In Re: Thakur Paper Mills Ltd.; In Re: Kailash Chand Jain

N.L. Untwalia, J.—This is a petition u/s 433 of the Companies Act, 1956 (Act 1 of 1956) hereinafter called the Act by a person claiming to be a creditor of the Company named Thakur Paper Mills Ltd. having its registered office at Samastipur in the district of Darbhanga for winding up the Company on the ground that it is unable to pay its debts.

The petition for winding up was first presented in this Court on the 13th of April, 1966 showing in the cause title "Kai-lash Chand Jain, partner of M/s. Kailash Chand Jain & Co. Unnao". as the petitioner. An employee of the petitioner had sworn the affidavit in support of this petition. There were several defects pointed out in this petition by the office. It was, therefore, directed to be returned by U.N. Sinha. J., the learned Judge who was then in charge of the Company Cases to be refiled after removing the defects. The petition was re-filed on 2-8-66. An affidavit of Kailash Chand Jain, however, was filed on 12-9-66 wherein the contents of the petition, as previously filed, were verbatim repeated. This petition supported by the affidavit of Kailash Chand Jain was directed to be treated as a part of the original petition bv order No. 7 dated 4-11-66

According to the petitioner''s case as made out in the petition for winding up, the Company was incorporated with the object of dealing in. and manufacturing, all kinds of finished papers besides other objects. In paragraph 6 of the petition it was stated that the Company was indebted to the petitioner to the tune of Rs. 20,000 besides interest amounting to Rs. 3,000 at the rate of 6 per cent, per annum. The amount was deposited by the petitioner with the Company as security for being appointed as the distributor of the Company, meaning thereby as distributor for distribution and sale of the Company''s products. It was further stated that "the Company stopped the manufacture of papers and as such the petitioner had to close his business of distributorship". Out of the total amount of Rs. 23,000 due, a sum of Rs. 2,500 was adjusted towards the price of paper and a sum of Rs. 20.500 was due to the petitioner from the Company.

In the 7th paragraph, it was stated that the petitioner applied to the Company for the payment of his debt by his notice of demand dated 1-4-64 served on the Company at its registered office on 3-4-64 by registered post. But the Company failed and neglected to pay the debt or any portion thereof. It had sent letters promising to refund the amount within a short time but nothing was paid. The petitioner then sent a notice of demand through his lawyer per registered post on 4-1-66, to which a reply dated 7-1-66 was received by the petitioner, intimating to him that the money would be refunded very soon but up till the presentation of the petition nothing was paid. Hence, according to the petitioner, the Company was unable to pay its debts within the meaning of Section 434 of the Act and was liable to be wound up.

It may be stated at this very stage that in the 6th paragraph of the petition it was not stated as to when the amount of security had been deposited, when the Company had stopped manufacture of papers and when the distributorship business was closed by the petitioner, nor was it stated as to when the sum of Rs. 2,500 had been adjusted and since when the balance of Rs. 20.500 was due. None of the letters or notice spoken of in paragraph 7 of the petition was annexed to it, either in original or by furnishing copy thereof.

U.N. Sinha, J., admitted the petition on 18-11-66 and directed issuance of notices and advertisement in accordance with the Companies (Court) Rules, 1959 hereinafter called the Rules. In pursuance of the notice served on the Company, it appeared and filed its affidavit in opposition on the 17th of August, 1967. It admitted in its affidavit which was sworn by one of its directors that an agreement dated 22-2-63 had been entered into between the Company and the firm Kailash Chand Jain and Co. By the said agreement, the Company appointed the said firm as distributor for certain areas in the State of Uttar Pradesh for a period of three years commencing from 26-2-63. The claim of the petitioner that the Company was indebted to the tune of Rs. 20,500 was refuted. Further facts were stated to say that the firm, by its letter dated 11-12-63, purported to terminate the agreement and demanded the refund of Rs. 20,000 with interest, but the termination was not in accordance with the terms of the agreement.

