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Indian CasesSupreme Court of India

The Aluminium Corporation Of … vs Lakshmi Ratan Cotton Mills Co. … on 28 July, 1969

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Allahabad High Court

The Aluminium Corporation Of … vs Lakshmi Ratan Cotton Mills Co. … on 28 July, 1969

Equivalent citations: AIR 1970 All 452, 1969 39 CompCas 23 All

Author: M Beg

Bench: M Beg

ORDER M.H. Beg, J.

1. This is a petition under Section 433 of the Indian Companies Act, I of 1956 (hereinafter referred to as the Act), filed by the Aluminium Corporation of India Ltd. (hereinafter referred to as the Corporation), for winding up the Lakshmi Ratan Cotton Mills Co., Ltd. (hereinafter referred to as the Company) in the circumstances detailed below.

2. The Company is one of the Industrial and business concerns controlled by the Guptas of Kanpur. The Corporation is controlled by another prominent group of industrial magnates of Kanpur, the Singhanias. It appears that the Gupta and the Singhania groups were at one time jointly running the company as well AS the Corporation. They were also jointly controlling a firm known as Firm Behari Lal Ram Chand (referred to hereinafter as the firm) so much so that the accounts of these three concerns were mixed and open to each other as though the three concerns were one. But, subsequently, as a result of differences between the two groups, they decided to part company. Their interests were separated under an award. The Corporation came to the share of the Singhanias exclusively. The Company and the Firm fell in the share of the Guptas. Accounting between the Corporation and the other two concerns indicated that the Company and Messrs. Behari Lal Ram Chand had certain claims against the Corporation which did not clear its accounts. Consequently, two civil suits had to be filed at Kanpur. Suit No. 63 of 1949 was filed by the Company against the Corporation, and Suit No. 65 of 1949 was filed by the Firm against the Corporation, claiming amounts due to them. The suit filed by the Company was decreed, after going into accounts, for a sum of Rs. 2,82,734/11/3 with proportionate costs and pendente lite interest at 3 per cent per annum.

3. Among the pleas taken by the Corporation in the suit decreed against it was that the claim was barred by tune. The Company relied upon an acknowledgment, contained in a letter sent by the Secretary of the Corporation to the Company, to extend the period of limitation. The trial Court held that the Secretary’s letter constituted an acknowledgment by an agent who had implied authority to make an admission of liability. But, when the case came up in a first appeal before this Court, a Division Bench of this Court held, in L. R. Cotton Mills v. Aluminium Corporation of India Ltd.. AIR 1967 All 391, that the so-called acknowledgment by the Secretary of the Corporation could not extend the period of limitation. This Court held the Secretary’s letter to be part of mere negotiation through an officer whose authority to make an acknowledgement of liability on behalf of the Corporation was not established. The Corporation’s appeal was, therefore, allowed by this Court.

4. During the pendency of the above-mentioned appeal of the Corporation, this Court had passed an order, on 11-5-1951, requiring the Corporation to deposit, as agreed upon between the parties, a sum of Rs. 1,00,000/- in the execution Court, and ordering the remaining sum decreed to be set off against a claim of the Corporation against the Company. The amount deposited in Court was withdrawn by the Company on furnishing security. The decree was thus satisfied. But, when its appeal was allowed, the Corporation filed a restitution application which was allowed on 15-4-1967. The Company was directed to pay a sum of Rs. 4,11,554/- to the Corporation by way of restitution. The company has filed an appeal in the Supreme Court of India against the judgment and decree of this Court in the abovementioned First Appeal. The appeal could be filed as a matter of right and is still pending. It did not, however, obtain any order from the Supreme Court to stay restitution or execution proceedings. Nor did the Company file any appeal against the restitution order which has become final.

5. The Corporation, without taking any steps to enforce the order of restitution by ordinary steps in execution, served a notice on 11-5-1967 calling upon the company to pay the sum of Rs. 4,11,554/-along with interest pendente lite at 6 per cent per annum within three weeks of the service of the notice. The Company replied disputing its liability to pay back and alleged that there was no question of its neglect or failure to pay. The Corporation then filed the winding up petition in this Court on 9-8-1967 on a number of grounds including the Company’s Inability to pay its debts. The company denied its inability to pay its debts and made counter allegations. The following issues, arising out of the assertions made by the two sides, were framed:–

(1) Whether the Company is liable to be wound up on the ground that it is commercially insolvent for the reasons mentioned in the petition as amended?

(2) Whether the Company has suspended its business for a whole year and is liable to be wound up for this reason?

(3) Whether it is otherwise just and equitable to wind up the Company?

(4) Whether the petition is mala fide and liable to be dismissed on that ground?

6. Considerable evidence has been placed before the Court by both sides through affidavits. At one stage, an application for summoning certain witnesses was also allowed, but, subsequently, after an application for serving a very large number of interrogatories had been partly allowed, so that answers to the interrogatories were also given in the form of affidavits, it was not found necessary to examine witnesses. As already indicated by me in a detailed order passed on 8-7-1967, the procedure on a winding up application, contained in Companies (Court) Rules, 1959, and the practice of this Court as well as of other High Courts and of English Courts is to decide such questions on winding up petitions generally by means of evidence submitted through affidavits. Cross-examination of persons who have sworn affidavits or adduction of oral evidence may be allowed by the Court when the Court considers it to be necessary. In the present case there is ample evidence submitted by both sides through affidavits to indicate where the balance of equities stands today.

