American Express Bank Ltd. vs Core Health Care Ltd.

R. Balia, J.—The petitioner, American Express Bank Limited, through this petition has sought winding up of the respondent - company,

Core Health Care Limited, on the ground that the respondent - company is unable to pay its debt within the meaning of section 433(e) read with

section 434. Briefly stated, the claim of the petitioner is that it had advanced a bridge loan to the respondent - company which was disbursed on

July 21, 1995, and July 27, 1995, in two instalments of Rs. 15 crores each which was payable in six instalments of Rs. 5 crores each commencing

from April 21, 1996, and ending of June 27, 1996. The respondent - company failed in its commitment and had paid only Rs. 15 crores by August

24, 1996, and for the remainder it was granted reschedulement by way of seven instalments, of which six instalments for Rs. 2.50 crores each

were payable by November 24, 1997, and the final instalment of Rs. 19.90 lakhs (on account of interest) too was payable on November 25,

1996. However, the respondent - company defaulted in making the payment and the very first cheque paid for the instalment was not honoured

under the instructions of the respondent - company for stopping the payment thereof. The petitioner, vide its notice dated February 6, 1997,

served on the company in terms of section 434 made a demand for the payment of the outstandings, which was duly received by the respondent -

company and replied thereto vide its letter dated February 26, 1997. The amount of indebtedness was not disputed. But on account of financial

difficulty, as arising out of delayed disbursement of release of promised finance by the other financial institution, six months'' time was sought for

repayment of the loan. It was also pointed out in the reply letter that the entire debt of Rs. 30 crores, the entire security continues to be available

for the discharge of the balance liability. In substance, while the claim for payment was admitted it expresses its inability to pay in praesenti but

pleaded to get over the current financial crisis in a short period and asked for time until then.

In response to the notice for admission, a reply affidavit has been filed. The company by furnishing details which shall be referred to presently

pleaded that the company which was incorporated in 1986, has in a short span acquired a prime position in the field of manufacture of intravenous

fluids in the country and almost accounts for 90 per cent. of the exports of the total country in respect of the articles manufactured by it. In the

circumstances narrated in the reply, it referred to multifold reasons leading to the present financial crisis which according to it is of a temporary

character and is making efforts to tide over the same with the assistance of the other financial institutions to whom the company owes about Rs.

850 crores, all secured creditors, and they are considering the rephasement of the entire credit structure of the company to enable it to survive the

present crisis rather then on insisting on spot payment right now and allow the company to die. In sum and substance, the pleading of the

respondent - company is that though the amount claimed by the petitioner is payable by it, as of others but it is not in a position to pay that sum

immediately though the company has net assets worth paying all the debts. If the entire dues are to be paid up, simultaneously, the same will result

in the end of the company. However, with some patience and restructuring of credit facility the entire sum can be paid. In the circumstances, it

would not be in the interest of creditors, its employees and the public in general nor will it be just and equitable to order winding up of the

company.

An additional affidavit in response to the reply has been filed by the petitioner - company placing on record a copy of the background note for

restructuring the proposal of Core Healthcare Limited prepared by the ICICI, one of the creditor financial institutions of the respondent -

company, and the minutes of the joint meetings of the secured creditors held as on August 21, 1997, at which the petitioner - company was also a

participant. The minutes of the meeting of the secured creditors show that in spite of concern expressed by the creditors, the majority of the

creditors were ready to restructure their loans as per the proposal, provided checks and balances are put to ensure commitment for which certain

proposals made by the company through its representative, Mr. Sushil Handa, were noticed. A sub-committee of the lenders was formed to

further discuss the proposal in detail.

Learned counsel for the petitioner in the first instance submitted that the petitioner having made out a case u/s 433(1)(e) read with section 434,

he is entitled to an order for winding up ex debito justitiae by raising the presumption u/s 434 that the company is unable to pay its debts, and it is

entitled to an order admitting the petition. This is not the stage at which the court should consider whether a winding up order can be made or not

as that can only arise after the petition has been admitted and public notice whereof is advertised inviting objections. It is only if an objection to the

winding up sought by the petitioner is raised from any quarters that the question of exercising discretion whether to order winding up or not would

arise for consideration.

On first principles, I am unable to agree with this submission. It is not in dispute and perhaps cannot be disputed in view of the settled law that a

claim to an order of winding up is not a matter of right but rests in the discretion of the court on one or more of the grounds having been established

as are mentioned in section 433. However there is not warrant to assume that the stage for exercise of such discretion arises only after the petition

is admitted and the court cannot exercise that discretion even if on considering the totality of the materials as are made available on record by the

petitioner it is satisfied that on order of winding up be made at the time of considering admission of the petition.

