Punjab-Haryana High Court
Canara Bank vs Arihant Industries Ltd. on 7 December, 2000
Equivalent citations: [2002]110COMPCAS70(P&H)
Author: J.S. Khehar
Bench: J.S. Khehar
JUDGMENT J.S. Khehar, J.
1. The instant is a winding up petition filed by Canara Bank (along,with others) under Sections 433 and 434 of the Companies Act, 1956 ('the Act'). It is the case of the petitioners that the debts on the date of filing of the winding up petition were approximately Rs. 8 crores. The learned counsel for the petitioners has been at great pains to establish that the amount advanced by the Canara Bank and others to the respondent-company has been acknowledged by the respondent-company. It is, however, not considered appropriate or necessary to refer to any of the documents relied upon, in this behalf in view of the fact that at the very outset, Mr. R.C. Setia, the learned counsel for the respondent-company, acknowledged that now the liability of the respondent-company was approximately Rs. 8 crores as suggested by the learned counsel for the petitioners.
2. To recover the aforesaid amount, the petitioners had issued a statutory notice dated 12-2-1997, in response to which the respondent-company paid a sum of Rs. 30 lakhs on 18-2-1997, which was admittedly adjusted towards interest payable by the respondent-company to the petitioners. Since the petitioners felt that the respondent-company was not in an effective position to discharge its liabilities, they filed the instant petition, whereupon this Court issued notice to the respondent-company on 10-7-1997. It is, therefore, clear that this matter has been pending in this Court now for over three years.
3. During the course of the pendency of the instant petition, a statement was made to this Court on 4-9-1997, on behalf of the respondent-company to the effect that efforts were being made to settle the matter with the petitioners and that the company had paid a sum of Rs. 15 lakhs through three cheques dated 4-9-1997, 25-9-1997 and 15-10-1997, drawn on State Bank of Patiala, Parliament Street, New Delhi, and a sum of Rs. 5 lakhs had been paid to each of the petitioners. It is the case of the petitioners that the aforesaid cheques were indeed encashed, but no final settlement could be arrived at with the respondent. It is also suggested that these insignificant payments made by the respondent-company were actually a ploy adopted by the respondent-company for delaying the final decision in the instant case. It was vehemently asserted that the respondent-company was deliberately causing delay in discharging its debts towards the petitioners.
4. It transpires that after the filing of the instant petition, there indeed were negotiations between the petitioners and the respondent-company, wherein the respondent-company besides acknowledging the debt it owed to the petitioners, also accepted to discharge its liability by agreeing to a schedule of payment, and indeed issued some cheques in furtherance of the schedule to assert its bona fides. In this behalf, attention of this Court has been invited to the letters dated 24-7-1997 and 4-8-1997 which have been placed on the record of this case as Annexures P1 and P2 with the replication. A perusal of the aforesaid documents reveals that there was an understanding between the petitioners and the respondent-company that the respondent-company would pay approximately Rs. 10 lakhs on a monthly basis (it is evident from the aforesaid communication that for some months, a sum of Rs. 20 lakhs and a sum of 15 lakhs, respectively, were also indicated for repayment by the respondent-company to the petitioners). Despite the assurances indicated in the letters dated 24-7-1997 and 4-8-1997, no payments were released by the respondent-company to the petitioners. In fact it is the express claim of the learned counsel for the petitioners that no cheques were issued by the respondent-company in fulfilment of the aforesaid undertaking.
5. All in all, it is pointed out that ever since the claim made by the petitioners from the respondent, Rs. 15 lakhs were received after issuance of the statutory notice and a further sum of Rs. 20 lakhs was paid during the pendency of this petition (which stands noticed in various orders passed by this Court). It is, thus, obvious that only a sum of Rs. 65 lakhs has been paid by the respondent-company to the petitioners, before and during the pendency of the instant petition out of the acknowledged debt of about Rs. 8 crores.
