TaxTMI 
TaxTMI 
2012 (12) TMI 620
X X X X Extracts X X X X
X X X X Extracts X X X X
....e initial stage of the final hearing. The cobwebs have, hopefully, now been cleared and the matter seen in proper perspective. 2. The petitioning creditor is a non-banking financial company which claims to have granted credit facilities in excess of Rs.4 crore to the company in terms of a sanction letter of September 17, 2009 and the subsequent loan agreement of October 5, 2009. The agreement recognised a maximum credit of Rs.5 crore being granted by the petitioning creditor to the company at an interest of 12.50 per cent per annum with 3 per cent per annum additional interest being payable in case of delayed payment of instalments. The agreement was backed by the personal guarantees executed by two directors of the company and the purpose of the loan was to enable the company to meet its working capital requirements. The loan was partly secured by the company by a pledge of a fixed deposit held in the name of the company in HDFC Bank Limited for a sum of Rs. 75 lakh. The tenure of the loan was extended on September 28, 2010 and in January, 2011 the company requested the petitioning creditor to renew the facility for a further period of six months to which the petitioning creditor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rence. The company suggests that the present petition is scandalous in that it seeks to extract money from the company or subject the company to the humiliation of the petition being advertised. The company claims that if the petition is received and directed to be advertised, all other creditors of the company who have otherwise not pressed for immediate payment would jump in and cause irreparable prejudice to the company. 5. The petitioner has also relied on a letter of dated July 14, 2011, wherein the company appears to have unequivocally admitted the three lots of payments having been made by the petitioner to the company or to its order. The company has merely glossed over such admission and says that the petitioner forced the company to issue the letter. The company has not denied the receipt of the statutory notice of August 19, 2011 by which the petitioning creditor claimed the principal sum of Rs.4,07,05,062 together with interest thereon at the rate 15.50 per cent per annum. The company did not reply to the statutory notice and the presumption under Section 434(1)(a) of the Companies Act, 1956 has arisen. It is such presumption that the company seeks to rebut by referrin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and the fact that the company may have blocked assets or investments which are not immediately available to be encashed to liquidate the company's present debts may be of no relevance at all. 7. There is a bit of wild goose chase that appears to have been undertaken in the petitioning creditor's anxiety to disabuse the court of what was perceived to be an impression that the petitioner had exposed the company to double jeopardy in instituting seemingly parallel proceedings for realising its claim and in the petitioning creditor apprehending that its obtaining orders in the Bombay High Court during the pendency of the present petition may weigh heavily with the court to dismiss the petition or adjourn the matter till after the conclusion of the arbitral reference. Though the petitioner has referred to several authoritative judicial pronouncements on matters where the creditors had invoked the jurisdiction on grounds other than what is recognised in Section 434(1)(a) of the Act, the petitioner concedes that its prayer for winding-up is based exclusively on such provision. The petitioner endeavours to demonstrate that even a secured creditor can seek winding-up of a company by invok....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Act and no person other than those recognised by Section 439 of the Act, and subject to the qualifications therein, may present a petition for winding up a registered company. Section 434 of the Act is only a deeming provision and how the legal fiction of the inability of a company to pay its debts within the meaning of the expression "unable to pay its debts" in Section 433(e) of the Act arises. At first blush, there appears to be an anomaly in Section 434 of the Act. A deeming provision, in the context of the meaning of a word or a provision in a statute, facilitates the fulfillment of the condition embodied in the relevant word or expression or circumstance in the statute and, generally, sets a lesser test for the inference relevant for the word or the expression or the circumstance to be drawn than the word or the expression or the circumstance may otherwise demand. Section 434(1)(c) of the Act, however, requires the inability of the company to pay its debts to be proved to the satisfaction of the court. It is not usual for a deeming provision, in the context of the meaning of a relevant word or expression in the statute, to require such condition to be complied with as the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the inability has to be determined only with reference to the liabilities of the company. Hence, the inability of a company to pay its debts has been understood and interpreted as the company's