It is at every stage of the proceeding from the time of issuing notice to the company until the winding up order is made, the court has to consider

the material placed before it about the desirability of making the particular order to proceed with the matter. If a petition is filed on the ground that

the company is unable to pay its debt, by complying with the provisions of section 434, the issuance of notice is not a matter of course. If from the

material disclosed in the petition and reply to the notice, a prima facie case of existence of a bona fide and reasonable dispute is spelt out, the court

would be justified in dismissing the petition in limine at the threshold. Likewise, even after notice has been issued to the respondent - company

before admitting the petition, it cannot be said that thereafter the court would not be considering the question whether a case is made our for not

making a winding up order to proceed further notwithstanding the acknowledgment of debt to the petitioner, and, the court must agree to advertise

the public notice thereof, sending a word about the winding up to all concerned, inviting objections and then alone consider the matter of making an

order of winding up or not, even though the court on existing material is satisfied that it will not be just and equitable to order winding up.

The principle is well settled by a catena of decisions of different High Courts of the country, that the words ""may"" used in sections 433 and 443

is indicative of the fact that even if one or more ground mentioned in section 433 is made out the company is unable to pay its debt, it is still not

mandatory, but rests in the discretion of the court whether to make an order of winding up. The court must in each case exercise its discretion in

deciding whether in the circumstances of the case, it would be in the interest of justice to wind up the company. This is also manifest from section

443 of the Act which leaves it in the discretion of the court to make any one of order envisaged therein. Section 443 also envisages relevant

consideration in which winding up order may not be considered just and equitable.

In the matter of the petition for winding up on the ground that the company is unable to pay its debt, the court has to bear in mind that winding

up petition is not an alternative to the ordinary procedure for realisation of the debts due from the company, and the mechanism of winding up

process is not to be used an a pressure tactic for enforcing realisation. For that the appropriate remedy is to seek enforcement under the ordinary

law through remedies provided there. At the same time, proceeding with the remedy for realisation of his debt, a creditor is not precluded from

seeking remedy under the Companies Act as well by asking for the winding up of the company and realisation of all the assets of the company for

the due discharge of all its liabilities. The object of the winding up petition being entirely different, the remedy provided u/s 433 has been held to be

discretionary. One well-known rule is that even in a case where indebtedness to the petitioner is not in dispute or doubt, courts do not order

winding up where it is satisfied that it would not be in the interest of justice to wind up the company, or whether the majority in value of the

creditors do not favour the winding up. It is also well settled that a winding up order will not be made on a creditor''s petition if it would not benefit

him or the company''s creditors generally.

Though, ordinarily, an unpaid creditor may claim an order of winding up ex debito justitiae, the rule is not of inflexible mandate, but is ultimately

of discretion vesting with the court. In P. & J. Macrae Ltd., In re [1961] 31 Comp Cas 424: [1961] 1 WLR 229, 231, the Court of Appeal was

concerned with an order or winding up made in the face of opposition from creditors. On the merits of the issue about exercise of discretion in that

case the judges differed, but were unanimous about the discretion of the court, in the matter. The majority opinion of Willmer L. J. repelled the

contention for dismissal of the winding up petition when the majority of creditors in value and opposed the winding up. It said :

In may judgment this ground of appeal will not bear examination. To say that the court is bout to dismiss the petition is to deprive the court of the

discretion which Parliament has conferred by the clear terms of section

346(1) of the Act. If such were the case the court would be left, as I see it, with no judicial function to perform. The argument involves that in all

cases the decision would have to be arrived at by a mere counting of heads. Had this been the intention, Parliament would surely have said so in

plain terms, and the wording of section 346 must have been quite different.

At page 233 of WLR and page 429 of 31 Comp Cas :

As a general rule, an unpaid creditor of a company is entitled to a winding up order ex debito justitiae; but that rule is subject to exceptions : e.g.,

where all the other creditors oppose the petition, and it appears that the petitioning creditor will not be in a better position by obtaining a winding

up order.

Upjohn L. J. opined (page 237 of WLR and page 433 of 31 Comp Cas) :

Where a creditor has proved his right against the company to a winding up order ex debito justitiae, but other creditors of the company have

expressed conflicting views as to the desirability of winding it up, the judge has conferred on his a discretion by section 346 of the Companies Act,

1948, which, leaving out immaterial words, provides : ''The court may have regard to the wishes of the creditors as proved to it by any sufficient

evidence''. The discretion is permissive and not mandatory, and is in terms complete and unfettered. However, it is a discretion which must be

exercised judicially ...

The Supreme Court in Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., while dealing with said question, opined as

under (page 131) :

Another rule which the court follows is that if there is opposition to the making of the wining up order by the creditors the court will consider their

wishes and may decline to make the winding up order.

In doing so the court referred to Palmer''s Company Law with approval (page 132) :

This right to a wining up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the

creditors and if for some good reason, they object to a winding up order the court in its discretion may refuse the order.

