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Judgment
Sanjib Banerjee, J.—Despite the provision remaining effectively unchanged in the statute for more than a century and it apparently having been interpreted in favour of the secured creditors, the statutory right has once again been questioned as to whether a secured creditor of a registered company enjoys equal rights as an unsecured of a company to have its winding-up petition cross the initial threshold and be admitted without, in any circumstances, it being assessed whether the claim exceeds the value of the security that it holds. The legal issue has arisen in the context of the petitioning creditor having proceeded against the securities it holds under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a consequence, some age-old principles which have come to be accepted as axiomatic have also been called into question. The petitioning creditor has previously invoked the said Act of 2002 and has thereby not only evinced an interest to not give up the securities that it holds, but has actually enforced its claim against the securities. The question that arises upon such conduct of the petitioning creditor - of proceeding against both the securities held by it and seeking to have the company wound up -relates not so much to the double jeopardy faced by the company as it pertains to the propriety of a secured creditor seeking to have a company wound up only on the basis of the legal fiction of the company''s inability to pay its debts u/s 434(1)(a) of the Companies Act, 1956 without demonstrating that the value of its securities is less than its claim or establishing that the securities are inefficacious or spurious. The ancillary issue that arises is as to whether, in the context of the legal fiction u/s 434(1)(a) of the Act, even a creditor which holds adequate security covering the debt due from the company can insist on its petition being admitted and a winding-up order passed thereon; or, the provision only contemplates the admissibility of a claim of a secured creditor as an unsecured creditor to the extent that its claim exceeds the value of its securities.
It is an oft-trodden path which needs be negotiated with care and trepidation for high authorities of persuasive and binding value stare down from every nook and cranny. But first, the applicable provisions need to be noticed, since the key lies in the Companies Act itself; as any misplaced sympathy for a company subjected to the vagaries of the 2002 Act - despite the perceived confiscatory nature of that statute or the apparent abuse in the application thereof - can scarcely be an aid for the construction of the parent statute, for such external influence in statutory interpretation militates against the well-established and unquestionable canons set down for such purpose.
Section 433 of the Companies Act confers discretion on the company judge whether or not to wind up a company despite one or more grounds enumerated thereunder having been made out. The element of discretion that the word "may" in the opening limb of Section 433 of the Act brings into play is no different from the settled principles involved in the exercise of judicial discretion generally. The company judge is robbed of the discretion otherwise accorded by Section 433 of the Act only in one of the nine cases: the proviso to the section commands that an order of winding up the company shall be made if the Central government or a State government applies to the company court under sub-section (h) that a company has acted against the interests of the sovereignty and integrity of the country, the security of the State, friendly relations with foreign States, public order, decency or morality. The exercise of the discretion in the eight other cases is only hedged by the time-honoured judicial principles. But a company judge''s everyday association with Section 433 of the Act primarily involves sub-section (e) thereof; the next, by a long distance, is the just and equitable clause in subsection (f). It would do well, however, to bear in mind that a company may be wound up not only because of its inability to pay its debts or it being perceived to be just and equitable for the company to be wound up, but also on the sundry other little-used limbs of that section.
As to when a company is deemed to be unable to pay its debts - the statutory presumption - is defined in Section 434 of the Act. Again, it is the first clause of Section 434(1) of the Act that is more often pressed into service before the company court than the two other. It is also such first clause which is exclusively relevant for the present purpose as the petitioning creditor here relies thereon for the court to draw an inference in these proceedings of the inability of the company to pay its debts. Section 439 of the Act exhaustively enumerates the classes of persons who may carry a petition for winding up a company. Section 439(1)(b) of the Act contemplates a winding-up petition to be presented by any creditor or creditors of the concerned company, including any contingent or prospective creditor or creditors. The other clauses of Section 439(1) of the Act are not relevant in the present context. Section 439(2) of the Act pertains to clause (b) of sub-section (1) and provides, inter alia, that a secured creditor shall be deemed to be a creditor within the meaning of the relevant clause. It, therefore, follows that a secured creditor of a company may apply for winding up the company u/s 433(e) of the Companies Act by citing the company''s inability to pay its debts.
The operative words of Section 434(1)(a) of the Companies Act for the present purpose may be reduced as follows:
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 ... to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company ... 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;
The consideration in the present proceedings hinges on the exact meaning of the expression "neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor". On a creditor''s winding-up petition founded solely on Section 434(1)(a) of the Act being instituted, the company court has to assess whether the company has neglected to pay the sum; or, whether the company has neglected to secure or compound for the sum due from it to the creditor to the reasonable satisfaction of the creditor. In the first case preceding the word ''or'', the company court has to assess whether any sum is due from the company to the petitioner, for it to be able to adjudicate if there has been any negligence on the part of the company to pay off such debt. In the second case following the word ''or'', the company court has to first assess whether any sum is due from the company to the petitioner; and, if a sum in excess of Rs. 500/- is found to be due, determine whether upon the company securing the sum due or compounding for it, such act ought to satisfy the creditor. The reasonableness of the creditor''s satisfaction is for the company court to ascertain. The underlying theme of Section 434 of the Act appears to be to evaluate whether a commercial entity is solvent enough to continue its business operations. The principles relating to insolvency are a fortiori incorporated in Section 434(1)(a) of the Act though the applicability of the rules relating to insolvency find express mention in Section 529 thereof, which is a provision that applies after a company has been wound up, and the rules relating to insolvency apply only to a company in liquidation to ascertain the inter se entitlement as between the creditors of a company in liquidation and such rules are otherwise of no relevance prior to a company being wound up. As a digression, it may be of some relevance that the provisions relating to the liquidation of a company have been carved out of the English statute and placed in another that deals exclusively with matters relating to insolvency. The original English Companies Act as modified over time is, of course, the one on which the Indian Companies Acts have been fashioned.
While on the provisions of the Companies Act, it may be remembered that Section 447 of the Companies Act mandates that an order for winding up a company operates in favour of all creditors and all contributories of the company as if it has been made on a joint petition of a creditor and of a contributory. That would imply, as suggested by the company here, than an order for winding up a company has to be for the benefit of its body of creditors as a whole and it is thus that, notwithstanding an unimpeachable claim being established by the petitioning creditor, the company court may refuse to wind up the company if the majority in value of the creditors of the concerned company do not support the prayer or if it is perceived by the company court that the order may not enure to the benefit of the creditors of the company as a whole or other relevant considerations demand that the company not be wound up.
Since the company court''s regular association with Sections 433, 434 and 439 of the Act has more to do with claims carried by the creditors, the effect of the secured creditors having been accorded the same status as unsecured creditors in Section 439(2) of the Act may understandably result in a first impression that, security or no security, every person claiming to be a creditor of the company sought to be wound up is deserving of the claim to be assessed without apparent reference to the security that it may hold. But Section 439(1) of the Companies Act merely lists the classes of the persons who may seek the winding-up of a company. Such provision, read with Section 433 of the Act, would reveal who may invoke what limb of Section 433 of the Act to seek the winding-up of a company. The apparent lack of any distinction between a secured creditor and an unsecured creditor seeking to have a company wound up on the ground of the company''s inability to pay its debts would apply to almost all the grounds that may be invoked for petitioning the court to have a company wound up; but such lack of distinction may not extend to a petition where Section 434(1)(a) of the Act is exclusively summoned in support of the prayer for winding up the company on the company''s inability to pay its debts u/s 433(e) of the Act. The discussion here is restricted to a case where the secured creditor only invokes or makes out a case on the strength of Section 434(1)(a) of the Act. The distinction between a secured creditor and an unsecured creditor is built into Section 434(1)(a) of the Act and must be seen with reference to the relevant expression in the clause which may be altered in its tense without any impact on its efficacy in the present context to read as "neglects to pay the same, or to secure or compound for it to the reasonable satisfaction of the creditor." The past tense reflected in the word "neglected" only emphasises that a creditor''s petition for winding up a company on its deemed inability to pay its debts founded on Section 434(1)(a) of the Act may not be instituted prior to the expiry of three weeks from the date of the receipt of the written demand referred to therein by the company.