Even after the demand dated 1-4-64 referred to in paragraph 7 of the petition, the firm continued the distributorship agreement and placed fresh orders for supply of paper. At that point of time it was agreed between the firm and the Company that the security deposit of Rs. 20,000 would be repaid by the Company to the said firm by adjusting 25 per cent of the price of paper payable by the latter to the former in respect of paper supplied. It was in pursuance of this fresh agreement and understanding between the parties that the sum of Rs. 2,500 was adjusted leaving the balance of Rs. 17,500 as security deposit with the Company, Thereafter it was asserted in the counter-affidavit that the firm was guilty of various laches, breaches and violation of the terms of the agreement and was liable to pay Rs. 36,041 which was due from the firm to the Company and after adjusting the sum of Rs. 17,500, the amount of security deposit, a sum of Rs. 18,541 was due from the firm to the Company.

The Company also asserted that an arbitration agreement is contained in Clause 17 of the agreement dated 22-2-63, under which the disputes between the parties could be decided and had to be decided by arbitration. The Company had been advised to file an arbitration suit u/s 20 of the Arbitration Act, 1940 for referring all these disputes between the parties to arbitration. I may state at this stage that title suit No. 64 of 1967 has been filed in the court of the Subordinate Judge at Samastipur by the Company and the petitioner has filed an application for transferring the title suit to this Court for hearing.

The petitioner filed his affidavit in reply on 7-9-67 to the affidavit in opposition filed by the Company on 17-8-67. after serving a copy of it on the learned advocate of the Company on that very date. In this affidavit in reply the disputes raised by the Company were refuted. It was asserted that the Company is not entitled to any amount from the firm or the petitioner and facts with reference to the said claim were denied. Copies of certain letters which had passed between the parties during the relevant time, for the first time, were annexed to this affidavit in reply as Annexures A to G. I shall have occasion to refer to some of these letters later on in my judgment.

On the 13th of September, 1967 a supplementary affidavit in opposition was filed by the Company In this supplementary affidavit a point was taken that the petitioner Kailash Chand Jain had no right to present the petition as he was not the creditor of the Company, in any view of the matter, the transaction had taken place between a partnership firm styled as Kailash Chand Jain and Co. and the petitioner had no right to present the petition. Some other technical points or defects in the winding up petition and the notice u/s 434 of the Act were also pleaded in this supplementary affidavit. It may. however be stated here that no further reply was given by the Company to the affidavit in reply filed by the petitioner on the 7th of September. 1967.

The petitioner filed his further affidavit in reply on 19-10-67 to the Company''s supplementary affidavit in opposition filed on 13-9-67, asserting that the petition for winding up had been properlv presented by the proper person.

The Registrar of Companies, Bihar, filed an affidavit on the 4th of January 1967 supporting the petition for winding up on various other grounds stated in that petition.

On the 24th of April, 1967 a registered partnership firm known as Sobha Ram Jokhi Ram of Sahibganj in the district of Santal Parganas filed a petition not only in support of the petitioner''s application for winding up but also giving details of the dues which this firm was claiming against the Company.

The Company has filed counter-affidavit to the affidavit and petition filed by the Registrar of Companies and the firm Sobha Ram Jokhi Ram on 23rd August, 1967 and 13th September, 1967 respectively. The said firm has filed affidavit in reply on 29th September, 1967.

Learned counsel for the Company which has vehemently opposed this application submitted the following points-

(i) That the petitioner in this case is Kailash Chand Jain who is not a creditor of the Company and has no locus standi to file this petition.

(ii) That the petition does not disclose any ground for winding up and is not in form as prescribed by the Rules.

(iii) That on the facts and in the circumstances of this case, the winding up petition is an abuse of the process of Court because it is with the motive to get rid of thp solemn arbitration agreement contained in the distributorship agreement dated 22-2-63 and that the debt being seriously disputed by the Company, the winding up petition is not a legitimate means of seeking to enforce payment of the disputed debt.

(iv) That the supporting affidavits filed by the Registrar or the other partnership firm cannot be looked into to support the case of the petitioner.