6. Negotiations to settle claims between the petitioners and the respondent-company were held on various occasions. This Court vide its order dated 15-3-1999, directed the respondent-company to get in touch with the four main financial institutions and to file an affidavit before this Court within two weeks to indicate whether or not there was any possibility of giving a final schedule for payment. An affidavit placed on the record of the case clearly depicts that no final agreement could be arrived at. According to the learned counsel for the petitioners, this was again an effort on the part of the respondent-company to delay the finalisation of the proceedings in this case, in view of the ultimate reality that the respondent-company could not discharge its debts.
7. Another order dated 6-4-1999, passed by this Court was referred to by the learned counsel for the petitioners, wherein this Court noticed (the contention of the petitioners) that there was no bona fides or genuineness in the intention of the respondent-company to give forthwith a proposal for repayment of the debts. However, in view of the claim/contention on behalf of the respondent-company that there had been expansion in the business of the company and that the respondent had approached various financial institutions for aid and assistance and further that the respondent-company was deliberating on a proposal for repayment, this Court again allowed indulgence to the respondent-company. A final decision in this behalf was to be taken at a meeting to be convened at Bombay on 16-4-1999, by associating the debenture holders. By the aforesaid order, this Court directed not only representatives of the petitioners but also representatives from the IDBI and IFCI to be present in court to examine the proposal to be mooted by the respondent-company after its deliberations. It was also suggested in the aforesaid order that the aforesaid representatives would also assist this Court in finalising the further course of action which may be adopted for discharging the liability of the respondent-company to the petitioners. On 23-4-1999, this Court further directed that the meeting would be attended by all the representatives who were present on the date of hearing, it was also clarified that the meeting would be chaired by the general manager of IFCI in order to examine the possibility/desirability of a one-time settlement scheme.
8. In spite of the aforesaid efforts made from time to time by this Court, no settlement was arrived at and no scheme was proposed by the respondent-company to discharge its debts and liabilities. It is, therefore, obvious that the creditors and representatives of the financial institutions including the petitioners could not get much from the respondent-company.
9. In August, 1999, the respondent-company seemingly made its best effort to discharge its liabilities. The respondent-company has four units, two of its units are located at Ludhiana, one at Sikandrabad and one at Baddi. The two units located at Ludhiana are stated to be profit earning whereas the units located at Sikandrabad and Baddi have not been earning profit and are stated to be in losses in the past few years and certainly from 1995-96 onwards. Through an application, the respondent-company agreed to make available for sale two of its units, i.e., its units at Sikandrabad and Baddi in order to discharge its liabilities. It was claimed by the respondent-company that the assets of the units at Sikandrabad and Baddi were substantially more than the liabilities of the respondent-company towards the petitioners. However, before an order was passed on the aforesaid application filed on behalf of the respondent-company, this Court considered it appropriate to associate other creditors in order to obtain their consent in this behalf. Before any such deliberation could take place, an affidavit was filed on behalf of Standard Chartered Bank, dated 12-1-2000: Along with the aforesaid affidavit, the applicants appended Annexure C, an order passed by the Debt Recovery Tribunal, New Delhi, in O.A. No. 166 of 1999 (preferred by the Standard Chartered Bank against the respondent-company), where the respondent-company was directed to pay a sum of Rs. 2,05,63,111.48 along with pendents lite and future interest at the rate of 20.92 per cent from the date of filing of the original application. Besides determining the liability of the respondent-company, it was observed that in the event of failure of the respondent-
company to discharge its debt, the same would be recovered by sale of the three properties of the respondents, i.e., two located at Ludhiana and one at Sikandrabad.
10. The learned counsel for the petitioners questioned the bona fides of the respondent-company by asserting that the properties at Baddi and Sikandrabad could not have been offered for sale in view of the factual position expressed above. On the basis of the affidavit filed by the Standard Chartered Bank, it is suggested that the respondent-company has never acted fairly and in spite of the order of the Debt Recovery Tribunal, New Delhi, wherein at least one of the properties offered for sale stood encumbered, the respondent-company had unhesitatingly offered to sell the same for discharging its liabilities towards the petitioners. In fact the suggestion of the learned counsel for the petitioners is that the aforesaid undertaking to sell the property in question was another deliberate ploy on the part of the respondent-company to sideline the main issue, i.e., of discharging its liabilities towards the petitioners. The learned counsel for the petitioners has strongly asserted that the action of the respondent-company in making available the properties in question for sale to discharge its debts is indeed contemptuous in nature.