7. At this stage. I must deal with an objection repeatedly put forward by Mr. Birjlal Gupta on behalf of the Company in the course of the hearing of this petition. It was that the petitioning Corporation should be confined to the facts alleged in the petition itself, or, at any rate, to the facts stated in the petition after its amendment. His contention was that fresh evidence by means of affidavits at subsequent stages making new allegations should not be permitted at all. Reliance was placed for this proposition on In re. East Kajoria Collieries Pvt. Ltd., (1965) 69 Cal WN 1 where it was held inter alia :

“……… the law is well established that a petitioner, who applies for winding up of a company on the ground that the company is unable to pay its debts, must make out sufficient grounds in the petition itself, and, if such grounds have not been so made out, the Court is not entitled to take notice of other evidence that may be produced in the affidavit of other parties. Nor should the court allow the petitioner an opportunity to introduce further evidence regarding indebtedness by fresh affidavit to be filed by him.”

8. In Palmer’s Company Law (20th Ed. 1959 at p. 716), the English law. on which our law is based, is thus summarised on this point:

“any liability, in fact, of the company existing at the commencement of the winding up may be proved and not merely debts due at the commencement of the winding up (See: Macfarlane’s claim (1880) 17 Ch D 337 at 339; Re Printing Co. (1878) 8 Ch D 535 Re Parana Plantations Ltd. (No. 2), (1948) 1 All ER 742). According to Section 441 of our Act winding up is deemed to commence from the filing of the petition, A rule confining evidence of indebtedness to the indebtedness existing at the time when the petition is made does not, however, preclude taking all evidence subsequent to filing of a winding up petition. It is a much narrower rule. Even this narrow rule can be easily overcome by a creditor, seeking to rely on fresh indebtedness, by the simple device of filing a fresh petition. That narrow rule is not really attempted to be transgressed by the petitioner here. The broader proposition Bought to be built on it, on behalf of the company, to exclude all evidence in support of a petition tendered after the petition is filed or to prevent this Court from considering all evidence of facts or events occurring after a petition is filed, which may have a bearing on questions raised, is not well founded.

9. In East Kajoria Collieries’ case, (1965) 69 Cal WN 1 (supra) the following passage was cited from Buckley “On Companies Acts” (13th edition p. 471): “An order will not be made if a sufficient case is not stated on the petition, even if such a case is proved in evidence. The order must be made secundum allegata et probata”. After having examined the cases cited in Buckley’s Companies Acts (13th edition), in support of the proposition stated there, I have come to the conclusion that the passage was not meant to convey anything more than that evidence must be confined to the case set-up.

10. There is no doubt that prima fade evidence must accompany the petition itself in order to justify its entertainment at all. But, I find no warrant for going further to hold that the essentially equitable jurisdiction of the Court, in considering a winding up petition, must be exercised only on evidence which accompanies the winding up petition. Such a view would run counter to the specific provisions relating to the procedure of this Court contained in Companies (Court) Rules for tendering of evidence after the filing of the winding up petition which is a representative action. Other creditors may file affidavits to support the petition by proving their claims existing at the time of making the petition, in addition to those set out by the petitioning creditor. The evidence given must no doubt be confined to the cases set up on which issues are framed. But, it cannot be said that the petitioner’s evidence must exhaust itself when the petition is filed. Indeed, the Company itself filed a Paper Book of this Court in the First Appeal mentioned above, and a copy of its petition for a certificate of fitness of its case for an appeal to the Supreme Court, even after the arguments which had closed but were reopened on the specific question for which the documents were relevant. If there could be a rule that the whole evidence of the petitioner must be filed with the petition. I see no reason. In justice, why there should not be a corresponding rule to prevent a company from filing any evidence after its affidavits in reply. I know of no such sweeping rules. I, therefore, overrule the company’s objection to the petitioner’s evidence tendered after the filing of the petition.

11. As each side relies on some part of Section 434(1) of the Act to support its case, the relevant provisions may be reproduced here:

“Section 434. Company when deemed unable to pay its debts.– (1) A company shall be deemed to be unable to pay its debts-

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or

(b) if execution of other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c) If it is proved to the satisfaction of the Court that the company is unable to pay its debts, 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.”

12. The petitioning creditor, having been met with a refusal to pay after it had served a registered notice on 11-5-1967 demanding payment of the amount declared to be due to it, claims the benefit of the deeming provision under Section 434(1)(a) of the Act. Its contention is that, once the statutory fiction or presumption is shown to operate in its favour, it becomes entitled ex debito justitiae” to a winding up order (Vide: Buckley “On the Companies Acts”, 13th Ed., 1957. p. 450). It relies, in particular, on a passage in the judgment of Lord Cranworth, in Bowes v. Hope Life Insurance and Guarantee Co., (1865) 11 HLC 389 where we find:

“…………..,I agree with what has been said, that it is not a discretionary matter with the Court, when a debt is established and not satisfied, to say whether the company shall be wound up or not; that is to say, if there be a valid debt established, valid both at law and in equity.”

It is urged that a creditor’s right to obtain a winding up order as a method of “equitable execution” is well recognised.

13. In each of the English cases cited to sustain the proposition that a creditor is entitled “ex debito iustitiae” to realize his debt, by invoking the powers of the Court to wind up an indebted company unable to pay its debts, the equities of the particular case dealt with determined the result of the case. Thus, in Bowes’ case, (1865) 11 HLC 389 (supra). Lord Cranworth pointed out that the real question, as it came up before the Master of Rolls was whether “there was such a clear proof of a debt, both at law and in equity, that he had no other course to take but immediately to direct the winding up.” In fact, there the sole creditor’s debt, though decreed by a Court appeared to their Lordships to be suspicious, and, the decree evidencing it could, in their opinion, have been collusive. Hence, the power to wind up immediately was not exercised. Time was given to file a suit to set aside, if possible, the decree evidencing the debt.