Upon a company being served a written demand u/s 434(1)(a) of the Act, there are at least four options available to it: it may pay off the sum demanded or such of it as it deems to be due; or, it may secure the entirety or such part of the claim as it deems to be due in such manner as it may choose; or, it may compound for the sum demanded or such part of it as it deems to be due in such manner as it may choose; or, it may disregard the notice and pay no heed to it.
If the company pays off the sum demanded in the written demand of the creditor: that is the end of the matter. If it does not pay the full amount demanded or does not pay at all, the extent to which it pays or does not is called into question before the company court upon a petition being carried by the creditor for winding up the company. If the company secures the claim or a part of it, or compounds for it, the reasonableness of such action and the manner in which it is brought about are subject to assessment by court at the behest of a creditor dissatisfied thereby at the admission stage of the creditor''s petition. It is the quality of the act of securing the claim or compounding for it that falls for consideration then.
That Section 439 of the Act permits a secured creditor to present a petition for winding up a company is beyond question. The circumstances in which a company may be wound up by court are comprehensively listed in Section 433 of the Act. The maintainability of a winding-up petition by a secured creditor cannot be questioned if one or more grounds u/s 433 of the Act are cited in support of the petition. But if a secured creditor seeks to take advantage of the deeming provision of the company''s inability to pay its debts in Section 434 of the Act and founds the prayer for winding-up on the first limb of sub-section (1) thereof, the efficacy and the adequacy of the security enjoyed by the secured creditor is a relevant consideration. It is possible for any creditor of a company to apply for winding up the company on any of the available grounds u/s 433 of the Act and the efficacy or the adequacy of the security it holds may be an irrelevant consideration; but when a secured creditor requires a company to be wound up on the company''s inability to pay its debts and petitions for the inability of the company to pay its debts to be presumed under the legal fiction in Section 434(1)(a) of the Act, the secured creditor has to demonstrate that the security that it holds is either inefficacious or inadequate to meet its claim. In a sense, to the extent that the security held by a secured creditor in a company action where the fifth clause of Section 433 of the Act is exclusively invoked and the first clause of Section 434(1) of the Act is the only basis for such invocation, the secured creditor, effectively, claims to be an unsecured creditor and the company court need only assess the excess of the creditor''s claim over its efficacious security to ascertain whether the deeming provision of the company''s inability to pay its debts is attracted.. As to whether the company should be wound up is, of course, based on several other considerations that come into play in the exercise of the discretion conferred by the statute on the company court. By contrast, if a secured creditor relies on the presumption of the company''s inability to pay its debts under the second or third clauses of Section 434(1) of the Act, the efficacy or the adequacy of the security that it holds is of no relevance. Indeed, if a secured creditor invokes Section 433(e) of the Act and is able to establish the inability of the company to pay its debts without taking recourse to the legal fiction in Section 434 of the Act, the efficacy or the adequacy of the security that it holds is, again, of no consequence.
Before referring to the authorities on such aspect of the matter, the essential facts pertaining to this case need to be recorded. The petitioning creditor is an assignee of the original creditor of the company. It is beyond dispute that the original creditor had granted substantial credit facilities to the company. Despite the company''s proclamation to the contrary, it is evident that the petitioner is a creditor of the company, as the amount due and owing from the company to the original creditor and the securities furnished by the company to the original creditor have all been assigned to the petitioner. The petitioner has invoked the said Act of 2002 in respect of the securities that it holds and claims to be - whatever it means - in symbolic possession of the primary immovable property of the company on which its manufacturing facility stands. The petitioner has said in passing that it has not been able to take possession of its securities by reason of the resistance put up by the company or the company''s men and agents, but it has not based the present petition on such score. The petitioner has recently obtained an order from this court on a petition under Article 226 of the Constitution of India requiring the appropriate District Magistrate to take effective steps as sought by the petitioner u/s 14 of the Act of 2002. Long after the invocation of the said Act of 2002 in furtherance of the securities that the petitioner holds, it issued a notice on November 19, 2010 demanding payment of a sum of Rs. 17,08,77,776 as at October 31, 2010 "in respect of the Term Loan granted in your favour along with further interests and other charges and monies thereon at the respective contractual rates calculated from March 1, 2004 until the date of payment of the same ..." Significantly, the notice was issued "without prejudice to all other rights and remedies that are available to us under law or otherwise against you." Though the company claims that it did not receive the statuary notice, there is a presumption under the General Clauses Act of the company having received the same. Upon the petitioner apparently not receiving the postal acknowledgement relating to the service of the postal article said to contain the statutory notice, it caused the entirety of the notice to be published "for abundant precaution" in an English and another Bengali newspaper on January 17, 2011.
Apart from the company''s contention that the petition should not be admitted as the debt allegedly due from the company to the petitioner has neither been established nor quantified despite the petitioner having taken recourse to the securities enjoyed by it, the company asserts that the limited discretion available to the court to refuse to admit a creditor''s winding-up petition on the conduct of the petitioning creditor should be exercised in this case. The company says that the petitioning creditor has taken the law into its own hands in advertising its claim before a direction in such regard was obtained from the court. The company also suggests that the limited discretion available to the court to not admit the petition should also be exercised in this case since the petitioning creditor has pursued its securities under the 2002 Act and it would be inequitable to admit the petition without the petitioning creditor being required to demonstrate a residual claim after exhausting its remedies against the securities.
Though the Companies Act, 1956 and the rules framed thereunder do not specifically require a creditor''s winding-up petition, or any other winding-up petition for that matter, to be heard by the court in two stages, a practice has developed in this court for a creditor''s petition being heard first as to whether it should be admitted and, if admitted and advertised, then to progress to the next stage for an assessment as to whether the company should be wound up. The rationale for such practice is explained with exemplary lucidity in the judgment reported at In Re: Bharat Vegetable Products Ltd., .
The practice in this court is that upon a creditor bringing a petition for winding up a company on the ground of its inability to pay its debt to the creditor, the court directs a copy of the petition to be served on the company and then, upon the company''s stand on merits coming on record, decides on affidavits as to whether the petition should progress to advertisements. The creditor''s winding-up petition does not automatically proceed to be advertised in the usual course in this court for the matter to be straightaway heard in a representative capacity. At the pre-admission stage, as per the practice followed in this court, only the petitioning creditor and the company are heard on the merits of the claim and a decision taken whether the petition should be advertised or not. Such order is Appealable.
There is good reason for such procedure to be adopted by this court as noticed in the Bharat Vegetable judgment and in the more recent Division Bench judgment reported at SRC Steel (P) Ltd. Vs. Bharat Industrial Corporation Ltd., and another unreported Division Bench decision delivered on September 14, 2004 in T. No. 308 of 2004 (Dhariwal Steel Private Limited v. Bengal Rolling Shutters & Engineering Works). Upon a creditor''s winding-up petition being advertised, there is considerable prejudice suffered by the concerned company since a doubt is cast as to the creditworthiness of such commercial entity. Experience also shows that other creditors not immediately pressing for payment would rush to seek the instant release of the monies due to them upon the advertisement of a winding-up petition relating to the concerned company. It is in such circumstances that the process has been split up, so to say, in this court where, at the initial stage, the matter is confined to the merits of the claim and only if the petitioning-creditor makes out a case of an indisputable debt remaining outstanding that the matter progresses any further. If the debt is bona fide disputed in the sense that a triable issue is raised, the company judge would arrest the proceedings and relegate the claim to a regular action. Such order - generally in the form of permanently staying the creditor''s petition, which is a euphemism for effectively dismissing the action - is, again, appellable.
A further practice has developed in this court where even if the company judge finds that there is an indisputable debt and the company has no defence to the petitioner''s claim, the company is offered a choice to ward off the advertisement of the petition. Ordinarily, when the court finds a debt due to the petitioner, the company is permitted to pay off the amount adjudged to be due by the order of admission on such conditions as the court, in its discretion, may impose. It is only in default of the company availing of such opportunity that advertisements are directed to be issued.
