Unsecured loan versus share application money, with unpaid debt and cheque dishonour supporting winding-up admission

Where money advanced is supported by contemporaneous records and post-dated cheques, and the rival plea of share application money lacks any application, correspondence, or reliable basis, the amount may be treated as an unsecured loan. Continued non-payment after demand, refusal of statutory notice treated as service, and cheque dishonour can establish default. Balance-sheet material showing substantial liabilities and negligible assets may also indicate inability to pay debts, supporting admission of a winding-up petition under the Companies Act, 1956. A defence based on absence of board resolution may fail where a resolution is produced on record.

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Issues: (i) Whether the amount of Rs. 1 crore advanced by the petitioner was an unsecured loan or share application money. (ii) Whether the respondent was unable to pay the debt so as to justify admission and winding up of the company petition.

Issue (i): Whether the amount of Rs. 1 crore advanced by the petitioner was an unsecured loan or share application money.

Analysis: The receipt of the amount was not disputed, but the respondent's plea that it was paid for allotment of shares was unsupported by any application for allotment, correspondence, or other reliable document. The balance-sheet entry describing the amount as share application money was also found inconsistent with the authorised share capital and was not shown to have any proper basis. The contemporaneous record, including the issued post-dated cheques, supported the petitioner's case that the amount was advanced as a loan.

Conclusion: The amount was held to be an unsecured loan and not share application money.

Issue (ii): Whether the respondent was unable to pay the debt so as to justify admission and winding up of the company petition.

Analysis: The debt remained unpaid despite demand, the statutory notice was refused and therefore treated as served, and the dishonour of the cheques reinforced the default. The balance-sheet material showed substantial liabilities with negligible fixed assets, indicating erosion of the company's substratum. The defence based on absence of board resolution was rejected on the basis of the resolution placed on record.

Conclusion: The respondent was held to be unable to pay the debt and the winding up petition was admitted, with directions for advertisement and winding up proceedings.

Final Conclusion: The petition was allowed in substance, the respondent company was held liable to be wound up, and consequential liquidation steps were directed under the Companies Act, 1956.

Ratio Decidendi: Where the debt is admitted in substance, the rival plea of share application money is unsupported by reliable material, and the debt remains unpaid after refusal of statutory notice, the company is deemed unable to pay its debts under Section 434(1) of the Companies Act, 1956 and winding up may be admitted.

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