Genuine lease versus loan: substance over form test upheld, and unpaid admitted lease dues justified winding up.

The true nature of a transaction is determined from the agreement as a whole and the surrounding circumstances. Where the financier purchased machinery from suppliers chosen by the company and then leased the equipment back under a separate arrangement, without any transfer of ownership or option to purchase on expiry, the arrangement was a genuine lease and not a loan. The Usurious Loans Act, 1918 and the Punjab Relief of Indebtedness Act, 1934 therefore did not apply. Because the company defaulted in paying admitted lease rentals, failed to clear the liability after notice, and did not pay or secure the debt to the creditor's satisfaction, inability to pay debts was established and winding up was maintainable.

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Issues: (i) Whether the lease agreement was, in substance, a loan transaction and therefore hit by the Usurious Loans Act, 1918 and the Punjab Relief of Indebtedness Act, 1934; (ii) whether the company was unable to pay its debts so as to justify winding up under the Companies Act, 1956.

Issue (i): Whether the lease agreement was, in substance, a loan transaction and therefore hit by the Usurious Loans Act, 1918 and the Punjab Relief of Indebtedness Act, 1934.

Analysis: The true nature of a transaction must be gathered from the agreement as a whole and the surrounding circumstances. The petitioner purchased the machinery from the suppliers selected by the company, paid the price, and thereafter leased the equipment to the company under a separate and subsequent arrangement. The company never became owner of the equipment and had no option to purchase it on expiry of the lease. On these terms, the transaction was a genuine lease and not a loan dressed up as a lease.

Conclusion: The agreement was not a loan transaction and was not hit by the Usurious Loans Act, 1918 or the Punjab Relief of Indebtedness Act, 1934.

Issue (ii): Whether the company was unable to pay its debts so as to justify winding up under the Companies Act, 1956.

Analysis: The company had defaulted in payment of lease rentals and failed to clear the admitted liability despite notice. Its plea that the agreement was really a loan was found to be an afterthought and not a bona fide defence. The debt due was above the statutory threshold and had neither been paid nor secured to the petitioner's satisfaction. These circumstances established inability to pay debts.

Conclusion: The company was unable to pay its debts and the winding-up petition was maintainable.

Final Conclusion: The petition succeeded on merits, and the company was held liable to winding-up proceedings for non-payment of its admitted debt under the lease arrangement.

Ratio Decidendi: In determining whether a transaction is a loan or a lease, the court must look to the substance of the arrangement and the surrounding circumstances; where the lender purchases the goods and independently leases them back without any transfer of ownership to the user, the transaction is a lease, not a loan.

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