11. In response to the aforesaid averments, Mr. R.C. Setia, the learned counsel for the respondent-company, has primarily raised three submissions which may be summarised as under :
Firstly, it is submitted that the finances made available by the petitioners to the respondent-company were converted into debentures. On the basis of the communication dated 27-5-1991, the Industrial Financial Corporation of India consented to be the debenture trustees for all the debenture holders, including the debentures held by the petitioners. A trustee agreement is stated to have been executed expressly delineating the rights and liabilities of the parties on 19-1-1996. The trustee agreement has been appended to the written statement as Annexure R-2 and the subscription agreement as Annexure R-3. It is sought to be submitted that a collective reading of the aforesaid agreements leads to an inevitable conclusion that in the case of default, only the debenture trustee was authorised to initiate action against the respondent-company. Since the debenture trustee has not been approached by the petitioners (who are all debenture holders), the action initiated by the petitioners in approaching this Court is misconceived as the petitioners in the aforesaid view of the matter have no locus standi to approach this Court.
12. Secondly, it is submitted that the respondent-company in spite of having suffered losses for some time yet it is confident of revival. It is stated in this behalf that there are 1,456 regular employees in the various units referred to above. All these employees have been paid their salaries regularly and without any interruption. It is further stated that the respondent-company has been discharging the liabilities of approximately Rs. 10 crores towards excise tax annually without any default. All other taxes besides excise tax have also been regularly paid by the respondent-company. To show the involvement of the public interest in the matter, it is emphasized that there are 85,000 to 90,000 shareholders and at least 120 dealers arc associated with the respondent-company. Even during the course of the proceedings before this Court rather than approaching BIFR, the respondent-company had decided to stand on its own feet. The only aim and object of the respondent-company is to earn profits and discharge its liabilities. In this behalf, an affidavit dated 6-4-1999, has been filed on behalf of the respondent-company affirming the aforesaid factual position. No counter has been filed to the aforesaid affidavit.
13. Associated with the aforesaid arguments and in continuation thereof, the learned counsel for the respondent-company defines his third and final submission. It is submitted that in spite of having accepted to assist the respondent-company for revival by making available a sum of Rs. 5 crores, the undertaking given by the petitioners to the respondent was not honoured inasmuch as it only made available a sum of Rs. 4 crores to the respondent-company. Besides the aforesaid, IFCI had agreed to grant a loan to the respondent-company of Rs. 2,572 lakhs. In fact the aforesaid loan cannot be stated to have been granted to the respondent-company because it was never disbursed to the respondent-company for being put to use for its revival. The said amount was adjusted towards the loan due from the respondent-company to IFCI.
14. So far as the first submission of the learned counsel for the respondent is concerned, it is pointed out that under the trustee agreement dated 20-12-1995, between the petitioner-bank and the respondent-company, only a debenture trustee could initiate action against the respondent-company and that the petitioner-bank being only a debenture holder had no authority whatsoever to initiate action. While adverting to the various clauses of the subscription agreement (dated 20-12-1995), it is pointed out that the terms 'debenture holder' and 'debenture trustee' have been defined as under :
"Debenture holders' or 'holders of the debentures' mean the mutual fund and where the context so requires holders of the debentures for the time being deriving their title to the debentures.
'Debenture trustees' or 'trustees' mean Industrial Finance Corporation of India, New Delhi, acting as the trustees for the time being for the holders of the debentures."
15. A perusal of the aforesaid definitions leads to the conclusion that the petitioner is a debenture holder whereas the Industrial Finance Corporation of India ('IFCI') is the debenture trustee. Remedies in the event of default are specifically stipulated in the trustee agreement dated 20-12-1995. Pointed attention of this Court has been invited to Clauses 8.1(b) and 8.2. The aforesaid clauses are extracted hereunder for facility of reference:
"8.1 Event of default.--If one or more of the events specified in this clause (hereinafter called 'events of default') shall have occurred then the debenture trustee by a notice in writing to the company may declare all the debentures outstanding and alt accrued interest thereon to be due and payable forthwith upon the happening of such event, and upon such declaration the same shall thereupon become due and payable forthwith as provided in such notice and the security created in terms of article III hereof shall forthwith become enforceable (anything in this deed to the contrary notwithstanding).