14. In re Manor of Lowestoft and Great Eastern Rly. Co.; Ex parte Reeve, (1883) 24 Ch 253, (Sic) Bowen, L. J., observed that even a proved creditor could only claim a right to “equitable execution” ex debito justitiae “in a special sense.” He held that the Court had to refuse, in that case, on equitable grounds, a winding up order altogether despite the proved inability of the company, within the terms of the statute, to pay its debts.

15. Learned counsel for the petitioner relied largely on English decisions, which are only persuasive authorities for us, on the ground that provisions of our Companies Acts are based on corresponding provisions of English Acts. English cases are not wanting where it had been held that “the Court is not bound ex debito justitiae to make an immediate order to wind up a company”, even whether a petitioning creditors’ debt exceeding the required amount is admitted and not paid within time fixed by Statute after a demand by notice, without giving time or opportunity, in the exercise of its discretion, to make arrangements to pay up (See: e.g. In re Brighton Hotel Co., (1868) LR 6 Eq Cases 339; In re Western of Canada Oil, Lands, and Works Co., (1873) LR 17 Eq Cases, 1.

16. In W. T. H.’s T. Works Co. v. G. E, Supply Co., AIR 1939 All 840 at p. 845 Iqbal Ahmad, J, observed, with regard to this Court’s discretionary power, now found in Section 433 of the Act, to wind up a company:

“It would thus appear that the company is unable to pay its debts. This fact, however, does not necessarily entitle the petitioner to an order for the winding up of the company as the discretion to pass such an order, even in the case of the inability of a company to pay its debts, is by Section 162 vested in the Court.”

I am unable to take a different view of the power contained in provisions of Section 433 of the Act, I, therefore, respectfully dissent from some of the views expressed recently by Vimadalal, J., of the Bombay High Court, in re Advent Corporation (P) Ltd., (1969) 39 Com Cas 463 (Bom) when admitting a winding up petition. Moreover, on facts, the position of petitioners appeared equitably strong there.

17. Although the power to wind up is discretionary, it has to be exercised judicially. This means that it is only where the balance of equities is shown by a petitioner to tilt appreciably in favour of a winding up order that it will be made “ex debito justitiae.” It is in this special sense that a petitioner relying on grounds contained in Section 433 can get a winding up order as a matter of right. It is issued as a matter of right when the proved contents of the right produce a compelling effect it is not granted mechanically as a matter of course on proof of certain facts. In other words, equitable considerations have a decisive effect even when the power to wind up a company is invoked under a clause of Section 433 other than the general just and equitable Clause (f). The provisions of Section 434(1) determine when the requirements of Section 433(e) will be deemed to be fulfilled, but they do not lay down when a winding up order must necessarily be passed. It is true that a creditor is not bound to wait and give time to the company beyond the time prescribed after the statutory notice, before filing his petition. But the Court may, if there are sufficient counter-balancing equitable grounds, deny an immediate winding up order, or, in appropriate cases, even refuse it altogether in spite of the proved inability of a company to pay its debts. Exercise of such discretionary power must necessarily be governed by justice and equity.

18. The petitioner’s counsel urged, with some vehemence, that law and equity, which are not separable in this country, combine to carry a compelling force when the inability of a company to pay its debts is supported by an unsatisfied judgment debt followed by a failure to pay within the prescribed period after the statutory notice. It was pointed put that it had been held that even the filing of an appeal against a judgment proving a debt, which left no room for a bona fide dispute about liability to pay, could not ward off a winding up order unless a stay order was obtained from the appellate Court. It was, however, conceded that a stay order from the appellate Court would disable the creditor, against whom it was made, from relying upon any neglect or failure of a company to discharge the liability already adjudicated upon to prove inability of the company to meet its obligations. The authorities relied upon were: In re Amalgamated Properties of Rhodesia Ltd., (1917) 2 Ch D 115; Re Douglas (Griggs) Engineering Ltd., (1962) 1 All ER 499; Sarkar Estate (P) Ltd. v. Kusumika Iron Works (P.) Ltd., AIR 1961 Cal 439; C. Hari Prasad v. Amalgamated Commerical Traders (P) Ltd., AIR 1964 Mad 519.

19. Furthermore, it was submitted that, inasmuch as the company did not choose to even appeal against the order passed on the restitution application, the petitioner’s right to an immediate payment could not be said to be disputed at all. Hence, reliance was placed on the following passage in Palmer’s Company Law (20th Ed. 1959 at p. 677):

“Where the debt is undisputed, it is futile for the company to say, ‘We are able to pay our debts, but we do not choose to pay this particular debt.’ The Court will not listen to such a defence.”

It was urged that such a stand was, in itself, inequitable. Equity and justice as well as sound commercial ethics, it was submitted, demand that obligations to pay in praesenti should be met. It was pointed out that even a temporary use of a large sum of money of over four lacs had considerable value for a manufacturing business concern.

20. On the other hand, learned counsel for the company relied strongly upon: Amalgamated Commercial Traders (P) Ltd. v. A. C. K. Krishnaswami, (1965) 35 Com Cas 456 (SC) where the Supreme Court quoted, with approval the following passage from Buckley on the Companies Acts (13th Ed. p. 451) :

“A winding up petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the Court. At one time petitions founded on disputed debt were directed to stand over till the debt was established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground, the Court may decide it on the petition and make the order.”

Their Lordships helds:

“If the debt was bona fide disputed, as we held it was, there cannot be ‘neglect to pay’ within Section 434(1)(a) of the Companies Act. If there is no neglect, the deeming provision does not come into play and the ground of winding up, namely, that the company is unable to pay its debts is not substantiated.”

21. Other cases cited in support of the principle enunciated above were: In re London and Paris Banking Corporation, (1875) LR 19 Eq Cas 444; Bengal Luxmi Cotton Mills Ltd. v. Mahaluxmi Cotton Mills Ltd. AIR 1955 Cal 273; Chellaradh & Co. Ltd. v. M. V. K. Sundaram, AIR 1965 Mys 122.

