Madras High Court
Sree Aravindh Steel (P.) Ltd. vs Trichy Steel Rolling Mills Ltd. on 7 January, 1992
Equivalent citations: [1992]73COMPCAS607(MAD), (1998)1COMPLJ451(MAD)
Author: A.R. Lakshmanan
Bench: A.R. Lakshmanan
JUDGMENT Lakshmanan, J.
1. Company Petition No. 69 of 1991 was filed by Sree Aravindh Steel Private Limited under section 433(e) and (f) read with sections 434(1)(a) and 439(b) of the Companies Act (1 of 1956), directing the respondent. Trichy Steel Rolling Mills Limited (in short "TSRM"), to be wound up under the provisions of the Act and to appoint the official liquidator to take possession of the assets of the company and for directing TSRM Limited to deposit a sum of Rs. 57,39,464 in this court or directing the said company to furnish a bank guarantee for the said sum and for costs.
2. Pending disposal of the main company petition, Aravindh Steel Private Limited filed Company Application No. 1028 of 1991 to direct TSRM Limited to deposit a sum of Rs. 57,39,464 in this court or to direct TSRM Limited to furnish a bank guarantee for the said sum or, in the alternative, to appoint the official liquidator as provisional liquidator to take charge of its assets and affairs and be in charge of the same pending disposal of the main company petition.
3. Company Application No. 2266 of 1991 was filed by TSRM Limited (respondent in Company Application No. 1028 of 1991) to revoke the order of admission in Company Petition No. 69 of 1991 dated August 2, 1991, and direct the same to be dismissed with costs.
4. By consent of both parties, both the Company Applications Nos. 1028 and 2266 of 1991 were taken up for hearing.
5. Sree Aravindh Steel Private Limited will be referred to as the petitioner and TSRM Limited who is the respondent in the main company petition and Company Application No. 1028 of 1991 and the petitioner in Company Application No. 2266 of 1991 will be referred to as the respondent in this order.
6. According to the petitioner, a sum of Rs. 49,62,101 together with interest is outstanding from TSRM Limited towards supply of materials and, after serving statutory notice, the respondent TSRM Limited has failed and neglected to make the payment of Rs. 57,39,464. The company petition was filed in this court on July 25, 1991, and the same was admitted by me on August 2, 1991. I directed issue of notice to the respondent both in the main company petition as well as in Company Application No. 1028 of 1991 on the said date. Advertisement in newspapers and also in the Tamil Nadu Government Gazette was deferred for the present. Private notice was also permitted. The respondent filed a counter-affidavit to the company application for which the petitioner has filed a reply affidavit. Thereafter, the respondent has filed Company Application No. 2266 of 1991 for the dismissal of the company petition. The petitioner had filed a counter-affidavit to the same.
7. Mr. T. Raghavan, learned counsel for the respondent, pressed that Company Application No. 2266 of 1991 must be heard first on the ground that if the said application is allowed, the question of consideration of Company Application No. 1028 of 1991 would not arise. On the said submission, Company Application No. 2266 of 1991 was taken up first for consideration.
8. On behalf of the respondent (TSRM Ltd.), Mr. T. Raghavan, learned senior counsel, contended that (sic) in the nature of Company Application No. 2266 of 1991 and in support of his submission, he relied upon the decision of the Supreme Court in National Conduits (P.) Ltd. v. S. S. Arora [1967] 37 Comp Cas 786. In the said judgment, the Supreme Court held that there are three stages in the hearing of a company petition for winding up and they are :
(i) that the court may order issue of notice to the company before admission as to why the petition should not be admitted;
(ii) that the court may admit the company petition but defer directions regarding advertisement but issue a notice to the company as to why the petition should not be advertised, and
(iii) that the company petition can be admitted and directions including advertisement can be made straightaway even at the time of admission and, thereafter, the court may proceed to hear the company petition.
9. In the said decision, the Supreme Court has also held that even the admission of the petition can be challenged by the company on the ground that the petition is an abuse of the process of the court.
10. Mr. T. Raghavan then contended to say that TSRM Ltd. (respondent-company) has a larger counter-claim against the petitioner even though it has admitted the claim of the petitioner and that there is substance in the counter-claim of the respondent and that, therefore, the main company petition should be dismissed. Dealing with the facts of the case, Mr. T. Raghavan stated that the debt due to the petitioner as claimed is not in dispute but TSRM Limited is claiming more than the amount claimed by the petitioner and if TSRM Limited succeeds in its contention, then there would be no amount due to the petitioner but, on the other hand, the petitioner itself would owe money to TSRM Limited. Therefore, the question whether the petitioner is due to TSRM Ltd. is a relevant factor to decide whether TSRM Ltd. is bona fide disputing its liability to the petitioner or not.
11. The sum and substance of the contention of the respondent that the petitioner owes money to the respondent can be summarised as follows :
Mr. S. B. Shankar was the managing director of TSRM from 1974 up to January 30, 1991. His relatives and associates held 52% of the shares in TSRM. Similarly he and his associates were holding 90 per cent. of the shares in the petitioner and he had contemplated selling away the controlling interest in TSRM and to make an unlawful gain, had masterminded a transaction of exchange between the petitioner and TSRM by which certain machineries of the petitioner were valued at the current value and some valuable machineries belonging to TSRM were taken by the petitioner as if the same were scrap so that the petitioner would gain and TSRM would lose. In other words, Mr. S. B. Shankar knew well that he was divesting control of the TSRM and he had also failed and neglected to protect the interests of TSRM and, therefore, TSRM would not only be entitled to recover the real value from Mr. S. B. Shankar but also from the petitioner. Since the petitioner did not pay the real value, TSRM had filed O.S. No. 480 of 1991 in the Sub-Court, Trichy, claiming a sum of Rs. 88 lakhs odd and in which TSRM was prepared to give credit for the sum of Rs. 45 lakhs and claim a decree for the balance of Rs. 40 lakhs. Mr. T. Raghavan, learned senior counsel, had urged the following submissions in support of the case of the respondent :
(a) That the petitioner would not be entitled to rely upon the board of director's resolution passed on June 14, 1990, which authorised the exchange of machineries between the petitioner and the respondent as the said resolution does not comply with the requirement of section 297 of the Act for the following two reasons :
(i) that the board was not aware of the fact that the machineries of TSRM Ltd. were removed between October, 1989, to December, 1990, nor about the value of the same and, therefore, the board was misled.