8.1-b Default in payment of interest--Default shall have occurred in the payment of any instalment of interest on a debenture and such default shall have continued for a period of thirty days; or.
8.2 Consequences of default.--On the happening of any of the events of default, in addition to the rights specified in Clause 8.1 hereof, mutual fund and the debenture trustees shall have the following further rights; mutual fund and the debenture trustees shall be entitled to appoint and remove from time to time whole-time and other directors on the board of directors of the company during the currency of this deed (such director/s are hereinafter referred to as 'the whole-time nominee director/s or other directors'). The company shall procure an undertaking from such persons as may be specified by the mutual fund/trustees to the effect that they shall support where necessary the removal and appointment of whole-time nominee director/s at meetings of the board of directors and of the shareholders of the company. Such whole-time nominee director/s shall exercise such powers and duties as may be approved by the mutual fund and have such rights as arc usually exercised by or are available to a whole-time director, in the management of the affairs of the company. Such whole-time nominee director/s shall not be required to hold any qualification shares nor be liable to retire by rotation and shall be entitled to receive such remuneration, fees, commission and moneys as may be approved by the mutual fund/trustees. Such whole-time nominee director/s shall have the right to receive notices of and attend all general meetings and board meetings or any committee(s) of the company of which they are members."
Collectively on the basis of the aforesaid clauses, it is submitted that it was incumbent upon the petitioners being a debenture holder to approach the IFCI, i.e., the debenture trustee, for initiating action against the respondent-company; and it was up to the debenture trustee to take such action against the respondent-company as it considered appropriate.
16. The aforesaid conclusions drawn by the learned counsel for the respondent-company are vehemently refuted by the learned counsel for the petitioners. On the basis of the agreement dated 20-12-1995, itself, the learned counsel for the petitioners stated that the conclusions sought to be drawn on behalf of the respondent-company are misconceived. Pointed attention in this behalf has been invited to Clause 8.1-d of the aforesaid agreement and to Clause 8.2. Clause 8.2 has already been extracted above. Clause 8.1-d is being extracted hereunder :
"8.1-d Default in performance of covenants and conditions.--Default shall have occurred in the performance of any other covenants, conditions or agreements on the part of the company under this deed or any other deed between the company and the debenture holders/trustees and such default shall have continued for a period of thirty days after notice in writing thereof shall have been given to the company by any of the debenture holders/trustees and such default shall have continued for a period of thirty days after notice in writing thereof shall have been given to the company by any of the debenture holders."
Cumulatively on the basis of the terms of the agreement extracted above, the learned counsel for the petitioners stated that action to be initiated by the debenture trustees envisaged under the agreement dated 20-12-1995, is limited to the action to be taken against the directors of the board of directors. It is specifically pointed out that there are no remedial measures indicated in the agreement for the recovery of the dues payable to the debenture holders by the respondent-company. In the aforesaid view of the matter it is submitted that the scope of the action contemplated by the agreement (in the event of default) is only limited and cannot be extended to govern the issue of recovery of dues payable by the respondent-company to the debenture holders.
17, It is pointed out that the petitioners addressed a communication dated 10-12-1996, copy of which has been placed on the record of this case as Annexure P-10, wherein the petitioners approached IFCI, i.e., the debenture trustees that the respondent-company was not honouring its financial commitments towards the debenture holders. It was also pointed out in the said communication brought to its notice that the respondent-company had not made payment of interest right from 1-1-1993 and the cumulative interest as on 30-6-1996, is Rs. 192 lakhs. In the aforesaid communication, the petitioners requested IFCI (as debenture trustee) to initiate recovery action including enforcement of securities against the respondent-company to safeguard the interest of debenture holders. It is pointed out that no action whatsoever was taken by the debenture trustee, i.e., the IFCI. The failure on the part of IFCI to initiate action lead to the filing of the instant petition.