22. In my opinion, learned, counsel for the Company rightly pointed out, relying upon a recent decision of the Calcutta High Court, In re Steel Equipment and Construction Co. (P) Ltd., (1968) 36 Com. Cas 82, where S. K. Dutta, J., has made a very comprehensive survey of all the authorities, both Indian and English, on the question, that the principle, that the existence of a bona fide dispute dispels the fiction or presumption contained in Section 434(1) of the Act, is applicable to a decretal debt as well. The only difference is that the decree against the alleged debtor raises a strong presumption, as held by S. K. Dutta, J., that a genuine debt exists. The presumption can, however, be repelled where there are substantial grounds for questioning the validity of the decree as there seemed to be to S. K. Dutta, J., in Steel Equipment and Construction Co.’s case, (1968) 38 Com Cas 82 (supra). But, a debt simpliciter, which is not supported by a judgment to evidence it has to be proved by other evidence. The difference lies not in the principle applicable but in the type of evidence produced to prove a debt and its effect.

23. Learned counsel for the petitioner tried to confine the applicability of the principle of bona fide dispute, in cases of decretal debts, to cases where the decree was shown to have been passed either without jurisdiction or could be strongly suspected of being collusive or obtained fraudulently so that it could be null and void. Learned counsel for the petitioner contended that, in other cases, the existence of a decree for money, which has not been, set aside, followed by a failure to pay within time after a statutory notice, was enough to give rise to the fiction or presumption laid down by Section 434(1) of the Act. I do not consider such a clear-cut or simple ground of distinction to be justified. The presumption that a judgment and decree are correct no doubt remains until they are set aside. But, there is no further presumption that their validity or correctness cannot be questioned on substantial grounds. It is certainly not enough, for the purpose of proving such substantial grounds, to merely show that either an appeal has been filed or an allegation has been made that the decree is collusive or obtained by fraud. But, together with other facts, a bona fide dispute either about the validity or about correctness of a decree may be established. The decision in each case must turn on its own facts. In fact, the case of an alleged collusion or fraud generally remains in the realm of prospective evidence to be produced. But, in the case of an appeal, the evidence, the judgment or judgments, as the case may be, and the grounds taken in appeal can be placed before the Court so that it may be easier to say whether a bona fide dispute about liability to pay exists or not. The principle that a bona fide dispute will save the creditor from the charge of neglect in paying applies to both types of cases.

24. In the Instant case, the learned counsel for the petitioner had at first merely tried to show, from the judgment of the Division Bench itself, that the case on behalf of the Company was not properly and fully argued before the Division Bench in this Court. But, neither the facts stated in the judgment nor the fact that an appeal had been filed as a matter of right in the Supreme Court could prove that the judgment of this Court had been questioned on substantial grounds so as to establish a bona fide dispute. However, when the learned counsel for the company, perhaps realising the weakness in the evidence given by the Company on this aspect of the matter, had filed a copy of the paper book of the first appeal and the proposed grounds of appeal in the Supreme Court, it could not possibly be said that the grounds of appeal were not substantial. If there are two differing judgments and certain substantial grounds are shown, to have been taken in a second appeal, which is pending in the Supreme Court, I think it could not be denied that there is a bona fide dispute about the existence of the Company’s liability to repay the amount which was initially decreed by the trial Court, I could come to this conclusion only after going through the judgments of the trial Court and of this Court and grounds of a proposed appeal on the facts of this particular case.

25. The proposition that even where there is an appeal involving substantial grounds for challenging a judgment under appeal, the judgment debtor must necessarily be held to have neglected to discharge his duty to pay, unless a stay order is granted by the appellate Court, seems to me to be too wide. A stay order from the appellate Court would certainly establish that there was no neglect, and, therefore, inability to pay, within the meaning of Section 434(1)(a) of the Act, could not be presumed. But, where a bona fide dispute about the liability to pay is satisfactorily shown by an appellant, inability to pay could not be presumed simply because the judgment-debtor has failed or refused to pay in response to the statutory notice of the creditor under Section 434(1)(a). It may however, still be presumed under Section 434(1)(b) when a process issued, in the course of execution, is shown to have been returned unsatisfied. A stay order is only indispensable in cases falling under Section 434(1)(b) of the Act because here the plea of a bona fide dispute is of no avail and is irrelevant.

26. In the instant case, the petitioner could only file and did file a restitution application under Section 144, Civil P. C. Such an application has been held, in M. M. Barot V. P. M. Gokul Bhai, AIR 1965 SC 1477, by the Supreme Court, to be an execution application. It was, therefore, contended, not without force, by the learned counsel for the company, that, in this case, no fiction or presumption arose under Section 434(1)(a) of the Act, although it could have arisen under Section 434(1)(b) of the Act provided some process had been issued on the strength of the restitution order and had been returned unsatisfied in whole or in part. Relying on an observation of Iqbal Ahmad, J., in AIR 1936 All 840, with regard to the three corresponding clauses of Section 163 of the Act of 1913, that it may be conceded that the three clauses were mutually exclusive, learned counsel for the Company went on to submit that, if the cast could fall under Section 434(1)(b), It could not fall under Section 434(1)(a) of the Act at all. But, in that case, it was also held that a presumption could arise simultaneously under the first clause if the judgment-debtor had served the required notice. It was held there that the case of a judgment-debtor is not ipso facto taken out of the purview of the first clause. That, however, was not a case of a bona fide dispute about liability to pay, If the existence of a bona fide dispute here takes the case out of the scope of Section 434(1)(a) of the Act, just as was held by the Supreme Court in A. C. Traders’ case, (1965) 35 Com Cas 456 (SC) (supra) the deeming provision could only apply by showing that provisions of either Section 434(1)(b) or of 434(1)(c) were satisfied in this case.

