2019 (5) TMI 1517 - HC - Companies Law

Court admits winding-up petition under Companies Act, 1956. Official Liquidator appointed as Provisional Liquidator. Citations ordered.

The court admitted the winding-up petition under Sections 433(e) and (f) of the Companies Act, 1956, finding that the respondent company's conduct was ... Winding up of Company - case of the OL/petitioner is that the Central Government received number of complaints from some investors of JVG Group of Companies regarding part payment of deposited amount - HELD THAT:- It is not clear as to how this document absolves the liabilities stated in the Statement of Account of the respondent company. Merely because the shares of the respondent company were sold by some of the promoters to the present Management does not wash away liability of the respondent company on account of inter corporate loan received from the petitioner company - the balance-sheets of the respondent company, clearly and unequivocally demonstrate the dues payable to the petitioner company. It is clear from the SFIO report that the respondent company continues to occupy the said land purchased for ₹ 19,42,500/-. The respondent company continues to be liable to return the said land or the consideration received. This is a continuing cause of action. Hence, the question of limitation in this regard would not arise - It is clear that respondent continues to remain liable to return the land or to pay to the petitioner a sum of ₹ 19,42,500/-. In my opinion, there is no bona fide defence raised by the respondent company. Under Section 433(f) of the Companies Act, where a court is of the opinion that it is just and equitable, a company may also be wound up - In the present case clear allegations have been made by the petitioners that the petitioners own 22,99,400 shares in the respondent Company. That apart, a total of 59,81,900 shares are owned by the JVG Group of Companies in the respondent company which companies are also in liquidation. Despite having such a large shareholding, no notices are being sent to the Official Liquidator, who is now the Liquidator of the aforenoted various companies, about holding any meetings or sending copies of any balance sheets, annual accounts etc. It is clear that the respondent Company is acting in a manner which is prejudicial to its shareholders and to the affairs of the company. The full facts and circumstances of the case would justify the passing of a winding up order. The Official Liquidator attached to this Court is appointed as the Provisional Liquidator - petition admitted. ISSUES PRESENTED AND CONSIDERED 1. Whether the inter-corporate deposits (ICDs) reflected in the respondent's balance-sheets constitute a debt enforceable by the creditors/official liquidator and therefore ground for winding up under section 433(e) read with section 439 of the Companies Act. 2. Whether the alleged purchase of land using funds of the creditor-company creates a continuing liability of the respondent to refund the consideration or return the land, and whether such claim is barred by limitation. 3. Whether the respondent has raised a bona fide and substantial dispute as to liability sufficient to defeat a winding-up petition, such that the petition ought to be dismissed and the creditor left to ordinary proceedings. 4. Whether the circumstances alleged (shareholdings by group companies in liquidation, non-receipt of notices/accounts by the official liquidator, alleged mismanagement, change of management and change of name) amount to 'just and equitable' grounds for winding up under section 433(f). 5. If admission is appropriate, what interim measures (provisional liquidation, taking over assets/records, publication and inventory) should be directed pending further hearing. ISSUE-WISE DETAILED ANALYSIS - ICDs AS ENFORCEABLE DEBT (Issue 1) Legal framework: A company court may wind up a company if it is unable to pay its debts; statutory provisions recognise payment of debts due as a ground for winding up. Balance-sheet entries and acknowledgements may constitute prima facie evidence of indebtedness. Precedent treatment: The Court considered established principles that where a creditor's claim is not bona fide disputed on substantial grounds, winding up may proceed; conversely, a bona fide substantial dispute warrants dismissal and leave to sue in ordinary action. (The Court relied on well-known authority articulating this standard.) Interpretation and reasoning: The balance-sheets for fiscal years 1997-2004 unequivocally recorded inter-corporate deposits from the creditor companies in specified amounts. The respondent did not meaningfully rebut the entries - its defence relied on a post facto certificate by a director claiming sale of the company and write-off of prior book entries, and an assertion that the present management purchased shares and goodwill. The Court found the certificate insufficient to obliterate the documentary entries or explain away the recorded liabilities. Mere change of management or sale of shares does not extinguish company liabilities appearing in its books. Ratio vs. Obiter: Ratio - where accounting records and consistent balance-sheet entries show ICDs and the company fails to raise a bona fide substantial defence, the entries constitute prima facie debts enforceable in a winding-up petition. Obiter - remarks on insufficiency of a director's post facto certification to absolve prior liabilities. Conclusion: The ICDs disclosed in the respondent's balance-sheets constitute prima facie dues payable to the petitioners/official liquidator and support the ground for winding up under the statutory provision addressing inability to pay debts. ISSUE-WISE DETAILED ANALYSIS - LAND PURCHASE AND CONTINUING LIABILITY (Issue 2) Legal framework: Liability arising from misapplication or siphoning of funds for acquisition of assets in the name of another company may give rise to a continuing obligation to restore