12. In support of his contention No. 1, Mr. T. Raghavan, drew my attention to a letter dated September 18, 1989, written by Mr. Veeraselvan of the petitioner to the respondent and also 85 copies of gate passes. He also relied on the copy of the resolution dated June 14, 1990, and also a copy of an undated note of Mr. Srinivasan and argued that S. B. Shankar, as managing director, ought to have placed all the facts before the board and his failure to do so amounts to breach of fiduciary duty. It is stated on in the said letter dated September 18, 1989, sent on behalf of the petitioner to the respondent that the petitioner requires the items mentioned in the said letter from the respondent-company to put up a rolling mill at SAS (petitioner). Hence, the petitioner requested the respondent to send the materials mentioned in the said letter.
13. A reading of the board's resolution passed on June 14, 1990, conveys an impression that the said board was giving consent prospectively to a transaction which had already taken place and, therefore, the consent accorded by the board is not a reasonable consent which should satisfy the requirement of section 297 of the Act. For this proposition, the decisions reported in :
Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343 (Bom) and M. C. Duraiswamy v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154 (Mad) were cited by learned counsel. In Walchandnagar Industries' case [1953] 23 Comp Cas 343, a Division Bench of the Bombay High Court consisting of Chagla C.J. and Shah J. under (headnote) :
"'Consent' implies knowledge of the necessary facts and materials which leads to the consent. Consent cannot be given in the abstract or in vacuo. Consent under section 86F of the Indian Companies Act can only be given in reference to the particular contract which a director intends to enter into. Therefore, the section requires that the board of directors should consider both the nature of the contract that the director wants to enter into and also the case of the particular director who wants to enter into the contract before the consent is given. It is only on a considerations of both these factors, viz., the nature of the contract and the qualifications of the director that a proper consent can be given for entering into a contract. The power that is given to the board of directors is not to remove the personal disability of the director generally, e.g., by passing a general resolution, but to remove the personal disability with regard to a particular contract or contracts to which the board has applied its mind."
14. In M. C. Duraiswamy's case [1980] 50 Comp Cas 154, a Division Bench of our High Court, consisting of Ismail J. and Nainar Sundaram J. (as they then were) held as follows (headnote) :
"'Consent in writing' contemplated in section 399(3) of the Companies Act, 1956, is a consent to the filing of a particular petition with a particular allegation for a particular relief under section 397 or section 398 or under both. There cannot be a blanket consent like a certain member or members consenting to some other member filing a petition under section 397 or section 398 or under both. Before a member can be said to have consented to a particular action, the said member should have known what was the action to be taken, what was the relief to be prayed for and what was the ground to be urged in support of the relief claimed. The members giving the consent should have applied their minds to the question before them which necessarily implies that the application of the mind was to the particular relief sought to be prayed for and the ground on which that relief was sought to be prayed for. A mere consent for filing an application under section 397 or section 398 or under both without any particulars such as the nature of the allegation or complaint to be made in the petition and the nature of the relief sought to be claimed in the petition cannot be the result of an application of the mind to the question before them and, therefore, such a consent cannot be a valid consent. A combined reading of sections 399(1) and 399(3) will also reinforce the above conclusions."
(ii) The second reason, according to Mr. T. Raghavan, learned senior counsel, for which the resolution does not comply with the requirement of section 297 of the Act is that the respondent-TSRM Ltd., is bona fide disputing its liability to the petitioner as it has to recover a larger amount from the petitioner and, therefore, the winding-up proceeding initiated by the petitioner is misconceived. He made reference to the copy of the plaint in O.S. No. 480 of 1991 and also to the report to K. B. Subramaniam and Associates. He submitted that TSRM Ltd., the respondent-company had repudiated its liability even at the outset while replying to the demand notice dated June 10, 1991, of the petitioner by letter dated June 29, 1991. He further argued that Dr. Ghatte's Engineering and Metallurgical Company Private Limited report about the valuation of the machineries exchanged is inconclusive as it has taken into consideration only 14 gate passes. Mr. T. Raghavan, relied upon the decisions in Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570 (Mad) and Amalgamated Commercial Traders P. Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456 (SC).
15. He also invited my attention to the passages from Palmer, 24th edition, page 1366, and Buckley, 14th edition, page 523 on Company Law, in which it has been mentioned that a counter-claim can also be put forward as a bona fide dispute. He also relied upon the decision of our High Court rendered by Mohan J. (as he then was) in Newfinds (India) v. Vorion Chemicals and Distilleries Ltd. [1976] 46 Comp Cas 87 (Mad), in which it has been held as follows (headnote) :
"'Debt' as defined in section 434(1)(a) of the Companies Act, 1956, means a definite sum and hence it cannot be contended that 'debt' also includes any unliquidated damages or a sum of money capable of being ascertained.
The question whether a dispute regarding a debt is bona fide or not depends upon the circumstances of each case. The test is whether the dispute is raised only to avoid payment of the debt and not based on a substantial ground. Bona fide dispute means that the dispute is based on a substantial ground and if such a dispute is raised, the court should refuse to make an order of winding up even if only a part of the debt is disputed on substantial ground."