Such practice is also supported by the judicial recognition that considerable prejudice is occasioned to a company upon a winding-up petition in respect of such company being advertised. The stigma and prejudice following the advertisement of a creditor''s winding-up petition have been noticed in a judgment reported at National Conduits (P) Ltd. Vs. S.S. Arora, The company contends, on the strength of the dictum in Bharat Vegetable that the court has adequate power to stop the abuse of its process, that there is discretion to be exercised by the court even at the stage of admission of a creditor''s winding-up petition notwithstanding the debt having been established. The company submits that the order of admission of a creditor''s petition is a judicial order and the company court is not robbed of the element of discretion that is ordinarily available in case of every judicial order. The company has criticised the judgments reported a JMD Medicare Ltd. Vs. Siemens Aktiengasellschaft, and (2007) 2 WBLR (Cal) 129 (Raghunath Exports Ltd. and Parekh Marine Agencies Pvt. Ltd.) for the observations therein that may imply that upon a creditor establishing the debt due from the company, such creditor is ex debito justitiae entitled to the petition being admitted without any other consideration. Indeed, the judgments are deserving of the criticism and the legal position may have been better explained in an unreported judgment of June 26, 2012 rendered in CP No. 382 of 2001 (Ashok Kumar Deora and Baljit Securities Ltd.) where it has also been observed that the finality of a finding arrived at the admission stage of the debt due to the petitioning creditor, can, in some cases, be undone at the post-advertisement stage. It is beyond question that the company court is vested with a discretion at both stages of a creditor''s winding-up petition in the two-tier procedure that is followed; albeit the amplitude of the discretion being of varying degrees in the two stages.
The parties have relied on several judgments on the rights of a secured creditor to pursue a claim in a winding-up petition. But the authorities that have been brought to bear on the specific legal issue raised by the court in this matter are more thereabouts than being exactly there. The first in point of time is a judgment reported at Karnatak Vegetable Oils and Refineries Ltd. Vs. Madras Industrial Investment Corporation Ltd. and Another, ). In an appeal from an order directing a company to be wound up on a secured creditor''s petition, the Division Bench of the Madras High Court found "considerable force in the argument of the appellant''s counsel" that the creditor in that case had ample security for its debts and there was no averment that the security was insufficient. However, the decision in that case had more to do with the court discovering that the larger body of creditors of the company did not desire the company to be wound up and the consideration that the order of winding-up had to be for the benefit of the creditors and contributories of the company than the creditor''s inability to establish the inadequacy of the security qua its claim.
In the judgment reported In Re: The India Electric Works Ltd., the court considered a secured creditor''s winding-up petition at the post-advertisement stage. The court noticed, at paragraph 4 of the report, that there was agreement all around that the company was hopelessly insolvent and that unless the company was taken over by the government it would not remain afloat. At paragraph 11 of the report, an argument made on behalf of a creditor opposing the winding-up was noticed: that if a secured creditor is to continue the winding-up proceedings, such creditor has to give up the security or prove for the balance after valuing the security and setting it off against its claim. The court did not accept such argument on the ground that the company was utterly insolvent and its assets were not sufficient even to satisfy the claim of the secured creditor. The company was directed to be wound up.
A Single Bench judgment of this court reported Calcutta Safe Deposit Co. Ltd. Vs. Ranjit Mathuradas Sampat, has been placed at great length by both parties. In that case, the Karnatak Vegetable Oils decision was noticed, but it was distinguished on the ground that the Madras judgment was rendered under the 1913 Act which did not carry any provision similar to Section 439(2) of the 1956 Act. With due respect, Section 439(2) of the 1956 Act appears to be clarificatory in nature in its reference to the expression "creditor or creditors" in Section 439(1)(b) thereof being applicable to a secured creditor of a company. It was not as if the law as it stood prior to Section 439(2) being incorporated therein precluded secured creditors from presenting petitions for winding up a company. Be that as it may; it is, however, paragraph 31 of the report in the Calcutta Safe Deposit Co, Ltd. case that the petitioner here cites as a complete answer to the legal issue that has arisen in the present case:
Mr. Mitter argued that if the sum so due is already secured does this sub-section require further security within the period of the said three weeks? He contends that it cannot be the intention of the legislature to get a further security from the company if the creditor is already secured. If Mr. Mitter''s contentions are accepted as correct it would amount to this that the secured creditor has no right to present a winding up petition. If that was the intention of the legislature then how could the new subsection (2) be enacted under the Act of 1956 so as to recognise the right of the secured creditor and also of the debenture holders including debenture stock-holders to present a winding up petition as creditors for nonpayment of the dues by the company? In my opinion, if a secured creditor would serve a notice u/s 434 then within the period of the said three weeks the company must take action in the matter and satisfy the creditor that his claim would either be paid or that his security is intact. He must in such a case, come to some arrangement with such creditor so that the creditor would be satisfied that there would not be any difficulty in his obtaining payment at some point of time as would be agreed upon by and between the creditor and the company.
It must be noticed here that the primary legal question involved in the present discussion is not as to the maintainability of a winding-up petition by a secured creditor but only as to the admissibility thereof. There is a gulf of a difference between the maintainability of a petition and the admissibility thereof, particularly when admission implies the conclusion of the first stage of the two-tier process in a creditor''s winding-up petition. In the context of Section 434(1)(a) of the Act, which is the focus of the present matter, a petitioning creditor would ordinarily be entitled to the petition being admitted if it can demonstrate that after the receipt of the statutory demand by the company it had "neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor". It would defy reason for the clause to be interpreted as requiring a company to honour the demand or secure it or compound for it even if efficacious security well in excess of the value of the claim had already been furnished to the creditor. The provision does not mandate the payment demanded to be made, or the claim to be secured or compounded for, irrespective of whether there is adequate, efficacious security furnished earlier to cover the claim. Say, a creditor holds impeccable security by way of government bonds of value in excess of its claim furnished by a debtor company where the bonds are capable of being encashed whenever presented. It would then not require the company to furnish any more security after the receipt of the statutory demand to ward off the presumption u/s 434(1)(a) of the Act. Equally, in such a case, the court would not presume the company''s inability to pay its debts if the petitioning creditor is found to hold adequate, efficacious security to satisfy its claim, even if the company did nothing after receipt of the statutory demand. The security that is envisaged in the relevant expression in Section 434(1)(a) of the Act is not only the security which is furnished after the receipt of the statutory demand, but would also include the security already held by the creditor. Even the Calcutta Safe Deposit Co. Ltd. judgment recognised such feature in the words "or that his security is intact" in the concluding part of the penultimate sentence of the passage extracted above.