Before I proceed to deal with the points urged before me. I may state one fact here that the Company at the earliest opportunity, put in a petition u/s 34 of the Arbitration Act. 1940 to stay the hearing of the case for winding up on the ground of the arbitration agreement contained in Clause 17 referred to above. On this petition I made the order on 17-7-67 that the said arbitration agreement could not possibly cover the question as to whether the Company should be ordered to be wound up in accordance with the provisions of law contained in the Act. and this question could not be referred to arbitration. The arbitration clause may cover, if at all it can, the dispute between the parties to the agreement and relating to it as also the question as to whether any debt is due to the petitioner or the dealer from the Company But since that question had to be examined while considering on merits the winding up petition filed by the petitioner, divorced from them no order u/s 34 of thp Arbitration Act was possible to be made in this case Therefore, I directed the petition to be heard along with the main petition for winding up. and at the end I shall dispose of this petition also by mv judgment which is being delivered today.

I shall discuss and express my views on all the questions urged before me with reference to the arguments submitted on behalf of the petitioner, the Registrar of Companies and the other partnership firm, although, in my opinion, the first point urged on behall of the Company has sot to succeed and this petition has got to fail on that around alone. I shall deal with this point first and then I shall take up points (ii) and (iii) together.

It is clear from the petition that the petitioner is Kailash Chand Jain, a partner in the partnership firm Kailash Chand Jain and Co. Neither the firm is the petitioner nor are all the partners of the firm petitioners for the winding up of the Company. This is further clear, as I have indicated above, from the affidavit sworn by the petitioner in support of the petition, wherein he says-

"I am the petitioner (creditor) in this case."

In various paragraphs of the affidavit filed by the petitioner subsequently, he has clearly drawn a distinction between himself and his firm. He has treated himself as the petitioner in this winding up proceeding He purports, as stated by him in his affidavit filed on 19-10-67 in reply to have a right to file this petition for winding up. He has stated in this affidavit that the petition for winding up has been filed by the firm Kailash Chand Jain and Co. through its partner Kailash Chand Jain

But in the same affidavit he further states that Kailash Chand Jain is Managing Partner of the firm and he alone is entitled to transact the business and to do everything on behalf of the firm "and as such he alone has filed the petition for winding up, legally representing all the partners". In my opinion, the error committed by the petitioner, although technical, is fatal. Merely because he is a Managing Partner of the partnership firm. he alone cannot file the petition either on behalf of the firm or on behalf of all the partners. Rule 6 of the Rules provides that the provisions of the Code of Civil Procedure, so far as applicable, shall apply to all proceedings under the Act and the Rules Under Order 30 of the Code of Civil Procedure, a procedure has been prescribed as to how suits by or against firms and persons carrying on business in names other than their own have got to be filed.

The only procedure prescribed is that the suit may be filed either in the name of the firm or by all the partners. It is a well known concept of the partnership law that a debt which is said to be due to the partnership firm is not due to any individual partner. The debt due is an asset of the partnership and no individual partner is entitled to any share in it on the strength of his share in the partnership or its profits. The asset of the partnership when dissolved, has got to be realised and distributed amongst the partners or persons entitled to it in accordance with the law engrafted in the Partnership Act. It is undisputed in this case that the agreement of distributorship was between the Company and the partnership firm Kailash Chand Jain and Co. Whatever money was deposited by the firm by way of security was out of the funds cf the partnership. It was the partnership which was entitled to claim the refund of the security deposit.

If the Company is liable to pay the debt in question, it is liable to pay to the partnership: that means either to the firm or to all the partners acting jointly. As I have said above, the mere fact that Kailash Chand Jain happens to be the Managing Partner of the partnership firm gives him no better right and does not entitle him to institute the proceeding in his own name. Being authorised by the other partners, he could have very well filed the petition on their behalf but that could be done only if either all the partners were shown as petitioners or the firm was shown as petitioner. I may add that if the firm would have been the petitioner in this case, even an express authority by the other partners was not necessary. It was competent for one of the partners to sign the petition and the vakalatnama on behalf of the firm. But the position which emerges in this case is that Kailash Chand Jain thinks himself under a wrong advice. being a Managing partner of the partnership firm, entitled to present this petition alone. This is a misconception in law and the petition has got to fail on this ground alone.