assets or their value; limitation does not preclude relief where cause of action is continuing or the company continues to occupy the asset. Precedent treatment: The Court applied the principle that a continuing cause of action exists where the company continues to occupy assets acquired by misapplied funds, thereby negating a limitation bar for winding-up relief based on restitution. Interpretation and reasoning: The investigative report attached to the petition documents payments from the creditor-company to intermediaries and shows parcels of land purchased in favour of various group companies, including the respondent, for specified values; the respondent continues to occupy the land. The finding of siphoning and the continuous occupation establish an ongoing obligation to return the land or the consideration. Ratio vs. Obiter: Ratio - where investigation establishes siphoning of funds and the company continues to occupy assets bought with those funds, the claim to recover the consideration or restitution is a continuing cause of action and not time-barred. Obiter - descriptive account of the investigative findings. Conclusion: The respondent remains liable in respect of the land purchased for Rs. 19,42,500 and the claim is a continuing cause of action; limitation does not defeat the petition on this ground. ISSUE-WISE DETAILED ANALYSIS - BONA FIDE DISPUTE (Issue 3) Legal framework: A winding-up petition should be dismissed if the company establishes a bona fide dispute on substantial grounds as to the debt; the company court must assess whether the defence is genuine but is not required to conduct a full trial. Precedent treatment: The Court adopted the established test that disputes which are spurious, speculative or a mere mask cannot prevent winding up; only genuine substantial disputes justify refusal to admit the petition. Interpretation and reasoning: The respondent's defences - (a) a director's certificate purporting to show sale and write-off of prior entries, and (b) assertions concerning purchase by present management - were held to be insufficient, not supported by cogent contemporaneous documentary evidence, and not amounting to a bona fide substantial dispute. The balance-sheet entries and investigative findings outweighed the post hoc assertions; therefore, the threshold for dismissal on the ground of bona fide dispute was not met. Ratio vs. Obiter: Ratio - where documentary accounting records and investigative findings point to indebtedness and the company's replies are conclusory or unsupported, the dispute is not bona fide/substantial and does not preclude admission. Obiter - procedural observations on scope of court's limited inquiry at admission stage. Conclusion: No bona fide substantial dispute as to liability was established; the winding-up petition could not be defeated on this ground. ISSUE-WISE DETAILED ANALYSIS - JUST AND EQUITABLE GROUND (Issue 4) Legal framework: The 'just and equitable' jurisdiction permits winding up where conscience and equitable considerations, including quasi-partnership features, loss of confidence, mismanagement, or conduct prejudicial to members, make continuation of the company untenable; the inquiry is fact-specific and discretionary. Precedent treatment: The Court applied established equitable principles: quasi-partnership and personal relationship elements, restrictions on transfers, participation in management, equal or significant shareholding, deadlock, lack of probity and mismanagement may warrant winding up on just and equitable grounds. Interpretation and reasoning: The petition alleged significant shareholding in the respondent by group companies (substantial aggregate shareholding), absence of notices/accounts to the official liquidator representing those shareholders, alleged takeover by new management involving forged resignations and irregularities, and a name change said to mask association with the group. Taken together with the indebtedness and occupation of assets acquired from group funds, these facts demonstrated conduct prejudicial to shareholders and mismanagement. The Court found a prima facie case that the company had been hived off to evade consequences of group liquidation and that equitable relief was warranted. Ratio vs. Obiter: Ratio - where significant shareholder rights are undermined by lack of notice/accounts, alleged forgery and mismanagement, and conduct evincing an attempt to evade liabilities, a just and equitable case for winding up may be made out. Obiter - commentary on the discretionary nature of the provision. Conclusion: On the facts alleged and prima facie proved, the just and equitable ground for winding up under section 433(f) is satisfied. REMEDIAL DIRECTIONS AND INTERIM RELIEF (Issue 5) Legal framework: On admitting a winding-up petition, the court may appoint a provisional liquidator, direct inventory and preservation of assets, require publication of citations, and take measures to protect assets pending full hearing. Interpretation and reasoning: Given the prima facie findings of indebtedness, continuing occupation of assets, and risk of dissipation, the Court admitted the petition, appointed the official liquidator as provisional liquidator, directed immediate takeover of assets/books/records, sealing of premises, preparation of inventory, valuation, publication of citations and ancillary protective steps including possible police assistance. Ratio vs. Obiter: Ratio - admission of petition and grant of provisional relief were justified by the prima facie evidence of debt, continuing liability and conduct prejudicial to shareholders; the specific interim measures directed are appropriate to preserve assets and facilitate winding up. Obiter - directions as to manner of publication and cost adjustment. Conclusion: The petition was admitted; provisional liquidation and protective directions were ordered to safeguard assets and the winding-up process pending further proceedings.