27. The learned counsel for the petitioner has contended, as already indicated, that, as no appeal had been filed against the restitution order, an additional liability to pay immediately under that order came into existence and that this could also be enforced by means of a notice under Section 434(1)(a) of the Act Even if this doubtful proposition could be technically correct, I do not think that compelling equities can arise in favour of the petitioner unless further steps to execute the restitution order are shown to have been taken unsuccessfully. The, better view seems to be that as a restitution order is a step in the course of execution, the particular mode contemplated by law for obtaining the benefit of the deeming provisions of Section 434(1) of the Act, in the case of a restitution order, is to proceed with the execution, to take further appropriate steps for executing the restitution order, and to show that these have not resulted in full satisfaction of the decree. Such steps include, it has to be remembered, even appointment of a Receiver, in a suitable case, as provided in Section 51, Civil P. C. A Division Bench of this Court has held in R. P. Tandon v. Budaun E. S. Co. Ltd., AIR 1949 All 112 that a receiver of a Company can be appointed under the Civil P. C. Even if the submission that no property of the Company, was available against which execution could be levied, as all its assets are already hypothecated, were correct Section 434(1)(b) could not apply until conditions laid down there are shown to have been fulfilled.

28. The petitioner has, however, submitted that it has also proved, as required by Section 434(1)(c), that the Company is actually insolvent It is a little difficult to understand how a deeming provision or a legal fiction could be said to apply to a state of actual proof of insolvency until one looks at the corresponding English provisions on which ours are based. One finds that the English provisions were meant to define inability to pay debts or insolvency both commercial and general or complete. Thus, we find in Buckley “On Companies Acts” (13th ed. p. 460) that the provisions of Section 223 (a) and (b) of the English Act, corresponding almost exactly to our Section 434(1) (a) and (1) (b), “are instances of commercial insolvency, that is of the company being unable to meet current demands upon it.” We also find here :

“In such a case it is useless to say that if its assets are realized there will be ample to pay twenty shillings in the pound; this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realizable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound up.”

It is also pointed out here that Section 223(d), corresponding exactly to Section 434(1)(c) of our Act, read with Section 222 (e) of the English Act, corresponding exactly to Section 433(e) of our Act “expressly authorises winding up in the case of another kind of insolvency, that is to say, if the existing and probable assets will be insufficient, taking into account not only liabilities presently due but those which are contingent and prospective.” This is the complete insolvency of a kind which was formerly dealt with in England (that is, before express provision was made for it) under the “just and equitable” clause. The test for this kind of insolvency is, as indicated above, more comprehensive. It is not enough to show existing indebtedness. Contingent and prospective liabilities can be added to it. And, after this has been done, it has to be shown that all these liabilities put together could not be satisfied by the existing and probable or prospective total assets.

29. The first difficulty in the way of considering a case of complete insolvency of the Company is that the petitioner has based its case of insolvency of the Company in its petition on alleged commercial insolvency only. The case of complete insolvency, as explained above, has not been taken anywhere in the petition. The first 21 paragraphs of the petition are concerned with facts relating to the particular debt of Rs. 4,11,454 of the petitioner which has been considered above,. Paragraph 22 sets out a number of debts of the company only in order to prove “that the company is not commercially solvent.” Paragraphs 25 to 45 deal with alleged mismanagement, fraudulent acts of the directors, closure of the mills due to its alleged financially precarious position, and the condition of its machinery which was said to be outmoded and incapable of producing Roods in such a way as to yield profits. In the last paragraph 49 of the petition it is only asserted that it is just and equitable for the Company to be wound up as the company is “commercially insolvent and unable to pay its debts.” A great deal of attention has been paid by the petitioner to the total liabilities of the company but only some assets are mentioned incidentally when dealing with the alleged outmoded machinery of the Company. An amendment application, filed on 21-8-1967 and allowed on 24-10-1967, sought only to introduce more facts relating to the liabilities of the company and alleged acts of fraud and breach of trust by its office bearers. Even the very detailed interrogatories, consisting of 94 questions, some of which were ordered to be answered by the company, do not seem to contain any question asking what the total assets of the company are. This must be so because they exceed total liabilities. The highest estimate submitted in the form of a chart by the petitioner’s counsel of total liabilities of the Company puts these at Rs. 2,57,72,476.87. According to the Company, they do not exceed Rs. 1,82,72,790. Even taking the figure of Rs. 3.44,58,632 for total assets of the company, shown in its balance sheet of 1964, this exceeds the total liabilities estimated by the petitioner for 1967. But, according to the Company, its total assets had risen to Rs. 7,13,36,267. in 1967 due to additions and rise in prices. However, as the case of total insolvency was not taken in the petition, no issue was framed on it, and no decision on the question is called for.

30. Thus, if Section 434(1)(c) were meant for proof of cases of total insolvency only, the petitioner could not rely on it. The language of Section 434(1)(c) is, however, wide enough to cover cases of commercial insolvency as well as of complete insolvency. But, contingent and prospective liabilities are meant to be taken into account only when the total liabilities are to be weighed against total relizable assets. For a case of “commercial insolvency”, in the sense that the company is “unable to meet current demands upon it” only the current liabilities, of which payment is actually due, have to be examined. It was urged, not unreasonably, that if any particular properties are charged with payment of any current liabilities, these liabilities, although current, could be set off, in equity, against properties which are charged with their payment. In other words, the contention on behalf of the company was that, in considering the sufficiency of liquid or easily realizable assets to meet current demands, only the unsecured debts should be weighed against current assets because the interests of secured creditors are not jeopardised. And, as some of the current assets of the Company are also pledged against bank advances although they exceed in value, by far, these advances, it was urged that this excess should still be treated as current assets which could counter-balance the remaining current liabilities.