16. Mr. T. Raghavan's submissions in a nutshell are as under :
(a) The respondent has not sought revocation of the order of admission since, in its submission, the debt relied upon by the petitioner is disputed and consequently the admission of the petition ought to be revoked;
(b) A winding up petition is not a recognised mode for recovery of a debt and if the company is solvent and the debt is bona fide disputed, the court generally is reluctant to admit the petition;
(c) Where the company petition is admitted without notice to the company, it is open to the company to seek revocation or stay of the petition. For this proposition, Mr. T. Raghavan, relied on the judgments in National conduits (P.) Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 (SC) and George v. Athimattam Rubber Company Ltd. [1965] 35 Comp Cas 17 (Ker).
It is, therefore, according to Mr. T. Raghavan, open to the respondent to move this court for revoking the admission of the main company petition.
(d) A winding-up petition to enforce a disputed debt would be stigmatised as a scandalous abuses of the process of court. He relied on the decisions in Amalgamated Commercial Traders (P.) Ltd.'s Case [1965] 35 Comp Cas 456, 463 (SC); Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125 (SC) and Shadiram and Sons'case [1978] 48 Comp Cas 570, 573 (Mad).
(e) The presumption under section 434(1)(a) would arise only if the company neglects to pay even after demand. Refusal or failure to pay a disputed debt would not constitute neglect within the meaning of section 434(1)(a). He relied on certain passages in Palmer's Company Law, para 88-06 pages 1366 and 1367, and Buckley on the Companies Acts, volume I, 14th edition, para 534.
(f) A bona fide counter-claim which exceeds the debt due to the petitioning creditor would stand on the same footing as a disputed debt and would be an answer to the petition for winding up.
(g) Genuine cross-claims result in dispute, where a genuine cross-claim overtops the petitioner's claim, winding up cannot be proceeded with. In support of this contention, Mr. T. Raghavan relied on the decision in Bharat Vegetable Products, In re [1952] 22 Comp Cas 62 (Cal); Federal Chemical Works Ltd., In re [1964] 34 Comp Cas 963 (All) and Euro Hotel (Belgravia) Ltd., In re [1975] 3 All ER 1075, 1078 (Ch D) which refers to and follows L. H. F. Wools Ltd., In re [1969] 3 All ER 882; [1969] 39 Comp Cas 934 (CA).
(h) A counter-claim in excess of the petitioner's claim is a good defence to a winding up action. For this proposition, he relied on in British India Banking Corporation Ltd. v. Sylhet Commercial Bank Ltd. [1949] 19 Comp Cas 15 (Assam).
(i) Even a wrong belief of the respondent that it is not bound to pay would not constitute neglect.
(j) Claims and cross-claims would result in disputed debts. He relied on the decision in J. N. Roy Chowdhury (Traders) Pvt. Ltd. v. Jainti Enterprises [1987] 61 Comp Cas 504 (Cal).
(k) Even where part of the debt is disputed section 433 will apply. He relied on the decision in Newfinds (India) v. Vorion Chemicals and Distilleries Ltd. [1976] 46 Comp Cas 87 (Mad).
(l) A plea of discharge based on a counter-claim is a good defence.
(m) The expression 'debt' ought to be understood in a practical and pragmatic sense.
It is, therefore, submitted by Mr. T. Raghavan that where the respondent has a genuine counter-claim to be tried which exceeds the petitioner's claims, winding up petition would not be a bona fide proceeding. According to Mr. T. Raghavan, learned senior counsel, to constitute a bona fide dispute, the respondent has only to show that prima facie he has a case to be tried and that it is likely to succeed on a point of law. In this connection, he invited my attention to the decision in Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570, 573 (Mad).
(n) The court only examines whether, on a prima facie view, the defence is sham or is substantial. In considering this aspect, all the factual circumstances as to the relationship of the parties, the manner in which the claim has arisen and the conduct of the parties would be relevant.
(o) The managing director occupies a fiduciary position in regard to the company and cannot put himself in a position where his duty and interest conflict.
(p) While section 300 of the Act precludes the director from participating or voting on matters where he has interest, it does not absolve the managing director from his duty to the company and the board of directors.
(q) Thus, the managing director is under an obligation to make the fullest disclosure and cannot avoid such responsibility by taking refuge under section 300 of the Act that he is not entitled to participate in the meeting.
(r) The facts as evidenced by several documents show that this duty was not performed by Mr. Shankar, the managing director.
(s) The respondent company by instituting a civil suit against the managing director and the petitioner herein who is the beneficiary of the transaction even before the winding-up petition was presented has unequivocally avoided the arrangement under which its assets were transferred to the petitioner for a totally inadequate consideration.
17. In reply to the above arguments of Mr. T. Raghavan, Mr. C. Harikrishnan contended as follows :
According to him, the matter under consideration of the court is the application for dismissal of the company petition. He relied on the decision in National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 783 (SC) which clearly lays down that the question of dismissal of the petition would arise only if such a petition is an abuse of the process of court. There is a statutory presumption under section 434(1) of the Act in favour of the petitioner. Since the indebtedness of the respondent to the petitioners is admitted, there is no question of the petitioner abusing the process of the court in filing the present petition. Thus, Mr. C. Harikrishnan contended that the application for dismissal of the main company petition should be dismissed on this simple ground. Further, the court having admitted the petition, the matter is at the second be dismissed on this simple ground. Further, the court having admitted the petition, the matter is at the second stage of the proposition enunciated by the Supreme Court in National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 786. What remains to be done for hearing the company petition is the advertisement. If at all what TSRM Ltd. could pray at this stage would be only for stay of the advertisement and not for dismissal of the petition itself. According to Mr. C. Harikrishnan, the bona fides of the petitioner would arise only if it is an attempt to recover an amount by using the process of the court with an unsustainable claim. The debt due to the petitioner being admitted, the petitioner's action cannot be criticised as one without substance. It is for the respondent (TSRM Ltd.) to establish that it is bona fide disputing it liability to the petitioner. The facts and circumstances show that TSRM Ltd.'s contentions are all an afterthought and invented for the occasion and that therefore, cannot be bona fide.
