2013 (5) TMI 1074 - HC - Companies Law

Company Faces Liquidation Over Unpaid Debts; Official Liquidator Appointed and Assets to Be Managed if Debt Not Settled.

The HC admitted the winding-up petition against the Respondent, EAPL, due to its inability to pay debts, as evidenced by dishonored cheques and failure to ... - ISSUES PRESENTED AND CONSIDERED 1. Whether non-delivery of a statutory demand at the company's registered office (Section 434(1)(a)) is fatal to a winding-up petition based on inability to pay debts under Section 433(e), or whether the petitioning creditor may rely on Section 434(1)(c) (proof of inability to pay) instead. 2. What constitutes sufficient pleading and evidence to invoke Section 434(1)(c) - i.e., when a Court may infer inability to pay debts from facts and admissions on record despite alleged defect in service of statutory demand. 3. The legal significance of corporate admissions (balance-sheet disclosures) and dishonour of post-dated cheques in establishing inability to pay debts and rebutting claims of bona fide dispute or solvency. 4. The standard for distinguishing a bona fide dispute as to liability from an inability to pay, and the evidentiary role of commercial solvency at the statutory demand stage. 5. Whether appointment of a provisional liquidator is warranted and under what terms (including conditional suspension of order to allow payment). ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of defective service of statutory demand under Section 434(1)(a) versus resort to Section 434(1)(c) / Section 433(e) Legal framework: Section 433(e) permits winding up where the company is unable to pay its debts; Section 434(1)(a) creates a statutory deeming where a valid demand served at the registered office is not complied with; Section 434(1)(c) permits proof to the Tribunal that the company is unable to pay debts on the merits. Precedent treatment: The Court follows the principle that the clauses in Section 434 are disjunctive - a creditor need not rely exclusively on the statutory demand deeming if it can satisfy the Court under Section 434(1)(c). The Court cites and follows prior authority holding that a creditor can seek winding up under Section 433(e) read with Section 434(1)(c) even when the statutory-demand route under Section 434(1)(a) is not established, provided appropriate pleading is made. Interpretation and reasoning: The Court analyses the statutory text and prior authority to conclude that failure to comply with Section 434(1)(a) is not necessarily fatal where the petition establishes inability to pay under Section 434(1)(c). However, the Court emphasises that absence of pleading under Section 434(1)(c) will lead to refusal where statutory demand requirements are not met. Ratio vs. Obiter: Ratio - the disjunctive operation of Section 434 and the permissibility of proving inability to pay under Section 434(1)(c) notwithstanding a defect under Section 434(1)(a), subject to proper pleading. Conclusion: Defective delivery of the statutory demand does not automatically bar a winding-up petition if the petition otherwise pleads and proves inability to pay debts under Section 434(1)(c). Issue 2: Sufficiency of pleading and evidence to establish inability to pay under Section 434(1)(c) Legal framework: The Court must determine inability to pay in the commercial sense - whether the company cannot meet current demands and whether existing and probable assets are insufficient to meet liabilities. Precedent treatment: The Court applies the Supreme Court's guidance that 'unable to pay its debts' is to be understood commercially and that evidence of insolvency may be decisive if liability is not genuinely disputed. The Court relies on authorities holding that solvency evidence is relevant to whether a dispute is bona fide but not a standalone defence where debt is undisputed. Interpretation and reasoning: The petition contained averments of a statutory notice and non-response. The Court treats those averments together with two undisputed facts: dishonour of post-dated cheques and balance-sheet entries admitting substantial indebtedness. The Court reasons that these admissions and events permit the inference of commercial inability to pay if the company does not raise a bona fide dispute or adequate proof of solvency. Ratio vs. Obiter: Ratio - pleadings that assert service of notice, non-compliance, and facts amounting to admissions of indebtedness (including financial statements and dishonoured cheques) can satisfy Section 434(1)(c) and justify proceeding with a winding-up petition despite a challenged statutory demand delivery. Conclusion: The averments and documentary admissions before the Court were sufficient to satisfy Section 434(1)(c) that the company was unable to pay its debts. Issue 3: Legal significance of admissions in balance-sheets and dishonour of post-dated cheques Legal framework: Documentary admissions and acts (e.g., issuing PDCs, balance-sheet disclosures) are relevant evidence as to liability and the company's financial position; cheque dishonour is evidence of inability to meet immediate obligations. Precedent treatment: The Court treats balance-sheet disclosures and cheque dishonour as probative and aligns with authority that undisputed admissions of indebtedness diminish the viability of a defence based on solvency or bona fide dispute. Interpretation and reasoning: The Court notes that the company's balance sheets repeatedly recorded amounts payable to the creditor and that post-dated cheques were dishonoured with bank confirmation. The company offered no satisfactory explanation for these matters or for identical figures across years. Such admissions are treated as clear evidence of outstanding liability and support an inference of inability to pay. Ratio vs. Obiter: Ratio - corporate admissions in statutory accounts and evidence of dishonoured cheques are strong evidence of liability and can rebut claims of bona fide dispute or solvency at the statutory demand stage. Conclusion: The admitted balance-sheet entries and cheque dishonours materially supported the finding that the company was unable to pay its debts. Issue 4: Distinguishing bona fide dispute/solvency from inability to pay Legal framework: If a company raises a genuine and substantial dispute as to liability, the Court should not wind it up on a statutory demand alone; conversely, where liability is undisputed, solvency is not an independent ground to defeat a proper demand. Precedent treatment: The Court follows binding guidance that solvency is relevant to whether a dispute is bona fide but does not itself constitute a stand-alone defence to a statutory demand when liability is undisputed. Interpretation and reasoning: The Court examined whether the respondent advanced any bona fide, substantive defence to liability or evidence of solvency sufficient to rebut the petition. Finding none - and noting admissions and lack of proper explanation - the Court concluded the defence was not bona fide and could not avert winding up. Ratio vs. Obiter: Ratio - absence of a bona fide dispute on liability and failure to prove solvency permits a finding of inability to pay and supports winding up. Conclusion: The respondent failed to demonstrate a bona fide dispute or solvency that would defeat the petition; refusal to pay on no genuine ground justified proceeding to winding up. Issue 5: Appointment of Provisional Liquidator and conditional abeyance of order Legal framework: Where inability to pay is found, the Court may appoint a provisional liquidator and make orders for seizure and inventory of assets; the Court may keep orders in abeyance to permit payment proposals to be implemented. Precedent treatment: The Court exercised discretionary relief consistent with court powers in winding-up proceedings to protect creditors' interests while allowing an opportunity for payment. Interpretation and reasoning: On finding inability to pay, the Court appointed the Official Liquidator as Provisional Liquidator, directed preservation and inventory of assets, and required statutory compliance by directors. The Court kept the order in abeyance for eight weeks to permit payment of the admitted liability with up-to-date interest; failure to pay would activate the order and further OL steps. Ratio vs. Obiter: Ratio - appointment of a provisional liquidator is appropriate where inability to pay is established; conditional suspension of the order to allow for payment is a legitimate exercise of discretion to balance interests. Conclusion: The Court appointed a provisional liquidator, imposed directions for asset custody and statutory filings, and kept the order in abeyance for a fixed period subject to payment - failing which the provisional measures would take effect.