Apart from the technicality of the form, under Rule 95 the petition for winding up by a creditor has to be in form No. 46 which provides under clause 6 that while stating that the "company is indphted to the petitioner in the sum of Rs " the petitioner has to state "consideration for the debt, with particulars, showing that the debt claimed is due" In substance also, in a winding up petition facts must be clearly stated at the outset. As I have pointed out above, fact? were too vaguely stated and particulars were not given as to when the security money was deposited, when there was a partial adjustment, since when the money was due and when the demand was made for the first time before the demand dated 1-4-64 Not only that, copy of no letter which passed between the firm and the Company was annexed as annexure to the winding up petition.

Even the statutory notice which had to be given u/s 434 of the Act was not appended as an annexure. The Court, on such a petition, will feel difficulty to find as to whether a proper statutory notice was given whether the debt is due to the petitioner from the Company and whether the Company is unable to pay its debts. But since further facts have come in the affidavit in opposition filed by the Company and the further affidavits filed by the petitioner I would not have felt inclined to dismiss the petition of the petitioner only on this ground. With reference to those facts, now I shall briefly indicate my views as to whether the present petition filed by the petitioner, if at all he would have been held entitled to file this petition, could be stigmatized as an abuse of the process of the Court, as argued on behalf of the Company.

The distributorship agreement dated 22-2-63 is annexure I to the affidavit in opposition. Various clauses and specially Clauses 3, 7 and 16 were referred to in support of the Company''s claim that the firm was liable to compensate the Company to the tune of Rs. 36,000 and odd in accordance with the said clauses and if anything remained due after the satisfaction of the Company''s claim then and then only it could be said that any sum was due to the firm on account of the security deposit made by it. It is not necessary for me to go into the details of the disputes now raised by the Company for the first time in its affidavit in opposition and which do not seem to have been raised at any stage prior to that when there was correspondence between the parties going on in regard to the matter of refund of security deposit.

Chronologically, the first letter which is on record is the letter of the firm to the Company dated 27-11-63 Annexure A to the affidavit in reply of the petitioner filed on 7-9-67. This letter merely indicates that there was some complaint on behalf of the petitioner''s firm about the quality of the paper supplied. It is not quite relevant for the point at issue. The Company''s reply to it is annexure B and is dated the 7th December, 1963 (Wrongly mentioned as ''1964'' in the copy of the letter enclosed, as was verified by me from the original at the time of the hearing of this case). After reluting the allegations of the firm, the Company intimated -

"In case, you feel that you are unable to push our products, we would suggest that you are at liberty to terminate the agreement, which we will gladly accept without prejudice and refund back your security if so desired."

It would appear from paragraph 5(c) of the affidavit in opposition filed by the Company on 17-8-67 that the firm at one time, by letter dated 11-12-63, purported to terminate the distributorship agreement but the termination was not in accordance with law This letter is not on the record. Thereafter, there is reference to letter dated 1-4-64 by the petitioner in paragraph 7 of his petition, as already stated, stating that it was a letter of demand for refund of the security money. This letter also has not been filed by any party. But it appears from letter dated 21-12-64, a copy of which is annexure II to the affidavit in opposition of the Company, that the stand of the Company in this regard is correct that even after the letter dated 1-4-64 was given by the firm, transaction and business dealings went on between the parties.

By this letter, the firm made certain enquiries from the Company about certain qualities of papers and then stated further that the other manufacturers were giving commission of 15 per cent. I, therefore, get that till December, 1964 the claim for refund of the security money, even if it had been made earlier, was not pressed. Then comes the reference to letter written by the firm to the Company sometime in January, 1965. At one place the date of this letter men-tinned is ''12'' and at another place it is ''18''. The letter is not on the record. But this fact is stated in paragraph 5(a) of the affidavit in opposition of the Company. There is a reference to the writing of such a letter on 12-1-65 in the letter written by the firm''s lawyer on 4-1-66, a copy of which is annexure III to the affidavit in opposition filed by the Company and annexure C to the affidavit in reply filed on behalf of the petitioner.