31. As there was considerable controversy on what was to be included or excluded from current liabilities and assets and the evidence of these was rather scattered, parties filed affidavits, under orders of this Court, about their respective stands on this specific question. According to the petitioner’s affidavit, current liabilities add up to Rs. 1,70,30,960 whereas current assets are estimated at Rupees 1,08,79,640 only. It disputes, without being able to disprove, the correctness of some of the items shown by the company among current assets and alleges that the current liabilities have been increasing. On the other hand, according to the company, current liabilities add up to Rs. 1,27,89,561 and current assets are shown at Rupees 1,97,69,497. Included in the current liabilities is a debt of Ra 74,72,117 to the State Bank, the principal creditor, for the payment of which goods in stock, valued at Rs. 1,18,32,496, shown among current assets are pledged. As these were pledged their value, to the full extent, should be, according to the corporation, deducted from the company’s current assets. There is incontestable evidence on record, in the form of certificates from the State Bank, that this liability has been reduced from nearly 75 lacs to about 10 lacs only in April, 1969. The resulting enormous excess in the value of the stock in trade over the liabilities for the satisfaction of which they are pledged could be used for counter-balancing the remaining current liabilities because the hypothecation does not diminish the market value of goods so that, if they were sold, they will fetch far more than the charge created. If this excess is, as it should be used for counterbalancing current liabilities, the company is still commercially solvent. Although stock in trade cannot be easily used to liquidate current liabilities as ready cash or bank balances, yet it could quite properly fall within the following definition of “current assets” given in Mr. William Pickles’ book on Accountancy (3rd ed. p. 125) : “Floating or Current Assets may be regarded as those assets which are made or acquired and merely held for a short period of time. With a view to sell at a profit in the ordinary course of business; that is to say, they are easily convertible into cash.”

32. I find that two creditors of the company, Messrs. Preston Electric Co. and Messrs Kambo Dyes (P) Ltd, with claims of Rs. 40,190/09 and Rs. 45.524/50, which came forward to support the petition, have withdrawn as they have been paid off. The only alleged creditor which remained to support the petition is the Textile Labour Association. It put forward the case that the company was indebted to its workmen to the extent of Rs. 4,85,000 payable on account of non-payment of wages and illegal deductions from wages. The Company, in reply, questioned the locus standi of the association to represent its workmen and stated that all its disputes with its workmen on this score had been settled by an agreement dated 25/26 July, 1967. Apart from this agreement, the aggrieved workmen, whose names are not revealed by the Association, have a more effective alternative machinery for enforcing their claims under the Payment of Wages Act, Unlike ordinary creditors, the employees of the Company are likely to suffer by a winding up order and not gain as they may lose their employment. Moreover, the nature of the allegations made by the Association against members of the Gupta family personally so closely resemble the nature of and even the language of the petitioner’s allegations against the Guptas, in an evident spirit of unnecessary hostility and acrimony, that the motives of this alleged interested party seem questionable. I am inclined to agree with the submission on behalf of the company that the application by the Association seems inspired by improper motives and could be instigated by some other party. In any case, the Association has not established its locus standi as a creditor. It has not even stated that it is a creditor as no sum from the company is due to the association itself.

33. Although the existence of several large amounts among the current liabilities of the company, which it has not yet met, may indicate the inability of the company to satisfy its liabilities as they arise, yet, it is quite clear that the Company has been able to liquidate large amounts of debts and to pay up every creditor, with an undisputed claim, who has come forward to support this petition. This shows that the company can pay its creditors when pressed even though it may be in financial difficulties. Its last balance-sheet does contain suspicious features such as the entry of Rs. 2,71.298 shown as cash in hand when the balance shown in current accounts in scheduled banks is only Rs. 11,483. The fact that the company can liquidate large outstanding debts, in spite of these modest cash reserves when compared with its large liabilities, even if its figures about the cash in hand are accepted as genuine, shows that the company is either making sufficient profits or that those who control it have some concealed sources which enable them to pav up their debts when they so desire. As the petitioners have not been able to prove that the current assets of the company are less than currpnt liabilities and that the company will not be able to pay up its debts from the profits it is said to be making, I do not think, that a winding up order can be made under Section 433(e) because the case cannot fall, at present, under, any of the provisions of Section 434(1) of the Act.

34. Taking up the second Issue next I find that it is not denied by the company that the mills were closed from 6-9-1966. But, one whole year had not elapsed during which the mills remained closed, when the corporation filed the winding up petition on 9-8-1967. It was asserted on behalf of the company that the mills were likely to start in about three weeks’ time from the filing of the counter-affidavit on 28-9-67 after the work of cleaning, oiling greasing, tuning, and adjusting the machinery which had already begun had been completed. It was also stated that a notice for restarting the mills had already been posted at the gate of the mills on 19-9-1967 and that the maintenance staff was busy working at the mills. In the reply, given in paragraph 43 of the counter-affidavit, the specific statements made on behalf of the company have not been denied, but the petitioner alleged that the company lacked funds to re-start business and was, therefore, negotiating for a loan of Rs. 40,00,000 from the Government of Uttar Pradesh. In fact, the petitioner had filed an application for an injunction by this Court, after the filing of the winding up petition, to prevent the company from taking a loan from the Government so as to start working the mills. If the Government was prepared to give or had given a loan of forty lacs to the company, it indicated that the company was in a position to operate the mills. And, it is asserted that the mills are now working.

