2013 (8) TMI 615 - HC - Companies Law

Respondent's Defense Rejected, Winding-Up Petition Admitted

Madhya Pradesh State Industrial Development Corpn. Versus Som Distilleries & Breweries Ltd.

The court concluded that the respondent had no bona fide defense against the winding-up petition and was unwilling and unable to pay the admitted ... Winding up Petition u/s 439 r.w. 433(e) and 434 of the Companies Act, 1956 - The Court had to examine if the debt is bona fide disputed and whether the company had the ability to and was willing to pay the debt – Held that:- The Directors were directed to strictly comply with the requirements of Section 454 of the Act and Rule 130 of the Rules and furnish to the OL a statement of affairs in the prescribed form verified by an affidavit - After considering the history of the litigation, and the fact that they claimed that it was a profit making company that had the capacity to pay the admitted liability – the Court considers it appropriate to grant - one more opportunity to pay the admitted liability was granted. In Madhusudan Gordhandas & Co. v. Madhu Woollen Industries (P.) Ltd. 1971 (10) TMI 49 - SUPREME COURT OF INDIA - The principles on which the court acts are first that the defence of the company was in good faith and one of substance, secondly, the defence was likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends - No bona fide defence in the winding up petition and was unwilling and therefore unable to pay the admitted liability - the defence as to why it will not pay the admitted debt was neither one of substance nor in good faith – they had also not been able to satisfy the Court that it was willing to make payment of the admitted debt – prima facie case had been made out for admitting the petition and appointing a provisional liquidator - the order to be kept in abeyance for a period of six weeks - If such payment was not made then the order will become immediately operational. ISSUES PRESENTED AND CONSIDERED 1. Whether a winding up petition under Sections 433 and 434 of the Companies Act may be admitted where the creditor's claim is disputed by the company as bona fide and substantial. 2. Whether the company has a bona fide defence when it disputes the quantum of debt, claims payments were misappropriated/adjusted incorrectly by the creditor, or asserts that debts are time-barred or notices were not served. 3. Whether the Court can scrutinise or direct the terms of a One Time Settlement (OTS) determined by a creditor (including apportionment between principal and interest and the adequacy of down payments) in proceedings under Sections 433/434. 4. Whether the admitted liability reflected in the company's balance sheet constitutes sufficient evidence of indebtedness for the purpose of winding up and how the company's ability and willingness to pay are to be assessed. 5. The consequences of a company repeatedly failing to comply with OTS deadlines and whether such conduct supports appointment of a provisional liquidator and admission of the petition. 6. Whether the Court may keep an admission/appointment of a provisional liquidator in abeyance to give a final opportunity to the company to pay an admitted liability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of winding up petition where debt is disputed Legal framework: Sections 433 and 434 empower the Court to wind up a company where it is unable to pay its debts; established principles require the Court to refuse winding up if the debt is bona fide disputed and the defence is substantial. Precedent treatment: The Court follows the well-settled rule that a bona fide and substantial dispute will defeat a winding up petition (principles drawn from the governing authorities cited). Interpretation and reasoning: The Court examined whether the dispute was prima facie bona fide and substantial. Mere assertion of dispute is insufficient where the company's own balance sheet admits a substantial indebtedness and the defence lacks substance in law or fact. The Court analysed correspondence, reconciliation, and admitted entries in the company's financial statements to test the genuineness of the dispute. Ratio vs. Obiter: Ratio - A bona fide substantial dispute will bar winding up; however, an asserted dispute is not bona fide where company's records admit liability and other defences (service, time-bar) are disproved. Conclusion: The company's dispute was not bona fide nor substantial; the petition was admissible. Issue 2 - Validity of company's defences (time-bar, service, dispute as to quantum, claimed settlement contract) Legal framework: Defences to a creditor's petition must be shown to be in good faith and of substance, likely to succeed in law, and supported by prima facie proof. Precedent treatment: Applied established tests for bona fide defence; treated assertions such as time-bar and improper service as matters for prima facie verification. Interpretation and reasoning: The Court found the time-bar objection unsupported given the admitted balance-sheet liability. Service was proved by postal records confirming delivery at the registered office. The claim of a binding settlement arising merely from the creditor's encashment of partial payments was rejected where the creditor expressly notified that prior payments were adjusted against pre-OTS dues and not as acceptance of an OTS; unilateral appropriation by the debtor cannot