Kerala High Court
Suresh Shenoy vs Cochin Stock Exchange Ltd. on 5 September, 1988
Equivalent citations: [1989]65COMPCAS240(KER)
JUDGMENT S. Padmanabhan, J.
1. Cochin Stock Exchange Ltd. (the company) is the sole respondent. One of its members who is also a trader in shares is the petitioner. The prayer is to wind up the company on the ground that it is unable to pay its debts. The prayer is opposed mainly on the ground that Rs. 46,143 claimed by the petitioner is not a debt due from the company and that the petition is only a pressure tactic.
2. Till August 17, 1987, trading members of the company were directly buying and selling shares in the premises of the company. With effect from August 17, 1987, a settlement procedure was adopted by which the transactions of buying and selling shares and clearance of liabilities were made through the intervention of the company. Settlement period was fixed as 14 days. Settlement is not on the basis of individual dealings. The entire purchases and sales of a member for that period will be taken into account and the balance struck. The company collects and pays on the basis of details of purchases and sales given by the trading members. The company is neither a purchaser nor a seller. Shares are handed over to the company only for transmission. It cannot purchase or sell. It is only a regulating authority to regulate the relations between share brokers. But that does not mean that the company does not have the liability to pay. When the company transacted the shares and received payments on behalf of the seller to be given to him, even if it is not the seller or purchaser, it has the liability to disburse the amount that comes into its hands even if it is as the regulating authority. At best, what could be said is that the company is the trustee so far as the amount is concerned.
3. Entrustment of shares of the value of Rs. 46,143 by the petitioner and collection of that amount by the company from the purchaser with liability to make payment to the petitioner is not disputed. The case of the company is that the petitioner admitted liability to various members including one T. K. Joy who obtained an order in O. P. No. 7225 of 1987 on the basis of which the company conducted an enquiry. To ascertain the full details of the transactions, the company issued a circular to all the members including the petitioner to make available the statutory records. The company was not able to make the payment to the petitioner only because of his failure in this respect and the consequent difficulty to ascertain the amount due from him to Mr. T. K. Joy. The petitioner admits liability to Mr. Joy and the further fact that he did not produce the records called for by the company. His stand is that the amount due to Mr. Joy is not by way of purchase of shares, but something else which the company cannot take into account in making the payment due to him. He says that he will settle his liability directly with Mr. Joy and that for that reason the company cannot withhold payment.
4. It is not disputed that the company is having assets worth more than Rs. 37 lakhs. There is no case that it has any other liability or that it is unable to discharge the liability to the petitioner. On the basis of the order in O.P. No. 7225 of 1987 produced as exhibit R-1(a), the company issued a notice to the petitioner to produce his accounts and records to settle the admitted transaction with Mr. Joy. Without complying with that notice, the present petition seems to have been filed as a pressure tactic to get the money under the threat of the company being wound up. The company is prepared to make the payment after settling the accounts of the petitioner with Mr. Joy on furnishing accounts and records. But the petitioner is taking the stand that the company will have to make the payment without any adjustment, because what is due to Mr. Joy is by way of personal dealings which is not adjustable by the company. He offers to make the payments to Mr. Joy direct. But his liability under Article 154 of the articles of association of the company to produce all his records, when called for, is not disputed. Records were called for only to settle a dispute with a member and that too as per a judgment of this court. In "such a situation, in spite of the technicalities, if any, involved in the right of adjustment, I cannot say that the dispute raised by the company is not bona fide. It is clear that more than the desire to have the claims settled and the amounts realised, the petitioner is actuated by the motive of settling scores with the company. The question is whether the petition could be admitted and advertised in this background.
5. Admission and advertisement involve serious consequences to the company and its members and shareholders. Section 433 of the Companies Act does not confer on any person a right to seek an order that a company shall be wound up. It only confers power on the court to pass an order of winding up in appropriate cases. The interest of the company and its members, shareholders and creditors as a whole is one of the considerations that will have to weigh with the court. The machinery for winding up will not be allowed to be utilised merely as a means of realising debts due from a company. It is not a legitimate means of seeking to enforce payment of debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed. It can even be stigmatised as a scandalous abuse of the process of the court. A winding up order will not be made on a creditor's petition if it would not benefit him or the company's creditors generally. An order under Section 433(e) of the Companies Act on the ground of inability of the company to pay its debts is discretionary and as a general rule made only when it is shown that the company is commercially insolvent. That is a condition in which the company is unable to meet current demands made upon it. The interests of the shareholders, financial institutions and the company cannot be allowed to suffer in a fight for power or for disputes among the members or a member and the company.