A Division Bench judgment of this court reported at 43 Comp Cas 556 (Techno Metal India (P.) Ltd. v. Prem Nath Anand) has been placed for its acceptance of the ratio in Calcutta Safe Deposit Co. Ltd. and its rejection of the contention on behalf of the company that a secured creditor was not entitled to apply for winding-up the debtor company unless it abandoned its security or satisfied the court as to its inadequacy. It is necessary to dwell on such decision for it is apparently binding on the company judge of this court. The issues that arose in that case must be seen before the discussion of the law therein. The appeal arose from an order of a company court refusing to stay a creditor''s winding-up petition. The company owed money to the petitioning creditor who was, at an earlier point of time, a director of the company. Shortly after the creditor''s winding-up petition was filed, the company applied for the petition to be taken off the file and, in the alternative, for it to be permanently stayed. The company''s application was disposed of by accepting the terms of settlement filed in court which, inter alia, recorded an admission by the company that a specified sum and the quantified interest thereon were due and provided that the company would pay off the amount by a certain date. The company also acknowledged in the terms of settlement that there would be a floating charge on all its specified assets and future fixed assets as a first charge towards such dues. The default clause recognised the petitioning creditor''s right to realise his dues then remaining due in such manner as he thought fit. After making some payment, the company committed default. A notice u/s 434(1)(a) of the Act was issued by the creditor, followed by a second petition which was withdrawn with liberty to file afresh. Another notice was thereafter issued u/s 434(1)(a) of the Act but no action was taken on the same. A subsequent statutory demand ensued and a petition was filed thereon which was directed to be served on the company. The company then applied for dismissal of the winding-up petition and it was the rejection of the company''s application that resulted in the appeal. The appellate court recorded two principal arguments put forth by the company: that the petitioning creditor was a secured creditor and was not competent to apply for winding up the company unless he satisfied the court that the security was insufficient to cover his debt; and, the claim of the creditor was barred by limitation and not enforceable in law. The argument of the appellate company on the first point was noticed and rejected in the following paragraph at page 560 of the report:
Mr. P.K. Sen appearing on behalf of the appellant submitted before us that an application for winding up by the secured creditor is not maintainable. It is now too late to argue that a secured creditor cannot successfully prosecute an application for winding up, especially in view of sub-section (2) of section 439 of the Companies Act, 1956, a provision which was lacking in the Indian Companies Act of 1913. Apart from the fact that for the purpose of winding up, the term "creditor" includes a secured creditor, there are judicial precedents established in cases decided under the earlier Act where it was held that a secured creditor is fully competent to make such an application. In this connection, reference may be made to the case of Karnatak Vegetable Oils and Refineries Ltd. v. Madras Industrial Investment Corporation Ltd. Reference may also be made to two decisions of learned single judges of our court In the matter of India Electric Works Ltd. and Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat. These were cases decided under the Act of 1956. The precedents as well as the provisions of section 439(2) of the Companies Act, 1956, are against the contention of Mr. Sen and we cannot accept the proposition that the respondent being a secured creditor is not entitled to apply for winding up unless he abandons his security or satisfies the court as to its inadequacy.
It is, thus, evident that the Division Bench considered the submission on behalf of the company in that case: "that an application for winding-up by the secured creditor is not maintainable." There can be no doubt that even on the strength of the provision in the statue without the clarificatory Section 439(2) of the 1956 Act, a petition for winding up a company could be presented by any creditor of the company. The Division Bench in Techno Metal India (P.) Ltd. did not consider the question of the admissibility of a secured creditor''s winding-up petition founded on Section 434(1)(a) of the Act when such secured creditor did not assert or establish the efficacy or inadequacy of its security.
A judgment is an authority for the proposition that is expressly decides and not necessarily for anything that it decides obliquely or is inferred to have decided by implication. Judicial discipline and the doctrine of stare decisis command that the company judge of this court treads cautiously, in the light of the view expressed in Techno Metal India (P.) Ltd., as to whether a secured creditor''s winding-up petition may be admitted by the company court without such creditor demonstrating the inefficacy or inadequacy of its security. Judicial discipline mandates that a previous decision of a superior forum in the hierarchy of our court structure is binding on an inferior forum and cannot be questioned. Even a previous view on an identical legal issue expressed by a bench of coordinate strength is binding unless it is discovered to be per incuriam or no longer good law by reason of either a change in the law or on the basis of a contrary view being expressed on the identical issue by a superior court. The doctrine of stare decisis is the basis of common law and, on the history of the doctrine and its applicability, the majority judges on a Constitution Bench had this to say in the judgment reported a Waman Rao and Ors Vs. Union of India (UOI) and Others,
The doctrine of stare decisis is the basis of common law. It originated in England and was used in the colonies as the basis of their judicial decisions. According to Dias (R.W.M. Dias: Jurisprudence (1976 4 Ed. 166), the genesis of the rule may be sought in factors peculiar to English legal history, amongst which may be singled out the absence of a Code. The Normans forbore to impose an alien code on a half-conquered realm, but sought instead to win as much widespread confidence as possible in their administration of law, by the application of near uniform rules. The older the decision, the greater its authority and the more truly was it accepted as stating the correct law. As the gulf of time widened, says Dias, judges became increasingly reluctant to challenge old decisions. The learned Author cites the example of Bracton and Coke who always preferred older authorities. In fact, Bracton had compiled a notebook of some two thousand cases as material for his treatise and employed some five hundred of them.
The principle of stare decisis is also firmly rooted in American jurisprudence. It is regarded as a rule of policy which promotes predictability, certainty, uniformity and stability. The legal system, it is said, should furnish a clear guide for conduct so that people may plan their affairs with assurance against surprise. It is important to further fair and expeditious adjudication by eliminating the need to relitigate every proposition in every case (Harold J. Grilliot: Introduction to Law and the Legal System (1979 2 Ed. 132). When the weight of the volume of the decisions on a point of general public importance is heavy enough, courts are inclined to abide by the rule of stare decisis, leaving it to the legislature to change longstanding precedents if it so thinks it expedient or necessary. In Burnet v. Coronado Oil and Gas Co. (285 US 393 406) Justice Brandeis stated that "stare decisis is usually the wise policy, because in most matters it is more important that the applicable rule of law be settled than it be settled right.
While dealing with the subject of stare decisis, Shri. H.M. Seervai in his book on CONSTITUTIONAL LAW OF INDIA (2nd Ed., Vol. I, at pp 59 to 61) has pointed out how important it is for judges to conform to a certain measure of discipline so that decisions of old standing are not overruled for the reason merely that another view of the matter could also be taken. The learned Author has cited an Australian case in which it was said that though the court has the power to reconsider its own decisions that should not be done upon a mere suggestion that some or all of the members of the later court may arrive at a different conclusion if the matter were res integra (The Tramways case (No. 1) (1914) 18 CLR 54, per Griffith CJ at page 58). The learned Author then refers to two cases of our Supreme Court in which the importance of adherence to precedents was stressed. Jagannadhadas, J. said in the Bengal Immunity case The Bengal Immunity Company Limited Vs. The State of Bihar and Others, that the finality of the decisions of the Supreme Court, which is the Court of last resort, will be greatly weakened and much mischief done if we treat our own judgments, even though recent, as open to reconsideration. B.P. Sinha, J. said in the same case that if the Supreme Court were to review its own previous decisions simply on the ground that another view was possible, the litigant public may be encouraged to think that it is always worthwhile taking a chance with the highest Court of the land. In Income Tax Officer, Tuticorin Vs. T.S. Devinath Nadar and Others, Hegde, J. said in his dissenting judgment that the Supreme Court should not overrule its decisions except under compelling circumstances. It is only when the court is fully convinced that public interest of a substantial character would be jeopardised by a previous decision, that the court should overrule that decision. Reconsideration of the earlier decisions, according to the learned Judge, should be confined to questions of great public importance. Legal problems should not be treated as mere subjects for mental exercise. An earlier decision may therefore he overruled only if the court comes to the conclusion that it is manifestly wrong, not upon a mere suggestion that if the matter were res integra, the members of the later court may arrive at a different conclusion.
There is, equally, a rule that a precedent sub silentio is not authoritative. The rule recognises that it is only the legal principle "deducible from the application of law to the facts and circumstances of a case which constitutes its ratio decidendi and not some conclusion based upon facts which may appear to be similar" [See The Regional Manager and Another Vs. Pawan Kumar Dubey, , at paragraph 7]. The Supreme Court has referred to Salmond on Jurisprudence (12th Ed) on several occasions to define the principle of sub silentio as enunciated in the following passage:
A decision passes sub silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind. The court may consciously decide in favour of one party because of point A, which it considers and pronounces upon. It may be shown, however, that logically the court should not have decided in favour of the particular party unless it also decided point B in his favour; but point B was not argued or considered by the court. In such circumstances, although point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on point B. Point B is said to pass sub silentio.