commercial insolvency rather than its actual insolvency. But the relevant expression in Section 434(1)(c) of the Act does not altogether preclude the court from assessing the company's ability to pay its debts upon the concerned company asserting and establishing the availability of worthwhile assets that may be efficaciously and immediately liquidated to meet the liabilities of the company. But the statutory manner of determination of a company's inability to pay its debts, pointedly, does not make any reference to the assets of the company since, ordinarily, the assets would be deployed in the company's business activities and would not be available for being liquidated for the purpose of discharging the company's debts. A company could be the owner of vast tracts of land on which its manufacturing facility stands, but neither the book value nor the market value of the land may of any relevance in considering whether the company is unable to pay its debts since the business of the company ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; (a) and (b)** ** ** (c) whenever it is proved to the satisfaction of the court that the company is unable to pay its debts." 11. Under the relevant provision as contained in the English Act of 1862, the leading cases where such provision was made the basis for creditors' petitions for winding up the relevant company are Globe Steel Co. (20 Eq. 337); Yate Collieries Co. [W.N. (1883) 171]; Flagstaff Mining Co. (20 Eq. 268) and Pavy's Fabric Co. (24 WR 91). In Globe Steel Co., (supra) which has been placed by the petitioner here and is referred to in greater detail hereafter, a bill of exchange accepted for payment by the company was dishonoured; and it was held to be sufficient proof of the insolvency of the company. In Flagstaff Mining Co. and Yate Collieries Co. (supra) it was held that if the company had given notice to a judgment-creditor that it had no assets on which the judgment creditor could levy execution, it was sufficient proof of the company's inability to pay its debts and the judgment-creditor need not actually proceed to execute the decree before he can petition for win....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r upwards has served a demand of payment, and the company for the space of three weeks after service has omitted to pay the debt. The second case is where execution issued upon a judgment has been returned unsatisfied. The third case is under Scoth law; and the fourth case is where it is proved to the satisfaction of the Court that the company is unable to pay its debts. The only question for me to decide is this, whether this is proved to my satisfaction. It appears that the Petitioners sold goods to the company, and took in part payment a bill, which was dishonoured, and continues unpaid. That is proof which ought to satisfy me, and which does satisfy me, that the company is unable to pay its debts. It was argued that the Petitioners are not entitled to their order because of the omission to serve the statutory notice demanding payment; but I think their omission to do so has no bearing on the question. In re Catholic Publishing and Bookselling Company (1) was a different case. Two points were raised in it, first, whether the Petitioners were creditors of the company at all; and, secondly, whether at the time the petition was presented the company was in such a position as to mak....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on account of price of goods sold and delivered, that impelled the court to infer the company's inability to pay its debts as the company did not show any justification for the admitted bill of exchange being dishonoured. In the absence of the judgment spelling out the objective criteria that the court set for the its subjective satisfaction that the company concerned was unable to pay its debts, an inference must necessarily be drawn that the objective criterion was the presumption in law that an accepted bill of exchange had to be discharged by payment unless legally established grounds were cited to rebut the presumption; and such grounds were not urged by the company in that case. 16. The petitioner has relied on passages from authoritative texts on company law published in more recent times to jump to some contemporary decisions following the dictum in Globe Steel Co. (supra) Palmer's Company Law (25th Ed, 1992) has been relied on for a passage at paragraph 14.312 thereof that instructs that "a debenture holder to whom a company is indebted in a sum presently payable can demand payment, and, if default is made, can petition for the winding up of the company, and this whether....