Bohra Motor Finance vs Vijaya Productions Ltd.

Chitra Venkataraman, J.—This petition is for winding up of the respondent company u/s 433(e) and (f) read with Sections 434 and 439 of

the Companies Act, 1956. The case pleaded by the petitioner herein is as follows:

The petitioner is engaged in the business of financing by way of hire purchase agreements and providing loans to customers on executing the

necessary documents. It is stated in the petition that the respondent approached the petitioner for financial assistance to purchase a car bearing

Registration No. TSB 2211. The hire purchase agreement was executed between the parties on 17.9.1996 for a total sum of Rs. 3,54,000/-

repayable in 12 instalments. The said sum was repayable in instalments starting from 17.9.1996 to 17.8.1997. The hire charges payable for the

period 17.9.1996 to 17.6.1997 was to the tune of Rs. 30,000/- per month and thereafterwards, Rs. 27,000/- per month for the remaining

instalments ending on 17.8.1997. Clause 26 of the hire purchase agreement also stipulated that the respondent should pay sum of Rs. 27,000/-

every month, in the event of a default in observing the conditions, and when the respondent fails to exercise the option of purchasing the vehicle in

accordance with the provisions of the contract and if the vehicle is not returned to the owner on termination of the hire purchase agreement. It is

stated that the amount due by the respondent to the petitioner was secured by promissory notes executed on 17.9.1996 from the Directors of the

respondent company. The said promissory note is stated to be replaced by a promissory note of the date 7.9.1999 and again on 6.12.2001. It is

stated the respondent had committed series of defaults in observing the monthly payments. Since the respondent neglected to pay the amount, on

3.11.2001, the petitioner issued a legal notice to the respondent company calling upon them to pay the dues. The petitioner submits that except for

a reply, there was no efforts by the respondent to make the payment. It is stated that in view of some disputes among the respondent and its group

companies, they requested the petition not to precipitate the matter arid assured the petitioner that the amount would be paid shortly. According to

the petitioner, a fresh promissory note-was issued on 6.12.2001 acknowledging the outstanding sum of Rs. 15,01,903/-; that the respondent

agreed to pay the amount with interest at 12% per annum. It is stated that contrary to this undertaking, the respondent did not pay the admitted

amount.

Under notice dated 16.8.2003, the petitioner issued a statutory notice u/s 434 read with Section 433(e) and (f) of the Companies Act and

called upon the respondents to pay the amount within 21 days from the date of receipt of the notice. A sum of Rs. 18,02,283.60 was the admitted

amount payable by the respondent to the petitioner. It is stated that the respondent, however, issued a reply dated 5.9.2003 denying its liability.

It is stated in the reply that they have paid a sum of Rs. 20,88,450/- on 22.12.2000. However, according to the petitioner, a sum of Rs.

18,02,283.60 is the amount payable under the promissory note on 6.12.2001, wherein, there is an acknowledgement of the debt. The petitioner

submits that the respondent is hurriedly disposing of the properties to defeat the lawful claim of the petitioner. The petitioner submits that

considering the admission made and the failure to make the payment as agreed upon, the petitioner has preferred this petition contending that the

respondent company be wound up and to appoint the Official Liquidator as the Liquidator of the company to take change of the respondent

company.

On notice, the respondent has filed a counter affidavit to the allegations of the petitioner, wherein, the respondent denied their liability to pay any

sum as claimed in the petition. The respondent submitted that the petitioner was not a creditor of the respondent company. Apart from making a

preliminary objection that there is a bona fide dispute as regards the very claim, the respondent submitted that they never took financial assistance

for the purchase of a car bearing registration No. TSB 2211 either in the month of September 1996 or on any other date. They also denied the

agreement dated 17.9.1996 undertaking to repay the said sum. Apart from denying the promissory note dated 17.9.1996 as executed by the

Directors of the respondent company, the respondent denied the allegation that the same was replaced by promissory notes dated 7.9.1999 and

6.12.2001. The respondent submitted that they entered into a hire purchase agreement on 23.2.1993 for a sum of Rs. 5,22,000/-in respect of the

vehicle bearing registration No. TSB 2211 from B.C. Bohra in his individual capacity and that they had paid the entire amount and no amount is

payable to the said Bohra. They submitted that there was no borrowing on 17.9.1996 of Rs. 3,54,000/- from Bohra Motor Finance. The

respondent also denied the allegation that the petitioner approached the respondent to make the payment under the hire purchase agreement and

that there was a promise from the respondent to settle the same. They also denied the receipt of a notice dated 3.11.2001 which appeared to have

been sent to several entities through its counsel purported to be on behalf of several persons. Referring to paragraph 3 of the said notice that there

was a reference to Item 25 where the name of the hirer was mentioned as Vijaya Productions Private Limited and the name of the guarantors in the

hire purchase agreement referred to as Bharath Reddy; the amount of defaulted instalments mentioned as nil; the additional finance charges

mentioned as Rs. 1,51,903/-; the date of expiry of the hiring period under the hire purchase agreement is mentioned as 17.8.1997 and the amount

due as per Clause 26 is Rs. 13,50,000/-, the respondent submitted that there was no reference to Vijaya productions private Ltd. The respondent

referred to the reply dated 26.11.2001, wherein they have specifically referred to the account books which showed no amounts outstanding be the

credit of the petitioner. Referring to the notice from the petitioner dated 16.8.2003 the respondent submitted that they had sent a reply dated

