1993 (7) TMI 269 - HC - Companies Law

Petition to Wind Up Company Dismissed: Court Emphasizes Last Resort Principle

K. Appa Rao Versus Sarkar Chemicals (P.) Ltd.

The court dismissed the petition for winding up the respondent company, finding that the petitioners failed to establish grounds warranting such action. ... Company when deemed unable to pay its debts Issues Involved:1. Whether the respondent company is liable to be wound up under sections 433, 434, and 439 of the Companies Act, 1956.2. Whether the deposits made by the petitioners were legitimate and acknowledged by the company.3. The legitimacy of the managing director's authority to execute receipts and incur liabilities on behalf of the company.4. The bona fides of the winding-up petition filed by the petitioners.Detailed Analysis:1. Whether the respondent company is liable to be wound up under sections 433, 434, and 439 of the Companies Act, 1956:The petitioners, who are creditors of the company, sought an order for winding up the respondent company on the grounds that it was unable to pay its debts. The petitioners argued that the company owed them substantial amounts and had refused to repay despite legal notices. The court examined the principles from the Supreme Court decisions, including *Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami* and *Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd.*, which emphasized that winding up should not be a mere expedient substitute for debt recovery and should be considered only when the company's inability to pay is evident and uncontested.2. Whether the deposits made by the petitioners were legitimate and acknowledged by the company:The petitioners claimed to have deposited various sums with the company, evidenced by receipts signed by the managing director, Sri C. Ramachandra Rao. The company, through its executive director, disputed the legitimacy of these deposits, arguing that the transactions were collusive and that the company was not liable for the amounts claimed. The court noted that multiple suits had been filed by the petitioners and their relatives against the company for similar claims, all based on receipts signed by Sri Ramachandra Rao.3. The legitimacy of the managing director's authority to execute receipts and incur liabilities on behalf of the company:The court scrutinized the authority of Sri C. Ramachandra Rao to act as the managing director and execute receipts on behalf of the company. According to clause 29 of the articles of association, only a member of the board of directors could be appointed as the managing director. The court found that Sri Ramachandra Rao was never elected as a director and thus could not have been validly appointed as the managing director. The executive director, Sri Bapuji, contested the legitimacy of the receipts and argued that Sri Ramachandra Rao had no authority to incur liabilities on behalf of the company.4. The bona fides of the winding-up petition filed by the petitioners:The court observed that the petitioners were closely related to Sri Ramachandra Rao and that the winding-up petition appeared to be a collusive action lacking in good faith. The court noted the peculiar circumstances, including the fact that multiple suits had been filed by relatives of Sri Ramachandra Rao based on receipts he had signed. The court found considerable force in the argument that the petition was not filed in good faith and that the company's defense was bona fide and reasonable.Conclusion:The court concluded that the petitioners had not made out circumstances justifying the initiation of proceedings for the winding up of the company. The defense presented by the company, through Sri Bapuji, was found to be bona fide and reasonable. Consequently, the court dismissed the company petition, emphasizing that winding up is a serious proceeding with drastic consequences and should be considered only when no other course is left open. The court dismissed the petition with no order as to costs.