18. The following facts have got to be noticed and borne in mind in deciding the disputes between the parties :
(1) The petitioner and TSRM Ltd., respondent, were having transactions for a long time earlier and the minutes of the meetings of the board of director of TSRM Ltd. would reveal that the said transactions came up before the board meetings of TSRM Ltd. at every quarter, and were considered and approved.
(2) There was a change in the management as and from January 30, 1991, in TSRM Ltd. Mr. Audikesavalu and his associates acquired a controlling interest in TSRM and the members of the board resigned and new directors of the choice of Mr. Audikesavalu were appointed on that day.
(3) Mr. Audikesavalu and Mr. S. B. Shankar agreed that the machineries exchanged between the petitioner and TSRM are to be valued by Dr. Ghatte Associates and accordingly, the letter dated February 6, 1990, was written. Dr. Ghatte's representative, Mr. Vade, inspected the machinery on 10th to 12th of February, 1991, and gave a report that the machinery examined were of equal value and, if not, that TSRM has to pay the petitioner an additional sum of Rs. 25,000.
(4) On February 16, 1991, the petitioner requested TSRM to pay the sum of Rs. 49,62,101 being the subject-matter of the company petition. Admittedly, there was no reply.
(5) Dr. Ghatte's report was available to the parties on March 4, 1991. Still there was no reply to the petitioner's demand nor was any dispute raised about the validity of the report.
(6) A letter dated April 24, 1991, from the Indian Overseas Bank was written to TSRM Ltd. demanding payment of Rs. 49,62,101. By two letters dated May 3, 1991, one written to Indian Overseas Bank and another written to the petitioner, TSRM Ltd., respondent, replied to Indian Overseas Bank that it has a greater claim on the petitioner and, consequently, refused to pay and by the other letter to the petitioner stated that the petitioner owes Rs. 78,83,422 odd. By a letter dated May 6, 1991, the respondent claimed payment or alternatively requesting the petitioner to deliver 60.395 mt. of shredded scrap.
(7) By further letters dated May 16, 1991, and May 27, 1991, the petitioner demanded the amount again. The respondent stated that the petitioner's contention cannot be accepted. By letter dated June 10, 1991, the petitioner informed TSRM, respondent, that if the amount of Rs. 55,25,686 together with interest at 18% per month is not paid, it would take winding up proceedings.
(8) Thereafter the respondent appears to have filed a suit on June 26, 1991, in the Sub-Court, Trichy, for a decree for Rs. 45 lakhs against the petitioner. The petitioner had filed a caveat on July 22, 1991 but the same was not served. On July 24, 1991, the respondent moved the suit after paying the deficit court fee and wanted interim orders. Counsel for the petitioner at Trichy having come to know of the said move, appeared in court and took notice. Thereafter, by a letter dated June 29, 1991, the respondent replied to the notice of demand dated June 10, 1991. In the reply, there was no mention of filing of any suit.
(9) Dealing with the first limb of the submission of Mr. Raghavan relating to section 297 of the Act, Mr. Harikrishnan denied that Sri S. B. Shankar had misled the board of directors in passing the resolution of June 14, 1990, or that Sri S. B. Shankar had acted in a manner violating his duties as the managing director and that it was not possible to do so. Inviting my attention to the provisions of section 300 of the Act, Mr. Harikrishnan submitted that there was an express prohibition on S. B. Shankar playing any part in the board's decision of June 14, 1990, and, therefore, the allegation against S. B. Shankar in this context is unsound both in law and fact. Further, he drew my attention to the qualifications and standing of the members of the board and said that it would be futile on the part of TSRM even to suggest that such members were misled. In this connection, the note of Mr. Srinivasan was read in full and it was mentioned that every conceivable detail required for the board to take a decision has been given in the said note. Counsel had also stated that, while the affidavits on behalf of the respondent have clearly stated that the decision of the board was taken on the basis of the note of the finance manager, an impression was sought to be made as if the note had no connection with the meeting. He also pointed out that the machineries of TSRM exchanged were more than 25 years old. Mr. Harikrishnan stated that the movement of machineries has no relevance for taking the decision relating to exchange. He also pointed out that a close scrutiny of the gate passes produced by TSRM would show that 98% of the materials, subject-matter, of the said gate passes, were moved to the sub-depot of TSRM Ltd. only. Therefore, the gate passes were irrelevant for the present dispute.
(10) Turning to the latter part of the submission of Mr. Raghavan relating to section 297, Mr. Harikrishnan contended that the decision in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343 (Bom) was a decision which interpreted the provisions of section 86F of the 1913 Act and that there is considerable difference between the present section 297 and the old section 86F. Further, in the case in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343, there was no consent but, in the present case, there is consent. Therefore, in my view, the decision in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw [1953] 23 Comp Cas 343 is not applicable to the present case. In so far as the case in M. C. Duraiswamy v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154 (Mad) is concerned, it is the contention of Mr. Harikrishnan that the said decision arose in dealing with section 399 of the Act which has nothing to do with the purport and intent of section 297 of the Act. Sections 399 and 297 deal with two different situations. My attention was drawn to the provisions of section 193 of the Act which say that it is enough if a fair and accurate summary of the decision of the board is kept and so long as there is a resolution relating to the matter in question, it would satisfy the requirement of consent under section 297 of the Act. Mr. C. Harikrishnan cited the decision in Mohan Lal v. Grain Chamber Ltd., , for the proposition that a consent can be implied. The said decision arose under section 86F of the old Act. It says as follows (p. 277) :
"Where a company started before the introduction of section 86F in the Companies Act, by its very constitution, envisaged that directors must carry on business with the company it must be held that there was implied consent of all the directors to the entry of contracts by other directors with the company. Further, as even after section 86F was introduced in the Act, no steps were taken either by the general body of shareholders or by the directors to amend their articles of association so as to omit requirement of every member having to carry on business with the company. The directors, who continued to function after the introduction of section 86F, as well as the directors of the company who were elected subsequently when the board of directors had to be reconstituted must be deemed to have impliedly consented to all the directors continuing to carry on business with the company so as to comply with the requirements of the articles of association."