convert encashment into acceptance of terms. Ratio vs. Obiter: Ratio - Technical defences (time-bar, service) will be rejected where documentary records and admitted accounts contradict them; payments and deposits do not ipso facto create binding settlement contracts when creditor's position and correspondence show continued dispute. Conclusion: The company's pleaded defences failed on prima facie assessment; they did not amount to bona fide, substantial defences. Issue 3 - Justiciability of the creditor's OTS determination and Court's power to direct apportionment Legal framework: The terms and quantum of an OTS offered by a creditor are matters of the creditor's commercial discretion; winding up proceedings are not a forum to review or dictate such commercial decisions. Precedent treatment: Court adhered to the principle that Company Court will not interfere with a creditor's bona fide commercial assessment of an OTS in recovery/winding up proceedings. Interpretation and reasoning: The Court held it cannot compel a creditor to accept a lower OTS or dictate that payments be first adjusted to principal rather than interest. The creditor's correspondence clearly set out its policy and the basis for adjustment of earlier payments; the Court will not substitute its view for the creditor's policy or commercial judgment in the course of a s.433 petition. Ratio vs. Obiter: Ratio - The Company Court will not re-open or direct terms of a creditor's OTS in adjudicating a winding up petition; challenges to OTS terms are not a legitimate defence to resist winding up unless they give rise to a bona fide dispute about liability. Conclusion: The company's contention that the Court should direct adjustment of payments or require the creditor to accept a lesser OTS was untenable and not a bar to admission. Issue 4 - Admitted liability in balance sheet and assessment of ability/willingness to pay Legal framework: An admission of indebtedness in statutory financial statements is material evidence of liability; the Court must assess both the ability and willingness of the company to pay the debt. Precedent treatment: The Court relied on established doctrine that undisputed debts or admitted liabilities support winding up unless the company shows capacity and willingness to pay. Interpretation and reasoning: The balance sheet entry of the admitted loan created a strong evidentiary foundation for the creditor's claim. The company repeatedly failed to make payments despite multiple opportunities and court directions; its conduct (protracted negotiations, non-payment, unilateral recalculations) demonstrated unwillingness or inability to pay the admitted sum. Ratio vs. Obiter: Ratio - Admitted balance-sheet liabilities are powerful evidence of debt; failure to pay admitted liabilities after sufficient opportunities supports a finding of inability/unwillingness to pay. Conclusion: The company was unwilling and unable to pay the admitted liability; this supported admission of the petition. Issue 5 - Effect of repeated failure to comply with OTS deadlines; appointment of provisional liquidator Legal framework: Where a company fails to discharge an admitted debt and spurns reasonable settlement opportunities, court may appoint a provisional liquidator pending final hearing. Precedent treatment: Court exercised discretionary powers under the Act to appoint a provisional liquidator where admission and conduct of company justified protective measures. Interpretation and reasoning: Repeated defaults, prolonged negotiations without payment, and protracted delay after court orders evidenced conduct prejudicial to creditors and justified protective intervention. The appointment was framed with conditions and procedural safeguards (inventory, valuation, obligations on directors) to preserve assets pending final resolution. Ratio vs. Obiter: Ratio - Recalcitrant failure to meet admitted obligations after opportunities may warrant appointment of a provisional liquidator and provisional admission of the petition. Conclusion: Provisional liquidator was appointed conditionally; the petition was admitted. Issue 6 - Power to keep order in abeyance to permit final opportunity to pay Legal framework: Courts may temper the harsh consequence of provisional winding up by giving a final opportunity to pay admitted liabilities, keeping interim orders in abeyance subject to strict timelines. Precedent treatment: The Court exercised equitable discretion to suspend operationalization of the provisional liquidation order for a fixed period to allow payment of the admitted liability. Interpretation and reasoning: Given the company's assertion of profit-making capacity and prior representations to the Court, a final opportunity (six weeks) to pay the admitted balance minus amounts thereafter paid, with interest, was a proportionate measure. The abeyance was conditional; failure to pay would trigger immediate operationalization of the provisional orders and reporting by the Official Liquidator. Ratio vs. Obiter: Ratio - The Court may keep a provisional winding up order in abeyance for a fixed, enforceable period to allow payment of an admitted liability; failure to comply results in immediate enforcement of liquidation measures. Conclusion: The Court lawfully kept the order in abeyance for six weeks on specified payment terms; non-payment was to activate the provisional liquidation regime.