In Gerard v. Worth of Paris Ltd. [(1936) 2 All ER 905] the only point argued was on the question of the priority of the claimant''s debt, and, on this argument being heard, the Court of Appeal granted the order. No consideration was given to the question whether a garnishee order could properly be made on an account standing in the name of the liquidator. When, therefore, this very point was argued in a subsequent case before the Court of Appeal, the court held itself not bound by its previous decision. Sir Wilfrid Greene, MR, said that he could not help thinking that the point now raised had been deliberately passed sub silentio by counsel in order that the point of substance might be decided. He went on to say that the point had to be decided by the earlier court before it could make the order which it did; nevertheless, since it was decided ''without argument, without reference to the crucial words of the rule, and without any citation of authority'', it was not binding and would not be followed.
In the Supreme Court judgment reported at Deb Narayan Shyam and Others Vs. State of West Bengal and Others, where the above passage has been quoted at paragraph 18 of the report, the court recognised that the rule that a precedent sub silentio robs the precedent of its binding value dates back to 1661 when counsel urged before Twisden, J: "An hundred precedents sub silentio are not material" and the Judge agreed that "precedents sub silentio and without argument are of no moment." In the oft-quoted judgment reported State of U.P. and Another Vs. Synthetics and Chemicals Ltd. and Another, on the jurisprudence as to binding precedents, the Supreme Court had this to say at paragraphs 40 and 41 of the report.
''Incuria'' literally means ''carelessness''. In practice per incuriam appears to mean per ignoratium. English courts have developed this principle in relaxation of the rule of stare decisis. The ''quotable in law'' is avoided and ignored if it is rendered, ''in ignoratium of a statute or other binding authority''. (Young v. Bristol Aeroplane Co. Ltd.; [(1944) 2 All ER 293]. Same has been accepted, approved and adopted by this Court while interpreting Article 141 of the Constitution which embodies the doctrine of precedents as a matter of law. In Jaisri Sahu Vs. Rajdewan Dubey and Others, this Court while pointing out the procedure to be followed when conflicting decisions are placed before a bench extracted a passage from Halsbury''s Laws of England incorporating one of the exceptions when the decision of an appellate court is not binding.
Does this principle extend and apply to a conclusion of law, which was neither raised nor preceded by any consideration. In other words can such conclusions be considered as declaration of law? Here again the English courts and jurists have carved out an exception to the rule of precedents. It has been explained as rule of sub-silentio. "A decision passes sub-silentio, in the technical sense that has come to be attached to that phrase, when the particular point of law involved in the decision is not perceived by the court or present to its mind." (Salmond on Jurisprudence 12th Edn., p. 153). In Lancaster Motor Company (London) Ltd. v. Bremith Ltd. [(1941) 2 All ER 11] the Court did not feel bound by earlier decision as it was rendered ''without any argument, without reference to the crucial words of the rule and without any citation of the authority''. It was approved by this Court in Municipal Corporation of Delhi Vs. Gurnam Kaur, The bench held that, ''precedents sub-silentio and without argument are of no moment''. The courts thus have taken recourse to this principle for relieving from injustice perpetrated by unjust precedents. A decision which is not express and is not founded on reasons nor it proceeds on consideration of issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. Uniformity and consistency are core of judicial discipline. But that which escapes in the judgment without any occasion is not ratio decidendi. In B. Shama Rao Vs. The Union Territory of Pondicherry, it was observed, ''it is trite to say that a decision is binding not because of its conclusions but in regard to its ratio and the principles, laid down therein''. Any declaration or conclusion arrived without application of mind or preceded without any reason cannot be deemed to be declaration of law or authority of a general nature binding as a precedent. Restraint in dissenting or overruling is for sake of stability and uniformity but rigidity beyond reasonable limits is inimical to the growth of law.
In another judgment reported at Arnit Das Vs. State of Bihar, , the court held that the rule of sub silentio applies when a particular point of law was not consciously determined. Paragraph 20 of the report is of relevance:
A decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. That which has escaped in the judgment is not the ratio decidendi. This is the rule of sub silentio, in the technical sense when a particular point of law was not consciously determined. ...
It is in such context that the authoritative value of the Division Bench judgment in Techno Metal India (P.) Ltd. has to be assessed. There is no doubt that the petitioning creditor''s claim in that case was based on a statutory demand. The Companies Act speaks of a written demand to be made by a creditor only in Section 434(1)(a) thereof. The point was urged that a petition for winding-up by a secured creditor was not maintainable and the court answered the argument by holding that "we cannot accept the proposition that the respondent being a secured creditor is not entitled to apply for winding up unless he abandons his security or satisfies the court as to its inadequacy." The Division Bench referred only to Section 439(2) of the Act to render its conclusion on such legal question, but did not deem it necessary to consider Section 434(1)(a) of the Act to assess whether in the absence of a secured creditor establishing the inefficacy or inadequacy of its securities it could set up the legal fiction of the concerned company''s inability to pay its debts. Such aspect of the matter was not considered in the judgment in Techno Metal India (P.) Ltd. and it was not determined; and the rule of sub silentio would come into play as the legal issue that falls for consideration in the present case was neither noticed nor determined in the Techno Metal India (P.) Ltd. judgment. The same rule will apply to the decision in Calcutta Safe Deposit Co. Ltd. qua the specific legal question in this case as the opinion in that case was based on Section 434(1) of the Act generally and not particularly on clause (a) thereof.
The company here has referred to a judgment reported at M.K. Ranganathan and Another Vs. Government of Madras and Others, where it fell for consideration whether the sale of certain securities enjoyed by a secured creditor could be made without reference to the official liquidator or the company court presiding over the liquidation proceedings. The Supreme Court referred to the English law on the meaning of the phrase "outside the winding up" as it is used with reference to a secured creditor of a company in liquidation. The decision is not relevant in the instant case and even the authoritative value thereof may have been lost upon Section 529A having been inserted in the present Companies Act in 1985.
The petitioner has relied on a decision reported at (1987) ILR Kar. 2673 (Hedge & Golay Limited v. State Bank of India) for the proposition that there is no impediment to a secured creditor prosecuting a petition for winding up the company without either giving up its security or valuing it. Such legal issue was the first of several questions noticed at paragraph 11 of the report. The argument in that case was founded on the general rules as to insolvency and the similar provisions in the two statutes on insolvency in this country (Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920) that obliges a secured creditor to either state in his petition that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent or give an estimate of the value of his security for such secured creditor to be admitted as a petitioning creditor to the extent of the balance of the debt. The rule in insolvency is that if the secured creditor does not relinquish his security, the value of his debt is only so much by which it exceeds the value of his security; as if he were an unsecured creditor for such difference. The court noticed the further argument that the law was the same both in bankruptcy and in winding-up but opined that the rules in insolvency were attracted to winding-up only in the matter of proof of debts after the order of winding-up was made. The court referred to Section 439(2) of the Act; to a passage from Palmer''s Company Law discussing the rights of debenture-holders to petition for the winding-up of the company; to Pennington''s Company Law for the view therein that a secured creditor need not value his security to be entitled to apply for winding-up; to Buckley on Companies Act for a passage therein that no rule from the bankruptcy law is incorporated in the winding-up jurisdiction requiring a secured creditor to value his security; to Halsbury''s Law of England for the same proposition; and, to the Anglo-Italian Bank case [(1879) 10 Ch D 681] for the pronouncement that a secured creditor is entitled as much as an unsecured creditor to obtain an order of winding-up. The first legal issue in that case was answered in paragraphs 12 to 15 of the report and nothing more was said on such score than has been noticed herein. In any event, the tests to be met by a secured creditor in order to establish the legal fiction of the company''s inability to pay its debts solely on Section 434(1)(a) of the Act were not discussed in the judgment.