The court also approved ratio in P. & J. Macrae Ltd., In re [1961] 1 WLR 229 and held (page 132) :

It is also well settled that a winding up order shall not be made on a creditor''s petition if it would not benefit him or the company''s creditors

generally.

The principles were reiterated by the apex court in Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical

Ltd. and Another, .

If that be the law and the court even if it is satisfied at the stage of admission with reference to the ultimate test whether it is reasonable to order

winding up looking into all the facts and circumstances attending to the winding up petition, is the court obliged to admit the petition and defer such

consideration until after advertisement of the public notice is made and objections have been filed ?

My answer is plain in negative. Accepting the argument would amount to surrendering the due application of mind to the mechanical act of a

ministerial nature, an attribute not attributable to the function of the court.

At the stage of admission of a petition at the behest of a creditor, the factor which may be taken into consideration and/or relevant is does the

company in question brook a curtain drop on its corporate personality inviting immediate order of winding up on the basis of material already on

record without anything more or the material already on record without anything more or the material points to a different direction ? In a petition

by an unpaid creditor ordinarily where a creditor is able to raise the presumption u/s 434 that the company is unable to pay its debt, he may be

taken to have proved his right against the company to a winding up order ex debito justitiae. But that by itself does not result in an order for

winding up. As against the creditors right to get an order or winding up order ex debito justitiae, where, from the material it appears that the

company is commercially solvent and the present state of affairs is a result of temporary set back in business operations, it may militate against an

order of immediate winding up. In yet other situations, where the court is satisfied that the petitioners are holding security for their debt and that

security is sufficient to pay the debt by realisation of security, point out that even an order of winding up so far as the petitioner''s debt is concerned

remains unaffected or in the case of secured creditors where they have right, even after the winding up order is made, to remain outside the winding

up and realise their dues directly, the court may be satisfied that the winding up order is not envisaged in a situation where on principle the order

would not benefit the petitioner not the company''s creditors generally. Learned counsel for the petitioner does not dispute that all these questions

become germane if after admission the court is considering whether to pass a winding up order or not. When, grounds on which a winding up

order can be refused which considering the petition after admission appear to exist from the material already before the court, in my opinion, it

would be a sound exercise of discretion not to admit the petition.

I am fortified in my aforesaid conclusion by a decision of this court in In Re: Rishi Enterprises, . The court after considering the fact that the

company which is a running concern employing about 500 employees who are paid their wages regularly and is engaged in the business having

turnover of crores of rupees every year cannot be brought to a halt on the basis of petitions for winding up u/s

433(1)(e) of the Companies Act, merely because of the momentary financial difficulty. Relying on the principle enunciated in Madhusudan

Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., referred to above, it adhered to the principle that it would not be right to say that

creditors can insist on wining up of the company as a matter of right if the position of the company is such that it would be unable to pay its debts

to them even if the company can be resurrected and keeping in view that even the petitions were admitted the petitioner was not likely to the

benefited, the court ordered (page 275 of 73 Comp Cas) :

It would be in the interest of justice to give the company some time to come out of the momentary financial crisis, hence these matters are not

admitted.

The principle enunciated in In Re: Rishi Enterprises, was approved by a Division Bench of this court in an unreported judgment in O. J. Appeal

No. 32 of 1993 in Company Petition No. 108 of 1992, decided on September 20, 1994.

One important test to which court addresses itself, which considering the petition for winding up, is in the opinion of Sir William James V. C., in

Europe Life Insurance Society, In re [1869] 9 Eq 122 as reproduced in A. Ramaiya''s Guide to the Companies Act.

Whether the company has reached a stage where it is plainly and commercially insolvent - that is to say that its assets are such, and its existing

liabilities are such as to make reasonably certain - as to make the court feel satisfied that existing and probable assets would be insufficient to meet

the existing liabilities.

The principle found the approval of the Supreme Court in Pradeshiya Industrial and Investment Corporation of U. P.''s case [1994] 79 Comp

Case 835 (SC). The opinion of William James V. C. was quoted with approval while holding that (page 842) :

What then is inability when the section says unable to pay its dues ? That should be taken in the commercial sense, in that it is unable to meet its

current demands.

Ordinarily, a creditor who on demand fails to get amounts due paid to him becomes entitled to obtain an order of winding up ex debito

justitiae. However, it is to be noticed that what is envisaged u/s 433(1)(e) is not inability to pay a particular debt, but inability to pay its debts.

Section 434 only provides rule of evidence by providing circumstances in which it can be presumed that the company is unable to pay its debts.

Thus, mere inability to pay a particular debt by itself cannot be held to be sufficient to pass an order of winding up ex debito justitiae. With the aid

of the presumption the court may be satisfied that the company is unable to meet the current liabilities in the commercial sense which included the

debt due to the petitioner as well as other debts. But the presumption is a rebuttable one. The presumption may be rebutted on existing material.