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he creditor, two cases have been noted in the text. The petitioner here has placed both. In the judgment reported at Cornhill Insurance PLC v. Improvement Services Ltd [1986] 1 WLR 114, the insurance company brought an action to restrain the defendants from presenting or threatening to present a petition to wind up the plaintiff under the provisions of Section 517(1)(e) and (f) of the English Companies Act, 1985 and obtained an initial injunction which was vacated by the judgment cited. The court's approach to the assessment is captured in the following two paragraphs from page 117 of the report. "The question arises: what should the court do with a threat to present a petition against a company which the court instinctively considers must be solvent, and as to which there is now evidence before the court that it was solvent to a major degree on 31 December 1984? The point as to possible abuse of process which particularly concerned me was that every winding up petition must contain an averment that the company is insolvent and is unable to pay its debts, and the affidavit in support, sworn either by the petitioner or by his solicitor under the winding up rules, must aver that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e injunction is sought. This second feature, the distinction between English law and Indian law, in the application of similar statutory or equitable principles may have a bearing in the present discussion. 19. In the judgment Taylors Industrial Flooring Ltd. v. M&H Plant Hire Ltd. [1990] BCLC 216, the two alternative limbs that were cited in support of the petition for winding up the company were that the company was unable to pay its debts and that the court should form an opinion that it was just and equitable that the company should be wound up. It is evident that the Court of Appeal relied on Section 123(1)(e) of the English Insolvency Act, 1986 which reflected Section 518(1)(e) of the English Companies Act, 1985 ["if it is proved to the satisfaction of the court that the company is unable to pay its debt as they fall due (and, in determining that question, the court shall take into account the company's contingent and prospective liabilities)."] The following passages from pages 219 and 220 of the report are relevant: "There is no requirement that a creditor must serve a statutory demand. The practice for a long time has been that the vast majority of creditors who seek to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... English Act of 1862 the clause did not contain the words "and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company." As noticed above, the English Act of 1862 on which the Indian Companies Act of 1882 was based, did not specify, in the relevant clause, the additional factors which the court had to take into account to satisfy itself that the company was unable to pay its debts. That made a world of difference to the provision. 21. In the English Act of 1985, as enacted, the same provision continued in Section 518 which set the parameters for the legal fiction of a company's inability to pay its debts; but the guide to the court on how to determine the company's inability to pay its debts was marked in parenthesis in clause (e) of its first sub-section. However, upon the matters pertaining to insolvency being consolidated in the English Insolvency Act, 1986, what was originally contained in Section 130(iv) of the English Act of 1908 and continued in Section 223(d) of the English Act of 1948, was split into two as reflected in paragraph 394 of Halsbury's Laws of English (5 Ed., 2011....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity of the fundamental principles involved in this branch of law as it is administered in this country and the English authorities that throw light on such principles. There is no denying that company law in India was introduced by the British during the colonial era and such law in this country has been considerably influenced by the English practice and authorities in such arena. But there is a danger in following English law and English judgments on legal principles that have been recognised in the statutes in this country. Ordinarily, a principle in company law or an expression that is duplicated in the Indian and English statutes may be seen or interpreted in the light of the English authorities on the point, since the body of Indian company law is based on the English law on such aspect. But it must never be lost sight of that statutory interpretation in this country is based on the constitutional jurisprudence of this land, the interplay between several statutes in this country which may not be the same case in England and the minor inflections in the other provisions of a similar statute which might throw a different light on the interpretation of a similar expression in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aulatram Rawatmull (P.) Ltd v. Peerless General Finance & Investment Co. Ltd. [2006] 66 SCL 364 (Cal.); and, an unreported judgment of a Division Bench of this court of July 23, 2012 in APO No. 211 of 2011 [Rajiv Tandon v. Dena Bank [2012] 174 Comp. Cas. 22 (Cal.)] merit no elaborate consideration in the present context. 