A Division Bench view of the Bombay High Court reported at 58 Comp Cas 174 (Bharat Overseas Bank Ltd. v. Shree Arcee Steels P. Ltd.) is placed by the petitioner for the recognition therein that a secured creditor''s petition for winding up a company could not be rejected without admission merely because the debt was secured. The discussion in such case also revolved around Section 439(2) of the Act and, upon noticing the previous decisions, inter alia, in Karnatak Vegetable Oils and Calcutta Safe Deposit Co. Ltd., the Bombay High Court said, at page 177 of the report, as follows:
We are of the opinion that bearing in mind the clear provisions of the Companies Act and the principles which have been discussed in detail in the Madras High Court and the Calcutta High Court judgments above-cited, the rejection of the petition in this case at the stage of admission was not at all justified. The petition was required to be admitted and advertised and it is at that stage that the court could go into the question as to whether the security is sufficient or not and exercise its discretion to accept the petitioning-creditor''s claim and request for winding-up or to reject the same on judicial consideration.
The opinion reflected in the first sentence of the passage was based on Section 439(2) of the Act and on the Madras and Calcutta judgments, including the one in India Electric Works Ltd. (supra). The second sentence in the passage from the Bombay judgment quoted above, in all humility, does not appear to be the correct position in law. In the two-tier procedure that is followed in this court and also appears to be in vogue in the Bombay High Court, as to whether a debt is due or not is invariably decided, almost conclusively, at the admission stage of a creditor''s winding-up petition and the finality thereof can only be dislodged in rare cases as noticed in SRC Steel (P) Ltd. and Baljit Securities Ltd. It is also elementary to the two-tier procedure that unless the debt is established and the petition admitted, the other considerations - for example, the wishes of the majority creditors of the company - in the exercise of the discretion to wind up the company do not come into play. If the ascertainment of the indisputable character of the creditor''s claim is not completed at the first stage of a secured creditor''s winding-up petition on the ground of the company''s inability to pay its debts, the petition cannot be admitted. Since the very rationale to adopt the two-stage procedure is primarily to ensure that a company suffers the prejudice of a creditor''s winding-up petition against it being advertised only after the indisputable character of the debt claimed by the petitioning creditor is established and the company is afforded a chance to pay it off, postponing the adjudication as to the quality of the petitioning creditor''s claim to the post-advertisement stage would be anathema to the established practice. It then follows that if the efficacy or the adequacy of the security of a secured creditor has to be assessed before the presumption u/s 434(1)(a) kicks in, such assessment cannot be postponed to the second stage. For, unless it is evident on a creditor''s winding-up petition that the company is unable to pay its debts, the petition cannot progress to the second stage for it to be considered whether the company should be wound up.
In the next decision cited by the petitioner, reported at 106 Comp Cas 52 (Canfin Homes Ltd. v. Lloyds Steel Industries), the question again squarely arose as to whether a secured creditor was entitled to have its petition for winding up the company admitted without reference to its security. The creditor in that case enjoyed an equitable mortgage of an immovable property of the company and the petition was lodged pursuant to a statutory notice. Two of the contentions raised by the company are noticed at page 55 of the report:
(ii) Under the provisions of section 434(1)(a) of the Companies Act, 1956, the company would be deemed to have been unable to pay the debt if within the stipulated period of the receipt of a notice of winding up, it had failed either to pay or to secure the debt due and outstanding to the petitioner. In the present case the petitioner has available to it valuable security in the form of an equitable mortgage of immovable property of the company. Consequently, it cannot be stated that the company has failed to secure the petitioner;
(iii) A secured creditor must, in the first instance, relinquish its security if it wants to be a part of the process of winding up of the company from whom a debt is due and payable. Unless the security is relinquished in the first instance, the petition for winding up cannot be maintained. In any event, the petition does not contain any disclosure of whether the security is or is not sufficient to meet the dues of the petitioner;
Again, the court referred to Section 439(2) of the Act and to several of the judicial precedents on such aspect referred to in the present judgment and, after the considering divers provisions of the statute as Sections 441, 444, 446, 447, 448, 466, 467, 528 and 529 of the Act and referring to the concept of a secured creditor being "outside the winding-up", expressed the following view at page 63 of the report:
In the present case, the petitioner has evinced a clear intention to enforce the security by filing a suit in this court for the recovery of its dues and the enforcement of its securities. There can be no doubt about the proposition that the object of a petition for winding up is to realise the property of the company for distribution to all the creditors in accordance with the applicable rules. This has been laid down by a Division Bench of this court in Harinagar Sugar Mills v. M. W. Pradhan [1967] BLR 294. A secured creditor who seeks to prove the whole of his debt in the course of the winding up proceedings is necessarily required to relinquish the security. That however, cannot be construed to mean that when he files a petition for winding up, a secured creditor must relinquish his security. In the present case, the petitioner has filed a suit in this court and made it clear, therefore, that he seeks to enforce the security. When the stage of proving its of debt does arise, the petitioner would necessarily have to prove for the balance of the debt which is due and owing to it after the security in respect of which the petitioner is a secured creditor is realised.
A judgment of the Madras High Court reported at 70 Comp Cas 295 (Canara Bank v. Official Liquidator) has been placed where a secured creditor applied for leave u/s 446 of the Act to pursue a suit against the company in liquidation. The judgment is inapposite in the context of the legal issue which has arisen in the present case. A Bombay High Court judgment reported at 107 Comp Cas 288 (Manipal Finance Corporation Ltd. v. CRC Carrier Ltd.) has been carried by the company for the absolute manner in which it rejected a secured creditor''s petition for winding-up in the following words which appear at page 294 of the report:
The concept of inability of paying the debt cannot be applied in the case where the creditors are fully secured and they have in fact nothing to do with the alleged inability of the company to pay its debts. A secured creditor can always realise his securities to satisfy his debt. He cannot say that the debtor is unable to pay the debt.
The opinion reflected in one judgment in the midst of a sea of authorities seemingly expressing a contrary view need not be clutched at to sustain the reason behind the legal view articulated in this case unless the reasons in such judgment appeal. After all, it is the reasons in a judgment in support of a proposition that carry a binding or persuasive value. The CRC Carrier Ltd. judgment gives no reason in support of the conclusion in the passage excerpted; and, worse, the unqualified manner of expression in the passage goes against the grain of the statute, particularly since the judgment makes no distinction between the first clause of Section 434(1) of the Act and the two other disparate clauses. The absolute proposition in the quoted passage is contrary to law. It is impossible, in the face of Section 439(2) of the Act, to suggest that a secured creditor cannot say that the company is unable to pay its debts or present a winding-up petition on such score. A secured creditor of a company has the legislative mandate to present a winding-up petition on the several grounds recognised in Section 433 of the Act, including on the basis of the company''s inability to pay its debts. The issue here is whether a secured creditor, which founds its petition only on Section 434(1)(a) of the Act to raise the presumption of the company''s inability to pay its debts, would be able to establish the legal fiction without demonstrating the inefficacy or inadequacy of its security that the expression "neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor" in the relevant provision envisages.
A further Bombay High Court judgment reported at 156 Comp Cas 108 (Cavendish Shipping Limited v. Polaris Marine Management Pvt. Ltd.) has been cited, where Section 439(4)(b) of the Act was in issue on a winding-up petition carried by a person claiming to be a contributory of the company. The petitioner also claimed to be a creditor of the company, but the maintainability of the petition on such basis was questioned on the ground that no notice u/s 434(1)(a) had been served on the company. On such count, the court held that a creditor''s petition was maintainable even without the statutory notice as contemplated in Section 434(1)(a) of the Act.
The final authority that the petitioner has brought is the case of Anglo-Italian Bank, reported at (1879) 10 Ch. D. 681. That judgment was on a motion for a declaration in a suit by some debenture-holders of the company which had been wound up against another creditor of the company in liquidation. The court examined the Judicature Act, 1875 and held that the rules in insolvency were to apply to companies which had been wound up in the event the value of the assets of the company was insufficient to meet the claims of its creditors; but such rule applied only to cases of winding-up on the ground of insolvency. It is beyond question that most rules of insolvency apply in the assessment of the entitlement of the creditors of a company in liquidation. But that is of no relevance in the present case. The company has not been wound up; indeed, we are two steps removed from such a situation since the present assessment is as to whether this petition made by a secured creditor, relying exclusively on Section 434(1)(a) of the Act for the court to presume the inability of the company to pay its debts, should be admitted for being advertised in the absence of the petitioning creditor having asserted or established the inefficacy or the inadequacy of the securities that it enjoys.