(11) Arguing further, counsel for the petitioner submitted that, even assuming that there was violation of section 297 of the Act, the only consequence that may follow is that TSRM Ltd. would be entitled to avoid the exchange. The balance-sheet for the year March 31, 1991, was produced to show that TSRM Ltd. had once again confirmed the exchange but says that the value of the same was fixed at Rs. 6.76 lakhs and that subsequently the value of the machineries supplied to the petitioner Aravindh Steel (P.) Ltd. has been evaluated at Rs. 78.83 lakhs and after adjusting the amounts lying to the credit of TSRM Ltd. there is a sum of Rs. 42.22 lakhs due from the petitioner as on March 31, 1991, for which the company has filed a suit in the Sub-Court at Trichy.
(12) It was further argued by counsel that, in the event of avoiding the transaction, TSRM Ltd. should restore the benefits kit had derived in the exchange. The provisions of sections 64 and 66 of the Contract Act were relied on. TSRM Ltd., now wants only the difference of the alleged value of its own machineries without saying anything about the machineries got from the petitioner. This conduct on the part of TSRM Ltd., in my view, only belies the contention under section 297 of the Act.
(13) Looking from all angles, the arguments of Mr. T. Raghavan relating to section 297 of the Act in my view are not justified. It may also be seen that the contention of TSRM Ltd. in this regard at the time of hearing had not been raised in the form submitted, in the pleadings of TSRM Ltd. before this court.
(14) Dealing with the contentions that TSRM's dispute is bona fide, Mr. C. Harikrishnan, counsel for the petitioner, replied that nothing special could be inferred from the filing of the suit. If filing of a suit can be considered bona fide, every company can just file a suit on unsustainable contentions and with that they can prevent valid winding up proceedings. Counsel particularly emphasised the fact that a mere reading of the plaint would itself establish that TSRM Ltd. is not acting bona fide. I feel that the suit is based only on boosted figures just for making TSRM's claim to be in excess of the claim made by the petitioner. I think the figures have been arrived at on the basis of replacement cost and the working of depreciation backwards. In my view, there seems to be no basis for such figures. The cause of action for the suit of TSRM seems to be the alleged fraud played by S. B. Shankar in not placing the real facts before the board of directors. He is said to have acted in breach of duty in the affairs of TSRM Ltd. By no stretch of imagination, even if such a fraud is established, can the petitioner be made liable to TSRM Ltd. on that account. It has not been stated as to on what ground the petitioner has been sought to be made liable on account of the alleged fraud of S. B. Shankar in the affairs of TSRM.
(15) It was further argued by Mr. C. Harikrishnan that there is no presumption so far as fraud is concerned. It is well-settled law that fraud, unless pleaded and proved, cannot be taken into consideration. Till such time that the alleged fraud is proved, there is no question of presumption from certain facts that fraud was played. Counsel placed reliance on the decision in Narayanan v. Official Assignee, Rangoon, AIR 1941 PC 93, for the proposition that fraud has to be proved. The Privy Council in the said decision held as under :
"Fraud - Fraud must be established beyond all reasonable doubt - It cannot be based on suspicion and conjecture.
Fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture."
The attempt of TSRM is to make the court presume fraud. It should not be permitted. Even otherwise, it is very clear to my mind that the suit was filed only for the purpose of avoiding winding up proceedings. A suit with a negligible court-fee of Rs. 100 was filed on June 26, 1991. This date is relevant as the petitioner had already issued a statutory notice under section 434(1) on June 10, 1991. If there had been any genuine intention in filing the suit, it would not have been filed with a nominal court-fee of Rs. 100 and also with a petition under Order II, rule 2, Civil Procedure Code, to permit them to reserve its right to sue the defendant for other claims not covered by the present suit. Filing of the petition under Order II, rule 2, Civil Procedure Code, itself in my view makes the claim of TSRM Ltd. a speculative one.
(16) Dealing with the contention that Dr. Ghatte's report was inconclusive, Mr. C. Harikrishnan replied that there is no basis for such a contention. Counsel took me through the said report and argued that the report was not based on any gate passes and was prepared only on the personal inspection by Mr. Vade along with the general manager of TSRM of the machineries exchanged. The contention that Dr. Ghatte's report was based on 14 gate passes is an afterthought. The said report was available to the new management even as early as March, 1991. No such contention was ever put forward by TSRM Ltd. up to the filing of the counter in the present proceedings. TSRM was only contending that, in compiling the report, the representative of the new management was not associated.
(17) Counsel for the petitioner submitted that K. B. Subramanian's report is very vague and unacceptable and appears to be one got up for the occasion. Though the report was said to have been given on April 26, 1991, a copy of the said report was not filed along with the suit nor even mentioned anywhere in the affidavits filed on behalf of TSRM Ltd., in these proceedings. The report itself admits that it was not based on any inspection of the machineries nor had the author taken pains to verify the actual state of the machineries exchanged. On the other hand, the report says that that would be the replacement cost and the working of depreciation backwards. Such a procedure is improper. It is also seen from the report that the same was prepared at the instance of the present management (TSRM) and the machineries, plant, spares and stores consumables despatched to Aravindh Steels (P.) Ltd. were valued on the basis of the details furnished by the management. In page 2 of the report, it is stated that the report is based only on the details furnished by the present management of TSRM as inspection of the items transferred could not be arranged. It is also stated that the replacement cost of machinery equipments, etc., have been assessed by enquiries and similarisation and these costs determine the expenditure to be incurred in reprocuring these items.