26. The company labours over its unimpressive balance-sheet to suggest that it has substantial assets and submits that since no other creditor of the company has applied for winding up, the court should not assume that the company's assets are not enough to meet its liabilities. The company contends that in assessing whether a company is solvent or not, its net worth ought to be taken into consideration and refers to the emphasis on net worth in the Sick Industrial Companies (Special Provision) Act, 1985 and the regulations made by the Securities and Exchange Board of India relating to initial public offers of listed companies and the regulations framed under the Foreign Exchange Management Act, 1999 in such regard. With respect, the argument does not appeal. The special purpose of the regulations under the Act of 1999 and those issued by SEBI requires net worth o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....judgment of the Bombay High Court reported at (Manipal Finance Corpn. Ltd v. CRC Carrier Ltd. [2001] 107 Comp Cas 288) has been brought for the acceptance therein of the securities furnished by the guarantors as a relevant consideration in assessing the admissibility of the creditor's petition against the principal debtor company. Paragraph 9 of the report is relevant for the present purpose. "9. I am not all inclined to admit the present petition as the petitioners ought to resort to a civil remedy and they cannot be allowed to take recourse to this extreme remedy for their doubtful debt which is yet to be crystallised. It is not the case of the petitioners that there are many other creditors who are knocking at the doors of the company and that the liabilities of the respondent-company have exceeded its assets and that it has lost its' substratum so that the company should be permanently extinguished from its existence. The petitioners are trying to force the respondent-company to surrender to the petitioner in spite of being fully secured under the personal guarantees of three guarantors and having security of a flat which would be worth of Rs. 1,50,00,000 as submitted by Shri ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven if the security furnished by the guarantors were adequate to match the claim, the company's inability to pay its debts can still be ascertained and established on the company not being able to secure the claim. Section 128 of the Contract Act makes the liability of the guarantor coexistent with that of the principal debtor, unless it is otherwise provided by the contract between the parties. There is no contract to the contrary that the company has been able to show. The petitioner has a choice of prosecuting its claim against the principal debtor and not against the guarantors. Indeed, the petitioner here has sought an order of winding up against the company on the company's failure to liquidate the petitioner's claim or to secure or compound for it to the reasonable satisfaction of the petitioner. The assessment of the company's inability to pay will, in such circumstances, not be judged by the security furnished or forced to be furnished by the guarantors who are the directors of the company. At a more fundamental level, it must be remembered that a petitioner does not seek a decree against a company on a creditor's winding-up petition. That a practice has evolved under whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etition has been launched is unavoidable. Since there is an element of discretion available to the company judge at the stage of admission and, to a much greater extent, at the final stage of the winding-up proceedings in the two-tier practice that is in vogue, a creditor who has sought an order of winding-up against a company can never be certain that the money claim therein will be realised in course of such proceedings. If, the creditor's petition lingers for any substantial length of time, it can be scarcely expected of the creditor to allow limitation to set in and not launch a regular action in pursuance of the same money claim. The institution of a suit or an arbitral reference, in such a situation, makes no difference since the arbitral reference has per force to be initiated in place of a suit if the matrix contract on which the money claim is based is governed by an arbitration agreement. In any event, the mere non-payment of a money claim is a dispute covered by the arbitration agreement governing the matrix contract on which the money claim is based. The word "dispute" used in the Supreme Court judgment must be understood in such light and not implying a dispute in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reported at (Andhra Pradesh State Financial Corpn. v. GAR Re-rolling Mills [1994] 2 SCC 647 on the doctrine of election. The question in that case arose in the context of the alternative courses of action available to a financial corporation under Sections 29 and 31 of the State Financial Corporations Act, 1951. The doctrine of election does not apply between a regular action for enforcement of a money claim and a creditor's winding-up petition based on the same claim since, inter alia, the reliefs claimed in the two sets of proceedings are completely different. In an action for enforcing a money claim simpliciter, the forum - be it a regular civil court or an arbitral tribunal or any other judicial or quasi-judicial body - would have no authority to entertain a prayer for winding-up the company. Similarly, in a creditor's winding-up petition, no relief can be claimed in the nature of a money decree even though a creditor's winding-up petition is regarded an equitable mode of executing a money claim. An oft-cited Division Bench judgment of this court reported at (SRC Steel (P) Ltd v. Bharat Industrial Corpn. Ltd. [2005] 4 CHN 343 has been cited in the same context, but the court re....