What evidence is sufficient, depends on the facts and circumstances of the case.

In Airwings (P.) Ltd. v. Viktoria Air Cargo Gmbh [1995] 84 Comp Cas 688: [1995] 1 Comp LJ 233, a Bench decision of the Karnataka

High Court, on which reliance has been placed by learned counsel for the petitioner as well, for the purpose of seeking admission of this petition,

had made a clear distinction between a company which has become defunct and has closed its activities since some time and its commercial

manufacturing activities have come to a grinding halt on the one hand and a company which is still a going concern and whose commercial-cum-

manufacturing activities having not been suspended or are only temporarily suspended and it is employing a large number of workmen. In the latter

case, the court formulated certain guidelines to the pursued before a petition is admitted or not admitted, while commending the holding of a

summary enquiry for reaching prima facie findings to various matters. The relevant portion for the present purpose may be noticed (page 720) :

(a) The court may hold a summary enquiry, after issuing notice to the respondent - company, giving it an opportunity to file its objections to the

proposal for winding-up, for ascertaining the following facts and for arriving at prima facie findings thereon;

(i) whether any debt is due from the respondent - company to the petitioning creditor; if yes, what is the amount of such debt ?]

(ii) whether the said debt due to the petitioning creditor is within limitation and is payable by the company and its defence is not valid but a mere

moonshine and not a substantial one;

(iii) whether the company is unable to pay the said debt and all its other debts.

(b) for arriving at prima facie findings on point numbers (a)(i) and (a)(ii), the court, while holding a summary enquiry, will hear the petitioning

creditor and the respondent - company, and will consider whatever evidence is offered by them in support of their respective cases. Such a

summary enquiry need not be a detailed enquiry like a trial but it would be an enquiry for the purpose of finding out whether a prima facie case is

made out by the petitioning creditor on the aforesaid two aspects. Ordinarily, in such summary enquiry whatever documentary evidence is offered

by both the sides would be sufficient. But, in exceptional cases, if the court so feels necessary even oral evidence can be permitted to be led by the

contesting parties. The findings arrived a tin such summary enquiry would be prima facie and tentative in nature and can be re-examined in greater

detail at the stage of trial of the petition if required and found necessary.

The court spoke about the significance of considering commercial insolvency as under (page 722) :

For that purpose, the court may look into the evidence led on record by the petitioning creditor as well as by the company and try to assess in a

summary way as to whether the company is prima facie shown to be commercially insolvent as contemplated u/s 434(1)(c). If the court arrives at a

tentative prima facie finding about commercial insolvency of the respondent - company then the respondent - company would be deemed unable to

pay its debts including the debt of the petitioning creditor and, then, in the light of the tentative findings on points Nos. (a)(i) and (a)(ii) and keeping

in view such a deeming fiction arising u/s 434(1)(c), the court may admit and advertise the petition.

It may be clarified that this is not to say that the condition of section 434(1)(a) as section 434(1)(c) are to exist simultaneously for raising the

presumption about the company''s inability to pay debts. Even in case the presumption u/s 434(1)(c) is raised, an order of winding up is not as a

matter of course. Before that the court has to consider whether in such a case a winding up order should prima facie follow. It is for that enquiry

germane to consider the question whether the company can be said to be plainly commercially insolvent, whether a winding up order would benefit

the petitioner or creditors generally, whether it will be advancing the public policy keeping in view commercial morality to order winding up.

Whether it will be just and equitable to all interests to order winding up ?

The course of admitting and advertising the petition is commended in the circumstances if and only if the court had a tentative prima facie

finding about commercial insolvency of the respondent - company in the case of a company which has not become a defunct company which has

not closed its activities for quite sometime for its commercial and manufacturing activities, but is a going concern employing a large number of

workmen.

It is not the case of the petitioner that the respondent - company has become defunct or has closed its shutters for quite sometime. It is also not

suggested that the company has become commercially insolvent. For the purpose of dining commercial insolvency a peep into financial data is

relevant to appreciate about its soundness as will appear from the following passage from Pradeshiya Industrial and Investment Corporation of U.

P.''s case [1994] 79 Comp Case 835 (SC) (page 845) :

We are informed that the financial position of the appellant is sound. It is the largest financial corporation of the State of Uttar Pradesh, it has

rendered financial assistance of Rs. 1,024.83 crores till March, 1992, to more than 100 industrial units and has also promoted joint sector

projects. It is profit-making financial corporation and is paying dividend as seen from the balance-sheet for the year 1991-92 (filed along with

special leave petition). The assets of the appellant - corporation are Rs. 5,26,35,36,568. The reserves are Rs. 17,60,15,222. The profits earned

by the appellant before payment of tax is Rs. 7.40 crores and after meeting its financial liabilities, Rs. 2,78 rores.