6. Even if a company's assets exceed its liabilities, it can be in a state of commercial insolvency if it is unable to pay its debts. The question in such a situation is not whether the company can pay its debts by converting all its assets into cash, but whether the existing liabilities can be paid while it is running as a company. Therefore, the expression " unable to pay its debts " should be taken in a commercial sense of being unable to meet current demands though the company may have large assets. There is no case that such a situation has arisen.
7. In this connection, learned counsel for the petitioner wanted to make a subtle distinction on the basis of the deeming provisions contained in Section 434 as to when the company will be deemed " unable to pay its debts " as provided in Section 433(e). Under Section 434(1)(a), when a demand is made as provided therein and the company has "neglected to pay" for three weeks, the company shall be deemed to be unable to pay its debts. But underSection 434(1)(c), the words used are " unable to pay its debts " and not " neglect to pay ". But even in such cases of " neglect to pay ", all the relevant considerations will have to weigh with the court before ordering winding up. A contingent or conditional liability is not a debt unless the contingency or condition, has happened. A bona fide dispute with a conditional offer as in this case cannot be taken as " neglect to pay " within Section 434(1)(a). If there is no neglect in the strict sense, the deeming provision of Section 434(1)(a) does not come into the picture at all. It must be neglect to pay an undisputed debt in the sense that it is a debt on which the dispute of the company is not bona fide. Further, in order to apply Section 4 34(1 )(a), there must be a demand satisfying the formalities provided therein. Even though it is not necessary to specify that the demand is under Section 434(1)(a), there must be some indication to the company by the contents of the notice that in the event of non-compliance, the creditor will take steps to apply for winding up. Neglect is not a mere omission. It is omission to pay on demand without reasonable cause and with notice of the consequences.
8. In Amalgamaled Commercial Traders (P.) Ltd. v. A. C. K. Krishna-swami [1965] 35 Comp Cas 456 (SC), the Supreme Court said that if the debt is bona fide disputed, there is no " neglect to pay" within the deeming provision in Section 434(1)(a). When the debt is undisputed or the dispute is not bona fide, the court will not act on the defence that the company has ability to pay. The principles involved in such cases are :
(1) Whether the defence of the company is in good faith and of substance ;
(2) Whether the defence is likely to succeed in point of law ; and (3) The company adduces prima facie evidence in support of its defence.
9. If these conditions, are not established and there is neglect, winding up can be ordered (Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125 (SQ). In such a situation, the fact that the company is not commercially insolvent also may not be relevant in some cases (Seksaria Cotton Mills Ltd., In re [1969] 39 Comp Cas 475 (Bom)). The dispute should not be be a cloak to cover the company's real inability to pay its debts (United Western Bank Ltd., In re [1978] 48 Comp Cas 378 (Bom)). What is to be considered at the preliminary stage is whether the debt is disputed on some acceptable or substantial ground. A detailed examination at that stage is not contemplated. The consideration at that stage is limited to deciding whether there is a bona fide, serious and substantial dispute arising or not. A prima facie case alone will be looked into (G. Claridge and Co. Ltd. v. Nav Bharat Investments Ltd, [1977] 47 Comp Cas 428 (Bom)). Anyhow, there cannot be any dispute that the forum of the company court cannot be misused under the guise of a petition for winding up to wreak vengeance on the company when such a procedure is absolutely unnecessary for realisation of the amount.
10. In this case, the company is prepared to make the payment and it has got assets also. It is not in a stage of insolvency, commercial or actual, and there is no such case also. What the company wants is only to make a legitimate adjustment of an admitted liability. This petition is not actuated by any bona fide desire to seek redressal of a grievance or enforcement of a claim. The desire is only to get the company wound up on personal grounds of animosity under the cover of a claim for the enforcement of which such a course is absolutely unnecessary. The forum of courts should not be used for such purposes.
11. The petition is, therefore, dismissed with costs.