Further in paragraph 3 of this letter dated 4-1-66, it is stated that the Company had written a letter on 11th February, 1965 informing the firm that the letter dated 12-1-65 would be replied to on return of the Director In-charge. Then in paragraph 4 of that letter it is stated that the firm sent another letter dated 6th of March, 1965 in which it again demanded money but no reply was sent to it by the Company. The receipt of this letter dated 6-3-65 is admitted in the affidavit in opposition filed by the Company, and a copy of the said letter is annexure IV to the affidavit in opposition. On the basis of this letter, the argument on behalf of the Company was that the firm threatened to start liquidation proceeding against the Company if the amount of the security money dup as demanded by it in its letter dated 12-1-65 was not returned by the 16th April, 1965.

In other words, the argument was that this proceeding for winding up of the Company has been initiated by the petitioner not for a winding up order but really to exercise pressure on the Company to pay the alleged debt of the firm. I do not propose to express any opinion in this regard as what I am emphasising at this stage is that in spite of the receipt of the letter dated 6-3-65, there is no statement on behalf of the Company nor any letter has been filed to show that the Company stated that it was not liable to refund the security money because of the disputes which have now been raised in its affidavit in opposition.

I have made reference to letter dated 4-1-66 already. The copy of the reply of the Company dated 7-1-66 is annexure D to the affidavit in reply of the petitioner although, as I have stated above, this copy was not filed earlier with the petition. I would not have attached any importance to the contents of the letter because it was filed late but for the fact that in the petition, with reference to the contents of this letter, it was stated that the Company, intimated that the money would be refunded very soon a fact which has not been denied by the Company in its affidavit, in opposition. I may, therefore, refer to the contents of the letter, a copy of which is annexure D. The Company wrote to the lawyer who had sent notice dated 4-1-66 on behalf of the firm:

"We are making arrangements for the return of security amount to all our distributors at an early date. Our Managing Agents are also very keen on the returning of security deposit. We hope you will certainly wait for at least for some more time without taking the course of legal proceedings."

It is to be noticed, therefore, that even in this reply dated 7-1-66 no claim was made on behalf of the Company as it has been done in the affidavit in opposition. In the affidavit in opposition it is stated further that a fresh demand letter dated 17-2-66 was sent by registered post, which was received by the Company from another advocate of the firm, demanding payment of Rs. 17,000 with interest at 5 per cent, per annum. Thereafter it is merely stated that the demand in that letter was not in accordance with law and was untenable It is not claimed on behalf of the Company that any reply was given by it even to this letter or any claim was made by the Company against the firm, as has been done in the affidavit in opposition to the tune of Rs. 36,000 and odd or any portion thereof.

A copy of this letter dated 17-2-66 is annexure G to the affidavit in reply filed on behalf of the petitioner on 7-9-67 I shall refrain from referring to two other letters dated 17-1-66 and 1-2-66. copies of which are respectively annexures E and F to the affidavit in reply first being on behalf of the firm and the second being on behalf of the Companv because it is not necessary to do so, for, reference to these letters is not to be found in the statement made by the Company in its affidavit in opposition and, specially, when I have referred to letter dated 17-2-66 in regard to which statement is made in the affidavit in opposition. From the materials placed before me in this case therefore, I have come to the conclusion that the dispute raised by the Company as to the amount due from it to the partnership firm on the around of the allegedly counter claim bv the Company against the firm is clearly belated and does not seem to be bona fide

I do not propose to dilate on this question any further as it is not necessary to do so. I may, however indicate that if the dispute raised by the Company being not bona fide, would not have stood in the way of the success of the application for winding up, the arbitration clause contained in the distributorship agreement would have met the same fate. If the dispute is not bona fide, there was nothing for the arbitrator to arbitrate, and that clause by itself, as I have expressed the view in my order dated 17-7-67, would not have attracted any bar to the maintainability of this application because then there would have been nothing left for the arbitrator to arbitrate or the winding up proceeding could not be referred to arbitration.