18. It is submitted that the instant petition has been filed under Section 434 of the Companies Act 1956. Pointed attention has been drawn to Clause (ii) of Section 434, which authorises, inter alia, a debenture holder to initiate a petition for winding up of the company under Section 433 of the Companies Act, 1956. It is submitted that the statutory right vested in the petitioners under the Companies Act, 1956, cannot be abrogated by the trustee agreement.
19. I have considered the submissions addressed by the learned counsels for the parties. I am unable to accept the contention advanced by the learned counsel for the respondent. A collective perusal of the clauses of the agreement dated 20-12-1995, does not exclude the initiation of action at the behest of the petitioners contemplated under the Companies Act, 1956. Undoubtedly, the Companies Act, 1956, specifically vests a right in a debenture holder to initiate action for winding up of the company. The aforesaid statutory right has not been abrogated by the petitioners in the agreement dated 20-12-1995, nor has an alternative remedial action been postulated for the recovery of debts under the said agreement. For the aforesaid reasons, it is not possible for me to hold that the instant petition is barred by any of the clauses of the trustee agreement dated 20-12-1995.
20. The second and the third contentions advanced on behalf of the respondent-company need to be examined and disposed of collectively. From a perusal of the facts narrated by the petitioners, it is evident that the debt payable by the respondent-company to the petitioners is not disputed. It is also evident that ever since the filing of the instant petition in 1997 not a single penny has been released by the respondent-company to the petitioners. Despite best efforts of this Court nothing whatsoever till date has been paid to the petitioners. In fact, during the course of deliberation before this Court in August, 1999, the respondent-company accepted to sell two of its four units and from the proceeds thereof agreed to pay off the petitioners. It was pointed out by the learned counsel for the petitioners that the offer of the respondent-company to sell two of its units was not bona fide. It was an effort on its part to deceive not only the petitioners but also this Court in view of the fact that one of the two units offered for sale at Sikandrabad could not be sold on account of an order passed by the Debts Recovery Tribunal, New Delhi.
21. The learned counsel for the respondent-company states that the aforesaid factual position, though correct in its broader perspective, does not rightly depict the factual position. In this behalf, it is submitted that the debt claimed by the petitioners is undoubtedly due and payable. It is further acknowledged that nothing whatsoever has been paid by the respondent-company ever since the filing of the instant petition in 1997. It is, however, denied that the offer to sell two of its units to pay off the debt due to the petitioners was a ploy on the part of the respondent-company or to hoodwink either the petitioners or the Court. In this behalf, it is pointed out that the debt pending consideration before the Debts Recovery Tribunal, New Delhi, was for a limited amount of approximately Rs. 2 crores. At the time of making the offer to the petitioners in this Court to sell two of its units, the intention was to seek the permission of the Debts Recovery Tribunal, New Delhi, to sell the unit at Sikandrabad against which there was a restraint order by the Tribunal besides one other unit so as to discharge the liability of the respondent-company towards the petitioners and also the liability towards the applicant who had approached the Debts Recovery Tribunal. The aforesaid action at the behest of the respondent-company could not fructify in view of the fact that the Debts Recovery Tribunal did not release the said unit from its restraint order. Accordingly, it is submitted that there has never been any dishonesty or deceit in the mind of the respondent-company. On the contrary, it is submitted that the respondent-company has always been entertaining an honest desire to discharge its liability towards the petitioners.
22. The factual assertion that there are approximately 1,500 regular employees on the rolls of the respondent-company who are engaged in the activities of running the company, all of whom have been regularly disbursed their salaries has not been controverted. And also that there are approximately 1,400 daily wagers besides the aforesaid regular employees who are also earning their livelihood from the respondent-company, to whom wages have been paid up to date, has also not been disputed. It is, therefore, evident that about three thousand families are earning their livelihood from the respondent-company. It is not disputed that the respondent-company has heen discharging its tax liability to the tune of Rs. 10 crores annually. Even the assertion made by the respondent-company that there is no pending tax liability against the respondent has not been controverted. The assertion made in the affidavit dated 6-4-1999, indicating that the respondent-company is moving towards revival needs to be noticed. On the basis of the said affidavit it has expressly been suggested that the company is covering its losses and moving towards profitability. No reply has been filed by the petitioners to the said affidavit dated 6-4-1999. Even the number of shareholders and dealers involved in the activities of the company as projected by the learned counsel for the respondent, details of which have been referred to above, have not been disputed by the learned counsel for the petitioners.