Counsel for the petitioner also pointed out that there is variation between what is alleged in the suit and what is stated in the pleadings on behalf of TSRM. The suit proceeds on the basis that some sale of the machineries of TSRM had taken place without mentioning that TSRM had taken back some of the machineries. If it is a suit for avoiding the agreement, then credit should have been given for the value of the machineries taken from the petitioner. According to counsel, the attempt of TSRM is to have the machineries and to claim an artificial difference in value for old machineries and to deny the admitted dues to the petitioner. Therefore, the contention of Mr. C, Harikrishnan that the dispute raised by TSRM is not bona fide is well merited for consideration.
(19) It is seen that Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570, 580 (Mad) and Amalgamated Commercial Traders P. Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456 (SC) cited by TSRM Ltd., counsel said, that the said decisions were given after hearing of the winding up petition. The said decisions also say that the company might establish its bona fides. Therefore, the said decisions do not run counter to the stand of the petitioner. Learned counsel also cited the decision in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125 (SC).
19. In reply to the above arguments, Mr. T. Raghavan said that, in all cases raising a plea of bona fide dispute, it is not necessary that the debt due to the petitioner should alone be the only factor. The expression "omitted to pay" in section 434(1) is not a mere omission to pay but one "neglected to pay". Neglect to pay cannot arise when the liability is under dispute. A particular debt may be admitted by the company but if the creditor owes the company on some other transaction, there would be no neglect to pay by the company. A valid counter-claim can also be construed as one falling under disputed liability. In support of his contention, he read passages from Palmer on Company Law and proceeded to cite the following decisions :
(i) Virendrasingh Bhandari v. Nandlal Bhandari and Sons Pvt. Ltd. [1979] 49 Comp Cas 532 (MP); (ii) London, Hamburg and Continental Exchange Bank, In re [1866] LR 2 Eq 231; (iii) Euro Hotel (Belgravia) Ltd., In re [1975] 3 All RE 1075 (Ch D); (iv) Shadiram and Sons v. Southern Aviation P. Ltd. [1978] 48 Comp Cas 570 (Mad); (v) L.H.F. Wools Ltd., In re [1969] 39 Comp Cas 934; [1969] 3 WLR 100 (CA); (vi) C. A. Galiakotwala and Co. P. Ltd., In re [1984] 55 Comp Cas 746 (Bom); (vii) J. N. Roy Chowdhury (Traders) P. Ltd. v. Janiti Enterprises [1987] 61 Comp Cas 504 (Cal); (viii) Thakar Gobind Singh v. Merchant Mohani Flour Mills Ltd. [1944] 14 Comp Cas 184 (Lahore) and [1949] 19 Comp Cas 47 (sic).
20. He further argued that Mr. S. B. Shankar's friends and family held a controlling interest in TSRM Ltd. and similarly held 90% of the holdings in the petitioner and, therefore, the transactions seems to be of only one mind, viz., Shankar's and thus the transaction involved only a single mind. He proceeded further to argue that, on account of the same, the court should ignore the provisions of section 300 of the Act and proceed further to look into details of the transactions and alleged fraud by Mr. S. B. Shankar. He cited the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) as to the theory of single mind. He said that it was held in the said decision that the mind of the subsidiary company is that of the holding company and, therefore, it was quite possible to have a single mind for two companies. He added that sufficient and valid material has been furnished by TSRM Ltd., so that there is substance in the counter-claim of TSRM Ltd.
21. Mr. T. Raghavan also argued that Arun Shankar was recently elected to the board of directors of the petitioner-company and he was deliberately made to verify the company petition thereby implying that Mr. S. B. Shankar was kept away from the present proceedings. The person who knew about the transaction is S. B. Shankar and in order that real facts would not be available to the court, he had kept himself away from the present proceedings. Mr. T. Raghavan also produced copies of the annual reports filed by the petitioner with the Registrar of Companies to show as to when Arun Shankar was elected.
22. Mr. Raghavan also strenuously contended that there was a deliberate attempt on the part of the petitioner to conceal the fact of the filing of the suit by TSRM Ltd. in the Sub-Court, Trichy. Though it is pardonable for the petitioner to have omitted to mention the said fact in the company petition, petitioner should have filed an additional affidavit mentioning the fact, that the petitioner was aware of the suit at the time when the company petition was moved on August 2, 1991.
23. Mr. Raghavan also filed a xerox copy of a document dated June 11, 1990, said to have been written by Sri. Srinivasan, financial manager of TSRM Ltd. along with an affidavit of one Mr. S. Kannan, works accountant, to the effect that he is acquainted with the handwriting of Srinivasan and that the original is not available. Mr. Raghavan, on the basis of the documents, contended that the former managing director of TSRM Ltd., viz., Mr. S. B. Shankar and the said financial manager were hand in glove and have brought about a fraudulent transaction of exchange to benefit the petitioner. In the word of Mr. Raghavan, the members of the earlier board were all people accustomed to act in accordance with the directions of Mr. S. B. Shankar as he was still the deciding mind in respect of TSRM Ltd. by virtue of his holdings in TSRM Ltd. With the aforesaid submissions, learned counsel wanted me to allow the application for revoking the admission of the company petition.
24. In view of the new points raised in reply, Mr. C. Harikrishnan was permitted to reply to the same. Mr. C. Harikrishnan said that he would reply only to the additional new points as he had already dealt with the points raised by Mr. Raghavan and it is not necessary to repeat.