Since the Anglo-Italian Bank case involved a claim by some debenture-holders of the company and since the rights of a secured creditor in several Indian judgments have been decided by referring to English decisions involving debenture-holders'' claims, it may be mentioned here that the claims of debenture-holders as secured creditors of a company have to be seen on a different footing, though the issue may not be of immediate significance in the present case. Traditionally, debenture-holders enjoyed a charge on all assets of the concerned company. In time, the extent of the security enjoyed by debenture-holders has been modified and refined and debenture-holders in the modern times enjoy such security as their debenture bonds specify. In the older cases of winding-up petitions made by debenture-holders, such creditors were not called upon to exhaust their remedies against their security as that would have amounted to all the assets of the company being sold, which is exactly what would happen if the company were to be wound up.
The company has referred to an old English judgment reported at 1881 WN 125 (In re: Cambrian Mining Company). A shareholder, who was also a creditor of the company where the debt was secured by mortgage, gave notice of his intention to exercise the power of sale contained in the mortgage deed and also presented a petition for winding up the company. The company moved for an injunction to restrain the creditor from exercising his power of sale until the hearing of the petition for winding-up. An interim injunction was granted, holding that it was inconvenient and unjust that the creditor should be allowed to exercise the power of sale till his petition for winding-up came on for hearing. When the winding-up petition was taken up, it was ordered to stand over sine die, upon the company admitting the mortgage and certain shareholders of the company undertaking to pay off the creditor and take a transfer of his mortgage. Though the decision does not expressly lay down any legal principle, the company here suggests that the course of action adopted by the court reveals that it endorsed the view that the remedy against the security should first be exhausted before a secured creditor is allowed to pursue a creditor''s winding-up petition.
A widely-followed judgment of this court reported at Bukhtiarpur Bihar Light Railway Co. Ltd. Vs. Union of India (UOI) and Another, has been placed by the company for the recognition therein of the inescapable necessity to ensure the strict compliance with all the conditions of a deeming provision, if the legal fiction thereunder is sought to be established. In that case, the statutory notice was addressed by the creditor to an office of the company other than its registered office. Despite the company not urging such ground, it was the court which found that the legal fiction would not be available to the creditor, as is evident from paragraph 13 of the report:
(13) It appears to us, however, that although the learned counsel for the appellant did not himself lay much stress on his first point, it is yet a point which must succeed. According to the petition for winding up itself, the registered office of the Railway Company is situated at No. 135, Canning Street, Calcutta. That being so, if a notice of demand was to operate as a valid statutory notice under S. 163(1)(i) of the Indian Companies Act, it would have to be delivered to the Company at its registered office. The letter of June 6, however, was addressed to "Fraser Road, Patna" which was not the appellant Company''s registered office. That fact is sufficient to prevent the Union of India from relying upon the notice of 6-6-1950, for the purposes of S. 163(1)(i) of the Act.
There was indeed a second notice as well which was delivered at the registered office of the appellant company, but that notice was sent only on 30-6-1950, and therefore it could not serve as a statutory notice of demand, seeing that the petition for winding up was made on July 18. The interval between the service of the notice of demand and the making of the petition for winding up was less than three weeks. I ought to state here that on behalf of the Union of India, Mr. Kar admitted that there was no statutory notice of demand in the case on which his client could rely and he also informed us that the court of appeal had already so held in connection with the application for a stay of the order which is under appeal before us now.
The judgment in Bukhtiarpur Bihar Light Railway Co. Ltd. instructs that the court must be strict in assessing whether all the conditions laid down in Section 163(1)(i) of the Indian Companies Act, 1913 (Section 434(1)(a) of the Companies Act, 1956 carries the same provision in the successor statute) have all been complied with before the inference of the inability of the company to pay its debts based on the legal fiction therein is drawn. The judgment is the specific recognition, in the context of the identical provision in the predecessor statute as Section 434(1)(a) of the current Act, of the general principle that a deeming provision must be strictly construed and all conditions therein must have been adhered to before the legal fiction thereunder can be seen to operate. The judgment is of immense relevance in the present discussion.
A judgment reported of C. Hariprasad Vs. Amalgamated Commercial Traders Private Ltd., has been placed for the proposition that even a commercially solvent company may be wound up if the legal fiction u/s 434 of the Act arises. Such decision is of no real relevance in the present case, except to contrast it against the dictum in Bukhtiarpur Bihar Light Railway Co. Ltd. to see the rule as to a deeming provision and its corollary. Just as it is imperative that the fulfillment of all conditions in a deeming provision must be ensured for such provision to be made applicable to a particular case, once a deeming provision becomes applicable the legal fiction therein operates even if in reality such situation may not be there. For example, if a solvent company overlooks or disregards a statutory notice of demand in respect of an indisputable debt and the creditor brings a petition for winding-up such company, it would not do then for the company to demonstrate its commercial solvency to resist the admission of the creditor''s petition unless the debt of the creditor is shown to be disputed. It is, thus, possible for a profitable, commercially solvent company to be regarded as being unable to pay its debts for its failure to make payment despite receipt of a statutory notice of a debt that is indisputably due. And, the hearing at the admission stage of a creditor''s winding-up petition in the two-tier procedure is almost exclusively for assessing whether the company is actually unable to pay its debts or is deemed to be unable to pay its debts; the consideration in the post-advertisement stage is as to whether, despite the company being actually unable to pay its debts or the company being deemed to be unable to pay its debts, it should be wound up or not.
There is no authority that the parties here have cited that has specifically dealt with the legal question raised here, limited as it is to Section 434(1)(a) of the Act as to whether a secured creditor which petitions for winding up a company for the company''s inability to pay its debts is entitled as of right to have the petition admitted, when it is founded only on the legal fiction in Section 434(1)(a) of the Act, without such creditor establishing the inefficacy or the inadequacy of its security. There is a common misunderstanding that a creditor has to claim a debt in excess of Rs. 500 to carry a petition based on such debt for winding up the company. There is no such requirement in law. Theoretically, any creditor''s petition for winding up a company on its inability to pay its debts is maintainable for any quantum of claim. The right of all creditors of a company to present a petition for winding up the company is only subject to the previous leave of court being obtained by certain creditors in certain cases as mandated in Section 439(8) of the Act. Any creditor of a company permitted by Section 439 of the Act to present a petition can come under any limb of Section 433 of the Act except under the second clause. Any creditor of a company may apply for winding up the company for the company''s inability to pay its debts without taking recourse to Section 434 of the Act. It is not mandatory for the inability of the company to pay its debts to be demonstrated only by dint of the legal fiction in Section 434 of the Act. It is also not obligatory for any creditor of a company seeking to have the company wound up to give prior notice of its claim to the company. A judgment-creditor of a company need not issue any prior notice and be none the worse for it as its status as an unpaid judgment-creditor, if established, would be enough for the legal fiction of the company''s inability to pay its debts to arise; since clause (b) of Section 434(1) of the Act is a stand-alone condition for the statutory presumption. Similarly, any creditor of a company can prove to the satisfaction of the court that the company is unable to pay its debts, irrespective of whether such creditor enjoys any security and regardless of the quantum of the debt of such creditor; provided the satisfaction of the court is established in the manner prescribed in clause (c) of Section 434(1) of the Act, which is also a stand-alone provision for the statutory presumption.