23. On the basis of the aforesaid factual and undisputed position, the learned counsel for the respondent vehemently argued that the order of winding up of the respondent-company would not only affect thousands of workers and the shareholders but would also be a public loss in view of the annual contribution towards tax by the respondent-company. It is, therefore, submitted that the winding up of the respondent-company at the present juncture would not be in the interest of any one including the petitioners. In this behalf, reliance has been placed by the learned counsel for the respondent on a decision of the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P.) Ltd.[1972]42 Comp. Cas. 125, wherein it has been held by the Apex Court that there is no such law that a company which is a running company employing about 500 employees who are paid their wages regularly and which is having a business of crores of rupees every year should be brought to a grinding halt by admitting the winding up petition. In the aforesaid judgment, it was also observed that even in those cases where the company is closed, it is the duty of the court to welcome revival rather than affirming the death of the company. The Apex Court in the aforesaid judgment even went on to the extent of asserting that the creditors of the company do not have the right to insist on winding up of the company as a matter of right, merely because at a particular moment, the company was unable to pay its debts, although there is a likelihood of resurrection. Reliance was also placed on New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corporation [1986] 59 Comp. Cas. 183 (Guj.) wherein a Division Bench of the Gujarat High Court has held that despite the inability of a company to pay its debts if there are still prospects of the company coming back to life, the court should be inclined to give a chance to the company to resurrect even though at a particular moment the company may not be solvent and may not be in a position to meet its obligation to its creditors. Attention of this Court was also invited to the decision rendered in American Express Bank Ltd. v. Core Health Care Ltd. [1999] 96 Comp. Cas. 841, [1998] 15 SCL 363' (Guj.), which is to the same effect, as the cases referred to above.
24. It is undoubtedly true that the issue of winding up of a company under Section 433 is a matter of discretion in view of the fact that Section 433 postulates that a company 'may' be wound up for the reasons indicated in various clauses of Section 433. The aforesaid discretion undoubtedly must be exercised on some sound footing. The court must put claim of the rival parties in a balance and weigh the same while exercising its judicial discretion. The weightier claim must be accepted. The question to be answered in this case is; who has the weightier claim, the creditors or the respondent-company?
25. Having heard the learned counsels for the parties, in my considered view, although there is an admitted debt which is to be paid by the respondent-company to the petitioners and although not a penny has been paid despite the service of the statutory notice on 12-2-1997 and the filing of the instant petition on 7-7-1997, yet the claim of the respondent-company is weightier. At the present juncture, it has about 3,000 employees who are being paid their salaries regularly. The company has also been honouring its tax liability by paying approximately Rs. 10 crores annually and there are no arrears on account of tax payable by the respondent-company. Further, there are a large number of shareholders, i.e., between 85,000 and 90,000 and at least 120 dealers associated with the respondent-company. All the employees and also their families must be deemed to be surviving on the respondent-company. The shareholders and the dealers of the company have an indirect financial nexus with the company. The shareholders and dealers would be the losers if the claim of the petitioners is accepted. The winding up of the company will undoubtedly be a loss for all of them. The most important aspect of the matter, however, is that the company has established that it is progressing towards revival. One of the units as per affidavit dated 6-4-1999, is already earning profits. The details in respect of the financial status of various units of the respondent-company in the aforesaid affidavit have not been controverted. In the aforesaid view of the matter, the winding up of the company at the present moment would certainly be a loss to one and all. Its winding up today may indeed pay off its liability towards the debenture holders. The said liability is trivial when compared to the beneficiaries of the company as per the details delineated above. On a cumulative assessment of facts narrated above, it is not possible for me to exercise my discretion in favour of the petitioners for admitting the instant petition for winding up specially in view of the legal position governing the subject-matter in dispute referred to above.
26. For the reasons indicated above, prayer at the behest of the petitioners to admit the instant petition is declined.
Dismissed.
No costs.