It may not be considered whether the material on record is suggestive of any such commercial insolvency of the respondent - company.

Noticing certain data about the company''s financial growth and its current status would not be out of place. The respondent - company has

averred that it was incorporated in the year 1986, and has started its manufacturing activities in the year 1988, to manufacture intravenous fluids

with a capacity of 60,00,000. In order to have a consistent growth, a group company, namely, the Core Laboratories Limited was merged with

the respondent - company in the year 1993. These facts are not in dispute. Before considering the commercial viability of the company as it exists

after amalgamation, be viewed. It reflected that the equity share capital of the company in 1989-90, was Rs. 1.95 crores which had increased to

Rs. 6.55 crores by 1992-93. This growth has been attributed to the issue of bonus shares. The reserves of the company have grown from Rs. 1.1

crores to Rs. 13.25 crores. The gross assets of the company and increased in worth from Rs. 8.99 crores in 1988-89, to Rs. 71.36 crores in

1992-93. The turnover of the company had risen from Rs. 6.17 crores in 1989-90 to Rs. 46.02 crores in 1992-93, resulting in rise of profit from

Rs. 71 lakhs to Rs. 9.02 crores. This is the reflection of pre-amalgamation economic growth.

The financial position of the company since 1994, has been considered by the body of secured creditors of the company while considering the

restructuring proposal for the company to the it back on a healthy course from the position in which it is finding it now. The confidential note

prepared by the ICICI - one of the secured creditors of the company - to the tune of Rs. 100 crores and considered by the body of secured

creditors in its meeting held on august 21, 1997, in which the petitioner too had participated and that report and minutes have been produced by

the petitioner - bank. The comparative chart of the financial state of affairs of the company after amalgamation since the year ending March 31,

1994, until the year ending June 30, 1997 (the year ending date being changed from March to June in 1996), discloses that gross sales had

increased from Rs. 102.38 crores in the year ending 1994, to Rs. 190.59 crores in the year ending June, 1997. Operational income had shown

that in the year ending March, 1994, the company had operational income of Rs. 4.58 crores which rose to Rs. 12 crores for the year 1996, albeit

for the period of fifteen months. For the current year ending June 30, 1997, for the first time, the company had shown operational loss of Rs.

73.46 crores of which cash loss has been shown to be Rs. 34.49 crores. The cash profit before providing for adjustments had in fact risen from

Rs. 26.5 crores in 1994, to Rs. 49.09 crores in 1996.

A comparative analysis of the balance-sheet of the company shows that its equity has gone up from Rs. 20.96 crores in March, 1994, to Rs.

34.44 crores for the current year referable to the EURO issue which the company resorted to in 1995. The reserves have gone up from Rs.

120.02 crores to Rs. 380.49 crores by the year ending June, 1996, and after adjusting operational loss for the current year amounting to Rs.

73.46 crores the reserves and surplus amount to Rs. 308.11 crores. The fixed assets of the company have gone up from Rs. 72.91 crores at

depreciated value to Rs. 877.15 crores at their depreciated value. As against this, the total liabilities of the company which exist as on today is Rs.

811.88 crores of which unsecured creditors account for about Rs. 53 crores only. Rest of the creditors all being secured creditors were

participants to the exercise for restructuring the affairs of the company by revising the repayment of debts with rescheduling payments and debt

servicing cost. As against the liability of Rs. 811.88 crores the company has assets and reserves worth Rs. 1,155.43 crores. The assets of the

company exceed the total liability by about Rs. 343.55 crores.

These figures clearly manifest that the company has shown the growth of this phenomena in a span of about twelve years and is intrinsically a

sound growth oriented concern. Its net worth is positive. It is employing around 3,500 employees in all its activities. It is still engaged in commercial

manufacturing activity transacting a business of around Rs. 200 crores annually and value of gross assets as per book value far exceeds its liability

to leave substantial balanced surplus for the shareholders far in excess of their contribution. On these premises it is not possible to come even to

prima facie conclusion that the company is a commercially insolvent person to raise the presumption to use the words of Majmudar, Chief Justice,

as he then was, that the ""company is unable to pay the said debt and its all other debts"" amounting to commercial insolvency for making an order

u/s 433.

In this connection it would be apposite to allude to the position obtaining in England as per Palmer''s Company Law. A winding up petition to

the High Court is presented a the office of the Registrar of the Companies court, who appoints the time and place at which the petition is to be

heard. After a petition has been presented, the petitioner or his solicitor must, on a day to be appointed by the Registrar, not less than five days

before the day appointed for the hearing of the petition, file a certificate of compliance with the rules relating to service and advertisement of the

petition. The law has been stated to be that unless the court otherwise directs, every petition is to be advertised in the Gazette not less than seven

clear days (excluding Saturdays, Sundays and public holidays) after it has been served on the company and not less than seven clear days before

the day fixed for the hearing.