25. In so far as the contention based on the said decision referred to by Mr. Raghavan is concerned, it was the contention of Mr. C. Harikrishnan that, in those cases, the decisions were rendered after contest and as a final disposal of the case. None of the cases is apt or appropriate at this stage. What the court is now considering is the application for revoking the admission. Even otherwise, it is the contention on behalf of the petitioner that all those cases were decided on the material before the court to hold that the contention of the company was bona fide, and that the counter or cross-claim arose in respect of the same transaction on which the debt arose. The same in my view is not the case in the present instance. In this case, it has been amply demonstrated that TSRM Ltd. is deliberately acting otherwise and the intention is to retain the money by TSRM Ltd., for its own use. The claim of TSRM Ltd. is of indefinite value and unascertained, whereas the claim of the petitioner is admitted in unequivocal terms.
26. Dealing with the point relating to Arun Shankar, Mr. Harikrishnan said that it is immaterial who had verified the petition. The debt due to the petitioner has been admitted by TSRM Ltd. without any kind of doubt. It is not a part of the duty of the petitioner to sit in judgment over a prospective contention of TSRM Ltd. and select persons accordingly to verify the petition. He also pointed out that reply affidavit in Company Application No. 1028 of 1991 and the counter-affidavit in Company Application No. 1266 of 1991 were sworn to by Mr. Venkataraman who has been a director of the petitioner for a long time. Therefore, the criticism regarding Arun Shankar verifying the company petition is not, in my view, well-founded. So far as Mr. S. B. Shankar is concerned, in view of that he was made the second defendant and fraud has been alleged in the suit, it would be futile to expect of Mr. S. B. Shankar to plead in the present proceedings where his presence is absolutely not necessary (sic).
27. In so far as the theory of one mind and the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) are concerned counsel refuted the same. Mr. S. B. Shankar had no mind in the resolution of June 14, 1990, in view of section 300 of the Act. The latest decision of the Division Bench in Hackbridge Hewittic and Easun Ltd. v. G.E.C. Distribution Transformers Ltd. [1991] 2 LW 361 was cited in answer to Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL).
28. Dealing with the document dated June 11, 1990, alleged to have been written by Srinivasan, Mr. C. Harikrishnan said that, in the absence of an explanation as to what happened to the original, the respondent, TSRM Ltd., would not be justified in producing the xerox copy of the document. Secondly, TSRM Ltd. has not pleaded anywhere about the existence of this document. Thirdly, it was not stated by anybody on behalf of TSRM Ltd. as to when this document was discovered. Fourthly, it is highly artificial to contend that where a confidential document was written by a loyal employee suggesting that the document should be destroyed after reading, a xerox copy was made and conveniently kept for the new management to discover. Fifthly, Mr. Srinivasan continued in the employment of TSRM Ltd. even after the new management took over and he could have been made to write such a document. Sixthly, there is not even an affidavit from Mr. Srinivasan as to when he prepared the said document and on whose directions. Seventhly, the document itself is unintelligible and does not convey any meaning and, lastly, if the contents of the documents are true, the present contention of TSRM Ltd. that machineries can be value at Rs. 78 lakhs in May, 1991, must be an absolute falsehood. On the aforesaid reasons, Mr. C. Harikrishnan said that this court should ignore and should not permit TSRM Ltd. to place documents without any pleadings and calling upon this court to condemn such a practice. Mr. Harikrishnan's argument is well-founded and in my view merits acceptance.
29. Dealing again with the aspect of alleged one mind of Mr. S. B. Shankar in the transaction, Mr. C. Harikrishnan said that no such pleadings had been put forward in the proceedings by TSRM Ltd. Learned counsel for TSRM Ltd. should not be permitted to raise different contentions and file documents as and when the hearing progressed. It would be only an attempt to improvise with false documents and contentions. There is no allegation against the other directors. Therefore, the plea of one mind and fraud argued by Mr. T. Raghavan, learned senior counsel cannot be allowed to be raised.
30. Mr. C. Harikrishnan also pointed out that TSRM Ltd. cannot allege fraud against the other members of the board of directors nor even against Mr. S. B. Shankar as the transaction took place long before the sale of shares in favour of the present management. The sale of shares in favour of the present management was not even in contemplation when the transaction of exchange was approved by the board of directors of TSRM Ltd. The transaction of sale of shares to the present management took place only on January 30, 1991. It is hardly believable that the present management would have come forward to invest in the shares of TSRM Ltd. without verifying the facts and circumstances. They were perfectly aware of the transaction of exchange at the time of acquiring the shares. If the amount of Rs. 49,00,000 (rupees forty-nine lakhs only) due to the petitioner is withheld, then it would be in very difficult circumstances and the liability would be going on increasing day by day and, ultimately, the petitioner would have to surrender itself which appears to be the object with which the present contentions on behalf of TSRM Ltd. are put forward.
31. The petitioner also submitted that it is paying interest at 18 per cent. to the Indian Overseas Bank which has been increased to 24 per cent. The dues to TSRM Ltd. on the transaction is now increased to Rs. 61,00,000 (rupees sixty-one lakhs only). Every day the liability is going on increasing.
32. Concluding, Mr. C. Harikrishnan said that if, any reason, the court feels that the advertisement should be deferred for the present, then it can be done only on terms. For this proposition, he relied upon the decision in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125 (SC) and the unreported decision of Shanmugham J. in C.P. No. 92 of 1984 in which it was clearly decided that the company cannot make use of the admitted amount and get away. TSRM Ltd. should be directed to deposit the amount due as on date with interest in the account of the petitioner with Indian Overseas Bank, Abishekapuram, Trichy.
33. Mr. C. Harikrishnan also stated that the petitioner can even ask its bankers, Indian Overseas Bank, to give a letter of undertaking that, in the event of TSRM Ltd. succeeding in the suit, the bank would pay whatever amount that it has received from TSRM Ltd.
