Dena Bank vs Khatau Dyes and Fibres Ltd.

S.M. Jhunjhunuwala, J.—This is a creditors'' petition for winding up of Khatau Dyes and Fibres Ltd. (hereinafter referred to as "the company") u/s 439, read with sections 433(e) and 434 of the Companies Act 1956 (hereinafter referred to as "the said Act").

The company is wholly owned subsidiary of the Khatau Makanji Spinning and Weaving Co. Ltd. (hereinafter referred to as "Khatau Mills"). The company has been incorporated and registered under the provisions of the said Act having authorised capital of Rs. 10,00,000 divided into 10,000 equity shares of Rs. 100 each and the issued subscribed and paid-up capital of Rs. 1,00,000 divided into 1,000 equity shares of Rs. 100 each with the object to carry on business as spinners and doubles of fibre substances, makers of bleaching, dyeing, printing and processing materials and of buying, selling, imparting and exporting yarn, cotton and other cotton staple fibre, yearn waste, silk, artificial silk, rayon, nylon, wool, jute and other fibre substance materials. Between the months of February, 1987, and June, 1987, the company drew 47 D.A. bills of exchange amounting to Rs. 1,29,76,000 which were duly accepted by one Fashion Prints Ltd. The said Fashion Prints Ltd. honoured only 14 D.A. bills of exchange out of the said 47 D.A. bills of exchange and paid only the sum of Rs. 33,00,000 to the petitioners leaving the remaining 33 D.A. bills of exchange amounting to Rs. 96,38,013 unpaid by them. The company as drawer of the said 33 D.A. bills of exchange was bound and liable to pay to the petitioners the amounts of the said D.A. bills of exchange together with interest thereon. Further, between the months of October, 1987, and December, 1987, the company drew 20 D.A. bills of exchange on the said Khatau Mills amounting to Rs. 76,06,623 which were duly accepted. The said Khatau Mills did not honour the said D.A. bills of exchange on their maturity and the company as drawer thereof was bound and liable to pay to the petitioners also the amounts of the said 20 D.A. bills of exchange together with interest thereon. The petitioners had granted a cash credit hypothecation facility to the company in respect whereof the sum of Rs. 1,29,798.77 with further interest at the rate of 16.5 per cent. per annum was found due and payable by the company to the petitioners and June 30, 1988. As on June 30, 1988, and aggregate sum of Rs. 82,52,483 together with further interest to be calculated at the rate of 17.5 per cent. per annum on Rs. 76,06,623 as from July 1, 1988, an aggregate sum of Rs. 1,16,67,341 together with further interest to be calculated at the rate of 19.5 per cent. per annum on Rs. 52,97,631 and at the rate of 17.5 per cent. per annum on Rs. 43,40,382 as from July 1, 1988 and an aggregate sum of Rs. 1,29,798.77 in respect of the cash credit hypothecation facility granted to the company with further interest thereon at the rate of 16.5 per cent. per annum to be calculated as from July 1, 1988, became due and payable by the company to the petitioners. The petitioners several times by themselves and finally by their advocate''s letter dated September 23, 1988, called upon the company to pay to the petitioners the said amounts. The company, despite having received the said letter dated September 26, 1988, failed and neglected to make the payment of the said amounts to the petitioners. By its letter dated November 28, 1988, the company requested the petitioners to bear with it and assured them that the payment of the dues of the petitioners would be shortly made. The company did not pay the said amounts to the petitioners. Since the company was unable to pay its debt, on January 25, 1989, the petitioners presented this petition for the company being wound up under the privations of the said Act.

On August 7, 1989, the company acknowledged and admitted that the sum of Rs. 2,30,43,588 was due and payable by it to the petitioners as on June 30, 1989, which the company agree to pay to the petitioners together with further interest thereon in installments as provided for in the consent terms singed by the petitioners and the company on August 7, 1989, and filed in this court on that day. On August 7, 1989, order in terms of the said consent terms was passed by this court. As per the said consent terms, the company became liable to pay to the petitioners the said sum of Rs. 2,30,43,588 and interest in instalments as mentioned therein which the company failed and neglected to pay. Neither the said Khatau Mills nor even Sunit Chandrakant Khatau made any payment on behalf of the company to the petitioners under the said consent terms. The petition accordingly stood admitted and the same has been duly advertised.