5.9.2003 denying the borrowing of any amount and that P. Venkatarama Reddy ceased to be the Director of the company on 19.11.2001 and

that Bharathi Reddy was never a Director of the company on 6.12.2001 or on any other date. He further pointed out that at the meeting held on

13.12.2001, all the powers given to Mr. B. Viswanath Reddy and other Directors to borrow and acknowledge debts have been withdrawn. That

Mr. Venkatarama Reddy and Mrs. B. Bharathi Reddy have signed the pronote-cum-acknowledgment on 6.12.2001 on behalf of the respondent

company, could not be true and hence, is fabricated. The respondent stated that he had also filed Form-32 dated 27.11.2001 with the Registrar of

Companies, Chennai, with reference to the cessation of office of Mr. B. Venkatarama Reddy. The respondent also pointed out to the notice dated

3.11.2001 where there was no reference to the amount said to be due with reference to the hire purchase agreement. Referring to the promissory

note dated 17.9.1996, 7.9.1999 and 6.12.2001, purported to have been executed on behalf of the respondent company, they submitted that the

documents were totally false and that there was no reference to the execution of the promissory note in the notice dated 3.11.2001. They also

submitted that the same had been explained in the letter dated 5.9.2003. The respondent also pointed out that the petitioner has not filed the

original of the hire purchase agreement and that they had denied the execution of the same as well as the promissory note dated 26.11.2001. They

also stated that they are all created documents for the purpose of the petition only. They also pointed out that there was no seal of the company in

the alleged promissory note executed on 6.12.2001. In short, the respondent denied the allegations; and as regards the amount alleged to be due

as well as on the allegations that the respondent has become commercially insolvent, the respondent submitted that the allegations are totally

untenable both on facts as well as on law and stated that the provisions of the Companies Act are not attracted and hence, prayed for dismissal of

this petition.

Learned Counsel appearing for the petitioning creditor placed reliance on the hire purchase agreement dated 17.9.1996 and submitted that the

promissory note executed on 6.1.2001 clearly show the admission of the liability. He also referred to the terms of the loan transaction and the

notice issued thereon and submitted that in the context of the promissory note executed, there is a clear admission of the liability; hence, the

submissions in the counter affidavit are only to avoid the proceedings and therefore, lacking in bona fide.

Learned Counsel for the respondent brought to my attention the reply notice dated 26.11.2001 and the earlier notice received from the

petitioner dated 3.11.2001. A perusal of the reply shows that there is a categorical denial as regards their liability to make the payment. He also

referred to the fact that the respondent company has its own separate legal existence and has nothing to do with the other firms and companies. In

the letter dated 5.9.2003, the respondent stated that the allegations that Venkatarama Reddy and Bharathi Reddy had acknowledged the debt due

under the said hire purchase agreement dated 17.9.1996 and the promissory note dated 6.12.2001 was totally false and fabricated, since there

was a change in the management of the company with effect from 19.11.2001 when Venkatarama Reddy ceased to be a Director. Learned

Counsel also pointed out in the letter dated 5.9.2003 that his wife Bharathi Reddy was never a Director and had not involved herself in the

management; as such, the promissory note claimed to have been signed by these people are totally false.

The respondent also pointed out that the amount due to Bohra group as on 22.12.2000 was settled by issue of various cheques totalling to Rs.

20,88,450/- and at no point of time thereafter M/s. Bohra Group or M/s. Bohra Motor Finance had stated that there was an outstanding due

under the alleged hire purchase agreement dated 17.9.1996. In support of the fact that Venkatarama Reddy and Bharathi Reddy had nothing to do

with the affairs of the company, the respondent also marked the Certificate from the Company Secretary who had conducted a search of the

documents pertaining to M/s. Vijaya productions Private limited in the Office of the Registrar of Companies, Chennai, In the certificate issued by

the Company Secretary, it is also stated that Form-32 dated 27.9.2001 was filed on the cessation of the Venkatarama Reddy with effect from

19.11.2001. Learned Counsel also referred to the letter dated 22.12.2000 addressed to Bohra Finance about the settlement of the account of the

company as well as letter dated 16.1.2001 evidencing the payment of a sum of Rs. 13,83,967/- in full settlement of the accounts. He also referred

to the payment of tax arrears to emphasise on the fact that the company''s finances are good, contrary to the allegations of the respondent. In the

circumstances, learned Counsel submitted that the allegation that the company owed money; that it is a perfected debt; that the company had failed

to clear the dues and that the company has lost its substratum are all allegations with ulterior motive and there are no substances to support the

claim of the petitioner. In the circumstances, learned Counsel denied the claim of the petitioner that an order u/s 433 of the Companies Act has to

be passed.