The difference in procedure has to be noticed that the petition is required to be served on the company and advertisement by public notice is to

wait until seven days excluding holidays after service on the company. The purpose for retaining this hiatus is that before notice is advertised the

company has an opportunity to prevent the advertisement of the petition which may immensely cause injustice to the company particularly if it is a

going concern. The following passage may be illuminating :

For the purposes of any stay of advertisement which is granted by the court, pending the resolution of any challenge to the pursuit of the

proceedings, the concept of ''advertisement'' is a wide one extending to any informal communication to third parties. Thus, the petitioner''s act of

sending a faxed copy of the winding up petition to the company''s bank on the same day as the petition was served on the company was

considered by the court in Bill Hennessey Associates Ltd., In re [1992] BCC 386 to justify dismissal of the petition. The faxing of the copy was

held to have been an advertisement in violation of rule 11(2), which requires a minimum of seven business days to elapse from the date of service

of the petition, and the ulterior purpose of this targeted publicity was judged to have been the putting of pressure on the company to pay the sum

demanded. This rigorous approach is necessitated by the commercial harm which can be inflicted upon a company through the improper use

against it of the presentation of a winding up petition.

These observations clearly warn against the inherent commercial harm that lay in advertising the winding up petition and pre-publication of any

sort had been viewed as so serious as to prove fatal to the petition.

It appears that there being no separate provisions like admission before making the order of advertisement, the provision for a clear period for

abstinence from advertisement has been stipulated in the rules itself giving the respondent - company a chance to approach the court and obtain the

postponement of advertisement resulting in a public notice of the pending petitions, and to save it from an inherent commercial harm which such

public notice may cause. In other words, the hearing of the petition at that stage about the advisability of winding up is envisaged before public

notice is advertised or order to be advertised, spelling serious adverse consequence in a commercial sense.

About the discretion of the court, it has been stated -

Upon hearing the petition the court may dismiss it with or without costs, may adjourn the hearing conditionally or unconditionally and may make an

interim order or any other order that it deems just (section 125(1) of the Insolvency Act). But the court will not as a rule order a petition to stand

over for a lengthy period : it would not be just to be company.

In all matters relating to the winding up, and winding up includes the petition, the court may have regard to the wishes of creditors and

contributories, and may, if expedient, direct meetings to be summoned to ascertain such wishes (Insolvency Act, section 195). If the company is

solvent, the wishes of contributories, as the persons chiefly interested in the assets, carry most weight; if the company is insolvent, the wishes of

creditors.

The element of public policy in regard to commercial morality has likewise to be taken into consideration when the propriety of a winding up order

is examined.

The above passages from Palmer suggest that where immediate wining up is not warranted it would be equally unsound to allow it to stand

over for a long duration as it acts at cross purpose for which winding up is not considered advisable. It also brings into consideration the element of

public policy in decision making while exercising discretion by the court.

The Indian companies Act makes like provision in sections 443 and 557. Section 443 reads as under :

(1) On hearing a winding up petition, the court may, -

(a) dismiss it, with or without cost; or (b) adjourn the hearing conditionally or unconditionally; or (c) make any interim order that it thinks fit; or (d)

make an order for winding up the company with or without costs, or any other order that it thinks fit;

Provided that the court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an

amount equal to or in excess of those assets, or that the company has not assets.

(2) Where the 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 the opinion that some other remedy is available to the petitioner and that they are acting unreasonably in seeking to

have the company wound up instead of pursuing that other remedy.

(3) Where the petition is presented on the ground of default in delivering the statutory report to the Registrar, or in holding the statutory meeting,

the court may, -

(a) instead of making a winding up order, direct that the statutory report shall be delivered or that a meeting shall be held; and

(b) order the costs to be paid by any persons who, in the opinion of the court, are responsible for the default.

Section 557 reads as under :

(1) In all matters relating to the winding up of a company, the court may, -

(a) have regard to the wishes of creditors or contributories of the company, as proved to it by any sufficient evidence;

(b) if it thinks fit for the purpose of ascertaining those wishes, direct meetings of the creditors or contributories to be called, held and conducted in

such manner as the court directs; and

(c) appoint a person to act as chairman of any such meeting and to report the result thereof to the court.

(2) When ascertaining the wishes of creditors, regard shall be had to the value of each creditor''s debt.

(3) When ascertaining the wishes of contributories, regard shall be had to the number of votes which may be cast by each contributory.

Section 443 leaves no room for doubt that it is ultimately left to the discretion of the court to dismiss the petition or adjourn the hearing

conditionally or make any interim order or order winding up. Sub-section (2) also leaves no room for doubt that while considering whether it is just

and equitable to wind up the company it is relevant to consider whether the petitioner has other alternative remedy and whether the petitioner is

acting unreasonably in seeking winding up instead of pursuing that other remedy.

