditor, in the normal course of business. According to the petitioners, no balance sheet or profit and loss account has been filed by the company for the period subsequent to 30th September, 1994; the present statement of affairs have also not been filed; the company has itself expressed difficulties in managing its affairs after the public issue and it was all the more reason that the company should have filed its financial statement for the period subsequent to the public issue. It is also contended that the assets which are stated to be owned by the company are all in dispute and the company is not in a position to raise money for settlement of the claims of the petitioners. Reliance by the petitioners has been placed upon the judgments reported as Deccan Farms & Distilleries Limited Vs.Velabai Laxmidas Bhanji, (1979)49 Company Cases 321; Navjivan Trading Finance Private Limited Vs.In Re. (Gujarat), (1978)48 Company Cases 402; Madhuban Private Limited Vs.Narain Dass Gokal Chand, (1971)41 Company Cases 685; Kalra Iron Stores Vs.Faridabad Fabricators P.Limited, (1992)73 Company Cases 337; C.Hariprasad Vs.Amalgamated Commercial Traders Private Limited, ; Seksaria Cotton Mills Limited, (1969)39 Company Cases 475; Airwings Private Limited Vs.Viktoria Air Cargo Gmbh Langer Kornweg, ; Karnataka Leasing and Commercial Corporation Limited Vs.Smt.Lalitha Holla, (1995)1 Company Law Journal 260 (Karnataka); Amalgamated Commercial Traders (P) Limited Vs.A.C.K.Krishnaswami and Another, (1965)35 Company Cases 456; Dena Bank Vs.Khatau Dyes and Fibres Limited, (1995)83 Company Cases 632; Madhusudan Gordhandas and Company Vs. Madhu Woollen Industries Private Limited, (1972)42 Company Cases 125; In the matter of Dhootpapeshwar Sales Corporation Private Limited, (1972)42 Company Cases 139; Tube Investment of India Limited and Another Vs.Everest Cycles Limited, (1984)56 Company Cases 165; and Sree Shanmugar Mills Limited Vs.S.K.Dharmaraja Nadar and Another, .
(11) In Pradeshiya Industrial & Investment Corporation of U.P. Vs.North India PetroChemicals Limited and Another (Supra), it was held by the Supreme Court that an order under clause (e) of Section 433 of the Act is discretionary. It was also held that a winding up petition is not a legitimate means of seeking to enforce payment of the debt which is bonafide 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 stigmatised as a scandalous abuse of the process of Court. The judgment is relied upon by Mr.Rohtagi in support of his contention that the present petition has really been filed to exercise pressure and same should, therefore, be held to be an abuse of the process of Court inasmuch as the company is stated to be commercially solvent and if given some time will be able to pay its debts. In my view, however, the judgment will not be of any assistance to the respondent. It is only in cases where the company has raised a bonafide dispute about its liability to pay that Court may not entertain the petition for winding up the company; holding the same to be an abuse of the process of the Court. However, in cases where the company has not disputed its liability to pay nor has filed any scheme for consideration of the Court to show as to how the company intends to pay its admitted debts, in my view, the respondent cannot be permitted to contend that the petition should not be admitted as the company has assets, even which are in dispute, in the present case, which if sold will realise more money than what is to be paid to the petitioner. The Supreme Court has held that inability to pay its debts in commercial sense means that the company was unable to meet the current demands. It is admitted case of the parties that the company in this case is not able to meet its current demands and it is only on the assumption that in case the assets of the company are sold that it will be able to recover such amount which will be sufficient to pay its liabilities. However, the assets which are allegedly owned by the company are in dispute and it is not certain as to what time will be taken by the company to acquire the money by the sale of its assets so as to pay its creditors. Even assuming for the sake of arguments that the company will be able to realise the amount more than its liabilities by the sale of the properties, in my view, this itself is not sufficient to hold that the company is commercially solvent or is not unable to pay its debts. In a case under Section 433(1)(e) the question is not whether the company can pay off its debts whether presently due or payable in future, but whether it is able to meet its current demands and whether the existing probable assets would suffice to meet the future demands. In my view, the company on its own showing is not in a position to meet its current demands and I, therefore, have no hesitation in holding that prima facie it is unable to pay its debts. At this stage, this Court is only to take a prima facie view of the matter. The question whether the company will ultimately be able to pay its debts would be considered at the time when the final order of winding up to be passed.
(12) In M/s.Madhusudan Gordhandas & Company Vs.Madhu Woolen Industries Private Limited, , it was held that where the debt was undisputed the Court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay. 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. The principles on which the Court acts are first that the defense of the company is in good faith and one of substance, secondly, the defense is likely to succeed in point of law, and, thirdly, the company adduces prima facie proof of the facts on which the defense 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 decline to make the winding up order. Though, this is not the stage for me to consider this aspect of the matter, however, even the creditors are not opposing the petition to be admitted. It is only the petitioner in CP.No.214/96 and CP.No.277/96 who has supported the petitioner in its demand to adjourn the case by two months, however, all other petitioners to whom the company owes a sum of more than Rs.12 crores are pressing for admission of this petition (13) In my view, the test of inability to pay the debts under Section 433(i)(e) is not whether the company, if it converts all its assets into cash, will be able to discharge its debt, but whether in commercial sense the existing liabilities can be paid by it while it continued to carry on as a company. Value of such assets without which it cannot carry on business cannot be taken into account. Admittedly, the respondent company is not able to discharge its present liabilities and I am not, at this stage, to consider the question whether the company will be able to pay its debts if all its assets are converted into cash. 14.Though, I am in agreement with Mr.Rohtagi that the power under Section 433 to wind up the company is discretionary, however, the discretion has to be exercised keeping in view the facts of each case. The company has been given sufficient time during the last about one and a half years to come out with a scheme as to in what manner it would be able to pay its creditors, however, in spite of the undertaking given by its Director to the Court that it will pay the creditors in instalments in the manner proposed by the petitioner w.e.f. April, 1996, no amount whatsoever has been paid to the petitioner. In these circumstances, I am unable to exercise my discretion in favour of the respondent company. Moreover, there is no reason as to why the discretion should be exercised in favour of the respondent company when there is sufficient material on record to show that the respondent company is not in a position to meet its current liabilities. For the view taken by me, I have not considered it necessary to refer to the judgments cited by both the sides.
(14) In this view of the matter, I admit this petition and direct the citation to be published in The Hindustan Times (English), Navbharat Times (Hindi) and the Delhi Gazette, returnable on 8th July, 1997.