On behalf of the company, an affidavit of the said Sunit Khatau had been filed in reply to the petition. Though the company admitted that the said amount is due and payable by the company to the petitioners, the company has resisted a winding up order being passed against it. According to the company, it is a wholly owned subsidiary company of the said Khatau Mills which is under the protective umbrella of the Board for Industrial and Financial reconstruction (hereafter referred as "BIFR") and as such, by reason of order passed u/s 22(3) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereafter referred to as "the said SICA Act"), no proceedings for recovery of any amount including winding up proceedings can lie or proceeded with either against the said Khatau Mills or the company. It is also the case of the company that the said Khatau Mills being acceptors of the said bills exchange are primarily liable to pay the amount and though the said Khatau Mills is solvent, in view of the protective umbrella of the BIFR, the company is unable to recover from the said Khatau Mills and in its turn, unable to pay to the petitioners and, in the circumstances, it is inequitable and unjust to permit any winding up proceedings against the company to be proceeded with. It is also the case of the company that at the time when the said consent terms were filed, it was in the contemplation of the parties that the said Khatau Mills would primarily be liable to pay to the petitioners and that the company would be secondarily liable for the payment and it is wholly reprehensible on the part of the petitioners to take advantage of the said consent terms and seek winding up of the company. According to the company, securities have been agreed to be created in favour of the petitioners to secure the debt and the petitioners ought to have proceeded to have the securities created and/or realised in respect of amount due to the petitioners rather than to force the company into liquidation.

On behalf of the petitioners, the affidavit of one S. B. Malgi has been filed in rejoinder. According to the petitioners, the petitioners are neither concerned with the solvency of the said Khatau Mills nor with the company being a wholly subsidiary company of the said Khatau Mills. The fact that the said Khatau Mills and the company are two distinct and separate legal entitles and that the company is indebted to the petitioners and is unable to pay its debt is sufficient to have the company wound up under the provisions of the said Act. According to the petitioners, the petitioners are also not concerned with as to what amount, if any, is due by the said Khatau Mills to the company. The petitioners have not been a member of the consortium of banks and neither was there any waiver of interest nor was any concession granted by the petitioners to the company otherwise than what is mentioned in the said consent terms. Since no security was created in favour of the petitioners, the question of the petitioners first getting the securities realised did not arise. The petitioners have denied that, at the time when the said consent terms were filed, it was in contemplation that the said Khatau Mills would be primarily liable to pay to or that the company would be secondarily liable to pay to the petitioners. The petitioners have also denied that, by reason of the said Khatau Mills being under the protective umbrella of the BIFR as contended by the company, no proceedings for recovery of any amount including winding up proceedings can lie or be proceeded with against the company. According to the petitioners, there is no bona fide dispute to the debt due and payable by the company and the company being unable to pay its debt, it is just and equitable that the company should be wound up.

Mr. Cooper, learned counsel appearing for the company, has submitted that the fact that the company is unable to pay its debt does not necessarily entitle the court to order 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 433 of the said Act, vests in the court. Mr. Cooper has further submitted that, in the facts and circumstances of the case, even though the company has not paid the amount payable to the petitioners, neither can it be deemed that the company is unable to pay its debt not is it equitable and fair to order winding up of the company. Alternatively, Mr. Cooper has submitted that the order of winding up can, in the facts and circumstances of the case, be suspended till the said Khatau Mills is out of the protective umbrella of the BIFR. In support of this submission, Mr. Cooper has relied upon the following cases :

(i) Jugalkishore Benarsidas Vs. South India Saw Mills (P.) Ltd., ;

(ii) Misrilal Dharamchand P. Ltd. v. B. Patnaik Mines P. Ltd. [1978] 48 Comp Cas 494 (Ori); and

(iii) Paramjit Lal Badhwar Vs. Prem Spinning and Weaving Mills Co. Ltd., .

Mr. Mehta, learned counsel appearing for the petitioners, has submitted that, so far as the debt due and payable by the company is concerned, the petitioners are not concerned with the said Khatau Mills and since no bona fide dispute is raised regarding the liability of the company to pay the debt to the petitioners, the winding up ought generally to follow in the public interest so that the public does not unwarily deal with the company and jeopardise their interest. In support of his submission, Mr. Mehta has placed reliance on the case of Bombay Metropolitan Transport Corporation Ltd. Vs. Employees of Bombay Metropolitan Transport Corporation Ltd. (Cidco) and others, .