34. There is no need to refer in detail to the various decisions cited and relied on by Mr. T. Raghavan in the view which I propose to take in this case. Further, all the cases relied on by learned counsel deal with the merits of the winding up petition at the time of final hearing and no case has been cited which has considered an application of this nature.
35. The principal ground raised in support of the application for revocation of the admission is that the respondent, TSRM Ltd., has a prima facie bona fide defence to the petition. This is clear from a fair reading of the entire affidavit filed in support of the Company Application No. 2266 of 1991 and, in particular, paragraph 14. On a deep consideration of the matter, it is my view that a prima facie bona fide defence cannot be a ground for revoking the admission of a winding up petition. No doubt this court has ample powers in appropriate cases for revoking the order of admission of the winding up petition. There may be extraordinary cases where the company court may revoke the order of admission of the winding up petition. Without being exhaustive, such ground could be gross abuse of the process of court, or that the company petition has been filed with a mala fide intention as a means to realise debts due from a company.
36. The fact that the respondent may have a bona fide defence cannot, in my opinion, be a ground for revoking an order of admission. It can only be a defence to the main winding up petition. On a careful and anxious consideration of the various facts and circumstances leading to the winding up petition, I am satisfied that the petitioner has not abused the process of court by filing the winding up petition against the respondent. Admittedly, the respondent owes a sum of Rs. 45,12,420.23 as could be seen from the averments contained in the plaint in O.S. No. 480 of 1991 filed in the Court of the Subordinate Judge of Tiruchirappalli. It is no doubt true that the respondent makes a counter-claim. The question whether the counter-claim put forward by the respondent is bona fide and whether it would constitute, valid excuse for non-payment of the admitted amount and whether inability to pay on the part of the respondent will have to be inferred or not are all matters which require a decision at the time of final disposal of the main company petition.
37. No decision has been cited at the Bar to show that these aspects can be gone into by a company court even at the threshold before hearing the main winding up petition. The cases referred to by Mr. T. Raghavan, learned senior counsel, are all cases where the question of the counter-claim and its bona fide nature has been considered at the time of final hearing of the winding up petition.
38. It is not open to the respondent to ask for revocation of the order of admission because when notice was ordered on August 2, 1991, after admitting the winding up petition, this court was fully satisfied that the debt claimed by the petitioner was bona fide. Even now, there is no dispute about the debt of the respondent-company to the petitioner to the tune of Rs. 45,12,420.23. Hence, it is not open to the respondent to ask for revocation of admission, when there is no dispute about the debt claimed in the company petition. The bona fide nature of the counter-claim raised by the respondent cannot be declared at this stage. Strong reliance was placed on the judgments in National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 (SC) and George v. Athimattam Rubber Co. Ltd. [1965] 35 Comp Cas 17 (Ker) which are not of any assistance to the respondent. The ratio of the decision of the Supreme Court in National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 is only that, even after the admission of the petition, it will be open to the respondent-company to pray that the company petition be not advertised in the interest of justice or to prevent the abuse of process of court. The appeal before the apex court arose out of the order passed by the Delhi High Court directing that the company petition be not advertised and be dismissed. The Supreme Court approved the decision of the Punjab High Court in the case of Lord Krishna Sugar Mills Ltd. v. Srimathi Abinash Kaur [1961] 31 Comp Cas 587 where the court observed that, in appropriate cases, the company court has power to suspend advertisement of a petition for winding up pending disposal of the application for revoking the order of admission.
39. However, the Supreme Court did not agree with all the observations made by the High Court of Punjab in the above decision.
40. The decision of the Kerala High Court in George v. Athimattam Rubber Co. Ltd. [1965] 35 Comp Cas 17 also does not lay down the circumstances under which an application for revocation of an order of admission could be made.
41. Hence, in my view, the respondent has not made out any ground for revocation of the order of admission of the winding up petition. Hence Company Application No. 2266 of 1991 is dismissed. No costs.
42. Further, on a prima facie consideration of the entire facts which have been narrated by me in extenso in the earlier part of this judgment, this is not a fit case for revocation of the order of admission. I hasten to add that I have considered the facts only in a prima facie manner for the purpose of the present application. It became necessary for me to go into the facts of the case and consider the factual position for the purpose of deciding this application because counsel appearing for both the parties invited me to refer to the facts.
43. Coming to Company Application No. 1028 of 1991 filed by the petitioner for appointment of a provisional liquidator or in the alternative a direction to the respondent to deposit the money claimed, the following circumstances are relevant :
Admittedly, the respondent-company is engaged in the manufacture of steel bars and rods. It is a running company. For the year ending March 31, 1991, the company has made a profit of Rs. 236.02 lakhs before providing for taxes. It has secured loans from nationalised banks and from financial institutions. The paid-up capital of the company is to the tune of Rs. 55.50 lakhs. Its monthly salary and wage bill is to the tune of Rs. 138.61 lakhs. The respondent employs more than 550 workers. In both public interest and the interest of the companies, both the petitioner and the respondent do not warrant the appointment of a provisional liquidator pending disposal of the main company petition. Serious and irreversible damage would be caused to the respondent-company, if their prayer for appointment of a provisional liquidator is acceded to. It will not be just, equitable or proper to appoint a provisional liquidator at this stage. Therefore, Company Application No. 1028 of 1991 is also dismissed. No costs.
44. In view of my specific findings above that the issues raised by the respondent have to be decided at the time of final hearing of the main company petition for winding up, I fix April 9, 1992, for hearing of the company petition and direct advertisement of the petition in News today (English daily) and Dhinakaran (Tamil daily). However, the advertisement and the hearing will stand deferred if the respondent deposits the sum of Rs. 30 lakhs or furnishes a bank guarantee from a nationalised/scheduled bank within one month from this date.