1954 (1) TMI 36 - HC - Companies Law

Court rules payment out of profits integral to scheme, company not liable without generated profits, adjourns appeal pending related suit.

The court held that the provision for payment out of profits in the scheme was integral and could not be disregarded. As the company had not generated ... - Issues Involved:1. Applicability of the provision for payment out of profits in the scheme.2. Bona fide dispute regarding the debts.3. Justification for a winding-up order based on the company's inability to pay debts.4. Appropriate course of action pending the decision of a related suit.Detailed Analysis:1. Applicability of the Provision for Payment Out of Profits in the Scheme:The appellants, creditors of the respondent company, sought a winding-up order due to non-payment of the first installment of their debts as stipulated in a scheme. The company argued that the debts were to be paid out of profits, and since no sufficient profits had been made, the debts had not become payable. The appellants contended that the provision for payment out of profits was repugnant to other clearer provisions of the scheme and should be disregarded.The trial judge held that the provision for payment out of profits was integral to the scheme and could not be ignored. Consequently, since the company had not made sufficient profits, its liability to pay the debts had not arisen, and thus, the company's failure to pay could not be grounds for a winding-up order.2. Bona Fide Dispute Regarding the Debts:The learned Advocate-General argued that the provision for payment out of profits was inconsistent with the scheme and that the company's failure to pay entitled the appellants to a winding-up order. The court questioned whether this was a bona fide dispute regarding the debts, suggesting that the petition for winding-up should be dismissed or kept pending until the appellants established their claim in a regular suit.The court referred to 'Buckley on the Companies Acts,' which states that a winding-up petition is not a legitimate means of enforcing payment of a debt bona fide disputed by the company. If the debt is disputed on substantial grounds, the court may dismiss the petition or keep it pending until the debt is established by action.3. Justification for a Winding-Up Order Based on the Company's Inability to Pay Debts:The basis for a winding-up order is the company's commercial insolvency, evidenced by its failure to pay a debt following a statutory notice of demand. However, if the failure to pay is due to a bona fide dispute over the debt's liability, there is no proof of insolvency, and thus, no basis for a winding-up order.In this case, the court found that the scheme presented a substantial problem of construction, indicating a bona fide dispute. Therefore, the company's failure to pay the debts, which were not immediately payable, could not justify a winding-up order.4. Appropriate Course of Action Pending the Decision of a Related Suit:Given the bona fide dispute and the fact that the company had not made sufficient profits to pay the debts, the court decided not to dismiss the appeal outright. Instead, the court chose to adjourn the hearing of the appeal until after the decision of Suit No. 1225 of 1951, which was pending on the Original Side of the court. This suit aimed to resolve the dispute regarding the construction of the scheme.The court emphasized that it was not laying down a general law regarding the winding-up court's actions when a debt is disputed. The decision was based on the convenience and practice of handling bona fide disputes. The company would still have the liberty to argue against a winding-up order on other grounds if the dispute was decided against it. Similarly, the creditors could pursue the remaining grounds for a winding-up order when the appeal resumed.Conclusion:The court directed that the further hearing of the appeal be adjourned until after the decision of the related suit, emphasizing that the winding-up court should not undertake the task of construction when a bona fide dispute exists. The judgment highlights the importance of resolving disputes in regular suits rather than through winding-up petitions.