2004 (2) TMI 349 - HC - Companies Law

Company petition for winding up admitted under Companies Act despite concurrent proceedings. Debt discharge argument rejected.

The court admitted the company petition for winding up under section 433(e) of the Companies Act, 1956, filed by Bharat Overseas Bank Ltd. against Saritha ... Maintainability of winding up petition despite parallel proceedings before Debt Recovery Tribunal - distinct and independent remedies under the Companies Act and the Recovery of Debts Due to Banks and Financial Institutions Act - prima facie case for admission of a company petition under section 433(e) of the Companies Act - bona fide and substantial defence in a company winding up petition - Status of pledged shares transferred to bank's name - question for full enquiryMaintainability of winding up petition despite parallel proceedings before Debt Recovery Tribunal - distinct and independent remedies under the Companies Act and the Recovery of Debts Due to Banks and Financial Institutions Act - Whether the company petition under section 433(e) is maintainable notwithstanding pendency of proceedings under section 19 of the Debts Recovery Act before the Debt Recovery Tribunal - HELD THAT: - The Court held that proceedings under the Debts Recovery Act and the Companies Act are different, distinct and independent. The DRT's jurisdiction under section 19 is confined to adjudicating liability of the defaulting company, ascertaining the debt and issuing a certificate for recovery; the DRT has no power to wind up a company. The power to wind up for inability to pay debts vests with the Company Court under section 433(e). Consequently, filing of an application before the DRT does not oust the jurisdiction of the Company Court to entertain a winding up petition where the creditor makes out a prima facie case. [Paras 13, 14]Company petition under section 433(e) is maintainable despite pendency of proceedings under the Debts Recovery Act.Prima facie case for admission of a company petition under section 433(e) of the Companies Act - bona fide and substantial defence in a company winding up petition - Status of pledged shares transferred to bank's name - question for full enquiry - Whether the petitioner made out a prima facie case for admission of the winding up petition and whether the respondent's plea of discharge by transfer of pledged shares is a bona fide and substantial defence - HELD THAT: - The Court found on the pleadings and documentary material that the respondent had admitted its inability to repay the loan in its own communications, and that the petitioner had established a prima facie case for admission of the petition. The contention that transfer of pledged shares to the petitioner discharged the debt or made the petitioner the beneficial owner was held to be a matter requiring full enquiry and trial; such contentions, involving questions under contract, transfer and depository law, could not be resolved at the admission stage. The settled test for admission was reiterated: where a petitioner shows a prima facie case, the respondent must prima facie demonstrate that its defence is in good faith, substantial and likely to succeed in law with prima facie proof of facts on which it relies. On the material before the Court the respondent's defence was not shown to be prima facie bona fide and substantial so as to defeat admission. [Paras 16, 20, 24]Petitioner made out a prima facie case; the defence relying on transfer of pledged shares is for full trial and did not preclude admission of the petition.Final Conclusion: Company petition under section 433(e) admitted on prima facie findings; petitioning creditor may proceed with winding up process (publication directed as per rule 99) and disputed questions regarding ownership/effect of transfer of pledged shares are left for full enquiry at trial (matter listed for further hearing). Issues Involved:1. Maintainability of the company petition for winding up under section 433(e) of the Companies Act, 1956.2. Alleged discharge of debt by the respondent due to the transfer of pledged shares.3. The effect of concurrent proceedings under the Debts Recovery Act, 1993.4. Bona fide dispute of debt and substantial defense by the respondent.Issue-wise Detailed Analysis:1. Maintainability of the company petition for winding up under section 433(e) of the Companies Act, 1956:The petitioner, Bharat Overseas Bank Ltd., filed a company petition under sections 433(e) and 439 of the Companies Act, 1956, read with rule 95 of the Companies (Court) Rules, 1959, seeking the winding up of the respondent, Saritha Synthetic and Industries Ltd., on the grounds of insolvency and inability to pay its debts. The respondent argued that the petition was not maintainable because the petitioner had already initiated proceedings under section 19 of the Debts Recovery Act, 1993. However, the court held that the scope of enquiry and reliefs under the Debts Recovery Act and the Companies Act are entirely different and independent of each other. The Debts Recovery Tribunal (DRT) does not have the power to wind up a company, which is vested in the company court under section 433(e) of the Companies Act. Therefore, the petition for winding up was held to be maintainable.2. Alleged discharge of debt by the respondent due to the transfer of pledged shares:The respondent contended that the debt was discharged when the petitioner transferred 80 lakh pledged shares into its name, arguing that the face value of each share was Rs. 8 at the time of transfer, amounting to Rs. 640 lakhs, which exceeded the loan amount of Rs. 500 lakhs. The petitioner, however, argued that the transfer of shares was done in compliance with RBI Guidelines, which required financial institutions to transfer pledged shares into their names when loans exceeded Rs. 10 lakhs. The petitioner maintained that the shares continued to remain as security until the loan was discharged and that they did not become the beneficial owner of the shares. The court noted that the respondent's own communications indicated an inability to repay the loan and did not mention the alleged discharge of debt by the transfer of shares. Therefore, the court found the respondent's plea of discharge to be not bona fide and not one of substance.3. The effect of concurrent proceedings under the Debts Recovery Act, 1993:The petitioner had filed an application under section 19 of the Debts Recovery Act before the Debts Recovery Tribunal, Bangalore, for recovery of the loan amount. The respondent argued that this precluded the petitioner from maintaining the winding-up petition. However, the court held that the proceedings under the Debts Recovery Act and the Companies Act are distinct and independent. The DRT adjudicates the liability and issues a certificate of recovery, but it does not have the power to wind up a company. Therefore, the concurrent proceedings did not bar the maintainability of the winding-up petition.4. Bona fide dispute of debt and substantial defense by the respondent:The respondent argued that the debt was bona fide disputed and that it had a substantial defense, thereby making the winding-up petition not maintainable. The court examined the nature of the defense and the facts of the case. It found that the respondent had admitted its inability to repay the loan in its communications and had not raised the plea of discharge at the time of the transfer of shares. The court held that the defense raised by the respondent was not bona fide and was not one of substance. The petitioner had made out a prima facie case for admission of the winding-up petition, as the respondent had failed and neglected to pay its debts and had become insolvent.Conclusion:The court admitted the company petition for winding up and directed the petitioner to take out newspaper publication of the admission of the company petition as required under rule 99 of the Companies (Court) Rules, 1959, in two daily newspapers, namely, 'Deccan Chronicle' (English) and 'Andhra Jyothi' (Telugu) of Hyderabad Edition, and file proof of service into court. The matter was listed for further hearing on 31-3-2004.