35. It has been held in O. P. Basra v. K. C. & G. Mills Co. Ltd., AIR 1962 Funj 151 and in Malabar I. & S. Works v. Registrar of Companies, AIR 1965 Ker 35 that a winding up order should not be made on the ground of closure of a cotton mill for over a year where there is sufficient explanation for the closure and a reasonable prospect of re-starting and earning profits. In the instant case, the company seems to have an adequate explanation on the ground of a depression in the cotton manufacturing industry and labour trouble which the company had to face. The mills are said to be working and the company making profits. Therefore, this would not be said to be a sufficient ground for a winding up order now.

36. Coming to the third issue relating to the question whether it is just and equitable, apart from commercial insolvency and suspension of business for more than a year, that the company should be wound up, provisions of Section 443(2) have to be borne in mind. It is laid down here: “Where a petition is presented on the ground that it is just and equitable that the company should be wound up the Court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.”

37. One of the grounds taken by the petitioner for invoking the just and equitable clause is the violation of Section 76 of the Employees Provident Funds Act, 11952, by the company. This formed the subject matter of prosecution by the State authorities. Another ground, alleged nonpayment of wages of workmen, was, according to the petitioner itself, the subject-matter of a complaint by the Chief Inspector of Factories. According to the Company, this ground does not now exist. Moreover, the machinery provided by Payment of Wages Act for realising such dues is there. Allegations of mismanagment and fraud in the conduct of the business of the company by its office bearers were made. These can form the subject-matter of investigation or proceedings under Section 235 or 237 of the Act. The Central Government is said to have already undertaken some inquiries into the affairs of the company and the Company’s registers and documents are said to have been seized by the Central Bureau of Investigation. This was the excuse made on behalf of the company for its inability to prepare a balance sheet after 1964.

38. It is true that the powers under the just and equitable clause are wide and are not to be construed ejusdem generis with matters mentioned in previous clauses of Section 433 as has been repeatedly held (See: Rajahmundry Electric Supply Corporation Ltd. v. A. N. Rao, AIR 1956 SC 213; D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd., AIR 1936 PC 114 and Louch v. John Blackwood Ltd., 1924 AC 783. Nevertheless, there are well, recognised types of cases illustrating what justice and equity in this clause means. Instances of these are given in Buckley, “On Companies Acts” (13th ed. page 455) under the following heads: (1) substratum gone; (2) deadlock; (3) fraud or illegality; (4) mismanagement or misapplication of the company funds; (5) bubble company; (6) insolvency; (7) business carried on for the benefit of the debenture holders; and (8) right given by provisions of the Articles. Cases considered under each head show that proved facts of the case must establish that a sufficiently grave situation exists to warrant a winding up order which is an extreme measure. Thus, we find that a fraud not connected with the formation or promotion of a company but against third parties would not ordinarily provide a ground for a winding up order Re. Haven Gold Mining Co., (1882) 20 Ch D 151. Again, mismanagement or misapplication of funds by directors, for which other remedies are available, will not ordinarily be a ground for a winding up order unless it has produced insolvency (Re Anglo Egyptian Navigation Co., (1869) LR 8 Eq 660). In R. E. S. Corporation Ltd, case, AIR 1956 SC 213 (supra), it was held by the Supreme Court that the fact that the directors had misappropriated the (funds of the company may not be sufficient to make it just or equitable to wind up the company.

39. Further details of the alleged mismanagement and dishonesty of the Gupta group, which is said to be thoroughly unreliable, given by the petitioner are: (1) Transfer of personal properties to the company without executing a proper conveyance and in order to “fritter away” the funds of the company. On behalf of the company, it was explained that, as disputes are still pending about these properties, a deed could not be executed for the sale of the properties of Gupta family to the company. But, it is asserted that It is an advantageous transaction from which the company benefits. Reliance is placed on Section 53-A of the Transfer of Property Act to show that the right and title of the vendee cannot be questioned by the vendors. It is too early to say that the transaction must necessarily injure and not benefit the company, (2) Purchases of overwhelmingly large quantities of cotton by the company from particular sources of supply under the control of the Gupta group. It is difficult to conceive how this could be mismanagement. It is, however, alleged that this is a device for enabling the Guptas to take advantage of fall in the prices of cotton and enabling the Guptas to pocket the funds of the company. The correctness of such an inference is strongly denied on behalf of the company. No loss to the company or its shareholders has been proved from the investment of funds in other concerns in which the Guptas are interested.

(3) The control of the investment of funds in other concerns in which the Guptas are interested. In reply, it is urged that investment in particular concerns could not constitute mismanagement unless loss to the company from it is shown. No loss attributable to it was proved.

(4) Payment of brokerage to the firm of sole selling agents, B. R. & Sons, in which the Guptas are interested. This Was alleged to be a device for misappropriating the funds of the company. In reply, the company asserts that B. R. & Sons of Bombay, were properly appointed selling agents of the company who passed on the commission to the brokers so that the insinuations against the Gupta (family personally were baseless.

 (5) Payment by the  company of sums upto  Rs.   25,000:     “being  arbitration  fee and other expenses of arbitration proceedings which should have been paid by Messrs. B. R. & Sons Limited.” The company justified the payment as one made under the terms of a properly made award. Nothing illegal or improper was proved about it. 

 (6) Indulgence in speculative transactions which had resulted in losses amounting to Rs. 35,00,000 to the company. In reply, the company asserts that the transactions were within the purview of the authorised objects of the company and it was contended that losses are part of the ordinary risks and incidents of business. 