Learned counsel for the Company stressed the argument that there was no clear admission of liability by the Company to pay the debt to the partnership firm, and that being so, the dispute was there although the details of the dispute were not there. I am unable to follow this argument. In my opinion, the liability of the Company to refund the balance of the security money was not disputed on any ground whatsoever at any stage of the correspondence, as is evident from the letters placed before me. It was not a case of lack of details in support of the dispute But I am inclined to think that no dispute was ever raised by the Company prior to the one which was raised in the affidavit in opposition. I may, however, conclude this point by stating that if the petitioner would not have failed on the first ground. I am not quite sure as to whether he would have failed on the second ground of lack of statement of relevant facts and sufficient materials in his application for winding up, although, as I have indicated above, in all probabilitv on this ground alone he should not have failed.

Coming to the last point, I find that the Registrar of Companies in his affidavit has taken various pleas to support the case for winding up on one ground or the other. The other partnership firm claimine to be a creditor of the Company has also stated facts to say that the Company is unable to pay its debts and. therefore, is liable to be wound up. In this connection, on reading the relevant rules, namely, Rule 34 with form No. 9, Rule 99 with form No. 48 and Rules 101 and 102 which were placed before me, I have come to the conclusion that the supporters of the petition cannot ask this Court in this proceeding to look to their facts which in their turn are disputed by the company and to adjudicate as to whether on these facts the Companv is liable to be wound up. They merely came as supporters of the petition filed by the petitioner, and the Companv was not called upon to meet the new facts which they have stated in their affidavits, although the Company has filed affidavit in opposition to their statements

But those disputed facts are not necessary to be referred to, or considered, in this proceeding. In the way of the Registrar, there is another insurmountable impediment. If the registrar wants in be a petitioner for winding up of a Company, apart from other for- malities which he has to comply with, the condition precedent to the presentation of such a petition is obtaining of the previous sanction of the Central Government under the second proviso to Sub-section (5) of Section 439 of the Act. It is manifest that if the Registrar, without complying with the said requirement, could not present a petition for winding up of a Company himself, he cannot ask this Court in this proceeding to make an order for winding up of the Company on the additional grounds stated by him when admittedly he has not obtained the previous sanction of the Central Government to file such an affidavit in support of the petition for winding up. What he could not have done directly he cannot be allowed to do indirectly.

At the end a request was made on behalf of the other partnership firm, Messrs Sobha Ram Jokhi Ram, to substitute it under Rule 101 of the Rules, because of my view that the petitioner in this case is not entitled to present this petition. After substitution the procedure provided in Rule 102 and thereafter has got to be followed. Firstly, on the facts and in the circumstances of this case, I do not feel inclined to exercise my discretion under Rule 101 of the Rules and to substitute that partnership firm as a petitioner in this case. It will be tantamount to starting a fresh proceeding for winding up on the facts alleged by that firm. It would be more advisable and convenient if that firm, if so advised, chooses to exercise its right, if any, by presenting another application for winding up. Secondly as was pointed out by the learned counsel for the Company, it is doubtful as to whether the Court in the present proceeding can take recourse to the procedure suggested in Rule 101 of the Rules in view of the powers of the Court enumerated in Section 443 of the Act at the hearing of a winding up proceeding and the orders to be made thereon.

In the result, the application for winding up filed by the petitioner fails and is dismissed but I shall make no orders as to cost.

It is obvious that the petition filed by the Company u/s 34 of the Arbitration Act has become infructuous and in the view expressed above it could not be allowed either. It is accordingly rejected.

On the failure of the petition for winding up. the application filed by the petitioner for transfer of title suit No. 64 of 1967 pending in the court of the Subordinate Judge, Samastipur. cannot be ordered to be transferred to this Court u/s 446(3) of the Act. It is obvious that there is no case for transferring it u/s 24 of the Code of Civil Procedure, under which also the application for transfer has been labelled. This application also, therefore, is rejected.