In the said consent terms filed on August 7, 1989, the company has in terms admitted its liability to pay to the petitioners the sum of Rs. 2,30,43,588 together with the further interest thereon to be calculated at the rate of 17.5 cent per annum from July 1, 1989, with quarterly rests. The payment of the said amount by the company has not been subjected to any condition such as the receipt thereof by the company from the said Khatau Mills or the petitioners first realising the same by enforcing the securities. It is an admitted position that the company has not paid any amount to the petitioners after the filing of the said consent terms in this court. Since neither the said Khatau Mills nor the said Sumit Khatau has paid any amount to the petitioners on behalf of the company, the question of the petitioners giving credit to the company in respect of the amount due and payable by the company to the petitioners did not arise. It is not borne out from the said consent terms that, at the time of filing of the same, it was in the contemplation of the parties thereto that the said Khatau Mills would make payment of the amount due thereunder in the first instance and that the company would only be secondarily liable for payment of the same. Although the company is a subsidiary company of the said Khatau Mills in respect whereof a reference has been made to the BIFR and an enquiry is pending, and, as a result whereof, all proceedings for winding up or execution in respect of any properties of the said Khatau Mills and for appointment of a receiver for the property or undertaking of the said Khatau Mills have been suspended under the provisions of section 22 of the said Sick Industrial Companies (Special Provisions) Act, 1985, yet the various provisions of the said Act dealing with holding companies and their subsidiaries maintain the distinction between the two as separate legal entities. The company is a separate legal entity separate from the said Khatau Mills and the existing protective umbrella of the BIFR over the said Khatau Mills is not extended to and does not cover the company. The company not being under the protective umbrella of the BIFR, proceedings for winding up of the company are not suspended by reason of the said Khatau Mills being under the protective umbrella of the BIFR.

Undoubtedly, the power to be exercised u/s 433 of the said Act is a discretionary one and it is competent for the court in consideration of the circumstances in a given case to refuse to pass an order of winding up even if the company is unable to pay its debts. It is equally open to the court in its discretion to make a conditional order. From a discussion of precedents, the following principles can be culled out :

(i) The court''s jurisdiction u/s 433(b) of the said Act is discretionary.

(ii) An order of winding up is ordinarily made when it is shown that the company is commercially insolvent and it is not just and proper to allow such an insolvent company to be in existence in the broader interests of commercial morality;

(iii) A company may have liability more than its assets, but still may have in particular circumstances, the capacity to meet the demands from its creditors; and

(iv) On an application to wind up a company on the ground that it cannot meet its debts, what has to be ascertained is not whether the company, if it converted all its assets into cash, would be able to discharge its debts but whether in a commercial sense the company is solvent.

Following the decision in the case of Aluminium Corporation of India Ltd. v. Lakshmi Ratan Cotton Mills Co. Ltd. [1970] 40 Comp Cas 259 (All) and in the case of Paramjit Lal Badhwar v. Prem Spinning and Weaving Mills Co. Ltd. [1986] 60 Comp Cas 420, the Allahabad High Court has held that the word "may" used in the opening part of section 433 of the said Act clearly indicates that, even if the company sought to be wound up is unable to pay its debts, it is a matter of discretion for the court as to whether, in the circumstances of the case, it would be in the interest of justice to wind up the company. It is true that in the case of Jugalkishore Benarsidas v. South India Saw Mills (P.) Ltd. [1975] 45 Comp Cas 273, the Kerala High Court has held as under (at page 277) :

"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 enquiry."

However, the discretion has to be exercised judicially.

The Orissa High Court, in the case of Misrilal Dharamchand P. Ltd. v. B. Patnaik Mines P. Ltd. [1978] 48 Comp Cas 494 has, on the facts of the case before it, thought it appropriate to direct the winding up of the company but to stay its enforcement for a period of six months from the date of the order to enable the company to pay up the dues of the petitioning company therein. However, in the instant case, although, according to Mr. Cooper, the company is solvent, since August 7, 1989, i.e., the day when the said consent terms were filed in this court and the company in terms admitted its liability to pay to the petitioner the sum of Rs. 2,30,43,588 together with interest in instalments as provided for therein, the company has not paid any amount to the petitioners. The company has not been able to satisfy the demands of the petitioners for many years and definitely for more than three years after the statutory demand. By reason of the self-operative order passed on August 7, 1989, the petition to wind up the company stood admitted on October 1, 1990. The outstanding feature that, even during the one and held years that this petition has been pending in this court, the company has not been able to offer to pay up the amount offers sufficient basis to hold that the company is not able to pay its debts. In the facts and circumstances of the case, it is neither appropriate nor in the interest of justice or the creditors of the company to stay or postpone the enforcement of the order to wind up the company which I propose to pass.

The company is a trading company. The debt due by the company to the petitioners is not disputed. It is not enough that the company has the ability to pay the debt; if the company chooses not to pay debt due to the petitioners, the court will have no choice but to pass an order for winding up the company. By non-payment of the undisputed debt within the period of statutory demand, the company is deemed unable to pay its debts and where the company is unable to pay its debts, winding up ought generally to follow in the public interest, so that the public does not unwarily deal with the company and jeopardise its interests. The petitioners have established that the debt is clear, valid in law, unimpeachable and are entitled to a winding up order ex debit to justitiae. In may opinion, the petitioners are not acting unreasonably in having the company wound up. On the facts and in the circumstances, it is just and equitable that the company is wound up. The petition is made absolute in terms of prayers (a), (b) and (c).

At the request of Mr. Cooper, the operation of this order has been stayed for a period of three weeks.

Certified copy to be issued expeditiously.