40. None of the above-mentioned grounds, taken either separately or together, appears to me to make a winding up order imperative in the interests of the creditors. Several of the allegations made look like attempts at mud-slinging in the hope that some of it would stick. The equities which the petitioner can properly invoke as a creditor must relate to the interests of the creditors which a petitioning creditor represents in a winding up proceedings. The test in such a case should be: Will the interests of creditors be better served by a winding up order? If the debts of the creditors can be liquidated more easily by taking proceedings other than those for the liquidation of the company itself, I do not think that a winding up order could be said to be absolutely necessary,

41. The question of insolvency was raised again under the just and equitable clause. I do not think that this can be done when there is a separate provision in Section 434(1)(c) of the Act for it now. Even if it could be considered here, I have already dealt with both types of alleged insolvency. Learned counsel for the company has rightly contended that only commercial insolvency was, according to paragraph 49 of the petition itself, the real ground of the claim for a winding up order even under the just and equitable clause.

42. The last issue arising out of allegations of mala fides made by the company against the petitioner may be briefly dealt with before making an order on the basis of equities as they stand today. The company has alleged that “there is a long standing dispute and enmity between Guptas and Singhanias since the partition” between the two groups. It is alleged that the company having come to the share of the Guptas, the Singhanias are interested in getting it closed or wound up somehow and have been fomenting labour trouble and putting other obstacles in its way. It is also alleged that the company has secured very profitable contracts and has been supplying 90 per cent of the needs of the Defence Department in canvas so that the Singhanias, as rivals in this business, are anxious to secure a monopoly in this line by getting the company wound up. These allegations are strongly denied on behalf of the petitioner. The rejoinder affidavit tries to make out that the Singhanias have been trying to help the Guptas in industry and trade.

43. Allegations of mala fides can generally be substantiated by circumstantial evidence only. One of the circumstances certainly is that the petitioner has made allegations in the petition itself disclosing hostility to the Guptas and the manner in which they conduct any business. Another circumstance is that the petitioners filed an application for an injunction soon after making the winding up petition so as to prevent the company from taking a loan of Rs. 40,00,000 which the company was alleged to be negotiating for enabling the company to restart its mills which are now, according to the company, running profitably. If the company could obtain such loans from the Government, there seemed no need for a winding up petition to obtain payment.

44. Learned counsel for the petitioner tried to mitigate the effect of some of the circumstances indicated above, which make the motives behind the petition suspect, and of the weakness in the equitable position of a petitioner starting as a debtor of the company originally but turned into a creditor only due to the setting aside of a decree against the debtor solely on the ground of a bar of limitation operating against the company, when the correctness of the decree of the appellate Court was questioned on substantial grounds in another pending appeal, by submitting that all he wanted was adequate security for the payment of the debt. Apparently, the petitioner was willing that the petition be dismissed if acceptable security for the amount due was forthcoming. At first, the petitioner’s counsel suggested that proper security was a bank guarantee, but, afterwards, seemed willing to accept other security of any suitable property free from any prior charge. The security of some shares, offered by the company was unacceptable to the petitioner. The parties, therefore, prayed that the question of adequate security may be decided by the Court. I do not, however, think that winding up proceedings should be used in such a case, as a means of merely obtaining indirectly an order which has the effect of stay of execution of a decree on furnishing security. Such an order can be more appropriately sought from the Court in which an appeal against the decree to be executed is still pending.

45. If the, petitioner’s debt, about which I have found that a bona fide dispute exists between the parties, was the only claim against the company, I may have followed the line indicated by a recent English case (not cited by the parties) Mann v. Goldstein, (1969) 39 Com Cas 353. There, it was held that to invoke the winding up jurisdiction, after it had become clear that the petitioner’s debt was disputed on substantial grounds, so that the petitioners’ locus standi was questionable, was an abuse of the process of the Court. In the instant case, a judgment in favour of the petitioner entitles the petitioner to claim the benefit of the presumption that the judgment in its favour is correct so that the petitioner has a locus standi or right to petition until it could be shown that the decree in its favour has been actually set aside in appeal. This distinction, on facts, is there. Nevertheless, if the correctness of the judgment has been questioned on substantial grounds by a pending appeal, the debt is still disputed. The proper order to pass, if the petitioner was the sole creditor, would, in my opinion, have been to postpone a decision on this petition until the appeal against the petitioner was decided. In this case, however, the existence of a large amount of other indebtedness has also been proved. The circumstances alleged by the petitioner, relating to the management of the company; and the inquiry by the Government, said to be pending against the company, could not be altogether ignored.

46. Upon a consideration of the totality of facts and circumstances in this case, it seems to me that a long adjournment of the hearing of this petition or postponement of the final order for one year will serve the interests of justice. This period can be utilised by the parties in obtaining, if possible, a decision of the pending appeal in the Supreme Court which will finally decide the question whether the disputed debt has to be discharged or not. In this period, the petitioners, can also take further steps to execute the restitution order of 15-4-1967 passed by the Court of the First Additional Civil Judge, Kanpur. If steps taken to enforce that order are unsuccessful, as seems unlikely in view of the proved ability of the company to wipe off or reduce such heavier liabilities within not too long a period, the petitioner will become entitled to equitable execution. On the other hand, if the company is able to obtain a stay order from the Supreme Court within this period of one year, staying the operation or the execution of the restitution order, the company will be in a position to urge that, there being no neglect on its part in discharging the particular obligation to pay the petitioner, this petition be dismissed. In this period, the company or the petitioner or some other creditor or creditors can also take appropriate steps, if so advised, to hold a meeting of the creditors as contemplated by Section 391 of the Act or otherwise to protect their interests if this is necessary under the provisions of the Act.

47. The result is that, in exercise of the powers of this Court under Section 443(1)(b) of the Act, I postpone the final decision on this petition for one year on condition that the parties will take such steps to assert their claims within this period as to establish a clear balance of equities either in favour of or against a winding up order. An order as to costs of this petition will also be passed after one year from today when the petition will be listed for further hearing before the Company Judge of this Court at that time. Parties may, after one year, file applications supported by affidavits to show the steps taken by them, and the results, and other facts which have a bearing on the equities of the case as they stand then.