Section 557 envisages that in all matters relating to the winding up of a company the court may have regard to the wishes of creditors or

contributories of the company as proved before it by any sufficient evidence.

In this connection Mr. Thakore''s contention that for ascertaining the creditors'' wishes it is necessary to admit the petition, invite the views of

the creditors or convene the meeting is not well founded. Convening the meeting of creditors is only one mode of knowing their wishes. But it is

equally possible for the court to be satisfied about creditors'' wishes on the evidence available on record. It is only when the court apart from

material on record desires to convene the meeting of creditors and contributories, it has necessary statutory sanction. This position is apparent from

a perusal of sub-clauses (a) and (b) together of section 557(1).

In view of the aforesaid circumstances, though a presumption u/s 434(1)(a) qua the respondent had arisen, in my opinion, in the facts and

circumstances found by me above, the petitioner could not be entitled to an order or winding up of the respondent - company on the material on

record as the same would not be just and equitable to all other interests. I have found that the making of a winding up order or not making of

winding up order would not affect the petitioner himself in any manner adversely. I have also found on the basis of financial statistics placed on

record by the petitioner himself about which there is no dispute on his behalf, that the company is still a going concern and not a commercially

insolvent company.

It also cannot be disputed and denied that after showing a growth and profitable state for eleven continuous years since its inception it has

suffered for the first time a setback during the previous year which has resulted in default in payments of the dues which can be described to be a

temporary phase which may occur in the course of any business. Nothing has been placed on record to suggest that the company has no possibility

to the restored back to its financial stability with reasonable efforts. The minutes of the secured creditors'' meeting dated August 21, 1997, to

which the petitioner was also a party, goes to suggest that the majority of the creditors in number as well as in value have faith in the company''s

resurgence and are interested in lending a helping hand albeit on certain terms and conditions and certain measures to streamline the company''s

working in future by rephasing and restructuring the credit structure of the company.

The minutes recording the petitioner''s response also shows it has not so must of fundamentally different opinion on the issue of the company''s

capacity to resurgence than to the current management. The minutes read about the petitioner''s view :

The representative of American Express Bank stated that the proposal was not acceptable to it under the present management set up of the

company and that it had already taken legal recourse to recover its outstanding dues.

The summary of discussion has been thus recorded :

Summarising the discussion, Shri Mukherji, observed that, in spite of the concerns expressed by the lenders, the majority of the lenders were

agreeable to restructure their loans as per the proposal, provided adequate checks and balances were put in place to ensure commitment of the

promoters. It was strongly felt, he added, that in view of various uncertainties regarding equity infusion and future performance of the company, the

promoters should back their commitment towards the project by executing a tangible and legally binding instrument in favour of lenders such as

pledge of shares.

With the company there is at stake the livelihood of about 3,500 people who are employed with it.

In the circumstances when there is unimpeachable evidence of secured conditions having a faith in bank strength and capability of the company

to survive the present crisis with a little patience on the part of those who have a demand to make against the company, the continuing threat of the

company on the fringe of being would up is to cause fear psychosis in the market and an aura of suspicion and uncertainty in the mind of those who

are otherwise willing to deal with the company commercially. Aiding the creation of such an atmosphere in a case like the present one will enure for

the benefit of those who seek destruction of the company rather than helping in salvaging it.

It is not to lose sight to fact that had the company become sick by erosion of its capital and reaching negative net worth, the provisions of the

Sick Industrial Companies (Special Provisions) Act, 1985, would have been attracted making it obligatory upon the statutory authority to explore

all the possibilities of reviving the company back to positive net worth within reasonable time, by putting in all embargoes on recoveries of all debts

and on proceedings like winding up during pendency of such proceedings. It will be quite unjust and iniquitous to bring quite a contrary result at the

behest of a secured creditor, who has nothing to lose, in the case of a company which in on the creditor''s own showing intrinsically strong and has

all the potentiality to tide over the present rough weather. Law and State policy in such circumstances favour relegating the creditor to his remedies

for enforcement of his dues rather than bringing an end of the corporate soul. This is not to say that in all cases the court as an invariable rule will

not grant a winding up petition. It must depend on the facts and circumstances of each case to be evaluated on the basis of material that comes

before the court. Such an approach is required in view of public policy keeping in view the commercial morality, and is justified by a large number

of precedents from this court. Without encumbering with number, reference may be made to Registrar of Companies Vs. Navjivan Trading

Finance Pvt. Ltd., M. P. Thakkar J., as High Lordship then was, emphasised (page 416) :

Winding up is the last thing that the court would do ant not the first thing that the court would do having regard to its impact and consequences, for

winding up of a company would result in, (1) closing down of a unit which produces some goods or provides some service; (2) it would throw out

of employment numerous persons and result in grave hardship to the members of families of such employees; (3) loss of revenue to the State by

way of collection that the State could hope to make on account of customs or excise duties, sales tax, Income Tax, etc; (4) scarcity of goods and

in diminishing of employment opportunities. The court would not, therefore, be too keen or too anxious to wind up a company by an order of court

only on the ground that the company is unable to pay its debts. In fact, it would be a blow to do so, so long as there is any possibility of

resurrecting the company. It would not be right to say that creditors can insist on winding up of the company by court as a matter of right if the

position of the company is such that it would be unable to pay its debts to them even if the company can be resurrected.