But if a creditor were to invoke the statutory presumption based only on Section 434(1)(a) of the Act, all the conditions therein have to be met before the inference of the company''s inability to pay its debts may be drawn thereunder. That is the cardinal principle of interpreting and applying a deeming provision; and requires no judicial authority to be cited in its support. The judgment in Bukhtiarpur Bihar Light Railway Co. Ltd. is the direct authority in the context of the deeming provision that is Section 434(1)(a) of the Act based on the identical words of the provision of similar import in the predecessor enactment. One of the conditions expressly recognised in the provision in the expression (truncated for the immediate context) "neglected to ... secure ... it to the reasonable satisfaction of the creditor" is the indisputable quality of the claim to be established. The entirety of the expression "neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor" governs all three situations: the company paying or not paying all or any part of the money claimed; the company securing, whether before or after the receipt of the written demand, all or a part of the money claimed; and, the company compounding for the claim. In a situation where the creditor enjoys security, whether furnished by the company before or after the receipt of the creditor''s written demand, the negligence of the company to pay the debt, or to secure or to compound for it to the reasonable satisfaction of the creditor, has to be tested by referring to the quantum of the debt, the efficacy of the security and the value of the security. The negligence of the company, within the meaning of the relevant word in the expression, would not be established in the case of a claim of a secured creditor without reference to the efficacy or the adequacy of the security, or the lack of it. It is the negligence of the company, as envisaged in the provision, which is the paramount consideration before the company court is impelled to infer the inability of the company to pay its debts. The relevant assessment cannot be made if the inefficacy or inadequacy of the security is not asserted. Even if such assertion is made, unless either the inefficacy or the inadequacy of the security is established, the inability of the company to pay its debts would not have been made out. If the security is found to be efficacious but the inadequacy of the security qua the indisputable quantum of the debt is established, the company court, while admitting the petition, will only require the company to adequately secure the same or pay off the shortfall for the advertisement of the petition to be warded off by the company. Just as only an indisputable debt even in the case of an unsecured creditor would give rise to the statutory presumption of its inability to pay its debts upon the company''s negligence to discharge the indisputable debt, in the case of a secured creditor whose claim is not met by the company despite receipt of the statutory notice, the negligence on the company''s part for the legal fiction of its inability to pay its debts would not arise if the security if efficacious and it is adequate. The nature of the assessment that the company court is obliged to undertake upon a secured creditor invoking the legal fiction of the company''s inability to pay its debts u/s 434(1)(a) of the Act is guided by the expression "neglected to ... secure ... it to the reasonable satisfaction of the creditor" in the relevant provision. Such exercise by the court will necessarily involve a reference to the efficacy and the adequacy of the security, whether such security has been furnished by the company before or after the receipt of the written demand from the secured creditor. In any event, even a doubt in either case would deter the company court for presuming the company''s inability to pay its debts as the benefit of doubt in such a situation is to the benefit of the company.
The judgments in Techno India Metal (P.) Ltd. and Calcutta Safe Deposit Co. Ltd. - the only two judicial precedents of binding value on the company judge in this court on the relevant aspect that the parties have brought among the several other authorities of only persuasive significance - passed sub silentio on the specific legal issue that has arisen and has been considered herein; and, as such, do not preclude a seemingly contrary view being expressed. More importantly, neither Techno India Metal (P.) Ltd. nor Calcutta Safe Deposit Co. Ltd. noticed the judgment in Bukhtiarpur Bihar Light Railway Co. Ltd. or, at the very least, the authoritative instruction therein on the prerequisites for the applicability of the identical deeming provision as in this case; and the decisions in Techno India Metal (P.) Ltd. and Calcutta Safe Deposit Co. Ltd., for such reason, cannot be viewed as good law even if such judgments were to be regarded - though they cannot be - as having, by necessary implication, answered the legal issue otherwise than is done here.
Finally, it is axiomatic that a right conferred by statute may be truncated in the manner of its exercise by the statute itself or the absoluteness of the statutory right may be subject to statutory conditions in some situations. Since the reference to secured creditors in Section 439(2) of the Act is only clarificatory as nothing in Section 439(1)(b) thereof otherwise detracts from the right of a secured creditor of a company from presenting a petition to wind up the company, it may be of significance that the right of any creditor of a company - secured or unsecured - to present a petition to wind up the company is curbed only by the expression "subject to the provisions of this section" in the opening words of Section 439(1) of the Act. By virtue of Section 439(7) of the Act, inter alia, no creditor of a company may present a petition for winding up the company only by dint of its status as a creditor. Section 439(8) of the Act qualifies the right of a contingent or prospective creditor of a company to present a petition to wind up the company. Thus, any class of persons enumerated in Section 439(1) of the Act may invoke any ground of Section 433 of the Act to present a petition to wind up a company, provided Section 439 of the Act does not prevent it or does not make in subject to any condition precedent. So much as to the maintainability of a petition for winding up a company; but that has nothing to do with the admissibility of a winding-up petition that is eminently maintainable, particularly when admission connotes the successful journey of the petition upon the conclusion of a judicial exercise that attaches a degree of finality to several of the features considered. Section 439 of the Act governs who may petition for winding up a company under what limb of Section 433 of the Act. Section 439 of the Act throws no light on the manner, mode or extent of the compliance with the preconditions of the deeming provision in Section 434 of the Act before the legal fiction thereunder can be seen to operate. Indeed, Section 434 of the Act is not integral to the scheme of winding up a company by the court and is merely a non-exclusive route for establishing only one of the many grounds available u/s 433 of the Act. It is only in practice that Section 434 is magnified in its relevance because creditors'' petitions are the most common petitions for winding up companies and most creditors prefer the short-cut of the legal fiction to establish the concerned company''s inability to pay its debts. Again, of the three possible limbs of Section 434(1) of the Act, it is clause (a) thereof that is taken recourse to most often. Section 439 of the Act has no impact on the quality of the proof of compliance which the mandatory fields of Section 434(1)(a) command before the legal fiction thereunder operates. Apart from meeting the other preconditions built in to Section 434(1)(a) of the Act, even an unsecured creditor of a company has to demonstrate the unimpeachable quality of its claim in its written demand or a part of such claim in excess of Rs. 500/- for the negligence of the company to be established as the final prerequisite before the legal fiction - the presumption of the company''s inability to pay its debts - is cemented. It is the same burden that rests on a secured creditor: the burden in evidence of demonstrating the company''s negligence to pay or secure or compound for the claim to the reasonable satisfaction of the creditor. In the absence of a secured creditor establishing the inefficacy or the inadequacy of the security held by it, such creditor cannot demonstrate any negligence on the part of the company which is relevant for the purpose of the provision; and, consequently, no inference may be drawn of the company''s inability to pay its debts and the legal fiction does not kick in.
It is, thus, the inevitable conclusion from the discussion herein that a secured creditor of a company which has not established the inefficacy or the inadequacy of the security held by it may maintain a petition for winding up the company but such petition, if founded solely on the legal fiction u/s 434(1)(a) of the Act, will not qualify either to be admitted or for any order of winding-up to be passed thereon.
Since the petitioning creditor here has neither averred nor otherwise established that the security that it enjoys is inefficacious or inadequate to meet its claim against the company, the petition cannot be admitted. In any event, even if the petitioning creditor had crossed that hurdle and had established that a debt was due which was unmatched by any efficacious security, its conduct in advertising the statutory notice prior to instituting this petition is a good ground for exercising the limited discretion available to the company court to refuse to admit a creditor''s petition even if the debt were unimpeachably established.
CP No. 493 of 2011 is permanently stayed with liberty to the petitioner to launch fresh winding-up proceedings upon exhausting its remedies against the securities that it enjoys. As a consequence, CA No. 856 of 2011, which is an application u/s 450 of the Companies Act, is dismissed. The interim order subsisting on such application is vacated with immediate effect and the official liquidator is discharged as the provisional liquidator of the company. There will no order as to costs in either case.
This matter was heard analogously with another creditor''s winding-up petition (Maheshwary Ispat Ltd. and Tata Capital Financial Services Ltd.). The judgment in the other matter, which is being delivered immediately after this judgment, may be seen for the discussion on Section 434 of the Act in general and on clause (c) sub-section (1) thereof in particular. Urgent certified photocopies of this judgment, if applied for, be supplied to the parties subject to compliance with all requisite formalities.