In the decision reported in 42 Company Gases 125, (M. Gordhandas & Co. v. Madhu Woollen Industries P. Ltd.) the Supreme Court held

that the principles on which the Court should act when prayed for a relief u/s 433(e) of the Companies Act are:

(i) the defence of the company is in good faith and one of substance;

(ii) that the defence is likely to succeed in point of law;

(iii) that the company adduces prima facie proof of the facts on which the defence depends.

The Apex Court held that ""where a debt is undisputed, the Court will not act upon a defence that the company has the ability to pay the debt but

the company chooses not to pay that particular debt."" The said decision of the Supreme Court has been consistently followed to hold that where

the debt is bona fide disputed there cannot be ""neglect to pay"" within the meaning of Section 434(1)(a) of the Companies Act 1956. Hence, where

on evidence adduced there is no neglect to pay, the question of invoking the deeming provision does not arise. Consequently, the ground for

winding up also fails. Hence, in every case it is a question of evidence to show that there exists a debt and there is a neglect to pay. Where the

existence of the debt is disputed and the dispute raised does not suffer in its bona fides, the question of the invoking the jurisdiction u/s 434(1)(a)

does not arise at all. In the context of the aforesaid facts, the initial burden is on the petitioning creditor to prove that there in reality existed a debt

and that on a prima facie examination of the evidence produced by the respondent the Court comes to a reasonable conclusion accepting the

defence of the company as bona fide, the Court will not order winding up. Now, coming to the merits of the claim, it may be seen that the case of

the petitioner rests on a hire purchase agreement of the year 1996 followed by a promissory note dated 6.12.2001 alleged to have been executed

by the respondent company''s Managing Director and one Bharathi Reddy. The consistent case of the respondent herein is that no amount was due

from the respondent and that the demand made was not true. Apart from denying their liability as early as 26.11.2001, they had also replied on

5.11.2003 to the alleged promissory note signed by D. Venkatarama Reddy and Bharathi Reddy, which, according to the respondent, are false

and fabricated. The respondent had also placed reliance on the letter dated 22.12.2000, as per which, the respondent company had settled the

amount due to the petitioner herein. Considering the definite denial herein both as regards the liability as early as November, 2001 and to the

genuineness of the promissory note raised, I do not find any merit in accepting the plea of the petitioner herein in invoking the jurisdiction of this

Court for the relief u/s 433(e) of the Companies Act. As already noted, if the debt is bona fide disputed and the defence is a substantial one, the

question of this Court exercising the jurisdiction u/s 433(e) does not arise. I do not find any merit to disregard the defence now taken as lacking in

bona fide. In this proceedings, I do not wish to go into the merits or demerits of the subsistence of a debt. All that this Court needs to look at for

the purpose of exercise of jurisdiction is an enquiry as to whether the defence is a bona fide one or not. If on an analysis of the materials placed in

support of the defence this Court comes to the conclusion that the respondents are not making a moonshine of their defence, there cannot be any

hesitancy on the part of the Court in refusing to exercise its jurisdiction. The existence of the debt needs to be proved as a matter of fact in a

manner known to law. To determine whether there existed a debt or not, hence, needs to be substantiated in a regular civil proceeding. In the

present case, as already noted earlier, the alleged dues are disputed, denied and doubted. The respondent counters the claim of the petitioner

through their letter dated 22.12.2000. In the face of such plea taken, I do not wish to enter into the claims of the parties herein. The contentions of

the parties herein only lead to the conclusion that there is a dispute as to the existence of a debt. In view of the rival contentions taken by the

parties in the light of the settled legal principles on the scope of the jurisdiction of this Court, I do find any justification for exercising the jurisdiction

u/s 433(e) of the Companies Act. It is, however, open to the petitioner to seek the remedy before the civil forum if they choose so.

A series of decisions of this Court as well as of the Supreme Court have held that an order u/s 433(e) of the Companies Act is a discretionary

one and the necessary forum for deciding the issue as to the debt existing is a civil Court. Consequently I find no justification for accepting the

petition in this case. Accordingly, the Company Petition is dismissed. There will, however, be no costs. It is made clear that this observation will

not stand in the way of the petitioner in invoking his rights before the civil Court if they choose so.