The principle found its echo in the pronouncement of a Division Bench of this court in New Swadeshi Mills of Ahmedabad Ltd. v. Dye Chem

Corporation [1986] 59 Comp Cas 183. That was a case where the company was heavily indebted and inability to pay its debt was self-evident.

The company had apparently gone commercially insolvent. Yet as a matter of policy the court said :

Even so a court will exercise a sound discretion in deciding whether to wind up a company or not and in doing so consider many relevant factors.

It may be that despite the inability to pay its debts, a company has still prospects of coming back to life... the court will be inclined to give a chance

to resurrect the company. It should be the policy of the court to attempt to revive though at the moment the company may not be solvent and may

not be able to meet its obligations to its creditors ... It may be easy for a court when once it is shown that company is unable to pay its debts to

bury it deep and distribute whatever is available as distributable surplus. But it is the duty of the court to welcome revival rather than affirm the

death of the company and for that purpose the court is called upon to make discreet exercise.

We are here concerned with a company which is not commercially insolvent, but is a going concern with intrinsic vibrant proven potentiality

over the years discussed above.

The question then arises whether the court ought to reject the petition at this stage or keep the matter pending for the purpose of reviewing the

situation at a later date on the petitioner''s showing that the circumstances have changed. No hard and fast rule can be laid down for the purpose of

making an order in that regard. It must depend in the very nature of things on the facts and circumstances of each case what the court considers the

best.

As I have come to the conclusion that the petitioner being a secured creditor to a very small extent considering the entire gamut of the

respondent - company''s business, for which he had already recourse to appropriate remedy for recovery and also in view of the settled provisions

of law that he being secured creditor, even in the case of a winding up order of the company being made, can remain outside winding up and

recover his debt by realising securities even without approaching the court is unaffected by this winding up petition going either way and other

creditors having shown their interest on the showing the petitioner himself in maintaining the corporate personality of the company by actively

considering ways and means to bail out the respondent - company from its present predicament, keeping the petition pending is to the benefit of

none except that it may be used as a Damocles'' sword for keeping the respondent - company on tenterhooks in its day-to-day operations. Any

apprehension that the company is likely to lose its corporate existence through winding up is likely to cause immense harm to the company in the

commercial sense both in its effort to resurrect, in day-to-day manufacturing and commercial operations. It fulfils all the criteria where the courts

have in spite of the presumption having been arisen u/s 434(1)(a) in favour of the petitioning creditor, held against

The Supreme Court in Pradeshiya Industrial and Investment Corporation of U. P.''s case [1994] 79 Comp Cas 835 deprecated the admission

of winding up petitions merely on the finding that the petition raised arguable issues by so holding (page 845) :

We find it difficult to appreciate the reasoning of the learned single judge when he holds that there are arguable issues and, therefore, the winding

up petition has to be admitted. On this aspect the courts below failed to note that the admission of the winding up petition is fraught with serious

consequences as far as the appellant is concerned.

This clearly indicates that unless the court is prima facie satisfied that on the existing material before an order of winding up is justifies, on order

of admission of a winding petition ought to be made.

In Airwings (P.) Ltd.''s case [1995] 84 Comp Cas 688: [1995] 1 Comp LJ 233, the Karnataka High Court observed noticing the aforesaid

decision in Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical Ltd. and Another, :

The latest decision of the Supreme Court puts the controversy beyond any pale of doubt that, in the case of a company which is a going concern

and which is actually functioning, even an order of admission of a company petition u/s 433(e) may prove disastrous, even leaving aside the

advertisement order which would be still more pernicious, for, even at that stage after hearing the company, it has to be decided . . . whether it is

prima facie shown that the company is plainly commercially insolvent or in other words its existing and probable assets would be insufficient to

meet the existing liability.

It has also been noticed that courts ought not to order the petition to stand over for lengthy periods.

On these premises, it is not possible to accede to the request of learned counsel for the petitioner that either the petition be admitted and

advertisement of notice be deferred or in the alternative the petition be ordered to stand over for a sufficiently long period and be considered after

obtaining the report about the outcome of the revival efforts.

With these premises, the petition deserves to be dismissed and I do dismiss it.

There shall be no order as to costs.